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IP Alert: Federal Circuit Clarifies Taxation of Costs for Electronic “Copies”

December 17, 2013

Federal Rule of Civil Procedure 54(d)(1) authorizes district courts to tax costs to the prevailing party. A federal statute, 28 U.S.C. 1920, limits the discretion of the district courts by enumerating that only certain costs may be taxed. Among these taxable costs are “the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” The statute was passed in 1948 and amended in 1978, long before the advent of electronic discovery. Today, much discovery in federal civil cases is handled electronically, and often instead of making paper copies of discovery documents. To what extent, if any, does the statute allow for taxation of costs for making electronic “copies”? 

On December 13, 2013, in CBT Flint Partners, LLC v. Return Path, Inc., and Cisco IronPort Systems, LLC, the Court of Appeals for the Federal Circuit addressed this issue. The court held that some, but not all, electronic discovery costs are taxable as the costs of “making copies.” Although the Federal Circuit conducted its analysis under the procedural law of the Eleventh Circuit, the circuit in which the case originated, the court’s guidance is expected to have wide-ranging ramifications for litigants in future federal cases.

In CBT Flint Partners, the district court taxed costs against the plaintiff CBT Flint Partners (“CBT”). Both defendants submitted bills of costs that reflected fees paid to electronic discovery vendors. The district court held that these vendor fees were “the 21st Century equivalent of making copies” and held them to be taxable. CBT appealed. 

On appeal, the Federal Circuit reviewed both the legislative history of section 1920 and earlier Supreme Court precedent. The court also reviewed prior Supreme Court decisions Crawford Fitting Co. v. J. T. Gibbons, Inc., and Oppenheimer Fund, Inc. v. Sanders. In Crawford, the Court explained that the Congressional policy behind the enactment of section 1920 was to place “rigid controls on cost-shifting in federal courts.” The Court in Oppenheimer stated the presumption that the costs of meeting discovery requirements stay with the litigant that incurred them. The court also reviewed an Eleventh Circuit case, Allen v. U.S. Steel Corp., which held that the statute “allows recovery only for the reasonable costs of actually duplicating documents, not for the cost of gathering those documents as a prelude to duplication.”

The Federal Circuit then reviewed a 2008 amendment to section 1920, finding it compelling that the Congressional committee that had drafted the 2008 amendment had considered the possibility of larger changes to section 1920, but instead proposed only smaller changes. The committee specifically noted concern that the charges for new expenses related to technology could dramatically expand the intention of the statute, which was to allow the taxing of costs in a very limited way, consistent with the Supreme Court’s prior opinions. The court also reviewed a post-2008 Supreme Court case discussing section 1920, Taniguchi v. Kan Pac. Saipan, Ltd., which had characterized the recovery of costs as “modest” and “limited to relatively minor, incidental expenses.”

The Federal Circuit concluded from the above that the 2008 amendment to section 1920 lacked a clear prescription for the dramatic change of large-scale cost shifting of litigation expenses. With this analysis, the court then considered which costs were taxable as “the costs of making copies.” The court held as follows:

  • Only those costs necessary to duplicate an electronic document as required by rule, court order, or agreement of the parties are taxable. 
  • To the extent that a party is obligated to produce electronic documents in a particular format, the costs to make duplicates in such a format are taxable. 
  • Only the costs of creating the produced duplicates are taxable, not the costs of preparatory or ancillary costs commonly incurred leading up to, in conjunction with, or after duplication, including the costs of document review.
  • Where an agreement, rule, court order, or other requirement regarding the format of the copies to be produced necessitates conversion to a uniform production format (for instance, TIFF), the cost of these steps are all taxable as part of “making copies” under 1920(4). In such case, the producing party might be required to copy the document, to perform the required format conversion, and then to copy the converted files to production media. These costs are taxable. 
  • If a vendor receives a large volume of documents and culls the documents to produce only a subset, the taxable costs are confined to the subset actually produced. The district court should use document-specific charges if they are discernable or a reasonable allocation method such as prorating.
  • Costs incurred in preparing and planning are not taxable. For example, fees for time spent deciding on a plan for securely copying source code are not taxable. Nontaxable costs also include vendor charges for “source code planning,” “source code discussion,” “plans for acquisition of source code,” “coordination meeting for source code processing,” and “source code briefing.”

The court also held that if a producing party is not subject to particular requirements governing the format or other characteristics of the produced documents, it might suffice for the producing party to copy the requested documents directly from the source media to the production media and to deliver the production media directly to the requester. In that event, only the costs of that simpler process will be chargeable under section 1920(4). Also, if a party later chooses to image source drives and upload the images to a document database for faster review or convenience, these costs would not then be taxable. As another example, if metadata can be preserved without first using imaging and extraction techniques, then those costs would not be taxable.  

With specific regard to the CBT case, the Federal Circuit noted that the defendants incurred many charges after imaging the hard drives as part of organizing the documents in a database, including indexing, decrypting, and de-duplicating and reviewing to determine which documents were responsive to discovery requests and which contained privileged information. These processes resulted in identification of a subset of documents for production. The Federal Circuit’s opinion states that these types of activities, specifically including keyword searching, logging of files, ensuring compliance with Federal Rules, and extraction of proprietary data, were not taxable. Instead, held the court, these are expenses of the document review process, and are not recoverable under the statute. The court remanded for recalculation of the costs under the correct standard.

In deciding procedural issues, the Federal Circuit defers to the regional circuit court from which the lawsuit originated (in this case, the Eleventh Circuit). Nonetheless, the court’s opinion is likely to influence the taxation of costs in other patent infringement cases. The CBT case is significant in this regard. 

For more information, please contact Fitch Even partner Alison Aubry Richards, the author of this alert.
 

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