FCRA and Employment Law

By Kevin Livingston

The Recorder/Cal Law

May 17, 1999

An opinion by the Federal Trade Commission is threatening to turn employment investigation laws upside down.

Using a 1996 consumer protection statute, the FTC says lawyers who investigate workplace issues for a fee are violating the law.

The letter -- issued in April by FTC staff in response to an inquiry from an attorney -- has employment lawyers reeling. The ruling marks the first time the FTC has applied the broad requirements of the Fair Credit Reporting Act to harassment investigations.

The action could radically alter the ability of lawyers to investigate harassment claims on behalf of their clients and may spell major trouble for firms that have invested heavily in investigations to expand their business. The matter is likely to spawn myriad lawsuits and may take a U.S. Supreme Court decision to iron out, employment lawyers said.

"This is an explosive issue," said Sonnenschein Nath & Rosenthal partner Mark Ross. "One that has been overlooked."

Under the FCRA, lawyers may morph into consumer reporting agencies when they receive payment for investigating harassment claims.

The issue the ruling raises for lawyers: When is a law firm considered a consumer reporting agency?

The opinion has employment defense lawyers shaking their heads in disbelief.

By placing employment investigations under the umbrella of the FCRA, local defense lawyers say the federal agency is attempting to put the squeeze on employers who are already required by federal and state harassment and misconduct laws to do prompt and thorough investigations.

At the same time, law firms who do such investigations may witness the deterioration of the attorney-client privilege as their work becomes the basis of a lawsuit, said Ross.

Employment defense lawyers will argue that the FCRA does not apply to workplace investigations, Ross said, and courts have yet to adopt the FTC's ruling.

But Orrick, Herrington & Sutcliffe's Thomas Klein said he is already receiving calls from concerned clients who wonder if they should investigate or follow the FTC's ruling.

The Orrick employment partner said he isn't sure whether the opinion will have any legal bearing.

Klein said plaintiffs lawyers may seize the ruling as an opportunity to bring wrongful termination claims on behalf of workers who do not grant consent for an investigation.

"It puts the employer in a bizarre position of receiving a complaint and then having to get the consent of the accused harasser to do an investigation," Klein said. "This is nuts."

Under the FCRA, damages are capped at $1,000, but punitive damages and attorneys fees are available.

Klein said he could envision a scenario where a worker was fired for sexual harassment following an investigation. Because he was never told of the investigation, he sues for wrongful termination.

"This is a potential fly in the ointment," Klein said.

Plaintiffs attorney Phil Horowitz blissfully agrees. The Lawless, Horowitz & Lawless partner said he had heard talk of such a law, but now it is moving forward.

"It has been pursued as a throw-away claim," Horowitz said. "That's all going to change now."

He said intrusive investigations, where co-workers are cross-examined and personal lives are examined, have gone too far.

"People are going to be pursuing remedies," he said.

Plaintiffs attorneys may use the law to exclude evidence from an unlawful employment investigation -- much like evidence gathered in an unlawful search and seizure, Horowitz said.

"You will be seeing a lot of lawsuits filed," he said. "A lot of defense lawyers will be educating companies on what they can't do."

Besides potential litigation, the expansion of the FCRA may have an impact on the bottom line of employment lawyers and employment-defense firms. Many of those firms -- Littler Mendelson for one -- have seized on investigations as a potential gold mine. Those firms greatly increased their investigative abilities in the last year thanks to two 1998 sexual harassment decisions from the U.S. Supreme Court.

Those opinions -- Faragher v. City of Boca Raton, 118 S.Ct. 2275, and Burlington Industries v.Ellerth, 118 S.Ct. 2257 -- held that a company could defend itself against workplace claims if it could prove it did a prompt and thorough investigation. Investigating workplace issues became a cottage industry overnight.

Horowitz does not expect outside investigators to go away. "They just have to make reports available" to the subject of the investigation, he said.

But Sonnenschein's Ross said the potential for liability will deeply hurt employment defense lawyers.

"If the letter is right and a law firm is a consumer reporting agency, the effect can be quite profound," Ross said. "It's just a mess."

ART: Meryl Schenker

Attorney Mark Ross