It can make you or break you: The importance of records mana

Many, perhaps most, disputes involving commercial entities entail the involvement of corporate records--even before litigation is initiated. Something as simple as a "slip and fall" case will implicate an organization's records virtually from the moment the claim is received. The law does not require that a company make a perfect guarantee against all hazardous conditions, only that it makes reasonable efforts to provide safe conditions. The presence or absence of records indicating such reasonable efforts will be critical to a company in evaluating a slip and fall claim made against it.

The company's policies and procedures regarding the cleanup of spills, ice and snow, and other hazards, and the records detailing whether or not those policies and procedures were carried out will come immediately to the forefront of the case. They contain information critical to the company's legal representatives as they make the determination as to whether to defend the claim or settle it. Thus, cost-effective management of the claim is dependent upon the organization's ability to create and maintain the appropriate records, and to locate them quickly when they are needed.

In other cases, such as lawsuits between two corporations for breach of contract or other business matters, disputes with regulatory agencies, or product liability disputes, the involvement of the company's records from the outset is even more apparent. A company contemplating a breach of contract claim against a vendor or supplier must first evaluate its own records to determine whether or not there has been a breach, and whether it can prove that breach to the other party or in court. The ability quickly to determine the true state of affairs will often allow settlement of the dispute without the initiation of legal action. A party defending such a claim has a similar need for timely and accurate information from its own records system.

In similar fashion, a company's records are immediately involved in a dispute with a regulatory agency. With few exceptions, any government agency which regulates a business is entitled to examine the company's books and records with little or no notice, and for any reason. The existence and availability of appropriate records for the auditor is critical to resolving the dispute on terms favorable to the company, while the absence or unavailability of such records may, in and of itself, be enough to raise warning flags which, in turn, cause the initiation of more intrusive or aggressive audit procedures.

In product liability cases, engineering records, accident reports, complaint files, and other related records will immediately become central to the dispute as both sides analyze the merits of the claim.

In all of these cases, a comprehensive records management program will enable an organization to quickly and accurately assess its own position with respect to any allegations made by an opposing party. In many cases, the organization can then favorably resolve the dispute, since it will be in a position to produce tangible, credible, and admissible evidence that its position is defensible should the matter proceed to litigation. Even in cases where the allegations being made have merit, there may still be a substantial savings to the company, since the claim can be thoroughly analyzed and a settlement reached without the considerable expense and risk involved in proceeding to litigation and then discovering late in the game that the organization is advocating a losing position.

THE LAWSUIT

Once a lawsuit is filed, the records management program becomes formally involved in the lawsuit. The plaintiff files a complaint, the defendant files an answer, and if there are multiple claims by multiple parties there may be cross claims or counterclaims. After every party has filed its claims and its answers, the lawsuit begins a phase called discovery, during which the parties gather evidence to bolster their positions. In the federal courts, discovery is governed by the provisions of the Federal Rules of Civil Procedure (F.R.C.P.). Most states have adopted the provisions of the Uniform Rules of Civil Procedure (U.R.C.P.), which are in most respects identical to the federal rules.

A company's records become involved at this stage through a variety of devices. F.R.C.P. 26 provides that discovery may be made by depositions upon oral examination or written question; written interrogatories; production of documents or things or permission to enter upon land or other property; physical and mental examinations; and requests for admission. In a commercial lawsuit, all of these procedures potentially implicate the corporation's records.

Laymen are oftentimes surprised by the wide latitude afforded parties during discovery. Contrary to the portrayals on television and in popular literature, where the parties play a cat-and-mouse game of hiding evidence from one another, the law requires that each party make all relevant evidence in its possession available to the other party, so that the true facts of the case can be determined.

Although the cat-and-mouse game can occur in real litigation, it is a risky strategy, as well as being illegal and unethical. Courts can and do impose drastic penalties, up to and including default judgment, for obstructive behavior during the discovery process. There are innumerable reported cases where parties incurred substantial sanctions for inappropriate behavior in this area. Therefore, if for no other reason than as a matter of self interest, an organization should be prepared to make full and timely disclosure of information during a lawsuit.

F.R.C.P. 26 provides, in pertinent part, that "parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party, including the existence, description, nature, custody, condition and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter." Further, "It is not ground for objection that the information sought will be inadmissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence." Thus, virtually anything which may shed light on the dispute is subject to discovery, even if it will be inadmissible at trial!

Under F.R.C.P. 26, a party can seek to limit discovery if the material sought is unreasonably cumulative or duplicative, it is obtainable from some source that is more convenient, less burdensome, or less expensive, or the party seeking it has already had ample opportunity to discover the material. In practice, however, a party seeking to limit discovery by an opponent must overcome a high burden of proof. In most cases, the opponent seeking discovery will have very broad access to the organization's records, and wide latitude in examining its affairs.

Therefore, if a litigant wishes to take a deposition from an officer of the opposing organization, the officer must show up for the deposition, and with very few exceptions, must answer all questions asked. If the opposing party propounds interrogatories (sets of questions relating to the lawsuit), the organization has a legal duty to answer each question as truthfully and fully as it possibly can, and later to supplement those answers if it becomes necessary. If the opposing party requests to see the organization's records, and the records requested are even remotely related to the controversy in question, the organization will probably end up having to produce them.

THE IMPORTANCE OF RECORDS MANAGEMENT

The records manager is involved in the above process in two ways. First, a sound records management program can serve to minimize those costs which are unavoidable, by maximizing the efficiency of the document production process. Since extensive document production will likely be needed, both for discovery response and in developing the company's own case, the records management program should ensure that the necessary documents can be collected, organized, and reproduced at the lowest possible cost and with the shortest delay, and with minimal disruption to the normal activities of the company.

The costs, and potential savings, in this area should not be underestimated. In In the matter of The Las Vegas Hilton Hotel Fire Litigation, (A206777, Clark County, Nev. Dist. Ct.) pretrial costs, including "labyrinthine" discovery, ran between $7 and $10 million. In antitrust litigation initiated against the major television studios in the 1970s, five independent production companies spent $2 million complying with subpoenas for documents relating to the litigation. See United States v. C.B.S., Inc., 103 F.R.D. 365 (C.D. Cal. 1984).

The demands placed upon the parties' records systems can be as enormous as the costs. Large scale commercial litigation often involves discovery of hundreds of thousands or millions of individual documents. In the television antitrust litigation, the independent studios were required to produce six million documents. In Hense v. G.D. Searle & Co., 452 N.W.2d 440 (Iowa 1990), a product liability case, the defendant was required to produce 750,000 documents. In Transamerica Computer Company, Inc. v. International Business Machines Corp., 573 F.2d 646 (9th Cir. 1978), the defendant was required to screen 17 million pages of discoverable material in 90 days to determine if attorney-client privilege applied to any of it.

Even under the best of circumstances, identifying and collecting such large numbers of documents for litigation will be expensive and burdensome; any inefficiencies simply make matters worse. Nor does the fact that many of the documents are unsorted or are in an otherwise unusable form justify failure to respond fully to a request. A warehouse containing thousands of completely unsorted boxes of documents, whose contents are completely unknown, is discoverable in its entirety if there may be pertinent information in some of the boxes. The fact that you could have or should have destroyed every one of these documents 20 years ago is immaterial; if they exist, the other party has a right to those that are relevant to the case.

Further, the party in possession of those documents has an obligation to organize and format the documents in a way that is useful to the party seeking discovery. The view taken by the court in Standard Dyeing and Finishing Co. v. ARMA Textile Printers Corp. No. 85CV5399-CSH (S.D.N.Y. Filed Feb. 10, 1987) is common: "It is not sufficient for [the defendant] to point to a haystack of documents and to tell plaintiffs to arrange with [a third party] to find the needles...[W]here, as here the state of the corporation's records would make it unreasonably burdensome for the discovering party to search for the sought-after documents, the burden falls on the discoveree to organize the documents so that the discoverer may make 'reasonable use' of them."

Thus, a party possessing such a warehouse of unsorted boxes, or any inefficient records system, whether active or inactive, may find itself in a position of having to hire and train staff for the specific purpose of going through these boxes for the purpose of a single lawsuit. Such a procedure could cost hundreds of thousands or millions of dollars, and take years.

The costs of having to hire additional personnel to respond to discovery in a single lawsuit should not be viewed as a rare occurrence. In the antitrust litigation against the major television studios, the five independent production companies, not even parties to the litigation, were obligated to hire nearly 100 additional employees and spend $2 million to comply with subpoenas for the six million documents ultimately produced. In Transamerica v. I.B.M., the deadline imposed by the court required the hiring of a large staff of outside attorneys and clerical help who worked around the clock to meet the deadline.

In neither of these cases is there an indication that the records system being searched was in particularly bad shape. The costs incurred in these cases may thus represent relatively ordinary figures for cases of this type. It is also highly probable that, although not explicitly stated in the reported decisions, most of the other cases cited above involved similar levels of effort and expense in document production. Cases involving such large numbers of documents are by no means uncommon, and the search for and production of millions of documents could well bring other activities in the records management system to a standstill if regular personnel were required for it.

In addition to the direct costs associated with having to sort through poorly managed records, other expenses will continue to mount while the sort goes on. The lawsuit will continue to drag on, often for years. Herse v. G.D. Searle & Co., cited above, went through six years of pretrial activity and discovery prior to being dismissed. In the matter of The Las Vegas Hilton Hotel Fire Litigation required four years of pretrial maneuvering prior to settlement.

When this occurs, the corporation's assets will be tied up, its decision-making process impaired, and its ability to go forward with business decisions significantly hampered. Further, already substantial legal costs will continue to rise as the case goes through an inevitable series of hearings where the party seeking the documents attempts to goad the other party into quicker production, and the producing party explains the reasons for the delay to the court, while attempting to fend off sanctions for the delay. In addition, should the court make a determination that the process is not moving along as fast as it ought to, F.R.C.P. 37 allows the imposition of a variety of sanctions, including the requirement that the sanctioned party pay that part of the other party's attorney's fees and costs which are attributable to the sanctioned conduct.

The burden of producing documents for litigation is likely to rise in the future. Under former Rule 26, full disclosure was limited to what the other party specifically asks for, thus somewhat limiting the search task for the party producing the documents. F.R.C.P. 26, as well as several states' version of U.R.C.P. 26, were recently modified to require parties to produce all relevant evidence early in the lawsuit, without a specific request from the other party. This change will require parties to identify all relevant records much sooner, without benefit of knowing precisely what the other party is looking for.

WHEN THE RECORDS AREN'T THERE AND SHOULD BE

In addition to being involved in the production of documents that are still in existence, records management is implicated in the discovery process when the records are no longer in existence. Whether or not that involvement is positive or negative for the company depends entirely upon how good the records management program is.

The worst case arises when the circumstances surrounding the absence of the documents indicates that they were destroyed after litigation began, in order to avoid having to produce them to the other party. If the court finds that this occurred, it is empowered to impose the most drastic sanctions, up to and including default judgment. In a default judgment, the court simply throws out one party's pleadings, treats the other party's allegations as true, and enters judgment accordingly. The merits of the allegations are not tested.

The result can be an unmitigated disaster. In United Nuclear Corp. v. General Atomic Co., 629 P.2d 231 (N.M. 1980), for example, the court determined that one of the parties had engaged in a deliberate pattern of destroying records and shipping them out of the country to avoid discovery. The court then entered a default judgment in excess of twenty million dollars on behalf of the plaintiff, as well as requiring the defendant to perform a contract for delivery of six million pounds of uranium, and canceling other contracts of which the defendant was the beneficiary. In a sharply-worded opinion, the New Mexico Supreme Court upheld the trial court's action, and warned future litigants that it would be equally intolerant of such behavior.

In cases where the records simply cannot be located, or were destroyed in error, a variety of sanctions may apply. If, for example, the missing records are tax records, the company may find that the exemptions or deductions supported by those records are simply disallowed, thus giving rise to increased tax liability and possibly penalties. In other types of litigation, a party unable to produce records might find itself precluded by the court from introducing some of its own evidence.

A potentially devastating sanction is that of an adverse inference or presumption. In legal proceedings, inferences and presumptions are simply factual statements which the fact finder, either the court or the jury, may or must take as true. In the case of a missing record, the inference or presumption that may arise in such a case will concern the contents of the record.

The inference or presumption arises upon a finding by the court that the missing documents are unavailable due to the negligence, bad faith, or other misconduct of the party which had custody of them. Mere absence of the records is not usually enough to result in an adverse inference. Rather, the court must determine that the party with custody of the records breached a duty to preserve them. The court may hold a hearing and take evidence concerning the missing records. The party unable to produce them is given an opportunity to explain their absence.

The operation of an inference or presumption during trial is quite simple. If, as was the case in Furlong v. Stokes, 427 S.W.2d 513 (Mo. 1968), the presumption is that the missing records would have proven what the other party claims they would have, that party's theory of the contents of the missing documents is presented to the jury, either through testimony or by the judge. Then, at some point prior to jury deliberations, the judge simply turns to the jury and says something like "Ladies and Gentlemen, you have heard certain testimony concerning the contents of documents which were in the defendant's possession which are unavailable for this trial. For the purposes of your deliberations, you must consider the plaintiff's testimony regarding these documents as true." A written instruction to this effect may also accompany the jury to the jury room. Obviously, if the plaintiff is claiming that facts highly favorable and critical to his case were contained in the missing documents, this can be devastating.

The precise formulation of the presumption, and thus its effects, vary from jurisdiction to jurisdiction. For example, in the First Federal Circuit, the court instructs the jury that the documents which were not produced would have been unfavorable to the party which could not produce them. In the Third Federal Circuit, the matter is argued to the jury, and the ultimate decision as to what, if any, inference is appropriate, is then left to the jury. Thus, the severity of the outcome depends at least in part, in the jurisdiction in which the case is being tried.

WHEN THE RECORDS AREN'T THERE AND SHOULDN'T BE

Proper records management is central to avoiding sanctions. Those records that the company has a duty to preserve, or which it would be unreasonable to destroy must be preserved. This requires a records management program which clearly identifies and tracks those records which must be preserved, the periods for which their retention is mandated, and the implementation of protocols to ensure that those retention procedures are implemented.

The second step for the records manager is to ensure that those records which need not be preserved for either business or legal purposes are destroyed in a systematic, appropriate, and well-documented fashion, which clearly demonstrates that the records were kept for a reasonable period of time, and that the motives for their destruction were legitimate.

The ability to prove both reasonableness and legitimate motive are vital. Courts have neither the power nor the desire to mandate that all records be kept forever. Rather, they are interested that the litigants behave in a reasonable fashion, and above all, do not attempt to destroy or hide evidence during, or in anticipation of, litigation. Thus, in order for an adverse inference or other sanction to arise, a court must first find that the absence of the record has not been adequately explained by the party which had custody of it. As observed by the court in Moore v. General Motors, 558 S.W.2d. 720, 735 (Mo. App. 1977):

There is no evidence that [at the time the records were thrown out] defendant had any knowledge that it was facing litigation so that it was put on notice that it should not pursue its customary practice of destroying these records. Anyone knowledgeable of business practices and the cost of storing records in these times would find it reasonable and not smacking of fraud for the defendant, with no knowledge of pending litigation, to follow its customary practice.

Explanations such as "We just don't know where that record is" or "We think it might have gotten thrown out" run a grave risk of the imposition of a sanction or adverse inference. In contrast, a demonstration that the record, no longer needed for any purpose, was destroyed in the normal course of business on October 27, 1987, after having been retained for a reasonable and legally sufficient period, will probably persuade the court that the record was destroyed for a legitimate reason and without any improper motive.

This difference is critical. If the court is persuaded that the record's absence is legitimate, the party which sought production of the document simply has to make do without it, and their case is that much weaker. The party which destroyed the document is not obligated to defend the circumstances of destruction to the jury, and the missing document may not be mentioned in front of the jury at all.

THE EXCEPTION

In connection with this, it cannot be emphasized too strongly that, when litigation arises, destruction of records related to that litigation must stop immediately. Once a legal duty to preserve it for a lawsuit has arisen, destruction of any evidence exposes the company to a grave risk of severe sanctions. Even if the destruction was purportedly carried out for business purposes, it will at least be viewed as negligent. Although in some cases, courts have declined to impose sanctions for merely negligent destruction, others have not been so lenient. Further, the appearance that it was an intentional attempt to destroy evidence will be hard to avoid. If the court so concludes, the matter will be dealt with very harshly.

The time at which a duty to preserve records in anticipation of litigation arises varies from jurisdiction to jurisdiction. For example, in William T. Thompson Co. v. General Nutrition Corp., 593 F. Supp. 1443 (C.D. Cal. 1984), the court concluded that the duty to preserve evidence extended not only to actual litigation, but to potential litigation as well, if the custodian of the evidence was on notice that such litigation was likely. The court in Carlucci v. Piper Aircraft Corp., 102 F.R.D. 472 (S.D. Fla. 1984) aff'd in part, rev'd. in part 775 F.2d 1440 (11th Cir. 1985) concluded that the duty extended even further, and entered a default judgment against the defendant for selective destruction of records possibly relevant in future, but at that time unknown, litigation.

The records management program must therefore be closely coordinated with the legal department prior to litigation. The legal department must be aware of the extent to which governing law requires preservation of possibly relevant records. Immediately upon occurrence of a duty to preserve records for litigation, those records must be identified and preserved until either the lawsuit is resolved or permission is granted by the court for their destruction.

CONCLUSION

A company's records management is implicated in a legal dispute at every stage from the initial dispute to trial. The results of that involvement can be either very positive or very negative, and which of these it turns out to be is in large measure within the control of the company and its records management personnel.

AUTHOR: John C. Montana is staff attorney and research supervisor at Information Requirements Clearinghouse, Denver, Colorado. He is associate editor of Legal Requirements for Business Records, and co-author, with Donald S. Skupsky, of Law, Records, and Information Management: the Court Cases. His involvement in record management began in 1990, as a researcher for Information Requirements Clearinghouse. He holds a J.D. from the University of Denver.

Copyright Association of Records Managers and Administrators Inc. Jan 1995
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