Academic journal article Defense Counsel Journal

Nothing Is Certain except Death and Taxes: But in the District Courts, Not Even Taxes Are Certain for E-Discovery Costs

Academic journal article Defense Counsel Journal

Nothing Is Certain except Death and Taxes: But in the District Courts, Not Even Taxes Are Certain for E-Discovery Costs

Article excerpt

UNDER the so-called "American Rule," parties in litigation are responsible for their own costs, with limited statutory exceptions. (1) Given this general rule, one losing party must have been stunned to recently receive a bill from the prevailing party for the exorbitant amount of $4.6 million for the cost of creating a litigation database. (2) Despite the losing party's protests, the court granted the prevailing party this $4.6 million in electronic discovery ("e-discovery") costs, finding that the expense was reasonable and saved time for the prevailing party's counsel. (3)

While $4.6 million in discovery costs is particularly high, changes in technology and the development of the digital era have forced litigants to devote increasing resources to e-discovery while preparing for trial. (4) Approximately 247 billion emails are sent daily worldwide, and in 2009, more digital data was created than in all prior years combined. (5) Because law firms are often ill-equipped to produce large quantities of electronic information themselves, third-party e-discovery vendors are often hired to compile and catalog electronic data for discovery at substantial expense. (6) These vendors perform discovery tasks that did not exist in the paper era, such as scrubbing metadata from fries and creating keyword searchable databases of documents and files. (7)

Traditionally, each party bears the cost of producing documents requested by the other side during discovery. (8) However, in the federal courts the prevailing party is entitled to tax certain costs to the losing party, including "fees for exemplification and the costs of making copies of any materials" ("[section] 1920"). (9) While this language was developed during the paper era, courts today are challenged to apply the statutory language to the modern technology of e-discovery techniques. (10) One such issue--the taxation of e-discovery costs--contentious. has become particularly. (11) Although United States discovery cost allocation is premised on reciprocity, production--including e-discovery production--is typically asymmetrical, causing one party to bear a far larger burden and cost of production. (12) As a litigation strategy, producing parties therefore take into account e-discovery production costs when deciding whether to litigate or settle a claim and when making discovery requests of the opposing party. (13)

Because the Third Circuit is the only appellate court to address the issue of whether e-discovery costs are taxable, the district courts are split and have used a variety of analytical approaches in addressing the issue. (14) Some district courts have held that scanning is the electronic equivalent of copying, and then compared e-discovery with scanning to conclude that e-discovery costs are taxable. (15) Other courts, however, maintain that e-discovery does not merely replicate documents, like the taxable cost of copying, but rather creates entirely new documents, and is therefore not subject to taxation. (16)

Because there is no consensus regarding the taxation of e-discovery costs and no real guidance from most federal appellate courts, the subject is gaining attention among practitioners and is in need of clarification. (17) In May 2011, in Race Tires America, Inc. v. Hoosier Racing Tire Corp., (18) the Western District of Pennsylvania issued the first opinion from the Third Circuit regarding this issue and taxed the losing party $367,359.36 in e-discovery costs. (19) As one of the most recent cases analyzing the taxation of e-discovery costs, Race Tires is notable for its broad interpretation of the statutory language and of case law from other districts. (20)

This article argues that the Western District of Pennsylvania erred in allowing the taxation of e-discovery costs in Race Tires. E-discovery costs should not be taxable under Section 1920 because e-discovery requires intellectual effort to create new documents rather than merely "copying" existing documents and Section 1920 should be narrowly interpreted to that effect. …

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