Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—9thCir: Wells Fargo May Be Liable for Misrepresenting Its Debit Card Transaction Posting Procedures , (Dec 28, 2012)

By Jody Coultas, J.D.

Federal law preempted state regulation of the posting order of debit and credit card transactions by banks as well as any obligation the banks have to make specific, affirmative disclosures to bank customers, according to the U.S. Court of Appeals in San Francisco (Veronica Gutierrez v. Wells Fargo Bank, NA, December 26, 2012, McKeown, M.). Federal law did not preempt the California Unfair Competition Law (UCL) with respect to fraudulent or misleading representations concerning posting.

Bank customer Gutierrez sued Wells Fargo under UCL for unfair business practices relating to overdraft fees based on the high-to-low posting order and for misleading clients as to the actual posting order used by the bank. The posting process takes all debit items presented for payment during the preceding business day and subtracts them from the account balance. Posting charges from high to low has the potential to multiply overdraft fees, turning a single overdraft into many such overdrafts.

A district court found that Wells Fargo’s sole motive for choosing high-to-low posting was to maximize the number of overdrafts and affirmatively reinforced the expectation that transactions were covered in the sequence the purchases were made. Wells Fargo was permanently enjoined against “high-to-low” posting. On appeal, Wells Fargo argued the UCL was preempted by the National Bank Act (NBA) and challenged the district court’s factual and legal findings.

Unfair Acts

Federal law preempted state courts from regulating Wells Fargo’s posting procedures, according to the court. Under the NBA, key powers of national banks include the authority to receive deposit and all such incidental powers as shall be necessary to carry on the business of banking. The ability to choose a method of posting transactions was a necessary component of a posting process that is integrally related to the receipt of deposits and fell within the type of federal banking regulatory power that preempts contrary state law. Also, the Office of the Comptroller of the Currency specifically delegated to banks the method of calculating fees. Therefore, the district court’s injunction ordering a particular kind of posting and ordering $203 million in restitution under the unfair prong of the UCL was preempted.

Fraudulent Statements

Because the UCL was a state law of general applicability that did not conflict, frustrate the purposes, or impair the efficiency of national banks to discharge their duties, the court found that the UCL was not preempted. The requirement to make particular disclosures falls squarely within the purview of federal banking regulation and is expressly preempted and the UCL cannot impose liability simply based on the bank’s failure to disclose its chosen posting method. However, the UCL’s prohibition of misleading statements did not significantly interfere with the bank’s ability to offer checking account services, choose a posting method, or calculate fees. Also, the UCL did not mandate the content of any statements in the banking arena. The district court could enjoin Wells Fargo from making fraudulent or misleading representations about its system of posting in the future.

Standing

The named customers had standing to bring the UCL claims, according to the court. To establish standing to seek class-wide relief for fraud-based UCL claims, the named plaintiffs must prove “actual reliance” on the misleading statements. The named customers were misled by Wells Fargo’s statements because the extent of the falsity of the statements was not known to either of them until they incurred hefty fees for having overdrawn their checking accounts.

Misleading Statements

The district court’s finding that Wells Fargo made misleading statements is amply supported by the facts, according to the court. Wells Fargo’s online banking page displayed pending transactions in chronological order but posted them in high-to-low order. Marketing materials promoted the same theme of chronological subtraction. Wells Fargo affirmatively reinforced the expectation that transactions were covered in the sequence made and violated the UCL by making misleading statements likely to deceive its customers.

The cases are Nos. 10-16959, 10-17468, and 10-17689.

Michael W. Sobol (Lieff Cabraser Heimann & Bernstein, LLP) for Veronica Gutierrez. Robert A. Long, Jr. (Covington & Burling LLP) for Wells Fargo Bank, NA

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