Supreme Court to Hear Credit Scoring Disclosure Case

September 27, 2006

The U.S. Supreme Court said this week it will consider several business cases during its upcoming term, including a case that could make it easier for consumers to hold insurers, banks and other businesses liable for not notifying them when their credit rating changes.

The case involves conflicting interpretations of the Fair Credit Reporting Act by lower federal courts in class action lawsuits against Geico General Insurance Co., Safeco Insurance Co. of America and others. The Act requires companies to notify consumers about rate increases that are based on information in their consumer credit reports.

In most federal courts, consumers alleging business violations of the disclosure requirements must show that businesses knew they had violated the law when they failed to tell consumers that a change in their credit rating prompted a rate hike.

The 9th U.S. Circuit Court of Appeals said last year that consumers do not need to demonstrate the companies didn’t realize they were breaking the law, however. Instead, consumers need to prove only that companies ignored the law’s requirements, the appeals court ruled in a series of class-action lawsuits involving four insurance companies.

The insurance companies argued that notification is not required when applicants are asked to pay more on an initial insurance policy based on a negative change in their credit rating. Being offered a higher rate when first buying a policy does not qualify as an “increase” under the law unless a lower rate had been offered previously, the companies argued.

The Court also agreed to hear a case involving the False Claims Act that could clarify the ability of whistleblowers to sue private contractors for the misuse of federal funds. The Court declined, however, to address the constitutional concerns about that act raised by some business groups.

Some provisions of the False Claims Act allow citizens to file suit on behalf of the government against contractors who make false claims for payment. The plaintiffs are eligible to receive a percentage of awarded damages.

For instance, the provision was recently used by a former employee of Halliburton Co. subsidiary Kellogg, Brown & Root in an unrelated lawsuit claiming that KBR had charged the government for recreational services to U.S. troops that it never provided.

The U.S. Chamber of Commerce, however, has argued that many suits filed under the Act are unfounded and brought by “officious bounty hunters.” The Chamber charged in a friend-of-the-court brief that the provisions “threaten every federal government contractor, health care provider and grant recipient in the United States.”

In the case before the Supreme Court, brought by Rockwell International Corp. and Boeing North American, Inc., the high court agreed to clarify the definition of an “original source” in the False Claims Act. A person must be the original source of information about misspent funds to bring a claim under the Act.

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