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Philip Yannella
The rising cost of e-discovery is well-known by litigants, particularly corporate defendants with multiple terabytes of electronically stored information (ESI) that can become discoverable in litigation. For years, courts and litigants have struggled with the complexity and cost of e-discovery to the point that in many cases e-discovery has become the proverbial tail that wags the dog.
A pair of recent rulings from district courts in the 3rd Circuit, however, offers new hope for litigants hoping to control their e-discovery costs. In Race Tires America Inc., v. Hoosier Racing Tire Corp., a May 6 opinion, and Hank's Beverage Co. v. Ajinomoto Co., a July 26 case, district courts in the Western District of Pennsylvania and the Eastern District of Pennsylvania, respectively, approved the taxation of hundreds of thousands of dollars in e-discovery costs under Rule 54.
The prospect that parties requesting ESI in discovery may be forced to bear at least some of the e-discovery costs incurred by producing parties is a tectonic shift in litigation that may change the way in which e-discovery is handled in the future. This article will examine the possibility that federal courts across the country will follow the trend set by the 3rd Circuit and explore the ways that litigants may respond to the potential taxation of e-discovery costs.
Taxation of e-Discovery Costs in the 3rd Circuit
Federal Rule of Civil Procedure 54(d) provides that a prevailing party may recover various costs. These costs, in turn, are specifically enumerated under 28 U.S.C. § 1920 and include "fees for exemplification and the costs of making copies of any materials where the materials are necessarily obtained for use in the case." Importantly, the language of § 1920(4) was amended in 2008: the amendment changed the phrase "fees for exemplifications of copies of papers" to "fees for exemplification and the costs of making copies of any materials ." (emphasis added). This change in language has led two district courts within the 3rd Circuit to recently consider the technical complexities of discovery in modern litigation and to allow recovery of some e-discovery costs.
In Race Tires America Inc., the Western District of Pennsylvania considered a request by the defendants for taxation of approximately $370,000 in vendor costs associated with the searching and production of documents in the electronic format requested by the plaintiffs. The court ruled that the costs incurred by defendants were necessary to comply with plaintiff's demands — and had not been done for convenience of defense counsel. The court also noted that use of e-discovery vendors to conduct the imaging, searching and production of electronic documents was necessary because these services were highly technical and not the sort that attorneys or paralegals could provide.
The Race Tires case was followed in July 2011 by Hank's Beverage Co. v. Ajinomoto Co., wherein the clerk of the Eastern District of Pennsylvania permitted the taxation of approximately $560,000 in e-discovery costs. Citing the 2008 amendments to Section 1920(4), the clerk held that the costs defendants had incurred by "hiring a private company that possesses the technology to search for, and/or recreate copies of evidence in electronic form" were taxable. In so ruling, the clerk rejected the plaintiffs' arguments that good faith and the economic disparity of the parties were relevant factors, noting that the taxation of costs is mandatory under Section 1920 where the materials for which costs are sought were "necessarily obtained" for the litigation. Both Hank's Beverages and Race Tires are currently on appeal.
Taxation of Costs in Other Circuits
Outside of the 3rd Circuit, there is little federal case law addressing the taxation of e-discovery costs. While some federal district courts have permitted the taxation of electronic discovery costs since the 2008 amendment to Section 1920(4), few have gone as far as the courts in Race Tires and Hank's Beverages in analyzing the scope of e-discovery costs subject to taxation.
One issue that federal district courts have reached relative consensus on is the taxation of costs associated with the imaging and scanning of paper documents into electronic format: Most federal courts agree that such costs are taxable. One Iowa district court characterized the process of electronic scanning as the modern-day equivalent of "exemplification and copies of paper." (See the 2007 Northern District of Iowa opinion in Brown v. The McGraw-Hill Cos. Inc. )
In considering cost petitions for imaging and scanning of documents, federal courts focus on the "necessarily incurred" requirement of Section 1920(4). A number of courts have rejected cost petitions for the scanning of documents where the scanning was determined to be for the convenience of counsel.
The taxation of costs for imaging paper documents, however, is a relatively narrow application of Section 1920(4) that does not afford litigants with much guidance. In a typical case, litigants retain vendors to provide a much wider (and costly) array of services than just scanning. These services can include electronic data collection, searching, culling, processing and production. On the thornier question of what specific types of e-discovery services are taxable, federal courts outside the 3rd Circuit have remained largely silent or disagree.
For example, several federal courts have considered whether the costs of electronic databases created for the purposes of reviewing and producing electronic documents are taxable, with mixed results. In one case, the District Court of Idaho found that the creation of a litigation database was necessary because of the complexity of the case and granted the defendant's cost petition. (See the 2006 opinion in Lockheed Martin Idaho Techs. Co. v. Lockheed Martin Advanced Environmental Systems Inc. )
Other courts, however, have not allowed taxation of costs associated with the creation of electronic databases on the grounds that processing electronic records, extracting metadata, and converting files is similar to copying but not the equivalent. A court in Virginia explicitly declined to expand the definition of copying to include the "burgeoning array of electronic discovery techniques." (See the 2009 Eastern District of Virginia opinion in Fells v. Virginia Department of Transportation .)
Suffice it to say, the dearth and inconsistency of federal case law exploring the taxation of e-discovery costs makes it difficult to predict how federal law will likely develop in this area. A first glimpse of how the law may develop will likely come when the 3rd Circuit rules on the appeal of the Race Tires case.
How Might Litigants Respond to the Potential Taxation?
Despite the current lack of consensus among federal courts on the issue, it is not too early to make some predictions as to how a world in which e-discovery costs are taxable might look.
Should the 3rd Circuit or other circuits find that e-discovery costs are taxable, the most likely result will be to arm parties that have significant amounts of ESI (typically corporate defendants) with a powerful new weapon to resist costly and overbroad discovery requests. Requesting parties will be less inclined to seek overbroad e-discovery requests if there is a significant likelihood that they will have to bear the costs of such discovery. While fees associated with attorney document review are generally the largest cost in e-discovery — and are not taxable under Rule 54 — e-discovery vendor costs can also be substantial and are potentially subject to taxation under Rule 54. Indeed, in both Hank's Beverage and Race Tires , vendor costs for e-Discovery were well over six figures.
Corporate defendants in asymmetric litigation — where the opposing party is unlikely to have significant ESI and theoretically has less incentive to limit its discovery requests — are likely to be the most aggressive in using Rule 54 to limit e-discovery. To prevail on a cost petition, responding parties will likely need to more rigorously track their e-discovery costs. (Some courts have rejected taxation requests where the prevailing party was unable to document why the costs were incurred.) To establish that e-discovery costs were necessarily incurred, and not for the convenience of counsel, documenting e-discovery obligations in court orders will take on added importance in this new discovery paradigm.
Conversely, plaintiffs and other parties requesting e-discovery will likely scramble to consider practical ways to limit their exposure for e-discovery costs. The most obvious way to reduce such exposure, of course, is for requesting parties to limit their e-discovery demands. Beyond that, counsel for requesting parties may seek an agreement from opposing counsel early in a case that the costs for e-discovery will not be sought in a Rule 54 motion. Counsel for requesting parties may also request that all electronic documents be produced "natively" and that producing parties refrain from costly processing operations. As most producing parties will resist such a request, requesting parties may alternatively request more transparency into opposing counsel's discovery process and seek agreements and limitations on the kinds of vendor costs that are potentially subject to taxation.
Other arguments will present themselves as courts begin to consider more closely the specific types of e-discovery costs that may be taxable. Until then, attorneys and litigants remain on cautious alert. There is no question that the potential taxation of costs for the searching, processing and production of electronic documents holds the promise of significantly reducing the volume of e-discovery that occurs in many cases and may fundamentally alter the way in which e-discovery is conducted. •
Philip Yannella is a litigation partner at Ballard Spahr and leads the firm's E-Discovery and Data Management Group. Yannella manages e-discovery issues in high-profile litigation, counseling clients worldwide on data preservation, retrieval and privacy matters. He represents Fortune 500 companies on e-discovery and data management issues in litigation, particularly in the pharmaceutical and health care industries. He can be reached at (215) 864-8180 or yannellap@ballardspahr.com
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