United States: "Making Copies" — Third Circuit Substantially Curbs Race Tires eDiscovery Award

Key Points

• The Third Circuit narrowly construed §1920(4) to permit taxation of eDiscovery costs for "making copies" of electronic documents, such as costs to scan paper documents into electronic format or to convert electronic documents into TIFF image format.
• The Court rejected using §1920(4) to shift the cost of broader eDiscovery expenses to the losing party, and held that it was improper for a court applying the statute to consider a litigant's conduct in discovery or the technical expertise required to produce electronic documents.
• The Court emphasized that broader eDiscovery costs can be shifted to other parties through a protective order under Federal Rule 26(c), a targeted cost-sharing agreement between parties, or through a request for sanctions in response to conduct alleged to be in bad faith.

Over the past year, we have reported on the growing number of federal court decisions shifting eDiscovery costs to the losing party by taxation under Federal Rule 54(d). Two decisions by district courts in the Third Circuit, Race Tires America, Inc. v. Hoosier Racing Tire Corp. (W.D. Pa. 2011) and In re Aspartame Antitrust Litigation (E.D. Pa. 2011), notably broadened the types of eDiscovery costs that could be considered taxable under Rule 54(d). Notwithstanding this trend, the U.S. Court of Appeals for the Third Circuit ruled on March 16, 2012 in Race Tires that the kind of eDiscovery costs that may be taxed against a losing party is substantially limited. The Third Circuit ruled that only certain limited categories of eDiscovery costs — i.e., those constituting "copying" of electronic materials — are properly taxable under Rule 54(d).

Case Background

Plaintiff Specialty Tires of America (STA) filed suit against Hoosier Racing Tire Corp (Hoosier) and Dirt Motor Sports (DMS) alleging that Hoosier's exclusive supply contracts with DMS and other sanctioning bodies were anticompetitive and violated sections 1 and 2 of the Sherman Act. STA sought more than $80 million in damages and attorney's fees. After two years of litigation and substantial discovery, the District Court in September 2009 granted summary judgment to defendants on all counts, finding that STA had failed to establish "antitrust injury" (i.e., that defendants' conduct was of the type the antitrust laws were intended to prevent, and that such conduct caused STA's injury). The Court of Appeals for the Third Circuit affirmed the summary judgment ruling in July 2010.

Both Hoosier and DMS then filed bills of cost against STA under Federal Rule 54(d), which provides that "costs" be "allowed to the prevailing party." Federal statute 28 U.S.C. § 1920 enumerates the kinds of "costs" that may be awarded. Section 1920(4) permits taxing costs that cover "fees for exemplification and the costs of making copies of any materials." The District Court affirmed the Clerk of Courts' assessment awarding $125,581 to Hoosier and $241,789 to DMS for a wide array of eDiscovery work performed by the defendants in the course of the litigation. Such work included imaging of hard drives, conversion of electronic documents to a searchable and reviewable format, and the creation of a litigation document database.

On STA's appeal of the District Court's decision, the Third Circuit reduced the award of costs to about $30,000, permitting taxation of only defendants' costs of scanning paper documents into electronic format, the conversion of electronic documents to TIFF images, and the conversion of VHS race recordings to DVD format.

Electronic Document "Copies" are Taxable under§1920(4)

The Third Circuit in Race Tires concluded that the 2008 amendment of§1920(4), which modified permissibly taxable costs from "copies of papers" to "copies of any materials," was intended to expand the reach of the statute to costs beyond making copies of paper documents. The Court therefore affirmed the taxation of costs against plaintiff STA that resulted from defendants' expense to scan paper documents into electronic image format and to convert electronic documents to TIFF image format. In support, the Court cited the broader consensus among courts that these types of commonly incurred eDiscovery costs are within the bounds of §1920(4).

The Third Circuit's endorsement of taxing electronic file conversion costs is of particular note. The sizable volume of electronic discovery in today's complex litigations can result in considerable expense merely to convert files into a format reviewable by attorneys. Within this category, plaintiff STA had further objected to taxation of conversion costs for electronic documents not "necessarily obtained for use in the case" — another requirement of§1920(4) — likely on the ground that not all converted documents were actually produced by the defendants. However, the Third Circuit declined to further limit the award, stating that because the category of costs were taxable, the amount to tax was within the sound discretion of the district court. Moreover, the Third Circuit did not find an abuse of discretion in taxing "all scanning and TIFF conversion costs" "in light of the volume of [electronic documents] produced."

Broader eDiscovery Costs are not Taxable under§1920(4)

The Third Circuit construed the statutory term "making copies" more narrowly than did the District Court below (and some courts in other jurisdictions). Where other courts had concluded that certain broader eDiscovery services, such as search term filtering and setting up an electronic document database, were the "21st Century equivalent of making copies" or were "an indispensible part of the discovery process," and therefore taxable, the Third Circuit rejected such reasoning as "untethered from the statutory mooring" of §1920(4).

The Court also clearly rejected the consideration of additional factors when assessing the amount or category of costs to tax that other courts had cited in support of their decisions to tax broader costs under §1920(4). The Court held that the statute does not permit consideration of either the expertise of the person(s) performing eDiscovery services or the nature of the conduct of the losing litigant in pursuing eDiscovery when determining which costs, if any, are taxable.

Instead, the Third Circuit noted that parties seeking to shift the expense of eDiscovery must consider other alternatives already provided for in the Federal Rules. Parties can seek cost-shifting for unreasonably burdensome discovery through a Rule 26(c) protective order. Parties can strike a bargain with the other side to share costs where an eDiscovery burden will benefit both sides, such as in creating a shared online electronic document database. Parties can also seek sanctions (under Rule 37) if they believe the other side's bad faith conduct has resulted in unwarranted discovery costs.

The Future after Race Tires' Wild Ride

Race Tires does not change the fact that eDiscovery costs will remain a critical concern in any sizable litigation today. Knowledgeable counsel should be looking for any means to offset the substantial costs involved in discovery of large volumes of electronic documents. The Third Circuit in Race Tires has solidified judicial precedent that prevailing parties can potentially recoup the significant costs for electronic document "copying." However, parties looking to successfully tax even these costs will need to keep thorough and accurate records of these costs and can expect a challenge to the contention that the services sought to be taxed involve "copying."

Race Tires also underscores the importance of a carefully planned strategy concerning electronic discovery at the outset of a case, and perhaps long before any actual discovery has commenced. To take advantage of cost shifting under the protective order provisions of Rule 26(c) or to recognize opportunities to strike bargains with the other side that save costs, litigants must thoroughly understand their structures and systems, have mapped out what sources of electronic documents are reasonably accessible, and gather evidence — to convince the court, if necessary — that certain eDiscovery costs should be borne by an opposing party.

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