https://www.law.cornell.edu/uscode/text/15/1681d

It's more than just "subject to a defamation lawsuit" (including class action lawsuits). Although for me, even if it were "just that", I'd still call it "potentially illegal". Rather, they'd potentially face FTC penalties and CFPB enforcement actions under 15 U.S.C. section 1681d(a), (b).

This law would likely classify such a company as falling under laws pertaining to "investigative consumer reports" under FCRA. This is any report on someone's "character, general reputation, personal characteristics, and mode of living" used for the purposes of employment, loans, housing, etc.

> A consumer reporting agency shall not prepare or furnish an investigative consumer report on a consumer that contains information that is adverse to the interest of the consumer and that is obtained through a personal interview with a neighbor, friend, or associate of the consumer or with another person with whom the consumer is acquainted or who has knowledge of such item of information, unless—

> (A) the agency has followed reasonable procedures to obtain confirmation of the information, from an additional source that has independent and direct knowledge of the information; or

> (B) the person interviewed is the best possible source of the information.

They'd find themselves subject to legal penalties under:

FCRA Willful Noncompliance (15 U.S. Code § 1681n) (if they did not disclose their existence/use/content of reports to employment candidates)

FCRA Negligent Noncompliance (15 U.S. Code § 1681o) (if they made somewhat reasonable but insufficient efforts to comply with the FCRA)

Administrative Enforcement (15 U.S. Code § 1681s)

and be subject to fines up to $4,700 per violation plus actual damages, plus punitive damages, plus legal fees. State Attorneys General can also bring FCRA lawsuits on behalf of their constituents, not just the federal government. FTC / CFPB can name the founders individually in the lawsuits, not just their corporate entity, and ban[1][2] them from operating any similar businesses in the future.

That all said, to some extent, YCombinator partners are on the record[3] supporting the idea of their startups sometimes doing illegal things. Generally they'll frame this as challenging outdated regulations, but they acknowledge that the founders whose strategies they fully support sometimes come into office hours and discuss how they're worried that the strategy puts them at risk of going to jail.

0: https://www.law.cornell.edu/uscode/text/15/1681d

1: FTC v MyLife.com, Inc., and Jeffrey Tinsley (CEO): https://www.ftc.gov/news-events/news/press-releases/2021/12/...

2: https://www.ftc.gov/legal-library/browse/cases-proceedings/b...

3: https://www.youtube.com/watch?v=Hm-ZIiwiN1o&t=8m46s