The Major Verdict in a Recent Identify Theft Case: How It Underlines the Risk for Financial Reporting Companies, and the Difficulty of Calculating Accurate Damages in This Area

The U.S. Court of Appeals for the Fourth Circuit recently upheld a sizable verdict against a credit agency for failing to promptly and efficiently aid a victim of identity theft. The decision in Sloane v. Equifax Information Services does not break new doctrinal ground. It does, however, underscore how identity theft could become a headache not only for individual consumers, but large financial reporting companies. The case also highlights the difficulty of determining non-economic damages in cases involving consumer activities.

The Facts of the Case

On June 25, 2003, Suzanne Sloane ("Sloane") entered Prince William Hospital in Virginia to give birth. While she was there, a hospital employee named Shovana Sloane stole her social security number and, between November and December 2003, created a debt of $30,000 in Sloane's name.

Sloane was finally alerted of the debt in January 2004, when Citibank notified her that it had cancelled her credit card and told her to contact Equifax. Equifax, which is one of the "big three" credit reporting agencies in the nation, had collected a record of credit defaults caused by Shovana Sloane and had released this information to anyone--such as Citibank--who paid for this information. This is, after all, what a credit reporting agency does. It is how they make their money.

Sloane contacted Equifax, which gave her instructions about how to correct her credit history. This required her to obtain numerous notarized forms, and she took two days off from work to complete the forms and submit them to the more than twenty creditors who had contacted Equifax. Sloane acted as quickly as she could--in fact, due in part to her diligence, Shovana Sloane was arrested and convicted of identity theft.

Sloane soon realized that Equifax not only had not corrected her credit report, but had actually begun to compound the damage from the information generated by Shovana Sloane. In March 2004, Sloane and her husband were refused a pre-qualification letter for a mortgage to buy a vacation home because, according to the credit officer, Sloane had the "worst" credit score the officer had ever seen.

Between March 2004 and November 2005, Sloane's life was turned upside down by Equifax's continued incompetence. In October 2004, she and her husband were refused credit to purchase a used car to replace a family car that was breaking down; the salesman insisted Sloane's name be removed from the transaction. In January 2005, they were informed that, due to Sloane's credit history, they would be offered only a very expensive adjustable rate mortgage, instead of the fixed 30-year mortgage they had been offered, to buy the vacation home she and her husband had been planning to purchase.

The constant stress and humiliation of having no access to credit, according to the Fourth Circuit, "significantly contributed" to Sloane's marriage almost ending. She and her husband fought about the real reason for their credit problems; they began to sleep in separate rooms; and Sloane's husband began to take significant steps towards obtaining a divorce.

Finally, in November 2005, Sloane sued all three of the national credit reporting agencies, the Prince William Hospital and the employment agency that had helped place Shovana Sloane. Sloane settled with all the defendants but Equifax.

The Basis for the Suit: The Federal Credit Reporting Act

Sloane sued the credit agencies under the Federal Credit Reporting Act, a 1968 law Congress passed to protect consumers from negligently-maintained credit records. The law sets out requirements to ensure that credit reporting agencies maintain accurate records, and it provides for a private right of action by injured consumers, who may seek to recover damages in the event that a credit reporting agency negligently violates any of the statute's requirements.

At trial, the jury found that Equifax had violated the FCRA and awarded Sloane $106,000 in economic losses and $245,000 in mental anguish. Although the statute allows for punitive damages, none were awarded (it is unclear whether any were requested).

The Arguments on Appeal, and the Court's Decisions on Each

On appeal Equifax, did not challenge any of the jury's findings about liability. However, it challenged the damages awarded on three grounds. First, Equifax complained that because the injury suffered by Sloane was a single, indivisible injury caused by all three credit agencies, the settlements with the other two agencies should have been credited against the damages found by the jury. Second, Equifax argued that Sloane submitted no evidence to support her claim that she suffered economic injury, so that part of the verdict had no basis in fact. Third, Equifax argued that the jury was unreasonable in finding that Sloane suffered $245,000 in pain and suffering, and argued that the trial judge should have remitted the amount to just $25,000.

The Fourth Circuit found the first two arguments almost completely without merit. It observed that, although Sloane had sued the other two credit reporting agencies, her case against Equifax was quite different than her case against the other two. For example, she had contacted Equifax a full year before she had contacted the other companies, and the other companies had rectified the erroneous information in their records relatively quickly. (This might explain why Sloane was able to settle with them; perhaps her case was weak, and certainly her damages were more limited.) Moreover, the Fourth Circuit found that Sloane did, indeed, provide evidence of economic harm.

The Fourth Circuit admitted, however, that Equifax's third objection raised some tricky issues. While it found Equifax's claim that Sloane suffered no more than $25,000 worth of pain and suffering arbitrary and implausible, it also was bothered by the jury verdict of $245,000. It noted that this amount was far more than any other reported non-economic damages award under FCRA, save one $400,000 award upheld by the U.S. Court of Appeals for the Sixth Circuit, which the Fourth Circuit called an "anomaly."

In the end, the Fourth Circuit cut Sloane's award down to $150,000. That is a pretty big reduction, and it is not clear what motivated the court, or why it picked that number.

The Lessons of the Sloane Case

What does Sloane's pain and suffering at the hands of Equifax teach us about the difficulties of determining non-economic damages in cases involving consumers injured by corporation?

To begin, there is no denying that Sloane suffered as a result of Equifax's negligence. The facts as reported by the court should resonate with many readers. Ironically, middle- class persons are especially vulnerable to the kind of injury inflicted by credit agencies. The middle class is wealthy enough to try to use the financial instruments marketed so aggressively by the financial services industry, but not so wealthy that they can ignore or weather a few bad credit reports. The sort of personal hell Sloane experienced is something she could only have avoided if she did not want to buy a car on credit, or buy a vacation house, or have a credit card. But she did, and reasonably so. Indeed, her desires are often held up as exactly the sort of desires that have kept this economy going. Sloane was not vulnerable to Equifax because she was greedy; all she wanted was what she was told she was entitled to want.

There is also no denying that $245,000 is a lot of money for pain and suffering. Something about Sloane's case must have resonated with the jury, and it is not hard to guess what that might be. Sloane's victory over Equifax reminds me of the massive pain and suffering award received by the plaintiff in State Farm v. Campbell, the infamous 2003 punitive damages case from Utah that I wrote about in a prior column. In Campbell, all the attention was on the $145 million punitive damages award. No one commented on the fact that the underlying compensatory award of $2.6 million was for the pain and suffering caused by State Farm to the plaintiff when it refused to settled a lawsuit against the plaintiff at the policy limits, thus exposing the plaintiff to the risk of losing his home--something which never happened, but almost did, thus causing the pain and suffering.

Behind jury verdicts like Sloane and Campbell are juries who identify with the highly sympathetic middle-class plaintiffs, who themselves did nothing wrong, yet suffered emotionally because of some paper-pusher's mistake. The juries are open to the argument, pushed by the plaintiffs' lawyers, that the damages in a tort suit are the only way to discipline companies who have developed enormous and apparently unaccountable power.

The problem, however, is that the pain and suffering stage in a consumer rights suit is a terrible place to start making decisions about how to regulate the credit reporting and insurance industries. As the Fourth Circuit said when it explained why it reduced Sloane's award, the common law seems to permit very large damages awards in defamation suits. Yet despite the fact that Sloane's "financial reputation" was ruined, the Fourth Circuit refused to compare her $245,000 pain and suffering award to defamation awards in similar amounts, which also represented significant harm to the plaintiff's reputation.

As the Fourth Circuit itself noted, FCRA cases are changing. Whereas errors used to arise from simple carelessness within the banking industry itself, the possibility of the errors' resulting, instead, from identity theft, as occurred here, is increasing, along with the ubiquity of the Internet, Wi-Fi, and smartphones. Credit reporting agencies will be the means by which much more misinformation will be "published" and the consequences of lax practices for correction will grow even more severe.

It may be that Congress will have to revisit the FCRA and create a statutory set of penalties that will force the credit reporting agencies to treat identity theft more seriously than Equifax seems to have done, in Sloane's case. Otherwise, juries will do it for Congress, and more courts will face the same quandary faced by the Fourth Circuit in Sloane v. Equifax.