Nothing is certain except death and taxes: but in the district courts, not even taxes are certain for e-discovery costs.

Author:Dapper, Kathleen P.
 
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UNDER the so-called "American Rule," parties in litigation are responsible for their own costs, with limited statutory exceptions. (1) Given this general rule, one losing party must have been stunned to recently receive a bill from the prevailing party for the exorbitant amount of $4.6 million for the cost of creating a litigation database. (2) Despite the losing party's protests, the court granted the prevailing party this $4.6 million in electronic discovery ("e-discovery") costs, finding that the expense was reasonable and saved time for the prevailing party's counsel. (3)

While $4.6 million in discovery costs is particularly high, changes in technology and the development of the digital era have forced litigants to devote increasing resources to e-discovery while preparing for trial. (4) Approximately 247 billion emails are sent daily worldwide, and in 2009, more digital data was created than in all prior years combined. (5) Because law firms are often ill-equipped to produce large quantities of electronic information themselves, third-party e-discovery vendors are often hired to compile and catalog electronic data for discovery at substantial expense. (6) These vendors perform discovery tasks that did not exist in the paper era, such as scrubbing metadata from fries and creating keyword searchable databases of documents and files. (7)

Traditionally, each party bears the cost of producing documents requested by the other side during discovery. (8) However, in the federal courts the prevailing party is entitled to tax certain costs to the losing party, including "fees for exemplification and the costs of making copies of any materials" ("[section] 1920"). (9) While this language was developed during the paper era, courts today are challenged to apply the statutory language to the modern technology of e-discovery techniques. (10) One such issue--the taxation of e-discovery costs--contentious. has become particularly. (11) Although United States discovery cost allocation is premised on reciprocity, production--including e-discovery production--is typically asymmetrical, causing one party to bear a far larger burden and cost of production. (12) As a litigation strategy, producing parties therefore take into account e-discovery production costs when deciding whether to litigate or settle a claim and when making discovery requests of the opposing party. (13)

Because the Third Circuit is the only appellate court to address the issue of whether e-discovery costs are taxable, the district courts are split and have used a variety of analytical approaches in addressing the issue. (14) Some district courts have held that scanning is the electronic equivalent of copying, and then compared e-discovery with scanning to conclude that e-discovery costs are taxable. (15) Other courts, however, maintain that e-discovery does not merely replicate documents, like the taxable cost of copying, but rather creates entirely new documents, and is therefore not subject to taxation. (16)

Because there is no consensus regarding the taxation of e-discovery costs and no real guidance from most federal appellate courts, the subject is gaining attention among practitioners and is in need of clarification. (17) In May 2011, in Race Tires America, Inc. v. Hoosier Racing Tire Corp., (18) the Western District of Pennsylvania issued the first opinion from the Third Circuit regarding this issue and taxed the losing party $367,359.36 in e-discovery costs. (19) As one of the most recent cases analyzing the taxation of e-discovery costs, Race Tires is notable for its broad interpretation of the statutory language and of case law from other districts. (20)

This article argues that the Western District of Pennsylvania erred in allowing the taxation of e-discovery costs in Race Tires. E-discovery costs should not be taxable under Section 1920 because e-discovery requires intellectual effort to create new documents rather than merely "copying" existing documents and Section 1920 should be narrowly interpreted to that effect. This article also provides an overview of the taxation of costs generally as well as the applicable federal rules and considers recent district court cases that have decided whether to allow the taxation of e-discovery costs, particularly examining the Western District of Pennsylvania's reasoning in Race Tires. This article argues that the Race Tires court, along with other district courts that have reached the same conclusion, inappropriately taxed e-discovery costs, which are not explicitly taxable under Section 1920.

  1. Taxation of Costs in General

    Under the Rule 54 of the Federal Rules of Civil Procedure, "costs-other than attorney's fees-should be allowed to the prevailing party," (21) The meaning of the term "costs" is defined by [section] 1920. (22) Section 1920 provides that a judge or clerk may tax "[flees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case." (23)

    When Rule 54 and Section 1920 are considered together, the federal courts have the authority to tax any costs enumerated in Section 1920 but also have the discretion to decline to tax any costs. (24) However, any cost outside Section 1920 is outside the discretion of the courts and may not be taxed. (25) There is a presumption in favor of awarding costs to the prevailing party, although certain circumstances can overcome this presumption. (26)

  2. Reconciling Modern Technology with Statutory Language: The District Courts Struggle with the Taxation of e-Discovery Costs

    Without any clear guidance from federal statutes, the Supreme Court or most Circuit Courts, district courts have struggled to resolve the issue of taxation of e-discovery costs. District courts have taken a variety of analytical approaches, and the result is muddled case law that make s it difficult to predict whether e-discovery is taxable in any particular district. District courts allowing the taxation of e-discovery costs have presented four main arguments: scanning is the electronic equivalent of copying; e-discovery is a highly technical service; taxation will address the policy consideration of reducing discovery demands; and e-discovery is a necessary expense in complex cases. (27) District courts denying the taxation of e-discovery costs have relied upon three major arguments: a narrow interpretation of Section 1920; the intellectual effort involved in e-discovery is not taxable; and e-discovery is the type of work that would normally be completed by an attorney if technology was not used. (28)

    1. Taxation After Representation: e-Discovery Costs Allowed

      Perhaps the most frequently cited case regarding the allowance of e-discovery costs is a case that does not directly address e-discovery, the Sixth Circuit's decision in BDT Products v. Lexmark International. (29) In BDT Products, the prevailing party submitted a bill of costs for $348,303.41, including costs for electronic scanning and imaging of documents. (30) The losing party appealed the taxation of these costs, contending that the recovery of costs for electronic scanning and imaging is not authorized by Section 1920. (31) The Sixth Circuit held that these costs are taxable, reasoning that "electronic scanning and imaging could be interpreted as 'exemplification and copies of papers"' under 1920(4). (32)

      Other courts justify the taxation of e-discovery costs because e-discovery is a highly technical service that attorneys are incapable of completing themselves. (33) In a recent case from the Eastern District of Pennsylvania, Hank's Beverage v. Ajinomoto, (34) the prevailing parties submitted bills of costs for a total of $576,060.08. (35) The majority of this requested cost was to compensate a third-party e-discovery vendor "to search for, and/or to recreate, copies of evidence in electronic form." (36) Although the losing parties objected to the taxation of the e-discovery costs, the clerk found such costs taxable as exemplification because "neither attorneys nor employees of attorneys are competent to conduct such a search, or to recreate such documents in paper format." (37)

      The Northern District of Georgia focused on policy considerations when allowing the taxation of e-discovery costs in CBT Flint Partners v. Return Path. (38) In CBT Flint, the prevailing party submitted a bill of costs that included $243,453.02 in fees for an e-discovery vendor. (39) When the losing party objected to these costs as not taxable under Section 1920, the court first noted that the services provided by the e-discovery vendor were highly technical, then advocated a policy in favor of taxation. (40) According to the court, e-discovery is necessary in the electronic age, and the "enormous burden and expense of electronic discovery" is well known. (41) The Northern District of Georgia held that "taxation of these costs will encourage litigants to exercise restraint in burdening the opposing party with the huge cost of unlimited demands for electronic discovery." (42)

      Another district court, the District of Idaho, presented a fourth reason to allow the taxation of e-discovery costs in Lockheed Martin Idaho Technologies v. Lockheed Martin Advanced Environmental Systems. (43)

      In Lockheed, the prevailing party sought $4.6 million in costs for creating a litigation database to organize electronic documents. (44) The court found that this type of e-discovery was necessary due to the case's complexity and the millions of documents to be organized. (45) Additionally, the court held that the $4.6 million cost was not unreasonably expensive and that the e-discovery "saved immense time" for the attorneys. (46) As such, the court allowed the taxation of e-discovery costs under 1920(4). (47)

    2. No Taxation After Representation: e-Discovery Costs Denied

      District courts denying the taxation of e-discovery costs focus on a strict interpretation of the statutory language in Section...

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