Every business strives to avoid a trip to court house, but at times litigation cannot be avoided. Businesses (and individuals) are wise to have legal counsel already in place before litigation ensues. Having an established relationship with legal counsel before facing litigation allows your business to be prepared to protect and advance its legal rights from the very beginning of the dispute. One critical reason to have legal counsel in place is to ensure your business understands it obligations to preserve all evidence – both electronic and physical – that is relevant to the potential dispute. In today’s electronic business environment where the great majority of data is created and stored electronically, it is critical that businesses understand their obligations to preserve their electronic data. By properly preserving data, a business can ensure the critical evidence in support of its case can be disclosed during the litigation and ultimately presented to the finder of fact.
The Arizona Rules of Civil Procedure (ARCP) set forth the requirements of all parties to the case to preserve and disclose “electronically stored information” (ESI). Rule 26.1(a)(9) requires all parties to any civil litigation to disclose their relevant ESI to all other parties to the litigation. In layman’s terms, this rule requires a party to preserve and then provide the opposing party with access to all relevant ESI, such as emails, text messages, excel spreadsheets (this is by no means an exhaustive list) that are not protected from disclosure by a privilege (such as the attorney-client privilege). A failure to preserve relevant ESI exposes the offending party to powerful sanctions.
These sanctions for failure to preserve ESI are set forth in Rule 37(g). If ESI is lost because a party failed to take reasonable steps to preserve the data, under Rule 37(g)(2), the Court must then determine whether the party that failed to preserve the information “acted to deprive another party of the information’s use in the litigation.” In other words, the Court must determine if the party intentionally destroyed its ESI to avoid disclosing that ESI to the other parties in the case. If the Court determines a party did act to deprive another party of relevant ESI, the Court may impose sanctions under Rule 37(g)(2)(B) including: (1) presuming the lost ESI was unfavorable to the party that failed to preserve the data; (2) instructing the jury that it must presume the lost ESI was unfavorable to that party; or (3) dismissing the lawsuit (if the Plaintiff destroyed the ESI) or entering a default judgment (if the Defendant that destroyed the ESI). These sanctions will inevitably lead to a poor result in the litigation for the party that failed to preserve its ESI, and likely expose that offending party to an award of attorneys’ fees in favor of the opposition.
Alternatively, if the failure to preserve data was not intentional, Rule 37(g)(2)(A) nevertheless authorizes the Court to make such orders that cure the harm caused by the loss of the ESI. While not as damaging as the sanctions for intentional destruction of ESI, no litigant wants to be in a position where a Court must make an order with the explicit purpose of helping the opposition recover from the inadvertent destruction of ESI.
In order to avoid these potential sanctions for the destruction of ESI, businesses must know when their obligations to preserve ESI begin. Here, Rule 37 again provides guidance. Rule 37(g)(1)(A) states that a party “has a duty to take reasonable steps to preserve ESI relevant to an action once it commences the action, once it learns that it is a party to the action, or once it reasonably anticipates the action’s commencement, whichever occurs first. Rule 37(g)(1)(B)(i-ii) then proceeds to define “reasonable anticipation” to mean when a person “knows or reasonably should know that it will likely be a defendant in a specific action” or “seriously contemplates commencing an action or takes specific steps to do so.” The duties to preserve evidence and the sanctions set forth in Rule 37 for the failure to preserve ESI are consistent with Arizona case law regarding the destruction of physical evidence. See Souza v. Fred Carries Contracts, 191 Ariz. 247, 251, 955 P.2d 3 (App. 1997) (“[L]itigants have a duty to preserve evidence which they know, or reasonably should know is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.”).
Based upon the parameters set forth in Rule 37, a business’s duty to preserve ESI may arise much earlier than its leadership may realize. As an example, a lender has a borrower that defaults on a loan payment. The lender sends a notice of default letter to its borrower reserving all of its rights under the loan documents. Pursuant to Rule 37, the lender’s duty to preserve ESI began at the time the decision was made to send the notice of default. The lender has a duty to preserve all relevant ESI (such as all emails between the borrower and lender representatives). As another example, a company hires a new employee that the company did not know was subject to a non-compete provision from the employee’s previous employer. The previous employer sends the company a letter informing the company that it has hired the employee in violation of a covenant not to compete and threatens legal action. At that point in time, the company (and the previous employer) has a duty to preserve all relevant ESI related to that employee, including email correspondence, on-line employment applications, etc.
Experienced litigation counsel can guide their clients through ESI preservation obligations as well as the production of ESI. Once you have retained counsel, the duty to preserve evidence – in your possession and in your opposition’s possession – is an important issue to discuss. Your legal counsel should provide you, the client, written guidance as to what relevant ESI needs to be preserved. Additionally, your legal counsel may send a “litigation hold” letter to all opposing parties and/or their counsel advising them of their ESI preservation duties under Rules 26.1 and 37. Through a litigation hold letter, your counsel places the opposition on notice of its obligations to preserve all relevant evidence in their possession, including ESI. This will prevent the opposition from later claiming it was unaware of its preservation obligations and insure your ability to obtain critical evidence in the opposition’s possession.
If you have any questions regarding your obligations to preserve evidence for purposes of civil litigation, contact your legal counsel to discuss and work through these issues. These questions should be asked at the beginning of any potential dispute to ensure that all evidence – including ESI – is preserved.
About the Author: Damien Meyer is a shareholder with Engelman Berger and a member of the civil litigation practice group. Damien practices primarily in commercial litigation and business counsel. His focus is to assist businesses and individuals in resolving disputes on a proactive basis to achieve and protect their business objectives and interests.
Disclaimer: This blog is not legal advice and is only for general, non-specific informational purposes. It is not intended to cover all the issues related to the topic discussed. If you have a legal matter, the specific facts that apply to you may require legal knowledge not addressed by this blog. If you need legal advice, consult with a lawyer.