Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—NDCal: $202 Million Restitution Order Reinstated for Wells Fargo’s Misrepresentation of Debit Posting Practices, (May 15, 2013)

By William Zale, J.D.

An order requiring Wells Fargo to pay over $202 million in restitution in a depositors’ class action was reinstated by the federal district court in San Francisco on remand from a Ninth Circuit decision reversing liability under California law for "high-to-low" posting of debit card transactions to increase overdraft fees but affirming liability for affirmative misrepresentations in marketing that caused class members to believe that debits would be posted chronologically (Gutierrez v. Wells Fargo Bank, N.A., May 14, 2013, Alsup, W.). The court also ordered that post-judgment interest be calculated from the date of the original judgment and entered a permanent injunction.

The depositors asserted, among other things, that Wells Fargo violated the California Unfair Competition Law (UCL) and False Advertising Law (FAL) by (1) processing account debits received by the bank each day in high-to-low order multiplied the overdraft fees collected by the bank by depleting the account as fast as possible and turning what might otherwise be a single overdraft into as many as ten and (2) misrepresenting that debits would be posted chronologically. Following trial, the court held Wells Fargo liable under the UCL for restitution to class members totaling over $202 million.

On appeal, the Ninth Circuit ruled that the National Bank Act preempted the application of the California Unfair Competition Law to a national bank’s order of posting. Both the order of posting and any requirement to make particular disclosures are within the exclusive purview of the National Bank Act. Liability based on failure to disclose was likewise preempted on the ground that it was tantamount to mandating specific disclosures.

The Ninth Circuit also ruled, however, that UCL liability for false and misleading statements, was not preempted. For these purposes the UCL is a non-discriminatory state law of general applicability that did not impose disclosure requirements in conflict with federal law. Rather, it prohibited statements that are likely to mislead the public.

On remand, the depositors moved to reinstate the court’s prior judgment on narrower grounds and requested injunctive relief and interest.

Restitution. The court rejected Wells Fargo’s contentions that an email from the depositors’ attorney waived any claims for restitution and that the depositors’ damages expert did not calculate the proper amount for misrepresentation based restitution. Based on a review of the parties’ pretrial filings and statements, the court concluded that the depositors expressly sought restitution for the fraud-based UCL claims and the false advertising claims.

The depositors’ allegation that Wells Fargo engaged in an integrated, multi-phase "Resequencing Scheme" was proven at trial. This scheme was not limited to changes to Wells Fargo’s posting method. The depositors proved at trial—and the Ninth Circuit affirmed—that Wells Fargo misled the class via affirmative misdirection that caused the class members to believe that their debits would be posted chronologically. The court of appeals stated that for the named plaintiffs, "[t]he misunderstanding that Wells Fargo’s misleading statements sowed among customers about its posting scheme was a significant cause of the magnitude of the harm experienced by [class plaintiffs] Gutierrez and Walker."

Even though liability could not be predicated on the posting method itself, the result was the same. The harm from Wells Fargo’s affirmative misrepresentations came in the form of unexpected overdraft fees—the same harm wreaked by the unfair practice of manipulating the posting method, according to the court. Restitution for this harm is the same, the court decided.

Interest. The court denied the depositors’ request for prejudgment interest on the ground that calculation of damages in this action was only possible through trial and judgment, rejecting the depositors’ argument that the equities had shifted post-appeal. The court ruled that post-judgment interest should be computed based on the date of the original entry of judgment.

Injunction. The Ninth Circuit stated that the court, on remand, "can enjoin the bank from making fraudulent or misleading representations about its system of posting in the future." Wells Fargo had voluntarily ceased posting debit-card transactions in high-to-low order and allegedly has no current intention of resuming the practice. Without an injunction, however, Wells Fargo would be able to return to its prior practice of misleading customers if it chose to implement modifications to its posting order, the court observed.

The court permanently enjoined Wells Fargo from making or disseminating, or permitting to be made or disseminated, any false or misleading representations relating to the posting order of debit-card purchases, checks, and ACH transactions in its customer bank accounts.

The case is No. C 07-05923 WHA.

Attorneys: Adam Kent Shea (Panish Shea & Boyle LLP) for Erin Walker. Sonya Diane Winner (Covington & Burling LLP) for Wells Fargo Bank, NA.

Companies: Wells Fargo Bank, NA

Cases: Advertising StateUnfairTradePractices CaliforniaNews