A major expense for defendants in class actions is the cost for electronic discovery vendors to collect, search through, process and host electronic data to be produced in discovery.  These often amount to hundreds of thousands of dollars.  These costs are likely to rise with the advent of computer-assisted predictive coding (see my March 9, 2012 post).  Can a prevailing party recover some or all of these large costs?  The Third Circuit recently held that scanning of hard copy documents, conversion of native electronic files to TIFF format, and transfer of VHS tapes to DVD format were recoverable, but other costs were not.  The recoverable costs here (and this case was not a class action) amounted to about $30,000 out of a total of $365,000.  In some class actions the scanning and conversion costs are considerably larger.  If a named plaintiff has to bear that cost, many cannot do so without suffering a substantial financial hardship, so the risk of incurring this cost can be a significant disincentive for a named plaintiff to bring a class action, and a not inconsequential bargaining chip in settlement discussions.  In some jurisdictions, plaintiff’s counsel may be able to bear these costs if they lose, although in other jurisdictions ethical rules may not permit that.  Even if plaintiff’s counsel is responsible for the costs, however, many plaintiffs’ firms will not take lightly having to pay out of pocket tens of thousands of dollars in e-discovery costs.

In Race Tires America, Inc. v. Hoosier Racing Tire Corp., No. 11-2316, 2012 U.S. App. LEXIS 5511 (3d Cir. Mar. 16, 2012), the dispute centered on the proper interpretation of the federal statute regarding taxable costs, which provides, in pertinent part, that costs taxed against a losing party may include “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case . . . .”  28 U.S.C. § 1920(4).  The district court had awarded the full $365,000, on the theory that the e-discovery charges were the modern equivalent of “exemplification and the costs of making copies.”  Race Tires, 2012 U.S. App. LEXIS, at *13. 

The Third Circuit explained that the costs statute goes back to 1853, long before anyone imagined copy machines, let alone e-mails and massive computer databases full of them.  There was a change in 2008 at the recommendation of the Judicial Conference of the United States, which modified “copies of papers” to “copies of any materials,” but otherwise the language goes back to a pre-computer era when you would need either a printing press or someone to write out copies by hand.

The Third Circuit first addressed whether “exemplification” would encompass e-discovery costs.  It concluded that “exemplification” must have a different meaning from “making copies,” based on the principle of statutory construction that separate terms used should be presumed to have distinct meanings.  The court concluded, based on dictionary definitions and prior case law, that “exemplification” refers to presentation of illustrative evidence (such as demonstrative exhibits) or authentication of public records, neither of which would apply to the e-discovery costs being claimed.

The Third Circuit then analyzed the meaning of “making copies.”  Laypersons might find it amusing that lawyers and judges really debate things like what it means to “make copies.”  The Third Circuit again went to a dictionary on that question, finding that “copy” means “an imitation, transcript, or reproduction of an original work.”  Id. at *22-23.  The court concluded that:

[W]e identify the following general categories of services comprising the vendors’ electronic discovery services: collecting and preserving ESI; processing and indexing ESI; keyword searching of ESI for responsive and privileged documents; converting native files to TIFF; and scanning paper documents to create electronic images.

Of the activities undertaken by the vendors, only the conversion of native files to TIFF (the agreed-upon default format for production of ESI), and the scanning of documents to create digital duplicates are generally recognized as the taxable “making copies of material.”

Id. at *25.  The Third Circuit further reasoned that the various steps that would be required before the digital era to identify potentially responsive documents and review them for responsiveness and privilege were not recoverable costs; only the actual copying was.  So the use of computers to do some of the kinds of things that lawyers or paralegals used to, and still do with hard copy documents would not be recoverable.  The court noted that Rule 26(c) allows a party in a motion for protective order to ask a court to shift additional costs, but that was not sought here.

This is unlikely to be the last word on recoverability of e-discovery costs, but it appears to be the first appellate decision on the issue.  Insurers and other defendants should remember to take advantage of the recoverability of at least a portion of e-discovery costs when they can, and try to collect as much as possible.  Recoverable costs are often an afterthought or not even thought about when you win on a dispositive motion.  An amendment to the federal statute may also be in order to expand recoverability of e-discovery costs and thereby deter frivolous litigation and encourage parties to narrow the scope of what they seek in e-discovery so as not to run up a large bill of costs.  Don’t forget though that in complex insurance claim litigation, insurers that demand extensive e-discovery from an opposing party can also be stuck with a larger bill of costs if they lose.