By Esther Slater McDonald, Seth J. Fortin, Wan LiRhea Yu, and Craig B. Simonsen

Seyfarth Synopsis:  The People’s Republic of China is making progress in implementing its mandatory “social credit system.”  Multinational businesses in China should be watchful of this system, and ready for it when it rolls out – if it hasn’t already.

In June 2014 China’s State Council issued a notice regarding the establishment of a “social credit system”–essentially, a national credit score for each citizen and business, but one reflecting more than just creditworthiness: the notice states that the goal of the system is to “[c]omprehensively move forward the construction of social sincerity” in order to “create harmonious and amicable interpersonal relationships” and “stimulate the progress of society and civilization.”  “State Council Notice concerning Issuance of the Planning Outline for the Construction of a Social Credit System (2014-2020),” GF No. (2014)21 (Jun. 14, 2014).

While the system is voluntary during an initial pilot stage, and run by nominally private entities like Alibaba, the Chinese government has indicated that by 2020 it will have “established fundamental laws, regulations and standard systems for social credit” and will “giv[e] complete rein to mechanisms to encourage keeping trust and punish breaking trust.”  Media sources have indicated that the government will at that point officially control the system, which will then be mandatory.  Local governments are also presently working to set up their own social credit systems.  Information collected in the systems of local governments, government agencies, and private entities will eventually be funneled into a national database.

According to a recent article in Wired, the score will ultimately be based on a multitude of factors, including the following:

  • Credit history — Does an individual or business pay its debts?
  • Personal habits — Does an individual engage in productive activity? Buying baby products reflects a sense of personal responsibility while playing video games reflects an idle nature.
  • Treatment of others — Does an individual respect others?
  • Civic obedience — Does an individual or business adhere to local and national laws?
  • Loyalty to party and country — Does an individual or business support the Communist Party and Chinese government? Does an individual or business purchase Chinese brands or partner with Chinese companies?
  • Network — With whom does an individual or business associate? Who are their partners, friends, and acquaintances, and what are their ratings?

Rachel Botsman, “Big Data Meets Big Brother as China Moves to Rate its Citizens,” Wired (Oct. 21, 2017).

A government official with the National Development and Reform Commission, which is charged with implementing the national system, noted that a “nation-wide information sharing platform” has been set up “to connect 37 government departments[,] and it has collected more than 640 million pieces of information on credit.”  Zhao Yusha, “4.9m People with Poor Credit Record Barred from Taking Planes,” Global Times (Nov. 2, 2016).  According to the Chinese government, the goal of this program is for “the whole society to pursue the common value[s] and code of conduct, and actively create a ‘trustworthy glor[ious], dishonesty shameful’ good social atmosphere.” “State Council General Office on Strengthening Guiding Opinions on Building a System of Personal Integrity” (Guidance Opinion), No. 98 (Dec. 30, 2016). Our translation.  Other observers have a different view, believing the system is more about social control than credit in the ordinary sense.  Asan Institute for Policy Studies, “Orwell’s Nightmare: China’s Social Credit System” (Feb. 28, 2017).

At the moment, pilot-stage credit systems like Alibaba’s Sesame Credit do not “directly penalise people for being ‘untrustworthy.’”  Botsman, supra.  But the system provides incentives to fall in line with the values the government seeks to inculcate:  A “good” score makes it easier to find a job, rent a car, check in at the airport, or obtain a travel visa; the corollary is that it is harder to do such things with a “bad” score.  Once the system is mandatory, though, those with low ratings may have “slower internet speeds; restricted access to restaurants, nightclubs or golf courses; and the removal of the right to travel freely abroad.”  Id.

At present, however, the social credit system cannot by itself inflict such penalties; rather, the judiciary can place companies or individuals who fail to meet their obligations on the official  “List of Dishonest Persons Subject to Enforcement”, published by the Supreme People’s Court.  “Several Provisions of the Supreme People’s Court on Announcement of the List of Dishonest Persons subject to Enforcement,” Interpretation No. 17 (2013).  Those on the list are subject to various restrictions, including limitations on travel, employment, financing and credit, market access, and government support.  Chinese news sources report that, by late 2016, nearly 5 million citizens were barred from air travel, and over a million were barred from train travel based on the information already in the system.  Zhao, supra.

And because the system looks at more than just debt payment history, one’s score can go down if one associates with the wrong people or, potentially, even just ends up in the wrong physical place.  As the country turns more toward app-based commerce, there will be a significant amount of data available on nearly every aspect of a citizen’s life. One locality included “not visiting your parents often” as a negative factor in computing credit scores.  Asan Institute, supra.  Even expressing the wrong thoughts could bring your score down; as a Chinese professor working with the government to develop the system explains: “The behaviour of the majority is determined by their world of thoughts. A person who believes in socialist core values is behaving more decently.”  Botsman, supra.

For businesses, the same system of rewards and punishments applies.  A corporation may be rewarded with a higher credit score for having reduced energy consumption, promoting local or national government projects, or partnering with Chinese businesses.  In contrast, a company that lacks a robust safety program, refuses to support a local government’s pet project, or balks at disclosing big data to the Chinese government may be downgraded.

The Mercator Institute for China Studies writes that, as to businesses, the system is designed “to constantly monitor and evaluate companies’ economic as well as non-economic behavior” and to create incentives for companies to comply “not just with laws and regulations but also with the industrial and technological policy targets laid down by the Chinese government.”  “MERICS China Monitor: China’s Social Credit System” (May 24, 2017).  Although the system will purportedly treat Chinese and foreign companies the same, there is a concern that foreign companies will be disadvantaged.

If all that sounds Orwellian, the flip side is that the new credit system might also make credit easier to obtain and business less costly in China.  Unlike the U.S., with its well-established credit bureau system, China has never had a comprehensive, national credit reporting scheme.  Moreover, the system goes beyond mere borrowing and lending and, according to the Chinese government, aims to promote a global concept of “trustworthiness.”  So, for example, one of the goals is to punish and isolate not only individuals and businesses who don’t pay their bills but also those who sell counterfeit or shoddy goods, breach contracts, or who otherwise fail to make good on their consumer or business obligations.

Making Chinese business trustworthy and attractive to foreign investment is an explicit goal of the credit system plan: as the State Council recognized in its “Planning Outline,” “[p]erfecting the social credit system is a necessary condition to deepen[ing] international cooperation and exchange, establishing international brands and reputations, reducing foreign-related transaction costs, and improving the country’s soft power and international influence . . . .”   Supra. However, investment freedom will be linked to businesses’ social credit scores; only companies with high credit scores will benefit from reduced regulation and greater investment opportunities.

What are the takeaways for multinationals in China?  At a minimum, companies will likely want to consider some of the following:

  • The BBC reports that “each citizen and Chinese organisation will be rated.” “China ‘Social Credit’: Beijing Sets Up Huge System” (Oct. 26, 2016).  This raises the question of whether the credit scoring system will also apply to foreign businesses operating in China.  To the extent that it does, will there be required disclosures or reporting that a business will need to make to the system?  Compliance may raise unique legal issues for foreign companies, and the cost of compliance may be prohibitive for some.
  • Will foreign companies or their affiliates operating in China have to disclose information about employees in China? If yes, will that include non-citizens working in China or only Chinese nationals?  What about non-citizens working temporarily in China (e.g., an foreign executive who regularly travels to China for extended business trips)?
  • If foreign employers have to disclose information about individuals working in China, does such conduct violate other law, such as federal or state privacy laws in the United States? Does furnishing information to or obtaining information from the Chinese social credit system expose foreign companies to liability in other jurisdictions?  For example, can companies participating in the social credit system be sued in the United States for violations of the Fair Credit Reporting Act?
  • Will foreign employers operating in China be required to obtain social credit scores on job applicants or current employees? Even if not required to do so, will it be to a company’s advantage to avoid hiring employees with low scores, not only because of whatever the scores actually reveal about the recruits’ trustworthiness and diligence, but also because an employee with a low score could bring the company’s own score down?
  • To the extent that the social credit system scrapes social media for data about people and companies, will that include social media worldwide? If so, do multinational companies have to worry about their political or other media positions in other countries affecting their social credit score in China?

Finally, companies should pay attention to the social credit system as a source of useful business information.  It remains to be seen whether the system will be reliable enough to provide useful information about potential employees or business partners (separate from the question of how any potential associations affect the company’s own score).  Will this system actually be helpful in sorting the wheat from the chaff–the diligent employees from the layabouts, the solid businesses from the scam artists?  That remains to be seen, but if American and other multinational companies can actually benefit from the transparency that the social credit system promises, it might remove some of the sting from the added level of regulatory hassle that it otherwise seems to portend.

For more information on this or any related topic please contact the authors, your Seyfarth attorney, or any member of the International Employment Law Team or the Background Screening Compliance & Litigation Team.

By Esther Slater McDonald

Seyfarth Synopsis: In Spokeo, Inc. v. Robins, the U.S. Supreme Court held that a plaintiff must have a concrete injury to sue for FCRA violations. Following Spokeo’s remand, courts have held that consumers have standing to sue if their reports are inaccurate even if an inaccuracy did not adversely affect them.

In Spokeo, the U.S. Supreme Court reaffirmed that plaintiffs seeking to sue in federal court must have a concrete, actual injury; a mere statutory violation is not enough. The U.S. Supreme Court remanded the case for the Ninth Circuit to determine whether the plaintiff had alleged a concrete injury. (See our prior posts hereherehere, and here for a summary of the case background and a more detailed explanation of the U.S. Supreme Court’s ruling.)

The Ninth Circuit’s Ruling on Remand

On remand, in Spokeo, Inc. v. Robins, the Ninth Circuit concluded that the plaintiff had sufficiently pled a concrete injury in fact and thus had standing to proceed with his FCRA claims. The court stated that, although a plaintiff may not show an injury-in-fact merely by pointing to a statutory violation, “some statutory violations, alone, do establish concrete harm.” To determine whether a statutory violation is itself a concrete injury, the court created a two-part test that asks (1) whether the statutory provision at issue was established to protect the consumer’s concrete interests (as opposed to purely procedural rights), and, if yes, (2) whether the specific procedural violation alleged actually harmed or presented a material risk of harm to those interests.

On the first question, the Ninth Circuit noted that the plaintiff had alleged a violation of the FCRA’s requirement that a consumer reporting agency have reasonable procedures in place to ensure the maximum possible accuracy in reporting. The court concluded that this provision “protect[s] consumers’ concrete interests” in accurate reporting and consumer privacy and that these interests are “‘real’ rather than purely legal creations.” The court reasoned that “given the ubiquity and importance of consumer reports in modern life—in employment decisions, in loan applications, in home purchases, and much more—the real-world implications of material inaccuracies in those reports seem patent on their face.” The court also noted that “the interests that FCRA protects also resemble other reputational and privacy interests that have long been protected in the law.”

As to the second question, the Ninth Circuit stated that it required an “examination of the nature of the specific alleged reporting inaccuracies to ensure that they raise a real risk of harm to the concrete interests that the FCRA protects.” The court concluded that, while a benign inaccuracy may not be harmful, the plaintiff had raised a real risk of harm by alleging that the defendant had inaccurately reported that he was married, had children, was in his 50’s, was employed, had a graduate degree, and was financially stable. The court reasoned that this information “is the type that may be important to employers or others making use of a consumer report.”

The Ninth Circuit held that whether an employer or other end user considered the inaccurate information was irrelevant. Although the defendant argued that the plaintiff must show that the information actually harmed his employment prospects or presented a material or impending risk of doing so, the court disagreed. In the court’s view, “[t]he threat to a consumer’s livelihood is caused by the very existence of inaccurate information in his credit report and the likelihood that such information will be important to one of the many entities who make use of such reports.” Thus, a materially inaccurate report is itself a concrete injury.

Although the Ninth Circuit spoke of harm and materiality, the crux of the opinion appears to be that any inaccuracy will provide standing if it involves information that a user of a report may consider even if no one ever does consider it. And that is how one court recently interpreted the ruling.

In Alame v. Mergers Marketinga judge in the Western District of Missouri held that a plaintiff had standing to sue because he alleged that the defendant’s reporting made it appear that he moved around a lot. The plaintiff’s background report included 22 address entries for him. Some of the address entries were for the same location but varied as to the formatting of the address. The plaintiff claimed that reporting formatting variations inaccurately conveyed that he had lived at 22 different locations. The plaintiff did not allege that anyone had interpreted the report that way or that he had not lived at those locations. Nonetheless, quoting Robins, the court held that a plaintiff is injured by “‘the very existence of inaccurate information in his credit report.’”

Potential Conflict with Spokeo and Dreher

The Ninth Circuit’s opinion is difficult to reconcile with Spokeo. In Spokeo, the U.S. Supreme Court held that, to be sufficient, an injury must “actually exist” and clarified that “not all inaccuracies cause harm or present any material risk of harm” to a plaintiff. Yet, the Ninth Circuit held that an inaccurate report is itself a concrete injury even if the only people who received the report were the plaintiff and his lawyer. (The plaintiff did not allege that the defendant had furnished his report to anyone other than the plaintiff and his lawyer.)

The Ninth Circuit’s position also seems to conflict with the Fourth Circuit’s ruling in Dreher v. Experian Information SolutionsIn that case, the plaintiff sued a consumer reporting agency for inaccurately identifying the source of credit information in his report. The Fourth Circuit rejected the plaintiff’s argument that the inaccuracy itself was an injury. Instead, the court held that a plaintiff must show that he “was adversely affected by the alleged error on his report.” The court reasoned that an inaccuracy “work[s] no real world harm” unless it has a negative impact on the consumer.

Implications for Businesses

Robins and Dreher indicate that the federal courts are still grappling with Spokeo’s meaning. We expect the issue will continue to percolate in the federal courts. If the divide on Spokeo’s application deepens among the federal courts of appeal, the U.S. Supreme Court may revisit the standing issue to provide more clarity.

For now, under Robins, consumers may be able to bring FCRA claims in federal court whenever their reports contain inaccurate information unless that information is truly benign, such as when an address contains a mistyped zip code. Even if a plaintiff lacks Article III standing under Dreher, he or she may be able to proceed in state court in jurisdictions that recognize broad standing to sue for any statutory violation.

For this reason, employers obtaining background checks should be careful to comply with each of the FCRA’s highly technical requirements. Failing to comply with a requirement could expose a company to class action liability even if the violation did not impact hiring. Employers should consider conducting a privileged compliance review of their background screening process, including the notices used and the procedures followed for obtaining and using background reports. Employers should also review their policies regarding requesting and using salary history and criminal history in light of the increasing number of jurisdictions that restrict use of such information and the Equal Employment Opportunity Commission’s continued interest in background screening policies that may have a disparate impact on minorities.

If you have questions about these or other issues, please reach out to the author or your Seyfarth attorney.

 

Data privacy issues keeping you awake at night?  Our colleagues, part of Seyfarth’s Global Privacy and Security Team (GPS), are here to help shed some light on this increasingly more complex body of law.  See the blog posted here.  Also, please consider joining us up for an upcoming webinar, on September 22, 2015, that will address Information Security Policies and Data Breach Response Plans.