Companies facing litigation and regulatory or enforcement proceedings today must bear not only the enormous burdens of electronic discovery, but also the risk of increasingly expensive penalties for failing to preserve email and business records from the earliest possible moment after a dispute arises.

Faced with these challenges, it is essential that companies issue litigation holds as soon as any type of formal legal proceeding is reasonably anticipated. Indeed, federal courts have held that the failure to design and implement an adequate litigation hold may constitute negligence. A recent example is Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 541 (D. Md. 2010), in which a defendant was held in contempt of court for its failure to implement an adequate litigation hold. The court entered a default judgment and required the defendant to pay plaintiff's costs and attorneys' fees. See also Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec. LLC, 716 F. Supp. 2d 236 (S.D.N.Y. 2010) (awarding attorneys' fees to defendant and instructing jury to draw an adverse inference against plaintiff who failed to properly implement a litigation hold).

In light of these considerations, this alert is designed to address questions as to when a litigation hold is required and how a litigation hold should be designed and implemented.

When Is a Litigation Hold Necessary?

Companies should issue a litigation hold whenever management reasonably anticipates the probability that the company will pursue or have to defend against a legal claim, or otherwise be required to produce its records in connection with a legal claim. Clear situations for a litigation hold include when the company receives a demand letter, a formal complaint or a records subpoena. Less obvious situations are:

  • The reasonable probability of claims by another company, either due to threats from the company or due to knowledge of a potential liability that could give rise to such claims,
  • The potential of a government investigation, either due to knowledge that a whistleblower has contacted the government or because of information suggesting that company employees are being interviewed by government regulators or investigative personnel, or
  • Any other circumstances that are likely to lead to claims or a regulatory or criminal investigation.

The duty to preserve records also extends to situations where the company itself is contemplating filing a complaint or regulatory proceedings against another business, entity or individual.

It is better to err on the side of caution by issuing a litigation hold. When in doubt, it is advisable to consult legal counsel about whether a hold is in fact necessary.

What Should a Litigation Hold Do?

A litigation hold should inform all relevant personnel of their obligation to locate and preserve all information that may be pertinent to actual or threatened proceedings. The litigation hold should describe the nature of the proceedings and the types of documents, paper and electronically stored information to preserve. This description should be drafted with sufficient breadth to include not only records that may be admissible as evidence, but also any materials that reasonably relate to the claims or defenses associated with the proceedings and any records that might lead to the discovery of other admissible evidence. The litigation hold should also make clear that it applies to all records, whether they are in paper or electronic form, and that it covers all copies of records in any location. This includes employee files and workspaces, computer hard drives, external hard drives and memory drives or jump sticks, voicemail, smart phones and company servers and backup tapes. The litigation hold should advise personnel to suspend their destruction of hold-related records otherwise required under the company's records retention schedule until such time as they are advised that the litigation hold has been lifted.

What Are the Key Steps in Implementing a Litigation Hold?

Identify and locate the records that need to be preserved: The first step in implementing a litigation hold is to identify the records that need to be preserved and where they may be located. As a general rule, the best way to accomplish this is in a meeting that includes counsel who are familiar with the claims and defenses associated with the proceedings, company personnel who have knowledge regarding both the claims and the potentially relevant company records, and an individual from the company's IT department who is familiar with the company's electronic data storage systems. The purpose of this initial meeting should be to generate sufficient information to draft the litigation hold and to identify those individuals to whom it should be sent.

Draft the litigation hold: The second step is to actually draft the litigation hold. As a general rule, the notice should be drafted by the outside counsel involved in the proceedings. Most law firms have standard templates that are used for this purpose and tailored to the particular circumstances of the case. Click here for an example of a litigation hold. However the notice is prepared, it should:

  • Accurately describe both the threatened or actual proceedings in sufficient detail to assist personnel in identifying all relevant materials;
  • Include a description of the specific types and date ranges of records that are known to be relevant;
  • Include explicit instructions to preserve all copies of such records no matter where they are located, including any copies that employees may have maintained at home or on home computers;
  • Describe the reasons why preserving the relevant documents is of critical importance; and
  • Provide contact details for a point person who can answer questions concerning the hold.

Finally, although the litigation hold should normally be drafted by outside counsel, it is often best to issue it through an individual of established authority within the company.

Implement the litigation hold: The litigation hold should be distributed to all individuals who are likely to possess relevant records, as well as to IT personnel who are in charge of the company's electronic data systems. The company should keep a record of the individuals to whom the hold has been sent. You should also maintain records establishing both distribution of the notice and confirmation that the notice has been reviewed by all recipients. For example, you should require that each person who has received a notice either send an email confirming receipt and review or sign a short statement acknowledging that he or she has received the notice, understands it and agrees to comply with it. If you send the notice by email, you can also send it with READ RECEIPT and keep a copy of each confirmation you receive indicating that the notice has been read. If you do not receive some form of confirmation that the notice has been reviewed, you should resend the notice at least two more times. If still no confirmation is received, then you should call the individual. No matter the form, all materials confirming receipt and review of the notice should be retained by the general counsel or another individual charged with overseeing the litigation hold so the materials can be easily accessed if the company's actions in implementing the hold are later challenged.

The company should also consider making an immediate copy of the hard drives and/or server files of those employees who are most likely to have a large amount of relevant information. Doing this immediately—even before the litigation hold is issued—can reduce the risk that employees will delete information they consider to be harmful.

Finally, it may be appropriate to issue periodic reminders of the litigation hold and/or to modify the hold if it becomes apparent that the scope of the proceedings and/or relevant information has expanded or narrowed. When a proceeding is terminated, the litigation hold should be lifted.

Implementing these steps can be time-consuming and expensive. But the cost of an effective litigation hold is far less than the cost of defending against sanctions motions.