California Supreme Court Upholds Preemption in Win for National Banks

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WASHINGTON — The California Supreme Court ruled Thursday that national banks do not have to comply with a state law that required certain disclosures for convenience checks, another court victory for preemption advocates following changes to the law made by the Dodd-Frank Act.

The case was initially filed in 2004 by Allan Parks, who claimed that MBNA, later bought by Bank of America, had failed to inform him of finance charges he incurred as a result of using convenience checks through his credit card to buy holiday gifts and pay bills. Under California state law, credit card companies are required to attach certain disclosures to preprinted checks when they have been provided to cardholders as an alternative form of credit.

Parks sued MBNA alleging that the bank engaged in unfair acts by failing to make the required disclosure.

But Laurence Hutt, a partner with Arnold and Porter who argued the case on behalf of the bank, said that the credit card company did not have to comply with the state law because it was preempted by federal regulations, which do not require such a disclosure.

Although the district court supported that view, a California appeals court later reversed that decision, concluded that federal law didn't preempt the state law because it did not "significantly impair" the ability of national banks to do business.

The California Supreme Court, however, disagreed, ruling that that the appeals court erred.

"We believe the Court of Appeal's approach is unsupported by preemption case law and unworkable in practice," the court wrote in its opinion.

"We know of no case decided by our court or by the United States Supreme Court in which the issue of preemption turned on whether a national bank made an adequate factual showing that state law significantly impaired its federally authorized powers," it said. "The fact that the Court of Appeals declined to 'elucidate a precise yardstick' for measuring significant impairment suggests the impracticality of this approach."

The California Supreme Court concluded that the specific state disclosure on such convenience checks "exceed(ed) any requirement in federal law."

Under state law, the disclosure is supposed to appear "on the front of an attachment that is affixed by perforation or other means to the preprinted check or draft," which has "no counterpart in federal law," the court said. The same is true in the state's requirement that certain precise language appears on each check.

Federal regulators require certain disclosures when the use of a convenience check differs from the terms of the customer's credit card account, but they do not mandate that every convenience check disclose if finance charges are triggered once it's used, the high court said.

Additionally, the court contended that while federal law requires disclosure of interest rates and finance charges, it only pertained to advertising and not convenience checks.

It also disagreed with the appeal court's approach that MBNA could offer convenience checks as long as it complied with the state law. The state Supreme Court argued that was the equivalent of saying MBNA may not offer convenience checks unless it complies with state law.

"Whether phrased as a conditional permission or as a contingent prohibition, the effect of section 1748.9 is to forbid national banks from offering credit in the form of convenience checks unless they comply with state law," the court wrote.

Moreover, the court ruled that even if California's disclosure requirement did not appear to be "particularly onerous" on the national bank, the courts have to consider the burden of disclosure "regimes imposed not just by [California], but by all States in which the banks operate," the court wrote.

"National banks would have to monitor requirements as to the content, language, manner, and format of disclosures for each of the 50 states (and possibly municipalities as well), and continually adjust their convenience check offers to comply with the prescriptions of each local jurisdiction," the court said.

Jeffrey Taft, an attorney who represents banks as a partner at the law firm Mayer Brown, said the ruling is helpful for the industry.

"California has traditionally been a difficult jurisdiction for financial institutions," Taft said. "This makes it a lot easier for banks to argue preemption."

The Dodd-Frank Act made changes to preemption standards, but their impact is still unclear. While the Office of the Comptroller of the Currency and national banks have said that little has changed, consumer advocates believe preemption has been substantially weakened. The California ruling did not rely on the Dodd-Frank Act, but may strengthen the perception that preemption remains mostly unchanged since the regulatory reform law was enacted.

The case involves a California state law, but Taft said that its ramifications could be felt elsewhere, since banks will be able to cite the decision in other preemption cases.

"If you're a bank, and you're relying on preemption," he said, "this is another arrow in your quiver."

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Law and regulation