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 & Other