By Matt Levin & Chip Paternoster
If you think your stress level is high, imagine being Arthur Andersen partner David Duncan in late 2001. With the collapse of his client Enron unfolding and an SEC investigation looming, Duncan met with a company forensic investigator. Duncan picked up a document with the words "smoking gun" written on it, said "we don’t need this," and began to destroy it. David Duncan was not alone. Arthur Andersen management issued several reminders to "ensure team members were complying with the document policy" that "were followed by substantial destruction of paper and electronic documents." Arthur Andersen LLP v. United States, 544 U.S. 696, 125 S.Ct. 2129, 2133 n. 6 (2005).
Andersen’s frenzied shredding may forever symbolize the nadir of American corporate responsibility. The firm was convicted by a Texas jury of violating the former 18 U.S.C. §§ 1512(b)(2)(A) and (B) by "knowingly, intentionally and corruptly persuad(ing) other persons, to wit: petitioner’s employees, with intent to cause them to withhold documents from, and alter documents for use in, official proceedings, namely: regulatory and criminal proceedings and investigations." Id. at 2134 (internal quotations and citation omitted). The conviction helped to ensure the demise of Andersen.
Although too late to resurrect the firm, on May 31, 2005, the United States Supreme Court reversed its conviction because "the jury instructions * * * were flawed in important respects." Id. at 2137. The Court held that merely reminding employees to follow the firm’s document retention policy was not necessarily criminal, and that the "the jury instructions at issue simply failed to convey the requisite consciousness of wrongdoing." The jury had been instructed to convict merely if it found Andersen intended to "subvert, undermine, or impede" governmental fact finding. No intent to commit a wrongdoing was required. In fact, the instructions provided that "even if (Andersen) honestly and sincerely believed that its conduct was lawful, you may find (Andersen) guilty." The Court also found that the instructions should have required the jury find a nexus between the "persuasion" to destroy documents and the intent to interfere with a particular proceeding. Id. at 2136-37.
The Arthur Andersen decision has more prurient than precedential value. It does not redefine the criminal boundaries of appropriate document destruction; it is still safe to advise your clients to call you before shredding "the smoking gun." Moreover, in response to the Enron collapse, Congress enacted the Sarbanes-Oxley Act, which directly addresses the destruction of records in connection with federal investigations. The Sarbanes-Oxley Act now provides for criminal liability for:
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both. 18 U.S.C. Sec. 1519.
The practical effect of the Sarbanes-Oxley Act with respect to the previous statute interpreted by the Supreme Court in Andersen is twofold: The word "corruptly," which the Court fixated on in analyzing the intent requirement under the previous statute is not found in the Sarbanes-Oxley Act. In addition, the required nexus between the act of obstruction and the actual or contemplated government matter is now clear.
While the Sarbanes-Oxley Act likely relegates the Andersen decision to the status of historical footnote, the Supreme Court’s decision in Andersen is a reminder of the importance of appropriate, ethical document retention policies, and presents an opportunity to evaluate such policies both internally and for our clients.
Meeting the challenges of appropriate document retention
The Supreme Court specifically highlighted the importance of appropriate document retention policies in Andersen, noting that such policies are common in business and that routine adherence to such policies will occasionally lead to destruction of information that would otherwise be available to the government. Id. at 2135. The Supreme Court noted that, "(i)t is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances." Id.
Andersen’s situation also shows that an appropriate document retention policy needs to be a "policy" and not just a document to be dusted off during emergencies. Andersen’s document policy appropriately required, for example, that an engagement file "should contain only that information which is relevant to supporting our work (and that) in cases of threatened litigation, no related information will be destroyed." Id. at 2133 n 4. The rub was in the implementation, not the drafting of the policy.
Reduce, retain and remove
Whether evaluating a document retention policy for internal use or for a client, there are common objectives to be addressed. A document retention policy can reduce storage costs and increase efficiency. It can ensure compliance with legal requirements. It can also provide some control over information. As the Supreme Court acknowledged in Andersen, document retention policies can also appropriately "keep certain information from getting into the hands of others, including the Government...." Id. at 2135. Importantly, a policy can also keep vital information accessible.
Like the familiar recycling theme, a policy should show how and when to "reduce, retain and remove."
Reduce: Generate only professional communications. We have all either salivated or sweated when discovery turned up e-mails with sexual references, off-color jokes and insults. Don’t assume your status as a lawyer will keep your firm’s internal documents from ever seeing the light of day.
Retain: If information is still important, have a mechanism for retrieving it efficiently.
Remove: Once that information is no longer useful, destroy it.
The following are ideas for implementing an effective policy:
- Reduce. Consider prohibiting personal e-mail on the company server. Impart common-sense advice to employees to consider how a misdirected (or maliciously directed) written communication would look to a client, a competitor or opposing counsel. Sarcasm and jokes are not very funny during cross-examination.
- Comply. There are a myriad of laws and regulations that impact the availability and timing of document destruction. A policy should simplify compliance.
- Tailor. An ethical policy should eliminate documents, good and bad, only when they have outlived their importance. Few companies will benefit from a mechanistic policy based only on vintage and not on the type of document.
- Write. Put the policy in writing. Ambiguity and inconsistency ensure failure.
- Retain. If information is worth retaining, it needs to be accessible. The cost of producing documents for litigation can be staggering, especially if the information is contained on old backup tapes for obsolete software applications.
- Execute. Establish regular intervals for destroying types of records, and specifically task enforcement and oversight responsibilities. Without centralized oversight, an inconsistently implemented policy can be as bad as no policy at all. Imagine where Andersen might be today if it had simply been consistent.
- Educate. Teach employees how the company expects them to manage documents. Inform clients how their documents will be retained.
The Sedona Guidelines
In September 2004, an organization called the Sedona Conference, made up of lawyers, judges and scholars, published the Sedona Guidelines: Best Practice Guidelines and Commentary for Managing Information and Records in the Electronic Age. The Sedona Guidelines serve as a companion to the Sedona Principles on electronic document production, which were published by the Sedona Conference in January 2004. Copies of both of these documents can be found at: www.thesedonaconference.org/content/miscFiles/publications_html?grp=wgs110
The Sedona Guidelines provide a framework for organizations to assess and amend their existing policies and training programs in order to create a culture of compliance. While the statements and conclusions of the Sedona Conference have not been expressly adopted by any court, they have received widespread approval. As a result, following these standards can provide strong evidence of a company’s good faith efforts to act properly with regard to document retention and destruction.
The five essential guidelines from the Sedona Conference regarding management of electronic information are as follows:
1. An organization should have reasonable policies and procedures for managing its information records.
2. An organization’s information and records management policies and procedures should be realistic, practical and tailored to the circumstances of the organization.
3. An organization need not retain all electronic information that is generated or received.
4. An organization adopting an information and records management policy should consider including procedures that address the creation, identification, retention, retrieval and ultimate disposition or destruction of information and records.
5. An organization’s policies and procedures must mandate the suspension of ordinary destruction practices and procedures (the "litigation hold") as necessary to comply with preservation obligations related to actual or reasonably anticipated litigation, governmental investigation or audit.
The best practice in analyzing the statements and suggestions made by the Sedona Conference is to have counsel work with the individual company to carefully consider these guidelines and tailor a document management policy that meets the client’s goals.
When trouble arises, stop the destruction
One issue the Andersen case highlights is that different standards apply to document destruction once litigation or a governmental investigation is anticipated.
A judge has broad discretionary power to punish the spoliation of evidence. For example, federal district courts may impose sanctions as part of their inherent power to manage their own affairs so as to achieve the orderly and expeditious disposition of cases. Chambers v. NASCO, Inc., 501 U.S. 32, 45 (1991); Unigard Security Ins. Co. v. Lakewood Engineering & Manufacturing Corp., 982 F.2d 363, 368 (9th Cir. 1992). The court’s inherent power to sanction may be invoked in response to destruction of evidence. Unigard, 982 F.2d at 365; Advantacare Health Partners, LP v. Access IV, 2004 WL 1837997, *4 (N.D. Cal).
There are a number of legal theories under which a party may pursue a spoliation claim. A body of case law addresses the situation where a company destroys documents during litigation or because it suspects it is about to be sued. Under these circumstances, some courts impose sanctions under Fed. R. Civ. P. 37, while others impose sanctions under the district court’s inherent authority to remedy discovery abuses. See Unigard, 987 F.2d at 368. Many jurisdictions also recognize spoliation as a separate tort. See e.g. Burge v. St. Tammany Parish, 336 F.3d 363 (5th Cir. 2003); Quality Measurement Co. v. IPSOS-ASI, Inc., 196 F. Supp. 2d 609 (S.D. Ohio 2002); Silhan v. Allstate Ins. Co., 236 F. Supp. 2d 1303 (N.D. Fla. 2002); Smith v. Salish Kootenai College, 378 F.3d 1048 (9th Cir. 2004); Hannah v. Heeter, 213 W. Va. 704, 584 S.E.2d 560 (2003).
One remedy for the spoliation of evidence is an adverse evidentiary inference. For example, the destruction of evidence can create a "presumption" or "inference" that the spoliator must overcome, and the inference is that if evidence had been produced it would have been unfavorable to the spoliator. Booher v. Brown, 173 Or 464, 474, 146 P2d 71 (1944) ("willful" destruction of evidence raises a presumption against the spoliator, which cannot be overcome unless "the evidence was destroyed under circumstances which free the party from suspicion of intentional fraud, and, if he was without neglect or fault in the premises); In re Kelly’s Estate, 150 Or 598, 626, 46 P2d 84 (1935)("The destruction of evidence, when unsatisfactorily explained, warrants an inference that the documents were unfavorable to the person who destroyed them").
Another remedy used by courts to punish a party for the spoliation of evidence is the drastic remedy of entering a default judgment against the party found to have destroyed documents. For example, in Diamond Claims & Investigation Services, Inc. v. Farmers Insurance Exchange, Civ No 84-1063-BE (1986), aff’d in part, rev’d in part, and remanded, 849 F2d 1475 (9th Cir 1988), the defendants destroyed documents before the litigation began and improperly withheld others during discovery. As a result, Judge Belloni, relying on Fed. R. Civ. P. 37 and the court’s inherent powers, struck defendants’ answer and counterclaims and entered a default judgment.
Courts also have not been afraid to dole out massive monetary fines as a sanction for spoliation of evidence and destruction of documents, even in cases where the destruction of documents was not found to have been for the purpose of intentionally thwarting discovery. See, In re Prudential Ins. Co. of America Sales Practices Litig., 169 F.R.D. 598 (D.N.J. 1997.) In the Prudential case, the District Court of New Jersey found that even though Prudential had not "intended to thwart discovery through the purposeful destruction of documents, its haphazard and uncoordinated approach to document retention indisputably denie(d) its party opponents potential evidence to establish facts in dispute." Among the sanctions in the Prudential case: a $1 million fine, which the court described as a sanction recognizing the unnecessary consumption of the court’s time and resources with regard to the issue of document destruction.
When trouble looms, do not send out an e-mail, as Andersen did, to "make sure to follow the (document) policy." A well-implemented policy has already done all it can do. Your client cannot wait to be served with papers. Instead, meet with your client early to ensure evidence is preserved. Even routine housekeeping tasks, such as writing over backup tapes, could subject a party to spoliation sanctions.
"Shred" is not a four-letter word
Selecting documents for destruction is only half the battle. The other half is making sure that the documents are actually destroyed. Because of the proliferation of dumpster-diving identity thieves, not even trash is sacred. Throwing documents away is no longer good enough.
As of June 1, 2005, anyone who uses a consumer report for a business purpose is subject to rules of the Fair and Accurate Credit Transactions Act of 2003 (FACTA). These rules require destruction policies that reduce the risk of consumer fraud and identity theft.
Covered entities must dispose of paper and electronic documents with personal information "by taking reasonable measures to protect against unauthorized access to or use of the information...." The rule suggests "burning, pulverizing, or shredding of papers" or entering into "a contract with another party engaged in the business of record destruction." For more information, refer to "New Rule Seeks to Protect Privacy by Requiring Proper Disposal of Sensitive Consumer Information," at www.ftc.gov/bcp/conline/ pubs/alerts/disposalalrt.htm.
Noncompliance invites enforcement actions by the government and suits from victims, including class actions, for actual damages and statutory damages of up to $1,000 per violation.
Regardless of whether FACTA or common sense applies, it makes good business sense, after implementing a document retention policy, to protect the confidences contained in discarded information.
ABOUT THE AUTHORS
Matt Levin is a shareholder and Chip Paternoster is an associate in the Portland law firm Markowitz, Herbold, Glade & Mehlhaf, where they focus on business disputes and employment law. Contact them at (503) 295-3085 or MattLevin@ MHGM.com and ChipPaternoster@ MHGM.com.
© 2006 Matt Levin and Chip Paternoster