California's false advertising law used to enforce federal banking law

Smith v. Wells Fargo Bank, N.A., 2005 WL 3588442 (Cal. Ct. App. 4th Dist.)

Sean Smith sued Wells Fargo (the Bank) over its Check Card policies, alleging that Wells Fargo, contrary to what it told customers, deliberately honored Check Card purchases that exceeded customers’ available balances in order to charge significant overdraft fees. This was a reversal of an earlier policy that transactions would be declined if there were insufficient funds in the customer’s account – unlike paper checks, Check Cards allow and indeed require the merchant to contact the bank before the transaction is complete. The Bank thus could have chosen to continue to decline authorizations for insufficient funds, resulting in immediate unhappiness and embarrassment for the consumer but saving him or her the fee. This policy change apparently promised additional revenues of between $120 and $145 million in overdraft fees per year.

Although Smith’s monthly account notice contained a statement about the Bank’s policy change, he was dissatisfied with the disclosure. He alleged that the new policy amounted to involuntary overdraft protection, contradicting marketing materials that claimed that overdraft protection was voluntary and that the Check Card operated like a credit card but without the extension of credit. In addition, he alleged that this conduct violated laws, including federal laws, that prohibit deceptive or misleading statements about financial services. The trial court ruled that federal bank regulations preempted Smith’s unfair competition, false advertising, and Consumer Legal Remedies Act (CLRA) claims. The court of appeals reversed.

Federal regulations require certain disclosures about account terms and notice of changes in those terms. The Truth in Savings Act (TISA) (12 U.S.C. § 4301 et seq.), has certain disclosure requirements for deposit fees charged by national banks, in order to allow consumers to make meaningful comparisons between competing products. Under governing regulations, state law requirements inconsistent with TISA are preempted, and 12 C.F.R. § 7.4007 states in relevant part that '[a] national bank may exercise its deposit-taking powers without regard to state law limitations concerning: ... disclosure requirements....' Nonetheless, the regulation also states that contract and tort claims are not preempted to the extent that they only incidentally affect banks’ deposit-taking powers.

Because Smith’s false advertising/unfair competition claims were based on a failure to disclose, the trial court concluded that they were preempted. On appeal, the Bank relied on express preemption under this regulation rather than arguing conflict or field preemption. The court of appeals pointed out that the Unfair Competition Law (UCL) defines "unfair competition" as "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising,” so that violations of other laws are actionable under the UCL, whether or not there is a private right of action for directly enforcing the other laws. “Virtually any law – federal, state or local – can serve as a predicate” for a UCL action.

Smith asserted that his UCL claim was not preempted to the extent it was based on the Bank’s alleged violations of federal disclosure requirements, and the court of appeals agreed. For instance, federal regulations require banks to disclose the amount of any fee that may be imposed in connection with an account, but the Bank’s notice of its policy change didn’t include notice of the amount. The Bank argued that 12 C.F.R. § 7.4007 nonetheless preempted the claim, but the court of appeals held that a violation of the UCL piggybacked on a violation of federal law was not a state law limitation; Smith’s claim sought only to enforce federal law using state-law means. Rather, the UCL claim can be seen as a tort law (predicated on federal law) with only an incidental effect on banking, and the same regulation that bans state-law disclosure requirements preserves state torts. Likewise, to the extent that his UCL claim is based on a systematic breach of the Bank’s contracts with its customers (which can be an unfair business practice), it is also not preempted, using similar reasoning. It followed that Smith’s false advertising and CLRA claims were not preempted. Indeed, Smith’s false advertising claims were separately preserved by 12 U.S.C. § 4302(e), which prohibits advertising about deposit accounts that is “inaccurate or misleading” or “misrepresents” deposit contracts.

The Bank additionally argued that its disclosures were adequate as a matter of law. The court of appeals found that summary judgment could not be granted; the facts were still in dispute.

My comment: this case demonstrates why companies often prefer federal regulation, at least when it’s exclusive. A single enforcer is more predictable and less aggressive than a multitude.