To Keep, Or Not To Keep: That Is The Question: Record Retention Policies and Spoliation of Evidence By Eric J. Remington January 2006

Like many individuals, businesses often must decide whether to keep or to destroy certain documents. A recent decision by the Supreme Court of the United States underscores the importance of having and enforcing a record retention policy. In Arthur Andersen LLP v. United States, the Supreme Court overturned the June 2002 conviction of Arthur Andersen, Enron's auditing firm, for shredding documents pursuant to its record retention policy.¹ The unanimous opinion of the Supreme Court is a major victory for businesses and emphasizes that compliance with a record retention policy standing alone is appropriate and not criminal. This decision, however, raises the questions of when destruction of documents can be improper and how that is related to record retention.

Spoliation of Evidence

As recent newsworthy cases have shown, the destruction of records created in the ordinary course of business can be a crime for which individuals and businesses may be convicted. However, even in the absence of a criminal charge, destruction of documents (also called "spoliation of evidence") can have severe consequences.

In the context of a civil lawsuit, a claim of "spoliation of evidence" often is raised when one party destroys (or "spoils") evidence that is relevant to the lawsuit. Spoliation of evidence is the intentional or negligent loss, destruction, or material alteration of evidence, or the failure to properly preserve evidence for another's use in pending or future litigation. Generally, businesses do not have a duty to preserve evidence before a lawsuit is filed, threatened, or reasonably foreseeable unless the duty is voluntarily assumed or imposed by law.² For example, the duty to preserve evidence can arise independently of litigation as a result of: (1) a contract, (2) a statute or regulation, (3) a record retention policy, or (4) professional ethical rules or regulations.³

When a civil lawsuit is filed, threatened, or reasonably foreseeable, the business, regardless of any record retention policy, must preserve evidence it knows or reasonably should know: (1) is relevant to the lawsuit, (2) is reasonably calculated to lead to the discovery of admissible evidence, (3) is reasonably likely to be requested during discovery, or (4) is the subject of a pending discovery request.4 In addition, the duty to preserve evidence may include items entrusted to or in the possession of third parties such as agents, consultants, insurers, lawyers, and accountants.⁵ If an item is lost, destroyed, or materially altered after a duty to preserve has arisen, the business runs the risk of being sanctioned by the court during the course of the litigation.

Remedies for Spoliation

In North Carolina, spoliation can be raised either by the plaintiff or the defendant. The traditional remedy imposed by the courts for spoliation of evidence is the granting of an adverse jury instruction.⁶ The adverse instruction advises the jury that: (1) the evidence was lost, destroyed, or materially altered while in the exclusive control of the spoiling party, and (2) the jury may infer, although it is not compelled to do so, that the evidence would have been damaging to the spoiler's position if it had been presented at trial.⁷

In addition to granting an adverse instruction, a court also has the authority to impose sanctions against the spoiling party such as the exclusion of evidence or expert testimony. Absent evidence of bad faith, a court generally will not dismiss a case as a sanction against a business that has lost, destroyed, or materially altered an item.

Factors that courts consider when deciding whether and what sanctions should be imposed include: (1) the culpability of the spoiling party, (2) the prejudice to the non-spoiling party, (3) the degree of interference with the judicial process, (4) whether lesser sanctions will remedy the harm and deter future acts of spoliation, (5) whether the item has been irretrievably lost, and (6) whether sanctions will punish a party unfairly for the misconduct of a third party.⁸

One step businesses can take to minimize the risk of being criminally prosecuted, receiving an adverse jury instruction, or being sanctioned for spoliation of evidence, is to develop, implement, monitor, and enforce a sound record retention policy that provides for the effective storage and destruction of electronic and documentary records. Record Retention Policies

A record retention policy is a set of guidelines that a business follows to determine how long it will keep records in electronic and documentary form. Record retention policies are important for many reasons. These include compliance with laws and regulations which specify which records must be maintained and for how long, as well as protection against claims of spoliation of evidence. Other reasons to implement a record retention policy include: (1) the expense of maintaining records, (2) the efficient organization of records, and (3) avoiding potential adverse implications that might arise from documents that are misunderstood when examined out of context.

A business should consider the following when creating and implementing a sound record retention policy:

1. The policy should be written in simple and straightforward language, dated, and distributed to all employees. For the policy to be effective, all employees must be aware of and understand the policy.

2. The policy should be reasonable. There should be valid reasons for the policy and a legitimate rationale underlying the method by which records are designated for destruction. In other words, the policy should not be adopted in bad faith or with the underlying purpose of avoiding the preservation of potential evidence.

3. The policy should comply with statutory and regulatory record-keeping requirements. There are many laws and regulations that specify which records a business must maintain and for how long. A business must comply with these requirements regardless of whether litigation is filed, threatened, or reasonably foreseeable.

4. The policy should be flexible. There should be a procedure for suspending the policy when a duty to preserve records arises.

5. The policy should be adhered to uniformly. Regular audits should be conducted to ensure compliance with the policy. A court is more likely to find that a record was destroyed in the regular course of business if an examination of the business' records reveals strict adherence to the policy.

6. The policy should be reviewed and, if necessary, revised on a regular basis. The policy should be updated as necessary to comply with any changes in the laws and regulations affecting record retention.

As recognized by the United States Supreme Court, it is not wrongful for a supervisor to instruct his or her employees to comply with a valid record retention policy under ordinary circumstances.⁹ It is improper, however, for a supervisor to "knowingly" (with awareness, understanding, or consciousness) and "corruptly" (wrongfully, immorally, with depravity or evilness) instruct an employee to destroy documents which are likely to be material to an actual or anticipated investigation.¹⁰ Conclusion

A sound record retention policy can be critical in justifying the destruction of records prior to a criminal investigation or civil lawsuit and, for various reasons, is an important part of any business's plan of operation.

To learn more about record retention policies and spoliation of evidence, contact any member of the Business Litigation Practice Group ( Thomas S. Babel, Jenna Fruechtenicht Butler, Alexander C. Dale, Donalt J. Eglinton, E. Bradley Evans, Cheryl A. Marteney, John M. Martin, Eric J. Remington, or Gary J. Rickner).

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¹ 125 S. Ct. 2129, 161 L. Ed. 2d 1008 (2005).
² Margaret M. Koesel, et al., Spoliation of Evidence 4 ( Daniel F. Gourash ed., American Bar Association 2000).
³ Id. at 8.
⁴ Id. at 9-10.
⁵ Id. at 12.
⁶ McLain v. Taco Bell Corp., 137 N.C. App. 179, 527 S.E.2d 712, disc. review denied, 352 N.C. 357, 544 S.E.2d 563 (2000).
⁷ North Carolina Pattern Jury Instructions for Civil Cases, vol. I, § 101.39.
⁸ Koesel, supra, at 33.
⁹ Arthur Andersen, 125 S. Ct. at 2135, 161 L. Ed. 2d at 1017.
¹⁰ Id. at 2135-37, 161 L. Ed. 2d at 1018-19.