The United States Court of Appeals for the Third Circuit in Race Tires America v. Hoosier Racing Tire Corp., et al., issued a decision on March 16, 2012 on a matter of first impression, vacating the Western District of Pennsylvania’s decision awarding in excess of $365,000 in taxable costs for activities related to e-discovery, such as hard drive imaging, data processing, keyword searching, and file format conversion.  The Court of Appeals addressed the issue of whether charges imposed by e-discovery vendors to assist in the collection, processing, and production of electronically stored information are taxable against a losing party as fees under 28 U.S.C. § 1920(4).  The court concluded that “of the numerous services the vendors performed, only the scanning of hard copy documents, the conversion of native files to TIFF, and the transfer of VHS tapes to DVD,” which totaled $30,370.42, involved “copying” costs attributable to activities that are recoverable under § 1920(4). 

LexisNexis provides a videocast of Kevin Brady discussing the key parts of this case, courtesy of Steve Berstler of LexisNexis.

The District Court Decision and the Award of Costs

In September of 2007, Race Tires (RTA), a tire supplier, sued Hoosier Racing Tire Corp. and Dirt Motor Sports, Inc. (DMS) asserting antitrust violations arising out of the use of tires in certain motor sports.  Hoosier produced over 400,000 pages in electronic format, and DMS produced almost 200,000 electronic documents and ten DVDs of racing videos. Both parties moved for summary judgment and the district court granted summary judgment in favor of Hoosier and DMS.  That decision was affirmed on appeal. 

The Clerk for the District Court addressed the Bills of Costs that had been presented by the defendants pursuant to Federal Rule of Civil Procedure 54(d).  The Clerk awarded almost the full amount of the e-discovery fees sought by the defendants “for fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.”  DMS claimed $329,051.41, and Hoosier claimed $143,007.05, which the Clerk reduced to $125,580.55 due to the lack of supporting detail.  The district court, while not assessing each of the services performed by the e-discovery vendors, affirmed the Clerk’s decision finding that “the steps the third-party vendor(s) performed appeared to be the electronic equivalent of exemplification and copying,” and that “the requirements and expertise necessary to retrieve and prepare…e-discovery documents for production were an indispensable part of the discovery process.”

Court of Appeals Decision 

Under Federal Rule of Civil Procedure 54(d)(1), “costs—other than attorney’s fees—should be allowed to the prevailing party.”  Moreover, 28 U.S.C. § 1920 defines the litigation expenses that qualify as taxable “costs” as “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.”  (Emphasis added).  With respect to the award of costs on appeal, the issue presented to the court was whether § 1920(4) authorizes the taxation of an electronic discovery consultant’s charges for data collection, preservation, searching, culling, conversion, and production as either the “exemplification [or] the…making [of] copies of any materials where the copies are necessarily obtained for use in the case.” 

The court reviewed the statutory history of § 1920(4), which provided little guidance since it does not contain any discussion of the statute’s application in the digital world.  The court also discussed a vendor’s process for copying paper versus the process for copying electronic data, and the need for technical expertise.  Focusing in particular on the issue of whether the expenses constituted “costs of making copies,” the court concluded that “[o]f the activities undertaken by the vendors, only the conversion of native files to TIFF [the agreed-upon default format for production of ESI], and the scanning of documents to create digital duplicates are generally recognized as the taxable ‘making copies of material.’”  The court went on to note that while transferring VHS recordings to DVD format does not require the technical expertise of e-discovery vendors, those expenses do qualify as “making copies.”

Precedential Decision

The Race Tires decision overrules the District Court’s recent decision in In re Aspartame Antitrust Litig., 2011 U.S. Dist. LEXIS 118226 (E.D. Pa. Oct. 5, 2011) which was one of the first decisions providing exhaustive detail on the factors courts will consider in deciding whether to shift costs and which costs are taxable to the non-prevailing party. There, the U.S. District Court for the Eastern District of Pennsylvania awarded more than $500,000 for the costs of e-discovery to the prevailing parties in an antitrust litigation matter.  The court provided a survey of then-current case law on the issue of taxing e-discovery, observing that it “is a new area of law where courts have diverged in their approaches.”  Several factors played into the court’s analysis, including the volume of discovery requested and produced; the complexity of the litigation; the e-discovery methods used by the defendants; which parties benefitted from those methods; which parties requested the use of those methods; the “necessity” of the chosen methods; whether the costs were those typically incurred by lawyers or non-lawyers; and the adequacy of documentation submitted to support the defendants’ bill of costs.  In Aspartame, the court taxed the following costs:

  • Creating a litigation database;
  • Storing data;
  • Imaging hard drives;
  • Deduplicating data;
  • Hosting electronic data;
  • Conducting keyword and privilege searches;
  • Making documents searchable using Optical Character Recognition (OCR) software;
  • Capturing metadata;
  • Creating “load” files (requested by the plaintiffs);
  • Creating CDs and DVDs of the electronic documents;
  • Data recovery and restoration; and
  • Technical support.

Since the Aspartame decision, courts in the Seventh, Ninth, and Federal Circuits have embraced the power to tax e-discovery costs against the non-prevailing party.  See Jardin v. DATAllegro, Inc., 2011 WL 4835742 (S.D. Cal., Oct. 12, 2011); LG Elecs. U.S.A., Inc. v. Whirlpool Corp., 2011 U.S. Dist. LEXIS 121361 (N.D. Ill. Oct. 20, 2011); Synopsys, Inc. v. Ricoh Co. (In re Ricoh Co. Patent Litig.), 2011 U.S. App. LEXIS 23495 (Fed. Cir. Nov. 23, 2011).

Practice Tips

While the costs associated with preserving, collecting, processing, reviewing, and producing ESI will not qualify as “costs of making copies” and so not “taxable costs” in the Third Circuit, expenses related to scanning hard copies or converting electronic information from one format to another for purposes of production might qualify.  As the court here noted “invoices that Hoosier and DMS submitted in support of their Bills of Costs are notable for their lack of specificity and clarity as to the services actually performed.”  It is imperative that the vendor include a detailed description of the work being done in a fashion that is readily understandable. This requirement should be addressed prior to retaining an e-discovery vendor, and payment to the vendor should be conditioned on properly detailed invoicing.  

It is also unlikely, given this ruling, that courts in the Third Circuit will broadly view the types of “costs” recoverable under FRCP 54(d).  In addition, if a party is considering an equitable argument to justify an award of costs for services that are not traditionally considered as taxable costs, this decision dismisses that approach.