Credit Report Agencies Liable if They Pass On Bad Watch List Data

Credit Report Agencies Liable if They Pass On Bad Watch List Data


Shannon P. Duffy



08-20-2010

In a significant setback for credit reporting agencies, the 3rd U.S. Circuit Court of Appeals has ruled that consumers have the right to sue if a credit report includes inaccurate information drawn from a government watch list.

The ruling in Cortez v. Trans Union comes in the case of a woman who claimed she was falsely branded as a Colombian drug dealer when she was confused with someone on the U.S. Treasury Department's watch list of known narcotics traffickers and terrorists.

The 91-page opinion marks the first time that a federal appellate court has held that such information is regulated by the federal Fair Credit Reporting Act, and could force Trans Union and other credit reporting agencies to overhaul their policies for handling such information in order to guarantee its accuracy.

But the ruling also includes a setback for plaintiffs because the appellate court refused to consider whether the trial judge was too harsh in slashing a punitive award of $750,000 down to $100,000 on the grounds that the plaintiff had opted to "accept" the trial judge's remittitur rather than opt for a new trial.

Although the appellate court said it was "troubled" by the severity of the trial judge's reduction, the unanimous three-judge panel concluded that such remittitur orders cannot be reviewed once the plaintiff accepts the reduced award.

Lawyers for Trans Union had argued that information gleaned from the Treasury Department's watch list of known terrorists and narcotics traffickers -- known as the OFAC List, for the Office of Foreign Assets Control -- simply wasn't covered by the Fair Credit Reporting Act.

But the 3rd Circuit disagreed, saying the statutory language was explicit, broad and clear, and showed that Trans Union's "OFAC Alert," which is added to some credit reports when customers pay an added subscriber fee, is subject to the FCRA.

"Trans Union's argument that the OFAC alert somehow manages to avoid the reach of the FCRA ignores the breadth of the language that Congress used in drafting that statute," Chief Judge Theodore A. McKee wrote.

"In order to conclude that the OFAC alert is not subject to that remedial statute even though the rest of the report clearly falls within the definition of 'consumer report,' we would have to conclude that Congress did not mean what it said when it unequivocally defined 'consumer report' to include 'any ... communication of any information by a consumer reporting agency,'" McKee wrote.

Trans Union argued that since the 3rd Circuit was the first court to address the question, it should recognize that the law was not settled and therefore decline to impose liability on the first offender.

McKee was unimpressed, saying: "The credit agency whose conduct is first examined under that section of the act should not receive a pass because the issue has never been decided. The statute is far too clear to support any such license."

In the suit, plaintiff Sandra Cortez, 64, claimed that Trans Union's error created humiliating ordeals when she was trying to buy a car and later when she was renting an apartment, but that Trans Union ignored her repeated pleas to have the erroneous information taken off her credit report.

After a three-day trial, a jury found that Trans Union had violated four provisions of the FCRA and awarded Cortez $50,000 in compensatory damages and $750,000 in punitive damages.

The jury also apparently wanted to make sure that its verdict sent a clear message. On the verdict form, below the monetary awards, the jury wrote: "The Trans Union business process needs to be completely revamped with much more focus on customer service and the consumer."

Senior U.S. District Judge John P. Fullam later slashed the verdict in a remittitur order, saying Cortez must accept a punitive award of $100,000 -- double the compensatory award -- or take a new trial.

Plaintiffs attorneys James A. Francis and John Soumilas of Francis & Mailman tried to take an immediate appeal of Fullam's ruling, but the 3rd Circuit dismissed that first appeal on the grounds that Fullam's remittitur order was not a final order.

Now, in a second appeal, the plaintiffs lawyers tried again to challenge Fullam's reduction of the punitive award, but the 3rd Circuit refused to consider the arguments on the grounds that the plaintiff had accepted the remittitur and therefore forfeited any right to challenge it.

Francis, in an interview, said the ruling on the scope of the statute is a major victory for consumers and will force the credit reporting agencies to modify their procedures in order to avoid false matches between drug dealers and terrorists on the watch list and innocent consumers whose lives are "turned upside down" by such mistakes.

Significantly, Francis said, companies like Trans Union will now be forced to disclose all such information to a consumer who lodges such a complaint. In Cortez's case, Francis said, the company repeatedly provided Cortez with copies of her credit report that did not include any OFAC alert, but nonetheless continued to include the alert when potential creditors asked for the report.

Francis said he was disappointed in the ruling on the remittitur issue and was hoping that the appellate court would recognize that such remittitur orders present the plaintiff with a Hobson's choice and effectively shield a trial judge's decision from any appellate review.

In the appeal, Francis argued that Fullam's ruling was premised on his view of a constitutional question, namely the upper limit, under the Due Process clause, for an award of punitive damages, and that Fullam was too stingy when limiting the award to double the compensatory award.

Since the ruling was constitutional, Francis said, the appellate court should have had jurisdiction to reach it.

But McKee found that the U.S. Supreme Court squarely addressed and rejected that argument in its 1977 decision in Donovan v. Penn Shipping Co.

"Cortez may be correct in claiming that she was on the horns of a dilemma and that the practical result of dismissing her challenge to the court's remittitur will be to place it beyond appellate review," McKee wrote in an opinion joined by Judges Thomas M. Hardiman and Franklin S. Van Antwerpen.

"Nevertheless, the court held in Donovan that a plaintiff cannot challenge a remittitur s/he has agreed to, even if the plaintiff has only agreed under protest or pursuant to a purported reservation of rights," McKee wrote.

Trans Union spokesman Steven Katz said the company never comments on pending litigation.

In the appeal, Trans Union was represented by attorneys Bruce S. Luckman, Mark E. Kogan and Timothy P. Creech of Kogan Trichon & Wertheimer in Philadelphia.