Privacy & Information Security Law Blog

On January 25, 2013, Kmart Corporation (“Kmart”) agreed to a $3 million settlement stemming from allegations that it violated the Fair Credit Reporting Act (“FCRA”) when using background checks to make employment decisions. The FCRA addresses adverse actions taken against consumers based on information in consumer reports and includes numerous requirements relating to the use of such reports in the employment context.

Although the lead plaintiff in the class action initially alleged multiple FCRA violations, he ultimately “determined to proceed solely” on the claim that Kmart failed to make “certain specific disclosures before it use[d] the [background] report for an adverse action” (i.e., a hiring or firing decision). The plaintiff alleged that he had been offered a position with Kmart pending the results of a criminal background check. Shortly thereafter, he received a copy of his background report that included misdemeanor convictions from 2002 along with an outdated statement of consumer rights under the FCRA. The statement of consumer rights he received was a copy of the version released by the FTC in 1997 rather than the updated form the FTC issued in 2005. The 1997 form listed inaccurate contact information for the FTC and the Federal Reserve and did not contain other important revisions, including the fact that consumers have the right to dispute incomplete and inaccurate information.

The plaintiff claimed that (1) the statement of rights he received did not adequately inform him of his rights under the FCRA, and (2) the misdemeanor convictions from 2002 included on the background report were outside the scope of the employment application provided by Kmart (which purported to cover only the preceding seven years). When the plaintiff notified Kmart that the convictions were outside the scope of the application, a Kmart representative informed him that once the convictions were “in the system” nothing could be done to rectify the situation and he would not be hired.

The putative class action complaint argued that a purpose of the FCRA is to grant consumers a meaningful opportunity to correct inaccuracies and omissions in background reports before employers take adverse employment actions. Accordingly, the plaintiff’s rights under the FCRA were undermined when Kmart deprived him of an opportunity to make such a correction. Although Kmart “denied…any fault, wrongdoing or liability whatsoever,” the parties filed a proposed settlement with the court on January 25. The proposed settlement class of nearly 65,000 individuals includes “all natural persons” who received the results of a background check and accompanying statement of consumer rights following a background check conducted for Kmart employment purposes. Kmart will pay $3 million and will be granted a “narrow release” covering only the FCRA claims.

As reported in Bloomberg BNA’s Privacy & Data Security Law Resource Center, in a similar action on January 18, 2013, a federal judge upheld the settlement of a class action alleging that U.S. Physical Therapy Inc. did not follow FCRA mandated procedures when it determined not to hire certain applicants based on the information contained in their background reports.