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Article: Shifting the Growing Costs of E-Discovery

January 01, 2013
Business Litigation Reports

Since the arrival of e-discovery in the mid-1990s, the cost of collecting, copying, reviewing, sorting, processing and producing electronically stored information (“ESI”) has grown exponentially. In 2007, for example, litigants spent nearly $2.79 billion dollars on e-discovery, a 43% increase from the amount spent just a year earlier. See George Socha & Tom Gelbmann, A Look At The 2008 Socha-Gelbman Survey, Law Tech. News, Aug. 11, 2008. In a more recent case study of Fortune 500 companies, the RAND Institute found that the median total cost for ESI production among participants reached the astounding sum of $1.8 million dollars per case. See Nicholas Pace & Laura Zakaras, Rand Institute for Civil Justice, Where the Money Goes: Understanding Litigant Expenditures for Producing Electronic Discovery, 28 (2012). Given the sheer volume of email and other electronic documents stored in the cloud and on company servers, hard drives, and handheld devices that are potentially responsive to discovery requests, these e-discovery costs will only continue to rise in 2013 and beyond.

In an effort to defray these costs, prevailing litigants can seek reimbursement of certain e-discovery expenses as taxable costs under Federal Rule of Civil Procedure 54(d)(1) and 28 U.S.C. § 1920(4). Litigants seeking to tax e-discovery costs have done so with varying degrees of success. See, e.g., Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158, 159, 162 (3rd Cir. 2012) (taxing $30,000 (or 8%) of requested e-discovery costs for copying related tasks); Fells v. Virginia Dept. of Transp., 605 F. Supp. 2d 740 (E.D. Pa. 2011) (refusing to tax any costs associated with the processing of electronic records because the techniques were not technically “photocopying or scanning”); Lockheed Martin Idaho Technologies Co. v. Lockheed Martin Adv. Envtl. Sys., Inc., 2006 WL 2095876, at *2 (D. Idaho July 27, 2006) (taxing $4.6 million (or 100%) of requested e-discovery costs for a document review database). Recent decisions like these and others, while not entirely consistent, provide guidance for litigation counsel hoping to shift at least a portion of the ever-rising e-discovery costs and expenses to an opposing party.

Statutory Support of Shifting Costs
Rule 54(d)(1) allows a prevailing party to recover certain costs and expenses incurred during litigation from the opposing party. “Unless a federal statute, these rules, or a court order provides otherwise, costs—other than attorney’s fees—should be allowed to the prevailing party.” Fed. R. Civ. P. 54(d)(1). Under this Rule, if a substantiated bill of costs is sent to the court clerk, there is a presumption that recovery is proper; however, courts still have discretion to reduce any award. Id.; see also Plantronics Inc. v. Aliph, Inc., 2012 WL 5269667, at *2 (N.D. Cal. Oct. 23, 2012). The losing party then has the burden of overcoming the presumption by affirmatively showing that the prevailing party is not entitled to costs.

However, the term “costs” is not defined under Rule 54. Instead, the universe of taxable costs is defined by 28 U.S.C. § 1920. See Taniguchi v. Kan Pac. Saipan, Ltd., 132 S. Ct. 1997, 2001-02 (2012) (rejecting the proposition that “the discretion granted by Rule 54(d) is a separate source of power to tax costs and expenses not enumerated in § 1920.”) Taxable costs under § 1920 include, inter alia, “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” 28 U.S.C. § 1920(4). Even among courts that have taxed e-discovery costs, however, there is a lack of uniformity on how or whether to treat individual e-discovery costs as taxable under §1920(4), with some courts taxing all e-discovery costs and some courts refusing to tax anything more than a minute fraction.

The Impact of Race Tires
The Third Circuit is the first, and arguably only, appellate court to directly address the propriety and scope of taxing e-discovery costs under §1920(4). In Race Tires, the Third Circuit was confronted with a bill of costs that contained over $365,000 of e-discovery charges related to the collection, processing, TIFF conversion, OCR, and production of approximately 600,000 pages of electronic documents. Race Tires Am., Inc., 674 F.3d at 159, 162.

Prior to the Circuit’s review, the district court had accepted the defendant’s bill of costs, viewing the work as “the electronic equivalent of exemplification and copying.” Id. at 163. The district court found that the “expertise” needed to “retrieve and prepare” the electronic information for discovery (an expertise “not normally” possessed by lawyers) was an “indispensable part of the discovery process” and thus taxable under §1920(4). Id. Disagreeing, the Third Circuit vacated the opinion and ordered the district court to tax a mere 8% of the requested costs. Id. at 171.

In reaching its decision, the Third Circuit first analyzed whether the e-discovery costs fell under the “exemplification” allowance contained in § 1920(4). Noting that its sister courts had split on the scope of the exemplification allowance, the Third Circuit ultimately decided it was unnecessary to decide how broadly the allowance extended since none of the work at issue was for “illustrative evidence or the authentication of public records,” it could not qualify as “exemplification” under any interpretation. Id. at 166.

The Race Tires court next reviewed the bill of costs to determine if any of the e-discovery work could be considered “making copies.” Id. The court held that only the scanning of hard copy documents, the conversion of native files to TIFF, and the transfer of VHS tapes to DVD were costs that were properly taxable under §1920(4). Id. at 171. In addition, the court explicitly disagreed with prior district court opinions that held all types of e-discovery services are taxable due to their “indispensable,” “highly technical,” and/or “cost-saving” nature. Id. at 168. The court criticized this approach as being completely “untethered from the statutory mooring” of §1920. Compare id. at 169 with CBT Flint Partners LLC v. Return Path, 676 F. Supp. 2d 1376, 1381 (Fed. Cir. 2009) (vacated on other grounds) (e-discovery vendor’s “highly technical” services are the “21st century equivalent of making copies”) (citing Cargill Inc. v. Progressive Dairy Solutions, Inc., 2008 WL 5135826, at *6 (E.D. Cal. Dec. 8, 2008)).

As §1920(4) did not provide for the taxation of “all steps” necessary to make a copy in the pre-digital era, the Third Circuit held that it cannot be used to tax the cost of all the services that proceed the making of an electronic copy, such as “gathering, preserving, processing, searching, culling, and extracting ESI.” Race Tires Am., Inc., 674 F.3d at 169-70. Fundamentally, to be taxable under §1920(4), the Race Tires court held that costs must be incurred for the “physical preparation and duplication of documents.” Id. (citations omitted).

Moreover, e-discovery costs are not taxable simply because the activities leading up to the making of copies are performed by third party consultants with “technical expertise.” Id. at 169. The Race Tires court held that neither the degree of expertise necessary to perform the work nor the identity of the party performing the work is a factor that can be gleaned from the text of § 1920(4). Id. In fact, Race Tires noted that the Ninth Circuit Romero rule has long limited these types of costs as not taxable under § 1920(4). See Romero v. City of Pomona, 883 F.2d 1418, 1427-28 (9th Cir. 1989), overruled on other grounds, (holding that § 1920(4) did not extend to the “intellectual effort” involved in the production of documents, only the physical preparation and duplication of documents).

The Romero rule has been interpreted by district courts to bar taxation of e-discovery costs. For example, in Oracle v. Google, Google attempted to seek remuneration for almost $3 million in e-discovery charges. Oracle Am., Inc. v. Google Inc., 2012 WL 3822129, at *3 (N.D. Cal. Sept. 4, 2012). The court refused Google’s requested e-discovery costs in their entirety because the costs were for “organizing, searching, and analyzing [of] discovery documents” and such “intellectual effort” costs were non-taxable under Romero. Id; see also, Gabriel Techs. Corp. v. Qualcomm Inc., 2010 WL 3718848, at *10-11 (September 20, 2010) (denying motion for a bond to tax $1.5 million in e-discovery consultant fees because the work was intellectual effort and not “the physical preparation and duplication of documents”); Computer Cache Coherency Corp. v. Intel Corp., 2009 WL 5114002, at *4 (N.D. Cal Dec. 18, 2009) (awarding less than 50% of requested e-discovery costs because OCR and metadata extraction costs were not “physical preparation and duplication of documents”).

The State of the Race Post-Race Tires
While the Third Circuit found it “imperative to provide definitive guidance to the district courts in [the Third] Circuit on the question of the extent to which electronic discovery expenses are taxable,” Race Tires, 674 F.3d at 160, the majority of district court decisions in other circuits have also tended to follow the rule announced by Race Tires. At the time of print, five district courts, from several circuits, have declined to tax large portions of e-discovery costs based on the analysis articulated in Race Tires. For example, the court in El Camino Resources, Ltd. V. Huntington Nat’l Bank noted that while there were diverging views on the appropriateness of taxing e-discovery costs, the “well-reasoned” approach of Race Tires had convinced it of the impropriety of adopting an expansive approach. El Camino Resources, Ltd. V. Huntington Nat’l Bank, 2012 WL 4808741, at *5-7 (W.D. Mich. May 3, 2012) (taxing only $2,000 of $84,000 in requested e-discovery costs).

Similarly, the courts in Johnson v. Allstate and Country Vitner v. Gallo Winery followed the “persuasive” and “helpful” Race Tires decision when they limited taxable e-discovery costs to the “making of copies” and ruled against taxing the pre-production processing costs of other e-discovery services such as the “creat[ion] of litigation database[s], processing of ESI, [and] extraction of metadata.” Johnston v. Allstate, 2012 WL 4936598, at *6 (S.D. Ill. Oct. 16, 2012) (denying $122,000 worth of e-discovery costs as non-taxable “gathering, preserving, processing, searching, culling and extracting [of] ESI”); Country Vitner v. Gallo Winery, 2012 WL 3202677, at *2-3 (E.D. N.C. Aug. 3, 2012) (denying $111,000 worth of e-discovery costs and only awarding $218.59 for the “tasks that involve copying [such as] the conversion of native files to TIFF and PDF formats and the transfer of files onto CDs.”).

On the opposite end of the spectrum, at least one district court has refused to follow the rationale articulated by the Third Circuit. In In re Online DVD Rental Antitrust Litig., a Ninth Circuit Northern District of California court allowed nearly $700,000 of e-discovery costs to be taxed to the losing party. In re Online DVD Rental Antitrust Litig., 2012 WL 1414111 (N.D. Cal. April 20, 2012). The court reasoned that, in the absence of controlling Ninth Circuit precedent, a broad approach to cost shifting was appropriate under the facts of the case Id. at *1. Notably, the court failed to mention the Ninth Circuit’s Romero rule against awarding “intellectual effort” costs in its brief two-page decision.

By contrast, another, more recent, Northern District of California district court followed the measured Race Tires and Romero analysis in taxing only $20,000 out of $200,000 of in-house e-discovery costs; limiting taxable costs to those associated with TIFF conversion; OCR; CD, DVD, and HD duplication. Plantronics Inc., 2012 WL 5269667, at *17-18. This decision is also instructive on “best practices” litigants should follow under Race Tires and Romero that are most likely to result in a successful motion to tax e-discovery costs. First, litigants should prepare detailed, itemized lists of the costs sought to be taxed as “[n]othing about… Rule 54(d)’s presumption excuses a prevailing party from itemizing its costs with enough detail to establish that each expense is taxable under section 1920.” Id. at 5 (citing Oracle America, Inc., 2012 WL 3822129, at *3). Second, litigants must be careful to avoid line-item descriptions that read like “intellectual effort” to a court, or they risk those costs being denied under the Romero rule. Id. at 21. Another pitfall is to avoid producing documents in a costlier, alternative format, especially if that format was not requested by the other side as it provides a basis for the court to deny costs. Id. at 23. Above all, litigants must remember that when it comes to e-discovery cost-shifting, greed is not good. Submitting a bill of costs with inflated costs, bad-faith accounting, or purposefully vague descriptions will result in “diminished award[s] and sometimes result in denying of taxable costs altogether.” Id. at 3 (quoting Jansen v. Packaging Corp. of Am., 898 F. Supp. 625, 629 (N.D. Ill. 1995).

The Supreme Court May Eventually Limit Section 1920(4) Similar to Race Tires
The Supreme Court chose not to accept certiorari in Race Tires so there is no definitive precedent on the taxability of e-discovery costs outside of the Third Circuit. However, in early 2012, the Supreme Court ruled on the scope of the category of taxable costs under §1920(6) (“compensation of interpreters”) in a decision that is instructive on how the Supreme Court might interpret the scope of taxable e-discovery costs under §1920(4).

Holding that the term “interpreter” could not be stretched to include non-oral translation, the Supreme Court articulated a relatively circumscribed approach to the recovery of litigation costs under § 1920. Taniguchi, 132 S. Ct. at 2005. The Court explained that taxable costs are of “narrow scope” and are “limited to relatively minor, incidental expenses.” Id. at 2006. Ultimately, the Court remanded the case to the Ninth Circuit with instructions to refuse to tax costs for the written translation of documents.

While Taniguchi was limited to costs associated with translation of documents, it appears that the thrust of Taniguchi, combined with the Court’s decision not to accept certiorari in Race Tires, may indicate that the Court is not sympathetic to arguments that § 1920(4) should be used to allow a party to shift the entirety of the costs associate with e-discovery.

Race Tires and subsequent cases provide mixed results for corporate litigants. On the one hand, Race Tires protects unsuccessful litigants (at least in the Third Circuit) from being saddled post-judgment with their opponents’ e-discovery costs that can run into the millions of dollars. On the other hand, Race Tires and courts following it pose the serious risk that successful litigants will still be on the hook for vast sums of money for e-discovery, even when the underlying litigation lacks merit. Ironically, the only true protection may come from the same source as the problem itself: technology. If companies can more fully automate the early stages of ESI processing and e-discovery, this issue may yet resolve itself.