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The Fair and Accurate Credit Transactions Act (FACTA) requires retailers, on electronically printed receipts provided to customers, to eliminate all but five numbers of the customer's credit or debit card number and the expiration date of the card. If a receipt includes either more than the last five numbers of the customer's card or the expiration date of the card, the receipt violates the Fair Credit Reporting Act (FCRA), U.S.C. §1681 et. seq.

During the past year, a substantial number of retailers, including franchisors and franchisees, have been surprised to learn the scope of the potential liability they may face if they provide their customers with illegal forms of receipts. That potential liability can be the actual damages sustained by a customer (e.g., if the illegal receipt can be shown to result in theft of the customer's identity) or, more likely, statutory damages that range from $100 to $1,000 for each violation of the applicable federal law—that is, for each customer who received one or more illegal forms of receipt.

A customer that receives an illegal form of receipt does not need to prove actual damages if its claim qualifies for statutory damages (see below). Multiply the lowest per violation statutory damage amount of $100 by the number of customers even a small retailer serves over a one- or two-year period and the scope of the potential damages becomes clear.

When Congress enacted FACTA in 2003 to amend the FCRA, it gave retailers three years to make the necessary modifications to the software that operates their receipt printing equipment in order to come into compliance with the new requirements of the FCRA. The credit and debit card truncation requirements became effective on December 4, 2006.

It appears that a significant number of retailers, including some large chain retailers, failed to meet this deadline. In the past year, numerous lawsuits have been filed against retailers alleging violations of the form of receipt provisions of the FCRA. Virtually every one of these suits has been filed as a class action.

In order for a claim under the FCRA to be litigated as a class action, the plaintiff must allege that the defendant willfully violated the statute. (If a violation was only negligent, a plaintiff may only recover actual damages and claims requiring proof of actual damages that would involve a large class usually do not meet the requirements for a class action under Rule 23(b) of the Federal Rules of Civil Procedure). If the plaintiff proves that a violation was “willful,” the plaintiff and other class members are each entitled to statutory damages of $100 to $1000. Recently, the United States Supreme Court ruled in Safeco Ins. Co. of America v. Burr, 127 S.Ct. 2201 (2007), a FCRA case, that a willful violation can be either a knowing violation of law or a reckless disregard of statutory requirements. In several of the illegal receipt cases, the defendants have argued, in an effort to avoid having the case proceed as a class action, that the violation (e.g., printing receipts with the card expiration date) was not willful because the statute was subject to more than one interpretation and the interpretation made by the defendants (that the statute required only the truncation of the card number or the elimination of the card’s expiration date, but not both) was reasonable. Most courts have rejected this argument, holding that the statute is quite clear and requires that electronically printed receipts may not contain either more than the last five digits of the card number or the expiration date of the card. The case law involves the sellers of both products and services.

Vicarious Liability Claims Against Franchisors

The credit/debit card receipt truncation obligations of the FCRA are of particular interest to franchisors. Not only are their franchisees at risk of substantial liability claims and potentially high defense costs, but a franchisor itself is at risk of both direct and vicarious liability claims that could be brought as a class action, with the class potentially consisting of all customers of the franchisor’s owned and franchised outlets.

While most franchise agreements make clear that it is the franchisee’s responsibility to comply with all applicable laws, a franchisor that prescribes the software which controls the printing of receipts given to customers by its franchised outlets might face a vicarious liability claim, especially if the software cannot be modified to comply with the FACTA truncation requirements.

In Patterson, et. al. v. Denny’s Corp., No. 07-1161 (W.D. Pa. 01/31/08), the federal district court refused to dismiss a vicarious liability claim against the franchisor. The court agreed with the franchisor that the card truncation provision of the FCRA does not expressly encompass such a vicarious liability claim, but held that the plaintiff nevertheless stated a viable claim against Denny’s. The court noted that “[T]he parties agree that in case law interpreting vicarious liability under both federal statutes and state common law in the franchise context, the decisive issue is whether a franchisor exercised control over the franchisee’s business operations.”

The court was influenced by a statement in Denny’s 10-K report for 2006 filed with the Securities and Exchange Commission discussing Denny’s franchise operations. The report stated:

“The Denny’s system is approximately one-third company operated and two-thirds franchised….A network of regional franchise operations managers oversee our franchised restaurants to insure compliance with brand standards, promote operational excellence, and provide general support to our franchisees. These managers visit each franchised unit an average of two to four times per quarter.”

That statement does not, of course, prove that Denny’s maintained control over the business operations of its franchisees sufficient to meet the somewhat elusive standard for vicarious liability. The determination of that standard is a factual determination, possibly resolvable on a motion for summary judgment after discovery, but probably more likely destined for resolution at trial. As noted above, whether Denny’s required its franchisees to use receipt printing software, and, more importantly, whether that software allowed Denny’s franchisees to print properly truncated receipts are likely to be key issues in determining whether there is any basis for seeking to hold Denny’s vicariously liable for its franchisees’ alleged violations of the FCRA. Motions by defendants to dismiss and for summary judgment on the issue of willfulness in FCRA cases have routinely been denied.

At least one trial court has granted summary judgment to plaintiffs on the issue of willfulness. See, e.g., Najarian v. Charlotte Russe, Inc., No. CV 07-501-RGK (C. D. Cal. 8/16/07). Other courts have reserved the issue for trial. See, e.g., Soulian v. International Coffee & Tea, LLC, No. CV 07-0502 – RGK (C.D. Cal. 2/9/08).

Other FCRA Cases Against Franchisors

Other claims for FCRA violations based on a failure to comply with the truncation requirements have been brought against franchisors, but most of these cases have not clearly asserted vicarious liability for alleged FCRA violations by franchisees. See, e.g., Peraria v. KFC Corp., Civ. Action No. 07-3190 (RMB) (D.N.J. , filed July 11, 2007); Smith v. Chili’s Grill and Bar, et al., Civil Action No. 2:07-cv-01905 (TJS) (E.D. Pa., filed May 10, 2007); Reisman v. Radisson Hotels International, Inc., Civil Action No. 2:07-cv-00547 (JFC) (W.D. Pa., filed April 25, 2007). Often in these complaints the plaintiffs do not distinguish between receipts issued by company-owned units or those issued by franchised units.

Class Actions

In addition to statutory damages, a plaintiff or plaintiff class is entitled to attorneys’ fees. This gives the large fraternity of plaintiff's lawyers a strong incentive to find retail customers who have received illegal receipts. Several courts have certified class actions involving alleged FCRA credit/debit card truncation violations, see, e.g., Redmon v. Uncle Julio's of Illinois, Inc., No. 07 C 2350 (N.D. Ill. 3/7/08). A few courts have refused to certify a class, particularly in cases that the court has characterized as “lawyer driven.” See, e.g., Azoiani v. Love’s Travel Shops and Country Stores, Inc., No. EDCV 07-90 ODW (S.D. Cal. 12/18/07), in which the court based a refusal to certify a class action on the inadequacy of the class representative (no involvement in or knowledge of the case other than obtaining a receipt from one of the defendant's stores), the involvement of counsel for the plaintiff in a number of similar suits, the fact that only one of the 200 stores of the defendant was within the court's jurisdiction and, most significantly, the due process issue raised by the potentially very large class recovery from a rather small company, which could put it out of business when no harm had been suffered by any class members. The "lawyer-driven" nature of the claim and the disproportion of the potential damages to any harm done led the court to conclude that a class action would not be a superior method of adjudication, and thus failed to meet the standard of Rule 23(b)(3).

The Central District of California has rejected class certification for such cases on the grounds that class adjudication was not a superior method of adjudicating the claimed violations--essentially on the basis of potential damages highly disproportionate to the "technical violations" of FACTA and the fact that there were viable alternatives to a class action (e.g., consolidation of cases). Other California Federal District Courts have denied class certifications in FACTA truncation cases based on Ninth Circuit precedent. One of these cases is currently on appeal to the Ninth Circuit.

It should be noted, however, that in an effort to defeat class certification a number of defendants in FCRA truncation cases, and other FCRA cases, have unsuccessfully made the due process claim of potential damages disproportionate to the harm done. Most courts have acknowledged this potential disproportion, but have ruled that it is a defense that needs to be raised during the damage phase of the trial, not as a defense to a motion to certify a class. See, e.g., Meehan v. Buffalo Wild Wings, Inc., No. 07 C 4562 (N.D. Illinois 2/26/08). In Meehan, the Northern District of Illinois certified a class, rejecting case law from the Ninth, Tenth, and Eleventh Circuits that rejected class actions on the basis of potential damages so disproportionate to the harm caused as to violate the defendant's due process rights. The Illinois court held that it was bound by Murray v. GMAC Corp., 483 F. Supp. 2d at 954, which held that the disproportionate potential damages was not a grounds for rejecting class certification under Rule 23 (b) (3), but should be considered after the class has been certified. Such a ruling means that the defendant may spend a good deal of money defending the claim before it can assert the due process defense and will be under considerable pressure to settle. The problem lies in the statute, which fails to cap damages.

A few class actions have been settled for a not insubstantial cost to the defendant. For example, the case of Pivarnik v. Lamrite West, Inc. d/b/a Pat Catan's Craft Center, No. 07-231 (W.D. Pa.), involved 650,000 violative receipts. The parties reached a settlement, which has received initial approval from the court, in which each class member who submits a claim form will receive a voucher worth between $5 and $20 (total potential settlement value of $3.25 million to $13 million), $4,600 of merchandise certificates to donate to charities, and up to $105,000 in fees for plaintiff's counsel. Even if this case is settled for nominal payments by the defendant, principally in the form of coupons, the defendant's legal expenses (its own and fees and costs paid to class counsel) may be substantial.

The Southern District of Florida has ruled in Grabein v. 1-800 FLOWERS.COM, Inc., No 07-22235 (1/29/08), that FACTA credit/debit card truncation requirements apply to an electronically transmitted receipt. The same court ruled in King v. Movietickets.Com, No. 07-22119 (2/13/08) that the FACTA truncation requirements do not apply to an order confirmation (as distinct from a receipt) transmitted to the customer through the Internet. The Northern District of Illinois ruled in Harris v. Direct TV Group, Inc., No. 07 C 3650 (2/5/08), that a FACTA truncation violation involving an on-line receipt should be arbitrated, rejecting claims that the arbitration clause was procedurally or substantively unconscionable.

What Franchisors Should Do

As noted above, the cases asserting claims for credit/debit card truncation violations have involved both products and services and this issue cuts across the full spectrum of the franchising community. The case law that has developed around the FACTA credit/debit card truncation amendment to the FCRA presents franchisors with several clear imperatives. If a franchisor has required or recommended specific receipt printing software for its franchisees, it should immediately determine whether that software is capable of printing receipts that are FCRA compliant. If the software is not, it should be changed immediately. This may seem to be locking the barn door after the horse is long gone, but, should a company be targeted with a possible suit, the fact that it continued using non-compliant software may only increase the potential damages. Moreover, in the face of the substantial volume of case law, failure to act can only hurt a defense, however slim its chance of success may be, on the issue of willfulness.

If a franchisor has neither prescribed nor recommended receipt printing software, it should remind its franchisees of their obligation to comply with FCRA and that they should ensure they are printing FCRA-compliant customer receipts that contain no more than five digits of the customer’s credit or debit card number and do not contain the card’s expiration date.