Employer Alert: Fair Credit Reporting Act And Employment Investigations

June 1999

On April 5, 1999, an FTC staff attorney issued an advisory letter, opining that employers using "outside organizations" to conduct sexual harassment investigations are covered by the Fair Credit Reporting Act ("FCRA") and must comply with its various disclosure and consent requirements. These obligations include: (1) advance notice to the "consumer" (the employee being investigated); (2) the employee's consent to the investigation; (3) a description of the nature and scope of the proposed investigation if the employee so requests; (4) release of the unredacted investigative report to the employee; and (5) notice of FCRA rights prior to any adverse employment action.

These disclosure obligations presumably would apply not only to sexual harassment investigations, but also to any employment investigation that meets the FCRA definitions and is conducted for a fee by an "outside organization," such as a private investigator, consultant, or law firm. This interpretation of the FCRA means that employers would be required to obtain the consent of employees suspected of theft, discrimination, SEC violations and other malfeasance prior to directing an outside organization to investigate.

Individual consumers can recover actual damages (including pain and suffering), costs and attorneys' fees for negligent noncompliance with the FCA, and punitive damages in the case of willful noncompliance. In addition, the FTC has administrative enforcement authority, including the power to investigate and bring civil actions; the court may assess civil penalties of $2,500 per violation. State law enforcement agencies also may bring actions in federal district court to enjoin violations and/or seek damages. Criminal penalties may be assessed for obtaining information from a consumer reporting agency under false pretenses.

The primary support for the FTC's position lies in the broad language of several FCRA provisions. A consumer report, for example, is defined as any type of communication "bearing on," among other things, "character, general reputation, [or] personal characteristics...collected in whole or in part...for employment purposes..." [emphasis supplied]. For this reason, the FTC historically has taken an expansive view of the FCRA's requirements, and particularly since the 1996 amendments to the FCRA.

Although most of the case law deals with credit reports prepared by conventional credit agencies, a few courts have treated the FCRA very broadly, finding, for example, that drug tests and reports regarding criminal convictions are consumer reports. We know of no court that has interpreted the FCRA as expansively as the FTC staff letter, however. We believe that the FTC staff interpretation is incorrect for the following reasons:

· Investigative reports prepared by law firms (and to a lesser extent by private investigators and consultants) typically do not meet the definition of "consumer report" or "investigative consumer report" in that they are designed to determine whether certain conduct has occurred, not to take employment action based on the character or reputation of the investigative subjects.

· The definition of a "consumer reporting agency" does not clearly encompass law firms and other outside organizations that do not necessarily "regularly engage in whole or in part...in...assembling...information on consumers."

· The legislative history and policies underlying the FCRA do not evidence any intent to cover sexual harassment or other investigations of employee misconduct conducted by law firms and other organizations.

· Employers who follow the FCRA's disclosure and consent requirements prior to investigating cannot comply effectively with their obligations under federal discrimination and securities laws -- the suspected employee can simply withhold his or her consent to any investigation.

· Even if the FCRA applied to employment investigations by outside counsel, employers would have a strong argument that confidential communications with their attorneys about an investigation were privileged. This argument would not apply, however, to investigations as to which the employer intends to disclose the results as part of its affirmative defense to discrimination claims, nor would it apply to investigations conducted by private investigators and non-attorney consultants.

· An FTC staff advisory letter, such as the April 5, 1999 letter, does not carry any

particular precedential significance. Courts have given such letters much or little weight, depending on whether they agree with them.

Recommendations

Although these considerations provide some comfort that the FTC staff letter will not be controlling in the event of litigation, we want you to be aware of the issues as you plan your employment investigations. As noted above, we believe that employers using outside organizations (particularly law firms) to investigate have a number of strong defenses available should an employee or the FTC sue for failure to comply with FCRA disclosure requirements.

We also believe that the advantages of such outside investigations can, in many circumstances, outweigh the risks of FCRA litigation. Nevertheless, given the uncertain state of the case law and the broad language of the FCRA, the outcome is not guaranteed.

We are working with the staff of the FTC and the EEOC to try to resolve these issues, and will seek to involve other federal agencies as well. We will keep you apprised of the status of our dialogue. In the meantime, if you have any questions about this "alert" or about the applicability of the FCRA to a specific employment investigation, we would be pleased to consult with you. If you have particular issues or problems you would like raised in our discussions with agency officials, please contact Anne Murphy at (202) 467-7058.

This White Paper is published to inform clients and friends of Morgan Lewis and should not be construed as providing legal advice on any specific matter.