Lawsuits filed by the Hawaii Attorney General alleging that card issuers deceptively advertised add-on products belong in state court – and are not preempted by the National Bank Act (NBA), the Ninth U.S. Circuit Court of Appeals has ruled.

Hawaii’s Attorney General (AG) filed suit in state court against HSBC Bank, Capital One, Citigroup, JP Morgan Chase, Discover Bank, and Bank of America claiming that the defendants deceptively marketed and improperly enrolled customers in add-on credit card products, particularly payment protection plans.

Specifically, the complaints charged that the defendants enrolled cardholders in plans without their consent, even those that did not qualify for the plan’s benefits; confused customers with deceptive marketing, contract language, and billing; and targeted “vulnerable” populations such as subprime borrowers. Three state law causes of action were asserted: two violations of Hawaii’s unfair and deceptive trade practices statute and an unjust enrichment claim.

The defendants successfully removed the cases to federal court and the AG moved to remand. A federal district court judge denied the motion. The Class Action Fairness Act (CAFA) did not provide an independent basis for federal jurisdiction, the judge held, but at least one of the claims against each defendant was preempted by the NBA’s provisions prohibiting state law challenges to interest rates charged by national banks.

The AG appealed. He argued that the relevant provisions of the NBA, Sections 85 and 86, did not apply because his complaints did not invoke Hawaii’s usury law. Instead, he argued his complaint focused on the defendant’s allegedly deceptive marketing and advertising.

Agreeing with the AG, the Ninth Circuit reversed the district court’s denial to remand.

Sections 85 and 86 of the NBA completely preempt state law claims challenging interest rates charged by national banks.

The first two counts of the complaints alleged violations of Hawaii’s unfair and deceptive acts and practices statutes, “which govern business disclosure, contractual terms, and trade practices,” the unanimous panel wrote. “None of these provisions proscribes the interest that a financial institution may charge.” Side-stepping the issue of whether payment protection plan fees are interest, the court held the complaint did not actually challenge the interest rates charged by the issuers.

As for the unjust enrichment claim, even though the request for damages may well require the card providers to disgorge any financial gain from the fees in the form of civil penalties and restitution, the Ninth Circuit said that was irrelevant. “[I]f a plaintiff asserts a usury claim simply by virtue of requesting damages, the states’ settled authority ‘to regulate national banks in areas such as contracts, debt collection, acquisition and transfer of property, and taxation, zoning, criminal and tort law’ would be rendered meaningless,” the court said.

For their part, the defendants pointed to language in the complaints that they charged “over-the-limit fees” and that consumers received “virtually no benefit” from the products.

But the court disagreed, stating that the allegations were consistent with unfair and deceptive acts claims. “The Attorney General could have claimed that the card providers charged excessive fees,” the panel wrote. “But he did not; even if the facts in the complaints might support a Section 86 claim, that does not mean the Attorney General pleaded one.”

Further, the “state law claims here were independent of and did not ‘merely duplicate[] rights and remedies available under’ Sections 85 and 86,” the court concluded. “The unfair and deceptive practice claims targeted alleged marketing misrepresentations. The unjust enrichment claims arose from the purported failure to obtain consent before enrolling consumers in debt protection products. Regardless of the rates charged, the banks had independent state law obligations to obtain consent from and not to deceive consumers. These claims are not preempted by the National Bank Act.”

The panel found additional support in a decision from the Fifth U.S. Circuit Court of Appeals decided last year in a similar case filed by the Mississippi AG, as well as federal courts in California, Iowa, Mississippi, and West Virginia.

Affirming the district court, the Ninth Circuit also ruled that CAFA did not provide jurisdiction for the suits, as the AG filed them as civil enforcement actions and specifically disclaimed class status.

To read the opinion in Hawaii v. HSBC Bank, click here.

Why it matters: The decision is a victory for the Hawaii AG, sending the case back to state court and allowing it to move forward in lieu of preemption under the NBA. Through careful pleading and avoiding allegations based on the actual rate of interest charged by the card issuers, both the Hawaii and Mississippi AGs have found a way to keep their lawsuits against the banks alive. But for banks, these cases are creating an ever-increasing hole in the preemption protections of the NBA.