Argument Preview: Geico v. Edo and Safeco v. Burr on 1/16

The following argument preview was written by Nada Taha, an attorney in Akin Gump’s litigation practice.

On January 16, 2007, the Court will hear argument in the consolidated cases of GEICO General Insurance Company v. Edo, No. 06-100, and Safeco Insurance Company v. Burr et al. , No. 06-84. Maureen E. Mahoney of Latham & Watkins LLP will argue on behalf of petitioners GEICO General Insurance Company et al. and Safeco Insurance Company, and Scott A. Shorr of Stoll, Stoll, Berne, Lokting & Schlachter, P.C. will argue for respondents. Assistant to the Solicitor General Patricia Millett will argue on behalf of the United States, which filed an amicus brief supporting vacatur in the Safeco case and reversal in GEICO.

Both cases involve alleged violations of the Fair Credit Reporting Act, which (among other things) requires businesses that rely on a consumer’s credit report when determining the price for a consumer good or service to provide an “adverse action notice” when negative information in the credit report adversely affects the quoted price. The issues presented for review are: (i) whether a “willful” violation of Section 1681n of the FCRA (which provides a remedy for violations of the Act) occurs when the violation is based on (a) a reckless disregard for the law or (b) an intentional disregard of the FCRA’s rules; and (ii) whether the Ninth Circuit improperly interpreted the “adverse action notice” rules to require such notices in all cases in which the consumer fails to qualify for the company’s best available rate, even if the credit history has no negative effect on the quoted price.

Although the facts for each plaintiff-respondent differ, their complaints are essentially based on the same theory: respondents were entitled to an adverse action notice because they received rates that were higher than the best available rates the companies could offer; and because the companies willfully failed to provide these notices, respondents are entitled to both statutory and punitive damages.

In the GEICO case, respondent Ajene Edo complains that GEICO issued him a policy through GEICO Indemnity, a lower-tiered company that issues standard-rate policies with higher premiums, rather than GEICO General, which issues lower-rate preferred polices. In the Safeco case, respondent Charles Burr applied for automobile insurance in 2001 and was issued a policy by petitioner American States Insurance Company. American States underwrote the policy through InsurQuest, a program designed for high-risk drivers. InsurQuest places a driver into one of five pricing tiers, based on the totality of the driver’s underwriting characteristics. Although his consumer information placed him in one of the lowest tiers, even the most favorable credit score would not have reduced his premium. After this policy lapsed, Burr purchased a policy with Safeco-Oregon, which relied on Burr’s credit information to set his initial premium. Finally, respondent Shannon Massey applied for renters’ insurance from Safeco Insurance Company of Illinois (“Safeco-Illinois”), which used her credit report in connection with the underwriting of her policy. Based on the totality of the circumstances, Safeco-Illinois placed Massey in a tier with a higher premium rate.

GEICO contends that because it did not increase the price that it quoted Edo based on negative information in his credit report, it had no duty under the FCRA to provide an adverse action notice to Edo. Specifically, when Edo applied for insurance, it utilized a complex procedure that considered his credit score along with other underwriting characteristics to determine that he was eligible for a policy with GEICO Indemnity. However, to determine whether Edo was entitled to an adverse action notice, the company used a procedure that neutralized his credit report factor and compared that score to the initial weighted score. The result was that even without considering Edo’s credit report, he would have been placed with the same company and charged the same premium. Safeco, by contrast, contends that its actions in offering an initial premium higher than the best possible rate did not trigger a notice requirement under the FCRA.

The Ninth Circuit held that the FCRA requires adverse action notices to be issued any time an insurer, after considering the credit report of a consumer, sets a premium rate higher than the company’s lowest possible rate, even if that pricing decision was not based on adverse items appearing in the credit report. Moreover, the court continued, if a consumer sues the insurer for a willful FCRA violation, he need only show proof of reckless disregard of the FCRA’s requirements. Finally, the court held, Safeco’s and GEICO’s legal positions on the adverse action issue were so “indefensible” and “implausible” as to create a triable issue on the question for willfulness under the Court’s “reckless disregard” standard.

The focal point of the Supreme Court briefing is whether the Ninth Circuit’s standard for “willfulness” under Section 1681n is correct. GEICO and Safeco contend that the most natural reading of “willful” as used in the FCRA is the intentional violation of a known legal duty. In criminal statutes, including the FCRA’s criminal provisions, “willfully” is read to require a specific intent to violate the law, and GEICO and Safeco contend that the term should be interpreted consistently throughout the FCRA. GEICO and Safeco also contend that the Act’s other civil liability provisions and drafting history suggest that Congress intended “willful” to mean something more than just “reckless disregard” and that interpreting the term to require anything less than a knowing violation would raise serious constitutional concerns given the potential for uncapped punitive damages even in cases not involving actual harm. GEICO’s and Safeco’s interpretation of Section 1681n is consistent with that of other courts of appeals, all of which have held that “willfully” means “knowingly and intentionally” committing an act in “conscious” or “deliberate and purposeful” disregard of the FCRA’s requirements.

On the adverse action issue, GEICO and Safeco dispute the Ninth Circuit’s holding that adverse action notices are required every time a consumer’s credit fails to qualify for the best possible rate. Instead, they contend, the most natural reading of the term “increase” would require notice to issue only where adverse information leads the company to increase the price of an already established premium and not when a premium is initially set by the companies.

In their joint brief, respondents argue that the Ninth Circuit properly defined a willful violation based on the clear text and context of the FCRA to include a policy or action carried out either knowing that policy or action to be in contravention of a consumer’s rights under the FCRA or in reckless disregard of whether the policy or action contravened those rights. They contend that the Ninth Circuit’s definition closely follows the Supreme Court’s precedents dating back to at least the 1930s. Since that time, the Supreme Court has consistently concluded that “willful” violations of similar civil statutes include conduct committed in reckless disregard of others.

Even if the Supreme Court agrees with the Ninth Circuit’s broadened adverse action notice requirement for insurance companies, it would likely have a limited temporal impact given the recent amendments to the FCRA. In 2003, Congress passed the Fair and Accurate Credit Transaction Act (“FACTA”), which effectively eliminated a private right of action to enforce any violation of Section 1681m, including alleged adverse action violations. Private rights of action under other parts of the FCRA were not affected by FACTA. Indeed, a number of courts, including the Seventh Circuit, have found that under FACTA, Section 1681m is now only enforceable by federal administrative agencies. So, while there are a number of adverse action cases pending across the country based on the “best rate” theory of Section 1681m(a), no new cases are likely to survive a motion to dismiss.

The issue that has broader ramifications is the Supreme Court’s interpretation of Section 1681n’s “willful noncompliance” standard. If the Supreme Court agrees with the Ninth Circuit’s standard for willful noncompliance, it will affect virtually all present and future FCRA litigation, because plaintiffs would be able to obtain statutory and punitive damages as long as they could show that a defendant acted in reckless disregard of the FCRA’s requirements. For this reason, numerous amicus briefs, including briefs from the Attorneys General and Insurance Commissioners in several states, insurance companies, and consumer agencies have been filed with the Court and are monitoring the cases closely. Indeed, both businesses subject to the FCRA’s regulations and consumer advocates should be closely monitoring the outcomes of these cases, as the Supreme Court’s rulings, particularly with respect to § 1681n, may seriously affect a company’s exposure to punitive damages for FCRA violations.