Court Holds Ignorance of Retention Laws Is No Excuse

But your Honor, we totally would have kept those emails had we known we were supposed to. We didn”t know! That”s essentially what the Defendant argued in a recently decided case (in so many words). But that didn”t mean bupkis to the Court in Philip M. Adams & Associates LLC v. MSI Computer Corp., where the Plaintiff sought sanctions against the Defendant when its flawed document retention policies led to the destruction of thousands of emails and files.

In light of the governance kick I”ve been on I thought this case was pretty appropriate. As many of you may or may not know, the new 990 inquires as to whether or not an organization has a document retention policy (and I believe  non-profits are required to retain litigation documents under Sarbanes-Oxley as well). As a means of implementing this policy many organizations, including the Defendant in Philip, use electronic document retention managers. The good thing  is that these systems automatically purge files once a defined amount of time expires. The bad thing? That files are automatically purged once a defined amount of time expires.

I say bad because companies and charitable organizations alike are required under law to cease the destruction of documents and emails once litigation is “anticipated”. As with any legal term, “anticipation” has been interpreted in a myriad of ways. But basically, once you think you”re about to be sued, or have in fact been sued, you are required to maintain all documentation, making it potentially available for opposing counsel”s review during trial. In the case of electronic retention systems, this means that a litigation hold must be put in place so the system knows to cease destruction. As you”ve probably gathered by now, the Defendant in this particular case hadn”t quite gotten that far.

The District Court in the Southern District of Utah found that, “once it became clear that litigation was a possibility,” then a litigation hold should have been implemented. I reiterate, possibility. Not strong chance or substantial likelihood. That”s extremely casino important to understand. And what about the Defendant”s argument that they had  previously had very little interaction with the judicial system and no knowledge that such a practice was needed? The Court could not have cared less. As with any legal system, ignorance does not dismiss one”s obligations. Once the Defendant knew there was a possibility of litigation, “ignorance of litigation hold practice was no excuse.”

So what is the takeaway? Primarily that just because you don”t know something about the law does not mean you will not be held accountable for it. Naturally Wal-mart and Joe Schmo will be held to different accountability standards. However, when you decide to create a non-profit corporation it is then incumbent upon you to familiarize your self with the laws associated with operations. Secondly, don”t dismiss this case under the notion that non-profits don”t get sued. For a potential plaintiff, a defendant is a defendant regardless of what it is they do. So it is becoming more and more important for charitable organizations to familiarize themselves with what happens when litigation is threatened.

As far as what can be done to mitigate the risks, start by making sure you actually have a document retention policy in place. Blue Avocado, Center for Non-Profit Advancement, and Management Help have document retention templates available. However, don”t use the templates at face value. They may need to be altered according to state law or the sector in which your organization operates. You might also need to include language dealing with what happens once litigation is threatened.  The National Council on Non-Profits and Foundation Center also have really good discussions that I highly suggest you look over. Particularly if you have questions. Lastly, if your organization utilizes electronic retention systems, recognize that the cruise control mentality is a perilous one. Don”t  just trust that the system will do everything it should do. Take time to think of all the worst-case scenarios (Litigation? Accidentally deleted proposal?) and make sure the system is equipped to handle them.

If you”re interested in what happened in the Philip case, the Defendant escaped sanctions but the jury was allowed to assume what was in the documents and why the Defendant failed to produce them. In other words, they kind of lucked out, but that doesn”t mean you will.