September 10, 2012 Articles

E-Discovery Costs: The Loser Pays for What, Exactly?

A very important question may be awaiting you at the end of litigation.

By Jennifer M. Williams and Tara S. Lawler – September 10, 2012

Electronic-discovery costs can be considerable. To what extent are such costs “taxable costs” that can be recovered by a prevailing party under the Federal Rules of Civil Procedure? Recent case law provides no uniform approach to taxing e-discovery costs under Rule 54(d). So the potentially very big question lurking at the end of a federal court litigation is: The loser pays for what, exactly?

E-Discovery Costs Are on the Rise

New technology and data sources, as well as the rapid rate at which existing technologies and data sources are expanding, continue to drive an unprecedented growth in the volume of information subject to discovery. Data and information that are responsive to a discovery request and that must be produced to the opposing side are not located just in an email or on a server anymore. E-discovery now encompasses mobile devices, blogs, social-media sites, instant messages, wikis, cloud computing, and other collaboration tools—to name just a few.

E-discovery costs associated with producing this ever-increasing volume of data from various sources can be staggering. To what extent might it be possible to recoup costs associated with electronically stored information (ESI) as part of a trial judgment? Federal Rule of Civil Procedure 54(d) gives the prevailing party the right to recover costs where authorized by statute; 28 U.S.C. § 1920(4) provides that “fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case” can be assessed as costs.

The Authority to Tax Costs
Generally, the responding party must bear the costs of complying with discovery requests and producing relevant material. See Mikron Indus., Inc. v. Hurd Windows & Doors, Inc., No. C07-532RSL, 2008 WL 1805727, at *1 (W.D. Wash. Apr. 21, 2008). Yet, Rule 54(d) gives the prevailing party the right to recover “costs—other than attorney’s fees. . . .” Rule 54(d)(1) is limited, however, by 28 U.S.C. § 1920. The types of electronic-discovery costs awarded under Rule 54 depend upon the interpretation of 28 U.S.C. § 1920(4), which lists as taxable costs “fees for exemplification and the cost of making copies of any materials where the copies are necessarily obtained for use in the case.” The interpretation of Rule 54(d)(1) in conjunction with 28 U.S.C. § 1920(4) as applied to e-discovery costs remains unsettled. Courts have reached different conclusions about what e-discovery-related costs may be recovered. Can a prevailing party recover the costs associated with imaging hard drives? Extracting metadata? Converting files to .TIFF format? Keyword searching? Production-related costs? Courts are increasingly taxing non-prevailing parties for some of these costs of e-discovery.

A Two-Part Analysis
Whatever costs are to be taxed, the first step is to determine which party is the prevailing party. In Tibble v. Edison International, No. CV 07-5359 SVW, 2011 WL 3759927 (C.D. Cal. Aug. 22, 2011), Edison prevailed on 11 claims while the plaintiffs prevailed on one part of an ERISA claim. Both sides sought an award of costs as the prevailing party, but the court determined that the defendants were the prevailing party because they “prevailed in the substantial part of the litigation.” Id. at *2.

Next, the court must decide which costs are taxable. In determining what costs to tax, courts will generally not award costs when there is an agreement between the parties to the contrary. See In re Ricoh Co., Ltd. Patent Litig., 661 F.3d 1361, 1366 (Fed. Cir. 2011) (although costs for database could be recovered, agreement of parties to share costs controlled); see also United States v. U.S. Training Ctr., Inc., 829 F. Supp. 2d 329, 337 (E.D. Va. Dec. 8, 2011) (agreement of parties that each side would bear own costs governed, and thus request to tax e-discovery costs was denied); accord Autry Petroleum Co. v. BP Prod. N. A., Inc., No. 4:05-CV-113, 2010 WL 3239010, at *1 (M.D. Ga. Aug. 16, 2010) (denying request to reduce e-discovery taxable costs when parties never reached an agreement on cost allocation).

Most courts seem inclined, absent an agreement to the contrary, to tax costs for scanning, imaging, and OCR’ing (optical character recognition) of documents for production in discovery. See generally BDT Prod., Inc. v. Lexmark Int’l Inc., 405 F.3d 415, 420 (6th Cir. 2005), abrogated on other grounds by 132 S. Ct. 1998 (May 21, 2012); Rundus v. City of Dallas, 2009 WL 3614519 (N.D. Tex. Nov. 2, 2009), aff’d, 634 F.3d 309 (5th Cir. 2011); Farrar & Farrar Dairy, Inc. v. Miller-St. Nazianz, Inc., No. 5:06-CV-160-D, 2012 WL 776945 (E.D.N.C. Mar. 8, 2012); One River Place Cond. Ass’n, Inc. v. Axis Surplus, Inc., No. 07-1305, 2010 WL 235028 (E.D. La. Jan. 14, 2010); Cargill Inc. v. Progressive Dairy Solutions, Inc., No. CV-F-07-0349-LJO-SMS, 2008 WL 5135826 (E.D. Cal. Dec. 8, 2008); but see Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158, 169–70 (3d Cir. 2012), petition for cert. filed (U.S. June 14, 2012); Francisco v. Verizon Inc., 272 F.R.D. 436, 446 (E.D. Va. 2011).

Two lines of cases are emerging: One line reasons that “exemplification” and “copying” under 28 U.S.C. § 1920 include a broad scope of e-discovery expenses, while the other line narrowly construes “exemplification” and “copying” to award only those costs most closely analogous to photocopying paper documents.

Cases Broadly Construing Exemplification and Copying Costs
It is not headline news that courts award at least some e-discovery-related costs to prevailing parties. For example, courts have awarded costs for the removal of metadata from partially privileged documents prior to production, see Neutrino Dev. Corp. v. Sonosite, Inc., No. H-01-2484, 2007 WL 998636 (S.D. Tex. Mar. 30, 2007); costs for the conversion of electronic data into a readable format, see Hecker v. Deere & Co., 556 F.3d 575, 591 (7th Cir. 2009), and even $4.6 million in costs for the creation of a litigation database, see Lockheed Martin Idaho Techs. Co. v. Lockheed Martin Advanced Envl. Sys., Inc., No. CV-98-316-E-BLW, 2006 WL 2095876, at *2 (D. Idaho July 27, 2006). However, the number of courts taxing e-discovery costs against a losing party is on the rise—as are the types of e-discovery-related costs being awarded. While courts are restricted to awarding only those costs enumerated in section 1920, courts are left to interpret the meaning of the categories listed under the rule.In particular, what are “exemplification” and “copying”?

Presumption in Favor of Awarding E-Discovery Costs
Courts awarding e-discovery costs find a strong presumption in favor of awarding the prevailing party its costs, other than attorney fees. For example, in Jardin v. DATAllegro, Inc., No. 08-CV-1462-IEG, 2011 WL 4835742 (S.D. Cal. Oct. 12, 2011), the clerk of the court entered judgment and taxed costs, including e-discovery costs, against Jardin. Because these courts find that Rule 54(d) creates a presumption in favor of awarding costs to a prevailing party, the losing parties must overcome the presumption of automatically taxing costs. The losing parties have a heavy burden to overcome in rebutting this presumption. InJardin, for example, the court rejected Jardin’s arguments that costs should not be awarded because he litigated in good faith, the issues in the case were close and difficult, and there was an economic disparity between Jardin and DATAllegro’s parent company. Assuming the losing party fails to overcome the presumption that e-discovery costs are taxable, what e-discovery costs can be recovered?

What E-Discovery Costs Are Taxable?
Are all e-discovery costs taxable? For example, culling data using search terms and applying a date restriction? Converting images to .TIFF format for production? What about the most expensive phase of the process: the costs associated with document review? Courts relying upon the presumption that all costs—except attorney fees—should be taxed must distinguish between tasks that require specialized computer expertise, as needed for replicating and producing the data, and costs associated with tasks that a lawyer can perform. Courts awarding e-discovery costs typically find that the costs associated with preserving, restoring, retrieving, processing, or converting data are “highly technical” in nature and are not the types of services that attorneys or paralegals are capable of providing. See CBT Flint Partners LLC v. Return Path, Inc., 676 F. Supp. 2d 1376, 1380 (N.D. Ga. 2009), vacated on other grounds, 654 F.3d 1353 (Fed. Cir. Aug. 10, 2011) (costs for collecting, searching, and processing ESI should be awarded because these services are not the types of services that attorneys are trained to provide).

In Jardin, the court reviewed the costs for e-discovery project management to determine whether they were taxable costs. The court differentiated between costs associated with physical production, i.e., physically replicating and producing the data, and costs associated with intellectual effort, or the costs arising out of strategy or other matters involving a lawyer’s judgment. Under section 1920(4), fees for preparing and producing documents are recoverable, while the fees associated with a lawyer’s intellectual effort are not. Because the e-discovery project manager’s duties were limited to overseeing data conversion, and he did not review documents or contribute to case strategy, the project-management costs were fully taxable. See also In re Ricoh Co., Ltd. Patent Litig. No. 2011-1199, 2011 WL 5928689, at *3 (Fed. Cir. Nov. 23, 2011) (costs for database do not fall within unrecoverable category of “intellectual efforts”).

Courts awarding e-discovery costs believe that exemplification and copying of ESI are analogous to the expenses incurred for reproducing paper documents. As one court recently noted,

The services required for producing information stored electronically differ from those required to produce information from hard copies of documents. It is appropriate to take into account the costs associated with these additional services in assessing costs for exemplification and copying of materials.

In re Scientific-Atlanta, Inc. Sec. Litig., No. 1:01-CV-1950-RWS, 2011 WL 2671296, at *1 (N.D. Ga. July 6, 2011).

Courts awarding e-discovery costs further distinguish between those costs incurred “merely for the convenience of counsel” and those “necessarily incurred in responding to . . . discovery requests.” Tibble, No. CV 07-5359 SVW, 2011 WL 3759927, at *7. In Tibble, the defendants requested that any award of taxable costs offset any attorney fees awarded to the plaintiff. The defendants’ submission for costs included approximately $530,000 for e-discovery; specifically, the costs for “utilizing the expertise of computer technicians” to unearth computerized data sought by the plaintiff’s discovery requests. The clerk of the court reviewing the cost application suggested that e-discovery costs were not recoverable. The court disagreed. The opinion distinguished between costs incurred “merely for the convenience of counsel” and those “necessarily incurred in responding to . . . discovery requests.”

Similarly, the Southern District of Indiana found that costs incurred in applying date restrictions, custodian filters, and de-duplication along with specialist work to repair corrupt data and fix database errors were not merely incurred for the convenience of counsel; the court noted, “if Roche had not used the more efficient electronic processes above, the cost to manually find and produce the information could have been far greater.” See Promote Innovation LLC v. Roche Diagnostics Corp., No. 1:10-cv-964-TWP-TAB, 2011 WL 3490005, at *1 (S.D. Ind. Aug. 9, 2011).

Were the E-Discovery Costs Necessarily Incurred?
In determining what costs were necessarily incurred in litigation, courts have taken into account the losing party’s requests and discovery conduct in assessing costs. There has been a significant call in recent years for increased cooperation among parties—as set forth in Federal Rules of Civil Procedure 16 and 26—to meet and confer about e-discovery-related topics. Taxing costs to the prevailing party is another area where the courts seem to be awarding “good behavior” for those parties that cooperate with the opposing party and agree upon the scope of discovery in an effort to limit e-discovery costs. Recently, for example, when the opposing side made requests for ESI to be produced in electronic format, the Eastern District of Arkansas found that the “technical, specialized services” required to extract, collect, and locate the ESI to make such an electronic production should be taxed.See B&B Hardware, Inc. v. Fastenal Co., No. 4:10-cv-00317-SWW, 2011 WL 6829625 (E.D. Ark. Dec. 16, 2011); Tibble, 2011 WL 3759927(noting the plaintiff aggressively sought ESI);Cargill, 2008 WL 5135826, at *7 (costs for scanning and Bates labeling were taxable because the losing party required Bates labeling of information being produced). On the other hand, if the parties have not discussed the production and its associated costs, the costs may be disallowed. See Cute v. ICC Capital Mgmt., Inc., No. 6:09-cv-1761-Orl-22DAB, 2011 WL 3444133 (M.D. Fla. July 22, 2011) (e-discovery costs disallowed because the charge “should have been the subject of specific good faith discussions between counsel before being incurred if ICC expected to tax such as part of costs at the conclusion of litigation”). As such, litigants should cooperate from the start of a matter to develop a well-controlled discovery plan. Evidence of such cooperation will increase the prevailing party’s likelihood of recovering its e-discovery costs.

As a side note, it is important to keep in mind that not all courts require a production of documents before awarding e-discovery costs. If a case ends before documents are produced, a party may still recover costs even though the costs were not necessarily incurred for litigation. In Parrish v. Manatt, Phelps & Phillips, LLP, No. C 10-03200 WHA, 2011 WL 1362112, at *3 (N.D. Cal. Apr. 11, 2011), the court found that costs for Bates stamping, conversion, reproduction, scanning, and imaging of documents were taxable because the costs were not incurred as a mere convenience but were incurred in “warming up the[] electronic discovery machine so that timely document productions could be made.”

Costs “necessarily incurred” as a result of litigation have included creation of a litigation database, storage of data, collection of material, application search filters, de-duplication, data recovery, data extraction, data processing, conversion of electronic data into image files, the running of documents through an optical character recognition (OCR) program, the creation of production CDs and DVDs, and technical support related to these tasks.

While federal courts may be divided on the issue of whether the costs for converting electronic data from one format into another are taxable costs “necessarily incurred,” theJardin court found that conversion “was a necessary part of discovery” because the Federal Rules require the production of ESI. While Jardin argued that the .TIFF conversion should not be taxed because the defendants could have produced the electronic data in its original format, the defendants countered that conversion allowed for Bates stamping, prevented alterations to the electronic data, protected the confidentiality of metadata, and allowed the parties to use document-review software. The court reasoned that converting data into a format that all parties could use “not only allows for the efficient and less expensive discovery, but is often necessary for any meaningful discovery at all.”

Decisions from courts in California, Illinois, and Arkansas have found that the prevailing party can recover e-discovery costs under Federal Rule of Civil Procedure 54. As the court recognized in United States ex rel. Yannacopoulos v. Gen. Dynamics, No. 03 C 3012, 2012 WL 1748120 (N.D. Ill. 2012),“it is undisputed that electronic discovery costs are available under Section 1920(4).”

Cases Narrowly Construing Exemplification and Copying
Conversely, a number of cases have found that costs for collecting, extracting, processing, and/or storing ESI should not be included within those costs that are taxable as “exemplification” and “copying” costs under section 1920(4). See, e.g,. Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158, 169–70 (3d Cir. 2012), petition for cert. filed (U.S. June 14, 2012); Francisco v. Verizon Inc., 272 F.R.D. 436, 446 (E.D. Va. 2011). In excluding such costs, the courts held that the costs of collecting, extracting, or processing electronic data are not the equivalent of copying documents, but are more akin to an attorney locating and segregating paper documents that might be responsive. See Fast Memory Ease, LLC v. Spansion, Inc., No. 3-10-CV-0481-M-BD, 2010 WL 5093945, at *6 (N.D. Tex. Nov. 10, 2010);Kellogg Brown & Root Int’l v. Atlanmia Comm. Mktg. Co., No. H-07-2684, 2009 WL 1457632, at *5 (S.D. Tex. May 26, 2009).

In the pivotal case of Race Tires, the Third Circuit sought to provide “definitive guidance” on “the extent to which electronic discovery expenses are taxable.” The court of appeals vacated the majority of the district court’s $365,000 award of e-discovery-related costs. The court allowed recovery for only those costs that it deemed equivalent to “making copies” under 28 U.S.C. § 1920, such as transferring VHS tapes to DVD, scanning hard-copy documents into electronic images, and converting native files into .TIFF format, and disallowed recovery for expenditures related to collecting, preserving, processing, indexing, and applying keyword searches to ESI.

After successfully defending against an antitrust action, the defendants in the underlyingRace Tires matter were awarded more than $365,000 as recovery for e-discovery costs. The district court upheld the award, following decisions where “the steps the third-party vendor performed appeared to be the electronic equivalents of exemplification and copying.” The plaintiffs appealed the award, claiming that most of the e-discovery costs were not eligible for recovery.

The court of appeals affirmed only a small portion of the e-discovery-costs award. The court found that costs for transferring, scanning, and conversion qualified under section 1920 as “making copies.” In reaching its decision, the court of appeals noted that “Section 1920 . . . defines the full extent of a federal court’s power to shift litigation costs absent express statutory authority.” 674 F.3d at 164.

Analyzing the text of section 1920(4), the court of appeals distinguished “exemplification” from “making copies.” The court concluded that none of the e-discovery services satisfied the definition of “exemplification.” Whether narrowly or broadly construed, exemplification costs would only include costs for producing illustrative evidence or for the authentication of public records. Thus, none of the e-discovery costs incurred would qualify as “exemplification” costs.

The court of appeals next addressed the definition of “making copies.” Noting that section 1920(4) had a history of being relied upon for recovering photocopying costs, the court cited common-use definitions of “copy” and “copying” as relating to imitating, transcribing, reproducing, or duplicating an item. In applying this analysis to the various services performed by the e-discovery vendors, the court found that scanning of paper documents, converting native files to .TIFF images, and transferring VHS tapes to DVD all constituted “making copies” and were therefore taxable against the losing party. Conversely, the court found that costs for imaging hard drives, searching relevant files, and other e-discovery processes did not constitute costs for “making copies.” Id. at 169. While acknowledging that extensive processing of ESI may be an essential and indispensable part of e-discovery, “that does not mean that the services leading up to the actual production constitute ‘making copies.’” Thus, the activities preceding the actual act of making copies, including gathering, preserving, processing, searching, culling, and extracting ESI, are not taxable.

The court further rejected the analyses of other courts that the “degree of expertise necessary to perform the work,” “the identity of the party performing the work,” the encouragement of cost savings, or other general equitable concerns should affect taxability. The court of appeals criticized such “decisions that allow taxation of all, or essentially all, electronic discovery consultant charges” as being “untethered from the statutory mooring.”Id. Indeed, the court of appeals noted that “[n]either the language of §1920(4), nor its history, suggests that Congress intended to shift all the expenses of a particular form of discovery—production of ESI—to the losing party,” and thus, even though there may be policy reasons or compelling circumstances in a particular case that warrant such an award, “the federal court lacks the authority to do so . . . under the cost statute.” Id. at 171.

Similarly, other courts have denied costs for collecting, processing, and converting files because such processes result in “creating” documents as opposed to “copying” documents. The primary case setting forth this reasoning is Fells v. Virginia Department of Transportation, 605 F. Supp. 2d 740, 743–44 (E.D. Va. 2009). In Fells, the defendant sought to recover costs for initial processing, metadata extraction, and file conversion. The court distinguished between techniques, such as scanning of paper, that merely copy documents, and the techniques employed by the defendant “that create electronically searchable documents.” As such, the court found that such e-discovery costs were not enumerated in section 1920 and therefore were not taxable. The court in Mann v. Heckler & Koch Defense, Inc., 2011 U.S. Dist. LEXIS 46045 (E.D. Va. Apr. 28, 2011) followed Fells in denying various e-discovery costs, such as costs for de-duplicating documents, metadata extraction, and other tasks associated with creating a database, because such tasks were more akin to “creating” new documents rather than “copying” documents. The court held that only the costs associated with burning the CDs (referred to by the court as the “production costs” of the case) qualified as “copying” for purposes of section 1920(4). See also Francisco, 272 F.R.D. at 445–46 (applying Fells in denying costs for retrieving emails to access them in a readable format); accord Gabriel Techs. Corp. v. Qualcomm, Inc., No. 08 CV 1992 MMA, 2010 WL 3718848 (S.D. Cal. Sept. 20, 2010) ($1.5 million to engage an e-discovery expert was not recoverable, as it was not one of the enumerated costs in section 1920).

While many courts that narrowly construe “exemplification” and “copying” deny the award of most e-discovery costs, such as costs for collecting or processing materials, it is important to note that those same courts will often allow parties to recover for the scanning, imaging, OCR, or .TIFF process involved in producing documents. See, e.g., Race Tires, 674 F.3d at 167, 171; see also Fast Memory, 2010 WL 5093945, at *5 (awarding costs particularly in light of the plaintiff’s requested format for production). Thus, some electronic-discovery costs may still be recovered even in courts narrowly construing section 1920(4).

The Future of Recovering E-Discovery Costs
Ultimately, the Supreme Court may end up deciding the split among the courts with respect to which e-discovery costs qualify as “exemplification” and “copying” costs. A petition for certiorari has been filed in Race Tires, and it remains to be seen whether the Court will grant the writ.

While the law continues to develop and evolve, a litigant must be cognizant of the fact that it may be taxed some or all of the opposing party’s e-discovery costs should the opposing party prevail. Attorneys and clients should assess the potential downsides of pursuing or defending a claim, including the possibility that a client may have to pay the opponent’s e-discovery costs. Once discovery has commenced, counsel and the parties should cooperate in narrowing the scope of discovery and discussing the number of custodians, the relevant time frame, search terms, or other filtering criteria. By narrowing the scope of discovery, a party limits the resultant costs that it may be required to pay should it lose.

Keywords: environmental litigation, ESI, attorney fees, costs, Rule 54, section 1920(4)

Jennifer M. Williams is an associate at Morgan, Lewis and Bockius LLP, resident in the firm's Houston, Texas, office. Tara S. Lawler is an associate in the firm's Philadelphia, Pennsylvania, office.

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