Fourth Circuit Addresses Taxable Costs Related to ESI

Country Vintner of North Carolina, LLC v. E & J Gallo Winery, Inc., —F. 3d.—, 2013 WL 1789728 (4th Cir. Apr. 29, 2013)

In this case, the Fourth Circuit clarified “what expenses related to electronically stored information (“ESI”) are taxable under the federal taxation-of-costs statute as ‘[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case’” and affirmed the district court’s order “taxing only the costs of converting electronic files to non-editable formats, and transferring files onto CDs.”

The parties in this case “clashed over the discovery of ESI.”  Ultimately, Gallo moved for a protective order and Country Vintner filed a motion to compel.  The district court denied Gallo’s motion for a protective order, granted Country Vintner’s motion to compel, and adopted Country Vintner’s proposal for handling ESI.  As a result, Gallo took the necessary steps to meet its discovery obligations, including collecting more than 62 GB of data which were then sent to counsel for processing and review.

Less than two months after Gallo began producing documents, the district court granted Gallo’s motion to dismiss certain claims and ultimately granted summary judgment on the remaining claims in favor of Gallo.  Thereafter, Gallo filed a bill of costs, seeking to recover $111,047.75 “for charges related to ESI” including:

• “$71,910 for ‘flattening’ and ‘indexing’ ESI;”
• “$15,660 for ‘Searching/Review Set/Data Extraction;’”
• “$178.59 for ‘Tiff Production’ and ‘PDF Production;’”
• “$74.16 for electronic ‘Bates Numbering;’”
• “$40 for copying images onto CD or DVD;” and
• “$23,185 for ‘management of the processing of the electronic data,’ ‘quality assurance procedures,’ ‘analyzing corrupt documents and other errors,’ and ‘preparing the production of documents to opposing counsel.’”

Adopting the reasoning of the Third Circuit in Race Tires America, Inc. v. Hoosier Racing Tire Corp, 674 F.3d 158 (3d Cir. 2012) the district court “concluded that, under 28 U.S.C. § 1920(4), ‘a prevailing party may recover costs associated with copying or duplicating its files, but it may not receive reimbursement for any other ESI-related expenses,’” and found that, in this case, “the only tasks that involve[d] copying [we]re the conversion of native files to TIFF and PDF formats and the transfer of files onto CDs” and awarded only $218.59 in ESI-related costs.  “The district court also concluded that none of the ‘ESI-related costs in this case . . . qualif[ied] as fees for exemplification under any established construction of the term.”

On appeal, the circuit court considered Gallo’s argument that its “ESI processing charges” were taxable under the statute as both “costs of making copies of any materials where the copies are necessarily obtained for use in the case,” and “[f]ees for exemplification . . . of any materials” but was not “persuaded.”  With regard to discussion of whether the processing charges were properly considered as the “costs of making copies … necessarily obtained for use in the case,” the court relied in large part upon the Third Circuit’s decision in Race Tires America, Inc., which supported the conclusion "that, in this case, subsection (4) limits taxable costs to those identified by the district court: converting electronic files to non-editable formats, and burning the files onto discs."  The court also reasoned that the fact that Gallo would recover only a fraction of its costs “[did] not establish that our reading of the statute is too grudging in an age of unforeseen innovations in litigation-support technology.”  To that point, the court noted that the Supreme Court has acknowledged that “costs almost always amount to less than the successful litigant’s total expenses” and that “the presumption is that the responding party must bear the expense of complying with discovery requests.”  Notably, the court instructed that to the extent costs are excessive, a party may seek a protective order (which Gallo did) and that “[w]hen, as here, a district court denies a protective order, the movant can appeal that decision” but “it cannot obtain the same relief from § 1920 which “impose[s] rigid controls on cost-shifting in the federal courts.”

With regard to the meaning of “exemplification” under the statute, the court noted a split among other circuits, but held that it need not endorse either interpretation where neither applied to the charges at issue in this case.

Thus, the court affirmed the district court’s findings.

A copy of the court’s opinion is available here.