Ninth Circuit Holds Liability Waiver Combined with Disclosure Notice Form Violates Fair Credit Reporting Act

02.06.2017

On January 20, 2017, the Ninth Circuit Court of Appeals held that an employer violates the Fair Credit Reporting Act ("FCRA") where its FCRA disclosure form also includes language serving as a liability wavier. Syed v. M-I, LLC , __ F. 3d. ____ (9th Cir. 2017). The Ninth Circuit, which has jurisdiction over California, is the first court to address the issue of whether employers may satisfy the FCRA by combining a background check disclosure form with a liability waiver.

Background
Sarmad Syed applied for a job with M-I in 2011. M-I provided Syed with a document labeled "Pre-employment Disclosure Release." The Disclosure Release informed Syed that his credit history and other information could be collected and used as a basis for the employment decision, authorized M-I to procure Syed’s consumer report, and stipulated that, by signing the document, Syed waived his rights to sue M-I and its agents for violations of the FCRA. Syed’s signature served simultaneously as an authorization for M-I to procure his consumer report, and as a release of liability.

The liability waiver read:

I understand the information obtained will be used as one basis for employment or denial of employment. I hereby discharge, release and indemnify prospective employer, PreCheck, Inc., their agents, servants and employees, and all parties that rely on this release and/or the information obtained with this release from any and all liability and claims arising by reason of the use of this release and dissemination of information that is false and untrue if obtained by a third party without verification.

Syed alleged the Disclosure Release failed to satisfy the disclosure requirements of the FCRA. Syed did not contend that M-I’s form contained too little information, but instead argued that it contained too much. Specifically, Syed alleged M-I’s inclusion of the liability waiver violated the statutory requirement that the disclosure form consist "solely" of the disclosure.

Syed filed a class action on behalf of himself and others whose consumer reports were obtained by M-I using the disclosure in violation of the FCRA. Syed sought statutory damages, punitive damages, and attorneys’ fees and costs. He did not seek actual damages, which would have required proof of actual harm. See Crabill v. Trans Union, L.L.C., 259 F.3d 662, 664 (7th Cir. 2001).

Under the FCRA, before obtaining a "consumer report" (credit or background check report), an employer must provide a disclosure to the applicant and obtain the applicant’s authorization:

[A] person may not procure a consumer report, or cause a consumer report to be procured, for employment purposes with respect to any consumer, unless—

(i) a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes; and

(ii) the consumer has authorized in writing (which authorization may be made on the document referred to in clause (i)) the procurement of the report by that person.

15 U.S.C. section 1681b(b)(2)(A) (emphasis added).

The court held that an employer may not combine the disclosure with a liability waiver or any other language (other than an authorization). However, the FCRA explicitly allows the disclosure to be combined with the applicant’s authorization to procure the consumer report.

The court also narrowly interpreted the term "authorization," finding that Congress intended the authorization to encompass only "the procurement of [a consumer] report." Applicants and employees may focus on this passage from the decision to challenge authorization forms that contain language other than the authorization and disclosure.

California Law
As readers may be aware, California has two counterpart laws to the FCRA: the Investigative Consumer Reporting Agencies Act ("ICRAA"), and the Consumer Credit Reporting Agencies Act ("CCRAA"). The ICRAA governs background checks, and the CCRAA governs credit checks. Each of these laws has its own unique disclosure and authorization requirements.

Under the CCRAA, before requesting a credit report on an applicant, employers must provide written notice to the individual. The notice must allow the applicant to check a box to ask to receive a copy of the credit report, among other requirements. California Civil Code Section 1785.20.5(a).

Under the ICRAA, an employer must give an applicant written notice in a document consisting "solely of the disclosure" as specified in Civil Code Section 1786.22. The employer must separately obtain the applicant’s authorization to obtain the report. Civil Code Section 1786.16(a)-(b). Unlike the FCRA, the ICRAA does not permit the authorization and disclosure to be combined.

What this Ruling Means for Employers
Employment background checks are commonly used by employers during the hiring process to vet candidates. While background checks may be a useful tool to increase the odds of hiring a qualified candidate, employers often fail to recognize the complicated state and federal laws that govern employment background checks and the extent to which employers must comply with each technical disclosure and authorization requirement.

To avoid potential liability, employers should independently confirm that their background check procedures and forms comply with state and federal laws, regardless of whether the employer relies on a third party to conduct the background check. Failure to comply with these laws may lead to significant liability for employers as the availability of attorneys’ fees awards under these statutes encourage experienced attorneys to litigate these claims, often as class actions.

The following best practices emerge from this decision:

(1) Employers may combine the FCRA disclosure and authorization on one form with no other provisions.

(2) Any release of liability, liability waiver, or references to other laws (state laws, etc.) should be made on a separate form.

(3) Ensure no inadvertent "authorizations" for credit or background checks appear in other forms (such as at the end of the employment application). (The risk is that an applicant may argue that the employer is attempting to obtain an authorization without proper disclosure).

(4) Review state law disclosure forms and authorization forms to ensure compliance with state laws.

Employers with questions regarding the FCRA and its California counterparts may contact one of the authors or their usual employment law counsel at AALRR.