Minimizing liability with an effective document creation and retention policy.

Abstract

An increasing number of statutes and governmental regulations impose obligations on organizations to retain documents. The failure to do so could expose the company to sanctions, liability and criminal penalties. This paper discusses why firms retain documents, considerations in creating documents, and the implementation and enforcement of an effective document retention policy to avoid or minimize the risk of liability.

Introduction

There have been an increasing number of statutory and regulatory schemes that impose obligations to retain documents on business organizations, including small businesses. For example, the Sarbanes-Oxley Act, enacted primarily in response to the Enron and Arthur Andersen scandals, impose, potential liability for shredding corporate documents on those who knowingly alter or destroy a document with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction or agency of the United States. The statute does not require that there be a pending proceeding. If a person has reason to believe that a document may be requested by a federal agency at a later time, even though no litigation or formal investigation is pending, and destroys or alters that document, that person may be found guilty of obstruction of justice and be subject to fines and up to 20 years imprisonment [9].

There are also federal and state obstruction of justice statutes that apply when there is a pending court proceeding, and there is a connection between document destruction and the proceeding. For example, under the Occupational Safety & Health Act (OSHA) an employer is obliged to keep detailed records of worker injuries and illnesses. An employer would face stiff fines or penalties if some or all of these records were found missing or destroyed while a court action was pending regarding an OSHA violation involving worker safety [7].

Courts have also held that there is a duty to preserve and not to destroy documents before litigation begins if a party knows of the existence of a potential claim and can identify relevant evidence [10]. Further, there are statutory time periods for retaining documents. Federal obstruction [4], and document retention requirements can also be found within various professional and industry standards, (e.g., a real estate broker or attorney must retain client trust fund records for a certain period of time). As a result, potential liability and sanctions (a penalty or punishment provided as a means of enforcing obedience to a law) can be avoided or minimized with an effective document retention policy (DRP).

In addition, instituting an effective DRP has other advantages. Litigation costs and sanctions can be reduced by lessening the time and expense spent in locating documents requested during discovery. By periodically destroying documents pursuant to a DRP, the firm reduces the volume of documents required to be produced in response to a search for stored documents, thereby enhancing business efficiency and minimizing storage costs. Also, documents can be legally destroyed pursuant to a reasonable and systematic DRP if no threat of litigation or government investigation is pending, thus preventing a claim of willful destruction of evidence.

It is important for the policy to consider the business objectives of the company, and DRP policies will vary from firm to firm and even within the company itself. Further, it is not enough to have a DRP in place without an effective enforcement mechanism. This paper will discuss the more important considerations in the development of a DRP, keeping in mind that the policy must be tailored for the particular firm.

Consider a Document Creation Policy

Before the retention policy is implemented, the company should first consider adopting a document creation policy that anticipates possible future litigation [2]. This is especially significant with the advent and extensive use of electronic communications. Documents are often created spontaneously and under pressure, using PDAs, e-mail, text and instant messaging, forums, bulletin boards and chat rooms. Employees often believe some documents and electronic communications are private, not aware or realizing that they may become evidence subject to subpoena (i.e., a court process where pertinent documents must be produced) in subsequent litigation. For example, an employee may have made comments via e-mail to other employees that may be construed as sexual harassment, and may expose the employer to liability. Often in civil and criminal cases issues of intent, dishonesty, wrongful conduct and judgment are the focus of the investigation: that is, there will be great interest in who said what, where and when to determine the party's motive. Employees are not always careful in their choice of words. They may simply be trying to do a good job. A simple, innocent communication can become harmful to the firm in the hands of a skillful trial lawyer as he introduces the document as evidence before a jury.

Employees may also think, often incorrectly, that their electronic communications are not recoverable since they were "deleted." For the most part employees believe they have a right to privacy with regard to many of these communications, when in fact there is often no such right since these electronic devices are owned and controlled by the employer. Any employee right of privacy stems from whether they had a reasonable expectation of privacy when using the employer's equipment, e.g., where the employer has a stated policy of allowing employees to make personal e-mail communication. Usually an employer will prohibit or restrict the employee's use of the equipment for personal purposes, thus barring any expectation of privacy.

In creating documents, the work force must be educated to understand the risks that are created whenever a document is created, either in paper or electronic form. Therefore firms should adopt a policy that controls the creation of potentially harmful documents. This can be accomplished by:

1. Prohibiting employees from creating documents that use vulgar and unprofessional language.

2. Prohibiting the use of company computers and electronic devices for activities such as viewing pornographic websites, participating in chat rooms, trading in securities, posting messages on message boards and similar conduct.

3. Discussing and resolving internal disputes only in person.

4. Avoiding the creation of documents that include unfounded assumptions or opinions (i.e., gossip) that may lead to misinterpretation and misunderstanding. The facts should be verified to assure accuracy of the written communication. Criticism of the firm's products, practices and employees should be avoided. Words should be chosen with care. Employees should not comment on potential legal liability of the firm.

5. Avoiding writing anything unless it is necessary. Nonessential or sensitive matters should be discussed and communicated in person or by phone.

6. Educating and informing employees that they are to assume that every written document will be read by an adversary in litigation. The federal and state court rules allow disclosure of nearly every potentially relevant e-mail, report, letter, and memo if a lawsuit is filed. Employees need to exercise caution and reflect before they write, and realize that if a communication can be interpreted to mean something else, it will be in litigation. Employees must be educated as to the importance of creating documents that could be harmful to the company, and be made aware that their e-mails are not destroyed when deleted. Further, management should understand that they must monitor documents created in their departments.

7. Taking corrective action to address issues raised in an original document that reveals a legitimate problem with the firm's products and practices, e.g., where test results show serious side effects of a new drug. Such action should be fully and carefully documented.

8. Restricting and controlling dissemination of all writings to only those individuals who have a need to know. Drafts of the final document, with markups and notes, should not be retained. These drafts can be harmful in that they may disclose other ideas and statements that were eliminated for sound business reasons but may be used later to show that the firm should have known there were better ways to proceed than the one chosen. Personal notes should not be kept if they are no longer needed. Retention of these notes often serves no business purpose. An exception would be notes taken during a stockholder or director meeting.

All of these actions create documents which, even if disclosed during an investigation, will minimize embarrassment or liability to the company. In addition, to be effective, the document creation policy must be communicated to all relevant parties. Meaningful enforcement procedures must be put in place and adhered to: for example, taking appropriate disciplinary action against those who violate the policy.

Reasons for Keeping Documents

Firms should keep documents for a number of different reasons: for example, compliance with statutes and regulations that require preservation of documents, anticipation of future litigation, and preservation of knowledge and information essential to the firm's present and future business practices. Often, however, companies retain documents out of habit and inattention, which in many cases would be a good reason not to keep them.

Statutory and Regulatory Duties