It is estimated that nearly ninety percent of all business information is now created in digital format, and that at least thirty percent of this information is never even converted to hard-copy format. Such electronic information includes business and financial reports, which, increasingly, are created and stored exclusively in electronic formats unless a special need arises for their conversion to paper.

Moreover, estimates of e-mail usage within corporations suggest that the amount of e-mails created each year is growing by at least twenty-five percent annually. A company with 200-300 employees can expect to store hundreds of thousands of e-mail over a several year period. At the same time, companies are finding that their computer hardware and software systems are outmoded within just a few years of purchase. A change in computer systems or even a change in IT managers often means the company no longer has easy access to its own electronic data. But this doesn’t mean nobody will ever obtain access to this “lost” information – just the opposite, since most of us have come to understand that it is nearly impossible to destroy electronic information. With the right tools and some effort, almost all information that was once stored electronically can be retrieved.

Until recently, however, it was left to the company’s IT manager or department managers to worry about retention policies and computer “back up” practices. Not anymore. Recent federal court cases and the new amendments to the Federal Rules of Civil Procedure relating to the discovery of electronically-stored information impose an affirmative duty on your corporation’s senior management to preserve electronic data, as well as traditional paper records. Although the duty to preserve information that could turn out to be “evidence” has long-existed, the federal courts have recently begun to rule that the obligation to preserve electronic information arises even before the litigation starts.

More importantly, the federal courts have asserted that where litigation is “reasonably anticipated,” the company’s senior management must bear the burden of making certain that this data is not accidentally destroyed. Management can not simply delegate this responsibility to the company’s IT manager or outside counsel. The costs of not meeting this obligation? Court sanctions, unfavorable jury instructions, and default judgments taken against the company are some of the punishments the Courts have doled out against companies and their officers for failure to actively preserve electronic data in the face of litigation.

What makes this duty so difficult to undertake is that the obligation could arise years before any litigation begins, or it might not arise at all if the corporation never finds itself in federal court. Everyone seems to agree that nobody has yet agreed on what the term “reasonably anticipate” means in the context of preserving electronic data. The evolution and popularity of electronic data seem to have outpaced the law’s ability to understand and manage it.

Legal scholars and electronic pundits are just now developing so-called “best practices” for corporations to adopt in terms of policies and procedures for the retention of electronic data in the ordinary course of business. These practices seem to recognize that where there is no litigation pending or likely, a company does not have an obligation to retain all data, and, in fact, should have a policy for the routine destruction of certain electronic data on a regular and systematic basis.

But in a situation were litigation is reasonably anticipated, two initial steps must be taken: First, the company must suspend any program that prompts the routine destruction of electronic information that could be discoverable in a potential lawsuit or dispute. Second, the company’s management must actively direct the IT managers and other responsible persons to put a “hold” on any potentially-relevant information that could be destroyed, either accidentally or intentionally. Keep in mind, the duty to issue a “litigation hold” directive to all relevant persons – and then follow-up to ensure there is complete compliance with the “litigation hold” directive – rests on the shoulders of the company’s senior management. This means if your company has a general “data destruction” policy and protocol in effect, the company’s management must actively stop the destruction of data that would otherwise be routinely deleted if the information might eventually be relevant to the anticipated litigation.

According to one important reported case, the financial firm UBS ended up with unfavorable jury instructions and eventually took a hit to the pocket book after UBS personnel failed to retain relevant e-mails in the summer and fall of 2001, even though the plaintiff did not file her lawsuit until mid-February, 2002. The court in that case found that UBS’s senior management should have reasonably anticipated in 2001 that the discharged employee would file a suit against the company. Upon that expectation, the company should have taken steps to make certain that relevant electronic data was not routinely or intentionally deleted. They failed to do so, and paid a high price for their failure.

No doubt that by this time next year, the federal courts, and possibly several important state courts, will provide more concrete instructions as to how companies should address the need to preserve electronic data before litigation is filed and what steps companies should take to preserve relevant data when litigation is “reasonably anticipated.” It is unlikely that the courts will reduce the obligations they are now imposing on companies and their executives.

For now, management should begin by walking down to the office of the IT manager (perhaps for the first time) and asking about the company’s computer system. After getting a primer on the network of drives, hardware, and software you are operating your company on, you should confirm that the company does have a policy in effect for the retention and destruction of electronic data, including company data contained in hand-held devices. Make certain that you know what a “litigation hold” directive means and how you would implement such a “hold” in the event the need to issue one occurs.

Most importantly, if you believe federal court litigation is likely in connection with a specific matter (for example, if you have already taken steps to defend against a possible claim), then consult with your attorney to make sure you are doing everything the court will expect of you and the company when and if a lawsuit is filed.