SCOTUS Deals Blow to Federal Court Plaintiffs with Statutory Violations But No Discernible Damages

Financial Services Law

The U.S. Supreme Court held on June 25 in TransUnion LLC v. Ramirez that plaintiffs lack Article III standing to pursue claims in federal court in the absence of a concrete injury-in-fact (i.e., actual economic damages or bodily injury) even where the defendant violated a federal statute granting a private right of action with a statutory damages provision. Although a seeming win for the defense bar, this ruling may have unintended adverse consequences for parties defending federal suits based on purely statutory damages. We explain below.

What Happened

The Fair Credit Reporting Act (FCRA) promotes the “fair and accurate reporting” of consumer credit data. In the event of a violation of most (but not all) provisions, there is a private right of action. Further, “[a]ny person who willfully fails to comply with any requirement [of FCRA] is liable to that consumer in an amount equal to the sum of any actual damages sustained by the consumer as a result of the failure or damages of not less than $100 and not more than $1,000 … such amount of punitive damages as the court may allow … and in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorneys’ fees …”

Credit bureaus (also known as consumer reporting agencies, or CRAs) are a frequent target of FCRA suits. Among other things, these CRAs (including the defendant here) receive data on “potential terrorists” from a list of names of actual terrorists (and other violent criminals) from the Treasury Department’s Office of Foreign Assets Control (OFAC). The process can lead to a “potential terrorist” flag being placed on consumer accounts as a “match” to such criminals when that consumer has the same first and last name of an actual criminal on the OFAC list.

Individual and class suits by consumers who were unable to obtain credit based on the flag—see, e.g., Cortez v. Trans Union, LLC—have percolated for years and led to an increasing number of caveats being placed on the “match” designation to “potential match” and the like, but the suits persisted.

The Ramirez plaintiff shared a first and (quite common) last name with a person on OFAC’s list. A car dealership refused to provide him a car loan based on the OFAC flag, which the credit bureau transmitted to the dealership upon its credit inquiry.

The district court certified a class of consumers who had OFAC flags placed in their accounts. As to about one-quarter of the class (1,853 of 8,185), the OFAC flag was not just notated on the CRA’s internal records but was further disseminated externally to a creditor (like the car dealership for the named plaintiff). For the rest, there was no allegation that the OFAC flag caused them any problems in obtaining credit and no allegation that the presence of the OFAC flag was known to anyone other than the CRA’s internal systems.

Plaintiffs alleged the defendant violated FCRA by providing the misleading OFAC report of a potential match (15 U.S.C. 1681e(b)—a CRA must “follow reasonable procedures to assure maximum possible accuracy of the information”). In addition to that main claim, plaintiffs also alleged the defendant violated technical FCRA provisions requiring provision of the full rather than partial credit report (report must include “all information in the consumer’s file at the time of request” with exceptions not relevant here) and a “summary of rights” “with each written disclosure” made to a consumer required by 15 U.S.C. 1681g(a)(1) and (c)(2). The latter claims were based on allegations that, upon requests by consumers, the defendant provided an initial mailing that included the credit report with the required summary of rights but without the OFAC flag notation, and then sent a follow-up letter with the full OFAC-inclusive report but without the summary of rights. Important to the majority, but irrelevant to the dissent, was that each consumer did receive the required summary of rights and a full OFAC-inclusive report one way or the other.

The jury found in favor of the class on all three claims and awarded near the $1,000 statutory maximum damages (about $8 million) plus punitive damages for an additional $52 million. Post-judgment motions reduced the punitive damages award slightly, to about $40 million, but the Ninth Circuit otherwise affirmed as to liability, and found typicality despite the differences between the two buckets of class members. Likewise, it found Article III standing satisfied even for the class members who had no concrete injuries to allege.

But the Supreme Court in its June 25 decision has come to a different conclusion. That 5-4 decision includes an unusual alignment in that one of the staunchest Court conservatives, Clarence Thomas, joined the three liberals in dissent. The other five conservatives wrote the majority opinion, with Justice Kavanaugh authoring the sole majority opinion. As a threshold matter, the majority agreed that the 1,853 class members for whom the OFAC flag was externally reported to creditors had sufficient Article III standing rooted in traditional common law concepts associated with defamation (apparently regardless of whether, like the individual plaintiff, they were denied credit on that basis, and even though the claim was brought under FCRA and not as a defamation tort).

As to the majority of the class members, however, they lacked Article III standing to pursue their claims in federal court because they had suffered no injury-in-fact. The reason? OFAC flags as to those class members were never transmitted to a creditor, so no harm could have occurred.

As to the technical violations, the Court concludes that consumers were not actually harmed because they received the summary of rights and the full credit report, and any risk that receiving these outside of the FCRA-required format could have caused confusion was speculative.

In dissent, Justice Thomas’s opening says it all. “[Defendant] generated credit reports that erroneously flagged many law-abiding people as potential terrorists and drug traffickers. In doing so, [the CRA] violated several provisions of the [FCRA] that entitle consumers to accuracy in credit-reporting procedures; to receive information in their credit files; and to receive a summary of their rights. Yet despite Congress’ judgment that such misdeeds deserve redress, the majority decides that [the CRA’s] actions are so insignificant that the Constitution prohibits consumers from vindicating their rights in federal court. The Constitution does no such thing.”

In a separate dissent, Justice Kagan argued that risk of harm was sufficient to justify Article III standing, noting, for example, that it was not so hypothetical to assume the OFAC flag was likely to eventually be included in a transmission to a creditor, as providing reports is the basic business of the reporting bureaus. In other words, it was somewhat just a matter of luck which consumers applied, and for what products, at what time, that determined whether the OFAC flag was included.

As to the technical violations, the dissenters argued that the nature of the information conveyed in the mailings—that the consumer was a “potential match” to a terrorist—was likely to occasion concern, confusion and follow-up inquiries such that receiving such information in a manner that violated FCRA—even if on hyper-technical grounds—was sufficiently connected to the harm Congress intended to prevent in passing FCRA that Article III standing should have been satisfied.

Leaving the issue for another day, the Court for various procedural reasons declined to rule on whether the technical violations were, in fact, violations, whether certification was proper given the arguable lack of typicality between the two buckets of plaintiffs, and whether the lack of standing for the uninjured class members should have prevented certification in the first place. The Court formally reversed and remanded the case to the Ninth Circuit for further determinations. (We expect more litigation on all these fronts.)

Why It Matters

This case has significance beyond FCRA because individual plaintiffs may now be unable to demonstrate sufficient standing to pursue class action recoveries for large numbers of persons with purely theoretical or conjectural damages. For example, while Sergio Ramirez was able to demonstrate harm (he was denied a car loan and canceled a vacation out of the country for fear of being denied reentry), the same could not be said for those who have not yet been harmed by the actions of the defendant, but could be in the future.

This fatal defect may be a non-issue in a number of plaintiff-friendly state courts. As a result, we expect more and more cases interpreting federal statutes—especially those governing financial institutions—to be subject to increasingly conflicting rulings in state courts with significant restrictions on the right to remove to federal court where actual damages are lacking. This has been a trending development in the last few years, especially in the Seventh Circuit, but with this ruling, the phenomenon now seems poised to effect a dramatic move away from federal courts to state courts as more frequent interpreters of federal statutes in class actions nationwide to at least the same degree that Spokeo sparked five years ago, if not more so.

Footnote 9 in Justice Thomas’ dissent (sometimes the important details are hidden in those oft-missed locations) nails the import—the CRA may have won this battle, but the financial industry may lose the war as more class actions are carefully pled to seek adjudication in less-favorable state courts.

“Today’s decision might actually be a pyrrhic victory for [Defendant]. The Court does not prohibit Congress from creating statutory rights for consumers; it simply holds that federal courts lack jurisdiction to hear some of these cases. That combination may leave state courts—which ‘are not bound by the limitations of a case or controversy or other federal rules of justiciability even when they address issues of federal law,’ … as the sole forum for such cases, with defendants unable to seek removal to federal court.… By declaring that federal courts lack jurisdiction, the Court has thus ensured that state courts will exercise exclusive jurisdiction over these sorts of class actions.” (Thomas, J., dissenting, at 18 n.9) (citations omitted).

We think “might” is an understatement. Under the logic of the ruling, everything from TILA, RESPA, FDCPA, FCRA (as in this case), ECOA to the Fair Housing Act … and the list goes on, may now fall outside federal subject-matter jurisdiction where actual damages are nonexistent and the theory of the claim relies on statutory damages allowed by Congress. Critically, this could well include suits otherwise subject to federal court jurisdiction under the Class Action Fairness Act because plaintiffs would be unable to plead the requisite damages.

And Congress may have a difficult time enacting legislation to override this result. Congress might, for example, legislate that consumers may recover statutory damages without actual injury, and that federal courts have jurisdiction over such purely statutory claims. Even so, the Supreme Court might still hold that federal courts lack jurisdiction based on separation of powers doctrine. See Opinion at 7-8.

The ruling thus does much to undermine the policy tool implemented by Congress since at least the 1970s of allowing enforcement of consumer protection statutes by private lawsuits in addition to or in lieu of federal agency enforcement by removing federal courts from the interpretative process.

Fifty years ago, this might not have made such a big difference, and could be pushed aside as a minor forum/venue issue of only academic interest. But in today’s polarized political climate, it seems inevitable that the state court system of, say, New York, is far more likely to interpret federal statutes on their merits in a manner more favorable to consumers than, say, Texas.

Likewise, class action practitioners used to litigating their cases under Fed. R. Civ. P. 23’s well-developed body of case law will now be increasingly likely to be litigating under various state corollaries and all of the doctrinal differences on numerosity, commonality, typicality and adequacy that entails, leading to greater uncertainty as to what is certifiable.

The consequences as this all develops over the next few years are likely to mean:

On the substance of federal consumer protection laws, more inconsistency in interpretations of federal consumer protection laws will necessitate herculean compliance efforts to track state decisions (and perhaps even implement varying practices depending on the state).

On the procedural level, with less federal court involvement, greater uncertainty and variability in class certification under 50 varying state court regimes.

Compliance professionals and class-action litigators alike: buckle up.

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