A federal appeals court in San Francisco Wednesday overturned a lower court order requiring Wells Fargo Bank to pay its California debit card customers $203 million restitution for allegedly excessive overdraft fees.
The 9th U.S. Circuit Court of Appeals said the San Francisco-based bank's former practice of processing debits in a way that maximized overdraft fees was "a pricing decision authorized by federal law."
But the court also left the door open for the customers to go back to a federal trial judge to seek restitution under a state law that bans
The appeals court ruled in a class-action lawsuit filed in federal court in San Francisco on behalf of California debit card customers in 2007 to challenge the bank's procedure for posting debit purchases to customers' checking accounts.
Attorney Richard McCune estimated there are more than one million California debit card holders in the class approved by U.S. District Judge William Alsup, the trial judge in the case.
Between 2001 and 2010, the bank used a "high-to-low" system of posting, or processing, the most expensive items in a given day first.
If the highest purchase overdrew the account, the remaining smaller items, such as a $4 coffee drink, would do the same, and the bank charged an overdraft fee for each one. The current fee is $35.
The procedure meant that customers could have multiple overdrafts, instead of just one, in a single day, and brought Wells Fargo $1.4 billion in overdraft fees between 2005 and 2007, the court said.
In 2010, Alsup issued a permanent injunction blocking the practice and ordered the bank to pay its California debit card holders $203 million in
Alsup concluded the bank's procedure violated the U.S. Banking Act because it wasn't based on sound business principles.
But a three-judge panel of the appeals court overturned both the injunction and the restitution order, saying the federal law and related regulations permitted the procedure.
At the same time, the court upheld another part of Alsup's decision in which he said Wells Fargo had violated anti-fraud provisions of California's Unfair Competition Act by misleading consumers about its system for posting debits.
The panel sent the case back to Alsup to determine whether an injunction against misleading statements is needed, whether restitution is
justified under the California law, and if so, how much.