PA Federal Business Decisions Volume 16, No. 3

By Henry M. Sneath, Kelly A. Williams

Business Litigation Update

Pennsylvania Federal Business Decisions

Kelly A. Williams and Henry M. Sneath, Business Decisions Editors (Originally published in the November 2011 edition of the Pennsylvania Bar Association’s Civil Litigation Update)

Dissenting Shareholders’ Post-Merger Remedies Are Not Limited to Statutory Appraisal

In Mitchell Partners, L.P. v. Irex Corp., Nos. 10-4040, 10-4091, 2011 U.S. App. LEXIS 18116 (3d Cir. Aug. 31, 2011) (opinion by J. Sloviter), Plaintiff Mitchell Partners, L.P. (“Mitchell”), a minority shareholder of Irex Corp. (“Irex”), which was already participating in an appraisal proceeding in state court, filed a post-merger suit in the U.S. District Court for the Eastern District of Pennsylvania against Irex, Irex’s directors and officers and others alleging, inter alia, breach of fiduciary duties by the majority shareholders in connection with Irex’s cash-out merger with North Lime Holdings Corp. The district court held that the statutory appraisal remedy previously instituted in state court was exclusive and, therefore, dismissed Mitchell’s complaint in its entirety. Mitchell appealed the dismissal. On appeal, the U.S. Court of Appeals for the Third Circuit analyzed the issue of whether the Pennsylvania statute providing for appraisal of the value of the shares of minority shareholders who are “squeezed out” in a cash-out merger precludes all other remedies.

Pennsylvania law provides a shareholder who dissents to a merger the right “to obtain payment of the fair value of his shares.” 15 Pa. Cons. Stat. § 1571. Pursuant to 15 Pa. Cons. Stat. § 1579, this appraisal remedy is to be pursued in a state court action initiated by the corporation against the dissenting shareholder after the shareholder has dissented and after the merger has been consummated. The relief provided by the appraisal remedy is limited to the fair valuation and payment of the dissenter’s shares. 15 Pa. Cons. Stat. § 1571.

Another statute, 15 Pa. Cons. Stat. § 1105, titled “Restriction on equitable relief,” limits the relief a dissenting shareholder may obtain outside the statutory appraisal remedy provided by 15 Pa. Cons. Stat. § 1571 et seq. Specifically, Section 1105 provides in part that: “A shareholder of a business corporation shall not have any right to obtain, in the absence of fraud or fundamental unfairness, an injunction against any proposed plan or amendment of articles authorized under any provision of this Subpart, nor any right to claim the right to valuation and payment of the fair value of his shares because of the plan or amendment, except that he may dissent and claim such payment if and to the extent provided in Subchapter D of Chapter 15 (relating to dissenters rights) where this Subpart expressly provides that dissenting shareholders shall have the rights and remedies provided in that Subchapter. Absent fraud or fundamental unfairness, the rights and remedies so provided shall be exclusive.” The scope of 15 Pa. Cons. Stat. § 1105 was the dispositive issue analyzed by the court on appeal.

In interpreting Section 1105, the Third Circuit first looked to the Pennsylvania decisions in In re Jones & Laughlin Steel Corp., 398 A.2d 186 (Pa. Super. 1979) ( Jones I) and In re Jones & Laughlin Steel Corp., 412 A.2d 1099 (Pa. 1980) ( Jones II). Those decisions held that the exclusive remedy provided to shareholders does not include the right to challenge the validity of the merger in an appraisal proceeding. However, as the Jones decisions did not directly address the issue of whether a suit for damages for breach of fiduciary duties may be brought post-merger, the court turned to the Third Circuit decision in Herskowitz v. Nutri/System, 857 F.2d 179 (3d Cir. 1988). In that case, the Third Circuit narrowly interpreted the Jones decisions as merely limiting the appraisal court’s jurisdiction and held that the statutory appraisal cause of action coexists with common law causes of action.

Based on the language of Section 1105, Jones and Herskowitz, the court predicted that the Supreme Court of Pennsylvania would permit a post-merger suit for damages based on the majority shareholders’ breach of their fiduciary duties for several reasons. First, the Jones decisions did not hold that a post-merger equitable claim could not be instituted separately from the appraisal proceeding. Second, nothing in the appraisal statute itself distinguishes between pre- and post-merger relief. Third, the appraisal remedy only permits dissenters to recover from the corporation and, thus, the appraisal remedy’s corresponding limitations only apply to suits against the corporation. Fourth, the appraisal remedy’s evaluation of fair value is more limited than the damages available for fiduciary duty breaches–breaches that may not become evident until after the merger has been consummated. Fifth, because the appraisal remedy is limited to shareholders who have perfected their rights as dissenters before the merger, an exclusive appraisal remedy would deprive majority shareholders that were deceived into voting for the merger from having a remedy for breach of fiduciary duty. Finally, relevant authority indicates that a claim for breach of fiduciary duty based on majority self-dealing and misrepresentations falls within the ambit of the “fraud or fundamental unfairness” language set forth in Section 1105. Consequently, the court reversed the decision of the district court, dismissing all counts of the complaint and remanding for further proceedings.

— Contributed by R. Brandon McCullough, Esq., Houston Harbaugh, Pittsburgh, Pennsylvania;

Third Circuit Reminds Readers That Class Certification Does Not Decide the Merits of a Matter and That Claims and Calculations Need Not Converge

In Behrend v. Comcast Corp., No. 10-2865, 2011 U.S. App. LEXIS 17524 (3d Cir. Aug. 23, 2011) (opinion by J. Aldisert), the Third Circuit affirmed the Eastern District of Pennsylvania’s application of the class certification standards established by In re Hydrogen Peroxide Antitrust Litigation, 522 F.3d 305 (3d Cir. 2008). Plaintiffs alleged that a class action was justified because they had sufficient class-wide proof regarding: 1) whether Comcast violated the Sherman Act by restraining competition for multichannel video distribution services (i.e., cable and satellite) in the Philadelphia area; and 2) whether Comcast’s violations caused damages that could be fairly quantified. The district court agreed, and the Third Circuit affirmed. The Third Circuit’s opinion made two points regarding the standards to be applied on a motion for class certification.

First, the Third Circuit reminded readers that the courts’ task on a motion for class certification is not to review the ultimate merits of plaintiff’s evidence, but rather to review whether the plaintiff has presented enough class-wide evidence to justify a class action (at which a fact finder will weigh the merits of that evidence). As the Third Circuit put it, “We are not the jury.” The Third Circuit used strong language to reject Comcast’s challenges to the merits of Plaintiffs’ evidence (as opposed to the quantum of that evidence), stating that “Comcast misconstrues our role at this stage of the litigation,” and that “the heart of Comcast’s arguments are attacks on the merits … that have no place in the class certification inquiry.”

Second, the majority of the Behrend panel also found that Plaintiffs’ claim regarding how Comcast violated the Sherman Act did not need to match their claim regarding how damages would be measured. In claiming that Comcast attempted to monopolize the market, Plaintiffs offered evidence supporting multiple theories. The district court found (and the Third Circuit affirmed) that Plaintiffs had presented enough class-wide evidence to justify a class claim on whether Comcast had discouraged competing cable companies called “overbuilders” from offering cable services in the Philadelphia area. Comcast had argued–and the dissent agreed–that because Plaintiffs’ damages expert did not attempt to calculate damages that flowed from the specific exclusion of overbuilders, but rather damages that flowed from the exclusion of general competition and/or satellite service competition, the “Plaintiffs failed to show that damages could be proven using evidence common to the class.” The majority disagreed and stated that “[a]t the class certification stage we do not require that Plaintiffs tie each theory of antitrust impact to an exact calculation of damages.”

In summary, the Behrend opinion stands for the propositions that: 1) class certification is not – and must not be mistaken for – a trial on the merits; and 2) if there is class-wide evidence of a violation and of a way to calculate damages, certification is appropriate even if the damages calculation does not flow from the theory of violation.

–Contributed by Jason A. Spak, Esq., Houston Harbaugh, Pittsburgh, Pennsylvania,

Restatement (Third) of Torts §§ 1 and 2 Adopted as Products Liability Law

In Covell v. Bell Sports, Inc., No. 10-3860, 2011 U.S. App. LEXIS 14252 (3d Cir. July 12, 2011) (opinion by J. Aldisert), David Covell (“Covell”), a schoolteacher, sustained serious brain injuries while bicycling to work when he was struck by a car. Covell became disabled to the point that his parents (the “Covells”) were appointed legal guardians, and they filed this lawsuit on his behalf against Easton-Bell Sports, Inc. (“Bell”), which manufactured the “Giro Monza” bicycle helmet that David Covell was wearing during the accident. At trial, the district court permitted Bell to introduce expert testimony regarding the U.S. Consumer Product Safety Commission’s Safety Standard for Bicycle Helmets (the “CPSC Standard”). Covell offered expert testimony regarding the CPSC Standard as well, and ultimately, the experts agreed that the CPSC Standard formed the starting point for any bicycle design and that the Giro Monza helmet satisfied the CPSC Standard in all respects. The district court then instructed the jury pursuant to Sections 1 and 2 of the Restatement (Third) of Torts, and also instructed the jury that it could consider evidence of standards or customs in the bicycle helmet industry, including the CPSC Standard, in determining whether the Giro Monza helmet was defective. The jury returned a verdict for the defense, finding that the helmet was not defective. The Covells’ appealed on the grounds that, inter alia, the district court should not have applied the Restatement (Third) of Torts and instead should have applied the Restatement (Second) of Torts, when instructing the jury and when admitting evidence of the CPSC Standard.

Section 402A of the Restatement (Second) of Torts makes sellers liable for harm caused to consumers by unreasonably dangerous products, even if the seller exercised reasonable care. Section 402A thus creates a strict liability regime by insulating products liability cases from negligence concepts. The Supreme Court of Pennsylvania has addressed the confusion caused by Section 402A, which instructs courts to ignore evidence that the seller exercised all possible care in the preparation and sale of his product, yet imposes liability only for products that are unreasonably dangerous. Thus, in many cases, it is difficult to determine whether a product is unreasonably dangerous to consumers without reference to evidence that the seller did or did not exercise care in the preparation of the product.

The American Law Institute responded to this conflict by publishing the Restatement (Third) of Torts. According to Section 1, “One engaged in the business of selling or otherwise distributing products who sells or distributes a defective product is subject to liability for harm to persons or property caused by the defect.” According to Section 2, “A product is defective when, at the time of sale or distribution, it contains a manufacturing defect, is defective in design, or is defective because of inadequate instructions or warnings. A product: (a) contains a manufacturing defect when the product departs from its intended design even though all possible care was exercised in the preparation and marketing of the product; (b) is defective in design when the foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reasonable alternative design by the seller or other distributor, or a predecessor in the commercial chain of distribution, and the omission of the alternative design renders the product not reasonably safe; (c) is defective because of inadequate instructions or warnings when the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of reasonable instructions or warnings by the seller or other distributor, or a predecessor in the commercial chain of distribution, and the omission of the instructions or warnings renders the product not reasonably safe.

Thus, Section 1 makes sellers liable only for the sale of products that are defective and Section 2 provides that a product may qualify as defective if it meets certain criteria, which incorporate negligence concepts such as “foreseeable risk” and “care” directly into the definition of “defective.” These new criteria serve as an express rejection of the “no negligence in products liability” theory applied in past cases. Due to the absence of a controlling decision by the Pennsylvania Supreme Court, the Third Circuit in the present case had to predict how the Supreme Court of Pennsylvania would decide the case. In this regard, the Third Circuit followed its decision in a case decided two years earlier, wherein the Third Circuit concluded that, if the Supreme Court of Pennsylvania was confronted with the issue to determine the law of Pennsylvania, i.e. Section 402A of the Restatement (Second) of Torts or Sections 1 and 2 of the Restatement (Third) of Torts, the Supreme Court of Pennsylvania would apply Sections 1 and 2 of the Restatement (Third) of Torts to products liability cases. In Covell, the Third Circuit affirmed the ruling of the district court, which followed the previous case decided by the Third Circuit and admitted evidence of the CPSC Standard as relevant to the amount of care exercised by Bell.

–Contributed by Esq., Houston Harbaugh, Pittsburgh, Pennsylvania,

In Ackourey v. Mohan’s Custom Tailors, Inc., 2011 U.S. Dist. LEXIS 98636 (E.D. Pa. Sept. 1, 2011), the U.S. District Court for the Eastern District of Pennsylvania was asked to determine whether and to what extent Plaintiff could recover special statutory damages and attorney’s fees for an alleged copyright infringement. Plaintiff was able to recover statutory damages and attorney’s fees in part.

Plaintiff, Richard C. Ackourey Jr. doing business as Graphic Styles/Styles International LLC (“Plaintiff”), produced, displayed and distributed “stylebooks containing copyrighted drawings and graphic representations of men’s and women’s clothing styles.” In 2004, Plaintiff obtained rights to utilize and reproduce all copyrighted material owned by Graphic Fashions, Inc. In 2006, Plaintiff published “Styles International Best of Seasons 2006” (the “2006 Stylebook”), which contained up to 260 drawings. The 2006 Stylebook included drawings from at least 27 prior stylebooks published by Graphic Fashions, Inc., as well as original drawings. The 2006 Stylebook was registered with the U.S. Copyright Office effective January 30, 2009. By 2007, Graphic Fashions, Inc. assigned all of its ownership rights in its copyrights to Plaintiff.

Defendants Mohan’s Custom Tailors, Inc. and its president, Mike Ramchandani (collectively “Defendants”), had received a copy of the 2006 Stylebook by April 2006. In 2008, Defendants created and printed 1000 copies of Mohan’s Custom Tailors Catalog (the “Catalog”). In 2009, Plaintiffs received a copy of the Catalog and then filed suit under the Copyright Act, alleging that Defendants had copied 123 images from the 2006 Stylebook without authorization. Plaintiffs Complaint sought, inter alia, statutory damages and attorney’s fees and costs. Defendants filed a motion for partial summary judgment seeking a ruling in their favor on Plaintiff’s claims for those damages. In short, Defendants asserted that the 2006 Stylebook was not timely registered within three months and that the alleged infringement had already commenced by the time that the copyright on the 2006 Stylebook was registered. Therefore, Plaintiff was barred from seeking statutory damages and attorney’s fees pursuant to 17 U.S.C. § 412. Section 412 provides that “no award of statutory damages or of attorney’s fees, as provided by sections 504 and 505, shall be made for-(1) any infringement of copyright in an unpublished work commenced before the effective date of its registration; or (2) any infringement of copyright commenced after first publication of the work and before the effective date of its registration, unless such registration is made within three months after the first publication of the work.”

In response, Plaintiff conceded that it was not entitled to statutory damages for those materials in the 2006 Stylebook that had not been previously registered. Nonetheless, Plaintiff asserted that it could recover for infringement of those images within the 2006 Stylebook that were registered before Defendants’ infringement. As such, Plaintiff maintained that it was entitled to statutory damage awards for each of those infringed copyrights.

The case boiled down to two issues: 1) whether Plaintiff could recover for alleged infringements of twelve copyrighted materials that were registered before the 2006 Stylebook’s publication and copyright registration; and 2) if so, whether Plaintiff was entitled to multiple statutory damages awards based on each infringement or whether Plaintiff was entitled to only a single statutory award for the infringement of a single work. On the first issue, the court concluded that Plaintiff’s copyright on the 2006 Stylebook extended only to new, previously uncopyrighted material contained therein. The copyright protections in the preexisting material used in the 2006 Stylebook, however, remained undisturbed and independently enforceable. Thus, under Section 412 of the Copyright Act, Plaintiff could recover statutory damages and attorney’s fees for the alleged infringement of the twelve preexisting copyrights.

Second, the court found that Plaintiff was only entitled to a single award of statutory damages because Section 504(c)(1) provides that “all the parts of a compilation or derivative work constitute one work.” The parties agreed that the 2006 Stylebook was a compilation, and therefore, Plaintiff’s reliance on the independent copyrights predating its publication was misplaced.

“Steak Umm” Trademark Not Likely to Be Confused by “Steak ‘Em Up”

In The Steak Umm Company, LLC v. Steak ‘Em Up, Inc., No. 09-2857, 2011 U.S. Dist. LEXIS 94088 (E.D. Pa. Aug. 23, 2011) (opinion by J. Stengel) , The Steak Umm Company, Inc. (“Steak Umm”) filed suit against Steak ‘Em Up, Inc. (“Steak Em Up”) for its alleged infringement of the “Steak Umm” trademark held by Steak Umm and registered in 1976. Steak Umm produces frozen, sliced steak and hamburger products for sale in grocery stores and has marketed and sold its products throughout the United States using the “Steak Umm” mark since 1975. Steak Em Up is a restaurant and grocery store that has takeout and delivery services and was opened in 2005. The owner created the name as a play on the words “stick ’em-up” and developed a logo, which is an old-time cartoon gangster holding a hoagie as if it were a gun. Upon learning of the use of “steak em up,” the owner of Steak Umm ran a Google search for the term “steak um up” and some of the top hits referred to a “Steak Um Up” store at Steak Em Up’s address. Steak Umm subsequently filed this suit seeking injunctive relief and monetary damages. During discovery, Steak Umm hired an expert, whose survey demonstrated that 12.9% to 24.1% of consumers would believe Steak Em Up sells Steak Umm products. Steak Em Up hired its own expert, who concluded that no more than 10% of consumers were likely to be confused.

Steak Umm’s trademark infringement and unfair competition/false advertising claims were analyzed under identical standards. To prove a prima facie case, a plaintiff must show that: (1) the trademark that is being infringed is valid; (2) the plaintiff owns the trademark in question; and (3) the defendant’s use of the mark to identify goods or services causes a likelihood of confusion. In this case, the validity and ownership of the “Steak Umm” mark were not contested. Therefore, this was a source of confusion case, meaning that Steak Umm’s claim was premised on the allegation that consumers believed Steam Em Up was affiliated with or related to Steak Umm or its products.

The court then analyzed the ten-part Lapp test established by the Third Circuit. With respect to Factor 1 – Degree of Similarity, the court noted that marks are not compared side by side, but are examined to determine if they create the same overall impression when viewed by an average consumer in isolation. The court determined that the evidence showed that the marks sounded similar but were visually distinct due to Steak Em Up’s gangster logo. The court did not weigh this factor in favor of either party. With respect to Factor 2 – Strength of the Mark, the court discussed the categories relating to the strength of a mark (arbitrary or fanciful, suggestive, descriptive and generic, from strongest to weakest) and determined that the category into which the “Steak Umm” mark fell was a question of fact. This Factor 2 did not favor one party over the other. With respect to Factor 3 – Price of Goods and Sophistication of Consumers, the court noted that the more sophisticated the buyer and the more expensive the product, the more likely the buyer will exercise caution when purchasing a particular product, and thus, the less likelihood of confusion. In this regard, the court concluded that this factor weighed in favor of Steak Umm because confusion is more likely as the parties’ products are inexpensive, and the consumers are not clearly sophisticated. With respect to Factors 4 and 6 – Length of Time Defendant Used Mark Without Actual Confusion and Evidence of Actual Confusion, the court noted that concurrent use of similar marks for a sufficient period of time without evidence of actual consumer confusion about the source of the products allows an inference that future consumers will not be confused. This factor is weighed alongside evidence of actual confusion. Here, a genuine dispute existed as to whether actual confusion occurred because the search for “steak um up” was not necessarily a term that a consumer would use to search. Also, the survey did not replicate the real world setting in which a consumer would encounter the mark because the survey used only the names of each company and not the logo or the packaging associated with the products.

With respect to Factor 5 – Intent of Defendants in Adopting the Mark, the court determined that the facts on record regarding the intent of Steak Em Up in choosing its name and logo suggested no connection to Steak Umm’s marks as Steak Em Up intended to use a gangster theme throughout its store and in its advertising, which had no relation to the overall goodwill of Steak Umm’s marks. The court concluded that Factor 5 weighed favorably for Steak Em Up. With respect to Factors 7 and 8 – Channels of Trade and Advertisement and Extent that Sales Targets are the Same, the court noted that if a party’s advertising and marketing campaigns are similar and/or their targeted customers are similar, the likelihood of confusion between their marks is greater. The court concluded that these factors weighed in favor of Steak Em Up because there was little geographical or intended-customer overlap in the advertising campaigns. With respect to Factors 9 and 10 – Relationship of Good in the Minds of Consumers and Other Facts Suggesting that the Consuming Public Might Expect the Prior Owner to Manufacture Both Products, the court noted that an analysis of these factors involves considering what products the parties make, how they sell the products, to whom they sell the products and whether a reasonable consumer could conclude that the plaintiff had expanded into the defendant’s market. The court determined that there was little evidence in the record regarding how consumers perceived the products, and there were clear differences between the products, how they were sold and to whom they were sold. The court concluded that genuine issues of fact existed as to nearly every Lapp factor, and given the fact-heavy nature of the Lapp inquiry, summary judgment was not appropriate.

Steak Umm also asserted a claim of federal and state dilution. To make a successful claim under the Trademark Dilution Revision Act of 2006, a plaintiff must show that: (1) its mark is famous; (2) the defendant is making use of the mark in commerce; (3) the defendant’s use of the mark began after the mark became famous; and (4) the defendant’s use is likely to cause dilution by either tarnishment or blurring. A plaintiff must show evidence and proof of the timing of when the plaintiff’s mark achieved that elevated status called “fame” and when the defendant made its first use of the mark. The court concluded that the “Steak Umm” mark was federally registered prior to Steak Em Up’s opening in October 2005 but that Steak Umm lacked evidence to prove and satisfy the high standard that its mark was famous prior to Steak Em Up’s use.

–Contributed by Esq., Houston Harbaugh, Pittsburgh, Pennsylvania,

Middle District of Pennsylvania Denies Motion to Dismiss PUTSA and Breach of Fiduciary Duty Claims but Dismisses Interference with Contractual Relations Claim

In Council for Educational Travel, USA v. Czopek, No. 1:11-CV-672, 2011 U.S. Dist. LEXIS 99230 (M.D. Pa. Sept. 2, 2011) (opinion by J. Rambo), Plaintiff filed a complaint for misappropriation of trade secrets under the Pennsylvania Uniform Trade Secrets Act (“PUTSA”), breach of fiduciary duty and duty of loyalty, and intentional interference with actual and prospective contractual relations against Defendants. Plaintiff was a nonprofit organization that coordinated employment opportunities for exchange students from around the world. Defendant Agata Czopek (“Czopek”), a former employee of Plaintiff, abruptly left to work for the other Defendant, Harristown Development Corp. (“Harristown”).

While working for Plaintiff, Czopek had access to client and oversee partner lists, as well as other confidential information. She had signed a written acknowledgement that required her to return all confidential information and not use this information when she left the company. Plaintiff alleged that she not only failed to return this information when she left but that she continued to use the information in her new job.

Defendant, moved to dismiss Plaintiff’s PUTSA claim arguing that Plaintiff failed to allege that there was a non-compete agreement between the parties, Plaintiff failed to identify the alleged trade secrets with specificity, and that an employee’s personal contacts made during her employment were not trade secrets. The court rejected all of these arguments.

First, the court held the PUTSA does not require that a restrictive covenant be executed. It only requires that the misappropriating party knew or had reason to know that he or she acquired a trade secret under a duty to maintain its secrecy. The allegations that Czopek signed a written acknowledgement restricting the use of confidential information were sufficient to state a claim.

Second, while acknowledging that a generic, formulaic recitation of trade secrets is not enough to state a claim, the Third Circuit does not require that a PUTSA plaintiff describe the allegedly misappropriated trade secrets with specificity. The trade secrets identified (strategic business and marketing plans, computer programs and codes, client lists, client account information, employee rosters, and compensation terms) were sufficient enough to survive the motion to dismiss.

Finally, the court ruled that whether an employee’s personal contact list constitutes a trade secret was a question of fact that should not be resolved on a motion to dismiss.

Defendants also moved to dismiss the breach of fiduciary duty and loyalty claim, arguing that the complaint failed to identify with specificity the corporate opportunities that were diverted, the confidential information that was shared, and the injuries Plaintiff suffered by this conduct. The court also rejected these arguments.

The court found that the complaint sufficiently alleged that Czopek diverted corporate opportunities, shared trade secrets, and solicited Plaintiff’s clientele. The court also noted that a plaintiff is not required to plead specific damages for these kinds of claims.

Unlike the other two claims, the court found Defendants’ motion to dismiss the intentional interference with actual and prospective contractual relations claim to be well taken. Defendants argued that Plaintiff failed to identify any relations that were interfered with and failed to plead any actual harm from the alleged interference.

The court reasoned that this type of claim requires that the plaintiff identify specifically the contractual relationships that suffered interference. Because Plaintiff failed to identify any clients or contracts (actual or prospective) in its complaint, the claim was dismissed. In addition, Plaintiff failed to make any factual allegations describing the harm it suffered beyond its conclusory allegations. While exact damage numbers are not required, some factual allegations are necessary. Plaintiff’s failure to do so warranted dismissal, but with leave to replead.

Western District of Pennsylvania Holds Prevailing Parties May Recover E-Discovery Costs Where Such Costs Were Indispensable Part of Discovery Process

The U.S. District Court for the Western District of Pennsylvania has held that prevailing parties may recover e-discovery costs incurred during litigation. In Race Tires America, Inc. v. Hoosier Racing Tire Corp., No. 2:07-cv-1294, 2011 U.S. Dist. LEXIS 48847 (W.D. Pa. May 6, 2011) (opinion by J. McVerry). The court had granted summary judgment in favor of defendants, Hoosier Racing Tire Corporation (“Hoosier”) and Dirt Motor Sports, Inc. (“DMS”), finding that plaintiffs had failed to show that they sustained an antitrust injury. Following plaintiffs’ failed appeals, Hoosier and DMS both filed a Bill of Costs, with Hoosier seeking total costs of $194,147.31 and DMS seeking $247,765.13. Hoosier’s e-discovery costs represented $143,007.05 of the total and DMS’ e-discovery costs amounted to $246,101.41. Plaintiffs objected, arguing that e-discovery costs were not taxable pursuant to 28 U.S.C. § 1920(4). The Clerk of Courts issued his Taxation of Costs in which he reduced Hoosier’s e-discovery cots to $125,580.55 and DMS’ e-discovery costs to $241,788.81.

Plaintiffs filed a Motion to Review Taxation of Costs again arguing that the e-discovery costs were not taxable under 28 U.S.C. § 1920(4). The court first observed that Federal Rule of Civil Procedure 54(d)(1) allows prevailing parties to recover costs, other than attorney’s fees. The rule is mandatory and “creates a ‘strong presumption’ that all costs authorized for payment will be awarded to the prevailing party” and that “the losing party, therefore, bears the burden of showing why costs should not be taxed against it.” In addition, section 1920 provides that the “court may assess the following costs:…(4) Fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” The courts have wide discretion in awarding costs as long as the costs are provided for in section 1920.

The court recognized that the terms “exemplification” and “copying” as used in 28 U.S.C. § 1920(4) were created in a paper world before electronic productions. While the Third Circuit has not yet addressed the issue, courts throughout the country appear to be split on the issue of whether “exemplification” and “copying” under section 1920 apply to electronically stored information. The court in Race Tires relied primarily on several decisions in which the district courts held that the costs of converting paper documents into electronic files, creating litigation databases and producing electronic documents were recoverable by the prevailing parties where the parties had agreed that responsive documents would be produced in an electronic format.

In Race Tires, the court recognized that since the litigation commenced, all parties as well as the court, anticipated that discovery would be in the form of electronically stored information. In particular, Plaintiffs had “aggressively pursued e-discovery” in the Case Management Plan and had directed 273 discovery requests to DMS as well as requiring 442 search terms to which DMS had objected. Furthermore, Hoosier created a litigation database in order to comply with the e-discovery requirements in the Case Management Plan, as well as hired computer experts to collect and image hard drives, create electronic images, process the electronic discovery data, extract metadata fields, create OCR searchable documents, and covert documents to the required .tif format. DMS and Hoosier had produced a massive amount of data at the request of Plaintiffs. Neither Hoosier nor DMS included their legal fees in their Bill of Costs. As a result, the court determined that Hoosier and DMS had undertaken highly technical services to retrieve and prepare e-discovery documents for production, and those costs were “an indispensable part of the discovery process.”

As for the amount of costs awarded to Hoosier and DMS, Plaintiffs argued that the invoices were exorbitant and unreasonable. Federal Rule of Civil Procedure 54(d) and section 1920, however, do not provide for any specified statutory rate for the recovery of costs. Because “it is unlikely that a party would ‘increase its costs unnecessarily without knowing that it would prevail at trial,” the court concluded that the costs sought by both Hoosier and DMS were within the parameters permitted by law.

The court distinguished Race Tires from Krouse v. American Sterilizer Co., 928 F. Supp. 543 (W.D. Pa. 1996), in which the court denied photocopying costs to the prevailing party, finding such costs to be normal office expenses and part of litigation costs. The court found Krouse to be distinguishable because the costs in Race Tires were incurred in retrieving and preparing the e-discovery documents, not photocopying. In its conclusion the court cautioned that its opinion “should not be read as a pronouncement or representation of how this Court or any other member of this Court will rule on future disputes regarding costs of e-discovery.”

Recent Insights

Related Professionals