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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386016_1206%3A06

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2006

## Text

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:

“i.

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”).

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386016_1206%3A06. Public record. Not legal advice.