By Pamela Q. Devata and Kendra K. Paul

On December 2, 2013, the U.S. District Court for the Western District of Pennsylvania opined on when employers’ deficient disclosures can make them liable under the Fair Credit Reporting Act (“FCRA”) in Reardon v. ClosetMaid Corporation, No. 2:08-CV-01730, 2013 U.S. Dist. LEXIS 169821 (W.D. Pa. Dec. 2, 2013).

In this FCRA class action, Plaintiffs, a group of former job applicants, alleged that ClosetMaid had a standard practice of disqualifying job applicants for employment on the basis of their consumer reports in violation of the FCRA. Plaintiffs specifically alleged, among other things, that ClosetMaid did not send them a standalone FCRA disclosure. Instead, most Plaintiffs received a combined FCRA disclosure/authorization that contained a liability waiver. The Court agreed with Plaintiffs that the company’s failure to utilize a standalone FCRA disclosure could, and in this case did, violate the FCRA.

This opinion is important for two reasons. First, Reardon is the second published decision to address whether the inclusion of a liability waiver in an FCRA disclosure invalidates the disclosure. After Reardon, two federal district courts have now held that liability waivers invalidate FCRA disclosures as a matter of law. Only one federal district court has held otherwise. Second, the Reardon case shows how such a simple mistake could subject a large employer that receives thousands of applications and conducts thousands of background checks to significant liability on a class-wide basis.

The Court’s Decision: FCRA Disclosures Cannot Contain Liability Waivers

In Reardon, Plaintiffs alleged that ClosetMaid relied upon information in their consumer reports without providing them with the appropriate disclosures required by the FCRA.  The “Disclosure Class” consisted of about 1,800 individuals. The Court observed that at one time ClosetMaid had both a “Notice of Intent to Obtain Consumer Credit Report” (the “Notice Form”) and an “Authorization to Obtain a Consumer Credit Report and Release of Information for Employment Purposes” (the “Authorization Form”). The Authorization Form contained a liability release that purportedly “released” ClosetMaid from complying with the FCRA’s disclosure and authorization obligations. The Court also observed that ClosetMaid did not always provide job applicants with the Notice Form and ultimately discontinued using the Notice Form altogether. 

ClosetMaid tried to argue that the Authorization Form served as both an FCRA disclosure and authorization for those individuals who only received the Authorization Form. However, the Court held that ClosetMaid’s “disclosure” in that combined form was not a standalone document as required under Section 1681b(b)(2)(A)(i) of the FCRA. Although the FCRA allows for the authorization to be on the same document as the disclosure, the addendum of a liability release was extraneous information; thus, the Court held the form to be non-compliant. According to the Court, “ClosetMaid had no obligation to obtain a waiver of rights from the consumer; in fact, doing so in a disclosure form directly conflicted with the FCRA’s clear prohibition on an employer’s inclusion of any additional provisions, excluding the authorization itself, in the disclosure form.” Because the FCRA is clear in this regard, Plaintiffs alleged and the Court agreed that ClosetMaid’s actions were objectively unreasonable and therefore willful.  

This is the third reported case to address whether the inclusion of a liability waiver in an FCRA disclosure invalidates the disclosure. Two other courts have addressed this specific issue of a liability waiver in the past – Smith v. Waverly Partners, LLC, No. 3:10-CV-00028-RLV, 2012 WL 3645324 (W.D.N.C. Aug. 23, 2012) (finding that the waiver of rights language included in the employer’s combined disclosure and authorization form was kept sufficiently distinct from the disclosure language so as not to render it ineffective); Singleton v. Domino’s Pizza, No. 11-1823,  2012 WL 245965 (D. Md. Jan. 25, 2012) (finding that “both the statutory text and FTC advisory opinions indicate that an employer violates the FCRA by including a liability release in a disclosure document”). The Reardon Court agreed with the reasoning in the Singleton case.

Implications For Employers – – (Hint: In Class Actions, Small Individual Damages Awards Can Add Up)

In this case, the Court has already determined that a significant portion of the 1,800 individuals in the Disclosure Class are entitled to willful damages under the FCRA. These individuals could each receive the greater of his or her actual damages or $1,000 plus attorneys’ fees.  Multiply these individual damages by 1,800 and that is a lot of money.  The moral of this story is the larger the company, the larger the potential class, and the larger the potential damages. Thus employers should consider using separate disclosure forms, or at least remove any liability release from a combined disclosure/authorization form, and ensure they comport with the strict standards of the FCRA.