Document Retention Practices for Small Business
The 2004 sports comedy Dodgeball: A True Underdog Story tracks the unlikely story of a gym owner whose dodgeball team must win an elimination tournament to save his business. Part of the story involves a banker hired to inspect the gym’s books. When she visits the gym, she asks the protagonist if he keeps and maintains financial records like invoices, revenue records, and other documents that could have tax implications. The protagonist responds: “I got a closet full of ‘em. I call ‘em keepers.” He turns and opens a closet that is packed from floor to ceiling with an array of receipts, financial papers, and other loose documents with no discernable sense of organization.
Many small business owners find themselves too busy running their businesses to draft and enforce document retention and organization plans. This practice lends itself to problems down the road if such businesses find themselves engaged in litigation. This article provides a set of high-level thoughts for small business owners to consider and enact now in the event business records are needed for litigation or compliance issues in the future.
Why it Matters.
A rigorous document retention and management program is necessary to ensure documents are readily available and easily identifiable in the event of a wide range of litigation possibilities. Litigation is something no small business owner wants to face, but it is occasionally unavoidable and inevitable. One significant litigation risk faced by a business with no procedures governing document retention is an adverse jury instruction where documents were destroyed without reference to a robust plan.
In Lewy v. Remington Arms Co., 836 F.2d 1104 (8th Cir. 1988), a gun owner accidentally discharged a rife while inside a home, which caused injuries to another resident of the home. Id., at 1105-06. The injured person and her husband brought product liability-based claims against the rifle’s manufacturer and the seller of the gun. Id. at 1106. Among the issues on appeal was whether the trial court could issue an adverse inference instruction against the manufacturer because the manufacturer destroyed several relevant records pursuant to a record retention policy. Id. at 1111. The policy at issue called for certain categories of records—customer complaints and gun examination ports—to be retained for three years. Id. If no action was taken on a particular document, the document was destroyed. Id.
The Eighth Circuit remanded the issue to the trial court for further consideration of the propriety of the instruction. Id. at 1112. The trial court was instructed to consider the following factors:
First, the court should determine whether [the manufacturer]’s record retention policy is reasonable considering the facts and circumstances surrounding the relevant documents. For example, the court should determine whether a three year retention policy is reasonable given the particular document. A three year retention policy may be sufficient for documents such as appointment books or telephone messages, but inadequate for documents such as customer complaints. Second, in making this determination the court may also consider whether lawsuits concerning the complaint or related complaints have been filed, the frequency of such complaints, and the magnitude of the complaints.
Finally, the court should determine whether the document retention policy was instituted in bad faith. . . . In cases where a document retention policy is instituted in order to limit damaging evidence available to potential plaintiffs, it may be proper to give an instruction similar to the one requested by the [plaintiffs]. Similarly, even if the court finds the policy to be reasonable given the nature of the documents subject to the policy, the court may find that under the particular circumstances certain documents should have been retained notwithstanding the policy. For example, if the corporation knew or should have known that the documents would become material at some point in the future then such documents should have been preserved. Thus, a corporation cannot blindly destroy documents and expect to be shielded by a seemingly innocuous document retention policy.
Id. (citation omitted). Lewy teaches that, depending on the circumstances, a business cannot use a document retention policy offensively by slating documents for destruction that may be of use in future litigation. Conversely, having a document retention policy and following it reduces the likelihood of an adverse jury instruction or similar sanction. See, e.g., Morris v. Union Pac. R.R., 373 F.3d 896, 902-03 (8th Cir. 2003) (reversing an adverse inference instruction where a company had no reason not to follow a standard retention policy in place); Stevenson v. Union Pac. R.R., 354 F.3d 739, 747 (8th Cir. 2004) (clarifying that adverse instructions are improper where a routine document retention policy was followed resulting in the destruction of documents absent “some indication of intent to destroy the evidence for the purpose of obstructing or suppressing the truth”); Rao v. St. Jude Med. S.C., Inc., — F. Supp. 3d —, 2022 U.S. Dist. LEXIS 174445, at *84-86 (D. Minn. Sept. 27, 2022) (declining to impute a finding of bad faith where individual thought documents were backed up to cloud storage media but were not); Kelley v. BMO Harris Bank, N.A., No. 19-cv-1756 (WMW), 2022 U.S. Dist. LEXIS 126377, at *21 (D. Minn. July 18 2022) (observing that “when litigation is imminent or has commenced, a party cannot blindly destroy documents and expect to be shielded by a seemingly innocuous document retention policy” (quotation marks omitted)); E*Trade Secs. LLC v. Deutsche Bank AG, 230 F.R.D. 582, 592-93 (D. Minn. 2005) (issuing an adverse instruction where a document retention policy was used “selectively” to destroy certain documents but retain others that aided the retaining party).
Two points about these authorities bear emphasis. First, in nearly all cases where sanctions were avoided, the business not only had a document retention policy, but followed it. That fact stresses the importance of drafting and implementing such a policy. Second, businesses have avoided sanctions even where documents were intentionally destroyed if there was no evidence of malicious intent or other particularized information supporting an inference of malevolent corporate intent.
What to Keep and How Long to Keep It.
Consideration of which records should be retained and for how long is a crucial part of any retention policy. As noted above, where litigation is imminent or ongoing, documents destroyed pursuant to a document retention policy can still give rise to sanctions. See also Paisley Park Enters. v. Boxhill, 330 F.R.D. 226, 232-33 (D. Minn. 2019) (while recognizing that “[e]ven when litigation is reasonably foreseeable, a party is under no obligation to keep every shred of paper, every e-mail or electronic document and backup tape,” imposing sanctions on a party whose key employees “wiped and destroyed their phones” after being litigation commenced (quotation marks omitted)). Where litigation is not on the horizon, development and implementation of a retention policy that categorizes documents by type is a best practice in the event access to certain categories becomes necessary later.
There is no one-size-fits-all approach to deciding what documents to retain and how long to keep them. Certain corporate formation documents like articles of incorporation, bylaws, real estate deeds, year-end financial records, and tax returns should be retained indefinitely. Consideration of permanent retention of documents with special institutional importance is also key. A sliding scale of two to seven years will generally suffice for correspondences with vendors or customers, bank statements, and payroll records.
Businesses should also consider where documents are stored and identify a person or group of individuals to ensure compliance with a policy. Documents at most businesses are almost certainly stored in a variety of formats, ranging from physical copies of documents to digitally stored media found on cloud-based platforms, like iCloud, or in messages found in instant messaging applications or text messages. Not only should documents be kept in a format that allows for organized retrieval and review, continued maintenance of documents in a usable format is generally a best practice.
Retention of corporate records is not usually at the forefront of small business owners. But drafting and implementing a document retention policy before litigation ensues can result in significant cost savings and maximize risk avoidance.
If this article was helpful, and you are interested in discussing strategies for the development and execution of a document retention strategy, contact Parker Daniels Kibort for more information at 612.355.4100.