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Although some courts lately have granted substantial e-discovery costs to the prevailing party in a lawsuit, the 3rd Circuit recently put the brakes on such awards in an opinion written by Judge Thomas Vanaskie, a noted e-discovery expert.
On March 16, in Race Tires America, Inc. v. Hoosier Racing Tire Corp. et al., the appeals court adopted a conservative view of the types of e-discovery costs recoverable by a prevailing party in a federal lawsuit.
In civil suits, the prevailing party is entitled to recover certain costs from the losing party. Prior to 2008, the U.S. Code allowed a winner in a lawsuit to recover “fees for exemplification and the costs of making copies of papers.” Recognizing the digital age, Congress in 2008 amended language in the Code from “papers” to “any materials,” thereby explicitly permitting courts to award costs incurred in producing electronically stored information (ESI) during discovery.
The key issue for federal courts remains to be interpreting what parts of the expensive collection, processing and production of ESI are included in the terms “exemplification” and “making copies of any materials.”
In its first decision addressing the issue, the 3rd Circuit held that only the costs of “scanning and file format conversion” are recoverable by a prevailing party. The court excluded all other e-discovery costs from the district court award. As a result, the court reduced the defendants’ award from $367,000 to $30,000.
“Race Tires has significantly slowed the momentum toward broad-based shifting of ESI costs for prevailing parties, certainly within the 3rd Circuit,” says Mark Sidoti, a Gibbons director.
In the underlying lawsuit, Race Tires America, Inc., a tire supplier, sued Hoosier Racing Tire Corp., a competitor, and Dirt Motor Sports, Inc. d/b/a World Racing Group (DMS), a motorsports sanctioning body, in the Federal District Court for the Western District of Pennsylvania. The plaintiff alleged the defendants violated the Sherman Act by monopolizing the racing tire market. The suit cited exclusive supply contracts between Hoosier and a number of sanctioning bodies, including DMS.
Following discovery of ESI, the district court dismissed the case on the defendants’ motion for summary judgment and awarded them a total of $367,000 for their e-discovery costs for work done by third-party vendors and consultants. The work was “highly technical” and “not the type of services that attorneys or paralegals are trained for or capable of providing,” the court said.
However, when the case reached the 3rd Circuit, the court identified just three e-discovery costs that were recoverable in the case: the conversion of electronic files to a format that had been previously agreed upon by the parties, the scanning of paper documents to create digital duplicates and transferring VHS tapes to DVD.
In his opinion, Judge Vanaskie cited the statute’s restriction of cost awards to fees for exemplification and copying and the “‘American rule’ against shifting the expense of litigation to the losing party,” saying these “define the full extent of a federal court’s power to shift litigation costs absent express statutory authority.”
“The court said, essentially, that there have always been unrecoverable costs that are attendant to producing copies of physical documents, and today there are a lot of unrecoverable costs attendant to producing copies of ESI. Race Tires makes clear that many e-discovery processes—such as gathering, preserving, processing, searching, culling and extracting ESI—are not recoverable in the 3rd Circuit,” says Michael Zabel, a member of Cozen O’Connor’s commercial litigation group. “Unfortunately for litigants, these can be some of the most expensive costs in e-discovery.”
Zabel says the 7th Circuit and some district courts have taken a broader view, finding that because technology is expanding, so should the interpretation of what counts as “exemplification” and “making copies.”
Experts make several recommendations based on the developing case law.
“Regardless of jurisdiction, prevailing parties should always seek reimbursement of copying expenses, including conversion, scanning and other duplication related costs, for both paper and ESI,” Sidoti says.
To accomplish this, he recommends asking vendors to clearly document the costs involved in those activities from the outset of a case.
“Have a definitive agreement between the parties as to what file format (such as TIFF or PDF) your ESI will be produced in,” Zabel adds. “Under the decision, you can recover the cost of converting files into an agreed-upon electronic format.”
In general, in-house counsel should be aware that courts are still defining the extent of recoverable e-discovery costs, and they must negotiate accordingly.
“Be wary if counsel or a vendor suggests to you that e-discovery processing costs will be recoverable at the end of a case, cautions Jay Yelton, a partner at Miller Canfield. “The landscape is still unsettled as to what e-discovery processing costs are and aren’t recoverable under the statute.”
He advises using the “meet and confer” conference to define e-discovery cost allocations early in the proceedings.
“Counsel should try to come to an agreement [during meet and confer] as to what e-discovery processing costs will be borne separately, shared during discovery and subject to recovery,” Yelton says. Parties also should memorialize areas of agreement and address areas of disagreement with the court during the subsequent scheduling conference, he adds.