August 14, 2013 Top Story

Discovery Processing Costs Not Recoverable

Non-taxability of discovery expenses costs winning litigant more than $100,000

Ian S. Clement

All e-discovery costs may not be recoverable by the prevailing party that filed pretrial dispositive motions. In its decision, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s order permitting the winning party to recover less than one percent of the e-discovery costs it sought. The Country Vintner of North Carolina, LLC v. E & J Gallo Winery, Inc. [PDF].

ABA Section of Litigation leaders note that the Federal Rules permit prevailing parties to recover only a fraction of their costs incurred to process electronically stored information (ESI). Moreover, Section leaders suggest that the case illustrates the need for Rule revisions.

Contentious Discovery

Country Vintner of North Carolina, LLC filed a lawsuit against E & J Gallo Winery, Inc. claiming that Gallo engaged in unfair and deceptive trade practices by violating an exclusivity clause related to the supply of Alamos wine, which Gallo wholesales. Almost immediately after the suit began the parties clashed over the scope of e-discovery. Country Vintner sought a broad universe of emails it thought relevant to the dispute. Gallo argued that retrieving those emails would be unduly burdensome; it would have to interview more than 40 employees and search at least seven servers.

Country Vintner agreed to narrow the field of potential employees and develop keywords, search terms, and/or date restrictions, but otherwise refused to limit its discovery requests. Gallo moved for a protective order estimating that it would cost more than $450,000 to process email data of 24 employees and guard against the privilege waiver. The district court denied Gallo’s motion for a protective order and adopted Country Vintner’s proposal for handling ESI. Gallo did not file an interlocutory appeal of the district court’s discovery order and complied with the court’s ESI instructions.

Gallo won its pretrial dispositive motion on the grounds that under the Wine Act [PDF] Country Vintner’s distribution rights did not prevent Gallo from using another supplier. Gallo then moved to recover its e-discovery costs under Federal Rule of Procedure 54(d)(1), which permits district courts to award the costs of making copies to the prevailing party in a lawsuit unless an express provision regarding costs is made by federal statute or court rule. The majority of expenses Gallo sought were associated with “flattening” and “indexing” ESI, “Searching/Review Set/Data Extraction,” and management of the processing of the electronic data.

Adopting the reasoning of the Third Circuit’s decision in Race Tires America, Inc., v. Hoosier Racing Tire Corp. [PDF], the district court ruled that 28 U.S.C. Section 1920(4) “limits taxable costs to . . . converting electronic files to non-editable formats and burning files to discs.” “Section 1920 enumerates expenses that a federal court may tax as a cost under the discretionary authority found in Rule 54(d).” The district court rejected Gallo’s argument that the cost of making copies includes the costs attendant to processing e-discovery.

The district court also found that the only tasks that involved copying were the conversion of native files to TIFF and PDF formats and the transfer of files onto CDs. The court further rejected Gallo’s argument that the ESI-related costs qualified as fees for exemplification—the act or process of showing or illustrating by example or the authentication of an official transcript of a public record for use as evidence—under either established construction of the term.

Gallo appealed. The Fourth Circuit, also relying on Race Tires America, discounted the effects innovations in litigation-support technology and their concomitant costs as a reason to expand the reach of Section 1920(4) [PDF]. The fact that Gallo would recover only a fraction of its costs though it was the successful litigant was not dispositive. The court noted that the Supreme Court has acknowledged that the presumption is that the responding party must bear the expense of complying with the discovery request. The Fourth Circuit further suggested that Gallo should have filed an interlocutory appeal of the district court’s denial of its protective order.

Lessons Learned?

“Gallo probably should have sought interlocutory review of the district court’s discovery order because the discovery phase is where cost shifting should be addressed,” says Betsy Collins, Mobile, AL, cochair of the ABA Section of Litigation’s Pretrial Practice and Discovery Committee. But Collins also notes that the court’s suggestion was imperfect. “It is not likely that the circuit court would have entertained Gallo’s interlocutory appeal of the denial of the protective order because of the finality rule,” Collins states. “And, even if it did, the appellate court’s abuse of discretion review would probably have led to the same outcome,” says Collins. “The circuit court was unlikely to find that the district court abused its discretion, and the merits of the case would not have been developed.” Conversely, “Gallo had a better opportunity of success with the Fourth Circuit’s de novo review of the district court’s interpretation of § 1920,” says Collins.

Attorneys should pay careful attention in their Rule 26(f) meetings. “Attorneys should be using the party planning meetings to come to comprehensive agreements regarding ESI including (if possible) who should bear the costs and reviewing with their clients what discovery is actually necessary,” says Joan Archer, Kansas City, MO, cochair of the Section of Litigation’s Pretrial Practice and Discovery Committee. “For example, in the District of Kansas the court has propounded guidelines for party discussions regarding e-discovery in Rule 26(f) meetings,” notes Archer. In Country Vintner, however, the court left open the question of whether processing costs could have been taxable had the parties clearly agreed to the production of ESI in a particular format. “Although Gallo complied with the district court’s discovery order, ultimately the Fourth Circuit got the decision right pursuant to the strictures of § 1920(4),” says Collins.

Is It Time to Revise Section 1920?

The Judicial Conference should consider revising Section 1920, according to Collins. In 2002, the Committee on Court Administration and Case Management of the United States Judicial Conference considered and rejected a recommendation that Section 1920 be expanded to cover costs associated with technological advances that had occurred over the previous 20 years [PDF]. “In 2002, however, e-discovery was in its infancy, and it has exploded in the intervening 11 years,” notes Collins. “The courts have spent the last decade catching up with technology and the issues that are caused by it,” says Archer.

Ian S. Clement is a contributing editor for Litigation News.

Keywords: e-discovery, ESI, taxable costs, 28 U.S.C. Section 1920

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