Is There Real Recovery For Costs Associated With E-Discovery? It Depends.

Discovery is an essential part of any case, and processing electronically stored information (“ESI”) is often extremely costly. This process entails identifying custodians, collecting their data and then reviewing, analyzing and culling the material to determine what ESI is responsive to your adversary’s requests. Evaluating work-product and privilege protections and creating the required disclosure log are tasks that add another layer of time and expense to ESI disclosure. Aside from a court’s discretion to shift discovery costs as part of disclosure management, federal courts are split regarding which e-discovery costs may be awarded to a prevailing party under 28 U.S.C. § 1920(4), also known as the Cost Statute, which speaks in general, discretionary language about “exemplification” and “making copies.”

The Applicable Statute And Rule

Rule 54(d)(1) of the Federal Rules of Civil Procedure gives the prevailing party the opportunity to obtain “costs” at the discretion of the court clerk or the court itself, “unless a federal statute, these rules, or a court order provides otherwise.” However, Rule 54(d)(1) provides no guidance as to what “costs” may be taxed. Although district courts have the authority to award costs under Rule 54(d)(1), not all expenses in connection with a lawsuit are recoverable.[1] Section 1920(4) enumerates certain “expenses that a federal court may tax as costs under the discretionary authority found in Rule 54(d),”[2]: “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” Significantly, this provision does not expressly refer to e-discovery costs. Historically, courts have interpreted this text as meaning the making of physical copies (i.e., paper copies of paper documents). However, in 2008, Congress amended Section 1920, modifying part (4) (previously, fees for exemplification and “copies of paper”) to now refer generally to the costs of making “copies of any materials.”[3] As a result of this statutory modification, courts have ruled, often inconsistently, as to whether “copies of any materials” extends to the extensive costs associated with processing ESI. Over time, court decisions have provided some clarification and guidance as the courts wrestle with how best to interpret the general, discretionary language of Section 1920 and Rule 54 as they apply to the novel issues related to e-discovery.

Evolution Of Section 1920(4) Among the Circuits

Tracking the statutory language, courts in the Fifth Circuit have consistently held that costs for copies are recoverable if they are reasonably necessary for use in a case.[4] For real meaning, we have to look at specific cases. In Rundus, the Fifth Circuit affirmed the district court’s decision permitting the recovery of costs related to an adversary’s request for “paper documents to be converted into text-searchable electronic files.”[5] In so doing, the Fifth Circuit also upheld the district court’s position that “[t]he costs of copying documents produced to the opposing party during discovery are necessarily obtained for use in the litigation and are taxable.”[6] Accordingly, the defendant recovered $14,547.23.

The Seventh Circuit has also held that costs for copies are taxable if they are reasonably necessary for use in a case.[7] In Hecker, the Seventh Circuit affirmed the district’s court’s decision and awarded $164,814.43 for costs associated with the selection and conversion of electronic documents.

Even prior to the 2008 Amendment of Section 1920, the Sixth Circuit determined that “electronic scanning and imaging could be interpreted as exemplification and copies of papers” and permitted the recovery of costs related to e-discovery services.[8]

The Federal Circuit has also held that the Cost Statute extends to all “costs of producing a document electronically.”[9] In Ricoh, plaintiff Ricoh sought the production of emails and other internal documents. Initially, the parties were unable to agree on the form of production but ultimately agreed that defendant Synopsys would produce documents using Stratify, an e-discovery company that provided document processing, review, production and hosting services. Under Section 1920(4), the district court awarded the full cost of using Stratify as “fees for exemplification and the costs of making copies of any materials where the copies were necessarily obtained for use in the case.” On appeal, the Federal Circuit agreed with the court’s characterization of the costs. “The act of producing documents is not so narrowly construed as to cover only printing and Bates-labeling a document.”[10] “Thus, the costs of producing a document electronically can be recoverable under [S]ection 1920(4).”[11]

During this evolutionary process, courts have reached inconsistent conclusions about e-discovery issues. Some courts have been inclined to award costs relating to e-discovery, see In re Aspartame Antitrust Litig.,[12] (“award[ing] costs for the creation of a litigation database, storage of data, imaging hard drives, keyword searches, deduplication, data extraction and processing.”) Other courts have refused to award the costs related to processing electronically stored data. See Rawal v. United Air Lines, Inc.,[13] (refusing to award electronic processing costs as taxable).

Recently, the Third Circuit weighed in on the issue of what type of e-discovery costs are recoverable under 28 U.S.C. § 1920(4). In Race Tires America, Inc. v. Hoosier Racing Tire Corp., [14] the district court concluded that more than $365,000 in charges imposed by electronic discovery vendors, covering such activities as hard drive imaging, data processing, keyword searching and file format conversion, are taxable costs, without specifying which charges constituted “[f]ees for exemplification” and which were “costs of making copies.”[15] During its analysis, however, the court examined whether Section 1920(4) authorized the taxation of e-discovery charges for data collection, preservation, searching, culling and conversion, as well as whether production was either “exemplification” or the “making of copies.” Understandably, the party that lost at trial and against which e-discovery costs were taxed argued that such e-discovery costs did not fall within the Section.

The Third Circuit analyzed the meaning of “exemplification” and “making copies” in connection with the new technical data at issue. First, because the e-discovery “vendors’ work did not produce illustrative evidence of the authentication of public records, the court held that such charges did not qualify as fees for ‘exemplification.’”[16] Second, the court found that “[o]f the activities undertaken by the vendors, only the conversion of native files to TIFF and the scanning of documents to create digital duplicates were generally recognized as taxable making copies of materials.”[17] The court found the charges for scanning and TIFF conversion to be about $20,000.[18] Third, the court also found that the cost of transferring VHS recordings to DVD format qualified as “making copies” and affirmed the award of $10,286.91 for such costs.[19] In taking a narrow view of the costs allowed under Section 1920, the Third Circuit reduced the district court’s award of $365,000 in taxable costs to a mere $30,370, limiting a prevailing party’s recovery of e-discovery costs to the scanning of hard copy documents, the conversion of native files to TIFFs, and the transfer of VHS tapes to DVDs. The Supreme Court denied a petition for certiorari, and, in so doing, rejected an opportunity to address and resolve this issue.

Following the Race Tires decision, the Fourth Circuit addressed the issue of what expenses related to ESI are taxable under Section 1920(4).[20] In Country Vintner, Gallo sought more than $100,000 in discovery-related costs for (i) “flattening” and “indexing” ESI, (ii) “searching/review set/data extraction,” (iii) “TIFF production” and “PDF production,” (iv) electronic “Bates numbering,” (v) copying images onto a CD or DVD, and (vi) “management of the processing of electronic data,” “quality assurance procedures,” “analyzing corrupt documents and other errors” and “preparing the production of documents to opposing counsel.”[21] Citing the Race Tires decision, the trial court allowed recovery of only $218.59 for “TIFF Production,” “PDF Production” and “CD Copy,” holding that processing charges did not constitute “making copies” under Section 1920(4). Gallo appealed and the Fourth Circuit affirmed the district court’s ruling, stating “subsection (4) limits taxable costs to those identified by the district court: converting electronic files to no-editable formats and burning the files onto discs.”[22] In coming to this conclusion, the court focused on the plain language of the statute while taking into account the congressional intent behind the law.[23] Like the Third Circuit’s analysis in Race Tires, the Fourth Circuit took a narrow view of the costs recoverable for ESI under Section 1920(4).

Although the Second Circuit and other circuits have yet to weigh in on this issue, it is clear that there is a split among the circuits. It is uncertain whether the narrow interpretation of Section 1920(4), adopted by the Third and Fourth Circuits, will influence future decisions in other circuits, or whether they will develop their own analyses. However, in light of recent cases, it is important for parties to consider all necessary factors and differing analyses before moving for e-discovery costs under the Cost Statute.