Flattened By Race Tires: The Third Circuit Limits What Types of E-Discovery Costs Are Recoverable by a Prevailing Party

On March 16, 2012, in Race Tires America, Inc. v. Hoosier Racing Tire Corp. et al.,[1] the U.S. Court of Appeals for the Third Circuit adopted a conservative view of the types of e-discovery costs recoverable by a prevailing party in federal court.  In a precedential opinion intended to “provide definitive guidance to the district courts in our Circuit,” the Third Circuit held that  the costs of “scanning and file format conversion” are recoverable by a prevailing party, but many other attendant e-discovery costs are not.

Federal Rules for Recovering Costs

            As e-discovery costs rise and become more common, a growing number of federal courts have been called upon to determine whether those costs are “taxable” – i.e., whether a prevailing party in federal court may recover the costs that it incurred in  producing ESI for discovery.  Federal Rule of Civil Procedure 54(d)(1) allows for “costs” (except for attorney’s fees) to be awarded to a prevailing party, and Congress defined what those “costs” are in 28 U.S.C. § 1920.  The debate over e-discovery costs arises almost entirely out of § 1920(4), which states that taxable costs include:

 Fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case[.]

As federal courts grapple with § 1920(4) in the context of e-discovery, they key question tends to be what parts of the e-discovery process are encompassed by “exemplification” and “making copies of any materials.”

In Race Tires, the Third Circuit was presented the opportunity to address the applicability of § 1920(4) to e-discovery costs.  Last year, this blog wrote about an opinion from the U.S. District Court for the Western District of Pennsylvania that took a broad view of the terms in § 1920(4), and awarded to the successful defendants in an anti-trust case over $367,000 in e-discovery costs for work done by third-party vendors and consultants that was “highly technical” and “not the type of services that attorneys or paralegals are trained for or capable of providing.” 

The Third Circuit Opinion

The Third Circuit reversed that District Court’s decision in Race Tires, as the appellate court opted for a limited, rather than expansive reading of § 1920(4).  The court identified only  two e-discovery costs that were recoverable in the case: 1) the conversion of native files[2] to an ESI format which had been agreed upon by the parties, and 2) the scanning of physical documents to create digital duplicatesAs a result, the court reduced the defendants’ award of costs to just over $30,000.

In the opinion, Judge Vanaskie emphasized the historical purpose of § 1920 and its statutory predecessors, and the “‘American rule’ against shifting the expense of  litigation to the losing party.”  The court cited Supreme Court precedent for the principle that § 1920 was intended to provide “rigid controls on cost-shifting in federal courts” and thus that the statute “defines the full extent of a federal court’s power to shift litigation costs absent express statutory authority.”

“Making Copies”

            In its most important piece of analysis, the court concluded that e-discovery services such as ESI collection and preservation, indexing and processing, and keyword searching do not fall within the meaning of the term “making copies” found in § 1920(4).  The court expressly rejected the argument that because such services are a necessary part of the process of ESI production, they are the modern equivalent of making copies. Such notions, the court wrote, “are untethered from the statutory mooring.”

Prior to the ESI era, Judge Vanaskie noted, there could also be a lengthy process involved in producing copies for discovery which included collecting, processing, and reviewing paper files for relevancy and privilege, and the costs of those activities were never taxable under the statute.  Similarly, the court reasoned, the costs of “gathering, preserving, processing, searching, culling and extracting ESI” may be necessary expenses leading up to the production of ESI, but they cannot be considered the costs of “making copies.”

            Several components of e-discovery do qualify as “making copies,” according to the Third Circuit.  The court expressly approved of scanning paper documents into electronic form and transferring VHS tapes to DVD as taxable costs.  Additionally, because the parties in Race Tires had agreed to produce ESI in TIFF[3] format, the court allowed the defendants to recover the costs of converting non-TIFF electronic files into TIFF format.  These recoverable costs represented roughly $30,000 worth of the defendants’ e-discovery bill, which totaled more than $367,000.

Recovering E-Discovery Costs with Race Tires

            Race Tires offers reasonably clear guidelines for the recovery of e-discovery costs by a prevailing party in a district court in the Third Circuit.  Under Race Tires, a prevailing party should be able to recover 1) the cost of scanning physical documents and 2) the cost of converting electronic files into another format that has been agreed upon by the parties in a discovery plan or case management order.  A prevailing party should not expect, however, to recover the costs of gathering, preserving, processing, searching, culling and extracting ESI – services which will often represent the bulk of e-discovery costs.  In short, Race Tires gives some certainty, but little relief to litigants facing expensive e-discovery bills.  

[1] No. 11-2316, 2012 U.S. App. LEXIS 5511 (3d Cir. March 16, 2012).

[2] As the Third Circuit explained, “the native file format is the file structure defined by the original creating application.” For example, a document which was originally created in Microsoft Word is a Word (or .doc) file in its native file format.

[3]Tagged Image File Format,” a type of electronic file. 

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Posted in Articles, costs, e-discovery consultants, e-discovery costs, e-discovery plan, eDiscovery, electronic communication, electronically stored information, ESI, exemplification, Race Tires, recovery of e-discovery costs

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