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.
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