FCRA Claim – Subject-matter Jurisdiction

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7^th Circuit Court of Appeals

Case Name: Daniel Rivera, et al. Allstate Insurance Company

Case No.: 17-1310; 17-1649

Officials: KANNE and SYKES, Circuit Judges, and DARROW, District Judge.

Focus: FCRA Claim – Subject-matter Jurisdiction

In 2009 Allstate Insurance Company launched an internal investigation into suspicious trading on its equity desk. The initial inquiry unearthed email evidence suggesting that several portfolio managers might be timing trades to inflate their bonuses at the expense of their portfolios, which included two pension funds to which Allstate owed fiduciary duties. Allstate retained attorneys from Steptoe & Johnson to investigate further, and they in turn hired an economic consulting firm to calculate potential losses. Based on the email evidence, the consulting firm found reason to believe that timed trading had potentially cost the portfolios $8 million and possibly much more. Because actual losses could not be established, the consultants used an algorithm to estimate a potential adverse impact of $91 million on the pension funds. Everyone understood that this estimate was wildly unrealistic, but in an abundance of caution, Allstate poured $91 million into the pension portfolios.

When the investigation wrapped up, Steptoe lawyers delivered oral findings to Allstate. The company thereafter determined that four portfolio managers—Daniel Rivera, Stephen Kensinger, Deborah Meacock, and Rebecca Scheuneman—had violated the company’s conflict-of-interest policy by timing trades to improve their bonuses. On December 3, 2009, Allstate fired them for cause. The four former employees sued Allstate in federal court for defamation based on the 10-K and the internal memo. They also alleged that Allstate violated 15 U.S.C. § 1681a(y)(2), a provision in the Fair Credit Reporting Act (“FCRA or the Act”), by failing to give them a summary of Steptoe’s findings after they were fired. The defamation claim was the main event in the litigation; the FCRA claim received comparatively little attention. A jury returned a verdict in the plaintiffs’ favor, awarding more than $27 million in compensatory and punitive damages, and statutory damages on the FCRA claim (there are no actual damages on that claim). The district judge tacked on additional punitive damages and attorney’s fees under the FCRA.

Allstate attacks the defamation awards on multiple grounds and also argues that the FCRA awards must be vacated for lack of standing under Spokeo, Inc. v. Robbins, 136 S. Ct. 1540 (2016). We agree that the plaintiffs lack a concrete injury to support Article III standing on the FCRA claim. So that claim must be dismissed on jurisdictional grounds. And that ends our review. Because the FCRA claim provided the sole basis for federal jurisdiction—and thus the only basis for the district court to exercise supplemental jurisdiction over the state-law claim under 28 U.S.C. § 1367(a)—the district court was without power to adjudicate the defamation claim, and it too must be dismissed for lack of jurisdiction. The parties did not identify the § 1367(a) jurisdictional problem in their initial briefing, but that does not matter; defects in subject-matter jurisdiction must always be addressed. Accordingly, we vacate the judgment and remand with instructions to dismiss the action in its entirety for lack of subject-matter jurisdiction. See FED. R. CIV. P. 12(h)(3).

Vacated and Remanded

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.