The U.S. Court of Appeals for the Second Circuit recently held that identity theft claims under New York’s Fair Credit Reporting Act based on a bank’s alleged vicarious liability for identity theft supposedly perpetrated by its employees are not preempted by the federal Fair Credit Reporting Act (FCRA).

However, to the extent that the claims could arguably be read to include the theory that the bank was liable because it furnished false information to consumer reporting agencies, the Court held that such claims are preempted under the FCRA because they plainly concern the bank’s legal responsibilities as a furnisher.

A copy of the opinion is available at:  Link to Opinion.

A bank customer sued the bank in New York state court under the New York Fair Credit Reporting Act, which “creates a cause of action for a victim to sue any person who engages in identity theft if, in turn, the theft results in the transmission of certain information about the consumer to a consumer reporting agency (i.e., a credit bureau).”

The customer alleged that over approximately three years, bank employees supposedly aided and abetted a money-laundering scheme designed to defraud the federal Medicare program. “In return for cash bribes and other gratuities, [the bank employees] assisted the money launderers in the fraudulent use of [plaintiff’s] name as a signatory for … accounts set up in the name of phony corporations. These accounts were used to deposit and pay out proceeds of the Medicare fraud scheme.”  According to the customer, bank employees supposedly also “falsified [the bank’s] records to enable the members of the money laundering scheme to make withdrawals from these accounts in [plaintiff’s] name, including for extravagant luxury purchases.”

The alleged scheme supposedly resulted in many bounced checks when the fraudulent accounts were overdrawn, which allegedly damaged the plaintiff’s credit rating. Eventually, the scheme was discovered and the fraudulent accounts were closed. In a bizarre twist, the customer, who supposedly knew nothing about the scheme, was arrested, indicted and tried for money laundering conspiracy. She was, however, acquitted after a seven-week trial.

The bank removed the case to federal district court and moved for dismissal pursuant to Fed. R. Civ. P. 12(b)(6), arguing that the plaintiff’s claims for identity theft under New York law were preempted by the FCRA. The district court granted the bank’s motion and the customer appealed.

On appeal, the Second Circuit began by discussing the principles governing preemption, which begins with the Constitution’s Supremacy Clause. Article VI, clause 2 of the Constitution provides that “the Laws of the United States … shall be the supreme Law of the Land … any Thing in the Constitution of Laws of any State to the Contrary notwithstanding.” Congress can “preempt (or invalidate) a state law by means of a federal statute … expressly or it may preempt state law implicitly in circumstances where it is clear that Congress intended to occupy the entire regulatory field, where state law stands as an obstacle to the objectives of Congress, or where compliance with both federal and state law is impossible.”

In order to discern Congress’ intent on preemption, the Court turned its focus to the plain language, structure and purpose of the FCRA, finding it significant that it “does not create a federal cause of action for victims against perpetrators of identity theft” and that “the FCRA’s applicable preemption provisions are somewhat intricate and require consideration of multiple cross-referencing statutory provisions.”

To begin with, the Second Circuit noted that section 1681(a) of the FCRA provides that it does not preempt state identity theft laws unless they are inconsistent with the FCRA and then only to the extent of such inconsistency.

However, Congress created exceptions to the general rule, including that “[n]o requirement or prohibition may be imposed under the laws of any State … with respect to any subject matter regulated under … section 1681s-2 of this title, relating to the responsibilities of persons who furnish information to consumer reporting agencies….”

Section 1681s-2 imposes certain duties on “furnishers of information to consumer reporting agencies, including that ‘[a] person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate.’ ”

The Second Circuit disagreed with the bank’s argument “that plaintiff’s claims under the New York law fall within the scope of the express exception to non-preemption that is set forth in § 1681t(b)(1)(F).” The Court reasoned that “the language of the provision expresses Congress’s intent to preempt claims which are “with respect to any subject matter regulated under … section 1681s-2 … relating to the responsibilities of persons who furnish information to consumer reporting agencies … [and] therefore, must be read to preempt only those claims against furnishers that are ‘with respect to’ the subject matter regulated under § 1681s-2.”

Relying on a Supreme Court decision involving preemption under the Federal Aviation Administration Authorization Act, the Second Circuit found “that a claim is ‘with respect to’ a preempted subject matter when it concerns that subject matter.” The Court then held “that § 1681t(b)(1)(F) preempts only those claims that concern a furnisher’s responsibilities … [i.e.,] it does not preempt state law claims against a defendant who happens to be a furnisher of information to a consumer reporting agency within the meaning of the FCRA if the claims against the defendant do not also concern that defendant’s legal responsibilities as a furnisher of information under the FCRA.”

Turning to the ultimate question of whether the customer’s claims against the bank “concern [its] responsibilities as a furnisher of information under the FCRA,” the Court concluded that, “when viewed in the light most favorable to [plaintiff], the complaint plausibly alleges identity theft claims that do not concern [the bank’s] responsibilities as a furnisher. Instead, the complaint advances a theory that [the bank] is vicariously liable—presumably under a respondeat superior theory—for the identity theft allegedly perpetrated by its employees.”

The Second Circuit noted in a footnote that “[u]nder New York law, ‘[t]he doctrine of respondeat superior renders an employer vicariously liable for torts committed by an employee acting within the scope of employment. Pursuant to this doctrine, the employer may be liable when the employee acts negligently or intentionally, so long as the tortious conduct is generally foreseeable and a natural incident of the employment.’ ”

The Court found that the identity “theft could be actionable under the New York statute because it eventually resulted in an alert by someone to consumer reporting agencies … [and] it does not matter if the defendant who is sued for identity theft is also the furnisher of information to a consumer reporting agency.”

In the Second Circuit’s view, it didn’t matter who reported the adverse information about the customer to consumer reporting agencies because “the [New York] law requires only that the theft have resulted in the transmission of the information by someone to a consumer reporting agency.”

The Court concluded that “[i]n short, [the bank] could face vicarious liability under the New York law for its employees’ theft of [plaintiff’s] identity, not for any later act by [the bank] or anyone else—proper or improper—of reporting adverse information about [plaintiff] to a consumer reporting agency.”

The Second Circuit thus rejected preemption, explaining that because “[i]n our federal system, there is no question that States possess the traditional authority to provide tort remedies to their citizens as they see fit … [and] as the Supreme Court has made clear—that ‘we presume federal statutes do not … preempt state law …’ [t]his means that ‘when the text of a pre-emption clause is susceptible of more than one plausible reading, courts ordinarily accept the reading that disfavors pre-emption.’ ”

Before closing, the Court clarified, however, that to the extent that the complaint “could arguably be read to include the theory that [the bank] is liable for damages (at least in part) because it furnished false information [to consumer reporting agencies] … such claims … are preempted under the FCRA because they plainly concern [the bank’s] legal responsibilities as a furnisher.”  The Court held that “[t]his is so because § 1681t(b)(1)F) preempts any recovery for damages based on allegations of erroneous or otherwise improper furnishing—regardless of the particular statute or common law theory that plaintiff utilizes to advance her claim.”

The district court’s judgment was vacated and the case remanded for further proceedings consistent with the Second Circuit’s opinion.