Not So Fast: Race Tires Court Gives a Flat to Momentum for Broad ESI Cost Shifting Under 28 U.S.C. §1920

A Third Circuit Court of Appeals panel, including the Hon. Thomas I. Vanaskie, one of the leading judicial authorities in e-discovery, has spoken — e-discovery-related cost recovery pursuant to 28 U.S.C. §1920 has limits; the costs must bear a reasonable connection to duplication of materials in the traditional sense to be recoverable by a prevailing party. As the first United States Court of Appeals decision to directly address this closely watched issue, this opinion may disarm a potentially powerful weapon in the already limited arsenal of parties burdened with excessive e-discovery costs.

The case is Race Tires America, Inc., et al. v. Hoosier Racing Tire Corporation et al., No. 11-2316 (3d Cir. Mar. 16, 2012) . It began in September 2007, when Race Tires filed its $90 million suit accusing Hoosier Racing Tire Corp. and Dirt Motor Sports Inc. of violating the Sherman Act by allegedly monopolizing the market for specialized tires. In September 2009, U.S. District Judge Terrence F. McVerry granted motions for summary judgment by Hoosier and Dirt Motor, finding that they had not committed antitrust violations, which was later affirmed by the Third Circuit. The defendants subsequently sought reimbursement of prevailing party costs pursuant Fed. R. Civ. P. 54(b) and §1920.

Throughout the course of the proceedings, Hoosier and Dirt Motor, using separate e-discovery vendors, claimed that they had incurred in excess of $365,000 in e-discovery costs, for activities including preservation and collection of ESI, processing of the collected ESI, keyword searching, culling for privileged material, scanning and TIFF conversion, optical character recognition (“OCR”) and conversion of videos to DVD format. In the application for costs, the defendants cited §1920(4) to recoup the costs of these activities, claiming that they represented fees for “exemplification” and the “costs of making copies of any materials where the copies are necessarily obtained for use in the case.” 28 U.S.C. §1920(4). The District Court found the amounts charged by the e-discovery vendors taxable as “the electronic equivalent of exemplification and copying” and awarded the costs to the defendants. The ruling was certainly not without precedent from other District Courts, including those within the Third Circuit. In several cases, including In re Aspartame Antitrust Litigation, 2011 WL 4793239 (E.D. Pa. 2011), CBT Flint Partners, LLC v. Return Path, Inc., 676 F.Supp. 2d 1376 (N.D. Ga. 2009), and Tibble v. Edison Int’l, (No. CV 07-5359 (C.D. Cal. Aug. 22, 2011), courts have awarded broad e-discovery costs under §1920(4).

Succintly framing the issue, the Race Tires Court stated “the question presented here is whether §1920(4) authorizes the taxation of an electronic discovery consultant’s charges for data collection, preservation, searching, culling, conversion, and production as either ‘exemplification [or] the …making [of] copies of any materials where the copies are necessarily obtained for use in the case.’” Writing for the panel, Judge Vanaskie prefaced the holding by conceding that the cost burdens of e-discovery are quite real and onerous, and becoming increasingly so. He also noted the 2008 amendments to §1920(4) which, in a nod to today’s digital world, clearly broadened the scope of cost recovery by replacing “copies of papers” with “the costs of making copies of any materials.” However, after carefully outlining the legislative history of §1920, the Court found that broad-based cost recovery for most e-discovery activities simply exceeds the statutory mandate.

The Court made short work of defendants’ claim that the e-discovery activities encompassed “exemplification” under the statute, holding that the term applied only to the production of “illustrative evidence or the authentication of public records.” The ESI services provided in this case served neither end.

Moving on to the “copying” element of the statute, the Court held that certain of the vendor activities –including conversion of the native files to TIFF images, the scanning of documents for the purpose of creating digital duplicates and the copying of the videos to DVD — clearly fall within the definition of copying as contemplated by the language and legislative history of §1920(4). The charges for those services, however, totaled only approximately $30,000 – a fraction of the total ESI costs incurred and awarded. The Court specifically noted that the fact that the e-discovery services are “indispensable” to the discovery process, involve “highly technical” expertise or result in significant cost savings — factors cited by other courts in support of broader cost awards — are simply not appropriate criteria by which to assess taxability under the plain language of the statute. Citing numerous decisions denying ESI processing costs that do not entail “making copies,” Judge Vanaskie pointedly opined that contrary decisions that allowed the taxation of “all, or essentially all,” e-discovery costs charged by consultants, including that by the District Judge in the Race Tire case, are “untethered from the statutory mooring.” Importantly, however, the Court further noted that the presumption under the Federal Rules that parties bear their own e-discovery expenses can be tempered, where appropriate, by a cost shifting application under Rule 26(c)’s  proportionality scheme.

In sum, the Race Tires decision has significantly slowed the momentum towards broad-based shifting of ESI costs for prevailing parties pursuant to 28 U.S.C. §1920(4), certainly within the Third Circuit. However, unless and until the Supreme Court provides guidance on this issue, the option to seek such costs in other jurisdictions remains viable. Regardless of jurisdiction, prevailing parties should always at least seek reimbursement of copying expenses, including conversion, scanning and other duplication related costs, for both paper and ESI, and ensure that to accomplish this, their vendors clearly document the costs involved in those activities from the outset of their involvement in the case.