Hanover Potato Products, Inc. v. Shalala

• Decision Date: 19 March 1993
• Docket Number: No. 92-7229,92-7229
• Citation: 989 F.2d 123
• Parties: HANOVER POTATO PRODUCTS, INC.; National Coalition of Fresh Potato Processors; Endico Potatoes, Inc.; Pre-Peeled Potato Co., Inc., Appellants, v. Donna E. SHALALA, Secretary of Health and Human Services, David A. Kessler, M.D., Commissioner of Food and Drugs.
• Court: U.S. Court of Appeals — Third Circuit

Page 123

989 F.2d 123

HANOVER POTATO PRODUCTS, INC.; National Coalition of Fresh Potato Processors; Endico Potatoes, Inc. Pre-Peeled Potato Co., Inc., Appellants, v. Donna E. SHALALA, Secretary of Health and Human Services David A. Kessler, M.D., Commissioner of Food and Drugs.

No. 92-7229.

United States Court of Appeals Third Circuit.

Argued Jan. 8, 1993.

Decided March 19, 1993.

James R. Phelps, (Argued), Robert A. Dormer, Mary Beth Neraas, Hyman, Phelps & McNamara, Washington, DC, Thomas B. Schmidt, III, Donna L. Fisher, John A. Witherow, Jr., Pepper, Hamilton & Scheetz, Harrisburg, PA, for Appellants.

Stuart M. Gerson, Asst. Atty. Gen., James J. West, U.S. Atty., Michael J. Singer, Mary K. Doyle (Argued), Attys., Appellate Staff, Civ. Div., U.S. Dept. of Justice, Washington, DC, for Appellees.

Before: MANSMANN, NYGAARD, Circuit Judges, and DALZELL, District Judge ^*

OPINION OF THE COURT

NYGAARD, Circuit Judge.

Hanover Potato Products, Inc., and its co-appellants (collectively "Hanover"), appeal from an order of the district court denying their application for attorney's fees under the Equal Access to Justice Act ("EAJA"), 28 U.S.C. § 2412. The district court held that although Hanover was a qualified prevailing party under the EAJA, the government's position in defending Hanover's claim was substantially justified. Because we conclude that the government's position was not substantially justified, we will reverse and remand for the entry of an appropriate fee award.

I. FACTS AND PROCEDURE

A. Background

This case is now before us again, having had an involved history both here and in the district court. Plaintiff-appellants are a coalition of fresh potato producers who market pre-peeled and pre-cut potato products, primarily to the restaurant industry. To preserve the potatoes for the required shelf life without unsightly discoloration, they are treated with sulfites before shipping. Because of health concerns about possible harm from sulfites to certain sensitive individuals, the Food and Drug Administration ("FDA") proposed a regulation in 1987 revoking the "generally recognized as safe" status of sulfite agents as applied to "fresh" ¹ potatoes intended to be served to the consumer unpackaged and unlabeled. 52 Fed.Reg. 46,968 (Dec. 10, 1987). In the FDA's notice of proposed rulemaking, it stated that, in accordance with the requirements of 21 C.F.R. § 10.40 (1987), the various documents comprising the administrative record were on file at the agency's Dockets Management Branch. The comment period was initially scheduled to close on February 8, 1988.

Hanover's co-plaintiff in this litigation is the National Coalition of Fresh Potato Processors ("the Coalition"). The Coalition is a trade association whose sole purpose is to represent the fresh potato industry on the sulfite regulation issue. After successfully petitioning for an extension of the comment period to March 9, the Coalition submitted detailed comments to the FDA explaining why the industry believed that a ban on sulfites was unnecessary. The thrust of these comments was that a sulfite ban would put the entire fresh potato industry out of business, even though less drastic regulatory alternatives, such as better labeling and reduced sulfite levels through the use of "Good Manufacturing Practices," were available. Neither the Coalition nor any of the other plaintiffs, however, made any attempt to examine or contest the adequacy of the administrative record during the comment period.

Two years later, the FDA issued a final rule banning the use of sulfites on fresh potatoes, to become effective on April 16, 1990. 55 Fed.Reg. 9,826 (Mar. 15, 1990). On March 23, the Coalition requested that the FDA produce the eighty-three volume administrative record on which it had purportedly based its regulatory decision. The FDA, however, was evidently slow in producing these documents. After the FDA had produced forty-eight volumes, the Coalition filed, on April 2 and 4 respectively, petitions with the FDA to stay implementation of the sulfite ban for thirty days and to reconsider its decision. ² An important purpose of these petitions was to give the industry time to review the complete record before the regulation went into effect; however, the FDA did not act on either petition until June 13, when it denied both.

B. Litigation on the Merits

1. District Court Proceedings

Frustrated by the recalcitrant FDA, and concluding that those parts of the record that had been made available did not support the regulation (which was to be implemented in only five more days), Hanover filed suit in the district court on April 11, 1990. The complaint alleged, among other things, that the FDA had no support in the record for many of its key regulatory conclusions. The district court granted a temporary restraining order and scheduled an expedited preliminary injunction hearing.

After the hearing, the district court concluded that Hanover "failed to present any substantial evidence that the agency's rationale [was] defective," vacated the TRO and denied Hanover's motion for a preliminary injunction. ³ Hanover then filed a motion for reconsideration. ⁴

Responding to Hanover's motion for reconsideration, the FDA made a surprising disclosure: the eighty-three volume record previously certified was not the true and complete administrative record after all. Instead, the FDA now asserted that the true record was still being assembled. After the district court ordered the FDA to submit these documents, a new forty-two volume record was certified. Fully sixty-three percent of this new record, and ninety-one percent of the new material filed pursuant to the court's order, had never been placed on file at the Dockets Management Branch, but was kept at the non-public offices of the Center for Food Safety and Nutrition.

Even the FDA now agrees that its "handling of the administrative record in this case [was] not a model for conduct of the informal rulemaking process." FDA brief at 29. Nevertheless, in the district court the FDA offered four defenses to support its omissions. First, it asserted that the agency had in fact complied with its own regulations. The crux of this argument was that the preamble to 21 C.F.R. § 10.40(g) (1987) did not require every document to be placed on the public file. Second, it maintained that a court may not impose additional procedures on an agency not otherwise required by statute. Third, it argued that Hanover waived its objections by not raising them during the comment period. Finally, the FDA asserted that because Hanover did not examine the administrative record during the comment period, it suffered no prejudice from FDA's omissions.

Nevertheless, this unexpected development led the district court to reconsider its conclusion and hold that the FDA, by not making the entire record available for public inspection, acted arbitrarily and capriciously. ⁵ The court then granted summary judgment in favor of Hanover, rejecting the four defenses the FDA offered to justify its position. The court specifically rejected the FDA's "no-prejudice" argument, stating

it is certainly possible that the agency's actions may have been different had the information relied upon by the FDA been available to interested parties during the notice and comment period. We can conclude prejudice from the sheer volume of what was not made available to the public.

Hanover Potato Products, Inc. v. Sullivan, op. at 7, No. 1:CV-90-0746 (M.D.Pa. Aug. 3, 1990). The FDA appealed.

2. Proceedings on Appeal

A panel of this court held that the FDA had indeed violated its own regulations. Nevertheless, at the FDA's urging, it vacated the district court's order and remanded with instructions for the district court to permit the FDA to defend its regulation using only those documents it had initially made available for review. The panel specifically declined to reach the issue of whether the FDA's omissions prejudiced Hanover, because it believed the opportunity it gave the parties on remand was sufficient to eradicate any prejudice. Hanover Potato Products, Inc. v. Sullivan, slip op. at 9, No. 90-5738, 1991 WL 7668 (3d Cir. Jan. 29, 1991).

Hanover then sought and was granted panel rehearing. Hanover Potato Products, Inc. v. Sullivan, No. 90-5738, 1991 WL 35857 (3d Cir. Mar. 20, 1991). The holding, remedy and rationale of the revised opinion were substantially the same as those of the original opinion.

After another petition from Hanover, we vacated the second panel decision and granted rehearing in banc. The in banc court was equally divided and affirmed the district court without opinion. ⁶ Accordingly, Hanover won on the merits and the regulation was struck down until the FDA repromulgates it in accordance with proper notice and comment procedures under the Administrative Procedure Act and its own regulations.

C. The Fee Application

As a prevailing party, Hanover then moved in the district court for attorney's fees under the EAJA, 28 U.S.C. § 2412. The district court denied the motion on the sole ground that, because Hanover did not review the administrative record during the comment period, it was not prejudiced by the FDA's omissions. Thus, even though the FDA lost on the merits, the district court held that the position the agency took was substantially justified, precluding a fee award under the EAJA.

II. STANDARD OF REVIEW

We review a district court's determination of substantial justification in an EAJA case for abuse of discretion. Pierce v. Underwood, 487 U.S. 552, 108 S.Ct. 2541, 2547, 101 L.Ed.2d 490 (1988). "An abuse of discretion arises when 'the district court's decision rests upon a clearly erroneous finding of fact, an errant conclusion of law or an improper application of law to fact.' " NLRB v. Frazier, 966 F.2d 812, 815 (3d Cir.1992) (quoting International Union, UAW v. Mack Trucks, Inc., 820 F.2d 91, 95 (3d Cir.1987)). We have also stated that...