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The Marcum Advisor - September 2011

 

Proper Document Preservation is Crucial

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A large increase in the use of electronic files and other digital media has complicated discovery issues for litigation and tax controversy work for attorneys and clients, but there are ways to maneuver around those problems.

Spoliation - the destruction or alteration of evidence - or the failure to preserve evidence in pending or reasonably foreseeable litigation has long been a concern in litigation matters but has recently become a focus of the government in tax cases. Spoliation is a serious issue in litigation. Failure to preserve both paper and electronic records properly can be detrimental to your case and could result in your case being dismissed. There have been several significant court cases dealing with the issues of spoliation and document retention.

Spoliation Case Law

In Zubulake v. UBS Warburg LC, 229 F.R.D. 422 (S.D.N.Y 2004), the plaintiff filed an employment discrimination suit against UBS Warburg, but failed to produce relevant information in discovery even after the court issued numerous rulings setting forth the parties discovery obligations. Judge Shira A. Scheindlin’s pioneering decision went into great detail on the technical aspects of document retention.

Electronic spoliation can be the result of either a company consciously deleting files, or unwittingly losing files due to the lack of understanding of complicated e-mail systems. In the Zubulake case, the defendant’s staff deleted relevant e-mails from their files and exhibited a prime example of electronic spoliation. The emphasis here is the proper preservation of emails for all types of clients, especially if the default e-mail system only backs up e-mails temporarily. In the Zubulake case, the district court sanctioned UBS Warburg by ordering an adverse inference charge to the jury and forcing the defendant to pay significant expenses for re-depositions, restoration of existing backup tape, and expenses related to the motion.

Another example of spoliation occurred in Consolidated Edison Co. of New York v. United States, 90 Fed. Cl. 228 (Fed. Cl. 2009)., where the Court of Federal Claims considered a refund suit brought by Con Edison for deductions related to a transaction in 1997.The main issue in this case was the IRS’s charge that Con Edison destroyed emails associated with the transaction during an e-mail system conversion, and therefore lacked proper documentation to support the deductions.

Document Retention

It has been suggested that attorneys institute a document hold immediately upon getting an engagement letter from a new client, beginning from day one.Attorneys should engage the information technology staff of the firm, as well as the client, to ensure documents are being properly saved and stored.

Exit interviews for employees leaving a company are also a vital way to ensure that documents and files have been properly retained.The location and disposition of all files of a departing employee must be determined.

Work Product and Spoliation

The "work product doctrine" protects materials prepared in anticipation of litigation from discovery by opposing counsel. A fundamental requirement of work product is the anticipation of litigation. If you do anticipate litigation, you must preserve those files. This is likely a common area where businesses and their employees make mistakes in saving documentation.

There are multiple factors that one should consider before deciding that a memo is work product. In many cases, if litigation is reasonably foreseeable, the company’s general counsel must be notified. If that has not happened, a judge will likely not consider that memo to be privileged.

Tax issues require even more care. Even if legal requirements say to keep something for five years, a tax return prepared today may be open back to 2001. If you dispose of files beyond the five year scope, you are not in compliance with the Internal Revenue Code, and will not be able to validate your case. It is advisable that attorneys have a tax-specific preservation policy that considers all rules of proper documentation retention.

Courts sometimes give leeway for complicated electronic systems, however when files are actively deleted, a defendant can expect sanctions. This has been shown true in both Zubulake v. UBS Warburg LLC, and Consolidated Edison Company of New York v. United States, along with multiple other cases. In order to avoid these issues, a company should establish company-wide policies, ensure litigation hold follows standards, establish tax-specific policies, and think broadly about documents to be retained.

 
 
 
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