On December 26, 2012 a panel of the Ninth Circuit Court of Appeals rendered its long awaited decision in Gutierrez v. Wells Fargo. The trial court had awarded the plaintiffs over $200 million in restitution damages, finding that Wells’ practice of sorting items for payment on a high-to-low basis violated California’s Unfair Competition Law (“UCL”), which prohibits unfair, unlawful, or fraudulent business practices.

The appellate panel reversed1 the grant of injunctive relief and the order for restitution, finding that the National Bank Act “preempts state regulation of the posting order as well as any obligation to make specific, affirmative disclosures to bank customers.” The UCL provisions against “unfair” business practices gave way to a national bank’s power to impose deposit fees. The panel went on, however, to find that the National Bank Act did not preempt the UCL provision prohibiting “fraudulent” conduct, and Wells Fargo’s “misleading statements about its posting method” were not “insulated by federal law.” State laws that require a business to “refrain from making misleading misrepresentations” are not preempted.

The panel returned the case to the district court to determine if injunctive and restitutionary relief was warranted under the “fraudulent” conduct prong of the UCL.

The panel’s decision is obviously extremely helpful in ongoing sort order overdraft litigation, since absent “fraudulent” conduct, the court validated the bank’s high to low sort order process.

The panel’s preemption reasoning breathes some new life into the value of a national bank charter versus a state bank charter. By virtue of the preemptive effect of the National Bank Act, national banks remain out of the reach of state control for many of their products and practices.

Both the plaintiff and defense bar will find things they like and things they don’t like in the Ninth Circuit’s decision. On the one hand, fee setting and matters that impact fees, such as posting order, are afforded preemption protection – these all relate to the “power” to “receive deposits.” The OCC’s regulation setting forth a national bank’s authority to assess customers non-interest charges and fees (12 CFR § 4002(b)) “delegate[s] to banks the method of calculating fees,” and banks have the authority to make business decisions about such fees in their discretion “according to sound banking judgment and safe and sound banking principles.” Wells Fargo’s decision on the sequencing of posting “falls squarely within the OCC’s definition of a pricing decision authorized by federal law.” 2

The panel concluded that any “good faith” limitation under the California UCL was preempted because that limitation would prevent or significantly interfere with the national bank’s “authorized power to choose a posting order.” Likewise, any obligation under the UCL to make disclosures, i.e., imposing liability for the bank’s failure to sufficiently disclose its posting method, was preempted. The OCC regulation provides that a national bank may exercise its deposit-taking powers “without regard to state law limitations concerning” among other things, “disclosure requirements.”

When it came to “misleading statements,” the panel felt differently. The California UCL’s prohibition on misleading statements under the fraudulent conduct prong of the UCL was not preempted by the National Bank Act. This state law prohibition did not “regulate the manner or content of the business of banking.” A prohibition of misleading statements does not significantly interfere with a bank’s ability to “offer checking account services, choose a posting method, or calculate fees.” The UCL does not mandate the content of statements. The UCL only prohibits deceptive statements. Here the deposit terms and conditions and disclosures “misleadingly” said debit card and ATM transactions “reduce the balance in your account immediately.” Thus the disclosures, according to the trial court, “promoted the same theme of chronological subtraction.”

The panel decision makes no mention of the National Bank Act preemption provisions of the Dodd-Frank Act, perhaps because the conduct and contracts predated the Act, but there is no reason to believe the result would have been different had Dodd-Frank been applied. The Gutierrez decision is grounded on the Barnett Bank (517 U.S. 25) “power” formulation which is the touchstone for Dodd-Frank.

The decision perhaps presages the future: national bank preemption is intact, but will give way to state laws that prohibit deception and fraud. The court’s distinction between “unfair” and “deceptive/fraudulent,” i.e., the former is preempted while the latter is not, represents a distinction the plaintiff’s bar will not welcome. The defendant’s bar may find this distinction difficult to apply; state UDAP provisions are preempted, but only in part. Just where does unfairness end and deception begin? Will Gutierrez find its way to the Supreme Court? Will that Court accept the Ninth Circuit’s unfair versus deceptive/fraudulent formulation? Stay tuned.