Today’s Decision in Safeco/Geico

The following commentary is by Anton Pribysh, a summer associate at Akin Gump and a student at Harvard Law School.

Do insurers owe their consumers “adverse action” notices after consulting credit reports for initial pricing decisions? Can those consumers collect statutory damages for merely “reckless” violations of that requirement? The Supreme Court today answered yes to both questions, but reversed the Ninth Circuit’s more sweeping holding that all consumers with less-than-spotless credit histories are owed notice.

Both Safeco v. Burr (No. 06-84) and GEICO v. Edo (No. 06-100) involved alleged violations of the Fair Credit Reporting Act (FCRA) – specifically, 15 U.S.C. § 1681m, which requires businesses using consumer credit reports in their pricing decisions to provide notice of any “adverse action” they take in setting terms or prices as a result of unfavorable consumer credit information. The plaintiffs in both cases (respondents here) filed suit in federal district court, seeking statutory damages under Section 1681n(a), which allows awards of up to one thousand dollars per consumer – regardless of actual damages – for “willful” violations. None of the plaintiffs claimed actual harm.

The Safeco respondents purchased various insurance policies, the premiums for which were determined by a “totality of the circumstances” approach that factored in their credit report information. The insurers failed to inform their customers that better credit reports may have improved their initial rates. The respondent in GEICO was sold insurance with the company’s “moderate-risk” subsidiary (as opposed to a “preferred” policy) based on underwriting characteristics that included his credit report. Because the respondent’s credit report beat the “neutral” score (an average value used if the credit report were not consulted), GEICO did not notify him of any “adverse action.”

The district court granted summary judgment for the defendants (petitioners here) in both cases. It held that an initial pricing decision could not be an “adverse action” for the purposes of the FCRA because by definition it was not an “increase” from any previously quoted or charged price. The court also held that a premium which matched or beat the rate a company would charge if the credit report were not considered could not be “adverse action.”

On appeal, the Ninth Circuit reversed and remanded. In an opinion by Judge Reinhardt, the court of appeals held that the “plain language” of the FCRA requires notice “whenever a consumer pays a higher rate because his credit rating is less than the top potential score.” Under this “best rate” reasoning, GEICO’s “neutral rate” notification scheme was insufficient. Acknowledging a circuit split, the court held that the term “willfully” in Section 1681n (authorizing statutory damages) went beyond “knowing” violations and established a “reckless disregard” standard. The court instructed that the question of willfulness may demand not only an objective inquiry into the “obviousness or unreasonableness of the erroneous interpretation,” but also on a subjective inquiry into the company’s decision making, and that reliance on legal counsel would not be dispositive. Having originally ruled GEICO’s interpretation of the statute so “unreasonable” that it was a “willful” violation as a matter of law, the Ninth Circuit later decided to remand on that issue.

The Supreme Court consolidated the two cases and granted cert. to settle the circuit split concerning the “reckless disregard” standard. The Court also addressed the proper scope of “adverse action,” and its application to initial pricing decisions. In an opinion joined in full or in part by all nine justices, the Court today adopted the “reckless disregard” standard, but accepted GEICO’s “neutral rate” approach and rejected the Ninth Circuit’s application of “recklessness” to Safeco.

The Court held that, despite some legislative history suggesting the contrary, the structure of the FCRA as adopted strongly supported giving “willful” its default meaning in civil liability statutes – that is, including both knowing and reckless violations.

The Court then held that, given the FCRA’s “ambitious objective,” an adverse initial pricing decision constitutes an “increase” within the meaning of the “adverse action” notice requirement,. Justice Souter explained that there was no reason to think Congress intended to exclude initial pricing decisions, given that “the newly insured who gets charged more owing to an erroneous report is in the same boat with the renewal applicant.”

However, to trigger the notice provisions, an “adverse action” must still be “based in whole or in part on” a credit report. The Court interpreted this to require notice only when consultation of the credit report is a but-for cause of some “identifiable effect on the rate.” The last piece of the puzzle, explained Justice Souter, was deciding the proper benchmark against which to measure rate increases. The Court held that GEICO’s “neutral rate” approach was the better interpretation of the statute and fit better with the Court’s interpretation of the “based on” requirement. Rejecting the Ninth Circuit’s “best rate” approach, Justice Souter wrote that Congress was “more likely concerned with the practical question whether the consumer’s rate actually suffered” than “the theoretical question whether a consumer would have gotten a better rate with perfect credit.” Justice Souter also discussed the practical implications of the Court’s ruling, reasoning that denying notification to some above-neutral consumers was better than “hypernotification” destined to be ignored by all.

Finally, the Court turned to an application of its holding to GEICO and Safeco. In GEICO’s case, it held, the insurer did not owe respondent Edo an adverse action notice because it offered him a rate identical to the one he would have received had his credit score not been considered. It held that Safeco’s interpretation of the statute (as not concerning initial prices), although erroneous, was “not objectively unreasonable” when made and thus could not be “reckless” as a matter of law. Justice Souter explained that Safeco’s reading had a basis in the statutory text, and he noted the absence of interpretive guidance from the courts of appeal and the FTC at the time.

With the exception of two footnotes discussing legislative history, Justice Scalia joined the Court’s opinion in full.. Justice Thomas, joined by Justice Alito, wrote a short concurrence indicating that, in his view, the Court should not have reached the issue of whether an initial pricing decision could be an “adverse action” because this was unnecessary to the Court’s holding and, according to Justice Thomas, was not briefed by the parties.

Justice Stevens, joined by Justice Ginsburg, concurred in the result but disagreed with the Court’s disposition of the “based on” question, writing that the Court should have applied the statute to all decisions made after consulting a credit report, regardless of a but-for effect on the final price. Justice Stevens noted that insurers were free to set their own “neutral” rates, and would probably set these rates low, resulting in very little notification for first-time consumers. Congress could not have intended, he reasoned, to leave such a large category of consumers without notice.

While the insurers technically lost on the “reckless disregard” standard, for the most part they can count this case as a win. The Supreme Court reversed the two most sweeping aspects of the Ninth Circuit decision that threatened insurers with large new costs: a “best rate” notification scheme that would have required notices to be sent to most consumers, and a particularly loose application of the “reckless disregard” standard that threatened large damage awards and litigation reaching into the attorney-client relationship. Moreover, the private cause of action that gave rise to these cases is itself in jeopardy: in amending the FCRA in 2003, Congress added Section 1681m(h)(8), which abrogates any private cause of action for violations of the “section.” District courts have split on whether this provision ends all private actions under § 1681, or was simply a drafting error intended to apply only to subsection h.