Employer's withdrawal of job offer to applicant causes class action suit to be filed - Electronic FCRA disclosures to prospective employees at issue

By Michael Klazema on 2/29/2012

Recently, a new class action lawsuit was filed in the Eastern District of Virginia challenging electronic disclosures made by Kmart to a prospective job applicant. The case, Eric Dante Pitt v. Kmart Corporation, was filed on October 17, 2011 and is currently pending.  

The Background: The Fair Credit Reporting Act Requires Disclosure.
The Fair Credit Reporting Act applies to all kinds of consumer reports, including those that are routine background checks that many employers purchase from background screening agencies. The FCRA has special provisions for consumer reports that are obtained for employment purposes.  While there are other requirements under 15 U.S.C. § 1681b(b)(2) as well as under various case law, two of the key employer obligations in the context of this new class action suit are:
(a)        disclosing to the applicant that the employer is obtaining a report for employment purposes; and
(b)        obtaining the applicant’s authorization for the employer to obtain the report.
The Claim: E-SIGN Only Works For Consumers.
In Pitt v. Kmart, Plaintiff applied online for a job with Kmart which included an electronic notice concerning Kmart’s consumer report requirements and consent request in order to obtain a consumer report on Plaintiff. Kmart subsequently offered Plaintiff a job following an initial interview. Once the results of the criminal record check were reviewed by Kmart containing a criminal history, Kmart withdrew the job offer from Plaintiff. Although not the subject of the suit, Plaintiff contends that the misdemeanors found on the report should not have been considered given their age. Plaintiff’s suit proposes a class action based on Kmart not fulfilling the disclosure and authorization requirements discussed above by alleging the following contentions:        
*The FCRA requires that the disclosure be “in writing”.  Absent the E-Sign Act, an electronic disclosure is not one made “in writing”.
*The only means to “legalize” the electronic signature application of Defendant is through application of the E-Sign Act.
*The E-Sign Act does not apply to the Defendant’s electronic application, because the term “consumer” in the Act is defined as “an individual who obtains through a transaction, products or services which are to be used primarily for personal, family, or household purposes”.
*A job applicant does not fit the definition of “consumer” and therefore the E-Sign Act does not authorize the Defendant’s electronic application.
Plaintiff’s Logic
Plaintiff’s logic in his assertions seems to lead to an incorrect conclusion and tends to follow along these steps:  
a.         The FCRA requires disclosures in writing.
b.         An electronic disclosure is not one made in writing without finding some other law that says so.
c.         The E-SIGN Act only authorizes electronic signatures by consumers.
d.         Therefore, the FCRA-required disclosures cannot be electronic.
Plaintiff’s First Premise: The FCRA Requires Disclosures In Writing.
The first premise is correct. We know this because of 15 U.S.C. § 1681b(b)(2)(A):
a person may not produce a consumer report … for employment purposes with respect to any consumer, unless … a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured …, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes.
Plaintiff’s Second Premise: An Electronic Disclosure Is Not One Made In Writing Under The FCRA.
The second premise has arguments on both sides. For several years, the Federal Trade Commission (the agency then charged with interpreting and enforcing the FCRA) issued opinion letters that gave informal guidance to the consumer reporting industry.  In one such letter (known as the Landever
Letter), the FTC opined about 15 U.S.C. § 1681b(a)(2), which allows anyone to obtain a consumer report “in accordance with the written instructions of the consumer to whom it relates.”  The FTC’s opinion was that this section did not allow someone to obtain a report based on a consumer clicking an online “yes” button in response to a question about whether the consumer authorizes the report.  Among other things, the FTC noted that Congress specifically allowed electronic communications in other sections of the FCRA.  While this letter does not interpret § 1681b(b)(2)(A), the same argument certainly exists and will likely be raised by the Plaintiff.   
Plaintiff’s Third Premise: E-SIGN doesn’t apply.
We believe Plaintiff’s assertion that E-SIGN does not apply will be a difficult hurdle for Plaintiff to overcome. Section 7001(a) of E-SIGN reads as follows:
Notwithstanding any statute, regulation, or other rule of law (other than this subchapter and subchapter II of this chapter), with respect to any transaction in or affecting interstate or foreign commerce -
(1)        a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and
(2)        a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.
This statute holds that a record relating to a transaction in interstate or foreign commerce may not be denied legal effect solely because it is in electronic form.   
In case one worries that the problem is hidden somewhere in the definitions, rest assured that Section 7006(9) defines the term “record” broadly enough that the FCRA disclosure must be a record:
“The term ‘record’ means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.”
Further, the language of 7001(b) bolsters the conclusion that Congress meant section 7001(a) to get rid of requirements that any be in writing. Section 7001(b) reads:
This subchapter does not -
(1)        limit, alter, or otherwise affect any requirement imposed by a statute, regulation, or rule of law relating to the rights and obligations of persons under such statute, regulation, or rule of law other than a requirement that contracts or other records be written, signed, or in non-electronic form; or
(2)        require any person to agree to use or accept electronic records or electronic signatures, other than a governmental agency with respect to a record other than a contract to which it is a party.
Here, the key language is that the E-SIGN Act does not affect any statutory requirement other than a requirement that records be written.
The Confusion: Consumers Get Heightened Protection.
So where did the Plaintiff get the idea that the E-SIGN Act only “legalizes” consumer transactions? Section 7001(c) establishes a heightened standard for the E-SIGN Act to make electronic disclosures satisfy a legal requirement that a disclosure to consumers be in writing. What is required is a set of disclosures along with a consent. (For example, look to any website where individuals purchase goods and services.) 
As the Plaintiff correctly notes, Section 7006(1) defines “consumer” as “an individual who obtains, through a transaction, products or services which are used primarily for personal, family, or household purposes.”  Therefore, job applicants aren’t “consumers” under the E-SIGN Act, even though they are under the FCRA.  This does not, however, remove Kmart’s disclosure from being considered legally valid under the E-SIGN Act.  It simply means that Kmart did not need to meet the heightened standard of Section 7001(c).  We also see a fundamental flaw in Plaintiff’s argument, especially in light of business-to-business transactions. If one has to be a “consumer” for the E-SIGN Act to apply to the transaction, then huge companies doing business with each other would have to do that business on paper.    Accordingly, we believe the argument is quite strong that electronic disclosure is still the equivalent of a written disclosure under the FCRA.  
Additionally, the Federal Trade Commission explicitly acknowledges the effect of the E-SIGN Act on the FCRA.  In a second opinion letter (known as the Zalenski Letter), the FTC states that the E-SIGN Act had superseded the logic in the Landever Letter: “under the E-SIGN Act, a[n FCRA-governed] consumer’s electronic authorization may not be denied legal effect solely based on its electronic nature.”  In this Letter, the FTC endorsed most of the reasoning set out above, which is reaffirmed in the FTC’s July 2011 Staff Report on the FCRA

To date, Kmart has not formally answered the complaint. We will keep our eye on what the court decides and provide a follow-up in a subsequent blog entry.

About Strasburger & Price

Attorneys from Strasburger & Price, LLP involved in FCRA litigation have been monitoring and analyzing the legislative and caselaw developments related to this area of the law.  This group of lawyers will continue to follow these developments throughout the coming months to help you understand how it impacts your business as well as to help you make the necessary decisions to succeed under this ever changing area of credit reporting and employment screening/criminal and credit background check compliance.

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