Bank Fees and Preemption

Problem 108 alludes to litigation surrounding the practice of “high to low posting” ofchecks and debit card transactions. Problem 79 previously alluded to the practice of somedrawee banks of charging non account holders a fee to cash checks presented over the counter forpayment, and to the potential for litigation over that practice. The following supplementalmaterials trace the development of litigation, with a principal focus on whether and to whatextent federal law preempts such claims.

I. Fees for Over the Counter Presentment

Fla. Stat. § 655.85, not part of the UCC, forbids drawee banks from settling for checks“otherwise than at par.” Relying on the statute, several lawsuits challenged the fees some draweebanks charged non-account holders who cashed checks in person, asserting either that the statuteitself makes the fee unlawful, or alternatively, that a drawee that charges a fee for cashing acheck is liable for unjust enrichment. To make litigation over an individual fee of no more thanten dollars worthwhile, plaintiffs brought their claims as class actions.

Baptista v. JPMorgan Chase Bank, NA640 F. 3d 1194 (11 Cir.), cert. denied, 132 S. Ct. 253 (2011)th

DUBINA, Chief Judge:

On or about October 1, 2009, one of Chase's account holders wrote Baptista a check for$262.48. Baptista was not an account holder at Chase. Baptista brought the check in person to Chasein order to cash it. Chase charged a $6.00 fee to provide cash immediately.

In response, Baptista filed this class action on January 28, 2010, against Chase seekingdamages on two counts. First, she alleged that Chase's charging of a check-cashing service feeviolated Fla. Stat. § 655.85. Second, she brought a claim for unjust enrichment.

The Florida statute at issue specifically prohibits a bank from "settl[ing] any check drawn onit otherwise than at par." Fla. Stat. § 655.85. The district court concluded that § 655.85 waspreempted by the National Bank Act, 12 U.S.C. § 21 et. seq., specifically citing two provisions. First,it cited 12 U.S.C. § 24, which allows banks to "exercise . . . all such incidental powers as shall benecessary to carry on the business of banking; by discounting and negotiating promissory notes,drafts, bills of exchange, and other evidences of debt." Second, it cited a regulation promulgated bythe Office of Comptroller of the Currency ("OCC"), the agency empowered by the NBA to superviseand regulate federally chartered banks in accordance with the act, which states that a national bankmay "charge its customers non-interest charges and fees, including deposit account service charges."12 C.F.R. § 7.4002(a). The OCC interprets "customer" to include "any person who presents a checkfor payment." Wells Fargo Bank of Tex. N.A. v. James, 321 F.3d 488, 490 & n.2 (5th Cir. 2003)(citing three interpretive letters sent by the OCC).

The Supreme Court has identified three types of preemption: express preemption, fieldpreemption, and conflict preemption. Wis. Pub. Intervenor v. Mortier, 501 U.S. 597, 604-05 (1991).

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Baptista and Chase both make much ado about which type of preemption is applicable to the NBA,ignoring the fact that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010("Dodd-Frank Act") amended the NBA's preemption section to address this very issue. Section5136(b)(1)(B) of the Dodd-Frank Act amended the NBA to state the following:

State consumer financial laws are preempted, only if . . . in accordance with the legalstandard for preemption in the decision of the Supreme Court of the United States in BarnettBank of Marion County, N. A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S.25 (1996), the State consumer financial law prevents or significantly interferes with theexercise by the national bank of its powers . . . .

12 U.S.C. § 25b(1). Barnett Bank of Marion County, N. A. v. Nelson addressed a Florida statute thatprohibited national banks from offering insurance coverage in small towns. In determining whetherthere was an "irreconcilable conflict" between the state statute and the NBA, the Court found thecontrolling question to be whether the state statute "forbid[s], or . . . impair[s] significantly, theexercise of a power that Congress explicitly granted." 517 U.S. 25, 33 (1996). Thus it is clear thatunder the Dodd-Frank Act, the proper preemption test asks whether there is a significant conflictbetween the state and federal statutes—that is, the test for conflict preemption.

Few cases have discussed the effect of the NBA and its regulations on so-called "par value"statutes. In fact, only one of our sister circuits has addressed the question head on. In Wells FargoBank of Texas N.A. v. James, the Fifth Circuit addressed a par value statute almost identical to theone at issue here. This statute prevented all banks operating in Texas from charging fees tonon-account-holding payees cashing checks at those banks. Specifically, the statute stated, "a payorbank shall pay a check drawn on it against an account with a sufficient balance at par, without regardto whether the payee holds an account at the bank." Id. at 490.

The Fifth Circuit determined that because Congress did not express a specific intent todisplace state banking laws, conflict preemption applied. Applying the standard announced inBarnett Bank, it found the par value statute was in "irreconcilable conflict" with the NBA becausethe NBA "expressly authorize[d] an activity which the state scheme disallows. In order to reach thisresult, the Fifth Circuit had to take three essential steps. First, it determined that the OCC had theauthority to promulgate rules such as, and including, 12 C.F.R. § 7.4002(a). Second, it determinedthat the OCC's interpretation of the word "customer" to include any person presenting a check forpayment warranted deference under Auer v. Robbins, 519 U.S. 452 (1997)—the standard applicableto an agency's interpretation of its own regulations. Finally, the Fifth Circuit found that a bar on abank's ability to charge fees to persons presenting checks for payment would clearly andirreconcilably conflict with the OCC's allowance of the charging of such fees.

We adopt the reasoning of the Fifth Circuit and hold that Fla. Stat. § 655.85 is preempted bythe OCC's regulations promulgated pursuant to the NBA. Congress clearly intended that the OCCbe empowered to regulate banking and banking-related activities. It is not unreasonable to define"customer" as any person presenting a check for payment. And finally, there is a clear conflict here:the OCC specifically authorizes banks to charge fees to non-account-holders presenting checks forpayment. The state's prohibition on charging fees to non-account-holders, which reduces the bank's

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fee options by 50%, is in substantial conflict with federal authorization to charge such fees.2

Moreover, we conclude that because Baptista's unjust enrichment claim relies on identical facts asher claim under Fla. Stat. § 655.85, it too is preempted.3

For the reasons discussed above, we affirm the judgment of dismissal.

Notes

1. Britt v. Bank of America, N.A., 52 So. 3d 809 (Fla. App. 5 DCA 2011) similarly held §th

At oral argument Baptista argued that Williamson v. Mazda Motor Corp. of Am., 5622

U.S. ___, 131 S. Ct. 1131 (2011), governs this case. We disagree. That case addressed whether afederal regulation requiring shoulder belts for all exterior seats but allowing the manufacturer thechoice of installing either lap or shoulder belts for all interior seats would preempt a tort claimarising out of a manufacturer's use of a lap belt. The Court held that because "providingmanufacturers with this seatbelt choice [was] not a significant objective of the federalregulation," the tort suit was not barred. Id. at ___, 131 S. Ct. at 1133. The objective of thatregulation was to regulate the safety of motor vehicles.

Here the significant objective of 12 C.F.R. § 7.4002 is to allow national banks to charge fees andto allow banks latitude to decide how to charge them. It states that "the establishment ofnon-interest charges and fees, their amounts, and the method of calculating them are businessdecisions to be made by each bank, in its discretion, according to sound banking judgment andsafe and sound banking principles." Id. Because allowing the banks the option of how to chargefees was a significant objective of the NBA and regulations promulgated thereunder, Williamsonis inapposite to this case.

We would also conclude that Baptista's unjust enrichment claim fails as a matter of law3

because Baptista cannot prove each element of the claim. See Della Ratta v. Della Ratta, 927So.2d 1055, 1059 (Fla. Dist. Ct. App. 2006) (“To state a claim for unjust enrichment, a plaintiffmust plead the following elements: 1) the plaintiff has conferred a benefit on the defendant; 2)the defendant has knowledge of the benefit; 3) the defendant has accepted or retained the benefitconferred; and 4) the circumstances are such that it would be inequitable for the defendant toretain the benefit without paying fair value for it.”).

“When a defendant has given adequate consideration to someone for the benefit conferred, aclaim of unjust enrichment fails.” Am. Safety Ins. Serv., Inc. v. Griggs, 959 So.2d 322, 331–32(Fla. Dist. Ct. App. 2007). Here, Baptista requested to have the check cashed immediately uponpresentment to Chase, and in return, Chase requested a $6.00 fee. Baptista agreed to the fee. IfBaptista had chosen to deposit the check in her own account and wait for processing, no feewould have been levied. The fee was only levied because Chase conferred an additional benefiton Baptista, that is, immediate payment of the check. Because Baptista cannot show that Chasefailed to give consideration for her $6.00, her claim for unjust enrichment fails as a matter of law.

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655.85 preempted as applied to federally chartered banks. OCC revised its preemption regulation,12 CFR 7.4007 in 2011, citing Baptista as correctly applying conflict preemption. 76 FR 43549-01(July 21, 2011). But Baptista, Britt, and the National Banking Act only protect from state regulationthe power of federally chartered banks to charge a fee for cashing a check. States also charter banks;12 U.S.C. § 1831a(j)(1) states:

The laws of a host State, including laws regarding community reinvestment, consumerprotection, fair lending, and establishment of intrastate branches, shall apply to any branchin the host State of an out-of-State State bank to the same extent as such State laws apply toa branch in the host State of an out-of-State national bank. To the extent host State law isinapplicable to a branch of an out-of-State State bank in such host State pursuant to thepreceding sentence, home State law shall apply to such branch.

Does 12 U.S.C. § 1831a(j)(1) preempt § 655.85 as applied to out of state state chartered banks? Pereira v. Regions Bank, 918 F. Supp. 2d 1275 (M.D. Fla. 2013) and Baptista v. PNC Bank, N.A., 91 So. 3d 230 (Fla. 5th DCA 2012), cert. denied, 133 S. Ct. 895 (2013) both answer that question,but the decisions irreconcilably conflict. Pereira held 12 U.S.C. § 1831a(j)(1) preempts Florida lawby offering state chartered banks the same protection as federally chartered banks. PNC Bank heldthe same statute does not preempt Florida law as applied to state chartered banks.

2. It is axiomatic that 1) Florida state court decisions construing federal law (PNC Bank) donot bind federal courts, and that 2) Federal trial and court of appeal decisions construing federal law (Pereira) do not bind state courts. For the moment, then, the forum in which claims against statechartered banks are litigated is outcome determinative; plaintiffs will win those cases in state courtand lose them in federal court until and unless SCOTUS resolves the conflict.

3. With that thought firmly in mind, think back to Civil Procedure. Plaintiff payees whoseek to recover the fee paid for cashing a check at the drawee bank assert claims based on state lawto which defendant banks assert preemption as a defense. Plaintiffs understandably will file thoseclaims in state court; defendants understandably will seek to remove them to federal court. Is afederal question defense sufficient to authorize a defendant to remove a claim based on state law tofederal court? If not, then under what circumstances will a defendant be able to remove?

4. Now, recalling the many ways in which lawyers may represent their clients, consider analternative solution. House Bill 673, currently before the Florida Legislature, would amend § 655.85 to add this language:

The term "at par" applies only to the settlement of checks between collecting and paying orremitting institutions and does not apply to, or prohibit an institution from, deducting fromthe face amount of the check drawn on it a fee for paying the check if the check is presentedto the institution by the payee in person.

The proposed legislation also would create this provision:

The Legislature intends that the amendment made by this act to § 655.85, Florida Statutes,shall be used to clarify the relevant portions of the financial institutions codes as defined in

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§ 655.005, Florida Statutes, relating to fees imposed by a financial institution for the paymentof checks presented in person without requiring further amendment.

Identical proposed legislation died during the 2013 legislative session. I will keep youapprised of the progress of the proposed legislation.

5. The OCC has broad rulemaking authority over federally chartered banks, so 12 C.F.R. §7.4002(a), which empowers such banks to charge fees to customers is unquestionably a valid rule. But the rule does not define “customer.”

6. Had the OCC rule defined customer to include “any person who presents a check forpayment,” then Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837(1984) would have required courts to defer to the regulatory definition as long as it represented apermissible interpretation of the National Banking Act. Because the NBA empowered the exerciseof regulatory authority, Chevron deference would have required acceptance of a regulatory definitionthat allowed banks to charge fees to non-account holding payees.

7. The difficult question is whether to defer to OCC’s interpretation of customer offered inopinion letters. OCC wrote those letters at the request of banks then involved in litigation over thepractice of charging fees to non-account holders. As the court of appeals notes, Auer v. Robbins,519 U.S. 452 (1997) requires deference to that interpretation unless it is clearly erroneous.

8. In the cited Wells Fargo litigation, the fifth circuit characterized the OCC interpretationof the word customer this way:

Certainly this is not the only reasonable interpretation of § 7.4002(a), and it is perhaps noteven the most natural reading of "customer." For example, one might easily understand"customer" to be include primarily those individuals with whom the Banks exchange servicesand remunerations, rather than payees seeking payment for executory negotiable instruments.Nevertheless, we find it neither unwarranted nor unreasonable to define customer as anyonewho seeks payment for a check from the bank. In doing so, the payee avails himself of theservants and services of the bank.

9. Absent Auer deference, courts would have been tasked with defining customer, and as theexcerpt from Wells Fargo suggests, courts likely would have held that customers did not includenon-account holders who present checks for payment, and therefore that statutes prohibiting thecharging of fees were not preempted.

II. High to Low Posting of Checks

As the casebook notes in the discussion accompanying problem 108, claims that high to lowposting of checks have uniformly failed, with most cases relying on UCC 4-303(b) to conclude thatthe practice cannot be said to be a bad faith or unconscionable practice, or an unfair trade practice. Assuming a bank does not fraudulently misrepresent its posting practices, then it should continueto be free to post checks high to low to maximize its overdraft fees until and unless bindinglegislation or regulation directs otherwise. I am unaware of any state that has sought to override

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UCC 4-403(b) and through state law to forbid high to low posting. As the later materials suggest,if such legislation were enacted, it would raise preemption questions. Although the ConsumerFinancial Protection Bureau has federal regulatory authority, it has so far not proposed exercisingit to regulate high to low posting of checks.

III. High to Low Posting of Debit Card Transactions

Because UCC 4-403(b) does not apply to debit card transactions, it offers banks lessprotection from consumer protection claims attacking high to low posting of debit card transactionsthan check transactions. In response, banks have argued that courts should apply the UCC byanalogy to debit card transactions. Rejecting that argument, the misleadingly named In re CheckingAccount Overdraft Litigation, 694 F. Supp. 1302 (S.D. Fla. 2010) held in consolidiated multidistrictpanel litigation involving many banks that plaintiffs stated claims for relief by pleading that high tolow posting of debit card transactions violated the duty of good faith, was both procedurally andsubstantively unconscionable, and constituted an unfair and deceptive trade practice:

[Plaintiffs] argue that there is a fundamental difference between check and electronictransactions, and that the UCC's endorsement of high-to-low posting for checks should notbe extended to cover debit card transactions. Plaintiffs submit that the instantaneous natureof debit card transactions, carries with it much less risk to the merchant than the riskinvolved when accepting a check, where there is usually a few days gap in between when thecheck is issued and when the check is presented to the bank for payment. With the fasterdebit card transaction, the risk to the merchant is much less significant since the bank canchoose to decline the purchase before the buyer leaves the store with the goods. Defendants'suggested analysis of applying the UCC's endorsement of high-to-low posting in checktransactions to debit card transactions does not logically follow. If they were the same, therewould be one body of law addressing both. The UCC's generally accepted principles whendealing with checks cannot be broadly applied to debit card transactions. To do so would beto ignore the fundamental differences between the two.

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Although the Court recognizes that the UCC commentary suggests that courts may apply theUCC provisions by analogy, this is the exact set of circumstances in which the analogybreaks down. With paper checks, the customer gives a check to the merchant and leaves withthe merchandise. The merchant then, at some unspecified time in the future, takes the checkto his or her bank, which then presents the check to the customer's bank for payment. Thisguaranteed time lapse increases the risk to the bank, the merchant, and the customer that, inthe intervening time period, there will not be sufficient funds in the account to cover thecheck. Thus, banks are far more justified in adopting a specific check posting order,providing overdraft services, and charging the customer an overdraft fee to account for therisk of insufficient funds. With electronic debit cards, however, the banks can know, at leastin many circumstances, instantly whether there are sufficient funds and can decline thetransaction immediately, decreasing the risk to all parties and obviating the need to “hold”the debit transactions for a period of time and then post them in a specific order. Thus,Defendants' reliance on UCC section 4–303(b) to defeat substantive unconscionability is

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misplaced.

The court carefully noted that it merely held that the complaint stated a claim for relief, notthat defendants would ultimately be found liable. It also rejected defense claims that the NationalBanking Act preempted the state law claims. After the Eleventh Circuit decided Baptista, the courtrefused to reconsider its preemption ruling or authorize an interlocutory appeal under 28 U.S.C. §1292(b). In Re Checking Account Overdraft Litigation, 797 F. Supp. 1312 (S.D. Fla. 2011). Thus,the Eleventh Circuit has not yet considered whether federal law preempts state law claims based onthe implied covenant of good faith or unconscionability or on statutes prohibiting unfair or deceptivetrade practices. The first trial from the consolidated cases should begin within the next two months.

Gutierrez v. Wells Fargo Bank, NA 704 F.3d 712 (9 Cir. 2012)th

McKEOWN, Circuit Judge:

Bank fees, like taxes, are ubiquitous. And, like taxes, bank fees are unlikely to go away anytime soon. The question we consider here is the extent to which overdraft fees imposed by a nationalbank [for debit card withdrawals] are subject to state regulation.

At issue is a bookkeeping device, known as “high-to-low” posting, which has the potentialto multiply overdraft fees, turning a single overdraft into many such overdrafts. The revenue fromoverdraft fees is massive. Between 2005 and 2007, Wells Fargo Bank (“Wells Fargo”) assessed over$1.4 billion in overdraft fees. Disturbed by the number of overdrafts caused by small, everydaydebit-card purchases, Veronica Gutierrez and Erin Walker (collectively “Gutierrez”) sued WellsFargo under California state law for engaging in unfair business practices by imposing overdraft feesbased on the high-to-low posting order and for engaging in fraudulent business practices bymisleading clients as to the actual posting order used by the bank.

The district court found that “the bank's dominant, indeed sole, motive” for choosinghigh-to-low posting “was to maximize the number of overdrafts and squeeze as much as possibleout of what it called its ‘ODRI customers' (overdraft/returned item).” The district court also foundthat Wells Fargo had “affirmatively reinforced the expectation that transactions were covered in thesequence [the purchases were] made while obfuscating its contrary practice of posting transactionsin high-to-low order to maximize the number of overdrafts assessed on customers.” On appeal, WellsFargo seeks refuge from state law on the ground of federal preemption. It also challenges the districtcourt's factual and legal findings. We conclude that federal law preempts state regulation of theposting order as well as any obligation to make specific, affirmative disclosures to bank customers.Federal law does not, however, preempt California consumer law with respect to fraudulent ormisleading representations concerning posting. As a consequence, we affirm in part, reverse in part,and remand for further proceedings.

“Posting” is the procedure banks use to process debit items presented for payment againstaccounts. During the wee hours after midnight, the posting process takes all debit items presentedfor payment during the preceding business day and subtracts them from the account balance. Theseitems are typically debit-card transactions and checks. If the account balance is sufficient to cover

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all items presented for payment, there will be no overdrafts, regardless of the bookkeeping methodused. If, however, the account balance is insufficient to cover every debit item, then the account willbe overdrawn. When an account is overdrawn, the posting sequence can have a dramatic effect onthe number of overdrafts incurred by the account (even though the total sum overdrawn will beexactly the same). The number of overdrafts drives the amount of overdraft fees.

Before April 2001, Wells Fargo used a low-to-high posting order. Under this system, thebank posted settlement items from lowest-to-highest dollar amount. Low-to-high posting paid asmany items as the account balance could cover and thus minimized the number of overdrafts.Beginning in April of 2001, Wells Fargo did an about-face in California and began postingdebit-card purchases in order of highest-to-lowest dollar amount. This system had the immediateeffect of maximizing the number of overdrafts. The customer's account was now depleted morerapidly than would be the case if the bank posted transactions in low-to-high order or, in some cases,chronological order.

As an illustration, consider a customer with $100 in his account who uses his debit-card tobuy ten small items totaling $99, followed by one large item for $100, all of which are presented tothe bank for payment on the same day. Under chronological posting or low-to-high posting, only oneoverdraft would occur because the ten small items totaling $99 would post first, leaving $1 in theaccount. The $100 charge would then post, causing the sole overdraft. Using high-to-low sequencing,however, these purchases would lead to ten overdraft events because the largest item, $100, wouldbe posted first—depleting the entire account balance—followed by the ten transactions totaling $99.Overdraft fees are based on the number of withdrawals that exceed the balance in the account, noton the amount of the overdraft. When high-to-low sequencing is used, the fees charged by the bankfor the overdrafts can dramatically exceed the amount by which the account was actually overdrawn.For example, Gutierrez incurred $143 in overdraft fees as a consequence of a $49 overdraft, and ErinWalker incurred $506 in overdraft fees for exceeding her account balance by $120.

Gutierrez claims that Wells Fargo made the switch to high-to-low processing in order toincrease the amount of overdraft fees by maximizing the number of overdrafts.

California's Unfair Competition Law allows individual plaintiffs to bring claims for unfair,unlawful, or fraudulent business practices. The district court certified a class of “all Wells Fargocustomers from November 15, 2004 to June 30, 2008, who incurred overdraft fees on debit-cardtransactions as a result of the bank's practice of sequencing transactions from highest to lowest.”After a two-week bench trial, the district court issued a comprehensive 90–page decision and foundthat Wells Fargo's “decision to post debit-card transactions in high-to-low order was made for thesole purpose of maximizing the number of overdrafts assessed on its customers.” The court alsoconcluded that Wells Fargo led customers “to expect that the actual posting order of their debit-cardpurchases would mirror the order in which they were transacted” while hiding its actual practice ofposting transactions in high-to-low order so that the bank could “maximiz[e] the number ofoverdrafts assessed on customers.”

The district court rejected Wells Fargo's federal preemption [defense], and held Wells Fargo'sactions to be both unfair and fraudulent under the Unfair Competition Law. As a remedy, the courtentered a permanent injunction requiring Wells Fargo to “cease its practice of posting in high-to-low

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order for all debit-card transactions” and “either reinstate a low-to-high posting method or use achronological posting method (or some combination of the two methods) for debit-cardtransactions.” It also imposed various related disclosure requirements. In addition to injunctive relief,the district court ordered Wells Fargo to pay $203 million in restitution.Analysis

[I] [The court held Wells Fargo waived its right to enforce its deposit contract arbitration clause byfailing to timely seek arbitration.]

II. Federal Preemption

We next consider whether the National Bank Act of 1864, 13 Stat. 99 (codified at 12 U.S.C.§ 1 et seq.), preempts application of California's Unfair Competition Law. In analyzing preemption,we ask whether the state law “prevent[s] or significantly interfere[s] with the national bank's exerciseof its powers.” Barnett Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25, 33 (1996). Althoughstates cannot exercise “visitorial” oversight over national banks, state laws of general applicationcontinue to apply to national banks when “doing so does not prevent or significantly interfere withthe national bank's exercise of its powers.” Id. at 33; see also Watters v. Wachovia Bank, N.A., 550U.S. 1, 11 (2007) (“Federally chartered banks are subject to state laws of general application in theirdaily business to the extent such laws do not conflict with the letter or purposes of the NBA.”). Asthe Supreme Court explained in Cuomo v. Clearing House Ass'n, LLC, 557 U.S. 519, 530 (2009),this balance of authority preserves “a regime of exclusive administrative oversight by theComptroller while honoring in fact rather than merely in theory Congress's decision not to pre-emptsubstantive state law. This system echoes many other mixed state/federal regimes in which theFederal Government exercises general oversight while leaving state substantive law in place.”Indeed, “[s]tates ... have always enforced their general laws against national banks.” Id. at 534, 129S.Ct. 2710.

Against the framework of extensive federal statutory and regulatory oversight of nationalbanks, the question is whether Wells Fargo's implementation of high-to-low posting is subject toCalifornia's Unfair Competition Law, a consumer protection statute of general applicability.

A. Unfair Business Practices and High–to–Low Posting

The district court deemed Wells Fargo's high-to-low posting method an unfair practice inviolation of the Unfair Competition Law because it was imposed in bad faith, in contravention ofthe policy reflected in California Commercial Code § 4303(b). The appeal of this claim turns onwhether state law can dictate Wells Fargo's choice of posting method. We hold that it cannot.

Under the National Bank Act, key powers of national banks include the authority to receivedeposits, as well as “all such incidental powers as shall be necessary to carry on the business ofbanking.” 12 U.S.C. § 24 (Seventh). The deposit and withdrawal of funds “are services provided by

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banks since the days of their creation. Indeed, such activities define the business of banking.” Bank6

of Am. v. City and Cnty. of San Francisco, 309 F.3d 551, 563 (9th Cir.2002). Both the “business ofbanking” and the power to “receiv[e] deposits” necessarily include the power to post transactions—i.e., tally deposits and withdrawals—to determine the balance in the customer's account. See 12U.S.C. § 24 (Seventh).

The ability to choose a method of posting transactions is not only a useful, but also anecessary, component of a posting process that is integrally related to the receipt of deposits.Designation of a posting method falls within the type of overarching federal banking regulatorypower that is “not normally limited by, but rather ordinarily pre-empt[s], contrary state law.”Watters, 550 U.S. at 12, 127 S.Ct. 1559 (quotation marks omitted).

In addition to the broad power vested by statute, federal banking regulations adopted by theOCC specifically delegate to banks the method of calculating fees. 12 C.F.R. § 7.4002(b). As theagency charged with administering the National Bank Act, the OCC has primary responsibility forthe surveillance of the “business of banking” authorized by the National Bank Act. The OCC isauthorized to define the “incidental powers” of national banks beyond those specifically enumerated.See 12 U.S.C. § 93a (authorizing the OCC “to prescribe rules and regulations to carry out theresponsibilities of the office”).

The OCC has interpreted these incidental powers to include the power to set account termsand the power to charge customers non-interest charges and fees, such as the overdraft fees at issuehere. 12 C.F.R. § 7.4002(a). More specifically, the OCC has determined that “[t]he establishment7

of non-interest charges and fees, their amounts, and the method of calculating them are businessdecisions to be made by each bank, in its discretion, according to sound banking judgment and safeand sound banking principles.” 12 C.F.R. § 7.4002(b)(2) (emphasis added).

OCC letters interpreting § 7.4002 specifically consider high-to-low posting and associatedoverdraft fees to be a “pricing decision authorized by Federal law” within the power of a nationalbank. The OCC has opined that “a bank's authorization to establish fees pursuant to 12 C.F.R.7.4002(a) necessarily includes the authorization to decide how they are computed.” Accordingly, theOCC has determined that a national bank “may establish a given order of posting as a pricingdecision pursuant to section 24 (seventh) and section 7.4002.” In sum, federal law authorizesnational banks to establish a posting order as part and parcel of setting fees, which is a pricingdecision.

The incidental powers reserved for national banks are “not limited to activities deemed6

essential to the exercise of enumerated powers but include activities closely related to bankingand useful in carrying out the business of banking.” Bank of Am. v. City and Cnty. of SanFrancisco, 309 F.3d 551, 562 (9th Cir.2002); see also 12 C.F.R. § 7.4007(a) (“A national bankmay receive deposits and engage in any activity incidental to receiving deposits.”).

Section 7.4002(a) provides that a “national bank may charge its customers non-interest7

charges and fees, including deposit account service charges.” 12 C.F.R. § 7.4002(a).

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The district court held that the bank's determination of posting order did not constitute apricing decision because Wells Fargo did not follow the four factor decision making process for safeand sound banking principles mandated by the OCC. 12 C.F.R. § 7.4002(b). The National Bank Act8

gives to the OCC the exclusive authority to exercise visitorial oversight over national banks, and itentrusts the OCC with the supervision of national banks' activities that are authorized by federal law. Whether Wells Fargo's internal decision-making processes regarding posting orders complied withthe “safe and sound banking principles” under § 7.4002(b)(2) is an inquiry that falls squarely withinthe OCC's supervisory powers. The district court's findings with regard to Wells Fargo's compliancewith the OCC regulation, then, are both “inapposite to the issue of preemption” and “fruitless.”

Wells Fargo's decision to resequence the posting order falls within the OCC's definition ofa pricing decision authorized by federal law. The district court is not free to disregard the OCC'sdeterminations of what constitutes a legitimate pricing decision, nor can it apply state law in a waythat interferes with this enumerated and incidental power of national banks.

The restriction that the district court imposed on posting is akin to the fee restrictionaddressed in the Eleventh Circuit's recent preemption ruling. See Baptista v. JPMorgan Chase Bank,N.A., 640 F.3d 1194, 1197 (11th Cir.2011). The court in Baptista held that a state statute thatdisallowed banks from charging non-customers for cashing a check was preempted because itsignificantly reduced the banks' latitude in deciding how to charge fees. The same logic applies here.

We hold that a “good faith” limitation applied through California's Unfair Competition Lawis preempted when applied in a manner that prevents or significantly interferes with a national bank'sfederally authorized power to choose a posting order. The federal court cannot mandate the order inwhich Wells Fargo posts its transactions.

B. Fraudulent Business Practices and Wells Fargo's Representations

The district court found not only a violation of the “unfair” prong of the Unfair CompetitionLaw with regard to the posting order, but also a violation of the “fraudulent” prong of the UnfairCompetition Law with regard to Wells Fargo's representations about posting. The UnfairCompetition Law authorizes injunctive relief and restitution as remedies against a person or entityengaging in fraudulent business practices. The district court faulted Wells Fargo both for its failureto disclose the effects of high-to-low posting and for its misleading statements. The district courtconcluded that Wells Fargo “did not tell customers that frequent use of a debit-card for small-valuedpurchases could result in an avalanche of overdraft fees for each of those purchases due to the

Section 7.4002(b) provides that:8

[a] national bank establishes non-interest charges and fees in accordance with safe and soundbanking principles if the bank employs a decision-making process through which it considers thefollowing factors, among others: (i) The cost incurred by the bank in providing the service; (ii)The deterrence of misuse by customers of banking services; (iii) The enhancement of thecompetitive position of the bank in accordance with the bank's business plan and marketingstrategy; and (iv) The maintenance of the safety and soundness of the institution.

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high-to-low posting order.” Instead, Wells Fargo “directed misleading propaganda at the class thatlikely led class members to expect that the actual posting order of their debit-card purchases wouldmirror the order in which they were transacted.”

The requirement to make particular disclosures falls squarely within the purview of federalbanking regulation and is expressly preempted: “A national bank may exercise its deposit-takingpowers without regard to state law limitations concerning,” among other things, “disclosurerequirements.” 12 C.F.R. § 7.4007(b)(3). [T]he Unfair Competition Law cannot impose liabilitysimply based on the bank's failure to disclose its chosen posting method. Imposing liability for thebank's failure to sufficiently disclose its posting method leads to the same result as mandatingspecific disclosures. Both remedies are tantamount to state regulation of disclosure requirements.

We turn now to the different question of state law liability based on Wells Fargo's misleadingstatements about its posting method. Notably, the Unfair Competition Law itself does not imposedisclosure requirements but merely prohibits statements that are likely to mislead the public. As anon-discriminating state law of general applicability that does not “conflict with federal law, frustratethe purposes of the National Bank Act, or impair the efficiency of national banks to discharge theirduties,” the Unfair Competition Law's prohibition on misleading statements under the fraudulentprong of the statute is not preempted by the National Bank Act.

Wells Fargo's position—that § 7.4007(b)(2) dictates preemption—is conclusively undercutby the OCC itself, which, far from concluding that the Unfair Competition Law is expresslypreempted under its regulations, “has specifically cited [California's Unfair Competition Law] in anadvisory letter cautioning banks that they may be subject to such laws that prohibit unfair ordeceptive acts or practices.” The advisory letter warns that the “consequences of engaging inpractices that may be unfair or deceptive under federal or state law can include litigation,enforcement actions, monetary judgments, and harm to the institution's reputation.” OCC AdvisoryLetter, Guidance on Unfair or Deceptive Acts or Practices, 2002 WL 521380, at *1 (Mar. 22, 2002).The OCC recognizes that state laws that withstand preemption “typically do not regulate the manneror content of the business of banking authorized for national banks, but rather establish the legalinfrastructure that makes practicable the conduct of that business.” Bank Activities and Operations,69 Fed.Reg.1904, 1913 (Jan. 13, 2004). By prohibiting fraudulent business practices, the UnfairCompetition Law does exactly that—it establishes a legal infrastructure.

Although Wells Fargo insists that a state law prohibiting misleading statements necessarilytouches on “checking accounts,” such an expansive interpretation—with no limitingprinciple—“would swallow all laws.” We recently declined a bank's invitation to interpret the term“lending operations” expansively because “every action by the bank, due to the nature of its business,affects its ability to attract, manage, and disburse capital, and could be said to ‘affect’ its lendingoperations.” California's prohibition of misleading statements does not significantly interfere withthe bank's ability to offer checking account services, choose a posting method, or calculate fees. Nordoes the Unfair Competition Law mandate the content of any nonmisleading and nonfraudulentstatements in the banking arena. On the flip side, the National Bank Act and other OCC provisionsdo not aid Wells Fargo, as neither source regulates deceptive statements vis-a-vis the bank's chosenposting method. Where, as here, federal laws do not cover a bank's actions, states “are permitted toregulate the activities of national banks where doing so does not prevent or significantly interfere

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with the national bank's or the national bank regulator's exercise of its powers.” Watters, 550 U.S.at 12; see also Gibson v. World Sav. & Loan Ass'n, 103 Cal.App.4th 1291, 1299, 128 Cal.Rptr.2d19 (2002) (the “state cannot dictate to the Bank how it can or cannot operate, but it can insist that,however the Bank chooses to operate, it do so free from fraud and other deceptive businesspractices”).

Other than an argument regarding the cost of modifying its published materials, Wells Fargodoes not articulate how abiding by the Unfair Competition Law's prohibition of misleadingstatements would prevent or significantly interfere with its ability to engage in the business ofbanking. Wells Fargo's inability to demonstrate a significant interference is unsurprising—the districtcourt found that when it chose to, the bank could accurately explain the posting process tocustomers: “Wells Fargo provided its tellers and phone-bank employees with a clear script torespond to customers who protested after receiving multiple overdraft fees caused by high-to-lowresequencing. These explanations were in plain English.” The limitation on fraudulentrepresentations in California's Unfair Competition Law does not subject Wells Fargo's ability toreceive deposits, to set account terms, to implement a posting method, or to calculate fees tosurveillance under a rival oversight regime, nor does it stand as an obstacle to the accomplishmentof the National Bank Act's purposes. Accordingly, we hold that Gutierrez's claim for violation ofthe fraudulent prong of the Unfair Competition Law by making misleading misrepresentations withregard to its posting method is not preempted, and we affirm the district court's finding to this extent.Consistent with the foregoing, the district court may provide injunctive relief and restitution againstWells Fargo. Although the court cannot issue an injunction requiring the bank to use a particularsystem of posting or requiring the bank to make specific disclosures, it can enjoin the bank frommaking fraudulent or misleading representations about its system of posting in the future. Restitutionis available for past misleading representations. We make no judgment as to whether it is warrantedhere. On remand, the district court will be in a position to determine whether, subject to thelimitations in this opinion, restitution is justified by the pleadings and the evidence in this case.

III. Remaining Issues

To establish standing to seek class-wide relief for fraud-based Unfair Competition Lawclaims, the named plaintiffs must prove “actual reliance” on the misleading statements. The districtcourt found that Gutierrez and Walker read portions of the “Welcome Jacket,” “which stated that‘[e]ach purchase is automatically deducted from your primary checking account.’ ” The district courtnext found that Gutierrez and Walker each “relied upon the bank's misleading marketing materialsthat reinforced her natural assumption that debit-card transactions would post chronologically.” Thedistrict court determined that both Gutierrez and Walker were misled by Wells Fargo's statementsbecause the extent of the falsity of the statements was not known to either of them until they incurredhefty fees for having overdrawn their checking accounts. These findings are well supported by theevidence and are not clearly erroneous.

Next, class certification under Fed.R.Civ.P. 23(b)(3) requires that “questions of law or factcommon to class members predominate over any questions affecting only individual members.”With respect to marketing materials, the district court found that:

A Wells Fargo marketing theme was that debit-card purchases were “immediately” or

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“automatically” deducted from an account. This likely led the class to believe: (1) that thefunds would be deducted from their checking accounts in the order transacted, and (2) thatthe purchase would not be approved if they lacked sufficient available funds to cover thetransaction. This language was present on Wells Fargo's website (TX 129), on Wells Fargo'sChecking, Savings and More brochures from 2001 and 2005 (TX 88, 89), and Wells Fargo'sNew Account Welcome Jacket from 2004 (TX 82).

The pervasive nature of Wells Fargo's misleading marketing materials amply demonstratesthat class members, like the named plaintiffs, were exposed to the materials and likely relied onthem. In addition, the district court found that Wells Fargo knew that “new accounts generate thebulk of OD [overdraft] revenue.” Wells Fargo's speculation—that “some class members would haveengaged in the same conduct irrespective of the alleged misrepresentation”—does not meet itsburden of demonstrating that individual reliance issues predominate.

Finally, the district court's finding that Wells Fargo made misleading statements is amplysupported by the court's factual findings. Wells Fargo told customers that “[c]heck card and ATMtransactions generally reduce the balance in your account immediately” and that “the money comesright out of your checking account the minute you use your debit-card.” The bank also misleadinglyadmonished customers to “[r]emember that whenever you use your debit-card, the money isimmediately withdrawn from your checking account. If you don't have enough money in youraccount to cover the withdrawal, your purchase won't be approved.” According to the district court,

the “account activity” information provided to customers through online banking—a servicemade available to all Wells Fargo depositors—displayed “pending” debit-card transactionsin chronological order ( i.e., the order in which the transactions were authorized by WellsFargo). When it came time to post them during the settlement process, however, the sametransactions were not posted in chronological order but were posted in high-to-low order.

The findings go on:

Misleading marketing materials promoted the same theme of chronological subtraction. Anumber of Wells Fargo marketing materials, including the Wells Fargo Welcome Jacket thatwas customarily provided to all customers who opened a consumer checking account,contained misleading representations regarding how debit-card transactions were processed.Specifically, these various materials—covered in detail in the findings offact—communicated that debit-card POS purchases were deducted “immediately” or“automatically” from the user's checking account.... Such representations would leadreasonable consumers to believe that the transactions would be deducted from their checkingaccounts in the sequence transacted.

Based on these findings, the district court concluded that “Wells Fargo affirmativelyreinforced the expectation that transactions were covered in the sequence made while obfuscatingits contrary practice of posting transactions in high-to-low order to maximize the number ofoverdrafts assessed on customers.” Wells Fargo's alternate interpretation of the word “automatically”is insufficient to render the district court's findings clearly erroneous. Accordingly, the district court'sholding that Wells Fargo violated the Unfair Competition Law by making misleading statements

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likely to deceive its customers is affirmed.

Notes and Comments

1. Wells Fargo easily could have avoided its losses had it timely demanded arbitration asauthorized by its deposit contract. It did not do so in part because its arbitration clause contained awaiver of the right to bring a class action in arbitration proceedings, and California’s courts had heldclass action waivers unconscionable whether imposed as part of an arbitration agreement or anyother other consumer contract. Discover Bank v. Superior Court, 36 Cal.4th 148, 162–63, 30Cal.Rptr.3d 76, 113 P.3d 1100 (2005). Discover Bank rested on decades of Supreme Courtprecedent holding that the Federal Arbitration Act (FAA) preempts state law that disfavorsarbitration agreements, but does not preempt state contract law defenses asserted to defeat anarbitration agreement if those defenses are generally available against and applicable to all contractsand not just arbitration agreements. Because the Discover Bank rule applied the general law ofunconscionability to hold all contractual consumer class action waivers unconscionable, it appearedconsistent with the FAA.

AT&T Mobility LLC v. Concepcion, ––– U.S. ––––, 131 S.Ct. 1740 (2011) overruledDiscover Bank and for the first time held that state contract law may not be neutrally applied toarbitration agreements when the effect of doing so is to frustrate the enforcement of privatearbitration agreements, even when doing so deprives the complainant of the opportunity to bring aclass action. Concepcion is representative of a trend; originally the FAA was construed to preventstates from treating arbitration clauses as the second class citizens of contract law, but now the courttreats arbitration clauses as entitled to special protection from contract law. Thus, had Wells Fargoelected arbitration and enforced that election, its only exposure to Guitierrez would have been hisoverdraft fees, a matter it could have resolved by demanding arbitration and simultaneouslytendering to Gutierrez the $143 it had charged in overdraft fees and to Walker the $506 it hadcharged in overdraft fees.

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