Taxation of ESI Costs in The Country Vintner v. Gallo Winery

Taxation of ESI Costs in The Country Vintner v. Gallo Winery

In an April 29 decision in The Country Vintner of North Carolina v. E & J Gallo Winery Inc. the 4th Circuit clarified what e-discovery costs are taxable under Title 28 of the U.S. Code Section 1920(4). This Opinion further emphasizes the importance of in-house counsel focusing their efforts at the outset of a case. It is critical to establish the cost and scope of a matter  early on rather than later in the process so that it can be compared proportionally to the case’s value.

In the aforementioned matter the dispute began over who had the right to sell Alamos, an Argentinean wine, wholesale. As the Opinion states, “Almost immediately, the parties clashed over the discovery of ESI.” Country Vintner requested all communication connected with their relationship with Gallo. In turn, Gallo moved for a protective order arguing that Country Vintner’s requests were “overbroad, vague,” and “not reasonably calculated to lead to the discovery of admissible evidence.” They claimed it would cost $30,000 to process the email data of 24 employees and up to $432,000 to review the data to protect from waiving privileged documents. The district court denied Gallo’s motion and accepted Country Vintner’s ESI proposal. In response to the order, Gallo collected more than 62 GBs of data to be processed and reviewed.

Less than two months after Gallo began producing documents, the district court granted Gallo’s motion to dismiss Country Vintner’s claim under the North Carolina Unfair and Deceptive Trade Practices Act. The parties then filed cross motions for summary judgment on the remaining Wine Act claims, and the court granted summary judgment in favor of Gallo, which was affirmed by the 4th Circuit. Since Gallo was the prevailing party they filed a bill of costs seeking to recover $111,047.75 for charges relate to ESI in six categories: 1) $71,910 for “flattening” and “indexing” 2) $15,660 for “Searching/Review Set/Data Extraction” 3) $178.59 for “TIFF Production” and “PDF Production” 4) $76.16 for electronic “Bates Numbering” 5) $40 for “copying images onto a CD or DVD” and 6) $23,185 for “management of the processing of the electronic data,” “quality assurance procedures,” “analyzing corrupt document and other errors,” and “preparing the production of documents to opposing counsel.”

In continuing the trend of clashing over ESI, both sides “vigorously contested the propriety of the bill of costs.” Based on the statute, the district court granted in part and denied in part the cost concluding, “a prevailing party may recover costs associated with copying or duplicating its files, but it may not receive reimbursement for any other ESI-related expenses.” Therefore, the only cost that Gallo could collect were those attached to copying the conversion of native files to TIFF and PDF and getting those onto CDs. Meaning, Gallo could recover a whopping $218.59. Another $350 was included for “fees of the clerk” bringing the totals cost to $568.59.

The real kicker is that the 4th Circuit noted that Gallo might have other recoverable cost but they were not “readily discernable because Gallo had included various multi-task entries.” Therefore, it was impossible for the court to determine if any other taxable costs existed. Although, it is impossible to know what extra costs Gallo might have recovered, we can assume because of the scope established by the statute it would be somewhat nominal.

Gallo did argue that its ESI charges are taxable in connection to “making copies” under section 1920(4) because ESI has “unique features” (i.e. ESI is different from paper in that it contains metadata, including searchable text). Gallo contended that when converting native files to PDF and TIFF formats for production it was necessary to extract all of the files, index for search, copy metadata and load into a “review platform.” The 4th Circuit did not agree with this logic and cited Race Tires America, Inc. v. Hoosier Racing Tire Corp. where the prevailing party was not permitted to receive reimbursement for any other ESI expenses other than those associated with copying or duplicating its files. In this case the 3rd Circuit explained that, “[s]ection 1920(4) does not state that all steps that lead up to the production of copies of materials are taxable. It does not authorize taxation merely because today’s technology requires technical expertise not ordinarily possessed by the typical legal professional. It does not say that activities that encourage cost savings may be taxed. Section 1920(4) authorizes awarding only the cost of making copies.”

When considering the cost return the 4th Circuit reasoned, “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. The Supreme Court has emphasized that ‘costs almost always amount to less than the successful litigant’s total expenses,’ and § 1920 is ‘limited to relatively minor, incidental expenses.’”

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