The U.S. Court of Appeals for the Fifth Circuit begins its recent decision in Gate Guard Services, L.P. v. Perez, with the truism that “It is often better to acknowledge an obvious mistake than defend it.” The Court continued that “When the government acknowledges mistakes, it preserves public trust and confidence. It can start to repair the damage done by erroneously, indeed vindictively, attempting to sanction an innocent business.” Unfortunately, the Department of Labor (DOL) did not follow such a course in this case, but rather “chose to defend the indefensible in an indefensible manner,” earning a solid lambasting by the Court, which imposed attorneys’ fees in favor of Gate Guard as a sanction for DOL’s bad faith.
The case arose out of a badly-flawed investigation and legally suspect enforcement action by DOL against Gate Guard relating to the alleged misclassification of gate attendants as independent contractors, in violation of the Fair Labor Standards Act (FLSA). The issue started with an over-zealous, undertrained, DOL investigator pursuing a tip received from a drinking buddy, who had worked as a service technician for Gate Guard and was concerned his pay had been miscalculated. After speaking with another former Gate Guard service technician and a gate attendant, the investigator, who had little training or experience in contractor misclassification cases, opened a formal investigation and scheduled an opening conference with Gate Guard. However, prior to the opening conference, he appeared unannounced at Gate Guard’s office – something he had never done in his 10-year career – and, although knowing Gate Guard was represented by counsel, confronted a low-level Gate Guard employee and demanded payroll information. After the opening conference and conducting only three interviews, and without further investigation, the investigator began calculating the potential penalty, concluding that Gate Guard owed over $6 million in back wages. He then began interviewing other gate guard attendants to support his conclusion, but interviewed only 17 of some 400 gate guards, failing to ask basic relevant questions and ignoring or discounting responses that contradicted his conclusion. Then, without any explanation, he destroyed his handwritten interview notes after composing formal witness interview statements. The Fifth Circuit characterized the investigation as “cursory” at best, and the investigator’s supervisors admitted that the investigator violated several internal policies and grossly inflated the potential penalty by $4M. However, DOL reasserted its position on liability and still demanded a multi-million dollar penalty.
Gate Guard sued DOL seeking a declaration that it was in compliance with the FLSA, and seeking attorneys’ fees under the Equal Access to Justice Act (EAJA) if Gate Guard prevailed. Meanwhile, DOL filed its enforcement action for back wages and injunctive relief. During the ensuing litigation DOL opposed nearly every motion on spurious grounds, filed specious motions of its own, forced Gate Guard to seek court supervision of depositions and a protective order against harassment of its personnel and protection of trade secrets and confidential company information. The Fifth Circuit stated that “[t]he government’s extraordinarily uncivil and costly litigation tactics,” which the Court stated “strongly suggest that [the government] hoped to prevail by oppressively pursuing a very weak case … left Gate Guard at a tremendous and unfair disadvantage.”
The legal basis for DOL’s position at the trial court level eroded as the same District Court held in a nearly identical case that gate attendants are not FLSA employees. Moreover, DOL learned that the U.S. Army Corps of Engineers was utilizing gate attendants and characterized them as independent contractors. Nevertheless, DOL continued to press forward. Only by expending over $800k in attorneys’ fees, wasting countless hours of employees’ time and marshalling affidavits from 94 gate attendants was Gate Guard finally able to vindicate itself, and obtain summary judgment (which DOL did not challenge) and an award of over $565k in attorneys’ fees under the not “substantially justified” prong of EAJA. 28 U.S.C. § 2412(d). However, the trial court denied fees under the “bad faith” prong of EAJA. 28 U.S.C. § 2412(b). DOL appealed the fees award, while Gate Guard appealed the denial of “bad faith” fees.
The Fifth Circuit reversed the denial of “bad faith” fees, and remanded for calculation of the same against DOL. The Fifth Circuit ruled that the trial court erroneously (i) applied an unduly rigid test in considering whether a “bad faith” fees award was justified, and (ii) focused solely on the case as filed, rather than considering DOL’s subsequent litigation tactics. As to the first issue, the Fifth Circuit stated that equity requires certain flexibility, and that “bad faith” fees are warranted where a party acts (i) in bad faith, vexatiously or wantonly, or (ii) for oppressive reasons. The Court concluded that the case here was “rife with the type of misconduct justifying an award,” and that “[t]he government’s conduct was oppressive and its case legally frivolous.” Importantly, the Court stated that “[f]rivolousness should also take account of the government’s duty, as prosecutor, to pursue only clearly meritorious enforcement actions.”
While this decision did not involve a government contract, every government contractor who has confronted an overzealous DOL investigator in a Service Contract Act or Davis-Bacon prevailing wage and benefits investigation can sympathize with Gate Guard’s predicament here and take heart from Gate Guard’s success in vindicating its position and recovering “bad faith” attorneys’ fees for DOL’s initiating and improper prosecution of this case.
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© Jackson Kelly PLLC 2015