As a Matter of FACTA: Your Next Customer May Take You to the Cleaners

USLAW Magazine

Merchants beware. This statement may strike an unfamiliar chord, but with the passage of the Fair and Accurate Credit Transaction Act, 15 U.S.C. § 1681 et seq. (FACTA) in 2003, a single receipt for $1 can expose a merchant to anywhere from $100 to $1000 in statutory damages without proof of any actual harm, as well as punitive damages, attorney fees, and costs. As severe as this may seem, the potential implications are even more drastic. A FACTA non-complying receipt affords any consumer the ability to spearhead a class action lawsuit against, for example, the local dry cleaning establishment whereby the collective statutory damages could reach into the millions of dollars and potentially bankrupt that dry cleaners. Of course, Congress did not intend this result when it enacted FACTA in 2003; yet, it is a reality that merchants everywhere must now face.

BACKGROUND ON FACTA

In a society inundated by credit and debit transactions on a daily basis, the United States Congress passed FACTA without much fanfare or publicity. Congress enacted the new legislation as an amendment to the Fair Credit Reporting Act (FCRA) to aid in the prevention of identity theft, and credit or debit card fraud. Under FACTA, 15 U.S.C. § 1681c(g), beginning in December 2006, “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 expiration date upon any receipt provided to the cardholder at the point of sale or transaction.” This means that, since December 2006, all merchants, both large and small, in the United States have been required to comply with FACTA.

Congress recognized that proving actual identity theft; thus, proving actual damages for a FACTA violation, is not always easy to do. Moreover, requiring individual proof of the violation would effectively make such cases unqualified for class action certification. Consequently, any violation amounting to “willful” noncompliance with FACTA allows a consumer to recover statutory damages from $100 to $1,000 per occurrence without showing any actual harm to the consumer. In addition, a consumer may recover costs of suit, attorney fees, and punitive damages. The simplicity of FACTA’s provisions and the ease by which a consumer can recover money without showing actual injury, as well as the potential damages and fees associated with a technical violation of FACTA, have proven particularly attractive and seemingly well-suited for class action lawsuits.

In 2007, the United States Supreme Court clarified the meaning of “willfulness” under 15 U.S.C. § 1681n. In Safeco Ins. Co. of Am. v. Burr, the Supreme Court explained that “where willfulness is a statutory condition of civil liability, it is generally taken to cover not only knowing violations of a standard, but reckless ones as well.” However, because the term “reckless” is not self-defining, the Court further explained that recklessness necessitates “a known or obvious risk that was so great as to make it highly probably that harm would follow.” Therefore, a business willfully violates FACTA only if it: (1) knowingly and intentionally performs an act that violates FACTA; and (2) either (a) knows that the action violates the rights of the consumers or (b) recklessly disregards those rights.

THE IMPACT OF FACTA ON COMMERCE

Although the Supreme Court’s holding refines the boundaries on FACTA’s interpretation and application, the more relevant and unsettling issue pertaining to this statutory amendment is the amount and nature of damages imposed on FACTA violators. At first glance, the damages provision is straightforward and appears harmless. However, when the legislative purpose for FACTA is considered and compared to its application in the real world, it becomes apparent that the damages provision has led to results unintended by the Legislature.

The purpose of FRCA was to ensure that consumers would maintain the benefit of accurate credit reporting and have reassurance that their credit reports could not be accessed in an inappropriate manner. The bulk of its statutory framework generally reflects this purpose and pertains to the banking system, credit reporting techniques, and “unfair credit reporting methods” that serve to undermine the public’s confidence in commerce.

Given the number of sales transactions of any business, the pursuit of FACTA claims through the class action vehicle exposes businesses to enormous liability. While the vast majority of class action lawsuits tend to settle prior to trial, not all businesses can survive the typical class action lifespan. Most large scale businesses have the financial capabilities to weather the storm of a class action; however, smaller businesses are often not financially equipped to carry the same burden. As a consequence, FACTA claims unduly burden smaller businesses to a greater extent than their larger counterparts. Additionally, because of the number of sales transactions during any given time period, the potential damages associated with a $1 receipt for a cup of coffee may be greater than those damages associated with a $50,000 receipt for an automobile purchase. A small business, therefore, can reach the brink of financial ruin with a single FACTA class action.

Not surprisingly, within the first quarter of its passage, courts across the country experienced an onslaught of FACTA-related class action lawsuits against unwitting merchants, ranging from national retailers to small mom and pop stores and restaurants, alleging willful violations of the Act. By the end of 2007, approximately 130 lawsuits were filed in California alone, and nearly 100 others in courts in Florida, Illinois, Kansas, Maryland, Nevada, New Jersey, and Pennsylvania. A survey of twenty-one FACTA class action lawsuits in California, for example, revealed that the potential classwide statutory damages in these cases alone (not even including the statutory attorney fees) collectively range from $4 billion to almost $40 billion.

In light of these class action lawsuits and the putative, financial exposure to businesses, President George W. Bush signed an amendment to FACTA in 2008. Specifically, the Credit and Debit Card Receipt Clarification Act of 2007 declares that any person who prints an expiration date on any receipt provided to a consumer cardholder at a point of sale or transaction, but otherwise complied with FCRA requirements for such a receipt, shall not be in willful non-compliance by reason of printing such expiration date on it. Congress passed this amendment after coming to the conclusion that a consumer’s identity cannot be procured from credit card’s expiration date. This amendment certainly quelled the number of FACTA-related class action lawsuits in the country, but did not end them.

RECOMMENDATIONS FOR PREVENTING POTENTIAL LITIGATION

Identity theft is a serious problem that plagues the American consumer. According to the FTC, each year over 9 million identities are stolen in the United States. In its totality, FACTA is well intended and evidence presented to Congress shows that disclosure of more than five digits of any credit card or debit card receipt may allow for identity theft. However, despite its good intentions, when class action litigation is pursued in conjunction with FACTA violations, the staggering costs jeopardizes the livelihood of any business.

As Benjamin Franklin aptly stated, “an ounce of prevention is worth a pound of cure.” Accordingly, the first step any company should take is to indentify whether it is in fact violating the statute’s provisions. For example, the company should verify that its registers and electronic equipment are properly upgraded; thus, in compliance. Next, in the event that a company is found to be in violation of FACTA, it should immediately remedy any non-compliant point-of-sale equipment or software. These initial steps will mitigate the potential for lawsuits as well as mitigate any damages arising from these lawsuits, particularly any claim based on willfulness.

If the company is purchasing new point-of-sale equipment or software, it should require the distributor or manufacturer of the equipment to ensure that the equipment is fully compliant with FACTA and all other relevant regulations. By doing so, the equipment or software distributor or manufacturer may bear a portion of liability and litigation costs. Additionally, prior to purchasing new software or equipment, any company would be wise to seek indemnification or to be added as an additional insured on the distributor’s or manufacturer’s insurance policy.

CONCLUSION

Given today’s economy, survival for the typical “mom and pop” corner shop is already precarious. While the recent amendment and judicial opinions have taken some of the sting out of FACTA-related class action lawsuits, the continued filings of these claims will have lasting effects on the small business community and the U.S. economy. Imposed damages of hundreds of millions of dollars may result in companies filing for bankruptcy or closing their doors. This will inevitably lead to job losses and higher unemployment. Even those companies who evade bankruptcy will undoubtedly pass their costs onto the consumers in the form of higher prices at the register. In the end, everyone, even the FACTA claimant, will suffer some form of economic harm. So, the next time a consumer swipes his or her credit card, the merchant should beware.