Appealed from: United States Court of Appeals, Ninth Circuit (Aug. 4, 2005 / Jan. 25, 2006)
Oral argument: Jan. 16, 2007
FAIR CREDIT REPORTING ACT (FCRA), ADVERSE ACTION, CREDIT SCORE, NOTICE, WILLFUL VIOLATION
The Fair Credit Reporting Act (FCRA) requires a lender to send an “adverse action” notice to a consumer when his or her credit score has negatively affected the terms and rates of the credit given. Safeco and Geico, two separate cases consolidated for oral argument, are class action suits against two insurance companies that allegedly failed to provide such notice. The issue in these cases is the Ninth Circuit’s expanded definition of “willful” under 15 U.S.C. § 1681n, which if upheld will expose every company that extends consumer credit to greatly increased liability and administrative costs. The Supreme Court’s decision will resolve a split among the circuit courts and determine the ultimate definition of willfulness under the FCRA.
- [Question(s) presented] | [Issue(s)] | [Facts] | [Discussion] | [Analysis]
Question(s) presented
Safeco Insurance Co. v. Burr
Whether the Ninth Circuit erred in holding that a defendant can be found liable for a “willful” violation of the Fair Credit Reporting Act (“FCRA”) upon a finding of “reckless disregard” for FCRA’s requirements, in conflict with the unanimous holdings of other circuits that “willfulness” requires actual knowledge that the defendant’s conduct violates FCRA.
Geico General Insurance Co. v. Edo
Two questions are presented:
1. Whether the Ninth Circuit’s construction of “willfully” under § 1681n of the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681 et seq., impermissibly permits a finding of willfulness to be based upon nothing more than negligence, gross negligence, or a completely good-faith but incorrect interpretation of the law, and upon conduct that is objectively reasonable as a matter of law, rather than requiring proof of a defendant’s knowledge that its conduct violated FCRA or, at a minimum, recklessness in its subjective form.
2. Whether the Ninth Circuit improperly expanded § 1681m of FCRA by holding that an “adverse action” has occurred and notice is required thereunder, even when a consumer’s credit information has had either no impact or a favorable impact on the rates and terms of the insurance that would otherwise have been offered or provided.
Issues
Does the definition of “willful” under the FCRA require the defendant to have actual knowledge that its conduct violates FCRA, or may a finding of willfulness be made where the defendant recklessly disregarded, misinterpreted, or neglected the law? Should “adverse action” notice be required only in circumstances where a consumer’s credit information has had a negative impact on the rates and terms of insurance offered?
Facts
This case arises out of two separate class action suits against two different insurance companies for allegedly failing to comply with the Fair Credit Reporting Act’s (FCRA) adverse-action notice requirements.
Burr v. Safeco Ins. Co.
Respondents Charles Burr and Shannon Massey are two of three co-representatives of a purported class consisting of "all purchasers of personal lines of insurance from" petitioners for the period January 2000 to the date of the complaint. Brief for Petitioners (Safeco) at 2. Burr and Massey purchased insurance policies from Safeco. Brief for the United States as Amicus Curiae at 5. Safeco relied on information in Burr’s and Massey’s consumer reports to set the initial premiums and, based on that information, charged them higher rates than it charged customers with better reports. Id. Safeco, however, did not issue Burr and Massey adverse action notices. Id. Burr and Massey subsequently joined as named plaintiffs in a class-action lawsuit, alleging that Safeco's failure to provide adverse action notices after setting higher insurance premiums based on their credit reports constituted a willful violation of the FCRA. Id. While they did not allege actual damages, Burr and Massey sought statutory and punitive damages. Id. The district court granted Safeco's motion for summary judgment against Burr and Massey. Id.
Edo v. GEICO Casualty Co., 426 F.3d 1020 (9th Cir. 2005).
In December 2000, Respondent Ajene Edo called GEICO for a rate quote for personal automobile insurance. Brief for Petitioner (GEICO) at 7. GEICO’s Computer-Assisted Underwriting (“CAU”) system considered Edo’s credit score along with his other underwriting characteristics and determined that he was eligible for a policy with GEICO’s standard rate company, GEICO Indemnity. Id. To determine whether Edo should receive an adverse action notice, the CAU system compared that result with the company and tier placement Edo would have received had his credit score not been considered. Id. Edo's weighted credit score (62) was greater than the weight associated with a "neutral" credit report (56), but not enough to improve his company or tier placement. Id. Therefore, Edo would have paid the same premium regardless of whether his credit score was utilized and no adverse-action notice was required. Id. Edo was offered a policy with GEICO Indemnity and he accepted the policy. Id. at 8. Edo alleges in this class action that GEICO violated § 615(a) of FCRA, 15 U.S.C. § 1681m(a), by failing to notify him of "adverse actions" it took against him based on his credit report. Id. at 8. According to Edo, GEICO treated him "adversely" by failing to place him in one of its preferred-insurance companies or offer him as good a rate within GEICO Indemnity as he would have received if, instead of his actual middle-of-the-road credit score, he had the highest possible credit score. Id. at 8. On February 23, 2004, the District Court granted GEICO’s motion for summary judgment and dismissed Edo’s claims against all of the GEICO defendants. Id. at. 8.
Edo appealed the district court’s grant of summary judgment in favor of GEICO, seeking statutory and punitive damages, as well as attorney fees, on behalf of the class of consumers for violation of FCRA's adverse action notice requirement. Edo v. Geico Casualty Company, 426 F.3d 1020 (9th Cir. 2005).
The Ninth Circuit addressed the question of whether the FCRA's adverse action notice requirement applied to the rate first charged in an initial policy of insurance, and held that the Act requires an insurance company to send the consumer an adverse action notice whenever a higher rate is charged because of credit information it obtains. Id. at 1023. The court also adopted the Third Circuit’s definition of “willfully,” a term employed in the FCRA, and held “that a company is liable for a willful violation of FCRA if it ‘knowingly and intentionally committed an act in conscious disregard for the rights of others.’” Id. at 1024. The Ninth Circuit held that “willful” noncompliance, under FCRA punitive damages provision, included reckless disregard, and that GEICO’s alleged FCRA violations constituted reckless conduct, thus qualifying for punitive damages. See id. at 1038-39.
The Supreme Court has consolidated the GEICO and SAFECO cases and will hear their oral arguments together. The Court will decide whether the Ninth Circuit erred in finding that the insurance companies willfully broke the law.
Discussion
To a great extent, we are a credit-based society. The average consumer has thirteen different credit obligations on record with a credit reporting agency, including credit cards, auto loans, mortgages, and student loans. See MyFico.com – Average Credit Statistics. Credit score information can also be used to determine premium rates for insurance, particularly auto insurance (as in Safeco and Geico). See Wikipedia - Credit score. Since this information is clearly sensitive and has wide-ranging impact, some safeguards are needed. One of these is the Fair Credit Reporting Act (FCRA), which helps to protect against misuse of consumers’ credit information.
The FCRA requires a user of consumer credit information, such as an insurance company, bank, or other lending institution, to notify a consumer (known as an “adverse action” notice) when his or her credit information results in adverse treatment by the lender. See 15 U.S.C. § 1681m(a). Under § 1681o of FCRA, if a consumer can show that the lender negligently failed to send an adverse action notice, the consumer can recover actual damages. However, if the consumer can show that the lender was not negligent, but in fact willfully failed to send notice, the consumer can recover damages between $100 and $1,000 (in lieu of actual damages) as well as punitive damages. See 15 U.S.C. § 1681n.
The Supreme Court has chosen to hear the Safeco and Geico cases in order to resolve a split between the circuit courts on the proper interpretation of “willful” under 15 U.S.C. § 1681n. The Ninth Circuit’s decisions in Safeco and Geico sided with the Third Circuit’s addition of “reckless disregard” for the law to the definition of “willful.” See On the Docket: Safeco Insurance Co. v. Burr, Charles, et al. / Geico General Insurance Co. v. Edo, Ajene, Medill Journalism, Sept. 26, 2006. Under this definition, even a company that complied in good faith with a legal opinion interpreting the FCRA could be held liable, if that interpretation was later determined to be unreasonable. See Geico General Insurance Co. v. Edo - Questions Presented. However, the Eighth Circuit and others have held that “willful” includes only the “knowing and intentional commission of an act the defendant knows to violate the law.” See On the Docket: Safeco/Geico (quoting Phillips v. Grendahl, 312 F.3d 357 (8th Cir. 2002)). The court will also address whether the Ninth Circuit unreasonably expanded the definition of “adverse action” under 15 U.S.C. § 1681m.
Because the FCRA affects every institution that extends consumer credit, the Court’s ultimate decision in this case will naturally have a broad impact on consumers, but also on the lenders themselves. See Brief of Amici Curiae Financial Services Roundtable et al. in support of Petitioners at 4. The American Insurance Association, in particular, is concerned that if the Court upholds the Ninth Circuit’s broad interpretation of “willful,” lenders will be exposed to “staggering, class-based statutory and punitive damages in cases where consumers do not even claim to have suffered any actual damages.” See Brief of Amicus Curiae American Insurance Assn. in support of Petitioners at 7. The Consumer Data Industry Association, among others, is also concerned with the increased administrative costs that will ensue if companies are required to provide adverse action notices to millions more consumers. See Brief of Amicus Curiae Consumer Data Industry Assn. in support of Petitioners at 2. If the lower court decisions in Safeco and Geico are upheld, insurance companies and their affiliates would be required to provide adverse action notices “virtually every time they make an initial offer of insurance,” confusing consumers and frustrating the educational objective of the FCRA. See Brief of Amicus Curiae Freedomworks in support of Petitioners at 1. However, if the Court reverses the Ninth Circuit and establishes a stricter interpretation of “willful” and “adverse action,” lenders may continue to avoid notifying new customers that their rates will be affected by their credit information. See On the Docket: Safeco/Geico.
“Willful noncompliance” under the Fair Credit Reporting Act:
Petitioners argue that the term “willfully,” as found in 15 U.S.C. §§ 1681n(a), requires an intentional violation of a known legal duty. Brief for Petitioners at 28. The term “refers to acts done intentionally, knowingly, purposely, or with an evil heart, as opposed to acts done carelessly or inadvertently.” Id. (citing Black's Law Dictionary 1599 (6th ed. 1990)). According to Petitioners, the language, structure and legislative history of FCRA confirm that Congress intended the term “willfully” to require proof of actual knowledge. See id. Although the meaning of “willfully” in any particular criminal statute must be determined by taking into account all relevant factors, See id. at 29 (citing Dolan v. U.S. Postal Serv., 126 S. Ct. 1252, 1257 (2006)), the Court’s previous cases suggest that Congress “is presumed to have anticipated specific intent when it requires proof of willfulness as an element of the crime.” Id.
Petitioners further contend that the Ninth Circuit’s interpretation of §1681n(a)’s willfulness requirement should be rejected because it raises grave constitutional concerns. See id. at 34. In Gore and State Farm, the Supreme Court confirmed that due process prohibits damages awards that are “grossly excessive” in comparison to their purposes. See id. (citing BMW of N. Am. v. Gore, 517 U.S. 559, 568 (1996); State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 417 (2003)). The Court specified that a determination of whether punitive damages are improper shall turn on three factors: “the relationship between the actual harm suffered by the plaintiff and his punitive damages award; the degree of reprehensibility of the defendant’s actions; and comparison to legislative penalties for comparable misconduct.” Id. at 35 (citing BMW of N. Am. v. Gore, 517 U.S. 559, 575 (1996)). According to Petitioners, § 1681n(a) gives rise to considerable constitutional challenges because it allows a consumer to recover punitive damages in the absence of actual harm. See id. Petitioners argue that the Ninth Circuit’s “tepid” interpretation of “willfully” fails to assure a reasonable relationship between punitive damages and actual harm, which places great weight on the reprehensibility inquiry. See id. The Ninth Circuit's “reckless disregard” standard fails to keep the statute's punitive and statutory damages regime within lawful bounds. See id. at 37. Under the Ninth Circuit's holding, a great deal of conduct that is not inherently egregious or reprehensible may nonetheless trigger punitive damages. See id. at 35-36.
Respondents, on the other hand, argue that “willfully” is traditionally interpreted in civil statutes to mean either knowing or reckless disregard of legal obligations. Brief for the United States as Amicus Curiae at 9. “Recklessness” requires more than just negligence—“it imposes an objective standard that is satisfied only if the defendant acted in the face of such a high risk that its conduct would violate the law that the illegality was either known or so obvious as to require the exercise of greater care.” Id. Moreover, Respondents argue that giving “willfully” the same meaning as that established “in substantively analogous and contemporaneously enacted statutes,” as did the Ninth Circuit, “is consistent with Congress’s general practice of employing a ‘reckless disregard’ standard to enforce compliance with federal law and to induce solicitude for federally created rights.” See id. at 12.
Furthermore, Respondents argue that Petitioners’ argument that willfulness requires actual knowledge of a violation “not only overlooks established usage of the term in civil statutes, but also fails to comport with the overall structure and design of the FCRA.” Id. at 13. Respondent points to 15 U.S.C. 1681n(b), in which Congress created a separate cause of action for consumer reporting agencies that limits adverse actions to those taken under false pretenses or “knowingly without a permissible purpose.” See id. This section, subtitled “Civil liability for knowing noncompliance,” can be contrasted to 15 U.S.C. 1681n(a)’s general caption of “Civil liability for willful noncompliance.” See id. Respondent contends that this structural separation of FCRA violations indicates Congress’s intent that willfulness not be limited to knowing violations. See Brief for the United States as Amicus Curiae at 13.
When an adverse action notice is required under the Fair Credit Reporting Act:
Petitioners argue that “the core problem with the Ninth Circuit's holding is that, instead of evaluating the actual impact of a consumer's credit information on that consumer's insurance rate, it compares the rate offered to the consumer with the rate he would have been offered if he had the best credit profile imaginable.” Brief for Petitioners (GEICO) at 15. Petitioners contend that this peculiar understanding of “adverse action” is not what Congress intended when drafting the FCRA, and that a consumer has not been treated “adversely” when in fact he was not affected or was benefited by the insurer’s consideration of his credit score. See id. at 16. An insurance company, such as GEICO or SAFECO, should not be faulted for failing to inform a consumer that it treated him adversely based on his credit score because he could have gotten a better rate or terms if he had a perfect credit score. See id.
In addition, Petitioners argue that adoption of the Ninth Circuit’s standard will frustrate the purpose of the adverse action notification requirement. See id. at 22. According to Petitioners, the Ninth Circuit’s holding requires an insurance company to send an “adverse action” notice to every consumer whenever a better credit score would have lowered his premiums, regardless of how good his credit score is or how positively the score impacted his insurance rate. See id. Petitioners argue that adoption of this expansive rule would dramatically increase the volume of notices and ultimately do more harm than good. See id. Whereas Congress designed the notification requirement to require notices when the information in a consumer’s credit report has adversely affected him, Petitioners believe that the Ninth Circuit’s rule would make adverse action notices so ubiquitous as to become useless or confusing. See id. Such an expansion of the scope of the notice provision would diminish the utility of the notices themselves. See id. at 22–23 (citing Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 568 (1980) (“Meaningful disclosure does not mean more disclosure. Rather, it describes a balance between ‘competing considerations of complete disclosure ... and the need to avoid ... [informational overload].’”)).
Respondents argue that providing a higher insurance rate based, in part, on a credit report constitutes an adverse action, which necessitates an adverse action notice. See Brief for the United States as Amicus Curiae at 24. Respondents contend that the FCRA’s prohibitions are not limited to repeat customers. See id. at 25–26 (“Nothing in the . . . FCRA presupposes that the baseline for determining whether a rate is greater must be a price previously paid by the same customer himself, as opposed to the price offered to others.”). “When an insurer charges one new customer more than others based, at least in part, on the content of the customer's credit report, it requires no linguistic leaps to conclude that the insurer has ‘increase[d]’ the insurance charge for that customer. Id.
Respondents further argue that “nothing in the FCRA conditions the existence of an adverse action on the absence of post hoc rationales for the higher rate.” Id. at 27. Respondents cite as irrelevant the fact that GEICO determined after the fact that Edo’s insurance rate would have been the same even if no credit report had been requested, and GEICO had instead applied a neutral credit score. See id. at 26. The statute simply states that an “adverse action” requires that the insurance company “take[] any adverse action,” 15 U.S.C. 1681m(a) - such as an “increase” in the charge for insurance, 15 U.S.C. 1681a(k)(1)(B)(i) – “based in whole or in part on any information contained in a consumer report.” 15 U.S.C. 1681m(a). If an insurance company takes such action, an adverse action notice is required. See Brief for the United States as Amicus Curiae at 26.
Conclusion
The Court’s decision in this case will have an enormous impact on anyone who uses or extends credit. If the Court upholds the Ninth Circuit’s expansive definition of “willful,” lenders may be exposed to staggering liability and administrative costs. If the Court chooses to adopt the narrower definition, consumers whose credit information has negatively affected their insurance, mortgage, or credit rates might not be notified that such an adverse action has occurred.
Authors
Prepared by: Kiernan Joliat and Emily Green