Phillip M. Adams & Associates, L.L.C. v. Dell, Inc., 2009 U.S. Dist. LEXIS 26964 (N.D. Utah March 30, 2009)

Take Away: The duty to preserve information, electronic or otherwise, may arise well before litigation commences. Retention “practices” should be transformed into consistent, written policies that are implemented throughout an organization. This is especially important in organizations that have adopted decentralized electronic retention policies that depend on the individual to save or download files and data to avoid their automatic deletion. The key words in retention are “routine” and “good faith.” All organizations should be aware that they may one day need to prove their polices are routinely carried out, and were both created and implemented in good faith.  

A Northern Division of Utah decision by United States Magistrate Judge David Nuffer is creating significant waves in the area of e-discovery, particularly with regards to retention policies and when an organization should begin “holding” its electronic information. Long regarded one of the most technologically savvy judges, Judge Nuffer has set forth some interesting precedents in Phillip M. Adams & Associates, L.L.C. v. Dell, Inc., 2009 U.S. Dist. LEXIS 26964 (N.D. Utah March 30, 2009). Several observers believe his decision will be either overturned or simply ignored into oblivion. Until it is, or if this is not the case, the implications for the field of e-discovery are extreme.

The case originates in defects found in floppy disk controllers (FDC) during the late 1980s to the mid-1990s. Dr. Phillip Adams (whose patents are assigned to plaintiff Phillip M. Adams & Associates, L.L.C.) developed solutions to address this FDC defect, an issue of particular importance because the FDCs at issue were present in most personal computers. Throughout the 1990s the FDC defects led to significant litigation, including a $2.1 billion class-action settlement with Toshiba in 1999. Alleged misuse of Adams' technology led to the current litigation. This particular discovery dispute related to defendants ASUSTEK Computer, Inc. and ASUS Computer International (collectively “ASUS”) allegedly destroying or withholding evidence.

The basis for Adams' allegations of destroyed information originate in discovery produced in other, prior litigation tending to show ASUS may indeed previously had the requested information. ASUS denied all such allegations. ASUS responded, explaining the near complete lack of responsive e-mail by describing its e-mail retention policies. In short, ASUS utilized what can best be described as a decentralized retention system, where employees had to save, download, or file away any e-mails necessary to their job functions, because the company would overwrite other e-mails automatically to make room on their servers. In addition, ASUS would periodically replace their computers, and erase all information on these computers before disposing of them.

The first major issue addressed by Judge Nuffer is when the duty to preserve is triggered. ASUS became aware of possible litigation in February 2005 as a result of a letter from the Plaintiff. ASUS states that the paucity of information results directly from this late notice, especially considering the bulk of requested e-mails hale from 2000 and 2001. Both parties agreed that the duty to preserve arises when a party knows or should know it is relevant to imminent or ongoing litigation. ASUS identified this date as February 2005. Judge Nuffer disagreed. Drawing an analogy to a 10th District case where a plaintiff building owner sued a manufacturer for failure to warn regarding proper care for a part which allegedly started a fire that destroyed the building. Plaintiff discarded a significant portion of the relevant product long before filing a lawsuit, including the portions where a warning label would have been located. The court held that the building owner had a duty to preserve such evidence because it knew or should have known that litigation was imminent directly after the fire.

Judge Nuffer proceeds to discuss the litigation environment surrounding FDC defects in 1999 and 2000. Stating the computer and component manufacturers were “sensitized” to this issue, Judge Nuffer ruled ASUS should have been preserving evidence related to FDC defects around this time. Under this analysis, ASUS should have been preserving evidence approximately 5 to 6 years before they were placed on notice of actual litigation.

ASUS attempted to argue the safe harbor provision governing routine, good-faith operation of an electronic information system. In a sharply worded rebuke of ASUS’s policies, Judge Nuffer stated:

As to the electronic discovery, including email, ASUS provided an extensive declaration from an experienced consultant in e-discovery. While he stated the reasons for and history of ASUS' "distributed information architecture," he did not state any opinion as to the reasonableness or good-faith in the system's operation. And while he says “ASUSTeK's data architecture relies predominantly on storage on individual user's workstations,” his 31-page declaration does not show he is familiar with the precise practices pointed out in the declarations of employees. Those employees' declarations describe the practice of ASUS' email system to overwrite old data regardless of its significance; ASUS' reliance on employees for all email and data archiving; and the process of replacement of computers, which also relies on employees to transfer data from their old to their new computers. Neither the expert nor ASUS speak of archiving “policies;” they speak of archiving “practices”. Apart from archiving, neither the expert nor the employees describe any sort of backup system or data backup policy, past or present. Presumably ASUS' current data is at the mercy of individual employees' backup practices. The expert does not evaluate risk of data loss from ASUS' reliance on employees though he does specifically mention the expected turnover of employees in this industry which would seem to heighten the risk. He does mention that certain financial-related data is stored in centrally accessible and presumably secure, backed-up servers. ASUS does know how to protect data it regards as important.

(Emphasis added). Deeming ASUS’s retention policies as “questionable” Judge Nuffer criticizes the fact that ASUS’s retention policy tends towards the loss of data, and invites the abuse of others’ rights. Additionally, he questions placing the responsibility of data retention on operations-level employees. Because the discovery period was not yet closed, Judge Nuffer did not issue sanctions in this decision, although it appears such sanctions would be forthcoming.

Perhaps the most disturbing portion of this decision is that related to when a duty to preserve arises. Presumably, a business needs to be well aware of the litigation environment surrounding its industry to draw its own conclusions regarding when to begin preserving information – even if the potential plaintiffs themselves are not aware of the possibility of litigation. The discussion of retention policies, however, is equally worrisome. According to Judge Nuffer, absent a centralized retention policy, any organization may be in trouble. Further, why organizations have any duty to retain documents for the rights of third parties is unclear. Indeed, one observer argues this idea may run afoul of Arthur Anderson v. United States, 544 U.S. 696, 704 (2005) which holds that document retention policies created in part to keep information from third parties are neither uncommon nor necessarily improper.

Whether or not Judge Nuffer’s opinion becomes widely accepted or ignored, there are important lessons for all organizations. First, for any organization without a clear and routinely applied electronic retention policy, if litigation appears even tenuously “imminent” it may be best to retain rather than destroy information. Second, any retention “practices” must be made into “policies.” This means subsuming any electronic information practices into an organization’s wider retention policies, complete with written and widely distributed directives and training. This is of particular importance if your policies depend on the acts of individual employees, as did ASUS’s. Further, like any other retention policy, the retention of electronic information must be capable being rationalized, because, as ASUS found out, eventually you may have to explain why your policies are reasonable.

Read the case

The observer whose insights are discussed above is Ralph Losey, whose impassioned two-part assault on the case can be found here (Part I) and here (Part II).

For another noted observer’s more positive take on Judge Nuffer’s decision, see Craig Ball’s comments here.