'Winner takes all' emerging as new cost-bearing paradigm
Interplay of "cost taxing" law and "prevailing party" rule dampens aggressive e-discovery demands
You will get what you asked for. And you will get the bill.
This is the e-discovery lesson that emerged from the courtroom of U.S. District Judge Terrence F. McVerry in Pittsburgh earlier this month in a lawsuit over an antitrust violation alleged by a racing tire manufacturer who claimed race sponsors were illegally excluding brands from the event.
The plaintiffs, Race Tires America (RTA) and Specialty Tires of America (STA), mounted an aggressive discovery effort at the start of the case, receiving objections and warnings from the defendants, Hoosier Racing Tire Corp. and Dirt Motor Sports, that the requests were excessive. Judge McVerry granted the plaintiffs’ requests, including them in a pre-trial Case Management Order he signed.
The case did not get very far. Before trial, Judge McVerry dismissed the plaintiffs’ claims and entered summary judgment for the defendants.
Bad news compounded by presentation of e-discovery bills
Bad news for the plaintiffs did not end here. Following the requirements of the Federal Rules of Civil Procedure, at Rule 54, and the statutory provisions of Title 28, US Code Section 1920(4), the defendants presented their discovery costs to the clerk of the court who subsequently adjusted them downward from $389,000.
Still, the clerk “taxed” the plaintiffs more than $367,000 in e-discovery costs alone, representing the amount incurred by the defendants in the antitrust suit.
The "taxation of costs" statute in Section 1920 is not new – it was originally enacted in 1948 – nor is it mandatory. It starts, "A judge or clerk of any court of the United States may tax as costs the following:" and is followed by six numbered items that specify the types of costs taxable. Subsection (4) of Section 1920 addresses the costs at play in the case before Judge McVerry. Until October 2008 it allowed taxation of “fees for exemplification and copies of papers."
Small change in wording, huge consequences in e-discovery
In October 2008, Congress made a small but crucial change to this subsection, replacing the words "copies of papers" with "the costs of making copies of any materials where the copies are necessarily obtained for use in the case."
That slight change will bring wide-ranging consequences to the e-discovery field.
However, although Section 1920 and its six subsections allow the "taxation of costs" in federal litigation, they do not specify the party that benefits from the taxation. To answer this question, one must look to the Federal Rules of Civil Procedure, at Rule 54, which simply states "costs – other than attorney's fees – should be allowed to the prevailing party," unless a law, rule or court order prohibits it.
In short, judges have discretion over awarding costs to the "prevailing party."
In upholding clerk’s decision to tax the plaintiffs’ $367,000 e-discovery costs, McVerry said that, since Section 1920’s October 2008 amendment, "no court has categorically excluded e-discovery costs from allowable costs." McVerry gave no weight to the plaintiffs’ argument that, because Section 1920 does not specifically enumerate e-discovery costs, they are not taxable.
The plaintiffs had argued that standard e-discovery tasks like “electronic document collection, hard drive imagining, and indexing and searching” were not reimbursable under Section 1920.
Decision cuts against grain, says plaintiff’s counsel
Joseph Decker, lead attorney for plaintiff Race Tires America, told ACEDS.org, “The judge adopted a distinct minority view on this issue. Virtually every court has disallowed e-discovery costs. They are not in the statute.”
"Section 1920 talks about the costs of copying materials and 99% of the imaged documents were not used in this case,” he said. “We didn't contest the scanning. Most of the costs of the defendant were processing charges, de-duping and searching.”
In a 25-page opinion, McVerry pointed to the 2008 Congressional amendment of Section 1920(4), grappling with the application of a rule born out of an exclusively paper world.
He noted the distinct conclusions that courts around the United States have reached in interpreting Section 1920. Some courts have taken a narrow view focusing solely on “physical preparation and duplication of documents." Others have factored in "the intellectual effort involved in production.”
While likening the process of e-discovery to the copying of paper, McVerry concluded that “‘exemplification’ in the modern era includes electronic copying.” He pointed, in particular, to an Idaho case where the court awarded $4.6 million for the construction of a litigation database.
‘Taxation’ of e-discovery costs in unreported cases is not uncommon, says famed litigator
“There’s no reason why electronic discovery expenses should be treated in any way other than as a taxable cost. It’s part of reality now and it’s part of the litigation process," said Ervin Gonzalez, partner at Colson Hicks Eidson in Miami and a leading plaintiffs’ attorney who is currently heading a Gulf oil spill case against BP.
“It’s consistent with where the courts have been going,” he said. “Without fanfare, courts throughout the country have been awarding e-discovery costs as part of the reasonable and necessary expenses related to litigation. And they’ve been awarding them to the prevailing parties.”
“Now we have an important decision… setting forth what many judges have already been doing. I think this is the trend going forward. It’s consistent with allowing the court to make the decision based on equitable principles as to who should bear the burden of expensive electronic discovery,” Gonzalez concluded.
Aggressive discovery pursuit led to costly bill
The case originated with the claim by Race Tire America (RTA) that Hoosier Racing Tire had violated antitrust laws through exclusive contracts with Dirt Motor Sports, the dirt track racing sanctioning body that RTA alleged was keeping it out of the market by requiring racers to use specific tire brands.
At the start, based on RTA’s “aggressive” discovery demands, McVerry approved a Scheduling Order that required Dirt Motor Sports to gather and disclose substantial discovery with the help of outside vendors. The defendant produced 490 gigabytes of electronic data that required a search of 270,000 server files. This complied with RTA’s request of 273 discovery items, including the production of metadata fields, .tiff imaging, and 7 million “hits” on potentially relevant files resulting from 442 search terms.
Deborah Pollock-Milgate, lead attorney for defendant Hoosier, told ACEDS.org, “The lesson here is that if you’re going to aggressively seek e-discovery in a case, there are consequences that flow from that. With so much data, parties have to hire vendors, and if you demand information, you may have to pay the bill for that."
E-discovery demands highly technical expertise
To meet the discovery demands, Hoosier hired computer forensics experts to create a litigation database – this after hiring outside experts for collecting and imaging hard drives, scanning documents to create electronic images, processing and indexing data, extracting relevant metadata and converting documents to searchable formats.
McVerry inspected the e-discovery bills submitted by the defendants and found “the services provided were not the type… that attorneys or paralegals are trained for or are capable of providing.” The requirements and technical expertise necessary to retrieve and prepare electronic documents for production were an “indispensable” part of the discovery process, he said.
None of the bills included any legal or paralegal fees for the review of documents for privilege and responsiveness.
McVerry pointed to a gray area of Section 1920(4) concerning expenses that are either “necessary” or merely “for the convenience of counsel.” He noted that the law as it relates to e-discovery is unsettled in many areas of the country and ruled that the defendants’ costs in meeting the plaintiff’s "aggressive" discovery demands were not “puffed, exorbitant or contrived.”
More than 80% of the total costs "taxed" originated in e-discovery demands ordered by the victorious defendants. Decker, the RTA lawyer, said he “feels very strongly” about his chances on appeal and pointed to a 1987 US Supreme Court case, Crawford Fitting Co. v. JT Gibbons, describing Section 1920 as limited in scope and not supportive of a judge’s discretionary taxation of costs for items not directly enumerated in Section 1920.
In the meantime, litigators consoled by mutual discovery’s ancient "broad and liberal" mantra may want to double-check their client’s budget before braving a road to trial submerged in digital deluge.
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