Failure to Implement Litigation Hold Puts Brakes on VW

Kasi Chadwick

January 18, 2017

When a lawsuit is imminent, litigation holds are routinely placed on a company’s electronic systems to preserve potential evidence. A “litigation hold” is an internal notice disseminated within a company advising that a lawsuit has been filed or is reasonably anticipated in the future and directs employees to identify and locate records pertaining to the subject matter described therein. The recipient of the litigation hold is then directed to preserve and otherwise suspend routine destruction of the records identified in the litigation hold. Failure to comply with a litigation hold exposes individuals—and the company itself—to possible liability and sanctions if the litigation hold procedures are not strictly followed. Likewise, if a litigation hold is not properly issued, the company and the individuals can befall the same fate. Recently, Volkswagen learned just that.

In 2015, the United States Attorney General embarked on an investigation to review Volkswagen’s vehicle emissions. Ultimately, in large part because Volkswagen failed to implement a proper litigation hold, the AG’s investigation pivoted from the review of Volkswagen’s vehicle emissions to the destruction of evidence. In short, when the AG learned that several in-house Volkswagen attorneys had purportedly tipped-off Volkswagen employees of a litigation hold to be subsequently sent, Volkswagen agreed to plead guilty to three felonies over an alleged emissions cheating scandal (obstruction of justice; importation of goods by false statements; and conspiracy to defraud the United States, commit wire fraud, and violate the Clean Air Act). As for the individuals involved, federal prosecutors have commented that six former Volkswagen department heads have been indicted over the incident.

As the statement of facts attached to the plea deal outlines, an in-house counsel, cited as “Attorney A,” was “the in-house attorney principally responsible for providing legal advice in connection with [Volkswagen’s] response to U.S. emissions issues.” Attorney A took part in several meetings with Volkswagen executives and engineers about the emissions issues. In these meetings, Attorney A mentioned the imminent litigation hold related to emissions documents and suggested that Volkswagen employees should “check” their documents before the litigation hold was issued. In other similar meetings, Attorney A advised that emissions-related data should be kept on a USB drive and put on Volkswagen’s computer systems “only if necessary.” After these meetings, Volkswagen employees understood that “there had been a recommendation from a [Volkswagen] attorney to delete documents related to the U.S. emissions issue.” Around forty Volkswagen employees then deleted what was believed to be thousands of documents related to Volkswagen vehicle emissions prior to the litigation hold being issued.

The resolution of charges against Volkswagen will ultimately require Volkswagen to pay $4.3 billion in criminal and civil penalties and to take specific reform measures to prevent future violations. In fact, the plea deal outlines 13 pages of internal compliance reforms including the placement of an internal “Monitor” to supervise Volkswagen’s compliance with the terms of the plea deal over the next three years. In short, failure to properly preserve evidence resulted in a sideshow in which the inquiry shifted from Volkswagen’s vehicle emissions to the preservation of evidence—the fallout of which will likely affect Volkswagen’s day-to-day operations and bottom line for the foreseeable future.