Abstract:  The Andersen/Enron fiasco teaches companies the need to pay attention to which documents are being retained and when documents should be destroyed, and the importance of consistently enforcing their document retention policies. How are your programs operating and would they hold up under court scrutiny?
Recent news articles and congressional testimony concerning Arthur Andersen's audit and consulting activities for Enron have sent reverberations through companies across the country. Hopefully, companies will appreciate and learn from the catastrophic consequences resulting from Andersen's failure to follow its own document retention policies and document destruction schedule, particularly its decision to initiate the shredding of documents on the eve of a government investigation. While a document retention program is not a guarantee for avoiding liability, Andersen's rapid demise should provide a powerful incentive for companies to reexamine their own document retention and destruction programs and, more importantly, their enforcement practices.
The important lessons which companies can learn from the recent Andersen/Enron fiasco are the need to pay attention to which documents are being retained and when documents should be destroyed, and the importance of consistently enforcing their document retention policies. By focusing on more effective management of their document retention programs, companies can improve their operations, reduce costs and reduce their potential liability. In light of Andersen's recent experience, companies should review how their own programs are operating and would hold up under court scrutiny.
Unfortunately, despite the publicity surrounding of Andersen's document destruction practices, many companies, particularly new or smaller enterprises, have not established a formal document retention program. More disturbing perhaps is that companies may have a document retention policy, but the policies are outdated or inadequate for the retention and destruction of electronic data (or the electronic discovery requests increasingly used in litigation), or the policies are poorly enforced or not enforced at all. Whichever the case, these companies are probably wasting money and increasing their liability risk.
FREQUENTLY ASKED QUESTIONS ABOUT DOCUMENT RETENTION PROGRAMS (DRP)
Q: We are a small company. Why do we need a formal DRP?
Companies with no formal document retention program typically offer a variety of excuses. Some of the more common excuses include, "we're just a small company
we don't have many employees or documents"; or, "it sounds too expensive and will cost us too much
."; or, "our company already keeps what it needs so we don't need a formal 'document retention program'
."; or, finally, "we're not embroiled in litigation
Regardless of the size or business of the company, those excuses do not stand up to scrutiny. All companies, even small companies with few employees and few documents, should have document retention and control policies in place to more effectively manage their business; minimize their risks and legal exposure; reduce ongoing costs; and proactively manage future expenses.
Q: We can't afford to develop a DRP.
Ironically, expense is one of the most frequent justifications for not having a document policy. It inevitably will cost a company far more to ignore document retention issues, however, than to address the issue head-on. Absent an effectively-enforced document retention and destruction program, documents are more likely to be lost resulting in costs incurred recreating documents or searching for documents. There may be excessive costs for unnecessary storage space. Most importantly, the company risks losing a history of its operations, transactions and business.
A company employing a haphazard approach is likely to keep too many documents, or too few, or both. Without a well-conceived program with established criteria for which documents are retained and how they are organized, a company risks losing or destroying records important to its operations, or even required by law. It is easy to imagine dire and expensive consequences resulting from the destruction of, or inability to find, important records. At the same time, retention of documents alone is not a solution. Effective management of corporate documents requires established retention schedules and procedures, including a regular, well-enforced destruction schedule. The most thoughtful and detailed retention schedule is of little value when it is not consistently and uniformly enforced.
The cost of developing and operating a document retention program will seem trivial when litigation besets a company. Any lawsuit will require a company to retrieve and review its own records, both to prepare its own, and to respond to the opposing party's, discovery requests. The retrieval, review and production of emails alone can be exorbitantly expensive and time-consuming. Consider, for example, the experience of parties in a recent case, Rowe Entertainment, Inc. v. The William Morris Agency, Inc., 205 F.R.D. 421 (S.D.N.Y 2002), where the physical recording, cataloging and processing of a sampling of eight back-up tapes of email, generated or received by 56 employees in two offices over two years, was estimated to cost almost $400,000, not including legal expenses. The total cost was estimated to mushroom to almost $9,750,000 if the emails on all of the back-up tapes retained by the company over two years were produced, instead of a sample of eight sessions. An important lesson from the case is that even after cost-sharing and cost-shifting of these expenses between the parties, the price of seeking justice through litigation may result in either the abandonment of meritorious claims or unjustified settlements. Thus, controlling what documents - hard copy as well as electronic - a company decides to retain, and for how long provides a meaningful, proactive means of controlling both expenses and possibly outcome when litigation occurs.
Q: How would a DRP help our company?
Habit or inattention aside, companies generally keep documents for two reasons: business efficiency and compliance with legal requirements.
Business efficiency requires a document retention program. Companies need an efficient and well-run document retention program to effectively identify and organize the documents it retains and facilitate easy and economical access to records when needed for business operations. The process of establishing and operating an effective document retention program requires a company to identify records necessary for ongoing operations, or emergency needs, and aggressively discard and destroy volumes of unnecessary and duplicative records which otherwise would clutter its offices or require off-site storage at significant cost and inconvenience.1 An effective document retention program which reduces the number of documents for storage can thus provide cost-saving advantages.
Companies also maintain records to allow them to comply with legal requirements. Often, state and federal laws subject a business to an affirmative legal duty to keep certain records for specific time periods. To comply with these requirements, applicable statutes and regulations necessarily encourage the implementation of minimum document retention periods.
A third reason, however, that should inspire companies to develop - and enforce - a well-planned document retention program is to save costs should they face litigation. Unfortunately, litigation is a fact of life in today's business environment. An effective and efficient document retention program can save significant resources (time, effort and money) locating and reviewing documents either to pursue legal claims or to respond to subpoenas and document requests. It also will help minimize the likelihood of unexpected surprises with adverse consequences in litigation, government investigations and audits. "Every litigator and corporate counsel knows that the Achilles' heel in almost every case involving a complex dispute is the paper found in the company's own files." Phillip Allen, What Corporate Counsel Should Do About Bad Documents, at 1, in American Corporate Counsel Association, Records Retention Manual (1995) (noting that "[n]othing is quiet as dismaying or as inevitable as finding a memorandum written by some employee that seems to prefigure the opposing party's theory of the case.")
Inattention to a reasonable document destruction policy will also result in retention of more documents for longer than necessary, and unnecessarily increase the risk of adverse evidence. On the other hand, selective or inconsistent retention or destruction of documents suggests improper document retention practices increasing the company's exposure and vulnerability to accusations of a cover-up.
Q: Now that we work in a paperless society, what is a "document"?
In developing or effectively enforcing a document retention program, an understanding of the legal definition of the term "document" is essential. The law applies a very broad interpretation to the term "document" and any company document retention program should adopt a similar approach. State and federal law defines "document" to encompass virtually any means by which information is generated, stored or communicated. See, Cal. Evidence Code § 250 and Federal Rule of Civil Procedure 34. These statutory definitions include not only hardcopy paper files, correspondence, manuals, etc., but computer email, floppy disks, CD-ROMs, hard drives, DAT files, photographs, videotapes, audio recordings, personal digital assistants, cell phone memory and voicemail, as well as an employee's "personal" files. Accordingly, in developing and enforcing its document retention program, a company must include all of these media in its categories of records for retention and destruction. The company also must educate its employees on the broad scope of the program.
Q: How do we go about creating and implementing a DRP?
The basic elements for creating and implementing an efficient and effective document retention program include: support of management; thoughtful, coordinated and systematic guidelines and procedures for the selection and categorization of documents with established time periods for retention and destruction; conscientious enforcement of the program to assure compliance with the guidelines and procedures for retention and destruction of records; and periodic review and revision of the program to effectively tailor it to the changing circumstances, needs and requirements of the company.
Whether a company is developing and implementing a document retention program or simply performing a periodic review, it should consider the following recommendations as a good starting place for avoiding or minimizing unnecessary risk:
- Put someone with experience and authority in charge of the policy and hold employees accountable.
- Document the goals of the program, as well as the guidelines and procedures for how these goals will be achieved.
- Consult with legal counsel and all appropriate management levels within the company and obtain written approval for the organization of records and proposed schedule of document retention and destruction.
- Involve the company's technology department in decisions regarding the program's methods for retention, destruction and enforcement.
- Documents should be destroyed systematically, as specified by the policy, not in a selective or haphazard way; require "sign off" to vary from the policy or schedule.
- Once established, the schedule of document retention and destruction should be published and all company employees should be educated about the policy and the necessity for compliance; require employees to confirm compliance.
- Be prepared to suspend regular retention and destruction procedures when litigation is pending or imminent; have a plan in place for quickly notifying all necessary staff that this action must be taken.
- Periodically conduct internal audits of the program.
- Conduct regular reviews of the effectiveness and operation of the program and consider any necessary revisions based on the changing needs and direction of the company.
Q: Where can I find out more about how to develop and manage a DRP?
Several particularly useful and valuable resources worth consulting when establishing or reviewing the effectiveness of a document retention program include: American Corporate Counsel Association, Records Retention Manual, 2001; Business Laws, Inc., Guide to Records Retention, 4/99; Office of the Federal Register, Guide to Record Retention Requirements in the Code of Federal Regulations, published with annual supplements; and Shupsky, ed., Legal Requirements for Business Records: Federal and State, a four-volume loose-leaf publication; CCH Inc., Guide to Record Retention Requirements, (Rev. 7/01).
Q: What are some of the dangers of an inadequate or poorly enforced PRD?
Improper Intent May Invalidate Policy
Whether the program was instituted in bad faith with fraudulent intent and a desire to suppress the truth may be a factor in determining whether a company's document retention program withstands legal scrutiny. In Lewy v. Remington Arms Co., Inc., 836 F.2d 1104 (8th Cir. 1988), the court suggested a reasonableness test to review the defendant's document retention program; the issue arose after the trial court used a "general negative inference" instruction due to defendant's failure to produce relevant documents (including customer complaints) that had been destroyed pursuant to the company document retention policy. Testimony was presented that the company had established its document destruction schedule to eliminate customer complaints from specific files to avoid potential liability. Other courts have found that implementing a document retention program will not insulate a company from liability if the policy is unreasonable, mismanaged or improperly applied.
Selective or Haphazard Enforcement of Policy is Dangerous
Establishing a document retention program is of little value if it is not well conceived and consistently enforced. In Carlucci v. Piper Aircraft Corp., 102 F.R.D. 472 (S.D. Fla. 1984), the court entered a default judgment and imposed monetary sanctions after determining that the stated purpose of the document record policy was the elimination of documents that might be detrimental to the company in litigation. Records management practices which are selective or inconsistent may actually create additional risks and liabilities for a company. In In Re Prudential Insurance Company Sales Practices Litigation, 169 F.R.D. 598 (D.N.J., 1997), the court imposed a $1 million fine and other litigation sanctions because Prudential's "haphazard and uncoordinated approach" to document retention, including repeated destruction of documents after entry of a document retention order, denied its opponents potential evidence. Prudential exposed itself to additional potential liability including spoliation of evidence claims, issue or evidence sanctions at trial, adverse inference instructions, as well as white collar criminal charges with its "haphazard approach" to document destruction. See, 18 U.S.C. §§ 1503, 1505 and 1510, and similar state statutes.
The Prudential case demonstrates that an effective procedure for suspending document destruction policies and instead preserving evidence is just as important as establishing destruction practices in the first place. A company should have a procedure in place that can be implemented without delay in the event of a governmental investigation or claim against the company (or a claim by your company against someone else).
The recent stories regarding Andersen's destruction of Enron documents should provide a wake-up call to companies to implement a document retention program or review the reasonableness and effectiveness of existing programs. Creating a document retention policy requires time and effort. Assuring that an existing records management program is functioning effectively and consistently also requires more than casual, sporadic attention.
While a document retention program does not guarantee that liability will be avoided, a well-conceived and consistent approach to the retention and destruction of documents should improve any company's business operations, reduce costs and minimize its liability risks. If you don't think these things matter, ask someone from Andersen.
1The expense of off-site storage is not insignificant. For example, a major document storage vendor in the San Francisco-Oakland, California area charges approximately $1.00 per box per year (5-year minimum), with handling charges of $10.00 per box for retrieval.
Thomas M. Freeman is a Director in the Oakland, California office of Crosby Heafey. Since joining the firm in 1984 after clerking for the Hon. Robert E. Coyle, U.S. District Court, Eastern District, California, his practice has focused on civil litigation with an emphasis in product liability and business litigation.
This article was originally published on the Advanced Medical Technology Association's website at http://www.advamed.org/business-solutions/index.html.