Court Fines CEO and Chastises Corporate Counsel for Failure to Preserve Documents

Danis v. USN Communications, Inc., 2000 WL 1694325, 53 Fed.R.Serv.3d 828 (N.D. Ill. 2000)

After a protracted discovery dispute in which the parties collectively spent over $1.5 million litigating the issue of sanctions, the court determined that the defendants had failed to take adequate steps to preserve potentially relevant documents.

Stating that “[t]he buck must stop somewhere,” it held the CEO of the company responsible because he was directed by the board to see that documents were preserved, and because he was on the scene with the ability to follow through and see that the job was completed. 2000 WL 1694325, at *41. The magistrate recommended the imposition of a $10,000 fine “to impress upon him the importance of the preservation duties that he failed to properly discharge and to deter others from taking that obligation lightly.” Id. at *51. The magistrate also recommended that the jury be instructed that plaintiff sought production of certain missing documents (finance and accounting documents), but that USN did not produce them.

The facts of the case provide valuable instruction about a corporation’s duty to preserve documents. At a board meeting the evening litigation was filed, outside counsel emphasized, “in vivid terms,” that document preservation must be a top priority. Id. at *12. The board directed management to take steps to preserve documents. Shortly thereafter, a high level staff meeting was held during which preservation of documents was discussed. However, little else was done. The court described the CEO’s failings: (1) He did not direct that USN implement a written, comprehensive document preservation policy, either in general or with specific reference to the lawsuit; (2) he did not instruct that any email or other written communication be sent to staff to ensure that they were aware of the lawsuit and the need to preserve documents; (3) he did not meet with the department heads after the staff meeting to follow up to see what they had done to implement the document preservation directive; (4) although he had a day-to-day presence at USN and readily could have inquired into what was being done to preserve documents, he did not do so; (5) he “exhibited extraordinarily poor judgment” by delegating the responsibility completely to “an in-house attorney with no litigation experience whatsoever, and with no experience in putting together a document preservation program”; (6) he and in-house counsel failed to consult with outside counsel about how to implement a document preservation program. Id. at 14.

The court similarly criticized the efforts (or lack of effort) of in-house counsel: (1) he did nothing to ensure that all USN employees who handed documents that might be relevant were aware of the lawsuit and the need to preserve documents; (2) he held no meetings with employees below the managerial level; (3) he did not issue any written communications to anyone on the subject; (4) he did nothing to determine whether the managers who attended the staff meeting followed his direction of communicating to their respective departments the need to preserve documents, or if they did so, in a way that sufficiently impressed upon them the urgency of the task; (5) he did not review the pre-existing practices at USN relating to document preservation for terminated employees and closed offices, to determine whether these practices were still suitable in light of the need to preserve documents related to the litigation; and (6) he failed to take steps to determine whether his expectation that people who were intending to discard potentially relevant documents would contact him for further clarification was being met. Id.

The court also criticized the lack of follow up by the company’s outside directors:

The court suspects that if the outside directors had instructed [the CEO] to pursue an advantageous corporate opportunity, they would have taken an ‘active’ role to follow up to see what had been done. They should have done the same thing with respect to the less pleasant task of document preservation.

Id. at *16. However, the court concluded that the outside directors could reasonably rely on the CEO following a board level directive to implement a preservation program, and thus they were not at fault for the CEO’s failure to do so.