decided as amended october 31 1983.: August 11, 1983.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA.
Adams and Garth, Circuit Judges and Harold A. Ackerman, District Judge.*fn*
Each party to a lawsuit ordinarily bears its own attorney's fees unless a statute or decisional authority provides otherwise. This principle is known as the American Rule. See Hensley v. Eckerhart, 461 U.S. 424, 103 S. Ct. 1933, 76 L. Ed. 2d 40, 51 U.S.L.W. 4552 (1983); Alyeska Pipeline and Service Co. v. Wilderness Society, 421 U.S. 240, 247, 258-59, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975); Hall v. Cole, 412 U.S. 1, 5, 36 L. Ed. 2d 702, 93 S. Ct. 1943 (1973). One of the exceptions to the American Rule authorizes a federal court to award counsel fees to a successful party "when his opponent has acted 'in bad faith, vexatiously, wantonly, or for oppressive reasons. '" Hall v. Cole, supra, 412 U.S. at 5, quoting in part 6 J. Moore, Moore's Federal Practice, § 54.77, at 1709 (2d ed. 1972); Skehan v. Board of Trustees of Bloomsburg State College, 538 F.2d 53, 57 (3d Cir. 1976) (Skehan I)(in banc) (opinion on remand from the Supreme Court).
The present dispute between plaintiff Perichak and Westinghouse Electric Corp. (Westinghouse) involves the application of the "bad faith" exception to the American Rule. The controversy giving rise to this issue came about when Perichak was discharged by Westinghouse for having taken property belonging to Westinghouse. Perichak then brought an action against Westinghouse and the International Union of Electrical, Radio and Machine Workers, Local No. 601 (the "Union"), in which he was unsuccessful. Westinghouse, claiming that Perichak's action was brought in "bad faith," petitioned for attorney's fees. The district court refused to award attorney's fees to Westinghouse, leading to this appeal.*fn1 Because the record appears clear that the district court, in rejecting Westinghouse's petition for fees abused its discretion, we reverse and remand for a determination of a proper fee award.
As a preliminary matter, it is necessary to explain the correct standard of review of determinations by a district court with respect to the awarding of attorney's fees under the "bad faith" exception to the American rule.*fn2 It has been established that a district court's finding of "bad faith" or the absence of "bad faith" in a particular case is a factual determination and may be reversed only if it is clearly erroneous. Fed. R. Civ. P. 52(a); Skehan v. Board of Trustees of Bloomsburg State College, 590 F.2d 470, 495 (3d Cir. 1978) (Skehan II);*fn3 see McCandless v. Great Atlantic and Pacific Tea Co., 697 F.2d 198, 201 (7th Cir. 1983) ("The district court expressly found that Wolley was guilty of bad faith. Our task, then, is to determine if this finding is clearly erroneous."); Nemeroff v. Abelson, 704 F.2d 652, 660 (2d Cir. 1983) (Nemeroff II); Nemeroff v. Abelson, 620 F.2d 339, 347 (2d Cir. 1980)(Nemeroff I) (district court's finding that action was commenced in bad faith was clearly erroneous); see also Lipsig v. National Student Marketing Association, 214 U.S. App. D.C. 1, 663 F.2d 178, 181-82 (D.D.C. 1980); Rollison v. Hotel, Motel, Restaurant and Construction Camp Employees, Local No. 879, 677 F.2d 741, 747-48 (9th Cir. 1982).*fn4
Here, as is discussed in a later part of this opinion, the district court in its opinion rendered on the merits of Perichak's claim against Westinghouse, implicitly found that Perichak's action had been brought in "bad faith." Such a determination, while essential to bring the proceeding within the framework of Hall v. Cole, supra and Christiansburg Garment Co. v. Equal Employment Opportunity Commission, 434 U.S. 412, 54 L. Ed. 2d 648, 98 S. Ct. 694 (1978), if the successful party (here Westinghouse) is to be authorized fees, does not end our inquiry.
It is equally well established that the district court has wide discretion to award or to deny fees pursuant to the "bad faith" exception to the American rule. Alyeska Pipeline Service Co., supra, 421 U.S. at 257-59; Hall v. Cole, supra, 412 U.S. at 5; In re Boston & Providence Railroad Corp., 501 F.2d 545, 549-50 (1st Cir. 1974). In order to properly exercise this discretion, the district court must balance the equities between the parties and "may award attorney's fees when the interests of justice so require. . . . [Indeed,] federal courts do not hesitate to exercise this inherent equitable power whenever 'overriding considerations indicate the need for such a recovery. '" Hall v. Cole, supra, 412 U.S. at 5, quoting in part Mills v. Electric Auto-Lite Co., 396 U.S. 375, 391-92, 24 L. Ed. 2d 593, 90 S. Ct. 616 (1970). Thus, a district court may, in its discretion, refuse to award attorney's fees even where it finds the existence of bad faith, if, in balancing the equities, it nevertheless determines that an award in a particular case would not serve the interests of justice.*fn5
Consequently, it is clear that any review of the district court's determination must proceed in two steps. First it must be determined whether the plaintiff's action was brought in "bad faith." If it was not, no fees under the "bad faith" exception may be awarded. If, however, a finding of "bad faith" is made, then the district court must proceed to exercise its discretion either in favor of or against the successful party who seeks fees. In almost all situations, and as is the case here, the district court's "bad faith" finding will be predicated upon the record developed at the merits hearing, for it is normally at that proceeding that the bona fides of the plaintiff's claims are disclosed.
The discretionary determination to award or deny fees made by the district court must also take content from the merits proceeding. While additional and extraneous factors may be brought to the district court's attention subsequent to the merits proceeding and thus inform the district court as to its discretion, it is apparent that the merits action which underlies and has given rise to the fee petition and which has given rise to the fee petition, must be scrutinized carefully "to spare members of the public from the expense of defending against baseless allegations." Nemeroff II, supra, 704 F.2d at 654. See, e.g., Dougherty v. Lehman, 711 F.2d 555 (3rd Cir. 1983) (no fees awarded under Equal Access to Justice Act, 28 U.S.C. § 2412(d) (Supp. IV 1980) where the government's position in opposing claims was held to be substantially justified).
Once "bad faith" has been demonstrated, the burden of proof would then shift to the party now proved to have acted in "bad faith." That party must then satisfy the burden of proving mitigating factors and circumstances warranting the exercise of discretion against the award of attorney's fees, despite the fact that "bad faith" has been found. Cf. Hall v. Cole, supra, 412 U.S. at 5; McCandless, supra, 697 F.2d at 202; Fisher v. Fashion Institute of Technology, 87 F.R.D. 485 (S.D.N.Y. 1980) (attorney's fees awarded against "bad faith" plaintiff reduced in light of income of plaintiff and her need to support dependents); J. H. Wigmore, Wigmore on Evidence (Chadbourn rev. 1981) § 2486; McCormick, McCormick on Evidence (2d ed. 1972) § 337, at 785-89.
Were it otherwise, the party seeking attorney's fees would be charged with anticipating circumstances which might bear on the district court's discretion, when such circumstances may be beyond its knowledge. Such a requirement, if imposed, would charge the petitioning party with a negative burden of proof. A party seeking attorney's fees would, in effect, be required to prove facts negating the presence of discretionary circumstances, the nature of which it could not know in advance. Indeed, it is beyond dispute that in cases such as this one the party against whom fees are sought to be assessed (here, Perichak) has almost exclusive knowledge of those mitigating circumstances which might persuade the district court to deny the petition for attorney's fees. As has often been repeated by courts in analogous circumstances, "where the facts with regard to an issue lie peculiarly in the knowledge of a party, that party has the burden of proving the issue." McCormick on Evidence, supra, § 337, at 787; see id., at 786 & 16.
Thus, once the party charging "bad faith" has succeeded in establishing that fact, the submissions filed or testified to in opposition to the fee application must be sufficiently substantial to overcome the "bad faith" determination and to provide grounds for the district court's exercise of discretion against awarding fees. Whatever may be the district court's ruling, it "should withstand appellate scrutiny unless appellants can either vitiate the court's critical factual findings or show that the decision to award [or to deny] attorney's fees exceeded a reasonable and restrained exercise of discretion." Nemeroff II, supra, 704 F.2d at 656.
Therefore, applying these precepts to the instant appeal, it is evident that the record on the merits proceeding must be examined in the first instance to ascertain whether Perichak's claim was found to have been brought "in bad faith, vexatiously, wantonly, or for oppressive reasons," and if found to have been brought in "bad faith," that finding must survive the clearly erroneous test on review. Second, the record of the fee proceeding must be reviewed in light of both the merits record and the fee ...