Novel case taxing e-discovery costs faces pivotal appellate review, as parties and non-parties await anxiously

Under federal law at Title 28 US Code 1920, the clerk plays an important role in determining the allocation of costs at the end of federal cases. The law permits the judge or clerk to “tax” several categories of costs, including, at subsection (4), “the costs of making copies of any materials where the copies are necessarily obtained for use in the case.”

 

That provision, in tandem with Rule 54(d) of the Federal Rules of Civil Procedure, which says "costs – other than attorney's fees – should be allowed to the prevailing party," has now become the e-discovery cost-shifting vehicle in federal litigation. The once-obscure law is now at the center of discussions and debate in the growing field of e-discovery, whose costs amount to billions of dollars in litigation and investigations throughout the United States.

 

The Race Tires America case was the first in the Western District of Pennsylvania in which a party submitted e-discovery expenditures as part of its bill of costs. Federal Judge Terrence McVerry’s order, allowing e-discovery as taxable costs, was the first in the district.

 

Congress amended Section 1920(4) in October 2008, replacing the previous language that focused on “fees for… copies of paper” to “fees for… the cost of making copies of any materials where the copies are necessarily obtained for use in the case.” Courts have since grappled with the scope and meaning of that new language.

 

The Third Circuit in the Race Tires case must not only seek to determine the congressional intent, but also consider three important questions, according to plaintiffs’ attorneys for Race Tires America (RTA):

 

1)      Was the trial court wrong in holding that expenses totaling $367,000, which covered a variety of activities associated with the preservation, capture, processing, key word searching, privilege searching, sorting, producing, scanning and copying of electronic documents are all taxable under Section 1920(4)?

 

2)      Was the trial court correct in deciding that even though electronic data was captured but not used or produced in the case it was “necessarily obtained for use in the case”?

 

3)      Did the trial court abuse its discretion in finding that the e-discovery-related expenses were reasonable, if it did not determine if the billable rates and hours were reasonable?

 

The prevailing defendant, Hoosier Racing Tire Corporation, has asked the appellate court to focus on the detailed e-discovery case management trial court order to which both parties agreed. Signed by Judge McVerry on January 10, 2008, it stipulated that the parties produce a list of keywords with which to search potentially responsive documents by the end of that month. The parties also agreed to comprehensive e-discovery guidelines, including inclusion of metadata fields, searchable text versions of files, and production of all electronically stored information (ESI) as “tiff” images.

 

“The substance of the Court’s Memorandum and Order on costs… is straightforward,” says the September 12, 2011, appellate brief of defendant, Hoosier. “The electronic discovery and copying costs were traced by the District Court to the Scheduling Order the parties adopted ….”

 

Despite the case management order, the parties jostled over electronic discovery, as the plaintiffs repeatedly requested court intervention to compel broad ESI production requests and often were forced to repeat their call for production by the defendants. Judge McVerry called RTA’s e-discovery requests “aggressive.”

 

In all, the defendants produced 490 gigabytes of data in response to the 442 search terms and 119 requests imposed by RTA. A May 2008 search of defendants’ computers produced more than seven million “hits” on potentially responsive information.

 

The defendants amassed roughly $469,000 in litigation expenses -- $389,000 of which was attributable to the e-discovery requests of the plaintiffs. After the defendants filed an amended bill of costs, chief court clerk Robert Barth taxed the plaintiffs $367,000 for the e-discovery costs of the defendants. Judge McVerry denied RTA's request for appointment of a special master to determine the “reasonableness and necessity” of the bills.

 

In his May 6, 2011 opinion, McVerry wrote, “The only ‘special expertise’ required to resolve [plaintiffs’] Motion to Review Taxation of Costs is an understanding that e-discovery has become a necessary and costly function of civil litigation.”

 

He noted that from the time of the congressional amendment to Subsection (4) in October 2008, “no court has categorically excluded e-discovery costs from allowable costs.”

 

Joseph Decker, of Babst, Calland, Clements and Zomnir in Pittsburgh, who is the lead plaintiffs’ attorney, told ACEDS that the amendment should not have been factored into McVerry’s decision.

 

“Section 1920 is clear, in my mind, in that it doesn’t allow these costs,” Decker said. “Until Congress expressly addresses electronic discovery, the statute is to be applied exactly by what it says.”

 

RTA objects to the combining of all “electronic evidence activities” by the court, which deemed them the 21^st Century equivalent of making photocopies.

 

“The overwhelming majority of courts have examined each type of task to see if it qualifies as ‘copying,’ and decline to tax electronic evidence expenses for anything except scanning or tiffing,” RTA's brief says.

 

“If the documents… were paper documents, as opposed to electronic documents, the expense of locating, preserving, gathering them…, sorting and reviewing them would not be taxable because those tasks are not ‘making copies.’ The same reasoning applies to electronic documents,” it continues.

 

Accordingly, RTA does not dispute the $20,000 awarded by the court for scanning expenses. It challenges the finding that all fees incurred by defendants were “reasonable” and the case law the court cited in reaching a decision.

 

Clerk of court Robert Barth, who occassionally writes opinions when he decides what costs to tax, says there are cases that come down on both sides of the issue.

 

“It is very difficult to get the clerk’s taxation overruled in our court,” Barth says. “Parties generally do not even file good objections to e-discovery costs.”

 

Decker is confident the Race Tire decision will be overturned, noting that a $268,000 taxation of e-discovery costs in the only case Barth's opinion cites was vacated in August by the US Circuit Court of Appeal for the Federal Circuit. It reversed an award of e-discovery costs by the Atlanta US district court.

 

Deborah Pollack-Milgate, at Barnes & Thornburg in Indianapolis, who represents the defendants in Race Tire, downplays the significance of that decision, saying “the basis of the order had nothing to do with electronic discovery.”

 

In that case, an underlying patent issue resolved the appeal and the appellate court vacated the order taxing costs because the defendant was no longer the prevailing party.

 

Second case of e-discovery cost-taxing is deferred pending RTA appeal 

While the Race Tires appeal has moved forward, a second case involving a request to tax $218,000 in e-discovery costs has arisen in the same district in a patent infringement case. The prevailing defendants are demanding that medical supplier, Respironics, pay the e-discovery bill. Barth told the parties this month he will await appellate guidance from the Race Tires appeal to resolve the issue.

 

If the Third Circuit affirms, federal courts could see a reduction in overly aggressive e-discovery demands by plaintiffs who fear they’ll end up footing e-discovery bills, for themselves and opponents.

 

“I don’t know if you’ll see e-discovery costs taxed in the same way they were taxed in Race Tires,” Pollack-Milgate says. “But the courts will have to deal with them in one way or another. And parties may be more circumspect in dealing with e-discovery knowing that someone’s going to have to pay the costs.”