Higgs Fletcher & Mack LLP

Document Retention Policies
Learning from Enron and Arthur Andersen's Mistakes
By Jason D. Maxwell

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News media coverage of the congressional hearings and investigations of Enron and Arthur Andersen's recent troubles have brought "document retention policies" into the limelight. These cases vividly illustrate the importance to businesses large and small of correctly designing and implementing document retention policies.

A document retention policy is simply a company's procedures for the preservation and non-preservation of information. This includes traditional records and documents, as well as documents or information stored in electronic or other formats, including e-mail. Retention policies address the life cycle of a business' documents from their creation, through storage and destruction.

Retention policies must be tailor-made to fit each business' needs. There is no one-size-fits-all plan. Policies vary from industry to industry and from company to company. State and federal laws may mandate the retention of certain documents. Companies doing business outside the United States must comply with foreign laws. Contractual relationships may also require the retention of certain documents.

Different kinds of documents must also be treated differently and have differing retention periods. For example, records concerning employee retirement plans must be maintained indefinitely, while e-mail may be disposed of more quickly. Last, but not least, a company must obviously retain the documents it needs to operate. All of these factors, and more, must be carefully evaluated in creating a business' retention policy.

Once a business no longer needs a document and its retention is not otherwise required, it should generally be destroyed. It is permissible to destroy documents, including deleting computer files and shredding documents, unless at the time of the destruction there was a duty to preserve them. Retaining such documents is a needless expense.

Possibly more important, though, a document retention policy can be critical in positioning a business to effectively and efficiently defend against future lawsuits. In litigation, this may benefit a company in several ways. First, a retention policy allows a business to justifiably dispose of unneeded documents while retaining and managing only necessary documents.

A retention policy also helps to hold down litigation costs. In litigation, if one party makes a discovery request for certain documents, the other party has a duty to conduct a diligent search for documents in its custody that may be responsive to the request. The more documents there are, the more time consuming and costly the search and production. Imagine the expense of having attorneys comb through filing cabinets full of documents and tens of thousands of e-mail that were needlessly kept. In a recent case, a business sought protection from the court to avoid having to do so. The court denied the request, stating that the company chose to store the information, and it would have to bear the cost of producing it.

A document retention policy may also help shield a business from potential liability in litigation. Any time a document is retained, there is a risk that the information in it could be used against the business in litigation. A document retention policy can reduce such risks.

Attorneys suing businesses will try to use the business' own records against it in litigation. Portions of documents may be taken out of context in a manner not flattering to the business. Indiscreet employee e-mail, notes, or portions of documents that did not make the final draft may be held up as "evidence" against the business. Attorneys may claim that such documents show a "paper trail" or that a document is a "smoking gun." The fewer such documents that exist, the less risk of their use or misuse against the business.

With that said, no retention policy at all is often better than a poorly designed, poorly implemented, or poorly enforced one. Flawed policies, or inconsistently or selectively enforced policies, can be a serious liability. At best, they may cause a company to incur increased litigation costs as discussed above. Worse yet, a flawed policy may also allow the destruction of documents contrary to laws, regulations, or contractual agreements. This could lead to governmental sanctions, civil liability, or even criminal liability.

An inconsistent retention policy can be especially harmful in litigation. If documents are not routinely destroyed in compliance with the policy, when destruction does occur, it may appear selective and calculated to destroy evidence, rather than to implement routine housekeeping.

In the Enron hearings, for example, the chairman of the House Committee on Energy and Commerce asked: "Why did key Andersen employees suddenly decide - in October, just as it was becoming clear that outside investigation was imminent - to enforce document destruction policies?" To avoid being the subject of this sort of question, it is imperative that businesses consistently implement and periodically audit compliance with their retention policy.

The following is an example of the basic steps needed to create and implement an effective document retention policy:

Inventory all documents generated or received by the business.
Survey all laws, regulations, or other requirements mandating retention of documents.
Evaluate business needs for document retention and the cost of retention.
Categorize documents into compliance groups.
Evaluate potential impact of retention or non-retention on future litigation.
Create a written retention policy taking into account the foregoing considerations.
Implement the policy.
Periodically audit compliance.
Periodically evaluate and update the policy.

A well-designed policy must also require the cessation of document destruction upon notice of a pending lawsuit or governmental investigation. As the Andersen investigation illustrates, failure to do so can have serious consequences.

Destroying documents with notice of a pending governmental investigation may give rise to criminal liability. In civil litigation, such destruction can give rise to arguments that harmful evidence was intentionally destroyed. If a court believes documents were intentionally destroyed when an investigation or the litigation was anticipated, it may instruct the jury to presume the worst about the content of those documents (see California Forms of Standard Jury Instructions, BAJI 2.03). Thus, a completely harmless memorandum could become a "smoking gun." A court may also sanction a party for abuse of the discovery process for destroying documents with notice of potential litigation (California Code of Civil Procedure § 2023). These sanctions may include ordering that the party pay fines or attorneys' fees, ordering that certain facts are deemed admitted, and even entry of judgment against the offending party. Attorneys participating in destruction of evidence are also subject to discipline by the state bar.

As the Enron and Arthur Andersen matters unfold, they emphasize the need for effectively and consistently applied policies. A well-designed and implemented policy can minimize the information in a company's archives that may be incriminating in the event of unforeseen litigation, without creating the appearance of impropriety. For these reasons, every business should implement and consistently enforce a well-designed document retention policy.