In a ruling likely to disappoint corporate defendants, the Third Circuit recently reversed a lower court’s taxation of more than $365,000 in eDiscovery costs, finding that the district court’s reading of the underlying taxation statute was “untethered” from the statutory language.

In Race Tires America, Inc. v. Hoosier Racing Tires Corp., the appellate panel found several flaws in the Western District of Pennsylvania court’s affirmance of the taxation of eDiscovery costs to two defendants that had retained third-party vendors to search, process, and produce electronically stored information, or ESI.

The defendants, after a grant of summary judgment in their favor, had moved for taxation of their vendor costs under Federal Rule of Civil Procedure 54 and 28 U.S.C. Section 1920(4), which permits the 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.”

The Western District, in a May 2011 decision, found that the third-party vendors performed tasks that were highly technical and not the type that attorneys or paralegals could provide. Because these services were “necessarily incurred” in the process of producing ESI in the parties’ agreed-upon format, the Western District held that the eDiscovery costs were taxable. The plaintiff appealed the ruling to the Third Circuit.

The Third Circuit reversed the Western District’s order, finding that the terms “exemplification” and “making copies” are not synonymous. The appellate court rejected the argument that producing documents in electronic format qualified as “exemplification” on the grounds that defendants’ vendors did not create illustrative evidence (which would conform with prior judicial interpretations of the term “exemplification”).

The court did, however, uphold the taxation of approximately $30,000 in costs for the conversion of native files to TIFF format (which had been agreed upon by the parties for production of ESI), conversion of VHS recordings to DVD format, and the scanning of documents to create duplicates.

Importantly, the Third Circuit also rejected the Western District’s ruling that eDiscovery costs incurred in the process of producing ESI are taxable under the “making copies” language of Section 1920(4). The court noted that Section 1920(4) does not permit taxation of costs for all steps leading up to the production of copies of materials; it merely authorizes taxation of costs for “making copies.”

Perhaps anticipating the argument that its ruling deprives defendants of an important means to mitigate ever-rising eDiscovery costs, the Third Circuit reminded the parties of their ability to seek relief from onerous discovery demands under the cost-shifting provisions of the Federal Rules.

Plaintiffs, in particular, will breathe more easily after the Third Circuit’s decision in Race Tires, which sharply circumscribes the type of eDiscovery costs that are taxable and at least temporarily denies corporate defendants a potentially powerful weapon to resist overbroad eDiscovery demands. Corporate defendants, on the other hand, should not overstate the impact of the ruling, which contains some potentially important language for defendants.

To begin, consistent with the weight of national authority, Race Tires permits the taxation of costs for imaging paper documents and file conversion—a not insubstantial cost in the typical case. Moreover, the Third Circuit’s explicit mention of the district court’s cost-shifting powers may prompt producing parties to become more aggressive in seeking cost-shifting or cost-sharing orders early in a litigation.

Finally, it remains to be seen whether other circuits will follow the Third Circuit’s narrow reading of Section 1920(4). District Courts in other circuits have noted that, for a variety of reasons, merely handing over electronic documents in their native format to the opposing side is not typically an option in litigation, and that reading Section 1920(4) in a way that does not account for the processing and related costs that must be borne to comply with an agreed-upon production order ignores the reality of modern litigation. Thus, there is some likelihood that other circuits will disagree with the Third Circuit and hold that eDiscovery costs are taxable.

Our E-Discovery and Data Management Group can help clients manage complex technological, legal, and logistical challenges of electronic discovery and creatively develop cost-effective, defensible strategies for compiling, storing, and protecting vital information. For more information on this decision or how to reduce eDiscovery costs generally, please contact Practice Leader Philip N. Yannella at 215.864.8180 or yannellap@ballardspahr.com. 


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