Consumer Federation of California

The Obama administration has delivered a mixed verdict to the U.S. Supreme Court on California’s financial privacy law, which lets consumers keep banks from sharing information with affiliated companies about their savings accounts or buying habits.

The 2004 law conflicts with federal regulation and should have been overturned by a lower court, Justice Department lawyers told the justices in a written filing. That largely agrees with banks and with the position the government took under President George W. Bush.

But the Obama administration agreed with the state and consumer groups that the California law is not imposing hardships on banks and that the high court should stay out of the case and leave the law in place.

The May 29 filing was the last the court will receive before deciding whether to grant the American Bankers Association’s request to hear its appeal in the term that starts in October. The federal government is not a party to the case, but the court requested its views and often gives them great weight.

That prospect pleased Richard Holober, executive director of the Consumer Federation of California.

"California’s law is a model for the nation and provides consumers much more control of their personal financial information than does federal law," Holober said Thursday.

Although the administration’s position is "very nuanced," he said, "they seem willing to live with the California law."

Gregory Taylor, chief of litigation for the bankers’ association, said the group is disappointed by the Justice Department’s recommendation but happy with its legal analysis. That analysis would put the administration on the bankers’ side if the court decided to review the case.

"We hear from our bankers that the uncertainty caused by (the lower-court ruling upholding much of the law) gives them fits on a daily basis," he said.

The filing came a week after President Obama issued an executive order reversing Bush’s policy of regularly using federal regulations to pre-empt state and local laws on consumer and environmental protection. Obama said he would rarely take such a step and would respect states’ authority.

The California financial law, the broadest of its kind in the nation, allows customers to stop banks from sharing certain types of information with affiliated companies. Some of the largest banks have thousands of affiliates in fields far removed from banking.

The bankers’ suit claimed the California statute clashed with a federal law that set nationwide standards for regulating consumer credit reports. In a September 2008 ruling, the Ninth U.S. Circuit Court of Appeals in San Francisco said the federal law’s ban on state regulation is limited to consumer reports, information that involves a customer’s fitness for credit, insurance or employment.

The ruling meant that customers could stop banks from sharing other information – for example, credit card statements that a bank-affiliated retailer might use to target advertising based on a customer’s buying patterns.

In last week’s filing, the Justice Department said the appeals court had interpreted the federal law too narrowly. The law set national standards and pre-empted state laws like California’s, which sought to impose additional restrictions, the department argued.

But department lawyers said they saw no need for Supreme Court review of the issue, at least until further experience in California reveals financial burdens or legal conflicts.

Banks already allow customers to control some information-sharing under federal law and may need "only modest efforts" to comply in California, the Justice Department said.