Plaintiffs challenged Wells Fargo’s “high-to-low” posting of account debits, which multiplied overdraft fees “by depleting the account as fast as possible and turning what might otherwise be a single overdraft into as many as ten.” After a bench trial, the court found that (1) Wells Fargo’s choice of high-to-low posting was made in bad faith with the sole object of increasing overdraft fees, violating the “unfair” prong of the UCL; (2) Wells Fargo failed to adequately disclose this practice, violating the “fraudulent” prong; (3) Wells Fargo made misleading statements to consumers about its resequencing practice, also violating the “fraudulent” prong; (4) this deceptive conduct also established liability under the FAL; (5) Wells Fargo was enjoined to stop using high-to-low posting and tell the truth about whatever sequencing practice it chose; and (6) Wells Fargo was ordered to pay restitution of nearly $203 million, based on the difference between the fees charged based on high-to-low versus chronological posting. The court didn’t reach the class claims for negligent misrepresentation and fraud because the injunctive relief sought thereunder would be duplicative.
On appeal, rulings 1-2 and 5-6 were reversed, but 3-4 were affirmed, though the court of appeals didn’t expressly address false advertising when it affirmed the findings on fraudulent misrepresentations. The court of appeals ruled that application of the “unfair” prong was preempted as applied to a national bank’s posting order. Liability based on failure to disclose was likewise preempted. However, liability based on the “fraudulent” progn wasn’t preempted, because it was a generally applicable law that didn’t impose disclosure requirements in conflict with federal law. It only barred statements likely to mislead the public.
Wells Fargo made several kinds of affirmative misrepresentations. One marketing theme was that debit card purchases were “immediately” or “automatically” deducted from an account. “This likely led the class to believe: (1) that the funds would be deducted from their checking accounts in the order transacted, and (2) that the purchase would not be approved if they lacked sufficient available funds to cover the transaction.” This language appeared on the website, in brochures, and on Wells Fargo’s New Account Welcome brochure for years—on such a wide array of marketing materials, which were distributed so broadly, that class members were likely to be misled by them.
Wells Fargo also made misleading statements directly to customers, such as, “[c]heck card and ATM transactions generally reduce the balance in your account immediately,” that “the money comes right out of your checking account the minute you use your debit-card,” and that “[i]f you don’t have enough money in your account to cover the withdrawal, your purchase won’t be approved.”
In online banking, Wells Fargo displayed pending transactions to customers in chronological order, only to secretly rearrange them high-to-low when posting to maximize overdraft fees. Buried deep in its 60-plus page Customer Account Agreement was language on posting order that was both difficult to understand and misleading. The agreement said that the bank “if it chooses” might use high-to-low posting, which “might” result in more overdraft fees. This language, “if it were ever discovered and read in the first place, affirmatively left the misleading impression with consumers that the bank had not yet implemented high-to-low posting (whereas, in fact, the posting practice was already in use).” The language also misled customers by suggesting that the order might be modified on a case-by-case basis, which it was not.
The court of appeals held that the ruling that the named plaintiffs were misled was “well supported by the evidence,” that “[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 Gutierrez and Walker,” and that “the district court’s finding that Wells Fargo made misleading statements is amply supported by the court’s factual findings.” Further, “[t]he pervasive nature of Wells Fargo’s misleading marketing materials amply demonstrates that class members, like the named plaintiffs, were exposed to the materials and likely relied on them.” The court of appeals vacated the injunctive relief because it related to posting order, and stated that the district court could provide restitution against Wells Fargo consistent with the finding on the “fraudulent” prong, even though the original restitution order, predicated as it was on Wells Fargo’s choice of posting method, had to be vacated as well.
On remand, the court reinstated the restitution award and granted a new injunction barring false and misleading representations about posting order. Wells Fargo argued that the district court couldn’t do that; the court disagreed.
Basically, Wells Fargo argued that there was no evidence supporting the money award because plaintiffs’ damages expert hadn’t calculated damages based on misrepresentations, and plaintiffs had waived any such claim for damages based on fraud. Though plaintiffs’ attorney sent an awkwardly worded email before trial, what he really meant (and how the trial proceeded) was that the expert hadn’t attempted to quantify damages or restitution based on common law misrepresentation/fraud claims (which require individualized reliance/proof of damages). That didn’t waive restitution claims ancillary to an injunction under the UCL. An injunction against an unfair or fraudulent business practice is usually accompanied by the ancillary equitable relief of restitution. Such relief isn’t “damages” for a conventional “fraud” claim. “This distinction may seem odd to those unfamiliar with Section 17200 but the difference is generally known to California practitioners.”
Further, Wells Fargo had every opportunity to dispute the damages analysis. As the case was tried, the court understood, and all the parties should have as well, that restitution was a possible form of relief.
The full award was reinstated. The remedial provision of the law provides that “[t]he court may make such orders or judgments . . . as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.” This language has been interpreted to allow recovery without proof of actual reliance. “[O]nce a wrongdoer is proven to have engaged in a fraudulent business practice whose whole point was to cheat consumers out of money, restitution may be used to restore the money to the victims of the practice.” It was sufficient that class members were likely to be deceived, a finding affirmed by the court of appeals.
Still, there needed to be evidentiary support for the amount of recovery. Plaintiffs’ expert didn’t attempt to quantify amounts obtained by misrepresenting the posting order (which order itself has now been held lawful). Wells Fargo argued that slicing out the amounts obtained by misrepresentation would be difficult, if not impossible, on a classwide basis. The court disagreed. There was an overall scheme, carried out by affirmative misrepresentations that caused class members to believe that debits would be posted chronologically. Again, the court of appeals affirmed the finding that “[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 couldn’t be predicated on the posting method itself, the harm from the affirmative misrepresentations came from the unexpected overdraft fees, which was the same harm caused by manipulating the posting method. Restitution was likewise the same. At trial, Wells Fargo had already tried to argue that the restitution calculations should be reduced based on assumptions about how many individuals were “on notice” of Wells Fargo’s practices, but the court already rejected that. The appropriate measure of damages was to restore class members to a position consistent with the reasonable expectations induced by the affirmative misrepresentations—which could be done by calculating overdraft fees in a way approximating chronological order. “Wells Fargo’s affirmative misrepresentations are intertwined with the other elements of the scheme and cannot be meaningfully separated into discrete causes of harm.”
The court drew an analogy to People ex rel. Bill Lockyer v. Fremont Life Ins. Co., 104 Cal. App. 4th 508 (2002), which challenged an annuity policy with unusual premium charges. The court found the policy as a whole misleading, and ordered restitution of premium charges paid plus interest. “Although the premium charge itself was lawful, the misleading annuity policy was not, and the restitution order properly returned the unexpected premium charges.” So here: the appropriate restitution was to return the unexpected charges to the customers, which was the calculation plaintiffs’ expert performed. “This order is not penalizing Wells Fargo for a practice protected by federal preemption. Instead, it is penalizing Wells Fargo for affirmatively misleading the class as to what the practice was.”
No prejudgment interest was allowed, but post-judgment interest should be computed based on the date of the original entry of judgment, since that was when Wells Fargo was found liable for false/fraudulent advertising.
Wells Fargo objected to an injunction as insufficiently specific, “but Wells Fargo should not escape an injunction because its misconduct was multifarious.” Also, Wells Fargo voluntarily cased high-to-low posting (in California, anyway) and allegedly didn’t plan on returning to the practice. But without an injunction, it could return to its prior practice of misleading consumers if it did change posting order. Thus, Wells Fargo was enjoined from making any false or misleading representations relating to posting order.