Since they became fully effective on December 4, 2006, the provisions in the Fair and Accurate Credit Transactions Act (FACT Act) requiring retailers to truncate the credit and debit card numbers on electronic receipts have triggered a significant number of class action law suits. A federal court in Alabama, however, has now declared that the provisions allowing plaintiffs to collect damages for a failure to truncate card numbers are unconstitutional.

The U.S. District Court for the Northern District of Alabama granted summary judgment in four cases on the grounds that FACT Act’s damages provisions violate the Fifth Amendment to the U.S. Constitution. (See Grimes v. Rave Motion Pictures Birmingham, 52 F. Supp. 2d 1302 (N.D. Ala. 2008)).

The FACT Act establishes strict liability for a failure to truncate card numbers on receipts and allows consumers harmed by willful noncompliance with the statute to recover actual damages or damages “of not less than $100 and not more than $1,000” (15 U.S.C. §§ 1681c(g) and 1681n). In addition, plaintiffs may recover punitive damages as well as costs and reasonable attorney’s fees (15 U.S.C. § 1681n).

As least when applied to a retailer’s failure to truncate card numbers on a receipt, the court found that these damages provisions were unconstitutionally vague in violation of the Fifth Amendment. The court rejected the plaintiffs’ arguments that Congress meant for juries to slide between the minimum and maximum damages, noting that doing so required finding degrees of willfulness and would make any penalty over $100 punitive and thus duplicative of the punitive damage provision.

In addition, the court found that the damages provisions represent a taking of property without due process. (See Id. at 1308.) The court cites the Supreme Court’s holding in State Farm Mutual Automobile Insurance Co. v. Campbell that “courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered” (538 U.S. 408, 426 (2003)). The district court concluded that “[t]o impose punitive damages without the suffering of any harm is inherently disproportionate” (552 F. Supp. 2d at 1308).

Beyond the obvious immediate impact, this decision will be cited by defendants in similar actions in district court in Illinois and California where the judicial panel on multidistrict litigation has transferred several FACT Act claims against merchants.

The decision will likely be appealed and the district court acknowledged as much: “Because this court knows that it will not have the final word, it will only briefly outline its rationale, citing little case authority because the propositions of law the court relies on are well understood, virtual truisms.” The Eleventh Circuit will then have an opportunity to decide if these truisms render portions of the FACT Act unconstitutional.

TAKE A CLOSER LOOK BACK

For more information about the FACT Act and litigation risks, please see:

New Credit Card Class Actions (January 17, 2007)

Privacy and Data Security Briefing Issue 2 - pg.8 (April 2008)