by Scott Nelson
Blogging about lost cases is about as satisfying as kissing your sister, but I wanted to add a few additional thoughts to those expressed by Deepak in Monday's post on Safeco v. Burr. In the interest of full disclosure, I should note that I was co-counsel for the respondents, who lost the case despite winning a couple of the key issues.
Willfulness and Recklessness: The principal reason the insurance companies gave for seeking review by the Supreme Court in the first place was that the Ninth Circuit's ruling that FCRA's willfulness standard is satisfied by a showing of "reckless disregard for the law" was erroneous and out of step with the holdings of other circuits. For a change, the Supreme Court ultimately agreed with the Ninth Circuit on that point and adopted a much more consumer-friendly standard for recovery than the insurance companies advocated.
Under the companies' view of the world, enhanced remedies should only be available under FCRA if a defendant violated the statute knowing that its conduct was illegal. The Supreme Court's ruling makes enhanced penalties available without regard to whether a defendant actually knew or believed it was violating the law, as long as the defendant's conduct was reckless, which the Court's opinion equates with a highly unreasonable interpretation of the law.
Interestingly, the Court's opinion appears to resolve, without actually acknowledging the existence of, considerable confusion about whether recklessness is a subjective or objective standard, or even a little of both. Justice Souter comes down squarely for an objective standard of recklessness in civil cases, defining recklessness as disregard of a high risk of harm that the defendant either was or should have been aware of.
In this case, the Court held that the objective standard was not satisfied because (in the case of Safeco) it was not clear enough that Safeco's interpretation of the statute was wrong. The Court therefore declined to consider evidence that might have suggested that Safeco actually was subjectively aware of a risk that it was violating the law. Such evidence, the Court ruled, was irrelevant because, objectively, the risk was not high enough to constitute recklessness no matter what the defendant thought.
Although the objective standard may have hurt the plaintiffs in this case, it seems likely that it will generally be more helpful than harmful. Under the Court's view of recklessness, a defendant should be found to be reckless if its interpretation of the statute was highly unreasonable and it should have known of the unreasonableness, even if it subjectively thought that what it was doing was completely proper. Thus, plaintiffs seeking to prove recklessness will not have to find smoking guns showing that defendants were actually aware of the risk that they were violating the law.
Finally, it should be noted that the impact of the Court's recklessness/willfulness ruling on future cases involving alleged violations of FCRA's notice requirements may not be very great, because most courts have held that the enactment of the Fair and Accurate Credit Transactions Act of 2003 (FACTA) prospectively eliminated private rights of action for notice violations. E.g., Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. 2006). Pending cases alleging notice violations (especially by insurance companies) that preceded FACTA's enactment, on the other hand, are likely to be adversely affected by the Court's ruling that the law on notice was not clear enough to support a finding of recklessness by a defendant in these circumstances. Any beneficial effect of the Court's adoption of a recklessness standard, therefore, is likely to be confined to cases alleging violations of other provisions of FCRA.
Notice to First-Time Customers. Safeco's petition for certiorari raised only the recklessness issue and did not challenge the Ninth Circuit's application of the standard to Safeco's conduct, nor did it seek review of the Ninth Circuit's ruling that it had violated the statute. In its merits briefs, however, Safeco sought to resurrect an argument it had lost on below -- that is, the claim that it did not violate the statute when it failed to give notice to first-time customers who were charged unfavorable rates because their rates had not been "increased."
Although Justices Thomas and Alito correctly noted that this issue was not really before the Court (a point, ironically, that we made in the brief for the plaintiffs), the majority chose to decide it anyway, and firmly rejected Safeco's argument. Although some of the Justices' comments at oral argument, particularly those of Justice Breyer, had suggested considerable sympathy for Safeco's reading of the law, the Court ultimately adopted a common-sense view: If a first-time customer gets a worse rate as a result of consideration of his credit report, his rate has been "increased" over what it otherwise would have been, which is enough to satisfy the statute.
As the Court noted, acceptance of Safeco's argument that first-time customers are excluded from the notice obligation would open a gaping loophole in the law by eliminating notice in the circumstance where it is most likely to be needed. Indeed, the Court pointed out that "notice in the context of an initially offered rate may be of greater significance than notice in the context of a renewal rate; if, for instance, insurance is offered on the basis of a single, long-term guaranteed rate, a consumer who is not given notice during the initial application process may never have an opportunity to learn of any adverse treatment."
The GEICO Loophole. Unfortunately, having avoided creating one gaping loophole, the Court turned around and created another by ruling that GEICO had not violated FCRA at all when it charged a customer a higher rate based on his credit report. The question the Court focused on was, "Higher compared to what?"
What the Court held was that the proper comparison was not to what the customer would have been charged if his credit report was better, but what he would have been charged if the company had not looked at his credit at all. GEICO had a practice of assigning a "neutral" credit score to applicants who refused to allow it to check their credit, a score that supposedly was a rough approximation of an average credit score. Thus, GEICO argued, and the Court held, that if an applicant whose credit was checked was not charged more than an applicant with a "neutral" score, the applicant's rate had not been "increased" as a result of his credit report.
What this meant in this particular case was that the plaintiff had not been adversely treated because the insurance rate he received based on his actual credit score was the same he would have gotten with a "neutral" credit score -- even though he was denied a more favorable rate solely because his credit report was not better. More generally, the Court's ruling means that GEICO could refuse to give notice to anyone with average or better credit, because such a customer would never be treated worse than someone with a "neutral" credit score -- even though the customer's credit report might contain mistakes that, if corrected, could entitle the consumer to a more favorable rate. Thus, roughly half of all consumers would be denied the information that the notice requirement is supposed to give them: that they have suffered in the marketplace because of their credit report and could benefit from the elimination of errors in the report that might have contributed to their adverse treatment.
But the potential loophole is even worse than that. After all, it is solely GEICO's choice to offer an average rate to consumers whose credit it does not check. A company could just as easily adopt a policy of offering only its worst rates to consumers whose credit it does not check (or even, as Justice Stevens pointed out, refusing altogether to do business with such consumers). Such a company would, by definition, never treat someone whose credit it checked worse than someone whose credit it didn't check, and thus would never be obligated to give anyone notice, no matter how significantly their credit report affected the rates they paid.
It can hardly have been Congress's intent to allow the notice obligation to be so manipulable and, potentially, so meaningless. The Court's sole rationale for its reading of the statute was the fear that a contrary reading would lead to too many adverse-action notices, including notices to any consumer with less than "gilt-edged" credit.
Aside from the fact that there is no indication in the statute of an intent by Congress to hold down the number of notices, the Court's decision actually goes much further than merely preventing notices from being sent to consumers with excellent credit. In the case before it, it excused GEICO from giving credit to half or more of the universe of consumers, and it created the potential for companies to eliminate notice to all consumers, not just those with near-"gilt-edged" credit.
The unfortunate result is that consumers won't be able to rely on the fact that they haven't received adverse action notices as any kind of assurance that their credit reports aren't hurting them in transactions in the marketplace. Congress wanted consumers to receive notice of such adverse effects so they would know that they had a real, dollar-and-cents interest in checking their credit reports to be sure that the adverse effects aren't the result of mistaken information (which is, sadly, very common in credit reports). The Safeco decision will heighten the importance of consumers' taking it upon themselves to check their credit periodically without the impetus of adverse-action notices. But human nature being what it is, it's likely that many of us won't do that, and thus will never know that we're paying more because of inaccurate information in our credit histories.