Kahn Consulting Case Summaries

Document Retention Policy Justifies Destruction of Documents Not Subject to a Legal Hold

2009-05-26T18:50:00.000-07:00

Courts have repeatedly held that organizations may lawfully destroy documents pursuant to a document retention policy when such documents are not relevant to a lawsuit. This principle was again upheld in Ahcom, Ltd. v. Smeding, 2009 U.S. Dist. LEXIS 4262 (N.D. Cal. Jan. 14, 2009). Ahcom had a document retention policy which called for the destruction of all documents other than “contracts in dispute” after three years. The defendants argued that Ahcom should have preserved all contracts with the company they owned, Nuttery Farms, since that would have shown the course of dealing between the parties, which was relevant to the central issue in the case—whether the parties had agreed to arbitrate disputes arising out of their business dealings.

The court disagreed with the defendants. Ahcom had produced the contracts which were in dispute between the parties. But Ahcom had no way of knowing, when suit was filed, that the defendants would argue that the course of dealing between the parties negated the alleged arbitration agreement. In fact, the first time that the defendants raised the issue of the course of dealing was in its motion accusing Ahcom of destroying the contracts. The court concluded: “As such, pursuant to Ahcom's regular document retention policy, it would have destroyed the completed contracts long before it had reason to know they were relevant here.”

Contracts which had been completed had no business value to Ahcom, so the company destroyed them after three years. Because Ahcom incorporated this into a formal document retention policy, the court did not penalize Ahcom for failure to retain them. Document retention policies give organizations legal permission to destroy documents they no longer need or which are not needed for a lawsuit at the time they are destroyed.

Lack of a Formal Litigation Hold Policy Can Be Harmful to Your Case

2009-05-26T18:49:00.000-07:00

In Keithley v. The Homestore.com, Inc., 2008 U.S. Dist. LEXIS 61741 (N.D. Cal. Aug. 12, 2008), a patent infringement case, plaintiffs had asserted that defendants had allowed relevant electronic data to be destroyed up to three years after the filing of the case. In testimony before the federal magistrate judge, the defendants conceded that they had no formal litigation hold policy, not only at the time the claim arose, but there was still no formal policy when defendants were arguing the case before the magistrate. The magistrate found that “[t]he lack of a written document retention and litigation hold policy and procedures for its implementation, including timely reminders or even a single e-mail notice to relevant employees, exemplifies Defendants' lackadaisical attitude with respect to discovery of these important documents.” This failure to maintain a formal litigation hold policy contributed to the magistrate’s levy of “severe” monetary and evidentiary sanctions.

The defendants appealed the magistrate’s findings to the federal district court. Before the district court judge, defendants contended that they had, in fact, distributed a litigation hold memo to their key employees. However, the district court judge (Keithley v. The Homestore.com, Inc., 2008 U.S. Dist. LEXIS 103296 (N.D. Cal Dec. 15, 2008)) agreed with the magistrate, holding that “between August 2001 (when the duty to preserve evidence first arose) and February 2006 (when the memo was supposedly sent to certain employees) there was no written litigation hold policy specific to this case, and that during this time period, defendants recklessly allowed the destruction of relevant source code.”

The lesson is that the adoption of a formal document retention policy is not enough. The prudent organization will also implement a formal litigation hold policy, and make sure that their employees understand the policy and the consequences of violating it. Auditing and enforcement procedures should apply to both the document retention policy and the litigation hold policy. Otherwise, as the Keithley case demonstrates, the organization will be held responsible for the acts of its employees if they destroy documents relevant to a case.

A Document Retention Policy Can’t Be Used As A Weapon

2009-05-26T18:45:00.000-07:00

Rambus, Inc. is a technology company which had focused on the development and production of computer memory chips. Rambus developed dynamic random access memory (DRAM) chips, and had filed patent applications on their DRAM chips. Subsequently, Rambus and other chip manufacturers began meeting to discuss the development of industry-wide standards for computer chips. During the course of these meetings, Rambus started to become concerned that other manufacturers were using Rambus technology to develop competing chips.

Rambus’ representatives at the meetings began to pass information learned at the meetings to their patent counsel to solidify and extend their patent claims to other types of memory chips. Rambus sought to create a “patent minefield” which it could use to obtain a competitive advantage against other manufacturers. After receiving patents for several other chip designs, Rambus hired Joel Karp as VP of intellectual property to work on a licensing program for technologies which the CEO asserted infringed on Rambus patents. The CEO instructed Karp to develop both a licensing framework and a litigation strategy.

Karp consulted both patent licensing and litigation counsel in order to develop the strategy. The litigation attorney stated that he advised his clients to develop a document retention policy, which would help to guard against spoliation of evidence. He also stated that he would not advise clients to destroy documents if he knew litigation was anticipated. Karp, however, said that adoption of the document retention policy would help Rambus become “battle ready.” He told the Rambus board that the retention policy was necessary to prepare for the “upcoming battle.”

Subsequently, Karp announced a policy where full system backup tapes would be saved for three months, and that data to be saved beyond three months must be archived separately. A new company-wide document retention policy would be implemented, which included the statement that “documents, notebooks, computer files, etc., relating to patent disclosures and proof of invention dates are of great value to Rambus and should be kept permanently." In contrast, a Rambus engineer later stated that a category of documents which should not be kept were documents questioning the patentability of Rambus inventions.

Karp instructed Rambus patent counsel to purge the Rambus patent files. Rambus employees subsequently participated in what was called “Shred Day,” during which they destroyed documents pursuant to the new document retention policy. Several “Shred Days” were subsequently held.

Rambus subsequently sued Micron for patent infringement. Micron countersued, and accused Rambus of spoliation of evidence. Micron Technology, Inc. v. Rambus, Inc., 255 F.R.D. 135 (D. Del. 2009). The court observed that “[i]f a party has a record retention policy, it is appropriate for the court to determine "whether the policy is reasonable considering the facts and circumstances surrounding the relevant documents," or whether it was instituted in bad faith.”

The court found that Rambus’ “patent portfolio was considered a weapon to be used, as necessary, in its chosen theater of operations, the DRAM market. Under these circumstances, one could safely predict that litigation was inevitable....Moreover, because the document retention policy was discussed and adopted within the context of Rambus' litigation strategy, the court finds that Rambus knew, or should have known, that a general implementation of the policy was inappropriate because the documents destroyed would become material at some point in the future.” The court concluded that the documents were destroyed in bad faith, and as a result of all Rambus’ actions, invalidated its patents.

Any organization which adopts a retention policy for the purpose of achieving advantages in litigation is playing with fire. If that is the intent, it is inevitable that some will interpret the policy as a means of destroying possibly incriminating documents. When rolling the policy out, it must be made crystal clear that the purpose of the retention policy is to retain valuable business information for as long as that information is valuable, but also that documents relevant to audits, investigations or lawsuits must be retained. If a “difficult” document turns up, at least counsel has the opportunity to explain it in a lawsuit. If documents are missing, the organization can be sanctioned, with penalties ranging from fines to the ultimate sanction (as in Rambus) – the loss of the suit before it is even tried.

Company sanctioned for lack of information management policies

2009-05-26T06:09:00.000-07:00

Having good information management policies and procedures is one of the seven keys to information management compliance. A recent court decision highlights just how important these policies can be. In Phillip M. Adams & Assoc., L.L.C. v. Dell, Inc., 2009 U.S. Dist. LEXIS 26964 (N.D. Utah, Mar. 27, 2009), an organization was sanctioned because they had lost e-mails which were relevant to the litigation. The court attributed it directly to the failure of the company to demonstrate that it had any information management policies. The court stated: “The culpability in this case appears at this time to be founded in ASUS’ questionable information management practices....ASUS did not have a designed information management policy taking varying needs into account. ASUS offers no statements from management-level persons explaining its practices, or existence of any policies….”

Employees were responsible for saving important corporation information. But without any guidance in the form of policies, important information which they should have kept about the case was lost. The court continued: “An organization should have reasonable policies and procedures for managing its information and records...’The absence of a coherent document retention policy’ is a pertinent factor to consider when evaluating sanctions.”

An organization’s information has value and should be managed like its other assets. The Phillip M. Adams decision demonstrates that an organization can incur real costs from its failure to do so.