4th Circuit Offers Ideas To Brake FACTA Truncation Class Actions

It seems unusual for the 4th Circuit to write a 21 page opinion, accompanied by a 20 page concurrence, but then designate it only as "unpublished" and "not binding precedent in this circuit."  That's what happened in Stillmock v. Weis Markets, Inc.  The Court's action in not publishing the opinion seems to be an indication that it does not want to do anything to encourage suits of this type.

Stillmock v. Weis Markets is a "FACTA Truncation" case.  FACTA is an acronym for the Fair and Accurate Credit Transactions Act of 2003.  Among other things, this statute provides that "no person that accepts credit cards or debit cards for the transaction of business shall [electronically] print more than the last 5 digits of the card number . . . upon any receipt provided to the cardholder at the point of the sale or transaction."  The statute also says that the merchant cannot print the card's expiration date on the customer receipt.  The statute provides for statutory damages of not less than $100 and not more than $1,000 against any person who "willfully fails to comply with" the foregoing truncation requirements, punitive damages as the court may allow, and attorney's fees and costs.   However, the Supreme Court has interpreted the phrase "willfully fails to comply" in the preamble sentence of 15 U.S.C. sec. 1681n(a), as reaching not only knowing violations of FACTA, but reckless ones as well.  Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007).  A reckless violation for this purpose is one "entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known."  Id. at 68.

The FACTA provision for statutory damages, the possibility of punitive damages, and the ability to recover attorney's fees and costs, is a combination that has sparked a flurry of FACTA truncation class actions in Maryland.   The typical scenario is that an individual makes a credit card purchase at a store or restaurant, and discovers that the customer receipt is not truncated per the requirements of FACTA.  The customer then retains an attorney who does FACTA litigation, who files a class action against the merchant seeking statutory damages, punitive damages, and the recovery of attorney's fees and costs.  The suit is filed, and discovery is taken from the merchant as to the point-of-sale terminals at the establishment, and the number of transactions those terminals have processed during the relevant time period.  The class action complaint will be carefully drafted to seek only statutory damages, not actual damages which would require too much of an individualized inquiry to allow for class certification. 

The potential exposure can be quite significant even for a relatively modest business.  For example, if there were 1,000 credit card transactions within the relevant window of time,  that would mean a potential exposure to statutory damages in the range of $100,000 to $1,000,000, plus attorney's fees and costs, plus the possibility of punitive damages.  The merchant may also receive reservation of rights letters from its insurer, since insurance typically does not cover intentional wrongdoing or punitive damages.  All of these factors create a powerful incentive on the part of the merchant to settle the FACTA class action. 

It seems clear that the Courts do not like FACTA truncation class actions, but this dislike doesn't appear to boil over except when a large merchant is caught in this snare.  Stillmock v. Weis Markets is such a case, but despite that, the 4th Circuit vacated the District Court's denial of Plaintiffs' motion for class certification.  The Stillmock case has varying estimates of the number of customer receipts that were issued in violation of FACTA.  One estimate was that at least a million of such receipts were provided to a hundred thousand or more individual customers.  Weis Markets estimated that it printed over 14 million FACTA violative receipts during the relevant time frame.

 [T]he district court denied class certification on two grounds. First, the district court denied class certification on the ground that determining the quantum of damages with respect to each class member would be too individualized for class-wide treatment under Rule 23(b)(3). Second, the district court denied class certification on the ground that a class action as requested by Plaintiffs "would not be superior and, indeed, would be inferior to having the Plaintiffs herein proceed on their individual claims and, if they prevail, having them obtain whatever statutory and punitive damages might be awarded together with their costs, including reasonable legal fees."

The 4th Circuit rejected the plaintiffs contention on appeal that a consumer is entitled to statutory damages under 15 U.S.C. sec. 1691n(a)(1) on a per violation basis, as opposed to a per consumer basis as implicitly held by the District Court.  Rather, the 4th Circuit agreed that statutory damages under section 1681n(a)(1)(A) are to be awarded on a per consumer basis.  However, the 4th Circuit agreed with the plaintiffs that the District Court erred in concluding that individual issues of damages would predominate over issues common to the class.

Here, the putative class members were exposed to the identical risk of identity theft in the identical manner by the repeated identical conduct of the same defendant, and none suffered actual damages from identity theft. Under these circumstances, it strains credulity to conclude that the individual damages issues presented by the purported class which Plaintiffs seek to certify would be anything other than simple and straightforward. Pragmatically, the only substantive difference between putative class members for purposes of affixing the statutory damages figure within the statutory damages range of $100 to $1,000 or in awarding punitive damages is the number of receipts received by a single class member during the approximately eighteen months at issue. And indeed, this difference does not complicate matters very much at all given that the class can be broken down into subcategories based upon the number of violating receipts received per putative class member.

 Judge Wilkinson wrote a concurring opinion containing many trenchant comments about FACTA class actions.

Specifically, neither this court nor the district court has yet addressed the real possibility that the suggested class could bankrupt an entire chain of supermarkets, and the district court retains wide discretion in deciding whether to certify a class in light of that problem.

I worry that the exponential expansion of statutory damages through the aggressive use of the class action device is a real jobs killer that Congress has not sanctioned. To certify in cases where no plaintiff has suffered any actual harm from identity theft and where innocent employees may suffer the catastrophic fallout could not have been Congress's intent. Indeed, the relatively modest range of statutory damages chosen by Congress suggests that bankrupting entire businesses over somewhat technical violations was not among Congress's objectives.

 Judge Wilkinson subsequently expressed concern that FACTA class actions raise constitutional issues:

Certifying a class action that would impose annihilative damages where there has been no actual harm from identity theft could raise serious constitutional concerns, as plaintiffs themselves admit. . . . . Other courts have noted that "the potential for a devastatingly large damages award, out of all reasonable proportion to the actual harm suffered by members of the plaintiff class, may raise due process issues." Parker, 331 F.3d at 22. See also Spikings v. Cost Plus, Inc., No. CV 06-8125-JFW (AJWx), 2007 U.S. Dist. LEXIS 44214, at *9, 13 (C.D. Cal. May 25, 2007)(same). Indeed, this principle has some salience in the punitive damages context, where the Supreme Court has noted that "[t]he Due Process Clause of the Fourteenth Amendment prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor." State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416 (2003)

 Judge Wilkinson suggested that to avoid the constitutional issues, it would be preferable for a district court to address them in the context of Rule 23(b(3)'s superiority requirement.

Judge Wilkinson warned that the risks of allowing FACTA class actions in cases like this are high:

 The risk of financial ruin as a result of class certification is far from illusory. Weis Markets estimates that it printed 14,578,600 receipts with improperly truncated account numbers between the time FACTA became effective on December 4, 2006 and the time the company brought its systems into compliance on June 7, 2007. Because FACTA establishes statutory damages between $100 and $1,000, under plaintiffs' per-receipt approach,Weis Markets would thus be subject to a massive payout of between $1.4 and $14 billion.

The court's per-consumer calculation, while less astronomical, is no less annihilating to Weis Markets . Both plaintiffs and Weis Markets  have estimated that "there are potentially over one million Class members." Multiplying that estimate by the statutory damages range results in total liability of between $100 million and $1 billion dollars, without even accounting for the possibility of punitive damages, attorney's fees, and costs, 15 U.S.C. § 1681n(a)(2), (a)(3).

It is no exaggeration to say that a judgment within this range would devastate Weis Markets.  As counsel for Weis Markets  put it, "a hundred million dollars sinks my client." The company is traded on the New York Stock Exchange, and its market capitalization at current prices is just over $900 million dollars. . . .

Nor is the destruction ofWeis Markets   a loss only to shareholders. If plaintiffs are successful, a substantial number of people will be left unemployed in one of the toughest job marketsin generations. Weis Markets currently owns and operates one hundred sixty-four retail grocery stores in Pennsylvania, Maryland, New York, New Jersey, and West Virginia as well as twenty-five pet supply stores. Weis Markets, Inc., Annual Report (Form 10-K), at 1 (Mar. 11, 2010). Approximately 17,600 individuals work for the company in either a full- or part-time capacity. Id. at 2. It is doubtful that Congress intended to cause these thousands of innocent employees to lose their jobs and paychecks by bankrupting their employer, in a situation where no plaintiff suffered identity theft.  

Judge Wilkinson also pointed out why, in FACTA truncation class actions, the critical decision point for the defense is whether the Court will grant certification to the plaintiff class.  Once that happens, the exposure to risk all but forces a settlement:

 Companies may be forced to settle in the face of such annihilating liability, even if they have a strong defense. In such an event, the substantial costs associated with settlement will inevitably be passed on to consumers — the very ones whom Congress sought to protect.

As the Seventh Circuit explained, there is a serious concern with forcing these "defendants to stake their companies on the outcome of a single jury trial, or be forced by fear of the risk of bankruptcy to settle even if they have no legal liability." Matter of Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1299 (7th Cir. 1995). Indeed, "[t]he risk of facing an all-or-nothing verdict presents too high a risk, even when the probability of an adverse judgment is low." Castano v. Am. Tobacco Co., 84 F.3d 734, 746 (5th Cir. 1996); see also Coopers & Lybrand v. Livesay, 437 U.S. 463, 476 (1978)(same). "[O]nce a class is certified, a statutory damages defendant faces a bet-the-company proposition and likely will settle rather than risk shareholder reaction to theoretical billions in exposure even if the company believes the claim lacks merit." Sheila B. Scheuerman, Due Process Forgotten: The Problem of Statutory Damages and Class Actions, 74 Mo. L. Rev. 103, 104 (2009). At least the plaintiffs in Rhone-Poulenc and Castano alleged substantial actual damages; here we face the risk of forcing a defendant to settle in the face of billions in liability for actions that resulted in not a single instance of identity theft.

With those high stakes in mind, it is interesting to review Weis Market's 40 page brief in opposition to class certification which was filed in the Stillmock case, following remand from the 4th Circuit.  They gave it all they had, and then subsequently the case settled. (Courtesy of Recap).




Fourth Circuit Upholds $90,000 Judgment Under Fair Credit Reporting Act For Failure To Conduct Reasonable Investigation

In Johnson v. MBNA America Bank, N.A., No. 03-1235 (4th Cir. Feb. 11, 2004), the Court affirmed a jury verdict in favor of the plaintiff based on an action against the defendant bank for violation of the Fair Credit Reporting Act (FCRA) by failing to conduct a reasonable investigation of the plaintiff's dispute concerning a credit card account issued by the bank that appeared on the plaintiff's credit report.

The account in question was a MasterCard account opened by the plaintiff's ex-husband. Apparently the account was originally opened prior to the marriage; and during the marriage the plaintiff was listed as an authorized user and was placed on the billing address. However, the plaintiff claimed that she was merely an authorized user and was never a co-applicant.

After the divorce, the ex-husband filed for bankruptcy, and the bank promptly removed his name from the account. At the same time, the bank contacted the plaintiff, and informed her that she was reponsible for the approximately $17,000 balance on the account.

The plaintiff disputed the account with each of the three major credit reporting agencies. Each credit reporting agency sent the bank an automated consumer dispute verification. In response, the bank reviewed its records and notified the credit reporting agencies that the disputed information was correct.

The plaintiff then brought suit on the grounds that the bank violated the FCRA by failing to conduct a proper investigation of her dispute. A jury found that the bank had negligently failed to comply with the FCRA, and awarded the plaintiff $90,300 in actual damages.

The bank appealed on the grounds that the FCRA only imposed a minimal duty on creditors to briefly review their records to determine whether the disputed information is correct, and that the Act does not contain any qualitative component that would allow courts or juries to assess whether the creditor's investigation was reasonable.

The 4th Circuit held that section 1681s-2(b)(1) of the Act requires creditors, after receiving notice of a consumer dispute from a credit reporting agency, to conduct a reasonable investigation of their records to determine whether the disputed information can be verified.

The 4th Circuit also held that a jury could reasonably conclude based on the evidence that the bank acted unreasonably in failing to verify the accuracy of the information in dispute. The bank's agents testified that in investigating consumer disputes generally, they do not look beyond the information contained in its computer system and never consult underlying documents such as account applications.