Entrepreneurs and small businesses might not get sued as often as say . . . Toyota is now. But if a Summons and a Complaint lands on your desk, one of the first things you’ll want to do besides calling your lawyer is to make sure no documents related to the case get destroyed. You’ll want to freeze those files and establish what’s known as a “litigation hold.”
Large companies who are more experienced with litigation typically have established procedures in place to create such hold. Smaller business enterprises may not. As a result, you may be vulnerable and not know it.
What exactly is a litigation hold?
A litigation hold is a written notice sent to employees that may have documents or other business records in their possession or control relevant to the case, basically telling them to hang on to it all and not to destroy anything. It also means that any routine purging of paper files or other media (think recycling back-up tapes, for example) that you would normally do under your document retention policy is put on hold until the case is over.
Issuing such a notice helps insure that records are preserved and available for collection, review and production to the opposing party. It’s required by law. It also helps avoid and protect the company against shredding parties, like those the now defunct accounting firm of Arthur Andersen held in connection with the Enron scandal.
In recent years the courts have become real sticklers about such litigation holds. Some courts consider the failure to issue them to be gross negligence. If that happens you are automatically teed up for sanctions that can include dollar penalties and negative inferences.
Negative inferences can be deadly because it allows the court to instruct the jury to assume the worst about the documents they don’t have. The theory is that the documents wouldn’t be missing or destroyed if they didn’t contain something really really bad. You can always try to explain away a bad document, but if you can’t produce it there’s no way to prove what it really said and rebut the presumption. You’re cooked. That’s why a litigation hold is a real good idea. It could mean saving the entire case.
The next question: How should a litigation hold be implemented?
Here the answer may very well depend on the context; but, to discharge your duty properly will require demonstrating transparency and thoroughness (not necessarily perfection). In other words, was not notice in writing (less confusion there than with a verbal hold and easier to prove), how comprehensive was the distribution list, was there follow-up, etc. The goal is to create a systematic approach, one that is repeatable and methodical to capture and preserve all of the relevant documents (evidence).
Just like a fire drill, it always pays to be prepared, to know what to do in advance of needing to actually do it. Your lawyer can help you create a plan and assist you in implementing it should the need arise. They can also advise you about events, other than the formal filing of a lawsuit that would trigger the need for a litigation hold in your jurisdiction – such as someone threatening to sue you.
When it comes to litigation holds, being forewarned truly means being fore armed.