Document Retention and Spoliation

Following the collapse of major financial institutions and other business leaders on Wall Street, both government agencies and shareholders have tightened oversight of corporate America, demanding greater accountability for money spent and decisions made by executives. Now more than ever general counsels must help their companies set clearly defined standards for legal, financial and business processes. Document retention policies are particularly important for protecting companies that may be involved in litigation, as well as in providing transparency to regulators and stakeholders.

Meanwhile, despite the economic downturn, companies looking to bolster their valuation are still focused on expanding and protecting their patent portfolios at all costs. A company's licensing agreements ' often an important source of revenue ' can be put at risk if document retention policies are not clearly set and carefully followed. In addition, general counsel must be aware that new standards for transparency present new challenges to IP and general litigation strategies. Knowing what to save, how to save it, and for how long can make or break a case. Destruction of documents is a surefire way to land a seat in the defense chair.

To protect the company against these challenges, corporate counsels should note recent legal developments surrounding spoliation ' the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation. This violation occurs when one party intentionally or negligently breaches its duty to preserve potentially discoverable evidence.

The Rambus Case

Most recently, the District Court of Delaware found Rambus Inc. guilty of spoliation conduct including the destruction of “innumerable documents relating to all aspects of Rambus' business,” dating back to the late 1990s and declared that the patents in suit were unenforceable against Micron.

The dispute between Micron and Rambus related to Micron's alleged infringement of multiple Rambus patents. In fact, this was the third decision from three different jurisdictions wherein Rambus was charged with spoliation of evidence based upon its licensing, litigation and document retention policy. Virginia and Delaware courts found Rambus guilty of spoliation conduct, (Rambus, Inc. v. Infineon Techs., AG, 220 F.R.D. 264 (E.D. Va. 2004); Micron Tech., Inc. v. Rambus Inc., Civ. No. 00-792-SLR, 2009 U.S. Dist. LEXIS 1260 (Dist. De. 2009). In California, however, the court found that Rambus did not commit spoliation. (Hynix Semiconductor Inc. v. Rambus, Inc., 591 F.Supp. 2d 1038, (N.D. Cal. Jan. 5, 2006).

The Facts

Each of the three courts evaluated the same basic set of facts in reaching their respective, and conflicting decisions on spoliation.

Rambus was founded in 1990 to address the increasing gap between microprocessor performance and DRAM performance. See Hynix Semiconductor Inc., 591 F.Supp at 1042; Micron Tech, Inc., Civ. No. 00-792-SLR, 2009 U.S. Dist. LEXIS 1260, at *2. In October 1997, Rambus hired Joel Karp as Vice President of Intellectual Property to develop a patent licensing and litigation strategy, including assessing Rambus' patent portfolio to determine when chips infringe, setting licensing strategies for infringing chips and to negotiating with companies that build and sell infringing chips. See Hynix at 1044-45; Micron at *8.

In conjunction with the licensing and litigation strategy, Rambus also began developing a document retention policy in early 1998. See Infineon Techs., AG, 220 F.R.D. at 284; Hynix at 1050; Micron at *12 and *18. As part of the document retention policy, Rambus sent 1,269 computer tapes out to be degaussed in July 1998, and the employees participated in company wide “shred days” in September 1998, August 1999 and December 2000. See Infineon Techs., AG, 220 F.R.D. at 284; Hynix at 1053, 1054 and 1056; Micron Tech, Inc., Civ. No. 00-792-SLR, 2009 U.S. Dist. LEXIS 1260, at *23-*24, *34-*35 and *41. Further, in April 1999, Rambus instructed its outside prosecution counsel to purge its patent files so that the files mirrored the PTO's files. See Infineon Techs. at 284; Hynix at 1054-55; Micron at *29-*30.

Duty to Preserve Evidence

In order to establish spoliation, it must first be shown that a party had a duty to preserve evidence. See Infineon Techs at 281 (citing Trigon Ins. Co. v. United States, 204 F.R.D. 277, 284 (E.D. Va. 2001)). The duty to preserve evidence arises not only during litigation, but also during the period before litigation when a party reasonably should know that the evidence may be relevant to anticipated litigation. See Silvestri v. Gen. Motors Corp., 271 F.3d 583, 591 (4th Cir. 2001) (citing Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998)). In this regard, whether or not Rambus anticipated litigation at the time it destroyed documents is a threshold issue in deciding the spoliation issue. See Samsung Elecs. Co. v. Rambus Inc., 439 F. Supp. 2d 524, (E.D. Va. 2006), (“the determination of when a party anticipated litigation is necessarily a fact intensive inquiry, and a precise definition of when a party anticipates litigation is elusive.”).

Despite reviewing essentially the same set of facts, the Virginia, Delaware and California courts did not agree on when Rambus' duty to preserve evidence arose. See Infineon Techs at 287; Hynix at 1064; Micron at *53.

In finding that Rambus had committed spoliation, the court in Rambus, Inc. v. Infineon Techs., AG, concluded that Rambus' duty to preserve evidence arose in “early 1998.” Id. at 287. In so doing, the court focused on the timing of when the document retention policy was developed. According to the court, an examination of Rambus' privilege logs showed that, in February 1998, while Rambus was developing its document retention policy, it was also receiving attorney-client communications regarding “legal strategy in anticipation of litigation” and “strategic patent litigation.” Id. at 285. The court also noted that Rambus' in-house counsel had prepared a memorandum entitled “preliminary infringement study” during this time frame. Id. Accordingly, the court concluded that Rambus was developing “strategy” in “anticipation of litigation,” while simultaneously developing it document retention policy, and as such “Rambus clearly anticipated some type of litigation at the point it destroyed documents.” See Infineon Techs. at 287.

In Micron Tech., Inc. v. Rambus Inc., where the court also found that Rambus had committed spoliation, the court determined that Rambus' duty to preserve evidence arose in December 1998. Id. At *53. In reaching its conclusion, the court found that: 1) litigation was reasonably foreseeable no later than December 1998, when Rambus articulated a time frame and motive for implementing a litigation strategy; and 2) the document retention policy was discussed and implemented within the context of Rambus' litigation strategy. Id. Thus, according to the court, Rambus knew, or should have known, that a general implementation of the policy was inappropriate because the documents destroyed would become material at some point in the future. Id.

The Micron court focused on that fact that sometime in late 1998 or early 1999, after a Nov. 30, 1998 management staff meeting, Rambus' VP of Intellectual Property drafted and circulated a memo outlining what Rambus strategy would be in the event that Intel cancelled its RDRAM production and moved instead to a competing technology. See Micron Tech., Inc. Civ. No. 00-792-SLR, 2009 U.S. Dist. LEXIS, at *28-*29. The memo identified that the major goal in this scenario was to convince Intel that, because of Rambus ability to assert its patents, it would be costly to move away from RDRAM. Id. The memo also identified potential targets, causes of action, and forms if negotiations with Intel failed, and indicated specifically that Rambus already had claim charts showing that Micron infringed one of the Rambus patents. Id.

In Hynix, the court determined that Rambus' duty to preserve evidence arose in “late 1999.” Id. at 1064. The court noted that although Rambus began to plan a litigation strategy as part of its licensing strategy as early as February 1998, the institution of litigation could not be said to be reasonably probable because several contingencies had to occur before Rambus would engage in litigation: 1) the direct RDRAM ramp had to be sufficiently developed so as not to jeopardize RDRAM production; 2) Rambus' patents covering non-RDRAM technology had to issue; 3) product samples from potentially infringing DRAM manufacturers had to be available in the market; 4) the non-compatible products had to be reverse engineered and claim charts made showing coverage of the actual products; 5) Rambus' board had to approve commencement of negotiations with a DRAM manufacturer; and 6) the targeted DRAM manufacturer had to reject Rambus' licensing terms. Hynix at 1062.

The court concluded that Rambus did not actively contemplate litigation or believe litigation against any particular DRAM manufacturer to be necessary or wise before its negotiation with Hitachi failed in late 1999, and “in light of the record presented, it would appear that litigation became probable shortly before the initiation of the “beauty contest” in late 1999 in which litigation counsel ' was selected.” Hynix at 1064. The court further concluded that Rambus' adoption and implementation of a content neutral document retention policy in mid-1998 was a permissible business decision, and as such, the destruction of documents on the 1998 and 1999 Shred Days pursuant to the policy did not constitute unlawful spoliation. Id.

What's a Company to Do?

The U.S. Supreme Court found that document retention policies, which are created in part to keep certain information from getting into the hands of others, including the Government, are common, acceptable business practices. See Hynix at 1060 (citing Arthur Andersen LLP v. United States, 544 U.S. 696, 125 S. Ct. 2129, 2135, 161 L. Ed. 2d 1008 (2005) (“It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.”). In other words, a legitimate consequence is that relevant information may be kept out of the hands of adverse parties. Id.

Thus, while it is a perfectly legitimate business practice to establish and maintain a document retention policy, which most certainly includes the intentional destruction of documents, these inconsistent court decisions provide little guidance to a company attempting to determine the point at which the implementation of the policy constitutes spoliation. It should be noted, however, that in finding Rambus guilty of spoliation, each of the courts focused on the timing. That is, the courts focused on the fact that Rambus developed its document retention policy at the same time it developed its licensing and litigation strategy. See Infineon Techs., AG at 287; Micron at *53. Perhaps the outcomes would have been different had the timing been different.

Electronic Document Retention

In finding Rambus guilty of spoliation, the courts made note of the company's “shred days” and the quantity of documents shredded prior to its filing suit against the respective defendants.

What if, however, in light of the present trend of moving toward a paperless office, all or most of a company's records are in electronic format? Is it ever reasonable for a company or its attorneys to destroy electronic documents, deemed by many to be essentially free to store, requiring no “space” and being instantly accessible? In other words, is it reasonable to expect a company to indefinitely retain all electronic documents?

While storage cost, space and accessibility may be realized benefits of maintaining a company's documents in electronic format, the purpose behind a document retention policy is to keep certain, albeit relevant, information from getting into the hands of others. Cf. Arthur Andersen LLP v. United States, 544 U.S. 696, (2005). In light of this judicially recognized policy, it would appear unreasonable to expect a company to indefinitely retain all of its electronic documents merely because of the convenience afforded by the format.

If the above court decisions reveal anything, it's that the issue of spoliation is unpredictable. Thus, the courts could presumably impose two sets of standards for document retention, one for paper documents and another for electronic documents, but to what end? If a company is forced to indefinitely retain all of its electronic documents, but not its paper documents, what motivation would a company and/or its attorneys have to retain any documents in electronic format?

Conclusion

For now, it would appear reasonable for a company and its attorneys to operate under the presumption that only one standard exists, and thus, proceed with a content neutral document retention program, which includes the destruction of documents regardless of their format.

Thomas M. Hunter is a member of the Chemical and Biotechnology/Pharmaceutical Group at the the global intellectual property firm, Sughrue Mion PLLC. Kenneth Burchfiel is a partner in the firm and specializes in pharmaceutical litigation before the federal courts. Both attorneys practice at the firm's Washington, DC, office and may be reached at [email protected] and [email protected].

Following the collapse of major financial institutions and other business leaders on Wall Street, both government agencies and shareholders have tightened oversight of corporate America, demanding greater accountability for money spent and decisions made by executives. Now more than ever general counsels must help their companies set clearly defined standards for legal, financial and business processes. Document retention policies are particularly important for protecting companies that may be involved in litigation, as well as in providing transparency to regulators and stakeholders.

Meanwhile, despite the economic downturn, companies looking to bolster their valuation are still focused on expanding and protecting their patent portfolios at all costs. A company's licensing agreements ' often an important source of revenue ' can be put at risk if document retention policies are not clearly set and carefully followed. In addition, general counsel must be aware that new standards for transparency present new challenges to IP and general litigation strategies. Knowing what to save, how to save it, and for how long can make or break a case. Destruction of documents is a surefire way to land a seat in the defense chair.

To protect the company against these challenges, corporate counsels should note recent legal developments surrounding spoliation ' the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation. This violation occurs when one party intentionally or negligently breaches its duty to preserve potentially discoverable evidence.

The Rambus Case

Most recently, the District Court of Delaware found Rambus Inc. guilty of spoliation conduct including the destruction of “innumerable documents relating to all aspects of Rambus' business,” dating back to the late 1990s and declared that the patents in suit were unenforceable against Micron.

The dispute between Micron and Rambus related to Micron's alleged infringement of multiple Rambus patents. In fact, this was the third decision from three different jurisdictions wherein Rambus was charged with spoliation of evidence based upon its licensing, litigation and document retention policy. Virginia and Delaware courts found Rambus guilty of spoliation conduct, ( Rambus, Inc. v. Infineon Techs., AG , 220 F.R.D. 264 (E.D. Va. 2004); Micron Tech., Inc. v. Rambus Inc., Civ. No. 00-792-SLR, 2009 U.S. Dist. LEXIS 1260 (Dist. De. 2009). In California, however, the court found that Rambus did not commit spoliation. ( Hynix Semiconductor Inc. v. Rambus, Inc. , 591 F.Supp. 2d 1038, (N.D. Cal. Jan. 5, 2006).

The Facts

Each of the three courts evaluated the same basic set of facts in reaching their respective, and conflicting decisions on spoliation.

Rambus was founded in 1990 to address the increasing gap between microprocessor performance and DRAM performance. See Hynix Semiconductor Inc., 591 F.Supp at 1042; Micron Tech, Inc., Civ. No. 00-792-SLR, 2009 U.S. Dist. LEXIS 1260, at *2. In October 1997, Rambus hired Joel Karp as Vice President of Intellectual Property to develop a patent licensing and litigation strategy, including assessing Rambus' patent portfolio to determine when chips infringe, setting licensing strategies for infringing chips and to negotiating with companies that build and sell infringing chips. See Hynix at 1044-45; Micron at *8.

In conjunction with the licensing and litigation strategy, Rambus also began developing a document retention policy in early 1998. See Infineon Techs., AG, 220 F.R.D. at 284; Hynix at 1050; Micron at *12 and *18. As part of the document retention policy, Rambus sent 1,269 computer tapes out to be degaussed in July 1998, and the employees participated in company wide “shred days” in September 1998, August 1999 and December 2000. See Infineon Techs., AG, 220 F.R.D. at 284; Hynix at 1053, 1054 and 1056; Micron Tech, Inc., Civ. No. 00-792-SLR, 2009 U.S. Dist. LEXIS 1260, at *23-*24, *34-*35 and *41. Further, in April 1999, Rambus instructed its outside prosecution counsel to purge its patent files so that the files mirrored the PTO's files. See Infineon Techs. at 284; Hynix at 1054-55; Micron at *29-*30.

Duty to Preserve Evidence

In order to establish spoliation, it must first be shown that a party had a duty to preserve evidence. See Infineon Techs at 281 (citing T rigon Ins. Co. v. United States , 204 F.R.D. 277, 284 (E.D. Va. 2001)). The duty to preserve evidence arises not only during litigation, but also during the period before litigation when a party reasonably should know that the evidence may be relevant to anticipated litigation. See Silvestri v. Gen. Motors Corp. , 271 F.3d 583, 591 (4th Cir. 2001) (citing Kronisch v. United States , 150 F.3d 112, 126 (2d Cir. 1998)). In this regard, whether or not Rambus anticipated litigation at the time it destroyed documents is a threshold issue in deciding the spoliation issue. See Samsung Elecs. Co. v. Rambus Inc. , 439 F. Supp. 2d 524, (E.D. Va. 2006), (“the determination of when a party anticipated litigation is necessarily a fact intensive inquiry, and a precise definition of when a party anticipates litigation is elusive.”).

Despite reviewing essentially the same set of facts, the Virginia, Delaware and California courts did not agree on when Rambus' duty to preserve evidence arose. See Infineon Techs at 287; Hynix at 1064; Micron at *53.

In finding that Rambus had committed spoliation, the court in Rambus, Inc. v. Infineon Techs., AG, concluded that Rambus' duty to preserve evidence arose in “early 1998.” Id. at 287. In so doing, the court focused on the timing of when the document retention policy was developed. According to the court, an examination of Rambus' privilege logs showed that, in February 1998, while Rambus was developing its document retention policy, it was also receiving attorney-client communications regarding “legal strategy in anticipation of litigation” and “strategic patent litigation.” Id. at 285. The court also noted that Rambus' in-house counsel had prepared a memorandum entitled “preliminary infringement study” during this time frame. Id. Accordingly, the court concluded that Rambus was developing “strategy” in “anticipation of litigation,” while simultaneously developing it document retention policy, and as such “Rambus clearly anticipated some type of litigation at the point it destroyed documents.” See Infineon Techs. at 287.

In Micron Tech., Inc. v. Rambus Inc., where the court also found that Rambus had committed spoliation, the court determined that Rambus' duty to preserve evidence arose in December 1998. Id. At *53. In reaching its conclusion, the court found that: 1) litigation was reasonably foreseeable no later than December 1998, when Rambus articulated a time frame and motive for implementing a litigation strategy; and 2) the document retention policy was discussed and implemented within the context of Rambus' litigation strategy. Id. Thus, according to the court, Rambus knew, or should have known, that a general implementation of the policy was inappropriate because the documents destroyed would become material at some point in the future. Id.

The Micron court focused on that fact that sometime in late 1998 or early 1999, after a Nov. 30, 1998 management staff meeting, Rambus' VP of Intellectual Property drafted and circulated a memo outlining what Rambus strategy would be in the event that Intel cancelled its RDRAM production and moved instead to a competing technology. See Micron Tech., Inc. Civ. No. 00-792-SLR, 2009 U.S. Dist. LEXIS, at *28-*29. The memo identified that the major goal in this scenario was to convince Intel that, because of Rambus ability to assert its patents, it would be costly to move away from RDRAM. Id. The memo also identified potential targets, causes of action, and forms if negotiations with Intel failed, and indicated specifically that Rambus already had claim charts showing that Micron infringed one of the Rambus patents. Id.

In Hynix, the court determined that Rambus' duty to preserve evidence arose in “late 1999.” Id. at 1064. The court noted that although Rambus began to plan a litigation strategy as part of its licensing strategy as early as February 1998, the institution of litigation could not be said to be reasonably probable because several contingencies had to occur before Rambus would engage in litigation: 1) the direct RDRAM ramp had to be sufficiently developed so as not to jeopardize RDRAM production; 2) Rambus' patents covering non-RDRAM technology had to issue; 3) product samples from potentially infringing DRAM manufacturers had to be available in the market; 4) the non-compatible products had to be reverse engineered and claim charts made showing coverage of the actual products; 5) Rambus' board had to approve commencement of negotiations with a DRAM manufacturer; and 6) the targeted DRAM manufacturer had to reject Rambus' licensing terms. Hynix at 1062.

The court concluded that Rambus did not actively contemplate litigation or believe litigation against any particular DRAM manufacturer to be necessary or wise before its negotiation with Hitachi failed in late 1999, and “in light of the record presented, it would appear that litigation became probable shortly before the initiation of the “beauty contest” in late 1999 in which litigation counsel ' was selected.” Hynix at 1064. The court further concluded that Rambus' adoption and implementation of a content neutral document retention policy in mid-1998 was a permissible business decision, and as such, the destruction of documents on the 1998 and 1999 Shred Days pursuant to the policy did not constitute unlawful spoliation. Id.

What's a Company to Do?

The U.S. Supreme Court found that document retention policies, which are created in part to keep certain information from getting into the hands of others, including the Government, are common, acceptable business practices. See Hynix at 1060 (citing Arthur Andersen LLP v. United States , 544 U.S. 696, 125 S. Ct. 2129, 2135, 161 L. Ed. 2d 1008 (2005) (“It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.”). In other words, a legitimate consequence is that relevant information may be kept out of the hands of adverse parties. Id.

Thus, while it is a perfectly legitimate business practice to establish and maintain a document retention policy, which most certainly includes the intentional destruction of documents, these inconsistent court decisions provide little guidance to a company attempting to determine the point at which the implementation of the policy constitutes spoliation. It should be noted, however, that in finding Rambus guilty of spoliation, each of the courts focused on the timing. That is, the courts focused on the fact that Rambus developed its document retention policy at the same time it developed its licensing and litigation strategy. See Infineon Techs., AG at 287; Micron at *53. Perhaps the outcomes would have been different had the timing been different.

Electronic Document Retention

In finding Rambus guilty of spoliation, the courts made note of the company's “shred days” and the quantity of documents shredded prior to its filing suit against the respective defendants.

What if, however, in light of the present trend of moving toward a paperless office, all or most of a company's records are in electronic format? Is it ever reasonable for a company or its attorneys to destroy electronic documents, deemed by many to be essentially free to store, requiring no “space” and being instantly accessible? In other words, is it reasonable to expect a company to indefinitely retain all electronic documents?

While storage cost, space and accessibility may be realized benefits of maintaining a company's documents in electronic format, the purpose behind a document retention policy is to keep certain, albeit relevant, information from getting into the hands of others. Cf. Arthur Andersen LLP v. United States , 544 U.S. 696, (2005). In light of this judicially recognized policy, it would appear unreasonable to expect a company to indefinitely retain all of its electronic documents merely because of the convenience afforded by the format.

If the above court decisions reveal anything, it's that the issue of spoliation is unpredictable. Thus, the courts could presumably impose two sets of standards for document retention, one for paper documents and another for electronic documents, but to what end? If a company is forced to indefinitely retain all of its electronic documents, but not its paper documents, what motivation would a company and/or its attorneys have to retain any documents in electronic format?

Conclusion

For now, it would appear reasonable for a company and its attorneys to operate under the presumption that only one standard exists, and thus, proceed with a content neutral document retention program, which includes the destruction of documents regardless of their format.

Thomas M. Hunter is a member of the Chemical and Biotechnology/Pharmaceutical Group at the the global intellectual property firm, Sughrue Mion PLLC. Kenneth Burchfiel is a partner in the firm and specializes in pharmaceutical litigation before the federal courts. Both attorneys practice at the firm's Washington, DC, office and may be reached at [email protected] and [email protected].