Can this happen to your client? Your client gets sued, is forced to spend over $100,000 on eDiscovery despite you making all the right objections, you deliver a clean victory on dispositive motions and the District Court awards costs of … $200. Here is what happened in the Fourth Circuit and what you can do to help your clients avoid the same fate:

The Fourth Circuit just decided the scope of taxable eDiscovery costs under 28 U.S.C. § 1920(4) in Country Vintner of North Carolina v. E. & J. Gallo Winery, Inc., __ F.3d __, 2013 WL 1789728 (4th Cir. Apr. 29, 2013). Section 1920(4) allows the District Courts to “tax as costs … [f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” Id. ¹   Under Federal Rule of Civil Procedure 54(d)(1), the cost of making copies “should be allowed to the prevailing party.” As an initial matter, the Fourth Circuit concluded that section 1920(4) applies to the costs related to documents produced in discovery – not just used at trial or in connection with a dispositive motion. Country Vintner, 2013 WL 1789728, *7. The Fourth Circuit then examined the meaning of “making copies,” and held that section 1920(4) “limits taxable costs to … converting electronic files to non-editable formats and burning files onto discs.” Id., *9. ²   In reaching that conclusion, the Fourth Circuit explicitly rejected the argument that “ESI processing costs constitute[d]” “making copies” under Section 1920(4). Id., *7. As a consequence, Appellant Gallo was awarded only $218.59 out of the $111,047.75 in eDiscovery costs it sought.       

What does that mean?

Appellant Gallo sought more than $70,000 for “indexing” and “flattening” ESI – processing methods that extracted irrelevant files and duplicates, made the remaining data searchable, and organized the data; spent more than $15,000 extracting and organizing metadata and preparing it for review; less than $100 on electronic bates numbering; and over $20,000 on quality assurance and preparing the document production. None of these costs were taxed. Instead, Gallo received only $178.59 to convert certain native files into TIFF and PDF format and another $40 to burn images onto CDs. While the documents could not be “copied” without all of the processing that preceded it, such processing costs will not be shifted through a bill of costs. Id., *8-9 (citing Race Tires Am., supra n. 2, 674 F.3d at 169).   

What lessons can we learn?

The Fourth Circuit seems to recognize the harshness of its ruling and provides two helpful clues for future litigants seeking to manage their eDiscovery burdens. The court first observes: “That Gallo will recover only a fraction of its litigation costs under our approach does not establish that our reading of the statute is too grudging in an age of unforeseen innovations in litigation-support technology.” Id., *9. Then, the court leaves open the question of whether the allowable costs of production might include the processing costs had the parties “clearly agreed to the production of ESI on a particular database or in native file format.” Id., *9 n. 20 (citing In re Ricoh Co., Ltd. Patent Litig., 661 F.3d 1361, 1365–66 (Fed. Cir. 2011) (holding that $234,702.43 for the cost of an electronic database which the parties agreed to use for document production would have been allowed, but for the parties’ agreement to share costs)). Next, the court points out that, where discovery costs are excessive, the responding party can move for a protective order and, if that motion is denied (as Gallo’s motion was denied), then the responding party “can appeal that decision” Id., *9; id., *9 n. 21 (noting that Gallo had not appealed the denial of its motion for protective order).

Lesson #1: While it is not entirely clear how the parties’ agreement to utilize a particular format or database alters the conclusion that processing is not “making copies,” the Fourth Circuit seems to suggest that it might. ³  So, any party seeking to shift its eDiscovery costs should consider agreeing with the other side regarding the format or database to be used to handle the parties’ productions.

Lesson #2: While it is not entirely clear whether parties are entitled to file an interlocutory appeal with respect to the denial of a motion for protective order, the Fourth Circuit seems to urge parties to do so. ⁴  Either the court is encouraging interlocutory appeals before the ESI expenses are incurred, or the court is suggesting that a final judgment (for either party) does not moot the trial court’s refusal to shift pre-trial eDiscovery costs.

 ¹ Because appellant Gallo’s eDiscovery costs neither involved authentication of public records nor demonstrative exhibits – two potential meanings of exemplification – the Fourth Circuit did not define the meaning of exemplification in this case.  Country Vintner, 2013 WL 1789728, *10. 

 ² In reaching that conclusion, the Fourth Circuit aligned itself with the Third Circuit’s approach in Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3d Cir. 2012).

³  In distinguishing In re Ricoh Co., the Third Circuit explained: “we have acknowledged that the costs of conversion to an agreed-upon production format are taxable as the functional equivalent of ‘making copies.’ It is all the other activity, such as searching, culling and deduplication that are not taxable.” Race Tires Am., 674 F.3d at 171 n.11.

 ⁴ On one hand, discovery orders against a party are not immediately appealable. See, e.g., Nicholas v. Wyndham Int’l, Inc., 373 F.3d 537 (4^th Cir. 2004). On the other hand, most discovery orders will be moot by the time a final order is entered. See, e.g., E. H. Reise v. Bd. of Regents of the Univ. of Wisconsin, Sys., 957 F.2d 293, 295-296 (7^th Cir. 1992).