Your organization has a policy for saving and disposing of its business records. The important question now is whether that policy is simply de facto or is actually implemented? The absence of a formal, systematic and consistently-applied record retention (and destruction) policy could have serious implications for your organization in the event of litigation—including exclusion of material evidence, adverse inferences against your position, and even the granting of sanctions against your company, up to and including the entry of default judgment. Furthermore, the preservation of useless records can drastically increase the costs of processing, reviewing and producing documents and data during the discovery process. In short, the irregular application of your records policy can result in the worst of both worlds—the appearance of bad faith in litigation and increased costs to store and access necessary information.
What should your organization do? Quite simply, develop a record retention and destruction policy and enforce it. Here are some rules you should follow to reduce your risks in connection with document retention.
- Do your homework and know where your data resides.
Talk to your IT department to learn what records your organization has, how they are stored and where they are located. A “data map” can help your organization fully and completely respond to subpoenas and document production requests efficiently and inexpensively. If you create a data map before litigation commences, responding to document requests and subpoenas in litigation won’t become an “all-hands-on-deck” emergency.
- “You gotta know when to hold and know when to throw them…”
Establish record classes and consult with counsel to develop appropriate retention periods for each class. For example, with respect to employment records, federal law creates retention periods from one to five years depending on the applicable law, e.g., Title VII of the Civil Rights of Act of 1964 and the Occupational Safety and Health Act. Establishing record classes will allow your organization to systematically and defensively reduce the volume of records that might otherwise have to be collected, reviewed and produced during litigation. Pay particular attention to backup media, which, typically, is infrequently purged and can be a particularly expensive data collection source during litigation.
- Change is inevitable—be ready.
Adopt procedures to prevent changes in outgoing personnel or equipment from resulting inadvertent data losses. Risks can arise from failing to track data residing in devices in the custody of departing employees, e.g., laptops, as well as devices that have been leased or devices that employees bring to the office (BYOD) or use to remotely access company data. Give your IT department lists of custodians and devices with data relevant to pending or anticipated legal matters so it can make arrangements to preserve what might otherwise be lost during the ordinary course of business.
- Be ready for litigation holds.
Be prepared to suspend your normal destruction policy and implement a litigation hold on demand. Remember that preservation duties commence when your organization reasonably anticipates litigation—not once it has been sued. Make certain all possible custodians of relevant information timely receive litigation hold instructions. This requires careful thought and advance planning, as well as formal organizational charts for medium and large businesses. Involve your litigation counsel in this step so that you get it right and so they can sleep at night.
- Have a plan.
Prepare a plan to implement best practices during litigation. Civil litigation attorneys and electronic discovery vendors can help you develop a plan that, in exchange for some up-front expense, could save you thousands of dollars in future costs and the unquantifiable risk of liability. Just as important, once you have developed a formal plan, enforce it. Train your employees and demand accountability. Your organization should insist that company data stay on company systems, lest the company be accused of spoliation, for example, because an employee’s home computer was disposed of when it crashed and was replaced. Appoint a policy czar to be in charge of implementation and administration, and have that person periodically and regularly review both policies and practices to make sure they are working and cost effective.
Now is an opportune time to begin developing such a formal record retention and destruction policy. Under proposed amendments to the Federal Rules of Civil Procedure expected to be effective on May 1, 2015, absent exceptional circumstances, a court may not impose sanctions (under the Federal Rules of Civil Procedure) on a party for failing to provide electronically-stored information lost as a result of the “routine, good faith operation of an electronic information system.” In other words, your organization can avoid paying to process and review large amounts of redundant or useless data without fear of creating legal liability so long as proper attention is paid to its preservation obligations.
If your business exclusively or largely operates in Georgia, changes to electronic discovery practices in civil litigation that will affect you are also likely in the near future. Under the current version of H.B. 643, which the General Assembly is expected to adopt in the next session, a court may impose sanctions for failure to produce electronically-stored information only if the party acts “willfully and in bad faith,” which is determined, in part, by the reasonableness of that party’s preservation efforts, including the use of a litigation hold. Again, purging data no longer needed for business purposes, outside of required retention periods, and irrelevant to any existing or anticipated legal needs can reduce storage costs and litigation expenses for your business so long as proper effective legal holds are timely implemented.
As experienced litigators who regularly deal with the pitfalls (and potential) of discovery practice, Ichter Davis LLC stands ready to assist your organization in developing a formal record retention and destruction policy, as well as developing a defensible discovery plan in the event of civil litigation, including careful attention to proportionality and reasonableness to control costs. If you’re interested in seeing what we can do for you, give William Daniel Davis a call at (404) 869-7600.
Good News for Georgia Franchisees
July 21, 2014
On July 16, 2014, in Legacy Academy, Inc., et al., v. Mamilove, LLC, et al. (Case No. A14A0718), the Georgia Court of Appeals affirmed the judgment of the Superior Court of Gwinnett County finding Legacy Academy, Inc. (“Legacy”) and its owners, Franklin Lee Turner and Melissa Veal Turner (the “Turners”), committed fraud and criminal theft by deception with respect to a former Legacy franchisee. Following a week-long trial last April, a jury concluded Legacy and the Turners fraudulently induced Michele and Lorraine Reymond (the “Reymonds”) to enter into a franchise relationship with Legacy by falsely representing that a pro forma financial statement was based on the historic performance of then-existing franchisees. Legacy and the Turners appealed the trial court’s judgment on the jury’s verdict for a host of reasons, including purported errors when the trial court denied Legacy and Turners’ motions for summary judgment, directed verdict and a new trial. In a full-Court decision, however, the Court of Appeals rejected all these arguments. As a result, the Reymonds’ franchise agreement with Legacy has been rescinded and the Legacy and the Turners are jointly and severally obligated to pay the Reymonds monetary damages in the principal amount of $1,155,000.
Of particular note, however, the Georgia Court of Appeals ruled, for the first time, that franchisees can assert claims for relief under O.C.G.A. § 51-1-6 for violations of duties arising under the Federal Trade Commission’s (“FTC”) franchise rule, 16 C.F.R. Parts 436 and 437 (the “Franchise Rule”). The FTC promulgated the Franchise Rule pursuant to its authority under the FTC Act, 15 U.S.C. §§ 41-58, for the stated purpose of “prevent[ing] deceptive and unfair practices in the sale of franchises and business opportunities….” FTC, Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunities, 72 Fed. Reg. 15,445 (Mar. 30, 2007). As a result, the Franchise Rule imposes substantial pre-sale disclosure requirements on franchisors concerning a variety of issues, including their business experience; litigation history; fees; supply chain restrictions; assistance and support to franchisees; renewal, termination, transfer and dispute resolution procedures; and financial performance representations.
Franchisees, however, cannot sue to enforce the Franchise Rule. See Holloway v. Bristol-Myers Corp., 485 F.2d 986, 987 (D.C. Cir. 1973) (“[P]rivate actions to vindicate rights asserted under the Federal Trade Commission Act may not be maintained”). In addition, several courts have concluded that, even if a franchisor violated the Franchise Rule, the franchisee is still stuck with the franchise agreement. See, e.g., Vino 100, LLC v. Smoke on the Water, LLC, 864 F. Supp. 2d 269, 281 (E.D. Pa. 2012) (“[A] franchisee may not use a franchisor’s alleged noncompliance with Rule 436 to invalidate a franchise contract”); Holiday Hospitality Franchising v. 174 W. Street Corp., 2006 WL 2466819, at *6 (N.D. Ga. Aug. 22, 2006) (“[T]he Defendants have not cited—and the Court cannot find—any case in which a court has voided an otherwise valid and enforceable franchise agreement because of regulatory violations”). Furthermore, while the FTC can enforce violations of the Franchise Rule, it often does not. See GAO-01-776, FTC’s Enforcement of the Franchise Rule 3 (July 2001) (“FTC staff told us that limited resources and other law enforcement priorities prevent FTC from pursuing every meritorious complaint and investigation involving franchises and business opportunities”). All of this is a particular problem for franchisees in states that, like Georgia, do not have any statutes, i.e., disclosure, registration or relationship laws, of general application. Cf. Georgia Motor Vehicle Franchise Practices Act, O.C.G.A. § 10-1-620 et seq.
O.C.G.A. § 51-1-6, however, provides that “[w]hen the law requires a person to perform an act for the benefit of another or to refrain from doing an act which may injure another, although no cause of action is given in express terms, the injured party may recover for the breach of such legal duty if he suffers damage thereby.” Courts applying Georgia law have previously held this statute allows private litigants to sue for a breach of legal duties arising under federal statutes (and the regulations promulgated pursuant thereto) that themselves do not confer the right to sue. See, e.g., Pulte Home Corp. v. Simerly, 322 Ga. App. 699, 746 S.E.2d 173, 179-80 (2013) (Clean Water Act); Cardin v. Telfair Acres of Lowndes County, 195 Ga. App. 449, 450, 393 S.E.2d 731 (1990) (OSHA). Now, for the first time, the Georgia Court of Appeals has held that franchisees can state a claim against franchisors that breach their disclosure obligations under the Franchise Rule pursuant to O.C.G.A. § 51-1-6. Furthermore, the appeal was decided by a seven-judge Court, with a four-judge majority concurring in the judgment. As a result, the Court’s decision is binding precedent. See Ga. Ct. App. R. 33(a).
If you are an unhappy franchisee considering litigation with your franchisor or are simply interested in assessing your options, this decision is a potent weapon in your arsenal. Cary Ichter and William Daniel Davis represented the Reymonds from the inception of their litigation in 2010 through a jury trial and on appeal. If you would like further information or a free legal consultation, call the experienced franchise litigators of Ichter Davis LLC at 404-869-7600.