The Business Suit

From the Vice Chair: Spring Has Sprung, but “What’s So Great About DRI?”

By Dwight W. Stone II

In Maryland, where I live and work, the spring weather has been beautiful lately and people are getting outside as much as possible to hike, bike, go to parks, eat and drink at outdoor cafes, and even safely socialize. With more and more people getting vaccinations, there seems to be an overall feeling of cautious optimism and hope that things can start getting more back to normal.

At my firm, many of us are also beginning to emerge from work-from-home “hibernation” and are working at the office again, at least part of the time. Based on my recent conversations with colleagues, there seems to be a common theme of wanting to give our practices a boost and position ourselves for greater success as we look ahead toward a post-pandemic future. I am guessing this might be happening in law firms around the country.

During one such conversation, a young associate asked for some advice on professional networking. “I know you have been very involved in DRI for a long time,” she said. “What’s so great about DRI?” As a former membership chair for the Commercial Litigation Committee (CLC), I am well armed for such questions! But rather than just go through the litany of benefits that I still know by heart (and which are all true), I also gave her a few personal examples. As it is my turn to write the “From the Chair” column, I thought I might share a few of them here as well.

Several years ago I was asked to defend a financial institution in a putative class action filed in a far-flung jurisdiction. Of course, I needed an excellent local counsel. I recalled meeting an impressive attorney from that jurisdiction at a DRI Commercial Litigation seminar and gave him a call, which turned into an excellent teamwork experience and an early victory for the client. Thanks to my DRI colleague’s knowledge of the judge and opposing counsel, we had an invaluable advantage.

Just a few days ago, a Maryland client asked if I could recommend local counsel to handle a litigation matter in Minnesota. Through DRI and the CLC, I have trusted attorney contacts in most states and Minnesota is no exception. I referred the client to one of our Steering Committee members, and she was very appreciative. In my experience, being able to provide these types of solid referrals for clients helps build the “trusted advisor” relationship that we all aspire to have with our clients.

But, as I explained to my associate, being actively involved in a DRI committee like the CLC does not just provide mutually beneficial business relationships. I have gained some great friends over the years through seeing them at our committee seminars and at the DRI Annual Meeting, as well as working together on committee calls, emails, Zoom meetings, etc. This is one of my favorite aspects of DRI. Yes, we “have each other’s back” when it comes to legal referrals or other assistance (e.g., conference rooms for depositions, advice on judges, experts, local laws and customs, etc.), but we also genuinely enjoy spending time together and catching up on family developments, our local sports teams, favorite new bourbon discoveries, and other “friend stuff.”

While our Business Litigation Super Conference in May will be virtual (and outstanding—please attend), the DRI Annual Meeting in Boston in October should be in-person. I cannot wait to see my old and new DRI friends there. A few years ago during the Annual Meeting a group of us discovered an amazing oyster bar in the North End, where we had a festive lunch and I ate the best lobster roll of my life. Moments like that are “what’s so great about DRI.” I hope to see you there!

Dwight W. Stone II is a partner in Miles & Stockbridge P.C.’s Baltimore office. Dwight’s practice includes products liability and class action defense, toxic tort and environmental claims, insurance coverage disputes, and other complex business disputes. He regularly represents clients before the U.S. Consumer Product Safety Commission (CPSC). Dwight is the Vice Chair for the DRI Commercial Litigation Committee and Immediate Past President of Maryland Defense Counsel, Inc.

From the Editor: The Art of Patience—and Impatience

By Sarah Thomas Pagels

As I prepare the spring newsletter for publication this year, the flowers and trees are coming out of their own hibernation. I am not a gardener, but I definitely am impatiently waiting for the flowers we planted last fall to wake up from their winter slumber. Every day that I wait for new buds to open, I am again reminded of the importance of patience. One of the original Apple marketing employees and “evangelist” marketing guru, Guy Kawaswki, once said that “Patience is the art of concealing your impatience.” This spring, many of us are emerging from not just our regular, seasonal hibernation, but also emerging from our COVID lockdowns. I don’t know about you, but I am often hit with feelings of both the need for patience and impatience at the same time.

While many of us are disappointed that the upcoming Business Litigation Super Conference will be held virtually instead of in person this May, we should be grateful that DRI and the incredible leadership team for this committee continue to strive for the best-ever content possible and the opportunity to still gather virtually. I for one am taking Mr. Kawasaki’s message to heart—I will be better about concealing my impatience now because I know that means that I will savor the reward of DRI’s in-person experiences again when they are available even more.

And what better way to get excited for the upcoming conference and future DRI in-person meetings than to review the latest issue of the Business Suit? In this issue, Vice Chair Dwight Stone shares some personal reasons why DRI matters, both now and in the new world “post” COVID. Membership Chair Matt Murphy shares his message “Just Get One,” with us, and introduces us to new committee member Jeffrey Sheehan.

We are also pleased to feature two of our SLGs in this issue, Class Actions and Financial Services. Both SLGs submitted timely articles that are relevant to our business litigation practices right now. Those that are impatiently waiting on the potential new administration’s changes in the Environmental Social and Governance (“ESG”) space, or who are worried about its potential impact on class actions should check out the article by Michael Stockham and his colleagues. The Financial Services SLG provides us with two different articles about recent trends in litigation over the Fair Credit Reporting Act. Mark Olthoff and Rodney Lewis’ article discusses the interplay between the Fair Credit Reporting Act and its affiliate agencies based on recent challenges by creative plaintiff’s lawyers provides helpful insight of this new litigation trend. You will not want to miss the guidance from Eric Hurwitz about other ways how to successfully challenge another creative theory in this litigation over alleged false statements that violate the act’s provisions based on an incomplete picture of the creditor’s “tradeline.” Finally, to round out our issue, we also are pleased to offer articles spotlighting recent decisions from the Canadian Supreme Court and the Vermont Supreme Court that bear on contractual interpretation issues.

All in all, reviewing and editing this issue has helped me conceal my impatience as I prepare to embark into a post-COVID litigation world where I hope to see many of my DRI friends in person. I hope it does the same for you.

Sarah Thomas Pagels is a partner at Laffey, Leitner & Goode LLC in Milwaukee, Wisconsin. She is passionate about solving her client’s problems, and prides herself on taking the time to provide creative and thoughtful solutions to them. She focuses her practice on Commercial Litigation, Product Liability litigation, Toxic Tort matters and complex E-discovery disputes. She is the Publications Chair for DRI’s Women in the Law committee and on the Commercial Litigation committee’s editorial board.

From the Membership Chair: “Just Get One”

By Matthew Murphy

I remember the attorney who first got me involved in DRI, and the Commercial Litigation Committee in particular. I bet everyone reading this column remembers the person who introduced them too. I was a new associate at Nilan Johnson Lewis when Cynthia, a partner at the firm, asked if I would give a presentation at the young lawyers’ breakout session at the 2013 Commercial Litigation seminar in Washington DC. Of course, I said yes, and I’m glad I did. Cynthia accompanied me to the first-time attendee breakfast, took me on dine arounds, and introduced me to her friends. I’m glad to say many of the people I met at that seminar remain my friends (and are part of my referral network)! That speaking opportunity led to a writing opportunity in For The Defense, which led to a leadership opportunity within the CLC, which in turn has led to more speaking and writing opportunities. In fact, I would not be writing this column today if Cynthia had not encouraged me to become an active member of the CLC all those years ago.

The point is that introducing one young lawyer to DRI and the CLC can have a big impact on that lawyer’s career and contribute to sustaining the leadership of the committee. It is also incredibly easy to do! Just think of the person who introduced you to DRI, the value you gained from it, and how you can pay that forward!

If every person reading this column were to take five minutes right now to think of one newer associate at their firm who would value the outstanding benefits DRI membership brings, we would easily reach our recruiting goal and invigorate the CLC community!

If you have any questions about DRI’s membership benefits and incentives, please feel free to call or email me. Thank you for your help!

Matthew C. Murphy is an associate in Nilan Johnson Lewis PA's Minneapolis office, concentrating on product liability, commercial litigation, and white-collar criminal defense. He is admitted to practice law in Minnesota and New York. Previously, he was associated with a full-service law firm in New York City.

New Biden Administration Landscape: SEC Leadership and ESG Initiatives

ESG-targeted SEC investigation and enforcement appear imminent. The Biden Administration’s SEC is laser-focused on ESG issues and disclosures, as reflected in recent leadership announcements and statements. At his Leaders Summit on Climate at the end of April 2021, President Biden announced a comprehensive plan in furtherance of the global effort to achieve net-zero carbon emissions across numerous economic sectors. Statements and Releases, FACT SHEET: President Biden’s Leaders Summit on Climate, The White House Briefing Room (Apr. 23, 2021). These efforts only complement President Biden’s appointment of new leadership in the regulatory landscape. SEC Chair Gary Gensler’s March 2, 2021 Senate confirmation hearing testimony signaled a commitment to tighter regulations, greater transparency, and consistent ESG disclosures to the public, particularly in connection with climate change. Taylor Tepper, Gary Gensler Nominated to Lead The SEC. What Does That Mean For You?, FORBES ADVISOR (Mar. 22, 2021, 8:27 AM). Additionally, in February 2021, the SEC announced Satyam Khanna’s appointment as its Senior Policy Advisor for Climate and ESG, a newly created position, to advise on and advance ESG initiatives. Press Release, Satyam Khanna Named Senior Policy Advisor for Climate and ESG, U.S. Securities and Exchange Commission (Feb. 1, 2021). The SEC’s Division of Examinations (formerly the Office of Compliance Inspections and Examinations) published a risk alert on April 9, 2021 describing the SEC’s focus in examining ESG-related investing, including its observations of effective practices by investment advisors and funds. Risk Alert, The Division of Examinations’ Review of ESG Investing, U.S. Securities and Exchange Commission (Apr. 9, 2021). The SEC also recently debuted its Enforcement Division’s Climate and ESG Task Force, conceived to “develop [ESG] initiatives,” use sophisticated data analysis “to proactively identify ESG-related misconduct,” and identify material omissions and misrepresentations in companies’ disclosure of climate risks. Press Release, SEC Announces Enforcement Task Force Focused on Climate and ESG Issues, U.S. Securities and Exchange Commission (Mar. 4, 2021). (The SEC makes all of its agency-wide statements and other ESG-related actions and information available here: https://www.sec.gov/news/pressreleases.)

With respect to corporate disclosure, the SEC has already initiated efforts to refine and strengthen ESG-related standards. Specifically, the SEC is considering uniform, mandatory standards for companies’ disclosure of ESG risks and opportunities, particularly relating to climate change and is currently seeking public comment on these issues. Press Release, Public Input Welcomes on Climate Change Disclosures, U.S. Securities and Exchange Commission (Mar. 4, 2021). Standardized disclosure requirements for climate-change and other ESG risks and opportunities would benefit investors, the SEC posits, by providing uniformity and comparability across issuers while also protecting against executives’ misapplying materiality standards for disclosure to investors. If and as ESG disclosure standards are implemented, with respect to climate change or otherwise, many companies will be required to significantly overhaul current internal processes and disclosure policies. Notwithstanding regulatory standardization and oversight, it is becoming clearer that shareholders are increasingly expecting greater transparency about companies’ ESG issues and, where they believe their practices do not align with their promises, are willing to take legal action.

ESG-Related Class Actions: Themes and Trends

Environmental Class Actions Alleging Fraud

High-profile lawsuits alleging climate-change related misrepresentations have been percolating since at least 2018. That year, the New York Attorney General sued ExxonMobil (“Exxon”) under New York law for allegedly misleading investors concerning potential climate-regulation (i.e., projected carbon) costs, making assets appear more secure. People by James v. Exxon Mobil Corp., 119 N.Y.S.3d 829 (2019). Following three and a half years of investigation and a twelve-day trial, the court ruled in Exxon’s favor after, among other things, no testifying investor witnesses claimed to be misled. Id. at *30.
That may strengthen some companies’ defense in plaintiffs’ class actions alleging securities fraud involving climate-related operations and disclosure. On the other hand, it provides further guidance to would-be plaintiffs about how to approach new litigation. And as the Biden Administration increases regulation in the climate change realm and ESG-focused investing gains popularity, all companies may consider reevaluating their ESG strategies in order to mitigate litigation risk.

With this backdrop in mind, possibly new SEC regulations demanding more robust ESG disclosure could trigger a wave of securities class actions. Proactive and aggressive ESG policies may quickly become the standard among publicly traded companies.

Diversity and Anti-Discrimination Litigation Alleging Fraud and Fiduciary Duty Breach

The ESG issue of board diversity has become increasingly important to both investors and boards alike. At the governance level, boards of directors are expected to have insight into and oversee ESG issues raised by institutional holders and other stakeholders. At the investor level, shareholders have begun suing for fraud and breach of fiduciary duty in connection with company disclosures describing a commitment to diversity and compliance with anti-discrimination laws. For example, in a 2020 shareholder derivative class action, plaintiffs allege, among other things, that Oracle’s board of directors (which consistently lacked any African-American directors) made false and misleading statements in proxy statements regarding board diversity and ongoing efforts to “actively seek women and minority candidates[.]”Complaint, Klein v. Ellison, No. 3:20-cv-04439 (N.D. Cal. July 2, 2020). The plaintiffs further allege that the Oracle board breached its fiduciary duty because its failure to adhere to principles of diversity and inclusion irreparably harmed Oracle, as the company expends funds to hire outside counsel, accountants, and investigators to conduct investigations regarding a lack of diversity, discrimination lawsuits, and other issues. See id. Defendants’ motion to dismiss is pending.

Similarly, a shareholder class is suing Qualcomm and its board of directors for allegedly falsely representing the company’s efforts to include diverse board members. Verified Shareholder Derivative Complaint, Kiger v. Mollenkopf, et al., No.1:21-cv-00409 (D. Del. Mar. 22, 2021). The plaintiffs also allege that directors breached their duties of loyalty and good faith by failing to ensure Qualcomm’s compliance with federal and state diversity and anti-discrimination laws, and by failing to disclose its noncompliance to shareholders. Plaintiffs contend that Qualcomm was damaged because it expended significant litigation costs and incurred reputational damage from the failure to recruit diverse board members and disclose shortcomings regarding diversity. We will monitor defendants’ challenges to this newly filed action—including in anticipated motions to dismiss—and other key events as the case proceeds.

Since the filing of the Oracle and Qualcomm cases, shareholders have sued at least four other publicly traded companies on similar grounds. See Verified Shareholder Derivative Complaint, Lee v. Fisher, et al., No. 3:20-cv-06163-SK (N.D. Cal. Sept. 1, 2020); Shareholder Derivative Complaint, Sanchez v. Robbins, et al., No. 4:20-cv-07728 (N.D. Cal. Nov. 2, 2020); Verified Shareholder Derivative Complaint, Esa v. Pilette, et al., No. 5:20-cv-05410 (N.D. Cal. Aug. 5, 2020); Verified Shareholder Derivative Complaint, Falat v. Sacks, et al., No. 8:20-cv-01782 (C.D. Cal. Sept. 18, 2020). These cases are also ongoing.

In light of the foregoing, companies that promote diversity and inclusion, including in publicly available corporate governance documents, should actively endeavor to deliver on such promises. Doing so can broaden the company’s investor base and protect it from, or at least mitigate the risks associated with, shareholder litigation. Public companies who do not focus on diversity and inclusion should be prepared for, at minimum, formal inquiries from institutional holders.

Corporate Strategy Considerations to Mitigate ESG Litigation Risk and Enforcement

Given the shift in the Administration and the potential onslaught of securities class actions based on, or including, ESG-focused allegations, companies should consider their own ESG strategies, policies, and disclosures. As always, companies must consider the particular circumstances specific to them and their industries, and be thoughtful about what they should or must disclose, and how. In light of the rapidly evolving ESG landscape, including increasing regulatory interest and possible oversight and related shareholder interest and activism, companies and their boards may wish to consult experienced legal counsel to ensure they understand how their competitors and others are approaching these issues and that they themselves are appropriately implementing healthy habits.

Companies can consider mitigating the risk of ESG litigation by shaping strategies to focus on: (1) disclosures and ESG data collection and analytics processes; and (2) management knowledge and communication.

Disclosures and ESG Data Collection and Analytics Processes

Accurate and complete public disclosure is essential for issuers and, of course, the major impetus underpinning most securities litigation. Considering the attention being paid to ESG by law makers, regulators, and investors—including an increase in litigation on these issues—companies who want to keep pace and mitigate risk must now identify how ESG risks, opportunities, and initiatives impact and inform their operations and consider how to accurately disclose those matters. And considering that standards for collecting and disclosing ESG data on topics like board and workplace diversity and climate-based operational headwinds and initiatives may become stricter under the Biden Administration, companies may want to consider implementing and documenting their ESG processes for data collection, tracking, and use.

Of course, when making public disclosure in any of its many forms—including offering documents, registration statements, proxy materials, and periodic and annual reporting, companies are open to liability for material misrepresentations or omissions. An actionable misrepresentation is an affirmative statement that is materially false or misleading, while an omission is the failure to disclose material information. In re Yum! Brands, Inc. Sec. Litig., 73 F. Supp. 3d 846, 859 (W.D. Ky. 2014). Materiality depends on what information reasonable investors consider important, and is broadly construed. Basic Inc. v. Levinson, 485 U.S. 224, 231–32, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988). Hence, as investors gravitate toward more ESG-based investing or, at least, considering ESG factors in the total mix of information underlying their investment decisions, the courts’ interpretation of what information a “reasonable investor” considers important is likely to shift in favor of more ESG transparency and accuracy for the perceived benefit of the investing public.

To that end, companies should consider evaluating their current ESG data collection and disclosure processes and make appropriate modifications and updates to reflect an increasing expectation for more information in this area. The process underpinning this exercise is itself important, and companies should consult their governance framework to determine whether the effort can or should be overseen by the Risk or Audit Committee and, possibly, involve an updated company risk profiling exercise. Naturally, these efforts create additional costs for any Company, and may warrant investing in consultants or outside legal counsel. Once a company establishes an internal understanding of its own ESG framework and processes, it will be prudent to communicate it, and any changes to key accounting policies, internal controls, and other systems throughout management and to the independent auditor and, thereafter, follow a process for periodic ESG risk assessments and reviews to ensure effective and accurate disclosure and compliance.

When making disclosures on ESG matters, as is the case with other disclosure, companies should form and follow healthy habits for reviewing the accuracy, completeness, and timeliness of its descriptions, to mitigate potential litigation—and reputational—risks. And, as is generally the case, companies should avoid making promises or guarantees, in connection with projections or otherwise, with respect to future ESG results or initiatives. Similarly, any disclosed ESG commitments or goals should be reasonably achievable.

Management Knowledge and Communication

Management knowledge and communication are vital to achieving a company’s ESG objectives. Management’s access to ESG training and resources, as well as informed board oversight of ESG matters, are paramount not only in keeping a company aligned with its ESG goals, but to ensuring appropriate and accurate disclosures of ESG goals, risks, opportunities, and initiatives. A company with robust ESG disclosure nevertheless invites regulatory scrutiny and litigation risk where its day-to-day practices do not align with its stated goals and policies. Hence, company culture—both in the “tone at the top” and the “buzz at the bottom,” and day-to-day policy implementation and accountability on ESG matters, such as workplace and board diversity, are as important as the concepts and issues described in a company’s public disclosure.

Management’s internal and public statements about ESG policies and practices can be general and high-level in nature, such as describing a company’s possible future ambitions and including appropriate forward-looking statements. Companies and their management may wish to avoid describing policies in detail or making promises about specific actions that the company will take to achieve ESG ambitions. See In re Vale S.A. Sec. Litig., No. 19-cv-526R-JDSJB, 2020 WL 2610979, at *11–12 (E.D.N.Y. May 20, 2020). Statements such as, “Company X has implemented policies to promote sustainability” or “Company X has developed strategies to address climate change” are safer than statements articulating specific goals, such as “Company X will reduce carbon emissions by 20 percent by 2025.”

Conclusion

The recent tidal shift in the political climate sets the stage for a potential surge in actual climate and other ESG-related class actions. As the Biden Administration begins implementing policies focused on addressing climate change and other ESG matters, investors may gravitate toward ESG opportunities and shareholder actions may become more complex, aggressive, and costly. Publicly traded companies may consider hiring sophisticated counsel now to update and implement corporate strategy in the context of key ESG issues.

Michael Stockham, partner of Thompson & Knight LLP in Dallas, is a trial attorney who focuses, both in and out of the boardroom and courtroom, on helping companies and individuals navigate the complex world of litigation and government regulation and enforcement. He has tried multi-million-dollar lawsuits to verdict and served as lead trial counsel or as a member of multifaceted trial teams in both state and federal court. He provides counsel in such areas as corporate governance, corporate compliance, fraud and breach of fiduciary duty, shareholder rights, securities fraud (including 10b-5, Section 11, Texas Securities Act), class actions, merger litigation, partnership and corporate disputes, qui tam litigation defense, and white collar defense for companies and individual executives. He is also known for his ability to conduct sensitive internal investigations for audit committees, demand review committees, or other corporate entities in a cost-effective manner that accomplishes the necessary objectives of the investigation, but that is least disruptive to the ongoing business enterprise. Michael is a Certified Fraud Examiner, certified by the Association of Certified Fraud Examiners, the world’s largest anti-fraud organization specializing in the complex issues raised by corporate and white-collar fraud and providing anti-fraud training and education as well as compliance with anti-fraud controls.
 
Jessica Magee, a partner of Thompson & Knight LLP in Dallas, formerly a Senior Officer with the U.S. Securities and Exchange Commission and a financial services company general counsel, focuses her practice on SEC, DOJ, IRS, and other federal and state governmental investigations and enforcement actions, internal investigations, securities class actions, corporate governance, and complex commercial litigation involving partnership and company disputes. A seasoned trial attorney and investigator who led the SEC’s trial unit and Enforcement program in this region, Ms. Magee has significant experience with SEC investigations and litigation involving alleged accounting or disclosure fraud, offering fraud, insider trading, alleged wrongdoing in connection with ICOs and cryptocurrencies, failure to register, investment adviser and broker dealer duties and conduct, and more. She also has significant experience advising clients on matters of strategic planning, regulatory compliance, disclosure, risk mitigation, and matters involving corporate and shareholder rights, partnership disputes, director and officer disputes, and federal receiverships.

Elissa McClure, a partner of Thompson & Knight LLP in Dallas, focuses her practice on complex litigation, government enforcement, and internal investigation matters. She represents clients, including Fortune 500 companies and individual executives, in all stages of disputes, from pre-litigation strategy through trial and appeal. Elissa has extensive experience advising clients on the False Claims Act, the Anti-Kickback Statute, and the Stark Law, as well as government and corporate investigations involving consumer protection, healthcare enforcement, trade secret misappropriation, discrimination, whistleblower, regulatory, and accounting and securities fraud matters.

Raina Duggirala, an associate of Thompson & Knight LLP in Dallas, focuses her practice on litigation matters.

Congress intended the FCRA to comprehensively regulate consumer reporting agencies and provide remedies to consumers for violations of its provisions, giving consumers the right to bring private actions for damages in either the state or federal courts, 15 U.S.C. §1681p, and remedies depending on whether the violations are willful, 15 U.S.C. §1681n, or negligent, 15 U.S.C. §1681o. Generally speaking, a consumer reporting agency can be liable under the FCRA for violations related to wrongfully furnishing a consumer report under circumstances such as, where the consumer reporting agency knew the report was not obtained for permitted purposes; where the agency had no knowledge of the report’s purpose and did not inquire; where the agency did not have in place reasonable measures designed to limit the furnishing of reports only for those purposes permitted under the FCRA; or where the agency fails to notify any person of his responsibilities under the FCRA who regularly and in the ordinary course of business furnishes information to the agency or any person who is provided and uses a consumer report (for example, a debt collector that regularly furnishes information to a CRA and a financial institution that uses consumer reports to make crediting decisions). See 15 U.S.C. §1681b; id. §1681e(a)–(d). Notably, FCRA claims are often the subject of class action lawsuits.

The term “consumer reporting agency” is defined in the FCRA as any person who, for monetary fees, dues or on a cooperative nonprofit basis, regularly engages in the practice of assembling or elevating consumer credit or other consumer reports to third parties. Id. §1681a(f). The FCRA creates several categories of “consumer reporting agency”: a “nationwide” consumer reporting agency (id. §1681a(p)), a “nationwide specialty consumer reporting agency” (id. §1681a(x)), a generic consumer reporting agency (§1681a(f)), and resellers (§1681a(u)). What constitutes a “consumer reporting agency” is a source of frequent litigation. See generally 48 A.L.R. 3d Art. 5 (2020).

Recently, plaintiffs and their attorneys have taken the question of what entity satisfies the definition of a “consumer reporting agency” a step further and have sought to expand the scope of FCRA liability in terms of potentially responsible affiliates. While common law or equitable derivative liability theories such as piercing the corporate veil, alter ego, or agency are well known, another statutory approach is being asserted under FCRA §1681x. Under this provision, a consumer reporting agency is prohibited “from circumventing or evading treatment as a consumer reporting agency… by means of a corporate reorganization or restructuring, including a merger, acquisition, dissolution, divesture, or asset sale of a consumer reporting agency…” 15 U.S.C. §1681x(1). The Code of Federal Regulations provides nearly identical language in 12 C.F.R. §1022.140(a). These two sections have become a focus of lawsuits particularly where the consumer reporting agency may have one or more affiliates whose purposes are intended to provide services outside the scope of the FCRA. Plaintiffs have challenged this organizational structure suggesting the companies are violating the requirements of these sections thus entitling plaintiffs to sue multiple entities.

In a recent example, McIntyre v. TransUnion, LLC, 2020 WL 1150443 (E.D. Pa., Mar. 5, 2020), the plaintiff sued TransUnion, LLC (“TransUnion”) and its affiliate TransUnion Rental Screening Solutions, Inc. (“TransUnion Rental”). Plaintiff alleged that the information supplied by TransUnion Rental was a consumer report within the meaning of the FCRA and that the defendants as a whole constituted a consumer reporting agency. That is, the plaintiff contended that §1681x prohibits TransUnion from evading its statutory duties under the FCRA by creative corporate structuring or by delegating certain credit reporting functions to its affiliate TransUnion Rental. In rejecting TransUnion’s arguments to dismiss the claims against it, the court found that the allegations on the complaint were sufficient to assert that the defendants constituted a single unified consumer reporting agency with integrated ownership and operations. Accordingly, based upon the allegations in the complaint, and that plaintiff had cited to and quoted the statutes and regulations, the court denied TransUnion’s motion to dismiss.

Similar allegations and claims were asserted against Equifax, Inc. in Jones v. Equifax, Inc., 2015 WL 5092514 (E.D. Va., Aug. 27, 2015). There, the court found that the plaintiff sufficiently stated a claim for liability under the FCRA because plaintiffs plausibly alleged that “all defendants operate collectively as a CRA.” In a footnote, the court noted that other courts have found to the contrary, but those decisions were at the summary judgment stage or based upon motions that went unopposed. Id. n. 11 (citing cases); see also Reynolds v. LeMay Buick-Pontiac-GMC-Cadillac, Inc., 2007 WL 2220203 (E.D. Wisc., July 30, 2007) (granting summary judgment where the court found that the plaintiff had failed to provide evidence demonstrating that the defendants were involved in a corporate restructuring with the intended purpose of evading the FCRA).

As the McIntyre and Jones cases reveal, plaintiffs are aggressively seeking to hold credit reporting agencies along with purportedly non-FCRA affiliate entities responsible for FCRA liabilities. Nationwide consumer credit reporting agencies seeking to diversify into other data gathering opportunities that do not involve creating or furnishing consumer reports, should seriously consider their structures and organizations, and whether the services their non-FCRA affiliates will provide are not governed by the FCRA. The law in this area is certainly developing but, at least at the pleading stage, more courts are allowing these types of claims to move forward.

Mark A. Olthoff is a shareholder in the Polsinelli law firm in Kansas City, Missouri, where he is a member of the Commercial Litigation Practice Group and chair of the commercial litigation class actions practice area. He routinely represents clients in a variety of complex commercial suits and class actions. Mark’s practice involves federal and state statutory claims, such as TCPA, RICO, FCRA, and FDCPA, common law and statutory privacy class actions, as well as a variety of business and commercial claims. He is a frequent author and speaker on various topics concerning class actions, piercing the corporate veil, business torts, and financial litigation and regulatory issues. Mark also serves as chair of the Financial Services Litigation SLG for the DRI Commercial Litigation Committee.

Rodney Lewis is a shareholder in the Polsinelli law firm in Chicago, Illinois where he is a member of the Commercial Litigation Practice Group. He is an experienced and seasoned litigator and routinely assists corporate clients in complex commercial litigation matters across an array of industries in state and federal courts, including consumer class action defense under the FCRA, TCPA, FDCPA, various state consumer protection laws, commercial real estate, privacy and data security matters, and general commercial disputes. He also regularly counsel’s clients on regulatory issues to avoid litigation.

Background

The case involved a dispute between the respondent, a group of condominium corporations (“Baycrest”), and the appellant, C.M. Callow Inc. (“Callow”), regarding a two-year winter maintenance contract (the “Contract”) and separate summer maintenance contract, both executed in 2012. The Contract stipulated that Baycrest was entitled to terminate the Contract if Callow failed to provide satisfactory service in accordance with its terms. The Contract also permitted Baycrest to terminate the Contract if Callow’s services were not required for any other reason upon 10 days’ written notice.

In early 2013, Baycrest made the decision to terminate the Contract, but chose not to contemporaneously inform Callow of its decision. Throughout the spring and summer of 2013, Callow and Baycrest discussed the renewal of the Contract in 2014. Those discussions left Callow with the impression that the Contract was likely to be renewed and that Baycrest was satisfied with its services.

In September 2013, shortly before Callow would have begun its winter work pursuant to the Contract, Baycrest informed Callow of its decision to terminate the Contract. Callow subsequently filed a claim for breach of contract, alleging that Baycrest exercised the termination clause in the Contract contrary to the requirements of good faith set forth in Bhasin, and in particular the duty to perform a contract honestly.

The trial judge determined that Baycrest actively deceived Callow from the time the decision to terminate was made and until September 2013, and that Baycrest acted in bad faith by withholding information to ensure Callow performed work pursuant to the summer maintenance contract. The Ontario Court of Appeal overturned this decision. The court disagreed with the trial judge’s decision to expand the duty of honest performance beyond the terms of the Contract, and found that any deception by Baycrest merely related to a new contract not yet in existence, namely a renewal of the Contract.

The Decision

With only one dissent by Justice Côté, the Supreme Court set aside the decision of the Ontario Court of Appeal and found that the duty to act honestly in performance of the contract precluded the active deception by Baycrest by which it knowingly misled Callow into believing that the Contract would not be terminated. The primary decision was issued by a five-member majority, with three judges concurring.

At the outset of its decision, the Supreme Court reiterated the general organizing principle of good faith established in Bhasin, which meant that “parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.” Bhasin, at para. 63.

The Supreme Court also reiterated that the duty of honesty applies to all contracts as a matter of contractual doctrine, and means “simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.” Ibid., at para. 73.

The Supreme Court thereafter noted that it disagreed with the court of appeal on two main points, namely, (1) whether the alleged dishonesty was related to the renewal of the Contract or the performance of the Contract (the Supreme Court determined that it was the latter) and (2) whether Baycrest’s actions amounted to a breach of the duty of honest performance (the Supreme Court determined that they did). Callow, at paras. 37–38.

It is the latter subject that has the greatest impact on parties to a contract, and potential contract disputes, going forward. In its discussion of the subject, the Supreme Court commented that whether or a not a party has knowingly misled its counterparty requires a highly fact-specific determination, and that it can “include lies, half-truths, omissions, and even silence, depending on the circumstances.” Ibid., at para. 91.

The Supreme Court agreed with the trial judge that Baycrest intentionally withheld information about its intent to terminate the Contract, and knew that such silence, when combined with its active communications over the prior months, left Callow under the false impression that Baycrest was satisfied with its performance and that it would likely renew the Contract. The Supreme Court ultimately found that Baycrest breached its contractual duty of honest performance by failing to correct Callow’s misapprehension thereafter.  Ibid., at paras. 99–101.

Key Takeaways

The decision in Callow, and in particular its expansion of the duty of honest performance to prohibit half-truths, omissions, or silence, under certain circumstances, and not merely overt dishonesty, will require parties to a contract to tread very carefully when engaging with counterparties when termination, contract renewal, or other material matters, are at issue.

Although the contours of the duty will undoubtedly continue to be explored, until further clarification is offered by the courts, parties would do well to consider what misapprehensions might result from any and all discussions with counterparties about such topics.

Steven Rosenhek,  a partner of Fasken Martineau DuMoulin LLP in Toronto,  is one of Canada's leading litigation lawyers. A senior partner in the firm's Litigation and Class Action Groups, he has extensive experience in complex commercial cases, major national and international class actions, commercial arbitrations, product liability, life sciences, and antitrust matters. Steven is widely recognized for his skills as a senior trial and appellate lawyer before all levels of Court in Canada, and a wide range of administrative and regulatory bodies. He is Chair of the firm's Automotive Group.

David Ziegler is a partner of Fasken Martineau DuMoulin LLP in Toronto with a broad civil litigation and arbitration practice, with a focus on complex commercial and financial disputes, cross-border disputes, product liability, international arbitration, and class actions. David represents clients across a wide range of industries, including mining, rail, professional services, insurance, banking and finance, manufacturing, and construction. David has extensive experience acting for both Canadian and U.S. companies involved in cross-border disputes resulting in litigation in Canada and regularly advises clients on the enforcement and recognition of foreign judgments in Canada.

The trial court did not dismiss the case, but ordered arbitration. Plaintiffs objected to arbitration on the grounds that the contract’s arbitration clause did not contain the separate Acknowledge of Arbitration language required by Vermont statute for Vermont contracts. 12 V.S.A. §5652(b). The court rejected their objection on the grounds that the contract was one “in interstate commerce” and therefore the Vermont statute did not apply. In addition, the plaintiffs objected because the arbitration service that was specified in the contract was no longer in business. But the court found that that provision could be severed, and ordered the parties to agree on an arbitrator of their own choosing.

The parties agreed on a Vermont arbitrator. The company requested that, as a preliminary matter and before convening for an evidentiary hearing with the arbitrator, the arbitrator should decide whether the case should be dismissed for the reasons the company had argued in the motion to dismiss it had filed with the court. Plaintiffs did not object to that procedure.

The arbitrator considered the company’s motion to dismiss and the plaintiffs’ opposition thereto and issued a decision dismissing the plaintiffs’ complaint on the grounds (as the company had argued in its motion) that the inspection contract clearly excluded the obligation to look for and report on non-visible environmental issues, such as asbestos.
Plaintiffs moved to vacate the arbitrator’s decision but a subsequent judge in the trial court affirmed it.

The homeowners appealed to the Vermont Supreme Court. (Note, the plaintiffs had also sued the homesellers for not disclosing the possible presence of asbestos in the home. The appeal against the inspection company proceeded after the plaintiffs’ resolved and dismissed their claims against the homesellers.)

The issues on appeal were: (a) the enforceability of the arbitration clause, and (b) the validity of the arbitrator’s substantive decision that the plaintiffs had no claim under the contract.

The Vermont Supreme Court Affirms the Enforcement of the Arbitration Clause Against the Consumers, Rejecting the Argument that the Clause Was Unenforceable Because It Did Not Contain the Vermont-Specific “Acknowledgement of Arbitration” Language.

First, the Vermont Supreme Court affirmed the trial court’s decision that the company’s home inspection contract was a contract in interstate commerce. The contract expressly called for arbitration, but did not include the special arbitration notice required for Vermont contracts.

Plaintiffs argued to the supreme court (as they had to the trial court) that the Vermont notice was required because the contract was not a contract in interstate commerce, but was a local home inspection contract pertaining to a home in Vermont. The supreme court rejected that argument, citing federal court cases, including two U.S. Supreme Court cases, giving broad effect to the Commerce Clause at it applies to arbitration agreements. See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 273–74, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995), and Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56, 123 S.Ct. 2037, 156 L.Ed.2d 46 (2003).

In both U.S. Supreme Court cases, the transaction at issue occurred within a single state, but the Court determined that the companies involved in the contracts, and the transactions at issue, “involved interstate commerce,” and that therefore the Federal Arbitration Act applied and the arbitration clauses in both cases were enforceable. Applying the reasoning of those cases, the Vermont Supreme Court observed that the home inspection company was part of a national franchise and used a national form of contract.

In addition, inspections are a regular part of home purchase transactions and therefore affect the national residential real estate market. The Vermont Supreme Court concluded that federal interstate commerce law applied, preempting the Vermont Arbitration Act, and that therefore the trial court had properly required the homeowners to arbitrate their claim against the inspection company pursuant to the clause in the contract.

As a separate matter, the supreme court then also concluded that the trial court had been well within its discretion to sever out the part of the arbitration clause that required the consumers to arbitrate with a particular organization that was no longer in business and order the parties to choose an arbitrator.

The Vermont Supreme Court Affirms the Arbitrator’s Decision Dismissing the Consumers’ Claims Against the Inspection Company, Rejecting the Argument that the Arbitrator’s Decision Showed “Manifest Disregard of the Law.”

Next, the Vermont Supreme Court rejected plaintiffs’ argument that the arbitrator exceeded his authority in dismissing their complaint. Plaintiffs argued that the arbitrator engaged in “manifest disregard of the law” in dismissing their claims against the company as unavailing under the Rule 12(b)(6) standard because of the disclaimers in the contract.

Importantly, the court held that even if, arguendo, the arbitrator committed “legal error” by dismissing the plaintiffs’ claims, “legal error” is not grounds for vacating an arbitration decision under the Federal Arbitration Act. The court recapitulated the many cases that hold that a court can vacate an arbitration decision only where misconduct or an egregious mistake occurred. (The court discussed whether “manifest disregard of the law” is even a basis for vacating an arbitration decision, but concluded that it did not matter, because under any circumstances ordinary legal errors are not a basis for doing so.)

Thus, the supreme court affirmed the trial court’s refusal to vacate the arbitration decision in the inspection company’s favor.

This is an important decision in Vermont commercial litigation law. There are few Vermont decisions on arbitration clauses at all, and even fewer discussing the interplay between the broadly construed Federal Arbitration Act and the more-restrictive Vermont Arbitration Act. The court never engaged in any discussion of whether an arbitration clause involving consumer contracts, such as the one at issue here, is unfair or unconscionable. Second, there are few Vermont decisions discussing the standards for vacating an arbitrator’s decision.

Walter E. Judge, Jr., is a member of the Burlington firm of Downs Rachlin Martin, PLLC, Vermont’s largest law firm. He focuses on commercial litigation, products liability, and intellectual property litigation. He is the past DRI State Representative for Vermont, and a member of DRI’s Commercial Litigation Committee. Walter is a member of several defense counsel organizations.

Standard Under the FCRA

The FCRA requires furnishers to provide accurate credit information to the CRAs, to correct inaccuracies, and to investigate disputed information upon notice. See 15 U.S.C. §1681s-2(b). A plaintiff cannot prevail on a claim against a furnisher for failure to conduct a reasonable investigation, or for refusing to change its reporting, without first making a showing of actual inaccuracy in the information the furnisher supplied. See, e.g., Alston v. Wells Fargo Home Mortg., No. CV TDC-13-3147, 2016 WL 816733, at *10 (D. Md. Feb. 26, 2016) (granting summary judgment because information was factually accurate), citing Chiang v. Verizon New England Inc., 595 F.3d 26, 38 (1st Cir. 2010) (finding that a FCRA claim requires an actual inaccuracy and that the existence of disputed legal questions is insufficient). Yet, courts have also held that “even if the information is technically correct, it may nonetheless be inaccurate if, through omission, it create[s] a materially misleading impression.” Seamans v. Temple Univ., 744 F.3d 853, 865 (3d Cir. 2014).

Cherry Picking Parts of a Tradeline

Courts have not consistently explained the standard to evaluate the accuracy of a furnisher’s tradeline. Does the analysis turn on an assessment of the entire reporting, or just the part the plaintiff contests? Plaintiffs have aggressively pushed the narrower interpretation because it leads to more claims, albeit by ignoring parts of the tradeline at odds with their theory.

One theory generating litigation concerns the “pay status” field, a historical data field that shows the account’s status at the time of some other event—for example, when the account was paid off, charged off, or transferred to another creditor. Plaintiffs have argued that this field by itself can prove an inaccuracy. For example, in Macik v. JP Morgan Chase Bank, N.A., No. 3:14-cv-0044, 2015 WL 12999728 (S.D. Tex. May 28, 2015), the plaintiff paid off a mortgage leaving a $0 balance. She filed suit when, years later, her credit report including a “past due” notation in the pay status field. Taken as a whole, the credit reporting showed that the account was delinquent before it was paid off, at which time the balance was then reduced to zero. The court nevertheless denied the furnisher’s summary judgment motion, finding that the jury could conclude the information in the pay status field “was inaccurate or incomplete because it was misleading in such a way and to such an extent that it could be expected to have an adverse effect on her.” Id. at *4. The jury ultimately returned a verdict in favor of the consumer.

The court very recently reached a similar result in Smith v. Trans Union, LLC, et al., No. 20-4903 (E.D. PA. Mar. 19, 2021) (Kenney, J.). The plaintiff alleged inaccurate credit reporting where the pay status field listed the account as 60 days past due, but where the plaintiff had previously paid off the account in 2016. The defendant argued that the pay status is a historical field that correctly reported the account as 60 days past due at the time it was paid off in 2016—a fact corroborated by the rest of the tradeline. The court denied the defendant’s motion for judgment on the pleadings, however, finding that the past due notation in the pay status field “would lead one to believe the account was past due and continued to be past due, or not fully paid, when the balance was zeroed out when it was closed.” Id. The court also found that the pay status field was not entirely “historical” information, since, for example, it did not say “paid in full at end when account was 60 days past due.” Id.

Viewing the Tradeline as a Whole

Other courts have rejected FCRA claims based on the pay status field following a review of a tradeline as a whole. For example, in Settles v. Trans Union LLC, No. 20-84, 2020 WL 6900302, at *1 (M.D. Tenn. Nov. 24, 2020), the plaintiff alleged that the pay status field inaccurately described an account as 120 day past due where the account balance was $0. In fact, the balance was $0 because the furnisher had closed the account to transfer it to another servicer. The defendants thus argued that the pay status field accurately reported that the plaintiff was over 120 days late at the time the account transferred.

The court in Settles found in the defendants’ favor when reviewing the tradeline as a whole. Id. at * 4 (“In evaluating whether reported account information is materially misleading, courts assess the alleged inaccuracy in the context of the report as a whole.”) The court reasoned that the delinquencies were clearly noted for the months leading up to the account transfer, and there was no reporting for any months after the transfer. The court found that it was “implausible that a creditor would be misled into believing Plaintiff is currently 120 days past due on his payment obligation each month when the reporting of the account states that the account was closed in February 2014 and has a zero-dollar balance.” Id. at *5.

The court reached the same conclusion in Bibbs v. Trans Union LLC, No. CV 20-4514, 2021 WL 695112, at *1 (E.D. Pa. Feb. 23, 2021), finding that the delinquency in the pay status field accurately represented the status of the plaintiff’s account at the time the furnisher transferred the account to a different servicer. The court rejected the plaintiff’s argument that “it is impossible for [the loans’] current status to be listed as late” if the balance on the loans is zero. Id. at *1. The court reviewed the payment history in the tradeline in conjunction with other reported fields to conclude that the pay status field accurately captured the account’s status at the time it was closed. As the court stated, “we must view the account information given to the creditor in its entirety, and doing so, the reported information is accurate as a matter of law.” Id. at *7. The case is now on appeal to the Third Circuit.

Conclusion

The decisions in Settles and Bibbs concerned accounts transferred to other creditors, whereas Macik and Smith concerned accounts allegedly paid off. These courts were cognizant of this factual difference and identified them as a basis to distinguish each other. And yet, this distinction should make no logical difference. If the pay status field is a historical one that shows the account’s status at the time of a prior event, it would seem to make no difference whether that prior event was a transfer to another creditor or a payoff in full—in both cases, the furnisher would still report a $0 balance.

Until higher courts provide more guidance, furnishers should continue to press the arguments in cases like Settles and Bibbs in both circumstances—that a tradeline must be reviewed as a whole, identifying all the reasons the pay status field was accurate at the time the account was closed.

Eric M. Hurwitz is the Co-Chair of Financial Services Litigation at Stradley Ronon Stevens & Young, LLP in Philadelphia, PA and Cherry Hill, NJ. Eric defends financial institutions from claims arising out of consumer and commercial financial products, including single-plaintiff and class actions against banks, mortgagees, student lenders, credit card companies, auto finance companies, and debt collectors. Eric is a member of DRI’s Commercial Litigation Committee and Financial Services SLG.