U.S. Supreme Court Issues Decision Construing What Constitutes a “Willful” Violation of the FCRA
Decision Impacts Hundreds of FCRA Prescreening Class Actions & Credit Card Receipt Class Actions

On June 4, 2007, the United States Supreme Court issued its decision in Safeco Ins. Co. v, Burr, No. 06-84, 551 U.S. ___, 2007 U.S. Lexis 6963 (June 4, 2007), construing a provision of the Fair Credit Reporting Act (“FCRA”) which provides a plaintiff with statutory damages of between $100 and $1,000 per violation where the defendant “willfully fails to comply with any requirement imposed” under the FCRA. 15 U.S.C. §1681n. This decision impacts hundreds of FCRA prescreening class actions filed across the country against lenders, insurance companies and others in which plaintiff class action attorneys are seeking statutory damages for alleged willful violations of the FCRA.

Court Holds “Willfully” Means Knowingly or Recklessly Violating the FCRA

The Court held that a defendant willfully violates the FCRA where the defendant knowingly or recklessly violates the Act. The Court rejected the argument of the petitioner insurance companies that liability under Section 1681n occurs only when there is a knowing violation, holding that in the context of civil liability it has generally construed willfulness to include not only knowing violations but also reckless violations of a statute. However, the Court did reverse the Ninth Circuit’s decision and made several statements in its decision which may offer solace to prescreening class action defendants.

As to the definition of what constitutes recklessness, the Court held that: “[A] company subject to FCRA does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute’s terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless.” Id. at *41. The Court declined to provide further specification as when a defendant’s actions cross the line between negligence and recklessness stating: “Here, there is no need to pinpoint the negligence/reckless line, for Safeco’s reading of the statute, albeit erroneous, was not objectively unreasonable.” Id.

The case before the Court involved the issue of whether an insurer is required to provide a customer with an adverse action notice which is required under Section 1681m(a) of the FCRA when a company takes an adverse action against a consumer based in whole or in part on information contained in the consumer’s credit report. Safeco used credit reports as part of the underwriting process in setting the initial premium on the first policy a customer purchased from it. The FCRA provides that with respect to insurers, adverse action means: “[A] denial or cancellation of, or an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of, any insurance, existing or applied for.” 15 U.S.C. §1681a(k)(1)(B)(i).

Safeco took the position that since this was the first policy that the customer purchased from it there could not be any increase in the premium charge. It reasoned that since it had no prior course of dealing with the customer its actions could not be deemed to constitute an increase in the cost to the consumer. The Court held that while Safeco’s analysis was wrong it was not “objectively unreasonable” and therefore it did not constitute a willful violation of the FCRA. The Court reversed the Ninth Circuit’s decision finding that Safeco willfully violated the FCRA by failing to give an adverse action notice.

In finding that Safeco’s position was objectively reasonable, the Court noted that neither the Federal Trade Commission nor any court of appeals had issued any guidance which would have warned Safeco away from the position it took. The Court stated: “Given this dearth of guidance and the less-than-pellucid statutory text, Safeco’s reading was not objectively unreasonable, and so falls well short of raising the ‘unjustifiably high risk’ of violating the statute for reckless liability.”

The Court rejected Respondents’ arguments that evidence of Safeco’s subjective bad faith had to be taken into consideration in determining whether it had acted willfully, stating: “Where, as here, the statutory text and relevant court and agency guidance allow for more than one reasonable interpretation, it would defy history and current thinking to treat a defendant who merely adopts one such interpretation as a knowing and reckless violator. Congress could not have intended such a result for those who followed an interpretation that could reasonably have found support in the courts, whatever their subjective intent may have been,” Id. at *43 n.20.

The Court also left open the issue of whether a good faith reliance upon legal advice would render a defendant immune to claims under Section 1681n, stating: “While we do not foreclose this possibility, we need not address the issue here in light of our present holdings.” Id.

Decision Impacts Hundreds of FCRA Pre-Screening Class Actions and Credit Card Receipt Class Actions Against Lenders, Insurance Companies, Retailers, Restaurants & Others

This decision impacts hundreds of FCRA prescreening and credit card receipt class action cases filed across the country in which the plaintiff class action bar is seeking to rely upon the availability of statutory damages under Section 1681n of the FCRA for willful violations of the Act to amass huge class damages awards.

The plaintiff class action bar has been actively filing FCRA class actions across the country alleging two theories of liability. The first is that lenders and others are impermissibly accessing credit reports for the purpose of sending prescreened solicitations to consumers (“prescreening class actions”). The second involves allegations that credit and debit card receipts issued by retailers, restaurants and others violate a provision of the FCRA added by the FACTA amendments which became generally effective on December 4, 2006 and prohibits printing more than the last five digits of the card number or the card expiration date on electronically printed receipts issued to the consumer at point of sale (“credit card receipt class actions”). Under both theories of liability, plaintiffs are seeking to recover the statutory damages available under Section 1681n of the FCRA. In order to do so, a plaintiff must show the defendant willfully violated the FCRA.

Pre-Screening Class Actions

A prescreened solicitation is a solicitation which is targeted to certain consumers meeting specified credit criteria. For example a home equity lender may contact a credit reporting agency and request a list of the names and addresses of all persons within a geographic area who have credit scores within a specified range and have substantial credit card debt. The credit reporting agency would then “prescreen” all of the consumer credit reports it has on file for the specified geographic area and generate a list of the names and addresses of persons meeting the credit criteria specified. The credit reporting agency would then provide the home equity lender with a list of the names and addresses of all persons meeting the criteria the home equity lender specified.

Despite the fact that the home equity lender only receives from the credit reporting agency the name and address of the persons meeting the criteria it specified, under the FCRA the home equity lender is deemed to have accessed the credit report of each of the persons whose name and address it received. Under the FCRA a business may only access a consumer’s credit report in a non-consumer initiated transaction where it has a permissible purpose to do so. The FCRA provides a business may access a consumer’s credit report for purposes of sending prescreened solicitations if the business makes a firm offer of credit or insurance to the consumer in the solicitation. 15 U.S.C. §1681b(c)(1)(B). The plaintiff class action bar has filed hundreds of cases alleging that the solicitation sent after conducting a prescreen do not contain the precise terms of the credit or insurance being offered and therefore the offers are vague and indefinite and it are not a firm offers as defined under the FCRA. Therefore plaintiffs contend that the defendants violated the FCRA as they did not have a permissible purpose for accessing their credit reports.

In the overwhelming majority of these cases, plaintiffs do not contend that they sustained actual damages. In fact in some cases plaintiffs affirmatively plead that they are not seeking actual damages. Instead, plaintiffs seek to recover the statutory damages provided under Section 1681n of between $100 and $1,000 per violation by alleging the defendants willfully violated the FCRA. In the context of a class action the availability of statutory damages creates a huge potential exposure for defendants and a big potential pay day for the plaintiff class action bar. Prescreened solicitations frequently involve thousands or hundreds of thousands of solicitations. Under Section 1681n, every 1,000 solicitations sent creates exposure of between $100,000 to $1,000,000.

While the Court’s decision on its face rejects the “knowing violation” interpretation of willfulness under Section 1681n which was advocated by the petitioner-insurers, it does not foreclose many arguments which may be made by FCRA prescreening class action defendants including good faith reliance upon legal advice. The Court declined the opportunity to draw the line between negligent conduct which is not actionable under Section 1681n and reckless conduct which it held does constitute a willful violation. It should be noted that while the Court did not agree with Safeco’s position on the necessity for an adverse action notice and found that Safeco violated the FCRA, it did hold that Safeco’s decision was not “objectively unreasonable” and reversed the liability finding against it. Prescreening class action defendants have the opportunity to make a similar argument. While the plaintiff bar may trumpet the Court’s decision as a victory, the war has not been lost.

Credit Card Receipt Class Actions

The plaintiff class action bar has also been filing class action cases across the country under another provision of the FCRA which prohibits a business from printing more than the last five digits of a consumer’s credit or debit card or the expiration date of the card on electronically printed receipts issued to the consumer at point of sale. 15 U.S.C. §1681c(g). This provision of the FCRA became effective generally as of December 4, 2006. Since that date, the plaintiff class action bar has filed hundreds of cases across the country alleging that businesses impermissibly printed more than the last five digits of the consumers card number or the card expiration date on the receipt issued to the consumer.

Again the plaintiffs in the vast majority of these cases are not alleging actual damages, but instead they are alleging defendants willfully violated Section 1681c(g) and seek to recover the statutory damages of between $100 and $1,000 per violation provided under Section 1681n. Under this theory of liability every 1,000 receipts issued in violation of Section 1681c(g) creates exposure of between $100,000 and $1,000,000.

With respect to the credit card receipt class actions cases, the Supreme Court’s decision does reject a more stringent interpretation of what constitutes a willful violation and recognizes that reckless conduct may be sufficient to establish a willful violation of the FCRA. However the Court declined to pinpoint when a defendant’s conduct crosses the line between negligent conduct which would not provide a basis for recovery of statutory damages under Section 1681n and reckless conduct which the Court held would be sufficient to establish a willful violation of the FCRA,

Thus the issue of whether a defendant willfully violated the FCRA in credit card receipt class actions is likely to turn on the particular facts of each case. The issue in these cases is not generally focused on the interpretation of Section 1681c(g) but rather on the efforts to comply with the requirements of this statute. Plaintiffs in these will seek to prove that defendants efforts to comply with Section 1681c(g) were reckless and therefore constituted a willful violation of the FCRA. As noted above, the Court’s decision in Safeco does not provide a bright line for determining when a defendant’s conduct cross the line between negligence and recklessness.

Ice Miller Has Been Actively Involved in the Defense of FCRA Prescreening and Credit Card Receipt Class Actions

Ice Miller has been actively involved in defending our clients in FCRA prescreeing and credit card class action cases. Our attorneys have represented lenders, insurance companies, and others in prescreening class action litigation. We have represented a national restaurant chain, a regional grocery chain and a regional retailer in FACTA credit card receipt class actions. We are on top of all the issues involved in these cases and are ready to assist you should you become a target of the plaintiff class action bar.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances .