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June 16, 2017

The “Business Judgment” Discovery Rule and its Impact on Information Governance

There has been a substantial push over the past several years for organizations to adopt an information governance (IG) program. Many legitimate reasons justify its implementation. For serial litigants or companies that are in highly regulated industries, IG measures such as information retention policies and a litigation hold process can facilitate the reduction of discovery costs and risks. Effective IG also includes information security and cyber security initiatives, which help secure company information from internal and external threats. IG additionally encompasses data privacy measures, which can safeguard consumer and employee information and satisfy domestic and cross-border data protection laws.

Beyond all this, a new trend supporting information governance focuses on the benefits such a program offers in connection with proportionality-related litigation requirements. As discussed last week in an article published by Legaltech News, Proportionality (which generally seeks to balance the benefits of discovery with the burdens of compliance) has become one of the principal touchstones of federal discovery practice since the enactment of the 2015 amendments to the Federal Rules of Civil Procedure.

The Interplay between Proportionality and Information Governance

The interplay between proportionality and information governance is encapsulated in the newly published Sedona Conference Commentary on Proportionality in Electronic Discovery (Commentary). While the Commentary offers guidance and practice tips on various discovery-related issues, it also discusses the impact of information governance on the proportionality analysis. The Commentary observes that courts should consider the reasonableness of a responding party’s information retention policies in evaluating the nature and extent of a particular discovery burden:

Information retention policies may also affect the proportionality analysis. Where a party’s information retention policies serve reasonable organizational or commercial purposes, burden, expense, or delay attributable to such policies should not be held against the party claiming burden. Conversely, where information retention policies do not serve such purposes, associated arguments of burden, expense, or delay should be discounted.[i] (emphasis added)

What can be extrapolated from these concepts is essentially a “business judgment” rule for discovery. In the context of proportionality, courts should generally credit responding parties whose information retention policies advance legitimate business objectives. The corollary is also true: burdens and related costs will matter less if retention policies lack a reasonable business purpose.

Judicial Guidance on the “Business Judgment” Discovery Rule

Judicial opinions have discussed the notion of a proportionality-based “business judgment” rule. The U.S. Supreme Court has recognized the legitimacy of information retention policies.[ii] In like manner, U.S. Courts of Appeals have endorsed the use of such policies for “benign business purposes . . . which may include a general concern for the possibility of litigation.”[iii]

More recently, courts have provided specific guidance on whether information-related policies truly serve business objectives and thus satisfy proportionality standards. For example, in Solo v. United Parcel Service Co.,[iv] the court determined that a responding party’s decision to keep certain packaging and billing information in active data format only for a limited time to be reasonable. Given the nature and scope of its business operations, the court reasoned that a “valid business reason” existed for the responding party to keep that information archived on backup tapes. As a result, the requesting party’s demand for five plus years of information (most of which was stored exclusively on backup tapes) was held to be “extraordinarily burdensome” and pared back accordingly.

In contrast, the court in U.S. ex rel. Guardiola v. Renown Health[v] rejected a responding party’s arguments of inaccessibility, undue burden, and undue cost given its reliance on disaster recovery tapes for common law preservation purposes. While acknowledging that companies are “best situated” to address the practical and technological needs for their information, the court explained that surely those needs would at some level include “the risk of litigation and corresponding discovery obligations.” Because the responding party failed to adopt “a sensible email retention policy,” it would have to bear the resulting costs and burdens without cost shifting or other relief.

Developing Effective Information Governance

Solo, Guardiola and other cases are instructive on how an organization’s information-related policies can help satisfy the proportionality-based “business judgment” rule in discovery. Companies should adopt information retention policies that are driven by reasonable business exigencies and that satisfy “generally accepted recordkeeping principles.” Policies that do so will likely help an organization obtain proportionality credit in discovery while strengthening its information governance program. Both of which will be welcome results for any enterprise.

 

 

[i] The Sedona Conference Commentary on Proportionality in Electronic Discovery, Third Edition, Comment 3.d (The Sedona Conference, 2017, available at https://thesedonaconference.org/publication/The%20Sedona%20Conference%20Commentary%20on%20Proportionality) (emphasis added).

[ii] See Arthur Andersen LLP v. United States, 544 U.S. 696, 704 (2005) (“‘Document retention policies,’ which are created in part to keep certain information from getting into the hands of others, including the Government, are common in business . . . It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.”).

[iii] Micron Technology, Inc. v. Rambus, Inc., 645 F.3d 1311, 1322 (2011) (“most document retention policies are adopted with benign business purposes, reflecting the fact that ‘litigation is an ever-present possibility in American life’ . . . In addition, there is the innocent purpose of simply limiting the volume of a party’s files and retaining only that which is of continuing value. One might call it the ‘good housekeeping’ purpose.”).

[iv] Solo v. United Parcel Service Co., No. 14-12719, 2017 WL 85832 (E.D. Mich. Jan. 17, 2017).

[v] U.S. ex rel. Guardiola v. Renown Health, No. 12-cv-0295, 2015 WL 5056726 (D. Nev. Aug. 25, 2015).

Philip Favro
Philip Favro
Philip Favro acts as a trusted advisor to organizations and law firms on issues surrounding discovery and information governance. Phil provides guidance on data preservation practices, litigation holds, data collection strategies, and ESI search methodologies. In addition, he offers direction to organizations on records retention policies and the need to manage dynamic sources of information found on smartphones, cloud applications, and social networks. Phil is available to serve as a special master on issues related to electronic discovery. Phil is a nationally recognized thought leader and legal scholar on issues relating to the discovery process. His articles have been published in leading industry publications and academic journals and he is frequently in demand as a speaker for eDiscovery education programs. Phil is a member of the Utah and California bars. He actively contributes to Working Group 1 of The Sedona Conference where he leads drafting teams and serves as the Steering Committee project manager. Prior to joining Driven, Phil practiced law in Northern California where he advised a variety of clients regarding business disputes and complex discovery issues. He also served as a Judge Pro Tempore for the Santa Clara County Superior Court based in Santa Clara, California.
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