As the proposed changes to the federal rules regarding the preservation of electronically stored information (“ESI”) continue to move through the approval process, it is crucial that lawyers understand the scope of these proposed changes.

One of the most important proposed changes relates to Rule 37(e) which addresses the sanctions that can follow from the failure to preserve ESI. The current Rule 37(e) focuses on the loss of information “as a result of the routine, good faith operation of an electronic information system.” While simple in theory, this has proven difficult to apply in practice. Multiple courts have decided that the trigger of a preservation duty supersedes routine operations – whether by policy (such as a records management policy or schedule) or technical means (such as suspending backup tape recycling and halting auto deletions) – effectively rendering the rule and its intended benefits hollow.

The proposed Rule 37(e) seeks to provide better guidance for courts to manage the increasing number of cases involving ESI by replacing the old “one-size-fits-all” rule for lost or missing information with a multi-factor approach focusing on the intent of the producing party and the prejudice to the receiving party.

Proposed Rule 37(e):

If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court may:

  1. upon finding prejudice to another party from loss of the information, order measures no greater than necessary to cure the prejudice;
  2. only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation,
    1. presume that the lost information was unfavorable to the party;
    2. instruct the jury that it may or must presume the information was unfavorable to the party; or
    3. dismiss the action or enter a default judgment.

This new construct, unlike the current rule, provides significantly more guidance as to what must be established before any sanctions can be imposed for the loss of ESI and the level of sanctions that can be imposed. A line by line examination of the proposed rule reveals seven important takeaways:

First, the proposed rule limits the inquiry to the litigation preservation duty: “if electronically stored information that should have been preserved in the anticipation or conduct of litigation . . .” This language mandates that sanctions in litigation should only result from the trigger of a preservation duty in litigation, not the existence of a separate duty (such as by statute or regulation), contractual agreement, or internal policy (such as a records retention policy or schedule).

Second, the proposed rule requires that ESI “is lost.” This means that for sanctions to be applied there must be an actual loss of data or information. Delays in production, or other issues that are not a “loss,” end the inquiry for spoliation sanctions (although, depending on the circumstances, there could be other consequences including sanctions if there are other violations of other rules or court orders).

Third, ESI must have been lost “because a party failed to take the reasonable steps to preserve it.” Consequently, sanctions should only be applied if the loss of information can be directly tied (i.e., there is a causal nexus) to a party’s failure to take “reasonable steps” to preserve it. This provision has two key takeaways: (1) if ESI is lost because of an act, despite a party’s reasonable steps, there should be no sanctions; and (2) the party will be required to demonstrate that it took “reasonable steps.” The test of reasonableness for most medium to large-sized organizations will likely require demonstration of a defensible process that includes documentation, validation, and audits. In addition, the standard will likely evolve over time in light of continually emerging technologies and legal expectations.

Fourth, it is also necessary that the information “cannot be restored or replaced through additional discovery.” Thus, even if a party failed to adequately preserve potentially relevant information, and if this information can be restored or replaced with other relevant information, then the accused party should still be free from sanctions. The proposed rule language is quite flexible; and these “replacements” could be anything from substitute copies, to “reconstituted” or “reconstructed” data sources (i.e., repopulating mailboxes using send/receive items from other users who were a part of the email string), or to interrogatory responses that provide substitute evidence addressing the lost information.

Fifth, assuming all the previous criteria are fulfilled, the aggrieved party must still demonstrate prejudice before the imposition of any sanction. This ties in with the above notion that the lost information “cannot be restored or replaced,” and that its absence must actually prejudice the party before sanctions can be imposed.

Sixth, sanctions are explicitly limited to those “measures no greater than necessary to cure the prejudice.” This removes any element of punitive or exemplary sanctions – sanctions must be related to the specific case and targeted at curing a specific aspect of prejudice. That said, significant leeway remains for courts to act punitively within this dictate, and it is likely that disputes will arise in the context of this new provision.

Seventh, the court is still able to impose more significant sanctions (including presumptions of adverse content, adverse inference jury instructions, and dismissal or default judgment on some or all parts of a case) if it is found “that the party acted with the intent to deprive another party of the information’s use in the litigation.” This is especially noteworthy because it eliminates the disparate standards that currently exist amongst different federal circuits and replaces the case-altering sanctions in circumstances often described as “negligence” or “gross negligence.” It is likely that this standard will also be tested in practice; leading to multiple, initial interpretations.

Beyond the realm of the rule itself, the draft Advisory Committee Note (not included here) provides an important supplement to the rule and will likely be cited in any disputes. In addition to laying out what the proposed rule is intended to accomplish, the Note discusses why the rule does not address “non-ESI” (to preserve the line of cases under Silvestri v. General Motors that allow for significant sanctions when physical items may have been lost without fault but the prejudice is so substantial that a case-altering sanction is necessary).

Overall, the proposed rule will allow corporate entities to avoid disproportionate or unduly harsh sanctions resulting from the inevitable loss of relevant ESI in a world in which the volume and volatility of ESI continues to grow at a blistering pace. This, in turn, should allow companies to develop and defend proportional approaches to preservation and tackle the substantial problems created by the historic and recurring over-retention of ESI. Taking steps now to revisit both retention policies and evidence preservation practices to assess whether they meet the “reasonableness” test is a good first step. Moreover, creating a regular process to ensure that these policies stay within the zone of reasonableness as technologies and expectations continue to change over time will allow companies to stay ahead of the legal curve. Finally, it is critical that companies engage legal counsel who (1) understand the evidence preservation issues from the onset; (2) can effectively guide the technical and procedural steps to avoid losses; and (3) can identify appropriate remediation steps when ESI is lost.

Ultimately, while no harbor is a completely danger-free zone in the event of a storm, the proposed Rule 37(e), if adopted, will offer substantial protection to all those who find it and successfully moor themselves to its structures.