In the Matter of the Complaint ) September 15, 1993 Against ) ) EQUISYSTEMS, CALIFORNIA, INC. ) c/o Donald E. Mason, Esq. ) 2121 Ponce De Leon Boulevard ) Suite 350 ) Coral Gables, FL 33134-5222 ) ) AARON E. HASTINGS ) c/o Donald E. Mason, Esq. ) 2121 Ponce De Leon Boulevard ) Suite 350 ) Coral Gables, FL 33134-5222 ) ) LORRAINE A. HASTINGS ) c/o Donald E. Mason, Esq. ) 2121 Ponce De Leon Boulevard ) Suite 350 ) Coral Gables, FL 33134-5222 ) P.S. Docket No. 33/115 (EAJA Application) APPEARANCES FOR COMPLAINANT: Elizabeth P. Martin, Esq. Geoffrey E. Drucker, Esq. Consumer Protection Law Law Department United States Postal Service Washington, DC 20260-1144 APPEARANCE FOR RESPONDENTS: Donald E. Mason, Esq. 18 Scott Avenue Hooksett, NH 03016-2636
Complainant has filed an appeal from an Initial Decision of an Administrative Law Judge which concluded that Respondents are entitled to an award of attorney fees in the amount of $17,122.50 under the Equal Access to Justice Act (EAJA), 5 U.S.C. § 504. Respondents oppose the appeal.
The Consumer Protection Division, Law Department, United States Postal Service (Complainant), initiated an action against Respondents by filing a Complaint, subsequently amended, alleging Respondents Aaron Hastings, Lorraine Hastings, and Equisystems, California, Inc., (collectively referred to as Respondents) solicited money or property through the mail by means of advertisements for credit cards which made materially false representations in violation of 39 U.S.C. § 3005.1/ Specifically, Complainant alleged that Respondent Equisystems, California, Inc. falsely represented:
"a) It is affiliated with, acting in concert with, or acting on behalf of, a financial institution that issues a nationally-recognized credit card (e.g. VISA or MasterCard);b) It is authorized to represent the financial institution named in its correspondence with consumers; and
c) The financial institution named in its correspondence with consumers issues a nationally-recognized credit card (e.g. VISA or MasterCard)."2/
Following a hearing and submission of proposed findings of fact and conclusions of law, the Administrative Law Judge issued an Initial Decision in which he dismissed the Complaint because Complainant had failed to prove either the falsity of the representations made by Respondents or that Respondents were engaged in a scheme within the meaning of 39 U.S.C. § 3005. On Complainant's appeal of the Initial Decision, the Judicial Officer concluded that Complainant had not shown that the Administrative Law Judge committed reversible error or that any other basis existed for altering the ultimate conclusion of the Initial Decision.
Thereafter, Respondents timely filed an EAJA application requesting an award of attorney fees in the amount of $34,245. Complainant opposed the application claiming its litigation position in bringing the 39 U.S.C. § 3005 action against Respondents was substantially justified and alternatively, that special circumstances exist which would make an award of fees to Respondents unjust. The Administrative Law Judge issued an Initial Decision under the Equal Access to Justice Act (EAJA Decision) in which he determined that Complainant had failed to establish that its litigation position was substantially justified or that special circumstances made an award unjust. The Administrative Law Judge then concluded that Respondents were entitled to receive an EAJA award of attorney fees in the total amount of $17,122.50,3/ but that the EAJA award should be paid to the law firm holding a "charging lien" on any attorney fees awarded to Respondents.
As Complainant contends on appeal, the findings and conclusions of the Administrative Law Judge are reviewed de novo by the Judicial Officer. See Lion Uniform, Inc. v. NLRB, 905 F.2d 120, 123 (6th Cir.), cert. denied,
U.S. ______, 111 S. Ct. 536, 112 L.Ed 546 (1990); Mester Mfg. Co. v. INS, 900 F.2d 201, 202-03 (9th Cir. 1990). A de novo review of the record establishes that Respondents meet the eligibility requirements of the EAJA and are prevailing parties who are entitled to an EAJA award unless Complainant's position was substantially justified or special circumstances make an award unjust. See 39 C.F.R. § § 960.5(a) & 960.19(a). A position is "substantially justified" if it is "justified to a degree that could satisfy a reasonable person," or, as more frequently stated, has a "reasonable basis both in law and fact." Pierce v. Underwood, 487 U.S. 552, 565 (1988); Beta Sys., Inc. v. United States, 866 F.2d 1404, 1406 (Fed. Cir. 1989). In opposing Respondents' EAJA application, Complainant bears the burden of proving its position was substantially justified,4/ or that special circumstances exist which would render the award unjust.5/ See 39 C.F.R. § § 960.5(a) & 960.19(a).
As determined by the Administrative Law Judge, Complainant has failed to meet its burden of proving its position was substantially justified or that special circumstances exist which would make an award unjust. Therefore, the Administrative Law Judge properly concluded that Respondents are entitled to an award of attorney fees in the amount of $17,122.50. However, contrary to the finding of the Administrative Law Judge, the EAJA award is to be paid directly to Respondents as the prevailing party despite the possible existence of a "charging lien" by Respondents' attorneys. See FDL Tech., Inc. v. United States, 967 F.2d 1578, 1580-81 (Fed. Cir. 1992); Phillips v. GSA, 924 F.2d 1577, 1582 (Fed. Cir. 1991); Oguachuba v. INS, 706 F.2d 93, 97-98 (2d Cir. 1983); O'Grady v. HHS, 661 F. Supp. 1030, 1037 (E.D.N.Y. 1987);
Soto-Valentin v. Heckler, 619 F.Supp. 627, 632 (E.D.N.Y. 1985); Eustache v. HHS, 601 F. Supp. 176, 178 (E.D.N.Y. 1985). The ultimate disposition of the funds is a matter to be resolved by Respondents and their counsel. See O'Grady, 661 F. Supp. at 1038; Oguachuba, 706 F.2d at 97; Ceglia v. Schweiker, 566 F. Supp. 118, 122 (E.D.N.Y. 1983).
Complainant has raised several specific exceptions to the EAJA Decision. Each of these exceptions is discussed hereafter:
Complainant's "first and foremost exception" is that the Administrative Law Judge used an erroneous standard of review in assessing Complainant's litigation position. According to Complainant the Administrative Law Judge based his EAJA decision on whether Complainant had shown that the Postal Service Decision was in error rather than assessing its position on a standard of "substantial justification." Complainant contends the Administrative Law Judge's erroneous use of this standard is illustrated by his statement in the EAJA Decision that Complainant had failed to show that the relevant rulings in the "order" were "erroneous or unfair" (EAJA Dec. at 7).
Complainant's exception reflects a misunderstanding of the substance of the EAJA Decision. Not only did the Administrative Law Judge correctly determine that the standard of review for assessing Complainant's litigation position is substantial justification (EAJA I.D. at 3-4), but throughout the EAJA Decision, that standard was properly applied (EAJA Dec. at 4-7 & 10). The Administrative Law Judge's statement that the "order" was not "erroneous or unfair" pertained to his Order dated February 13, 1990, and was in response to Complainant's suggestion that the Administrative Law Judge had erroneously ruled on the admission of certain evidence into the record. Since Complainant has failed to show that the Administrative Law Judge either misstated the proper EAJA standard of review or erred in its application, its first exception is denied.
Complainant next contends the Administrative Law Judge erred by not applying the proper standard of review to the question of witness credibility and in finding that Complainant had failed to rebut Respondents' evidence, including the testimony of Respondent Aaron Hastings (Hastings). According to Complainant, its litigation position does not lack substantial justification simply because the trier of fact made a credibility determination adverse to its case or because more thorough preparation and effective trial advocacy, or arrangement for rebuttal testimony, might have changed the outcome of the case.
Complainant again misunderstands the Administrative Law Judge's EAJA Decision. The Administrative Law Judge's statements concerning the credibility of Hastings' testimony and Complainant's failure to present rebuttal evidence were in response to Complainant's contention that it was unable to prepare for the hearing since it did not anticipate the substance, admission, or reliance on the testimony of Aaron Hastings, or the need to obtain rebuttal evidence. On this subject, the Administrative Law Judge properly concluded that Complainant's attacks on Hastings' credibility and its excuses for failing to arrange rebuttal testimony were not sufficient to establish that its litigation position was substantially justified.
The Administrative Law Judge went on to conclude that Complainant's litigation position was not substantially justified in view of Complainant's decision to proceed to hearing on a theory that ignored the facts of the case, the lack of evidence in support of its position, and the defenses raised by Respondents (EAJA Dec. at 5). The Administrative Law Judge did not err in concluding that under the facts presented, Complainant did not sustain its burden of establishing that its litigation position had a reasonable basis both in law and fact. Cf. Pierce, 487 U.S. at 563 & 565-66; Beta Sys., Inc., 866 F.2d at 1406; Keyava Const. Co. v. United States, 15 Cl. Ct. 135, 137 (1988); Jones v. Lujan, 887 F.2d 1096, 1098 (D.C. Cir. 1989); Gavette, 808 F.2d at 1467-68. Accordingly, there is no merit to Complainant's Exceptions 2 or 4.
Complainant next contends the Administrative Law Judge erred in concluding that Complainant's litigation position was not a novel extension or interpretation of the law (EAJA Dec. at 5), in light of his previous determination in the Initial Decision that a novel fact situation existed in this case (I.D. at 6). Complainant claims it took the reasonable, but previously untried, position that Respondents should not be absolved from liability because the state intervened in the dealings of its credit card issuer. In connection with this contention, Complainant points out that intent to deceive is not an element of § 3005 violations.
The existence of a novel or unusual fact situation does not alone establish that a litigation position is substantially justified. While this case may have involved an unusual fact situation, Complainant's position was nevertheless not substantially justified when those facts were carefully considered. In proceeding against Respondents in both the initial action and on appeal, Complainant failed to properly evaluate the circumstances surrounding this case including Respondents' lack of control over the state freeze placed on Security, the state's delay in instructing Respondents to cease marketing credit cards, and Respondents' affirmative steps in cancelling their advertisements and attempting to find a new credit card issuer. It was for this reason that the Administrative Law Judge concluded that Complainant's litigation position lacked a reasonable basis in fact or law, and therefore, was not substantially justified. See Pierce, 487 U.S. at 563 & 565-66; Beta Sys., Inc., 866 F.2d at 1406; Keyava Const. Co, 15 Cl. Ct. at 137; Jones, 887 F.2d at 1098; Gavette, 808 F.2d at 1467-68.
Complainant correctly contends that intent to deceive need not be shown in order to establish that a violation of 39 U.S.C. § 3005 has occurred. Nevertheless, there is no violation of the postal false representation statute where a representation cannot subsequently be fulfilled because of an intervening state act. Therefore, under the facts presented in this case, the decision to bring the case, continue to prosecute the case and appeal the Initial Decision to the Judicial Officer was not substantially justified. Accordingly, Complainant's Exception 3 has no merit.
In Exceptions 5 and 6, Complainant reasserts the same factual and legal arguments which were considered and rejected by the Administrative Law Judge and the Judicial Officer in the original proceeding. An EAJA claim should not result in a second major litigation. See, e.g., Hensley v. Eckerhart, 461 U.S. 424, 437 (1983); Naekel, 884 F.2d at 1379-80; Brewer, 814 F.2d at 1569. Therefore, the merits of Complainant's position will not be revisited in this proceeding. Moreover, a reexamination of the merits of the § 3005 proceeding would not alter the determination that Complainant's litigation position was not substantially justified. Rather, as previously discussed, the Administrative Law Judge's decision that Complainant's litigation position was not substantially justified is supported by the record. Accordingly, Complainant's Exceptions 5 & 6 are denied.
Complainant takes exception to the Administrative Law Judge's conclusion that Complainant was attempting to advance a new theory when it claimed in its EAJA brief that Respondents' failure to provide consumers with the credit cards promised in their solicitations was itself a violation of 39 U.S.C. § 3005 (EAJA Dec. at 6). Complainant contends that it not only advanced this theory in the § 3005 proceeding, but that its position in advancing it was reasonable since no financial institution named in Respondents' solicitation issued any credit cards after August 18, 1988.
While there is merit to Complainant's argument on appeal, it does not serve as a basis for altering the ultimate conclusion reached in the EAJA Decision. Under the facts presented in this case, Respondents' failure to provide the credit cards promised to customers does not establish that a § 3005 violation has occurred (see discussion under Exception 3). Both the Initial Decision and the Postal Service Decision clearly recognized that no credit cards had been issued after August 18, 1988, because of the state's freeze on the operations of Security, and not the result of any action or omission by Respondents (P.S.D. at 3-4; I.D. FOF ¶ ¶ 6 & 13). Neither the Administrative Law Judge nor the Judicial Officer determined that a violation of 39 U.S.C. § 3005 had occurred under these facts. Complainant's contention that its litigation position was substantially justified because the credit cards were not furnished is no more compelling at this stage of the proceeding. Accordingly, Complainant's Exception 7 does not establish that its litigation position was substantially justified.
Complainant claims the Administrative Law Judge erred in concluding it was not substantially justified in amending the Complaint to include allegations (d)-(g), which were subsequently dismissed on Complainant's motion. Complainant argues that evidence in support of those allegations, which was either rejected or ignored by the Administrative Law Judge in the Initial Decision, would have shown its position was substantially justified. Complainant claims, in the alternative, that even if it was not substantially justified in amending the Complaint, it was substantially justified in bringing allegations (a)-(c), which according to Complainant were the "most important elements" of its case.
Complainant again reargues the merits of its case. However, Complainant has failed to show the Administrative Law Judge erred in concluding that Complainant's amendment of the Complaint was not substantially justified. Even if Complainant was substantially justified in amending the Complaint to include allegations (d)-(g), Complainant has not shown that its litigation position was substantially justified with respect to allegations (a)-(c). See e.g., Hensley, 461 U.S. at 436; Myers v. Sullivan, 916 F.2d 659, 666 at n. 5 (11th Cir. 1990); Naekel, 884 F.2d at 1379-80; Hong-Yee Chiu v. United States, 18 Cl. Ct. 567, 569 (1989), rev'd on other grounds, 948 F.2d 711 (Fed. Cir. 1991); Hudson v. HHS, 839 F.2d 1453, 1456 & n. 3 (11th Cir. 1988). Accordingly, Complainant's Exception 8 is denied.
Complainant also contends that the Administrative Law Judge erred in finding that special circumstances do not exist making an award of EAJA fees unjust. In support of this contention, Complainant argues that Respondent Aaron Hastings gave false testimony at the hearing and the Administrative Law Judge improperly refused to consider the affidavit of Larry Hearn (Hearn), which it contends establishes the falsity of this testimony. While Complainant admits it did not arrange for Hearn to testify at the hearing, Complainant argues a review of the Hearn affidavit is necessary for a "full and fair resolution" on the issue of special circumstances, especially since Hastings' false testimony was the "cornerstone" of the Initial Decision.
Contrary to the Administrative Law Judge's decision, consideration of the Hearn affidavit is appropriate to determine whether special circumstances exist making an EAJA award unjust. Even considering the affidavit, however, I am unable to conclude that such special circumstances exist in this case. While the Hearn affidavit establishes that Hastings' testimony contained minor inconsistencies on inconsequential matters, such inconsistencies do not establish the falsity of his testimony. Moreover, while the affidavit and its exhibits suggest that Security and another company, First Data Resources, were ordered to temporarily stop issuing credit cards, it does not establish that Respondents were instructed to stop marketing credit cards prior to September 12, 1988 (See Hearn Affidavit & attached Exhibits A-H). Accordingly, Complainant's Exception 9 has no merit.
After consideration of the entire record and Complainant's exceptions, it is concluded that Respondents are entitled to recover attorney's fees in the amount of $17,122.50. Accordingly, Complainant's appeal of the EAJA Decision is denied. The EAJA Decision of the Administrative Law Judge is modified to the extent indicated but otherwise affirmed.
James A. Cohen Judicial Officer
1/ The promotion which was the subject of the Complaint involved Respondents' credit card advertisements for the period August 18, 1988, to September 12, 1988, when a temporary freeze was placed on the operations of Respondents' credit card issuer, Security Bank Company of Arlington, Texas (Security), pending an investigation by the Texas Department of Banking. See Equisystems, California, Inc., P.S. Docket No. 33/115 (I.D. June 11, 1990), aff'd, (P.S.D. July 10, 1991).
2/ Allegations (d)-(g) were dismissed on Complainant's motion by Order dated February 13, 1990 (I.D. at 2).
3/ The Administrative Law Judge properly determined that Respondents were only entitled to receive the maximum allowable hourly rate of $75, not $150 per hour as requested (EAJA Dec. at 10-11). See 5 U.S.C. § 504(b)(1)(A) & 39 C.F.R. § 960.6(b). The Administrative Law Judge disallowed 10 hours of attorney fees spent in defending Respondents' application because these hours were not spent "in defense of the original proceeding" (EAJA Dec. at 11). Contrary to the Administrative Law Judge's decision, attorney fees incurred in preparation and defense of an EAJA application are recoverable, see Brewer v. American Battle Monuments Comm'n, 814 F.2d 1564, 1570 (Fed. Cir. 1987). In this case, however, the additional fees are not allowed because Respondents failed to submit the necessary supporting documentation. See 39 C.F.R. § 960.11. See also Raton Gas Transmission Co. v. FERC, 891 F.2d 323, 330-31 (D.C. Cir. 1989); Naporano Iron and Metal Co. v. United States, 825 F.2d 403, 404-05 (Fed. Cir. 1987); Griffin & Dickson v. United States, 21 Cl. Ct. 1, 11 (1990).