“Who’s Gonna Pay for All This?” Can Prevailing Litigants Have Their E-discovery Charges Taxed as Costs Against Their Losing Opponents?

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“Who’s Gonna Pay for All This?” Can Prevailing Litigants Have Their E-discovery Charges Taxed as Costs Against Their Losing Opponents?Parties in today’s complex litigation world, and their counsel, need no reminder of the ubiquity of electronic discovery and the tremendous expense it occasions. Even before 2006, when “electronically stored information” (ESI) was expressly added to the federal rules, parties have had discovery obligations regarding electronic documents and data. E-discovery, and the costs associated with it, are not going away. (By some estimates, the volume of data existing in the world doubles every two years.) It is also increasingly common for case management orders to require production ESI in particular formats, with particular metadata fields, with the capability of being searched electronically – all of which entail increased expense, frequently from e-discovery vendors.

So, the question presents itself: To what extent can winning litigants have their e-discovery expenditures taxed as costs to their opponents? The short answer is, a lot less than a winning litigant would want, but perhaps more than a winning litigant might think.

Taxable Costs – The Rules 

Federal Rule 54(d)(1) provides that “[u]nless a federal statute, these rules, or court order provides otherwise, costs – other than attorney’s fees – should be allowed to the prevailing party.” The rule further provides that the clerk of court “may tax costs on 14 days’ notice.” 28 U.S.C. § 1920 in turn defines “costs” for purposes of Rule 54 and sets forth the items that the clerk may properly tax. Relevant to e-discovery, the statute also allows taxation of “fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case” (§ 1920(4)). This subsection of the statute is the battlefield for e-discovery cost fights.

What the Courts Are Saying

Six of the federal courts of appeal have interpreted § 1920(4) in the e-discovery context with varying results. The Third Circuit’s opinion in Race Tires America v. Hoosier Racing Tire Corp. was one of the earliest.  There, the district court’s taxation of more than $350,000 in e-discovery expenses was reversed by the appeals court. The Third Circuit’s central holding was that § 1920(4) covers making copies only, so expenses related to tasks that aren’t directed to copying or its “functional equivalent” cannot be taxed under the statute. This ruling invalidated charges for storage, searching, indexing, and deduplication of data – even for documents ultimately produced in the case. However, charges for converting data from native to TIFF format, scanning of documents to make digital duplicates, and reproduction of media from CDs to DVDs were found to be the functional equivalent of copying and therefore taxable. The court also held that “equitable considerations” – for example, that e-discovery vendors’ services are “specialized” and indispensable to the production of ESI – are not relevant, being “untethered from the statutory mooring” of § 1920. The Fourth and Ninth Circuits have taken similarly restrictive views.

The Federal Circuit adopted a slightly different analysis in CBT Flint Partners, LLC v. Return Path, Inc. It distinguished between “preparatory or ancillary steps” in the ESI production (not taxable) and steps “associated with the creation of an image and preservation of metadata” (taxable). The tasks necessary to convert data to a uniform production format (such as TIFF), performing format conversions, and copying the converted files to production media would all, in the court’s view, be a compensable part of “making copies.” The same court several years later – albeit in a nonprecedential opinion – observed that if an agreement between the parties requires expenditures for particular tasks necessary to conform the production to the parties’ agreement, such expenditures can fall within the ambit of § 1920.

Practice Pointers and Takeaways

  • The law is not settled yet. While most courts tend to distinguish between tasks that are a part of “copying” (taxable) and mere “preliminary steps” to copying (not taxable), it’s not yet clear what tasks fall into which bucket. Courts have disagreed, for example, on the compensability of expenses relating to optical character recognition, supplying confidentiality designations and bates numbering, and extraction and preservation of metadata. Consider the law in your circuit and district carefully when considering a cost request for e-discovery expenses.
  • That said, some costs are pretty clearly out. No court to date has allowed expenses for data hosting or storage (at least in the absence of an agreement between the parties that such costs could be shifted), nor has any court allowed recovery of ESI costs that didn’t relate to documents assembled and produced for one’s litigation opponent (in other words, tasks undertaken for counsel’s own convenience in litigating the case will not be recoverable under § 1920). And the law is also clear thus far that attorneys’ fees incurred in working with ESI are not taxable.
  • Vendor billing clarity is key. A little bit of preparation on the front end can make a big difference on compensability down the road. Have a clear understanding with the e-discovery vendor at the outset as to how it will bill for its services. The vendor must provide time and cost entries that detail exactly the services being provided; both overgeneralization and multi-task entries (the equivalent in this context of “block billing”) are likely to lead to invoices being non-taxable. Ensure that the vendor avoids technical jargon in its billing descriptions; multiple courts have rejected charges because the language used did not convey what work had been done in an understandable way. Keep in mind that the “audience” for these billing submissions is going to be court clerks, the district court, and its law clerks, none of whom are likely to have the same level of technical expertise on e-discovery processes that your e-discovery vendor does.
  • Case management orders and ESI protocols can impact taxability. As noted above, one court of appeals has held that if an ESI protocol requires production in a certain way, the steps necessary to comply with the protocol can be taxed as costs in favor of the prevailing party. Some district courts have followed. On the other hand, it has been held that the parties can by agreement remove from the scope of § 1920 expenses that which would have otherwise been taxable (for example, by agreeing that each side will bear all its own ESI costs). How the case management order or ESI agreement is worded can have definitive impact in an ESI cost fight, so foresight and care in drafting are essential.
  • Keep local rules in mind. Many districts have local rules that can impact ESI discovery in general, the costs associated with it, and the timing for filing cost bills.
  • Proportionality and other Rule 26 issues are not likely to matter much when it comes to taxation of costs. While the federal rules allow for cost shifting in various contexts – notably through the burden and proportionality concepts under Rule 26 – such concepts are not in play under Rule 54(d). An attempt to shift discovery costs as disproportionate or burdensome should be made by objection at the discovery stage, rather than in connection with a motion to tax costs.