Source: http://www.templelawreview.org/winner-doesnt-take-all-race-tires-america-inc-v-hoosier-racing-tire-corp-limits-recovery-of-e-discovery-costs/
Timestamp: 2019-04-24 09:48:33+00:00

Document:
In the realm of e-discovery, Race Tires America, Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3d Cir. 2012), limits the prevailing party to recover only scanning and file format conversion costs for “making copies” under 28 U.S.C. §1920(4).
In Race Tires America, Inc. v. Hoosier Racing Tire Corp., the Third Circuit provided district courts with “definitive guidance” on the taxability of e-discovery expenses under Federal Rule of Civil Procedure 54(d)(1) and 28 U.S.C. §1920. Narrowly reading 28 U.S.C. § 1920(4), the court held that “only scanning and file format conversion” can be recovered as costs for “making copies” and that none of the activities conducted by the e-discovery vendors are considered “exemplification” of materials. Most other e-discovery activities (privilege culling, keyword searching, data extraction, etc.) are non-recoverable as being akin to sorting, gathering, and review. As a result, the Third Circuit did not view most of the defendants’ sought-after e-discovery costs as being encompassed by the statute. In the end, the court allowed only $30,370.42 of the original $125,580.55 granted by the district court to be recovered by the winning party.
Federal Rule of Civil Procedure (FRCP) 54(d)(1) permits the prevailing party to recover costs—other than attorney’s fees—from the losing side, “[u]nless a federal statute, these rules, or a court order provides otherwise.” The prevailing party is presumably entitled to costs, but courts have discretion to reduce or decline an award.
Costs related to document review or litigation generally are not recoverable under these rules because they fall within the scope of attorney’s fees. However, e-discovery activities often involve both document review and electronic data copying. Since § 1920 does not explicitly address e-discovery costs, the scope of e-discovery recovery is unclear.
Some courts have drawn the line based on the necessity of the activities performed and/or the level of skill required to carry them out. If the tasks billed are necessary and indispensable to e-discovery, and not merely for the convenience of counsel, courts have been more likely to tax them. If the work requires technical skill beyond that of legal professionals and necessitates the use of an outside consultant, courts have also found its costs to be recoverable.
In September 2007, Race Tires America, Inc. (RTA) sued Hoosier Racing Tire Corp., a competitor, and Dirt Motor Sports, Inc., a motorsports sanctioning body, for antitrust violations. After more than a year’s worth of discovery, the district court granted summary judgment in favor of the defendants, which the Third Circuit affirmed.
The defendants, who together produced over 600,000 pages of electronically stored information (ESI), sought recovery of e-discovery costs totaling $384,058.46. Both sides hired e-discovery vendors to assist with production. The defendants requested recovery of costs for: 1) collection and preservation of ESI, 2) ESI processing, 3) keyword searching, 4) segregating out privileged materials, 5) scanning and converting to Tagged Image File Format (TIFF), 6) converting documents via optical character recognition, and 7) converting videos from VHS to DVD format.
Race Tires was the first request for e-discovery costs in the Western District of Pennsylvania. The Clerk of the District Court—the initial authority charged with determining costs—allowed recovery of all outside consultant expenses, citing the level of expertise required to perform them as being indispensable to e-discovery.
The Third Circuit affirmed in part, vacated in part, and remanded the case.
The Third Circuit determined that only scanning to create electronic copies, conversion from native files to an agreed-upon file format for ESI production, and conversion of VHS tapes to DVDs are activities within the scope of “making copies” under § 1920(4). All other e-discovery costs were non-recoverable. Race Tires also concluded that the e-discovery activities at issue could not be considered “exemplification” of materials.
In light of this legal background, the issue became whether § 1920(4) allowed the recovery of “an electronic discovery consultant’s charges for data collection, preservation, searching, culling, conversion, and production” as either “exemplification” or “making copies.” In applying statutory interpretation canon, the court determined that “exemplification” and “making copies” were not interchangeable terms; if Congress included both in the statute, it intended that they have different meanings.
Looking first at “exemplification,” the Third Circuit noted that some courts define the term either as “exhibits and demonstrative aids” or as “an official transcript of a public record, authenticated as a true copy for use as evidence.” The court did not decide which definition it would use going forward. Finding the requested costs to not fall within either interpretation, the court ruled that e-discovery charges in this case would not qualify for exemplification.
Turning then to whether the charges qualified as “making copies,” the court used plain meaning to define “copy” as duplicating an original. While taxable copying charges have typically included only photocopying, the 2008 amendment expanded this definition to include copying of “any materials,” including electronic files. However, the court did not believe that the “activities leading up to the actual production” were encompassed by the statute. Therefore, the court considered both the technical expertise necessary to perform the work and the fact that it was performed by a third party to be moot points in awarding costs.
Instead, the court analogized the vendor’s activities to pre-information age actions. Prior to the advent of third-party vendors and electronic media, paralegals and lawyers would find, collect, and sort through paper files; such costs were not seen as “making copies” but simply litigation discovery costs. For this reason, the court determined that privilege culling, keyword searching, data collection, and document extraction were non-taxable as being nothing more than technically savvy document sorting, gathering, and review.
Though daunting in its limited standard of recovery, Race Tires, in dicta, suggested other ways to defray e-discovery costs: (1) cost-sharing agreements, (2) FRCP 26(c) cost-shifting protective orders, and (3) sanctions for bad faith discovery requests.
Race Tires also provided practitioners with an additional tool: the implied obligation to ask for more detailed invoices from outside e-discovery consultants. In examining the e-discovery costs themselves, the court noted the “lack of specificity and clarity as to the services actually performed.” These invoices became the basis for the court’s decision on awarding costs. Going forward, practitioners can better argue that these expenses fall more within the realm of electronic copying, than that of review or prep work, if they ask for more information from e-discovery consultants about what their expenses entail.
This case is the first of its kind to come from any Circuit. While Race Tires clearly identifies which costs are allowed – physical “copying,” not prep work – there are several things it does not say. First, the court did not define the scope of exemplification and which e-discovery costs qualify under this term. Second, Race Tires did not indicate what costs for scanning and conversion were reasonable. Lastly, it did not indicate whether the actual use of digital copies in the case is needed for their recovery. These questions remain for future cases.
 674 F.3d 158 (3d Cir. 2012).
 Race Tires America, Inc., 674 F.3d at 160.
 Fed. R. Civ. P. 54(d)(1).
 See, e.g., Kohus v. Cosco, Inc., 282 F.3d 1355, 1357 (Fed. Cir. 2002) (“Rule 54(d) creates ‘a presumption in favor of awarding costs, but allows denial of costs at the discretion of the trial court.’” (quoting White & White, Inc. v. Am. Hosp. Supply Corp., 786 F.2d 728, 730 (6th Cir. 1986))).
 Id. In re Paoli Railroad Yard PCB Litigation outlines which factors a Third Circuit court can consider when determining a cost award. 221 F.3d 449, 468 (3d Cir. 2000). These include: (1) the prevailing party’s unclean hands, bad faith, or obstructive behavior in complying with litigation orders; and (2) each losing party’s inability to pay. Id. A court should not consider: (1) a losing party’s good faith, (2) the complexity or closeness of the issues in the dispute decided, or (3) the relative wealth disparity between the sides. Id. In re Paoli Railroad Yard also offers guidance on when a court can award costs jointly and severally. Id. at 468–71.
 28 U.S.C. § 1920 (2008).
 Crawford Fitting Co., 482 U.S. at 445. Crawford Fitting also held this authority to be limited by § 1821. Id.
 See, e.g., In re Paoli Railroad Yard, 221 F.3d at 457–58 (3d Cir. 2000) (explaining that recovery of costs is less than a party’s actual litigation expenses); Krouse v. Am. Sterilizer Co., 928 F. Supp. 543, 546 (W.D. Pa. 1996) (affirming Clerk’s determination that “normal office expenses and the costs of litigating” are not recoverable; Boise Tower Assoc., LLC v. Wash. Capital Joint Master Trust Mortg. Income Fund, 2007 WL 4355815, at *7 (D. Idaho Dec. 10, 2007) (“[C]omputer-aided research, like any other form of legal research, [is] a component of attorney fees that should not always be independently taxed as an item of cost.”).
 In order for parties to produce forensically accurate copies, the copying must not alter the files’ metadata—the information which shows the modifications to an electronic file—making the process more complex than just simply scanning documents or copying electronic files. See Fast Memory Erase, LLC v. Spansion, Inc., 2010 U.S. Dist. LEXIS 132025, at *14-17 (N.D. Tex. 2010) (testimony of e-discovery vendor Jake Brown explaining what is needed to get forensically accurate copies and convert documents to TIFF). But the same process used to convert documents to a forensically accurate copy may also be used to allow the document to become searchable. Id.
 Ronni Solomon & Andrew H. Walcoff, E-Discovery Cost-Shifting, Metro. Corp. Counsel, Oct. 1, 2011, at 23, available at http://www.kslaw.com/imageserver/KSPublic/library/publication/2011articles/10-11MCCSolomonWalcoff.pdf.
 See, e.g., In re Scientific-Atlanta, Inc. Securities Litigation, 2011 WL 2671296, at *1 (N.D. Ga. July 6, 2011) (finding certain e-discovery costs as being “for the convenience of counsel” and not authorized by 28 U.S.C. § 1920).
 See, e.g., CBT Flint Partners, LLC v. Return Path, Inc., 676 F. Supp.2d 1376, 1381 (N.D. Ga. 2009) (allowing recovery of all costs for services provided by e-discovery consultant since they “are not the type of services that attorneys or paralegals are trained for or are capable of providing”), vacated and remanded in part on other grounds CBT Flint Partners, LLC v. Return Path, Inc., 654 F.3d 1353, 1361 (Fed. Cir. 2011) (reversing district court’s summary judgment of patent invalidity, thereby making Cisco no longer the prevailing party and costs award inappropriate).
 See, e.g., Rawal v. United Air Lines, Inc., 2012 U.S. Dist. LEXIS 21880, at *7 (N.D. Ill. Feb. 22, 2012) (converting electronic documents into searchable format “comprise[s] the kind of work conventionally performed by attorneys and paralegals, the costs of which are not recoverable under § 1920(4).” (emphasis omitted)).
 See In re Aspartame Antitrust Litig., 817 F. Supp. 2d 608, 615 (E.D. Pa. 2011) (awarding costs for the creation of a litigation database, storage of data, imaging hard drives, keyword searches, deduplication, data extraction and processing, privilege screens, hosting data, and technical support), implicitly overruled in part by Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158, 169 (3d Cir. 2012).
 The creation of an electronic database may be taxable if the parties can show it was used as a means of production, versus a method of review. See Synopsys, Inc. v. Ricoh Co., (In re Ricoh Co., Ltd. Patent Litig.), 661 F.3d 1361, 1365 (Fed. Cir. 2011) (holding that the production of documents through creation of a database was a taxable cost, falling outside the category of “intellectual efforts” (quoting Romero v. City of Pomona, 883 F.2d 1418, 1428 (9th Cir. 1989, overruled in part on other grounds by Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1363 (9th Cir. 1991))); Lockheed Martin Idaho Techs. Co. v. Lockheed Martin Advanced Envtl. Sys., Inc., 2006 WL 2095876, at *2 (D. Idaho July 27, 2006) (allowing recovery for litigation database costs as “necessary due to the extreme complexity of this case and the millions of documents that had to be organized”).
 See, e.g.,Mann v. Heckler & Koch Def., Inc., 2011 U.S. Dist. LEXIS 46045 (E.D. Va. Apr. 28, 2011) (following Fells v. Virginia Department of Transportation in holding that creating an electronic database does not qualify as copying); Fells v. Va. Dept. of Transp., 605 F. Supp. 2d 740 (E.D. Va. 2009) (distinguishing simple scanning as reproduction from file conversion as document creation).
 Race Tires Am., Inc., 674 F.3d at 160. The dispute arose out of the adoption of a “single tire rule” and certain related supply contracts of Hoosier. Id.
 Id. As part of discovery, the District Court issued a Case Management Order which directed the parties to: (1) agree upon a keyword search list which the parties could use to fulfill the obligation of conducting a reasonable search, (2) provide ESI in TIFF with a reference guide (unless the native file format was “reasonably necessary to enable the other parties to review those files”), (3) produce certain metadata fields if reasonably available, and (4) produce “[a]n extracted text file or searchable version . . . for each electronic document in the document level text file” except those produced in native form. Id. at 161.
 Id. at 162. The initial costs sought were $88,000 higher; however, the plaintiff objected that the costs were inaccurate. The defendants admitted that they had included duplicate invoices and reduced the sought-after amount to correct the error. Id.
 Id. The Clerk excluded costs for data conversion and processing performed by Hoosier’s Litigation Support Department, and not a third-party. Id.
 The plaintiff’s Motion to Appoint Special Master Regarding E-Discovery Issues, however, was denied. Id. at 163.
 Id. at 165. The Third Circuit outlined the historical evolution of fee shifting in American jurisprudence before reaching this conclusion. Id. at 164–65.
 Id. (alteration in original). The two amendments included: (1) a change from “[f]ees of the court reporter for all or any part of the stenographic transcript” to “[f]ees for printed or electronically recorded transcripts” in § 1920(2); and (2) a change from “[f]ees for exemplification and copies of papers necessarily obtained for use in the case” to “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case” Judicial Conference of the U.S., 2003 Report of the Proceedings of the Judicial Conference of the United States 10 (emphasis added) [hereinafter Judicial Conference Report].
 Race Tires America, Inc., 674 F.3d at 165 (quoting Judicial Conference Report at 10).
 Id. at 165. The court cited to the statutory construction canon it set out in Tavarez v. Klingensmith, 372 F.3d 188, 190 (3d Cir. 2004) (“[I]f possible, we must give effect to every clause and word of a statute, . . . and be reluctant to treat statutory terms as surplusage.”).
 Id. at 166 (quoting Cefalu v. Vill. of Elk Grove, 211 F.3d 416, 427 (7th Cir. 2000).
 Id. (citing Kohus v. Cosco, Inc., 282 F.3d 1355, 1359 (Fed. Cir. 2002)).
 Id. at 169. The court’s analysis mirrored that of the Ninth Circuit regarding cost recovery for “intellectual efforts” under § 1920(4). In Romero v. City of Pomona, the Ninth Circuit rejected expert witness fees for “research and analyses” of the five witnesses. 883 F.2d 1418, 1427–28 (9th Cir. 1989). Reading § 1940(4) narrowly, Romero determined that “fees are permitted only for the physical preparation and duplication of documents, not the intellectual effort involved in their production.” Id. at 1428. The Ninth Circuit explained that allowing costs for “intellectual effort” could become too expansive since “any document ‘necessarily produced’ for purposes of the litigation will contain somebody’s intellectual input.” Id.
Interestingly, despite the Ninth Circuit’s influence in Race Tires, two Ninth Circuit district court cases have declined to follow Race Tires’ reading of “making copies.” See Petroliam Nasional Berhad v. GoDaddy.com, Inc., 2012 U.S. Dist. LEXIS 64555, at *11 (N.D. Cal. May 8, 2012) (noting Race Tires but concluding that broad construction of § 1920 was appropriate in the absence of directly analogous Ninth Circuit authority); In re Online DVD Rental Antitrust Litig., 2012 U.S. Dist. LEXIS 55951, at *41 (N.D. Cal. Apr. 20, 2012)(same).
 Race Tires Am., Inc., 674 F.3d at 169. While the court was sympathetic to “strong policy reasons” and “compelling equitable circumstances,” it did not see granting costs for such reasons to be within its power. Id. at 171.
 Id. at 170. The court was persuaded by the reasoning in In re Scientific-Atlanta, Inc. Securities Litig., 2011 WL 2671296, at *1 (N.D. Ga. July 6, 2011) (analogizing keyword searching to a “room full of reviewers physically review[ing] paper documents”)and Fast Memory Erase, LLC v. Spansion, 2010 U.S. Dist. LEXIS 132025, at *4 (N.D. Tex. Nov. 10, 2010) (noting that data extraction “is more like the work of an attorney or legal assistant in locating and segregating documents that may be responsive to discovery than it is like copying those documents for use in a case” (quoting Kellogg Brown & Root Int’l, Inc. v. Altanmia Commercial Mktg. Co., 2009 WL 1457632, at *5 (S.D. Tex. May 26, 2009))).
 Race Tires Am., Inc., 674 F.3d at 169.
 Id. at 171 n.12. Courts are likely to uphold cost-sharing agreements between the parties and will not allow 54(d)(1) to supersede them. See Synopsys, Inc. v. Ricoh Co., (In re Ricoh Co., Ltd. Patent Litig.), 661 F.3d 1361, 1367 (Fed. Cir. 2011) (holding that the parties’ cost-sharing agreement was controlling).
 Race Tires Am., Inc., 674 F.3d at 171.
 The court rejected the defendants’ argument that the activities were a part of one continuum leading to the act of production, which could not be segregated into taxable or non-taxable. It relied on the vendor’s invoices to determine which costs were taxable and which were not. Id. at 170.
 The Third Circuit Says “No” to the Taxation of E-Discovery Costs, Seyfarth Shaw LLP (Apr. 9, 2012), http://www.seyfarth.com/publications/eDIG0412.
 Race Tires Am., Inc., 674 F.3d at 166.
 In re Aspartame Antitrust Litigation stated that the rate of $0.13–.15/page for scanning in that case was reasonable given that copying costs of up to $0.25/page have been granted previously. 817 F. Supp. 2d 608, 618 (E.D. Pa. 2011). However, this case also expansively interpreted the scope of copying recovery. Id. at 615. Since Race Tires essentially overruled In re Aspartame, the reasonability of costs appears to remain open. See supra, note 19 for more information about In re Aspartame.
 While RTA agreed that TIFF conversion fell within the scope of § 1920(4), it argued that there was no showing that these digital copies “were necessarily obtained for use in the case.” The court, however, was unable to reduce or deny costs on this basis, since it found no abuse of discretion by the District Court in awarding such costs under the statute. “Once statutory authority to tax costs has been established . . . the amount awarded is reviewed only for abuse of discretion.” Race Tires America, Inc., 674 F.3d at 167.

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