In the recent decision Rambus Inc. v. Infineon Technologies AG, 2004 WL 547 (E.D. Va. Mar 14, 2004), the United States Court of Appeals for the Federal District truly shook up previous understandings of what is and is not acceptable in the creation and enforcement of corporate document retention policies. The decision found that Rambus, a chip-to-chip interface solutions company, was guilty of spoliation of documents because it formulated and instituted a records retention policy (RRP) at a time when it reasonably anticipated IP litigation.
Rambus' vice president of Intellectual Property, Joel Karp, began planning the company's RRP in March 1998 with the assistance of Cooley Godward LLP, a respected California law firm. Over the summer of 1998, Rambus educated its staff about the new records retention policy. When it was launched on September 3rd, the company held a "Shred Day" when they destroyed approximately 2 million documents. All of this would have been fine, except for one, not so small fact: At the time Rambus' RRP was being formulated and implemented, the company was considering a strategy to possibly launch patent infringement litigation. One document and some deposition testimony suggested a possible connection between shred day and the company's general patent litigation plan.
Waiver Of Attorney-Client Privilege
Equally important to corporate counsel, the court held that any of the Rambus' communications with outside counsel that were closely related to implementing the RRP's purging would not be privileged under the crime-fraud exception to the attorney-client privilege and therefore would have to be disclosed to company's litigation opponents. The court stopped short of ordering disclosure of the withheld documents pending review to determine whether the attorneys' communications were closely connected to Rambus' spoliation scheme.
Spoliation Under Rambus
The federal court in Virginia ruled that Rambus, regardless of whether the company acted in good faith in creating the RRP, had committed spoliation because it destroyed the documents when it anticipated future litigation to which the documents could be relevant. The court commented, "Even valid purging programs need to be put on hold when litigation is 'reasonably foreseeable.'"
Many corporations, particularly large ones, operate in a litigious environment in which litigation is a fact of doing business. While Rambus does not mean that such companies should not formulate document retention policies, it does mean that they must be extremely careful when an RRP is designed and instituted. Any new policy must not "blanket" the entire company. Each section and product line must be considered and exceptions made for any materials that might become relevant to current or potential litigation. Those documents and other materials must be kept, preferably in a database where they can be quickly retrieved if necessary.
The Days Of Leniency In Document Purging Are Over
Before the Rambus ruling, the courts had traditionally found that companies could properly destroy their documents and other records relating to a potential litigation if this destruction was pursuant to a properly adopted RRP. It was generally accepted that companies were better off purging their records before litigation commenced. Rambus has stood that doctrine on its head. The days of leniency in document purging are over.
To cite some examples of earlier rulings on document spoliation, in Stevenson v. Union Pacific RR Co., 354 F. 3d 739 (2004), the railroad allowed its crew's radio communication tapes to be re-recorded per its RRP shortly after a train wreck. The 8th Circuit Court ruled that sanctions for pre-litigation purges could be imposed only if a corporation destroyed documents in bad faith and this action prejudiced the opposing party in a lawsuit. The court found that adverse inferences could be drawn from this action because the actual contemporaneous communications record had been taped over showing sufficient indicia of "bad faith" (i.e., the railroad had preserved tapes in other cases where the communications were likely to be helpful and the company had general knowledge that this type of record would be important in evaluating the event).
In Zubulake v. UBS Warburg. L.L.C., 220 F. R. D. 212 (S.D.N.Y. 2003) (Zubulake IV), the court applied a similar test to determine if adverse inferences could be drawn against UBS. Prior to litigation, the company had destroyed email backup tapes in compliance with the company's RRP. The court concluded that the plaintiff failed to show the evidence would have been favorable to the plaintiff, therefore no sanction was warranted.
Rambus Throws Out Bad Faith
The Rambus case expands on the rule of pre-litigation cases because it tosses out the bad faith requirement for spoliation and adopts a very broad view of when a company has a duty to preserve documents. The court held that even if Rambus had not intended to destroy evidence in litigation against its specific opponent in the case, the court could find spoliation based on the company's realization "on a broad level" that it could be in litigation with opponent on the same issues. Rambus holds that even if a company implemented an RRP for good cause - to reduce the costs of discovery in possible future litigation - the company can be sanctioned for spoliation. The court laid down a bright line that if a company reasonably anticipated or ought to anticipate litigation, it cannot simply carry out an RRP; it must first save documents that might be relevant to the litigation.
Half Of Large CorporationsHave No RRP
In spite of the Rambus restrictions on the creation and execution of records retention policies, it is an extremely good idea for every records-intensive corporation to have one and implement it. Documents that are organized, indexed and stored in a searchable database can cut down on the costs of discovery enormously. RRPs can prevent sanctions by having relevant information at the fingertips of the in-house lawyers. Yet, a recent industry survey (Cohasset Associates, 2004) reported that nearly half of large companies currently have no retention policy about when to keep or destroy business records, which include electronic as well as paper formats.
Companies that do have RRPs usually do not enforce them. This is unwise given the growth of litigation and, in particular, the proliferation of electronic documents in discovery. However, before a company creates or executes an RRP, its lawyers must know case law effecting document spoliation well. A long line of court cases has held that when litigation is commenced, a company must stop destroying documents pursuant to its usual RRP. The courts have gradually expanded companies' legal obligations to suspend document purging under the RRPs, but the Rambus ruling expands this legal trend.
Know Your Spoliation Case Law
Once a lawsuit has been commenced, a company that is party to the suit cannot destroy records without the possibility of facing sanctions if the destroyed records are potentially discoverable. In Prudential Insurance Company of America Sales Practice Litigation, 169 F.D.R. 598 (N.D. N.J. 1997), the court rules that even if the destruction per an RRP was not intentional, but the result of negligence, a company may face sanctions for spoliation if the company reasonably knew the documents were relevant to the litigation. Prudential was fined $1 million. Attorneys for the company may also face charges for ethical violations. See Bradley v. Sunbeam Corporation, 2003 WL 21982038 (N.D.W.Va. 2003)
If a company does not know, before it destroys records, that those records may be relevant to a lawsuit, the company may avoid sanctions. One such case is U.S. Taber Extrusions LP. 2001 WL 1941318 (E.D. Ark 2001). The amount of knowledge (or lack thereof) a company must have about potential document relevance to incur or avoid sanctions is still unclear, however. Some courts apply a "bad faith" standard, imposing sanctions only if the company knows the documents are relevant at the time they are destroyed. See Stevenson v. Union Pacific R.R., 354 F. 3d 739 (8th Cir. 2004). Some courts apply a "willful blindness" standard of scienter. See Danis v. USN Communs., Inc. 53 Fed. R. Serv. 3d 828, 835 (N.D. Ill. 2000). The Second Circuit has waffled a bit in its standard, applying a "bad faith," intentional or "gross negligence" standard. See Byrnie v. Town of Cromwell, 243 F.3d 93, 107-108 (2d Cir. 2001). Rambus applies essentially a negligence standard without any showing of substantial prejudice.
Some courts will impose sanctions even if the requesting party can show it has been prejudiced by its inability to review the destroyed documents. See, e.g., Wiginton v. C.B. Richard Ellis, Inc. 2003 WL 22439865 (N.D. Ill. Oct 27, 2003); U.S. v. Koch Industries, 197 F.D.R. 463 (N.D. Okla. 1998).
One case held that a requesting party can obtain sanctions for spoliation only if the party can show the destroyed records are "highly material" to the case. See Concord Boat Corporation v, Brunswick Corp., 1997 U.S. District LEXIS 24068 (E.D. Ark. 1997). No other ruling has repeated this standard.
Lessons From Rambus
Unfortunately, the Rambus case raises the specter that for large companies, there may never be a legal safe time to institute a RRP. Rambus has shaken up the rules regarding spoliation, but it does not give clear and exact definitions for what the new rules will be. However, the Rambus ruling does give in-house lawyers some lessons for crafting corporation records retention policies and preparing for litigation. Lawyers who understand the acute need for records retention management should make it clear to the legal department and executives that:
Any upfront inconvenience and cost will be recouped many times over in gathering documents, reduced discovery costs, and avoided sanctions down the road.
The company should have a case readiness plan in place in conjunction with the RRM to preserve information potentially relevant to litigation.
Large corporations may carefully craft RRMs around various product and service lines.
A well-crafted RRM technology system can search for relevant documents quickly and avoid costly scrambling for documents and expensive reviews.
Documents should never be destroyed pursuant to an RRM if litigation is anticipated.
The legal department should work with IT to determine the best technology to fit your company's RRM and case readiness needs.
If a company learns from these Rambus lessons, it will be well on the way to protecting itself from not only spoliation sanctions and possible waiver of privilege, but from unnecessary litigation costs.