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09.15.2015 Legal News

Using Consumer Reports for Hiring Decisions Creates Unanticipated Litigation Risk for Employers

When employers obtain a consumer report for employment purposes, §1681b(b)(3)(A) of the Fair Credit Reporting Act (the “FCRA”) requires issuance of a pre-adverse action notice to the subject of the report (the “consumer”) if the employer determines it may take an “adverse action” based in whole or in part on the information in the consumer report.  The pre-adverse action notice must be sent before the adverse action is taken, and it must include a copy of the consumer report and a summary of the consumer’s rights under the FCRA.  If the consumer does not timely dispute or appeal the information in the consumer report, it is common practice for an adverse action notice to be sent automatically to the consumer at the end of dispute period.  It is possible; however, that following this procedure will result in an employer’s liability for statutory damages under the FCRA, even if the two-step process required by §1681b(b)(3)(A) was followed and the employment decision was proper.

A recent decision allowing such a class action to proceed presents this issue for a large employer.  In Manuel v. Wells Fargo Bank, N.A., 3:14-cv-238 (E.D. Va.), a class has been certified consisting of a class of persons who were not provided a pre-adverse action notice at least five days before they were first coded as ineligible for hire.  Thus, the initial decision that information in a consumer report may disqualify the consumer is being treated as the employer’s final decision, and, therefore, it is an “adverse action” taken before issuance of a pre-adverse action notice.  This class was certified after the court denied Well Fargo’s motion for summary judgment on the ground that it is a factual question for a jury whether or not the act of coding a consumer as ineligible for employment before the pre-adverse action notice was sent is an “adverse action”.

Two earlier decisions highlight the opposing arguments on this issue.  In Obabueki v. International Business Machines Corp., 145 F.Supp. 2d 371 (S.D.N.Y. 2001), plaintiff asserted that IBM had taken an “adverse action” by withdrawing a conditional offer of employment without first sending plaintiff the pre-adverse action information required by §1681b(b)(3)(A).  The court granted defendant’s motion for summary judgment finding that “the statute expressly allows for the formation of an intent to take adverse action before complying with Section §1681b(b)(3) as it states that ‘the person intending to take’ adverse action must provide the report and description of rights.  After all, how can an employer send an intent letter without having first formed the requisite intent?”[1]

A different result was reached in Goode v. LexisNexis Risk & Info. Analytics Group, Inc., 848 F.2d 552 (E.D. Pa. 2012), in which the defendant’s motion to dismiss was denied.  The defendant in Goode is a consumer reporting agency (“CRA”) that sent the pre-adverse and adverse action notices on the employer’s letterhead after notifying the employer of a problem in the consumer report based on criteria established by the employer.  The employer was not sued.  The plaintiffs claimed that the initial determination or adjudication that the plaintiffs had a history of theft or fraud that could prevent their continued employment before sending a pre-adverse action notice was an adverse decision by the CRA under both the statutory definition of “adverse action” in the employment context and the definition of “adverse action” applying to a review of certain accounts.  15 U.S.C. §1681a(k)(1)(ii) and (iv). 

In denying a motion to dismiss this claim, the court in Goode held that the plaintiffs had no real opportunity to change the initial decision and rejected the argument that the initial decision that was made before sending the pre-adverse action notice was not an “adverse action.”  It found that this case was unlike Obabueki because the CRA, not the employer, made the final decision based on the background report and any information provided by the consumer after receiving the pre-adverse action notice.  In this regard, the court noted that the pre-adverse action notice directed the consumer to contact the CRA instead of contacting the employer.  This court believes that there was a lack of involvement of the employer in the decision-making process.

The foregoing cases were considered in Manuel pursuant to stipulated facts concerning the process followed by Wells Fargo.  Wells Fargo uses a CRA to provide a criminal background report on job consumers.  Wells Fargo reviews the reports, and, for those consumers who would not be eligible for the position based in whole or part on the consumer report, it codes the consumer as ineligible for hire.  This code is a direction to the CRA to send each such consumer a pre-adverse action notice automatically followed by an adverse action notice, if the consumer does not dispute the information included with the notice within the specified time period.

In Manuel, the court recognized that “[i]t would be impossible for a company to notify a consumer of a potential adverse action without first determining that such consumer likely does not qualify for a position based, in part, on a consumer report.”  Consistent with this observation, the pre-adverse action used by Wells Fargo states that a “decision is currently pending.” Yet, the court decided this issue will go before a jury.  The court recognized that a reasonable jury could find on these facts that an “adverse action” had not taken place before the pre-adverse action notice was sent.  In the court’s view; however, a reasonable jury could also find that the initial decision was the final decision “because Wells Fargo was comfortable adhering to that decision without reviewing it a second time if the individual did not file a dispute.”


The final outcome of Manuel will be important for employers.  The class definition in Manuel, as currently defined, applies both to consumers who received a pre-adverse action notice and disputed information in the consumer report and to those who did not respond to the pre-adverse action notice.  It is unclear why the court includes these different factual situations in the same class definition as it is likely there will be evidence that consumers who disputed information in the consumer report were subject to a second review by Wells Fargo.  Nevertheless, it is possible that consumers who received a second review as a result of a dispute, consistent with the purpose of the two-step adverse action process in the FCRA, will recover damages.

With respect to consumers who were sent a pre-adverse action notice and did not timely dispute information in the consumer report, the employer has not been put on notice of a possible error in the consumer report or been provided additional information to review.  In such circumstances where there has been no dispute, a second review is not expressly mandated by the FCRA and there is no new information for an employer to review.  Yet, under the ruling in Manuel, Wells Fargo may be held liable for not conducting a second review of the same information previously reviewed before the pre-adverse action notice was sent. 


[1] The U.S. Court of Appeals for the Second Circuit affirmed the decision in Obabueki, and the U.S. Supreme Court denied certiorari.