The U.S. Court of Appeals for the Third Circuit has  vacated a district court award in excess of $367,000 for e-discovery costs to the winning defendants in Race Tires America Inc. v. Hoosier Racing Tire Corp.

As we reported in an earlier edition of Antitrust Today, Judge Terrence F. McVerry of the U.S. District Court for the Western District of Pennsylvania ordered the plaintiff, Race Tires America Inc., to pay these costs after granting summary judgment in favor of the defendants.

Race Tires argued that defendants entered into exclusive contracts which allegedly shut it out of the dirt oval track market. Judge McVerry held that Race Tires could not show it sustained an antitrust injury because such contracts are permissible when a sports entity freely decides it wants exclusivity and has precompetitive, good faith or business motives for entering into the agreements.

After the Third Circuit affirmed the ruling in 2010, the district court clerk taxed almost all of the defendants’ e-discovery costs to the plaintiff under 28 U.S.C. § 1920(4). The statute allows recovery of “(f)ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.”

At issue on appeal was whether section 1920(4) authorizes the taxation of e-discovery vendor charges for data collection, preservation, searching, culling, conversion and production as either “exemplification” or “making copies” of materials where necessary for use in the case.

In a decision by Judge Thomas Vanaskie, the Third Circuit sharply reduced the recovery to $30,000. The court held that none of the vendors’ work qualified as “exemplification” and that the only “copying” that was performed was the scanning of hard copy documents, converting native files to the .tif format, and the transfer of videotapes to DVDs.

The appellate court reasoned that shifting the costs of e-discovery was inconsistent with the “American rule” against shifting the expense of litigation to the losing party and that “[n]either the language of § 1920(4), nor its history, suggests that Congress intended to shift all the expenses of a particular from of discovery – production of ESI – to the losing party.”

Plaintiff Race Tires America Inc. is racing to appeal an order of Judge Terrence F. McVerry of the United States District Court for the Western District of Pennsylvania ordering it to pay $367,369 in e-discovery costs to Hoosier Racing Tire Corp. and Dirt Motor Sports, Inc., the winning defendants in Race Tires America Inc. v. Hoosier Racing Tire Corp.   

Race Tires, a division of Speciality Tires of America, initiated the litigation in 2007 claiming that its competitor, Hoosier Racing Tire Corp., violated the Sherman Act by entering into exclusive supply contracts with Dirt Motor Sports, a motorsports racing sanctioning body.

Dirt Motor Sports sanctions at least 5,000 races in 21 states each year and adopted a “single tire rule” which exclusively required Hoosier tires for its sanctioned events.  Race Tires America alleged that the exclusive contracts shut it out of the dirt oval race track market. 

Judge McVerry granted summary judgment in favor of defendants finding that Race Tires failed to show it sustained an antitrust injury.  He held that exclusive contracts are permissible when a sports entity freely decides it wants exclusivity and has procompetitive, good faith or business motives for entering into the agreements.  The United States Court of Appeals for the Third Circuit affirmed the ruling in 2010. 

After the ruling by the Third Circuit, each defendant filed a Bill of Costs with the District Court – mostly for the costs of e-discovery.  The Clerk of Court slightly reduced the costs owed to defendants and Race Tires then moved for review claiming that costs of e-discovery are not allowed under 28 U.S.C. § 1920(4).  The statute allows recovery of “(f)ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” 

Judge McVerry acknowledged that the terms “exemplification” and “copying” originated and were developed in the world of paper, and that courts need to figure out how to apply these terms to the world of electronically stored information.  The court noted that the Third Circuit has yet to address the issue of whether e-discovery costs are taxable but pointed to the Sixth Circuit which has held that electronic scanning and imaging could be interpreted as “exemplification” and “copies” of paper.

Judge McVerry also discussed how Congress, in 2008, changed the wording of § 1920(4) from “fees for exemplifications and copies of paper” to “fees for exemplification and the costs of making copies of any materials.”  No court has categorically excluded e-discovery costs from allowable costs since the amendment’s passage.

The court found that that the requirements and expertise to retrieve and prepare the e-discovery documents for production were an “indispensable” part of the discovery process and denied Race Tires’ objection to the taxation of e-discovery costs.  Judge McVerry reasoned that the parties had agreed that responsive documents would be produced in an electronic format.  Race Tires also aggressively pursued e-discovery under the Case Management Plan.  Defendant Hoosier hired experts to collect and image hard drives, to scan documents, to create electronic images, to process and index electronic data, to allow documents to be OCR-searchable and to convert documents to the required .tif format. 

Race Tires is appealing the decision to the Third Circuit.