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On March 16, 2012, the Third Circuit, for the first time, answered the question of the extent to which the losing party in litigation has to pay for electronic discovery expenses. Specifically, it examined whether the electronic discovery vendors' charges to assist in the collection, processing, and production of electronically stored information ("ESI") are taxable against a losing party under 28 U.S.C. § 1920(4). Section 1920(4) allows for taxation of "[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case."

The Third Circuit held that "none of the electronic discovery vendors' activities in this case can be regarded as 'exemplification' of materials," and concluded that "only scanning and file format conversion can be considered 'making copies.'"

In Race Tires America, Inc. v. Hoosier Racing Tire Corp., --- F.3d ---, 2012 WL 887593, *1 (3d Cir. 2012), a racing tire supplier brought an antitrust action against a competitor and motorsports sanctioning body, challenging a "single tire rule" and related exclusive contracts between the competitor and the sanctioning body for the supply of race tires at certain races. The racing tire supplier was seeking damages, before trebling, in excess of $30 million.

The case involved extensive discovery of ESI. The competitor and the sanctioning body each retained separate vendors to assist with the production of ESI, incurring more than $125,000 and $240,000, respectively. The competitor and sanctioning body won summary judgment. Both the competitor and sanctioning body then submitted Bill of Costs forms, resulting in the Clerk taxing a total of approximately $365,000.

The district court concluded that the entire amount charged by the electronic discovery vendors was taxable, finding: "the steps the third-party vendor(s) performed appeared to be the electronic equivalent of exemplification and copying." The Third Circuit reversed the district court.

The Third Circuit closely examined the meaning of the terms "exemplification" and "making copies" under the applicable Section 1920(4). It determined that, regardless of whether it applied the Sixth Circuit's narrow legal definition of "exemplification" as being restricted to authentication of public records or the Seventh Circuit's broad definition of exhibits and demonstrative aids, the e-discovery vendors' work did not qualify as exemplification.

With regard to "making copies," the Third Circuit held that it extends beyond "paper copying" and includes the e-discovery vendors' production activities. Specifically, it includes the vendors' "conversion of native files to TIFF (the agreed-upon default format for production of ESI), and the scanning of documents to create digital duplicates[.]" Overall, those ESI costs were $20,083.51 for the competitor, and $10,286.91 for the sanctioning body. The Third Circuit found that the remaining approximately $335,000 for collection, preservation, processing, searching, filtering, and exporting, did not fall within the term "making copies."

In reaching its holding, the Third Circuit rejected the competitor's argument that the ESI services leading to the act of production cannot be divided into taxable and nontaxable costs. The Third Circuit found that "it is possible to tax only the costs incurred for physical preparation of ESI produced in the litigation." The court also noted that the proper way to shift the costs of ESI is by obtaining a cost-shifting protective order – not relying upon Section 1920, which does not provide for a shift of all ESI costs to the losing party.

Going forward, while the law differs in different jurisdictions, litigants in the Third Circuit now have a clear rule that, absent a protective order to the contrary, only costs incurred for the physical preparation of ESI production, such as format conversion and scanning, will be taxable ESI costs.