On June 1, 2007, the U.S. Supreme Court in Safeco Insurance Co. of America v. Burr, 2007 WL 1582951 (U.S. 2007), adopted the common law definition of the term “willful,” holding that for purposes of the Fair Credit Reporting Act (FCRA) “willful” conduct includes “reckless” conduct, and that reckless conduct is conduct that violates an objective standard: action entailing “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Although Safeco dealt with insurance companies using credit reports to set insurance rates, the decision has important implications for all companies defending individual or class actions under the FCRA.
The FCRA provides a private right of action (meaning that a private person can sue for damages) against businesses that use consumer reports but fail to comply with the requirements of the FCRA. A negligent violation entitles a consumer to “actual damages” (the amount of damages or harm actually sustained by the consumer) plus attorneys fees and costs. A willful violation, in contrast, entitles the consumer to statutory damages of $100 to $1,000 per violation at the court’s discretion, plus punitive damages, actual damages, and attorney fees and costs. In a class action based on willful violations of the FCRA, statutory damages of $100 to $1,000 multiplied by the number of class members can quickly reach large numbers.
In Safeco, the Court considered consolidated cases that had been brought seeking to certify class actions against Safeco Insurance Company of America and GEICO Insurance Company. In both cases, the plaintiffs charged that the insurance companies used credit reports to set initial rates on new insurance policies. Consumers with less favorable credit report information were charged higher rates.
The FCRA requires that notice be provided to a consumer subjected to “adverse action based in whole or in part on any information contained in a consumer [credit] report.” As it applies to insurance companies, the FCRA defines “adverse action” as “a denial or cancellation of, 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, exiting or applied for.” The plaintiffs claimed that the insurance companies had taken adverse action against consumers by charging higher rates based on credit reports but had failed to provide the required notices, and that such failures constituted willful violations of the FCRA. The insurance companies contended that they did not need to provide such notices because the initial rate for a new insurance policy cannot be an “increase” within the meaning of “adverse action” applicable to insurance companies.
The Court held that “willfulness” under the FCRA includes not only acts known to violate the FCRA, but also “reckless disregard of statutory duty.” The Court rejected the insurance companies’ position that the use of credit reports to set possibly less favorable initial rates for new insurance policies cannot constitute adverse action under the FCRA, holding that “the ‘increase’ required for ‘adverse action’ speaks to a disadvantageous rate even with no prior dealings.”
Despite prevailing on two important points of law, the plaintiffs failed to establish liability against either insurance company. As to GEICO, the Court held that, because the initial rate GEICO offered to plaintiff was the one plaintiff would have received if his credit report had not been taken into account, GEICO owed him no adverse action notice. As to Safeco, the Court held that “it is clear enough that if Safeco did violate the statute, the company was not reckless in falling down on its duty.” According to the Court, “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.” Safeco could not be held liable for a willful violation of the FCRA based on recklessness, the Court concluded, because “Safeco’s reading of the statute, albeit erroneous, was not objectively unreasonable.”
Pepper Points – The Court’s holding may have a direct effect on two common types of FCRA class actions. Numerous class actions have been filed under the FCRA alleging that financial services companies willfully violated the FCRA by obtaining credit reports on consumers in connection with offers of credit that did not qualify as “firm offers of credit” within the meaning of the FCRA exception for that purpose. We anticipate that the defendants in these actions will argue that they developed their firm offers of credit pursuant to interpretations of FCRA that were “not objectively unreasonable” and so they cannot be liable for willfully violating the FCRA.
A second common type of class action under FCRA attacks businesses that print receipts showing more than the last five digits of customer account numbers. Since late 2006, FCRA has required businesses to truncate credit and debit card numbers and to suppress printing of card expiration dates on electronically printed receipts issued to consumers. We anticipate that plaintiffs in these actions will argue that defendants can be liable for willfully violating the FCRA even if they did not knowingly violate the law. With the possibility of millions of dollars in statutory and punitive damages riding on the distinction between “willful” and “negligent” violations of the FCRA, companies defending claims under the FCRA should be aware of the distinction.
Stephen G. Harvey, Matthew D. Janssen and Travis P. Nelson
