E-discovery is often a substantial expense of litigation. For prevailing parties – that is, parties in whose favor judgment was rendered – there are limited ways to recoup e-discovery costs. In recent years, some prevailing parties have found a successful avenue for e-discovery cost recovery in federal court: a provision of the United States Code that provides for the reimbursement (known as “taxing”) of costs – 28 U.S.C. § 1920(4). However, the case law implementing section 1920(4) is unsettled and inconsistent. A recent decision by the Court of Appeals for the Third Circuit, Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3d Cir. 2012) (“Race Tires II”), strictly limited the range of e-discovery costs to which section 1920(4) applies. Nevertheless, several federal courts outside of the Third Circuit have allowed for broader cost recovery, and a federal court in California has twice explicitly declined to follow the Third Circuit on this issue. Further, no federal court in New York has directly addressed the scope of section 1920(4) with respect to e-discovery costs. Thus, prevailing federal litigants in New York may have available a new avenue for substantial e-discovery cost recovery.
A Brief History of Section 1920(4)
Federal Rule of Civil Procedure 54(d) states that “[u]nless a federal statute, these rules, or court order provides otherwise, costs—other than attorney’s fees—should be allowed to the prevailing party.” 28 U.S.C. § 1920(4) enumerates the litigation expenses that qualify as taxable costs. However, it does not expressly refer to e-discovery costs; it simply allows for prevailing parties to recover costs for “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” Historically, courts construed this text to encompass only the copying of physical documents. Indeed, until an amendment in 2008, the statute referred to “copies of papers” rather than “copies of any materials.” The Committee on Court Administration and Case Management, in recommending the 2008 amendment, aimed “to permit taxing the costs associated with copying materials[,] whether or not they are in paper form.” See Judicial Conference of the U.S., Report of the Proceedings of the Judicial Conference of the United States 10 (Mar. 18, 2003). Even before the amendment’s enactment, several federal courts, including the Court of Appeals for the Sixth Circuit, had read Section 1920(4) to permit the recovery of costs related to e-discovery services. See BDT Products, Inc. v. Lexmark Int’l, Inc., 405 F.3d 415, 420 (6th Cir. 2005).
In recent years, federal courts have taken differing views on the meaning of Section 1920(4) and considered various factors in deciding whether to award e-discovery costs under the section. While some courts have allowed for the recovery of a broad range of e-discovery costs, others have awarded only limited recovery, and still others have denied e-discovery cost recovery altogether.
The Race Tires Decisions
Federal courts have analyzed various arguments in favor of, and in opposition to, awarding a broad range of e-discovery costs under section 1920(4). Many of these arguments are reflected in the divergent opinions of the District Court for the Western District of Pennsylvania and the Court of Appeals for the Third Circuit in Race Tires.
The district court’s opinion in Race Tires Am., Inc. v. Hoosier Racing Tire Corp. (“Race Tires I”), 2011 WL 1748620 (W.D. Pa. May 6, 2011) appeared to open the door to wide-ranging e-discovery cost recovery. The case stemmed from a 2007 antitrust lawsuit filed by Race Tires America against a rival tire producer and a motor sports sanctioning body. The defendants prevailed on summary judgment, and the court considered whether the prevailing defendants’ e-discovery costs could be taxed under section 1920(4). Much of the costs were attributable to the services of third-party vendors who had created litigation databases. This involved collecting and imaging hard drives, scanning documents, processing and indexing data, extracting metadata, making documents searchable, and converting documents into .tif format. In awarding these costs to the prevailing defendants, the court stressed that the plaintiff had aggressively pursued e-discovery. Id. at *9. Hiring expensive third-party vendors to retrieve and prepare e-documents was thus an “indispensable part of the discovery process” for the defendants and was not used “merely for the convenience of the parties.” Id. Further, the court noted that the creation of an e-discovery database is “highly technical” and “not the type of services that attorneys or paralegals are trained for or are capable of providing.” Id. The court awarded over $367,000 in e-discovery costs to the prevailing defendants.
On appeal, the Third Circuit issued a lengthy opinion strictly limiting the prevailing defendants’ e-discovery cost recovery under section 1920(4) to the conversion of native files to .tif format, the scanning of documents, and the transferring of VHS recordings to DVD format. Race Tires II, 674 F.3d at 165-70. The court reasoned that these services were equivalent to making copies of materials. Although the district court in Race Tires I and several other federal courts had upheld broader taxation based on the indispensability and cost-effectiveness of a prevailing party’s use of complex e-discovery services, the Third Circuit concluded that section 1920(4) “does not authorize taxation merely because today’s technology requires technical expertise not ordinarily possessed by the typical legal professional” and “does not say that activities that encourage cost savings may be taxed.” Race Tires II, 674 F.3d at 169. Instead, the Third Circuit adopted a literal reading: “Section 1920(4) authorizes awarding only the cost of making copies”; thus, activities “leading up to the actual production” of documents would not be taxable. Id. The court cited several federal courts that had followed this principle and quoted the Court of Appeals for the Ninth Circuit in Romero v. City of Pomona, which, in considering whether fees paid to experts who assembled and prepared trial exhibits were taxable, suggested that “fees are permitted only for the physical preparation and duplication of documents, not the intellectual effort involved in their production.” Race Tires II, 674 F.3d at 169 (citing 883 F.2d 1418, 1428 (9th Cir. 1989)). Thus, the Third Circuit denied costs for various e-discovery services performed prior to actually converting, scanning, or transferring documents and data, reducing the defendants’ e-discovery cost award from $367,000 to slightly over $30,000. Id. at 171-72.
While perhaps influential, outside of its jurisdiction the Third Circuit’s opinion is not the final word on recovering e-discovery costs under section 1920(4). The District Court for the Northern District of California has already explicitly rejected the Race Tires II holding in two cases. See Petroliam Nasional Berhad v. GoDaddy.com, Inc., 2012 WL 1610979, at *4 (N.D. Cal. May 8, 2012) (taking note of Race Tires II “but conclude[ing] that in the absence of directly analogous Ninth Circuit authority, broad construction of § 1920 with respect to electronic discovery costs – under the facts of this case – [was] appropriate”); In re Online DVD Rental Antitrust Litig., 2012 WL 1414111, at *1 (N.D. Cal. Apr. 20, 2012) (holding that court had ability to broadly construe section 1920 “with respect to electronic discovery production costs” and, given the specific facts of the case, awarded to plaintiffs over $700,000 in costs, including, among other things, .tif conversions and professional fees).
There is a range of divergent precedent on this issue in other federal courts outside of the Third Circuit, with courts awarding or denying cost recovery relating to various aspects of the e-discovery process.
Diverging Opinions: Conversion and Scanning Costs
Many other federal courts, in addition to the Third Circuit, have awarded conversion and scanning e-discovery costs under section 1920(4). These costs might be viewed as the most basic type of cost that could be taxed upon the application of section 1920(4) to electronic discovery. Indeed, even prior to the 2008 amendment, the Court of Appeals for the Sixth Circuit stated that “electronic scanning and imaging could be interpreted as ‘exemplification and copies of papers’” and approved of cost recovery for those services. BDT Products, 405 F.3d at 420. The Court of Appeals for the Seventh Circuit has also affirmed that conversion costs are taxable under section 1920(4). See Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009). Numerous federal district courts have allowed for the taxation of scanning and/or conversion in e-discovery. See, e.g., Farrar & Farrar Dairy, Inc. v. Miller-St. Nazianz, Inc., 2012 WL 776945 (E.D.N.C. Mar. 8, 2012); Jardin v. DATAllegro, Inc., 2011 WL 4835742 (S.D. Cal. Oct. 12, 2011); Mann v. Heckler & Koch Def., Inc., 2011 WL 1599580 (E.D. Va. Apr. 28, 2011). Several of these courts, along with the Third Circuit in Race Tires II, have stated that “electronic scanning of documents is the modern-day equivalent of ‘exemplification and copies of paper.’” Brown v. The McGraw Hill Cos., Inc., 526 F. Supp. 2d. 950, 959 (N.D. Iowa 2007).
Nevertheless, some courts, for various reasons, have refused to award even scanning or conversion costs under section 1920(4). See, e.g., Little Rock Cardiology Clinic, P.A. v. Baptist Health, 2009 WL 763556, at *4 (E.D. Ark. Mar. 19, 2009) (“it has been the practice in this district to limit costs recoverable under § 1920(4) to the costs of copying items used in presenting the case at trial or prepared for that purpose. This Court historically has not awarded as costs under Section 1920(4) the expense of copying documents during discovery.”); Roehrs v. Conesys, Inc., 2008 WL 755187, at *3 (N.D.Tex. Mar. 21, 2008) (denying conversion costs because digital versions of the documents “were merely more convenient for counsel to search and examine” and not “necessary”); Fells v. Virginia Dep’t of Transp., 605 F. Supp. 2d 740, 743 (E.D. Va. 2009) (conversion costs are not recoverable because the conversion process “served to create searchable documents, rather than merely reproduce paper documents in electronic form” (emphasis in original)).
Recovery Beyond Conversion and Scanning
As demonstrated above, there is considerable disagreement in the courts regarding the taxation of e-discovery costs, even concerning basic tasks like conversion and scanning. Beyond those tasks, various courts have stressed different factors in deciding whether to award costs for compiling electronic databases, extracting data, and completing various other e-discovery services.
Several courts have distinguished the physical production of documents from work “leading up” to the production of documents, holding that “gathering, preserving, processing, searching, culling, and extracting ESI simply do not amount to ‘making copies.’” Race Tires II, 674 F.3d at 170. See also In re Scientific-Atlanta, Inc. Sec. Litig., 2011 WL 2671296, at *1 (N.D. Ga. July 6, 2011) (cost of keyword searching analogous to cost of reviewing paper documents, which is not recoverable); Windy City Innovations, LLC v. Am. Online, Inc., 2006 WL 2224057, at *3 (N.D. Ill. July 31, 2006) (denying costs for keyword searching, optical character recognition, and coding services). Some courts have stressed the distinction between “physical production” and “intellectual effort” as set out by the Ninth Circuit in Romero. 883 F.2d at 1428. The District Court for the Southern District of California wrote in Jardin that “costs associated with physically replicating or producing documents or data are recoverable under § 1920(4), while costs arising out of discovery-related activities tied to strategic, confidentiality, or other types of concerns typically entrusted to lawyers involve intellectual effort and are not recoverable.” 2011 WL 4835742, at *8. In Jardin, the court found that the cost of hiring an e-discovery project manager who merely oversaw the conversion process and “did not review documents or contribute to any strategic decision-making” was recoverable. Id. at *9.
Several courts have focused on the “necessarily obtained for use in the case” language of section 1920(4) and weighed the purported necessity of e-discovery costs that a prevailing party seeks to recover. These courts have highlighted the distinction between “necessity” and “convenience.” See, e.g., Tibble v. Edison Int’l, 2011 WL 3759927, at *7 (C.D. Cal. Aug. 22, 2011) (costs for hiring e-discovery experts to provide data “were not accrued merely for the convenience of counsel, but were necessarily incurred in responding to Plaintiffs’ discovery requests”); Parrish v. Manatt, Phelps & Phillips, LLP, 2011 WL 1362112, at *2 (N.D. Cal. Apr. 11, 2011) (“[t]he reproduction costs defendants incurred in collecting, reviewing, and preparing client documents for production were necessary expenditures made for the purpose of advancing the investigation and discovery phases of the action”); In re Aspartame Antitrust Litig., 817 F. Supp. 2d 608, 616 (E.D. Pa. 2011) (awarding costs for various services but denying costs for an “undoubtedly helpful” but non-essential document mapping program). Some courts have stressed efficiency as a factor in awarding costs. For example, although the Third Circuit explicitly rejected this rationale, other courts have held that, in some cases, the substantial cost savings achieved from using e-discovery make the services “necessary.” See, e.g., Lockheed Martin Idaho Techs. Co. v. Lockheed Martin Advanced Envtl. Sys., Inc., 2006 WL 2095876, at *2 (D. Idaho July 27, 2006) (cost of creating litigation database was “necessary” and thus recoverable “due to the extreme complexity of this case and the millions of documents that had to be organized”).
There is no consistent approach among these cases, either for the taxation of basic scanning and conversion costs, or for costs relating to more complex or tangential parts of the process. This suggests that courts faced with the issue have flexibility to award a variety of costs to prevailing parties, based on the specific circumstances of the case.
No district court in New York has directly examined the extent to which e-discovery costs are taxable by the prevailing party under section 1920(4). It remains to be seen how broadly these courts, and the Court of Appeals for the Second Circuit, might read the statute. Despite the Third Circuit’s decision in Race Tires II, there is considerable precedent for allowing extensive e-discovery cost recovery under section 1920(4), including the two recent Northern District of California cases that explicitly declined to follow the Third Circuit.
At this juncture, prevailing parties may want to consider the potential benefit of moving for e-discovery costs under section 1920(4), especially in cases involving extensive e-discovery. Similarly, non-prevailing parties should anticipate the possibility that an adversary may seek substantial e-discovery cost recovery.
Summer Associates Daniel Lennard, David Mayo, Anna Schoenfelder, and Alexander Traum.