In Smith v. LexisNexis Screening Solutions, Inc., the Sixth Circuit reversed a $150,000 punitive award in a suit under the Fair Credit Reporting Act. The case arose when LexisNexis was conducting a criminal background check for a potential employee named David Smith.  The check returned a fraud conviction for a different David Smith, but not the applicant.  The aggrieved applicant sued, largely challenging LexisNexis’s alleged negligence in the course of conducting the background check.

Although LexisNexis offered evidence of a 99.8 percent accuracy rate for its background reports, the Sixth Circuit concluded that the evidence introduced at trial, viewed in the light most favorable to the plaintiff, sufficed to establish negligence, although it noted that the issue was a “close call.” But when it turned to the punitive award, the Sixth Circuit had no hesitation in reversing.  Although a jury could find LexisNexis negligent, according to the Court, “that is a far cry from being willful.”  In light of the evidence produced by LexisNexis regarding its efforts to combat inaccuracies, the Court simply could not find a willful of the FCRA necessary to support a punitive damages award.  This was particularly true in light of the fact that LexisNexis corrected the mistake not long after the Plaintiff raised the issue.

Standing and Data Breach Suits in the Sixth Circuit

A divided panel of the Sixth Circuit recently overturned a district court’s dismissal of claims against Nationwide Mutual Insurance Company involving the theft of data, as hackers breached Nationwide’s computer network to steal the plaintiffs’ personal information.  The plaintiffs In Galaria et al. v. Nationwide Mutual Insurance Co., asserted claims against Nationwide under the Fair Credit Reporting Act (FCRA) in addition to a number of common law claims (including negligence and bailment).  The district court dismissed the common law claims for lack of Article III standing, and dismissed the FCRA claims for lack of “statutory standing,” and as an issue of subject matter jurisdiction, because the plaintiffs alleged that Nationwide violated the FCRA’s statement of purpose rather than any substantive provision.   The panel reversed the district court on both fronts.

With respect to the plaintiffs’ FCRA claims and “statutory standing,” the panel explained that “statutory standing” is an inquiry that goes to whether or not the plaintiff has a cause of action under the statute (i.e., whether the plaintiff falls within the class of plaintiffs authorized to sue under the statute) and is analytically distinct from whether federal courts have the power to adjudicate a dispute (compare with Article III standing and the Constitution’s limitation that the federal judicial “power” extends to “cases” and “controversies”).  Therefore, the proper course for dismissing a claim where there is a lack of “statutory standing” is to dismiss it for failure to state a claim rather than a lack of subject matter jurisdiction, and the Court returned that question to the district court for further consideration.  In a footnote, the Court mentioned the Supreme Court’s recent decision in Spokeo, Inc. v. Robins and noted that FCRA claims may present Article III standing issues where alleged violations of the statute are procedural in nature but, in any event, the plaintiffs here had satisfied the Article III injury requirement.  Specifically, the Court found that Article III injury was satisfied at the pleading stage by “allegations of a substantial risk of harm, coupled with reasonably incurred mitigation costs.”  Regarding mitigation costs, the Court noted allegations that “[p]laintiffs and the other putative class members must expend time and money to monitor their credit, check their bank statements, and modify their financial accounts.”

The primary focus of the dissent was that it was unnecessary for the Court to reach the issue of Article III “injury” because the plaintiffs had failed to satisfy the separate traceability/causation requirement for standing (i.e., that there is a sufficient connection between the defendant’s actions, or inactions, and the plaintiff’s injury).  The dissent reasoned that any injury suffered by the plaintiffs was “at the hands of criminal third-party actors” and that the plaintiffs failed to allege facts that fairly traced their injury to Nationwide.  In contrast, the majority emphasized the low-threshold nature of the traceability inquiry and found the requirement satisfied because “but for Nationwide’s allegedly lax security, the hackers would not have been able to steal [p]laintiffs’ data.”  The dissent argued that the plaintiffs’ allegations about lax security were conclusory statements, not factual allegations entitled to deference.

Car Dealership That Sets Terms of Credit Must Comply With Equal Credit Opportunity Act

Under the Equal Credit Opportunity Act (“ECOA”), creditors who deny credit or change the terms of credit arrangements must notify applicants of the specific reasons why.  At issue in the Sixth Circuit’s recent decision in Tyson v. Sterling Rental, Inc. is whether a “middle man” like a car dealership is a “creditor” that must meet the ECOA’s notice requirement.  The Sixth Circuit held that yes, car dealerships and other intermediaries qualify as “creditors” that must provide notice of adverse actions if they participate in financing arrangements for their customers.

In Tyler, the Plaintiff made a down payment for a used car from defendant Car Source.  For the rest of the car’s cost, Plaintiff was put on a financing plan.  Plaintiff provided pay stubs and bank statements to Car Source, and Car Source set the terms of the financing agreement by inputting Plaintiff’s financial information into a computer program.  Car Source then assigned the agreement to a third party, Credit Acceptance Corporation (“CAC”), which ordinarily would provide Car Source an advance if it was satisfied with the financing terms.  In this case, however, the terms were based on an overestimation of Plaintiff’s monthly income, either due to an error by the salesperson or the computer program.  Discovering the discrepancy, CAC refused to pay Car Source an advance.

Car Source demanded that the customer come back to the store and pay an additional payment of $1,500 to keep the car.  It is undisputed that Plaintiff was never provided with written notice explaining why the terms of her credit arrangement were changed.  The primary issue on appeal was instead whether Car Source is a “creditor” for purposes of the ECOA who was required to provide notice.  The statute defines such creditors as those who “in the ordinary course of business, regularly participate[] in a credit decision, including setting the terms of the credit.”

Car Source argued that it was merely a middle man between the applicant and CAC, to whom the financing agreement was assigned.   The Sixth Circuit disagreed, noting that Car Source set the terms of the deal, bore the consequences of the financing falling through, and made the unilateral decision to change the terms of the existing credit arrangement.  Adopting the Seventh Circuit’s “continuum” analysis, the court held that even “middle men” such as dealerships are required to provide notice so long as they regularly participate in credit decisions.  The court also concluded that injunctive relief is available to private parties under the plain language of the ECOA, and it reinstated Plaintiff’s statutory claim for conversion under Michigan law.

Just Approaching The Canadian Border Can Satisfy The Fourth Amendment’s Probable Cause Requirement For A Suspicionless Search

In D.E. v. Doe (15-2128), the Sixth Circuit upheld the conviction of a teenager who “took a wrong turn on his way to summer camp.”  When he reached the Canadian border, he asked permission to turn around without crossing the border—but had his car searched instead.  The opinion written by Judge Rogers holds that a search was reasonable because the Customs and Border Protection officers cannot “tell the difference between a motorist who has just crossed the border … and a ‘turnaround motorist’ who is at the border area by mistake.”  Because the teenager was near the international border, the panel held that he had to submit to a suspicionless search.

Judge Keith disagreed, arguing that a suspicionless search is only allowed when a person actually crosses the border, and that the difficulty in deciding whether a person actually crossed the border does not excuse that constitutional limitation.  He also explained that because Customs and Border Protection chooses to “comingle non-crossing motorists with crossing motorists” they should not complain that it is hard to distinguish the two.  Judge Keith was “deeply troubled” that the government admitted that its usual practice, which plainly violates the Fourth Amendment, was to conduct suspicionless searches of people that did not cross the border.

Judicial Candidates and Free Speech

In a recent decision that affects judicial elections in Kentucky and throughout the Sixth Circuit (Winter v. Wolnitzek), a unanimous panel weighed eight provisions in Kentucky’s Code of Judicial Conduct against the First Amendment free speech rights of judicial candidates. 

 The specific provisions included prohibitions on (1) “campaign[ing] as a member of a political organization” [facially unconstitutional]; (2) “mak[ing] speeches for or against a political organization or candidate” [facially unconstitutional] (3) “mak[ing] a contribution to a political organization or candidate” [upheld] (4)  “publicly endors[ing] or oppos[ing] a candidate for public office” [upheld, but doesn’t apply to opposing one’s own opponent]; (5) “act[ing] as a leader or hold[ing] any office in a political organization” [upheld]; (6) making “false [] statements” “knowingly” or “with reckless disregard for the truth” [facially constitutional but unconstitutional as applied to one plaintiff]; (7) making “misleading” statements [facially unconstitutional]; and (8)  making “commitments” concerning “cases, controversies, or issues that are likely to come before the court” [remanded for further consideration concerning the clause’s meaning].       

 While the Court’s analysis of each provision contains elements of nuance in First Amendment analysis, a key theme running throughout the opinion is that if states decide to elect judges then they cannot deny those candidates the ability to express their beliefs and argue why they are the best candidate for the job (i.e., campaign).  But at the same time that is different than engaging in more quid pro quo-type activities traditionally associated with political actors gathering influence (e.g., making financial contributions, publicly endorsing other candidates, and/or holding office in political organizations).  Given the traditional difference between judges and elected officials in the other branches of government, and the importance of judges applying the law without partiality (or the appearance of any partiality), the latter activities may be prohibited if the law is narrowly drawn to serve that compelling interest.  Ultimately, the court ruled that three of the provisions were unconstitutional on their face (campaigning, speeches, and misleading statements), one was facially constitutional but unconstitutional as applied (false statements), and three were constitutional (endorsements, acting as a leader, and contributions).  With respect to the “commitments” clause, the Court vacated the district court’s judgment and remanded for further consideration.



Sixth Circuit Vacates $20 Million Arbitration Award

In an unpublished opinion Star Insurance Company vs. National Union Fire Insurance Company of Pittsburgh, PA, the Sixth Circuit vacated a judgment of the district court confirming an arbitration award for roughly $20 million.  To say that is an unusual outcome is an understatement, as courts generally confirm arbitration awards against all manner of challenges.

What made this case unique was the potential taint on the three arbitrator panel caused by ex parte communications between counsel and an arbitrator. In this case, each party selected an arbitrator and those two arbitrators appointed the third neutral.  However, they entered into a scheduling order that specified that all ex parte communications should cease by a specific date certain. After the panel issued an interim award, one of the party arbitrators began communicating ex parte with one of the parties.  Working in conjunction with the neutral, this party arbitrator effectively disenfranchised, in the words of the Sixth Circuit, the other party’s arbitrator.  The two arbitrators agreed on a number of orders without input from the third.

Assessing this under Michigan law, the Court declined to draw a bright line rule that simple ex parte communication would irrevocably taint an arbitration award. Instead, relying on cases from Michigan explaining that ex parte communications in contravention of an arbitration agreement could taint the award, the Court held that the communications violated the scheduling order that barred ex parte communications, and thus represented a ground for vacatur of the award.  The Court rebuffed a variety of challenges by the prevailing party, concluding that this was an arbitration in which “the coincidences all broke one way.”

Ex parte communications in arbitration can be a very sensitive topic, and this case illustrates the need to police such activities, and the benefits that may flow memorializing either in an arbitration agreement or in a scheduling order a prohibition on ex parte communications.

Sixth Circuit Rejects Solar Energy Antitrust Claim

In Energy Conversion Devised Liquidation Trust vs. Trina Solar Limited, the Sixth Circuit rejected a $3 billion antitrust case filed by a bankrupt solar energy company.  The plaintiff alleged that three solar panel producers in China agreed to decrease prices to below cost levels, with the support of the Chinese government, and in so doing, drove the plaintiff out of business.  The plaintiff accordingly filed an antitrust suit under § 1 of the Sherman Act seeking to recover damages.

The Sixth Circuit began its analysis by noting that under § 2 of the Sherman Act, for predatory pricing claims, the plaintiff must plead and prove that (1) the defendants charged below caused prices, and (2) they had reasonable prospect of recouping their investment in the below cost prices. The question this appeal boiled down to was whether the latter requirement also applied to a § 1 claim.  The Sixth Circuit ultimately concluded that it did, in large measure because if the plaintiff could not plead or prove that the antitrust actor was ultimately hoping to harm consumers by higher prices, than there may be no actual consumer injury.  Likewise, the Court found support both in Supreme Court authority, prior Sixth Circuit precedent, and cases from other circuits to support the proposition that a § 1 claim had to establish that the actor would ultimately recoup its losses.

At the end of its opinion, the Court paused to consider the plaintiff’s request for leave to file an amended complaint alleging recoupment. Although courts should freely grant leave to amend, the Court pointed out that the permissive standard changes in the wake of an adverse judgment.  At that point, courts must consider the finality of judgments and therefore the plaintiff seeking amendment bears a heavier burden that includes a request to reopen the case.

Sixth Circuit Rejects College Athletes’ “Legal Fantasy”

The Sixth Circuit issued a short tongue-lashing this week, calling claims by former college athletes in Marshall v. ESPN, “a legal fantasy.”  Former basketball and football players brought a putative class action against college athletic conferences and TV networks, claiming a right to the licensing of their names and images in the television broadcast of their college sports games.  Without licenses from every player, the plaintiffs argued, those broadcasts are illegal.

“To state the plaintiffs’ theory in this case is nearly to refute it,” the unanimous panel held.  The players grounded their claims in Tennessee state law on rights of publicity.  But the Sixth Circuit ruled that Tennessee law does not recognize a “right of publicity” for the players in this context.  The Tennessee statute contains an express exemption for “sports broadcast,” and the Court suggested that the statute is exclusive.  The Court further concluded that there is no common law claim recognized in Tennessee courts.

Based on the holding that no such licensing rights exist in this context, the Court also rejected a Sherman Act claim alleging a price-fixing scheme to fix the price of those rights at zero.  A false endorsement claim under Lanham Act received similar cursory treatment.  Plaintiffs alleged that defendants created a false perception that the athletes endorsed products being advertised during broadcasts.  But, “[o]rdinary consumers have more sense than the theory itself does,” the panel explained.

This case turned on exceptions in Tennessee state law to rights of publicity.  Whether such claims could remain viable under the law of other states is not addressed by the panel, although the opinion suggests courts will remain skeptical. 


Sixth Circuit Limits Successor Liability For Product Defects

When one company acquires another, the “successor” company is not automatically responsible for warning purchasers regarding alleged defects in products previously  sold by its predecessor.  In Holland v. FCA US LLC, the Sixth Circuit affirmed the district court’s grant of a motion for judgment on the pleadings in favor of a successor to an automobile manufacturer whose 2004-2005 vehicles were allegedly prone to premature rust and corrosion.

The court’s  holding that plaintiffs had failed to allege a sufficient “economic relationship” or any other assumption of a duty to warn by the successor. Among other things, the court rejected the plaintiffs’ attempt to hold the successor corporation liable under a failure-to-warn theory where the damages were purely economic—costs of repair to the vehicles themselves—pointing out that the costs were “the result of the defect, not [the defendant-successor’s] failure to warn.”  A post-succession warning by the defendant would have done nothing to avert any alleged premature rust or corrosion.  Thus, there was no need to reach the question of whether the successor knew of the defect or whether, under Ohio law, such knowledge would have been sufficient to impose a duty to warn.

This decision provides helpful additional guidance for those contemplating mergers and acquisitions of product manufacturers.

Cloud Storage Trips Up Spyware Software Service Under The Wiretap Act

In Luis v. Zang (No. 14-3601), the Sixth Circuit held that a maker of monitoring software was potentially liable under federal and state Wiretap Acts—not for selling the software, but for saving the intercepted communications on its own servers.  The plaintiff claimed that the defendant Awareness Technologies, Inc. markets the WebWatcher brand as allowing customers to create a secret record of the target’s computer activity in “near real-time” on its cloud servers.  He alleged that the WebWatcher software was used to illegally intercept his communications, and that Awareness marketed WebWatcher to encourage those illegal uses.

In an opinion by Judge Gilman, a divided panel held that the plaintiff stated a claim under 18 U.S.C. § 2511, 2512 & 2520(a).  Following other circuits, it held that an “intercept” under the Wiretap Act must occur “contemporaneously with the transmission” of the communication.  WebWatcher met that standard because of its real-time monitoring and ability to capture communications that are not saved by the target.  More importantly, the panel held that Awareness was “engaged in” the illegal surveillance under Section 2520 because the captured communications were saved on its own servers.  If the software saved the files directly on the customer’s computer, rather than the cloud, it may have avoided application of the Wiretap Act.

In dissent, Judge Batchelder argues that the complaint insufficiently alleges that Awareness itself intercepted any communications under Section 2511.  She also argues that WebWatcher does not violate 18 U.S.C. § 2512 because it is consistent with uses requiring “full disclosure, including an employer’s monitoring of its employees or parental monitoring of children.”

This decision may have significant implications for companies that market and support software tools that can be used for illegal purposes.