Appellants (collectively “the Wilderness Society”) appeal the denial of their application for attorneys’ fees pursuant to the Equal Access to Justice Act (“the EAJA”). 28 U.S.C. § 2412(d)(1)(A). The Wilderness Society maintains that the district court abused its discretion in finding: (1) that the Wilderness Society was not a “prevailing party” within the meaning of the EAJA, and (2) that the Service’s position was substantially justified. We reverse.
Background
The present action for attorneys’ fees stems from a citizen’s enforcement suit against appellees (collectively “the Service”). The Wilderness Society claimed that the Service violated the National Environmental Policy Act (“NEPA”) by faffing to examine the effects of cattle grazing on the Hart Mountain Refuge (“the Refuge”) and to dis-, close such findings in an Environmental Impact Statement (“EIS”).' Furthermore, the Service.allegedly violated the National Wildlife Refuge System Administration Act (“the Refuge Act”), Executive Order 7528, the Migratory Bird Conservation Act, the Wilderness Act, the Administrative Procedure Act, and Fish & Wildlife Service guidelines by faffing to prepare compatibility determinations for grazing on the Refuge and by allowing grazing that was incompatible with the Refuge’s purposes.
On August 22, 1991, .the magistrate in charge of this case1 recommended dismissal of the Wilderness Society’s suit. The magistrate found that, because the Service was in the process of formulating a management plan for the Refuge and had not issued any grazing permits for the 1991 season, the case was not ripe for review. The district court did not enter judgment on the merits because the parties entered into a Stipulation of Dismissal Without Prejudice. The Service formally agreed to prepare an EIS and a compatibility determination, and to refrain from issuing any grazing permits until thirty days after the. adoption of a management plan.
The stipulation also provided that the Wilderness Society “may file their bill of costs and application for award of attorney fees under 28 U.S.C. § 2412.” The district judge denied the Wilderness Society’s application seeking $51,691 in attorneys’ fees. We review this denial as an abuse of discretion. Thomas v. Peterson, 841 F.2d 332, 334 (9th Cir.1988).
Discussion
The EAJA provides that a court shall award attorneys’ fees to a “prevailing party” in a civil, action brought against the United States “unless the court finds that the position of the United States was substantially justified or that special circumstances make the award unjust.” 28 U.S.C. § 2412(d)(1)(A).
*386I. Prevailing Party
Although the Wilderness Society and the Service reached an out-of-court settlement, “[a] party need not obtain formal relief on the merits to be deemed a prevailing party.” Oregon Envtl. Council v. Kunzman, 817 F.2d 484, 497 (9th Cir.1987). The Wilderness Society may be deemed a prevailing party if it can demonstrate “a clear, causal relationship between the litigation brought and the practical outcome realized.” McQuiston v. Marsh, 707 F.2d 1082, 1085 (9th Cir.1983) (emphasis in original) (citation omitted). We must inquire whether the Wilderness Society’s lawsuit was a “material factor” or played a “catalytic role” in bringing about the desired outcome. Kunzman, 817 F.2d at 497. We must then determine whether “the benefit achieved was required by law and was not a gratuitous act of the defendant.” Greater Los Angeles Council on Deafness v. Community Television, 813 F.2d 217, 220 (9th Cir.1987).
A. Material or Catalytic Factor
The Wilderness Society argues that the district court clearly erred in finding that the lawsuit was not a material or catalytic factor in prompting the Service to conduct an EIS and a compatibility study and to prohibit grazing on the Refuge pending their completion. It maintains that the catalytic force of the lawsuit is demonstrated by two factors: (1) the chronology of the case, and (2) the extraordinary circumstances surrounding the Service’s decisions to undertake the actions urged by the Wilderness Society.
1. Chronology of the Case
“[C]hronological events are important, although not a definitive factor, in determining whether or not a defendant can be reasonably inferred to have guided his actions in response to a plaintiffs- lawsuit.” Braafladt v. Board of Governors of the Oregon State Bar Ass’n, 778 F.2d 1442, 1444 (9th Cir.1985).
The Wilderness Society filed its action on February 7, 1991. At this time, the Service allowed grazing on the Refuge but was considering “temporary” reductions in grazing levels because of drought conditions. On February 6, the Service had urged the grazing permittees to find alternate grazing sources because of the drought conditions. The Service had previously notified them that “[c]ontinued grazing during the remainder of this very dry period can occur only after the needs of [fish and wildlife] resources are met.” In the spring, the permit-tees elected to forego their permits for the 1991 season.
In addition, the Service was in the process of preparing a general management plan initiated in February 1989. Two earlier recommendations to prepare a plan, in 1984 and in 1988, had not resulted in the formulation of any plan. Nonetheless, the Service had taken some steps toward realizing the goal of the 1989 recommendation. The Service had commenced public “scoping” meetings in January 1991 which were attended by a total of three hundred people. The Service had also hired two new staff members, albeit seasonal biotechnicians with only “limited experience or expertise in the setup of studies and the analysis of data.”
In August 1991, seven months after the Wilderness Society filed its lawsuit, the Service decided to prepare an EIS analyzing grazing on the range. The Service hired three full-time biologists for the Refuge staff, upgraded three other scientific positions, and added $200,000 to the Refuge’s budget — a 33% increase in funds.
The Service also decided to prohibit grazing on the Refuge in 1992. Prior to August, the Service had maintained that “requests for grazing will be reviewed on a case-by-case basis until such time as we have completed refuge management plans and associated NEPA documentation.”
The Wilderness Society maintains that this sequence of events demonstrates that the Service made little headway in addressing the environmental needs of the Refuge prior to the initiation of the lawsuit. The lawsuit, according to the Wilderness Society, was the catalyst causing the Service to cease grazing on the Refuge and to agree to prepare an EIS and a written compatibility determination.
*387The Service contends, to the contrary, that its decisions flowed logically from an ongoing planning process commenced prior to the lawsuit. According to the Service, the decision to complete an EIS was the result of the feedback received during the January 1991 public “scoping” process and from written comments from Refuge staff, and the decision to ban grazing during the 1992 season was designed to allow the Refuge to recover from the drought.
The district court was presented with the task of choosing between two interpretations of the same sequence of events. The court’s decision to credit the Service’s explanation is not implausible and, based upon this factor alone, the court’s decision would not be considered an abuse of discretion.
2. Extraordinary Circumstances ■■
Second, the Wilderness Society maintains that the decisions to complete an EIS and to ban grazing were normally within the province of the Refuge Manager, but that, in this ease, the decisions were made at a much higher level of management. The record indicates that these decisions were made by the Refuge Supervisor, in consultation with his own supervisor and the Regional Director. Furthermore, these upper-level managers did not consult at all with the Refuge Manager prior to banning grazing on the Refuge in 1992. The Wilderness Society contends that this suggests that the decisions were not motivated by drought concerns; rather, they were part of a deliberate attempt by high-level Service officials to avoid the precedential impact of the underlying-lawsuit.
The Wilderness Society’s position is supported by the testimony of Barry Reiswig, the Refuge Manager. Reiswig testified several times at deposition that the decisions to prepare an ElS and to prohibit interim grazing were part of the settlement of the lawsuit. Reiswig testified: “It’s my understanding that [the decision to prohibit grazing in 1992] was part of the court settlement between the Sierra Club and the service.” He later testified that the decision whether to allow or prohibit grazing in 1992 had been “precluded by the court settlement.”
Reiswig had previously been interviewed by a local newspaper and made similar comments regarding the effect of the lawsuit:
“Since cattle are not on the refuge, the' lawsuit (by the Sierra Club) is not appropriate. If cattle were put on the refuge before the (Environmental Impact Statement), before a compatibility study, the lawsuit would be in effect,” Reiswig said.
Permittees on the mountain voluntarily kept cattle off the refuge this year, due to drought conditions, and to allow U.S. Fish and Wildlife to forestall a suit by intrest [sic] groups seeking to permanently ban grazing there.
“We’re pleased with the suit in that, one, it doesn’t set a precedent to eliminate grazing nationwide ...,” he said.
The district court disregarded Reiswig’s statements on thé ground that Reiswig’s “understanding” was based on-comments from the Refuge Supervisor, Sanford Wilbur. At his deposition, Wilbur testified as follows:
A: ... the reasons for prohibiting [grazing] until after the planning process was complete was a combination of the drought situation, the fact that we had no permit-tees active on the refuge at that time who had not made other accommodations for at least the next season, and — and because of the controversy about the grazing overall. It was easier just to keep them off for a time. So probably sort of a three-pronged reason for doing that.
Q: And did you consider this lawsuit part of that controversy?
A: Certainly the lawsuit promoted the controversy.
The district court found that “in context, Wilbur’s statements cannot reasonably be construed as acknowledging that the lawsuit was a material factor or played a catalytic role in defendant’s decisions.”
An examination of the record, however, reveals no “context” that alters the plain meaning of Wilbur’s statements. Wilbur’s testimony does not contradict Reiswig’s testimony. To the contrary, it supports Reis-wig’s testimony that the lawsuit played a material role, in the decision to ban grazing on the Refuge. We are therefore “left with *388the definite and firm conviction that a mistake has been committed.” United States v. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). The district court clearly erred in finding that the Wilderness Society lawsuit was not a material or catalytic factor in the Service’s decision.
B. Not a Gratuitous Act
We therefore turn to the second prong of the “prevailing party” test:
If it has been judicially determined that the defendants’ conduct, however beneficial it may be to plaintiffs interests, is not required by law, then defendants must be held to have acted gratuitously and plaintiffs have not prevailed in a legal sense. For prevailing party purposes, a claim has a basis in law as long as it is not frivolous, unreasonable pr groundless. .
Sablan v. Department of Finance, 856 F.2d 1317, 1327 (9th Cir.1988) (quotations omitted).
We'find that the Wilderness Society has met this burden. The Refuge Act permits the use of a national wildlife refuge only upon a determination “that such uses are compatible with the major purposes for which such areas were established.” 16 U.S.C. § 668dd(d)(1)(A). Similarly, NEPA requires that “[a]n EIS must be prepared for action that may significantly affect the quality of the human environment.” Foundation for N. Am. Wild Sheep v. United States Dep’t of Agric., 681 F.2d 1172, 1177 n. 24 (9th Cir.1982) (emphasis in original). The Wilderness Society’s lawsuit cannot be considered “frivolous, unreasonable or groundless.” Sablan, 856 F.2d at 1327.
Having found that the Wilderness Society lawsuit was a material factor in the Service’s decisions and that the underlying claim for relief finds some basis in the law, we conclude that the district court abused its discretion in determining that the Wilderness Society was not a prevailing party within the meaning of the EAJA.
II. Substantially Justified
As an alternative ground for its denial of attorneys’ fees, the district court held: “Based on the [magistrate’s] findings and recommendation recommending dismissal of plaintiffs’ action on ripeness grounds, I conclude that the government’s position in moving to dismiss on procedural grounds was substantially justified.” The court was correct in finding that the Service’s procedural litigation defense was substantially justified. The court erred, however, in ending its analysis at this point.
Under the EAJA, the “position of the United States” includes both the government’s litigating position and “the action or failure to act by the agency upon which the civil action is based.” Abela v. Gustafson, 888 F.2d 1258, 1264 (9th Cir.1989). In other words, to determine whether the position of the Service was substantially justified, we must consider not only the “validity of the [government’s] action in court”, but also the reasonableness of “the underlying government action at issue.” Bay Area Peace Navy v. United States, 914 F.2d 1224, 1230 (9th Cir.1990) (quotations omitted).
The Service argues that its obligations under the Refuge Act were ambiguous and that it was substantially justified in allowing grazing on the Refuge. See id. at 1231 (holding that absence of adverse precedent is one of several factors to be considered). “Where the Government can show that its case had a reasonable basis both in law and fact, no award will be made.” League of Women Voters v. FCC, 798 F.2d 1255, 1257 (9th Cir.1986). We find, however, that the Service’s underlying actions in this case, including its failure to halt grazing on the Refuge prior to 1991, was not “justified to a degree that could satisfy a reasonable person.” Bay Area Peace Navy, 914 F.2d at 1230 (quotations omitted).
The Refuge Act provides that the Secretary of the Interior may “permit the use of any area within the [National Wildlife Refuge] System ... whenever he determines that such uses are compatible with the major purposes for which such areas were established.” 16 U.S.C. § 668dd(d)(l)(A). In the present case, the Service renewed annual grazing permits without regard to the incompatibility of grazing to the Refuge’s purposes. As early as December 1989, the Ser*389vice was aware that its grazing practices were damaging the Refuge. The Refuge Manager warned that “there' is no question that current grazing practices causing this damage are negatively impacting' fish and wildlife habitats and are (1.) in violation of the refuge’s executive orders and (2.) currently not compatible with the uses for which the refuges were established.”
The Refuge Manager’s report did not foreclose the possibility that the Service could formulate a grazing plan that would be compatible with purposes of the Refuge. Based upon this report, however, the Service had a duty to investigate the compatibility of grazing with the Refuge’s purposes prior to permitting grazing on the Refuge. Nonetheless, the Service continued its same practices, issuing grazing permits for 1990 without any compatibility determination. It made little headway in formulating a new management plan prior to the initiation of the Wilderness Society lawsuit in 1991. In light of the Refuge Manager’s report, we cannot find that the Service’s actions were substantially justified.2
In conclusion, we hold that the Wilderness Society was a prevailing party within the meaning of the EAJA and that the Service’s position was not substantially justified.3
REVERSED and REMANDED for further proceedings in accord with this judgment.
. Michael Hogan became a United States District Judge for the District of Oregon- on September 16, 1991. Prior to that time, he was a United States Magistrate with responsibility over this case.
. The dissent argues that the Service's failure to comply with the Refuge Act was substantially justified on the ground that the "ongoing activity” exception to NEPA requirements might also apply to Refuge Act requirements. We disagree. Neither the Service nor the dissent cites any caselaw in support of the proposition that a particular exception to NEPA is generally applicable to all environmental statutes.
In addition, we stress that our holding is limited to the facts of the present case: the Service renewed the grazing permits in 1990 despite its knowledge that it was permitting a use that was incompatible with the purposes of the Refuge. We need not address the separate issue whether a compatibility determination must be completed for all ongoing activities.
. Because we find that the Service was not substantially justified in its failure to comply with the Refuge Act, we need not also consider its failure to comply with NEPA.