Third Circuit Limits Amount of Costs Recoverable for E-Discovery

By: Chris Placitella @ Mar 23, 2012

Written by James P. Goslee, Esquire

On March 16, the Third Circuit issued an important opinion significantly limiting the amount of recoverable e-discovery costs that can be charged to losing parties in federal court. In Race Tires America Inc. v. Hoosier Racing Tire Corp., the Third Circuit took the rare occasion to wade into the murky world of electronic discovery and provided important clarity on a controversial issue.

In Race Tires, the Third Circuit addressed the contentious issue of determining the extent of e-discovery costs that can properly be charged to a losing party in federal court. Federal Rule of Civil Procedure 54(d)(1) allows prevailing parties in federal litigation to recover “costs,” other than those for attorneys’ fees. The term “costs” is defined by statute to mean, among other things, “[f]ees for exemplification and costs of making copies of any materials where the copies are necessarily obtained for use in the case.” 28 U.S.C. § 1920(4). Until recently this cost-shifting mechanism was relatively uncontroversial and was typically restricted to minor costs of copying documents.

However, with the advent of e-discovery the volume of documents produced and the resulting costs of discovery has increased exponentially. With these increasing costs, the question became whether § 1920(4) allows for the recovery of not only the costs of copying documents electronically, but the costs incurred in preparing these documents for copying. In other words, could the cost-shifting statute be used to recover fees charged by e-discovery consultants and contractors, which can frequently be hundreds of thousands of dollars?

For years district courts have disagreed on the extent of recoverable e-discovery costs. In Race Tires, the Third Circuit finally stepped to the plate to resolve the issue. Writing for the Court, Judge Vanaskie framed the question as “whether § 1920(4) authorizes the taxation of an electronic discovery consultant’s charges for data collection, preservation, searching, culling, conversion, and production.” Judge Vanaskie began his analysis by noting that in contrast to England, America adopted a rule against shifting the expenses of litigation to the losing party based on “the egalitarian concept of providing relatively easy access to the courts to all citizens and reducing the threat of liability for litigation expenses as an obstacle to the commencement of a lawsuit.” He then turned to the statutory text of §1920(4) and Congressional intent. Judge Vanaskie rejected the idea that the term “copying” used in § 1920 encompasses the “numerous services” vendors perform, such as collection, preservation or searching documents.

Relating back to the pre-electronic discovery era, he noted that “[n]one of the steps that proceeded the actual act of making copies in the pre-digital era would have been considered taxable. And that is because Congress did not authorize taxation of charges necessarily incurred to discharge discovery obligations. It allowed only for the taxation of the costs of making copies.”

Ultimately, Judge Vanaskie concluded that “of the numerous services . . . vendors performed, only the scanning of hard copy documents, the conversion of native files to TIFF, and the transfer of VHS tapes to DVD involved ‘copying,” as that term is used in the statute. Therefore, under the statute, no other charges could be taxed to the losing party. As a result, the Court slashed e-discovery costs awarded by the Clerk of Court from $125,580.55 to $30,370.42.

The significance of the Race Tires opinion should not be underestimated. By limiting the scope of costs available to prevailing parties, the Third Circuit eliminated a major barrier to litigation for many plaintiffs and law firms who previously feared potentially ruinous costs if they brought a losing claim. This opinion is also significant as it potentially signals the Third Circuit’s willingness to finally enter the foray of e-discovery disputes, an area they had seemed reluctant to address in the past.