Republican Fifth Circuit Justices Rule Obama's Labor Department's Position in Bad Faith

Even after the Department of Labor discovered that its lead investigator conducted an investigation for which he was not trained, concluded Gate Guard was violating the Fair Labor Standards Act based on just three interviews as to approximately 400 affected workers, destroyed evidence, ambushed a low-level employee for an interview without counsel, and demanded a grossly inflated multi-million dollar penalty, the government pressed on. In litigation, the government opposed routine case administration motions, refused to produce relevant information, and stone-walled the deposition of its lead investigator.

For this misbehavior, the district court awarded Gate Guard attorneys’ fees under the Equal Access to Justice Act’s substantially-justified provision, 28 U.S.C. § 2412(d), but denied fees under the EAJA’s bad faith provision, 28 U.S.C. § 2412(b).

On November 19, 2010, Gate Guard sued the DOL seeking a declaration that it was in compliance with the FLSA. R. 9778. Gate Guard also sought attorneys’ fees under the EAJA if it prevailed. R. 41-42. Before Gate Guard served the complaint, the DOL filed its own FLSA enforcement action for back wages and injunctive relief. R. 9778. Both suits were filed in the Southern District of Texas, but in different divisions. Id. Gate Guard filed the declaratory judgment action in the Victoria Division; the DOL filed the FLSA enforcement action in the Corpus Christi Division. Id.

During litigation, the government opposed nearly every motion—even routine case administration motions—on spurious grounds and filed specious motions of its own. First, Gate Guard moved to transfer the FLSA enforcement action[1]2 to the Victoria Division where its declaratory judgment action was already pending. The company noted that the actions were substantially related, Victoria was the most convenient forum, and there was a possibility of conflicting judgments. R. 9779. The DOL opposed the motion to transfer, even though Victoria and Corpus Christi are less than 100 miles apart. Moreover, eighty-five of the affected gate attendants resided within the Victoria division, R. 1327, and Rapstine worked in the Victoria field office, R. 1326. DOL also argued that the two suits—both centering on whether Gate Guard violated the FLSA—were not substantially similar. R. 440. Unsurprisingly, the district court granted Gate Guard’s motion to transfer. R. 446.

Gate Guard then moved to consolidate the FLSA enforcement and declaratory judgment actions. DOL opposed this routine motion because, inter alia, “consolidating the two actions will confuse the jury,” R. 1330, and “consolidation would accelerate disputes between the parties, causing unnecessary cost and delay,” R. 1331. The consolidation motion was granted. R. 1333.

While Gate Guard’s motion to consolidate was pending, the government moved to dismiss the declaratory judgment action on the grounds that there was no “final agency action” and the controversy was not “ripe.” The government took this position despite the fact that DOL had conducted a “final” conference to inform Gate Guard of its findings and demanded a multi- million dollar penalty, had threatened legal action if Gate Guard did not comply, and then sued Gate Guard for enforcement. R. 1305-19. The district court denied the government’s motion. R. 1333.

The government’s conduct worsened as this litigation entered the discovery phase. During Rapstine’s initial deposition, which lasted only forty- five minutes, DOL’s lead counsel, Colleen Nabham, objected 102 times. R. 9780 n.3. Eighteen additional times Nabham instructed Rapstine not to answer basic questions related to his investigation. Id. As a result, Nabham spoke more during the deposition than Rapstine did. Id. Nabham’s conduct was so disruptive, the deposition had to be stopped and Gate Guard was required to seek court supervision of future depositions. R. 9780. Gate Guard later withdrew its motion after the DOL agreed that Nabham would not defend any other depositions that it would not coach witnesses, and that Rapstine would sit for another deposition. R. 9780.

Notwithstanding the deposition debacle, the government continued its belligerent litigation tactics. It forced Gate Guard to seek court-ordered production of the witness statements underlying this prosecution, which the government claimed were privileged. The government maintained its position even after it filed some of the same statements with the court as evidence and thereby waived any privilege. R. 9780. Gate Guard had to seek a protective order when the government sent harassing and misleading letters to gate attendants seeking further information about their relationship with Gate Guard. R. 9780. Gate Guard also had to ask the court to seal several depositions containing trade secrets and confidential company information because the DOL unreasonably withheld its consent. R. 9780.

Labor’s legal position eroded during their bad behavior. The same district court held, in a nearly identical case, that gate attendants are not FLSA employees. See Mack v. Talasek, No. V-09-53, 2012 WL 1067398, *2 (S.D. Tex. Mar. 28, 2012). Further, the DOL continued this prosecution even after discovering that the federal Army Corps of Engineers utilizes gate attendants and classifies them as independent contractors. R. 9786. Predictably, given the legal precedents and botched investigation, the district court found the DOL’s case so weak, it granted summary judgment for Gate Guard—a disposition the DOL has not appealed. See Gate Guard Servs. L.P. v. Solis, No. V-10-91, 2013 WL 593418, at *13-14 (S.D. Tex. Feb. 13, 2013).

Gate Guard then moved to recover attorneys’ fees under the EAJA’s bad faith provision, 28 U.S.C. § 2412(b). The district court surveyed the in-circuit and out-of-circuit precedent, eventually concluding that the government’s conduct was not sufficiently egregious to constitute bad faith. See Gate Guard Servs. L.P. v. Solis (Gate Guard I), No. V-10-91, 2013 WL 3873275, at *6-7 (S.D. Tex. July 24, 2013). Specifically, although only one of eleven relevant facts weighed in favor of FLSA employee status, the court found that the government’s position was “not entirely frivolous.” Id. Accordingly, it denied Gate Guard’s request. Id. In the same opinion, the court left open the possibility that Gate Guard could recover attorneys’ fees under the EAJA’s substantially justified provision, 28 U.S.C. § 2412(d). Id. Gate Guard took the hint and reframed its original fee request. Gate Guard Servs. L.P. v. Perez (Gate Guard II), 14 F. Supp. 3d 825, 828 (S.D. Tex. 2014). The district court agreed that the government’s position was not substantially justified and awarded Gate Guard over $565,000 in attorneys’ fees. Id. at 841. Both sides appealed.

The appellate court used an abuse of discretion standard. Perales v. Casillas, 950 F.2d 1066, 1071 (5th Cir. 1992). A district court abuses its discretion when it relies on clearly erroneous factual findings, erroneous conclusions of law, or misapplies the factual or legal conclusions. See Symetra Life Ins. Co. v. Rapid Settlements, Ltd., 775 F.3d 242, 254 (5th Cir. 2014) (citing N. Alamo Water Supply Corp. v. City of San Juan, Tex., 90 F.3d 910, 916-17 (5th Cir. 1996)).

The EAJA provides two paths for recovering attorneys’ fees from the government. First, under 28 U.S.C. § 2412(b), the federal government may be liable for attorneys’ fees “to the same extent that any other party would be liable under the common law.” The general rule in federal courts and under the common law is that litigants are responsible for their own attorneys’ fees. Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 257, 95 S. Ct. 1612, 1621 (1975). Courts can, however, award attorneys’ fees when a party has “acted in bad faith, vexatiously, wantonly, or for oppressive reasons” or when a “litigant has conferred a substantial benefit on a class of persons.” F.D. Rich Co., Inc. v. U. S. ex rel. Indus. Lumber Co., 417 U.S. 116, 129-30, 94 S. Ct. 2157, 2165 (1974). Thus, § 2412(b) essentially applies these common-law bad faith and common fund exceptions to the government. Baker v. Bowen, 839 F.2d 1075, 1080 n.3 (5th Cir 1988). Second, 28 U.S.C. § 2412(d) allows courts to award attorneys’ fees “unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.”  Section 2412(d) does not apply to high net worth individuals or corporations and limits attorney compensation to $125 per hour absent special factors. 28 U.S.C. § 2412(d)(2)(A)-(B).

As noted earlier, the court awarded fees under § 2412(d) but denied them under § 2412(b). In this appeal, the government contends that an award under § 2412(d) was inappropriate because its position was substantially justified and Gate Guard’s application was untimely. Gate Guard cross-appeals the denial of fees under § 2412(b). Because we hold that Gate Guard is entitled to fees under § 2412(b), our discussion is limited to that provision.

The district court denied fees under the bad faith exception. See Gate Guard I, 2013 WL 3873275, at *4-7. To constitute bad faith, the court explained, a party must show that: “(1) the government’s position was meritless, (2) the meritlessness was known to the government, and (3) the government’s position was advanced or maintained for an improper purpose, such as harassment.” Id. at *4 (internal citations and quotation marks omitted). Because the government’s position that gate attendants are employees was “not entirely frivolous”— meaning it was not “wholly unsupported” or “easily dispatched by cursory review of the evidence”—the court found that the government did not act in bad faith. Id. at *7. The appeals court made two criticisms.

The district court’s analysis was criticized two ways. First, the court’s test was unduly rigid. The district court’s three-part test “if strictly applied, threaten[s] the ‘evils of archaic rigidity.’ ” Holland, 560 U.S. at 650, 130 S. Ct. at 2563 (quoting Hazel- Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 248, 64 S. Ct. 997, 1002 (1944)).

Second, in applying its unduly rigid test, the district court mistakenly focused solely on whether the government’s position—that gate attendants are employees—was frivolous.[2]

With the foregoing principles in mind, there is no doubt that a bad faith award of attorneys’ fees is appropriate. The government’s conduct was oppressive and its case legally frivolous.

The EAJA allows for an attorneys’ fees award against the government whenever it has “acted in bad faith, vexatiously, wantonly, or for oppressive reasons.” F.D. Rich, 417 U.S. at 131, 94 S. Ct. at 2165. Although the most common situation will involve the government knowingly bringing a frivolous claim, a finding of legal frivolousness is not required. Here, the circumstances giving rise to an award included both the government’s conduct before and during litigation as well as a legally insupportable case. The government’s conduct here was sufficiently egregious to warrant an award under § 2412(b).

Circuit Judge Edith H. Jones wrote for a panel including Circuit Judge Catherina Haynes and Eastern District of Texas Judge Marcia Crone, happily remembered of the beautiful Bayou City, reversed the district court and remanded the case for calculation of attorneys’ fees under § 2412(b).

Gate Guard Services, L.P. v. Perez, ___ F.3d ___, No. 14-40585, available at http://www.ca5.uscourts.gov/opinions/pub/14/14-40585-CV0.pdf (July 2, 2015, no cert. h.)

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[1] Gate Guard alternatively moved to dismiss the enforcement action.  The district court denied that part of Gate Guard’s motion.

[2] The district court did cite cases involving fees awards for abusive or defiant litigation conduct. Gate Guard I, 2013 WL 3873275, at *6. But the court only analyzed whether the FLSA enforcement action was frivolous. See id. The district court never discussed whether the government’s conduct throughout this litigation justified an attorneys’ fees award. Id.