A recent opinion vacating most of the electronic discovery costs affirmed in Race Tires II provides clarity in the Third Circuit as to the limited scope of electronic discovery costs recoverable by a prevailing civil party.
The rapidly evolving area of the law regarding whether a prevailing party can recoup electronic discovery costs recently reversed course in the Third Circuit. In Race Tires America, Inc. v. Hoosier Racing Tire Corp. (Race Tires III),1 the U.S. Court of Appeals for the Third Circuit sought to provide “definitive guidance” on “the extent to which electronic discovery expenses are taxable” and vacated the majority of a $365,000 award of electronic discovery– related costs. The court of appeals found that less than 10% of the costs the district court awarded for electronic discovery charges were in fact taxable, eliminating more than $335,000 of the award. The court of appeals allowed recovery only for the costs it deemed equivalent to “making copies” under 28 U.S.C. § 1920(4), such as transferring VHS tapes to DVD, scanning hard-copy documents into electronic images, and converting native files into TIFF format. As a result, the court of appeals disallowed recovery for expenditures related to collecting, preserving, processing, indexing, and applying keyword searches to the electronically stored information (ESI).
Cost Recovery for Electronic Discovery
As we reported in our previous LawFlash on the topic of “Loser Pays,”2 a prevailing civil party may recover nonattorney-fee “costs” under Federal Rule of Civil Procedure 54(d)(1).3Rule 54(d)(1) is limited, however, by 28 U.S.C. § 1920, which enumerates the expenditures that are taxable against the losing party. In particular, § 1920(4) specifies that “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case” are recoverable costs. However, the interpretation of Rule 54(d)(1) and 28 U.S.C. § 1920(4) as applied to electronic discovery activities is unsettled. Some courts have taken an expansive view of “exemplification” and “making copies” as related to electronic discovery costs. For example, courts have awarded costs for TIFF conversion and project management;4 collecting, searching, and processing ESI;5ESI production when “the opposing party requested that responsive documents be produced in certain electronic formats”;6 and costs related to applying date ranges, custodian filters, and deduplication, and for repair of corrupt data and databases.7
Other courts have adopted a narrower interpretation and have disallowed many of the same costs. For example, courts have disallowed recovery of costs that “involved more than merely converting a paper version into an electronic document”;8 costs relating to ESI collection, extraction, and storage;9 costs for “the processing of tapes to locate, retrieve, and store” ESI;10 costs related to creating searchable ESI;11 and costs for deduplication, metadata extraction, and database creation, which were more akin to creating documents than “making copies.”12
The Race Tires Cases
After successfully defending an antitrust case, the defendants in the first Race Tires case were awarded more than $365,000 as recovery for electronic discovery costs. In affirming the clerk of the court’s award of electronic discovery costs, the district court followed decisions where “the steps the third-party vendor performed appeared to be the electronic equivalents of exemplification and copying.”13 The plaintiff appealed the award to the Third Circuit claiming, among other things, that most of the electronic discovery costs were not eligible for recovery.
The court of appeals affirmed only a small portion of the award relating to certain ESI transferring, scanning, and conversion tasks that qualified under its analysis as “making copies”—approximately $30,000—and vacated the rest of the award—more than $335,000.14 In reaching its decision, the court of appeals noted that “Section 1920 . . . defines the full extent of a federal court’s power to shift litigation costs absent express statutory authority.”15 Analyzing the text of § 1920(4), the court of appeals distinguished “exemplification” from “making copies” and concluded that none of the electronic discovery services satisfied the definition of “exemplification.” The court of appeals next addressed “making copies.” Noting that § 1920(4) had a history of being relied on for recovering photocopying costs, the court cited common-use definitions of a “copy” and “copying” as relating to imitating, transcribing, reproducing, or duplicating an item.
In applying this analysis to the various services performed by the electronic discovery vendors, the court of appeals found that scanning of paper documents, converting native files to TIFF images, and transferring VHS tapes to DVD all constituted “making copies” and were therefore taxable against the losing party. While acknowledging that extensive processing of ESI may be an essential and indispensable part of electronic discovery, the court of appeals observed, “that does not mean that the services leading up to the actual production constitute ‘making copies.’”16 The court also rejected the “degree of expertise necessary to perform the work,” “the identity of the party performing the work,” the encouragement of cost saving, or general equitable concerns as factors affecting taxability.
The court of appeals criticized the district court’s ruling and other “decisions that allow taxation of all, or essentially all, electronic discovery consultant charges” as being “untethered from the statutory mooring.”17 Indeed, the court of appeals noted that “[n]either the language of § 1920(4), nor its history, suggests that Congress intended to shift all the expenses of a particular form or discovery—production of ESI—to the losing party,” and thus, even though there may be policy reasons or compelling circumstances in a particular case that warrant making such an award, “the federal courts lack the authority to do so . . . under the statute.”18
While the issue of broad recoverability of electronic discovery costs remains unsettled, at least Race Tires III provides clarity in the Third Circuit. While the law continues to develop in other jurisdictions, however, litigants outside the Third Circuit should be aware that they may be taxed more of the opposing party’s electronic discovery costs than just those the Third Circuit deemed as “making copies” should the opposing party prevail. Through the meet-and-confer process, cooperation, an agreed-upon case management plan, and a focus on identifying relevant information in a cost-efficient manner, the parties can help limit any costs they may be required to pay should they lose.