Navigating new rules for electronic information retention

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Amendments to Federal Rules of Civil Procedure should aid counsel in helping clients limit preservation costs, exposure to discovery sanctions

By Ryan M. Billings
Kohner, Mann & Kailas

Anyone who is involved in or reasonably expects litigation has a duty to preserve documents and information they have, including electronically stored information that might relate to the litigation.

A party that fails to meet this obligation can face monetary penalties and other court sanctions. They can be severe — in extreme cases courts have awarded fees in the millions of dollars, dismissed cases or defenses, and have even threatened offending parties with imprisonment for contempt of court.

To avoid the risk of stiff penalties, companies often err on the side of caution and over-preserve electronically stored information. And with the recent increase in the volume of information generated in the course of business operations, data preservation has become increasingly expensive.

A recent study found that some companies are spending millions of dollars a year to preserve electronic records. New changes to the Federal Rules of Civil Procedure could serve to help businesses limit these costs, and better manage the risk of sanctions.

On Dec. 1, Federal Rule 37(e), which deals with the preservation of electronically stored information, was significantly amended. The former Rule 37(e) was limited and merely instructed courts that they could not sanction a party that lost such data “as a result of the routine, good-faith operation of an electronic system.” This provided little practical guidance to companies in making decisions about what data they were required to retain. The new Rule 37(e) provides a much clearer standard.

The amended rule clarifies that when companies foresee litigation or become involved in a suit, they have a duty to take reasonable steps to preserve electronically stored information. If a party does indeed take reasonable steps toward that end, it cannot be sanctioned because of lost data. Even if information is lost because of a party’s failure to make reasonable preservation efforts, the courts must first decide if the lost information can be restored or replaced with additional or alternative discovery before considering sanctions. Further, before sanctions may be imposed, a court must make an affirmative finding that the party that lost the information acted intentionally, or that the opposing party has been prejudiced by the loss.

Unless the court finds that a party lost electronically stored information intentionally, the court may not impose sanctions any greater than what is necessary to cure the prejudice to the opposing party. The amended rule further clarifies that, absent a finding of intentional deprivation, the court may not impose the most severe sanctions, including the dreaded “adverse inference” penalty, in which the court or jury presume that the lost information was unfavorable, or the “nuclear sanction,” involving outright dismissal of an action or default judgment.

The amended rule provides structure and guidance to companies deciding how and when to preserve data that may be relevant to litigation, and protects them as long as they act reasonably. Companies can limit risk and curb costs by tailoring their document-retention policies and litigation holds to the amended rule.

In addition, counsel facing motions for discovery sanctions have new defenses to protect their clients. Conversely, parties seeking to pursue sanctions must make sure to exhaust other remedies and be prepared to show prejudice or intentional deprivation before they seek court intervention.

While the amended rule applies only to cases under federal law, Wisconsin discovery law tends to gravitate, over time, to the federal standard. Businesses and counsel should take heed of the changes.