Introduction
When litigation or government inquiry is reasonably anticipated, threatened, or pending, there is a duty to timely identify, locate, and preserve data.1 This duty to preserve applies to all litigants or parties to investigation, ranging from individuals,2 to large healthcare systems,3 to the government.4 How can you help your clients hold on to their data and documents? A recent decision by the U.S. District Court for the District of New Mexico, United States v. Community Health Systems, Inc. outlines how to properly implement a "litigation hold."
Duty to Preserve
The duty to preserve arises from the common law duty to avoid spoliation of relevant evidence for use at trial.5 The duty requires reasonable and good-faith actions to preserve potentially relevant information related to the threatened litigation.6 Potentially relevant information includes documents that the party knows, or reasonably should know, are relevant in the action, are reasonably calculated to lead to the discovery of admissible evidence, are reasonably likely to be requested during discovery, or are subject to a pending discovery request.7 To decide what should be preserved, counsel must be able to identify all potential custodians of relevant data. Counsel must also identify potential sources of data, and means by which that data could be destroyed. A party must then "suspend its routine document retention/destruction policy and put in place a 'litigation hold' to ensure the preservation of relevant documents."8
Background: United States v. Community Health Systems, Inc. et al.
In Community Health Systems, the government intervened in a qui tam case alleging Medicaid fraud based on violations of the False Claims Act.9 The government began investigating the case in 2005. It issued a "preservation notice," or notice to issue a litigation hold to preserve evidence, to the defendants in December 2005. The government did not intervene, however, until February 2009. It initiated its own litigation hold on the day it intervened.
The defendants had asserted the "government knowledge inference" as a defense. This defense arises when the government knows and approves of the facts underlying an allegedly false claim prior to presentment, because no violation exists where the government has not been deceived.10 Two employees of the Centers for Medicare & Medicaid Services (CMS) were believed to have custody of documents that could demonstrate the government's knowledge. The first, James Frizzera, was a division director for CMS from 2006 to December 2008, when he retired. The second, Robert Cowan, was the CMS New Mexico financial analyst from 2007 until his retirement in September 2010.
When the government's litigation hold went into effect, Frizzera had already retired. Following an employee's departure, CMS' policy was to automatically delete computer files and emails. That auto deletion could have been avoided or halted. However, the attorney implementing the litigation hold did not take any steps to preserve Frizzera's computer files or emails.
Cowan, on the other hand, was still employed at CMS when the litigation hold went into effect. His documents were initially preserved, but when he retired there was no effort to continue to preserve them until several months later. His documents were then found to be missing.
Untimely and Inadequate Litigation Holds
In Community Health Systems, defendants filed a motion for sanctions against the government, claiming that the government's litigation hold was: (1) untimely; and (2) inadequate, which caused the destruction of relevant evidence. The court's analysis in that case demonstrates why timely and adequate litigation holds are essential to fulfilling a duty to preserve.
Untimely Litigation Holds
A party's duty to preserve evidence begins when the party is placed on notice that the evidence is relevant to litigation or when the party should know that the evidence may be relevant to future litigation.11 In other words, once a party reasonably anticipates litigation, it must suspend its routine document destruction policy and put in place a litigation hold. For a plaintiff, the duty to preserve may attach when it seeks advice of counsel or takes specific steps to commence litigation.12 The duty may attach for a defendant, at the latest, when a plaintiff informs the defendant of its potential claim.13 Pre litigation events may, added together, be enough to trigger the duty to preserve when the threat of litigation is credible.14
For healthcare companies, the duty to preserve may be triggered by receipt of a subpoena, complaint, or demand letter; by pre-litigation discussion with an opposing party or their counsel; by an inquiry from a state or federal government or regulatory agency; by receipt of a civil investigation demand; or when a federal investigation or inquiry is contemplated.
In Community Health Systems, the government argued that it could not have reasonably anticipated litigation, and therefore had no duty to issue a litigation hold, until it filed its notice of intervention on February 20, 2009. The court found that the government's intervention was reasonably foreseeable after it received a letter from defense counsel rejecting its offer of settlement on September 5, 2008. If the government had timely implemented its litigation hold, Frizzera's emails would have been available. By failing to preserve documents once litigation was reasonably anticipated, the government violated its duty to preserve documents.
Inadequate Litigation Holds
To be adequate, a litigation hold must be supervised. "Once a 'litigation hold' is in place, a party and [its] counsel must make certain that all sources of potentially relevant information are identified and placed 'on hold.'"15 It is not sufficient to circulate a litigation hold without any additional instruction.16 Rather, "[c]ounsel must take affirmative steps to monitor compliance so that all sources of discoverable information are identified and searched."17
In order to monitor compliance, it is a best practice for outside counsel and general counsel to interview any key players or potential custodians of data. Interviews will help counsel identify where each custodian's potentially relevant data, in all sources and formats, is stored in active systems, legacy data systems, archival systems, back-up media, portable systems, and third-party systems. In particular, healthcare companies generally have a large amount of Electronic data in addition to paper files. For healthcare providers, this is in part due to the specific incentives to create electronic records established by the Health Information Technology for Economic and Clinical Health Act of 2009. Electronic records may take the form of emails, voicemails, diagnostic images, free text physician notes, photos, videos, audio files, and web portals.
Counsel should then identify the organization's policies that are in place that affect that data. For example, if the party has a "retention policy" or plan for regular data destruction that affects relevant data, it should be suspended or the documents otherwise preserved. If there is no retention policy, counsel should understand whether there are defaults in software for deletion, or informal policies for destruction. Such defaults and practices that affect relevant data must also be suspended. Understanding where data is will help counsel determine whether relevant information is being preserved.
After identifying data and how it could potentially be deleted, counsel should explain the consequences of failing to comply with a litigation hold to all custodians.18 Because litigation can be lengthy, custodians may need periodic reminders of the litigation hold throughout the litigation.
In Community Health Systems, the attorney responsible for implementing the litigation hold did not take steps to monitor compliance with the litigation hold. The attorney did not alert Frizzera's supervisors or anyone else about the importance of preserving his data even though he had already retired. Further, the attorney did not investigate other potential locations for Frizzera's data.
CMS used a shared drive where employees could place emails, but that drive was not investigated beyond an initial search by a contractor. Further, backup tapes existed on which, even if they had been erased, some information may have been left that an administrator could have recovered.
The court found the attorney did not take adequate steps with regard to Cowan's email. When he retired, there was no effort to identify and preserve his documents until several months later. The court noted that it was inappropriate to assume the litigation hold would somehow "trickle down" to the appropriate personnel. Because the compliance with the legal hold was not monitored, the government's legal hold was inadequate.
Sanctions for Failure to Preserve
A breach of the duty to preserve and consequent spoliation of evidence can lead to the imposition of sanctions. When imposing sanctions for spoliation of evidence, courts consider: (1) the degree of culpability of the party who lost or destroyed the evidence; and (2) the degree of actual prejudice to the other party.
The court in Community Health Systems found that the government's misconduct did not rise to the level of bad faith or wilful misconduct. It did find, however, that the government's pre-litigation attempts to preserve data were "woefully inadequate and go beyond mere negligence." The court also found that defendants had demonstrated prejudice because the data that was lost or destroyed went to the critical issue of government knowledge, on which evidence was conflicting.
Unique to that case, the government was withholding documents on the basis of work-product immunity, deliberative process privilege, and attorney-client privilege that were relevant to the government knowledge issue. In order to craft sanctions that were in proportion to the defendants' prejudice, the court ordered the government to produce all documents withheld under a claim of work product immunity or deliberative process privilege which discussed certain reports. Further, the court ordered the government to produce all email to or from Frizzera and Cowan, regardless of whether they were being withheld under a claim of work product immunity, deliberative process privilege, or attorney client privilege. In addition, the court awarded defendants their reasonable attorney fees and costs associated with their motion for sanctions. Finally, the court requested additional briefing about whether additional forensic searches of the shared drive would be completed at the government's expense.
Takeaways From United States v. Community Health Systems
In its conclusion, the court in Community Health Systems noted that its sanctions had been designed to prevent the government from benefitting "from its apathetic conduct in preserving documents that were clearly meant to be preserved." In light of the court's holding, how can a party strenuously comply with its duty to preserve documents?
First, when your company or your client receives an inquiry, becomes part of or conducts an investigation, or receives a threat of litigation, perform a reasoned analysis of whether there is a credible probability that litigation will be forthcoming. If litigation is probable, take steps to begin preservation efforts and implement a litigation hold.
You may wish to create a policy or practice for your client that sets out a process for determining whether the duty to preserve information has attached. This may include criteria for an assessment of the threat and factors that indicate the potential for litigation or investigation that are specific to your client's organization.19 Following a policy will help the organization to make the decision in good faith in a reasoned manner. Requiring that the steps are memorialized will also help the organization defend its decision to implement or not to implement a hold.
Second, as counsel or general counsel, make sure to monitor compliance with the litigation hold on an ongoing basis. Initially, you may consider meeting with potential custodians when the litigation hold is released so that they have an opportunity to ask questions about the hold. For your client, signed confirmation of receipt of the litigation hold from custodians may be more appropriate. And although they may not have custody of data, you should also meet with your client's information technology (IT) services provider, whether that provider is in-house or a third party. They can be a great resource. IT services may even be able to suggest ways to automate certain aspects of the duty to preserve, such as suspension of deletion features.
Your work is not over after the initial implementation of the litigation hold. Make sure compliance continues by sending reminders of the litigation hold to the custodians. If the litigation hold is not mentioned again, custodians may believe that the duty to preserve has been fulfilled and will revert to their normal practices.
Finally, you may need to update the legal hold as the litigation progresses and the scope of potentially relevant data changes. If new custodians are added to the litigation hold, make sure that they receive the same attention as the older custodians. Following this guidance will help your client "hold on" to the data that they have a duty to preserve.
Footnotes
1 See, e.g., Managed Care Solutions, Inc. v. Essent Healthcare, Inc., 736 F. Supp. 2d 1317, 1324 (S.D. Fla. 2010); John B. v. Goetz, No. 3:98-0168, 2010 WL 8754110, at *65 (M.D. Tenn. Jan. 28, 2010).
2 Kvitka v. The Puffin Company, L.L.C., No. 1:06-cv-0858, 2009 WL 385582 (M.D. Pa. Feb. 13, 2009).
3 See Tabon v. University of Pennsylvania Health System, No. 10-cv-2781, 2012 WL 2953216 (E.D. Pa. July 20, 2012).
4 United Med. Supply Co. Inc. v. United States, 77 Fed. Cl. 257 (Fed. Cl. 2007).
5 See, e.g., Silvestri v. General Motors, 271 F.3d 583 (4th Cir. 2001); Chambers v. NASCO, Inc., 501 U.S. 32 (1991).
6 Zubulake v. UBS Warburg, LLC, (Zubulake IV), 220 F.R.D. 212, 217 (S.D.N.Y. 2003).
7 Id.
8 Zubulake v. UBS Warburg, LLC (Zubulake V), 229 F.R.D. 422, 431 (S.D.N.Y. 2004).
9 United States v. Community Health Systems, Inc. et al., No. 05-279 WJ/ACT, 2012 WL 5387069 (D.N.M. Oct. 3, 2012).
10 Id. at *7 (collecting cases).
11 Eckhardt v. Bank of America, No. 3:06-cv-512, 2008 WL 1995310, at *5 (E.D.N.C. May 6, 2008).
12 University of Montreal Pension Plan v. Banc of America Securities, 685 F. Supp. 2d 456, 475 (S.D.N.Y. 2010), abrogated by Chin v. Port Auth. of New York & NewJersey, 685 F.3d 135, 162 (2d Cir. 2012) (rejecting the notion that a failure to institute a litigation hold is gross negligence per se, and instead finding that failure to adopt good preservation practices is one fact in the determination of whether discovery sanctions should issue).
13 Haraburda v. Arcelor Mittal USA, Inc., No. 2:11-cv-93, 2011 WL 2600756, at *1 (N.D. Ind. June 28, 2011).
14 Surowiec v. Capital Title Agency, Inc., 790 F. Supp. 2d 997, 1005-1006 (D. Ariz. 2011) (holding that duty to preserve was triggered pre-litigation when defendant received a letter that an attorney was investigating the potential claim, and when individual defendant had sought legal advice about potential claim prior to letter); Cache LaPoudre Feeds, LLC v. Land O'Lakes, Inc., 244 F.R.D. 614, 622 (D. Colo. 2007). For additional guidance on when the duty to preserve may be triggered, see The Sedona Conference Commentary on Legal Holds: TheTrigger & the Process, 11 The Sedona Conference Journal 265, 283 (Fall 2010), available at https://thesedonaconference.org/download-pub/470 .
15 Zubulake V, 229 F.R.D. 422, 432 (S.D.N.Y. 2004).
16 Nacco Materials Handling Group, Inc. v. The Lilly Company, 278 F.R.D. 395, 403 (W.D. Tenn. 2011).
17 Zubulake V, 229 F.R.D. at 432.
18 Haraburda, 2011 WL 2600756, at *2.
19 The Second Conference has a list of factors that will provide a good starting point for creation of such a policy. The Sedona Conference Commentary on LegalHolds: The Trigger & the Process, supra note 14.
This article was previously published in Healthcare Liability and Litigation, Volume 15, Issue 1, January 2013.
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