Court: District Court, S.D. New York; January 26, 2015; Federal District Court
Congress enacted the Fair Credit Reporting Act (FCRA) to promote fair credit reporting and protect consumer privacy. The Act mandates that consumer reports used for employment eligibility must comply with specific notification requirements. Halstead Management Co. conducted criminal background checks before hiring, and plaintiff Kevin Jones alleges that his job offer as a doorman was revoked due to an inaccurate report from Sterling Infosystems, which he was not notified about, nor given his rights under the FCRA. Jones claims he lacked a meaningful opportunity to contest the erroneous report before adverse employment action was taken.
In his Amended Complaint, Jones alleges two counts against Halstead: Count I claims failure to disclose the potential procurement of a consumer report in a manner compliant with the FCRA, while Count II argues that Halstead negligently or willfully violated the FCRA by not providing pre-adverse action notice, a copy of the report, or a description of his rights in time for him to dispute the report.
Halstead filed a Third-Party Complaint against Sterling, alleging that Sterling should be liable for any FCRA compliance failures since it was engaged to conduct background checks and issue notices. Halstead attempted to dismiss Count I based on a disclosure form it provided, arguing it complied with the FCRA, while Sterling and the Terra Defendants sought to dismiss Count II, asserting that Jones had an opportunity to dispute the information before adverse action was taken.
The court denied the motions to dismiss the Amended Complaint but granted Sterling's motion to dismiss Count III of the Third-Party Complaint, while denying the remainder of Sterling's motion. Jones had applied for the doorman position on July 12, 2012, and was offered the job following an interview, completing the necessary employment paperwork, which included Halstead's standard authorization and disclosure form.
Halstead Disclosure provided authorization for Halstead to obtain a consumer or investigative report about the Plaintiff and informed him of his right to request details regarding the investigation. It included acknowledgments that Halstead processes applications but that hiring decisions are made by the client building, a waiver of claims against Halstead related to employment by the client, and consent for Halstead to gather background information, including criminal records. Additionally, Plaintiff signed a Sterling Disclosure, which permitted the company to obtain a consumer report as part of the hiring process. Terra's human resources department sent materials to Sterling for a credit check, criminal background check, and drug test, with Sterling scoring background check results to determine applicant eligibility based on a Terra-approved matrix.
On July 13, 2012, Terra received a background report from Sterling that inaccurately listed four criminal convictions. On July 16, Terra informed Halstead that the report indicated Plaintiff did not meet hiring criteria. Subsequently, Halstead notified Plaintiff about the criminal history reported. Plaintiff disputed the accuracy of the report, claiming he had no criminal record. On July 17, 2012, he received a "Pre-Adverse Action Notice" from Halstead, indicating that the employment offer was revoked based on the report and inviting him to dispute its accuracy within five business days. The report was later confirmed as inaccurate by an official Record of Arrest and Prosecution from New York State's Division of Criminal Justice Services, which showed no arrests or convictions. Plaintiff contends that the revocation of his employment offer violated the Fair Credit Reporting Act (FCRA) as it occurred before he received proper notice, a copy of the report, or a fair opportunity to dispute the findings.
The Third-Party Complaint indicates that during this period, the Third-Party Plaintiffs, through their parent company Terra, engaged Sterling for background checks on employment applicants and used Sterling for credit and criminal background checks across its subsidiaries.
Terra required Sterling to issue a "pre-adverse action" notice to the Plaintiff on July 16, 2012, due to criminal offenses identified in the Plaintiff's background check. Following this, the Plaintiff disputed the results, prompting Sterling to investigate further. Terra communicated the presence of criminal offenses in the Plaintiff's background to Halstead, the prospective employer, who then awaited the outcome of Sterling's investigation. Halstead expressed urgency in hiring the Plaintiff, sending multiple inquiries to Terra regarding the investigation's progress. On July 24, 2012, Terra requested an update from Sterling, emphasizing the time-sensitive nature of the matter. Sterling later confirmed that the criminal results were validated and unchanged. The Plaintiff continued to dispute the findings, and by October 19, 2012, Sterling reaffirmed its stance on the accuracy of the background check.
The Third-Party Complaint alleges that Sterling is liable for breach of contract, negligence in fulfilling its obligations under the Fair Credit Reporting Act (FCRA), and negligent misrepresentation regarding the background check and the "pre-adverse action" notice. Additionally, the Third-Party Plaintiffs claim that any violations of the FCRA were solely due to Sterling's actions, leading to claims for common law contribution and indemnification. Sterling has moved to dismiss these claims. To withstand the motion to dismiss, the complaint must present sufficient factual matter to establish a plausible claim for relief, considering the complaint's allegations and relevant documents. The court can assess documents that are integral to the complaint, provided there are no material disputed issues regarding their relevance.
Under Rule 12(d), if a court considers matters outside the pleadings during a motion under Rule 12(b)(6) or 12(c), the motion is treated as one for summary judgment under Rule 56. The Second Circuit emphasizes that a document can be deemed "integral" to a complaint only if the plaintiff relied on it while drafting the complaint; mere possession or notice is insufficient. For instance, if a complaint frequently references a contract and seeks judicial interpretation of its terms, the contract is considered integral. Conversely, if the complaint does not refer to the document, its consideration is improper unless its incorporation is clear and undisputed.
In the context of Count I of the Amended Complaint, the plaintiff alleges violations of the Fair Credit Reporting Act (FCRA) due to the defendants procuring a consumer report without providing a required disclosure. The complaint relies solely on the Halstead Disclosure, disregarding the Sterling Disclosure. Halstead argues that the Sterling Disclosure should be included in its motion to dismiss based on its authenticity, plaintiff's prior notice, and its connection to employment paperwork. The plaintiff contends he did not possess the Sterling Disclosure when filing and asserts that it does not meet the statutory requirement of being a standalone disclosure. There is a significant question regarding whether the Sterling Disclosure is integral to the Amended Complaint, as the plaintiff's claims are based on the absence of any disclosure other than the Halstead Disclosure.
Plaintiff acknowledges signing the Sterling Disclosure but contends it does not comply with the Fair Credit Reporting Act (FCRA). The FCRA mandates a standalone disclosure, allowing only consumer authorization for report access, per 15 U.S.C. § 1681b(b)(2)(A)(i)-(ii). The Federal Trade Commission (FTC) emphasizes this requirement to prevent consumer distraction. The Sterling Disclosure includes extraneous information such as time frames for challenging report accuracy, acknowledgments regarding employment decisions, agency contact details, and unrelated state-specific disclosures, resulting in an overly lengthy form. Consequently, the Amended Complaint sufficiently alleges claims against both the Halstead and Sterling Disclosures under the FCRA.
Halstead seeks to dismiss allegations of willful violation of § 1681b(b)(2), arguing its engagement of a third-party for compliance should negate willfulness. Additionally, Halstead posits that if its liability waiver in the Halstead Disclosure is found to violate the FCRA, its interpretation of the statute was not unreasonable. The FCRA imposes liability for willful non-compliance defined as recklessness, as established in Safeco Ins. Co. v. Burr. Plaintiff asserts that including a liability waiver in the disclosure significantly deviates from FCRA requirements, rendering Halstead's conduct objectively unreasonable. The Court concurs with Plaintiff's argument regarding willfulness.
Finally, in Count II, Sterling moves to dismiss Plaintiff's claim that Halstead failed to provide necessary notice before taking adverse action, contending that the alleged facts do not sufficiently demonstrate that Halstead's internal decision to revoke the job offer constituted an adverse action.
Sterling contends that the facts in all pleadings, including those in the Third-Party Complaint, indicate that Halstead did not take adverse action until informed of the results of the Plaintiff's dispute. The court denies Sterling's motion to dismiss Count II, as the Plaintiff alleges that Halstead revoked his job offer based on Sterling's report without giving him notice or an opportunity to dispute it, which violates Section 1681b(b) of the FCRA. This section mandates that before any adverse action is taken based on a consumer report, the consumer must receive a copy of the report and a written description of their rights under the FCRA. "Adverse action" in the employment context encompasses any decision that negatively impacts a current or prospective employee, as well as actions related to a consumer's application that harm their interests. Sterling argues that no violation occurred if Halstead's intent to revoke was not communicated, asserting that an adverse action isn't recognized until it is communicated or enacted. The court references Safeco Insurance Co. v. Burr, affirming that revoking an employment offer clearly constitutes an adverse action. Sterling disputes whether Halstead made a final decision to revoke the offer before the Plaintiff could dispute the report and questions if "stopping the onboarding process" qualifies as an adverse action under the FCRA. The court notes that Sterling and Third-Party Defendants wish to dismiss the explicit language in their July 17 letter to the Plaintiff, which stated the revocation of the offer, based on internal emails suggesting a different interpretation. However, these emails raise factual questions that cannot be resolved at the motion to dismiss stage. The court must accept the Plaintiff's well-pleaded allegations as true and draw all reasonable inferences in favor of the Plaintiff without evaluating the evidence's weight.
After discovery, Defendants may demonstrate that the language in the "Pre-Adverse Action Notice" was misleading as no decision had been finalized. However, the Complaint sufficiently asserts a cause of action under FCRA § 1681b(b)(3), resulting in the denial of Sterling's motion to dismiss Count II. Regarding Counts II through V of the Third-Party Complaint, Sterling argues that claims for negligence and negligent misrepresentation lack duties independent of the contract, and that contribution and indemnification claims are not permissible under the FCRA. Third-Party Plaintiffs counter that FCRA compliance was part of their contract, thus imposing a duty of care on Sterling. They also argue that their claims for contribution and indemnification fall under New York State law, not the FCRA.
The court grants and denies Sterling's motion in part. The Third-Party Plaintiffs claim Sterling breached its duty by providing an inaccurate background check and failing to send a compliant notice under the FCRA. Sterling contends that the Third-Party Complaint does not adequately allege an independent duty of care or a special relationship for the negligent misrepresentation claim. Under New York law, a tort claim can arise from a breach of contract only if a legal duty independent of the contract has been violated, which can be established through the relationship between the parties. The determination of whether a duty exists is a legal question, while the application of that duty to a specific case is a factual question. The Second Circuit has recognized that duties can stem from the circumstances surrounding a contract and the nature of the services involved, allowing for both tort and contract claims based on the same conduct if an independent duty exists.
In William Wrigley Jr. Co. v. Waters, the court established that when a party presents itself as an expert and enters into a contract involving legal interests, an extraneous duty arises, with the standard of care reflecting the level appropriate to their professional role. The Third-Party Complaint suggests that Sterling had a duty to issue "pre-adverse action" notices in accordance with the Fair Credit Reporting Act (FCRA), as compliance with the FCRA was integral to the contracted services. The Third-Party Plaintiffs claimed to have relied on Sterling for this compliance, directing Sterling to send the notice on July 16, 2012, under the context that non-compliance would expose them to liability. However, the Complaint failed to provide sufficient facts indicating that Sterling had an obligation beyond its contractual duties regarding background checks, leading to the dismissal of the negligence claim related to allegedly inaccurate checks. While the Third-Party Plaintiffs sufficiently pleaded an extraneous duty concerning the FCRA notices, they did not adequately assert that Sterling owed a duty of care in relation to the accuracy of the background checks. Furthermore, the claim for negligent misrepresentation was not supported, as the necessary "duty to speak with care" was not established due to the absence of a special relationship or identifiable source of such a duty between the parties.
The Third-Party Plaintiffs assert reliance on Sterling's claims regarding compliance with the Fair Credit Reporting Act (FCRA) in sending pre-Adverse Action Notices related to employment applications. However, the complaint lacks factual allegations supporting a "special relationship of trust or confidence" or any unique expertise from Sterling that would impose a heightened duty of care. The Plaintiffs claim privity of contract with Sterling and describe their relationship as vendor-based, yet these assertions do not suggest more than a standard business interaction.
Regarding indemnification and contribution, Sterling seeks dismissal of these claims, contending that neither federal nor state law recognizes them in the context of FCRA liability. Sterling's support for this position is based on opinions from outside the relevant circuit. In contrast, the Third-Party Plaintiffs reference Yohay v. City of Alexandria Emp. Credit Union, which upholds a right to indemnification against a primary wrongdoer when the indemnitee is a secondary wrongdoer, although it does not clarify whether such claims are governed by state or federal law.
The Third-Party Plaintiffs argue their claims arise under New York common law, which Yohay suggests would be valid. The court finds the issue of whether tort claims for indemnification or contribution regarding FCRA liability are permissible under federal common law to be unsettled in this circuit but leans towards following Yohay. Ultimately, Sterling's motion to dismiss these claims is denied.
The court's conclusions include denying Halstead's motion to dismiss Count I and Sterling's motion to dismiss Count II of the Amended Complaint. However, Sterling's motion to dismiss Count II of the Third-Party Complaint related to alleged negligence in a background check and all of Count III for negligent misrepresentation is granted, while the motions to dismiss Counts IV and V are denied. The Court will refer to the defendants collectively as the "Terra Defendants."
Sterling has a contract to provide consumer reporting information, including criminal background checks, to Terra. A plaintiff has initiated a consumer class action on behalf of himself and others who applied for jobs with Terra's companies and were adversely affected by background checks conducted by Sterling. The plaintiff has not contested that he signed the Sterling Disclosure, which incorrectly references "Halstead Management Company, LLC" but does not mention that name elsewhere on the form. Sterling reported that the plaintiff had various New York state criminal convictions, all of which are claimed to be inaccurate. Neither party has provided the actual contract, meaning the motion to dismiss is based on alleged facts rather than contract terms. The court does not have to accept allegations that are contradicted by other documents. There is a factual question regarding whether the plaintiff received the disclosure form prior to litigation, but this issue is not relevant to the current motions. The Fair Credit Reporting Act (FCRA) did not initially allow the disclosure document to include written authorization, but amendments in 1998 changed this, allowing for clear and conspicuous disclosure. The Terra Defendants have joined Sterling's motion, but Sterling's assertion that the third-party complaint's facts are equivalent to those in the plaintiff's complaint is incorrect; the third-party complaint is separate and does not determine the sufficiency of the plaintiff's claims.
Iqbal emphasizes that the cases cited by Sterling do not support a different legal conclusion regarding the evaluation of motions to dismiss third-party complaints. The cases referenced, including Lessard v. Tyco Elec. Corp., Gladney Const. Inc. v. Edwards, and Novinger v. E.I. DuPont deNemours Co. Inc., all uphold the principle that both the complaint and the third-party complaint can be considered in such evaluations. Sterling's reliance on Obabueki v. Int’l Bus. Machines Corp. is noted, where it was determined that an internal decision to rescind an offer does not constitute an adverse action. However, Obabueki is distinguishable because the court did not consider whether forming an internal intent qualifies as an "adverse action," as it focused on actions communicated to the plaintiff. The adverse action in the current case is established because the Notice indicated that the plaintiff's conditional offer of employment had been revoked. This aligns with the ruling in Burghy v. Dayton Racquet Club, Inc., which states that an adverse action occurs when a decision is executed and communicated. Other courts have similarly distinguished Obabueki based on these grounds.
