by Deepak Gupta
In an opinion by Justice Souter, the Supreme Court this morning handed consumers an incomplete victory in the consolidated Fair Credit Reporting Act cases, Safeco v. Burr and Geico v. Edo. For our previous coverage of those cases, including all of the briefs, see here, here, here, and here. (Disclosure: My colleague, Scott Nelson, is co-counsel for the respondents.) In this post, I'm going to attempt a quick summary of the decision, but I hope we'll be able to bring you some additional anaysis in the days to come.
1. Willfulness Entails Reckless Disregard: The really good news for consumers today is that the insurance companies lost on the principal question in these cases -- whether a "willful" violation of the FCRA can be established by proof that the defendant recklessly disregarded the law. The companies had argued that a willful violation could only be established by proof that the defendant's actions were known to violate the Act, but the Court firmly rejected that interpretation as inconsistent with standard common law usage in civil actions. The Court also concluded that the FCRA's drafting history didn't shed light on the question either way and that the reckless-disregard standard wouldn't lead to absurd results. In terms of impact on the run of FCRA cases, this was the most significant question decided by the Court today; a contrary ruling would have made it much harder for consumers to obtain statutory or punitive damages.
2. Adverse Action Requirement Extends to First-Time Rates, But Considering the Credit Report Must Be A "Necessary Condition" of the Increase: Having arrived at the proper standard of recklessness, the Court then had to decide whether the companies had actually violated the statutory requirement that they send notice to consumers before taking any "adverse action" based on their credit reports. To make a long story short, the companies had charged consumers higher initial rates for insurance based on their credit reports. The question was whether that action constituted "an increase in any charge for . . . any insurance, existing or applied for."
As an initial matter, the Court agreed with the position of the Solicitor General and the plaintiffs--that the word "increase" extended to a first-time rate, consistent with the "ambitious" consumer protection objectives that Congress had in mind when it enacted the FCRA: "[T]he point from which to measure difference can just as easily be understood without referring to prior individual dealing. The Government gives the example of a gas station owner who charges more thanthe posted price for gas to customers he doesn’t like; it makes sense to say that the owner increases the price and that the driver pays an increased price, even if he never pulled in there for gas before." This section of the opinion has some great language about the broad scope and purpose of the FCRA and the need for courts to interpret the statute in a manner that's consistent with Congress's goals.
However, Justice Souter also reasons that the statutory requirement that the adverse action be "based on" the credit report means that "considering the credit report must be a necessary condition for the difference." It isn't enough, in other words, that the insurance company considered the score and based its score on the rate; the score had to be a "necessary" factor in the decision.
As Justice Stevens points out in his brief but powerful dissent, the statute says nothing of the sort. The more natural reading is to focus on what the company actually did rather than what it might have done. The Court's reasoning, moreover, invites manipulation; companies are free to adopt whatever "natural" credit scores they want.
3. The Baseline Is The "Neutral Rate," Not the "Best Possible" Rate: Building on its analysis of the causation issue, the Court next addressed the question of the appropriate baseline: Should the increase be measured against the rate the consumer would have received with the "best possible" credit score, or should it be measured against the rate the consumer would have received if the credit score had not been taken into account (the so-called "neutral rate")? The Court held that the latter was more appropriate, explicitly tying the baseline question to causation: If, as the Court had just concluded, Congress required notice only when the effect of the credit report on the initial rate offered was necessary to put the consumer in a worse position than other relevant facts would have decreed anyway, it makes sense to assume that Congress was more likely concerned with the "practical question" of whether the consumer's rate actually suffered instead of the "theoretical question" of whether the consumer would have gotten a better rate with perfect credit.
The Court frankly acknowledged that its reading would leave a "loophole" in the statute because "it keeps first-time applicants who actually deserve better-than-neutral credit scores from getting notice, even when it errors in credit scores saddle them with unfair rates." But donning his legislator cap, Justice Souter concluded that the loophole was necessary to prevent the problem of "hypernotification"--people would get so many notices of this sort that they would regard them as "formalities" and "formalities tend to be ignored." The Court offered no statutory or other legal support for this view, just its own policy preference.
4. Application to the Facts & Objective Unreasonableness: In the GEICO case, the Court held that because the initial rate offered to the plaintiff was the one he would have gotten if his score wasn't taken into account, GEICO didn't owe him an adverse action notice. In the Safeco case, the Court ducked the question of whether Safeco violated the statute. Instead, it held that the question didn't matter because it was clear that any violation wasn't reckless--that is, that it violated an objective standard of disregarding an unjustifiably high risk of harm that is either known or so obvious that it should be known. This was so because the company's view of the law, although wrong, was not unreasonable. This was not a case, said Justice Souter, in which the defendant "had the benefit of guidance from the courts of appeals or the Federal Trade Commission that might have warned it away from the view it took."
This final section of the opinion has some unfortunate language. Justice Souter supports his point about objective reasonableness by dropping a "cf" citation to Saucier v. Katz, a leading case applying the rule that government officials are entitled to qualified immunity in civil rights cases unless their actions violate "clearly established" law. As a result of years of Supreme Court hostility to civil rights plaintiffs, it's gotten very difficult for plaintiffs in constitutional cases to get around this qualified-immunity hurdle. The possibility that defendants could try to use today's opinion to import the qualified-immunity standard into the consumer law context is troubling. In a similarly unfortunate development, the Court notes, parenthetically, that the FTC has "only enforcement authority" rather than "substantive rulemaking authority" with respect to the FCRA, without specifically identifying in what other form the FTC might deliver authoritative guidance that would bear on the question of objective reasonableness. The Court also left undecided the extent to which evidence of subjective bad faith should be taken into account in determining willfulness and expressly left open the possibility that good-faith reliance on legal advice might constitute a defense to liability.
On the whole, however, the decision is about as good as could have been expected, particularly based on the tenor of the oral arguments. The plaintiffs didn't prevail, but the Court sided with consumers on the two biggest issues in the case--the reckless disgregard standard and the question whether the adverse-action requirement extends to initial rates.