E-discovery expenses can be significant. Can they be taxed to the losing party as standard (although now high tech) exemplification fees or the costs of making copies?

In Race Tires America, the U.S. Court of Appeals for the Third Circuit limited taxable e-discovery costs to scanning and file conversion. Scanning and file conversion are typically not the big ticket items of an e-discovery invoice so, in the Third Circuit at least, most of your e-discovery costs would not be taxable.

Under 28 U.S.C. § 1920(4), which codifies the “American” rule of limiting cost shifting (the Court summarizes nicely how we came to this rule and the 1853 law that first established the “American” rule), only fees for exemplification or the costs of making necessary copies are taxable.

The Third Circuit determined that among ALL the e-discovery services undertaken (and billed), which included (1) preservation and collection of ESI, (2) processing the collected ESI, (3) keyword searching, (4) culling privileged material, (5) scanning and TIFF conversion, and (6) optical character recognition conversion, only scanning and TIFF conversion and OCR were the equivalent of making copies. These were the only charges allowed to be taxed against the losing party.  

 

The District Court allowed $125K (of $143K originally requested) to be taxed, the Third Circuit reduced that to allow only $30K to be taxed.

In providing its rationale, the 3rd Circuit takes us down memory lane (for those who remember the pre-digital era). Way back in the early 2000s, most document collection and review involved (1) going to the client site, a warehouse, or opposing counsel’s office, (2) reading paper documents one by one (no deduplication there!), (3) physically applying post its to documents (hence the etymology of the term “tag”) with the appropriate designation (I recall a red sticker for “Privileged” and a green sticker for “Responsive”).

The Court notes that all these steps are the equivalent of electronic data collection, processing, keyword searching, and culling for privileged materials. It states: “None of the steps that preceded the actual act of making copies in the pre-digital era would have been considered taxable.”

The 3rd Circuit supported the District Court in finding that none of the OCR and tiff conversion work done by the law firm’s litigation support department was taxable.

This decision may protect “the little guy” who goes after a large corporation and need not fear, if unsuccessful, being hit with huge adversary’s e-discovery bill.

Another possible impact: Race Tires may put the squeeze on e-discovery vendors as their customers will understand they are on the hook at the end of the day, regardless of the outcome of the case.

The court recognizes there is a division of opinion on this issue. Race Tires may bring us closer to unanimity.

Sidebar:
In a slam against the e-discovery vendors used in the case, the court noted:

DMS [Dirt Motor Sports, Inc., one of the defendants] acknowledged that the invoices of its vendor, CCC [Capital City Consulting], “were exceedingly confusing and inconsistent.” As a result, DMS mistakenly included duplicate invoices, and asserted that its actual e-discovery costs [were] $241,139.37, an amount that was almost $88,000 less than its original claim.

The invoices that Hoosier and DMS submitted in support of their Bills of Costs are notable for their lack of specificity and clarity as to the services actually performed. For instance, Preferred Imaging invoices appended to the Bill of Costs thousands of dollars in charges for have thousands of dollars in charges for “EDD Processing” without explaining what that activity encompasses. And while Preferred Image‘s use of the phrase “Performing Searching/Filtering/Exporting” may be less obtuse, the invoices provide no indication of the rationale for these activities, nor their results in terms of the actual production of discovery material. These activities also amount to thousands of dollars in charges. The CCC invoices are similarly replete with technical jargon that makes it difficult to decipher what exactly was done.

Tips for e-discovery providers include

1. Make your invoices specific and clear.
2. Explain the rationale for the service performed
3. Avoid technical jargon.

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