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Every corporate chief executive officer and corporate counsel should read the 9th U.S. Circuit Court of Appeals opinion in Reynolds v. Hartford Financial Services Group Inc., nos. 03-35695, 04-35279, 2005 WL 2714503 (9th Cir. Oct. 3, 2005, amended Oct. 24, 2005), and it would be wise to read it twice. The case says more than may at first appear. The case addresses alleged violations of the Fair Credit Reporting Act in two consolidated class actions against two insurance companies, Hartford Fire Insurance Co. and GEICO. If your company doesn’t sell insurance or use consumer credit reports, don’t stop reading. The risk exposure created by the decision extends to a far broader range of companies. Reynolds is the bird flu of corporate liability. The Fair Credit Reporting Act, 15 U.S.C. 1681, requires users of credit reports to notify a consumer and provide certain information any time the user takes “adverse action” with respect to the consumer that is based in whole or in part on any information contained in the credit report. Adverse action is defined, among other things, as “an increase in any charge for” insurance. Hartford read the statute not to apply to an initial premium and gave notice only to insureds whose premium was increased from an earlier premium as a result of credit information. Hartford also did not give notice when a credit report indicated no credit information was available, even though a good credit rating might have resulted in a lower premium. GEICO did not treat a report as adversely affecting rates if the premium would have been the same if the company did not consider the information in the consumer report even though a good credit report might have resulted in a lower premium. 9TH CIRCUIT FOUND THAT THE COMPANIES ACTED ‘WILLFULLY’ The district court granted summary judgment for both companies, and the 9th Circuit reversed, holding as a matter of law that both companies had violated the act and that they had done so “willfully.” The FCRA distinguishes between negligent and willful noncompliance, allowing only actual damages for negligence. The consequences of willful noncompliance are considerably more onerous. A party found to have engaged in willful conduct in violation of the FCRA is subject to punitive damages and actual damages not less than $100 nor more than $1,000. The distinction affects more than the maximum penalty in a particular case. It is difficult to sustain a negligence class action under the FCRA. Even if a partial class were certified on liability issues, each insured would have to prove damages individually. When a court finds willfulness as a matter of law, however, a tenable argument could be made for a class action as to minimum statutory damages, dramatically increasing exposure. The broader implications of Reynolds arise from its interpretation of the term “willful” and its treatment of advice of counsel in determining whether a defendant has acted willfully. In terminology, if not application, the court adhered to the definition previously used by the 9th and other circuits. Under that definition, a party acts willfully if it knows that its conduct violates the law or acts with reckless disregard of whether its action is lawful. From that point forward, however, the court skidded well off the precedential track. It gave the phrase “reckless disregard” a meaning that is unsupported by prior decisions in the 9th Circuit or elsewhere, and that leaves corporate clients in a dangerous posture. The court acknowledged that Reynolds was a case of first impression with respect to the FCRA issues it resolved. The trial court had not held an evidentiary hearing on the willfulness question, and it had not been briefed on appeal by the insurance companies. Nonetheless, the appellate court decided as a matter of law that the companies had acted willfully even if they had sought and abided by advice of counsel. The court held that a party cannot rely upon “creative lawyering that provides indefensible answers to issues of first impression” or “implausible interpretations” to avoid a finding of willfulness. In a partial dissent, Judge Jay S. Bybee agreed with the panel’s interpretation of the reporting requirements of the FCRA, but dissented on the question of willfulness, stating that he could not conclude on the basis of the record that the defendants’ actions were “so ‘indefensible,’ ‘implausible,’ ‘untenable,’ ‘plainly unmeritorious,’ ‘clearly contrary to the FCRA’s language,’ ‘nonsensical’ and without ‘colorable argument’ ” as to support a finding of reckless disregard. Bybee noted the unreasonableness of finding that the defendant acted with reckless disregard for the law by relying upon a statutory definition with which the trial court itself had agreed. No one would suggest that a client should be able to hide behind advice of counsel when the advice is patently unreasonable or the client has knowingly contributed to a flawed legal analysis. Courts have rarely held advice of counsel to be an absolute defense against a finding of willfulness. However, the denial of the defense has historically arisen from some conduct by the client that resulted in the erroneous advice, such as failure to provide the attorney with material information or from circumstances that should have given the client reason to be wary of the accuracy of the advice received. Many of the latter circumstances have arisen in patent infringement cases when the infringer was on notice that it was infringing on another’s patent and yet relied upon an oral, an informal or a conclusory opinion that the patent was invalid. The Reynolds record before the appellate court contained none of those elements. Moreover, the determination of both willfulness and the reasonableness of relying upon legal advice have always been considered issues of fact requiring evidentiary hearing. Yet no such hearing occurred in Reynolds. The 9th Circuit formulated a troublesome new doctrine — the “creative lawyering” exception. That doctrine as applied by the court holds that a party can be found to have willfully violated the law, even if it acted in good faith on advice of counsel, simply because a majority of the appellate panel finds that the lawyer’s legal theory falls below some undefined level of persuasiveness. Even though the theory is tenable enough to be embraced by a learned trial judge, the lay client is expected to analyze its lawyer’s theories and determine whether they meet the “creative lawyering” test. Factual circumstances are of no relevance. The 9th Circuit has thus shifted the question from the good faith of the client to the reasonableness of the lawyer’s analysis. HOLDING WOULD APPLY TO A WIDE VARIETY OF CASES The 9th Circuit’s new doctrine would apply in a wide variety of cases. Willfulness is a standard for liability or enhanced penalties, either by statute or judicial decree, under the Age Discrimination in Employment Act, the Fair Labor Standards Act, the Occupational Safety and Health Act, federal patent and copyright laws, federal and state securities laws and a multitude of commercial criminal provisions. The willfulness standard can touch the great majority of companies at any time. Even if other circuits do not follow Reynolds and even if a company isn’t headquartered in one of the nine states that comprise the 9th Circuit, such a company wouldn’t be safe from nationwide liability based on Reynolds. Any company doing business in one of the 9th Circuit states, which include Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington, faces the prospect of being named a defendant in a nationwide class action filed in any federal court in the 9th Circuit. Since the law of the forum would apply, the Reynolds holding would be binding. COUNSEL MUST BE EXTRA DILIGENT IN ADVISING CLIENTS Hopefully, Reynolds will prove to be an anomaly, but the decision should sensitize corporate counsel to the need for extra diligence when advising clients with respect to compliance, particularly as to requirements that carry enhanced penalties for willful violation. The most common grounds for rejecting the advice of counsel defense are that the opinion was oral or informal, the client failed to provide the lawyer with material facts, the lawyer lacked sufficient expertise or the opinion failed to reflect diligent research by the lawyer. Counsel should remain conscious of the importance of creating sufficient documentation to protect the client. It is likely that the failure of clients to provide material facts is more often the result of a lack of understanding of what is material or a failure to make adequate effort to assemble the facts than a conscious effort to mislead counsel. Counsel should make a conscientious inquiry into the facts. The opinion should be in writing, reflect thorough research and set forth the lawyer’s analysis in a manner designed to illustrate that the lawyer has attempted in good faith to determine the intent of the law, not to engage in “creative lawyering” in an effort to evade the law. If in-house or outside general counsel lack sufficient expertise or experience with respect to the law at issue, the matter should be referred to a lawyer better equipped to opine on the issue. It should be remembered that the question of willfulness is, Reynolds notwithstanding, generally a question of fact that requires an evidentiary hearing. Courts have consistently held that when the advice of counsel defense is asserted, the attorney-client privilege is waived. Consequently, in conversations between counsel and client regarding the opinion, caution should be maintained to avoid anything that could later be interpreted as an effort by the client to pressure counsel to reach a desired result. Barry Richard, based in Tallahassee, Fla., is a principal shareholder at Greenberg Traurig. He was lead litigation counsel in Florida for George W. Bush during the 2000 Bush-Gore election dispute.

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