In the fast-paced and dynamic environment of startup and emerging companies, standard operating procedures and compliance matters may often fall by the wayside.   However, it is important for management and employees to understand their obligations for retaining documents, particularly electronic documents.  A detailed and enforced document retention and destruction policy is an important first step in complying with various federal, state, and local laws and regulations.

One such federal rule to carefully consider is Fed. R. Civ. P. 37(e), which relates to a failure to preserve electronically stored information and provides the following consequences for such failures:

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:

(1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or

(2) only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation may:

(A) presume that the lost information was unfavorable to the party;

(B) instruct the jury that it may or must presume the information was unfavorable to the party; or

(C) dismiss the action or enter a default judgment.

Thus, a party anticipating litigation should take “reasonable steps” to preserve electronically stored information, and not act “with the intent to deprive another party of the information’s use in the litigation.”

In re Ivantis, Inc., (Fed. Cir. 2020), a brief but informative Federal Circuit decision issued on November 3, 2020, highlights the necessity of carefully implementing an appropriate document retention policy and considering anticipated litigation risks before deleting potentially relevant emails and documents.  Ivantis competes directly with Glaukos Corporation in the field of FDA-approved stent treatments for glaucoma. While Glaukos sued Ivantis for patent infringement in 2018, the facts of the case dated back more than a decade when Ivantis was informed in 2009 that it allegedly infringed Glaukos’ patents.  In 2013, Ivantis hired counsel to conduct diligence related to Glaukos’ patents. Shortly thereafter, Ivantis implemented a document policy that included deleting all emails relating to Glaukos’ patents.  In 2017, the CEO of Ivantis distributed a report from an industry analyst indicating Glaukos would sue Ivantis for infringement in 2018, and in 2018 Ivantis began preparing a petition for inter partes review of Glaukos’ Patent No. 6,626,858.

Glaukos brought an infringement action against Ivantis in the Central District of California. During discovery, after Ivantis informed Glaukos it was unable to produce emails prior to April 19, 2017, Glaukos moved for an adverse jury instruction. The district court granted Glaukos’s motion, finding Ivantis had destroyed evidence despite foreseeing the litigation. It subsequently ordered the jury to presume the destroyed evidence was favorable to Glaukos and unfavorable to Ivantis. Ivantis petitioned for a writ of mandamus to the Federal Circuit, requesting the Federal Circuit vacate the order and bar an adverse-inference or, alternatively, require the district court defer consideration of adverse-inference instructions for the end of trial. For at least the facts outlined above, the Federal Circuit denied Ivantis’ petition.

Although the district court’s order may be reviewed in a post-judgment appeal, Ivantis suggested to the Federal Circuit that it may not be in a position to appeal if Glaukos is successful in obtaining the judgment it seeks. The Federal Circuit was not persuaded and explained that it would not “depart from the usual practice of waiting until after final judgment to review such orders based on such speculation.”

Therefore, startup and emerging companies should create and uniformly enforce a detailed document retention policy in order to mitigate risks associated with failing to comply with various laws and regulations, including Fed. R. Civ. P. 37(e).  The policy should define the lengths of time for keeping different types of records depending on the record type.  Such records can include paper files, electronic files, text messages, voice and video recordings, correspondence (including letters, faxes and emails), and data used in various business applications and databases.  Various licensing partners, investors, and government funders may impose specific document retention requirements that should be carefully incorporated into such policies.

When contemplating a document retention policy, it is crucial to ensure that when there is any anticipated litigation, all relevant documents are preserved until the litigation risk has passed. Enacting a reasoned, circumspect email retention policy can save a company from having to endure unnecessary headaches and costs.  Because statutes of limitations and regulatory requirements vary from state to state and also case-by-case based on how each organization is situated (e.g., government-funded, investor-funded, and/or licensing partner), each organization should carefully consider its requirements and consult with legal counsel before adopting a document retention policy.