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The appeal in Reynolds v. Hartford Financial Services, Inc., et al., ___ F.3d ___ (2005) (pdf format) involved consolidated cases against insurance companies whose principal argument was that they did not commit
"adverse action" within FCRA's meaning when they set initial insurance premiums higher based on information contained in consumers'
credit reports. If they did not engage in adverse action, the insurers could not be held liable for failing to send an adverse
action notice to the affected consumers. The heart of the adverse action issue turned on whether the setting of an initial
rate could be considered an "increase in charge" as required under the adverse action definition applicable to insurance transactions.
The district court agreed with the insurers that the plain meaning of that phrase presupposed a rate change and therefore
could not apply to the start rate.
Plaintiffs appealed the district court's dismissals, and the Ninth Circuit issued its decision on August 4, 2005. Although
the news is particularly grim for the insurers involved, it also portends further FCRA litigation against a broad array of
financial service companies subject to FCRA. We highlight below those portions of the decision that are of particular concern:
Adverse Action
The Ninth Circuit reversed the district court and concluded that the setting of an initial insurance rate could just as easily
constitute adverse action as a subsequent rate change to an existing policy. The court also held that denying insurance to
an individual as to whom the credit reporting agency has said they did not have sufficient information to produce a score
(a "no hit") also qualifies as adverse action. They reached that conclusion despite the statutory language limiting adverse
action to the use of "information contained in a consumer [credit] report."
Joint and Several Liability
The court also discussed the possibility of joint and several liability under FCRA as between companies to whom the consumer
applied, and those that ultimately issued the policy in question. Defendants argued that only the entity issuing the policy
could take adverse action in pricing the insurance. The court disagreed, and said as a matter of law that all of the affiliated
entities involved with the consumer could be held liable. Although the facts at issue involved companies that were corporate
relatives of one another, one certainly could see another judge applying the court's analysis to other contexts -- such as
the relationship between mortgage lender and mortgage insurance provider. On a positive note, in response to the claim that
joint and several liability would provoke multiple and confusing notices to the consumer, the court clarified that only one
adverse action notice had to be issued in order to discharge the FCRA notice obligation of all responsible companies.
Adequacy of Adverse Action Notices
In another important (and unfortunate) part of the decision, the court added new requirements for the content of an Adverse
Action Notice to be deemed adequate. The court stated that the Adverse Action Notice must not only communicate to the consumer
that adverse action was taken, but also "describe the action" and "specify the effect of the action upon the consumer." It
is far from clear what a user of credit reports must actually state based on the court's wording, particularly with respect
to the effect on the consumer. But what is clear is that nothing in the statute requires this level of detail. It is unlikely
that users are currently specifying such information in Adverse Action Notices.
Willfulness
This is perhaps the most troubling portion of the decision, and even provoked a dissent from one justice. The court started
the analysis by declining to adopt the strictest standard for proving willful FCRA violations. It opted instead to follow
the Third Circuit, which requires either a knowing violation of FCRA or a "reckless disregard" for whether a policy was violative
of FCRA. Remarkably, applying this standard, the court found that defendants were in fact reckless. More specifically, despite
the fact that the district court had agreed with the defendants' interpretation of adverse action in connection with the setting
of an initial rate, the majority found that position "unreasonable" and thereby subject to statutory penalties (up to $1,000
per transaction) and punitive damages for willful violations. Indeed, in explicating the willfulness standard, the majority
made numerous gratuitous comments about companies that "avoid learning the law's dictates by employing counsel with the deliberate
purpose of obtaining opinions that provide creative but unlikely answers to 'issues of first impression.'" The majority
does states that a company will not have acted willfully under FCRA if it has "diligently and in good faith attempted to fulfill
its statutory obligations and to determine the correct legal meaning of the statute and has thereby come to a reasonable,
albeit erroneous, interpretation of the statute." Id. at 10061 (emphasis added) But given the majority's conclusion that
there was a willful violation on the facts of that case, and the repeated admonition that "creative lawyering that provides
unreasonable answers" will not insulate the company from willful liability, it certainly appears that there is little room
for an incorrect interpretation of the statute to be adjudged "reasonable" after the fact.
