United States: High Alert For California Employers And Employers Nationwide For The Second Wave Of FCRA Class Actions

Last Updated: October 20 2017
Article by Rod M. Fliegel, Alison S. Hightower and Allen P. Lohse

The flurry of Fair Credit Reporting Act ("FCRA") class actions against employers started in or about 2012 and was not limited to California.1 Many of those lawsuits resulted in significant payouts for violations of one or more of the FCRA's no-harm, hyper-technical requirements. The U.S. Supreme Court's most recent opinion on Article III standing and "concrete injury-in-fact" (Spokeo) has helped employers slow down, but not stop, the FCRA juggernaut.2 Employers across the U.S., and particularly in California, should remain vigilant about their compliance with the FCRA and related state laws.3 The dozens of class action filings in California make the threat even more acute in the Golden State.4

FCRA Overview

The FCRA imposes requirements on employers who use "consumer reports" or "investigative consumer reports" for "employment purposes." A consumer report is known as a credit report or a background report prepared by a consumer reporting agency ("CRA"). An investigative consumer report is a specific type of consumer report whereby the CRA obtains information through personal interviews (e.g., an in-depth reference check).

Broadly speaking, the FCRA's requirements on employers may be divided primarily into two categories: (1) requirements that employers must follow before obtaining a consumer report from a CRA, and (2) requirements employers must follow if they intend to take "adverse action" against an individual based even in part on information contained in the consumer report.

As to the former, before an employer may obtain a consumer report from a CRA, typically it must make a "clear and conspicuous" written disclosure to the consumer in a "document" that consists "solely" of the disclosure that a consumer report may be obtained. The applicant or employee must provide written authorization for the employer to obtain any consumer report. (In some circumstances, motor carriers must follow related but distinct requirements.)

As to the latter, before an employer may take adverse action against an individual based even in part on information contained in the consumer report, typically it must provide the employer with a copy of the report and the CFPB's summary of FCRA rights (known as the "pre-adverse action notice"). The employer then must wait to take the adverse action until the individual has had a meaningful opportunity to review the report and summary. If the employer still intends to take the adverse action, the employer must then provide a second, specific notice (known as the "adverse action notice"). (Again, in some circumstances, motor carriers must follow related but distinct requirements.)

FCRA Class Actions

One of the more popular FCRA claims challenges the employer's background check disclosure form. These class actions tend to target disclosures that are included within the employer's job application (whether hosted on-line, or presented on paper, or both), or if separate from the job application, that include alleged impermissible ("extraneous") text, such as a release of liability.5

Increasingly, the plaintiff's bar in California, including regular players in the wage and hour arena, have been expanding their practice to include FCRA claims. Familiar examples include Capstone Law, Blumenthal, Nordrehaug & Bhowmik LLP and Setareh Law Group. There are several reasons for the recent increase in California FCRA suits.

Statutory Damages: For "willful" violations, FCRA allows consumers to recover actual or statutory damages. The range of statutory damages is $100 to $1,000. The appeal of such damages obviously is to try to avoid the individualized issues that can make it more difficult for the plaintiff to prosecute claims on a class-wide basis.

Concurrent Jurisdiction in State Courts: Congress provided concurrent jurisdiction to prosecute FCRA actions in either federal court or state court. This allows for the attorneys to file the actions in the plaintiff-friendly state courts of Los Angeles and San Francisco, among others. Just recently, a FCRA disclosure class action was certified in state court in Los Angeles.6

California's FCRA: Many of these new filings combine FCRA claims with claims for violation of California's primary version of the FCRA: the Investigative Consumer Reporting Agencies Act ("ICRAA"). The ICRAA's hyper-technical requirements are similar to the FCRA.7

Plaintiff-Friendly Rulings in the Ninth Circuit: A FCRA claim initially filed in state court can usually be removed to federal court based on, at a minimum, federal question jurisdiction. But for cases filed in California, this typically means that the removed action proceeds in a district court within the Ninth Circuit. This year the Ninth Circuit has issued two significant plaintiff-friendly rulings in FCRA class cases.

In Syed v. M-I, the Ninth Circuit became the first appellate court to rule on the lawfulness of a liability waiver in a background check disclosure.8 Before this, federal district courts had not been able to agree on when the inclusion of such text in the disclosure is unlawful and, if so, whether the plaintiff can clear the next hurdle of proving a willful theory of liability. The latter is important because if a plaintiff can show the employer acted "willfully," then the plaintiff does not have to prove "actual damages," which makes it easier for the plaintiff to attempt to certify the class. Thus, many FCRA litigators have been waiting for a federal appellate court to weigh in. In Syed, the Ninth Circuit ruled that an employer acted willfully in violation of the FCRA when it included a liability waiver in its FCRA disclosure. Despite the FCRA's undefined terms and disagreement in the lower courts on what form of disclosure complies with the FCRA, the Ninth Circuit held that the FCRA unambiguously requires that the disclosure "consist solely" of the disclosure language, which does not allow for a release. In the wake of Syed, any FCRA disclosure case pending in a California district court will have to contend with this decision, which could be problematic both for defending the underlying alleged violation as well as the plaintiff's claim that the employer acted "willfully" by including "extraneous" information in the disclosure.

On remand, the Ninth Circuit also issued a plaintiff-friendly opinion on standing in Robins v. Spokeo, Inc.9 The defendant Spokeo provided a "people search engine" that compiles consumer data and builds individual consumer profiles. The plaintiff alleged that Spokeo published a report on him that contained "flattering inaccuracies," which portrayed him as the holder of a master's degree, relatively affluent, and married with children. The plaintiff filed a FCRA suit alleging Spokeo failed to "follow reasonable procedures to assure maximum possible accuracy" of the information in violation of 15 U.S.C. § 1681e(b). The district court dismissed the case for lack of standing, finding the plaintiff alleged only a bare violation of the statute divorced from any actual injury. The Ninth Circuit reversed, finding injury based on violation of the statute. In May 2016, the U.S. Supreme Court vacated the Ninth Circuit's opinion and declared that a plaintiff does not "automatically" have the requisite injury-in-fact "whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right." The Supreme Court held that the Ninth Circuit erred by implicitly relying on Spokeo's alleged statutory violation, without more, to find a "concrete" injury. The Supreme Court remanded to the Ninth Circuit to address whether the plaintiff suffered a "concrete" injury," and the Ninth Circuit recently found that he had. The Ninth Circuit ruled that the FCRA statute at issue was intended to protect "concrete interests" of consumers and that the plaintiff had suffered a "concrete" injury "to [his] employment prospects by [Spokeo] misrepresenting facts that would be relevant to employers." Thus, the Ninth Circuit adopted a plaintiff-friendly standard for Article III standing and, in doing so, separated itself from other circuits that have taken more defense-friendly stances in the wake of the Supreme Court's ruling. Therefore, while lack of Article III standing is a common defense to FCRA claims, that defense has been somewhat weakened in Ninth Circuit courts.

Next Steps for Employers

The resurgence of persistent nationwide FCRA class action filings is no coincidence. The plaintiff's bar will continue to pursue actions against employers that operate in plaintiff-friendly jurisdictions like California. Employers must stay alert and remain vigilant—especially during transitions to new applicant tracking systems, different background vendors, and other HRIS systems relevant to background screening. To help mitigate risk, especially the risk of willful FCRA violations, employers also should consider arranging for a privileged review of their background check processes, policies and procedures. Employers, of course, also should continue to be mindful of their obligations under the proliferating state and local ban the box laws, including the Golden State's latest law (AB1008).10

Footnotes

1. See Rod Fliegel, Weathering the Sea Change in Fair Credit Reporting Act Litigation in 2014, Littler Insight (Jan. 6, 2014).

2. See Rod Fliegel and Phil Gordon, U.S. Supreme Court Holds Not Every Violation of a Federal Statute is a Ticket to File a Federal Court Lawsuit, Littler Insight (May 17, 2016).

3. See Rod Fliegel and William Simmons, The Swelling Tide of Fair Credit Reporting Act (FCRA) Class Actions: Practical Risk-Mitigating Measures for Employers, Littler Report (Aug. 1, 2014).

4. See Rod Fliegel and Allen Lohse, Ninth Circuit Revisits Article III Standing For An Alleged FCRA Violation, Littler Insight (Aug. 15, 2017).

5. See Rod Fliegel, Ninth Circuit is the First Appellate Court to Rule on "Extraneous Text" in a FCRA Background Check Disclosure, Littler Insight (Jan. 25, 2017)

6. See Rod Fliegel, California Court Certifies FCRA Class of Over 40,000 Applicants (Jul. 17, 2017); Rod Fliegel, Ninth Circuit is the First Appellate Court to Rule on "Extraneous Text" in a FCRA Background Check Disclosure, Littler Insight (Jan. 25, 2017)

7. There is also a threshold question of whether the ICRAA is even constitutional. That issue is currently on appeal to the California Supreme Court.

8. Supra note 5.

9. Supra note 4.

10. See Rod Fliegel and Allen Lohse, California Statewide Ban-the-Box Law Signed By Governor, Littler Insight (Oct. 16, 2017); Rod Fliegel and Christina Cila, City of Los Angeles Mayor to Sign Long-Awaited "Ban the Box" Law, Littler Insight (Dec. 9, 2016); California Employers Are Subject to New Requirements When Using Criminal History, Littler Insight (Feb. 21, 2017); Rod Fliegel San Francisco's OLSE Issues "FAQs" On Fair Chance Ordinance, Littler Insight (Dec. 17, 2014).

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