On July 13, 2018, in Dutta v. State Farm Mutual Automobile Insurance Company, the Ninth Circuit affirmed the district court’s decision granting summary judgment to State Farm in a putative Fair Credit Reporting Act class action. The decision presents another helpful application of the U.S. Supreme Court’s 2016 Spokeo decision. The Dutta decision highlights the importance of continuing to challenge standing at all stages of a case even in the face of a statutory violation.

Background

In Dutta v. State Farm, the plaintiff Bobby S. Dutta alleged that State Farm violated section 1681b of the FCRA, by failing to provide him with a copy of his consumer report, notice FCRA rights and an opportunity to challenge inaccuracies in the report before State Farm denied his employment application. As background, Dutta applied for employment with State Farm through the company’s Agency Career Track, or ACT, hiring program. State Farm examines the 24-month credit history of every ACT applicant, and if an applicant’s credit report indicates a charged-off account greater than $1,000, the applicant is automatically disqualified.

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On June 21, 2018, the U.S. District Court for the District of Oregon dismissed a putative class action complaint alleging that a potential employer violated the disclosure and pre-adverse action notification requirements of the Fair Credit Reporting Act in Walker v. Fred Meyer Inc.[1] The Walker decision highlights several key lessons associated with FCRA class actions, particularly related to the disclosures employers must provide to prospective employees.

Background

Daniel Walker applied for a job with Fred Meyer Inc. As part of the application process, Fred Meyer provided Walker with separate disclosure and authorization forms regarding its intent to procure a background report on Walker. Fred Meyer presented the disclosure and authorization forms together, each in separate documents. The disclosure form mentioned both a general consumer report and an investigative consumer report.

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On May 31, the Fourth Circuit Court of Appeals affirmed a $150,000 sanctions award against three consumer attorneys and their law firms for bad faith conduct and misrepresentations.

The opinion reads like a detective story and lays out, in the Court’s own words, “a mosaic of half-truths, inconsistencies, mischaracterizations, exaggerations, omissions, evasions, and failures to correct known misimpressions created by [consumer attorneys’] own conduct that, in their totality, evince lack of candor to the court and disrespect for the judicial process.”

The litigation arose from a payday loan that plaintiff James Dillon obtained from online lender Western Sky.  Later, Dillon engaged attorneys Stephen Six and Austin Moore of Stueve Siegel Hanson LLP and Darren Kaplan of Kaplan Law Firm, PC who filed a putative class action against several non-lender banks that processed loan-related transactions through the Automatic Clearing House network.  Defendant Generations Community Federal Credit Union promptly moved to dismiss Dillon’s lawsuit on the basis of the loan agreement’s arbitration clause.  In response, Dillon challenged authenticity of the loan agreement and a two-year-long dispute ensued during which the district court refused to send the case to arbitration based on Dillon’s authenticity challenge; Generations appealed the district court’s decision; and the Fourth Circuit vacated it and remanded the case for further proceedings on the arbitration issue.  Significantly, when questioned by both the district court and the Fourth Circuit, Six maintained authenticity challenge and represented that he had drafted the complaint without the loan agreement and that Dillon’s claims do not rely on the loan agreement.

Six’s representations regarding the contents of the complaint were problematic given the complaint specifically referenced the loan agreement and its terms.  Evidence uncovered during arbitration-related discovery showed that Dillon possessed the loan agreement all along and, crucially, that he supplied his counsel with a copy of the agreement a week before the complaint was filed.  The latter piece of evidence was discovered only as a result of forensic examination of Dillon’s computer.  Once this evidence came to light, Dillon responded to Generations’ requests for admissions that the loan agreement was authentic.

Generations moved for sanctions against Dillon’s attorneys.  Instead of admitting their wrongdoing, Kaplan argued that there was never any challenge to authenticity, and Six argued that he still doubted authenticity even though he signed Dillon’s admissions that the loan agreement was authentic.  Invoking its inherent authority to punish bad faith behavior, the district court sanctioned Six, Kaplan, and their law firms jointly, ordering them to pay the defendants $150,000 in attorneys’ fees.  Moore was held liable jointly for only $100,000 of the total amount due to his lesser role in the bad-faith conduct.  The lawyers appealed.

The Fourth Circuit summarily rejected their arguments that neither the rules of ethics nor the Federal Rules of Civil Procedure required them to disclose the copy of the loan agreement before discovery commenced.  “These arguments miss the point.  Counsel are not being sanctioned for their failure to disclose the Dillon copy of the Western Sky loan agreement.  Rather, counsel are being sanctioned for raising objections in bad faith—simultaneously questioning (and encouraging the district court to question) the authenticity of a loan agreement without disclosing that the Plaintiff provided them a copy of that loan agreement before the complaint was filed.”

Discovery in consumer litigation is often asymmetrical and focuses on defendants’ obligations.  This opinion is a good reminder that the rules apply to plaintiffs too and that the courts will not condone a “crusade to suppress the truth to gain a tactical advantage.”

On May 29, the Ninth Circuit ruled that an end-user’s misuse of reported information does not render a credit reporting agency’s report inaccurate for purposes of liability under the Fair Credit Reporting Act.  The Court affirmed the district court’s grant of summary judgment in the putative class action case brought against a national credit reporting agency (“CRA”). 

The action centered on the CRA’s reporting of short sales and foreclosures.  In reporting a short sale, the CRA coded the account with a “9-68.”  The lead code of “9” indicated “Settled” and the “68” indicates “Acct legally paid in full for less than the full balance.”  In reporting a foreclosure, the CRA coded the account with an “8-94,” indicating “Creditor Grantor reclaimed collateral to settle defaulted mortgage.” 

Although the CRA reported the two types of accounts distinctly, Fannie Mae’s software, Desktop Underwriter, treated the codes the same.  Desktop Underwriter identified a mortgage account as a foreclosure if it included a lead code of either 8 or 9.  Fannie Mae “knew from the instructions [the CRA] had provided that code 9 did not represent a foreclosure, and that it was ‘necessarily capturing accounts there were not actually foreclosures.’”  Merging the two codes had significant adverse consequences, as consumers with a short sale were subject to a seven-year waiting period for another mortgage, rather than a two-year waiting period that normally applies to short sales. 

Despite Fannie Mae’s alleged misuse of the reported information, plaintiffs John Shaw, Kenneth Coke, and Raymond Rydman brought a putative class action against the CRA.  They alleged the CRA violated § 1681e(b) in failing to follow reasonable procedures to ensure maximum accuracy, § 1681i in failing to conduct a reasonable investigation, and § 1681g in failing to fully disclose their files. 

In a well-reasoned opinion, the Ninth Circuit refused to impose liability on the CRA for Fannie Mae’s supposed misuse of its report.  The Court first disposed of the §§ 1681e(b) and 1681i claims by concluding the reports were not inaccurate.  In doing so, the Court examined whether the report was “misleading in such a way and to such an extent it could be expected to adversely affect credit decisions.”  Noting the CRA’s technical manuals “unambiguously” stated the coding referred to a short sale, Fannie Mae’s treatment of the codes “does not render [the CRA’s] reporting misleading.”  Any inaccuracy was due to Fannie Mae’s mistreatment, not the CRA’s own inaccuracies. 

Likewise, the Court flatly rejected the plaintiffs’ argument that the CRA could be held liable because it knew Fannie Mae misused the data.  The Court found no support for the suggestion that a CRA “must amend its reporting system when a subscriber disregards its technical manuals in order to avoid liability.”   

The plaintiffs’ failuretodisclose claim under § 1681g met a similar fate.  The plaintiffs’ chief complaint with the CRA’s file disclosure to its consumers was that it displayed information differently than it did when reporting to customers.  However, as the Court found, the CRA fulfilled its duties under § 1681g to make a clear disclosure.  Use of its proprietary coding system would have run afoul of that requirement by confusing the consumer. 

This decision shows that even in the plaintiff-friendly Ninth Circuit, a CRA’s liability has bounds.  It also demonstrates the importance of a CRA clearly explaining its coding system to its customers.  The CRA’s clear explanations within its technical manuals allowed it to escape liability for its customer’s misinterpretation of the coding system.        

 

On May 21, the U.S. Supreme Court, in a 5-4 decision penned by Justice Neil Gorsuch, held that employers can include a clause in their employment contracts that requires employees to arbitrate their disputes individually and to waive the right to resolve those disputes through class actions and other joint proceedings. The Court ruled such requirements are enforceable under the Federal Arbitration Act (“FAA”).

The decision is a major victory for employers, as arbitration can be a tool to funnel employee disputes into out-of-court resolution and away from class actions. The ruling, moreover, takes its place in a lengthy and growing list of rulings by the Supreme Court enforcing arbitration agreements and the pro-arbitration policies of the FAA over the resistance of some lower federal courts and state courts.

The court addressed three cases in this decision:

  • A class action from the Fifth Circuit against Murphy Oil USA Inc. under the Fair Labor Standards Act (“FLSA”);
  • A wage and hour class from the Seventh Circuit against Epic Systems, a healthcare software company, alleging that it violated the FLSA; and
  • A class action from the Ninth Circuit claiming Ernst & Young violated the FLSA and California labor laws by misclassifying employees to deny them overtime wages.

According to the majority decision, the FAA mandates enforcing the terms of an agreement to arbitrate, given that the FAA was enacted “in response to a perception that courts were unduly hostile to arbitration.” The FAA thus instructed courts to “respect and enforce the parties’ chosen arbitration procedures” – such as the agreement to “use individualized rather than class or collective action procedures.”

The appellee-employees argued that the National Labor Relations Act (“NLRA”), passed in 1935, rendered class action and other joint-proceeding waivers unenforceable in arbitration agreements because the NLRA gives workers the right to organize “and engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The Supreme Court rejected that position, stating, “The NLRA secures to employees rights to organize unions and bargain collectively, but it says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.”

“The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written,” wrote Justice Gorsuch.

Further, the majority refused to defer to the conclusion of the National Labor Relations Board (“NLRB”) that the NLRA trumps the FAA. The Court found such Chevron deference was inappropriate since the NLRB was interpreting the NLRA “in a way that limits the work of” the FAA. The majority also declined to defer to the NLRB’s prior conclusion that the NLRA trumps the FAA.

Justice Ruth Bader Ginsburg penned a strongly-worded dissent, deeming the majority’s decision an attack on “statutes designed to advance the well-being of vulnerable workers.”

Going Forward

The Epic Systems decision is good news for employers nationwide as it enhances their ability to limit exposure to employee claims in class arbitration, class actions, and other joint proceedings.

Moving forward, we see several potential developments:

  1. Undoubtedly, more employers will include class and joint-proceeding waivers in their arbitration agreements, and will make those agreements mandatory for new hires. This will become the norm for employers.
  2. Defenders of the decision point to an overall reduction in costs for all parties, as arbitration of individual disputes may allow for more efficient and quicker resolution of claims.
  3. Democrats in Congress likely will push to pass legislation to reduce the overall impact on employees from the Epic Systems decision. The passage of any such legislation, however, will be difficult in the Republican-controlled Congress.
  4. The logical underpinnings and reasoning in the Epic Systems decision have ramifications beyond the employment context. Pro-employee advocates have long argued that employment law or the relationship between employer and employee somehow justified different treatment than other contractual relationships meaning that the FAA did not apply or these special circumstances trumped the FAA. Likewise, in the consumer context, many pro-consumer advocates have raised a host of similar arguments that the relationship between consumer and businesses (such as credit card companies, auto finance entities, and debt collectors) provides justification for courts to disregard plainly worded arbitration provisions embedded in applicable contracts under supposed public policy rationales. Epic Systems reiterates the Supreme Court’s view that the FAA will govern the interpretation of arbitration provisions, including in the class action context, by reviewing the plain language used by the parties and will reject arguments that amount to a rewriting or failure to enforce the clear language in arbitration provisions.

Employers who do not have an arbitration program, or a program that has not been recently refreshed, might now consider adding or updating arbitration clauses to their agreements. Indeed, consumer-facing companies of all types can take additional comfort in the efficacy of arbitration agreements in designing and implementing arbitration programs for consumer claims.

Troutman Sanders advises clients in developing and administering consumer arbitration agreements, and has a nationwide defense practice representing employers in many types of class actions and individual claims. We will continue to monitor these developments.

In Echlin v. PeaceHealth, the U.S. Court of Appeals for the Ninth Circuit held that a debt collection agency meaningfully participated in collection efforts even if it did not have authority to settle the account, did not receive payments, and was not involved in collection beyond sending two collection letters.  Accordingly, the collection agency did not violate the Fair Debt Collection Practices Act by sending the letters on its own letterhead.

Michelle Echlin incurred a debt in the form of medical bills owed to PeaceHealth.  After Echlin ignored multiple requests for payment, PeaceHealth referred her account to ComputerCredit, Inc. (“CCI”).  CCI sent Echlin two collection letters on its letterhead but Echlin did not respond.  In accordance with its agreement with PeaceHealth, CCI returned the account back to PeaceHealth.  Echlin later filed a purported class action alleging that CCI’s letters created a false or misleading belief that CCI was meaningfully involved in the collection of her debt—a practice known as flat-rating.  CCI and PeaceHealth moved for summary judgment.  The district court granted PeaceHealth’s and CCI’s motions for summary judgment, and Echlin appealed.

The Ninth Circuit found that CCI had meaningfully participated in collection of Echlin’s debt because it controlled the content of collection letters it sent and did not seek PeaceHealth’s approval prior to mailing.  While CCI did not have authority to process or negotiate payments from PeaceHealth, CCI handled correspondence and phone inquiries from debtors.  In addition, CCI personnel returned consumers’ calls if requested.  In rejecting Echlin’s claims that CCI could not have meaningfully participated if it had not handled payments or taken further action in collecting on the account, the Court noted that “[m]eaningful participation in the debt-collection process may take a variety of forms,” as shown by a long, non-exhaustive list of factors considered by courts across the country.

Notably, the Ninth Circuit distinguished cases that addressed the meaningful involvement by attorneys because those cases reflect concerns regarding the “unique sort of participation that is implied by letters that indicate the creditor has retained an attorney to collect its debts.”  The higher standard of involvement required of attorneys and law firms collecting a debt did not apply to non-attorneys.

On April 23, the Office of the Comptroller of the Currency Bank added its support to Bank of America’s efforts to convince the Ninth Circuit to review a March 2 panel decision holding that the National Bank Act does not preempt a California state law requiring the payment of 2% interest on escrow accounts. “The panel decision errs in matters of fundamental importance to the national banking system” and “therefore presents the rare case that justifies rehearing,” the OCC wrote.

The case arises from a 2014 putative class action filed by borrower Donald Lusnak, alleging that Bank of America violated California’s Unfair Competition law by failing to pay 2% interest on mortgage escrow accounts, as required by a 1976 California statute. Bank of America argued, on a motion to dismiss, that the California law was preempted by the National Bank Act and its implementing regulations. The lower court agreed, holding that national banks’ incidental powers include providing and servicing escrow accounts and that the California law constituted a significant interference with those powers. The court also held that Dodd-Frank revisions to TILA (which took effect in 2013) did not apply retroactively to the plaintiff’s account and, more importantly, did not “expressly condition” the grant of a national bank’s powers on compliance with state law.

On appeal, a panel of the Ninth Circuit reversed, holding that the Dodd-Frank Act emphasized that the legal standard of preemption set forth in Barnett Bank of Marion County, N.A. v. Nelson applies to questions of whether state consumer financials laws are preempted. Under this standard, a state law is preempted if it “prevents or significantly interferes with the exercise by the national bank of its powers.”

Turning to the preemption question, the panel held that the California law did not rise to the level of significant interference. Specifically, the court pointed to another Dodd-Frank revision – TILA – which requires creditors to pay interest on escrow accounts “if prescribed by applicable state or federal law,” suggesting that Congress did not intend for the NBA to preempt state escrow interest laws. And – more importantly for the case at hand – the panel held that the California law had never been preempted, even before the enactment of Dodd-Frank. The panel dismissed Bank of America’s argument that OCC regulations specifically addressed the preemption issue, finding that the OCC had “inaccurately” interpreted the preemption standard articulated by Barnett Bank. Moreover, those regulations were not entitled to much deference, the panel held.

Interestingly, in a footnote, the court noted that it was not suggesting that “a state escrow interest law can never be preempted by the NBA” and that a state law setting “punitively high rates” may prevent or significantly interfere with a national bank’s business, raising the specter of multiple case-by-case determinations as to when a state escrow interest statute is “punitively high” and when it is not.

On April 13, Bank of America filed a Petition for Rehearing En Banc. In an amicus brief filed on April 23, the OCC called on the full court to grant the Petition, contending that the panel’s criticism of its regulation is “baseless” and that “numerous courts have sustained” the agency’s interpretation of Barnett Bank. The OCC also took issue with the panel’s reliance on Dodd-Frank’s amendments to TILA, arguing that those provisions cannot influence the issue because they went into effect after the borrower obtained his mortgage. On April 20, the American Bankers Association, U.S. Chamber of Commerce, and other industry groups submitted their own amicus brief also urging the Ninth Circuit to review the panel’s decision.

The resolution of this issue is an important one for national banks. As the Ninth Circuit pointed out, thirteen states have escrow interest laws similar to California’s. If the panel decision is not reversed, we expect that national banks will face growing litigation on this issue both in those states and in California. Already in California, at least four lawsuits have been filed in the wake of Lusnak in an attempt by plaintiffs’ lawyers to capitalize on the panel’s decision.

A plaintiff’s putative class action suit in the Southern District of Ohio under the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., has been thrown out because she could not show that the employer’s initial assessment or grading of her eligibility for the position was an adverse action.

On June 2, 2014, plaintiff Deloris Reid applied for a job with grocery retailer Kroger. Reid disclosed that she had been convicted of a misdemeanor assault a year earlier. She then interviewed with the store’s Administrative Assistant, Nancy Austin, who contacted Reid several days later and offered her a position contingent on her passing a background check.

Kroger utilized General Information Solutions, Inc. (“GIS”) to provide background checks and to assign “preliminary grades” based on a matrix provided by Kroger. Kroger maintained the ability to review the preliminary grades before making a decision on whether to hire an applicant.

About three weeks after Reid submitted her application, GIS returned the background check, which indicated that Reid had previously been convicted of felony assault on June 11, 2013. Kroger reviewed Reid’s background report and confirmed GIS’ initial grade of “Not Clear for Hire,” triggering GIS to send a pre-adverse action letter.

Reid disputed her report with her contact at the store, Austin, who claimed she could not help her. Reid then disputed the report directly with GIS. GIS investigated the matter and determined that the charges had been reduced to a misdemeanor, and provided a corrected report to Kroger. However, Reid was still ineligible for hire based on the temporal proximity of her misdemeanor assault conviction, and GIS sent a final adverse action notice.

In her suit, Reid claimed that Kroger violated the FCRA by taking an adverse action without providing her with a copy of her initial background check and description of her FCRA rights. Reid based this on the claim that her initial grade was in fact an adverse action because her offer of employment was effectively revoked.

The Court rejected this argument, finding instead that the grade was only preliminary, relying on the fact that Kroger’s preliminary grade was subject to change. In rejecting Reid’s claim that the dispute process was “illusory,” the Court found that the evidence showed that Reid remained under consideration for employment pending the resolution of her dispute. Moreover, Reid remained ineligible for hire even after she successfully disputed the information in her background report.

Additionally, the Court gave little credence to Reid’s argument that the employee at the store telling her she could not help her demonstrated the illusory nature of the dispute process. “The FCRA does not require users of consumer reports, like Kroger, to make individual employees, like Ms. Austin, available to assist applicants, like Ms. Reid, with their disputes,” the Court reasoned. Such a requirement goes beyond the obligations imposed by the FCRA.

Plaintiffs’ attorneys have been advancing this theory that any negative grading constitutes an adverse action. However, this Court showed that it is not willing to accept such a theory. To avoid liability on such claims, however, employers need to show that the dispute process is meaningful. Kroger prevailed on summary judgment because it could show that Reid’s job remained available through the dispute process.

A copy of the court’s opinion can be found here.

On March 19, the United States District Court for the Western District of New York granted summary judgment to a debt collector who was sued for allegedly violating the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692-1692p, by including language in a form letter that referred to the tax implications of accepting a settlement offer. 

The underlying facts are that on or around July 13, 2015, debt collector Financial Recovery Services, Inc. (“FRS”) sent a form collection letter to plaintiff Mary Rozzi Church, stating that she owed $2,170.50, and offering her three separate “settlement opportunities” to pay the balance for less than what was owed.  Following the details of the settlement offers, the letter stated the following: 

These settlement offers may have tax consequences.  We recommend that you consult independent tax counsel of your own choosing if you desire advice about any tax consequences which may result from this settlement.  FRS is not a law firm and will not initiate any legal proceedings or provide you with legal advice.  The offers of settlement in this letter are merely offers to resolve your account for less than the balance owed. 

Church argued that the language contained in the letter, wherein FRS stated that “these settlement offers may have tax consequences,was a false representation or deceptive means in connection with the collection of a debt in violation of 15 U.S.C. § 1692e because an unaccepted offer does not have any tax consequences and the least sophisticated consumer would be confused by the statement. 

The Court, however, agreed with FRS and found that even the least sophisticated consumer would read the entirety of the statement and understand that any potential tax consequences attach only once the offer has been accepted and, as such, the statement was neither deceptive nor misleading in violation of the FDCPA. 

A copy of the entire opinion can be found here. 

This decision is part of a growing body of cases centering around similar language regarding potential tax consequences on settlement offers made by debt collectors.  Debt collectors should evaluate this decision and review their policies and procedures to minimize potential liability under the FDCPA for “tax consequences” disclosures.  We will continue to monitor court decisions to identify and advise on new compliance risks and strategies.

 

According to a recent decision from the California Court of Appeal, mortgage lenders and servicers can, at least under certain circumstances, be “debt collectors” under the California Rosenthal Fair Debt Collection Practices Act, frequently referred to as the “Rosenthal Act.”.

In the case, plaintiff Edward Davidson filed a putative class action suing his mortgage servicer, Seterus, Inc., after allegedly receiving hundreds of phone calls from employees of Seterus demanding mortgage payments that Davidson had already paid or that were not yet due.  The alleged calls included threats to report negative credit information to the credit bureaus and to foreclose on Davidson’s home.  The trial court sustained Seterus’s demurrer, dismissing the complaint with prejudice based on the fact that a mortgage servicer may not be considered a debt collector under the Rosenthal Act.

The California Court of Appeal reversed the trial court’s ruling and held that Seterus and its parent company were subject to the Rosenthal Act for these alleged collection activities.

The Court noted that there is a split in authority among federal district courts that have interpreted the Rosenthal Act, that there is no California authority on the issue, and that there is no language specific to whether entities attempting to collect mortgage debt are subject to, or exempt from, the Rosenthal Act.  However, in adhering to the general principle that civil statutes enacted for the protection of the public should be broadly construed in favor of protecting the public, the Court held that the definitional language in the Rosenthal Act was sufficiently broad to include mortgage lenders and mortgage servicers.  The Court further discussed that collecting on a mortgage is the same as collecting on a consumer debt, which is governed by the Rosenthal Act.  The Court also noted that the definition of a “debt collector” under the Rosenthal Act is broader than its counterpart under the federal Fair Debt Collection Practices Act, which excludes mortgage servicers in certain circumstances.

The Court distinguished the body of case law holding that the foreclosure on a deed of trust does not constitute debt collection activity under the Rosenthal Act.  The Court noted that the present action does not involve foreclosure allegations and that it was not deciding whether a mortgage lender or mortgage servicer can be sued under the Rosenthal Act for any activity that the mortgage servicer undertakes with respect to a mortgage.  The Court held that this was a different question from the one they were currently addressing: whether a mortgage lender or mortgage servicer may ever be considered a debt collector under the Rosenthal Act, the answer to which is “yes.”

Mortgage lenders and mortgage servicers should evaluate this decision and review their policies and procedures in California to minimize potential liability under the Rosenthal Act.  Troutman Sanders is experienced in California debt collection and will continue to provide updates on new legislation, court decisions, and other legal developments in this area of law.