In a Nov. 23, 2011 decision that adds to the growing body of case law supporting the recovery of eDiscovery costs by prevailing parties under Fed.R.Civ.P. 54(d) and 28 U.S.C. § 1920(4), the Court of Appeals for the Federal Circuit held that although “the costs of producing a document electronically can be recoverable under section 1920(4),” the parties’ cost-sharing agreement precluded the prevailing parties’ claim for $234,702.43 of the $235,281.03 in costs they paid to Stratify for use of its ESI-review software.  In re Ricoh Co., Ltd. Patent Litig. (Fed. Cir. Nov. 23, 2011).

The Lower Court’s Award of Costs

This consolidated patent infringement action involved a dispute pitting patent-holder Ricoh Co. Ltd. against Synopsys, Inc. and several Synopsys customers (collectively, “Synopsys”).  Following a disagreement on the form of production for Synopsys email sought by Ricoh, the parties agreed to use the Stratify review platform to load the electronically stored information (“ESI”) selected by Synopsys onto a pair of identical document review databases — one for use by Ricoh, the other for Synopsys — and to share the costs of the platform.  The parties’ cost-sharing agreement did not address the prospects of cost taxation.

After Synopsys prevailed on a motion for summary judgment of noninfringement, it sought to recover its eDiscovery-related (as well as certain other) costs, and the district court ultimately awarded costs of $938,957.72 plus applicable post-judgment interest.  Notwithstanding the parties’ cost-sharing agreement, the award included $235,281.03 in costs related to Synopsys’ use of the Stratify document review database to make the requested email available to Ricoh.

Synopsys’ use of the review database, the lower court concluded, constituted electronic production of the email and could be taxed as “fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case” under § 1920(4) and Local Rule 54-3(d)(2) (which provides that “[t]he cost of reproducing disclosure or formal discovery documents when used for any purpose in the case is allowable”).  According to the lower court,

The parties['] prior compromise as to the method of data production for e-mails . . . is not an agreement as to the taxability of data production costs.  . . .  Moreover, the Stratify database was set up solely for Ricoh’s benefit as a means of producing certain documents natively.  . . .  Synopsys and the Customer Defendants explicitly represented to the Court that they did not use the Stratify database for any other purpose, such as “to review, filter, search, annotate, or otherwise process their documents.”  . . .

In re Ricoh Co., Ltd. Patent Litig., No. 03-CV-2289, slip op. at 13-14 (N.D. Cal. Sept. 29, 2010).

On appeal, Ricoh contested $688,465.42 of the cost award, including $234,702.43 of the $235,281.03 awarded to Synopsys for its database-related costs.  (Ricoh also challenged a portion of the $322,515.71 in costs awarded for document copying, most of the $102,070.67 in costs for deposition transcripts, and certain other costs included in the award.  This post discusses only the Stratify-related costs.)

The Federal Circuit’s Analysis of Review-Platform Costs: Production Costs Are Taxable

Although the parties presented multi-layered arguments on the review-platform cost issue, the Federal Circuit summarized their respective positions as a dispute over whether the challenged costs were incurred for email production:

Synopsys contends that, because Stratify was used as the exclusive means for producing e-mails, the full cost of Stratify is taxable as “fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case” under section 1920(4).  Ricoh in turn argues that Stratify does not fall under section 1920(4) because it was a “document review database” (as opposed to a form of document production) for the convenience of counsel and not necessary for use in the case.

Slip Op. at 5-6.

The court then concluded that, absent an agreement to the contrary, the use of an electronic database to produce documents is taxable under § 1920(4), which authorizes a court 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”.

Under section 1920(4), exemplification and copying costs for producing documents in discovery are recoverable. This is reflected in Northern District of California Civil Local Rule 54-3(d)(2), which permits taxing “[t]he cost of reproducing disclosure or formal discovery documents when used for any purpose in the case.” N.D. Cal. Civ. R. 54-3(d)(2). Here, the district court did not abuse its discretion in concluding that, absent a contrary agreement such as we conclude existed in this case, costs associated with Stratify were taxable because “the Stratify database was used as a means of document production in this case.” Taxation Order, slip op. at 13.

The act of producing documents is not so narrowly construed as to cover only printing and Bates-labeling a document.  . . .  Thus, the costs of producing a document electronically can be recoverable under section 1920(4).

. . .  The district court did not err in concluding that Synopsys’s act of making available all of the requested e-mail to Ricoh through Stratify constituted electronic production of the e-mail. We do not consider any of the Stratify database costs to fall into the unrecoverable category of “intellectual efforts.”  . . .  “Since the documents were produced in their native form via the database,” Taxation Order, slip op. at 13, we hold that the basic Stratify costs would be recoverable under section 1920(4), absent an agreement to the contrary.  In light of our decision, we need not decide if the additional challenged items related to the database were improperly allowed.

Slip op. at 6-7.

But in This Case, The Parties’ Cost-Sharing Agreement Trumps

So far, so good for Synopsys — except for the matter of that cost-sharing agreement.  Noting that “[t]here is no question that parties may agree to share costs that would otherwise be taxable,” the Federal Circuit held that the parties’ cost-sharing agreement was controlling and nullified Synopsys’ § 1920(4) argument:

Here, there is no dispute that Synopsys agreed to share the cost of the Stratify database with Ricoh. Synopsys originally proposed that Ricoh “agree to pay half of the costs associated with producing [Synopsys’s] e-mails.” J.A. 3062. When Ricoh later suggested using Stratify to produce the e-mails, it agreed that “[t]he cost would be divided between the parties.” J.A. 3069. The parties then implemented this arrangement by entering into a 14-page agreement with Stratify in which they jointly retained Stratify to perform electronic discovery services. The parties characterized this agreement as a cost-sharing agreement, but never indicated that the cost-sharing was only temporary. Communications between the parties after the agreement with Stratify was executed continued to reflect the cost-sharing agreement. See, e.g., J.A. 3396 (“Accordingly, we . . . will split the cost, pursuant to the contract, of the additional databases.”). There is no indication in any of the extensive communications between the parties that they intended this cost-sharing agreement to be anything other than a final settlement of the cost of the Stratify database. If the cost-sharing agreement were designed to be only an interim agreement, it seems likely that there would have been some indication to that effect in either the communications between counsel or the agreement with Stratify. Under these circumstances, the parties’ agreement is best interpreted as agreeing to a final, not an interim, sharing of costs.

Slip op. at 9.

Open Issue — What Are Taxable “Production” Costs?

While this decision provides significant support for the proposition that (in the absence of an agreement to the contrary) a prevailing party may recover the costs it incurred to produce ESI, it does not address which costs are properly treated as taxable production-related costs.

In its briefing, Ricoh argued that all of the disputed Stratify costs were unrelated to Synopsys’ ESI production, including

Stratify’s hourly fees for custom work requested solely by Synopsys, web-based training fees for Synopsys’s counsel, Microsoft application user license fees for Synopsys’s lawyers, courier charges, media handling fees to and from Synopsys’s counsel, and data processing requested by Synopsys.

. . .  The District Court also erred in concluding that the databases were created exclusively for Ricoh’s benefit even though Synopsys conceded, and the evidence shows, that Synopsys used its database to review, filter, tag, and process its documents.

Ricoh opening brief at 4-5 (discussed in greater detail at 12-17 et seq.).  (In fact, Ricoh argued that production was accomplished solely by printing hard-copy documents, id. at 14, and for that reason Ricoh did not challenge $578.60 in taxed costs for producing roughly 16,000 pages from the Stratify database.  Id. at 15.  The Federal Circuit appeared to reject this argument out of hand: “The act of producing documents is not so narrowly construed as to cover only printing and Bates-labeling a document.”  Slip op. at 6.)

Synopsys rejected Ricoh’s characterization of Synopsys’ use of the Stratify platform:

First, Ricoh–not Synopsys–proposed using Stratify to produce documents in native format.  . . .  Second, merely alleging ways in which Synopsys used the database, even if true, fails to address the district court’s finding that Ricoh benefited from the Stratify database.  . . .  Third, Ricoh is factually wrong that Synopsys used the Stratify database for review rather than production. On three separate occasions during discovery in this case, Synopsys identified and removed privileged e-mails published On the Stratify database.  . . .  The district court relied on these events to support its finding that the Stratify database was used for document production rather than review.  . . .  Ricoh has not shown that the district court abused its discretion in doing so.

Synopsys brief at 16; see also id. at 17-21.

The court declined to examine the disputed Stratify-related costs in any detail, though it did acknowledge the potentially significant distinction between production-related and non-production-related costs:

. . . [W]e hold that the basic Stratify costs would be recoverable under section 1920(4), absent an agreement to the contrary.  In light of our decision, we need not decide if the additional challenged items related to the database were improperly allowed.

Slip Op. at 7 (emphasis added).  Thus, given the court’s framing and analysis of the issues, its decision leaves open the argument that not all costs related to an ESI review platform may properly be treated as taxable costs related to a prevailing parties’ document production.

*****Of course, the In re Ricoh decision doesn’t exist in a vacuum, and there are decisions from other jurisdictions addressing similar eDiscovery-taxation issues.  Last spring’s decision in Race Tires America, Inc. v. Hoosier Racing Tire Corp., 2: 07-cv-1294 (W.D. Pa. May 6, 2011), for example, awarded costs for (among other things) creating a litigation database, processing and indexing data, extracting metadata, and enabling documents to be OCR searchable.  For readers interested in digging further into the case law, I’ve listed a few earlier eDiscovery-taxation cases below.

This is not the Federal Circuit’s first foray into the eDiscovery world.  In September, Chief Judge Randall R. Rader announced a model order that limits eDiscovery in patent litigation.  In August of this year, the court reversed a lower court’s summary judgment determination of invalidity and vacated its award of costs (including eDiscovery costs related to collecting, searching, identifying, and producing ESI).  CBT Flint Partners, LLC v. Return Path, Inc., 676 F. Supp. 2d 1376 (N.D. Ga. 2009), vacated, CBT Flint Partners, LLC v. Return Path, Inc., 2010-1202, -1203 (Fed. Cir. Aug. 10, 2011).  And in May 2011, the Federal Circuit stepped into the Rambus “shred days” saga with a pair of decisions addressing the duty to preserve.  See Micron Technology, Inc. v. Rambus Inc., 2009-1263 (Fed. Cir. May 13, 2011); Hynix Semiconductor Inc. v. Rambus Inc., 2009-1299, -1347 (Fed. Cir. May 13, 2011).

A few closing thoughts:

• If you’re contemplating an agreement with your adversary to share discovery-related costs (for a shared review platform or otherwise), you may want to consider whether (and if so, how) the agreement should address the possibility of cost taxation down the road.  What’s best for a particular party will depend on the facts and circumstances of the case, its evaluation of (and taste for) risk, and various other factors.
• Be prepared to support your § 1920 cost request should you be fortunate enough to end up as a prevailing party.  While the application of § 1920 to ESI is still relatively new and evolving, there is enough case law out there to provide a fair measure of direction; and an understanding of the case law will help guide you in keeping the records necessary to document your prospective bill of costs.
• Remember: the eDiscovery costs you impose on your adversary could come back your way in a bill of costs.

Resources

Here are links to the Ricoh opening brief (which includes as an addendum a copy of the lower court’s Sept. 29, 2010 decision), the (corrected) Synopsys brief and the Ricoh reply brief, as well as an MP3 of the Oct. 4, 2011 Federal Circuit oral argument (approx. 37 MB).

And here’s a non-exhaustive selection of additional cases addressing the taxation of eDiscovery costs (in reverse chronological order):

• Jardin v. DATAllegro, Inc., 2011 WL 4835742 (S.D. Cal., Oct. 12, 2011).
• In re Aspartame Antitrust Litig., No. 2:06-CV-1732-LDD (E.D. Pa. Oct. 5, 2011).
• Tibble v. Edison Int’l, No. CV 07-5359 SVW (AGRx) (C.D. Cal. Aug. 22, 2011).
• Promote Innovation LLC v. Roche Diagnostics Corp., Case No. 1:10-cv-964-TWP-TAB (S.D. Ind. Aug. 9, 2011).
• Hank’s Beverage Co. v. Ajinomoto Co., Civ. No. 06-cv-1732 (E.D. Pa. Jul. 26, 2011).
• Specht v. Google, Inc., No. 09 C 2572 (N.D. Ill. Jun. 27, 2011).
• Race Tires America, Inc. v. Hoosier Racing Tire Corp., 2: 07-cv-1294 (W.D. Pa. May 6, 2011).
• Mann v. Heckler & Koch Defense, Inc., 1:08cv611 (JCC) (E.D. Va. Apr. 28, 2011).
• Parrish v. Manatt, Phelps & Phillips, LLP, No. C 10-03200 WHA (N.D. Cal. Apr. 11, 2011).
• Monolithic Power Systems, Inc. v. O2 Micro Int’l Ltd., No. C 08-04567 CW (N.D. Cal. Mar. 3, 2011).
• Francisco v. Verizon South, Inc., Case No. 3:09cv737-DWD (E.D. Va. Mar. 1, 2011).
• Comrie v. IPSCO Inc., No. 08 CV 3060 (N.D. Ill. Dec. 1, 2010).
• Service Employees, Int’l. Union v. Rosselli, No. C 09-00404 WHA (N.D. Cal. Nov. 1, 2010).
• United States Bankr. v. Dorel Indus., Case No. A-08-CA-354-SS (W.D. Tex. Aug. 2, 2010).
• CBT Flint Partners, LLC v. Return Path, Inc., 676 F. Supp. 2d 1376 (N.D. Ga. 2009), vacated, CBT Flint Partners, LLC v. Return Path, Inc., 2010-1202, -1203 (Fed. Cir. Aug. 10, 2011) (reversing summary judgment of invalidity and vacating award of costs).
• Kellogg Brown & Root Int’l, Inc. v. Altanmia Comm’l Marketing Co., Civil Action No. H-07-2684 (S.D. Tex. May 26, 2009).
• Fells v. Virginia Department of Transportation, 605 F. Supp. 2d 740 (E.D. Va. 2009).
• Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009).
• Klayman v. Freedom’s Watch, Inc., Case No. 07-22433 (S.D. Fla. Nov. 18, 2008) (report and recommendation), adopted by Klayman v. Freedom’s Watch, Inc., Case No. 07-22433 (S.D. Fla. Dec. 4, 2008).
• Brown v. The McGraw-Hill Cos., 526 F.Supp.2d 950 (N.D. Iowa 2007).
• Lockheed Martin Idaho Techs. Co. v. Lockheed Martin Advanced Envtl. Sys., Case No. CV-98-316-E-BLW (D. Idaho July 27, 2006).