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District Court Taxes Losing Litigant $367,359 in E-Discovery Costs

By John W. Joyce, Litigation News Associate Editor – September 16, 2011

Disputes regarding the taxability of e-discovery costs, particularly in federal court, have escalated arm-in-arm with increasingly sophisticated demands for ESI. Harsh sanctions for noncompliance from two recent Pennsylvania federal court orders highlight this apparent trend.

Specifically, creative litigators are beginning to go straight to court clerks to recover e-discovery costs. The two recent orders direct that costs and expenses incurred compiling, formatting, and producing electronically stored information (ESI) are taxable against the losing party under 28 U.S.C. § 1920. Each has ordered in excess of $300,000 in e-discovery costs against the losing party.

The district court judge in the first case has already affirmed one of the clerk’s orders. The other is briefed and pending a motion to review before the trial judge.

Taxation of E-Discovery Costs
Federal Rule of Civil Procedure 54(d) provides courts discretion to award costs to a prevailing party. This discretion is limited: Courts may only award costs described in 28 U.S.C. § 1920.

Courts typically evaluate whether to tax e-discovery costs under section 1920(4). This subsection permits recovery of “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.”

“The courts have thrown down the hammer on parties who don’t fully comply with e-discovery obligations, so it’s important to be fully forthcoming, even if the cost is high,” says Richard S. Stockton, Chicago, cochair of the ABA Section of Litigation’s Technology for Litigator Committee. “Those costs should be taxed under section 1920,” maintains Stockton.

Race Tires America
In Race Tires America, Inc. v. Hoosier Racing Tire Corp. & Dirt Motor Sports, Inc. [PDF], a tire supplier filed an antitrust case in the U.S. District Court for the Western District of Pennsylvania. The plaintiff alleged that a competitor, Hoosier Racing Tire Corporation (Hoosier), and a motorsports racing sanctioning body, Dirt Motor Sports, Inc. (DMA), entered illegal exclusive supply contracts.

The plaintiff went full throttle on discovery during the litigation. Nearly a dozen discovery motions were filed, most by the plaintiff. Each defendant engaged forensic computer experts to collect and image hard drives, scan and index documents, extract metadata fields, and convert documents to the required searchable format.

The plaintiff imposed 442 search terms for DMA to examine on its systems for ESI, propounding 273 discovery requests, including 119 requests for ESI. To comply, DMA copied 490 gigabytes of electronic data and more than 270,000 files from its servers.

Hoosier imaged 19 hard drives from five custodians. It produced ESI with metadata and in a format that was immediately key-word searchable.

The district court granted summary judgment in favor of defendants. The clerk of court taxed the plaintiff with $125,580 in e-discovery costs incurred by Hoover, and $241,788 for DMS.

The District Court Decision
The plaintiff filed a motion for review with the district court, arguing that e-discovery costs are not taxable under section 1920 (4). The court denied the plaintiff’s motion.

Analyzing cases from several jurisdictions, the court recognized the difficulty inherent in applying statutory terms such as “exemplification” and “copying” that “originated and developed in the world of paper” to modern day ESI discovery practice. The most central consideration supporting taxation of e-discovery costs, the court decided, was Congress’s 2008 amendment to section 1920.

This amendment changed the description of recoverable costs from “fees for exemplification and copies of papers” to “fees for exemplification and the costs of making copies of any materials.” Since that amendment, the district court found that “no court has categorically excluded e-discovery costs from allowable costs.”

Hank’s Beverage Co. v. Ajinomoto Co., et al.
About the same time, the Third Circuit upheld the dismissal of price fixing claims against aspartame manufacturers in Hank’s Beverage Co. v. Ajinomoto Co., et al. [PDF]. After winning on appeal, three defendants filed a bill of costs seeking over $575,000 in discovery costs.

At the end of July, the clerk of the court for the Eastern District of Pennsylvania issued an order that allowed “exemplification costs” to three of the defendants in amounts of $161,418.93, $211,513.03, and $192,373.87 to defendants Ajinomoto, Nutrasweet, and Holland respectively.

The clerk, in a 70-page (285-footnote!) order, stated that there is a “heavy presumption” that the prevailing party is automatically entitled to costs if they are the type set forth by section 1920, which governs taxation of costs in federal courts.

As in Race Tires America, the clerk noted the 2008 change to the language of section 1920(4). Accordingly, it approved the e-discovery costs pursuant to Federal Rule of Civil Procedure 54(d)(1) and 28 U.S.C. § 1920(4). The plaintiffs have filed and briefed a motion for review with the district court.

Specifically, the clerk in Hank’s Beverage Co. noted multiple times in its order that:

[T]here is a heavy presumption241 in favor of “automatically”242 taxing those types of costs listed in 28 U.S.C. § 1920243 which the prevailing parties both actually incurred (as evidenced by a sworn affidavit)244 and necessarily incurred for their effective preparation (judged in light of the situation existing when the costs in question were actually incurred, without regard to whether the costs relate to items which were actually used).245

(emphasis original). The clerk also stated in three different spots in the order that:

The costs of hiring a private company that possesses the technology to search for, and/or to recreate, copies of evidence in electronic form, for the purpose of making the alleged facts contained in the exhibits more clear to the finder(s) of fact, are taxable as exemplification under 28 U.S.C. § 1920(4)279 as generally, neither attorneys nor employees of attorneys are competent to conduct such a search, or to recreate such documents in paper format.280

Have the Courts Properly Applied the Amended Statute?
“E-discovery is an important part of litigation these days, and while the statutory language of 28 USC §1920 hasn’t quite caught up with modern practice, the courts have done a good job filling in the gaps,” says Stockton.

Race Tires America in particular acknowledges that other courts have struggled to determine whether costs for tasks such as scanning documents are “necessary” and recoverable under section 1920, or only “for convenience of counsel” and thus not recoverable. In deciding that the ESI costs were necessary to the litigation, the Race Tires court found it important that the costs incurred were largely due to the demands of the parties, particularly the (unsuccessful) plaintiff, including the incorporation of ESI requirements in the case management order.

The court stressed as a final note that, because of its unique facts, the ruling should not be considered a bright-line rule for all future disputes. This caution did not appear to dissuade the clerk in Hank’s Beverage, if in fact he was even aware of the Race Tires America opinion. (The Hank’s Beverage order does not cite to Race Tires America.)

“The [Race Tires America] judge is trying to say that one size doesn’t fit all in discovery disputes,” says Stockton. “That said, this is a well-reasoned, precedent-filled decision that other courts will find persuasive.” If the district court upholds the costs order, the same may be said about Hank’s Beverage.

Keywords: litigation, e-discovery, taxability, Pennsylvania federal court

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