The Shifting and Taxation of eDiscovery Costs Can Be a Murky Scene

I have been spending time digging into the topic of cost shifting and taxation of costs as related to electronic discovery.   While the questions may be simple, the answers are not and courts vary widely in their responses and dispositions to the arguments raised.

The challenges parties face are complicated because there are no clear-cut rules or positions that courts take in dealing with shifting of costs during pre-trial activities or what costs are taxable expenses after litigation has ended.  Courts take widely divergent positions and the language around the rules and regulations are about as clear as mud.

Let’s first look at cost shifting.

Here we are looking at the possibility of transferring or sharing costs around discovery efforts during the pretrial phase.  The general rules for domestic litigation are:

  • Each party is responsible for its own legal fees.
  • The responding party bears the costs of their eDiscovery efforts – Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340 (1978).

Enter the Federal Rules of Civil Procedure (FRCP).

  • FRCP 26(b)(2)(B) – Specific Limitations on Electronically Stored Information
    • Focus is on “inaccessible” ESI.
    • The argument depends on the ability to prove the burden and costs of producing ESI.
    • The opposing side must present a proportionality analysis showing the benefits outweigh the burden or cost, which leads us to…
  • FRCP 26(b)(2)(C) – When Required
    • Discovery can be limited where the burden or expense of the required discovery activity outweighs the benefit.
    • Proportionality is a critical factor.
  • FRCP 26(c) – Protective Orders
    • Again where  undue burden or expense is raised.
    • The issue of “cooperation” is paramount before the courts will step in to help.
    • Proportionality analysis is also significant.
    • See Pippins v. KPMG LLP279 F.R.D. 245 (S.D.N.Y. 2012)

Those facing motions to compel discovery also have some help for cost shifting or sharing.

  • FRCP 37(a)(5) – Payment of Expenses; Protective Orders
    • Undue burden can again be argued.
    • Cooperation or proportionality arguments are valid.

Finally, always keep in mind the Zubulake Test and develop your arguments around the following factors:

  • The Benefit Factors (The Marginal Utility Test)
    • The extent to which the requests are specifically tailored to discover relevant information.
    • The availability of such information from other sources.
  • The Cost Factors
    • The cost of production compared with the amount in dispute.
    • The total cost of production compared with the resources available to each party.
    • The relative ability of each party to control costs and its incentive to do so.
  • The Remaining Factors
    • The importance of the issues at stake in the litigation.
    • The relative benefits to the parties of obtaining the information.

Let’s now look at taxation of costs.

The next question that arises is which discovery-related, or taxable, costs can be billed to the prevailing party.

Enter 28 USC § 1920.

Congress outlined what litigation expenses could qualify, but unfortunately the language is anything but clear as related to the language around eDiscovery work.

The specific subsection that we look to is 28 USC § 1920(4), which states in part, “fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.”

So the obvious question that results from reading the above is: what do the following terms/phrases mean in the context of eDiscovery?

  • “Exemplification”
    • For a narrow definition see Kohus v. Cosco, Inc., 282 F.3d 1355  (Fed. Cir. 2002), but,
    • In Cefalu v. Vill. of Elk Grove, 211 F.3d 416 (7th Cir. 2000) the court interpreted this from a much broader and more expansive perspective.
  • “Making copies of any materials”
    • In Race Tires America, Inc. v. Hoosier Racing Tire Corp. 674 F.3d 158 (3d. Cir. 2012) the court kept to a narrow definition; however,
    • In re Online DVD Rental Antitrust Litigation, No. M 09-2029 PJH, 2012 U.S. Dist. LEXIS 55951 (N.D. Cal. Apr. 20, 2012) the court determined that a, “…broad construction of Section 1920 with respect to electronic discovery production costs—under the facts of this case—is appropriate.”
  • “Necessarily obtained” (What is necessary and what is not?)
    • In re Aspartame Antitrust Litigation, 817 F.Supp.2d 608 (E.D. Pa. 2011) the court found that:
      • Keywords searching and filtering was necessary.
      • Concept clustering was convenient.
    • See also Roehrs v. Conesys, Inc., No. 3:05-CV-829, 2008 WL 755187 (N.D. Tex. Mar. 21, 2008)
      • Conversion to searchable format —convenient.
    • And Cargill Inc. v. Progressive Dairy Solutions, Inc., No. CV-F-07-0349, 2008 WL 5135826 (E.D. Cal. Dec. 8, 2008)
      • Scanning—necessary

As we can see from the examples above there is no clear definition and courts, even those within the same circuit, have differed on the scope of what eDiscovery costs are taxable.  In Romero v. City of Pomona, 883 F.2d 1418 (9th Cir. 1989),the court took a very narrow view of how this section should be applied and used the argument that it did not extend to the “intellectual effort” involved in the production of documents, only the physical preparation and duplication of documents.   District courts have used this narrow interpretation as well as a much broader interpretation to provide for a confusing landscape of case law. The questions continue to swirl around what can be taxed.

What is an Attorney to do?

Without clear definitions or directions, how is one to prepare for litigation? Here are 10 things an attorney should evaluate and consider in preparation for litigation:

  1. Whether the discovery sought is unreasonably cumulative or duplicative;
  2. Whether the is obtainable from some other more convenient, less burdensome or inexpensive source;
  3. Whether the party seeking the information already has had adequate opportunity to obtain the information;
  4. Whether the burden or expense of the proposed discovery outweighs its likely benefit;
  5. Can the parties agree on areas to share the expense?
  6. Can sample data be obtained to weigh the cost vs. benefits?
  7. Keep VERY clear and detailed records of the eDiscovery service costs;
  8. Raise the issue early on with your adversary or the court – try to cooperate!
  9. Can you “balance” discovery? Can the various discovery mechanisms be juggled to help achieve a balance?
  10. Analyze standards from all jurisdictions so that you can make your arguments with supporting case law.

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