Critical FCRA Development: Third Circuit Denies Willfulness Claims in Pro-Defendant Decision
On December 6, 2012, the Third Circuit Court of Appeals issued a major opinion on the proper interpretation of “willfulness” under the Fair Credit Reporting Act (FCRA). The decision, in Fuges v. Southwest Financial Servs., Ltd., No. 11-4504, further strengthened the pro-defendant rulings of the U.S. Supreme Court in its seminal case on FCRA “willfulness,” Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007). The Fuges court definitely adopted a broad reading of the Safeco decision, namely that if a company’s conduct would comply with any objectively reasonable interpretation of an FCRA provision, regardless of whether such interpretation is erroneous, then the company enjoys an outright “safe harbor” from liability for willful violations of the Act. As explained below, this principle is particularly significant in the context of FCRA class actions.
FCRA Litigation
The defendant, Southwest Financial Services, Ltd. (Southwest), sells property reports to consumer lenders, so they can determine the identity of a property’s current title holder or whether the parcel is encumbered. Southwest had never considered whether it was a consumer reporting agency (CRA) or its property reports were consumer reports governed by the FCRA.
In 2008, Marie Ann Fuges’s credit application with PNC Bank was denied after the bank received a property report from Southwest that contained alleged inaccuracies related to delinquent property tax and judgment liens against her property. On February 18, 2009, Fuges filed a putative class action alleging willful violations of the FCRA. Granting summary judgment in Southwest’s favor, the district court held that “a reasonable jury could not conclude that Southwest willfully, i.e., knowingly or recklessly, violated . . . FCRA, because Southwest reasonably interpreted its activities to fall outside the scope of the Act, in light of the less-than-clear statutory text and absence of meaningful judicial or FTC guidance.” The court reasoned that the information on Southwest’s property reports “more closely related to a particular parcel of property than to a particular consumer.” Consequently, Southwest’s reading of the FCRA – that it was not a CRA and did not issue consumer reports – was reasonable, not reckless.
The Third Circuit agreed. The court rejected Fuges’s first argument on appeal, that Southwest never had made a reasonable interpretation of the FCRA since, before litigation, it failed to consider the Act. Instead, it held that “Safeco does not require that the defendant actually have made such an [FCRA] interpretation at any particular point in time.”
As to Fuges’s second argument, the court noted that under Safeco’s objective test, subjective bad faith is irrelevant. A company subject to the FCRA “does not act in reckless disregard of it unless that action is not only a violation under a reasonable reading of the statute’s terms, but also shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless.” According to the appeals court, Southwest’s reading was objectively reasonable since the FCRA definitions of “consumer report” and “consumer reporting agency” (as applied to Southwest) were ambiguous and unclear. Moreover, Southwest’s reading of the FCRA had a foundation in the statutory text since the CRA definition is limited to companies that assemble information “on consumers.” Finally, the court found no judicial or agency guidance contrary to Southwest’s reading, thus Southwest “did not run a substantial risk,” i.e. did not act recklessly, in adopting its interpretation.
Practical Impact
The Fuges opinion is important in its affirmation of Safeco’s guiding principles on “willfulness.” Most importantly, the decision marks a significant blow to the ability of FCRA plaintiffs: (1) to attempt to certify a class of individuals alleging willful violations of the statute, and (2) to obtain statutory and punitive damages, in addition to attorney’s fees. For negligent violations of the Act, the FCRA only provides for the recovery of actual damages. See 15 U.S.C. § 1681o(a)(1). However, it is widely viewed that a class action seeking actual damages under the FCRA cannot be certified due to the individual inquiries necessary to determine the amount of damages for each class member. Under 15 U.S.C. § 1681n(a), a company that commits a willful violation is liable for statutory damages ranging from $100 to $1,000, as well as punitive damages and attorney’s fees.
The difference in risk exposure for a defendant faced with negligent versus willful violations can be astronomical. Potential statutory damages in a class action can reach into the hundreds of millions to even billions of dollars. This is what makes the Fuges decision so critical. The Third Circuit provided necessary clarity and strength to Safeco’s safe harbor against liability for willfulness, and hence, scored a telling blow against FCRA class actions in general.
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