Amicus Curiae Brief — State Farm Farm Mutual Mutual Automobile Automobile Insurance Insurance Insurance Co. Co. v. Willes (No. 06-101)

m @

Nos. 06-82, 0, a, 0 06-160, 06 Oo

‘In The

HARTFORD FIRE INSURANCE COMPANY,

Petitioner

v.

JASON JAY REYNOLDS

+

SAFECO INSURANCE COMPANY OF AMERICA, ET AL.,

Petitioners

v.

CHARLES BURR, ET AL.

¢

GEICO GENERAL INSURANCE COMPANY, ET AL..,

Petitioners

V.

AJENE EDO

¢

STATE FARM MUTUAL AUTOMOBILE

INSURANCE COMPANY, ET AL.,

Petitioners

V.

JULIE WILLES

@

On Petitions For Writs Of Certiorari To The

United States Court Of Appeals For The Ninth Circuit

¢

BRIEF FOR THE FINANCIAL SERVICES ROUNDTABLE

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

¢

L. RICHARD FISCHER

BETH S. BRINKMANN*

SETH M. GALANTER

NATHAN D. TAYLOR

MORRISON & FOERSTER LLP

2000 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 887-1544

August 21, 2006 *Counsel of Record

FILER

Mesh we

Supreme Court of the Gnit SUB:

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COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-2831

TABLE OF CONTENTS

Page

INTEREST OF AMICUS CURIAE.............:cccecccccsesvevees 1

INTRODUCTION AND SUMMARY OF ARGUMENT.... 2

ARGUMENT .. cassccsisscuiccoutea te ebeeetnencacce miieeaes 5

I. Review Is Warranted To Correct The Ninth

Il.

Circuit’s Expansive Interpretation Of The

FCRA’s “Adverse Action” Definition, Which

Otherwise Will Have A Substantial Negative

Effect On The Conduct Of The Financial Ser-

vices Industry Nationwide................scccccsseeeseeees

A. The Ninth Circuit’s Holding That The

Failure Of A New Customer To Receive

The Lowest Possible Rate Constitutes An

“Adverse Action” By The Insurer Will Re-

. quire The Issuance Of Millions Of Useless

Notices And Is Wrong As A Matter Of

Statutory Interpretation................ceeee

B. The Ninth Circuit’s Holding That All Par-

ties Who Participate In A Transaction

That Results In An Adverse Action Are Li-

able For A Failure To Provide An Adverse

Action Notice Threatens To Disrupt Set-

tled Expectations Of The Financial Ser-

Wier Eo ccsdasasdssemaibceteisbiniivsvees sees

Review Is Also Warranted On The Proper

Interpretation Of The FCRA’s “Willfully” Re-

quirement To Correct The Ninth Circuit’s Ex-

pansive And Erroneous Interpretation That

Permits Recovery Of Unwarranted Punitive

Damages And Enables Nationwide Class Ac-

tions For Statutory Damages .............cccccceeeeeees

12

TABLE OF CONTENTS — Continued

Page

A. The Ninth Circuit’s Ruling Will Permit A

Dangerous Array Of Class Actions Seeking

Millions Of Dollars In Statutory Damages

Without Any Proof Of Actual Harm ........... 14

B. The Ninth Circuit Ignored That A “Will-

fully” Finding Triggers The Availability Of

Punitive Damages, A Disfavored Pena!

Remedy Subject To Significant Constitu-

CE SIG iret ceticenrecatladans 16

CA sR IOS chiticcinicntvincsincunntevteinipeaamaniaetaaadabien 20

ili

TABLE OF AUTHORITIES

Page

CASES: - :

Ashby v. Farmers_Ins. Co. of Oregon, 2004 WL

ZSEGSEE (D. Or. Oct. 16, BOGS) .....ccrcccocesessvorvecressevceresess 14

Blair v. Equifax Check Services, Inc., 181 F.3d °32

UN sad enensibaonanapets 16

BMW of N. Am. v. Gore, 517 U.S. 559 (1996) ...... ee 19

Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697 (1945).......... 18

Bryan v. United States, 524 U.S. 184 (1998) .............. 18, 17

Cavin v. Home Loan Ctr. Inc., 2006 WL 1313191

Se ee es SN Br I icictecniceacbepeqeienseamsaeabsoccvevtieneadess 14

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

2) PEURRES RIES mie bea ares nce rn NTE ee teas SOO Dh 16

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

el ED doicicsthaisntnaccnsddichadstcbushivdbantsiusidisestines 16

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

SORES ORSY. aA loomed DR Weed EU EE MORE NN ENT MOET 9

Hazen Paper Co. v. Biggins, 507 U.S. 604 (1998)............. 18

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

WL 1042450 (W.D. Okla. Apr. 13, 2006)................0..0025 15

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

1293 (7th Cir.), cert. denied, 516 U.S. 867 (1995)......... 16

International Bhd. of Elec. Workers v. Foust, 442

Bs MT heli iadicdatsicncisicditeianinsliacinlaiutidscidamsnsoialieienionseiine 16

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

SITET citslicndinisicibehapicipsaanicteddcasgibeamaanaipeecuauiuaaemnets 18

Missouri Pac. Ry. Co. v. Tucker, 230 U.S. 340 (1913)....... 20

lV

TABLE OF AUTHORITIES ~— Continued

Page

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

PIU RIP baer seed re Re ANSE RR RS UI BNS 18

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

ee MS IIE csitists de casccoishlepunieh cscisshaddanndlndendaesaeeiacantvuedseudnn 15

Powers v. Grinnell Corp., 915 F.2d 34 (1st Cir. 1990)....... 18

Ratzlaff v. United States, 510 U.S. 135 (1994) ........... 13, 17

Southwestern Telegraph & Telephone Co. v. Danaher,

Be i ME IIIT sibcaiier atin cchcckataasedarniiceicstrntneeooessiecsneanien 20

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

es ME ED tks takai desihitatiictnsivasediceocinromnaninueld passim

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

SIU ca iccipkeachinesuitanicniits Calis skiseial actos darcsinkekcrceasehcsobaon cactiasipadoaaeie 18

Treadway v. Gateway Chevrolet Oldsmobile Inc.,

ee EE FE Ces I saneccesssenccetssersnratecncdivscasnenats 11

STATUTES, REGULATION, AND RULE:

Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq.

ee I Boiss sa bsics ces tinccsviircapatparecusndedtomaiowibaonvaan 11

EE ET ves iitisice tncitsicctssodudassotessaneriingnieascdaibenete 6, 8

BU ica cccsniswisiccatonsdsvnrencntionssnnocrinans 11

OE iiss varnaiiteresekcinnheaiienstbiccenleceeacadainmbin 7

OI NE ines se oe cccdiortnisabintecsbanvenapcanemanespnanenalane 10

RI sts isicdscusionas vicidstsamvnveienseueniatadiasndadainnmminiaiaa 10

§ 1681m(a)(1)............ his isos des cincalaaealaesaakaceetmatnbamaniiaaadaie 7

Be iiciacakinssencpudesuntdencasdaacsnsadoaeeanbobniscmvasaamiabaainl 13

i ia cc ousacg entscgue nckatieiaa deamaeslanes Manian 14

Oe NNR 5s cies pesc hcl seaepesetanceiiedsstakasbe aihiaernaabtioomn 13

TABLE OF AUTHORITIES — Continued

Page

— f__ERERETTRERRIERETRI Re ones sed NP NERY COR OD HSRC ee 17

iii cnt inccnessicnusnicovvskitiasbadeisbdbeieemmnncevedessiantpl 12,13

Se EI sc ssid scanicntascigedenianexeneenienmsnniiinedands 11

I tI sii disisiinoties iesteniaebeiiaieciuciisieipevnciaseninm viene

ee ae ee seinsisnciesicencenunciunieguicantececoctbincisncigeaentin 18

I Oe i carats dcinepeaiadyinmusmadmaceran tae 11

i Ne Fr SR ic ecissessigaccinsbiesinsencanecsnaiedincoabeaasitetomien 14

MISCELLANEOUS:

Brief for Property Cas. Ins. Ass’n of Am. as Amici

Curiae Supporting Pet. for Reh’g En Banc (9th

RF EE SU BG PIPED vacecniicn raesscnansarnce'cusestoncobbivarvieennc’ 9

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

ioe cee euaeeeniaineis 9

Federal Rule of Civil Procedure 23, Advisory

COREY OEE CIGD)... cacscseccsccesccoreseosesessorcceseeseosenees 15

The Hartford Financial Services Group, Inc.,

Quarterly Report (Form 10-A) (July 27, 2006)............... 7

Michigan Office of Financial and Insurance Ser-

vices, The Use of Insurance Credit Scoring in

Automobile and Homeowners Insurance (2002) ............. 8

Norman J. Singer, Sutherland Statutory Construc-

I IE BININE B es ccsscestheteousauts Pewee psivceaounbueniendseionianes meni: 16

BRIEF FOR TH’ ‘NANCIAL SERVICES

ROUNDTABL. © 5 AMICUS CURIAE

IN SUPPORT OF PETITIONERS

The Financial Services Roundtable respectfully

submits this brief as amicus curiae in support of the

petitions for writs of certiorari in these four cases.’

INTEREST OF AMICUS CURIAE

The Financial Services Roundtable (Roundtable)

represents 100 of the largest integrated financial services

companies that provide banking, insurance, and investment

products and services to American consumers.

The Roundtable believes that the Ninth Circuit has

gone far astray in its interpretations of the Fair Credit

Reporting Act (FCRA). The Roundtable urges this Court to

grant certiorari to address the scope of the statutory terms

“adverse action” and “willfully.” The Ninth Circuit’s

unprecedented construction of the term “adverse action”

will significantly increase the number of notices that

businesses must send to consumers under the FCRA, raising

compliance costs for a hosi of industries without providing

any material benefit to consumers. The Ninth Circuit’s

concurrent expansion of the term “willfully” to include mere

recklessness has permitted class action lawsuits seeking

statutory and punitive damages that could, in the aggregate,

cost the insurance and other financial services industries

billions of dollars, despite the absence of any showing of

actual injury on the part of the plaintiffs.

The Roundtable therefore respectfully urges the Court

to grant the petitions for writs of certiorari and to review

* Letters from petitioners and respondents indicating their consent

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

this Court. Pursuant to Rule 37.6, amicus curiae states that no counsel

for a party authored this brief in whole or in part, and no person or

entity other than amicus curiae, its members, or its counsel, made a

monetary contribution to the preparation or submission of this brief.

2

and reverse the Ninth Circuit’s errant judgments in these

four cases.

INTRODUCTION AND SUMMARY OF ARGUMENT

The issues presented in these four petitions for writs

of certiorari warrant review. This Court would benefit

from granting certiorari in all four petitions because each

petitioner could add valuable depth and focus to the

statutory arguments in light of the factual circumstances

present in each case. To the extent, however, that the

Court is inclined to grant certiorari only in a single case

and hold the other related petitions pending its

disposition, the petition in State Farm Mutual Automobile

Insurance Co. v. Willes, No. 06-101, appears to be the best

vehicle for the Court to review in order to correct the

Ninth Circuit’s erroneous~interpretation of both the

“adverse action” and “willfully” provisions of the FCRA.

I. A. Only a small number of consumers receive the

lowest possible rate for insurance when those rates are based

in part on information in a consumer report. The Ninth

Circuit’s unprecedented interpretation of the term “adverse

action” in the FCRA to require notice to a consumer when

an insurer issues him anything but the lowest possible rate

will force insurance companies to issue tens of millions of

pointless notices to consumers. That deluge of additional

notices will provide consumers with little, if any,

appreciable benefit, and may, in fact, harm consumers by

overloading them with information and numbing them to

the important notices they otherwise receive.

The Ninth Circuit’s interpretation of “adverse action”

in this case is contrary to the plain language of the FCRA.

The FCRA adverse action requirements do not address a

hypothetical comparison of the rate charged to a consumer

with the rate available to all consumers with “more

favorable” consumer report information. The statutory

framework confirms this point.

There also is a risk that the Ninth Circuit’s holding may

be extended beyond insurance to credit transactions and

other transactions governed by the FCRA, which would

3

increase the number of adverse actions notices astrono-

mically, burying consumers in paper. The extension

of the Ninth Circuit’s erroneous interpretation to credit

transactions could have a dramatic adverse effect on banks

and other lenders.

B. The Ninth Circuit’s holding that all parties who

participate in a transaction that results in an adverse

action are each liable for a failure to provide an adverse

action notice finds no statutory basis in the FCRA. The

Ninth Circuit’s ruling threatens to expand the reach of FCRA

liability to banks and other lenders for insurance transactions,

far beyond the intent of Congress. The potential effect of such

an interpretation would be significant.

II. The Ninth Circuit’s substantial relaxation of the

“willfully” requirement for the award of statutory and punitive

damages under the FCRA imposes significant liability not

intended by Congress. The Ninth Circuit held that, in order to

establish the willfulness necessary to obtain these special

damages, a plaintiff need not demonstrate that a defendant

knew its action violated the FCRA, even though such

knowledge is an essential part of the typical definition of

willfulness employed when punishment is involved.

A. By adopting a more lenient standard than most (if

not all) other circuits, the Ninth Circuit has become a

magnet for nationwide class action lawsuits alleging a

variety of technical violations of the FCRA. This is so

because an allegation of “willfully” permits a plaintiff (or,

more realistically, an attorney who identifies technical

violations of the FCRA and then locates a plaintiff in

whose name to sue) to demand statutory damages for

certain FCRA violations of at least $100 and up to $1,000

on behalf of each member of a class, a remedy not

available if such violations are negligent.

The driving force in this kind of case is not

compensation for individual harm, but attorneys intent on

extracting money for themselves and a class of uninjured

consumers from companies that provide valuable services

that may have engaged in unknowing technical violations

of a complex regulatory statute. The size of these suits,

4

and the risk of hundreds of millions (if not billions) of dollars

in statutory or punitive damages, sometimes can enable

plaintiff attorneys to successfully obtain tens (if not

hundreds) of millions of dollars in settlements from entities

that can show they acted in good faith, but cannot be certain

that they could defeat the Ninth Circuit’s unorthodox

standard of “willfully.”

B. By reading the term “willfully”-to encompass states of

mind other than a knowing violation of the law, the Ninth

Circuit ignored basic rules of statutory construction that

weigh against such a low threshold for recovery of punitive

damages. The rule of lenity applies to the “willfully” provision

of the FCRA because it authorizes punitive damages, which

impose penal sanctions. 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

also require the government to prove that a person acted

“willfully” in order to establish criminal liability.

The structure of the FCRA also weighs strongly in favor ~

of requiring a plaintiff to establish specific intent in order to

recover punitive or statutory damages. In enacting the

FCRA, Congress did not permit monetary remedies for every

action that is later determined by a court to violate the

FCRA. By limiting recovery of even actual damages to

instances where a plaintiff can show a negligent violation of

the FCRA, Congress necessarily understood 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 rlaintiff. The legislative history

confirms that Congress rejected proposals permitting the

award of statutory or punitive damages for gross negligence,

a term often used interchangeably with recklessness.

Finally the requirement that a federal statute be read to

avoid doubt about its constitutionality also supports an

interpretation of the term “willfully” to require a showing by

a plaintiff of a specific intent on the part of the defendant to

not comply with the FCRA. The contrary interpretation of

the term by the Ninth Circuit raises substantial questions

5

about the constitutionality of the statute in light of the

Constitution’s substantive limits on punitive damages

awards. For offenses such as those created by the FCRA —

which occur purely in the economic realm, pose no risk to the

health or safety of individuals, and do not target any

particular set of persons — the absence of a requirement that

the defendants have engaged in conduct knowing that it was

unlawful would draw into significant question every award

of punitive damages under the FCRA.

ARGUMENT

The Ninth Circuit’s published decision in Reynolds v.

Hartford Financial Services Group, Inc., 435 F.3d 1081, was

applied immediately in several unpublished opinions issued

the same day. That interpretation of the Fair Credit

Reporting Act (FCRA), 15 U.S.C. §1681 et seqg., has

produced four petitions for writs of certiorari: Hartford Fire

Ins. Co. v. Reynolds, No. 06-82; Safeco Ins. Co. of Am. v.

Burr, No. 06-84; Geico Gen. Ins. Co. v. Edo, No. 06-100; and

State Farm Mut. Auto. Ins. Co. v. Willes, No. 06-101.

All four certiorari petitions challenge the Ninth Circui.

unduly expansive view of what showing is sufficient to

establish that a defendant “willfully” violated the FCRA so as

to trigger the availability of statutory and punitive damages.

Each of the four petitions is an appropriate vehicle in which

the Court could address that important question on which

the circuits are divided because each of the Questions

Presented on the “willfully” issue appears adequately broad

to allow the Court to resolve all the necessary issues.

Three of the petitions also seek review of the Ninth

Circuit’s erroneous construction of a different and equally

important provision of the FCRA that defines “adverse

action” for various purposes, including for when businesses

must provide certain notices to consumers. This “adverse

action” issue affects the day-to-day operations of financial

services entities subject to the FCRA and could pose

substantial compliance burdens on them with no material

benefit to consumers regardless of how the “willfully” issue is

6

resolved. These three petitions thus merit review by this

Court on the adverse action issue as well.

This Court would benefit from granting certiorari in all

four cases because each petitioner could add valuable depth

and focus to the statutory arguments as well as useful clarity

in light of the varied factual circumstances present in each

case. To the extent, however, that the Court is inclined to

grant certiorari only in a single case and hold the other

related petitions pending its disposition, the petition in State

Farm, No. 06-101, appears to be the best vehicle for the

Court to address the “adverse action” and “willfully”

provisions of the FCRA. The scope of the Question Presented

in each of the petitions on the “adverse action” issue is

somewhat different. The question in the State Farm

petition,’ however, is broad and encompasses the question in

Geico.’ Also, resolution of the question in State Farm is

antecedent to the question in Hartford, which focuses only

on the required content of an adverse action notice and not

on the threshold question of whether a notice is required.”

* “Whether the Ninth Circuit Court of Appeals erred in interpret-

ing key statutory terms in the definition of ‘adverse action’ in the Fair

Credit Reporting Act, 15 U.S.C. § 1681a(k1\(B)(i), so as to expand the

reach of that definition far beyond its plain meaning, thus substantially

increasing the statutory obligations on insurance companies to notify

consumers of purported ‘adverse actions’ and creating vastly expanded

potential liabilities under the statute?” State Farm, No. 06-101, Pet. ati.

* “Whether the Ninth Circuit improperly expanded § 1681m of

FCRA by holding that an ‘adverse action’ has occurred and notice is

required thereunder, even when a consumer’s credit information has

had either no impact or a favorable impact on the rates and terms of

the insurance that would otherwise have been offered or provided?”

Geico, No. 06-100, Pet. at ii.

* “Whether the Ninth Circuit erred in creating new and open-ended

disclosure requirements for adverse action notices beyond the discrete

list expressly set forth in Section 615 of FCRA, 15 U.S.C. § 1681m(a).”

Hartford, No. 06-82, Pet. at i.

* A factor that may become significant arose in the Hartford case

subsequent to the filing of that petition. Hartford has informed the

Securities and Exchange Commission that, after it filed its petition for

certiorari in this matter, “the parties entered into a memorandum of

(Continued on following page)

I. Review Is Warranted To Correct The Ninth

Circuit’s Expansive Interpretation Of The FCRA’s

“Adverse Action” Definition, Which Otherwise

Will Have A Substantial Negative Effect On The

Conduct Of The Financial Services Industry

Nationwide

The Ninth Circuit erroneously intey»reted the term

“adverse action” for purposes of the FCRA in a manner that

is contrary to the plain language of the statute. In doing so,

the Ninth Circuit held that any consumer who does not

receive the lowest possible rate has suffered an adverse

action, that every entity that participates in that action is

liable for failure to provide an adverse action notice, and that

each adverse action notice must contain detailed information

far beyond that identified in the FCRA itself. The potential

impact of this erroneous ruling on the insurance industry is

quite significant, and its impact may extend far beyond to

other industries as well.

A. The Ninth Circuit's Holding That The Failure

Of A New Customer To Receive The Lowest

Possible Rate Constitutes An “Adverse Action”

By The Insurer Will Require The Issuance Of

Millions Of Useless Notices And Is Wrong As A

Matter Of Statutory Interpretation

Under the FCRA, if an insurance company takes an

“adverse action” with respect to a consumer in connection

with its underwriting decision, based at least in part on a

consumer report that it obtained in connection with the

underwriting under 15 U.S.C. §1681b(a)(3)(C), the

insurance company must provide the consumer with notice

of the adverse action. See id. § 1681m(a)(1). The FCRA

understanding setting forth the essential terms of a class settlement in

this action. The settlement is subject to certain contingencies, including

preliminary and final approval by the district court.” The Hartford

Financial Services Group, Inc., Quarterly Report (Form 10-Q), at 86

(July 27, 2006).

8

«“

defines the term “adverse action” for insurance as “a

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

reduction or other adverse or unfavorable change in the

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

applied for, in connection with the underwriting of

insurance.” Jd. § 1681a(k)(1)(B)(i) (emphasis added).

The Ninth Circuit erroneously held that the phrase “an

increase in any charge for” insurance coverage includes an

initial purchase of new insurance where the consumer is

charged a rate that is higher than what the consumer would

have been charged if his score, based on information from his

consumer report, was the “top potential score.” State Farm,

No. 06-101, Pet. App. 43a. Under that interpretation, 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.” bid.

1. The Ninth Circuit’s unprecedented interpretation

of the term “adverse action” to include issuance of

anything but the best insurance coverage at the lowest

possible rate will force-insurance companies, and possibly

other financial services institutions, to issue tens of

millions of pointless notices to consumers.

The effect-of the Ninth Circuit’s holding on insurance

companies will be dramatic. Only a small number of

consumers will receive the lowest possible rate for insurance

when those rates are based in part on information from the

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). As a result, the Ninth Circuit’s holding will 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 lowest

possible rates. Because the majority of consumers nationwide

must obtain automobile and/or homeowner’s insurance, the

Ninth Circuit’s holding will require businesses to produce and

send tens or hundreds of millions of additional adverse action

9

notices each year. See C.A. Br. for Property Cas. Ins. Ass’n of

Am. as Amici Curiae Supporting Pet. for Reh’g En Banc at 2

(filed Nov. 14, 2005) (insurers in 2005 issued approximately 24

million homeowners policies and 48 million —personal

automobile policies using credit information).

Congress could not have intended such an absurd result.

The Federal Trade Commission cautioned Congress to this

effect when Congress was addressing revisions to the FCRA. It

explained how important it was “to avoid a situation where in

essence everyone is getting an adverse action notice because no

one ever gets the absolute best rate.” 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., 529 (2003)

(testimony of Joel Winston, Associate Director, Bureau of

Consumer Protection, Federal Trade Comm’n).

That deluge of additional notices will provide consumers

with little, if any, appreciable benefit, and may, in fact, harm

consumers. 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 lowest possible

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 substantially diluted.

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”).

Also, the flood of additional notices will undercut their

statutorily intended function — focusing consumers on po-

tential material inaccuracies in their consumer reports. For

example, a consumer with a good credit history who obtains

insurance at a favorable rate, but receives an adverse

action notice, could spend unnecessary time investigating a

consumer report for material inaccuracies that do not exist.

10

_ 2. The Ninth Circuit’s interpretation of “adverse

action” is contrary to the plain language of the FCRA. The

relevant portion of the statute specifies that an adverse

action occurs only if consumer report information is used,

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

coverage for that consumer. As a result, if a consumer

receives the same rate or a better rate than she would have

received if her consumer report information had not been

considered, an adverse action has not occurred because the

consumer report information did not result in an increase

in the charge for the insurance coverage for that consumer.

The FCRA adverse action notice requirements are

triggered when information in a consumer report has an

actual and negative impact on a consumer’s insurance rate.

They do not address a hypothetical comparison of the rate

charged to the consumer with the rate available to all other

consumers with “more favorable” consumer report information.

The statutory framework confirms this point. 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 requirements to generate free consumer

reports to nearly all consumers, Congress would not have

needed to amend 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 the only consumers not already

receiving them would be the small number of consumers

with the top credit scores who have no need for them.

3. There is a risk that the Ninth Circuit’s holding may be

extended beyond insurance to credit transactions and other

transactions governed by the FCRA, which would increase the

number of adverse actions notices astronomically, burying

consumers in paper. Cf. Senate Hearings, supra, at 48 n.15

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

Consumer Protection, Federal Trade Comm’n) (each day, two to

three million consumer reports subject to the FCRA are issued).

Application of the adverse insurance ruling in this case

should not apply in the context of credit because the FCRA

11

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

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

Act. 15 U.S.C. § 1681la(k)(1)(A). That Act, in turn, 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 consumer accepts the lender’s

counteroffer, see 12 C.F.R. § 202.2(c).

There is yet another definition of “adverse action” in

the FCRA, however, that at least one court has applied in

the credit context. That definition of “adverse action”

provides that an adverse action is one 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)(B)(Gv).

Congress intended this “miscellaneous” definition to apply to

transactions other than credit or insurance, as indicated by

the transaction-specific definitions of adverse action and the

legislative history. See Senate Hearings, supra, at 53 & n.46

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

Consumer Protection, Federal Trade Comm’n). The Seventh

Circuit, however, 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).

There is a significant risk that courts could conclude

that, under the Ninth Circuit ruling at issue here, if a

consumer is charged a rate for credit that is higher than

the rate that the consumer would have been charged if his

or her credit score was the “top potential score, the lender

has taken an action that is “adverse to the iriterests of the

consumer” within the miscellaneous definiti»: of “adverse

action” in the FCRA. The extension of vu» Ninth Circuit’s

erroneous interpretation to credit transac. ions could have

a dramatic adverse effect on the compliance activities of

banks and other lenders, similar to the effect of the Ninth

Circuit's decision on insurance companies.

12

B. The Ninth Circuit’s Holding That All

Parties Who Participate In A Transaction

That Results In An Adverse Action Are

Liable For A Failure To Provide An Adverse

Action Notice Threatens To Disrupt Settled

Expectations Of The Financial Services

Industry

~The Ninth Circuit held that all parties who

participate in an insurance adverse action are liable for

any failure to provide an adverse action notice. State

Farm, No. 06-101, Pet. App. 47a. The Ninth Circuit opined

that Congress did not “intend[] that only a single company

be responsible * ** when a consumer is charged an

increased rate for insurance.” Jd. at 48a. The Ninth Circuit

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. This holding finds no statutory basis in the FCRA.

The Ninth Circuit’s ruling threatens to expand the reach of

FCRA liability for insurance transactioris to banks and other

lenders, far beyond the intent of Congress. Courts may be

persuaded that a bank or other lender is deemed responsible,

along with an insurance company, for the failure to provide an

adverse action notice in connection with an “increase in the

charge” for certain types of insurance coverage that are closely

related to credit products. For example, a bank may obtain

mortgage insurance to protect the bank from a borrower’s

default on a mortgage loan. If the bank selects the mortgage

insurance company to underwrite the policy based on consumer

report information, the Ninth Circuit's interpretation suggests

that the bank could be liable under 15 U.S.C. § 1681s(b) along

with the insurance company for failure to provide an adverse

action notice if the rate charged for-the mortgage insurance

is not the lowest possible rate.

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 selects

13

the insurance company that will receive the consumer’s

insurance application based on consumer report information,

a 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

lowest possible rate and no adverse action notice is

provided.

The potential effect of such an interpretation would be

significant. Banks and other lenders could find themselves

facing enforcement actions for an insurance adverse action

that they did not take.

II. Review Is Also Warranted On The Proper

Interpretation Of The FCRA’s “Willfully”

Requirement To Correct The Ninth Circuit’s

Expansive And Erroneous Interpretation That

Permits Recovery Of Unwarranted Punitive

Damages And Enables Nationwide Class

Actions For Statutory Damages

The Ninth Circuit’s substantial relaxation of the

“willfully” requirement for the award of statutory and punitive

damages under the FCRA imposes significant liability not

intended by Congress. The FCRA ensures that any individual

who has been injured as a result of a negligent violation of

certain of the FCRA’s obligations is entitled to compensatory

relief for that injury. 15 U.S.C. § 1681lo(a)(1). In addition,

where a defendant “willfully failed to comply” with such FCRA

obligations, id. § 168in(a), Congress authorized uncapped

punitive damages and statutory damages of at least $100 and

up to $1,000 for each consumer.

The Ninth Circuit held that in order to establish

willfulness, a plaintiff need not establish that a defendant

knew its action violated the law, even though such

knowledge is an essential part of the typical definition of

willfulness employed when punishment is involved. See, e.g.,

Bryan v. United States, 524 U.S. 184, 196 (1998); Ratzlaff v.

United States, 510 U.S. 135, 149 (1994). Instead, relying on a

short line of cases that involve extending statutes of

limitations and doubling lost wages awards for labor law

violations, the Ninth Circuit held that a plaintiff can

14

establish that a defendant acted “willfully” by demonstrating

that the defendant acted “either knowing that the policy [or

action] to be in contravention of the rights possessed by

consumers pursuant to the FCRA or in reckless disregard of

whether the policy [or action] contravened those rights.”

State Farm, No. 06-101, Pet. App. 53a.

The Ninth Circuit acknowledged that its “reckless

disregard” view of the mens rea required to establish

“willfully” under the FCRA conflicts with both the Sixth

Circuit and the Eighth Circuit. State Farm Pet. App. 54

n.17. As all the petitioners demonstrate, the Ninth

Circuit’s standard to determine “willfully” is also contrary

to the great weight of other circuit authority.

A. The Ninth Circuit’s Ruling Will Permit A

Dangerous Array Of Class Actions Seeking

Millions Of Dollars In Statutory Damages

Without Any Proof Of Actual Harm

By adopting a more lenient standard than most (if not

all) other circuits, the Ninth Circuit has become a magnet for

nationwide class action lawsuits alleging a variety of

technical violations of the FCRA. See Safeco, No. 06-84, Pet.

at 13 & n.5 (citing recent filings); see also Hartford, No. 06-

82, Pet. at 23 (hundreds of class actions alleging FCRA

violations have been filed in the past two years). This is so

because an allegation of “willfully” permits a plaintiff (or, more

realistically, an attorney who identifies certain technical

violations of the FCRA and then locates a plaintiff in whose

name to bring a class action) to demand statutory damages

of up to $1,000 on behalf of each member of a class, a remedy

not available for negligent violations under Section 1681o.

By avoiding the need to establish actual damages, if

any, incurred by each individual member of a class, a

“willfully” allegation increases the likelihood that a class

composed of a large number of individuals will be certified

as a damages class action under Federal Rule of Civil

Procedure 23(b)(3). See, e.g., Ashby v. Farmers Ins. Co. of

Oregon, 2004 WL 2359968 (D. Or. Oct. 18, 2004) (class of

at least 130,000 insureds); Cavin v. Home Loan Ctr., Inc.,

15

2006 WL 1313191 (N.D. Ill. May 10, 2006) (class of

approximately 49,000 members); In re Farmers Ins. Co.,

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

13, 2006) (class of over one million insureds).

Respondent Willes’s complaint in the State Farm

litigation, which is typical of other alleged FCRA violations

plaintiffs seek to litigate as class actions, made no claim

that petitioners’ actions were negligent or that she

personally suffered any actual damages. Instead, her

complaint at the time it was dismissed by the district

court alleged only willful misconduct and :wught only

statutory and punitive damages on behalf of a class. State

Farm Third Amended Complaint (D. Or. Dkt. No. 35) at 4.

The allegations in the three other FCRA cases in which

certiorari petitions are pending are also silent as to the

actual harm, if any, suffered by the named plaintiffs and

likewise seek only non-compensatory damages for a class.

The driving force for such class actions is not

compensation for individual harm, but attorneys intent on

extracting money for themselves and a class of uninjured

consumers from companies that provide valuable services

(and their shareholders) that may have engaged in

unknowing technical violations of a complex regulatory

statute. Cf. id. at 4 418 (respondent’s counsel “are

experienced in class action securities litigation”).

The size of these suits, and the risk of hundreds of

millions (if not billions) of dollars in statutory or punitive

damages, sometimes can enable plaintiff attorneys to

successfully obtain tens (if not hundreds) of millions of

dollars in settlements from entities that can show they acted

in good faith, but cannot be certain that they could defeat the

Ninth Circuit’s unorthodox standard of “willfully.” See note 5,

supra; Fed. R. Civ. P. 23, Advisory Committee’s note (1998)

(money class actions may force many defendants “to settle

rather than incur the costs of defending a class action and

run the risk of ruinous liability”); Parker v. Time Warner

Entm' Co., L.P., 331 F.3d 13, 22 (2d Cir. 2003) (class action

for statutory damages “could create a potentially enormous

aggregate recovery for plaintiffs, and thus an in terrorem

16

effect on defendants, which may induce unfair settlements”);

Blair v. Equifax Check Services, Inc., 181 F.3d 832, 834 (7th

Cir. 1999) (Easterbrook, J.); In the Matter of Rhone-Poulenc

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

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

B. The Ninth Circuit Ignored That A “Willfully”

Finding Triggers The Availability Of Punitive

Damages, A Disfavored Penal Remedy Subject

To Significant Constitutional Limitations

A finding that a defendant acted “willfully” allows an

award of punitive damages in suits for all violations of

FCRA that can be privately enforced. By reading the term

“willfully” to encompass states of mind other than a

knowing violation of the law, the Ninth Circuit ignored

basic rules of statutory construction that weigh against

such a low threshold for recovery of punitive damages.

1. Punitive damages are an “extraordinary sanction.”

International Bhd. of Elec. Workers v. Foust, 442 U.S. 42, 48

(1979). “[Bly 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 similar extreme conduct.” City of Newport v.

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

damages “serve the same purposes as criminal penalties,”

State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408,

417 (2003), and “have been described as ‘quasi-criminal,’”

Cooper Indus., Inc. v. Leatherman Tool Group, Inc., 532 U.S.

424, 432 (2001) (citation omitted).

The rule of lenity applies to statutes that authorize

punitive damages because punitive damages impose penal

sanctions. See 3 Norman J. Singer, Sutherland Statutory

Construction § 59.2, at 121 (6th ed. 2001) (collecting cases

applying rule of lenity to statutes awarding punitive

damages). 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,

17

168ir; Ratzlaff, 510 U.S. at 143 (“A term appearing in

several places in a statutory text is generally read the same

way each tirae it appears.”).

Thus, to the extent that the term “willfully” is

ambiguous, it must be read narrowly for purposes of the

felony provisions and the punitive damages provisions to

protect defendants from punishment. See Ratzlaff, 510 U.S.

at 148 (“were we to find [the statute’s] ‘willfulness’

requirement ambiguous * * *, we would resolve any doubt

in favor of the defendant”). The Ninth Circuit, however, in

conflict with other circuits, rejected the reading most

favorable to defendants and did not require that plaintiffs

show that a defendant had a specific intent to violate the

FCRA.

2. The structure of the FCRA weighs strongly in favor of

requiring a plaintiff to establish specific intent in order to

recover punitive damages. The FCRA is a technical statute

that, even decades after its enactment, is still the subject of

much uncertainty. When Congress uses the term “willfully”

in such “highly technical statutes” that present “the danger

of ensnaring individuals engaged in apparently innocent

conduct,” a defendant must know “that his conduct was

unlawful” in order to be liable. Bryan, 524 U.S. at 194-195.

In enacting the FCRA, Congress did not permit

monetary remedies for every action that is later

determined by a court to violate the FCRA. By limiting

recovery of even actual damages to instances where a

plaintiff can show a negligent violation of certain FCRA

provisions, Congress necessarily understood 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.

Furthermore, the legislative history confirms that

Congress rejected proposals permitting the award of

statutory or punitive damages for gross negligence, a term

often used interchangeably with recklessness. See Safeco,

No. 06-84, Pet. at 20-21 (describing legislative history);

Geico, No. 06-100, Pet. at 22 (same). For all these reasons,

18

the Ninth Circuit erred in not reading the FCRA “willfully”

requirement to incorporate a specific intent standard.

The court of appeals disregarded this analysis and,

instead, adopted the recklessness standard that this Court

employed in interpreting the term “willful” in the Age

Discrimination in Employment Act (ADEA) and the Fair

Labor Standards Act. State Farm, No. 06-101, Pet. App. 53a

(citing 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)).

In neither of those statutes, however, does the willfulness

determination trigger an award of punitive damages.

In one provision common to both statutes, at issue in

McLaughlin, a willfulness finding extends the statute of

limitations for bringing suit from two years to three years.

See 29 U.S.C. § 255(a). In another provision under the

ADEA, at issue in Thurston and Hazen Paper, a finding of

willfulness permits a court to award an amount equal to

the amount of lost wages as liquidated damages. See 29

U.S.C. §626(b). That liquidated damages remedy, this

Court has held, 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), and as a

substitute for prejudgment interest, which is not available,

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)). The Court made clear that the term

“willful” in those statutes was ambiguous and that its

meaning in any statute is dictated by the history and

structure of the statute. See McLaughlin, 486 U.S. at 132-

133 (reviewing structure of statute and legislative history);

Thurston, 469 U.S. at 125-128 (same).

3. Finally, the requirement that a federal statute be

read to avoid doubt about its constitutionality also

supports an interpretation of the term “willfully” to

require a showing by a plaintiff of a specific intent on the

part of the defendant to not comply with the FCRA. The

contrary interpretation of the term by the Ninth Circuit

19

raises substantial questions about the constitutionality of

the statute in light of the Constitution’s substantive limits

on punitive damages awards.

The Due Process Clause prohibits unreasonable

punitive damages awards and “the most important

indicium of the reasonableness of a punitive damages

award is the degree of reprehensibility of the defendant’s

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

Am., Inc. v. Gore, 517 U.S. 559, 575 (1996)). 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.” Ibid.

Under these factors, the FCRA requirement that a

plaintiff establish that a defendant “willfully” failed to

comply with the FCRA in order to be eligible for punitive

damages must be interpreted to require proof that a

defendant knew that its conduct violated the FCRA so as

- to not raise constitutional doubt. For offenses such as

those created by the FCRA — which occur purely in the

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

individuals, and do not target any particular set of persons

— the absence of a requirement that the defendant engaged

in conduct “knowing or suspecting that it was unlawful”

would draw into significant question every award of

punitive damages under the FCRA. 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”).°

* The FCRA authorization of statutory damages raises the same

serious constitutional doubt under the -Ninth Circuit’s interpretation

because the Due Process Clause prohibits the award of statutory

damages that have no relationship to the amount of actual injury

(Continu’d on following page)

20

There is no basis in the text, structure, or history of

the FCRA that would sustain the Ninth Circuit’s minority

view of “willfully.” Yet given the availability of nationwide

class actions, the Ninth Circuit’s view will be the one to

which defendants will often be subjected. Such a holding

requires immediate review from this Court.

CONCLUSION

For the reasons set forth above and in the petitions for

writs of certiorari, the Court should grant all the petitions.

To the extent this Court grants a single petition, it should

grant the petition in State Farm Mutual Automobile

Insurance Co. v. Willes, No. 06-101, and hold the

remaining petitions pending decision in State Farm, and

then dispose of them as appropriate in light of that

decision.

Respectfully submitted,

L. RICHARD FISCHER

BETH S. BRINKMANN*

SETH M. GALANTER

NATHAN D. TAYLOR

MORRISON & FOERSTER LLP

2000 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 887-1544

*Counsel of Record

AUGUST 21, 2006

suffered unless there is a showing of specific intent to violate the law.

See Southwestern Telegraph & Telephone Co. v. Danaher, 238 U.S. 482

(1915) (statutory damages of $100 per day for refusing customer phone

service violated due process when company’s action was in good faith,

impartially applied, consistent with longstanding practice, and done in

the absence of any state ruling that conduct was unreasonable, rulings

elsewhere that like conduct was reasonable, and weight of differing

opinions on company’s side); see also Missouri Pac. Ry. Co. v. Tucker,

230 U.S. 340, 351 (1913) (statutory damages of $500 for overcharging

custemer $3 violates due process because damages were “grossly out of

proportion to the possible actual damages”).