Co-authored by: Gil Keteltas

Given the significant costs of electronic discovery in complex litigation, it is no surprise that an increasing number of parties are litigating whether e-discovery costs are taxable against a losing party under 28 U.S.C. § 1920(4).

The Third Circuit recently weighed in on this question in Race Tires America, Inc. v. Hoosier Racing Tire Corp., reversing the trial court and holding that only “approximately $30,000 of the more than $365,000 in electronic discovery charges taxed” by the district court – charges involving scanning and the conversion of native files to TIFF format – constituted “[f]ees for exemplification [or] the costs of making copies of any materials where the copies are necessarily obtained for use in the case.”

The Third Circuit rejected the lower court’s conclusion that defendant’s costs for hard drive imaging, data processing and keyword searching were recoverable as an indispensable part of the process of creating copies of electronically stored information (ESI) for production.

Given the “the significant role” of e-discovery in modern litigation, and the activities required to preserve, collect, process, and review “huge volumes of data generated as a result of the information technology and communication revolutions,” the Third Circuit found it “imperative to provide definitive guidance to the district courts in [the Third] Circuit on the question of the extent to which electronic discovery expenses are taxable.”

Apart from its conclusion, a few additional points from the decision are noteworthy:

  • Although the Court acknowledged “there may be strong policy reasons in general, or compelling equitable circumstances in a particular case, to award the full costs of electronic discovery to the prevailing party,” it concluded there was no statutory basis to do so.  Indeed, the court criticized decisions to the contrary as “untethered from the statutory mooring.”
  • The Court reminded parties who believe they have compelling equitable reasons to seek protection from the burden or expense of electronic discovery that they can appeal to the district court’s discretion under Fed. R. Civ. P. 26(c) and seek an order “conditioning discovery on the requesting party’s payment of the costs of discovery.”  Also, as discussed in the Federal Circuit’s recent decision in In re Ricoh Co. Patent Litigation, in the course of litigation, the parties can allocate e-discovery costs in a cost sharing agreement and that agreement will control the ultimate taxation of those costs.
  • The Court bemoaned the “notable . . . lack of specificity and clarity” in the vendor invoices and the difficulty in identifying the “services actually performed.”  This is also an increasingly common theme – the Federal Circuit in Ricoh similarly concluded that generic statements on invoices are “unhelpful in determining whether . . . costs are taxable.”  Greater clarity in vendor invoices may streamline the recovery of taxable costs for prevailing parties.

In the Wall Street Journal Law Blog, Joe Palazzolo described the Third Circuit’s ruling as a “sizzling opinion” that “probably isn’t going to please corporate defendants.”  You can decide whether all the appellate talk of zetabytes and 57.5 billion iPads meets your definition of “sizzle” (it meets ours).  But this decision is yet another reason for corporate parties to sharpen their early focus on steps to reduce the scope and burden of electronic discovery through cooperation or rules-based advocacy of proportionality in the discovery process.  This may not replace the desire of a prevailing party to try to shift its vendor costs to an opponent, but it may meaningfully reduce such costs.