January 28, 2011
In a significant development for those who may litigate in the Delaware Court of Chancery, that court has issued guidelines regarding preservation of electronically stored information in cases before it. See Court of Chancery Guidelines for Preservation of Electronically Stored Information ("Guidelines"). The Delaware Chancery Court has general equity jurisdiction and, among other cases, typically presides over M&A and shareholder derivative litigation involving Delaware corporations. Companies that anticipate being involved in such matters and their counsel should be aware of the Guidelines and prepared to follow them.
The duty to preserve information relevant to pending or reasonably anticipated litigation is a common law duty that courts have developed in an often conflicting fashion. Neither the Federal Rules of Civil Procedure nor, generally, state e-discovery statutes and court rules contain preservation provisions, although there have been increasing calls for uniform rules regarding preservation. For more information regarding developments in state e-discovery statutes, court rules and calls for a uniform federal preservation rule, see Gibson Dunn’s 2010 Year-End E-Discovery Update.
According to the Chancery Court Guidelines, their purpose is to "remind all counsel (including Delaware counsel) appearing in any case before this Court of their common law duty to their clients and the Court with respect to the preservation of electronically stored information (‘ESI’) in litigation." But the Guidelines go further in emphasizing counsel’s oversight duties, expressly identifying certain best practices that parties and their counsel (both in-house and outside) should follow, and identifying specific possible sources of ESI that should be a "starting point."
In particular, the Guidelines emphasize that:
See Court of Chancery Guidelines at 1-2 (emphasis added).
Following the Guidelines does not guarantee that a party and its counsel will avoid sanctions where relevant ESI is lost or destroyed after the duty to preserve is triggered. The Guidelines are careful to state that implementing such preservation measures "may not be sufficient by itself to avoid the imposition of sanctions[.]"
Although the Guidelines note that the "steps [that] will be considered to be reasonable will vary from litigation to litigation," it is likely that the Chancery Court will consider each of them (where applicable) as a base point for parties’ preservation obligations. Of particular significance is the Chancery Court’s direction to consider, "as a starting point," several potential sources of relevant ESI, including home computers, portable storage devices and personal email accounts. According to the Guidelines, "experience has shown" that these are some of the "potential problem areas" regarding preservation of ESI.
The Chancery Court may have been drawing upon its experiences in two 2009 decisions where defendants were sanctioned for failure to preserve data stored on the home computers of employees. See Triton Construction Co. v. Eastern Shore Electrical Services, 2009 Del. Ch. LEXIS 88 (May 18, 2009) and Beard Research v. CB Research & Development, 981 A.2d 1175 (Del. Ch. 2009). The Chancery Court’s emphasis on the need to consider preservation of such outside sources of ESI may also stem from the frequency with which it handles litigation involving the fiduciary duties of corporate directors. Outside directors, for example, often do not have company computers and email accounts and instead use their own computers and accounts.
The Guidelines’ statement that parties may agree to limit or forego electronic discovery, and presumably related preservation obligations, appears to recognize the increasingly common practice of parties reaching agreements regarding the scope of their preservation obligations. The Guidelines are silent on the issue of backup tapes, but the Chancery Court has previously held that "simply because ESI is now contained on Backup Tapes instead of in active stores does not necessarily render it not reasonably accessible" and thus it may be discoverable. It follows that relevant information residing on backup tapes would likely be considered subject to the preservation obligation, despite the lack of any express reference to them in the Guidelines. See Omnicare v. Mariner Health Care Management Co., 2009 Del. Ch. LEXIS 95 (May 29, 2009).
Finally, the Chancery Court states that although the Guidelines are focused narrowly on the preservation of ESI—"an area where problems are often difficult to remedy after the fact"—the Court of Chancery Rules Committee "is continuing to monitor the broader topic of discovery of ESI[.]" Although the Chancery Court has not adopted a comprehensive set of rules or Guidelines regarding electronic discovery generally, it highlights that "extensive resources on that topic are available from many sources," including "The Sedona Guidelines: Best Practices & Commentary for Managing Electronic Information in the Electronic Age" and the "Conference of Chief Justices: Guidelines for State Trial Courts regarding Discovery of Electronically-Stored Information."
The Chancery Court Guidelines emphasize the need for companies (and their legal and IT departments) to develop in advance of litigation policies and procedures for issuing and implementing litigation holds. Doing so enables companies to be prepared to follow best practices and have a preservation process that is legally defensible, particularly as the duty to preserve may arise even before litigation commences.
Gibson Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The Electronic Discovery and Information Law Practice Group brings together lawyers with extensive knowledge of electronic discovery and information law. The group is comprised of seasoned litigators with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. The group’s lawyers work closely with the firm’s technical specialists to provide cutting-edge legal advice and guidance in this complex and evolving area of law. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following Chairs of the Electronic Discovery and Information Law Practice Group:
Gareth T. Evans – Practice Co-Chair, Los Angeles/Orange County (213-229-7734, firstname.lastname@example.org)
Jennifer H. Rearden – Practice Co-Chair, New York (212-351-4057, email@example.com)
G. Charles Nierlich – Practice Co-Chair, San Francisco (415-393-8239, firstname.lastname@example.org)
M. Sean Royall – Practice Co-Chair, Dallas (214-698-3256; email@example.com)
Farrah Pepper – Practice Vice-Chair, New York (212-351-2426, firstname.lastname@example.org)
© 2011 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.