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E-discovery: Transactional attorneys have a duty to preserve too

Litigators are not the only ones tasked with recognizing preservation obligations

There is surprisingly little case law on the duty of the transactional lawyer, whether in-house or outside counsel, in the preservation of electronic information that may be relevant to existing or foreseeable litigation. That is strange given that transactional lawyers are frequently on the scene long before the litigators arrive, and are often in the best position to ensure that businesses promptly take proper preservation steps. Indeed, by the time a litigator is involved, relevant information may already be lost. It is critical for law firms and corporations to ensure that their transactional lawyers know when information preservation duties arise and how to react when they do.

For transactional lawyers, there are numerous situations in which disputes and potential disputes can arise while a transaction is being negotiated and documented. Post-acquisition disputes over asset valuation and contract interpretation disputes have long been the subjects of commercial disputes, just to name a couple. For this reason, deal lawyers, contract negotiation and drafting history are frequently the subjects of discovery and trial evidence in commercial disputes.

Until recently, however, few if any courts had addressed the transactional lawyers’ preservation duties. Recently, Magistrate Judge Joan Azrack of the Eastern District of New York issued a ruling that should be a wake-up call to transactional lawyers. In FDIC v. Malik, Judge Azrack held that a transactional lawyer may face sanctions for failing to preserve emails and other documents relating to the drafting and negotiation of a loan agreement. Although the decision turned on document retention regulations and not on a duty to preserve based on the foreseeability of litigation, the case serves to highlight the peril facing a transactional lawyer with no information preservation experience. There is no reason to believe that deal lawyers are somehow exempt from the same preservation duties that are imposed on their litigation counterparts and corporate clients who help them negotiate the deal. The lawyer’s duty is likely heightened as the court will presume some familiarity with the legal duty to preserve.

What if, during the negotiation, a dispute arises that qualifies as potentially foreseeable litigation? What if that dispute does not ripen into litigation until months after the deal is closed?  You can be sure that in litigation the parties will request production of, among other information, drafts of contracts, internal and external emails and myriad other information that could be relevant to the dispute. Did the deal lawyers or their corporate client custodians have a duty to preserve information relevant to the dispute when they became aware of it? Apart from the lawyers, corporate information custodians who are potentially subject to this duty could include anyone in the information chain who possesses relevant information, from the CEO to the mid-level management involved in the transaction.

If a transactional lawyer has no practical guidelines or experience with information preservation, he will not be in a position to provide appropriate advice when such disputes and potential disputes arise during a transaction. The result can be devastating if information relevant to a later dispute is lost at a time when there was a duty to preserve it. Sanctions can be awarded, and the company’s litigation position can be compromised.

While many law firms and corporations have made it a priority to train their litigation lawyers to be sensitive to circumstances giving rise to preservation duties, few have similarly trained their transactional lawyers. A transactional lawyer must be aware that when a dispute arises and litigation is potentially foreseeable, he too may be obligated to take prompt steps to preserve information and advise the company to preserve information so that its litigation position does not suffer later. Minimum preservation steps should include:

1. Get a litigator fluent in relevant data preservation issues. If you don't know the rules, make sure you are talking to someone who does.

2. Issue a written litigation hold directive. Advise all employees who may be in possession of information relevant to the potential dispute to preserve all documents and electronic data. The hold must ensure the suspension of all automated electronic information deletion functions and back-up tape recycling.

3. Follow up and speak face to face with document custodians. Issuing a written hold is necessary but not sufficient. You must have direct and regular contact with all key document custodians to confirm their compliance with the hold. 

Contributing Author

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Joseph Fogel

Joseph L. Fogel is a Partner at Freeborn & Peters and co-leads the Litigation Practice Group. His areas of focus include multiple areas of business...

Additional Contributors: Todd Ohlms

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