A Massachusetts business has received harsh sanctions from the Superior Court for its CEO’s destruction of documents potentially relevant to a pending lawsuit. This underscores that once a business has been put on notice of an actual or potential legal dispute, it must take careful and thorough steps to ensure that all relevant documents are preserved – or face potentially devastating consequences.
In Idnani v. Venus Capital Management, Inc., the defendant company, with its counsel’s assistance, hired a vendor to collect and preserve business records pertinent to the litigation. However, shortly before the vendor was to make an on-site visit to collect hard-copy files, the defendant’s CEO discarded thousands of pages of material. As justification for his action, the CEO claimed that this was a regular cleanup for purposes of freeing up storage space. He added that the documents were either unrelated to the case or available in electronic form anyway.
When this came to the attention of the defendant’s counsel, he conducted his own investigation, which revealed that many of the discarded documents may have been responsive to the plaintiffs’ discovery requests. Accordingly, pursuant to his ethical obligations under the Massachusetts Rules of Professional Conduct, he informed the plaintiffs and the court of the CEO’s action.
Superior Court’s Decision
In ruling on the plaintiffs’ subsequent motion for sanctions, the Superior Court held that the CEO had committed a willful spoliation of evidence, rejecting the CEO’s explanation – that his conduct was part of a routine cleanup – as “not credible.”
The purported availability of some of the paper documents in electronic form also was rejected as a defense. In addressing this point, the court explained that the paper copies had independent relevance, as they could have included handwriting or notes not maintained electronically.
While the destroyed documents “would not appear to go to the heart of the plaintiffs’ case,” the court nonetheless ruled that the CEO’s conduct “[could] not go unsanctioned.” Thus, the court ordered that the plaintiffs could introduce the CEO’s conduct into evidence at trial, in which case the jury would be given an “adverse inference” instruction – i.e., an instruction that the jury could infer that materials destroyed by the CEO would have provided support for the plaintiffs’ claims. The court also ordered the defendant to pay the attorneys’ fees and costs incurred by the plaintiffs in litigating the spoliation issue.
Implications Of Decision
As the Superior Court’s decision demonstrates, the destruction of evidence can carry severe costs for a litigant. In particular, an “adverse inference” jury instruction such as that ordered in the Idnani case could cause a party to lose a lawsuit, since the jury may infer that the documents would have been fatal to the party’s case, regardless of whether that is actually true.
Additionally, the Idnani ruling is only the latest in a number of recent court decisions that have cautioned litigants to be diligent in preserving relevant documents. Sanctions imposed by other courts in such cases have included dismissal of a party’s claims, substantial monetary penalties, orders that a party pay a computer forensic expert to try to salvage electronic documents destroyed by the party, and even criminal charges for obstruction of justice.
Recommendations For Businesses
There are a number of important steps that businesses should take to protect themselves against the potentially severe consequences of destroying relevant documents. Counsel should be involved in each of these steps to ensure that they are carried out correctly and thoroughly:
1. Issue Litigation Holds Early And Often
A “litigation hold” refers to both the suspension of normal document-destruction procedures and the issuance of specific communications to those employees or other individuals who may possess relevant documents. While a litigation hold should be issued whenever a party becomes involved in litigation, the duty to preserve evidence often arises at an earlier point. Specifically, as stated by the Idnani court, the duty arises “[o]nce a litigant knows or reasonably should know that evidence might be relevant to a possible legal action.”
Thus, the duty to preserve evidence often arises before any formal legal action takes place. For instance, if a departing employee indicates that he or she may consider legal action, it may be appropriate for the employer to issue a litigation hold at that point. The service of a demand letter also may trigger this obligation.
Once a business has decided that a litigation hold is appropriate, two separate memoranda should be prepared and distributed. The first of these, directed to those individuals who will be overseeing the litigation-hold process, should include (i) a detailed description of the materials to be preserved, (ii) the steps that should be taken to prevent disposal of relevant materials, (iii) the potential sanctions for destroying relevant evidence, and (iv) a list of the “key players” who have or are believed to have custody of relevant materials. The second of these documents should be a simplified, instructional memorandum to those key players, with clear directions regarding the documents that must be preserved.
The identity of a party’s “key players” will vary depending on the nature of the dispute. Generally, however, the following individuals will be included: (i) those named as parties or witnesses by the opposing party, (ii) any other persons believed to have knowledge of the issues in the case, and (iii) information technology (IT) personnel who are responsible for maintaining and periodically disposing of the entity’s electronic records. In addition, key players may include former employees or third parties (such as vendors) over whom a business can exert some level of control.
It is important to remember that a litigation hold is a process, not a one-time event. An effective litigation-hold process requires, among other things, that the memoranda described above be regularly updated and reissued so that both new and current employees are fully aware of their obligation to preserve relevant documents.
2. Communicate Regularly With Key Players
A business should ensure that its “key players” are making diligent efforts to comply with the litigation hold. As part of this process, a business needs to understand its key players’ specific document-retention practices so that it can most effectively guide them.
In addition, a business should ensure that materials identified in the course of a litigation hold are collected and preserved in a logical and useful manner. For instance, it may be prudent to make paper copies of electronic documents and to create a log of all collected documents. By taking such steps, a business can minimize the possibility of misplacing or losing track of relevant materials – which potentially could expose a business to sanctions similar to those applicable to the destruction of documents.
3. Coordinate Carefully With IT Personnel
Finally, businesses should bear in mind that IT personnel play a critical role in every litigation hold. Thus, those employees overseeing the litigation-hold process should coordinate carefully with IT personnel in order to understand the entity’s electronic backup and document-destruction procedures, and to ensure that those procedures have been suspended or modified as necessary to preserve all relevant evidence. IT personnel can also serve as a valuable resource in locating relevant electronic records.
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Please do not hesitate to contact us if you have any questions about litigation holds generally or the Idnani case in particular. Our litigation team would be happy to help.