United States: Ninth Circuit Ruling Bars Liability Waivers In Employers' FCRA Background Check Disclosure Forms

The Ninth Circuit recently became the first appellate court in the country to rule that an employer's inclusion of a liability waiver in a background check disclosure is a willful violation of the Fair Credit Reporting Act (FCRA).

U.S. Code, Title 15, section 1681b(b)(2)(A) provides that any employer that wishes to obtain a background check report on an individual through a consumer reporting agency must first make a "clear and conspicuous" written disclosure to the individual that a background check report may be obtained on him or her. This section says written disclosure must be made in a document consisting "solely" of the disclosure (hereinafter referred to as the "'sole disclosure' requirement"). The employer must also obtain written consent, or authorization, from the individual before it may procure a background check report on him or her.

In recent years, the number of class action lawsuits brought under the FCRA against employers has risen dramatically. The most common types of claims are those alleging noncompliance with the "sole disclosure" requirement, including claims that an employer's inclusion of a liability waiver in a disclosure form was a willful violation of the "sole disclosure" requirement. While the Federal Trade Commission (FTC) opined in a 1998 advisory letter that including a liability waiver in a background check disclosure violated the "sole disclosure" requirement under the statute, FTC advisory letters are not binding on any court. Absent any controlling authority on the issue, federal district courts had been in disagreement as to whether the inclusion of a liability waiver in a disclosure form constituted a willful violation of the statute.

Syed v. M-I, LLC Decision

On January 20, 2017, the Ninth Circuit ruled in Syed v. M-I, LLC, — F.3d —, No. 14-17186, (9th Cir. Jan. 20, 2017) that an employer willfully violated the FCRA when it included a liability waiver in its FCRA disclosure form.

In applying for a job with M-I, LLC, Mr. Syed signed a "Pre-Employment Disclosure Release" provided by M-I, which advised him that his credit history and other information may be collected by the company for the purposes of employment screening. The form authorized M-I to order a background check report on Mr. Syed through a consumer reporting agency and further stated that the applicant or employee would be waiving his rights to sue the employer and its agents for violations of the FCRA. Mr. Syed signed the authorization form. After learning that M-I had run a background check report on him, Mr. Syed brought a class action lawsuit against M-I in the United States District Court for the Eastern District of California alleging that M-I's inclusion of a liability waiver in its disclosure form was a willful violation of the FCRA's "sole disclosure" requirement.

In response to the Class Action Complaint, M-I moved to dismiss the case, arguing that Mr. Syed's lawsuit failed to allege sufficient facts to state a claim for a willful violation of the FCRA. M-I argued that the legal standard for "willfulness" requires a violation of an unambiguous statutory requirement, and that the subsection of the FCRA setting forth the "sole disclosure" requirements was too uncertain to find that a willful violation had occurred. The district court agreed with M-I that the law was too uncertain at the time M-I issued the disclosure and dismissed Mr. Syed's lawsuit accordingly.

On January 20, 2017, the Ninth Circuit reversed the judgment and reinstated the lawsuit, finding that a lack of guidance from courts and administrative agencies did not render the company's interpretation "objectively reasonable." Rather, because the statutory language of section 1681b(b)(2)(A) plainly states that the disclosure document must consist "solely" of the disclosure, the statute is clear that the disclosure must not include any additional terms beyond what is mandated by the statute. The only recognized exception is Congress's 1998 amendment to the statute expressly allowing the authorization for the procurement of the report to be made on the same document as the disclosure. In light of this finding, the court held that an employer's inclusion of any terms beyond the mandatory disclosure language, such as the inclusion of a liability waiver, is a willful violation of the FCRA's "sole disclosure" requirement.

Mr. Syed did not seek actual damages in this case. As the Court noted, statutory and punitive damages are available under the FCRA only where a defendant "willfully fails to comply" with the statute, as provided in U.S. Code, Title 15, section1681n(a). As a result, such a violation of the "sole disclosure" requirement could lead to statutory damages and punitive damages, although the latter are not frequently awarded, even if the plaintiff cannot establish any specific harm. Other damages and costs may apply depending on the facts and circumstances.

Potential Damages for Willful Violations of the FCRA

The FCRA provides multiple possibilities for a plaintiff to recover damages. For each willful violation of the statute, a plaintiff may recover either his or her actual damages caused by the violation or statutory damages between $100 and $1,000. A plaintiff could also potentially receive punitive damages for each willful violation of the statute. In order to recover statutory or punitive damages for a willful violation under the statute, plaintiffs need not prove that they suffered any harm as a result of the violation—only that a violation occurred. Finally, a plaintiff may also recover attorney's fees and costs.

Moreover, the statute of limitations for FCRA claims is two years after the individual discovers the violation or five years after a violation occurs, whichever is earlier. In claims alleging noncompliance with the "sole disclosure" requirement of the statute, it is common for the five-year limitations period to apply, as employees are not typically notified that a background check report was run on them unless an issue with the report arises.

Because of the five-year period, FCRA class actions can often involve large numbers of putative class members, since a putative class generally encompasses every applicant or employee on whom the employer ran a background check report within the past five years. For example, an employer who provided a deficient FCRA disclosure to one employee likely provided the same deficient disclosure to all new hires within the last five years. Depending on the size of the company and whether the company runs background checks on all of its new hires, the potential liability to an employer for willful noncompliance of the FCRA can be substantial, given that the statutory damages range of $100 to $1,000 is calculated per class member and per violation going back five years, and punitive damages are also available under the statute.

Recommendations for Employers

Following the Ninth Circuit's ruling in Syed, employers who run background checks on applicants, current employees, contractors, and volunteers should immediately review their application and onboarding documents to ensure that any background check disclosure and authorization forms do not include any liability waivers or other extraneous terms beyond what is mandated by the FCRA disclosure requirements. Furthermore, employers can minimize their risk by having their hiring forms and background screening policies and procedures audited on an annual basis to ensure compliance with the FCRA, state statutes, and local ban-the-box ordinances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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