Prevailing Party Recovery of ESI Costs: Recent Case Law and Practice Pointers

Use of electronic media for information storage has exploded in both proportion of information created and stored and in absolute terms. ¹Sedona Conference Best Practices Commentary on the Use of Search and Information Retrieval Methods in E-Discovery, 8 Sedona Conf. J. 198, 193 (2007). The steps necessary to collect, process and ultimately produce electronically stored information (“ESI”) are multi-layered, complex and expensive.

Accordingly, production of ESI is a significant cost for participants in modern day litigation. A prevailing party’s ability to recover some of these costs in federal court has been the subject of several recent decisions by various United States Courts of Appeals and District Courts. ²The authors are not aware of state court case law specifically discussing post judgment recovery of ESI costs. However, counsel should investigate post judgment cost recovery authority in the jurisdictions in which they practice.

A leading position is emerging that many expenses incurred to manage and process ESI are not taxable as costs, and instead only expenses related to the actual production of ESI are properly taxable.

Because the case law still varies by jurisdiction, and differentiating between these two cost categories is not always clear, counsel should be familiar with the varying approaches courts have taken when deciding whether or not to tax ESI costs.

Furthermore, counsel should make sure that invoices from ESI vendors and in house discovery consultants distinguish between and emphasize later stage review and production of ESI from other cost categories that courts have deemed non-compensable.

I. Basis for Prevailing Party
Post Judgment Cost Recovery

The Federal Rules of Civil Procedure permit a court to tax costs in favor of a prevailing party, excluding attorney fees, “[u]nless a federal statute, these rules, or a court order provides otherwise.” ³Fed. R. Civ. P. 54(d)(1).

Congress defined the term “cost” as used in Rule 54(d) to include, among six specified items:

“[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” ⁴28 U.S.C. §1920(4). In 2008, the statute’s reference to “copies of papers” was replaced with “the costs of making copies of any materials.” Judicial Administration and Technical Amendments Act of 2008, Pub. L. No. 110-406, Sec. 6, 122 Stat. 4291 (2008).

This provision, 28 U.S.C. § 1920(4), is the statutory basis for the recovery of costs associated with the copying and production of documents originating as ESI.

The definition of “cost, ”however, has been narrowly construed. Indeed, the U.S. Supreme Court recently reaffirmed a narrow reading of the cost statute in Taiguchi v. Kan Pacific Saipan, Ltd. ⁵Taiguchi v. Kan Pacific Saipan, Ltd., 566 U.S. __, 132 S. Ct. 1997 (2012). The Taiguchi court concluded that although the statute permitted the recovery of costs for “compensation of interpreters,” the recovery of the cost for document translation would not be allowed.

In so holding, the fourt confirmed that §1920 is to be construed narrowly and contextually and that “taxable costs are limited to relatively minor, incidental expenses.” ⁶Id. at 2006.

Furthermore, the court emphasized that taxable costs are a fraction of the nontaxable expenses borne by litigants for attorneys, experts, consultants and investigators, and costs almost always amount to less than the successful litigant’s total expenses in connection with a lawsuit. ⁷Id. (citing 10 C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure 2666 at 203 (3rd Ed 1998)).

II. Recovery of ESI Expenses as Costs

Recently, several U.S. Courts of Appeals and District Courts have addressed the issue of whether, and to what extent, a prevailing party may recover costs incurred to produce electronic documents. In deciding this issue, courts acknowledge the difference between “copying” and producing paper documents versus ESI documents.

The uniqueness of ESI requires many discrete steps prior to actual copying and production in order to make the information usable. ⁸The Sedona Conference sets forth six areas in which e-discovery is different than paper discovery: (1) volume and duplicability; (2) persistence; (3) dynamic and changeable content; (4) metadata; (5) environment independence and obsolescence; and (6) dispersion and search ability. THE SEDONA PRINCIPALS: Best Practices Recommendations & Principles For Assessing Electronic Document Production 1 (Jonathan M. Redgrave et al. eds., 2d ed. 2007). Some courts have determined that the multifaceted process necessary to produce ESI is the 21st century equivalent of “making copies,” and thus recoverable under the cost statute. ⁹CBT Flint Partners LLC v. Return Path, Inc., 676 F. Supp. 2d 1376, 1380-81 (N.D. Ga. 2009), vacated and remanded by Patent interpreted by
654 F.3d 1353 (Fed. Cir. 2011).

Other courts, however, including two federal Courts of Appeals, have determined the cost statute only permits taxing costs related to later stage review and specific production tasks, such as copying, scanning, Bates stamping, imaging, assignment of confidentiality and protective order designations and other production related tasks.

Intellectual efforts applied in the course of e-discovery—including locating, organizing, searching and analyzing ESI documents—are, as a general matter, not taxable costs. Because there remains a grey area between these cost categories, a close examination of the precepts behind the case law is necessary.

A. Limited Recovery Approach:
Race Tires and County Vintner

Two cases decided in 2012 and 2103 by the Third and Fourth Circuit Courts of Appeals, respectively, take a narrow view of the cost statute in the ESI context. ¹⁰See Country Vintner of North Carolina, LLC v. E&J Gallo Winery, Inc., 718 F.3d 249 (4th Cir. 2013); Race Tires America, Inc. Hoosier Racing Tire Corp., 674 F.3d 158 (3rd Cir. 2012). The Race Tires and Country Vintner cases have informed subsequent district court taxing order decisions. ¹¹ Abbott Point of Care, Inc. v. Epocal, Inc., CV-080S0543-NE (N.D. Ala. 2012) (noting that since Race Tires nearly all district courts considering this issue have held that the costs of creating and maintaining an electronic discovery database are not recoverable under the costs statute, except insofar as the costs involve scanning documents or converting documents to an agreed-upon format) (citing cases).

In Race Tires, the Third Circuit reversed the district court order that taxed essentially all electronic discovery vendor charges to the non-prevailing party. After reviewing the statutory history of the cost statute, the Third Circuit explained that which costs are taxable under §1920(4) is a matter of statutory construction. ¹²Race Tires America, Inc., 674 F.3d at 163 Thus, in order to be taxed as costs, ESI-related expenses must qualify as either “exemplification” or “making copies.”

The court first found that none of the costs sought involved “exemplification” because they were not costs associated with producing illustrative evidence or authentication of public records. ¹³Id. at 166

The court further determined the vendor’s charges for assisting with the collection, preservation, searching and culling of ESI was “not making copies” under the cost statute. ¹⁴Id. at 166-67.

Rather, according to the court, taxable costs consisted only of those incurred to scan files to create digital duplicates, convert files for production, and transfer of VHS recordings to DVD format.

In reaching this decision, the Third Circuit rejected arguments that ESI vendor services should be taxable because they (1) are highly technical and beyond counsel’s expertise and (2) create efficiencies and cost savings compared to printing paper copies. ¹⁵Id. at 171 (”Section 1920(4) does not state that all steps that lead up to the production of copies of materials are taxable. It does not authorize taxation merely because today’s technology requires technical expertise not ordinarily possessed by the typical legal professional. It does not say that activities that encourage cost savings may be taxed. Section 1920(4) authorizes awarding only the costs of making copies.”)

The court equated the expensive and necessary processing of ESI to the process employed in the pre-digital era to produce documents. As such, because the pre-digital pre-production costs were not considered taxable costs, neither should ESI processing and pre-production tasks.

In the court’s words, “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.” ¹⁶Id. at 169.

More recently, in Country Vintner of North Carolina, LLC, the Fourth Circuit affirmed a taxing order limiting recovery only to those expenses incurred to convert native files to TIFF and PDF format, to perform Bates numbering and to transfer those files to CDs. ¹⁷Country Vintner, 718 F.3d at 260-61.

Like Race Tires, the court concluded that most of the ESI costs were not “exemplification” and therefore not taxable costs.

Specifically, the court determined that the following expense categories were not taxable as costs of making copies:

• (1) flattening and indexing ESI, which involved initial processing of data involved in decompressing container files;
• (2) searching, review and data set extraction; and 
• (3) management, hosting, and processing electronic data. ¹⁸Id. at 252-53. 

The court noted that if the case had involved a situation in which production of metadata were required, taxable costs would have included costs associated with any technical processes necessary to copy ESI in a format that included such information. ¹⁹Id. at 261.

The court also highlighted the district court’s finding that it was possible that there were other ESI-related expenses that were taxable and that the party had included in its bill of costs. However, because the vendor’s invoices included various multi-task entries and did not differentiate such costs from the non-taxable costs, such costs were not readily discernible and therefore were not awarded. ²⁰Id. at 254.

B. Broader Interpretations of the Cost Statute

Other courts, most notably several district courts in California and the Federal Circuit applying Ninth Circuit case law, have read the cost statute more broadly.

The Federal Circuit court in In re Ricoh Company, Ltd. determined that absent an agreement by the parties providing otherwise, the entire amounts of costs incurred to process, host and produce ESI in its native version using a Stratify database would be properly taxable as costs. ²¹In re Ricoh Company, Ltd. v. AMI Semiconductor, 661 F.3d 1361, 1365 (Fed. Cir. 2011).

In In re Ricoh Co., the parties agreed to produce documents in their native form via the database. Accordingly, the use of the Stratify database was deemed the equivalent of document production and the associated costs were thus taxable. ²²Because the parties agreed to share the cost of the database services, the prevailing party could not recover its share, and the costs were not taxable. “There is no question that parties may agree to share costs that would otherwise be taxable.” Id. at 1366.

Several decisions from the U.S. District Court for the Northern District of California are also instructive. ²³Ebay Inc. v. Kelora Systems, Inc.,
2013 BL 95917, N.D. Cal., No. C 10-4947 CW (LB), 4/5/13); Ancora Technologies, Inc. v. Apple, Inc., 2013 BL 227405, N.D. Cal., C 11-CV-06357, 8/26/13); Platronics, Inc. v. Apiph, Inc., No. C 09-1714 WHA (LB) (N.D. Cal. Oct., 23, 2012) (concluding costs for electronic .TFF and .PDF conversion and OCR of documents produced were permissible exemplification costs, but pre-production document collection and processing costs were not); Oracle Am., Inc. v. Google, Inc., No. C 10-03561 WHA (N.D. Cal. Sept. 4, 2012) (denying eDiscovery fees where the court found that costs were incurred for intellectual effort in gathering and analyzing the documents rather than reproducing the documents). In Kelora Systems, the court denied the recovery as costs of several ESI expenses. However, the court stated that “taxable costs of copying client documents include the costs of collecting documents, reviewing those documents, and determining which are relevant.” ²⁴Kelora Systems, Inc. (recognizing that the process is often costly, but the costs are nonetheless taxable) (citing Parrish v. Manatt, Phelps & Phillips, LLC, C 10-03200 WHA (N.D. Cal. Apr. 11, 2011) (emphasis added).

The court recognized that not all costs attributable to producing discovery are recoverable. For example, the court explained, copies made solely for counsel’s convenience or the litigant’s own use are not “necessarily” obtained for use in the case, and the costs would not be taxable.

Similarly, intellectual efforts involved in the production of discovery—including research, analysis, and distillation of data incurred in the production of documents—are not taxable costs.

Applying this standard, the court deemed the costs related to the following ESI tasks taxable:

• Scanning paper documents, electronic scanning and conversion to PDF, TIFF conversion, OCR conversion;

• Image endorsement/Bates Stamping, slip sheet preparation, blowback scanning paper documents, electronically stamping Bates numbers; and

• Processing costs tied to specific productions as a part of the copying process, productions in agreed-to native format, and load files necessary to read information.

Moreover, in Platronics, the court noted that what is “necessary” for use in the case is evolving with the advance of technology. ²⁵Platronics, (explaining that yesterday’s necessary paper document has been supplanted by today’s email that is produced with extracted metadata, which gives necessary information about, for example, the date it was created). Therefore, some ESI related costs incurred to comply with discovery orders or agreements (such as native file conversion or metadata extraction) are appropriately taxable. ²⁶Kelora Systems, Inc. (allowing costs for work by technicians to convert computer data into readable format) (citing Petroliam Nasional Berhad v. GoDaddy.com, Inc., No. C 09-5939 PHJ (N.D. Cal. May 8, 2012).

Thus, even when ESI costs are deemed non-compensable intellectual activity, they may be taxable if they are related to data formatting and production activities that are required by the parties’ stipulated discovery plan or local rules. ²⁷Fast Memory Erase, LLC v. Spansion, Inc., 3:10-cv-00481-M-BD, (N.D. Tex. Nov. 10, 2010) (awarding costs for creating TFF/OCR images of documents when the request for production required that format).

Similarly, the U.S. Courts of Appeals for the Seventh and Sixth Circuits have held that fees incurred for the conversion of files to the agreed upon format are taxable costs. ²⁸Hecker v. Deere & Co, 556 F3d 575, 591 (7th Cir. 2009) (permitting recovery of costs of converting computer data into readable format in response to discovery requests); BDT Products v. Lexmark Int’l, Inc., 405 F.3d 415, 420 (6th Cir. 2005) (interpreting electronic scanning and imaging as exemplification and copying of papers).

Likewise, the U.S. Court of Appeals for the Fifth Circuit Court permitted a prevailing party to recover the cost incurred to perform OCR on its discovery. ²⁹Rundus v. City of Dallas, 634 F.3d 309, 316 (5th Cir. 2011) (“[T]he determination of whether such copies are reasonably necessary is best made by the district court, and we give great deference to its decision.”).

Some courts have upheld the broad taxation of ESI-related costs based on the premise that such services are indispensable to the ultimate act of production of otherwise unintelligible electronic documents. ³⁰CBT Flint Partners LLC., 676 F. Supp. 2d at 1380-81 (N.D. Ga. 2009). ESI services are highly technical, beyond the expertise of counsel and basically amount to “the 21st Century equivalent of making copies.” ³¹Id. at 1381.

Other courts have justified taxing ESI costs based on the cost savings created by the use of ESI technology, which allows discovery to be conducted in an efficient and cost effective manner. ³²In re Aspartame Antitrust Litig.,
817 F. Supp.2d 608 (E.D. Pa. 2011), overruled by Race Tires, 674 F.3d 158 (3rd Cir. 2012).

III. Practice Pointers

A. Requirements of Discovery Orders, Parties’ Discovery Plans May Expand ESI Cost Taxability

Some ESI-related costs incurred to comply with discovery orders or agreements (such as native file conversion or metadata extraction) have been deemed taxable. Therefore, even when ESI costs are deemed non-compensable intellectual activity, they may be recoverable if they are related to data formatting and production activities that were required by the parties’ stipulated discovery plan or local rules. The parties’ agreement about the form of production may provide a basis to impose related ESI costs on a non-prevailing party. ³³Platronics, No. C 09-1714 WHA (LB) (concluding that costs associated with OCR conversion and load file creation compensable per the parties stipulated agreement to produce non-source code documents in an electronic format).

Accordingly, counsel should review all ESI related requirements set forth in any local rule, court ordered discovery plan or stipulation with opposing party with an eye towards preserving the ability to recover certain ESI costs post judgment.

B. Vendor, Consultant Billing Should Be Specific

When seeking a post judgment award of costs, parties must provide enough detail to establish that each expense is taxable under the cost statute provision for making copies. Generic statements such as “document production” or vague documentation of tasks performed or documents produced will not suffice. In Oracle Am., Inc., the court refused to award Google $2.9 million of ESI costs because many of the descriptions failed to segregate intellectual efforts from production costs.

Likewise, courts have reduced ESI cost awards when vendor invoices fail to separate compensable from non-compensable costs. ³⁴Amdocs (Israel) Ltd. v. Opennet Telecom, Inc., 1:10-cv-00910-LMB-TRJ, (E.D. Va. Mar. 21, 2013) (stating that invoice charging over $60,000 for production copying, file conversion, and metadata extraction did not allow court means to break out non-compensable meta-data extraction).

The ability to recover ESI costs is enhanced if vendor or consultant invoices specify the compensable ESI-related production tasks and also highlight any tasks that were performed to comply with obligations of any joint discovery agreement or court order (for example, metadata extraction).

Counsel should work with their vendors and consultants early in the case to make sure that all billing expressly breaks out both labor and operations of various applications per the basic phases of ESI processing as set forth in the Electronic Discovery Reference Model (ERDM). Doing so will improve a party’s potential ability to recoup some of these very expensive costs down the road.