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From Banking and Finance Law Daily, June 5, 2014

Interpreting law as allowing printing of membership number that duplicated credit card number not unreasonable

By Richard A. Roth, J.D.

It was not objectively unreasonable for Sam’s Club to conclude that a federal law prohibiting printing more than the last five numbers of a credit card on a receipt was not violated by printing a membership number that included the full credit card number, the U.S. Court of Appeals for the Eighth Circuit has decided. As the company’s interpretation was not objectively unreasonable, its violation of the Fair and Accurate Credit Transactions Act was not willful, the court said (Hammer v. Sam’s East, Inc., June 5, 2014, Bright, Circuit Judge).

In an effort to combat identity theft, FACTA limits what a merchant is permitted to print on an electronically generated credit or debit card receipt. The receipt may include neither the card expiration date nor more than the last five digits of the card number (15 U.S.C. §1681c(g)(1)). The consumers brought class actions complaining that Sam’s Club stores had violated this restriction.

Card numbers. As described by the court, Sam’s Club customers must be members, meaning they have a membership card and a membership number. They also may, but are not required to, have a private label Sam’s Club credit card. If they do, their credit card doubles as their membership card.

At the time the consumers used their credit cards, a consumer’s Sam’s Club credit card number incorporated the consumer’s membership number, the court said. Each credit card had a 19-digit card number, and the last 12 digits of that number were the customer’s membership number.

When the consumers made credit card purchases at Sam’s Club, the printed receipts included only the last four digits of the credit card number, but separately stated the entire membership number. As a result, the entire credit card number could be discerned from the receipt, the court said.

Consumers’ claims. According to the consumers, Sam’s Club had violated FACTA because the entire credit card number was printed on the receipt, regardless of how the number was labeled. The consumers also asserted that the FACTA violation was willful rather than negligent. The difference is significant because, if the violation was willful, the consumers could demand statutory damages without proving an actual injury.

Sam’s Club denied there was any violation. The company also asserted that if there was a violation it was not willful under the standard set by the U.S. Supreme Court in Safeco Ins. Co. v. Burr. In Safeco, the Supreme Court said that a violation of the Fair Credit Reporting Act could not be willful if it resulted from an interpretation of the act that was incorrect but not objectively unreasonable.

The federal district court judge agreed with the consumers that FACTA had been violated, but agreed with Sam’s club that the violation had not been willful. As a result, he ordered summary judgment against the consumers’ claims. The consumers appealed.

Article III standing. Before considering whether Sam’s Club had violated FACTA willfully, the appellate court addressed the company’s claim that the consumers, who had described no actual injury, did not have standing to sue under Article III of the Constitution. In the absence of standing, there would be no case or controversy that would give the federal courts jurisdiction, the court pointed out.

For the consumers to establish standing, they had to show they had suffered an “injury in fact,” that the injury was caused by the violation, and that the court had the ability to redress the injury. Sam’s Club claimed that the consumers had suffered no actual injury. The Eighth Circuit had not previously decided whether standing existed in the absence of an actual injury.

The appellate court decided that the violation of a right created by Congress could constitute an injury in fact, even in the absence of any other injury. A violation of the consumers’ statutory right under FACTA would be an injury in fact as long as the consumers were complaining of a violation of their own rights, not the rights of someone else, and the rights were individualized rather than abstract.

There was no question that the injury was caused by Sam’s Club’s FACTA violation, the court said. Since an award of statutory damages would redress that injury, the consumers had standing under Article III.

Willful violation. The appellate court assumed for purposes of argument that Sam’s Club had violated FACTA. The question it took up was whether that violation was willful. The answer was no, the court decided.

Under Safeco, a violation is willful if it is either knowing or reckless, the court began. A violation cannot be reckless if it is objectively reasonable. So, was it objectively reasonable for Sam’s Club to decide that printing a membership number that included the full credit card number was permissible?

Sam’s Club could have reasonably concluded that FACTA only prohibited printing more than five digits of a credit card number if it was labeled as the credit card number, the court said. This meant the interpretation, although erroneous, had a foundation in the text of the law.

No contrary guidance had been issued by any regulatory agency, the court pointed out, and no previous court decisions said the company’s interpretation was wrong.

Dissenting opinion. In dissent, Chief Judge Riley disagreed with both of the majority opinion conclusions. The court did not need to decide whether a statutory violation alone could create standing, he said, and should not have done so. On the other hand, if the consumers had standing, Sam’s Club’s violation could have been willful and should have been presented to a jury. As a result, the dissenter said, “the majority unnecessarily decides a difficult Article II standing question of first impression in our circuit, leading to an unsound ruling on the merits.”

After casting doubt on the majority’s decision about the consumers’ standing to sue, the dissenting judge said the issue should have been avoided. Circuit courts of appeals should not decide difficult constitutional issues unless doing so is unavoidable, he argued. In this case, he asserted that FACTA could, and should, be interpreted to require an actual injury beyond the invasion of the consumers’ statutory rights.

However, if the consumers had standing, “the unambiguous statutory text” of FACTA made clear that Sam’s Club’s interpretation was not objectively reasonable. The act prohibited printing more than five digits of an account number regardless of how the number was labeled, he said. The violation was clear.

Reading a labeling element into FACTA was objectively unreasonable, the dissenter concluded. If that interpretation was objectively reasonable it would allow Sam’s Club to print as much information on a receipt as it chose as long as the information was not labeled as a credit card number.

The consumers had produced enough information to permit a jury to decide whether the unreasonable interpretation led to a willful violation, the dissenting judge added. On two occasions before the consumers made their purchases, fraud experts working for Sam’s Club had warned the company that its handling of membership numbers presented an unacceptable risk. A jury easily could find that taking no action in response to those warnings was a willful violation.

The cases are Nos.12-3724 and No. 12-3858.

Attorneys: Kenneth Eugene Cox (McClelland Law Firm) for Steven E. Hammer. Ze-wen Julius Chen (Akin & Gump) and James R. Eiszner (Shook & Hardy) for Sam's East, Inc., Sam's West, Inc. and Wal-Mart Stores, Inc.

Companies: Sam’s Club; Sam’s East, Inc.; Sam’s West, Inc.; Sam’s Wholesale Club; Wal-Mart Stores, Inc.

MainStory: TopStory ArkansasNews CreditDebitGiftCards FairCreditReporting IdentityTheft IowaNews MinnesotaNews MissouriNews NebraskaNews NorthDakotaNews SouthDakotaNews

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