eDIGital Newsletter - April 2012

The Third Circuit Says “No” To The Taxation of E-Discovery Costs

Introduction

In Race Tires America v. Hoosier Racing Tire Corporation,¹ the Third Circuit Court of Appeals significantly limited the taxation of e-discovery expenditures as costs to the losing party. The District Court in the Western District of Pennsylvania held that more than $365,000 in charges imposed by e-discovery vendors, covering hard drive imaging, data processing, keyword searching, and file format conversion, were taxable under Federal Rule of Civil Procedure 54(d), without differentiating between those charges that constitute “fees for exemplification,” and charges that constitute “costs of making copies.”² On appeal, in Race Tires,³ the Third Circuit affirmed in part and vacated in part. After first noting conflicting decisions by other courts, the Third Circuit held that none of the activities at issue can be regarded as “exemplification” of materials and only scanning and file format conversion can be considered to be “making copies,” activities that amount to approximately $30,000 of the e-discovery charges taxed in the case.

In arriving at this decision, the Court effectively narrowed what is recoverable as an “exemplification” and “copy” expense under the statute. What follows is a summary of 28 U.S.C.§ 1920, the decisions of the lower court, the parties’ respective arguments and distinguishing cases from other jurisdictions. While binding only in the Third Circuit, the opinion is useful for both outside and in-house counsel in discussing both the role of e-discovery vendors in the discovery process and the extent to which vendor costs should be included in settlement demands.

F.R.C.P. 54(d) and 28 U.S.C. § 1920

Federal Rule of Civil Procedure 54(d)(1) provides that “[u]nless a federal statute, the rules, or court order provides otherwise, costs - other than attorney’s fees - should be allowed to the prevailing party.”⁴ By way of background, 28 U.S.C. § 1920 gives federal courts the authority to force losing parties to reimburse their winning counterparts for certain costs incurred during the course of a litigation.⁵

Section 1920(4) provides in pertinent part:

A judge or clerk of any Court of the United States may tax as costs the following:

Fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.⁶

Procedural History

In Race Tires, Plaintiff, Race Tires of America, a producer and supplier of racing tires, sued Defendants, Hoosier Racing Tire Corporation and Dirt Motor Sports, also tire suppliers, asserting violations of Sections 1 and 2 of the Sherman Act.⁷ Once discovery concluded, Defendants’ motion for summary judgment which was granted by the District Court.⁸ Plaintiff appealed the judgment, but was unsuccessful.⁹

As the prevailing parties, Defendants submitted a Bill of Costs pursuant to F.R.C.P 54(d).¹⁰ The Clerk of the Court stated that this was “the first case in the Western District of Pennsylvania [where] a party ha[d] requested [e-discovery] costs be taxed.”¹¹ The Clerk subsequently awarded $367,359.36 in costs for hard drive imaging, file processing, file conversion, keyword searching and production.¹² The Court made clear that such costs were “fees for [the] exemplification and the cost of making copies of any materials where the copies [we]re necessarily obtained for use in the case” and found that “the steps the third-party vendors [took] were the equivalent of exemplification and copying.”¹³ Further, that the vendor’s “highly technical” services were not “the type of services that attorneys or paralegals [we]re trained for or capable of providing.”¹⁴

Arguments

Plaintiff argued that the e-discovery expenditures did not constitute fees for “exemplification” or “making copies” and, specifically, that the District Court erred in its interpretation of § 1920(4) by (i) including costs other than that of scanning and Tagged Image File Format (“TIFF”) imaging (ii) permitting electronic materials that were not used or produced in the litigation to be taxed and (iii) that the e-discovery costs were generally exorbitant.¹⁵

Defendants argued that the e-discovery expenditures fell within the statute’s allowances for “exemplification” and “making copies” but failed to distinguish between both.¹⁶ They further argued that the costs were reasonable based on the amount of electronically stored information (“ESI”) requested by Plaintiff.¹⁷

Applying a strict statutory interpretation of 28 U.S.C. § 1920(4) in arriving at its decision, the Court held that the work performed by the e-discovery vendors did not constitute fees for “exemplification” because the vendors “did not produce illustrative evidence or authentic[ate] public records.”¹⁸ Moreover, the Court used a strict constructionism approach to the “making copies” language used Section 1920(4). It opined that the physical activities performed by the e discovery vendors leading up to production, despite requiring technical expertise, did not amount to “making copies.”¹⁹ According to the Court:

Section 1920(4) does not state that all steps that lead up to the production of copies of materials are taxable. It does not authorize taxation merely because today’s technology requires technical expertise not ordinarily possessed by the typical legal professional. It does not say that activities that encourage cost savings may be taxed. Section 1920(4) authorizes awarding only the cost of making copies.²⁰

The Court noted that the lack of specificity by the third-party vendors and their technical jargon made it difficult to understand the expenditures.²¹ The Court ultimately held that only the scanning, file format conversion and VHS to DVD conversion could be considered “making copies” – activities that amounted to a mere $30,000.²²

Other Decisions

Contrary to the court in Race Tires, several jurisdictions have allowed for the recovery of e-discovery expenses under Section 1920. In Tibble v. Edison International, the court awarded the defendant more than $500,000 under Section 1920, holding that the costs were incurred as a direct result of responding to the plaintiff’s discovery requests.²³ The court stated that because the plaintiff aggressively sought electronic data, the defendant should be reimbursed for expenses incurred in complying with such requests.²⁴

In another case out of the Eastern District of Pennsylvania, In re Aspartame Antitrust Litigation, the defendant prevailed on summary judgment and costs were awarded under Section 1920.²⁵ In that case, the defendant was awarded $573,035.13 for the creation of a litigation database, hard drive imaging, data storage, keyword searching, data extraction, processing, hosting and the creation of Concordance load files.²⁶

Most significantly, the case heavily relied upon by the Race Tires court was CBT Flint Partners, LLC v. Return Path Inc.²⁷ In that case, the Northern District of Georgia allowed for the taxation of $243,453.02 in e-discovery expenses associated with the identification, collection, searching and producing of 1.4 million electronic records and six versions of source code.²⁸ The court stated that the e-discovery services were “the 21st century equivalent of making copies.”²⁹

Conclusion

Setting aside whether this opinion may have been wrongly decided, it is important to note that it is the first to come from a federal appellate court in any circuit. Based on the case law, we can be fairly confident that costs will be awarded under Section 1920(4) for scanning, media copies and the expenses associated with producing documents such as the creation of TIFF images. Conversely, it is unlikely that a court will reimburse attorney review costs. What is far less certain is whether taxation of expenditures associated with other essential phases of the e-discovery process will be granted.

Practitioners should ensure that their e-discovery vendor invoices are able to be clearly explained in an ultimate petition for costs. Those practicing in the Third Circuit should note that e-discovery costs, except for those enumerated above, cannot be included in final estimates when having settlement discussions. Although the Third Circuit has said a resounding “no” to a broad interpretation of taxable e-discovery costs under U.S.C. Section 1920, it is difficult to determine what the future holds for other jurisdictions. In the meantime, please do not hesitate to contact any of the ten experienced members of Seyfarth Shaw’s eDiscovery and Information Governance practice group with questions or advice regarding this or any related matter.

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¹ No. 11-2316 (3d Cir. Mar. 16, 2012), rev’g 614 F.3d 57 (3d Cir. July 23, 2010), available at http://www.ca3.uscourts.gov/opinarch/112316p.pdf.

² 28 U.S.C. § 1920(4) (2006).

³ Race Tires, 614 F.3d 57

⁴ FED. R. CIV. P. 54(d)(1).

⁵ 28 U.S.C. § 1920.

⁶ Id.

⁷ Race Tires, at 6.

⁸ Id. at 9.

⁹ Id. at 10.

¹⁰ Id.

¹¹ Id.

¹² Id.

¹³ Race Tires, at 12.

¹⁴ Id.

¹⁵ Id. at 17.

¹⁶ Id.

¹⁷ Id.

¹⁸ Race Tires, at 18.

¹⁹ Id.

²⁰ Id. (emphasis added).

²¹ Id. at 20.

²² Id. at 24-25.

²³ No. CV 07-5359-SVW-AGR, 2011 WL 3759927, at *8 (C.D. Cal. Aug. 22, 2011).

²⁴ Id. at *7.

²⁵ No. 2:06-CV-1732-LDD, 2011 WL 4793239 (E.D. Pa. Oct. 5, 2011).

²⁶ Id.

²⁷ 676 F. Supp. 2d 1376 (N.D. Ga. 2009), vacated on other grounds by 654 F. 3d 1353 (Fed. Cir. 2011).

²⁸ Id. at 1380-81.

²⁹ Id. at 1381.