Does The Fair Credit Reporting Act Preempt State-Law Claims For Unfair And Deceptive Trade Practices?

by Ellis & Winters LLP
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In cases that involve claims brought under North Carolina’s Unfair and Deceptive Trade Practices Act, an often overlooked issue is whether federal law preempts the 75-1.1 claim.

In a case of apparent first impression, a federal district court in North Carolina recently ruled that the federal Fair Credit Reporting Act (FCRA) can preempt a 75-1.1 claim, at least where there is no evidence that the defendant’s acts were willful or malicious.

Equifax doesn’t report the bankruptcy discharge of a consumer’s debt

Myrick v. Equifax Information Services, LLC involves a consumer whose obligations under a mortgage that had been discharged in bankruptcy. The consumer alleged that Equifax failed to properly report the status of the debt on the consumer’s credit report. Equifax was reporting that the consumer’s loan payments were past due, but did not note the discharge of the obligation.

The consumer disputed the report with Equifax through Equifax’s website. The consumer asserted that the credit report should reflect the discharge.

After Equifax received the dispute, Equifax contacted the bank that had extended the credit line and attempted to verify the status of the debt. The bank indicated that the consumer had an open account. The bank did not verify to Equifax that the account had been discharged. Equifax then informed the consumer that Equifax believed that the account reporting was correct.

Several months later, the consumer sent a dispute letter to Equifax. In the letter, the consumer reiterated that this debt had been discharged.  The consumer also attached a copy of the bankruptcy court’s order of discharge. As is typical, the discharge order did not specifically identify the bank’s debt.  The order further indicated that the bankruptcy had discharged at least some of the consumer’s debts, but may not have discharged all of them.

In response to the letter, Equifax requested that the consumer “be specific with [his] concerns by listing the names, numbers, and the nature of the dispute.”

The consumer sues Equifax for its reporting and dispute investigation procedures

The consumer did not provide the information requested. Instead, the consumer sued both the bank and Equifax in the United States District Court for the Eastern District of North Carolina. The lawsuit alleged that the companies violated both the FCRA and section 75-1.1.

The FCRA is a federal statutory scheme that governs the reporting of consumer debt. The FCRA imposes statutory duties on consumer reporting agencies about how they maintain and report consumer credit histories. The FCRA creates a private right of action, and provides for the recovery of actual damages, for the negligent or willful violation of any duty that the statute imposes. An aggrieved consumer can also recover punitive damages, but only if the consumer can prove that the reporting agency was willfully non-compliant.

After the consumer filed the lawsuit, the bank verified to Equifax that the debt had been discharged and settled with the consumer.  The consumer and Equifax proceeded to litigate the matter.  At the conclusion of discovery, Equifax moved for summary judgment.

Senior District Judge W. Earl Britt partially denied summary judgment as to the FCRA claims, but granted summary judgment to Equifax on the 75-1.1 claim.

The consumer alleged that Equifax violated the FCRA through both its procedures for preparing credit reports, and for conducting post-dispute investigations. As to its investigation, the consumer contended that Equifax had an independent duty to verify that the disputed debt had been discharged once Equifax received notice of the general bankruptcy discharge.

Judge Britt determined that the evidence was insufficient to make out a FCRA violation for Equifax’s original credit reporting, but denied summary judgment as to the FCRA claim premised on Equifax’s post-dispute investigation procedures. The judge did not believe that the consumer forecast sufficient evidence of willful non-compliance to take a punitive-damages claim to a jury.

The FCRA preempts the consumer’s 75-1.1 claim

Equifax also sought summary judgment on the 75-1.1 claim. Equifax argued that the 75-1.1 claim was preempted by the FCRA. The FCRA broadly limits consumers from bringing a suit against a reporting agency under state law “except as to false information furnished with malice or willful intent to injure such consumer.”

In a decision of apparent first impression, Judge Britt determined that the FCRA preempted the 75-1.1 claim in this particular case because Equifax’s conduct was, at most, negligent. In his decision, Judge Britt referenced Congress’s intent to allow state-law claims only in very narrow circumstances. Because the consumer failed to forecast any malice or willful intent to injure by Equifax, the consumer could not maintain his state-law claim for unfair and deceptive trade practices.

As Myrick shows, preemption can be a powerful way for a defendant to eliminate potential treble-damages liability under a state unfair and deceptive practices statute. The FCRA is one of a few federal statutes with an express preemption statute. Defendants have been successful, however, in arguing that other federal statutes so pervasively regulate conduct impliedly as to preempt state-law claims

Myrick is a reminder that plaintiffs and defendants alike should consider potential preemption arguments where federal statutes or regulations may also regulate conduct that allegedly violates section 75-1.1.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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