United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 96-3660

___________ United States Department * of Labor; Robert B. Reich, * Secretary of U.S. * Appeal from the United Department of Labor, * States

Appellants, * Western District of

v. * Rapid Robert's Inc.; * Robert E. Wilson, Jr..

Appellees. * District Court for the

* Missouri.

*

___________ Submitted: April 10, 1997 Filed: December 2, 1997

___________ Befo re MCMILLIAN, FLOYD R. GIBSON, and JOHN R. GIBSON , Circuit Judges.

___________ JOHN R. GIBSON, Circuit Judge.

The United States Department of Labor and it s Se cretary appeal from an order of the district cour t grantin g attorneys' fees to Rapid Robert's, Inc. as a result of the district court setting aside an order o f the Secretary of the United States Department of Labo r assessing penalties against Rapid Robert's for violation-2-

of t he Employee Polygraph Protection Act, 29 U.S.C. § § 2001-2009 (1988), and implementing-3-

regulation s. The Secretary concedes that Rapid Robert's was the prevailing party in the litigation on the merits, but arg ues the district court erred in holding that th e Department's position was not substantially justified , and in awa rding fees. We decline to address the issue of substantial justification and instead hold that specia l circ umstances exist which would make the award o f attorneys' fees unjust. Accordingly, we reverse.

In 1990, Rapid Robert's performed fifteen polygrap h
exam inations of employees, testing five employees o n March 10, May 31, and June 11. Rapid Robert's explained that it performed the polygraphs to investigat e heig htened inventory losses occurring close to thos e dates. The Department of Labor sought penalties fro m Rapid Robe rt's, claiming that the polygraph examinations violated the Employee Polygraph Protection Act.

This Act, which was enacted June 27, 1988, becam e effective six months following that date on December 27, 1988. Congress had directed the Secretary of Labor t o issu e rules and regulations not later than ninety day s after June 27, 1988, or September 25, 1988. The interim final regu lations, however, were actually promulgated on Octo ber 21, 1988, with comments requested on or befor e February 27, 1989. The final regulations wer e eventually promulgate d three years later on March 4, 1991, with the effective date of April 3, 1991.

The Department conducted an investigation, issued a noti ce of violation, and assessed a $74,000 penalty

. Rapi d Robert's denied the violations and requested a n administrative hearing.-4-

The ALJ found that Rapid Robert's had made a goo d faith ef fort to comply with the Act and had no t termi nated any employees based on the polygrap h examinations.Specifically, the ALJ found that Rapid Robert's failed to give proper notice 1 according to 29 U.S.C. § 2006(d)(4). The amount assessed for violation of 29 U.S.C. § 2006(d) was reduced to $500 for each of eight incidents in which the notices provided to employees did not comply with the content requirements set forth in § 2006(d)(4). The ALJ assessed $1000 for each of seven incidents in which the notices not only contained insufficient content but also were not provided to employees at least forty-eight hours before testing. The ALJ upheld the penalty of $1,500 assessed for each of six counts of unlawfully threatening to discipline employees refusing to submit to polygraph testing in violation of 29 U.S.C. § 2002(3)(A). With respect to the unlawful suspension of three employees, the ALJ reduced the $22,000 in penalties for violations of 29 U.S.C. §§ 2002(3)(A) and 2002(4)(C) to a penalty of $2000 for each of the three violations.

-5- Alth ough it found Rapid Robert's and its President , Robert Wilson, liable for violating the Act, it reduce d the penalty to $26,000. 1

All parties appealed the ALJ's decision to th e Secr etary. The Secretary affirmed the $26,000 penalty , although articulating some what different reasoning. Furt her, the Secretary rejected the ALJ's exception no t to h old Wilson personally liable and placed liabilit y upon Wilson as an employer under § 2001(2).
Rapid Robert's then sought review of the Secretary's deci sion in the district court. Rapid Robert's argue d that the Secretary's decision was unlawful because th e Department of Labor implemented the controlling interi m regulation s without notice or the opportunity for public comment in violation of the Administrative Pr ocedure Act, 5 U.S .C. § 551, as well as the Fifth and Fourteent h Amendments of the United States Constitution

. Additional ly, Rapid Robert's claimed that the Department failed to provide technical assistance as req uired by the-6-

Act, that Wilson was not an employer under the Act, an d that it conducted the polygraph examinations i n accordance with the ongoing investigation exe mption in 29 U.S .C. § 2006(d). Rapid Robert's prayed that th e deci sion of the Secretary and the administrative la w judge be reversed and set-7-

asi de, and that it be awarded its attorneys' fees. A s
a re sult, the district court dismissed the enforcemen t action.

The co urt held that it was undisputed that th e Dep artment brought the enforcement action under th e interim final regulations, not the final regu lations. In analyzing the requirement of the Administrati ve Procedure Act for notice and comment, the court rejected th e argument t hat the situation fell within the "good cause"
exem ption contained in 5 U.S.C. § 553(b)(3)(B). Afte r considerin g legislative history as well as law from this circuit, the district court concluded that th e good cause exemption applies only in narrow circumstances where the facts a nd interests are such that notice and comment i s impossible or manifestly unnecessary. The co urt rejected the Secretary's argument that ninety days wa s insufficient to solicit public comments, revi ew them, and pr omulgate final regulations. Likewise, the cour t reje cted the Secretary's argument that the good caus e exemption applied because the interim regulation s obviated uncertainty on the part of employers , employees, and polygraph examiners concerning the scope of th e stat utory coverage and the exemptions. The court hel d that the regulations were promulgated without publi c participation under § 553(b)(3)(B), and therefore, wer e invali d. The district court set aside the decision o f th e Secretary and entered judgment in favor of Rapi d Robert's. The Secretary did not appeal.

Thereafter, Rapid Robert's applied for attorneys ' fees under the Equal Access to Justice Act, 28 U.S.C. § 2412 (1997). The court found that Rapid Robe rt's was the prevail ing party under the Act, that the Secretary o f-8-

Labor's po sition in the litigation was not substantially ju stified, and that the award of attorneys' fees an d expenses was proper.

The district court's decision to set aside th e Secretary's decision and enter judgment in fa vor of Rapid Rob ert's is not in issue. It was not appealed, and th e Secretary concedes that no issue is raised co ncerning its propriety. The only issue before us is the propriety of the att orneys' fee award. The district court held tha t the-9-

Department lacked substantial justification for it s posit ion simply because it lost on the merits. For th e
mos t part, both parties on appeal battle over th e ques tion of whether the issuance of the interi m regulations without notice and comment was such that i t could n ot be defended. The government also argues tha t its position was substantially justified because th e pursuit of penalties against Rapid Robert's w as primarily based on violations of the statute and not the interi m regulations.

While the parties have vigorously asserted thei r posi tions with respect to the propriety of the interi m regulations, we need not tread that sensitive ground t o
reac h the issue of attorneys' fees. Under the Equa l Access to Justice Act, the court should deny an award of atto rneys' fees not only when the government's positio n is substantially justified but also when "specia l cir cumstances make an award unjust." 28 U.S.C. § 2412(d)(1)(A).

The district court's decision concerning a n application for fees under the EAJA is review ed for abuse of d iscretion. S.E.C. v. Kluesner , 834 F.2d 1438, 143 9 (8th Cir. 1987). Under this standard, the distric t court's conclusions of law are reviewable und er a de novo basi s, and its factual findings are reviewed for clea r
error. Id. at 1439-40.
In explaining the "s pecial circumstances" exception, the House Report accompanying the EAJA stated:

Furt hermore, the Government should not be hel d liable where "special circumstances would mak e-10-

an award unjust." This "safety valve" helps to insure that the Government is not deterred from advan cing in good faith the novel but credibl e exte nsions and interpretations of the law tha t often underlie vigorous enforc ement efforts. It also gives the court discretion to deny award s where equitable considerations dictate an awar d should not be made.-11-

H.R.Rep. N o. 1418, 96th Cong., 2d Sess. at 11, reprinted in 1980 U.S.C.C.A.N 4953, 4990. "The EAJA thu s explicitly directs a court to apply tradition al equitable principles in ruling upon an application for counsel fees by a prevailing party." Oguachuba v. INS , 706 F.2d 93 , 98 (2d Cir. 1983).

Rel ying on this direction, courts have denie d attorneys' fees in a number of different situ ations. For
exam ple, in Oguachuba , the Second Circuit upheld th e dist rict court's denial of attorneys' fees to a n applica nt who, because of a technical error by the INS , prevailed on a petition for writ of habeas co rpus despite having repeatedly violated federal immigrati on laws. Id. at 99. In reaching its result, the appellate court found the p etitioner to be "without clean hands." Id. ; se e also Taylor v. United States , 815 F.2d 249 (3rd Cir

. 1987) (denying attorneys' fees under EAJA whe re applicant for fees took advantage of unlawful governmen t action but then challenged that action to avoid serving vali d manslaughter conviction).

In United States v. 27.09 Acres of Land in Town o f Harrison , 43 F.3d 769 (2d Cir. 1994), an otherwis e eligible a nd prevailing party was denied attorneys' fees beca use it did not substantially contribute to th e
succes sful phase of the litigation. Id. at 775

. Purpo rting to apply general equitable principles, th e Seco nd Circuit reasoned that "where one or mor e ineligi ble parties are willing and able to pursue th e litigation against the United States, the partie s eligible f or EAJA fees should not be able to take a free ride through the judicial process at the government' s expense." Id. (quotation and citation omitted).-12-

The circumstances surrounding the present cas e similar ly demand that attorneys' fees be denied. Th e government argues that, regardless of the val idity of the interimregulations, Rapid Robert's committed severa l viol ations of the statute itself. These statutor y vi olations have gone unpunished as the result of th e dist rict court's order setting aside the Secretary o f Labor's decision.-13-

The gov ernment did not argue the statutory basis o f the penalties before the district court, and ordinaril y
we do not consider issues raised for the first time o n appe al. See Miller v. Federal Emergency Managemen t Agency , 57 F.3d 687 (8th Cir. 1995). This general rule, how ever, is not absolute. As the Supreme Court ha s stated,
The matter of what questions m ay be taken up and resolv ed for the first time of appeal is on e left primarily to the discretion of the court s of appeals, to be exercised on the facts o f individual cases. We announce no general rule. Ce rtainly there are circumstances in which a federal appellate court is justified i n resolving an issue not passed on below, as where the p roper resolution is beyond any doubt, o r where injustice might otherwise result. Singleton v. Wulff , 428 U.S. 106, 121 (1975) (quotations and citations omitted).

Th is court has applied an exception to the genera l
ru le where "the obvious result of following the rul e
wou ld be a plain miscarriage of justice or would b e inconsistent with substantial justice." Seniorit y Rese arch Group v. Chrysler Motor Corp. , 976 F.2d 1185 , 1187 (8th Cir. 1992). We believe this exception applies here.
Rapid Robert's direct violations of the statutor y provisions are outlined in detail in the ALJ' s order. As
a resul t, the record on the issue is well-developed an d amenable to our review. The Secretary briefe d and argued the statutory basis for the penalties, and Ra pid Robert's had the opportunity to respond. Therefore, it i s-14-

appr opriate for us to consider whether Rapid Robert' s rel ief from valid statutory penalties constitutes a spec ial circumstance which would make an award o f attorneys' fees unjust.

While the district court focused exclusively on th e validity of the interim regulations, the vast majority of the penalties levied against Rapid Robert's were fo r direct violations of statutory provisions.-15-

An analysis of the administrative law judge's orde r
reve als that the only violations which depended on th e regulations were those related to the failure to give 48- hour advance notification of testing. See 29 C.F.R. § 801.12(g)(2). Because the statutory language specifie s only that written notice be provided before t he polygraph test, the 48-hour time frame was derived purely from the interimregulations. See 29 U.S.C. § 2006(d)(4)

. Therefore, without the interim regulation, th e admi nistrative law judge could not conclude that Rapi d Robe rt's did not give written notice sufficiently i n advance of testing.

The o ther violations were based on requirement s plainly set forth in the statute. The admini strative law judge foun d fifteen violations related to the content of the wri tten notices provided by Rapid Robert's to it s emplo yees. Namely, the written notices did not se t "f orth with particularity the specific incident o r activity being investigated" as required by 29 U.S.C. § 20 06(d)(4)(A) and did not describe "the basis of th e
em ployer's reasonable suspicion" as required by 2 9 U.S.C. § 2 006(d)(4)(D)(iii). Rapid Robert's argues that the interim regulations provided a detailed descriptio n of "reason able suspicion." See 29 C.F.R. § 801.12(g)(3) (Int erim1989). The administrative law judge, however , referred primarily to a line of Supreme Court decision s to determine the meaning of "reasonable suspicion. " Thus, he did not rely on regulatory language to interpret the statutory requirements or to ascertain that thos e requirements had been violated.
Rapid Robert's was also held accountable for si x violations involving unlawful threats in conj unction with-16-

polygraph examinations and for three violatio ns involving unlawful e mployee suspensions. While the administrative law jud ge found that Rapid Robert's violated both th e statute an d the regulations in these instances, only the stat utory language was necessary to find the violation s as the statutory and regulatory provisions we re virtually identical. Compare 29 U.S.C. §§ 2002(3)(A), 2002(4)(C),In its brief, Rapid Robert's argues that §§ 801.40-.43 of the interim 2 regulations dictated the procedures for enforcement actions and the assessment of penalties under the Employee Polygraph Protection Act. The Administrative Procedure Act, however, provides that rules of agency procedure or practice are exempt from the requirements of notice and hearing. 5 U.S.C. § 553(b)(3)(A) (1997). Thus, the validity of the enforcement procedures contained in the interim regulations was never at issue.

-17- with29 C. F.R. § 801.4(a)(3). Therefore, Rapid Robert's

was in clear violation of the statute regardless of th e validity of the interim regulations. 2

When the district court set aside the decision of th e Secr etary of Labor, the court released Rapid Robert' s from all penalties, not just those rooted in regulator y violations. Consequently, Rapid Robert's recognized a subs tantial benefit beyond mere relief from the interi m regula tions. For the seven violations of the 48-hou r advance no tice requirement, the administrative law judge levi ed penalties totaling $3500. The remaining $22,50 0 in penalties were levied for other violations which, a s disc ussed above, stemmed from clear violations of th e statute.

While we may not disrupt the district court' s disp osition on the merits, the consequence of tha t dispo sition is a factor in weighing the equities o f
awar ding attorneys' fees. Here, the district cour t relieved Rapid Robert's of over seven times t he amount of penalties which actually resulted from the invalidate d regulat ions. Rapid Robert's has reaped a windfall b y escaping i ts duty to pay for clear violations of a valid st atute. To add to that windfall by requiring th e government to pay attorneys' fees and expenses would b e-18-

patentl yunjust. We conclude that the district cour t abus ed its discretion by failing to find specia l circumstances in this case.

We reverse the district court's order.-19-

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHT H CIRCUIT.

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