(CN) - The 9th Circuit on Wednesday lifted an injunction against Wells Fargo's use of the "high-to-low" method of posting customers' debit card purchases, which a California class action claims brings billions of dollars in fees to the bank at the expense of regular customers.
Finding that federal banking laws supersede the state unfair business practices statute under which the class sued, the federal appeals court in San Francisco unanimously vacated a lower court's injunction and let Wells Fargo off the hook for $203 million in restitution.
After paying hundreds of dollars in fees on relatively small overdrafts, lead plaintiffs Veronica Gutierrez and Erin Walker sued the bank to get their money back and stop the "high-to-low" practice, which Wells Fargo started in California more than a decade ago.
"Beginning in April of 2001, Wells Fargo did an about-face in California and began posting debit-card purchases in order of highest-to-lowest dollar amount," the ruling states. "This system had the immediate effect of maximizing the number of overdrafts. The customer's account was now depleted more rapidly than would be the case if the bank posted transactions in low-to-high order or, in some cases, chronological order."
Wells Fargo Bank made about $1.4 billion in overdraft fees between 2005 and 2007, according to the court.
After a bench trial in San Francisco, U.S. District Judge William Alsup ruled for the plaintiffs, essentially finding that the bank had instituted the method simply to get more of its customers' money.
Alsup enjoined the "high-to-low" method, but he did so without jurisdiction, according to the 9th Circuit.
"The ability to choose a method of posting transactions is not only a useful, but also a necessary, component of a posting process that is integrally related to the receipt of deposits," wrote Judge M. Margaret McKeown for the panel. "Designation of a posting method falls within the type of overarching federal banking regulatory power that is 'not normally limited by, but rather ordinarily pre-empt[s], contrary state law.'"
The plaintiffs may yet win something, however. Since federal law does not preempt "California consumer law with respect to fraudulent or misleading representations concerning posting," the panel remanded that portion of the case back to the District Court for another look.
"Although the court cannot issue an injunction requiring the bank to use a particular system of posting or requiring the bank to make specific disclosures, it can enjoin the bank from making fraudulent or misleading representations about its system of posting in the future,"McKeown wrote, adding that "Restitution is available for past misleading representations."
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