Impact on Litigation/Discovery Costs

Companies that have invested the time and resources to prepare a comprehensive records retention policy can comply with their discovery obligations efficiently. In contrast, companies that do not prepare in advance have found themselves unable to make required disclosures and to timely comply with discovery obligations without incurring tremendous costs. Most significantly, companies who have not prepared for e-discovery have suffered evidentiary and monetary sanctions.

As noted by Judge Shira Scheindlin of the Southern District of New York in the first of the seminal Zubulake decisions, “the more information there is to discover, the more expensive it is to discover all the relevant information until, in the end, ‘discovery is not just about uncovering the truth, but also about how much of the truth the parties can afford to disinter”’ Zubulake v. UBS Warburg, 217 F.R.D. 309 (S.D.N.Y. 2003); quoting Rose Entm’t, Inc. v. William Morris Agency, Inc., 205 F.R.D. 421, 423 (S.D.N.Y. 2002). An effective records retention policy can assist companies in dealing with the tremendous volume of electronic records and reducing the costs of complying with electronic discovery requests.

Developing the Policy

In developing a records retention policy, the company should first analyze the records environment to assess areas and levels of risk to the organization that may result from existing records retention policies and practices. Based on identified risk areas, the company can then evaluate existing written and/or de facto policies, processes, and technologies to identify weaknesses, categorize risks, and recommend improvements. With the results of the risk and needs assessment in hand, the organization can then modify the existing policy or develop a new, practical, and cost-effective records management and retention policy that addresses and resolves any potential issues revealed during the risk and needs assessments.

Litigation Discovery Procedures

To avoid court sanctions, costly e-discovery compliance, and missing court deadlines, companies should prepare in advance to properly respond to e-discovery requests and mandatory disclosures. Tire company should provide training to its personnel with respect to the policy to assist compliance with paper and e-discovery obligations. A critical aspect of litigation preparedness is knowing what electronic records the company maintains and where they are stored. The company should develop legally compliant data maps that categorize the company’s electronic records and identify where the records are stored, as well as the appropriate records custodians who can provide electronic records as needed.

The records retention policy should address obligations under the federal and state rules of civil procedure relating to electronically stored information. These rules require early treatment of e-discovery issues, as well as full and accurate disclosure of the existence of relevant ESI. If not properly planned, managed, and coordinated, locating and producing ESI can become very time-consuming and expensive. Failure to comply with the discovery rules can result in court-imposed sanctions, fines, and adverse rulings. Accordingly, it is critical for companies to develop accurate documentation describing their ESI practices and policies on the “front end,” rather than dealing with these issues on an ad hoc, case-by-case basis after litigation has commenced.

Developing the Retention Schedule

An essential component of every records retention policy is the retention schedule that identifies all different types and categories of records and the required retention periods. Hie retention periods may be based on a statute, regulation, or other law that mandates the record be retained for at least a specified period of time. In the absence of a legally mandated retention period, operational requirements will dictate how long records should remain available. Failure to utilize an accurate retention schedule can lead to premature destruction of records, resulting in legal fines and sanctions and loss of information needed for the ongoing operations of the business. The company’s records retention policy should have a retention schedule that accurately and concisely identifies all different categories and types of paper and electronic records retained by the company and legally compliant retention periods for each category or type of record.

■ Compliance with applicable law. First and foremost, retention periods must comply with applicable laws. Many types of records have mandatory retention periods required by law. For example, in the area of human resources, federal law requires payroll records to be retained for at least three years, and records relating to employment actions (e.g., hiring, promotions, demotions, firing) must be retained for at least one year. (26C.F.R. 1627-3; 29C.F.R. 1602.14; 29C.F.R. 516.5.) In the area of employee safety, employee medical records and records relating to exposure to hazardous materials must be retained for at least thirty years. (29 C.F.R. 1910.1020.) State laws and regulations also contain record retention requirements.

■ Senior management involvement. Senior management must stress the importance of developing the records retention policy and an accurate schedule in order to maximize the likelihood of receiving timely and accurate responses to the surveys. If possible, it is preferable to provide applicable employees with a sample or starting list. The starting list might come from existing lists within the organization that need updating or from legal counsel or consultants with records retention expertise.

■ Litigation hold. Records that are relevant or may be relevant to pending, threatened, or reasonably foreseeable litigation, claims, investigations, or other legal proceedings must be preserved from destruction. If the organization becomes aware that a lawsuit or other legal process has commenced or is likely to commence, records relating to that claim may not be destroyed. The records should be identified, segregated, and preserved until the claim is resolved. This is often referred to as a “legal hold” or “litigation hold.” The legal hold process should be coordinated by the company’s legal counsel— whether in-house, external, or both. Companies that do not avoid destruction of records subject to a legal hold scenario face risks of sanctions, including monetary fines, adverse rulings in court, and other detrimental consequences.

■ Data collection. The first step in developing the retention schedule is data collection. If the company has an existing retention schedule or list of records, they can be used as a starting point in the development of the retention schedule. Often, a company will not have an enterprise-wide retention policy in schedule; however, certain business units or departments may have developed their own schedules out of necessity or as a useful tool.

■ List of records categories. The records list should be detailed enough to accurately reflect and capture all different types and categories of records maintained by the company, however, should not be so long and detailed as to render the list meaningless or overly difficult to use. Remember, the goal is to have a defensible policy that can and will be substantially complied with by the employees of the organization.

■ Surveys. Tire records list is typically prepared by using written surveys, interviews of key personnel, or a combination of both. The survey is essentially a questionnaire designed to solicit information and identification of the different types of records maintained by a particular department or business unit. It typically is a waste of resources to survey all employees. Accordingly, the company must decide which employees should receive the survey. Department managers and leaders typically are in a good position to identify the appropriate personnel to receive the surveys.

■ Interviews. Interviews are also useful in collecting the necessary information to develop the records list. Interviews have the advantage of one-on-one communication, which allows for interaction, questions, and answers in a format more efficient than the survey process. Additionally, the interview has the added benefit of “getting the job done” rather than the inevitable delays and back-and-forth that may result from using a survey. Finally, interviews can be more easily tailored to the specific personnel and business function. As with the survey process, the company must carefully determine the most appropriate individuals to be interviewed.

■ Structure or retention schedule. For most organizations, the best way to structure the retention schedule is by using the internal organization structure used by the company, for example, by departments, divisions, business units, and/or business lines. Thus, employees in the human resources department will know to first look at the “Human Resources” section of the schedule, while accounting personnel will be directed to the “Accounting” or “Finance” section of the schedule. The schedule should be published in an electronic format (e.g., Word or .pdf) so that it is word searchable, which will make it easier for employees to locate the applicable retention periods.

- Keep in mind that a department-based schedule can result in duplication. For example, many different departments may deal with invoices, contracts, and inventories. While there may be legitimate business reasons to retain similar records for different periods of time depending on the business function, the same or similar records should be retained for consistent time periods as much as possible.

Determining retention periods. After developing the records list, it is necessary to determine how long each type of record should be retained. The first question to ask is whether a federal or state law, regulation, or statute requires retention for a particular period of time. If so, this will be the minimum retention period. Most records, however, will not have a clear and explicit legally read wired retention period. Accordingly, the organization will need to consider other factors in determining the retention period, for example, ongoing business operations, litigation, regulatory audits, customer service, budgeting, and strategic planning.

• - The number of different retention periods should vary (e.g., one year, four years, seven years), but having too many different retention periods adds to the complexity of the schedule and makes compliance more difficult. Accordingly, many companies will use three or four “buckets” such as short-term (one year), medium-term (three years), long-term (seven years), and very long-term (e.g., thirty years for OSHA- and hazardous waste-related records).
• - In determining the retention period, the company should ask not how long a record is kept, but rather, being realistic, how long the record is really needed. Many employees overestimate the value of their records and mistakenly believe they should be kept longer than they really should be retained. Similarly, employees often overestimate the risk of destroying records. Thus, personnel involved in determining retention periods should be educated on the importance of retaining records long enough, but not too long.
• - One common factor in assessing appropriate retention periods is whether the records are likely to be relevant in the event of litigation. For example, contracts, accident records, customer complaints, research and development, and employee disciplinary records are often relevant and needed for litigation, whether for prosecuting or defending claims. For these types of records, consideration should be given to the applicable statutes of limitation. For example, if the statute of limitation for contract actions is five years, contracts and records relating to the contract should be retained for at least a period of five years after termination of the agreement.

• - Keep in mind, however, that a statute of limitation relates to how long a party can wait before bringing a lawsuit and is not an explicit retention period. Thus, a company with operations in several states may choose a reasonably long retention time based on the various statutes of limitation; however, not necessarily the longest statute of limitation. For example, Illinois has a ten-year statute of limitation for written contracts. Six years or less is a common limitation period for written contracts. A company with operations in Illinois and other states with shorter limitation periods may appropriately use a six-year retention time for records retention based on statutes of limitation. Most lawsuits are brought within a year or two of the circumstances giving rise to the claim. As time passes after a particular event, the likelihood of a lawsuit diminishes. Thus, a retention period shorter than a long statute of limitation may be appropriate under the circumstances.
• - Retention periods generally come in two types—the time may be based on when a document is created, or when the document is no longer “active.” A contract is active for the period of time it is in effect. For example, a company policy is active until it is superseded by a new policy. A contract is active until it is terminated or expires. Thus, a retention period for an invoice may be “1”—meaning it should be retained for one year after it is created. A retention period for a contract may be “A-I-5” meaning it should be retained for five years after termination of the agreement.
• - Generally, it is not advisable to use “permanent” or “indefinite” retention periods. When used, permanent typically means the record is kept “forever.” Indefinite records do not have a definitive retention period, but should be periodically reviewed to determine if they are eligible for destruction and are not subject to continued legal or business retention requirements. Overuse of the permanent retention period is discouraged as it defeats one of the primary benefits of a retention policy, namely the ability to destroy records. Indefinite times are problematic as they add subjectivity and uncertainty to the records retention and destruction decisions. Subjectivity can result in inconsistent and haphazard retention practices, increasing the risk of loss and liability due to untimely or improper destruction of records.
• - A company’s past experience should also be considered in determining retention times. For example, a company that experiences a high level of litigation relating to a particular business function should examine past history in determining which types of records have been relevant or needed for the litigation, and determining the retention time, most likely driven by the applicable statute of limitation, and secondarily, the typical timing of when claims are filed.
• - Numerous resources exist for identifying laws, statutes, and regulations that contain mandatory retention times. Nonetheless, the number of such laws and regulations is so numerous, particularly when including the state level, it is not always a simple or quick task. Legal counsel and consultants with experience and expertise in records retention matters will likely have existing work product and databases with legally required retention times. Commercially available legal databases, such as Westlaw and LexisNexis, can be utilized for electronic searching. Additionally, Information Requirements Clearinghouse (www.irch.com) provides useful records retention resources.
• - Citations to the applicable laws and regulations should be identified either in the retention schedule itself or in separate documentation maintained as part of the records retention program. This is particularly useful if it is necessary to review the actual law to determine applicability to a particular type of record. Additionally, tracking the applicable laws makes periodic updating to comply with changes in the law and confirmation of the retention times easier and more efficient.