200 F.3d 1076 (7th Cir. 2000)
United States of America,    Plaintiff-Appellee,v.Hallmark Construction Company,    Defendant-Appellant.
No. 99-1948
In the  United States Court of Appeals  For the Seventh Circuit
Argued December 1, 1999Decided January 11, 2000

Appeal from the United States District Court   for the Northern District of Illinois, Eastern Division.  No. 97-C-3682--Suzanne B. Conlon, Judge.
Before Bauer, Cudahy and Flaum, Circuit Judges.
Flaum, Circuit Judge.
The United States filed  suit on behalf of the Army Corps of Engineers  (the "Corps") charging Hallmark Construction  Company ("Hallmark") with discharging pollutants  into a wetland in violation of the Clean Water  Act ("CWA"), 33 U.S.C. sec. 1251 et seq. The  trial court found in favor of Hallmark on the  merits but denied Hallmark the attorney's fees it  requested under the Equal Access to Justice Act  ("EAJA"), 28 U.S.C. sec. 2412. Hallmark now  appeals the denial of attorney's fees. For the  reasons stated herein, we remand.

I.  BACKGROUND

1
In 1988, Hallmark purchased a plot of land  known as Area B, a natural topographical  depression situated in the middle of the Swift  Research Farm in Frankfort, Illinois. In 1989,  Hallmark began a construction project on Area B  that involved filling some parts of the  depression. It is a violation of the CWA to  discharge pollutants into an area identified as  a wetland without a permit or some form of  mitigation. Therefore, in 1990, Hallmark hired  Planning Resources, Inc. ("PRI") to identify  potential wetlands that its construction might  affect. PRI identified Area B as a "farmed  wetland." Hallmark promptly provided the PRI  report to the Corps, and the Corps requested that  Hallmark develop a plan to mitigate the damage  caused by its discharge of pollutants into Area  B. In 1995, Hallmark employed SDI Consultants,  Ltd. ("SDI") to assist in developing a mitigation  plan for Area B. However, SDI came to the  conclusion that Area B was not a wetland and  required no mitigation. Hallmark provided SDI's  report to the Corps. However, the Corps continued  to believe that Area B was a wetland and to  demand mitigation.


2
On May 19, 1997, the Corps, through the United  States Attorney, filed a complaint against  Hallmark alleging that Hallmark had violated the  CWA by discharging pollutants into Area B.  Hallmark contested this allegation, arguing that  Area B was not a wetland. Hallmark provided the  Corps with documents, studies and the deposition  testimony of witnesses to support its contention  that Area B was not a wetland. Hallmark's chief  argument was that Area B was not inundated with  water for a long enough period of time to qualify  as a wetland under applicable wetland delineation  criteria. The Corps persisted with its complaint,  and Hallmark moved for summary judgment. The  district court initially concluded that the Corps  was not empowered to enforce the CWA against  Hallmark and granted summary judgment for  Hallmark on this basis. Then, on a motion from  the government to reconsider, the district court  reversed its ruling and denied summary judgment  to Hallmark. In its second summary judgment  order, the district court determined that, among  other things, there were genuine factual disputes  concerning the attractiveness of Area B as a  habitat for migratory birds and the actual length  of time for which Area B was inundated during the  growing season. However, the district court also  stated that "[t]he United States may face an  uphill battle in convincing a jury to credit its  interpretation of [the evidence]." The court then  set the case for a bench trial.


3
At this point, Hallmark's attorneys filed a  motion with the court for leave to withdraw  because Hallmark was unable to pay its attorney's  fees, but the trial court denied this motion.  Hallmark's attorneys went forward to ably  represent Hallmark at trial, and the district  court ruled in favor of Hallmark. In its merits  opinion, the district court stated that much of  the Corps' evidence rested on speculation and  conjecture and found that the Corps'  determination that Area B was a wetland was an  arbitrary and capricious application of the CWA.  Hallmark then petitioned to recover attorney's  fees from the government under the EAJA. The  district court denied Hallmark's motion, finding  that the government's position in the litigation  had been substantially justified. Hallmark now  appeals.

II.  DISCUSSION

4
Hallmark appeals only the district court's  denial of its motion for attorney's fees under  the EAJA. We review the district court's decision  in this matter for an abuse of discretion. Pierce  v. Underwood, 487 U.S. 552, 558 (1988); Jackson  v. Chater, 94 F.3d 274, 278 (7th Cir. 1996).  However, "this deferential standard does not  dilute our meaningful examination of the district  court's decision." Jackson, 94 F.3d at 278; see  Marcus v. Shalala, 17 F.3d 1033, 1037 (7th Cir.  1994).


5
The EAJA provides that a district court may  award attorney's fees where 1) the claimant is a  "prevailing party"; 2) the government's position  was not substantially justified; 3) no "special  circumstances make an award unjust"; and 4) the  fee application is submitted to the court within  30 days of final judgment and is supported by an  itemized statement. 28 U.S.C. sec. 2412(d)(1)(A),  (B); Commissioner, INS v. Jean, 496 U.S. 154, 158  (1990). It is uncontested that Hallmark was the  prevailing party and that the fee application was  timely filed. In addition, no "special  circumstances" are alleged. Therefore, the only  question for us on appeal is whether the district  court abused its discretion in finding that the  government's position was substantially  justified.


6
Ordinarily, we give the district court's  conclusion on the question of substantial  justification considerable deference because "the  district court may have insights not conveyed by  the record, into such matters as whether  particular evidence was worthy of being relied  upon, or whether critical facts could easily have  been verified by the Government." Pierce, 487  U.S. at 560. However, in this case, it is not  apparent that the district court applied the  proper legal standard to arrive at its conclusion  regarding the justification of the government's  position. Therefore, deference to that court's  special competence in evaluating factual matters  does not end our inquiry.


7
The reason given by the trial court for its  denial of Hallmark's petition is as follows:


8
While this court found Hallmark's evidence  regarding Area B more persuasive, the  government's case was far from baseless. There  existed a genuine dispute over which reasonable  minds could differ. For that reason, Hallmark's  attempts to secure judgment prior to trial  failed. . . . Failure to prevail at trial does  not necessarily mean that the government's  litigative position was unreasonable or  unjustified.


9
Order Denying Attorney's Fees, April 5, 1999.  This brief statement of the district court's  reasoning might be satisfactory in some cases.  However, it is an insufficient explanation of  that court's conclusion in this case. Although  there is no presumption that a prevailing party  against the government will recover attorney's  fees under the EAJA, Marcus, 17 F.3d at 1036, the  government bears the burden of proving that its  position meets the substantially justified  standard, id., see also Jackson, 94 F.3d at 278.  In this case, the trial court had found in its  merits opinion that "[t]he Corps' conclusion  [that Hallmark violated the CWA] was arbitrary  and capricious because it was not based on a  consideration of the relevant factors and  evidence." United States v. Hallmark Constr. Co.,  30 F.Supp. 2d 1033, 1041 (N.D. Ill. 1998). The  district court also had determined that "[m]uch  of the government evidence rested on speculation  and conjecture." Id. at 1039. While these  conclusions alone may not mandate an award of  attorney's fees, they do raise the question of  how the government was able to prove the  substantial justification of its position in  light of the district court's ultimate findings.  See Marcus, 17 F.3d at 1038 (noting that strong  language against the government's position in an  opinion discussing the merits of a key issue is  evidence in support of an award of EAJA fees);  Cummings v. Sullivan, 950 F.2d 492, 498 (7th Cir.  1991) (finding that "the closeness of the  question is, in itself, evidence of substantial  justification"). Where, as here, the trial  court's merits opinion so strongly favors the  defendant against the government, a more thorough  explanation for denying attorney's fees to the  prevailing party is warranted.


10
We recognize that the mere finding that the  government's position was arbitrary and  capricious does not mandate an award of  attorney's fees under the EAJA. The outcome of a  case is not conclusive evidence of the  justification for the government's position. See  Pierce, 487 U.S. at 569 ("Conceivably, the  Government could take a position that is not  substantially justified, yet win; even more  likely, it could take a position that is  substantially justified, yet lose."). Similarly,  the stage of the proceedings at which the case is  disposed of also does not mandate a particular  finding on the issue of attorney's fees. See id.  at 568-69 (explaining that the fact that the  government was unable to survive summary judgment  does not mandate an award of attorney's fees).  While the district court may consider objective  criteria such as these when they are relevant, we  caution that these objective factors are rarely  conclusive. See id. at 568-69. It is more  important for the district court to examine "the  actual merits of the Government's litigating  position." Id. at 569. This analysis will vary  considerably with the circumstances of each case.  However, it is rare that a single factor will be  dispositive of whether the government's position  was substantially justified, and the district  court's analysis should contain an evaluation of  the factual and legal support for the  government's position throughout the entire  proceeding. We find the district court's brief  description of its reasoning in this case  especially troubling, as we are left with the  impression that the mere fact that the government  succeeded in surviving summary judgment was  central to the trial court's determination that  its position was substantially justified.


11
While the resolution of the attorney's fees  question "'should not result in a second major litigation,'"  Pierce, 487 U.S. at 563 (quoting Hensley v.  Eckerhart, 461 U.S. 424, 437 (1983)), when  considering this issue the district court must  reexamine the legal and factual circumstances of  the case from a different perspective than that  used at any other stage of the proceeding, see  Cummings, 950 F.2d at 498 (stating that  "substantial justification" and "substantial  evidence" are different standards used at  different stages of the proceeding); see also  Pierce, 487 U.S. at 568-69 (noting that  substantial justification is not equivalent to  the summary judgment standard). This Court has  described the substantial justification standard  as requiring that the government show that its  position was grounded in "'(1) a reasonable basis  in truth for the facts alleged; (2) a reasonable  basis in law for the theory propounded; and (3)  a reasonable connection between the facts alleged  and the legal theory advanced.'" Phil Smidt &  Son, Inc. v. NLRB, 810 F.2d 638, 642 (7th Cir.  1987) (quoting Donovan v. Dial America Mkting,  Inc., 757 F.2d 1376, 1389 (3d Cir. 1985)).1 In  addition, there is also a certain element of  policy involved in the award of attorney's fees  under the EAJA. The potential threat of having to  pay for the litigation costs of the opposing  party may serve as an encouragement to government  agencies to investigate, prepare and pursue  litigation against private parties in a  professional and appropriate manner. Likewise,  the potential for recovering the expenses a  private party puts forward to oppose the  government encourages members of the public to  assist in the "valuable public service [of]  improving the efficiency of government  operations." Gotches v. Heckler, 773 F.2d 108,  111 (7th Cir. 1985).


12
In making a determination of substantial  justification, the district court must examine  the government's conduct in both the  prelitigation and litigation contexts. See  Marcus, 17 F.3d at 1036 ("[F]ees may be awarded  in cases where the government's prelitigation  conduct was not substantially justified even  though its litigating position may have been  substantially justified and vice versa."). For  example, we have held that an EAJA award may be  justified where an agency knows before trial that  there is conflicting evidence on a key point it  is required to prove and it "fail[s] to take  adequate measures to assess that evidence." Phil  Smidt, 810 F.2d at 643. In this case, the  government apparently had full knowledge before  trial of Hallmark's conflicting evidence  regarding the central issue of the inundation  period for Area B. We would expect the district  court's attorney's fees opinion to address, among  other things, whether it was reasonable for the  government to proceed to trial if it had  adequately assessed Hallmark's computer modeling  and eye-witness testimony as compared to its own  evidence on this issue.


13
The district court's analysis must not end  here, however. A determination of substantial  justification requires the district court to  examine the position the government took at the  litigation stage as well. For example, we have  concluded that "even if an agency's legal  argument is perfect . . . , the agency may still  be liable for costs, fees and expenses under the  EAJA if the agency has knowledge that the  presumed facts supporting its position are  without merit." Phil Smidt, 810 F.2d at 642. In  this case, the government was unable to prove at  trial the required minimum 15 day inundation  period. We would expect the district court's  attorney's fees opinion also to address whether  the government was substantially justified in  pressing forward with the suit given the factual  support it had for the legal elements it was  required to prove.


14
Finally, we note that the trial court does not  make separate determinations regarding each stage  but "arrive[s] at one conclusion that  simultaneously encompasses and accommodates the  entire civil action." Jackson, 94 F.3d at 278.  This global assessment comprehends that the  district court will examine not simply whether  the government was substantially justified in its  position at the beginning or end of the  proceedings, but whether the government was  substantially justified in continuing to push  forward at each stage. See Quality C.A.T.V., Inc.  v. NLRB, 969 F.2d 541, 545 (7th Cir. 1992)  (holding that the government's position was  substantially justified only up to the point in  the proceedings at which it became apparent that  its theory was "unsupportable"). We understand  that the standard for evaluating the  appropriateness of awarding attorney's fees under  the EAJA is somewhat nebulous. It is for this  reason that we require a thorough explanation of  the reasoning behind the district court's  decision in cases such as the one before us,  where the district court's conclusion on the  merits that the government's position was  "arbitrary and capricious" appears, at least on  the surface, to be at odds with its subsequent  conclusion that the government's position was  "substantially justified."

III.  CONCLUSION

15
We cannot determine on the record before us  whether the district court abused its discretion  in denying attorney's fees to Hallmark, the  prevailing party in this matter. Therefore, we  Remand for the district court to reexamine the  issue of attorney's fees consistent with this  opinion.



Notes:


1
 We are aware that Phil Smidt was decided one year  before Pierce, where the Supreme Court addressed  the proper application of the substantial  justification standard. However, the Phil Smidt  formulation was an elaboration on the term having  "a reasonable basis in law and fact" that the  Supreme Court expressly found was an acceptable  interpretation of "substantial justification."  See Pierce, 487 U.S. at 565 ("[Our  interpretation] is no different from the  'reasonable basis both in law and fact'  formulation adopted by the Ninth Circuit and the  vast majority of other Courts of Appeals.")  (citing Ramos v. Haig, 716 F.2d 471, 473 (7th  Cir. 1983)).


