STRATEGIC PARTNERS
An attorney offers his analysis of court cases in California, Connecticut and Iowa.by David J. Bartone, contributing writer
January 3, 2000
The nationwide dispute over whether national banks may charge a fee to non-customers for the privilege of withdrawing cash from ATMs reached a decisive point in California when U.S. District Judge Vaughn Walker enjoined authorities in San Francisco and Santa Monica from enforcing recently imposed bans on ATM surcharging. In granting injunctive relief in favor of the Bank of America, Wells Fargo and the California Bankers Association, Judge Walker dealt what could be a crippling blow to the California authorities in their controversial move to ban ATM surcharging. The case before Judge Walker is the first in which the question of whether an express state ban on surcharging at ATMs owned by nationally chartered banks has been put before a federal court. In his ruling, Judge Walker observed that the prohibitions imposed by the California state authorities were likely pre-empted by federal law and, therefore, invalid. Prior to his ruling, there had been little or no definitive guidance from the courts on the issue of whether the right to limit or ban ATM surcharging is within the exclusive province of either federal or state banking regulators. A review of prior court decisions evidences a confusing morass of procedural arguments between litigants over federal preemption, abstention and federal question and subject matter jurisdiction. The decisions have also addressed Tenth Amendment claims that enforcement of federal banking laws against states strips the state regulators of their sovereign function to interpret and enforce their own laws. While prior court decisions analyze issues that are fundamental to the proper adjudication of disputes within our system of jurisprudence, they fail to answer, once and for all, the two most important questions within the ATM industry today: Can ATM surcharging be banned and, if so, by whom? Until those questions are definitely answered, the dispute between federal and state banking regulators over whether a surcharge can be imposed at ATMs owned by nationally chartered banks will continue. The dispute within states over whether a surcharge can be imposed on ATMs owned by state chartered banks will likewise continue. More importantly, the public debate over whether surcharging should be allowed on any ATM, whether the ATM is owned by a bank or a private company, will intensify. In the following discussion, Judge Walker's ruling and key federal and state cases decided prior to his ruling will be analyzed. The California case In San Francisco and Santa Monica, both the Bank of America and Wells Fargo have been charging non-customers a fee to withdraw cash from their ATMs, typically $1.50. In a Nov. 2 referendum, citizens of San Francisco voted two-to-one to prohibit surcharging beginning Dec. 1. In Santa Monica, the city council passed an ordinance on Oct. 12 banning surcharging effective Nov. 11. In response to those bans, the Bank of America and Wells Fargo discontinued ATM services to non-customers in Santa Monica, effective Nov. 11, and threatened to discontinue services to non-customers in San Francisco, if the bans were enforced. Bank of America, Wells Fargo and the California Bankers Association filed suit in U.S. District Court seeking, among other things, an injunction prohibiting enforcement of the bans. They argued that the National Bank Act grants only to the federal government the right to regulate a national bank's ATM surcharging. Under the National Bank Act, therefore, the bans imposed by the California local governments were pre-empted. Judge Walker scheduled a hearing on a joint application for a preliminary injunction for Nov.15. Judge Walker's ruling At the conclusion of the Nov. 15 hearing, Judge Walker issued an oral ruling from the bench in which he held that the bans imposed by Santa Monica and San Francisco most likely were pre-empted by federal law and, therefore, were invalid. He also noted that it did not appear likely that similar bans could be imposed against state chartered banks because there was no practical way to enforce a ban against a state chartered bank but not against a federally chartered bank located within the same state. Judge Walker rejected the arguments of San Francisco and Santa Monica that the Electronic Funds Transfer Act preserves the rights of a state to enforce state banking laws against national banks where the state law was imposed as a consumer protection measure and was not otherwise inconsistent with the EFTA. He ruled that, under the EFTA, while the states may impose rules requiring a nationally chartered bank to disclose to consumers that they will be charged a fee for making cash withdrawals and allow consumers the right to cancel the transaction, the EFTA does not give states the right to ban a national bank from imposing such a fee in the first instance. However, the judge did order the Bank of America and Wells Fargo to maintain records of the ATM surcharges collected during the pendency of the litigation. If and when a final judgment is entered in favor of the banks, those records would be used to refund the surcharges to consumers. The implications It should be noted that Judge Walker's ruling is only preliminary in nature. It is not a final judgment on the merits of the parties' claims. It does not yet nullify the bans that San Francisco and Santa Monica imposed. However, the judge's issuance of a preliminary injunction may well foreshadow of his final decision. Typically, a party seeking a preliminary injunction must show that: it will suffer irreparable harm if an injunction is not entered; there exists a likelihood of success the moving party will prevail in the proceeding; there exists sufficiently serious questions concerning the merits of the case that make fair ground for litigation; and a balance of the hardships of the parties tips in the favor of the moving party. Under the foregoing standard, the banks' victory could be seen as being quite significant. However, San Francisco and Santa Monica vow a lengthy court battle before Judge Walker and the U.S. Court of Appeals. Undoubtedly, the ruling will continue to gain national attention as other states within the country follow suit and attempt to ban surcharging on ATMs. How he finally decides the case depends upon his interpretation of the National Bank Act, the EFTA and court decisions interpreting those statutes. The Fleet Bank cases In Connecticut, there exists a longstanding dispute between the Connecticut Banking Commissioner and Fleet Financial Services (now FleetBoston after a merger with BankBoston) over whether Fleet may charge non-customers using its ATMs a convenience fee. The Banking Commissioner interpreted section 36a-156 of the Connecticut General Statute to mean that ATM surcharging was not authorized. Fleet brought suit in federal court in Connecticut seeking a declaratory judgment that the effect of the national banking laws pre-empted the Commissioner's interpretation of state law. The court ruled that section 36a-156 did not prohibit ATM surcharging and that, even if it were interpreted to prohibit such surcharging, section 36a-156 was pre-empted by federal law. The Second District U.S. Court of Appeals reversed that ruling, holding that the lower court should not have interpreted section 36a-156 as a predicate step for determining whether the state law conflicted with federal law and was, therefore, pre-empted. In short, the Second Circuit's decision was based upon its conclusion that the lower federal court did not have the power to interpret section 36a-156 of the Connecticut statute; only the Banking Commissioner could interpret that section. The Fleet I and II cases, therefore, offer little guidance to other courts on the question of whether a state can regulate the surcharging practices of nationally chartered banks. First Union/Fleet case: the fight continues Immediately after the Second Circuit issued its opinion in Fleet II, the Banking Commissioner issued cease and desist orders prohibiting, among others, Fleet and First Union National Bank from imposing surcharges. The orders, if violated, carried with them a fine of up to $7,500 per violation. On the same day, Fleet and First Union filed separate actions in U.S. District Court seeking injunctive relief prohibiting the Banking Commissioner from enforcing his cease and desist order. Fleet and First Union simultaneously filed an action in Connecticut state court in which, on state law grounds, they sought to enjoin the Banking Commissioner's cease and desist orders while expressly reserving their federal law claims for adjudication in federal district court. Thereafter, the Office of the Comptroller of the Currency, after initially filing an amicus brief to advise the federal court on the legal issues that were presented, sought to become a party in the case by filing an intervening complaint in order to preserve what it asserted to be its exclusive authority to enforce all state and federal banking laws against national banks. The OCC also sought to enjoin the Banking Commissioner from enforcing his cease and desist orders. In federal court, the Commissioner sought to dismiss the OCC's intervening complaint arguing, principally, that the complaint lacked subject matter jurisdiction, that the court should otherwise abstain from considering the OCC's arguments and that the regulatory scheme advocated by the OCC violated the Tenth Amendment. On April 7, 1999, the court denied the Banking Commissioner's motion to dismiss the OCC's intervening complaint and rejected the previous arguments. The court then granted the OCC's motion for a preliminary injunction and enjoined the Banking Commissioner from enforcing his cease and desist order. However, the court stated its order did not address the Commissioner's interpretation of the statute in dispute, nor did it preclude either the OCC from initiating its own administrative proceeding related to the statute or the Commissioner from further seeking enforcement through judicial means. This case has been touted by some as a victory for national banks on the ATM surcharge issue. However, it hardly resolved most of the critical issues and it appears to have invited the Banking Commissioner to seek enforcement of the state statute in the Connecticut state courts. The court's decision, therefore, is essentially procedural. It hits the ball back into the state court for resolution. Status of the Connecticut dispute As could be expected, after the First Union decision, the Banking Commissioner brought an action in the Connecticut state courts seeking a declaration that state law prohibits ATM surcharging. The federal court action was stayed pending a final decision in the Connecticut state court action. By agreement of the parties, the state court action was certified to the Connecticut Supreme Court in order to expedite a final ruling. The issues have been fully briefed before the state Supreme Court. Oral argument was held on Sept. 29, 1999. The parties await a final ruling, which is expected in the next few months. One can only speculate as to what the Connecticut Supreme Court's decision will be. If it rules in favor of the Banking Commissioner, First Union and Fleet will, undoubtedly, go back before the federal court and argue, again, that federal law preempts state law. No matter how the federal court decides that issue, there most certainly will be another appeal to the Second Circuit U.S. Court of Appeals. If the state Supreme Court rules against the Banking Commissioner and holds that Connecticut law does not prohibit surcharging, First Union and Fleet will have scored a major victory which would all but end the federal court action. Bank One v. Guttau: a separate but related issue The only other key court decision that appears to instructive on the question of whether federal law pre-empts state law in the ATM surcharge area is in a case that involves ATMs, but does not involve surcharging. In Bank One v. Guttau, Bank One filed suit seeking a declaratory judgment that various provisions of Iowa's regulatory statute imposing in-state office and approval requirements and limiting advertising placed on ATMs were pre-empted by the National Bank Act. Bank One sought an injunction against the enforcement of those provisions. The lower court denied the injunction and Bank One appealed. On appeal, the Eighth Circuit U.S. Court of Appeals reversed the lower court and remanded the case with instructions to enter a permanent injunction prohibiting enforcement of the relevant sections. The Court held that the provisions of the Iowa EFTA were pre-empted by section 36 of the National Bank Act. The Bank One decision is instructive in the ATM surcharge controversy. The court specifically held that federal law pre-empts a state from imposing regulatory restrictions on ATMs owned by national banks. Indeed, the court stated: "Congress has made clear in the NBA its intent that ATMs are not to be subject to state regulation, and thus the provisions of the Iowa EFTA that would prevent or significantly interfere with Bank One's placement and operation of its ATMs must be held to be preempted." Under Bank One, it would appear almost certain that if state regulatory requirements relating to approval and advertising are preempted by the National Bank Act, then state regulatory requirements relating to ATM surcharging are also preempted. Conclusion Judge Walker's ruling in California was obviously impacted by the Fleet I and II, First Union and Bank One cases discussed here. His ruling will no doubt impact the litigation that is still extant in the First Union case. Judge Walker's ruling is the first in which an express state ban on surcharging on ATMs owned by nationally chartered banks has been challenged and placed before a federal court for resolution. His observation that the prohibitions imposed by the local California authorities appear to be pre-empted by federal law is part of an emerging trend that was championed most significantly by the Eighth Circuit in the Bank One decision. The California ruling is critical to the development of the law in this area. It could be the precursor to many other court decisions in which state and local governments will be prohibited from banning surcharging on ATMs owned not only by nationally chartered banks, but state chartered banks and private ATM deployers as well. One thing that is for certain: Courts and legislatures must be decisive in order to clarify the law on surcharging and eliminate the uncertainty. Notwithstanding the complaints of consumer advocacy groups, it appears that courts and legislatures alike will find that public policy must militate in favor of ATM surcharging. Since ATM surcharging has been permitted, more than 220,000 ATMs have been deployed in the U.S. Without surcharging, those ATMs could not continue to be operated. The public now has a convenience it never had before. There is, however, a price to be paid for that convenience. We all have the power of free choice. Those who do not wish to pay a surcharge, do not have to use the ATM that imposes it. Contact David J. Bartone: Law Offices of David J. Bartone 1700 K Street, N.W., Suite 302 Washington, DC 20006 Phone 202-824-8173 David Bartone
