Plaintiffs Pay the Tab in Netflix Case

On April 20th, Netflix was awarded $700,000 to recover costs associated with e-discovery, and it all came out of the plaintiff’s taxed pockets. Judge Phyllis Hamilton of the Northern District of California awarded the ruling, standing in direct contrast to a recent decision in another antitrust case, Race Tires America, Inc. v. Hoosier Racing Tire Corp, in the Third Circuit. On May 14th, plaintiffs filed an appeal to fight the penalty with the Ninth Circuit Court of Appeals. More and more cases rely on e-mails, word documents, and raw digital data to decide verdicts. Part of e-discovery’s cost comes from scanning and converting documents from paper and analog form to digital. There are three essential phases of e-discovery: collection, processing, and review. Processing whittles down and refines these sources of data to more viewable forms of data, and review involves the actual evaluation of the information to identify pertinent documents and information. The most labor intensive and demanding phase is review.

Hamilton heard the plaintiffs appeal against the taxed payment. Legally, Electronic Discovery is a fairly new issue. In another case, Race Tires America, Inc. v. Hoosier Racing Tire Corp, the appellate court overturned the district’s decision to pay back the defendant over $300,000 for e-discovery costs.  This court used the “Taxation of Costs” statute (Title 28, USC Section 1920(4) to back up the ruling. In Hamilton’s case, she did not interpret this statute in the same way. One issue with this decision is that it might discourage plaintiffs from filing class action lawsuits. However, the obvious benefit of a substantial payoff from a decision would outweigh the costs, typically lower than in this case, of paying the bill for a defendant’s e-discovery.

The Netflix case, of the anti-trust variety, involves the allegations that Netflix and Walmart configured a plan to manipulate US DVD sales and rentals in their favor. The case has Netflix scouring over 1 million records, and plaintiffs are alleging that Netflix is inflating e-discovery costs, and performing e-discovery in an inefficient manner.  E-discovery often mandates that for trial presentation, files and documents must be in a certain format. In this case, Netflix is converting millions of pages into TIFF format, with corresponding raw data. Plaintiffs feel that Netflix has inadequate documentation for the e-discovery services, and for the complete invoices that they do have, run high above market standards for these services.

While Hamilton’s ruling is good for defendants, one thing is certain: something has to be done about Section 1920 (4). Without a clear notion of what is and is not covered by discovery, and its rapidly growing offshoot e-discovery, these cases cannot be decided reliably. In the meantime, Hamilton has provided respite for tired hands at Netflix’s scanners, and a few headaches for eager plaintiffs.