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Few e-discovery costs are taxable for prevailing parties

4th Circuit clarifies recoverable costs under Title 28 of the U.S. Code Section 1920(4)

See the breakdown of Gallo's e-discovery costs in this online exclusive.

The 4th Circuit clarified what e-discovery costs are taxable under Title 28 of the U.S. Code Section 1920(4) in its April 29 decision in The Country Vintner of North Carolina v. E & J Gallo Winery Inc. Put bluntly, their answer was: not much.

The parties, embroiled in a dispute over who had the right to sell a certain Argentinean wine wholesale, found themselves at odds over how to conduct e-discovery. Country Vintner wanted pretty much all of Gallo’s communication related to its relationship with the wine, and Gallo moved for a protective order, claiming Country Vintner’s requests were “overbroad.” The district court denied Gallo’s motion and adopted Country Vintner’s e-discovery proposal.

Less than two months after Gallo started producing documents, the district court, then the 4th Circuit, granted Gallo summary judgment on claims under both the North Carolina Wine Distribution Agreements Act and the North Carolina Unfair and Deceptive Trade Practices Act. As the prevailing party, Gallo sought to recover its e-discovery costs and filed a bill for $111,047.75.

Under the statute, a prevailing party can recover costs for “making copies.” Of all the costs that Gallo asserted, the district court ruled that only transferring files to CDs and converting native files to TIFF and PDF formats counted as making copies, and so Gallo could only recover $218.59. The 4th Circuit affirmed this ruling.

The appeals court noted that Gallo might have had some other recoverable costs, but because it “included various multi-task entries,” such as “indexing,” the court couldn’t determine if any taxable costs were hiding in those entries.

This serves as a reminder to in-house counsel to be detailed when writing a bill.

“[In] every entry you’ve got to say what you’re doing, why you’re doing it and the result that was obtained,” says Quarles & Brady Partner William Hamilton. “That doesn’t mean you document every minute, but it has to be task-focused. Make sure when someone’s reading the bill, [he] can understand what was done, why it was done, the purpose and what was obtained.”

However, Franklin Zemel, a partner at Arnstein & Lehr, thinks that whatever extra costs Gallo might have recovered would have been “minor.”

“I read that as sort of like, in the circus parade, the guy coming in with the broom at the end, cleaning up,” he says.

Minor Recoveries

Gallo argued that the unique nature of e-discovery makes things like processing and indexing necessary when “copying” electronically stored information (ESI). According to the decision, though Gallo “concedes that this process was far more involved than that necessary to copy paper documents, [it] argues that just as copying a table or dress requires a different approach than copying a paper document, copying ESI also requires a different approach.”

But the 4th Circuit did not agree, aligning itself with the 3rd Circuit’s reasoning in Race Tires Am., Inc. v. Hoosier Racing Tire Corp.: “a prevailing party may recover costs associated with copying or duplicating its files, but it may not receive reimbursement for any other ESI-related expenses.” The 4th Circuit was not convinced that Gallo’s other expenses were part and parcel of the “copying” process, and it acknowledged that this necessarily means very few e-discovery costs will be recoverable. The court reviewed the legislative history of the statute and came to the conclusion that its finding aligned with the statute’s intent, regardless of technological advances that may have made discovery more expensive.

“That Gallo will recover only a fraction of its litigation costs under our approach does not establish that our reading of the statute is too grudging in an age of unforeseen innovations in litigation-support technology,” the court wrote. “The Supreme Court has emphasized that ‘costs almost always amount to less than the successful litigant’s total expenses,’ and § 1920 is ‘limited to relatively minor, incidental expenses.’”

“Just because you’ve got a technological development doesn’t mean that’s automatically a cost that’s going to be passed onto the other side,” Hamilton says. “The worst thing in the world that any counsel can think … is to somehow consider e-discovery as a form of a copying service.”

Upfront Battle

Though this ruling at first blush seems distressing for in-house counsel who routinely deal with out-of-control e-discovery costs, there are other ways to control costs. The court here is just saying that “the mechanism to get the costs back is not under 28 U.S.C. § 1920,” says Greenberg Traurig Shareholder David Panzer. “There may be an opportunity through some strategic planning to find a way to recover the costs.”

In-house counsel should focus their efforts at the beginning of a case, not after the fact, and make an effort to keep costs proportional to the case’s value, Hamilton says. “The battle has to stay up front.”

Zemel suggests updating contracts to “treat ESI discovery costs as if you’re drafting a prevailing party attorney’s fee provision.” If you have an agreement in writing to shift e-discovery costs to the prevailing party at the end of a case, you’re a lot more likely to actually recover them than by submitting a bill under this statute.

“If the parties understand that they can tax these enormous expenses against each other if they win, don’t they all sort have an incentive to cooperate?” Zemel asks. “I think they would.”

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