One of the most significant sources of litigation risks for niche businesses occurs when the statutory laws governing their conduct fail to reflect the real-world context of the industries in which they operate. Because even well-intentioned laws are often drafted and ratified by legislators with no experience in the affected industry, such laws may present high risk exposure or compliance costs to businesses that find themselves held to an abstract legal standard that they logistically cannot implement.
This disconnect between the law and business reality—and the resulting risk exposure—is precisely what faces resellers of consumer reports (or “credit reports”) today when it comes to producing “tri-merge” reports that correctly recite inaccurate information produced by one or more of the three major credit bureaus. An increasingly aggressive plaintiffs’ bar, buttressed by recent decisions upholding claims under the Fair Credit Reporting Act (the “FCRA” or the “Act”) by consumers against resellers in such situations, will likely continue to bring lawsuits against resellers until the chasm can be bridged between the duties imposed on resellers under the FCRA and the reality of resellers’ place within the consumer credit industry. Resellers, therefore, must be prepared to manage these lawsuits with an aim toward reconciling this disconnect.
Why Are We Here?
At the outset, we should pause to understand why, from a strategy standpoint, plaintiffs’ attorneys name resellers in lawsuits where the alleged inaccuracy originates with one of the three major bureaus and is simply recited in a tri-merge report. The FCRA imposes liability on “[a]ny person” who fails to comply with the statute’s requirements regarding credit information—including the accuracy of credit reports.1 The import of this language is that courts have interpreted the statute to preclude equitable claims for contribution or indemnification among co-defendants.2
This principle is particularly important when, as frequently occurs, a plaintiff sues both a reseller and one or more credit bureaus responsible for the alleged inaccuracy (and/or an original furnisher of allegedly inaccurate credit information). In such cases, the plaintiff may settle with the reseller’s co-defendant(s) and continue to pursue their claims against the resellers. In these cases, resellers cannot offset any potential damages award by the amounts of the settled-out co-defendants. In other words, the statutory scheme as interpreted by courts allows plaintiffs to “double-dip” (or more) on their alleged damages by suing several defendants, including resellers.
In addition, the FCRA allows prevailing plaintiffs to recover their attorneys’ fees and costs. The potential for significant fee recovery discourages reseller defendants from vigorously defending themselves when sued. After all, the farther the litigation goes, the higher the opposing attorney’s potential fee application will be. Plaintiffs’ attorneys use the looming threat of fee-shifting to leverage significant settlements, often for amounts disproportionately high relative to the actual damages alleged.
The FCRA Standard Regarding Credit Report Accuracy
With respect to the accuracy of credit reports, the FCRA provides in 15 U.S.C. § 1681e(b) (“Section 1681e(b)”):
Whenever a consumer reporting agency prepares a consumer report it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.
Courts have held, with increasing frequency, that a reseller is a “consumer reporting agency” (“CRA”) that must “follow reasonable procedures to assure maximum possible accuracy” of credit information in a tri-merge report. Resellers’ risk exposure for inaccuracies in credit reports stems largely from the unresolved question of what procedures are “reasonable” to ensure the accuracy of tri-merge reports.
As important as knowing what is required by the FCRA, though, is understanding what the law does not require. Most importantly, the FCRA is not a strict liability statute. That means that the mere existence of an error in a tri-merge report does not, in and of itself, mean that the reseller violated the FCRA—although plaintiffs’ attorneys frequently imply as much when filing lawsuits over disputed or inaccurate information.3
Further, resellers’ procedures need not be perfect—only “reasonable.” Nor must those procedures ensure absolute accuracy—only “maximum possible accuracy.”4 Where a greater degree of accuracy than what is delivered in a tri-merge report is impossible, resellers should not be held liable for a violation of the FCRA.
Unfortunately for resellers, the question of what constitutes “reasonable procedures” remains unanswered. In large part, this lack of clarity results from legal precedent holding that “the reasonableness of a credit reporting agency’s procedures is normally a question for trial ...”5 As a result, courts have largely declined to address what procedures are reasonable for a reseller to follow.
The Federal Trade Commission’s former regulations implementing the FCRA, however, may shed light on resellers’ reasonableness when an alleged inaccuracy that originates with one of the major credit bureaus is reproduced in a tri-merge report:6
If a consumer reporting agency accurately transcribes, stores, and communicates consumer information from a source that it reasonably believes to be reputable, and which is credible on its face, the agency does not violate [Section 1681e(b)] simply by reporting an item of information that turns out to be inaccurate.
This standard is no longer officially in force, as the FTC regulations implementing the FCRA were largely rescinded in mid-2011, when responsibility for enforcement of the FCRA was transferred from the FTC to the Bureau of Consumer Financial Protection.7 Although this standard no longer represents the official governmental commentary on the matter, it does establish a logical framework for defending credit report resellers, which are generally not the original “source” of allegedly inaccurate information.
Cases Regarding Reseller Liability
Recently, courts have denied a number of resellers’ motions to dismiss FCRA “accuracy” claims early in litigation. These cases will likely continue to incentivize plaintiffs’ attorneys to name resellers as defendants in these lawsuits, at least until the obligations of resellers are further clarified by court decisions and jury verdicts, or legislative or administrative action.
In Dively v. Trans Union, LLC,8 a reseller, DataQuick, was sued along with Trans Union for allegedly including two inaccurate tax liens on the plaintiff’s consumer report. According to the plaintiff, the tax liens were actually the responsibility of his father, who shared his name. The plaintiff asserted a claim against DataQuick under Section 1681e(b) for failing to employ and follow reasonable procedures to assure maximum possible accuracy of his credit report.
DataQuick moved to dismiss the plaintiff’s claim against it, arguing that it had no duty to reconcile the reports of the three major bureaus in the course of assembling and merging the reports. The court rejected DataQuick’s argument, holding that “resellers are CRAs for the purposes of the FCRA, which makes them subject to the § 1681e(b) ‘maximum possible accuracy’ requirement[.]”9
The court in Dively held that whether DataQuick had complied with Section 1681e(b) or not required factual discovery regarding what procedures DataQuick used to ensure accuracy in its reports, what DataQuick knew when it assembled the plaintiff’s tri-merge report, what DataQuick knew regarding Trans Union’s procedures, how information in the consumer reports should be verified, and what it would cost to reconcile report discrepancies. Given these factual issues, the court held that DataQuick’s arguments were inappropriate for resolution at the motion to dismiss stage.10
DataQuick also unsuccessfully sought dismissal of a Section 1681e(b) claim in Waterman v. Experian Information Solutions, Inc.11 There, the plaintiff sued Experian and DataQuick based on allegedly inaccurate information in the plaintiff’s Experian credit report. That information was assembled and merged by DataQuick with the plaintiff’s reports from Equifax and Trans Union, and sold to a bank in connection with the plaintiff’s application for a mortgage. The plaintiff alleged that her mortgage application was denied based on the inaccurate information, and that DataQuick was liable for failing to comply with Section 1681e(b).
DataQuick moved to dismiss the plaintiff’s claims against it, arguing that resellers should not be held liable when an individual’s information is used to create a tri-merge report, and that “under the FCRA, resellers are subject to a different, and more practical set of requirements than those applicable to the traditions CRAs” (i.e., the three major bureaus).12 DataQuick further argued that resellers do not “prepare” consumer reports for purposes of Section 1681e(b).
The court, however, denied the motion, observing that there are situations in which the FCRA explicitly imposes different requirements on resellers—for example, with respect to investigating consumer report disputes.13 The court noted that there is no such explicit distinction drawn between resellers and other CRAs when it comes to following reasonable procedures to assure maximum possible accuracy. The court also rejected DataQuick’s assertion that resellers do not “prepare” consumer reports, noting that the statutory definitions of a CRA and a reseller does not draw any distinction “between an agency that ‘prepares’ a consumer report and one that does not.”14
The court noted that in two prior cases “resellers … have been held obligated ‘to establish reasonable procedures to ensure the accuracy of the information [they resell].”15 Accordingly, the court found that DataQuick could potentially be held liable under Section 1681e(b).
Most recently, in Willoughby v. Equifax Information Services, LLC,16 reseller Credit Technologies, Inc. sought the dismissal of a Section 1681e(b) claim on the basis that a reseller’s “sole obligations are found in Section 1681e(e)(2) of the Act,” and that resellers are not bound to comply with Section 1681e(b).17 The court, without significant analysis, followed Waterman and Dively and the case on which they principally relied—Poore v. Sterling Testing Systems—and held that “any portions of the Act applying to consumer reporting agencies also apply to resellers unless … there is an explicit provision to the contrary.”18 The court therefore denied the motion to dismiss.
What Do These Cases Mean, and Where Do We Go from Here?
The primary significance of Dively, Waterman, and Willoughby is that for the foreseeable future, resellers of tri-merge reports will likely continue to be sued in Section 1681e(b) cases along with the bureaus; and those resellers will likely not be dismissed from litigation at the early stages of these cases. Resellers therefore face a choice between two unappealing options: (1) seek early settlement out of these cases, or (2) defend themselves through summary judgment and, potentially, trial. Both options involve costs and risks.
With respect to settlement, particularly in the early stages of cases, a reseller may find themselves paying (or over-paying) for someone else’s mistake without an opportunity to assess the merits of the plaintiff’s claims. Plaintiffs’ attorneys may attempt to frame early settlement demands as a “discount” from the value of the case; but without the benefit of discovery, one cannot be certain. Further, settlement of cases can become a habit, viewed as simply an unfortunate part of the cost of doing business. This may encourage plaintiffs’ attorneys to name settling resellers as defendants more frequently, as they need perform little additional work while recovering additional settlement dollars for their clients—and themselves, as many plaintiffs’ attorneys work on a contingent-fee basis.
Conversely, litigating Section 1681e(b) cases offers resellers the opportunity to shed light on the discrepancy between what plaintiffs’ attorneys imply is resellers’ duty—absolute accuracy—and the practical limitations on resellers’ ability to detect and correct errors generated by the credit bureaus. These limitations may include contractual and regulatory restrictions on resellers’ abilities to manipulate the data furnished by the bureaus,19 requirements that tri-merge reports be delivered within literally seconds of the request,20 technological restrictions of the software available to resellers to create tri-merge reports, and the costs associated with developing and implementing additional safeguards or flags for potentially inaccurate data. Developing these issues through litigation—specifically, discovery and motion practice—however, can be time-consuming and costly; more so, perhaps, than simply settling cases early.
In addition, there is a lack of guidance in the form of court decisions or jury verdicts that ensures that even a well-prepared defense would be successful. Because the Section 1681e(b) standard invokes the “reasonableness” of resellers’ procedures, judges are frequently inclined to deny summary judgment on the basis that reasonableness is a jury question.21 And juries are, of course, unpredictable.
Best Practices to Prepare for and Defend Section 1681e(b) Claims
Since Section 1681e(b) claims against resellers do not appear to be going away in the near future, resellers should take a number of steps to prepare themselves for these suits.
First and foremost, resellers should review their policies and procedures presently employed with respect to accuracy. Assessing these policies and procedures may require a bit of reconceptualizing;. policies and procedures toward accuracy may already be in place, even if not thought of in those terms.
For example, consider the consumer information that customers are required to input in order to generate a tri-merge report. The more source criteria required—name, address, Social Security number, date of birth, etc.—the more likely the tri-merge report is to pull information on the correct individual; these criteria therefore represent a procedure toward assuring accuracy.
Another thing to keep in mind is how a program responds to potential user error when inputting information. If a customer wants a credit report on John Doe, but enters “Jon Doe” or “John Foe” as the consumer’s name, but correctly enters other criteria, how does the software respond? Does the software assume a typo and generate a report anyway, or does it prompt the customer to reenter the consumer’s information due to the discrepancy? If the latter is the case, that can likely be asserted as a procedure toward assuring accuracy.
In evaluating such procedures, also bear in mind that Section 1681e(b) requires “reasonable procedures to assure maximum possible accuracy.” From a reseller’s perspective, the maximum possible accuracy may be limited to pulling the correct consumer’s data from the three major bureaus. Due to the contractual and regulatory restrictions placed on resellers previously identified, reconciliation of that data may be literally impossible.
Therefore, resellers should be prepared to explain and offer evidence as to what is and is not possible given the business context in which resellers operate and the technology available to them, including the costs associated with any procedures to further improve accuracy.22 Resellers should also be prepared to explain and offer evidence on what may or may not be a “red flag” on a tri-merge report. Is a discrepancy in credit score among the three bureaus indicative of a potential error? If not, resellers should be prepared to explain why that is.
Finally, when faced with lawsuits, resellers should carefully weigh the risks associated with early settlement versus litigation, and make a measured decision on how to proceed with their cases. Although there are common themes in Section 1681e(b) cases—“mixed” files, inaccurate or misleading “deceased” notations, inaccurate data from the original furnishers of credit information—no two cases are precisely alike. The appropriate strategy on a case may be dictated by more nuanced factors such as the personality or reputation of the opposing counsel, the demonstrable potential damages, and the venue of the case. Likewise, even two resellers faced with substantially identical lawsuits might reasonably reach different conclusions on the appropriate handling of their cases due to factors like company culture and risk tolerance.
Until the law recognizes the on-the-ground realities of resellers’ businesses and their place in the context of the consumer reporting industry, plaintiffs’ attorneys will continue to exploit the ambiguities inherent in Section 1681e(b)’s requirement of “reasonable procedures to assure maximum possible accuracy.”
Resellers, therefore, will have to proactively prepare themselves to defend against such cases based on the business context and reality in which they operate.
1. 15 U.S.C. §§ 1681n(a), 1681o(a).
2. See, e.g., Gonzales v. Bank of Am., No. S-10-2143 KJM-EFB, 2011 U.S. Dist. LEXIS 147372, at *3–4 (E.D. Cal. Dec. 22, 2011) (collecting cases); Ameriquest Mortgage Co. v. Trans Union LLC, No. 05-7097, 2008 U.S. Dist. LEXIS 18314, at *11–19 (N.D. Ill. Mar. 5, 2008).
3. See Nelski v. Trans Union, LLC, 86 F. App’x 840, 844 (6th Cir. 2004) (“Although a showing of inaccuracy is an essential element of a claim under § 1681e(b), the FCRA does not impose strict liability for incorrect information appearing on an agency’s credit reports.”); Ogbon v. Beneficial Cred. Servs., Inc., No. 10 Civ. 3760 (PAE), 2013 U.S. Dist. LEXIS 50816, at *22 (S.D.N.Y. Apr. 8, 2013) (holding, “[t]o defeat a motion for summary judgment on a § 1681e(b) claim, a plaintiff must minimally present some evidence from which a trier of fact can infer that the consumer reporting agency failed to follow reasonable procedure in preparing a credit report,” and rejecting a plaintiff’s contention that “because there was an error, the procedures must have been unreasonable” because “the FCRA does not impose such strict liability”); Lee v. Experian Info. Solutions, No. 02 C 8424, 2003 U.S. Dist. LEXIS 17420, at *9 (N.D. Ill. Oct. 2, 2003) (noting that “the [FCRA’s] statutory scheme recognizes that complete accuracy of all credit reports from their very inception is of couse impossible” and that “consumer reporting agencies … are not held to strict liability for the accuracy of the information in the reports they produce and disseminate”).
4. See Lee, 2003 U.S. Dist. LEXIS 17420, at *9 (recognizing the impossibility of absolute accuracy).
5. Cortez v. Trans Union, LLC, 617 F.3d 688, 710 (3d Cir. 2010) (quoting Sarver v. Experian Info. Solutions, 390 F.3d 969, 971 (7th Cir. 2004)) (internal quotations omitted); Cahlin v. Gen. Motors Acceptance Corp., 936 F.2d 1151, 1156 (11th Cir. 1991) (holding that the reasonableness of a CRA’s procedures “will be a jury question in the overwhelming majority of cases”); Poore v. Sterling Testing Sys., Inc., 410 F. Supp. 2d 557, 570 (E.D. Ky. 2006) (quoting Dalton v. Cap. Associated Indus., 257 F.3d 409, 416 (4th Cir. 2001)) (same).
6. Elsady v. Rapid Global Business Solutions, Inc., No. 09-11659, 2010 U.S. Dist. LEXIS 17266, at *9 (E.D. Mich. Feb. 26, 2010) (quoting 16 C.F.R. 600 app. § 607); see also Sarver, 390 F.3d at 972 (observing that this standard “does not hold a reporting agency responsible where an item of information, received from a rouse that it reasonably believes is reputable, turns out to be inaccurate unless the agency receives notice of systemic problems with its procedures”).
7. See 76 Fed. Reg. 44462 (July 26, 2011). The Bureau of Consumer Financial Protection has not yet implemented any regulations or offered any official commentary regarding CRAs’ potential liability for accurately reciting inaccurate information from a reliable source.
8. No. 11-3607, 2012 U.S. Dist. LEXIS 9314 (E.D. Pa. Jan. 26, 2012).
9. Id. at *8 (emphasis omitted).
10. Id. at *13.
11. No. SACV 12-01400 SJO (PLAx), 2013 U.S. Dist. LEXIS 35455 (C.D. Cal. Feb. 25, 2013).
12. Id. at *5–6.
13. Id. at *6.
14. Id. at *6–7.
15. Id. at *7 (quoting Poore v. Sterling Testing Sys., Inc., 410 F. Supp. 2d 557, 566 (E.D. Ky. 2006), and citing Perez v. Trans Union, LLC, 526 F. Supp. 2d 504, 509 (E.D. Pa. 2007)).
16. No. 2:12-cv-00788-RDP (N.D. Ala. Aug. 12, 2013) (slip op., ECF no. 19).
17. Id. at 4.
19. See, e.g., Fannie Mae, Selling Guide: Fannie Mae Single Family, (Apr. 9, 2013). In addition, the bureaus’ service agreements with resellers, pursuant to which the resellers have access to the bureaus’ credit information and without which resellers would not be able to conduct business, generally contain clauses prohibiting resellers from altering the credit information provided by the bureaus.
20. Fannie Mae’s Service Level Requirements require that 95 percent of credit report requests are fulfilled within 20 seconds.
21. See generally, e.g., Perez v. Trans Union, LLC, 526 F. Supp. 2d 504 (E.D. Pa. 2007).
22. Arguably, the duty to set forth evidence of reasonable alternative procedures rests with plaintiffs, not with resellers. See id. (denying summary judgment to the reseller, but holding that “the trier of fact will have to determine whether the type of credit reporting for which [the reseller] was engaged by its customer reasonably required that it do more than accurately reiterate what the credit bureaus were reporting,” putting the burden on the plaintiff to “prov[e] what, at a minimum, would have been reasonable, under the circumstances, including the business costs of any suggested alternative”).