eDiscovery: Is it Taxable or Not?
The issue of whether eDiscovery costs are taxable to the losing party is picking up steam in the federal courts. The Third Circuit is now the first federal court of appeals to issue a ruling regarding the taxability of traditional eDiscovery costs. In Race Tires America v. Hoosier Racing Tire Corporation, the Third Circuit significantly limited the taxation of eDiscovery costs to the losing party. This decision came after a series of federal district court decisions that allowed recovery of eDiscovery costs relating to hard drive imaging, data storage, keyword searching and other services.
The central issue for the Third Circuit was to determine whether the eDiscovery costs were an "exemplification" and "copy" expense under Federal Rule of Civil Procedure 54(d) and 28 U.S.C. § 1920. FRCP 54(d) provides that "costs-other than attorney's fees- should be allowed to the prevailing party." 28 U.S.C. § 1920 further provides that a federal court may tax as costs "fees for exemplification and the costs of making copies of any material whether the copies are necessarily obtained for use in the case." The district court in Race Tires found that the services provided by the eDiscovery vendero "were equivalent of exemplification and copying" and awarded the prevailing defendant $367,359.36 in taxable costs related to hard drive imaging, file processing, file conversion, keyword searching and production. The court noted that the services were technical in nature and not "the type of services that attorneys or paralegals" could provide.
The appellate court took a different tact. The appellate court focused on whether the work performed by the vendors amounted to "making copies" rather than whether the services were the type that attorneys and paralegals would conduct. The court found that the vendors "did not produce illustrative evidence or authenticate public records," thus the services rendered were not the equivalent of "making copies." However, the court did hold that costs relating to file conversion and VHS to DVD conversion could be considered making copies and are taxable.
Future decisions will likely fall on whether other courts see traditional eDiscovery services and costs as simply "making copies" or providing analytical services more closely aligned with the work done by attorneys and paralegals. In this particular case, the court noted that the lack of specificity in the vendor's description of services made it difficult to determine whether the services were more closely aligned with "making copies." A more detailed description of services may tilt the next decision in the direction of taxing the costs. However, it is fairly certain that costs related to review will remain non-taxable. It is the costs related to the imaging, analysis and keyword searching that would be in play.
David S. Weber is General Counsel for Digital Discovery www.digitaldiscoveryesi.com and serves as a computer forensics consultant and eDiscovery expert to corporations and law firms. He can be reached at email@example.com