Previously, we wrote on the huge threat posed to businesses and insurers alike by the wave of litigation following from the Fair and Accurate Credit Transactions Act ("FACTA") (see articles by Terrence Guolee in our October 2007 and June 2008 newsletters). Now, an early indication regarding the potential insurance coverage aspects of FACTA is available for review.
Background – Congress’ Cure is Worse Than The Potential Illness
FACTA, enacted into law in 2003, added new sections to the Fair Credit Reporting Act, codified at 15 U.S.C. §1681 et seq., requiring businesses to come into compliance by December 4, 2006. Following this date, FACTA requires businesses to limit the amount of information printed on credit card receipts, as follows:
… no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.
15 U.S.C. §1681c(g)(1).
Pursuant to Section 1681n of the Act, a person who "willfully" fails to comply with these requirements can be liable for:
· Actual damages of not less than $100 or more than $1000
· Punitive damages
· Lawyer fees and costs
Likewise, Section 1681o of the Act provides that a person who "negligently" fails to comply can be liable for actual damages and legal fees.
To comply with Section 1681c(g)(1), electronically-printed credit card receipts should contain no more than the last five digits of the card number and should not include the card's expiration date. While the language of the statute could seemingly be read to mean that, alternatively, the receipt could contain the expiration date and not the last five digits of the card number, several Federal District Court judges held the statute's language prohibited printing more than the last five digits of the card number and also prohibits printing the expiration date.
Congress’ purpose behind the Act was noble: to prevent identity theft. Indeed, Congress set out to reduce the amount of potentially sensitive personal information from being available to identity thieves by prohibiting merchants from printing credit and debit card information on receipts. However, Congress’ best intentions led to a wave of very damaging litigation throughout the country, such that the “cure,” seems clearly to have been worse than the feared illness.
In this respect, the law was drafted such that the Act is violated if a merchant prints a receipt containing nothing more than a card's expiration date – even if the card numbers were properly truncated. Many merchants and credit card vending companies assumed they were complying with FACTA by simply deleting the customers' card numbers on receipts, not realizing that they needed to omit the expiration date as well. As a result, a wave of class action claims arose first in California, then through Illinois and then onto the rest of the nation where merchants who thought they had complied with the Act faced potentially annihilating damage claims for allegedly non-compliant receipts.
Important is that none of the cases seen to date actually alleged that the named plaintiff or the proposed class members suffered any instances of identity theft or damages because of the defendants’ failure to truncate the credit card numbers and/or expiration dates. This wasn’t necessary, as FACTA does not require plaintiffs to either plead or prove any actual injury before seeking damages and attorney fees under the Act.
Not surprisingly, plaintiff class action lawyers were quick to jump on the FACTA bandwagon. Merchants who either did not know of the Act’s requirements or mistakenly thought they had complied by truncating just the credit card number and left the expiration date on their receipts (or vice versa), were subject to hundreds, and in many cases, thousands of potential claims, given that each violating receipt provided to a customer can lead to a separate statutory damage claim of $100-1000.
While many suits settled for confidential amounts, certain settlements were made in the typical class action mode of coupons provided to class members and high attorney fees assessed. See, for example, Palamara v. Kings Family Restaurants, 2008 U.S. Dist. LEXIS 33087 (W.D. P.A. April 22, 2008) (each class member gets coupon for their choice of ice cream, soup, salad or homemade pie from the defendant's restaurant, with a value of up to $4.68, with plaintiffs' attorney's fees awarded in an amount up to $75,000).
Congress Tries to Cure its Cure
Seeing this wave of class action litigation spreading across the country and hearing the cry of retailers and their lobbying associations regarding the huge threat posed to businesses by FACTA, Congress stepped in and attempted to close the loophole that allowed for liability based on nothing more than an expiration date violation. A limited cure for the cure provided by FACTA was provided via the passage of the Credit and Debit Card Receipt Clarification Act (“Clarification Act”) (Public Law No. 110-241) on June 3, 2008.
The Clarification Act states that any person who printed an expiration date on a receipt that was provided to a consumer between December 4, 2004 and June 3, 2008, but which otherwise complied with the card number truncation requirements of FACTA, shall not be deemed in willful noncompliance of FACTA. There was no noted opposition to the amendment - the House voted 407-0, the Senate passed the bill by unanimous consent and the bill was signed into law just days after Congress’ passage.
By deeming that an expiration date violation taking place during the December 4, 2004 – June 3, 2008 window would not be considered "willful," the Clarification Act did wipe away hundreds of FACTA cases. However, the threat of FACTA remains. In this respect, the Clarification Act does not do away with claims for FACTA violations based solely on expiration dates printed after June 3, 2008. Likewise, no relief is provided for merchants whose credit card receipts contain more than five of the consumer’s credit card number.
Moreover, the Clarification Act itself has been argued to be further “notice” to merchants issuing receipts in violation of FACTA’s truncation requirements, such that later-filed claims pose more of a threat to merchants that their failure to truncate their receipts was reckless or willful, even in the absence of any evidence that the merchant was aware of the Act or the truncation requirements.
So, despite Congress's efforts to cure its cure, FACTA lives on and the early signs of a new wave of class action litigation have been seen in the months since the passage of the Clarification Act. Cases against both “mom and pop” retailers, as well as very large corporate businesses, remain to be filed on a regular basis as businesses largely still are completely unaware of the truncation requirements of FACTA. In either case, the potential for annihilating damages remains. Where a case involving a few hundred or a few thousand receipts could bankrupt a small retailer, larger businesses (and their employees) are similarly threatened by FACTA class action claims which often involve tens of thousands of receipts.
The First Insurance Coverage Decision
Lagging behind the development of the waves of class action litigation has been the insurance coverage considerations posed by the claims. When FACTA litigation first appeared, many insurers faced the question of whether it posed a kind of liability included within the scope of commercial general liability coverage, especially as to the costs of defense. Carriers considered this issue without the benefit of any case law either from the state or federal courts – and often themselves first became aware of FACTA on the tender of the first claim to their claims offices. Not surprisingly, the response of carriers has been varied, from straight denials of the claims, to defenses under reservations of rights and to the filing of declaratory judgment actions. Likewise, now slowly becoming aware of the massive liability posed by FACTA, certain carriers have added endorsements to their policies specifically excluding FACTA claims. However, to date, this appears to be more “the exception than the rule.”
Now, nearly two years after the first FACTA violations occurred, the first known FACTA coverage case has been released, finding that no coverage was available to a policyholder under a commercial general liability (CGL) policy for an alleged violation of FACTA. Whole Enchilada, Inc. v. Travelers Property and Casualty, No. 2:07-cv-1533 ( Federal District Court for the Western District of Pennsylvania, September 29, 2008).
In Whole Enchilada, the defendant business, a Mexican restaurant in Pittsburgh, provided plaintiff in the underlying class action with an electronically printed receipt that included the expiration date only. The question addressed by the court was whether coverage was available under the "Personal Injury" section of a CGL policy issued by Travelers Insurance to the parent company of the restaurant.
The Travelers policy at issue initially contained a standard Insurance Services Office (“ISO”) definition of "personal injury," which defined the term as:
… injury, including consequential 'bodily injury,' arising out of one or more of the following offenses:...
* * *
e. Oral or written publication, in any manner, of material that violates a person's right of privacy.
However, the Travelers policy was amended by endorsement to define "personal injury" as:
… injury, other than 'bodily injury' arising out of one or more of the following offenses:...
* * *
e. Oral, written or electronic publication of material that appropriates a person's likeness, unreasonably places a person in a false light or gives unreasonable publicity to a person's private life." (emphasis added).
In summary, the court concluded that, based on the nature of a FACTA violation – arising from a “one-on-one” transaction between customer and merchant - it does not involve the kind of public communication to which the terms "publication" and "publicity" refer.
Reviewing the complaint at issue, the court reasoned:
Here, however, the [ ] Complaint does not allege publication that gives unreasonable publicity to a person's private life. It does not allege that Whole Enchilada displayed the plaintiff's information to the public or took any action designed to disseminate the information to the public at large. Rather, the Complaint alleges factual allegations stating that the [ ] plaintiffs' credit or debit card information was printed on a receipt that was handed back to them, in violation of FACTA. While the Complaint alleges that Whole Enchilada printed information, this Court finds it does not allege the kind of public communication to which the term "publicity" refers, thereby triggering coverage…
* * *
In the context of the factual scenario surrounding Whole Enchilada's alleged violation of this provision of FACTA, the Court's reasoning becomes clear. At the point of sale transaction, a cardholder gives his or her credit or debit card to the individual at the cash register. The credit information is exchanged between the cardholder, Whole Enchilada and the cardholder's bank. There is no violation of a privacy right, insofar as the cardholder willfully gives over his or her credit information to Whole Enchilada so that the information can be used to process the sale. This factual scenario does not meet the requirement of publicity under the policies.
Whole Enchilada, at 36-37.
The Whole Enchilada court addressed coverage under a non-standard definition of "personal injury," namely, publication of material that gives unreasonable publicity to a person's private life. However, most FACTA claims test whether coverage is available for "personal injury" that is defined as oral or written publication, in any manner, of material that violates a person's right of privacy. This decision decides this issue, even though it was not before the court. Indeed, given the court's additional holding that a FACTA violation does not involve "publication" and its determination that the "statutory damages" being sought for a FACTA violation are not compensatory and, therefore, do not satisfy the policy's "damages" requirement, Whole Enchilada seems broad enough to encompass claims brought under the standard ISO definition of "personal injury."
The Whole Enchilada decision, being only the decision of a federal district court, is not precedent over any other state or federal courts. However, it may well provide a point of reference for courts considering FACTA coverage claims and may foretell the response of other courts soon to consider FACTA coverage disputes. In the interim, in jurisdictions with no authority documenting a potential lack of insurance coverage for plaintiffs’ claims, the financial lure supporting the continued filing of FACTA class actions remains.
Conclusion
Whole Enchilada appears to be a huge blow for merchant policyholders. Some defendants who had their FACTA claims extinguished by the Clarification Act still have claims for defense costs pending and will benefit from a finding of coverage. Likewise, defendants facing claims in the second wave of FACTA litigation arising following the passage of the Clarification Act still risk potentially devastating statutory damage and attorney fee claims with questionable insurance coverage.
That said, on a greater scale, the future of FACTA litigation is in doubt. If other courts follow the lead of Whole Enchilada and find no insurance coverage exists, the current feeding frenzy of class action claims may abate with the removal of insurance money from the cost-benefit analysis made by plaintiff counsel when deciding whether to file suit.
Alternatively, a trend towards no coverage may make the filing of cases easier as the only relief available to defendants may be quick settlements under the threat of having the defendants’ businesses being bankrupt by pending FACTA claims. Indeed, a business owner hit with a FACTA class action claim considering whether to risk the annihilation of his business and the jobs of his employees will find no solace in learning that the number of FACTA claims across the country are diminishing due to the lack of available insurance proceeds.
* * *
Terrence Guolee, a shareholder in our Chicago office, has successfully represented defendants, plaintiffs and insurance carriers in dozens of complex, multi-million dollar claims covering a wide area of facts and law. Terrence represents several municipalities, elected governmental officials and their employees in very complicated civil rights class actions and claims brought under state and federal whistleblower laws. He also represents several businesses in defense of statutory consumer rights class action clams – including several FACTA claims.
Terrence also represents insurance carriers, claims administrators and companies in coverage claims and litigation involving third-party claims administration practices and has represented insurers in a variety of complex coverage disputes.
Prior to joining Q&H in 2002, Terrence was Assistant Director and Counsel to The Hartford where he managed the carrier’s claims systems and trained regional claims office management and employees on proper claims handling and review of attorney billing. He also worked on the drafting of the carrier’s case management and attorney billing guidelines, the design of the carrier’s electronic billing submission and review systems, and served as a liaison to several defense bar groups and legislative lobbying units in representing the carrier and the insurance industry’s interests in connection with pending legislation in several states.
If you are facing a FACTA claim, whether on the defense or coverage side, or should you have any questions regarding this article, please contact Terrence via 312-540-7544 or via tguolee@querrey.com.
