The Seventh Circuit issued a decision recently that eliminates an enforcement tool long used by the Federal Trade Commission (“FTC”)—the ability to obtain equitable monetary relief from defendants when the FTC challenges conduct under Section 13(b) of the Federal Trade Commission Act (“FTC Act”).

Under Section 13(b), the FTC may seek an injunction in federal court “[w]henever the Commission has reason to believe . . . that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission.”  But the FTC has long sought and obtained restitution under Section 13(b) as an implied remedy.

In Credit Bureau Center, the FTC sued a credit monitoring service and its owner for an injunction and restitution.  The FTC brought the suit under Section 13(b) for violating several consumer protection statutes by enrolling consumers in a monthly subscription without proper notice.  The service offered a “free credit report and score” while disclosing in much smaller text that applying for the information automatically enrolled customers in an unspecified $29.94 monthly membership subscription—the defendants’ credit monitoring service.  The district court entered a permanent injunction and ordered the defendants to pay more than $5 million in restitution.

On appeal, the defendants made the straightforward argument that Section 13(b) does not authorize restitution because it does not mention restitution.  And the Seventh Circuit agreed.  It concluded that nothing in the text or structure of the FTC Act supported an implied right to restitution under Section 13(b), which by its terms authorizes only injunctions.  As a result, the court affirmed the judgment against the defendants but vacated the restitution award.

The court reached its decision despite prior Seventh Circuit precedent recognizing a right to restitution under Section 13(b) in FTC v. Amy Travel Service, Inc., 875 F.2d 564 (7th Cir. 1989).  Looking to the Supreme Court’s subsequent decision in Meghrig v. KFC W., Inc., 516 U.S. 479 (1996), the court concluded that it must consider whether an implied equitable remedy is compatible with a statute’s express remedial scheme, and that it cannot assume that a statute with elaborate enforcement provisions like the FTC Act implicitly authorizes other remedies.  The court analyzed the FTC Act’s overall text and structure, including the FTC’s various enforcement powers, and concluded that an implied restitution remedy was incompatible with Section 13(b).

In particular, the court observed that the FTC can obtain other equitable relief under separate provisions of the FTC Act that involve certain administrative procedures.  The court explained that the FTC can try cases before an administrative law judge or define unfair or deceptive practices through rulemaking and then pursue violators of the rule, and that that those mechanisms afford protections to defendants not offered under Section 13(b).  As a result, the court reasoned, the FTC asserted an unqualified right to a remedy that the FTC Act’s other enforcement provisions give only with protections or, as the court called it, “heavy qualification.”

The Seventh Circuit’s decision is significant.  It creates a circuit split on a key aspect of FTC’s enforcement authority.  The Seventh Circuit did not grant a rehearing en banc, and it is unclear whether the FTC will appeal to the Supreme Court.  Congress may attempt to resolve the split through legislation.  In the meantime, the FTC will no doubt see increased challenges to its right to recover restitution in Section 13(b) cases.  Indeed, the Seventh Circuit criticized contrary decisions in other circuits as based on a “similarly brief analysis” as Amy Travel and observed that they have been the subject of recent judicial skepticism.

Seyfarth attorneys Pam Devata, Esther Slater McDonald, Courtney Stieber, John Drury, and Rob Szyba are speaking at multiple key sessions during the 2019 NAPBS Annual Conference in San Antonio, Texas from September 8-10, 2019. The NAPBS Annual Conference offers a diverse range of educational topics ranging from global screening techniques, strategic business sessions, technology and information security practices, legal and compliance guidelines, legislative updates and what’s on the horizon for NAPBS members, to name just a few. Whether you are new to the industry or a seasoned expert, there’s content for everyone. Each attendee will be able to take away valuable information and resources to benefit their specific business goals.

*Plaintiff v. End User: Common Litigation Trends Targeting Your Clients
Courtney Stieber, Seyfarth Shaw LLP; Esther Slater McDonald, Seyfarth Shaw LLP
Level: Advanced
CRAs are not the only ones sued for alleged violations of the FCRA and other background check laws. In this advanced level session, we discuss common litigation trends against end users, areas of risk and potential exposure, and how end users (and the CRAs who provide services for them) can help mitigate risks. We explore the most recent case law on disclosure and authorization forms as well as rumblings from the Plaintiffs’ bar, adverse action pitfalls (and best practices), and common claims under analogue laws like ICRAA and ban the box laws.

Tales from the Battlefield: A Primer on Fighting Litigation from Start to Finish
Robert Szyba, Seyfarth Shaw LLP; John Drury , Seyfarth Shaw LLP; Esther Slater McDonald, Seyfarth Shaw LLP
Level: Advanced
Lawsuits against CRAs and background screeners continue to rise. How will litigation affect your day-to-day business? What steps should you take to ensure the best outcome and the least disruption to your business? In this session, we break down the pretrial litigation process, from a complaint’s filing through the discovery process to trial, and the options for successful resolution. We will examine how each step of the process may impact your business and the often-competing goals of maximizing resolution with minimizing business disruption

*Attorney Insights: Your Questions Answered
Pamela Q. Devata, Seyfarth Shaw LLP; Rebecca Kuehn, Hudson Cook LLP; David Anthony, Troutman Sanders LLP
Level: Foundational
A panel of three of the top FCRA attorneys in the industry will bring their collective expertise to address the top six areas of exposure for clients in background screening practices. These experienced lawyers will highlight the litigation and compliances topics that they see create the highest risk for members. This must-attend session will include Pamela Q. Devata (Seyfarth Shaw LLP), Rebecca Kuehn Hudson Cook LLP) and David N. Anthony (Troutman Sanders LLP).

*Hit Me With Your Best Shot
Pamela Q. Devata, Seyfarth Shaw LLP
Level: Foundational
“Hit me with your best shot” — that’s what CRAs are feeling lately. Learn how to say “fire away” and be prepared to defend the newest trends in FCRA and state law litigation.

For more information and to see the full agenda, click here.

On August 23, 2019, the United States Court of Appeals for the Fifth Circuit issued its long-awaited opinion in Klocke v. Watson, 17-11320, 2019 WL 3977545, at *1 (5th Cir. Aug. 23, 2019), holding that the Texas Citizens Participation Act (“TCPA”) does not apply to diversity cases in federal court. This decision settles a split manifested across dozens of cases at the district courts.

By ruling that the TCPA does not apply to diversity cases in federal court, the Fifth Circuit foreclosed an otherwise potent weapon used by defendants throughout Texas in trade secrets litigation. Because of the TCPA’s extremely broad application, defendants in trade secrets cases, for example, often asserted that claims alleging the misappropriation of trade secrets and related causes of action were based on and related to the defendant’s freedom to speak freely on all topics, including the trade secrets at issue, and its freedom to associate with competitors, and therefore such claims should be dismissed under the TCPA. Such arguments are now foreclosed by this ruling, at least in federal court.

Nevertheless, the Fifth Circuit’s holdings in Klocke may be soon revisited, as new provisions of the TCPA went into effect September 1 that repealed and replaced some of the burden-shifting framework that the Fifth Circuit held conflicted with the Federal Rules of Civil Procedure. The statute’s September 1 amendments also dramatically reduce the TCPA’s applicability to trade secret cases regardless of where they are filed.

Background

The TCPA is an anti-SLAPP (Strategic Lawsuit Against Public Participation) statute allowing litigants to seek early dismissal of a lawsuit if the legal action is based on, relates to, or is in response to a party’s exercise of the constitutional right of free speech, right to petition, or right of association. Like other states, Texas enacted the TCPA to address concerns over the increasing use of lawsuits to chill the exercise of First Amendment rights. As it applied up until September 1, a movant was required to show by a preponderance of the evidence that the TCPA applied. If a movant was successful, a non-movant was then required to show by “clear and specific evidence” each element of its prima facie case or face mandatory dismissal, fees, and sanctions. If a movant was successful, a movant could still obtain dismissal fees and sanctions if the movant could show by a preponderance of the evidence each essential element of a valid defense to the non-movant’s claim.

Case Facts

Thomas Klocke was a student at the University of Texas at Arlington who tragically committed suicide in June 2016 after being refused permission to graduate while the University investigated allegations made by fellow student Nicholas Watson that Klocke harassed Watson based on his sexual orientation. Thomas Klocke’s father, as administrator of his son’s estate, filed suit against the University for possible Title IX violations and against Watson alleging common law defamation and defamation per se. Watson moved to dismiss the defamation claims under the TCPA, alleging the lawsuit was based on, related to, and in response to his freedom of speech rights.

The district court granted Watson’s motion to dismiss, holding the TCPA applicable in federal court, and awarded Watson attorneys’ fees and sanctions pursuant to the TCPA. Klocke appealed, arguing that the TCPA conflicts with the Federal Rules. The Fifth Circuit agreed with Klocke, reversing and remanding the district court’s judgment for further proceedings.

The Ruling

Breaking with its recent practice of declining to rule on whether, and to what extent, the TCPA applies in federal court, the Fifth Circuit directly held the TCPA does not apply in diversity cases in federal court. While the opinion applies expressly to federal diversity cases, the Fifth Circuit’s reasoning equally applies to any case filed in federal court, including those based on supplemental or federal question jurisdiction, although the latter set of cases are likely excluded from the TCPA’s application due to the Supremacy Clause of the U.S. Constitution.

In reaching this decision, the Fifth Circuit found most persuasive the D.C. Circuit’s reasoning in Abbas v. Foreign Policy Grp., LLC, 783 F.3d 1328, 1333-34, that Rules 12 and 56, governing dismissal and summary judgment respectively, answer the same question as the TCPA: namely, what are the circumstances under which a court must dismiss a case before trial? The Fifth Circuit analyzed the issue under the framework of Abbas and Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 559 U.S. 393, 398 (2010), which hold that state rules conflict with federal procedural rules when they impose additional procedural requirements not found in the federal rules. The Fifth Circuit found that the TCPA and the Federal Rules “answer the same question” because each specifies requirements for a case to proceed at the same stage of litigation.

Specifically, the Fifth Circuit found:

  1. The TCPA’s “clear and specific evidence” standard exceeds the pleading requirements of Rules 8 and 12 and the evidentiary requirements of Rule 56, and therefore must yield. Further, it requires the court to weigh evidence “by a preponderance of the evidence” prior to the parties conducting discovery, thereby imposing weighing requirements not found in the Federal Rules, and thus conflicts with them;
  2. The TCPA answers the same question as the Rules 12 and 56 because they all involve when the court must dismiss a case before trial;
  3. The Fifth Circuit relied on the United States Supreme Court’s ruling in Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 559 U.S. 393 (2010), to make clear that the federal rules impose comprehensive, not minimum, pleading requirements, and states may not superimpose additional requirements on the federal rules; and
  4. Under the rule of orderliness, the Fifth Circuit concluded it was not bound by its prior decision in Henry v. Lake Charles American Press, L.L.C., 566 F.3d 164 (5th Cir. 2009), where the Fifth Circuit upheld the dismissal of a lawsuit under Louisiana’s anti-SLAPP statute, because Henry preceded the Supreme Court’s Shady Grove decision, subsequent Fifth Circuit rulings declined to hold Henry controlling on the applicability of the TCPA, and because Henry addressed Louisiana’s anti-SLAPP statute, rather than the TCPA.

Applicability to Cases Moving Forward

The impact of the Klocke case ultimately may be limited. On September 1, 2019, H.B. No. 2730 went into effect, which changed several key provisions of the TCPA. In addition to changing the scope of several key definitions, the amendments included removing the requirement that the movant must show by a “preponderance of the evidence” that the TCPA applied or each essential element of a valid defense to the non-movant’s claim. These evidentiary burdens were replaced by more amorphous language stating that a movant only needed to “demonstrate” the TCPA’s applicability and to “establish” an affirmative defense or that it was entitled to judgment as a matter of law.

It is likely, however, that Klocke’s holding, if not all of its reasoning, will be upheld by a future Fifth Circuit panel addressing the new TCPA language. While the  “preponderance of the evidence” language in the TCPA has been removed for the movant, the “clear and specific evidence” standard for the non-movant remains, language which the Fifth Circuit held constitutes an “evidentiary weighing requirement[] not found in the Federal Rules” and which “exceeds the plaintiff’s Rule 56 burden to defeat summary judgment.” Accordingly, a future Fifth Circuit panel may likely conclude that the TCPA remains inapplicable to cases in federal court.

Regardless of how the Fifth Circuit rules on TCPA cases in general, its applicability to trade secret cases has been much narrowed by the September 1 amendments. Specifically, the new provisions state that the TCPA does not apply to a legal action arising from an officer-director, employee-employer, or independent contractor relationship that seeks recovery for misappropriation of trade  secrets or corporate opportunities. While this does not eliminate all conceivable trade secret claims from the TCPA’s grasp, it greatly reduces the number, whether in state or federal court.

 

 

We are pleased to announce the webinar “Hot Topics and Trends in California Consumer Class Actions” is now available as a webinar recording.

On Wednesday, August 7, 2019, Seyfarth partners Robert Milligan and Joseph Escarez reviewed the latest consumer class action law developments affecting companies that do business in California. It is no secret that resourceful plaintiff’s attorneys target companies conducting business in California with expensive and time-consuming putative class actions alleging violations of federal or state consumer statutes. Specifically, Robert and Joe provided a summary of recent key decisions, identified trends for companies to watch for in 2019 and beyond, and provided practical “best practices” and risk management advice for the future.

As a conclusion to this well-received webinar, we compiled a summary of key takeaways:

  1. Companies that record or monitor outbound or inbound calls with California residents need to ensure that they have adequate disclaimers at the inception of the call that alert the other party that they call may be monitored or recorded, otherwise they face exposure under California’s call recording/monitoring statute.
  2. Companies that use a subscription or renewal based system for the sale of goods or services with California residents need to strictly comply with California’s auto-renewal statute to ensure they avoid costly claims by regulators and class action attorneys.
  3. Companies with consumer arbitration agreements and class action waivers should review and revise those agreements to address potential claims for public injunctive relief and comply with McGill v. Citibank and Blair v. Rent-A-Center.
  4. The FCC is expected to issue new rules defining “Automated Telephone Dialing System” under the TCPA.  In the meantime, companies that make calls or send text messages to consumers should ensure that they have first obtained the call or text recipients’ prior express consent (or prior express written consent for telemarketing calls or texts).
  5. Companies faced with a consumer class action in California state court should know that plaintiffs are NOT required to establish ascertainability to certify a class.  A named plaintiff need only describe a class that might in the future be identified by reference to objective criteria.
  6. The Court of Appeal recently held that Cal. Bus. & Prof. Code section 17501 is NOT unconstitutional for vagueness and does not restrict speech.  But defendants facing false pricing lawsuit may still prevail by challenging the plaintiff’s damages model.

For more information, please contact your Seyfarth Shaw attorney, Robert B. Milligan at rmilligan@seyfarth.com or Joseph Escarez at jescarez@seyfarth.com.

On Thursday, July 11, 2019, a diverse group of trade associations spanning numerous industries, including retail, telecom, manufacturing, and food and beverage, urged Congress to enact a consumer privacy law.  In a letter to the Senate and House commerce committees, the coalition of 27 industry groups asked Congress “to act quickly to adopt a robust and meaningful national consumer privacy bill to provide uniform privacy protections for all Americans.”  The coalition said that a “comprehensive federal privacy law that establishes a single technology and industry-neutral framework for our economy” is necessary because “consumers’ privacy protections should not vary state by state.”  The coalition noted that “a uniform federal framework” would “provide certainty for businesses and consumers alike.”

The coalition’s letter was likely spurred by congressional hearings on data privacy and the growing number of states considering data privacy legislation following the European Union’s implementation of the GDPR.  California Maine, Nevada, and Vermont recently enacted laws governing collection, use, or sharing of consumer data, and similar legislation is pending in Hawaii, Illinois, Massachusetts, Minnesota, New Jersey, New York, Pennsylvania, Rhode Island, Texas, and Washington.  Privacy bills introduced in Louisiana, Maryland, Mississippi, Montana, New Mexico, and North Dakota failed to pass but could be reintroduced in upcoming legislative sessions.

To keep abreast of developments and for compliance webinars, sign up at the links below.

Consumer Class Defense Blog

The Global Privacy Watch

On Wednesday, August 7, 2019, at 12 p.m. CT, Seyfarth attorneys will review the latest consumer class action law developments affecting companies that do business in California. It is no secret that resourceful plaintiff’s attorneys target companies conducting business in California with expensive and time-consuming putative class actions alleging violations of federal or state consumer statutes. Specifically, Seyfarth attorneys will provide a summary of recent key decisions, identify trends for companies to watch for in 2019 and beyond, and provide practical “best practices” and risk management advice for the future. This webinar will provide insight on the following areas:

  • Latest TCPA decisions and trends
  • Eavesdropper and call recording claims under CIPA
  • Recent developments in privacy/data breach
  • False advertising based on pricing and Made in America claims
  • Latest developments concerning arbitration and class waivers

 

Cross-Posted from ADA Title III Blog

Seyfarth Synopsis:  Courts in the Fourth Circuit are taking a hard look at a plaintiffs’ standing in website accessibility cases.

In a small but potentially important victory for defendants facing website accessibility lawsuits, the Fourth Circuit has issued two decisions upholding dismissal of lawsuits for lack of standing with a well-reasoned analysis that can be applied to the defense of other lawsuits.

The blind plaintiff in Griffin v. Dept. of Labor Credit Union sued the credit union under Title III of the ADA alleging its website was not accessible to him through his screen reader software.  Reviewing the district court’s dismissal of the case for lack of standing, the Fourth Circuit held that the plaintiff did not have standing to bring his claim because he had not suffered an injury in fact and was not facing an imminent injury in the future.  The Court cited to the fact that the plaintiff could never become a member of the defendant credit union whose membership was limited to current and former employees of the Department of Labor and their immediate families and households.  This position contradicts a few decisions from judges in other jurisdictions who concluded that the inability obtain information about a business that a plaintiff could never actually patronize is an injury in fact sufficient to establish standing.  Although the Fourth Circuit said its holding was intended to apply narrowly to the scenario before it, its thoughtful elaboration of the standing requirements still provides support for defendants seeking to dismiss cases where the complaint fails to plead a credible desire or need to obtain goods or services from the defendant’s website. Continue Reading Fourth Circuit Says Inability to Get Information from Website, Without More, is Not Enough to Establish Standing to Sue

Seyfarth Synopsis:  Following Delaware’s lead in Trulia, an Illinois District Court judge refused to approve a mootness fee settlement as “worthless to the shareholders.”  The judge noted that such settlements amounted to a plaintiffs’ bar “racket” with the goal of obtaining fees in cases that should be “dismissed out of hand.”  Specifically, Judge Thomas M. Durkin exercised his “inherent authority” to abrogate the settlement of shareholder litigation arising out of the proposed acquisition of Akorn, Inc.  In ordering Plaintiffs’ counsel to return the $322,000 mootness fee paid in connection with the settlement, the Court signaled that this decision should mark the beginning of the end for the merger objection litigation “racket,” which recently shifted from Delaware Chancery Court to federal court following Delaware’s 2016 Trulia decision, which cracked down on merger litigation in Delaware.  A recent study1 about mootness fees found that in 2018 alone at least 65% of federal merger litigation filings resulted in a settlement after supplemental disclosures were made accompanied by the payment of a mootness fee to Plaintiffs’ attorneys.  These mootness fee settlements generally occur without meaningful judicial oversight, and the negotiated supplemental disclosures often provide little or no value to shareholders.

Presumably, the decision in Akorn will further deter the filing of merger litigation now that several courts have reprimanded plaintiffs’ counsel for bringing meritless claims in order to obtain a quick pay day.  Indeed, based on Judge Durkin’s ruling, plaintiffs’ counsel should no longer assume they can avoid judicial review of mootness fee settlements or assume they can keep fees paid pursuant to those settlements.  If the case is appealed, it will be closely watched and if upheld could have important effects in the Seventh Circuit and elsewhere.  Moreover, as a policy matter this decision should further raise the profile of this issue and hopefully result in legislation which will curb the abuse present here.
Background
Plaintiff shareholders sued Akorn, Inc. and its board of directors in connection with its proposed acquisition.  After Akorn revised its proxy statement and issued a Form 8-K, Plaintiffs voluntarily dismissed their lawsuits and settled for a $322,000 mootness fee.  Following the settlement, one shareholder filed a motion to intervene to object to the settlement.  The Court denied that motion, but in light of the shareholder’s arguments ordered the parties to brief the issue of whether the Court should abrogate the settlement agreements in light of a recent Seventh Circuit’s decision, Judge Richard Posner overturned the district court’s approval of a disclosure only settlement and referenced Chancellor Bouchard’s decision in Trulia, wherein the Chancery Court held that disclosures made in this context must be “plainly material . . . mean[ing] that it should not be a close call that the . . . information is material.”  In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 894 (Del. Ch. 2016).  Because no class was certified in this case and no class claims were released in the settlement, the Court determined that it must assess whether “a class action that seeks only worthless benefits for the class should be dismissed out of hand.”  The Court then reviewed each of the disclosures that Plaintiffs sought in their complaints and ruled that they were not “plainly material” and instead were “worthless to the shareholders” and “caused the company in which they hold an interest to lose money.”  Because “[t]he quick settlements obviously took place in an effort to avoid the judicial review this decision imposes,” the Court declared that “this sharp practice ‘must end.’”
Takeaways

1. Other Federal Judges May Start Scrutinizing Mootness Fee Settlements.

Judge Durkin’s decision has paved the way for other judges, particularly in the Seventh Circuit, to exercise their inherent authority to abrogate mootness fee settlements that they in the past may have concluded they don’t have the authority to review.
2. Reaffirms High Bar To Finding That Supplemental Disclosures Are Plainly Material.
The Court deemed all of Plaintiffs’ additional sought-after disclosures as “not ‘plainly material’” and “worthless to the shareholders.”  These included the following:
  • GAAP reconciliation of the proxy’s projections because the applicable SEC regulation requiring GAAP reconciliation does “not apply to . . . a disclosure relating to a proposed business combination.”
  • Certain components of financial advisor’s analysis because (i) the information was already provided in the original proxy; (ii) shareholders can make their own determination as to whether a growth rate range is reasonable in light of prior performance; and (iii) courts find that only a “fair summary” of data underlying a financial advisor’s opinion must be disclosed.
  • Financial advisor’s compensation from Akorn because (i) that information was disclosed in the original proxy, and (ii) the fact that the fee was contingent on consummation of the merger could be inferred from other language in the proxy and, moreover, is plainly not material.
  • Financial advisor’s compensation from the buyer because the exact historical payments were deemed not material and the proxy, in any event, did not indicate that the financial advisor was continuing to receive payments from the buyer.
  • Potential upside in stand-alone strategic plan because the “upside” was readily apparent in that avoiding the merger means avoiding the costs and the relinquishment of control inherent to the merger and that it was sufficient to disclose in the proxy that the plan involved significant risks in light of the industry and competitive pressures the Company faced.  The Board additionally translated those concerns into financial projections that were provided in the proxy. Moreover, Plaintiff settled the case without receiving this information, which cast significant doubt on whether information was truly material.
  • Substance of the March 2017 projections because (i) “completeness” is not the standard for disclosure; (ii) Plaintiff did not identify what information in particular was necessary to evaluate the merger; and (iii) Plaintiff settled without receiving this information, which again cast doubt on its materiality.
  • Other potential buyers and the reason for their rejection because the Board had disclosed that it determined “it was highly unlikely that any of those counterparties would be interested in an acquisition of the Company at that time due to competing strategic priorities and recent acquisitions in the industry” and detailed information about potential buyers that weren’t actually considered is not material.
  • Pending litigation because (i) the lawsuits were public record prior to issuance of the original proxy, and (ii) the allegation that the Board had ulterior motives related to absolving themselves of liability arising from pending litigation is unfounded speculation and, moreover, does not seek information relevant to the merger.
For a copy of the opinion, click here.
1 Matthew D. Cain, Jill E. Fisch, Steven Davidoff Solomon & Randall S. Thomas, Mootness Fees, Vanderbilt Law Review, Forthcoming; U of Penn, Inst. for Law & Econ. Research Paper No.
19-26 (May 29, 2019).

The Fair Credit Reporting Act (“FCRA”) bars consumer reporting agencies from reporting civil suits, civil judgments, records of arrest, and other “adverse items” more than seven years after they occur. In a recent decision in Moran v. The Screening Pros, the Ninth Circuit held that the later dismissal of criminal indictments or charges was not a new adverse event and did not restart the seven-year clock for reporting. Judge Kleinfeld, dissenting, argued that dismissals often are evidence of an “adverse event,” such as a guilty plea followed by deferred sentencing, and should be considered a separate event that restarts the clock. Because Moran opens the door to additional lawsuits based on the reporting of dismissals, other circuits are likely to consider the same question. Judge Kleinfeld’s dissent is a potential roadmap for both defendant consumer reporting agencies litigating in other jurisdictions and other courts considering the issue anew.

The Ninth Circuit majority made a two-step analysis. First, it considered whether the starting date of the seven year period, as to an indictment or other filing of charges, should begin at the “date of entry” of the charge or the “date of disposition.” (Because convictions are always reportable, “disposition” here will generally mean dismissal by the court.) The district court had determined that the starting date was the date of disposition, but the panel majority reversed. While noting that the statute was “silent” on this question as to “other adverse items,” including indictments, the court noted that “[a] charge is an adverse event upon entry so it follows that the date of entry begins the reporting window.”

The majority then tackled the question of whether the dismissal of a charge itself constituted an adverse event, so that it would have its own seven-year reporting window separate from the window that begins to run when the charge is entered. The majority concluded that it did not, reasoning that a dismissal could not be adverse because it “indicates that the consumer no longer faces an indictment, an overall positive—but at least neutral—development.”

This was confirmed, in the majority’s view, by the fact that Congress had amended the FCRA in 1998 to remove the section pertaining to arrests, indictments, and convictions, lumping arrests in with civil suits and civil judgments (whose clock starts running at “date of entry”), and leaving just the “other adverse item” section to cover indictments. Congress did not change the wording of the “other adverse item” section, which refers to neither the date of entry nor the date of disposition, but simply refers to items that “antedate[] the report by more than seven years.” The majority conceded that ordinarily where a term is included in one section of a statute but not another, “it is generally presumed that Congress acts intentionally.” Thus, one might think that if “date of entry” is used as to suits, judgments, and arrests, but not as to “other adverse items,” that difference must be significant. Nonetheless, the majority here found that maxim “inappropriate,” because the thrust of the amendment was to limit reportable events, which suggested that the “other adverse item” section, like the suits, judgments, and arrests section, should be read as incorporating a date-of-entry rule.

Judge Kleinfeld dissented from these holdings and, in doing so, charted a course for defendants in other circuits to try to obtain a different result. The dissent argued that the statute must be read in light of how the criminal justice system actually works. While the majority saw a dismissal as a positive or neutral event that should not be reported because it might unfairly and untimely bring to light an adverse indictment, Judge Kleinfeld argued that a dismissal itself frequently indicates an outcome that at least does not rule out guilt and in many cases involves an actual admission of guilt.

For example, charges are commonly dismissed after a period of deferred sentencing: the defendant often pleads guilty and serves a certain term of probation or jail time. While the defendant actually receives some punishment (or at least monitoring), the actual sentence is “suspended,” and, if the defendant does not breach the terms of sentencing, he may withdraw the guilty plea and have the charge dismissed. “Such a dismissal,” the dissent argued, “means that the defendant behaved himself after sentencing, and not that he was found innocent or ‘cleared.’”

In other cases, a prosecutor may obtain a guilty plea for some charges in exchange for dropping other related charges. “The prosecutor dismisses the lesser charges because they would likely lead to in-custody time concurrent with and less than the prison time already assured. Far from ‘clearing’ the defendant, the dismissal means that the defendant pleaded guilty to other crimes generating an adequate sentence.”

The dissent also noted that dismissals can occur for other reasons that, while they do not involve an admission of guilt, also do not per se exonerate the defendant—for example, when a police officer or other key witness fails to appear for trial.

For all these reasons, the dissent reasoned, Congress allowed landlords, employers, and other users of background checks to consider dismissals as “adverse events” that signal, or at least flag the potential for, possible criminal behavior on the part of the consumer. The dissent found this conclusion bolstered by the fact while Congress’s 1998 amendments increased restrictions on the reporting of civil lawsuits/judgments (and arrests that never led to charges), it lifted the seven year limitation on reporting criminal convictions. In other words, while Congress tightened the requirements as to events that do not tend to confirm the possibility of criminal behavior, it allowed more reporting of events that do tend to confirm such behavior.

(Moreover, while the dissent only sidles up to this point, it should be noted that Congress saw fit to move arrests to the civil group while relegating indictments (by implication) to the “other adverse items” section. If Congress had wanted to impose the “date of entry” standard on indictments, it would presumably have placed indictments in the section applying that standard, as Congress did with arrests. The actual structure of the amended statute, on the other hand, seems to imply the opposite—that Congress was intentionally omitting indictments from the “date of entry” standard that Congress now saw fit to apply to arrests.)

Finally, although the Consumer Financial Protection Bureau and the Federal Trade Commission had submitted amicus briefing urging the majority’s position, Judge Kleinfeld noted that such briefing was not entitled to Chevron deference, especially when the agencies’ position contradicted prior agency practice and commentary that businesses had long depended on in shaping their policies.

In short, the dissent lays out a map of compelling, arguable ideas that undermine the majority’s simple position that a dismissal of an indictment is not a new adverse event. While the ship has sailed on these arguments in the Ninth Circuit, it seems likely that litigants will be navigating these issues in other circuits. Thus, consumer reporting agencies may want to carefully study these ideas and marshal the dissent’s more complex and nuanced view of the criminal justice system and the function of a dismissal.

Seyfarth Synopsis: On June 5, 2019, the Ninth Circuit issued an opinion in NEI Contr. & Eng’g, Inc. v. Hanson Aggregates Pac. Sw., Inc., 2019 U.S. App. LEXIS 16885 (9th Cir. June 5, 2019), upholding the district court’s decertification of a class whose class representative lacked standing on its individual claims.

NEI Contracting and Engineering, Inc. (“NEI”) sought to bring a class action based on allegations that Hanson Aggregates, Inc. (“Hanson”) violated California Civil Code section 632.7 for recording phone calls without the consent of the individuals placing the calls. The district court, after initial certification, decertified the class, observing that the individualized inquiries required to determine if each class member consented to the recording would predominate over questions of fact common to all class members. The court also found that NEI did not have standing to bring its individual claims. Continue Reading Ninth Circuit Upholds Decertification of Class in Unauthorized Customer Call Recording Suit Where the Class Representative Did Not Have Standing