A New Avenue For E-Discovery Cost Recovery

Thursday, February 21, 2013 - 10:09

E-discovery is often one of the largest expenses of litigation. In recent years, some prevailing parties in federal court have found a successful avenue for recovering those costs through 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 applying section 1920(4) to e-discovery costs is unsettled. Last year’s decision by the Court of Appeals for the Third Circuit in 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 taxable under section 1920(4). Nonetheless, several federal courts outside of the Third Circuit have allowed for broader cost recovery, and a federal court in California has twice expressly declined to follow the Third Circuit’s narrow approach.  Further, no court in the influential Second Circuit has directly addressed the scope of section 1920(4) with respect to e-discovery costs. Thus, prevailing federal litigants in New York and elsewhere 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, in pertinent part, that “cost – other than attorney’s fees – should be allowed to the prevailing party.”  Section 1920(4) enumerates which litigation expenses qualify as taxable costs, including “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” The Committee on Court Administration and Case Management, in recommending a 2008 amendment to § 1920(4) that replaced “copies of papers” with “copies of any materials,” 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).  Prior to the amendment, several federal courts 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). However, the amendment itself did not go so far as to expressly refer to e-discovery costs. 

The Race Tires Decisions

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 opinion stemmed from a 2007 antitrust lawsuit, in which defendants prevailed on summary judgment. The court then considered whether their 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, including the collection and imaging of hard drives, scanning documents, processing and indexing data, extracting metadata, making documents searchable, and converting documents into .tiff format. In allowing taxation of over $367,000 in such costs, the court stressed that the plaintiff had aggressively pursued e-discovery. Id. at *9. As a result, hiring costly third-party vendors to retrieve and prepare e-documents was an “indispensable part of the discovery process” for the defendants and 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.

On appeal, the Third Circuit issued a lengthy opinion strictly limiting the taxation of e-discovery costs to the conversion of native files to .tiff 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 and otherwise 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 Third Circuit denied over 90 percent of the costs sought to be recovered 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 approximately $30,000.  Id. at 171-72.

Diverging Opinions: Conversion And Scanning Costs

Race Tires II supports the recovery of conversion and scanning costs, at a minimum. Indeed, many other federal courts have awarded similar costs under section 1920(4). See, e.g., Silicon Knights, Inc. v. Epic Games, Inc., 2012 WL 6809721, at**5-6 (E.D.N.C. Nov. 7, 2012) (awarding $150,687.00 for costs associated with imaging electronic information); Johnson v. Allstate Ins. Co., 2012 WL 4936598, at **6-7 (S.D. Ill. Oct. 16, 2012). 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).

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).  Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009).

Courts adopting the stringent approach espoused in Race Tires II have routinely distinguished the physical production of documents from the work “leading up” to it, holding that “gathering, preserving, processing, searching, culling, and extracting ESI simply do not amount to ‘making copies.’” Race Tires II, 674 F.3d at 169-70.  See 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.”  The District Court for the Southern District of California wrote in Jardin v. DATAllegro, Inc., 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 (S.D. Cal. Oct. 12, 2011). Arguably, Jardin reached beyond Race Tires II, however, when it awarded the costs associated with hiring an e-discovery project manager to oversee the conversion process, who “did not review documents or contribute to any strategic decision-making.” Id. at *9.

Notably, a few courts have refused to award any recovery for costs associated with scanning or conversion, but these appear to be the exception. See, e.g., Little Rock Cardiology Clinic, P.A. v. Baptist Health, 2009 WL 763556, at *4 (E.D. Ark. Mar. 19, 2009); Fells v. Virginia Dep’t of Transp., 605 F. Supp. 2d 740, 743 (E.D. Va. 2009).

Diverging Opinions: Recovery Beyond Conversion And Scanning

While undoubtedly influential as the most recent and lengthiest treatment of the issue by a Circuit Court of Appeals, outside of its jurisdiction, the Race Tires II decision has not been the final word on recovering e-discovery costs under section 1920(4). For example, the District Court for the Northern District of California 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, .tiff conversions and professional fees).

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 **6-7 (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”).  Some courts have stressed efficiency and cost-savings as a factor in awarding broader e-discovery costs.  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”).

Looking Forward

No district court in the Second Circuit or Southern District of 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, which are quite influential in national e-discovery jurisprudence, might interpret 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 expressly declined to follow Race Tires II.

Prevailing parties may 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 at the conclusion of the case.

Brendan M. Schulman is E-Discovery Counsel at Kramer Levin Naftalis & Frankel LLP. He advises clients on the preservation, collection, processing, review and production of electronic information, with an emphasis on technology-assisted review and other cost-effective and defensible strategies. Samantha V. Ettari, an Associate, focuses primarily on white collar criminal and regulatory defense, as well as general commercial litigation, with an emphasis on real estate, complex contract disputes and bankruptcy litigation.

Please email the authors at bschulman@kramerlevin.com or settari@kramerlevin.com with questions about this article.