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Risk And Document Retention Policies

By Robert J. Hennessey, J.D. and Mark H. Zitzewitz, J.D.
Lindquist & Vennum P.L.L.P.

On June 15, immediately following its conviction for obstruction of justice in the Enron shredding fiasco, Arthur Andersen announced it would cease operations. “The Big Five,” so goes the gallows humor, has come down to “The Final Four.”

As the dust settles on Arthur Andersen’s grave, risk managers will do well to attend to one of the lessons of the story: the implications of destroying corporate documents can be far greater than the perceived pitfalls of retaining documents. While Arthur Andersen impaled itself with criminal behavior, a more likely consequence to a business employing myopic document retention policies are civil sanctions for destruction of evidence.

The tale of Arthur Andersen’s demise is well documented. Andersen’s key executives and lawyers tried to defend Enron’s shredding of documents in the face of a Securities and Exchange Commission (SEC) investigation by pointing to Andersen’s document retention policy. That policy required that final memoranda and documents be retained and drafts, notes and correspondence related to the final documents be destroyed. While Andersen publicly portrayed its efforts as an attempt to manage voluminous records, Andersen executives admitted Andersen was using its retention policy to keep documents from being used against it — and its clients — in litigation. Richard Corgel, Andersen’s practice director for North America, acknowledged on cross-examination that the document policy was intended to keep information from potential litigants.

While the Andersen situation involved an anticipated SEC investigation, the rules regarding document retention apply to private litigation as well. A concern in those situations should be: what is the civil liability for spoliation (willful destruction) of evidence? Many states recognize a civil cause of action for spoliation, while other states treat the destruction of evidence as a sanctionable violation of a party’s obligations in discovery. Either way, a company’s liability for destroying documents, by evil design or seemingly innocuous policy, entails severe risk.

In states that do not recognize a separate cause of action for spoliation, courts have broad discretion to deal with the destruction of documentary evidence. This discretion comes from the courts’ inherent authority to preserve and protect the integrity of civil proceedings and to sanction abusive discovery practices. If the court finds that a party willfully destroyed a document that could be used as evidence, the court can levy appropriate sanctions to reduce the exposure of the opposing party and to punish the wrongdoer.

Sanctions are particularly appropriate when a party has actual notice that a document in its possession is relevant to existing or anticipated litigation, but then still fails to preserve the documents. Generally, a party seeking sanctions does not have to prove that the destroying party acted in bad faith. Moreover, a court may sanction a party for destroying a document whether or not its opponent formally requested the document, or even if the destroying party was unaware the document was evidence. If the party should have known that a document would become material to likely litigation at some point in the future, and destroyed the document nonetheless, it may be sanctioned.

Arthur Andersen unsuccessfully sought to excuse its destruction of documents by hiding behind its document retention policy. The lesson? A document retention policy — a critical piece of risk management — will not save you from civil sanctions if the policy does not conform to the law.

In Lewy v. Remington Arms Co., the Eighth Circuit Court of Appeals set out three additional guidelines to determine whether sanctions are appropriate when documents are destroyed under the guise of a document retention policy. First, the court should examine whether the document retention policy is “reasonable considering the facts and circumstances surrounding the relevant documents.” Second, the court should consider whether the party knew, or should it have known, that the documents would become material in litigation. Third, the court should evaluate “whether the document retention policy was instituted in bad faith,” to purposely limit the evidence available to potential plaintiffs.

Under the law of the Eighth Circuit, the core of which has been adopted by numerous courts throughout the country, a document retention policy that fails to consider the circumstances surrounding certain records, or the likelihood that documents will become material to future litigation, may not save a company from sanctions. A neutral document retention policy may fail to protect the company if the policy ultimately results in destruction of evidence.

Civil sanctions for destruction of evidence can be severe. An example is the recent Utah Supreme Court decision upholding a $145 million punitive damage award against State Farm Mutual Auto Insurance Company, in part because evidence showed State Farm deliberately concealed and destroyed documents related to the plaintiff’s claims.

To serve the dual purpose of punishing the party that destroyed evidence and deter future transgressions, a court can do any or all of the following:

• Enter default judgment against the offending party
• Disallow certain claims or defenses
• Instruct the jury that it can assume the missing documents would be damaging to the offending party
• Impose monetary sanctions

Even if a court resists the ultimate sanction — entry of judgment — the other available sanctions can be devastating to a party’s claims or defenses, not to mention extremely costly. A company that does not keep a sharp eye on its policies and practices of destroying documents assumes risks that far exceed the perceived risks in keeping those documents around. 

ABOUT THE AUTHORS

Robert J. Hennessey is chair of Lindquist & Vennum’s Litigation Section. He can be contacted at 612-371.3221; e-mail rhennessey@lindquist.com.

Mark H. Zitzewitz practices in commercial litigation, with particular emphasis on premises liability, insurance coverage and tort litigation. He can be contacted at 612-371.3287; e-mail mzitzewitz@lindquist.com.

riskVue | The webzine for risk management professionals
August 2002