Businesses today face mounds of papers and Himalayan-sized mountains of emails. Business owners often must decide whether to keep or to destroy these hard-copy and electronic documents. So, when can you destroy these materials without getting into trouble? Do the rules apply only to criminal matters?

From a legal perspective, the rules related to data disposal (whether the data is on paper, in e-mails or sitting on the hard drive of the now-defunct computer) relate to what must be produced in response to a data discovery request in litigation or in a criminal investigation. If you have wrongfully disposed of what might be evidence, then you could be in serious trouble.

Not all destruction of data is problematic, however. Several recent court decisions have underscored the importance of having and enforcing a record-retention policy in order to avoid the dilemma of destruction versus jail time. In the most notable of these, Arthur Andersen LLP v. United States, the U.S. Supreme Court overturned the conviction of Arthur Andersen, Enron's auditing firm, for shredding documents pursuant to its record-retention policy, holding that compliance with a record-retention policy, standing alone, is appropriate and not criminal.

Destruction of Evidence

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. For example, the duty to preserve evidence can arise independently of litigation as a result of a contract, a statute or regulation, a record-retention policy, or professional ethical rules or regulations.

When a civil lawsuit is filed, threatened, or reasonably foreseeable, however, then the business, regardless of any record-retention policy, must preserve evidence it knows or reasonably should know is relevant to the lawsuit. In addition, the business is required to preserve anything that can be reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery, or is the subject of a pending discovery request. Further, 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. 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 (the party bringing the suit) or by the defendant (the party against which the claim is made). The traditional remedy imposed by the courts for spoliation of evidence is for the judge to advise the jury that the evidence was lost, destroyed, or materially altered while in the exclusive control of the spoiling party, and that, as a result, 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.

In addition to granting an adverse jury 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, however, a court generally will not dismiss a case as a sanction against a business that has lost, destroyed, or materially altered an item.

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

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/or documentary form. Record-retention policies are important for many reasons, including compliance with laws and regulations that specify what records must be maintained and for how long, as well as for protection against claims of spoliation of evidence. A business should consider the following when creating and implementing a sound record-retention policy:

• 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 it.
• The policy should be reasonable. There should be valid reasons for it 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.
• 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 record-retention policy must comply with these requirements regardless of whether litigation is filed, threatened, or reasonably foreseeable.
• The policy should be flexible. There should be a procedure for suspending it when a duty to preserve records arises.
• The policy should be adhered to uniformly. Regular audits should be conducted to ensure compliance with it. 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.
• The policy should be reviewed and, if necessary, revised on a regular basis. It should be updated as necessary to comply with any changes in the laws and regulations affecting record retention.

As the Supreme Court recognized, it is not wrong for a supervisor to instruct employees to comply with a valid record-retention policy under ordinary circumstances. 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 that are likely to be material to an actual or anticipated investigation.

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 the plan of operation for any business.

For further information regarding the issues described above, please contact Eric J. Remington.

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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.