Retention rules challenge businesses as they ponder what to storeSMALL AND MEDIUM-SIZED businesses may be placing themselves in jeopardy because of the way they store e-mail correspondence and other records, some attorneys say. As courts raise the bar on electronic-record retention standards, big businesses are changing their practices. But many smaller companies are holding off in an effort to save money—a shortsighted practice that could cost a company a lot more if it ever gets dragged into court, attorneys note.
Smaller businesses tend to swing to one extreme or the other regarding electronic-record retention, notes Nancy McDonald, founder and partner of the Florham Park law firm McDonald Law Group LLC.
“Many small businesses either throw everything out or keep everything forever,” she says. “Many businesses may be too small to afford an in-house lawyer, but are large enough to accumulate a great deal of records. When a business gets pulled into court, it quickly gets the message the hard way.”
McDonald says when her firm was involved in a case in New York City, her client’s opponent turned over a stack of about 10,000 spreadsheets.
“We went to an arbitration panel and requested the data in electronic form, so it would be easier to analyze,” she says. “Ultimately the panel ruled in our favor and we got the records in electronic format.”
A recent survey indicates almost half of companies do not have a strategy or policy in place to deal with electronically stored information, or ESI, in litigation or in internal investigations, says Fernando M. Pinguelo, a partner in the Bridgewater law firm Norris McLaughlin & Marcus PA.
He notes that even after high-profile cases, many companies are not addressing electronic discovery issues.
In an August 2007 patent-dispute decision, Qualcomm Inc. v. Broadcom Corp., a California federal district judge found Qualcomm failed to disclose a host of e-mails and electronic documents as required during discovery, the formal pretrial investigation during which one party can force the others to produce documents and other evidence.
Based on the finding, the judge ordered Qualcomm to pay Broadcom’s $8.5 million litigation costs and reported Qualcomm’s legal counsel to the state bar for investigation.
In today’s networked environment, even small businesses routinely send and receive scores of e-mail and other electronic documents every day. But many companies do not have procedures in place to systematically save or purge electronically stored information, says Pinguelo, even though they could get into hot water for misplacing or destroying it in error.
Some companies think it’s too expensive to set up formal procedures for storing and deleting electronic information, he says. Others may not be aware of the requirements or think they’re exempt from the rules.
But it’s not necessarily that difficult, says Pinguelo, who co-chairs his firm’s Response to Electronic Discovery and Information Group, which helps clients develop strategies for information technology-related issues.
“First, you should have the chief executive or someone of a similar rank assemble an e-discovery task force that includes someone from human resources, information technology and a lawyer, and a risk manager or compliance officer,” he says. “Then you develop a written policy that covers the retention and deletion of electronically stored information. Finally, communicate the policy in writing to all of your employees and be sure everyone sticks to it.
“In one case we counseled a services company, with a New Jersey office, and we were under the impression that they understood ESI protocol,” says Pinguelo. “During the case it turned out a relevant backup tape was in an out-of-state location and we were worried that it might be deleted. Although we found out about its existence at a relatively late stage, we were able to secure it.”
Part of the challenge is companies don’t always know what information they can delete and what they should keep, he adds.
“Most businesses don’t have the storage capability to keep every bit of e-mail and other correspondence, but they may be called upon to produce almost any kind of document in litigation.”
Fortunately, courts have carved out somewhat of a safety net. Companies that have a formal set of rules for purging their files, such as deleting e-mails after a month and purging electronic invoices after three years, may be able to avoid sanctions even if it turns out the destroyed document plays a part in later litigation.
But there is at least one important exception. A 2002 employee discrimination case, Zubulake v. UBS, resulted in a $29.2 million jury verdict for plaintiff Laura Zubulake and established that a company has to preserve certain documents as soon as it has a reasonable expectation of being involved in litigation, says Florina A. Moldovan, a partner with the Morristown law firm McElroy Deutsch Mulvaney & Carpenter LLP.
“A company does not have to be formally notified of a possible lawsuit to be subject to electronic-record retention rules,” Moldovan warns. “Instead, for example, if there’s a clear case of employee conflict a reasonable person thinks could lead to a discrimination suit, a business should make sure to suspend its routine deletion or other disposal and put in place a ‘litigation hold’ to ensure the preservation of relevant documents. In a general sense, the bar is whether the company knew or should have known that litigation is likely.”
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