Amicus Curiae Brief — GEICO GENERAL INSURANCE CO. v. Edo

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gos Nos. 06-84, 06-100

In The

Supreme Court of the United States

SAFECO INSURANCE COMPANY

OF AMERICA, ET AL..,

Petitioners

V.

CHARLES BURR, ET AL.

¢

GEICO GENERAL INSURANCE COMPANY. ET AL...

Petitioners

We

AJENE EDO

e —

On Writs Of Certiorari To The United States

Court Of Appeals For The Ninth Circuit

@——

BRIEF FOR THE FINANCIAL SERVICES

ROUNDTABLE, CHAMBER OF COMMERCE

OF THE UNITED STATES OF AMERICA,

BUSINESS ROUNDTABLE, MORTGAGE

BANKERS ASSOCIATION, AMERICAN BANKERS

ASSOCIATION, AMERICAN FINANCIAL

SERVICES ASSOCIATION, AMERICA’S

COMMUNITY BANKERS, AND CONSUMER

BANKERS ASSOCIATION, AS AMICI CURIAE

IN SUPPORT OF PETITIONERS

———_____¢

L.. RICHARD FISCHER

BETIS. BRINKMANN

ROBIN S. CONRAD SETH M. GALANTER

SHANE BRENNAN NATHAN D. TAYLOR

NATIONAL CHAMBER MORRISON & FOERSTER LLP

LITIGATION CENTER, INC. 2000 Pennsylvania Ave., NW.

1615 H Street. N.W. Washington, D.C. 20006

Washington, DC 2006 (202) SS7-1544

(P02) 463-5337 Counsel of Record

NOVEMBER 13. 2006

QUESTIONS PRESENTED

Amici Curiae will address the following questions:

1. Whether the Ninth Circuit erred in holding that a

defendant can be found liable for “willfully” violating the

Fair Credit Reporting Act (FCRA), and thus be subject to

punitive and statutory damages under 15 U.S.C. § 1681n,

upon a finding of reckless disregard of the FCRA’s

requirements, which is contrary to the holdings of other

circuits that “willfully” requires actual knowledge on the

part of the defendant that the conduct violated the FCRA.

2. Whether the Ninth Circuit improperly expanded

the FCRA by holding that an “adverse action” occurs

within the meaning of Section 615 of the FCRA, 15 U.S.C.

§ 1681m, thereby triggering the requirement to provide

notice to am insurance consumer, whenever such a

consumer does not get the best insurance coverage at the

lowest rate even when the consumer’s credit information

had no impact (or had a favorable iznpact) on the rates and

terms of the insurance.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED .........:ccsesscsssesecessssssessssessen i

INTERESTS OF AMICI CURIAE ......cc.csccsssssssssesessseses 1

INTRODUCTION AND SUMMARY OF ARGUMENT... 4

MI ik ici ccsciaiiitinscasiseniniiletbtiaciiiiiaiicsaaiti acc f)

I. THE FCRA DEMANDS A SHOWING THAT A

DEFENDANT SPECIFICALLY INTENDED TO VIOLATE

THE STATUTE IN ORDER TO ESTABLISH THAT IT

“WILLFULLY” Dip So AND IS THEREFORE SUBJECT

To PUNITIVE AND STATUTORY DAMAGES ............-0+- 9

A. The Rule Of Lenity Requires That The-

FCRA’s “Willfully” Requirement Be Met

By A Showing Of Specific Intent Because

It Triggers Imposition Of Punitive And

Statutory Damages, And Supports Criminal

Sanctions Elsewhere In The Statute............. 10

B. A Specific Intent Standard Avoids The

Substantial Constitutional Doubt Raised

pe, ee 16

C. Awards Of Uncapped Punitive Damages

And Statutory Damages Based On Mere

Recklessness Would Result In FCRA Class

Actions For Billions Of Dollars Not Based

EE ID occ niichineiaisiciiiibinimdgininiendaes 19

II. THE NINTH CIRCUIT'S INTERPRETATION OF THE

FCRA’s “ADVERSE ACTION” INSURANCE PROVISION

Is ConrraRy To THE STATUTORY TEXT AND

STRUCTURE AND WOULD HAVE A SUBSTANTIAL

NEGATIVE EFFECT ON THE CONDUCT OF AMERICAN

ili

TABLE OF CONTENTS - Continued

Page

A. The FCRA’s Text And Statutory Structure

Demonstrate That The “Adverse Action”

Insurance Provision Does Not Extend To

Every Insurance Customer Who Does Not

Receive The Best Coverage At The Lowest

PN TDG gcenieviccsisiecensecetnisintsincnascetnsanipseces

B. The Ninth Circuit’s Ruling Would Require

The Issuance Of Millions Of Useless

Notices To American Consumers...............+.

CONCLUSION ....c.cccsesorscccosssosecocctvosrosssonscssossssoseossoeseeoees

iv

TABLE OF AUTHORITIES

Page

CASES:

BMW of N. Am., Inc. v. Gore, 517 U.S. 559 (1996)....5, 17, 18

Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697 (1945).......... 15

Brown v. Kildea, 58 Wash. 184 (1910).............cccsesssesesseees 13

Bryan v. United States, 524 U.S. 184 (1998) ..........ceseeees 11

Cavin v. Home Loan Ctr., Inc., 236 F.R.D. 387 (N.D.

ie SID ins accep toinatin dicing eabipanabegdbaidanniiadaliaiphaiebeanieieat 20

City of Newport v. Fact Concerts, Inc., 453 U.S. 247

TIT cee cinitensiniibicendancislndisds inhdenitipiaibalihucpitieiensienbeniibiaies 12

Clark v. Martinez, 543 U.S. 371 (2005) .....ccssesssessecseseeees 16

Cleveland, C. C. & S. L. Ry. Co. v. Wells, 62 N.E.

NE BE cies sosnrdicantescencachetschutennitidpatenunininnnegeineat 13

Cooper Indus., Inc. v. Leatherman Tool Group, Inc.,

ee es I iceknitntnditntidntacdtepceninigitsabenisniaseniaianein 12

Crandon v. United States, 494 U.S. 152 (1990)................ 14

Crowell v. Benson, 285 U.S. 22 (1932).........ccccscseeseeeeeeseees 16

Dalton v. Capital Associated Indus., Inc., 257 F.3d

ee Ny ee iceiiterriihceshinitinidchitingictintnbastesnitittiensncnantiinds 10

Ford Motor Credit Co. v. Milhollin, 444 U.S. 555

CTTTTa aseosisiidiosibsNcheenachadbeatnioniotaieedatnilicabianindidindndadonbieiccebeinatens 29

Harper v. Lindsay Chevrolet Oldsmobile, LLC, 212

F. Supp. 2d 582 (E.D. Va. 2002) ...........csecccssssccssssoreees 27

Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993)............. 14

Hines & Battle v. Wilmington & W. Ry. Co., 95 N.C.

GE Se tes thcncteecetintnnnencctiiinamectannremectelcctessrains 13, 14

v

TABLE OF AUTHORITIES -— Continued

Page

In re Farmers Ins. Co., Inc., FCRA Litigation, 2006

WL 1042450 (W.D. Okla. Apr. 13, 2006) ..........::ceeeeeeees 20

In re Progressive Ins. Corp. Underwriting and

Rating Practices Litigation, No. 1:03-cv-01519-

MP-AK, slip op. (N.D. Fla. June 23, 2006 ) .........0eseees 20

In the Matter of Rhone-Poulenc Rorer, Inc., 51 F.3d

1293 (7th Cir.), cert. denied, 516 U.S. 867 (1995)......... 21

Marshall v. Wabash Ry. Co., 46 F. 269 (C.C.S.D. Oh.

BAIS ic ccciocinesinshssssacrcneincncntinsivicncsnchingiiatiiihiinds<tetipeimmmaanadagaes 13

McLaughlin v. Richland Shoe Co., 486 U.S. 128

CRI scicoscsiiicctoiditedacectebithpubinneuiiduinsiianteticaniabnaagteiiiaia 14, 15

-Missouri Pac. Ry. Co. v. Tucker, 230 U.S. 340 (19138)....... 17

Murray v. Cingular Wireless II, LLC, 2005 US.

Dist. LEXIS 39542 (N.D. Ill. Dec. 22, 2005)..............++ 21

Murray v. Cingular Wireless II, LLC, 2005 U.S.

Dist. LEXIS 39561 (N.D. Ill. Nov. 2, 2005)............:0000 21

Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th

Cle. BOOB) .ccceccscocceccsceccscsstvnnscsoctocssnsenssocscovascosessecsciesesoess 16

Overnight Motor Transp. Co. v. Missel, 316 U.S. 572

CBIDEB) « ccocoverinrecececcicsssscqnsstensnciccosoccnessnosimecsasesbosenanspnasanpes 15

Parker v. Time Warner Entm’t Co., L.P., 331 F.3d 13

(BE Cle, BIDE) ncesccoscncscnciccsesesoconenprictoseccensontanesstetpeaseronsans 21

Powers v. Grinnell Corp., 915 F.2d 34 (1st Cir. 1990) ...... 15

Public Citizen v. Department of Justice, 491 US.

GOD (1GGDD cccirecccsncessssccriccstutnensenssestetinshncnenanctemcspediasanta 19

Ratzlaf v. United States, 510 U.S. 135 (1994)............. 11,14

Southwestern Tel. & Tel. Co. v. Danaher, 238 U.S.

OOD CBOE scccocacccstinnvnttanbatisataianicaitiniaiadidbaniiaaman 5,17

vi

TABLE OF AUTHORITIES -— Continued

Page

Spies v. United States, 317 U.S. 492 (1943) ...............cce000 11

State Farm Mut. Auto. Ins. Co. v. Campbell, 538

See SE neceecrtcnnainetitctctiinnimnanininitingianmmsiteines passim

Steam-Engine Co. v. Hubbard, 101 U.S. 188 (1879)........ 12

Trans World Airlines, Inc. v. Thurston, 469 U.S. 111

EES See ee ane ee On eee 14, 15

Treadway v. Gateway Chevrolet Oldsmobile Inc.,

963 F.Sd O71 (7th Cir. 2004)........cecccccsrcccsccsscssesscecesceeses 26

United States v. Pomponio, 429 U.S. 10 (1976)..............00+ 9

Wood, Walker & Co. v. Evans, 461 F.2d 852 (10th

SL Ie atendinicentabecentinlanmandteriiennnetineiiiamamanemsnenigete 13

STATUTES, REGULATIONS, AND RULES:

Equal Credit Opportunity Act,

a Oa inserter initinsitneniianenanetanicin 27

Fair Credit Reporting Act (FCRA),

15 U.S.C. § 1681 et seg.

I tia haat han natinintnnnaeianiieticinannenpiisataniibinin 26

EE EE ee noe aOR 26

SRT TET aT aE 8, 22, 23

§ 1681a(k\ 1) Biv) ............... pendvennitiniddsininnsimeanspibeidea 26

TTT nti hiehimesrinesetsniianininglibiaidaabeecmbiatailits 4

Et iiidinnhestennceninnacsteninnstcitiedsipingnecminentitipaieaiin 23

ail 8, 25

STII daiinciedhscicibenitelinienteniipennuninniganepmeningerenesiedl 8, 24, 25

3 SE ee ea eNO te eee 4

Be ee ererinnaiannsionsemenninetnniacteeenbiquenterininnntatienetn 23

vil

TABLE OF AUTHORITIES -— Continued

Page

SS ) : eee 25

OD SED eccicccsccetsncsntesscnsenteeesinnsniveviincennntimasieioninntiitin 8

Oe I si deisciseumntscneristipientenseviiiestenndnaspsinngniiaiiniesttid 9,11

| 5 aes sear eee 14

5) en en 11

ON a ee eiallcbilaens 11, 14

BF ERG cccecescesescansosccsccenuntocecrssvscesusasuvnssesocosansnapantoneses 11,14

IO einicticeisidscnsnntcsusisicesensanecesenaseninssmnentenetenennvensies 28

Ry ———_—_— 27

Fed. R. Civ. P.:

SERRE: SE Re res weer a aor ema ma ren Orn 6, 20

ID acccrsintinctittiiinpeneinepecsartnntinnnndindegiclmnaneniticausiiniidnitios 6, 20

23 advisory committee note (1998 Amendments)......... 21

CONGRESSIONAL MATERIALS:

H. Conf. Rep. No. 95-950 (1978) ...........cccccseeeseeseeeeneeeeneeees 15

H.R. Rep. No. 103-486 (1994) .......c.ccccescescenesereseeeeneeeeennenes 26

S. Rep. No. 104-185 (1995)................c0sccssssrsesssenneseesensees 26

The Fair Credit Reporting Act and Issues Presented

by Reauthorization of the Expiring Preemption

Provisions: Hearings Before the Senate Comm. on

Banking, Housing, and Urban Affairs, 108th

Camm, (BBG G) nnceccccccsccscscescveccccscccccosscesocecconeses 25, 26, 27, 29

113 Cong. Rec. 2199 (1967) ......c...csscssssssesssessseesssesssessesenees 15

TABLE OF AUTHORITIES — Continued

Page

MISCELLANEOUS:

American & English Encyclopaedia of Law (1st ed.

ERR RRL SE ERS ee Ae ORNL TPO RE 13

Norman J. Singer, Sutherland Statutes and Statutory

Construction (6th ed. 2001)............cccccccsesssetersesecesseeeees 12

Michigan Office of Financial and Insurance

Services, The Use of Insurance Credit Scoring in

Automobile and Homeowners Insurance (2002)........... 28

1

BRIEF FOR THE FINANCIAL SERVICES

ROUNDTABLE, CHAMBER OF COMMERCE OF

THE UNITED STATES OF AMERICA, BUSINESS

ROUNDTABLE, MORTGAGE BANKERS

ASSOCIATION, AMERICAN BANKERS

ASSOCIATION, AMERICAN FINANCIAL

SERVICES ASSOCIATION, AMERICA’S

COMMUNITY BANKERS, AND CONSUMER

BANKERS ASSOCIATION, AS AMICI CURIAE

IN SUPPORT OF PETITIONERS

The Financial Services Roundtable, the Chamber of

Commerce of the United States of America, the Business

Roundtable, the Mortgage Bankers Association, the

American Bankers Association, the American Financial

Services Association, America’s Community Bankers, and

the Consumer Bankers Association respectfully submit

this brief as amici curiae in support of petitioners in these

two cases.’

INTERESTS OF AMICI CURIAE

Amici curiae are a coalition of prominent national

financial services and business organizations whose

members include various companies that are authorized

under the Fair Credit Reporting Act (FCRA), 15 U.S.C.

§ 1681 et seg., to obtain and use consumer reports for

various purposes. Those purposes include issuance of

insurance, extension of credit, and employment and rental

' Letters from petitioners and respondents indicating that they

consent to the filing of amicus curiae briefs have been filed with the

Clerk of this Court. Pursuant to Rule 37.6, amici curiae state that no

counsel for a party authored this brief in whole or in part. Counsel for

amici curiae provided legal services to petitioners in No. 06-100

regarding this matter at other stages. No person or entity other than

amici curiae, their members, or their counsel, made a monetary

contribution to the preparation or submission of this brief.

2

decisions. Such companies are charged under the FCRA

with providing notice to a consumer when they take an

“adverse action” against the consumer based on a

consumer report.

The Financial Services Roundtable represents 100 of

the largest integrated financial services companies that

provide banking, insurance, and investment products and

services to American consumers. Roundtable member

companies provide fuel for America’s economic engine

accounting directly for $18.3 trillion in managed assets,

$678 billion in revenue, and 2.1 million jobs.

The Chamber of Commerce of the United States of

America is the world’s largest business federation,

representing an underlying membership of more than

three million businesses and organizations of every size, in

every industrial sector and from every region of the

country. One of its principal functions is to advocate the

interests of the business community by filing amicus

curiae briefs in cases involving issues of national concern

to American businesses.

The Business Roundtable is an association of chief

executive officers of leading American companies with

more than $4.5 trillion in annual revenues and more than

ten million employees. Its member companies comprise

nearly one-third ci the total value of the United States

stock market, and represent over forty percent of all

corporate income taxes paid to the United States

government. Collectively, its member companies returned

more than $112 billion in dividends to shareholders and

the American economy in 2005. The Business Roundtable

is committed to advocating public policies which ensure

vigorous economic growth and a productive workforce in

America.

The Mortgage Bankers Association (MBA) is a

nonprofit corporation headquartered in Washington, D.C.

The MBA represents the real estate finance industry, an

3

industry that employs more than 500,000 people in virtually

every community in the country. Its membership of over 3,000

companies includes all elements of real estate finance:

mortgage companies, mortgage brokers, commercial banks,

thrifts, Wall Street conduits, life insurance companies, and

others in the mortgage lending field.

The American Bankers Association (ABA) is the

principal national trade association of the financial

services industry in the United States. Its members,

located in each of the fifty States and the District of

Columbia, include financial institutions of all sizes and

types, both federally and state-chartered. ABA members

hold a majority of the domestic assets of the banking

industry in the United States.

Founded in 1916, the American Financial Services

Association (AFSA) is the trade association for a wide variety

of market-funded providers of financial services to consumers

and small businesses. AFSA members are important sources

of credit to the American consumer, providing approximately

over 20 percent of all consumer credit.

America’s Community Bankers (ACB) is the national

trade association committed to shaping the future of

banking by being the innovative industry leader

strengthening the competitive position of community

banks. ACB members, whose aggregate assets are more

than $1.5 trillion, pursue progressive, entrepreneurial and

service-oriented strategies in providing financial services

to benefit their customers and communities.

The Consumer Bankers Association (CBA) is the

recognized voice on retail banking issues in the nation’s

capital. Member institutions are the leaders in consumer,

auto, home equity, and education finance, electronic retail

delivery systems, privacy, fair lending, bank sales of

investment products, small business services and

community development. The CBA was founded in 1919 to

provide a progressive voice in the retail banking industry.

4

The CBA represents over 750 federally-insured financial

institutions that collectively hold more than 70% of all

consumer credit held by federally-insured depository

institutions in the United States.

INTRODUCTION AND SUMMARY OF ARGUMENT

The substantive and remedial provisions of the Fair

Credit Reporting Act (FCRA) govern large sectors of the

American economy. The FCRA regulates when consumer

reports can be obtained and how consumer reports can be

used. The purposes for which a consumer report can be

used include not only extensions of credit and

underwriting insurance, but also decisions regarding

employment, eligibility for a license, and any “legitimate

business need for the information * * * in connection with

a business transaction that is initiated by the consumer.”

15 U.S.C. § 1681b(a)(3)(A)-(F).

The FCRA applies to any person who uses information

contained in a consumer report to make such decisions.

See, e.g., 15 U.S.C. § 1681m(a). Thus, the FCRA regulates

companies regularly involved in finance, such as banks

and insurance companies, and also companies involved in >

a wide range of non-finance related business, such as

department stores, landlords, employers, cell phone

companies, and even cities and towns.

1,

The interpretation by the Ninth Circuit of the FCRA’s

“willfully” requirement to trigger uncapped punitive

damages and statutory damages not based on actual

injury to plaintiffs is erroneous and would have a

significant detrimental impact on businesses.

5

A. The FCRA’s punitive and statutory damages are

not imposed according to any actual damages that a

plaintiff may sustain and, accordingly, are penal in

nature. Thus, the “willfully” requirement that triggers

them must be strictly construed. The “willfully”

requirement also is a necessary finding to trigger the

Act’s criminal provisions. The rule of lenity therefore

applies to require a showing of specific intent to violate

a known legal duty on the part of defendants before they

can be held liable for “willfully” violating the FCRA. The

employment case law cited by respondents is not to the

contrary because it involved different statutory schemes

that did not provide uncapped punitive damages or

statutory damages unrelated to proof of actual injury. -

B. Interpretation of “willfully,” for purposes of the

FCRA, to require a showing of specific intent to violate a

known legs. duty also is warranted in order to avoid doubt

about the constitutionality of the federal statute.

Significant doubt about the constitutionality of the FCRA’s

punitive and statutory damages provision arises under the

recklessness standard because of the due process limits on

excessive or arbitrary awards. —

This Court’s earliest cases involving violation of the

Due Process Clause’s substantive limit on private

monetary awards arose where statutes fixed damage

awards that had no relationship to any actual damages

incurred. See, eg., Southwestern Tel. & Tel. Co. v.

Danaher, 238 U.S. 482 (1915). Building on those cases, the

Court has held that the Due Process Clause prohibits

“grossly excessive or arbitrary” punitive damages awards.

See, e.g., State Farm Mut. Auto. Ins. Co. v. Campbell, 538

U.S. 408 (2003); BMW of N. Am., Inc. v. Gore, 517 U.S. 559

(1996).

When dealing with violations of a technical statute

like the FCRA involving reporting of credit, only instances

of deliberate lawbreaking could even colorably result in a

constitutionally permissible punitive damage award.

6

Indeed, a prominent factor relevant to the determination

of whether a particular award is constitutionally

excessive is “the degree of reprehensibility of the

defendant’s conduct.” State Farm, 538 U.S. at 419.

Violations of the FCRA’s requirements occur purely in the

economic realm, pose no risk to the health or safety of

individuals, and do not target any particularly vulnerable

persons. Thus, a finding of an unintended, reckless

violation of the FCRA, in particular, falls far short of the

sort of reprehensible conduct that could support punitive

damages. The need for reading the FCRA to require a

particularly culpable state of mind is even greater in this

situation because statutory and punitive damage awards

under the FCRA will generally fail to comply with

another significant measure of the constitutionality of

such damages: the ratio of those damages to actual

damages. Id. at 425.

C. A significant litigation risk to defendants sued

under the FCRA is caused by the aggregation in class

actions of individual] claims totaling hundreds of millions

(if not billions) of dollars in statutory or punitive damages.

Allegations of “willfully” violating the FCRA based on a

mere recklessness standard may increase even more that

risk because there is a greater likelihood in such cases that a

large class will be brought and certified as a damages class

action under Federal Rule of Civil Procedure 23(b)(3). That is

because courts hold that the FCRA permits plaintiffs in a

class to avoid the need to establish any actual damages if

they allege willful FCRA violations since the class can seek

only statutory damages unrelated to actual individual

harm. A recklessness standard such as that adopted by the

Ninth Circuit makes it easier for plaintiffs’ counsel to

make such an allegation of “willfully” consistent with

Federal Rule of Civil Procedure 11.

At the same time, the Ninth Circuit’s mere

recklessness standard for “wilifully” violating the FCRA

—

adversely affects the ability of a defendant to estimate

accurately the risk of litigation. A business that

determines it can prove that it acted in good faith (i.e.,

non-willfully), and thus would be willing to litigate to

conclusion a case making allegations of willfulness, would

be under increased pressure to settle a case that relies on

some amorphous standard of recklessness to determine

the plaintiffs’ eligibility for potentially significant punitive

and statutory damages unrelated to any actual harm.

The driving force for such class actions is not

compensation for individual harm, but professional

plaintiffs and attorneys intent on extracting monetary

damages from companies (and their shareholders) for

themselves and’ a-class of uninjured consumers. The

defendant companies, however, provide valuable services

and may have engaged in unintended technical violations

of a complex regulatory statute. Such class action lawsuits

could, in the aggregate, cost American businesses billions

of dollars that are not tied to any actual injury to plaintiffs.

Il.

The Ninth Circuit interpreted the term “adverse

action” for purposes of the FCRA insurance provisions in a

manner that is contrary to the plain language of the

statute. The court’s application of that term te the

issuance of any insurance coverage that is not the best

insurance coverage at the lowest possible rate is

unprecedented. It would have unreasonably broad

practical implications not intended by Congress.

A. The FCRA’s adverse action insurance provision is

intended to ensure that an insurer gives notice to a

consumer when it charges a consumer an increased rate

because of credit information in a consumer report. The

plain language of the statute specifies that an adverse

action occurs only if consumer report information is used,

8

in whole or in part, to “increase [the] charge for” insurance

coverage for that consumer. 15 U.S.C. § 1681a(k)(1)(B)(i).

The FCRA is not concerned about comparisons of a

consumer’s rate with that of the hypothetical consumer

who gets the best coverage at the lowest possible rate.

Thus, if a consumer receives the same rate that she would

have received if her consumer report information had not

been considered (or, of course, a better rate), an adverse

action has not occurred within the meaning of the

statutory provision. That is because the consumer report

information did not result in an increase in the charge for

the insurance coverage for that consumer.

The court of appeals disregarded critical aspects of the

FCRA’s text and structure when it attempted to shoehorn

into the “adverse action” insurance definition all rates

other than the best coverage at the lowest rate. First, the

FCRA, as amended in 2003, requires that consumer

reporting agencies provide consumers with a free consumer

report once each year upon request. See 15 U.S.C.

§ 1681j(aX 1A). But under the Ninth Circuit’s view, such a

provision would have been nearly meaningless because all

insurance consumers except those with the very best

coverage with the lowest rates already would be receiving

such reports with annual renewals under 15 U.S.C.

§ 1681)j(c), which provides that each adverse action entitles

the consumer to a free consumer report from the consumer

reporting agency.

Second, the Ninth Circuit ignored Congress’s

amendment of the FCRA in 2003 to require an alternate

risk-based pricing notice in the credit area, but not the

insurance area, in certain instances when a_ business

provides a consumer with credit on “terms that are

materially less favorable.” 15 U.S.C. § 1681m(h\(1), (5).

Congress did not treat that issue as involving an “adverse

action.” The Ninth Circuit’s interpretation below of the term -

“adverse action,” however, would impose on the insurance

9

industry such a risk-based pricing notice as a matter of

judicial fiat.

B. Only a small number of consumers receive the

“best” rate for insurance when the rate is based in part on

information in consumer reports. The Ninth Circuit ruling

thus would result in the issuance of tens of millions of

pointless notices to consumers each year who receive good

rates based on good consumer reports but do not receive

the absolute best coverage at the lowest possible rate.

That deluge of additional notices would not only burden

significantly insurance companies, but it also would

provide consumers with little, if any, appreciable benefit.

Such a volume of notices could, in fact, harm consumers by

overloading them with information and numbing them to

important notices.

ARGUMENT

I. THe FCRA DEMANDS A SHOWING THAT A

DEFENDANT SPECIFICALLY INTENDED TO VIOLATE

THE STATUTE IN ORDER TO ESTABLISH THAT IT

“WILLFULLY” DimD So AND IS THEREFORE SUBJECT

To PUNITIVE AND STATUTORY DAMAGES

In order for a plaintiff to recover punitive damages

(which are not capped) and statutory damages (of at least

$100 and up to $1,000 per consumer) for violating the

FCRA, the plaintiff must establish that the defendant

“willfully” failed to comply with the relevant FCRA

requirement. 15 U.S.C. § 1681n(a). In the context of the

FCRA, “willfully” must be interpreted to require proof that

a defendant specifically intended to violate a known legal

duty under the FCRA in order to recover punitive or

statutory damages. See, e.g., United States v. Pomponio,

429 U.S. 10, 12 (1976) (“willfulness in this context simply

means a voluntary, intentional violation of a known legal

duty”).

10

The Ninth Circuit’s misreading of the term “willfully”

to include mere recklessness (Pet. App. 128a-129a) is

erroneous. Three contextual features of the FCRA are

particularly significant in reaching this result: the penal

nature of the remedies under the FCRA that are triggered

by a “willfully” showing; the need to construe the FCRA’s

damages provision to avoid doubt about its

constitutionality; and the unduly harsh consequences of

the Ninth Circuit’s lesser standard, particularly in class

actions.

A. The Rule Of Lenity Requires That The

FCRA’s “Willfully” Requirement Be Met By

A Showing Of Specific Intent Because It

Triggers Imposition Of Punitive And

Statutory Damages, And Supports Criminal

Sanctions Elsewhere In The Statute

1. The FCRA is a technical statute that, even

decades after its enactment, is still the subject of much

uncertainty on the part of businesses who must comply

with its varied notice requirements. This fact is reflected

in Congress’s three-tiered approach to liability for

damages.

When a defendant violates the FCRA, but does not do

so willfully or even negligently, Congress did not authorize

any private plaintiff enforcement. See Dalton v. Capital

Associated Indus., Inc., 257 F.3d 409, 417 (4th Cir. 2001)

(“FCRA does not impose strict liability”). Congress thereby

recognized that those subject to the FCRA could

reasonably, i.e., non-negligently, engage in conduct that

violates the FCRA and that no damages should be

awarded in such instances, regardless of the injuries

incurred by the plaintiff.

* References to “Pet. App.” are to the Petition Appendix filed by

petitioners in No. 06-84.

11

At the same time, the FCRA ensures that actual

damages are available to an individual who has been

injured as a result of a negligent violation of certain of the

FCRA’s requirements. 15 U.S.C. § 1681o(a)(1).

Congress set the bar much higher for recovery of

money damages in excess of actual damages caused by the

FCRA violation. A finding that a defendant “willfully”

violated the FCRA is required to allow an award of

punitive or statutory damages in suits for all violations of

FCRA that can be privately enforced. 15 U.S.C. § 1681n(a).

It also is a necessary finding to trigger criminal conviction

elsewhere in the statute. Jd. § 1681q (sentence of up to two

years imprisonment for knowingly and willfully obtaining

consumer reporting agency information under false

pretenses); id. §1681r (sentence of up to two years

imprisonment for consumer reporting agency’s employee

knowingly and willfully providing information to

unauthorized recipient). \

2. The term “willfully” is, of course, “a word of many

meanings,” and the correct interpretation of the term “is

often dependent on the context in which it appears.” Bryan

v. United States; 524 U.S. 184, 191 (1998) (quoting in part

Spies v. United States, 317 U.S. 492, 497 (1943)). See Br. in

Opp. 18 (acknowledging relevance of context). The

ambiguity of the term “willfully” in the context of the

FCRA means that it must be read narrowly not to trigger

punishment in order to comply with the rule of lenity. See

‘Ratzlaf v. United States, 510 U.S. 135, 148 (1994) (“were

we to find [the statute’s] ‘willfulness’ requirement

ambiguous * * * , we would resolve any doubt in favor of

the defendant”). When Congress uses the term “willfully”

in “highly technical statutes” like the FCRA that present

“the danger of ensnaring individuals engaged in

apparently innocent conduct,” a plaintiff must show that

the defendant acted with specific intent, knowing “that his

conduct was unlawful” in order to hold it liable. Bryan v.

United States, 524 U.S. at 194-195.

12

The rule of lenity is not limited to criminal sanctions

but applies to statutes in which the civil remedies can be

described as “penal.” See 3 Norman J. Singer, Sutherland

Statutes and Statutory Construction § 59.1, at 114-116 (6th

ed. 2001). In Steam-Engine Co. v. Hubbard, 101 U.S. 188

(1879), for example, a statute required that a corporate

president file an annual report and provided that if he

“intentionally neglects or refuses to comply with that

requirement,” he would be personally liable for any debts

incurred by the corporation contracted during the period of

neglect or refusal. Jd. at 189. This Court held that the

private civil action for damages created by the statute

“should be strictly construed” because the statute “is

penal.” Jd. at 191.

The rule of lenity applies to statutes that authorize

punitive damages because those damages are widely

recognized to be penal. See Sutherland, supra, § 59.2, at

119, 121 (“provisions for exemplary damages” are “penal”

because “their effects are punitive”). Punitive damages

“serve the same purposes as criminal penalties,” State

Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. at 417, and

“have been described as ‘quasi-criminal,’” Cooper Indus.,

Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 432

(2001) (citation omitted). “[B)y definition [they] are not

intended to compensate the injured party, but rather to

punish the tortfeasor whose wrongful action was

intentional or malicious, and deter him and others from

sim?'!ar extreme conduct.” City of Newport v. Fact Concerts,

Inc., 453 U.S. 247, 266-267 (1981).

Statutory damages that allow an award of monetary

damages against a defendant without regard to the

existence or amount of actual injuries sustained by a

plaintiff also call for application of the rule of lenity. Such

statutes are penal because they “compel obedience beyond

mere redress to an individual for injuries -received.”

Sutherland, supra, § 59.1, at 116. Courts traditionally

have held that a civil action providing for such statutory

13

damages is penal, and thus must be strictly construed. See

23 American & English Encyclopaedia of Law 378-379 (1st

ed. 1893) (rule of strict construction “applies not only to

statutes relating to criminal offenses, but also to all

statutes which impose, as punishment, any penalties,

pecuniary or otherwise, * * * or provide for the recovery of

damages beyond just compensation to the party injured,

whether such penalties, forfeitures, or damages are to be

enforced and recovered at the suit of the state or of a

private individual.”); Marshall v. Wabash Ry. Co., 46 F.

269, 270-271 (C.C.S.D. Oh. 1891) (“where the plaintiff is

not required to offer any evidence proving damages, and

the defendant is not permitted to offer any evidence

disproving damages, and the recovery is to be one fixed

sum in every case, I cannot understand how the statute

under which that is dome can be regarded as providing

compensation merely, and not penal”); Wood, Walker & Co.

v. Evans, 461 F.2d 852, 855 (10th Cir. 1972) (statutes

where “the amount of the damages is fixed on a somewhat

liquidated measure without regard to injury suffered” are

“strictly construed”). “By this is meant no more than * * *

when there is reasonable doubt as to {a word’s} true

meaning, the Court will not give them such interpretation

as to impose the penalty.” Hines & Battle v. Wilmington &

W. Ry. Co., 95 N.C. 434, 437 (1886).

In Brown v. Kildea, 58 Wash. 184 (1910), the court

was faced with statutory damages akin to those at issue

here. The court held that a statute authorizing a private

cause of action against a corporate official for a statutory

damage award of not less than $100 nor more than $1,000

should be “strictly construed” because it “subjects one

person to the payment of a sum of money to another,

without reference to any actual injury and without

requiring him either to allege or prove an actual injury.”

Id. at 186-187; see also Cleveland, C. C. & S. L. Ry. Co. v.

Wells, 62 N.E. 332, 334 (Ohio 1901) (“the right to recover

not less than one hundred and fifty dollars, although

14

double the amount of overcharge might not be one dollar,

and the right to recover exemplary damages, are severely

penal privileges” and thus those provisions “are to be

strictly construed”); Hines, 95 N.C. at 438 (same for

~ statute authorizing private suit to recover statutory

damages of $200 for discriminatory rates). Here, of course,

the statutory damages provision of the FCRA allows

damages “of not less than $100 and not more than $1,000”

regardless of any injury sustained by the plaintiffs and

respondents seek such damages for each class action

consumer. 15 U.S.C. § 1681n(a)(1)(A).

The application of the rule of lenity to determine the

meaning of “willfully” in the FCRA is particularly apposite

because the FCRA’s felony provisions require the

government to prove that a person acted “willfully” in

order to establish criminal liability. See 15 U.S.C.

§§ 1681q, 1681r. The fact that the criminal provisions are

not applicable in this particular case is irrelevant. There is

nothing in the FCRA that suggests, much less

demonstrates, that Congress intended the same word to

have different meanings in different portions of the same

statute. See Ratzlaf, 510 U.S. at 143 (“A term appearing in

several places in a statutory text is generally read the

same way each time it appears.”); see also Crandon v.

United States, 494 U.S. 152, 168 (1990) (applying the rule

of lenity in a civil action premised on a criminal statute).

3. Respondents’ attempt to seek refuge in

employment law cases that interpret “willful” to mean

reckless must be rejected. See Br. in Opp. 14 (citing, inter

alia, Trans World Airlines, Inc. v. Thurston, 469 U.S. 111

(1985); McLaughlin v. Richland Shoe Co., 486 U.S. 128

(1988); and Hazen Paper Co. v. Biggins, 507 U.S. 604

(1993)). Under the Age Discrimination in Employment Act

(ADEA) provision at issue in Thurston and Hazen Paper, a

finding of willfulness permitted a court to award an

amount equal to the amount of lost wages as liquidated

damages, but this Court has expressly held that such a

15

double damages remedy is “compensation, not a penalty or

punishment” and serves as remuneration for “damages too

obscure and difficult of proof.” Overnight Motor Transp.

Co. v. Missel, 316 U.S. 572, 583-584 (1942) (interpreting

similar provision in Fair Labor Standards Act). That

remedy also has been viewed as a substitute for

prejudgment interest, which is not otherwise available

under the ADEA. See Powers v. Grinnell Corp., 915 F.2d

34, 39-41 (1st Cir. 1990) (citing Brooklyn Sav. Bank v.

O’Neil, 324 U.S. 697, 715-716 (1945)). Thus, there was no

cause for the Court to apply the rule of lenity in those

cases.

Likewise, the third employment case did not involve

either uncapped punitive damages or statutory damages

without proof of actual injury and thus did not implicate

the rule of lenity. See McLaughlin v. Richland Shoe Co.,

486 U.S. 128 (1988) (willfulness finding based on a

recklessness standard extended the statute of limitations

for bringing suit from two years to three years).

* The Court’s indication in Thurston that the double back-pay

provision was “punitive in nature,” 469 U.S. at 125, relied on the

statement of a Senate sponsor of the ADEA, but that legislative

statement was that the double back-pay provision would “furnish an

effective deterrent to willful violations,” /bid. (quoting 113 Cong. Rec.

2199 (1967) (Sen. Javitts)), and remedial provisions can provide

effective deterrence so that statement does not necessarily support the

Court’s dictum. Additional legislative history concluded that the

provision was not punitive. See H. Conf. Rep. No. 95-950, at 13-14

(1978) (explaining that the “ADEA as amended by this act does not

provide remedies of a punitive nature” and quoting Missel, 316 U.S. at

583-584).

16

B. A Specific Intent Standard Avoids The

Substantial Constitutional Doubt Raised

By A Lesser Standard

A federal statute must be read to avoid doubt about its

constitutionality. See Crowell v. Benson, 285 U.S. 22, 62

(1932). “[W]Jhen deciding which of two plausible statutory

constructions to adopt, a court miust consider the

necessary consequences of its choice. If one of them would

raise a multitude of constitutional problems, the other

should prevail — whether or not those constitutional

problems pertain to the particular litigant before the

Court.” Clark v. Martinez, 543 U.S. 371, 380-381 (2005).*

This constitutional avoidance doctrine supports

interpretation of the term “willfully” to require a showing

by a plaintiff of a specific intent on the part of the

defendant to violate a known FCRA requirement. The

contrary interpretation of the term urged by respondents,

and adopted by the Ninth Circuit, that establishes a mere

recklessness standard raises substantial questions about

the constitutionality of any resultant statutory or punitive

damages awards because of the Constitution’s substantive

limits.

This Court’s earliest cases involving violation of the

Due Process Clause’s substantive limit on private

* The Seventh Circuit’s recent refusal, in deciding whether a class

should be certified, to consider whether subjecting a defendant to

“billions of dollars for purely technical violations of the FCRA” could

violate the Constitution, Murray v. GMAC Mortgage Corp., 434 F.3d

948, 953 (7th Cir. 2006), conflicts with the reality that defendants

confronted with a certified FCRA class seeking billions of dollars in

damages cannot reasonably rely on the possibility that constitutional

limits will be imposed after damages are awarded, as the court there

suggested. Such circumstances likely would unfairly induce settlement

to avoid potential ruinous liability. In any event, Murray does not

suggest that constitutional doubt can be ignored in determining the

scope of the statute.

17

monetary awards arose where, as here, a statute fixed a

damages award that had no relationship to any actual

damages incurred. Thus in Southwestern Tel. & Tel. Co. v.

Danaher, 238 U.S. 482 (1915), this Court held that a

provision authorizing statutory damages of $100 per day

for refusing a customer phone service violated due process

when the company’s action was in good faith, impartially

applied, consistent with longstanding practice, and done in

the absence of any state ruling that the conduct was

unreasonable. Under these circumstances, this Court held

that “inflictling] upon the company penalties aggregating

$6,300 was so plainly arbitrary and oppressive as to be

nothing short of a taking of its property without due

process of law.” Jd. at 491; see also Missouri Pac. Ry. Co. v.

Tucker, 230 U.S. 340, 351 (1913) (statutory damages of

$500 for overcharging a customer $3 violated due process

because the damages were “grossly out of proportion to the

possible actual damages”).

Building on those early cases, the Court has held that

the Due Process Clause prohibits “grossly excessive or

arbitrary” punitive damages awards. See, e.g., State Farm

Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003); BMW

of N. Am., Inc. v. Gore, 517 U.S. 559 (1996). When dealing

with violations of such a technical statute like the FCRA

involving reporting of credit, only instances of deliberate

lawbreaking could even colorably result in a

constitutionally permissible punitive damage award. Cf.

Gore, 517 U.S. at 576; see id. at 580 (“the omission of a

material fact may be less reprehensible than a deliberate

false statement, particularly when there is a good-faith

basis for believing that no duty to disclose exists”);

Southwestern Tel. & Tel. Co., 238 U.S. at 489-490 (relying

on defendant’s good faith to find statutory damages

unconstitutionally excessive).

Indeed, a prominent factor relevant to the determination

of whether a particular award is constitutionally excessive

is “the degree of reprehensibility of the defendant’s

18

conduct.” State Farm, 538 U.S. at 419 (quoting BMW of N.

Am., Inc. v. Gore, 517 U.S. at 575). In assessing

reprehensibility, a court must consider whether “the harm

caused was physical as opposed to economic; the tortious

conduct evinced an indifference to or a reckless disregard

of the health or safety of others; the target of the conduct

had financial vulnerability; the conduct involved repeated

actions or was an isolated incident; and the harm was the

result of intentional malice, trickery, or deceit, or mere

accident.” 538 U.S. at.419.

Violations of the FCRA’s requirements occur purely in

the economic realm, pose no risk to the health or safety of

individuals, and do not target any particularly vulnerable

persons. Such violations will thus rarely be sufficiently

“reprehensible” to permit any award of punitive damages

under the Constitution, under any standard of willfulness.

A finding of an unintended, reckless violation of the FCRA,

in particular, falls far short of the sort of reprehensible

conduct that could support punitive damages. To reduce

the likelihood of unconstitutional damage awards, this

Court must read the statute to require proof of a

particularly culpable state of mind, i.e., at least a specific

intent to violate a known legal duty.

The need for reading the FCRA to require a

particularly culpable state of mind is even greater in this

situation because statutory and punitive damage awards

under the FCRA will generally fail to comply with another _

significant measure of the constitutionality of such

damages: the ratio of those damages to actual damages.

State Farm, 538 U.S. at 425. The ratio is extremely large

in virtually all FCRA cases because the actual damages to

individuals in such cases, especially those involving failure

to provide notice such as here, is almost always quite low.

This is true even when, as in these cases, plaintiffs seek

only statutory damages. In the cases now before the Court,

the actual damages likely would be $0 because receiving

the notice would not have altered the results, yet

19

respondents seek $1,000 damages for each of an

unquantified number of individuals in the putative class.

The only way such damages could survive a constitutional

challenge, if at all, is if the plaintiffs are required to prove

that defendants possessed the specific intent to violate a

known legal duty under the statute. There certainly is no

evidence that Congress intended to authorize such

damages, unrelated to actual harm, based merely on

unintended, reckless violations. In the absence of “firm

evidence” to the contrary, it should not be assumed that

“Congress intended to press ahead into dangerous

constitutional thickets” and the term “willfully” thus

should be read in a manner that avoids, or at least

reduces, such potentially unconstitutional results. Public

Citizen v. Department of Justice, 491 U.S. 440, 466 (1989).

C. Awards Of Uncapped Punitive Damages

And Statutory Damages Based On Mere

Recklessness Would Result In FCRA Class

Actions For Billions Of Dollars Not Based

On Actual Harm

A significant litigation risk to defendants sued under

the FCRA is caused by the aggregation in class actions of

individual claims -totaling hundreds of millions (if not

billions) of dollars in statutory or punitive damages.

Respondents’ complaints in the two actions under

review are typical of FCRA cases that plaintiffs seek to

litigate as class actions. Plaintiffs made no claim that

petitioners’ actions were negligent or that the named

plaintiffs personally suffered any actual damages. Instead,

their complaints, at the time they were dismissed by the

district court, alleged only willful misconduct and sought

statutory and punitive damages on behalf of a class. On

remand from the Ninth Circuit, plaintiffs amended their

complaints to strike their claims for punitive damages,

and now seek $1,000 statutory damages for each member

20

of the putative class. The allegations in the two other

FCRA cases in which certiorari petitions are pending

likewise seek only non-compensatory damages for the

putative classes and do not bother to allege any actual

harm sustained by the named plaintiffs.

Such allegations of willful FCRA violations based on a

mere recklessness standard may increase even more the

risk of enormous damage recoveries. There is a greater

likelihood that such a case will be brought and certified as

a damages class action under Federal Rule of Civil

Procedure 23(b)(3). That is because courts hold that the

FCRA permits plaintiffs in a class to avoid the need to

establish any actual damages if they allege the defendant

willfully violated the FCRA. See, e.g., In re Progressive Ins.

Corp. Underwriting and Rating Practices Litigation, No.

1:03-cv-01519-MP-AK, slip op. (N.D. Fla. June 23, 2006)

(certifying a FCRA class, for settlement purposes, of

“several million” consumers); Jn re Farmers Ins. Co., Inc.,

FCRA Litigation, 2006 WL 1042450 (W.D. Okla. Apr. 13,

2006) (certifying FCRA class of over one million insureds);

Cavin v. Home Loan Ctr., Inc., 236 F.R.D. 387 (N.D. Il.

2006) (FCRA class of approximately 49,000 members). A

recklessness standard for willfulness, such as that adopted

by the Ninth Circuit, makes it easier for plaintiffs’ counsel

to make such an allegation consistent with Federal Rule of

Civil Procedure 11.

At the same time, the Ninth Circuit’s mere

recklessness standard for willful violations adversely

affects the ability of a defendant to estimate accurately the

risk of litigation. A business that determines it can prove

that it acted in good faith (i.e., non-willfully), and thus

would be willing to litigate to conclusion a case making

allegations of willfulness, would be under increased

pressure to settle a case that relies on some amorphous

standard of recklessness to determine the plaintiffs’

eligibility for potentially significant punitive and statutory

damages unrelated to any actual harm.

21

Under a recklessness standard, such a class action

“create|s) a potentially enormous aggregate recovery for

plaintiffs, and thus an in terrorem effect on defendants,

which may induce unfair settlements.” Parker v. Time

Warner Entm’t Co., L.P., 331 F.3d 13, 22 (2d Cir. 2003); see

Fed. R. Civ. P. 23 advisory committee’s note (1998

Amendments) (money class actions may force many

defendants “to settle rather than incur the costs of

defending a class action and run the risk of potentially

ruinous liability”); Jn the Matter of Rhone-Poulenc Rorer,

Inc., 51 F.3d 1293, 1298 (7th Cir.) (Posner, J.) (noting that

“Judge Friendly, who was not given to hyperbole, called

settlements induced by a small probability of an immense

judgment in a class action ‘blackmail settlements’”), cert.

denied, 516 U.S. 867 (1995).

The driving force for such class actions is not

compensation for individual harm, but professional

plaintiffs and attorneys intent on extracting monetary

damages from companies (and their shareholders) for

themselves and a class of uninjured consumers. The

defendant companies, however, provide valuable services

and may have engaged in unintended technical violations

of a complex regulatory statute. One example of this

phenomenon is Mr. and Mrs. Murray, who have sought to

be class representatives in dozens of FCRA class actions

and, as one district court noted, “greet the arrival of what

most people would consider junk mail (i.e., unsolicited

offers of credit) with joy and eagerly show ther mail to

lawyers * * * pursuant to a pre-existing agreement in the

hope of finding an offer that presents a colorable FCRA

claim.” Murray v. Cingular Wireless II, LLC, 2005 U.S.

Dist. LEXIS 39542, at *7-*8 (N.D. Ill. Dec. 22, 2005); sre

also Murray v. Cingular Wireless II, LLC, 2005 U.S. Dist.

LEXIS 39561, at *1-*2 (N.D. Ill. Nov. 2, 2005). The

“willfully” requirement should not be read as respondents ~

would have it, to make it easier for the Murrays and their

lawyers to obtain class certification and obtain a windfall

22

of non-compensatory damages from a broad range of

American businesses.

Counsel who bring such actions are well aware that

such allegations increase substantially the pressure for

settlement regardless of the merits of the case. In a case

described by respondents as involving an “identical” claim

(Br. in Opp. 7 n.2), insurance companies settled a class

action suit for $280 per person in statutory damages for a

class of more than 67,000 members. That settlement

totaled nearly $20 million in damages without any proof of

actual damages sustained by a class member. See Razilov v.

Nationwide Mut. Ins. Co., No. CV 01-1466 BR (D. Or. July

6, 2006) (Stipulation of Settlement). Of that settlement,

plaintiffs’ counsel has requested nearly $6 million in fees.

Razilov v. Nationwide Mut. Ins. Co., No. CV 01-1466 BR

(D. Or. Oct. 20, 2006) (Fee Petition).

Il. THE NINTH CIRCUIT’S INTERPRETATION OF THE

FCRA’s “ADVERSE ACTION” INSURANCE PROVISION

Is CONTRARY TO THE STATUTORY TEXT AND

STRUCTURE AND WOULD HAVE A SUBSTANTIAL

NEGATIVE EFFECT ON THE CONDUCT OF AMERICAN

BUSINESSES

The FCRA defines the term “adverse action” for

purposes of its insurance provisions as “a denial or

cancellation of, an increase in any charge for, or a

reduction or other adverse or unfavorable change in the

_ terms of coverage or amount of, any insurance, existing or

applied for, in connection with the underwriting of

insurance.” 15 U.S.C. § 1681a(k)(1)(B)(i) (emphasis added).

See also page 26, infra (discussing other definitions of

“adverse action” in the FCRA). The FCRA requires that an

insurance company notify a consumer of such an action

taken in connection with an underwriting decision when it

is based in part on a consumer report obtained under 15

. 23

U.S.C. § 1681b(a\(3)(C) in connection with thé underwriting.

See id. § 1681m(a)(1).

The Ninth Circuit held that the phrase “an increase in

any charge” in Section 168la(k\1)(B)(i) includes the

purchase of insurance where the consumer is charged a

rate that is higher than what the consumer would have

been charged if his score had been the “top potential score”

based on information from his consumer report. Pet. App.

118a. That interpretation would mean that an adverse

action occurs whenever a “consumer would have received a

lower rate for his insurance had the information in his

consumer report been more favorable.” Jbid. The ruling

thus applies to issuance of any insurance coverage that is

not the best insurance coverage at the lowest possible rate.

A. The FCRA’s Text And Statutory Structure

Demonstrate That The “Adverse Action”

Insurance Provision Does Not Extend To

Every Insurance Customer Who Does Not

Receive The Best Coverage At The Lowest

Possible Rate

1. The plain language of the FCRA insurance

provision specifies that an adverse action occurs only if the

information from a consumer report is used, in whole or in

part, to “increase [the] charge for” insurance coverage for

that consumer. 15 U.S.C. § 1681a(k)(1)(B)(i). The provision

is intended to ensure that an insurer gives notice to a

consumer when it charges a consumer an increased rate

because of credit information in a consumer report.

The FCRA is not concerned about comparisons of a

consumer’s rate with that of the hypothetical consumer

who gets the best coverage at the lowest possible rate.

Thus, if a consumer receives the same rate that she would

have received if her consumer report information had not

been considered (or, of course, a better rate), an adverse

action has not occurred within the meaning of the

24

statutory provision. That is because the consumer report

information did not result in an increase in the charge for

the insurance coverage for that consumer.

The facts of one of the other FCRA cases currently

pending before the Court demonstrate that the Ninth

Circuit’s contrary interpretation would expand the

meaning of the statutory text. In State Farm Mutual

Automobile Insurance Co. v. Willes, No. 06-101, the

plaintiff was quoted a price for insurance before she

formally applied for automobile insurance. The quote was

based only on background information she provided

including, for example, the fact that she had received a

speeding ticket within the preceding thirty-six months.

See State Farm Pet. 3. After the plaintiff submitted her

formal insurance application, the insurer reviewed her

credit history in the consumer report as part of its

underwriting process but ultimately issued her insurance

policies “at the rates that had been quoted to her without

reference to any credit information or other consumer

report” information. Jd. at 3-4. Despite evidence that

conclusively demonstrated that the plaintiff received the

same rate that she would have received if her consumer

report information had not been considered, the Ninth

Circuit held that the plaintiff had been subjected to an

adverse action because she did not get a lower rate.

2. The Ninth Circuit disregarded critical aspects of

the FCRA’s structure when it attempted to shoehorn into

the “adverse action” definition any consideration by a

company of a consumer report that does not give a

consumer the best possible coverage at the lowest possible

rate, regardless of whether consideration of the report

made the consumer worse off than if no consideration had

been given to the consumer report.

First, each adverse action notice entitles the recipient

to a free consumer report from the consumer reporting

agency. See 15 U.S.C. § 1681j(c). If Congress had intended

the FCRA adverse action insurance provision to generate

25

free consumer reports to nearly all consumers, Congress

would not have amended the FCRA in 2003 to require that

consumer reporting agencies provide consumers with a

free consumer report once each year upon request, see id.

§ 1681j(a)(1)(A), because all insurance consumers except

those with the very best coverage with the lowest rates

already would be receiving such reports with annual

renewals under 15 U.S.C. § 1681j(c), which provides that

each adverse action entitles the consumer to a free

consumer report from the consumer reporting agency.

Second, the Ninth Circuit ignored Congress’s addition

in 2003 of certain provisions to govern risk-based pricing

of credit, but not of insurance, when a business provides a

consumer with credit on “terms that are materially less

favorable.” 15 U.S.C. §168lm(h)(1). Section 1681m(h)

requires that federal agencies issue regulations to require

a business that extends credit to provide an alternate

risk-based pricing notice in certain instances.

Congress added the provisions in response to the

growing use of consumer reports to determine the terms of

the credit extended, and not just whether to extend credit.

The FTC informed Congress in hearings preceding the

2003 amendments that extenders of credit “increasingly

are using consumer reports to undertake risk-based

pricing of products or services. Many creditors *** no

longer merely approve or deny applications, but, rather,

they use credit report data to finely calibrate the terms of

their offer.” The Fair Credit Reporting Act and Issues

Presented by Reauthorization of the Expiring Preemption

Provisions: Hearings Before the Senate Comm. on Banking,

Housing, and Urban Affairs, 108th Cong., 6 (2003)

(statement of J. Howard Beales, III, Director, Bureau of

Consumer Protection, Federal Trade Comm’n).

26

Congress was also told that the existing definition of

“adverse action” for the FCRA’s credit provisions was not

triggered by such risk-based pricing because the FCRA

specifies that, in the credit context, the term “adverse

action” “has the same meaning as in” the Equal Credit

Opportunity Act (ECOA). 15 U.S.C. § 1681a(k)(1)(A).° The

* The FCRA includes different definitions of the term “adverse

action” in the different contexts of insurance, credit, employment,

government license and benefits transactions, and a “miscellaneous”

definition. See 15 U.S.C. § 168la(k). The so-called miscellaneous

definition provides that an adverse action is an action that is “made in

connection with an application * * * made by, or a transaction * * *

initiated by, any consumer” and is “adverse to the interests of the

consumer.” 15 U.S.C. § 168la(k)(1)(BXiv). Congress did not intend the

FCRA's “miscellaneous” definition to apply to transactions governed by

another “adverse action” definition. The transaction-specific structure

of the FCRA adverse action definitions demonstrates that the

“miscellaneous” definition was intended to ensure that if a person has

a permissible purpose to obtain a consumer report for a non-credit,

non-insurance, non-employment, non-license or non-benefit transaction

and the person uses such report as the basis for an action adverse to

the consumer’s interest, the person would be required to provide the

consumer with an adverse action notice. The legislative history

confirms that Congress intended the miscellaneous definition to apply

only when the transaction did not fal) within another definition. See

Senate Hearings, supra, at 53 & n.46 (statement of J. Howard Beales,

Ill, Director, Bureau of Consumer Protection, Federal Trade Comm'n);

S. Rep. No. 104-185, at 31-32 (1995); H.R. Rep. No. 103-486, at 26

(1994) (explaining that earlier proposed version of the “miscellaneous”

definition was intended to cover “a refusal to cash a check, lease real

estate, or open a new transaction account based on a consumer report”).

_ The Seventh Circuit, in a conclusory opinion that finds no basis in

the statute, erroneously held that the “miscellaneous” definition can

apply to credit transactions. Treadway v. Gateway Chevrolet Oldsmobile

Inc., 362 F.3d 971, 982 (7th Cir. 2004). That decision is wrong and, if

followed, could significantly expand the effect of the “adverse action”

holding because the Ninth Circuit’s interpretation here could similarly

expand the “miscellaneous” definition. Moreover, if the “miscellaneous”

definition applied to credit transactions, the “credit” definition would be

rendered superfluous because it would be subsumed by the broader

“miscellaneous” definition — a result that Congress could not have

intended.

27

ECOA defines “adverse action” to mean “a denial or

revocation of credit,” 15 U.S.C. § 1691(d)\(6), and its

implementing regulations make clear that if a consumer

applies for credit at a specific rate but the lender makes a

counteroffer at a different rate, there is no adverse action

if the comsumer accepts the lender’s counteroffer. See

12 C.F.R. § 202.2(c); Senate Hearings, supra, at 53 n.46

(statement of J. Howard Beales, III, Director, Bureau of

Consumer Protection, Federal Trade Comm’n) (consumers

“often receive a counter-offer at a higher price. Under the

law, if the consumer accepts that counter-offer, there is no

adverse action because the FCRA definition [of adverse

action for credit] is coupled to the definition under the

[ECOA].”). Courts have relied on these implementing

regulations to conclude that “a denial of credit coupled

with a counteroffer that is accepted by the applicant does

not trigger the FCRA’s [adverse action] notice requirement

because the applicant has suffered no ‘adverse action.’”

Harper v. Lindsay Chevrolet Oldsmobile, LLC, 212

F. Supp. 2d 582, 591 (E.D. Va. 2002).

The Ninth Circuit, through its interpretation of the

term “adverse action,” has imposed on the insurance

industry its own risk-based pricing disclosure requirement.

The details of what terms are material will, apparently, be

determined through case-by-case adjudication. It is clear

that Congress did not intend such a requirement for

insurance, however, because it could have easily extended

the amendment to apply the risk-based pricing provision

that it created in the credit context to such insurance

transactions as well, but did not do so.

28

B. The Ninth Circuit’s Ruling Would Require

The Issuance Of Millions Of Useless Notices

To American Consumers

The Ninth Circuit’s interpretation of “adverse action”

in this case would force insurance companies, and possibly

other persons subject to the FCRA, to issue tens of

millions of pointless notices to consumers each year.”

Only a small number of consumers receive the best

insurance coverage at the lowest possible rate when the

rates are based in part on credit information from

consumer reports. At many insurance companies that rely

in part on such information to set rates, fewer than 15% of

insureds receive the best rate available. See Michigan

Office of Financial and Insurance Services, The Use of

Insurance Credit Scoring in Automobile and Homeowners

Insurance, Apps. C & D (2002). But the Ninth Circuit’s

holding would require insurance companies to provide

adverse action notices to. nearly all consumers who

purchase insurance, i.e., all but the small group who have

the best scores and receive the best coverage and rates.

Because the majority of consumers nationwide must

* The Ninth Circuit appears to have found that when a consumer is

charged an increased rate for insurance and no adverse action notice is

provided, the party that makes “the decision as to which of the”

affiliated insurance companies will issue the policy will be subject to

liability along with the company that issues the policy. Pet. App. 125a.

That holding, which finds no statutory basis in the FCRA, could

possibly make a bank liable under 15 U.S.C. § 1681s(b), along with a

mortgage insurance company, if it selects which mortgage insurance

company to underwrité a policy and the rate charged for the mortgage

insurance is not the “best” rate and the bank fails to provide an adverse

action notice. Similarly, if a consumer wishes to obtain credit-life or

credit-disability insurance to protect against default on a credit product

obtained from a bank and the bank, based in part on consumer report

information, selects the insurance company that will receive the

eonsumer’s insurance application, the bank might face liability under

15 U.S.C. § 1681s(b) in the Ninth Circuit if the rate charged for the

insurance is not the “best” rate and no adverse action notice is provided.

29

obtain automobile and/or homeowner’s insurance, the

\ Ninth Circuit’s holding will require insurance companies

to produce and send tens or hundreds of millions of

additional adverse action notices each year.

Congress could not have intended such an absurd

result. To the contrary, the Federal Trade Commission

cautioned Congress to this effect when Congress was

addressing revisions to the FCRA. It explained that it was

important “to avoid a situation where in essence everyone

is getting an adverse action notice because no one ever

gets the absolute best rate.” Senate Hearings, supra, at

529 (testimony of Joel Winston, Associate Director,

Financial Practices Division, Bureau of Consumer

Protection, Federal Trade Comm'n).

The deluge of additional notices would provide

consumers with little, if any, appreciable benefit and

might, in fact, harm consumers by overloading them with

information and numbing them to important notices. For

example, the notices may confuse or mislead consumers

who receive insurance at favorable rates because of their

good credit histories, but not at the “best” rates. In

addition, as more adverse action notices are provided,

there is a real risk that the effectiveness of the notices

intended by Congress will be diluted substantially.

Consumers may begin to treat the notices as boilerplate

disclosures that should be ignored. See Senate Hearings,

supra, at 95-96 (testimony of J. Howard Beales, III,

Director, Bureau of Consumer Protection, Federal Trade

Comm’n) (“[I]f you give notices too widely and in too many

circumstances, then it * * * becomes something that people

ignore.”); cf. Ford Motor Credit Co. v. Milhollin, 444 U.S.

555, 568 (1980) (discussing problem of “informational

overload”). The flood of additional notices will undercut

their statutorily intended function to focus consumers on

potential material inaccuracies in their consumer reports.

30

Typical consumers with good credit histories who obtain

insurance at a favorable rate but receive adverse action

notices, would spend unnecessary time examining

consumer reports for material inaccuracies that do not

exist.

CONCLUSION

For the reasons set forth above, the judgments of the

Ninth Circujt should be reversed.

Respectfully submitted,

L. RICHARD FISCHER

BETH S. BRINKMANN*

SETH M. GALANTER

wane BREN NATHAN D. TAYLOR

- went nen MORRISON & FOERSTER LLP

2000 Pennsylvania Ave., N.W.

LITIGATION CENTER, INC. ‘

Washington, D.C. 20006

1615 H Street, N.W. (202) 887-1544

Washington, DC 20062

(202) 463-5337 *Counsel of Record

NOVEMBER 13, 2006

RoBIN S. CONRAD