Federal Court Affirms Corporations' Ability to Investigate Employee Misconduct

November 1, 2001 Advisory

In recent years, corporations have been concerned, justifiably, about an advisory opinion issued by the Federal Trade Commission in April 1999. That opinion interpreted the federal Fair Credit Reporting Act (the "FCRA") to cover internal investigations of employee misconduct when those investigations were conducted by experienced outside law firms. Under this interpretation, employers would be required to obtain the employee's prior written consent to the investigation, and later to provide a full copy of the investigative report to the employee, before taking any adverse employment action against him or her.

We and others questioned at the time the FTC's interpretation of the statute and stated that its interpretation, if adopted by the courts, would have substantially impaired employers' ability to investigate potential employee wrongdoing. See David Fein and Suzanne Wachsstock, "Compromising Compliance: FTC Opinion Undercuts Corporations' Ability to Unearth Workplace Problems," Legal Times, September 20, 1999, S34. We further argued that it directly conflicted with the government's directives that companies adopt effective compliance programs to prevent and detect employee wrongdoing. Simply put, under the FTC's view of the law, companies would have been permitted to conduct an experienced and effective investigation of employee misconduct only with the employee's approval.

The April 1999 advisory opinion's interpretation of the FCRA was echoed in a letter written by FTC Chairman Robert Pitofsky on March 31, 2000 to Congressman Pete Sessions, concerning proposed amendments to the FCRA. In that letter, Chairman Pitofsky stated that "[i]n the employment context, an outside agency (such as a private investigator or law firm) that regularly conducts investigations of alleged workplace misconduct by employees is very likely a ‘consumer reporting agency' and the report it makes to an employer is likely to be a ‘consumer report' within the meaning of the FCRA." (Letter of R. Pitofsky to Rep. Pete Sessions, Mar. 31, 2000.) At the same time, Chairman Pitofsky recognized the problems inherent in this interpretation, and recommended that the Act be amended to create a limited exemption from the Act for internal investigations and thereby to ensure "prompt, credible investigations of workplace misconduct."

A federal district court, the first to have squarely addressed this precise issue, has just recognized the untenability of the FTC's reading of the FCRA. The Northern District of Illinois, in Hartman v. Lisle Park District, 2001 WL 936165 (N.D. Ill. 8/16/01), rejected an investigated employee's claim that an outside law firm's investigation report was protected under the FCRA. The employee claimed that the company's investigation violated the Act because the employer and agent did not advise her that she was being investigated, did not obtain her prior consent to the investigation, and did not provide her with a copy of the investigative report. In rejecting this contention, the court carefully applied a common-sense reading of the FCRA along with its legislative history. The court also concluded that the FTC's opinion letters have no binding authority, thus allowing it and other courts to disregard the FTC's own interpretation of its statutes.

The Hartman court's analysis is straightforward. The court emphasized that there is nothing in the FCRA or its legislative history that indicates that Congress intended to abrogate the attorney-client or attorney work-product privileges, as would be the effect if the FCRA were applied to internal investigative reports. Unlike a third-party credit bureau or detective agency, moreover, an outside attorney acts in a relationship of trust, confidence and confidentiality with the employer, just as if the employer had asked its own employees to conduct the investigation. The decision noted that an employer's investigation of employee misconduct does not fall within the FCRA's definition of a "consumer report" – a report that, among other things, relates to a consumer's "credit history, character, general reputation, personal characteristics or mode of living." Rather, such an investigation relates to transactions or experiences between the employer and the employee. As a different court in a related context recognized (Johnson v. Federal Express Corp., 147 F. Supp. 2d 1268, 1272 (M.D. Ala. 2001)), it simply makes no sense to think of an attorney's investigative report relating to particular workplace wrongdoing (such as harassment or threats of violence) as analogous to employment decisions based upon information about a consumer's general status (credit, criminal, family history or the like), which are protected under the FCRA.

The Hartman decision provides a critical affirmation of the value of expertly conducted internal investigations of employee misconduct. While the opinion is not binding on courts in other jurisdictions, it is an important judicial precedent for corporations seeking to effectively meet their compliance objectives, and we hope that other courts will follow in its path.

1 Two earlier decisions had rejected the reasoning of the FTC opinion in somewhat different contexts. See Johnson v. Federal Express Corp., 147 F. Supp. 2d 1268 (M. D. Ala. 2001) (rejecting claim that handwriting analysis requested by employer is a "consumer report" under the FCRA); Robinson v. Time Warner Inc., 187 F.R.D. 144 (S.D.N.Y. 1999) (rejecting application of FCRA to attorney report prepared to provide legal advice to company, and not for the purposes of evaluating employee and taking "adverse action" against him).