FYI: 9th Cir Holds FCRA "Permissible Purpose" Plaintiff Had Standing, Establishes Elements for Such Claims

In a case of first impression in that circuit, the U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court’s dismissal of a consumer’s Fair Credit Reporting Act (“FCRA”) claim for lack of standing and failure to state a claim, holding that the plaintiff had Article III standing.

In so ruling, the Ninth Circuit held that the consumer suffered a concrete injury in fact when a bank obtained her credit report for a purpose not authorized by the statute, and it was irrelevant whether the report was published or used by the party requesting it.

The Court further held that:  (1) in order to state a claim under this provision of FCRA, a plaintiff only needs to allege that the credit report was obtained for an unauthorized purpose;  (2) the defendant must then plead that it was obtained for an authorized purpose; and  (3) the plaintiff need not plead the actual purpose, but only facts creating a reasonable inference the report was obtained for an improper purpose.

A copy of the opinion is available at:  Link to Opinion

A consumer reviewed her credit report from one of the “big three” credit reporting agencies and discovered that a bank with whom she allegedly had no prior or existing relationship had requested her credit report. The consumer filed suit alleging that the bank violated the FCRA by obtaining her credit report without her consent and not for any of the purposes authorized under the Act.

The trial court dismissed the complaint with prejudice for lack of standing and failure to state a claim, and the plaintiff appealed.

On appeal, the Ninth Circuit noted that the case presented two issues of first impression in that circuit: “(1) whether a consumer suffers a concrete Article III injury in fact when a third-party obtains her credit report for a purpose not authorized by the FCRA and (2) whether the consumer-plaintiff must plead the third-party’s actual unauthorized purpose in obtaining the report to survive a motion to dismiss.”

The Court answered “yes” to the first question and “no” to the second, holding that “a consumer suffers a concrete injury in fact when a third-party obtains her credit report for a purpose not authorized by the FCRA … [,] a consumer-plaintiff need allege only that her credit report was obtained for a purpose not authorized by the statute to survive a motion to dismiss[,] [and] the defendant has the burden of pleading it obtained the report for an authorized purpose.”

The Court noted that the FCRA prohibits a person from using or obtaining a consumer report for any purpose unless it is obtained for an authorized purpose and the user certifies the authorized purpose for which it is obtained or used.

As you may recall, FCRA provides that a “consumer reporting agency” can only furnish a consumer report for certain enumerated purposes “and no other.” See 15 U.S.C. § 1681(b)(a).

These permissible purposes include, among other things, that the consumer report was obtained in response to a court order, or pursuant to the consumer’s written instructions, or only “[t]o a person which it has reason to believe — (A) intends to use the information in connection with a credit transaction involving the consumer … and involving the extension of credit to, or review or collection of an account of, the consumer; (B) … for employment purposes; or (C) in connection with the underwriting of insurance involving the consumer; or (D) … in connection with a license or other benefit granted by a governmental instrumentality …; or (E) [to] a potential investor or servicer, or current insurer …; or [who] otherwise has a legitimate business need for the information—(i) in connection with a business transaction that is initiated by the consumer; or (ii) to review an account to determine whether the consumer continues to meet the terms of the account.”

On the issue of standing, the Court explained that Article III of the U.S. Constitution limits federal courts’ power “only to ‘Cases’ and ‘Controversies’ … [and] ‘[s]tanding to sue is a doctrine rooted in the traditional understanding of a case or controversy.’ … ‘[T]he irreducible constitutional minimum’ of standing consists of three elements. The plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.’”

According to the Ninth Circuit, the case at bar primarily involved the first “injury in fact” element, with the Court explaining that “[t]o establish injury in fact, a plaintiff must show that he or she suffered ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.’ … ‘Concrete’ is not, however, necessarily synonymous with ‘tangible.’ Although tangible injuries are perhaps easier to recognize … intangible injuries can nevertheless be concrete.’”

“’In determining whether an intangible harm constitutes injury in fact, both history and the judgment of Congress play important roles … [and] it is instructive to consider whether an alleged intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.’ … ‘The … injury required by Art. III may exist solely by virtue of ‘statutes creating legal rights, the invasion of which creates standing.’”

The Ninth Circuit further recited that “a bare procedural violation may not establish a concrete harm sufficient for Article III standing[,]” but “an alleged procedural violation [of a statute] can by itself manifest concrete injury where Congress conferred the procedural right to protect a plaintiff’s concrete interests and where the procedural violation presents ‘a risk of real harm’ to that concrete interest.’”

The Court also explained that it has “recognized a distinction between violations of a procedural right …and a substantive right … [and a] violation of a substantive right invariably ‘offends the interests that the statute protects.’”

Based on the foregoing prior rulings, the Court concluded that the plaintiff had standing to sue under FCRA section 1681b(f)(1) because “[f]irst, obtaining a credit report for a purpose not authorized under the FCRA violates a substantive provision of the FCRA.

This is because, the Ninth Circuit held, this section of FCRA, “which prohibits obtaining a credit report for a purpose not otherwise authorized—protects the consumer’s substantive privacy interest. The section does not merely ‘describe a procedure’ that one must follow. Rather, [it] is the central provision protecting the consumer’s privacy interest: every violation invades the consumer’s privacy right that Congress sought to protect in passing the FCRA.”

Accordingly, the Court held, “the Plaintiff ‘need not allege any further harm to have standing.’”

Second, the Court noted that it had “previously found the invasion of the interest at issue — the right to privacy in one’s consumer credit report — confers standing.”

“Third, historical practice also supports a finding of standing … [because] [t]he harm attending a violation of §1681b(f)(1) of the FCRA is closely related to—if not the same as—a harm that has traditionally been regarded as providing a basis for a lawsuit: intrusion upon seclusion (one form of the tort of invasion of privacy).”

The Ninth Circuit concluded that the plaintiff had “standing to vindicate her right to privacy under the FCRA when a third-party obtains her credit report without a purpose authorized by the statute, regardless whether the credit report is published or otherwise used by that third-party.”

The Court then turned to the second issue of first impression: “[m]ust “the consumer-plaintiff plead the third-party’s actual unauthorized purpose in obtaining the credit report to survive a motion to dismiss? The Court answered “no,” finding that “[t]he trial court erred in holding that … [plaintiff] has the burden of pleading the actual purpose behind [defendant’s] procurement of her credit report. A plaintiff need allege only facts giving rise to a reasonable inference that the defendant obtained his or her credit in violation of  §1681b(f)(1) to meet their burden of pleading.”

As with any affirmative defense, the defendant bears “the burden of pleading it had an authorized purpose to acquire [plaintiff’s] credit report[,] … first, because “the FCRA generally prohibits obtaining a credit report, … but then provides a numerous and diverse list of exceptions[.] … As such, the authorized purposes … are matters of exception that the defendant must plead as a defense.”

“Second, placing the burden on the plaintiff would be unfair, as it would require the plaintiff to plead a negative fact that would generally be peculiarly within the knowledge of the defendant.”

Finally, the Ninth Circuit concluded that the complaint contained “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face’”.

Here, the Court noted that the plaintiff alleged “that she did not have a credit relationship with [defendant]” and made  “factual assertions which negative each permissible purpose for which [defendant] could have obtained her credit report and for which [plaintiff] could possibly have personal knowledge.”

Accordingly, the trial court’s order of dismissal was reversed and the case remanded.

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

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FYI: Cal App Ct (1st Dist) Refuses to Enforce Predispute Jury Waiver Despite Forum Selection Clause

The Court of Appeal of the State of California, First Appellate District, recently held that a forum selection clause in favor of a New York forum was unenforceable where the clause included a predispute jury trial waiver, which is unenforceable under California law but which would have been enforceable under New York law. 

Accordingly, the Appellate Court reversed the order of dismissal entered by the trial court. 

A copy of the opinion is available at:  Link to Opinion

The plaintiff storeowner ("Plaintiff") filed a lawsuit against the defendant company ("Defendant") alleging that the Defendant supposedly defrauded the Plaintiff regarding a lease agreement for credit card processing equipment.

The complaint alleged causes of action for fraud, rescission, injunctive relief, and violation of the California Business and Professions Code section 17200.  The complaint also attached a lease agreement, which provided that New York law would apply to all disputes between the parties, and that all disputes "shall be instituted and prosecuted exclusively in the federal or state court located in the State and County of New York."  Further, the agreement provided that "YOU AND WE WAIVE, INSOFAR AS PERMITTED BY LAW, TRIAL BY JURY IN ANY DISPUTE."

The Defendant moved to dismiss the complaint based on the forum selection clause of the lease agreement.  The trial court granted the dismissal, and the matter was appealed. 

  

On appeal, the Appellate Court first observed that "California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and their enforcement would not be unreasonable," but "California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates our state's public policy."

The Appellate Court also noted that a party opposing enforcement of a forum selection clause ordinarily bears the burden of proving why it should not be enforced, but the burden is "reversed when the claims at issue are based on unwaivable rights created by California statutes [in which case] the party seeking to enforce the forum selection clause bears the burden to show litigating the claims in the contractually designated forum" will not diminish the substantive rights afforded under California law.

The Plaintiff argued that the forum selection clause impacted his substantive rights under California law because it includes a predispute waiver of the right to a jury trial and such right is unwaivable, even voluntarily, under California law.  Thus, the Plaintiff argued that the trial court erred in failing to place the burden on the Defendant to prove litigating in New York would not result in a diminution of his substantive rights under California law.

The Defendant argued that the Plaintiff's lawsuit did not involve claims based on unwaivable rights under a statutory scheme and therefore the burden should not shift to the Defendant.

In siding with the Plaintiff, the Appellate Court held that "enforcing the forum selection claim here would be contrary to California's fundamental public policy protecting the jury trial right and prohibiting courts from enforcing predispute jury trial waivers."

Although the Plaintiff's claims were not based on a statutory scheme which includes an antiwaiver provision, the "complaint includes a demand for a jury trial, which [the Plaintiff] correctly argues is unwaivable in predispute contracts under California law."  The right to a jury trial "is inviolate under the California Constitution, and which may only be waived by the methods enumerated by the Legislature." 

However, "[w]hile California law holds predispute jury trial waivers are unenforceable, it is undisputed that under New York law there is no similar prohibition." 

The Appellate Court next considered whether the right to jury trial was a substantive or procedural right, which it noted "is an open question."

After analyzing the issue, the Appellate Court determined that "even if the rule is considered procedural, it is intimately bound up with the state's substantive decision making" and "serves substantive state policies" of preserving the right to jury trial, which is "an interest the California Constitution zealously guards."

Thus, the Appellate Court held that "because enforcement of the forum selection clause here has the potential to contravene a fundamental California policy of zealously guarding the inviolate right to a jury trial, which is unwaivable by predispute agreements, [the Defendant] bears the burden of showing that litigation in New York" will not diminish the Plaintiff's substantive rights under California law.

The Defendant argued that the only issue to be decided was the enforcement of the forum selection clause, and that the issue of whether to enforce the jury trial waiver should be decided by a New York court. 

The Appellate Court disagreed, ruling that "enforcing the forum selection clause in favor of New York will put the issue of enforceability of the jury trial waiver contained in the same agreement before the New York court," and "[b]ecause New York permits predispute jury trial waivers, and California does not, enforcing the forum selection clause has the potential to operate as a waiver of a right the Legislature and our high court have declared unwaivable."

The Appellate Court therefore held that "the trial court erred in enforcing the forum selection clause in favor of a New York forum where the clause includes a predispute jury trial waiver, which . . . is unenforceable under California law."

Accordingly, the Appellate Court reversed the order of dismissal entered by the trial court, and remanded the matter for entry of a new order denying the motion to dismiss.

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

ALABAMA   |   CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   MARYLAND   |   MASSACHUSETTS   |   NEW JERSEY   |   NEW YORK   |   OHIO   |   PENNSYLVANIA   |   TEXAS   |   WASHINGTON, D.C.