Feb 21, 2006
California’s Fourth District Court of Appeal has narrowly construed explicit preemption provisions in federal banking regulations, holding that account disclosure regulations do not preempt claims brought under California’s Unfair Competition Law, Bus. & Prof. Code § 17200 et seq. (the “UCL”), based on violations of those regulations.
Smith v. Wells Fargo Bank, N.A. (4th Dist. Dec. 29, 2005) was a class action brought on behalf of checking account holders of Wells Fargo Bank, alleging that Wells Fargo violated the UCL and the Consumer Legal Remedies Act (“CLRA”) by failing to adequately disclose a change to its policy regarding overdrafts on transactions using debit cards, known as “Check Cards.” The bank’s practice was to deny a Check Card point-of-sale transaction if the account contained insufficient funds. This was in contrast to the Bank’s practice with respect to a traditional paper check transaction in an account with insufficient funds, as to which the bank could, at its option, pay the check and create an overdraft in the account, charging the customer a fee. As part of an effort to generate additional fee revenue, Wells Fargo determined to extend its options for paper checks to Check Card transactions as well.
Smith’s March 2002 monthly customer account statement contained a notice that “Wells Fargo is changing [its] approval criteria” with respect to Check Cards. The notice stated that when an account contained insufficient funds to cover a Check Card transaction, the bank could elect whether to pay the charge under an existing overdraft protection agreement with the account holder, pay the charge and create an overdraft in the account, charging the customer a fee, or deny the transaction due to insufficient funds. The notice informed the account holder that “If we authorize the transaction, you may be assessed a fee, which will vary depending upon the action taken.” The change went into effect in May 2002.
Smith alleged that the Check Card program was misleading, because the bank’s unilateral establishment of overdrafts, accompanied by a fee of approximately $30, differed materially from the bank’s practices regarding overdrafts as described in the customer account agreement and other marketing materials.
The bank moved for summary judgment, arguing that the claims were preempted by federal law, specifically regulations issued by the Office of the Comptroller of the Currency (“OCC”) that govern national banks’ account disclosure requirements. The court entered judgment for Wells Fargo.
The Fourth District reversed, holding that the claims were not preempted. The court analyzed and narrowly construed the language of a 2004 OCC regulation, 12 C.F.R. part 7.4007, which specifically addressed preemption of state law in the context of a national bank’s deposit-taking powers. That regulation provided that “[a] national bank may exercise its deposit-taking powers without regard to state law limitations concerning . . . [d]isclosure requirements” but that state contract and tort laws are not preempted “to the extent that they only incidentally affect the exercise of national banks’ deposit-taking powers.”
The bank argued that the particular OCC regulation preempted Smith’s claims based on violation of the disclosure regulations. The court disagreed, noting that the specific wording of the regulation’s preemption provision provided only that state laws imposing limitations on the OCC’s disclosure requirements were preempted. Smith’s state-law claim, however, asserted that the bank had violated the OCC disclosure regulations themselves and thus “merely seeks to enforce federal regulations concerning disclosure requirements.” The court also ruled that the federal disclosure regulations did not preempt the UCL claim because the regulatory claim was akin to a tort claim that only “incidentally” affected the bank’s deposit-taking powers. Lastly, the court rejected the preemption argument because the UCL claim in substance alleged systematic breaches of the bank’s standard account agreement, which is governed by California general contract law principles. The court applied the same reasoning to hold the CLRA claim not preempted.
The Smith decision joins several other published appellate opinions rejecting defendants’ arguments that federal banking law preempts UCL claims. Other courts, however, considering other banking laws and federal regulatory settings, have reached the opposite conclusion and held UCL claims preempted.
Joanna McCallum. Ms. McCallum’s practice focuses on appellate matters and business litigation, specializing in the areas of health law, unfair competition and ERISA. She has represented hospital systems and other healthcare providers, multi-employer pension trusts and insurance companies in a variety of litigation and appellate matters in federal and state courts, as well as participated in environmental, financial services, securities, trade secret and real estate litigation.
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