The FCRA Newsletter: April 23, 2012

Prepared by Marc F. Kirkland

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Employer's Withdrawal of Job Offer to Applicant Causes Class Action Suit To Be Filed - Electronic FCRA Disclosures to Prospective Employee At Issue 

Although not the subject of the suit, Plaintiff contends that given their age the misdemeanors found on the report should not have been considered.  Plaintiff's suit proposes a class action based on Kmart not fulfilling the disclosure and authorization requirements discussed above and alleges:    

a.      The FCRA requires that the disclosure be "in writing." Absent the E-Sign Act, an electronic disclosure is not one made "in writing".

b.      The only means to "legalize" the electronic signature application of Defendant is through application of the E-Sign Act.

c.      The E-Sign Act does not apply to the Defendant's electronic application, because the term "consumer" in the Act is defined as "an individual who obtains through a transaction, products or services which are to be used primarily for personal, family, or household purposes."

d.      A job applicant does not fit the definition of "consumer" and therefore the E-Sign Act does not authorize the Defendant's electronic application.

Plaintiff's Position.

Plaintiff's position leads to an incorrect conclusion and tends to follow along these steps:  

a.         The FCRA requires disclosures in writing.

b.         An electronic disclosure is not one made in writing without finding some other law that says so.

c.         The E-SIGN Act only authorizes electronic signatures by consumers.

d.         Therefore, the FCRA-required disclosures cannot be electronic.

Plaintiff's First Premise: The FCRA Requires Disclosures In Writing.

The first premise is correct as § 1681(b)(2)(A) provides that:

a person may not produce a consumer report ... for employment purposes with respect to any consumer, unless ... a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured ..., in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes.

Plaintiff's Second Premise: An Electronic Disclosure Is Not One Made In Writing Under The FCRA.

The second premise has arguments on both sides.  For several years, the Federal Trade Commission (the agency then charged with interpreting and enforcing the FCRA) issued opinion letters that gave informal guidance to the consumer reporting industry.  In one such letter (known as the Landever Letter), the FTC opined about § 1681b(a)(2), which allows anyone to obtain a consumer report "in accordance with the written instructions of the consumer to whom it relates."  The FTC's opinion was that this section did not allow someone to obtain a report based on a consumer clicking an online "yes" button in response to a question about whether the consumer authorizes the report.  Among other things, the FTC noted that Congress specifically allowed electronic communications in other sections of the FCRA.  While this letter does not interpret § 1681b(b)(2)(A), the same argument certainly exists and will likely be raised by the Plaintiff.   

Plaintiff's Third Premise: E-SIGN doesn't apply.

Plaintiff's assertion that E-SIGN does not apply will be a difficult hurdle for Plaintiff to overcome.  Section 7001(a) of E-SIGN provides:

Notwithstanding any statute, regulation, or other rule of law (other than this subchapter and subchapter II of this chapter), with respect to any transaction in or affecting interstate or foreign commerce -

(1)        a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and

(2)        a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.

This statute holds that a record relating to a transaction in interstate or foreign commerce may not be denied legal effect solely because it is in electronic form.  

In case one worries that the problem is hidden somewhere in the definitions, rest assured that § 7006(9) defines the term "record" broadly enough that a FCRA disclosure must be a record:

"The term 'record' means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form."

Further, the language of § 7001(b) bolsters the conclusion that Congress meant § 7001(a) to get rid of requirements that any be in writing. Section 7001(b) provides:

This subchapter does not -

(1)        limit, alter, or otherwise affect any requirement imposed by a statute, regulation, or rule of law relating to the rights and obligations of persons under such statute, regulation, or rule of law other than a requirement that contracts or other records be written, signed, or in non-electronic form; or

(2)        require any person to agree to use or accept electronic records or electronic signatures, other than a governmental agency with respect to a record other than a contract to which it is a party.

Here, the key language is that the E-SIGN Act does not affect any statutory requirement other than a requirement that records be written.

The Confusion: Consumers Get Heightened Protection.

So where did the Plaintiff get the idea that the E-SIGN Act only "legalizes" consumer transactions? Section 7001(c) establishes a heightened standard for the E-SIGN Act to make electronic disclosures satisfy a legal requirement that a disclosure to consumers be in writing. What is required is a set of disclosures along with a consent. (For example, look to any website where individuals purchase goods and services.) 

As the Plaintiff correctly notes, § 7006(1) defines "consumer" as "an individual who obtains, through a transaction, products or services which are used primarily for personal, family, or household purposes."  Therefore, job applicants aren't "consumers" under the E-SIGN Act, even though they are under the FCRA.  This does not, however, remove Kmart's disclosure from being considered legally valid under the E-SIGN Act.  It simply means that Kmart did not need to meet the heightened standard of § 7001(c).  There is another fundamental flaw in Plaintiff's argument, especially in light of business-to-business transactions.  If one has to be a "consumer" for the E-SIGN Act to apply to the transaction, then huge companies doing business with each other would have to do that business on paper.    Accordingly, we believe the argument is quite strong that electronic disclosure is still the equivalent of a written disclosure under the FCRA.   

Additionally, the Federal Trade Commission explicitly acknowledges the effect of the E-SIGN Act on the FCRA.  In a second opinion letter (known as the  Zalenski Letter), the FTC states that the E-SIGN Act had superseded the logic in the Landever Letter: "under the E-SIGN Act, a[n FCRA-governed] consumer's electronic authorization may not be denied legal effect solely based on its electronic nature."  In this Letter, the FTC endorsed most of the reasoning set out above, which is reaffirmed in the FTC's  July 2011 Staff Report on the FCRA. 

Kmart recently filed a motion to dismiss some of the claims, arguing that the electronic consent form satisfies the FCRA and that Plaintiff was also provided and signed a paper consent form.  We will keep our eye on what the court decides and provide a follow-up in a subsequent newsletter.

The FCRA Does Not Literally Preempt All State Laws Regulating Furnishers of Credit Information

Menashi v. Am. Home Mortg. Servicing, Inc., 2011 U.S. Dist. LEXIS 114387 (M.D. Fla. Oct. 4, 2011)

Facts:  Plaintiff filed suit against the three major Consumer Reporting Agencies ("CRAs"), Wilmington Trust Company and American Home Mortgage Servicing, Inc. ("AHMSI"), the servicer of Plaintiff's mortgage, alleging violations of § 559.72(5), (6), and (9) of the Florida Consumer Collection Practices Act ("FCCPA").  Plaintiff's claim arose from the modification of his home mortgage under the Home Affordable Modification Program ("HAMP").  Plaintiff and AHMSI negotiated a mortgage modification under HAMP and after a three-month HAMP "trial period plan," AHMSI offered Plaintiff a permanent HAMP agreement, which he accepted.  Less than a year later, AHMSI rejected a mortgage payment from Plaintiff and informed him that the HAMP modification, while a valid contract, was a "mistake" that AHMSI would no longer honor.  AHMSI then reported to the three CRAs that Plaintiff was behind on his mortgage.  AHMSI sought to dismiss the FCCPA claim arguing they were pre-empted by the FCRA.  AHMSI alleged and Plaintiff conceded that §§ 559.72(5) and (6) are preempted by the FCRA.  The Court held that the FCRA only preempts those state law causes of action against furnishers of credit information that regulate credit reporting - including a cause of action under a state law not directed expressly to the regulation of credit information, such as a debt collection act.

• Preemption.  Section 1681t(b)(1)(F) prohibits states from imposing a law "with respect to any subject matter regulated under § 1681s-2 of [the FCRA], relating to the responsibilities of persons who furnish information to consumer reporting agencies."  If a state law regulates credit reporting only in limited circumstances, § 1681t(b)(1)(F) preempts the state law only in those limited circumstances.  Here, the FCRA preempted the FCCPA only if AHMSI violated § 559.72(9) while engaged in credit reporting activity regulated by § 1681s-2.  Plaintiff did not allege that AHMSI rejected the mortgage modification with the purpose of altering or inaccurately reporting his credit information.  If AHMSI refused to honor the mortgage modification because it decided the modification was a "bad deal," that decision had no connection to the purpose of § 1681s-2 and falls outside its scope.  The Court rejected AHMSI claims that the FCRA literally preempts all state causes of action against furnishers of credit information. 

Eleventh Circuit Says Revealing Full Credit Card Number On Sales Receipt Is Not A "Publication"  

E.T. Limited, Inc. v. United States Liability Insurance Company and Essex Insurance Company, 2011 U.S. App. LEXIS 19990 (11 Cir. Fla. Sep. 30, 2011)

Facts: Plaintiff-Appellant E.T. Limited, Inc., ("ETL") appealed the district court's grant of summary judgment to Defendant-Appellee Essex Insurance Company ("Essex") pertaining to an alleged violation of the Fair and Accurate Credit Card Transaction Act ("FACTA"). The alleged violation occurred when a credit card receipt revealed more than five digits of a customer's credit card number.  The district court concluded that Essex's commercial general liability policy (the "Policy") imposed no duty to defend ETL in the underlying litigation in state court.  Specifically, the district court concluded that Essex owed no duty to defend ETL under the Policy because ETL's issuance of a credit card receipt did not constitute a "publication" as required under the Policy's coverage for "personal and advertising" injury.  The 11th Circuit agreed with the district court's finding that "publication" as used in the Policy was unambiguous and that providing, a credit card receipt to a customer involves no "publication" within the meaning of the Policy.   

• FACTA Requirements.Section 1681c(g)(1) provides: "[N]o person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction."   

• FACTA Requirements.  The providing of a credit card or debit card receipt to a customer fails to constitute a "publication" within the meaning of Essex's Policy. Note:  the Court specifically stated that it rejected ETL's argument that the language of "publication, in any manner" was ambiguous, and instead applied the dictionary definition of "publication" as used by the Florida Supreme Court in prior case decisions that "publication" meant "communication (as of news or information) to the public: public announcement" or "the act or process of issuing copies . . . for general distribution to the public." (quoting Webster's Third New International Dictionary 1836 (1981)).

• FACTA Requirements.  The credit card receipt was a contemporaneous record of a private transaction between ETL and the customer, and ETL neither broadcasted nor disseminated the receipt or the credit card information to the general public.  ETL provided the receipt only to the customer (who already knows the credit card number and its expiration date).   

Plaintiff's Defamation Claim Preempted by the FCRA

Longman v. Wachovia Bank, N.A., 2011 U.S. Dist. LEXIS 105450 (D. Conn. Sep. 16, 2011)

Facts:  Plaintiff sued Wachovia alleging violations of the FCRA and state law defamation related to Wachovia's reporting of Plaintiff's real estate loan. Plaintiff, a real estate developer, financed a land purchase with a three-year balloon lot note with Wachovia.  At the end of the three-year term Plaintiff informed Wachovia that he was unable to continue making monthly interest payments on the balloon payment and offered to continue to make payments if Wachovia would reduce the interest rate and lengthen the amortization period.  Wachovia rejected Plaintiff's offer.  Plaintiff then attempted to obtain an agreement with Wachovia for a short sale on the property, however the parties were unable to agree on terms.  Although Plaintiff failed to pay the balloon obligation on the note, he continued to make monthly interest payments.  Plaintiff then filed suit against Wachovia.  After suit was filed Plaintiff began disputing Wachovia's negative reporting of the account with the CRAs.  In response to each dispute Wachovia verified that the account was accurately reported on Plaintiff's credit file.  Wachovia then moved for summary judgment on Plaintiff's claims.  The Court held that: 1) the FCRA preempted Plaintiff's defamation claim; 2) he did not have private right of action under§ 1681s-2; and 3) his complaint did not assert § 1681s-2(b) claim.

• Preemption. Section 1681t(b)(1)(F) expressly preempts the application of state law with respect to matters regulated under § 1681s-2.  Therefore, because Plaintiff's claim that Wachovia reported false information to the CRAs asserted a violation of § 1681s-2(a), the Court determined that Plaintiff's defamation claim would be preempted by § 1681t(b)(1)(F).

• Preemption. Plaintiff argued that despite the language in § 1681t(b)(1)(F), § 1681h(e) permits recovery for state law defamation.  Section 1681h(e) provides that: no consumer may bring any action. . . in the nature of defamation. . . with respect to the reporting of any information against any CRA, any user of information, or any furnisher, based on information disclosed pursuant to 1681g, 1681h, or 1681m of this title or based on information disclosed by a user of consumer report to or for a consumer against whom the user has taken adverse action based in whole or in part on the report, except as to false information furnished with malice or willful intent to injure such consumer.  Plaintiff argued that because he alleged that Wachovia had intentionally reported false information to the CRAs his allegations satisfied the malice or willful intent provision in § 1681h(e).

• Preemption.  Section 1681h(e) only applies to CRAs and those who take adverse action against consumers based on consumer reports.  Consequently, § 1681h(e) only applies where a plaintiff brings a claim against a CRA or against someone who has taken adverse action based on a consumer report.  Because Plaintiff did not assert that Wachovia was a CRA or that Wachovia took action against him on the basis of a consumer report, the Court determined that Plaintiff defamation claim was preempted.

• Private Right of Action.  The Court found that Plaintiff's § 1681s-2(a) claim failed as a matter of law because there is no private right of action under that section.  Instead, federal agencies, federal officials, and specified state officials have exclusive authority to enforce § 1681s-2(a).

• Reasonable Investigation. Section 1681s-2(b) requires a furnisher of credit information, on receiving notice from a CRA that a consumer has disputed a debt, to investigate the dispute and to report the results of the investigation to the CRA.  Here the Court granted summary judgment to Wachovia because (in his complaint) Plaintiff never asserted claims related to his disputes to the CRAs. The complaint was filed prior to Plaintiff disputing the account with the CRAs and the Court was not inclined to grant Plaintiff leave to amend his complaint as discovery had closed. Wachovia had filed its motion for summary judgment and Plaintiff was put on notice of the deficiency by Wachovia when it filed its answer to the complaint.

Ferkler v. RCN Corp., 2011 U.S. Dist. Lexis 104209 (E.D. Pa. Sept. 13, 2011)

Mere Assumption that the FCRA Applies to Facts Alleged is Insufficient for Removal to Federal Court

Facts:  Plaintiff alleged he was erroneously billed by his cable service provider, RCN Corporations, Inc. ("RCN").  Plaintiff and RCN allegedly resolved the issue and Plaintiff made a payment for full and final payment on the account.  Plaintiff asserted that despite RCN's knowledge that the account was paid in full, it forwarded the account to two different collection agencies who thereafter supplied the CRAs with false or erroneous information.  Plaintiff filed suit against RCN and NCO Financial Systems, Inc. ("NCO"), one of the collection agencies.  NCO removed the case alleging federal question jurisdiction pursuant to 28 U.S.C. §1331.  NCO contended that Plaintiff's allegation that NCO provided the CRAs false or erroneous information is a claim asserted under § 1681s-2 of the FCRA.  Plaintiff sought remand arguing that his complaint made no mention of any violation of a federal statue, but relied exclusively on Pennsylvania consumer protections laws and, as such, there was no basis for the Court to assert federal question jurisdiction.  In response, NCO asserted that "[w]hen the FCRA and its proscriptions [are] examined along-side plaintiff's averment that NCO supplied false and erroneous information to three reporting agencies, it is irrefutable that plaintiff's action against NCO is one for an alleged violation of the FCRA."  The Court found NCO's assumption that Plaintiff must be pursuing a federal claim insufficient to establish ground for federal jurisdiction.

• Removal.  Under 28 U.S.C. § 1441(a), a defendant may remove a civil action originally filed in state court if the federal court would have had original jurisdiction over the action.  The "well pleaded complaint" rule prescribes that federal question jurisdiction exists only where an issue of federal law appears on the face of the complaint and the federal law under which the claim arises must be a direct and essential element of plaintiff's case.  The well pleaded complaint rule is subject to the "artful pleading doctrine" whereby a defendant will not be denied a federal forum when the plaintiff's complaint contains a federal claim "artfully pled" as a state law claim.  The artful pleading doctrine allows for removal when (1) the state law that serves as the basis of plaintiff's complaint is completely preempted by federal law, or (2) a federal question, not pleaded in plaintiff's complaint, is nonetheless both intrinsic and central to plaintiff's cause of action.  The Court found that Plaintiff's well-pleaded Complaint made no mention of a federal statute and, on its face, failed to assert a federal question.  While the FCRA could apply to the facts alleged, Plaintiff clearly decided to base his claims exclusively on state law and in state court.  NCO's assumption that Plaintiff must be pursuing a federal claim was insufficient to meet its burden of establishing grounds for federal jurisdiction.

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