Awarding e-Discovery Costs to Prevailing Party: Billing Descriptions Dictate What is Recoverable

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E-discovery costs incurred by the prevailing party – easily running into the hundreds of thousands of dollars in complex commercial and IP litigations – may be compensable under 28 U.S.C. § 1920(4).

I say ESI costs "may be compensable" advisedly. Not all of them are. Most importantly, the likelihood of recovering tens if not hundreds of thousands of dollars of ESI costs depends in significant part upon  the billing descriptions used by your vendor (or your firm's in-house e-discovery group).

By specifying at the beginning of the case the billing format for ESI costs, you greatly increase the amount of these costs you will recover at the end of the case.

ESI costs deemed not compensable

The vendor's primary responsibility was collecting data (e.g., by imaging hard drives) and de-duplication of electronically-stored information so that it could be reviewed in-house by Aliph and produced in discovery. Tasks on the bills include the following: pick-up and imaging of computer; local email extraction; network email merge and de-dupe (eliminating duplicates); normalize, prep, index, and search email; extract, de-archive, hash, filter, de-dupe, normalize, index, and search user files; and computer media.

Plantronics v. Aliph, 2012 WL 3822129, at *17 (N.D. Cal. 2012) (citations omitted) (refusing to tax third party vendor costs of $100,948.17).

Other ESI costs deemed not compensable:

The problem with Google's e-discovery bill of costs is that many of item-line descriptions seemingly bill for “intellectual effort” such as organizing, searching, and analyzing the discovery documents. Most egregious are attempts to bill costs for “conferencing,” “prepare for and participate in kickoff call,” and communications with co-workers, other vendors, and clients.

Oracle v. Google, 2012 WL 3822129, at *3 (N.D. Cal. 2012 ) (citations omitted) (refusing to award $2.9 million of ESI costs).

But compare - ESI costs deemed compensable:


Cost of assembling, ordering, tagging, and QA for document release to Kelora. Includes the creation of metadata load files as requested by Kelora and image “placeholders” for documents and ESI that the requesting party asked to receive in native format. $ 43,500.00

Cost of feeding assembled documents into an image printer for the creation of image copies of those documents to the requesting party. The cost includes imaging, de-blanking, bates stamping, assignment of protective orders and confidentiality designations, insertion of slip sheets, and native file place holders, image quality QA and final export to production media. $ 22,450.00

[Cost of] isolating and presenting eBay source code on a secure and locked down machine in anticipation of inspection by the requesting party.  $ 1,800.00

eBay v. Kelora Systems, 2013 WL 1402736, at *6 (N.D. Cal 2013).

So why are costs taxed on some of these ESI vendor invoices and not the other? There are several reasons, each of which highlights the importance of being smarter about the manner in which ESI providers bill for their services. Let’s break this down.

First of all, “intellectual efforts” applied in the course of e-discovery—including organizing, searching and analyzing e-discovery documents —are not taxable costs. This rule comes from recent cases out of the Northern District of California, see, e.g., Oracle America, Inc. v. Google Inc., 2012 WL 3822129, at *3 (N.D. Cal., Sept. 4, 2012) and eBay Inc. v. Kelora Sys., LLC, 2013 WL 1402736, at *3 (N.D. Cal. Apr. 5, 2013), which themselves cite to Ninth Circuit non-ESI cases, see Romero v. Pomona, 883 F.2d 1418, 1428 (9th Cir.1989) (“fees are permitted only for the physical preparation and duplication of documents, not the intellectual effort involved in their production.”), overruled in part on other grounds in Townsend v. Holman Consulting Corp., 914 F.2d 1136, 1141 (9th Cir.1990), as well as the Third Circuit case Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158, 171 (3d Cir.2012).

The above example of non-compensable ESI invoicing reflects numerous conferences, meetings and communications deemed intellectual efforts. Swept into the same non-compensable category are ESI hosting and storage costs, collection and processing costs, strategic filtering and other services related to reducing the amount of ESI to be processed and/or reviewed post-processing. ESI vendors (or in-house departments), in their billing descriptions as well as in their itemization of costs, should both break out and emphasize later stage review and production of ESI from earlier stage identification, collection, preservation and filtering/reduction. Courts will most likely tax the former as costs but not the latter. Likewise, project management services will not be compensated unless differentiated from intellectual activity and tethered to later stage production activities.

Secondly, prevailing parties often incorrectly assume that the burden is on the losing party to justify the denial of each cost line item on the e-discovery invoice. To the contrary, as confirmed in recent decisions by Magistrate Judge Beeler in the Northern District of California, the burden is on the prevailing party to itemize its ESI costs with enough detail to establish that they are compensable under section 1920. eBay Inc. v. Kelora Sys., LLC, 2013 WL 1402736, at *3 ; Plantronics, Inc. v. Aliph, Inc., 2012 WL 6761576, at *3 (N.D. Cal. Oct. 23, 2012). The upshot is that prevailing parties submit vaguely worded or ambiguous ESI invoices at risk of the court denying taxation of ESI costs.

The lack of sufficient specificity caused the court in Oracle Am., Inc. v. Google, Inc. to deny taxation of any of the $2.9 million of ESI costs incurred by the prevailing party. 2012 WL 3822129, at *3. Likewise, in Amdocs (Israel) Ltd. v. Openet Telecom, Inc., 2013 WL 1192947, at *8 (E.D. Va. Mar. 21, 2013), the ESI invoice descriptions charged over $60,000 for “[p]roduction copying, file conversion, and metadata extraction” without providing the court with any means of breaking out non-compensable meta-data extraction. This left the court to impose a solution of reducing by one-third or over $20,000 the award of ESI costs.

As reflected in the above examples of compensable and non-compensable invoices, a good litmus test here is whether the billing expressly breaks out both labor and operation of various applications by such basic Electronic Discovery Reference Model (EDRM) phases as collection, preservation, processing, review, production etc, with specific billing descriptions under each and costs tethered to these specific descriptions. Woe unto the ESI vendor or the in-house e-services department that does not do this and relies on unduly brief, general descriptions in their billing for their services. The clear weight of the case authority is that they may not recover any of the very expensive e-discovery costs incurred in their case.

These dire consequences can be easily addressed at the outset of any e-vendor relationship. Typically, at the outset of the case, a vendor will provide a budget and statement of work. It is a relatively simple matter to attach a sample of a sufficiently specific invoice (such as the above) and require compliance with this format in any subsequent vendor billing.

Third, and finally, even where the ESI costs are deemed non-compensable intellectual activity or otherwise are deemed to fall outside of statutorily compensable document preparation and production, they nonetheless are taxable as costs if they are tethered to data formatting and production activities required by the parties’ stipulated discovery plan or local rules. See Fast Memory Erase, LLC v. Spansion, Inc., 2010 WL 5093945, at *4–5 (N.D.Tex. Nov.10, 2010) (awarding $197,637.72 in costs “for creating TIFF/OCR images of documents responsive to [non-prevailing party]'s discovery requests” when the requests for production required that documents be produced in that format). Cf. Eaglesmith v. Ray, 2013 WL 1281823, at * (E.D. Cal. Mar. 26, 2013) (denied recovery of Optical Character Recognition (OCR) conversion costs, stating “[c]ourts have held that OCR, which makes documents electronically searchable, is not taxable, unless requested by the parties, because it is generally for the convenience of the parties.”).

As Judge Beeler recognized in Plantronics, the parties' agreement about the form of production might militate in favor of imposing costs on the non-prevailing party. 2012 WL 6761576, at *15 (costs associated with OCR conversion and load file creation compensable per the parties stipulated agreement “to produce non-source code documents in an electronic format to be agreed upon (e.g. TIFF files with a Concordance compatible load file) and to reasonably accommodate one another's request for OCR and load-file information to allow processing of production documents by the receiving party.”).

Once again, counsel greatly improves the odds of recovering ESI costs if, early in the relationship with the e-vendor, counsel requires that the e-vendor’s billing descriptions track the formatting agreed upon or requested by the parties. For example, rather than list metadata extraction under potentially non-compensable processing phase activities, the vendor could instead create a “Required Formatting” section and list such items metadata extraction in this section. This protects tens of thousands of dollars incurred in connection with OCR conversion, extracting metadata or other data formatting services that courts otherwise may refuse to tax.

Topics:  Billing, Complex Litigation, Intellectual Property Litigation, Jury Awards, Legal Costs

Published In: Civil Remedies Updates, Electronic Discovery Updates, Intellectual Property Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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