Taxing ESI Costs: The Impact of the Third Circuit’s Decision in Race Tires
By Kluger, Kaplan, Silverman, Katzen & Levine, P.L. September 25, 2012
By Steve Silverman
Rule 54 of the Federal Rules of Civil Procedure allows the prevailing party to recover its costs, other than attorney’s fees. However, as electronic discovery becomes more of a presence in litigation, whether the staggering costs often associated with ESI can be recovered by the prevailing party is a ripe issue and not all circuits are in agreement. In the recent opinion of Race Tires Amer., Inc. v. Hoosier Racing Tire Corp., __ F.3d __ (3d Cir. May 16, 2012), the Third Circuit severely limited the types of ESI costs that are recoverable to the prevailing party.
In May 2011, the Western District of Pennsylvania found that the defendant, Hoosier Racing Tire Corp. was entitled to $367,000 in costs for collecting and producing ESI using third-party vendors after Hoosier Racing prevailed on a motion for summary judgment. As grounds for the decision, the court relied on 28 U.S.C. § 1920(4), which allows for taxation of “the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” The plaintiff, Race Tires, propounded 273 discovery requests and 442 search terms seeking ESI. When Hoosier Racing prevailed at summary judgment and was able to recover the costs of hard drive imaging, keyword searching, and data production, Race Tire appealed.
On March 16, 2012, the Third Circuit reversed the district court’s decision. The Third Circuit found that section 1920(4) does not authorize “the taxation of an electronic discovery consultant’s charges for data collection, preservation, searching, culling, conversion, and production.” The court further reasoned that “although there may be strong policy reasons in general, or compelling equitable circumstances in a particular case, to award the full cost of electronic discovery to the prevailing party, the federal courts lack the authority to do so, either generally or in particular cases, under the cost statute.”
The Third Circuit, in analyzing Section 1920(4) found no evidence that Congress intended to shift all the expenses of ESI production to the losing party:
Section 1920(4) does not state that all steps that lead up to the production of copies of materials are taxable. It does not authorize taxation merely because today’s technology requires technical expertise not ordinarily possessed by the typical legal professional. It does not say that activities that encourage cost savings may be taxed. Section 1920(4) authorizes awarding only the cost of making copies.
Accordingly the Third Circuit reduced the costs award to only those costs that it determined met Section 1920(4)’s definition of “copying”: (1) conversion of native files to TIFF format; (2) scanning of paper documents; and (3) transfer of VHS tapes to DVD format.
Prior to the Third Circuit’s reversal of the district court, a series of opinions nationwide granted liberal recovery of ESI costs. For example, in In re Aspartame Antitrust Litigation, 2011 WL 4793239 (E.D. Pa. Oct. 5, 2011), three defendants recovered over $500,000 in ESI costs for a huge variety of ESI-related tasks, including creation of a litigation database, storage of data, imaging hard drives, keyword searches, deduplication, data extraction and processing; and technical support. In Tibble v. Edison International et al., 2011 U.S. Dist. LEXIS 94995 (C.D. Cal. Aug. 22, 2011), the district court allowed e-discovery costs to a prevailing defendant for producing over 500,000 pages of responsive discovery. These cases, decided before the Third Circuit reversed the Pennsylvania District Court, allowed for liberal recovery of ESI costs. However, in light of the recent opinion from the Third Circuit, it is important for litigants to be aware that the bulk of ESI costs may no longer be recoverable. As the cost of ESI discovery continues to climb, it would be helpful for Congress to review and revise Section 1920 to either expressly include or exclude ESI in order to clarify the statute and to prevent inconsistency in the courts when interpreting it.
For more information or if you have questions about the new e-discovery rules, please contact Steve Silverman, Chair of Kluger Kaplan’s ESI Discovery Group at 305.379.9000 or firstname.lastname@example.org
Steve Silverman, Esq. – Chair, Kluger Kaplan ESI Discovery Group
Marilyn Kohn, Esq.
Michael Landen, Esq.
Jonathan Korin, Esq.