Federal Circuit Issues a Caution on Costs

Bulletin Newsletter: February 2006

Can a prevailing party in patent litigation recover the costs of preparing trial exhibits that its expert witnesses used to explain its case to the jury and the court?

A January 26, 2006 decision of the U.S. Court of Appeals for the Federal Circuit answers this question and others concerning the costs that can be recovered in patent cases – while issuing a caution to lawyers on properly documenting costs.

The Federal Circuit ruled that fees paid by the prevailing party to a consulting firm to prepare trial exhibits for use by its experts were not within the scope of 28 U.S.C. § 1920(4), which allows taxation of costs "for exemplification and copies of papers necessarily obtained for use in the case."

The ruling, Summit Technology Inc. v. Nidek Co. Ltd., 05-1292 (January 26, 2006), arose out of the 1st Circuit, so the Federal Circuit sought to interpret the statute in light of how it believed the 1st U.S. Circuit Court of Appeals would decide the question. However, because no 1st Circuit case was on point, the court looked to the law of other circuits for guidance.

In an opinion written by Circuit Judge William C. Bryson, the Federal Circuit concluded that the 1st Circuit would adopt the same, narrow definition of "exemplification" it had adopted in an earlier case, Kohus v. Toys ‘R’ Us Inc., 282 F.3d 1355 (Fed. Cir. 2002) – an approach also taken by the 5th and 11th Circuits.

The court quoted with approval Moore's Federal Practice, which says, "A video exhibit or a physical model may not qualify as an 'exemplification' if it is essentially explanatory and argumentative, serving merely as an aid to the argument of counsel and the explanations of expert witnesses."

That, Bryson wrote, was precisely the nature of the materials prepared in this case, which included computer animations, videos, PowerPoint presentations and graphic illustrations. "The evidence showed that expert witnesses used those materials simply to explain the case to the jury and the court." Given this, the nearly $100,000 spent to prepare the exhibits could not be taxed as costs, the court found.

Even if the 1st Circuit were to adopt a broader definition of "exemplification," the court said, a substantial portion of these fees still could not be recovered. The bulk of the consultant's fees were for hourly consulting and time spent with trial counsel. "That sort of work amounts to trial preparation and strategizing, and is not akin to the cost of photocopying a piece of paper, a cost that section 1920 explicitly contemplates," the court reasoned.

Insufficient Documentation
This was the second time this case made its way to the Federal Circuit on the issue of costs. After Nidek prevailed on its underlying patent infringement suit in the U.S. District Court for Massachusetts, it submitted a bill of costs for $465,875.63. Without explanation, the district court awarded Nidek $257,660.13. After both parties appealed, the Federal Circuit sent the case back to the district court, directing it to specify its findings.

On remand, the district court held an evidentiary hearing that consisted entirely of direct and cross-examination of the lead trial counsel in the underlying suit. This time, the district court awarded costs of $388,230.83, and Summit again appealed.

In addition to challenging the costs of trial exhibits, Summit also disputed the propriety of the district court's award of more than $200,000 in photocopying costs and $40,000 in deposition costs. Summit contended that Nidek’s supporting documentation for those expenses was insufficient because they were based on unsupported estimates or did not identify whether the documents were "necessarily obtained for use in the case," as required by section 1920(4).

With respect to at least some of the expenses, the court agreed that the documentation was insufficient and it issued a caution on the proof a prevailing party should provide to justify its costs.

The court was particularly troubled by Nidek's claim for $78,553.69 in internal copy expenses incurred by the law firm of Testa, Hurwitz & Thibeault, which was co-counsel in the case to Nidek's principal counsel, Sughrue Mion.
Testa did not specifically track photocopy expenses related to its work on the case. Instead, it billed Nidek a 7 percent overhead fee on top of its legal fees to cover photocopies, telephone, postage, telecopy, local transportation, overtime, Westlaw fees and other miscellaneous expenses. Nidek claimed half of that total overhead fee as its cost for Testa’s internal photocopies necessarily obtained for use in this case.

The Federal Circuit concluded that this was not sufficient to support the award of nearly $80,000 in photocopy expenses. "Not only is Nidek’s estimate of the portion of the overhead attributable to copying ‘rough’, there was not even an attempt to account for the portion of the photocopies that were not necessary to the maintenance of the action," it explained, concluding, "Awarding any costs in the absence of reasonable proof supporting Testa’s internal copy expenses was an abuse of discretion."

The court expressed similar concern about costs awarded for deposition transcripts. In its review of the record, the court discovered at least two deposition charges that were counted twice and others that failed to show who was deposed or what services were included in the invoice charge.

"Without knowing who was deposed or what services were provided, the district court could not have determined whether the expenses at issue were 'necessarily obtained for use in the case’, and so could not have determined whether those expenses were taxable under section 1920(2)," the court said.In light of this record, the court concluded its opinion with a warning.

"[T]he fact that a case is particularly complex does not give the prevailing party an unchecked right to collect nearly $400,000 in costs. Cost awards are bound by the constraints of section 1920, and, when challenged, a prevailing party must offer some reliable documentation or other proof that its bill of costs represents the allowable costs that it actually and necessarily incurred during the litigation."

Because Nidek failed in several instances to offer appropriate documentation, the court said, it is not entitled to recover those costs, "no matter whether the total amount of the billed costs may seem reasonable."

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