The U.S. Court of Appeals for the Third Circuit has ruled that the Fair Credit Reporting Act applies to an alert a creditor obtained from a consumer reporting agency to determine whether a credit applicant was listed on the Specially Designated Nationals and Blocked Persons List, compiled by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC).

The decision in Cortez v. Trans Union, LLC,  issued on August 13, 2010, is the first court of appeals ruling on this issue. 

The OFAC alert was included in a Trans Union credit report issued to a dealer from whom the plaintiff sought financing to purchase a car. The alert incorrectly indicated that the plaintiff was a "match" with a person on the OFAC list, despite differences between the names and birthdays of that person and the plaintiff's. The plaintiff filed an action under the FCRA after Trans Union failed to correct the inaccurate information or otherwise satisfactorily respond to her dispute. A jury found both negligent and willful FCRA violations by Trans Union, and awarded the plaintiff $50,000 in compensatory damages and $750,000 in punitive damages. The punitive damages award was later reduced by the U.S. District Court for the Eastern District of Pennsylvania to $100,000.

In affirming the District Court judgment, the Third Circuit rejected Trans Union's central position that the FCRA does not cover OFAC alerts because, by contract, credit grantors are to use them only to comply with the USA Patriot Act's prohibition on extending credit to people on the OFAC list—not to establish credit eligibility. According to the Third Circuit, it was "difficult to imagine an inquiry more central to a consumer's 'eligibility' for credit than whether federal law prohibits extending credit to that consumer in the first instance."

The Third Circuit found that the compensatory damages award was supported by evidence that the inaccurate OFAC alert caused the plaintiff's emotional distress and was not excessive. Most significantly, it also found that the punitive damages award for willful FCRA violations was appropriate as a matter of law.

Although acknowledging that the issue before it was one of first impression, the Third Circuit nevertheless observed that the "breadth and scope of the FCRA is both evident and extraordinary" and that the FCRA was "far too clear" to support Trans Union's reading. As a result, the Third Circuit had little difficulty concluding that the law did not preclude a finding that Trans Union acted "'in reckless disregard of [the FCRA because it] ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless,'" quoting the standard for willful FCRA violations established by the U.S. Supreme Court in Safeco Insurance Co. of America v. Burr

The Third Circuit also rejected Trans Union's argument that the punitive damages award violated its due process rights under the 14th Amendment, observing that it did "not even begin to approach the outer limit of punitive damages" allowed for purposes of deterrence and retribution by the Constitution and that a punitive damages award of twice the compensatory damages award did not create a disparity that fell outside the U.S. Supreme Court's  standard "for ordinary cases of a single-digit ratio."

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or; John L. Culhane, Jr., 215.864.8535 or; Barbara S. Mishkin, 215.864.8528 or; or Mark J. Furletti, 215.864.8138 or

Copyright © 2010 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.