Petition for Writ of Certiorari — Crandon v. United States

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91-1908

Buprems Court, U.S. |

FILED

iain ian 291992 |

IN THE OFFICE OF THE CLERK |

Supreme Court of the United

October Term, 1991

——— es

ates

LAWRENCE H. CRANDON, THOMAS K. JONES,

HAROLD KITSON, JR., MELVYN R. PAISLEY

AND HERBERT A. REYNOLDS,

UNITED STATES OF AMERICA,

Petitioners,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

PETITION FOR WRIT OF CERTIORARI

GERARD F. TREANOR, JR

AMY BERMAN JACKSON

VENABLE, BAETJER, HOWARD

& CIVILETTI

Suite 1000

1201 New York Ave., N.W.

Washington, D.C. 20005

(202) 962-4800

Counsel for Petitioner

Lawrence H. Crandon

ROBERT S. PLOTKIN

PAUL, HASTINGS, JANOFSKY & WALKER

Suite 1200

1050 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 223-9000

Counsel for Petitioner

Melvyn R. Paisley

WILLIAM R. STEIN

(Counsel of Record)

DAVID M. DORSEN

JOHN C. MOYLAN

HUGHES HUBBARD & REED

1300 I Street, N.W.

Washington, D.C., 20005

(202) 408-3600

Counsel for Petitioners

Thomas K. Jones,

Harold Kitson, Jr., and

Herbert A. Reynolds

CASILLAS PRESS, 1N¢

1717 K STREET

N.W., WASHINGTON, D.C. 20036

QUESTIONS PRESENTED

This petition follows the Fourth Circuit’s divided decision

reversing the district court’s award of attorneys’ fees and ex-

penses to petitioners under the Equal Access to Justice Act

(‘‘EAJA’’) upon remand after this Court’s decision in Cran-

don v. United States, 494 U.S. 152 (1990). The following ques-

tions are presented:

1. Are corporate employees excluded from eligibility under

the EAJA simply because indemnification for legal fees may

be available from their employer under a state statute, where

the employees retain their own lawyer and are personally

obligated by contract with the lawyer to pay his fees whether

or not they are indemnified by their employer?

2. Does an individual who hires and becomes personally

liable for paying his lawyer ‘‘incur’’ attorneys fees within the

meaning of the EAJA, notwithstanding the availability of funds

to pay the legal fees from a collateral source?

3. Do this Court’s holdings in Pierce v. Underwood and

Cooter & Gell v. Hartmarx permit courts of appeals to engage

in an ‘‘independent assessment”’ of the reasonableness of the

government’s position when reviewing a district court’s deter-

mination whether the government’s position was ‘‘substan-

tially justified’ under the EAJA?

4. Under the EAJA, is the substantial justification for the

government’s position determined solely by reference to the

strength of its legal arguments, or may the trial court in the

exercise of its discretion also consider other factors going to

the reasonableness of the government’s decision to litigate,

such as the unprecedented nature of the lawsuit and the

government’s long acquiescence in the challenged conduct?

ill

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED...................ccc cc cece. i

eo Ss ee es cc iil

Bimum OF AUTHORITIES... 2... ooo ccc ccccee V

RPP ROEPU MEATY or eck ia uct ccucnccccencccccccy 1

POPUP URIIN oon ac cece cass ccavansccununccucce, 2

A 2

EE 2

A. Background—Petitioners’ Receipt Of

So 3

B. The Government’s Lawsuit......................... 4

C. The Litigation On The Merits....................... 5

o. wemuamers Legal Fees............................ 6

E. Petitioners’ Fee Application......................... 7

REASONS FOR GRANTING THE WRIT................ 10

I. The Fourth Circuit Drastically Restricted

The EAJA, Contrary To The Established

Definition Of A Critical Term In The

Statute And In Disregard Of The Trial

Court's Well Supported Factual Findings........... ll

Page

II. Contrary To This Court’s Mandate In Pierce v.

Underwood, The Fourth Circuit Engaged In De Novo

Review Of The District Court’s Fact-Based

Determination That The Government’s Position

Was Not Substantially Justified, And Improperly

Narrowed The District Court’s Inquiry Under

ce er eS rey rir erat eee 20

ee EET PCT eT ER ET OLT EET TT Te CeCe Ce 28

APPENDICES

Appendix A. Opinion of Court of Appeals............... la

Appendix B. Opinion of Distnct Court................. 25a

Appendix C. Opinion of District Court

Oe ON REE eee

Appendix D. Judgments and Orders of District

EE. tC oh oak cea moGlaie~ ¥aw ee es 46a

Appendix E. Judgment of Court of Appeals............. 55a

TABLE OF AUTHORITIES

CASES Page

Adkins v. Auto Owners Ins. Co.,

105 Mich.App. 430, 306 N.W.2d 312 (1981)............- 14

American Indem. Co. v. Olesyuk,

353 S.W.2d 71 (Tex. Civ. App. 1901). ..... 00. sce ccaes 16

In re American Int’l Airways, Inc.,

GR BR. S06 CED. Fa. TOR ounce ccc cesarean aes 14

Anderson v. Bessemer City,

OIO US. GRE CR a5 gc hdc i hace enisccivaeeiees 19, 21

Anderson v. Liberty Lobby, Inc.,

G77 03.G: Dee Ce oc cc a ca Viena ease caer eee 27

Barash v. Public Fin. Corp.,

658 F.2d 504 (7th Cir. 1981)............ cece eeeeeeees 14

Bauer Bros. Co. v. Commissioner of Internal Revenue,

46 F.2d 874 (6th Cir.)

cert. dented, 283 U.S. 85 (IGGL)... 0c cect were enes 14

Bailey v. United States,

vias © £2). Se eer 24

In re Caceres Johnson P.R., Inc., -

9] B.R. 200 (Bankr. D.P.R. 1988)..............-.. cy AR 14

Ceglia v. Schwetker,

566 F. Supp. 118 (E.D.N.Y. 1983)...........----5+5>. 14

Chee v. Schweiker,

563 F. Supp. 1362 (D. Ariz. 1983)............---. eee 14

Cooter & Gell v. Hartmarx Corp.,

Page

Crandon v. United States,

494 U.S. 152 (1990) rev'g United States v.

Boeing, 845 F.2d 476 (4th Cir. 1988), aff’g in

part & rev'g in part 653 F. Supp. 1381

Gs WO SUES Cae GNC eee uehiweeean 2, 6, 24, 2, 27

Dilltone v. Deborah Hosp.,

113 N.J. Super. 548, 274 A.2d 597 (1971).............. 16

In re Donovan,

eee 8 ee A | A re 13

In re Emerald Oil Co.,

GOS FBG Gis Gtk Cir. BOB). oi ec ctece savas 13

In re Energy Coop.,

103 B.R. 171 Gaenkr. N.D. TF. 1966)... 2... ese ses 14

FERC v. Martin Exploration Mgmt. Co.,

SEG Ue. ee Claes eae haere ee 12

Graham v. Reserve Life Ins. Co.,

274 NO. 156, B61 5.8.26 S65 CUBGB). ew ks ceccdase 14, 16

Hall v. Cook County,

OOS Th. Gee, 10S MB. OE ies sc cei nine ieee eves 14

Icicle Seafoods, Inc. v. Worthington,

STG US: FOR Tes so ov os 8 00kb 0 5s00e ceer kere 19

In re Iowa Premium Serv. Co.,

— pst Bt fF Ee | peepee errs 13

Jackson v. Virginia,

O69 Ua. ee Ceca ake co abenkas ET eee ge rer ye 27

Mallard v. United States Dist. Ct. for

S. Dist. of Iowa, 490 U.S. 296 (1989).................. 12

Vil

Page

Margolis v. Prudential Ins. Co. of Amenca,

ee ©. BU. Kier Carin RRs sce sce ic cuseceseess 14

Maryland Cas. Co. v. Thomas,

260 S.W.2d G52 (Tex. Civ. App. 1956)... «2... ..00208, 14

MCI Telecommunications Corp. v. MCI Communications Corp.,

C.A. No. 89C-MR-216, 1990 WL 91100 (Del. Super. Ct.

i Sa. | Pee aie ieee recame yanmar gy ane yr re Ae ear ue 19

In re Miniscnbe Corp.,

oe 8 a 2 eee OR} ree 14

Myers v. Sullivan,

3 ef Bibl Eo Se. | rey 24, ,25

Phillips v. General Serv. Adm’r,

ee Bok le ae | rer eee 15

Pierce v. Underwood

a ee 8, 20-23, 27

Quarles Pet. Co. v. United States,

Je ge Be > a Oe en. onenerenee one 13

Rawlings v. Heckler,

ee ee ee ss is a ae eb he a 24

Reliance Mut. Life Ins. Co. of Illinots v. Booher,

166 30.20 Zee (Fm. Dest. Ct. App. i906)............%.. 14

Rubin v. Empire Mut. Ins. Co.,

25 N.Y.S.2d 426, 306 N.Y.2d 914, 255 N.E.2d 154 (1969)14, 16

Russell v. Thermalito Union School Dtst.,

176 Cal. Rptr. 1, 115 Cal. App. 3d 880 (1981)........... 14

SEC v. Comserv Corp.,

ae bg fe Re Beer errr ry ese

Page

Sorensen v. Overland Corp.,

142 F.Supp. 354 (D. Del. 1956),

. ¢ & fe § R. fe A). ) re 14, 18

Spencer v. NLRB,

712 F.2d 539 (D.C. Cir. 1983), cert. dented,

ee er ren ee ree 24, 25

Standard Oil Co. of Ohio v. Federal Energy Admin.,

612 F.2d 1291 (Temp. Emer. Ct. App. 1979),

aff'g 465 F. Supp. 274 (N.D. Ohio 1978)............... 14

Stuyvesant Ins. Co. v. Nardelli, ail

266 F.20 GOO Gih Cr. 1961)........55..... Serre 13

Unification Church v. INS,

Pe oe ee es Ges PE as ek a ebooks 16

United States v. St. Paul Mercury Indem. Co.,

ge GF ee | ee eee eee ere 13,16

United States v. Ron Pair Enterpnses, Inc.,

ee I se ek as da vids wh Rene warn es 12

United States v. Yoffe,

pee go Fg go ey Rees 20

Wall Industries, Inc. v. United States,

15 Cl. Ct. 796 (1988),

aff'd mem., 883 F.2d 1027 (Fed. Cir. 1989)............. 16

Walsh v. Grange Mut. Cas. Co.,

1 Ohio App.2d 304, 204 N.E.2d 690 (1964).......... 14, 16

Wayte v. United States,

Be AE FR Pe ere me ee Peers: 25

West Virginia Univ. Hosp., Inc. v. Casey,

Se ee NR ss kas Wow coh hha okies ane kee 12

Page

In re White River Corp.,

Ce £ Et. Ce ae) | Seer errr rer 13

STATUTES

| ihe og ee ere eee en ree passim

BBE Oe Gy) Pn eter ree ee se 2

28 U.S.C. § 2412(d)(I)(A)... «ee eee eee ee eee passim

Del. Code Ann. tit. 8, § 145(c)..... 66... eee eee ee eee 8, 11

N.Y. Bus. Corp. Law §§ 722-25. ........-- 2s eee eee eee 11

LEGISLATIVE MATERIALS

H.R. Rep. No. 1418, 96th Cong., 2d Sess. (1980),

reprinted in 1980 U.S. Code Cong. & Admin.

NA ee rer ree eer ee ee ee 19, 23

TREATISES AND MISCELLANEOUS

The American Heritage Dictionary (2d College ed.

Houghton Mifflin Co. 1982, 1985)...........-+++-+- 19, 23

Ballentine’s Law Dictionary (3d ed. 1969)..........-.---- 13

Black’s Law Dictionary (6th ed. 1990)............. +++. 13

Burton, Legal Thesaurus (1980)........-..-.6--0 see seers 13

E. Falk, The Delaware General Corporation Law (1972)... .13

2 Model Business Corporation Act Annotated 1081-98.1

oe ee | ee eer err re ee ee. 13

Page

E. Veasy, J. Finkelstein, C. Bigler, Delaware Supports

Directors With Three-Legged Stool of Limited

Liability, Indemnification, and Insurance,

42 The Business Lawyer 399 (1987)................... 18

VII The Oxford English Dictionary (2d ed. _ a 13

Webster’s New Collegiate Dictionary (G.& C. Merriam

| ELD BUM die. ee ee 13

Webster’s Second New International Dictionary

(G.& C. Merriam Co., 1934)......................... 13

Webster’s Third New International Dictionary

ems ©. Minette Co. BOF)... wo ccc cc ccccecce ns. 13

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

No.

LAWRENCE H. CRANDON, THOMAS K. JONES,

HAROLD KITSON, JR., MELVYN R. PAISLEY and

HERBERT A. REYNOLDS,

Petitioners,

Vv.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

Petitioners Lawrence H. Crandon, Thomas K. Jones, Harold Kit-

son, Jr., Melvyn R. Paisley and Herbert A. Reynolds petition this

Court to issue a writ of certiorari to review the judgment of the

United States Court of Appeals for the Fourth Circuit entered in

United States of America v. Melvyn R. Paisley, Thomas K. Jones,

Herbert A. Reynolds, Harold Kitson, Jr., and Lawrence H. Crandon.

OPINIONS BELOW

The opinion of the court of appeals is reported at 957 F.2d 1161

and is set forth in Appendix A to this Petition (cited as ‘‘App.’’).

The opinion of the district court is reported at 747 F. Supp. 319

and is set forth in Appendix B.

This case was previously before this Court during the October

1989 Term, at which time the Court unanimously reversed an earlier

judgment of the United States Court of Appeals for the Fourth Cir-

cuit. Crandon v. United States, 494 U.S. 152 (1990), rev’g United

States v. Boeing Co., 845 F.2d 476 (4th Cir. 1988), aff’g in part

and revg in part 653 F. Supp. 1381 (E.D. Va. 1987).

JURISDICTION

The judgment of the court of appeals was entered on March 3,

1992. The Court has jurisdiction to review the judgment of the court

of appeals under 28 U.S.C. § 1254(1).

STATUTE INVOLVED

28 U.S.C. § 2412(d)(1)(A) provides in pertinent part:

a court shall award to a prevailing party other than the

United States fees and other expenses . . . incurred by

that party in any civil action (other than cases sounding

in tort) . . . brought by or against the United States in

any court having jurisdiction of that action, unless the

court finds that the position of the United States was

substantially justified or that special circumstances make

an award unjust. -

STATEMENT

This case began in 1986 when the government filed a civil action

against former and current government employees, claiming that

their receipt of severance payments from their former private

employer had violated a criminal conflict-of-interest statute, 18

U.S.C. § 209. On the prior sojourn in this Court, all nine Justices

found incorrect the Fourth Circuit’s 2-1 opinion that held 18 U.S.C.

\ 209 applicable to one-time, irrevocable severance payments receiv-

ed prior to entry into government service.

On remand, petitioners sought to recover legal fees from the

government under the EAJA. The district judge, who had conducted

the trial, found that the Government had failed to sustain its burden

of proving that its position was substantially justified. App. 28a. He

further ruled that petitioners had ‘‘incurred’’ fees within the meaning

of the EAJA because at all times they were personally obligated

to pay their lawyers. The district court rejected the government’s

argument that the petitioners had not ‘‘incurred’’ fees because they

may be covered by a Delaware statute that provides for indemnifica-

tion by a Delaware corporation of an individual who is made a party

to an action ‘‘by reason of the fact that he is or was a[n} . . .

employee of the corporation.’’ The district court ordered the govern-

ment to reimburse a portion of petitioners’ substantial legal fees.

As in the merits phase of this litigation, a divided court of appeals

reversed.

A. Background — Petitioners’ Receipt

Of Severance Payments

Petitioners are five former employees of The Boeing Company,

who resigned or took early retirement from the company in 1981

or 1982 to accept important positions in the Executive Branch of

the Federal Government, four with the Department of Defense,

one with NATO. App. 34a-35a. In each case the government

recruited the individual and each man agreed to become a candidate

for the proposed government position. App. 33a.

Before the government formally offered any of the men positions,

Boeing informed each man of his eligibility for a severance payment

and invited him to prepare his own estimate of the anticipated total

financial impact of retiring or resigning from Boeing at that stage

of his career. JA (1987) 332, 333, 335, 336, 338.! This invitation

was in accordance with long-standing Boeing policy. Boeing had made

a total of 21 similar severance payments between 1962 and 1982,

and had fully disclosed all such payments to the government. App.

33a-34a.

Each man received an unconditional and irrevocable lump-sum

severance payment before leaving Boeing and before being formally

\JA refers to the Joint Appendix filed in the court of appeals in the ins-

tant case. JA (1987) refers to the Joint Appendix filed in the court of ap-

peals in the appeal on the ments.

appointed to the proposed government position. App. 35a. None

of the men promised to return to Boeing at a later time and Boeing

made no commitment to rehire them. Jd. Boeing unilaterally deter-

mined the amount of the payments. App. 36a. The government

presented no evidence that, until suit was filed, any of the men knew

how Boeing calculated the amount of severance payments or even

what financial factors Boeing had taken into account. E .£., JA (1987)

957, 1045, 1056. The payments made by Boeing ranged from 22

to 75 per cent of the amounts the petitioners had requested. JA

(1987) 332-40.

Before being appointed to their government positions, the men

disclosed to the government the possibility that they might receive

severance payments; after their appointments, they disclosed their

actual receipt of those payments to responsible government officials.

App. 37a-38a. The first two of the recruited Boeing employees

discussed the proposed payments both with the government officials

who were to be their superiors and with Defense Department legal

counsel. The four Defense Department recruits submitted SF-278

Financial Disclosure Reports, which included the sources and

amounts of the payments. The responsible Defense Department

officials reviewed and certified that they were ‘‘satisfied that there

Is no actual or potential conflict of interest.’’ E.g., JA (1987) 121-22,

126-27, 148-49, 1035-37, 1060-63.

After entering government service. none of the individual peti-

tioners provided Boeing with any favored treatment or, indeed, par-

ticipated in any source selection or procurement decision that af-

fected Boeing. App. 37a, 43a. It was stipulated at trial that all five

were competent and faithful government servants and. at the trial.

Secretary of the Navy John.F. Lehman testified for the defense.

App. 36a; JA (1987) 1072.

B. The Government's Lawsuit

The government did not get around to filing its complaint until

July 22, 1986, which was between four and five years after the peti-

tioners had received their severance payments. App. 35a. The

government’s complaint was an unprecedented attempt to rely in

a civil action on the criminal conflict-of-interest provisions embodied

in 18 U.S.C. § 209, which makes it a crime for federal officers know-

ingly to accept a ‘‘supplementation of salary, as compensation for

services as an officer or employee’’ of the government. Thus, it was

against petitioners that the government chose to bring their first

civil action based on section 209 after 24 years on the books (or,

indeed, based on the predecessor statute to section 209, which had

been on the books since 1914). Nor had the government ever promul-

gated regulations or guidelines for its prospective employees regard-

ing the legality of severance payments. Nevertheless, the govern-

ment sought to recover twice the amount of the severance payment

(plus interest) — once from Boeing and once from the recipients.

C. The Litigation On The Merits

The trial judge, sitting without a jury, conducted a tnal that in-

cluded live testimony from two of the five individual defendants,

a government auditor, and the Secretary of the Navy. JA (1987)

988, 1007-78. The trial judge made detailed findings of fact and con-

clusions of law. He concluded that the acceptance of a severance

payment before entry into government service does not violate 18

U.S.C. § 209. App. 41a. Alternatively, he found that the payments

did not violate section 209 because they were neither paid nor receiv-

ed with the intent that they act as a supplementation to the govern-

ment salanes or as compensation for government services. App.

41a-42a. The tnal court also found that the severance payments

were timely disclosed to the government and therefore did not violate

common-law agency principles, which prohibit only secret profits.

App. 42a-43a. Finally, he held that the payments created neither

the appearance of nor an actual conflict of interest because none

of the individuals was in a position to — nor in fact did — render

preferential treatment to Boeing, and, as a result, the government

suffered no injury. App. 43a.

On appeal, the Fourth Circuit, in a divided decision, reversed the

distnct court's conclusion that section 209 does not apply to

severance payments made pnior to entry into government service.

Dilciictina eile

845 F.2d at 480. In addition, while the court agreed that liability

can be imposed under section 209 only when the defendant specifical-

ly intends to pay or receive the money ‘‘as compensation for govern-

ment service,’’ the majority rejected the trial judge’s finding that

Boeing and the individual defendants did not possess the requisite

intent, even though the court acknowledged that the trial judge’s

finding was ‘‘based largely on statements by individual defendants

and others at Boeing.’’ Jd. The panel also rejected the trial judge’s

findings that the individuals’ disclosure of the payments obviated

any potential conflict of interest and that the government had suf-

fered no injury. Jd. at 481.

In dissent, Judge Hall objected to the majority’s statutory con-

struction as well as to its reversal of the trial judge’s findings on

the issue of intent. Judge Hall reminded the majority that the issue

of intent is ‘‘a factual determination purely within the province of

the district court,’’ which had reached its finding ‘‘after hearing

substantial testimony and weighing the credibility of numerous

witnesses.’ Jd. at 483.

This Court unanimously reversed. The Court’s decision, joined

in by six Justices, held that section 209(a) requires status as a

government employee at the time of payment. 494 U.S. at 159.

Three Justices filed a concurring opinion in which they concluded

that section 209(a) applies only to periodic payments, and could never

apply to unconditional, lump sum payments. Jd. at 174-75. Because

this Court resolved the case based on its construction of section

209, neither opinion addressed petitioners’ arguments concerning

the court of appeals’ reversal of the trial judge’s findings on intent

or injury.

D. Petitioners’ Legal Fees

In order to defend themselves against the government’s lawsuit —

alleging a criminal violation based on an action that the government

had previously approved — petitioners retained counsel to repre-

sent them. The individuals hired their own attorneys and agreed

to be responsible for their fees. During the lengthy course of

discovery, pre-trial motions, trial and two appeals on the merits,

petitioners’ legal fees amounted to hundreds of thousands of dollars.

Fortunately, the Board of Directors of Boeing, acting pursuant

to Delaware law and Boeing’s by-laws, agreed to advance funds

to the petitioners to cover their legal bills. In order to obtain the

advances, the petitioners were required to — and did — execute

undertakings promising to repay the advances to Boeing unless the

Board votes to indemnify them, an event which has not yet occurred.

Boeing initially declined to advance fees to petitioners Crandon and

Paisley because they were still government employees at the time

the lawsuit was filed. (Paisley began to receive advances after he

left government service in 1987.) As a result, during the course

of litigation on the merits, Crandon received no advances, and Paisley

paid over $20,000 in legal fees out of his own pocket and ended

up owing his lawyers an additional $40,000 that he was unable to

pay. JA (1987) 50, 70.

Notwithstanding its agreement to advance fees to petitioners, no

fee arrangement existed between Boeing and petitioners’ counsel.

As the district court expressly found, petitioners’ attorneys at all

times viewed themselves as answerabie only to petitioners. Peti-

tioners were personally contractually liable to their lawyers, and

the lawyers affirmed that they looked to petitioners for ultimate pay-

ment of their fees. Boeing had no role in retaining petitioners’

lawyers and exercised no control over the petitioners’ defense or

the conduct of petitioners’ lawyers. App. 27a.

I. Petitioners’ Fee Application

Following remand from this Court, petitioners applied to the

district court for attorneys’ fees pursuant to the Equal Access to

Justice Act, 28 U.S.C. § 2412(d)(1)(A). Petitioners sought to

recover from the government the attorneys’ fees which they had

obligated themselves to pay to their attorneys, but which Boeing

had largely advanced. Because of the hourly rate limitations of the

EAJA, the amount sought was far less than the fees actually charged.

The district court ruled in favor of petitioners. It rejected the

government's argument that petitioners were not the real parties

in interest because fees had been advanced by Boeing and because

Delaware law calls for indemnufication of former corporate em.vyees

who successfully defend a lawsuit brought against them ‘‘by reason’’

of their employment. Del. Code Ann. tit. 8, § 145(c). The district

court made the factual determination that recovery by petitioners

of their attorneys’ fees from Boeing was only a ‘‘possibility,’’ and

held that ‘‘the mere possibility of future indemnification’ did not

disquality them under the EAJA, because at all times they were

personally liable for their legal fees. App. 27a.

The district court also held that the government had failed to satisfy

its burden that its position was substantially justified. App. 28a. The

district court emphasized that although the statute had been on the

books in its current form for 27 years, ‘‘this is the first time the

government has ever brought a criminal or civil case against anyone

for receiving a severance payment, and this is the only time the

government has tried to apply that provision to a person receiving

any kind of payment before entering government service.”’ Id. Rely-

ing on the unanimous decision of this Court, the district court con-

cluded that the government’s construction of section 209 found no

substantial justification in the text or legislative history of the statute.

App. 28a-29a. The judge rejected the government’s suggestion that

‘the fact that two appellate judges agreed with the government’s

position’’ in and of itself ‘‘make[s] it a substantially justified one.’’

App. 29a. The trial court concluded that ‘‘[a]lthough the govern-

ment has the right to seek modification or repudiation of establish-

ed doctrine, the EAJA exists to ensure that individual private litigants

are not compelled to subsidize such re-evaluations.’’ Jd.

Once again, a divided F ourth Circuit reversed. Purporting to apply

the abuse-of-discretion standard set forth in Pierce v. Underwood,

487 U.S. 552 (1988), the majority proceeded explicitly to embark

on a de novo review: ’’we turn to an independent assessment of

the strength of — the justification for — the Government’s posi-

tion... .’’ App. 12a. The court of appeals objected to the fact

that ‘‘the district court accorded no weight to the cogency of the

reasoning’ of two circuit judges, App. 14a, and charged that the

district court had ‘‘seriously underestimated the Supreme Court’s

recognition of the difficulty of the interpretive issue.’’ App. 15a.

Finally, contrary to the district court’s weighing of the relevant fac-

tors, the appellate court found that this Court’s use of the rule of

lenity in resolving the interpretive issue cut against petitioners, and

that the unprecedented nature of the case was ‘‘completely neutral.’’

App. 12a.

The court of appeals also held that given the existence of the

Delaware corporate indemnification provision, the petitioners had

not ‘‘incurred’’ legal fees. App. 6a-7a. First, the court disregard-

ed the district court’s finding of fact that indemnification was a ‘‘mere

possibility,’’ and instead made its own finding of fact, without record

support, that Boeing was required to and actually would indemnify

petitioners. App. 7a. Next, having ignored the district court’s find-

ings of fact, the court of appeals ignored the statutory language.

Rather than addressing whether petitioners had ‘‘incurred’’ fees

— the language of the EAJA — it concluded that ‘‘the purposes’’

and ‘‘critical concern’’ of the EAJA required denying recovery to

petitioners. App. 7a-8a.

Once again, Judge Hall dissented. Especially without Boeing before

the court, he was unwilling to conclude that ‘‘it is a foregone con-

clusion’ that Boeing will indemnify petitioners, and found no basis

to overturn the district court’s factual finding that indemnification

was only a ‘‘possibility.’’ App. 21a. Furthermore, Judge Hall con-

cluded that the government, not Boeing, should be the first line

of reimbursement, and that any indemnification obligation of Boe-

ing should be reduced by petitioners’ EAJA recovery. ‘‘ I see nothing

in EAJA that permits the government to stand in back of the line

to pay attorneys’ fees . . . The government’s obligation is fault-

based; Boeing’s is analogous to insurance. . . [A]ppellees most

definitely ‘incurred’ fees for which they were and are personally

liable.’’ App. 21a-22a. He quoted the following language from the

district court’s opinion:

Simply put, the mere possibility of future indemnifica-

tion by a company for the attorney’s fees incurred by its

employees is not, in itself, enough to alter the fact that

employees who are ultimately liable for those fees are

the real parties in interest. Were this not the case, the

government would be able to viciously pursue corporate

employees with the knowledge that, due to the possibility

of later corporate indemnification, the government would

not be held accountable for any unjustified conduct. The

EAJA would certainly not be served by such a rule. (App.

22a-23a.)

Judge Hall also concluded that the district court did not abuse its

discretion in finding that the government failed to establish that its

position was substantially justified. Disagreeing fundamentally with

the majority’s view of the rule of lenity, he explained that the rule

of lenity ‘‘is a force the government must weigh before it decides to

go on its foray.’’ App. 23a (emphasis in original). Judge Hall observed

that for a period of over 20 years Boeing had disclosed to the govern-

ment that it had made a total of 21 lump-sum payments to employees

departing for government service, that ‘‘the government had ac-

quiesced in this practice,’’ that the government had waited over four

years to bring its suit, and that it had taken petitioners four more

years to vindicate their rights, culminating in unanimous vindica-

tion in the Supreme Court. App. 20a. Judge Hall continued:

The price of vindication, over a half-million dollars of at-

torneys’ fees, was dear — more, indeed, than the govern-

ment’s original complaint sought to recover. Today, the

majority permits the government to walk away from the

carnage it has wrought and leave the appellees to clean

up as they may. (/d.)

REASONS FOR GRANTING THE WRIT

This petition presents an important question of federal law con-

cerning the applicability of the EAJA to present or former corporate

employees who may be subject to indemnification by their corporate

employers under state law. In addition, this case confronts the Court

with a situation in which the court of appeals, acting inconsistently

with this Court’s precedent, failed to give proper deference to the

district court’s finding regarding substantial justification under the

EAJA. Furthermore, as to two questions (discussed at pp. 15-16

and 23-25, infra), the decision of the court of appeals conflicts in

principle with the decisions of other circuits.

I. THE FOURTH CIRCUIT DRASTICALLY

RESTRICTED THE EAJA, CONTRARY TO THE

ESTABLISHED DEFINITION OF A CRITICAL

TERM IN THE STATUTE AND IN DISREGARD

OF THE TRIAL COURT’S WELL SUPPORTED

FACTUAL FINDINGS

1. The issue presented by this case has broad applicability to

employees of every corporation in the nation. The law of the State

of Delaware provides that an individual who has been successful

in defending an action brought against him ‘‘by reason of the fact

that he is or was’’ a corporate employee, shall be indemnified by

the corporation against expenses, including attorneys’ fees, ‘‘ac-

tually and reasonably incurred.’’ Del. Code Ann. tit. 8, § 145(c).

All but seven U.S. jurisdictions have enacted similar indemnifica-

tion provisions, which are based on the Model Business Corpora-

tion Act. The remaining seven jurisdictions all have indemnification

statutes, though they differ in form from the Model Act.?

The court below held that, because Delaware law provides for

corporate indemnification, the government was excused from pay-

ing petitioners’ legal expenses even though petitioners from the

outset of the litigation had been legally obligated to pay their lawyers,

and, in one instance, personally had made substantial payments.

In other words, the court ruled that fees subject to indemnification

have not been ‘‘incurred’’ by the prevailing party. Since all state

2Model Business Corporation Act Annotated 1081-98.1 (3d ed. 1992

Supp.) (‘‘All jurisdictions have indemnification statutes, and all but seven

of them are similar to the present or one of the earlier versions of the

Model Act,”’ including Delaware). See, e.g., N.Y. Bus. Corp. Law

§§ 722-25.

laws provide varying degrees of indemnification to corporate

employees who prevail in litigation, the decision below has all but

eliminated the availability of the EAJA to defendants who are pre-

sent or former employees of corporations in cases where there is

any kind of nexus between the lawsuit and the individual’s status

as a corporate employee.

2. The Fourth Circuit’s conclusion that the EAJA does not per-

mit petitioners to recover from the government if the Delaware

Statute imposes a parallel obligation on Boeing finds no support in

the language of the statute. ‘Interpretation of a statute must begin

with the statute’s language.’’ Mallard v. United States Dist. Court

for S. Dist. of Iowa, 490 U.S. 296, 300 (1989). ‘‘[W]here, as here,

the statute’s language is plain, ‘the sole function of the court is to

enforce it according to its terms.’’’ West Virginia Univ. Hosp., Inc.

v. Casey, 111 S.Ct. 1138, 1147 (1991); United States v. Ron Pair

Enterpnises, Inc., 489 U.S. 235, 241 (1989); see also, e.g., FERC

v. Martin Exploration Mgmt. Co., 486 U.S. 204 (1988).

Despite the existence of this well established principle, the court

of appeals never even stopped to consider the definition of the word

“‘incurred,’’ but, instead, leapt immediately into its view of the con-

gressional purpose in enacting the EAJA. After concluding that Boe-

ing was obliged to reimburse petitioners and that Boeing would not

‘default deliberately on its legal obligation,’’ the court of appeals

next stated:

Aside from the unseemliness of such a judicial assump-

tion, such a holding would not in fact serve a principal

purpose of the EAJA: to avoid the deterring effect which

liability for attorney fees might have on parties’ willingness

and ability to litigate meritorious civil claims or defenses

against the Government. The EAJA provides for fee-

shifting precisely to avoid this result. . . . [T]o effectuate

the purposes of the EAJA, a claimant with a legally en-

forceable right to full indemnification of attorney fees from

a solvent third party cannot be deemed to have incurred

that expense for purposes of the EAJA, hence is not eligi-

ble for an award of fees under that Act. (App. 7a.)

The failure of the court of appeals to consider the definition of ‘‘in-

curred’’ is highlighted by its phrasing of the issue not as whether

fees were ‘‘incurred,’’ but as whether the expenses should be

‘‘deemed”’ to have been incurred. App.6a, 8a.

The word ‘‘incurred”’ has a clear meaning in the English language

generally and in legal usage. ’’To incur’’ is ‘‘to become liable to,”’

‘‘responsible for,’’ ‘‘legally obligated to pay,’’ or ‘‘subject to.”’

Numerous dictionaries (including legal dictionaries)? and literally

dozens of federal and state cases uniformly give the word “‘incur’”’

that definition.‘

3E.g., Webster’s Third New International Dictionary 1146 (G.&C. Mer-

riam Co. 1971) (‘‘to meet or fall in with (as an inconvenience): become

liable or subject to... ."’); Webster’s Second New International Dictionary

1261 (G.& C. Merriam Co. 1934) (‘‘To meet or fall in with, as something

inconvenient or harmful; to become liable or subject to... .’’); The

American Heritage Dictionary 653 (2d College ed. Houghton Mifflin Co.

1982, 1985) (‘To become liable or subject to, esp. as a result of one’s

own actions... .'’); Webster’s New Collegiate Dictionary 423 (G.& C.

Merriam Co. 1961) (‘‘To meet with, as a thing inconvenient or harmful;

become liable to... .’’); VII The Oxford English Dictionary 834-35 (2d

ed. 1989); Black’s Law Dictionary 768 (6th ed. 1990) (‘To become liabie

or subject to... .’’); Ballentine’s Law Dictionary 606 (3d ed. 1969) (‘‘To

bring upon one’s self. To become subject to liability by act or operation

of law’’); Burton, Legal Thesaurus 273 (1980) (‘‘acquire, assume, bargain

for, become liable for, become responsible for... .’’).

4E.g., Quarles Pet. Co. v. Umited States, 551 F.2d 1201, 1205 (Ct. Cl.

1977) (‘‘To incur means to becomie liable for or subject to; it does not

mean to actually pay for’’ ) (footnote omitted); Jn re Donovan, 877 F.2d

982, 991 (D.C. Cir. 1989) (‘‘the term ‘incurred’ [means] actual fees which

the subject paid or for which he is liable’); In re White River Corp., 799

F.2d 631, 632 (10th Cir. 1986) (‘‘a debt is incurred when a debtor first

becomes legally bound to pay’’); Jn re lowa Premium Serv. Co., 695 F.2d

1109, 1111 (8th Cir. 1982) (en banc) (‘‘a debt is incurred on the date upon

which the debtor first becomes legally bound to pay’’); United States v. St.

Paul Mercury Indem. Co., 238 F.2d 594, 598 (8th Cir. 1956) (‘‘’Incur

emphasizes the idea of liability’’’); Jn re Emerald Oil Co., 695 F.2d 833,

837 (5th Cir. 1983) (‘‘the debt is incurred on the date that the debtor

becomes liable for it’); Stuyvesant Ins. Co. of New York v. Nardelli, 286

F.2d 600, 603 (5th Cir. 1961) (‘‘The term ‘incur,’ when used in policies

of insurance, has a fixed legal meaning. ‘A debt has been incurred when

In this case, of course, the petitioners were liable to and legally

obligated to pay their lawyers. The district court so found and the

court of appeals did not disagree. If Boeing had not advanced fees,

petitioners would have had to pay from their own assets, as Paisley,

liability attaches’’’); Barash v. Public Fin. Corp., 658 F.2d 504, 510 (7th

Cir. 1981) (‘‘construing ‘incurred’ to mean when a debtor first becomes

legally bound to pay comports . . . with the plain meaning of the word’’);

Standard Oil Co. of Ohio v. Fed. Energy Admin., 612 F.2d 1291, 1294

(Temp. Emer. Ct. App. 1979) (‘‘future costs can be regarded as having

been ‘incurred’ before actual payment takes place’’), aff’g 465 F. Supp.

274, 280 (N.D. Ohio 1978) (‘‘A cost is normally incurred, regardless of

amount, when a reciprocal obligation to pay for the item received arises’’):

Bauer Bros. Co. v. Commissioner of Internal Revenue, 46 F.2d 874, 875

(6th Cir.), (‘‘expenses are incurred only when there is an agreement or

a legal obligation to pay them within the taxable year’’), cert. denied, 283

U.S. 850 (1931); Margolis v. Prudential Ins. Co. of America, 629 F . Supp.

195, 198 (D.D.C. 1985) (‘‘Where there is no obligation to pay for a thing

provided, there is no ‘expense incurred’ ’’); Ceglia v. Schweiker, 556 F.

Supp. 118, 122 (E.D.N.Y. 1983) (‘‘Plaintiff maintains that the term ‘‘in-

curred’ as used in the statute should not be given a narrow reading re-

quiring the plaintiff to be actually liable for the fees awarded’’): Chee v.

Schwetker, 563 F. Supp. 1362, 1364 (D. Ariz. 1983) (‘‘The terms ‘fees’

and ‘incurred’ indeed connote an obligation to pay’’); Sorensen v. Overland

Corp., 142 F. Supp. 354, 361 (D. Del. 1956) (‘‘Where indemnity

agreements use ‘incurred’ the indemnity is against liability and not against

loss or damage’’), aff'd, 242 F.2d 70 (3d Cir. 1957); In re Miniscribe Corp.,

123 B.R. 86, (Bankr. D. Colo. 1991) (‘‘a debt is incurred when a debtor

first becomes legally obligated to pay’’); Jn re Energy Coop., 103 B.R.

171, 174 (Bankr. N.D. Ill. 1986) (‘‘a debt is incurred . . . when the deb-

tor becomes legally obligated to pay’’); In re Caceres Johnson P.R., Inc.,

91 B.R. 200, 202 (Bankr. D.P.R. 1988) (‘‘a debt is incurred . . . when

the debtor becomes legally obligated to pay’’); Jn re American Int’! Air-

ways, Inc., 68 B.R. 326, 327 (Bankr. E.D. Pa. 1986); Russell v. Ther-

malito Union School Dist., 115 Cal. App. 3d 880, 176 Cal. Rptr. 1, 2 (Ct.

App. 1981); Reliance Mut. Life Ins. Co. of Illinois v. Booher, 166 So.2d

222, 224 (Fla. Dist. Ct. App. 1964); Hall v. Cook County, 359 Ill. 528,

195 N.E. 54, 62 (1935); Adkins v. Auto Owners Ins. Co., 105 Mich. App.

430, 306 N.W.2d 312 (1982); Rubin v. Empire Mut. Ins. Co.,25 N.Y.2d

426, 306 N.Y.S.2d 914, 916, 255 N.E.2d 154 (1969): Graham v. Reserve

Life Ins. Co., 274. N.C. 115, 161 S.E.2d 485, 490 (1968); Walsh v. Grange

Mut. Cas. Co., 1 Ohio App.2d 304, 204 N.E.2d 690, 691 (1964); Maryland

Cas. Co. v. Thomas, 289 S.W.2d 652, 655 (Tex. Civ. App. 1956).

’ a

in fact, did. If Boeing does not indemnify petitioners and they are

required to repay the advances, they will not be able to recover

amounts already paid to their lawyers and would be legally bound

to pay all their unpaid legal bills. Under the plain meaning of the

word, they ‘‘incurred’’ fees. The Fourth Circuit’s view of sound

policy is not a proper basis for ignoring the established meaning of

the words used in the statute.

3. While perhaps not rising to the level of a split in the circuits,

the decision below is at odds with a 1991 case from the Federal

Circuit, a case relied on by petitioners but ignored by the court of

appeals. In Phillips v. General Serv. Adm’r, 924 F.2d 1577 (Fed.

Cir. 1991), the court awarded legal fees under the EAJA where the

plaintiff had a contingency fee arrangement under which her lawyer

agreed to represent her for $2500 plus whatever additional fees

might be awarded under the EAJA. The plaintiff ‘“was not respon-

sible for further payment of . . . charges and no further payment

was made by her during the course of the litigation.’’ Jd. at 1582.

The court nevertheless allowed recovery of attorneys’ fees in ex-

cess of $2500. ‘‘Inherent in the agreement is an intention on the

part of Ms. Phillips to be obligated to her counsel for fees properly

obtainable under the statute.’’ Jd. at 1583. The court held that the

plaintiff had ‘‘incurred’’ fees despite the fact that the plaintiff made

no payments during the course of the litigation and had no respon-

sibility for any further payments, and despite the fact that there

was a strong possibility she would never be obligated to pay her

attorney any more money. If Ms. Phillips ‘‘incurred’’ fees under

the EAJA, then a fortion the petitioners in this case did, since, as

the district court found, petitioners’ obligation to pay their lawyers

is concrete and absolute, as Paisley learned when he had to pay

$20,000 from his own pocket.

The one case cited in the panel’s opinion, as well as the cases

relied upon by the government below, involved situations in which

the fee applicant had no obligation to pay attorneys’ fees, because

at the outset of the case a third party had retained and uncondi-

tionally agreed to pay the lawyers. In those cases, the applicants

were never legally obligated to pay the lawyers and, therefore,

did not ‘‘incur’’ any obligation. SEC v. Comserv Corp., 908 F.2d

1407, 1413-14 (8th Cir. 1990) (cited by court of appeals, App. 7a)

(‘Comsery, not Johnson, was legally obligated to pay Johnson’s

attorneys’ fees’’ so ‘‘Johnson was never exposed to unconditional

liability for legal fees in the SEC litigation’); Wall Industries, Inc.

v. United States, 15 Cl. Ct. 796, 799, 802 (1988) (‘‘no credible

evidence was proffered establishing that Wall assumed any respon-

sibility to pay for the legal fees and other expenses incurred in the

refund litigation,’’ so Wall had not ‘‘incurred’’ fees) (emphasis add-

ed), aff'd mem., 883 F.2d 1027 (Fed. Cir. 1989): Unification Church

v. INS, 762 F.2d 1077, 1082 (D.C. Cir. 1985) (‘! ‘arrangement’

for payment for his [attorney’s] services is solely with the Unifica-

tion Church’’).

4. The critical distinction based on whether an individual is legal-

ly responsible for payment is well known and established in insurance

law. In cases where an insured has no legal obligation to pay ex-

penses, the insured did not incur an obligation and there is no

coverage. But where the insured becomes legally responsible for

payment, he incurs expenses and is entitled to coverage. The key

in insurance law — as was the key in Phillips — is legal obligation,

not actual payment.

*For example, in American Indem. Co. v. Olesyuk, 353 S.W.2d 71, 72

(Tex. Civ. App. 1961), the court held an insurance company liable on a

policy that provided for payment to an insured when he ‘“‘incurred’’ ex-

penses. The court reasoned that because the insured ‘‘became liable for

the payment of the charges therefor, such charges were incurred by him

and [the insurance company] became liable to him for such expenses so

incurred.’’ The court held inapplicable cases involving suits by veterans

who received treatment free of charge: ‘‘[T]reatment was free to the

veteran, therefore, he could incur no liability therefor . . . . The insured

was not and could not be liable for any amount thereof.”’ Jd. at 73. Olesi-

juk has been cited with approval in Rubin v. Empire Mut. Ins. Co., 25

N.Y.2d at 429, 306 N.Y.S.2d at 916; Walsh v. Grange Mut. Cas. Co.,

204 N.E.2d at 691; Dillione v. Deborah Hosp., 113 N.J. Super. 548, 274

A.2d 597, 600 (1971); Graham v. Reserve Life Ins. Co., 161 S.E.2d at

490. See also United States v. St. Paul Mercury Indem. Co., 238 F.2d 594,

998 (8th Cir. 1956) (free hospital care provided to veteran ‘‘cannot in law

be claimed to constitute an ‘expense incurred’’’).

As Judge Hall pointed out in dissent, while ‘‘the government's

[EAJA] obligation is fault-based,’’ Boeing's indemnification obliga-

tion is ‘‘analogous to insurance.’’ App. 22a. To hold that the ex-

istence of insurance means that a litigant does not ‘‘incur’’ expenses

is contrary to the most fundamental principles of insurance coverage.

The same logic would conclude that a person injured by another's

fault has not incurred damages if his medical insurer pays his medical

bills. As Judge Hall explained, the ‘‘majority’s decision rejects the

wisdom ef the common-law collateral source rule, which does not

permit the wrongdoer to profit from his victim’s foresight to secure

an insurer.’’ /d.®

Indeed, under the Fourth Circuit’s crabbed reading, the EAJA

would be unavailable to individuals with any source of reimburse-

ment for their legal fees. The court held that ‘‘to effectuate the

purposes of the EAJA, a claimant with a legally enforceable right

to full indemnification of attorney fees from a solvent third party

cannot be deemed to have incurred that expense for purposes of

the EAJA.’’ App. 7a-8a. According to the Fourth Circuit, therefore,

a person who purchased liability insurance that reimburses his legal

fees could never seek redress under the EAJA for the government’s

overreaching. Nor could a fee applicant with a contractual claim for

reimbursement from a third party. In fact, if a wealthy aunt induc-

ed the individual to undertake a defense by promising to reimburse

his legal bills if he is vindicated at trial, the court below would deny

his EAJA claim because he has a ‘“‘legally enforceable nght’’ to

recover from his aunt on the basis of promissory estoppel. There

simply is no basis in the language or legislative history of the EAJA

for so restrictive a reading of the statute. As Judge Hall observed,

‘It is worth noting that if a current or former corporate employee

receives reimbursement for attorneys’ fees under the EAJA, only a por-

tion of the empioyee’s fees will be covered, since the maximum hourly

rate awardable under the EAJA — $75 per hour adjusted by the cost of

living ($106 in this case) — is far below current market rates for lawyers.

Thus, the corporate employer would never be entirely relieved of its in-

demification obligation by the EAJA, but would face, at best, a reduced

obligation.

the Fourth Circuit’s holding is likely to have devastating conse-

quences for the availability of the EAJA and its effectiveness in

achieving the congressional goal of deterring unreasonable govern-

ment litigation. This Court should resolve the issue.

5. The Court also should hear this case to correct the appellate

court’s failure properly to defer to the trial court’s findings. The

district court made a factual determination that Boeing’s payment

of petitioners’ legal fees must be considered no more that a ‘‘mere

possibility.’ Ample evidence existed in the record before the court

to support this finding. Boeing had not retained petitioners’ counsel

and had not exercised any control over the defense or conduct of

the petitioners’ attorneys. JA 108. Boeing had not advanced fees

to two of the petitioners. Boeing was not before the court and would

not be bound by any determination regarding its indemnification

obligation. JA 109. Boeing’s Board of Directors had made no deci-

sion to indemnify petitioners. JA 108.7

Equally important, the district court recognized that Boeing had

available the argument that it should not have to pay petitioners’

legal bills because suit had not been brought against each petitioner

‘‘by reason of the fact that he is or was a director, officer, employee

or agent of the corporation,’’ one of the pre-requisites for indem-

nification under the Delaware statute. The government had charg-

ed petitioners with violating their duty to the United States by their

receipt of the severance payments, and had alleged no wrongdoing

by them related to their work for Boeing. See Sorensen v. Overland

Corp., 242 F.2d 70 (3d Cir. 1957); E. Falk, The Delaware General

Corporation Law 102 (1972). Thus, it is far from clear whether this

lawsuit was brought against petitioner ‘‘by reason of the fact’’ that

7See also E. Veasy, J. Finkelstein, C. Bigler, Delaware Supports Direc-

tors With Three-Legged Stool of Limited Liability, Indemnification, and In-

surance, 42 The Business Lawyer 399, 408 (1987) (‘‘Entitlement to in-

demnification is not automatic, whether permissive or mandatory, whether

by statute, by-law, or contract. A determination of ultimate entitlement

must be made by the appropriate decisionmaker’’).

. |

they were Boeing employees. Boeing also might argue that the

amount of expenses incurred was unreasonable.®

The court of appeals summarily reversed the district court’s find-

ing and concluded, despite the substantial support in the record for

the trial court’s finding, that Boeing was obligated to and would in-

demnify petitioners. Judge Hall took the majority to task for its failure

to defer to the district court’s finding. As he stated in his dissent,

| do not share the majority’s confidence . . . that in-

demnification by Boeing is a foregone conclusion .. . .

Aside from this court’s lack of day-to-day familiarity with

Delaware law, Boeing is not even before us. It may fight

indemnification claims; the record before us contains no

concessions or waivers from Boeing. We have no way

of knowing what creative arguments its lawyers may pre-

sent to the state courts. (App. 21a.)

This Court should remind the Fourth Circuit that it must give pro-

per weight to the factual findings of the district court. Anderson v.

Bessemer City, 470 U.S. 564, 576 (1985); Icicle Seafoods, Inc. v.

Worthington, 475 U.S. 709 (1986). Moreover, the appellate court’s

readiness to deny EAJA coverage based on unsupported assump-

tions and surmise is inconsistent with the salutary purpose of the

legislation. This Court should take this opportunity to correct this

erroneous approach to questions about eligibility under the EAJA.

8Furthermore, the Delaware courts provide more limited reimburse-

ment than the EAJA; they do not award attorneys’ fees incurred by a defen-

dant in enforcing his right to indemnification. MCI Telecommunications

Corp. v. MCI Communications Corp., C.A. No. 89C-MR-216, 1990 WL

91100, *12-13 (Del. Super. Ct. June 19, 1990).

Il. CONTRARY TO THIS COURT’S MANDATE IN

PIERCE v. UNDERWOOD, THE FOURTH CIRCUIT

ENGAGED IN DE NOVO REVIEW OF THE

DISTRICT COURT’S FACT-BASED

DETERMINATION THAT THE GOVERNMENT’S

POSITION WAS NOT SUBSTANTIALLY JUSTIFIED,

AND IMPROPERLY NARROWED THE DISTRICT

COURT’S INQUIRY UNDER THE EAJA

The EAJA provides that a prevailing party is entitled to attorneys’

fees ‘‘unless the court finds that the position of the United States

was substantially justified or that special circumstances make an

award unjust.’’ 28 U.S.C. § 2412(d)(1)(A). The government has

the burden of proving that its litigation position was substantially

justified. United States v. Yoffe, 775 F.2d 447, 450 (1st Cir. 1985):

H.R. Rep. No. 1418, 96th Cong., 2d Sess. 18 (1980), reprinted in

1980 U.S. Code Cong. & Admin. News 4953, 4984, 4989, 4997.

1. This Court has held that EAJA fee determinations must be

reviewed deferentially, and may be overturned only if an abuse of

discretion: ‘‘the text of the statute permits, and sound administra-

tion counsels, deferential review of a district court’s decision regar-

ding attorney’s fees under the EAJA.’’ Pierce, 487 U.S. at 563.

See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 403 (1990)

(in analogizing appellate review of Rule 11 sanctions to review of

EAJA awards, the Court stated that ‘‘[iJn Pierce, the Court held

a District Court’s determination under the [EAJA] that the posi-

tion of the United States was substantially justified should be review-

ed for an abuse of discretion’’).

The Fourth Circuit, however, chose to ignore this Court’s man-

date that a district court’s EAJA determinations should be review-

ed deferentially. Notwithstanding that this Court’s decisions in Pierce

and Cooter & Gell clearly answer the question of the proper stan-

dard of review for EAJA fee determinations, the Fourth Circuit decid-

ed to address that settled question anew: ‘‘There remains the ques-

tion — how deferential?’’ App. 10a. Then, in complete defiance of

this Court’s holdings, the Fourth Circuit answered its own ques-

tion: ‘‘we turn to an independent assessment of the strength of —

the justification for — the Government’s position.’’ App. 12a (em-

phasis added). -

The Fourth Circuit’s ‘‘independent assessment’’ standard — in

essence, de novo review — flies in the face of this Court’s deci-

sions as to the meaning of deferential review. See Anderson v.

Bessemer City, 470 U.S. at 573-74 (‘‘If the district court’s account

of the evidence is plausible in light of the record viewed in its en-

tirety, the court of appeals may not reverse it even though con-

vinced that had it been sitting as the trier of fact, it would have weigh-

ed the evidence differently’) (emphasis added). By ‘‘independently

assessing’ whether the Government was substantially justified in

litigating this case, the Fourth Circuit has completely undermined

this Court’s decisions in Pierce and Cooter & Gell and ignored prin-

ciples of sound judicial administration. The court below apparently

rejected this Court’s admonitions that ‘‘the district court may have

insights not conveyed by the record” (Pierce, 487 U.S. at 560);

and that ‘‘only deferential review [gives] the district court the

necessary flexibility to resolve questions involving ‘multifarious,

fleeting, special, narrow facts that utterly resist generalization.’ *’

Cooter & Gell, 496 U.S. at 404, quoting Pierce, 487 U.S. at 561-62.

2. In fact, the Fourth Circuit has distorted Pierce case beyond

recognition. The panel inferred that because this Court in the Pterce

case engaged in a detailed analysis to determine whether the court

of appeals had overreached in reversing the district court, it was

free to re-examine and re-weigh the evidence underlying the district

court’s determination. App. at 10a. That analysis turns Pierce on

its head. Pierce was intended to instruct the courts of appeals to

leave district court decisions alone as long as the record contains

substantial evidence supporting the trial court’s determination. This

Court’s opinion in Pierce examined the details of the record simply

to demonstrate that the district court’s view was supportable and

thus must be accepted. In this case, by contrast, the Fourth Cir-

cuit reversed the district court simply because it disagreed with the

trial judge’s assessment of the factors going to the reasonableness

of the government’s legal and factual positions. The appellate court’s

iat i

substitution of its own judgment for that of the district court’s is

precisely what this Court in Pierce warned against doing. Under

Pierce, the trial court has the responsibility for weighing the rele-

vant factors, and the appellate courts may not reverse because they

disagree with the balance reached by the trial court. Unreversed,

the action of the Fourth Circuit will serve to eviscerate Pierce.?

The court of appeals also usurped the district court’s authority

by asserting that the district court had accorded ‘‘no weight to the

cogency of the reasoning’’ of the two judges of the Fourth Circuit

who had voted to reverse the district court on the merits. App.

14a. In fact, the district court held only that the government’s vic-

tory before the Fourth Circuit ‘‘does not, in itself, establish substan-

tial justification.’’ App. 29a (emphasis added). The trial court’s posi-

tion is consistent with this Court’s teaching in Pierce that ‘‘[o]bvious-

ly, the fact that one other court agreed . . . with the Government

does not establish whether its position was substantially justified’’

for purposes of the EAJA because ‘‘the Government could take a

position that is not substantially justified yet win.’’ Pierce, 487 U.S.

at 569. The district court, therefore, took into account the Fourth

Circuit majority opinion, but simply concluded, in the exercise of

its discretion, that other factors outweighed the opinion of two of

the thirteen judges who have considered this case. Certainly, the

petitioners’ ‘‘side of the case has at least sufficient force that [the

Fourth Circuit] cannot possibly state, on the basis of [its prior deci-

sion] alone, that the District Court abused its discretion in finding

no substantial justification.’’ Pierce, 487 U.S. at 569.

3. In addition to misapplying Pterce, the panel converted the whole

°The panel also sought to distinguish Pierce, on the ground that the merits

issues have been finally resolved and there is no danger of indirect ‘‘affirm-

ances.’’ But that danger is always present in some degree, as evidenced

by the fact that this Court did not reach several merits issues, including

the issues of intent and harm to the government. Furthermore, when

the case is not finally resolved until after a trial on the merits, the record

is considerably longer than when a case is dismissed on motion or is settl-

ed, and it makes all the more sense to defer to the trial court’s familiarity

with the extensive record. See Pierce, 487 U.S. at 560.

issue of substantial justification into a limited inquiry of the ‘‘legal

strength’’ of the government’s position, to the exclusion of other

factors going to the reasonableness of the government’s action. The

panel then proceeded to equate the legal strength of the govern-

ment’s position with its legal right to bring an action: ‘‘[T]he Govern-

ment’s interests here were essentially those that inform prose-

cutorial discretion in criminal matters’’ and that discretion ‘‘must

and does involve the targeting of pa: ticular conduct at particular times

in response to many legitimate factors having nothing to do with

the general legal strength of the claim.’’ App. 12a (emphasis add-

ed). The panel went on to criticize the trial court on the ground

that its action ‘‘necessarily implies a more cramped view of the

latitude that must be accorded Government interpretations of the

reach of untested, ambiguously-drawn criminal statutes than is ac-

ceptable.’’ App.19a-20a.

There are two fundamental flaws in this reasoning:

First, the panel’s opinion, by limiting the issue under the EAJA

to the ‘‘legal strength’’ of the government’s case, improperly and

unnecessarily restricts the scope of the trial court’s inquiry into the

_ justification for the government's position. This Court has observed

that a trial judge should consider all the surrounding circumstances

when deciding whether the government established that its posi-

tion was substantially justified. See Pterce v. Underwood, 487 U.S.

at 562 (issue is ‘‘multifarious and novel question’); Cooter & Gell

». Hartmarx Corp., 496 U.S. at 401 (analogizing Rule 11 deter-

mination to EAJA determination, and holding that *‘to determine

whether an attorney’s prefiling inquiry was reasonable, a court must

consider all the circumstances of a case’’); see also H.R. Rep. No.

1418, 96th Cong., 2d Sess. 18 (1980), reprinted in 1980 U.S. Code

Cong. & Admin. News 4953, 4984, 4989 (° ‘An adjudication, for ex-

ample, may show that the policy or factual foundation underlying

an agency rule is erroneous or inaccurate’’).!°

l0By narrowing the issue to the ‘‘legal strength’ of the government's

position, the court of appeals incorrectly took out of the case such factors

as the government’s brazen attempt to play fast and loose with the courts.

The Fourth Circuit’s decision is inconsistent with decisions in other

circuits. For example, in Spencer v. NLRB, 712 F.2d 539, 559-60

(D.C. Cir. 1983), cert. denied, 466 U.S. 936 (1984), the D.C. Cir-

cuit cited three criteria to be used to decide whether the govern-

ment’s position was substantially justified; (1) clarity of the gover-

ning law (‘‘The government is always free, of course, to seek

modification or repudiation of established doctrine, but individual

private litigants should not be compelled to subsidize such reevalua-

tions of controlling doctrine’’); (2) foreseeable length and complexity

of the litigation; and (3) consistency of the government’s position

(‘a court reviewing an EAJA petition should demand that the govern-

ment make a particularly strong showing of justification for its position

when there is evidence that the petitioner was subject to atypically

harsh treatment’’) (emphasis in orginial). See also, e.g., Myers v.

Sullivan, 916 F.2d 659,665-66 (11th Cir. 1990); Rawhngs v. Heckler,

725 F.2d 1192 (9th Cir. 1984); Bailey v. United States, 721 F.2d

357 (Fed. Cir. 1983).

The Fourth Circuit improperly rejected the district court’s

reliance, in part, on the fact that the government had not during

the 27-year life of section 209 (or the more than 50 years its

predecessor was on the books) brought a single civil case based

on the statute, much less based on a severance payment made before

government employment commenced. The court of appeals also

wrongly criticized the district court’s consideration of the facts that

Boeing had a ‘‘long standing practice of making severance

payments’’ (‘‘at least twenty-one’’ from 1962-82); that ‘‘Boeing

has repeatedly disclosed to the United States government, including

Throughout the merits litigation, the government maintained — ‘‘indeed

boast[ed] — that its position was ‘firmly established.’’’ 494 U.S. at 174

(Scalia, J., concurring). In the fee litigation, the government reversed its

position and argued that the case was one ‘‘of first impression.’’ Memoran-

dum of the United States in Opposition to the Motion of the Individual

Defendants for Attorney’s Fees and Costs at 6, C.A. No. 86-829-A

(E.D.Va., April 20, 1990); Brief for Appellant United States of America

at 29, Nos. 90-3510 & 90-3513 (4th Cir., April 26, 1991).

responsible officials of the Department of Defense, the fact of these

payment and the circumstances under which they are made’’; that

the government had ‘‘actual knowledge of Boeing’s making

severance payments’’; and that ‘‘the government has never ob-

jected to the practice, and on at least one occasion informed Boe-

ing that a proposed severance payment was in compliance with the

federal conflict of interest statutes.’’ App. 33a-34a.

To the district court’s consideration of these circumstances, the

court of appeals’ answer in reversing the fee award was simple:

‘‘We disagree.’’ The court of appeals believed this enforcement

history was ‘‘a completely neutral factor.’’ App. 12a. It defies logic,

however, to conclude that the government’s sudden, dogged and

intense attempts to apply a novel and untested theory to a practice

it has long acquiesced in — and had in fact initially approved in this

very case — cannot support a conclusion that the government’s deci-

sion to subject innocent individuals to years of litigation, enormous

expense, and the personal obloquy of being charged with criminal

conduct was not substantially justified.

Second, the decision below gives far too much leeway to the

government. The Fourth Circuit ruled that the district court had

not accorded enough weight to prosecutorial discretion to take ex-

pansive ‘‘interpretations of the reach of untested, ambiguously drawn

criminal statutes.’’ App. 19a-20a. In so holding, the court of ap-

peals ignored this Court’s conclusion that section 209 was not am-

biguous. 494 U.S. at 159. Even if the statute were ambiguous,

however, the Fourth Circuit took an insupportably narrow view of

the EAJA and ignored its goal of deterring unreasonable govern-

ment litigation. See Spencer v. NLRB, 712 F.2d at 550; Myers v.

Sullivan, 916 F.2d at 665. Since there are few limitations on the

exercise of prosecutorial discretion, see, e.g., Wayte v. United States,

470 U.S. 598 (1985), there is, at least in the Fourth Circuit, little,

if anything, left to the EAJA in situations such as the one before

the Court. It is precisely when the government subjects an individual

to the expense of litigation based on an expansive ‘‘interpretation’’

of an ‘‘untested and ambiguously drawn criminal statute’’ that the

government should be required to bear the cost.

4. In reversing the district court, moreover, the court of appeals

misconstrued this Court’s opinions in Crandon. The panel ignored

the primary teaching of Crandon, namely, that a court’s focus must

be on the text of the statute. The Statute’s text requires that the

person must receive a supplement to his or her ‘‘salary’’ and that

it be ‘‘as compensation for his services an officer or employee”’

of the government. All nine Justices of this Court concluded that

a lump sum paid prior to entry into government service could not

possibly violate the language of the statute. '’The text of § 209(a)

thus indicates that employment status is an element of the offense.’’

494 U.S. at 159. ’’[T}he only reasonable meaning of subsection (a)

itself is that it applies exclusively to periodic payments.’’ Jd. at

174-175 (Scalia, J., concurring) (emphasis in original).

The panel majority took great comfort in the detailed analysis

engaged in by this Court of the legislative history of section 209(a),

which had been, in large measure, the basis of the panel’s decision

on the merits. By contrast, the district court correctly read this

Court’s opinions in Crandon as (1) emphasizing that construction

of a criminal statute based on legislative history rarely can provide

the kind of warning due process requires, (2) pointing out that the

panel had relied on materials that could not properly be considered

as legislative history, and (3) demonstrating that the court of ap-

peals had misconstrued the legislative history and that the legislative

history actually reinforced the text of the statute. This Court’s

analysis of legislative history in Crandon, therefore, provides no

basis for overturning the district court’s assessment, made after

weighing all the evidence and considering numerous relevant fac-

tors, that the government had not been substantially justified in bring

this lawsuit.

The Fourth Circuit's reasoning also reveals a fundamental misap-

prehension of the rule of lenity, on which this Court placed great

emphasis in Crandon. Contrary to the view of the court below,

however, this Court in Crandon did not look to the rule of lenity

as a final factor to consider in a close case. Rather, this Court began

its legal discussion with the rule of lenity and the importance of the

rule in ensuring that ‘‘there is fair warning of the boundaries of

criminal conduct.’’ 494 U.S. at 158; cf. Jackson v. Virginia, 443

U.S. 307, 318-19 & n. 11 (1979) (analysis required in applying

‘‘reasonable doubt’’ standard); Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 252-56 (1986) (analysis required in applying ‘‘convincing

clarity’’ standard). The point was that an expansive interpretation

of a criminal statute — such as the reading of section 209 preferred

by the government in this case — cannot, as a matter of due pro-

cess, be supported by obscure and ambiguous legislative history.

Judge Hall made this compelling point when he stated:

The rule of lenity is not a passive recognition of a statute’s

ambiguity; it is an affirmative principle in favor of the in-

dividual, and it protects him from the tyranny of vague

criminal laws. . . . [L]enity is not merely a way to decide

whether the government prevails on the merits of a foray

into the boundaries of a criminal law; it is also a force

the government should weigh before it decides to go on

its foray. Our inquiry, then, should be whether the

government knowing that ambiguity in the statute would

be resolved against it, was substantially justified in tak-

ing the position it took on the meaning of § 209(a). The

district court held that it was not, that holding is not an

abuse of discretion. (App. 23a-24a (emphasis in original).)

The district court, in other words, gave appropriate weight to

this critical factor. The failure of the court of appeals to apprehend

this balance demonstrates the wisdom of the deferential standard

of review mandated by Pierce. This Court should grant certioran

in order to reaffirm this important principle.

CONCLUSION

This Court should grant the petition for a writ of certiorari.

Respectfully submitted.

GERARD F. TREANOR, JR. WILLIAM R. STEIN

AMY BERMAN JACKSON (Counsel of Record)

VENABLE, BAETJER, HOWARD DAVID M. DORSEN

& CIVILETTI JOHN C. MOYLAN

Counsel for Petitioner HUGHES HUBBARD & REED

Lawrence H. Crandon Counsel for Petitioners

Thomas K. Jones,

Harold Kitson Jr., and

ROBERT S. PLOTKIN Herbert A. Reynolds

PAUL, HASTINGS, JANOFSKY

& WALKER

Counsel for Petitioner

Melvyn R. Paisley

May 1992

APPENDIX A

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

UNITED STATES OF AMERICA.

Plaintiff-Appellant,

MELVYN R. PAISLEY; THOMAS K.

JONES; HERBERT A. REYNOLDS;

HAROLD KITSON, JR.; LAWRENCE H.

CRANDON,

Defendants-Appellees,

and

THE BOEING, COMPANY, INC..,

Defendant.

UNITED STATES OF AMERICA.

Platintiff-Appellant,

¥.

MELVYN R. PAISLEY; THOMAS K.

JONES; HERBERT A. REYNOLDS;

HAROLD KITSON, JR.; LAWRENCE H.

CRANDON,

Defendants-Appellees,

and

THE BOEING, COMPANY, INC.,

___ Defendant.

No. 90-3510

No. 90-3513

Appeals from the United States District Court

for the Eastern District of Virginia, at Alexandria.

Claude M. Hilton, District Judge.

(CA-86-829-A)

Argued: October 2, 1991

Decided: March 3, 1992

Before RUSSELL, HALL, and PHILLIPS,

Circuit Judges.

Reversed by published opinion. Judge Phillips wrote the ma-

jority opinion, in which Judge Russell joined. Judge Hall wrote

a dissenting opinion.

COUNSEL

ARGUED: Mark William Pennak, Civil Division. UNITED

STATES DEPARTMENT OF JUSTICE, Washington, D.C..,

for Appellant. William Robert Stein, HUGHES, HUBBARD

& REED, Washington, D.C., for Appellees. ON BRIEF:

Stuart M. Gerson, Assistant Attorney General. William

Kanter, Civil Division, UNITED STATES DEPARTMENT

OF JUSTICE, Washington, D.C., Henry E. Hudson, United

States Attorney, Alexandria, Virginia, for Appellant. John C.

Moylan, Paul Greco, HUGHES, HUBBARD & REED,

Washington, D.C., for Appellees Jones, Reynolds and Kitson;

Gerard F. Treanor, Jr., Amy Berrman Jackson, VENABLE,

BAETJER & HOWARD, McLean, Virginia, for Appellee Cran-

don; Robert Plotkin, WASHINGTON, PERITO & DUBUC,

Washington, D.C., for Appellee Paisley.

OPINION

PHILLIPS, Circuit Judge:

The question is the entitlement of certain government

employees, appellees in this appeal, to an award of attorney

fees as prevailing parties under the Equal Access to Justice

Act, 28 U.S.C. § 2412 (the EAJA), following the Govern-

ment’s unsuccessful attempt to recover from them a civil

penalty for allegedly -receiving from their former private

employer compensation in violation of 18 U.S.C. J 209(a).

Because the former employer is legally obligated to indem-

nify the employees for their attorney fees in the event of their

successful defense of the Government action, we conclude that

they did not ‘‘incur’’ the fee expenses, hence are not eligible

for a fee award under the EAJA. Alternatively, we conclude

that in any event the Government’s position in the underly-

ing litigation was ‘‘substantially justified,’’ so that on that basis

as well the employees are not entitled to a fee award under

the EAJA. Accordingly we reverse the order of the district

court awarding fees to the employees.

In 1986, the United States brought a civil penalty action

against The Boeing Company, Inc. (Boeing), and appellees,

five former Boeing employees, alleging that the lump sum

payments appellees received as ‘‘severance payments”’ from

Boeing upon leaving their employment with that company, but

before accepting government appointments, violated 18 es

§ 209(a), a criminal statute prohibiting payment of any govern-

ment employee's salary by anyone other than the Govern-

ment or receipt of supplemental salary by a government

employee from an outside source. Boeing advanced the at-

torney fees and expenses of four of the five appellees pur-

suant to agreements obligating these appellees to repay Boe-

ing all amounts advanced ‘’unless it shall ultimately be deter-

mined pursuant to Section 145 of the Delaware Corporation

Law and Section 4 of Article VII of the By-Laws of the Com-

pany’ that appellees are entitled to indemnification by Boeing.

The district court held that the payments did not violate 18

U.S.C. § 209(a); a divided panel of this court reversed; and

the Supreme Court, on writ of certiorari, reversed this court,

holding that the payments did not violate section 209(a)

because the statute does not apply to payments made to or

received by persons who, like appellees, were not govern-

ment employees. at the time the payments were made and

received. United States v. Boeing Co., 653 F. Supp. 1381 (E.D.

Va. 1987), aff'd in part and rev'd in part, 845 F.2d 476 (4th

Cir. 1988), rev'd sub nom. Crandon v. United States, 494 U.S.

152 (1990).

Appellees then applied to the district court for an award of

attorney fees and costs of defending the action under the EA-

JA, which, in pertinent part, provides that a court

shall award to a prevailing party other than the

United States fees and other expenses . . . incur-

red by that party in any civil action (other than cases

sounding in tort) . . . unless the court finds that the

position of the United States was substantially

justified or that special circumstances make an award

unjust.

28 U.S.C. § 2412(d)(1)(A).

The Government opposed appellees’ EAJA claim by argu-

ing that because controlling Delaware law obligated Boeing

to indemnify appellees, only Boeing, and not the appellees,

actually ‘‘incurred’’ the fees in this action.! The Government

also argued that even if appellees were held to have incurred

the fees and expenses in this matter, the Government had

been ‘‘substantially justified’’ in bringing and prosecuting the

underlying action against appellees. Rejecting both of the

Government’s arguments, the district court granted appellees’

application for an EAJA award. United States v. Boeing Co.,

747 F. Supp. 319 (E.D. Va. 1990).

This appeal by the Government followed.

The Government challenges both grounds upon which the

district court found the appellees entitled to a fee award: (1)

that appellees incurred the fees and costs at issue, and are

therefore eligible to recover them under the EAJA; and (2)

that the Government’s position in the underlying merits litiga-

tion was not substantially justified. We take these in order.

The Government argues that because Del. Code Ann. tit.

8, § 145(c) unconditionally required Boeing to indemnify ap-

pellees for all of their attorney fees and costs, appellees did

not “‘incur’’ those expenses, an essential condition to entitle-

ment under the EAJA. Section 145(c) provides:

To the extent that a director, officer, employee or

agent of a corporation has been successful on the

merits or otherwise in defense of any action, suit

or proceeding referred to in subsections (a) and (b)

‘Boeing does not qualify for recovery of fees under the EAJA. A corp

oration is eligible for an EAJA award only if its net worth did not exceed

$7,000,000 and it had no more than 500 employees at the time the action

was filed. 28 U.S.C. § 2412(d)(2)(B).

of this section, or in defense of any claim, issue or

matter therein, he shall be indemnified against ex-

penses (including attorneys’ fees) actually and

reasonably incurred by him in connection therewith.

We agree with the Government.

The underlying merits litigation was of a type referred to

in subsection (a) of section 145 of the Delaware Code, so that

its subsection (c) applies.? Appellees indisputably were suc-

cessful on the merits. Under these circumstances, section

145(c) plainly directs that appeilees ‘‘shall be indemnified’’ by

Boeing and we therefore hold that Delaware law requires Boe-

ing to indemnify appellees for the attorney fees and costs of

defending the underlying action.

Appellees contend, however, that even if Delaware law gave

them an unconditional right to be indemnified, this does not

resolve the question whether they nevertheless should be

deemed to have ‘“‘incurred’’ the expenses for EAJA purposes.

They argue that they should be deemed to have incurred them

because having paid them, Boeing’s indemnification (or, more

properly, declination to demand return of its advances) can

only be counted at this point ‘‘a mere possibility.’’ The district

Each appellee was a party to the underlying action ‘‘by reason of the

fact that he is or was a director, officer, employee or agent of the cor-

poration.’’ Del. Code Ann. tit. 8, § 145(a). In their brief, appellees con-

jecture that Boeing might decline to indemnify them, taking the position

that appellees were sued by the Government because of their employ-

ment with the United States, not because of their employment with Boe-

ing. However, it was only ‘‘by reason of the fact’’ that appellees were

employees and received payments from Boeing before going to work for

the Government that they were parties to the action brought against them

(and Boeing) by the Government. Any effort by Boeing to avoid liability

for indemnification on that basis (a basis, it should be noted, which ap-

pellees carefully decline to suggest as more than a theoretical possibility)

would not succeed.

court accepted this argument, Boeing, 747 F. Supp. at 321.

We disagree.

To hold that a prevailing party with an unconditional legal

night to indemnification of its attorney fees by a manifestly sol-

vent third party might nevertheless qualify for an EAJA award

because indemnification had not yet occurred is unacceptable

for several reasons. In the first place, it necessarily would imply

an assumption by a court that the indemnitor either would

default deliberately on its legal obligation, or, even more ques-

tionably, would conspire with the indemnitee to alter the in-

tended operation of the EAJA by jointly disregarding the legal

right and duty.

Aside from the unseemliness of such a judicial assumption,

such a holding would not in fact serve a principal purpose of

the EAJA: to avoid the deterring effect which liability for at-

torney fees might have on parties’ willingness and ability to

litigate meritorious civil claims or defenses against the Govern-

ment. The EAJA provides for fee-shifting precisely to avoid

this result. See SEC v. Comserv Corp., 908 F.2d 1407, 1415

(8th Cir. 1990). Consequently, in any situation in which the

eligibility of a particular prevailing party for an EAJA award

is in issue, it is appropriate to inquire whether that party would,

as a practical matter, have been deterred from litigating had

it been known that a fee-shifting award was not available upon

a successful conclusion. If that question is asked here, it is

obvious that appellees, all but one of whom were funded by

an advance which by contract they need not refund if they

prevailed in litigation, would not have been deterred had the

EAJA not then existed. This is the critical concern underlying

the EAJA precondition that a fee claimant shall have ‘‘incur-

red’’ the expense.

Accordingly, we hold that, to effectuate the purposes of the

EAJA, a claimant with a legally enforceable right to full indemni-

ee Se

fication of attorney fees from a solvent third party cannot be

deemed to have incurred that expense for purposes of the EA-

JA, hence is not eligible for an award of fees under that Act.

The Government also contends that even if appellees should

be deemed to have “‘incurred”’ these expenses, thereby quali-

fying for a fee award if the other requirements of the EAJA

were met, the district court also erred in concluding that the

Government's position was not substantially justified. We

agree.

Whether for purposes of the EAJA the Government’s ‘‘posi-

tion’’ in particular litigation is ‘‘substantially justified’ has proved

to be an issue of considerable conceptual and practical difficulty,

given the open-endedness of the statutory language and, no

doubt, the delicacy of the question. It had given the lower

federal courts enough trouble that in 1987 the Supreme Court

undertook to clarify the matter — so far as was possible in

light of the statutory text. In Pierce v. Underwood, 487 U.S.

902 (1988), the Court, wrestling essentially with the two possi-

ble (almost opposite) meanings of ‘‘substantially’’ in this con-

text — ‘‘considerable’’ (to a high degree) or ‘‘in the main’”’

(to a reasonable degree) — came down with ‘‘in the main,’’

i.e., ‘‘to a degree that could satisfy a reasonable person.’’

Id. at 565. That comes out, said the Court, as ‘‘no different

from the ‘reasonable basis in law and fact’ formulation adopted

by . . . the vast majority of Courts of Appeals that have ad-

dressed this issue,’’ including this court, see Anderson v.

Heckler, 756 F.2d 1011, 1013 (4th Cir. 1985).

In the context of this case, the question of substantial

justification is therefore whether the Government’s ‘‘position’’

—that the severance payments to the Boeing employees were

prohibited by 18 U.S.C. § 209(a) — was one that had a reason-

able basis in law and fact, i.e., was such as to satisfy a

reasonable person. In practical terms, this comes to whether

the Government attorneys who decided to bring the civil penal-

ty action made a reasonable legal decision that § 209(a) covered

the payments.

The district court held that this decision was not a reasonable

legal one, that the position taken on its basis was not substan-

tially justified. The court’s conclusion was rested almost en-

tirely on the fact that the legal position taken by the Govern-

ment had in the end been found legally wrong by a unanimous

Supreme Court (not to say by the district court and a dissen-

ting court of appeals judge on the way to the Supreme Court).

747 F. Supp. at 322.

We are required to review this decision of the district court

under an abuse of discretion standard. Pierce, 487 U.S. at

997-63. Though recognizing that such a decision may involve

both factual, legal, and discretionary components, the Pierce

Court concluded that, mainly for concerns of judicial administra-

tion, a unitary standard that accords the deference traditionally

associated with abuse of discretion review was appropriate

for all aspects of this decision, including even those that could

be characterized as purely legal. Jd.

Some of the practical reasons thought in Pierce to justify

deferential review even of purely legal aspects of substantial

justification decisions are not present where, as here, the

merits issue has by now been finally and definitively resolv-

ed. In such a situation, there is not the general danger em-

phasized in Pierce that intensive de novo review of the legal

aspects of an EAJA decision might indirectly compromise a

still pending review of the closely-related merits issues, or

encourage needless merits appeals by the Government to avoid

the risk of indirect ‘‘affirmances’’ (on fee-claimants’ EAJA ap-

peals) of Government losses on the merits in the district

courts. See id. at 561.

10a

Furthermore, since Pierce was decided, the Court has in-

dicated that in the comparable use of a unitary abuse of discre-

tion standard in reviewing Rule 11 sanction decisions, flat er-

rors of law must be considered abuses of discretion. Cooter

& Gell v. Hartmarx Corp., U.S. __, _, 110 S.Ct. 2447,

2459 (1990).

Notwithstanding these intimations that pure legal error must

yet on occasion ve freely reviewable under these administra-

tively-driven deferential review regimes, Pierce still stands

powerfully against such a view. See Pierce, 487 U.S. at 563

(conceding apparent need in some cases for more stringent

review standard to avoid injustice, but nevertheless concluding

that “‘the generality rather than the exception must form the

basis for our rule [of deference]’’). We therefore consider that

even with respect to misapprehensions of controlling law, our

review must be deferential in obedience to Pierce.

There remains the question — how deferential? Pierce of

course wisely did not attempt to formulate the degree in terms

more precise than the traditional abuse-of-discretion formula-

tion it adopted for across-the-board application. But Pierce ob-

viously contemplated a degree of deference considerably short

of a simple, accept-on-faith, rubber-stamping of district court

decisions on this issue. Pierce’s own careful, detailed review

to determine whether the primary EAJA decision in that case

reflected an ‘‘abuse of discretion’’ demonstrates that the

deference commanded is a suitably informed deference. See

Pierce, 487 U.S. at 568-71 (affirming court of appeals holding

of no abuse in district court’s determination that Government’s

position was not substantially justified).

‘Although one of the avowed aims of the adoption of an across-the-board

abuse of discretion review standard is the avoidance of duplicative judicial

efforts, see Pierce, 487 U.S. at 560-61, it is inescapable that honest, prin-

cipled review under the traditional deferential standards may yet require

considerable appellate court effort. In order to declare that discretion has

lla

In the course of its review, Pierce also gave some guidance

on the way to conduct principled review under this standard.

It first assessed the district court decision by looking at the

available ‘‘objective indicia of the strength of the Government’s

position: in that case, the terms of the settlement agreement

that ended the underlying litigation, the stage at which the

merits were thereby decided, and the views of other courts

on the strength, hence reasonableness, of the Government’s

position. Essentially finding these a washout, certainly not suf-

ficiently favorable to the Government to find on their basis

alone an abuse of discretion in the district court’s decision,

the Court turned to an independent assessment of the merits

of the Government’s position. Finding that the opposing

arguments advanced by the parties on the unadjudicated merits

did not ‘‘command’’ a conclusion that the Government’s posi-

tion was substantially justified, the Court concluded that the

district court had not abused its discretion in its determina-

tion to the contrary. See id. at 568-71.

We can follow the genera! review process Pierce charted,

but the available indicia inevitably are not at all the same. This

case was litigated all the way to the Supreme Court, not settled

before trial. No other court has ruled on the merits of the issue

| in other cases. Here the obvious sources for an independent

assessment of the strength of the Government’s merits posi-

tion are the merits, decisions and opinions of the district court,

the court of appeals, and the Supreme Court, rather than mere

opposing contentions of counsel as to the merits.

been abused, or clear error committed in finding facts, a substantial can-

vassing of the relevant materials may be required in any case of signifi-

cant complexity. See Anderson v. City of Bessemer City, 470 U.S. 564,

981 (1985) (Powell, J., concurring) (cautioning that Court’s deliberate

heightening of deference to be accorded in clear ecror review of factfind-

ings should not be read to relieve appellate courts of the “type of burden-

some review that may be appropriate in some cases’’). Review of ‘‘discre-

tionary’’ EAJA decisions can be expected frequently to require the same

| sort of ‘‘burdensome’’ review.

12a

As did the Pierce Court, we look first to the available ‘‘ob-

jective indicia.’’ Here the merits were finally decided against

the Government only at the Supreme Court level. We think

this at best a neutral factor. Although the fact that the claim

survived through the court of appeals rather than collapsing

or settling at an earlier stage points generally in the direction

of strength, it obviously could not suffice, standing alone, to

command a finding of substantial justification. Completely un-

founded claims sometimes, for a variety of reasons, survive

beyond their just desserts.

The fact that no other court has ruled on the merits — none

having had a chance — is advanced by the appellees as an in-

dication of non-justification. The fact that although § 209(a)

had been on the books for 27 years, this was the first action

ever brought by the Government on comparable facts in-

dicates, they contend, the weakness of the claim, hence non-

justification for its prosecution. The district court thought this

persuasive. 747 F. Supp. at 322. We disagree.

We see this as a completely neutral factor in assessing the

strength of the Government's position. There are any number

of practical reasons other than awareness of a claim’s intrin-

sic weakness why its attempted application by Government

enforcers to a particular type of conduct may be delayed.

Though this was a claim for civil penalty rather than a pro-

secution, the Government’s interests here were essentially

those that inform prosecutorial discretion in criminal matters.

That discretion must and does involve the targeting of par-

ticular conduct at particular times in response to many

legitimate factors having nothing to do with the general legal

strength of the claim.

When we turn to an independent assessment of the strength

of — the justification for — the Government’s position, the

13a

most direct indicator is that it has been rejected on the merits

by the Supreme Court. As earlier noted, this was the prin-

cipal basis upon which the district court found it not substan-

tially justified for EAJA purposes.

Although the impulse to equate ultimate judicial rejection

of the Government’s merits position — at whatever level —

with its lack of substantial justification is understandable, the

courts perforce have rejected it as inappropriate, for to do

so, ‘‘would virtually eliminate the ‘substantially justified’ stan-

dard from the statute.’’ Broad Avenue Laundry & Tailonng

v. United States, 693 F.2d 1387, 1391-92 (Fed. Cir. 1982).

Or, as Judge Murnaghan of this court once put it, it would

be ‘‘a war with life’s realities to reason that the position of

every loser in a lawsuit upon final conclusion was unjustified.”’

Evans v. Sullivan, 928 F.2d 109, 110 (4th Cir. 1991).

Equally unacceptable is the opposite impulse: to find in an

intermediate judicial determination of merit in the Govern-

ment’s position proof that the position was at least one that

‘‘could satisfy a reasonable person,”’ i.e., the one or more

presumably reasonable Article III judges who at some stage

of the litigation found merit in it. That too, despite the possi-

ble incongruity of not so concluding, cannot be allowed, to

determine the matter. To do so would be equally at ‘‘war with

life's realities’ in the world of judges and judging and the legal

process. As a practical matter, the substantial justification issue

cannot be transformed into an up-or-down judgment on the

relative reasoning powers of Article III judges who may have

disagreed on the merits of a Government litigation position.

In sum, merits decisions in a litigation, whether intermediate

or final, cannot, standing alone, determine the substantial

justification issue. But of course they — and more critically

their rationales — are the most powerful available indicators of

14a

the strength, hence reasonableness, of the ultimately rejected

position. As such, they obviously must be taken into account

both by a district court in deciding whether the Government's

position, though ultimately rejected on the merits, was

substantially justified, and by a court of appeals in later review-

ing that decision for abuse of discretion. -

In this case, the district court accorded no weight to the

cogency of the reasoning by which two circuit judges of this

_ court had concluded that the Government’s position was not

only justified, but was legally correct.’ That reasoning was,

essentially, that the critical language of § 209(a) did not ‘‘[o]n

its face . . . require that payment occur while the [recipient]

was a government employee’ ’; that in total statutory context

the intended legislative meaning on this critical point was am-

biguous, requiring resort to legislative history; and that this

history pointed to an intention to cover the type pre-

government employment payments at issue. 845 F.2d at

479-80.

4For the reasons just noted, the court was of course right in holding

that the court of appeals decision could not ‘‘in itself’’ establish substan-

tial justification. 747 F. Supp. at 222. But this does not mean, on the other

hand, that the rationale of an ultimately rejected intermediate decision is,

on that account alone, entitled to no weight. That may or may not be the

case, depending upon the cogency of rationale for that decision, as that,

in turn, is mainly indicated by the rationale for its later reversal. The point

is that the mere cast of intermediate and final merits decisions, or simple

head-counting of judges on different sides of the merits issue, cannot be

made decisive. An independent assessment of the substantial justification

for the Government position requires a deeper and more difficult inquiry.

Interestingly, the district court apparently thought it necessary to discount

the significance of the court of appeals’ intermediate reversal of the

former’s ultimately vindicated merits decision. This the court did by point-

ing — erroneously — to Pierce's requirement of deference to district court

decisions on the substantial justification issue itself. Jd. As noted above,

the proper view would be that the court of appeals’ reversal — standing

alone — was of no significance, only the cogency of its rationale was.

15a

Indirectly alluding to the court of appeals’ reasoning — which

of course was relied upon by the Government in attempting

to establish its substantial justification for its position — the

district court considered it to have been flatly rejected by the

Supreme Court. As to whether the critical language was, in

the first place, ambiguous on its face — as the court of ap-

peals had held — the district court thought that the Supreme

Court had unequivocally concluded that the ‘text of [Section]

209(a) . . . indicates that employment status is an element

of the offense’ ’’ 747 F. Supp. at 322 (quoting Crandon, 110

S. Ct. at 1002). On this basis, the district court concluded that

‘‘[iJt was, therefore, unreasonable for the government to re-

ly on a nonexistent ambiguity in the statute.’’ Jd.

Furthermore, opined the district court,

even if the statute were ambiguous the authority

construing Section 209, as well as the pertinent

legislative history, provides no support for the

government’s position. As the Supreme Court

found, the government’s attempt to apply the statute

to persons not serving as federal employees at the

time of the payment was at odds with the language

and clear congressional intent of Section 209.

Id. (citing Crandon, 110 S. Ct. at 1003-06).

In sum, the district court read the Supreme Court’s rationale

for reversal of the court of appeals’ decision as so thorough

and ready a rejection of that court’s statutory interpretation

as to compel the conclusion that the Government’s position

thereby upheld was not substantially justified.

With all respect, and with the deference we think Pierce com-

mands, we think the district court so seriously underestimated

the Supreme Court’s recognition of the difficulty of the inter-

pretive issue, hence of the reasonableness of the Govern-

16a

ment’s position, that its conclusion cannot be allowed to stand.

At odds with the district court’s reading of the Supreme

Court’s decision, we think that decision, fairly read, demon-

strates that the interpretive issue was sufficiently difficult and

arguable that the Government was completely justified in seek-

ing to apply § 209(a) to the conduct at issue. Our assessment

rests both on the general indications of difficulty reflected in

the Supreme Court’s decision and on a particular feature of

the underlying litigation that — as the Supreme Court deci-

sion implicitly recognized — warrants special deference to the

Government’s litigation position in this type case.

First off, the Supreme Court decision was not, as it might

have been had the interpretive issue been considered an open-

and-shut one, by summary reversal. Cf., e.g., Palmer v. BRG

of Georgia, Inc., 111 S. Ct. 401 (1990) (per curiam) (sum-

mary reversal of court of appeals decision respecting reach

of § 1 of the Sherman Act). Instead it prompted two separate.

fairly lengthy, opinions, each of which demonstrates a percep-

tion by the author that the issue was one whose resolution

required significant intellectual effort, careful analysis of rele-

vant interpretive sources, and sophisticated applications of

traditional canons of statutory construction. See Crandon, 110

S. Ct. at 999-1007 (Stevens, J., majority opinion); Jd. at

1007-15 (Scalia, J.. with O’Connor and Kennedy, JJ., concur-

ring in the judgment).

Although the two opinions agree in the end that § 209(a)

_ could not properly be interpreted to cover the pre-Government

employment lump-sum severance payments there in issue,

they differ on the proper interpretive route to that end. Critical-

ly, both seem to agree that the most directly applicable

statutory text (that of the section’s ‘‘receiving’’ prohibition),

does not, as a matter of piain, unaided meaning, dictate the

answer. See id. at 1002 (majority opinion) (‘‘neither [of

}

17a

§ 209(a)’s prohibitions] directly specifies when a payment must

be made or received’’); id. at 1007-08 (concurring opinion)

(opining that neither prohibition, literally read, excludes the

possibility that some types of payment made before or after

Government employment might be covered). Both then find,

with the aid of a wider contextual analysis of the specifically

applicable prohibition, legislative history, and indications of

general statutory policy, meanings that exclude from coverage

the severance payments there at issue, but the meanings so

found are different. The majority finds a congressional intent

to prohibit only payments received during the period of

Government employment, id. at 1003-06; the concurrence,

an intent to prohibit only those payments, whenever made,

that in some form could be considered periodic contributions

to or supplementations of Government salaries, id. at 1008-10.

We are satisfied that any legally trained reader of the two

Crandon opinions would see in them a Court concerned with

a serious issue of statutory interpretation.

Passing these general indications of the interpretive difficulty

posed by § 209(a), the most critical specific aspect of the Cran-

don Court’s statutory analysis is its reliance on the rule of lenity

in resolving the interpretive issue against the Government’s

position. Pointing out at the beginning of its analysis that ‘‘the

governing standard is set forth in a criminal statute,”’ the Court

noted that this made it ‘‘appropriate to apply the rule of leni-

ty in resolving any ambiguity in the ambit of the Statute’s

coverage.’’ Jd. at 1001. And the Court concluded its analysis

of statutory text, legislative history, and statutory design and

policy, see id. at 1001-06, by reiterating its reliance on this

interpretive rule in construing the reach of this criminal statute.

Finally, as we have already observed, we are con-

struing a criminal statute and are therefore bound

to consider application of the rule of lenity. To the

18a

extent that any ambiguity over the temporal scope

of § 209(a) remains, it should be resolved in [the

employees’] favor unless and until Congress plainly

states that we have misconstrued its intent.

Id. at 1007; see also id. at 1008, 1010 (concurring opinion)

(drawing on rule of lenity).

Implicit in this of course is a perception by the Court that

the statute had enough of ambiguity about it to require invoca-

tion of the rule of lenity, for that is the only occasion for its

invocation. See Liparota v. United States, 471 U.S. 419, 427

(1985). This implication is reinforced by various specific allu-

sions in the two opinions to the ambiguity of the § 209(a) text.

See Crandon, 110 S. Ct. at 1005 (majority opinion) (‘‘ap-

propniate, in a case that raises questions about the scope of

the prohibition, to identify the specific policies that the provi-

sion serves’’); id. at 1006 (majority opinicn) (noting that in-

terpretation finding coverage under § 209(a) serves one of the

two principal statutory policies, disserves the other); id. at

1010 (concurring opinion) (conceding that proffered interpreta-

tion “‘is no more successful than the Government's in giving

effect to all the language of the section,’’ and concluding on

the particular interpretive problem that ‘‘at most we have an

ambiguity’’).

We therefore think that the district court’s perception that

Crandon’s ultimate unanimous rejection of the Government’s

position necessarily demonstrated that ambiguity justifying the

Government's position was ‘‘nonexistent,’’ is flatly belied by

a careful reading of the Crandon Court’s two opinions. In-

stead, in its recognition of the need to draw on the rule of

lenity to resolve the interpretive issue, the Court implicitly

recognized that the Government’s position, taking a broader

view of the statute’s reach than lenity allowed the Court to

take, might well be ‘‘justified,’’ given the different roles of the

ORO eS OREO Lalo eine, sis Mn thins Can

19a

executive and judicial branches in enforcing the criminal laws.

For as Justice Scalia pointed out in his concurring opinion, the

Government’s enforcement role requires that as between the

opposing risks of taking too narrow or too broad a view of

‘‘what it may prosecute,’’ it must in prudence choose the

broad view, knowing that judicial review (including lenity in

the end) stands guard against error in that choice, whereas

an error in the opposite direction is not likely ever to be cor-

rected. Jd. at 1011.5 In effect, this reflects a judicial percep-

tion that, within bounds of essential prosecutorial fairness,

Government prosecutors have an obligation to establish the

outer limits of a criminal statute’s ambiguously-defined reach

by making just such choices when occasion requires.

Here, despite the deference we must accord even those

district court EAJA decisions that we may think legally

‘‘wrong,’’ we think this one sufficiently wrong, with sufficiently

dangerous implications for the Government’s prosecutorial

function, that we must consider it, under Pierce’s standard,

an ‘‘abuse of discretion.”’ It reflects, as we have attempted

to demonstrate, an insufficiently careful assessment of the true

import of the Crandon opinions as they bear upon the strength,

hence justification for, the Government’s litigation position.

And it necessarily implies a more cramped view of the latitude

that must be accorded Government interpreta-

‘Justice Scalia’s point was not of course being made with reference to

the EAJA substantial justification issue, but in addressing the merits. He

was explaining why the Government’s consistent pattern of interpreting

} 209(a) to cover such payments as those in issue was due no judicial

deference. To accord deference, he pointed out, would in effect be to con-

vert the judicial rule of lenity into one of judicial ‘‘severity’’ in construing

the reach of a criminal statute, since the proper prosecutorial rule is not

lenity, but severity, i.e., broad interpretation. Though made in reference

to the merits issue, it perfectly anticipates the substantial justification issue.

20a

tions of the reach of untested, ambiguously-drawn criminal

statutes than is acceptable.®

We therefore hold that, contrary to the district court’s deter-

mination, the opposite conclusion, that the Government’s

litigation position in the underlying litigation was substantially

justified, is ‘‘commanded,’’ see Pierce, 487 U.S. at 470, by

the most relevant indicators on that issue.

REVERSED

HALL, Circuit Judge, dissenting:

Between 1962 and 1982, through the administrations of six

presidents, Boeing made twenty-one lump sum payments to

employees departing for federal service. All of these payments

were disclosed to the government. Until the case of the ap-

pellees, the government had acquiesced in the practice. A full

four years after receiving actual notice of the payments, the

government filed this suit to place a constructive trust on them.

Four more years were expended as the appellees worked their

way towards unanimous vindication in the Supreme Court. The

price of vindication, over a half-million dollars of attorneys’

fees, was dear — more, indeed, than the government’s onginal

complaint sought to recover. Today, the majority permits the

government to walk away from the carnage it has wrought

and leave the appellees to clean up as they may. Because I

believe that the district court did not abuse its discretion in

awarding EAJA attorneys’ fees to appellees, I would affirm.

I therefore respectfully dissent.

6If, as we suggest, special latitude for Government litigation positions

respecting the reach of criminal statutes may be due in assessing their

justification for EAJA purposes, the special case thereby created is an ex-

ceedingly narrow one. It is limited to those relatively rare occasions when

the Government has sought, as here, to recover a civil penalty for viola-

tion of a criminal statute. The EAJA does not, of course, apply to criminal

prosecutions.

2la

The majority opinion turns the issue of Boeing’s indemnify

obligation on its head. EAJA is not served by a rule that the

government may take unjustified positions in litigation against

anyone who may have a collateral source to defray his at-

torneys’ fees. I see nothing in EAJA that permits the govern-

ment to stand in the back of the line to pay attorneys’ fees.

The government asserts that it is legally and factually cer-

tain that Boeing must indemnify under state law; therefore,

appellees have not ‘‘incurred’’ attorneys’ fees reimbursable

under EAJA.

Boeing has not yet decided whether it will indemnify ap-

pellees. The government points out that Boeing has no in-

terest in making such a determination until this case is resolv-

ed. I do not doubt the accuracy of the government’s observa-

tion. On the other hand, though I think it is likely Boeing would

indemnify the appellees if they do not recover their fees in

this action, I do not share the majority’s confidence, ante at

9 n.2, that it is a foregone conclusion. Boeing must indemnify

if the suit was brought against a person ‘‘by reason of the fact

that he is or was a director, officer, employee or agent of the

corporation.’’ Del. Code § 145(a), (c). Aside from this court’s

lack of day-to-day familiarity with Delaware law, Boeing is not

even before us. It may fight indemnification claims; the record

before us contains no concessions or waivers from Boeing.

We have no way of knowing what creative arguments its

lawyers may present to the state courts.

Moreover, even if Boeing is compelled to indemnify, I do

not see any particular reason why it should be the first source

of reimbursement for appellees. I think it is much more

reasonable to reduce Boeing’s state-law obligation by the

amount first recovered from the government than to do it the

22a

other way around. The government’s obligation is fault-based;

Boeing’s is analogous to insurance. The majority’s decision

implicitly rejects the wisdom of the common-law collateral

source rule, which does not permit the wrongdoer to profit

from his victim’s foresight to secure an insurer.

The majority’s authority is SEC v. Comserv, 908 F.2d 1407

(8th Cir. 1990). The court in Comserv held that a corporate

officer did not ‘‘incur’’ attorneys’ fees where those fees were

paid by his employer. The important distinguishing fact of Com-

serv, however, is that the employer undertook, at the begin-

ning of the litigation, to pay the employee’s attorneys’ fees,

win or lose. The court found that ‘‘from the inception of the

underlying lawsuit, [the employee] was able to pursue his

defense in the SEC action secure in the knowledge that he

would incur no legal liability for attorneys’ fees.’’ 908 F.2d

at 1414.

Appellees began this litigation with none of the security of

the employee in Comerv. The most basic difference is that

the Comserv employee’s fees would be paid even if he lost.

In the instant case, victory was a prerequisite to even the

possibility of indemnification. Therefore, appellees most

definitely ‘‘incurred’’ fees for which they were and are per-

sonally liable. That they have another potential source from

which to obtain reimbursement ought not be a defense for the

government. I find the district court’s observations compell-

ing, 747 F. Supp. at 321:

Simply put, the mere possibility of future indemnifica-

tion by a company for the attorney’s fees incurred

by its employees is not, in itself, enough to alter the

fact that employees who are ultimately liable for

those fees are the real parties in interest. Were this

not the case, the government would be able to

viciously pursue corporate employees with the

23a

knowledge that, due to the possibility of later cor-

porate indemnification, the government would not

be held accountable for any unjustified conduct. The

EAJA would certainly not be served by such a rule.

Il.

Likewise, I disagree with the alternate ground for the ma-

jority’s decision. I believe that the district court did not abuse

its discretion in finding that the government’s position was

not substantially justified.

The Supreme Court’s unanimous ruling in favor of appellees

rested heavily upon the rule of lenity, and the root of my

disagreement with the majority lies in the significance of the

Court’s use of the rule. The majority notes that reliance on

the rule of lenity presupposes that the statute was ambiguous;

I concede as much. I disagree, though, that any colorable con-

struction urged by the government of an ambiguous criminal

Statute is a substantially justified one.

The rule of lenity is not a passive recognition of a statute’s

ambiguity; it is an affirmative principle in favor of the individual,

and it protects him from the tyranny of vague criminal laws.

If an individual must parse conference committee notes and

remarks of bill sponsors to discover the hidden meaning of

a Criminal law, the law is too ambiguous to satisfy the rule

of lenity.

In other words, lenity is not merely a way to decide whether

the government prevails on the merits of a foray into the boun-

daries of a criminal law; it is also a force the government must

weigh before it decides to go on its foray. Our inquiry, then,

should be whether the government knowing that ambiguity

in the statute would be resolved against it, was substantially

justified in taking the position it took on the meaning of

24a

\ 209(a). The district court held that it was not, that holding

is not an abuse of discretion.

Finally, though I recognize that the majority expressly does

not so hold, ante at 11, I fear that we have turned the longevity

of a case, the particular earnestness with which the govern-

ment litigated it, and interim victories before administrative

bodies or lower courts into impregnable shields against EAJA

liability. See Crawford v. Sullivan, 935 F.2d 655, 659-660 (4th

Cir. 1991) (Hall, J., dissenting). The government's trying of

the case does not prove that it was substantially justified in

bringing it.

I respectfully dissent.

25a

- APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

ALEXANDRIA DIVISION

UNITED STATES OF AMERICA

Plaintiff,

CIVIL ACTION

NO. 86-0829-A

THE BOEING COMPANY, INC., et al.,

Defendants.

eet “ee? Net Nee “eet Sea Ne

MEMORANDUM OPINION

This matter is before the court on defendants’ motion for

attorney's fees and costs pursuant to the Equal Access to

Justice Act, (‘‘EAJA’’), 28 U.S.C. § 2412 1982 & Supp. 1989.

The court finds defendants’ motion persuasive and awards

attorneys’ fees and costs to the defendants.

The case was an action for civil damages filed by the govern-

ment against five private citizens. Specifically, the government

charged these individuals with breach of a ‘‘duty of loyalty,’’

arising from the standard set out in 18 U.S.C. § 209(a), a

criminal statute. Section 209(a) prohibits a person from receiv-

ing a ‘‘supplementation of salary, as compensation for his ser-

vice as an officer or employee of the executive branch of the

United States .. .”’

After a one-day trial, this court found that the payments were

not made with the intent of supplementing the employees’

government salaries, nor were they intended as compensa-

tion for government service rendered by these individuals.

Thus, this court held that Section 209 does not apply to

26a

payments made to or received by persons who, like defen-

dants, become government employees after receipt of

severance payments.

Plaintiff appealed the decision to the Fourth Circuit, which

reversed this court’s judgment in a divided opinion. In that

decision, two of the three judges on the panel ruled that

employment status at the time of payment is not an element

of a Section 209(a) violation and that the payments were, in

fact, intended as compensation for services as federal

employees. See United States v. Boeing Co., 845 F.2d 476

(4th Cir. 1988). Defendants filed a petition for rehearing en

banc, which was denied by a vote of 6-5.

On November 6, 1989, the case was argued before the

United States Supreme Court. On February 27, 1990, in a

9 to 0 decision, the Court held that Section 209(a) applies on-

ly to incumbent federal employees, reversing the judgment

of the court of appeals and upholding this court’s decision. See

Crandon v. United States, 110 S.Ct. 997 (1990).

Defendants now come before the court requesting an award

of attorneys’ fees and costs pursuant to the EAJA. Section

2412(d)(1)(A) of that statute provides:

Except as otherwise specifically provided by statute,

a court shall award to a prevailing party . . . fees

and other expenses, in addition to any costs award-

ed pursuant to subsection (a) incurred by that party

in any civil action . . . brought by or against the

United States in any court having jurisdiction under

that action unless the court finds that the position

of the United States was substantial [sic] justified

or that special circumstances make an award unjust.

The court finds that defendants have met all the re-

quirements of this provision and are thus entitled to an award of

27a

fees and costs from the United States. Defendants are clear-

ly prevailing parties as contemplated by the EAJA. They in-

itially prevailed at tria! and won definitively and completely in

the United States Supreme Court. In addition, defendants are

eligible for an award of fees under the EAJA as each has a

net worth under $2,000,000 and each has incurred fees and

expenses in defending this case.

The government takes issue with the defendants’ eligibili-

ty arguing that they are not the real parties in interest in the

case and thus have not aciually incurred the fees as required

by the statute. The court rejects this argument.

In deciding which party is the real party in interest the court

must look to the ‘‘totality of facts.”’ See Design and Produc-

tion, Inc. v. United States, No. 553-84C, 1990 U.S. Cl. Ct.

(April 23, 1990). The totality of fact in this case suggest that

the defendants were at all times the real parties in interest.

Although Boeing agreed to advance the costs and fees incur-

red by defendants, the promise was undertaken with the

understanding that all monies would be repaid unless, at a later

date, Boeing’s Board of Directors determined that the defen-

dants should be indemnified. At no time was there any fee

arrangement between Boeing and the defendants’ counsel to

shift that liability for fees. Moreover, Boeing did not retain

the individuals’ counsel nor did it exercise any control over

the defense or conduct of attorneys. Throughout this litiga-

tion, the lawyers involved viewed themselves answerable only

to the defendants they represented and viewed the defendants

ultimately liable for all attorneys fees incurred.

Simply put, the mere possibility of future indemnification by

a company for the attorney’s fees incurred by its employees

is not, in itself, enough to alter the fact that employees who

are ultimately liable for those fees are the real parties in in-

terest. Were this not the case, the government would be able

28a

to viciously pursue corporate employees with the knowledge

that, due to the possibility of later corporate indemnification,

the government would not be held accountable for any un-

justified conduct. The EAJA would certainly not be served by

such a rule.

Having found the individuals eligible to recover fees and ex-

penses, the court’s focus now turns to whether or not the

government was substantially justified in its position or whether

or not special circumstances exist which would make award

unjust. A finding of either would bar recovery under the EAJA.

The Supreme Court has held that the government's posi-

tion is substantially justified if it would satisfy a reasonable per-

son knowing all of the law and all of the facts. See Pterce v.

Underwood, 108 S.Ct. 2541, 2550 (1988). Considering all the

circumstances surrounding this litigation, the court concludes

that the government has not met this burden.

Although 18 U.S.C. Section 209 has been on the statute

books in its current form for 27 years, this is the first time

the government has ever brought a civil or criminal case against

anyone for receiving a severance payment, and this is the on-

ly time the government has tried to apply that provision to

a person receiving any kind of payment before entering federal

service. The government argues that its position was justified,

nevertheless, because the statute on its face is not restricted

to recipients who are government employees on the date they

receive the disputed payment. However, the Supreme Court

unequivocally concluded that the ‘‘text of [Section] 209(a)

_. indicates that employment status is an element of the of-

fense.’’ Crandon 110 S.Ct. at 1002. It was, therefore,

unreasonable for the government to rely on a nonexistent am-

biguity in the statute in filing suit against these private citizens.

Moreover, even if the statute were ambiguous the authority

29a

construing Section 209, as well as the pertinent legislative

history, provides no support for the government’s position.

As the Supreme Court found, the government’s attempt to

apply the statute to persons not serving as federal employees

at the time of the payment, was at odds with the language

and clear congressional intent of Section 209. See Id., at

1003-06. Although the government has the nght to seek

modification or repudiation of established doctrine, the EAJA

exists to ensure that individual private litigants are not com-

pelled to subsidize such reevaluations. See Spencer v. NLRB,

712 F.2d 539, 559 (D.C. Cir. 1983), cert. dented, 466 U.S.

936 (1984).

Nor does the fact that two appellate judges agreed with the

government’s position make it a substantially justified one. The

fact that one other court agreed with the government does

not, in itself, establish substantial justification. Pierce, 108 S.Ct.

at 2552. Moreover, there is no support for the contention that

an appeals court decision should be given greater weight than

that of a trial court. On the contrary, because trial courts are

in a better position to know all of the facts concerning the

government’s prosecution of the case, appellate courts must

defer to district courts in determining whether substantial

justification exists. Jd., at 2547. There is certainly no substan-

tial justification in this particular case, where the Supreme

Court soundly and unanimously rejected the appellate court’s

approach, holding that it had erroneously disregarded the plain

language of the statute and established precedent. See general-

ly, Crandon, 110 S.Ct. 997.

As the Fourth Circuit decision does not impede defendants’

EAJA claim, the court is free to find, as it does, that a

reasonable person knowing all the facts and all the law involv-

ed in this case would not be satisfied by the government’s

arguments. The defendants are thus entitled to an award of

30a

reasonable fees and costs from the government.

Although the government challenges the reasonableness of

the fees and costs defendants have requested, the court finds

the requested amounts to be appropriate. The government

first challenges the $106 hourly rate employed by defendants.

There is no dispute that $106 per hour is the current statutory

rate under the EAJA ($75.00 increased by CPI adjustments);

however, the government argues that the cost of living calcula-

tion should be done individually for each bimonthly period in

which services were performed rather than one calculation us-

ing the current CPI. The court does not agree. The CPI should

serve as a disincentive to the government to prolong the litiga-

tion process. See Natural Resources Defense Council, Inc. v.

U.S.E.P.A., 703 F.2d 700, 713 (3d Cir. 1983). More impor-

tantly, only by using the recent CPI in calculating the fee

amount will attorneys receive, in today’s dollars, the purchas-

ing power to which they are entitled. Garcia v. Schwetker, 829

F.2d 396, 402 (3rd Cir. 1987).

The government also argues that the $50 hourly rate claimed

for the work of law clerks and paralegals is excessive, and

that such time should be compensated at the rate that the law

firm actually pays these employees. However, the Supreme

Court has held that in calculating awards under fee shifting

statutes, paralegal time and law clerk time should be compen-

sated at market rates, not at the cost to the particular attorneys

employing them. See Missouri v. Jenkins, 109 S.Ct. 2463,

2469-72 (1989). Although Missoun v. Jenkins involved a

§ 1988 case, its holding and logic applies to other fee shifting

statutes, including the EAJA. See, e.g., Raton Gas Transmis-

sion Co. v. F.E.R.C., 891 F.2d 323, 329-30 (D.C. Cir. 1989)

(applying logic to EAJA). In this case it appears that defen-

dants have asked for a rate which is less than that which clients

are billed for paralegal and law clerk time. See, e.g., Stein Decl.,

reerreene anaes erent cee ear:

3la

par. 21, and Plotkin Affidavit, par. 6. The court finds that the

hourly rate requested by defendants for support services is

neither unreasonable or excessive.

Next, the government makes a general assertion that the

stated number of hours worked by defendants is excessive.

The government offers no concrete challenge to the reason-

ableness of the fees claimed nor does it point out specific time

that was improperly spent. For this reason the government

is not entitled to a reduction in the fee request.

The government also challenges certain expenses claimed

by defendants and asserts that they are not compensable under

the EAJA. However, the majority of courts addressing this

issue have held that expenses claimed by defendants are com-

pensable under the EAJA. See, e.g., International Woodworkers

of Am., AFL-CIO, Local 3-98 v. Donovan, 792 F.2d 762, 767

(9th Cir. 1986). Moreover, in Missouri v. Jenkins, 109 S.Ct.

at 2470-72, the Supreme Court asserted that the key ques-

tion in considering what is proper under fee shifting statutes

is what would be normally billed to the client. This certainly

would include requests for costs associated with the litigation.

Finally, the court finds that defendants are entitled to recover

the costs of filing and arguing this EAJA motion. See Commis-

stoner, I.N.S. v. Jean, 110 S.Ct. 2316 (1990). An appropriate

order shall issue.

/s/ Claude M. Hilton

UNITED STATES DISTRICT JUDGE

Alexandria, Virginia

August 14, 1990

32a

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

ALEXANDRIA DIVISION

UNITED STATES OF AMERICA.

Plaintiff,

CIVIL ACTION

NO. 86-0829-A

)

THE BOEING COMPANY, INC., )

MELVYN R. PAISLEY, )

THOMAS K. JONES, )

HERBERT A. REYNOLDS )

HAROLD KITSON JR. AND )

LAWRENCE H. CRANDON, )

Defendants. )

)

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Findings of Fact

1. The Boeing Company (‘‘Boeing’’) is a corporation

organized and existing under the laws of the State of Delaware.

The corporate headquarters are located at 7755 East Marginal

Way South, Seattle, Washington. Boeing maintains an office

and conducts business within the geographical limits of the

jurisdiction of this Court.

9 Defendant T.K. Jones (‘‘Jones’’) is a resident of the

State of Washington; Defendant Melvyn Paisley (‘‘Paisley’’)

is a resident of the Commonwealth of Virginia; Defendant

Herbert A. Reynolds (‘‘Reynolds’’) is a resident of the State

of Washington; Defendant Harold Kitson, Jr. (‘‘Kitson’’) is

a resident of the State of Washington; Defendant Harold Cran-

don (‘‘Crandon’’) is a resident of Brussels, Belgium.

Ne os: crc RO ac eine umn ne eames

33a

3. Boeing traditionally has encouraged public service by

its employees. Some forms of public service, such as service

in state or local government, do not require a complete

severance of the individual’s employment relationship with

Boeing. Boeing has made financial arrangements with its

employees who accept positions in state and local government,

such as paid leave, in an effort to diminish the personal

economic incentives associated with public service.

4. Over the past twenty years, the Department of Defense

has regularly solicited highly qualified employees from Boe-

ing for government service. The government repeatedly has

asked Boeing to assist it in identifying such qualified employees,

and has specifically requested that Boeing encourage these

employees to accept positions in the Federal government.

9. Boeing has a long-standing practice of making severance

payments to individuals who terminate their employment with

the Company inorder to enter government service. In mak-

ing these payments, Boeing has endeavored to encourage its

employees to serve their government and provided a

mechanism to completely sever all financial ties between Boe-

ing and the departing employee.

6. During the period from 1962-1982, Boeing made at least

twenty-one severance payments to individuals who terminated

their employment with the Company in order to enter govern-

ment service.

7. Boeing has repeatedly disclosed to the United States

government, including responsible officials of the Department

of Defense, the fact of these payments and the circumstances

under which they are made. One such disclosure letter

specifically noted that severance payments were calculated

with reference to the differential between the financial benefits

that would accrue to the employee if he remained with Boe-

34a

ing, as compared with those that would accrue to the employee

if he accepted the anticipated government position.

8. Despite actual knowledge of Boeing’s practice of mak-

ing severance payments, the government has never objected

to the practice, and on at least one occasion informed Boeing

that a proposed severance payment was in compliance with

the federal conflict of interest statutes.

9. During 1981 and 1982, each of the individual defendants

was recruited from Boeing by the federal government for a

position within the Department of Defense.

10. Onor about May 19, 1981, Jones resigned from Boe-

ing and, on or about June 1, 1981, he assumed the position

of Deputy Under Secretary of Defense for Strategic and

Theater Nuclear Forces.

11. On or about October 31, 1981, Paisley retired from

Boeing. On December 2, 1981, following Senate confirmation,

Paisley was sworn in as Assistant Secretary of the Navy for

Research, Engineering and Systems. Paisley continues to

serve in this position.

12. On or about July 22, 1981, Reynolds resigned from

Boeing. On July 26, 1981, he became a consultant to the

Defense Department and on October 4, 1981, received an ap-

pointment to the position of Deputy Director of Space and In-

telligence Policy.

13. On March 5, 1982, Defendant Crandon resigned from

Boeing. On or about March 8, 1982, he was appointed to the

position of computer scientist with the North Atlantic Treaty

Organization (‘‘NATO’’) Air Command and Control Systems

(‘‘ACCS ‘‘ ) Team in Brussels, Belgium. Crandon continues

to serve in this position.

14. On August 1, 1982, Kitson retired from Boeing. Kit-

son served as a consultant to the Department of Defense from

;

35a

August 2, 1982, until September 1982, when he was appointed

Deputy Assistant Secretary of the Navy for Command, Com-

munications and Control Intelligence.

15. Boeing made severance payments to the five individual

defendants on the following dates: T. K. Jones, May 19, 1981;

Herbert R. Reynolds, July 22, 1981; Melvyn R. Paisley, Oc-

tober 1, 1981; Lawrence H. Crandon, March 5, 1982: and

Harold Kitson, Jr., July 31, 1982.

16. At the time Boeing made and the individual defendants

accepted the severance payments in question, the individuals

were still employed by Boeing and had not yet entered into

government service.

17. The severance payments made to the individual defen-

dants were not contingent upon the individuals entering into

federal government service, the position assumed in the federal

government, the agency served in the federal government,

their remaining in government service for any stated period

of time, or their returning to Boeing at anytime in the future.

Once the individual separated from the Company, the

severance payment was his unconditionally, no matter what

he did in the future.

18. At the time the individual defendants left Boeing, Boe-

ing did not make any commitment to rehire them at any time

in the future and the individuals made no commitment to return

to Boeing. Although Boeing might have been willing ultimate-

ly to reemploy the individuals, it had no expectation that the

individuals would return to the Company at the time that they

terminated their employment.

19. The severance payments to these individual defendants

were not made with the intent that the individuals would give

Boeing preferential or other favorable treatment during the

36a

term of their government employment, and the payments were

not understood by the individuals as such.

20. Staff personnel in the Industrial Relations Department

performed calculations to arrive at a proposed severance pay-

ment for presentation to individuals within Boeing with final

decision making authority. Those responsible for the ultimate

decision were not aware of the specific calculation method

followed by the Industrial Relations Staff, and approved

severance payments to the individual defendants based on their

determination that the proposed payment was reasonable and

fair to the departing employee.

21. Boeing never asked the individual defendants to pro-

vide it with any preferential treatment or special advantages —

during their tenures with the government, and the individuals

in fact never provided Boeing with any such preferential treat-

ment or special advantage.

22. The severance payments made to the individual defen-

dants were not intended by Boeing as a supplementation of

their government salaries or as compensation for their govern-

ment services. The individual defendants did not understand

the severance payments to be compensation for their services

to the government or a supplement to their government

salaries.

23. The government supervisors of each of the individual

defendants were and are fully satisfied that the individuals

capably and honorably performed their public duties without

bias and with independence and impartiality and have never

engaged in or otherwise participated in a conflict of interest.

24. Atno time has the Department of Defense taken any

disciplinary or other adverse action against any of the individual

defendants, although it has had actual knowledge of their

previous employment by Boeing and their receipt of a

severance payment from Boeing.

sh ct Pech ORD

37a

25. The severance Payments were understood by the in-

dividual defendants to be partial compensation for the loss of

benefits which they had earned as a result of their prior ser-

vice with Boeing. They were informed by Boeing that the pay-

ment was a means of avoiding any possible conflict of interest

by severing all financial connections with Boeing.

26. Before entering into government service, during the

course of routine ethics reviews, Messrs. Jones and Paisley

disclosed to attorneys in the Office of the General Counsel

of the Department of Defense and the Navy, respectively, of

the fact and amount of the severance Payments which they

received from Boeing. Jones also discussed his receipt of the

Boeing severance payment with his government superiors,

Under Secretary of Defense Dr. Richard DeLauer, and Dr.

DeLauer’s Executive office, Colonel Kenneth Hollander. Jones

was assured that he could accept the anticipated severance

payment.

27. Messrs. Jones, Reynolds, Kitson and Paisley dis-

qualified themselves from working on any Boeing-related mat-

ters as of September 1982. The disqualifications applicable to

Messrs. Jones, Reynolds and Kitson remained in effect for

the balance of the period of their government service. Mr.

Paisley resumed participation in a Boeing-related project on

September 17, 1984, at the express direction of Secretary

of the Navy, John Lehman. In his government position, Mr.

Crandon has no direct procurement role, does not award con-

tracts and does not make source selection decisions.

28. The amounts of the severance payments to the in-

dividual defendants were recorded in the overhead pools on

the accounts of BAC. The account in which these payments

were recorded is Systematically and regularly monitored by

auditors of the Defense Contract Audit Agency (‘‘DCAA’’)

of the Department of Defense, resident at the Boeing facility.

38a

Payments were recorded on the following dates: Jones, May

21, 1981; Reynolds, July 30, 1981; Paisley, October 8, 1981;

Crandon, February 25, 1982; Kitson, July 29, 1982.

29. During the course of such routine monitoring of BAC’s

overhead costs, DCAA auditors noted the severance payments

to Messrs. Jones, Reynolds and Paisley. During the period

from November 1981 to January 1982, DCAA auditors re-

quested information from Boeing about these payments. In

response, Boeing informed the auditors of the Company’s

historical practices of making severance payments and the basis

for the severance payments to these individuals, including

specifically the factors considered in arriving at the payment

amount.

30. Asa result of this dialogue, as of mid-February 1982,

the DCAA Resident Auditor at BAC, the DCAA Branch

Manager of the Puget Sound Branch, and Director of the San

Francisco Region of DCAA were aware of the following: that

severance payments had been made to Messrs. Jones, Rey-

nolds and Paisley; the amount of the payments; the govern-

ment positions assumed by these individuals following their

separation from Boeing; the factors now alleged by the govern-

ment to have been considered by Boeing in arriving at the

amount of the payment; and the method by which Boeing ac-

counted for those payments pursuant to Armed Services Pro-

curement Regulation 15-205.39.

31. Each year the government calculates a percentage of

costs included in the overhead pools of contractors that the

government anticipates or projects will ultimately be disallowed

when the overhead claim is closed. This calculation of an-

ticipated unallowable costs is expressed as a percentage of

the total overhead pools, and is called the withhold rates. The

government unilaterally establishes these withhold rates. Boe-

ing applies the withhold rate to the overhead dollars to be billed

39a

on each contract, and the resultant dollars are withheld from

periodic contract payments made by the government to Boe-

ing.

32. The withhold rate is set annually and adjusted

periodically during the course of the year at the discretion of

the government’s Administrative Contracting Officer. The

withhold rate is set at a level intended to cover all potential

unallowable costs. In the past, the application of the withhold

rate has resulted in the government withholding monies in ex-

cess of Boeing Aerospace Company’s total costs ultimately

disallowed in every year.

33. In 1981, during the period in question, $7.8 million to

$4.4 million was withheld. For 1982, $4.6 million to $3.9 million

was withheld.

34. Overhead claims of Boeing Aerospace Cornpany for

the years 1981 and 1982 have not been finally settled to date.

The withhold rates set by the government for those years are

more than adequate to cover all costs which may ultimately

be disallowed, including the severance payments paid by Boe-

ing during those years. Moreover, even if the withhold rates

established for 1981 and 1982 were not sufficient to cover all

ultimately disallowed costs for those years, that will not be

known until the overhead claims for those years are finally

settled.

35. On March 22, 1985, at the request of the Civil Divi-

sion of the Department of Justice, Boeing executed an agree-

ment tolling the three-year statute of limitations governing the

government's tort claim against Boeing, set forth in 28 U.S.C.

§ 2145(b). The agreement, which was-prospective only, con-

tained an effective date of March 25, 1985.

36. The Plaintiff commenced this action on July 22, 1986.

40a

Conclusions of Law

This Court has jurisdiction over this matter pursuant to 28

U.S.C. § 1345, and venue is proper in this Court pursuant

to 28 U.S.C. § 1391(b). The government contends it has a

cause of action under the federal common law for breach of

fiduciary duty created by 18 U.S.C. § 209 against both the

recipients of a salary supplement for government services and

against the payer of such a supplement. It also claims a cause

of action against the individual defendants for breach of an im-

plied contract. At the trial the government elected to proceed

against Boeing in tort for breach of fiduciary duty and against

the individual defendants for breach of implied contract.

At the time that Boeing made and the individuals accepted

the severance payments in question, the individuals had not

yet entered into government service and were not employees

of the United States government. For this reason, there was

no principal-agent relationship between the individual defen-

dants and the United States government at the time that Boe-

ing made, and the individuals accepted, those payments. See

Restatement (Second) of Agency, § 387 (1958).

Because they were not government employees, the in-

dividual defendants owed no fiduciary or other duty to the

United States government at the time of the severance

payments. See id. In accepting those payments, the individuals

therefore breached no common law or other duty owed to the

United States government, and Boeing did not induce or other-

wise participate in any breach of fiduciary duty by the individual

defendants.

Even assuming that the individual defendants owed a

fiduciary duty to the United States government at the time

of the severance payments in question, neither the making,

acceptance or retention of those payments constituted or in-

duced in any fashion a breach of that duty.

4la

18 U.S.C. § 209(a) provides . . .

Whoever receives any salary, or any contribution

to or supplementation of salary, as compensation for

his services as an officer or employee of the Ex-

ecutive Branch of the United States government,

of any independent agency of the United States, or

the District of Columbia, from any source other than

the government of the United States, except as may

be contributed out of the treasury of any state, coun-

ty, or municipality; or

Whoever, whether an individual, partnership,

association, corporation, or other organization pays,

or makes any contribution to, or in any way sup-

plements the salary of, any such officer or employee

under circumstances which would make its receipt

a violation of this subsection

Shall be fined not more than $5,000 or imprison-

ed not more than one year, or both.

18 U.S.C. § 209 forbids the supplementation of Salary and

does not apply to the giving of a severance payment by a

private employer to an employee who has not, at the time of

receipt, entered inte government service. Moreover, the ac-

ceptance of a severance payment by a non-government

employee does not violate 18 U.S.C. § 209. See S. Rep. No.

2213, 87th Cong. 2d Sess. reprinted in 1962 Code Cong. &

Ad. News 3852, 3863.

Even if 18 U.S.C. § 209 were read to apply to the defen-

dants in this case, the Court concludes that that statutory sec-

tion was not violated. Based on all the evidence before the

Court, including the testimony of the witnesses, the Court

finds that the severance payments in question were not made

by Boeing with the intention of supplementing the individual

defendants’ government salaries, nor were they intended as

compensation for government services rendered by

42a

those individuals. Similarly, the severance payments were not

accepted by the individual defendants as a supplementation

to their government salaries or as compensation for their

government services. The government contends that the use

of salary loss as a method of computation necessarily has a

prospective effect which equates to a salary supplementation.

This ignores the fact that the use of salary figures and benefits

are an accurate measure of past contributions to the company.

Salaries are paid on the basis of length of service and level

of performance. In any event the formula for calculation of

severance pay cannot make the payment something other than

severance pay. The payments made by Boeing were severance

payments made to sever the relationship with these employees

based on past performance and accumulated benefits. The

payments therefore were not contrary to the standards of con-

duct established by Section 209. See United States v. Mun-

tain, 610 F.2d 964 (D.C. Cir. 1969). .

The defendants cannot be said to have violated the Depart-

ment of Defense regulations codified in 32 C.F.R. Part 40

(1980). Those regulations by their express terms apply only

to employees of the Department of Defense. Because the in-

dividual defendants were not employees of the United States

government at the time they accepted the payments, they

were not bound by those regulations, and their conduct was

not prohibited by the regulations. For this reason, the Court

concludes that severance payments, as made here, did not

violate these regulations.

The defendants also did not violate standards of conduct

established by common law principles of agency. In accordance

with those principles, an agent may be held liable to his/her

principal for receipt of undisclosed, secret profits which create

a conflict of interest. See Continental Management, Inc. v. |

United States, 527 F.2d 613 (Ct. Cl. 1978). The severance

43a

payments here at issue were timely disclosed to responsible

agents of the United States government. The payments were

not in the nature of ‘‘secret profits,’’ and could not in any

fashion tend to subvert the loyalty of the individual defendants

to the United States government. See also United States v.

Carter, 217 U.S 286 (1910); United States v. Kenealy, 646 F.2d

699 (1st Cir.), cert. dented, 454 U.S 941 (1981); United States

v. Kearns, 595 F.2d 729 (D.C. Cir. 1978).

These payments created neither the appearance of nor an

actual conflict of interest. None of the individual defendants

were in a position in the government to provide preferential

treatment to Boeing and in fact none of the individual defen-

dants rendered preferential treatment to Boeing while a

government employee. Under these circumstances, neither

the making nor the acceptance of the severance payments

could be said to have created an actual or a potential conflict

of interest, or a corresponding breach of the employees’ du-

ty of undivided loyalty.

The government was not injured by the making or accep-

tance of these payments. The severance payments were not

made with the intent to secure preferential treatment for Boe-

ing. The individuals never rendered preferential or other

favorable treatment to Boeing during their respective periods

of government service. Under these circumstances, the

government cannot be said to have been injured by the

challenged conduct. Having in fact suffered no harm, the

government is not entitled to recover damages.! See Continen-

tal Management, Inc. v. United States, 527 F.2d at 619 n.6.

‘In any event, the government would not be entitled to recover damages

twice — once from Boeing, and once again from the individual defendants.

See Continental Management, Inc. v. United States, 527 F.2d at 619.

44a

Moreover, the government is not entitled to recover interest

on the amount of the severance payments for the period of

time during which they were recorded by Boeing as an

overhead cost. At the government’s direction, Boeing has

withheld from the amount of overhead costs billed to the

government on government contracts an amount which is suf-

ficient to cover the amount of the challenged payments. The

government therefore has not paid to Boeing an amount

representing these payments. Again, having suffered no in-

jury, the government is not entitled to recover the damages

which it here claims. Moreover, inasmuch as Boeing’s

overhead rates for 1981 and 1982 have not been finally

negotiated, this claim by the government is not ripe, and would

be justifiable, if at all, only before the Board of Contract Ap-

peals or Claims Court.

The defendant, Boeing, also raises as a defense the statute

of limitations. The Court finds that the government’s claims

as to the first four of the questioned severance payments are

barred by 28 U.S.C. § 2415(b). For purposes of computing

the running of this statute of limitations period, the govern-

ment’s cause of action is deemed to have accrued on the date

on which the severance payments were made. See, e.g., United

States v. Central Soya, Inc., 697 F.2d 165 (7th Cir. 1982);

United States v. Limbs, 524 F.2d 799 (9th Cir. 1975); Dameron

v. Washington Magazine, Inc., 575 F.Supp 1578 (S.D.N.Y.

1983).

The severance payments to Messrs. Jones, Reynolds,

Paisley and Crandon were each made more than three years

prior to the March 25, 1985 effective date of the statute of

limitations tolling agreement executed by Boeing on March

22, 1985. The government actually knew, or with the exer-

cise of reasonable diligence could have known, all the facts

underlying its cause of action as to the payments to Messrs.

45a

Jones, Reynolds, Paisley and Crandon, more than three years

prior to March 25, 1985. Accordingly, the government’s claim

for damages against Boeing as to these individuals arising from

these payments is time barred.

For reasons set forth above, judgment on all counts will be

entered for the defendants.

An appropriate order shall issue.

/s/ Claude M. Hilton

United States District Judge

Alexandria, Virginia

Date: February 17, 1987

46a

APPENDIX D

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

ALEXANDRIA DIVISION

UNITED STATES OF AMERICA

Plaintiff,

CIVIL ACTION

NO. 86-0829-A

THE BOEING COMPANY, INC.,

MELVYN R. PAISLEY,

THOMAS K. JONES,

HERBERT A. REYNOLDS

HAROLD KITSON JR. AND

LAWRENCE H. CRANDON,

Defendants.

i A ae A ae ee a a ee a

ORDER

Pursuant to the attached Findings of Fact and Conclusions

ot Law, it is hereby:

ORDERED that judgment is entered on behalf of the defen-

dants, and this case is DISMISSED.

/s/ Claude M. Hilton

United States District Judge

Alexandnia, Virginia

February 17, 1987

47a

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

ALEXANDRIA DIVISION

Date: August 14, 1990

Present: DORIS R. CASEY

United States of America

Vv.

CIVIL ACTION

NO. 86-0829-A

The Boeing Company, Inc.,

et al.

)

ORDER that pltf shall pay to deft. L. Crandon $65,503.80

in attorneys fees and in costs incurred as a result of legal

representation performed on his behalf by the firm of Venable,

Baetjer, Howard & Civiletti.

Pitf. shall pay to defts T. Jones, Harold Kitson, Jr., Melvyn

Paisley and H. Reynolds $423,586.66 in attorneys fees and

costs incurred as a result of legal representation performed

on their behalf by the firm of Hughes Hubbard & Reed.

Pitf shall pay to defts T. Jones, H. Kitson, Jr., and Herbert

Reynolds an additional $6,457.50 in attorneys fees and costs

incurred as a result of legal representation performed by P.

Lacovara, Esq., individually.

Pitf. shall pay to deft. M. Paisley an additional $5,084.62

in attorneys fees & costs for legal representation of Laxalt,

Washington, Perito & Dubuc.

48a

UNITED STATES OF AMERICA

EASTERN DISTRICT OF VIRGINIA

I, DORIS R. CASEY Clerk of the United States District

Court for the Eastern District of Virginia, do hereby

certify that the foregoing is a true extract of the order

entered in the case of United States of America v. The

Boeing Co., Inc., et al., Civil Action No. 86-0829-A as

will more fully appear from the records of the said

Clerk’s Office.

IN TESTIMONY WHEREOF, I have hereunto set my

hand and affixed the seal of the said District Court at

Alexandria, Virginia this 11th day of October, A.D.,

1990.

DORIS R. CASEY

By: /s/ Sandra J. Sacchetti

Deputy Clerk

49a

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

ALEXANDRIA DIVISION

Date: October 11, 1990

Present: DORIS R. CASEY

United States of America )

)

v. ) CIVIL ACTION

The Boeing Company, Inc., ) NO. 86-0829-A

etal., )

)

ORDER that pltf. shall pay to Hughes Hubbard & Reed,

counsel for various individual defts., $44,669.21 in attorney

fees & costs incurred as a result of legal representation of

the individual defts in connection with litigation of defts’ mo-

tion for attorney fees & costs;

Pitf shall pay to Venable, Baetjer, Howard & Civiletti,

counsel for deft. L. H. Crandon, $1638.30 in attorney fees

& costs incurred in connection with litigation of defts’ motion

for attorney fees & costs;

FURTHER ORDERED that the Clerk shall enter judgment

against the United States in accordance with this Order and

the Court’s Order filed on August 14, 1990 in this action.

50a

UNITED STATES OF AMERICA

EASTERN DISTRICT OF VIRGINIA

I, DORIS R. CASEY Clerk of the United States District

Court for the Easterrn District of Virginia, do hereby

certify that the foregoing is a true extract of the order

entered in the case of United States of America v. the

Boeing Company, Inc., et al., Civil Action No. 86-9829-A

as will more fully appear from the records of the said

Clerk’s Office.

IN TESTIMONY WHEREOF, I have hereunto set my

hand and affixed the seal of the said District Court at

Alexandria, Virginia this 11th day of October, A.D.,

1990.

DORIS R. CASEY

By:/s/Sandra J. Sacchetti

Deputy Clerk

5la

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

ALEXANDRIA DIVISION

UNITED STATES OF AMERICA

)

Plaintiff, )

)

v. ) CRIMINAL

) NO. 86-0829-A

THE BOEING COMPANY, INC., ET Als; )

Defendants. )

)

ORDER

This matter came before the Court on defendants’ motion

and second supplemental application for attorneys’ fees and

costs. For the reasons stated in the memorandum opinion fil-

ed in this action on August 14, 1990, it is hereby

ORDERED that plaintiff shall pay to Hughes Hubbard & Reed,

counsel for various individual defendants, $6,988.00 in attorney

fees and costs incurred as a result of legal representation of

the individual defendants in opposing the government’s tno-

tion for reconsideration.

/s/ Claude M. Hilton

United States District Judge

Alexandria, Virginia

October 2, 1990

copies to: counsel of record

52a

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

ALEXANDRIA DIVISION

UNITED STATES OF AMERICA

)

Plaintiff, )

)

v. ) CRIMINAL

) NO. 86-0829-A

THE BOEING COMPANY, INC., et al., )

Defendants. )

)

ORDER

This matter came before the court on the plaintiff’s motion

for reconsideration of its award of attorney’s fees and costs.

It appearing to the court that the issue was properly decided,

and for reasons stated in the Memorandum Opinion and Order

entered on August 14, 1990, it is hereby

ORDERED that the plaintiff's motion for reconsideration

is DENIED.

/s/ Claude M. Hilton

United States District Judge

Alexandria. Virginia

September 7, 1990

copies to: counsel of record

53a

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

ALEXANDRIA DIVISION

UNITED STATES OF AMERICA

)

Plaintiff, 4

)

v. ) CIVIL ACTION

) NO. 86-0829-A

THE BOEING COMPANY, INC., et al., )

Defendants. )

ORDER

This matter came before the Court on defendants’ motion

for attorney’s fees and costs. For the reasons stated in the

accompanying memorandum opinion, it is hereby;

ORDERED that defendants’ motion is GRANTED and it

is further ORDERED that:

Plaintiff shall pay to defendant Lawrence Crandon

$65,503.80 in attorneys fees and in costs incurred as a result

of legal representation performed on his behalf by the firm

of Venable, Baetjer, Howard & Civiletti;

Plaintiff shall pay to defendants Thomas K. Jones, Harold

Kitson, Jr., Melvyn R Paisley and Herbert Reynolds

$423,586.66 in attorneys fees and costs incurred as a result

~ of legal representation performed on their behalf by the firm

of Hughes Hubbard & Reed;

54a

Plaintiff shall pay to defendants Thomas K. Jones, Harold

Kitson, Jr., and Herbert ReynoNs an additional $6,457.50 in

attorneys fees and costs incurred as a result of legal represen-

tation performed by Philip A. Lacovara, Esq., individually;

Plaintiff shall pay to defendant Melvyn R. Paisley an addi-

tional $5,084.62 in attorneys fees and costs incurred as a result

of legal representation performed on his behalf by the firm

of Laxalt, Washington, Perito & Dubuc; and

Defendants shall submit their requests for fees and costs

associated with arguing this motion within ten days. Plaintiff

then shall have five days in which to respond.

's/Claude M. Hilton

UNITED STATES DISTRICT JUDGE

Alexandna, Virginia

August 14, 1990

55a

APPENDIX E

FILED: March 3, 1992

JUDGMENT

UNITED STATES COURT OF APPEALS

for the

Fourth Circuit

No. 90-3510

CA-86-829-A

UNITED STATES OF AMERICA

Plaintiff-Appellant

MELVYN R. PAISLEY; THOMAS K. JONES:

HERBERT A. REYNOLDS; HAROLD KITSON, JR.;

LAWRENCE H. CRANDON

Defendants-Appellees

and

THE BOEING COMPANY, INC.

Defendant

No. 90-3513

CA-86-829-A

UNITED STATES OF AMERICA

Plaintiff-Appellant

MELVYN R. PAISLEY; THOMAS K. JONES:

HERBERT A. REYNOLDS; HAROLD KITSON. JR.

LAWRENCE H. CRANDON

Defendants-Appellees

and

THE BOEING COMPANY, INC.

Defendant

career

56a

Appeals from the United States District Court for the

Eastern District of Virginia at Alexandria

These cases were heard by the Court on the record from

the District Court and were argued by counsel.

The Court reverses the judgement of the District Court.

/SJJOHN M. GREACEN

Clerk

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.