Phil Smidt & Son, Inc. v. N.L.R.B.

• Decision Date: 15 January 1987
• Docket Number: No. 85-2749,85-2749
• Citation: 810 F.2d 638
• Parties: 124 L.R.R.M. (BNA) 2417, 105 Lab.Cas. P 12,183 PHIL SMIDT & SON, INC., Petitioner, v. NATIONAL LABOR RELATIONS BOARD, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 638

810 F.2d 638

124 L.R.R.M. (BNA) 2417, 105 Lab.Cas. P 12,183

PHIL SMIDT & SON, INC., Petitioner, v. NATIONAL LABOR RELATIONS BOARD, Respondent.

No. 85-2749.

United States Court of Appeals, Seventh Circuit.

Argued June 12, 1986.

Decided Jan. 15, 1987.

Timothy F. Kelly, Beckman, Kelly & Smith, Hammond, Ind., for petitioner.

Eric G. Moskowitz, NLRB (Aileen A. Armstrong-NLRB), Washington, D.C., for respondent.

Before BAUER, Chief Judge, COFFEY and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

The petitioner, Phil Smidt & Son, Inc. (Phil Smidt), applied for an award of attorneys' fees, costs and expenses pursuant to the Equal Access to Justice Act (EAJA), 5 U.S.C. Sec. 504 (Supp. III 1985). ¹ That application arose out of backpay litigation initiated by the General Counsel of the National Labor Relations Board (NLRB or Board). The Board, finding that the General Counsel's position in the backpay litigation was substantially justified, dismissed the petitioner's application. For the reasons which follow, we vacate the Board's order and remand this case for determination of the amount of costs, expenses and attorneys' fees to be awarded to the petitioner.

I

A. The Underlying Litigation

In the underlying proceeding, the NLRB found that the petitioner had violated section 8(a)(1) of the National Labor Relations Act (NLRA), 29 U.S.C. Sec. 158(a)(1), by suspending and discharging an employee, Josephine Faught, for engaging in protected concerted activity under the NLRA. To remedy that violation, the Board ordered the petitioner to pay Ms. Faught all of her lost earnings and benefits. On appeal, this court affirmed the Board's order. NLRB v. Phil Smidt & Son, Inc., 729 F.2d 1464 (7th Cir.1984). The only remaining question therefore, concerned the amount of backpay to which Ms. Faught was entitled.

According to the Board, backpay awards are determined by first estimating an employee's adjusted gross pay during the discharge period and then reducing that amount by any income that the employee may have earned during the same period through other endeavors (interim earnings). In this case, Nancy Harris, one of the NLRB's field examiners, made two distinct backpay computations. The first computation, outlined in an April 6, 1984 letter to Phil Smidt, indicated that Ms. Faught was entitled to a total award of $980.29 (representing $611.93 in backpay and $368.36 in interest). This calculation was based upon information gathered by Ms. Harris through a number of interviews and through her review of Ms. Faught's tax returns. In her second computation, outlined in an April 17, 1984 letter to Phil Smidt, Ms. Harris maintained that Ms. Faught was eligible to receive a backpay award of $5,249.31 (representing $3,234.82 in backpay and $2,014.49 in interest). The difference between these two computations, irrespective of interest on the backpay awards, is $2,622.89. Of that amount, $713.92 was attributable to Ms. Harris' recomputation of Ms. Faught's adjusted gross pay. However, the bulk of the difference, $1,908.97, resulted from Ms. Harris' new-found belief that Ms. Faught had no interim earnings. Ms. Harris arrived at this new position on interim earnings, despite tax records to the contrary, because Ms. Faught submitted an affidavit (with allegedly supporting documentation) that stated that Ms. Faught's tax returns were erroneous and, in fact, that she sustained a loss during the discharge period.

Because of the petitioner's failure to pay voluntarily the amount itemized in Ms. Harris' second letter, the NLRB's Regional Director issued a Backpay Specification on May 11, 1984, requiring the petitioner to pay Ms. Faught a backpay award of $3,229.28, irrespective of withholding taxes and accumulated interest. Additionally, and more importantly for purposes of this case, the Regional Director affirmatively averred in the Backpay Specification that Ms. Faught "did not earn any interim earnings but rather suffered a loss" during her interim employment period. General Counsel's Ex. 1(c) at 4. On July 19, 1984, the first scheduled day of hearings regarding the Backpay Specification, the petitioner made an offer of settlement in the amount of $980.29 (equivalent to the amount of Ms. Harris' original backpay computation). Apart from stating the terms of the settlement, the offer also indicated that, if the offer should not be accepted and if the petitioner should succeed on the backpay issue in the administrative hearing, the petitioner would "proceed pursuant to 5 U.S.C. Sec. 504 [of] the Equal Access to Justice Act to obtain full reimbursement for any costs and expenses incurred as a result of Ms. Faught's or the Board's failure to accept this good faith offer." Phil Smidt's Ex. 9 at 2. The settlement offer was rejected and the administrative hearings continued.

At the hearing, Phil Smidt presented four arguments in defense against the Backpay Specification. The administrative law judge (ALJ) reviewed the first three arguments--relating to 1) the duration of the backpay period, 2) Ms. Faught's alleged withdrawal from the labor market, and 3) the appropriate comparisons for estimating the backpay award--and found them to be without merit. However, the ALJ found substantial merit in Phil Smidt's fourth argument. Here, the petitioner had challenged the Board's assertion that Ms. Faught had no interim earnings during the discharge period. Upon reviewing this issue, the ALJ found that the General Counsel's claim that Ms. Faught had no interim earnings was unsupportable on the record. In fact, while the ALJ agreed with Ms. Faught that her tax returns were erroneously completed, he found that those returns understated, not overstated, her net income. Accordingly, the ALJ held that Ms. Faught was entitled to a backpay award of only $430.37, irrespective of taxes and interest. Therefore, at the close of all the proceedings, the petitioner was required to pay only $631.27 ($430.37 in backpay, plus $297.00 in interest, less $96.10 in taxes)--markedly less than the $980.29 for which the petitioner was willing to settle and grossly less than the $5,249.31 sought by the NLRB's General Counsel.

B. The EAJA Award

The petitioner applied for an award of fees, costs and expenses under the EAJA, 5 U.S.C. Sec. 504. Under the EAJA,

when an agency ... conducts an adversary adjudication and loses, the agency shall award fees and other expenses incurred by the prevailing party in connection with that proceeding. The agency can avoid the imposition of fees and costs only by demonstrating that its position as a party to the proceeding was "substantially justified," or that special circumstances exist that would make such an award unjust.

Temp Tech Indus., Inc. v. NLRB, 756 F.2d 586, 588-89 (7th Cir.1985). The ALJ dismissed the application. The ALJ grounded his decision on the fact that, with respect to the issue of interim earnings, the burden of proof in the underlying action rested with Phil Smidt, not the General Counsel. Since the General Counsel did not "lose" on any particular issue on which he had the burden of proof, the ALJ determined that the "General Counsel was the prevailing party" even though Ms. Faught found herself in a substantially worse position by litigating the backpay issue. Phil Smidt's App. at 6. By implication, then, the ALJ found that the petitioner was not a prevailing party and, therefore, was not entitled to an award under the EAJA. On review, a panel of the NLRB disagreed in part with the ALJ and noted that the petitioner "may have been a prevailing party in the backpay proceeding." Id. at 1 n. 1. Nonetheless, the Board ultimately agreed with the ALJ's conclusion because it found "that the General Counsel's position in issuing the backpay specification and proceeding to a hearing was 'substantially justified' within the meaning of [the] EAJA." Id. Subsequently, Phil Smidt filed its petition for review in this court.

II

A

We start by noting our standard for reviewing the Board's determination. As mentioned earlier, a party is entitled to an award under the EAJA only if 1) that party was a prevailing party in the agency's adversary adjudication, and 2) the agency's position was not substantially justified. Since the Board conceded at oral argument that the petitioner was a prevailing party, ² we need only consider whether the Board's position in the backpay proceeding was substantially justified. ³ In this regard, it is clear that we must disapprove the Board's denial of fees only if we find that the Board's decision "was unsupported by substantial evidence." 5 U.S.C. Sec. 504(c)(2).

B

In EAJA litigation of this type, the NLRB's General Counsel bears the burden of proving that his position in the backpay proceeding was substantially justified. See Berman v. Schweiker, 713 F.2d 1290, 1293 n. 9 (7th Cir.1983). The "position of the agency" which must be substantially justified is not just the legal position which the government took in the underlying litigation but also the action which led to the litigation. ⁴ Furthermore, "it is settled in this circuit that an agency's position is substantially justified [only] if it has a 'reasonable basis in law and fact.' " Temp Tech, 756 F.2d at 590 n. 4 (citing Ramos v. Haig, 716 F.2d 471, 473 (7th Cir.1983) and Berman v. Schweiker, 713 F.2d 1290 (7th Cir.1983)) (emphasis added). ⁵ As Judge Becker of the Third Circuit noted in Donovan v. DialAmerica Mkting, Inc., 757 F.2d 1376, 1389 (3d Cir.), cert. denied, --- U.S. ----, 106 S.Ct. 246, 88 L.Ed.2d 255 (1985), "[t]o satisfy its burden the government must demonstrate (1) a reasonable basis in truth for the facts alleged; (2) a reasonable basis in law for the theory propounded; and (3) a reasonable connection between the facts alleged and the legal theory advanced."

The Board argues that its position in the backpay proceeding was substantially justified because 1) it did not have the burden of proof on the issue of...