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FACTA-Based Class Actions: A New Fact of Life For Retailers

January 30, 2008

Since the Fair and Accurate Credit Transaction Act (FACTA) became fully effective in December 2006, federal courts across the country have seen a tremendous spike in class-action lawsuits alleging violations of the statute.  With the recent certification of FACTA classes in the Southern District of California [1] such litigation is no longer a mere possibility, but a genuine and significant risk to retailers.  Given the millions of credit-card transactions that occur every day, the potential statutory damages could be enough to cripple virtually any business. 

FACTA:  A Consumer Protection Law Gone Awry?

On December 4, 2003, Congress enacted FACTA, which amended certain provisions of the Fair Credit Reporting Act (FCRA).  The objective of the law was to reduce consumer exposure to potential theft of credit card information by criminals using discarded receipts.  Similar legislation has been proposed in a number of states, including Texas, requiring merchants to comply with payment-card industry (PCI) standards.

Since December 2006, more than 200 retailers have been named as defendants in cases claiming FACTA violations.  Although no plaintiff has claimed any losses due to credit-card information theft, plaintiffs' attorneys are seeking statutory damages based on theories of "reckless disregard" of, or "willful" failure to comply with, FACTA.  Under the FCRA, retailers found liable for willful violations can face penalties of $100 to $1,000 per transaction.

Most efforts to obtain dismissals of these cases have been unsuccessful, requiring retailers to expend substantial resources to fight class certification.  Some retailers have succeeded in defeating class certification on the ground that the potential damages are so excessive as to constitute a violation of the retailers' constitutional right to due process. [2]  Further, at least one retailer has succeeded on transferring venue to the retailer's home state on convenience grounds. [3]  Finally, Bracewell & Giuliani LLP was recently successful in obtaining dismissal on the basis of an arbitration agreement contained in a retailer's purchasing conditions, the terms of which prohibit class actions. [4]  However, most of these cases are filed in California and Illinois, due to a perception that federal district courts in California and Illinois are more tolerant of these claims and the Seventh Circuit's refusal to deny FACTA class certification on the basis of a potentially unconstitutional recovery. [5]  Thus, as the two recent class certifications in California demonstrate, these claims remain a costly risk for retailers. 

Legislative Corrections Pending

Federal legislators are beginning to realize the full impact of FACTA on retailers.  For example, on October 30, 2007, U.S. Congressman Tim Mahoney (FL-16) introduced H.R. 4008, a bill aimed at amending FCRA and making technical corrections to the definition of willful noncompliance with respect to violations involving the printing of an expiration date on certain credit and debit card receipts.  The bill currently has 11 cosponsors and is pending before the House Financial Services and Judiciary committees.  However, no specific timeframe for consideration of the bill has been set.

Compliance and Caution the Best Policies

Given the current uncertainty of FACTA-related class-action lawsuits and corrective legislation, retailers should take every possible step to ensure full compliance with the law.  If internal audits or threatened legal action identify any potential failures to comply with the statute, businesses should extend their investigations to determine whether these failures were caused by internal actions or by third-party vendors, and respond accordingly.


[1] Medrano v. WCG Holdings, 2007 U.S. Dist. LEXIS 95693 (C.D. Ca. Oct. 15, 2007) and Reynoso v. S. Cty. Concepts, 2007  U.S. Dist. LEXIS 95691 (C.D. Ca. Oct. 15, 2007).

[2] See, e.g., Najarian v. Avis Rent A Car Sys., 2007 U.S. Dist. LEXIS 59932 (C.D. Cal. June 11, 2007); Spikings v. Cost Plus, Inc., 2007 U.S. Dist. LEXIS 44214 (C.D. Cal. May 25, 2007).

[3] Klingensmith v. Paradise Shopes, Inc., 2007 U.S. Dist. LEXIS 51591 (W.D. Penn. July 17, 2007).

[4] Deaton v. Overstock.com, Inc., 2007 U.S. Dist. LEXIS 94436 (S.D. Ill. Dec. 27, 2007).

[5] Murray v. GMAC Mortgage Co., 434 F.3d 948 (7th Cir. 2006).