Can You Recover Costs for E-Discovery Services as an Expense of Litigation

By Michael Palumbo

Much has been written about the exploding costs of commercial litigation as a result of discovery of electronically store information ("ESI"), in legal opinions, in law reviews, blogs and in the growing number of publications produced by service providers in this cottage industry. For example, for the year 2009, electronic discovery vendors had revenues equaling approximately $2.8 billion. See Erin Greenwood, Law Practice: A New View, Part 2: E-Discovery Changes Have Some Seeing a Career in Document Review, 97 ABA J. 27 (2011).

To date, a great deal of the discussion has related to duties and obligations of the litigants to preserve and produce ESI and the various techniques and methods available to accomplish those duties and obligations in the most cost-effective manner.[1] Now that a few years have gone by and cases where e-discovery has played a significant role in the litigation have wound their way through the court system to a conclusion, a new issue that is of significant interest to litigants in these cases is coming to the fore: that issue is can a successful litigant recover the tens of thousands (maybe even hundreds of thousands) of dollars spent on e-discovery from the other side as taxable costs. A relatively few appellate courts have addressed this issue, and, as might be expected, there is no uniformity of opinion.

Every jurisdiction has a cost recovery statute (or rule of court). These statutes define what litigation expenses can be "taxed" to the losing party (meaning recovered from).[2] In Arizona, the cost recovery statute is A.R.S. § 12-331, et seq.[3] A.R.S. § 12-332 provides that the following categories of litigation costs can be taxed to the other party: fees of officers and witnesses, costs of taking depositions, compensation of referees, costs of certified copies of papers or records, sums paid to a surety company for any bond or other obligation, and other disbursements incurred pursuant to a court order or agreement of the parties. Of course, this statute, and the opinions interpreting it, arose in the pre-ESI era. In fact, A.R.S. § 12-332 was last amended in 2001.

The pertinent question is how is the taxable cost statute and similar statutes to be applied to ESI-era cases. An opinion from the United States Third Circuit Court of Appeals, Race Tires of America, Inc. v. Hoosier Racing Tire Corp, et al., 674 F.3d 158 (3^rd Cir. 2012), provides some insight.

Hoosier Racing involved antitrust claims in federal court, so the federal cost recovery statute, 28 USC § 1920, was the focal point of the analysis. Expenses that can be recovered per the federal statute are similar to those approved in the Arizona statute. They are (1) fees of the clerk [of the court] and [federal] marshal; (2) fees for printed or electronically recorded transcripts necessarily obtained for the use in the case, (3) fees and disbursements for printing and witnesses, (4) fees for exemplification and the costs of making of any materials where the copies are necessarily obtained for use in the case, (5) docket fees, and (6) compensation of court appointed experts, compensation of interpreters, and salaries, fees, expenses, and costs of [other] special interpretation services.

Hoosier Racing was the successful party, and it applied to the District (trial) Court for the recovery of more than $365,000 in charges imposed by its electronic discovery vendors for such services as hard drive imaging, data processing, keyword searching and format conversion. The District Court, concluding that the E-discovery services fell within sub-section (4) of the statute-fees for exemplification and making copies, awarded Hoosier the amount that it sought, and RTA appealed.


The Court of Appeals, describing the issue as "whether § 1920(4) authorizes the taxation of an electronic discovery consultant's charges for data collection, preservation, searching, culling, conversion and production as either the "exemplification [or] the ...making [of] copies of any materials where the copies are necessarily obtained for the use in the case," reversed the trial court's award of costs. It decided that none of the vendor's services could be regarded as "exemplification." Noting, "[o]f the activities undertaken by the vendors, only the conversion of native files to TIFF (the agreed upon default format for production of ESI), and the scanning of documents to create digital duplicates are generally recognized as the taxable ‘making copies of materials,'" it allowed only approximately $20,000 to be assessed as costs against the losing party. It also allowed an additional $10,000 for the cost of transferring VHS recordings to DVD format under the making copies concept. Thus, the court of appeals reduced the trial court cost award by about 90%.[4]

The Third Circuit rejected the reasoning of other courts that have upheld the taxation of electronic discovery costs because such services are "indispensab[le]...to the ultimate act of production of intelligible electronic documents... [and, thus,] the fees that are incurred in retaining experts to perform the services are unavoidable." Nor was the Court convinced that "the efficiencies and cost savings resulting from the efforts of electronic discovery consultants as justification to tax their charges to the losing side." The Court stated:"the decisions that allow taxation of all, or essentially all, electronic discovery consultant charges, ... are untethered from the statutory mooring. [The statute] does not state that all steps that lead up to the production of copies of material are taxable. It does not authorize taxation merely because today's technology required technical expertise not ordinarily possessed by the typical legal professional. It does not say that activities that encourage cost savings many be taxed."

The Third Circuit acknowledged that equity and other circumstances might justify the full cost of e-discovery, but it could not do so under the federal cost recovery statute as it is currently written. The Court noted that parties in each case had the ability to affect cost-shifting by agreement, pursuant to cost shifting protective orders under federal civil procedure Rule 26(C) or pursuant to the Case Management Order process that is required under Federal Rule of Civil Procedure 26.[5]
A summary of some of the other federal cases that have dealt with cost recovery in the ESI context follows:

• Petroliam Nasional Berhad v. GoDaddy.com, Inc., 2012 WL 1610979, (N.D. Cal. May 8, 2012). In contrast to Hoosier Racing, the District (trial) Court found that work, which was necessary to convert computer data into a readable format, was an essential component of "[t]he cost of reproducing disclosure or formal discovery documents" used in the case. Accordingly, the court awarded $6,365.04. in costs that represented fees for exemplification and costs of making copies.
  
• In Re Online DVD Rental Antitrust Litigation, 2012 WL 1414111, *2 (N.D. Cal. April 20, 2012)-The same judge as above, adjusting the clerk's taxation of $737,838.79 in costs to omit the amount of costs that the court has determined are not allowable ($27,644.56), awarded the defendant (Netflix) $710,194.23 in costs against plaintiffs.
  
• Hecker v. Deere & Company, et al., 556 F.3d 575 (7^th Cir. 2009)- Costs for converting computer data into a readable format are recoverable under 28 U.S.C. § 1920.
  
• BDT Products, Inc. v. Lexmark International, Inc., 405 F.3d 415 (6^th Cir. 2005) - Federal District Court did not abuse its discretion by taxing prevailing party's costs of electronic scanning and imaging, since those activities could be interpreted as "exemplification and copies of papers" under authorizing statute.
  
• Fells v. Virginia Department of Transportation, 605 F.Supp.2d 740, 743 (E.D. Va. 2009)-Federal District Court found that creating electronically searchable documents, i.e. "electronic records initial processing, Metadata extraction, [and] file conversion," is not taxable activity under Section 1920(4)'s language, which permits recovery for expenses "for exemplification and ... making copies of any materials where the copies are necessarily obtained for use in the case."
  
• Mann v. Heckler & Koch Defense, Inc., 2011 WL 1599580, * 9 (E.D. Va., Alexandria Div. April 28, 2011)-Costs of creating database, tasks described as "Searching and Deduping," and "Creation of Native File Database with Full Text and Metadata Extraction," qualify as "copying" as opposed to "creating" and therefore, are recoverable.
  
• In re Scientific-Atlanta, Inc. Securities Litigation, 2011 WL 2671296, (N.D. Ga. Atlanta Div. July 6, 2011)-Court finds that training-related costs, keyword searching costs, and home support costs are not taxable. Regarding the keyword searching, "[s]uch searches are simply the ESI equivalent of having a room full of reviewers physically review paper documents for responsive documents," costs for such a review are not taxable. However, equipment rental charges were necessary to perform the electronic production of documents; therefore, the equipment rental costs of $9,000.00 are taxable.
  
• Fast Memory Erase, LLC v. Spansion, Inc., 2010 WL 5093945 (N.D. Tx., Dallas Div. 2010)-Defendants sought court costs totaling $1,117,625.14 paid to an outside vendor for collecting, processing, and producing electronic documents. Court noted that a majority of district courts have held that costs for data extraction and storage are not recoverable under Section 1920(4). Citing Kellogg, 2009 WL 1457632 at *5; Fells v. Virginia Dept. of Transportation, 605 F.Supp.2d 740, 743 (E.D. Va. 2009); Klayman v. Freedom's Watch. Inc., No. 07-22433-CIV, 2008 WL 5111293 at *2 (S.D. Fla. Dec. 4, 2008); Windy City Innovations, LLC v. America Online, Inc., No. 04-C-4240, 2006 WL 2224057 at *3 (N.D. Ill. Jul.31, 2006). However, the court also noted that one court in CBT Flint Partners, LLC v. Return Path, Inc., 676 F.Supp.2d 1376, 1381 (N.D. Ga. 2009), allowed recovery of all costs for services provided by e-discovery consultant in processing electronic documents for production. In view of the weight of authority declining to tax costs for data extraction and storage, the court sustained plaintiffs objection to $860,533.18 in costs for collecting and processing ESI.

In conclusion, the take away point, at least for cases that are litigated under the Arizona cost recovery statute, is that without an agreement that the prevailing party will be entitled to recover the costs of services provided by e-discovery consultants, expenses for such services are not likely to be recoverable. Similarly, for cases litigated under federal rules and statutes, an agreement pursuant to Rule 26, Federal Rules of Civil Procedure, will be necessary to recover for the services of e-discovery consultants.
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[1] Given the huge costs involved, one might think that "cost-effective" e-discovery is an oxymoron.
[2] Generally, attorneys' fees do not fall within cost recovery statutes. There are separate statutory and procedural rules that impact the recovery of attorneys' fees.
[3] There are different cost recovery statutes for superior (trial) court and the courts of appeals. Since this article focuses on e-discovery, which is part of the trial process, we will deal only with the trial court cost statute - A.R.S. § 12-332 - Taxable Costs and Jury Fees in Superior Court.
[4] Of course, other federal circuit courts could disagree with the Third Circuit's analysis; and, there could be a different result depending on the provisions of the particular cost recovery statute that governs the situation.
[5] There is no equivalent in the Arizona rules of civil procedure for the latter process. However, as noted above the Arizona statute does allow cost recovery when there is an agreement to that effect. (See A.R.S. § 12-332(A)(6))