A federal appeals court recently issued a potentially troubling decision for corporations and their attorneys when it ruled that two insurance companies willfully failed to comply with a federal law protecting consumers from misuse of credit information despite reliance on advice by counsel that the original trial judge in the case said was legally correct.
In the case, Reynolds v. Hartford Financial Services, the San Francisco-based 9th Circuit held that the insurance companies intentionally violated the Fair Credit Reporting Act even though their lawyers told them the credit act did not require sending notices to their insureds and there was no caselaw or other precedent suggesting that the advice was wrong.
The 9th Circuit said the insurance companies had unreasonably relied on “creative lawyering” and were subject to heightened penalties for willfully violating the credit statute.
“[R]eliance on such implausible interpretations constitutes reckless disregard for the law and therefore amounts to a willful violation of the law,” wrote Judge Stephen Reinhardt.
But a dissenting judge noted that the trial judge had agreed with the legal position of the insurance companies’ lawyers, “a position the majority now declares to be ‘nonsensical’ and ‘untenable.’” Therefore, the case should be returned to the lower court for fact finding on the question of whether the companies willfully violated the fair credit law, said Judge Jay S. Bybee.
“Be Extra Cautious”
Richard
Barry Richard, a partner with the law firm Greenberg Traurig in Tallahassee, Fla., tells Compliance Week that the 9th Circuit’s ruling requires companies to be careful about their obligations under the FCRA – and the numerous other laws that contain a similar “willfulness” standard – even when their lawyers have provided seemingly reasonable advice.
But the court’s decision doesn’t provide much guidance as to when legal advice needs to be second-guessed, Richard notes, because it simply criticizes the insurance companies for relying on “creative lawyering.”
“There’s nothing wrong with creative lawyering,” he says. “That’s what lawyers are paid to do—be creative. [The] phrase [creating lawyering] tells you nothing. It doesn’t give the client any standard to judge. If the court had said ‘creative lawyering that is designed to help the client circumvent the statute,’ that would be one thing. But here the trial judge thought [the lawyers’ opinion] was a rationale [interpretation].”
In light of this ruling, lawyers who represent companies, Richard says, need to be extra cautious when giving clients advice on statutes of this type, and must be proactive in getting all the material facts.
“Lawyers also need to know that the attorney-client privilege is going to be waived in order for the client to defend itself [against a charge that it acted willfully],” he notes. “You have to avoid any conversation that can be interpreted to be evidence of an intent or request by the client to evade [the statute]. And you need to have a good paper trail of the communications with the client of what they did to engage in due diligence. Those things are always true, but this case brings them to the surface. It’s a good time to remind people to be cautious.”
Schwartz
Elizabeth Schwartz, a partner with Perkins Coie in Portland, Ore., notes that the trial judge in the Hartford Financial case didn’t make any ruling on whether or not there was a willful violation. “There was no evidence taken or presented or taken at the summary judgment stage.”
As a result, the way for companies to protect themselves in the future, Schwartz says, “is to be sure to put in evidence of what the policies were and how they communicated with their legal counsel and came to understand the statute was based on what the legal counsel told them, or at least get the trial court to point out there is no evidence of willfulness.”
Willfulness Standard “Eroded”
Under the FCRA, companies that use credit reports are required to notify consumers any time the company takes an “adverse action” with respect to the consumer that is based in any way on information contained in the credit report. The statute includes in the definition of “adverse action” any “increase in any charge” for insurance.
The 9th Circuit case involved a suit against Hartford Financial Services and GEICO Casualty, which raised an issue that had never been decided by the courts: Does the “adverse action” requirement in the FCRA apply to the rates first charged in an initial policy of insurance, or is it limited to an increase in a rate that the consumer has previously been charged?
CREATIVE LAWYERING
The excerpt below is from the Oct. 3, 2005 decision of Judge Stephen Reinhardt, in Reynolds v. Hartford Financial Services:
In sum, if a company knowingly and intentionally performs
an act that violates FCRA, either knowing that the action violates
the rights of consumers or in reckless disregard of those
rights, the company will be liable under 15 U.S.C. § 1681n
for willfully violating consumers’ rights. A company will not
have acted in reckless disregard of a consumers’ rights if it
has diligently and in good faith attempted to fulfill its statutory
obligations and to determine the correct legal meaning of
the statute and has thereby come to a tenable, albeit erroneous,
interpretation of the statute. In contrast, neither a deliberate
failure to determine the extent of its obligations nor
reliance on creative lawyering that provides indefensible
answers to issues of first impression is sufficient to avoid a
conclusion that a company acted with willful disregard of
FCRA’s requirement. We hold that reliance on such implausible interpretations constitutes reckless disregard for the law
and therefore amounts to a willful violation of the law.
Source:
Judge Stephen Reinhardt's Decision In Reynolds v. Hartford Financial Services
The trial judge agreed with the insurance companies that the statute did not apply to the rates first charged in an initial insurance policy and entered summary judgment for the insurers.
But the 9th Circuit said the trial judge—like the attorneys who advised Hartford and GEICO—were wrong. “[W]henever because of his credit information a company charges a consumer a higher initial rate than it would otherwise have charged, it has increased the charge within the meaning of FCRA,” wrote Judge Reinhardt, who went onto find that both insurance companies acted willfully in violating the statute.
“[The insurance companies’] interpretation of the statute was untenable,” the judge wrote. “Indeed, the companies’ exceedingly narrow interpretations of their obligations under FCRA were counter to the statute’s plain text as well as its purpose. Relying on reasoning that was plainly unmeritorious, these companies sought to benefit from the privilege of using consumers’ private credit information and yet be free of the attendant obligations.”
Richard, of Greenberg Traurig, says the 9th Circuit’s decision “seriously erodes the willfulness standard” that is contained in numerous state and federal laws, including securities laws. “When Congress writes a willfulness requirement into a statute, it is because they want to create a higher bar to finding a company guilty of a crime or imposing heavy damages on a company,” Richard notes. “Congress or state legislatures intend willfulness to be a protection—so that plaintiffs have a higher bar to overcome.”
According to Richard, the 9th Circuit has blurred a “fairly bright guideline’ with respect to advice of counsel. That’s because advice of counsel is generally considered to be a defense to a willfulness assertion; if you acted in accordance with advice of counsel, says Richard, you did so in good faith, you didn’t act willfully. “Although courts have held that acting on advice of counsel can be insufficient, they’ve only done so if there’s a strong showing that using the advice of counsel was a pretext—that the client failed to give the lawyer material facts, or something about the lawyer’s opinion should have placed the client on notice of the fact that the opinion couldn’t be relied upon, or it was some kind of conspiratorial opinion that seemed more designed to [further] the client’s desire to circumvent the statute,” he adds.
Schwartz, of Perkins Coie, agrees that the 9th Circuit’s decision was “somewhat surprising,” and says she wouldn’t be surprised if “plaintiffs lawyers try to use [the decision] to argue that a broader standard [of willfulness] should apply.”
But Schwartz says the ramifications of the ruling could be limited. “Yes, on its face it does present a troubling position. … But, in practice, judges are still going to do what they always do, which is wrestle with the facts and the law and come up with the best decision that they can. Plaintiffs are still going to have to put on some kind of evidence of a willful violation of the FCRA or any other statute.”
No comments yet