California Supreme Court Holds State Disclosure Law Preempted by National Bank Act

Financial Institutions Regulatory Update

In a case with potentially significant implications for state regulation of national banks, the California Supreme Court ruled unanimously on June 21, 2012 that a state law mandating the form and content of disclosures printed on the front of convenience checks issued to credit card customers was preempted by the National Bank Act (NBA). In the decision, the Court adopted a preemption analysis that reaffirmed the primacy of the NBA in regulating the activities of national banks, and rejected the argument that a national bank must make a specific factual showing in order to establish that a state regulation significantly impairs a power granted to it by the NBA.

The case, Parks v. MBNA America Bank, N.A. (Cal. Sup. Ct. No. S183703), addressed a California state law (Cal. Civ. Code § 1748.9) that required credit card issuers to include a specified disclosure on the front of any convenience check issued to a consumer. The trial court in the case held that the state law was preempted, following the Ninth Circuit’s decision reaching that same result, in Rose v. Chase Bank USA, N.A., 513 F.3d 1032 (9th Cir. 2008). The California Court of Appeal reversed. The appellate court concluded that the state law was a “generally applicable disclosure law” that did not forbid national banks from exercising their powers. That court further held that, on its face, the law did not “significantly impair” the bank’s powers, and stated that a factual showing would be necessary to find preemption on that basis.

The Supreme Court rejected both of the Court of Appeal’s conclusions. As an initial matter, the Court concluded that requiring particular content and language in, or the manner and format of, a disclosure amounted to a prohibition on issuing convenience checks unless the national bank complied with the state law. Equating a “conditional permission” with a “contingent prohibition,” the Court determined that the state law forbade national banks from exercising their powers unless they complied with state law—and therefore the state law must be preempted. The Court further noted the potential that, if the California law were not preempted, national banks could be required to monitor and comply with separate disclosure requirements in every state, and perhaps in individual municipalities. The prospect of compliance “with a diverse or duplicative patchwork of local disclosure requirements” also constituted a significant impairment on the national bank’s power to lend money pursuant to the NBA.

The Court also concluded that a bank need not make a specific factual showing to prove significant impairment. In addition to noting that it was aware of no Supreme Court or California Supreme Court decision imposing such a requirement, the Court opined that such a test would be unworkable in practice. A cost threshold, articulated either in absolute terms or in proportion to the size of the bank, would create a situation where a state law might be preempted as to some national banks, but not as to others. Furthermore, the Court noted, whether a law was preempted as to a particular bank might in fact change over time, as the bank’s relevant activities increased or decreased in scope. The Court concluded that such a system would be unworkable in practice.

Importantly, the Court reached its conclusion based solely on the NBA, and did not consider whether the state law was preempted by the regulations of the Office of the Comptroller of the Currency. As a result, the Court did not reach the question of the validity of the regulations.

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The Financial Institutions Regulatory Practice of Sidley Austin LLP

The Financial Institutions Regulatory Practice group offers counseling, transaction and litigation services to depository and nondepository financial institutions and their holding companies. Our lawyers assist domestic and non-U.S. financial institutions and their holding companies, and electronic payment systems, as well as securities, insurance, finance, mortgage, and other diversified companies that provide financial services companies. We also represent all sectors of the payments industry, including payment networks and processors, money transmitters, and payors and payees in various systems. We represent financial services clients before the U.S. Department of the Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and state bank regulatory agencies, as well as financial services regulators in other jurisdictions where we have offices. In addition, we represent clients before the United States Supreme Court, the other federal courts of appeal, federal district courts and state courts.

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