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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

AMERICAN BANKERS ASSOCIATION,

THE FINANCIAL SERVICES

ROUNDTABLE, and CONSUMER

BANKERS ASSOCIATION,

NO. CIV. S 04-0778 MCE KJM

Plaintiffs,

v. AMENDED MEMORANDUM AND ORDER

BILL LOCKYER, in his official

capacity as Attorney General

of California, HOWARD GOULD,

in his official capacity as

Commissioner of the Department

of Financial Institutions of

the State of California,

WILLIAM P. WOOD, in his

official capacity as

Commissioner of the Department

of Corporations of the State

of California, and JOHN

GARAMENDI, in his official

capacity as Commissioner of

the Department of Insurance of

the State of California,

Defendants.

----oo0oo----

Plaintiffs American Bankers Association, The Financial

Services Roundtable, and Consumers Bankers Association

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("Plaintiffs") sued various California state officials (Attorney

General Bill Lockyer, Department of Insurance Commissioner John

Garamendi, Commissioner of the Department of Corporations William

P. Wood, and Commissioner of the Department of Financial

Institutions Howard Gould)(collectively, “Defendants”) on the

ground that the affiliate sharing provisions of California’s

Financial Information Privacy Act, commonly referred to as SB1,

(“SB1") are preempted by federal law. This Court granted

Defendant’s motion for summary judgement. On appeal, the Ninth

Circuit reversed holding that federal law does partially preempt

SB1 and instructed this Court to ascertain the scope of that

preemption. Specifically, this Court is to decide whether any

part of SB1's affiliate sharing provision survives preemption

and, if so, can that surviving portion be severed from the

remainder of SB1. For the reasons set forth below, this Court

finds that SB1's affiliate sharing provision does not survive

preemption and, even if some limited applications could be saved,

they cannot be severed from the remainder of the statute. 

BACKGROUND

This case involves the convergence of the Fair Credit

Reporting Act (“FCRA”), as amended by the Fair and Accurate

Credit Transactions Act of 2003(“FACTA”), Title V of the Gramm

Leach Bliley Act (“GLBA”) and California’s SB1. These four

legislative enactments generally seek to govern the treatment of

personal information albeit to varying degrees. In FCRA, FACTA

and GLBA, Congress created a statutory framework that seeks to

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While the additional protections of SB1 extend to both 1

affiliate sharing of information as well as third party

information sharing, only the affiliate sharing provisions are at

issue here.

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strike a balance between providing citizens affordable financial

services while protecting them against invasions of privacy and

the misuse of personal information. Through SB1, the California

Legislature is seeking to accord the citizens of California with

more stringent protections than those afforded under the federal

scheme which has given rise to this litigation.1

STANDARD

Plaintiffs have styled their motion as one for declaratory

relief. The operation of the Declaratory Judgment Act is

procedural only. Skelly Oil Co. v. Phillips Petroleum Co., 339

U.S. 667, 671, 94 L. Ed. 1194, 70 S. Ct. 876 (1950)(citations and

quotations omitted). Generally, declaratory judgment actions are

justiciable if "there is a substantial controversy, between

parties having adverse legal interests, of sufficient immediacy

and reality to warrant the issuance of a declaratory judgment." 

Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270,

273, 85 L. Ed. 826, 61 S. Ct. 510 (1941). Declaratory relief is

appropriate when, as here, (1) the judgment will serve a useful

purpose in clarifying and settling the legal relations in issue,

and (2) the judgment will terminate and afford relief from the

uncertainty, insecurity, and controversy giving rise to the

proceeding. Eureka Federal Sav. & Loan Asso. v. American

Casualty Co., 873 F.2d 229, 231 (9th Cir., 1989)(citations and

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quotations omitted).

Plaintiffs are also seeking injunctive relief against

enforcement of SB1's affiliate sharing provisions. In ruling on

a request for injunctive relief, the trial court considers the

irreparable injury to the moving party and the inadequacy of

legal remedy for such injury. See Weinberger v. Romero-Barcelo,

456 U.S. 305, 312, 102 S. Ct. 1798, 1803, 72 L. Ed. 2d 91 (1982).

When seeking a preliminary injunction, a party must demonstrate

either (1) a combination of probable success on the merits and

the possibility of irreparable injury if relief is not granted;

or (2) the existence of serious questions going to the merits

combined with a balancing of hardships tipping sharply in favor

of the moving party. Int’l Jensen, Inc. v. Metrosound U.S.A., 4

F.3d 819, 822 (9th Cir., 1993). The standard for a permanent

injunction is essentially the same as for a preliminary

injunction with the exception that the plaintiff must show actual

success on the merits rather than a mere likelihood of success. 

See Amoco Production Co. et. al. v. Village of Gambeel et. al.,

480 U.S. 531, 107 S. Ct. 1396, 94 L. Ed. 2d 542 (1987). When

Actual success on the merits is shown, however, the inquiry is

over and a party is entitled to relief as a matter of law

irrespective of the amount of irreparable injury which may be

shown. Sierra Club v. Penfold, 857 F.2d 1307, 1318 n.16 (9th

Cir., 1988).

//

//

// 

//

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ANALYSIS

As explained above, the Ninth Circuit declared that FCRA’s

affiliate sharing preemption clause preempts SB1 insofar as it

attempts to regulate the communication between affiliates of

information as that term is used in 15 U.S.C. § 1681a(d)(1). 

That is, SB1's affiliate sharing provision is preempted to the

extent that it applies to information shared between affiliates

concerning consumers’ “credit worthiness, credit standing, credit

capacity, character, general reputation, personal

characteristics, or mode of living that is used, expected to be

used, or collected for the purpose of establishing eligibility

for credit or insurance, employment, or other authorized

purposes. See Am. Bankers Ass’n. v. Gould, 412 F.3d 1081, 1087

(9th Cir., 2005). This Court has been charged with determining

whether, applying this restricted meaning of “information,” any

portion of the affiliate sharing provision of SB1 survives

preemption and, if so, whether it is severable from the portion

that does not.

1. Survival

Defendants first contend that a significant portion of

information, as defined above, falls outside the preemptive reach

of FCRA. Defendants argue that although FCRA appears to

encompass a broad spectrum of information, there is a whole host

of information that does not meet the definition of information

as that term is used in 15 U.S.C. § 1681a(d)(1), leaving

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California free to govern the sharing of that information among

affiliates. This Court disagrees. 

For information sharing to be preempted under FCRA, the

information must satisfy two conditions. First, it must fall

within the scope of information governed by FCRA. Specifically,

it must concern a consumer’s “credit worthiness, credit standing,

credit capacity, character, general reputation, personal

characteristics, or mode of living.” Id. Second, the

information must be for an FCRA authorized purpose. To

constitute an authorized purpose under FCRA, the information must

be “used, expect to be used, or collected for the purpose of

establishing eligibility for credit or insurance, employment, or

[other authorized purposes.] Id. The definition of information

under FCRA is a two pronged inquiry that encompasses both the

scope of information that is governed under FCRA as well as the

purpose for which that information is to be collected, used or

expected to be used. Information that does not meet both the

scope and purpose prongs of information as defined under FCRA is

not federally protected. 

Defendants concede that virtually all information regarding

a consumer falls within the scope prong of information as defined

under FCRA. Defendants’ axial argument, however, is that a vast

sea of information exists that does not meet the purpose prong of

information as defined under FCRA, and therefore, is subject to

SB1. For example, Defendants argue that if information is

collected by a financial institution solely to ascertain whether

an individual is likely to purchase a product, that information

is not subject to FCRA regulation.

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The only certain way to avoid violating SB1 when sharing 2

information with affiliates, would be to comply with SB1's notice

and opt out requirements whether or not the information appears

prospectively to be federally protected.

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Plaintiffs argue, however, that it would be virtually

impossible to ascertain in advance whether or not information

collected and shared by a financial institution would satisfy an

FCRA authorized purpose. Plaintiffs contend that parsing what

information meets the purpose prong of information as defined by

FCRA versus that which does not would cast a cloud of uncertainty

over the preemption that Congress has decreed in the FCRA. This

Court agrees.

A financial institution may gather and share information

with its affiliates believing in good faith that it is not

required to comply with SB1 because the information will be used

for an FCRA authorized purpose. If, in fact, the information is

not so used, the financial institution would have acted in

violation of SB1 exposing it to the penalties thereunder. This 2

creates the untenable situation of forcing California financial

institutions to either risk violation of SB1 or comply therewith

whether or not the information is for an FCRA authorized purpose.

Further, the same information could be gathered for both

FCRA authorized and unauthorized purposes. Imposing SB1's

requirements on the collection or use of this dual purpose

information necessarily violates FCRA’s preemption clause because

California would be imposing a requirement with respect to the

exchange of information among affiliates as expressly prohibited

by FCRA. See 15 U.S.C. § 1681t(b)(2). 

While in theory it seems financial institutions could

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delineate in advance what information enjoys federal protection

and which does not, in practice any such delineation would simply

be conjecture. Accordingly, this Court finds that no portion of

SB1's affiliate sharing provision survives.

2. Severance

Although we find that no portion of SB1's affiliate sharing

provision survives, we reach the issue of severability as a

distinct ground of preemption. As an initial matter, the parties

agree and this Court concurs that whether a state statute may be

reformed or construed in a manner that preserves its

constitutionality is a question of state, and not federal, law. 

Kopp v. Fair Pol. Practices Com., 11 Cal. 4th 607; 905 P.2d 1248; 

47 Cal. Rptr. 2d 108 (Cal. Sup. Ct., 1995). 

Defendants argue that this Court has the authority to sever

only those applications of SB1 that are unconstitutional while

retaining those applications that are not. Essentially,

Defendants are seeking to have this Court reform or rewrite SB1

to save it from constitutional infirmity. In support of their

position, Defendants rely on Kopp wherein the California Supreme

Court rejected the view that “a court lacks authority to rewrite

a statute in order to preserve its constitutionality or that the

separation of powers doctrine ... invariably precludes such

judicial rewriting." 11 Cal. 4th at 615.

This precise argument was raised in another federal court

where the court explained that “...a federal court, which derives

its power from the federal Constitution and is bound by

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A number of other circuits have followed this same 3

reasoning. See Eubanks v. Wilkinson, 937 F.2d 1118, 1126 (6th

Cir., 1991)(federal courts "must take the state statute or

municipal ordinance as written and cannot find the statute or

ordinance constitutional on the basis of a limiting construction

supplied by it rather than a state court.); see also Hill v. City

of Houston, 789 F.2d 1103, 1112 (5th Cir.)("[A] federal court may

not itself provide a limiting construction of legislation that is

not so readily susceptible"), aff'd 482 U.S. 451, 96 L. Ed. 2d

398, 107 S. Ct. 2502 (1987); see also Erznoznik v. City of

Jacksonville, 422 U.S. 205, 216, 45 L. Ed. 2d 125, 95 S. Ct. 2268

(1975) (narrowing construction only permitted if the language is

"easily susceptible of a narrowing construction").

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principles of federalism, has no power by virtue of California's

separation of powers doctrine, or otherwise, to rewrite a state

statute, even to save it from unconstitutionality.” California

Prolife Council PAC v. Scully, 989 F. Supp. 1282, 1301 (D. Cal.,

1998). In fact, the Ninth Circuit has flatly declared that it is

"not within the province of [a federal] court to 'rewrite' [a

state law] to cure its substantial constitutional infirmities." 

Tucker v. State of Calif. Dept. of Education, 97 F.3d 1204, 1217

(9th Cir., 1996). The Supreme Court has likewise adhered to 3

this general principle. See e.g. Am. Booksellers Assn., 484 U.S.

383, 387; 108 S. Ct. 636; 98 L. Ed. 2d 782 (1988)(stating in the

First Amendment context that "we will not rewrite a state law to

conform it to constitutional requirements"); see also Blount v.

Rizzi, 400 U.S. 410, 419, 27 L. Ed. 2d 498, 91 S. Ct. 423 (1971)

(declaring that "it is for Congress, not this Court, to rewrite

the statute"). 

Although eliminating unconstitutional conditions is not

necessarily the same as adding new language, the Supreme Court

has voiced a similar note of caution about eliminating

unconstitutional conditions when a federal court reviews state

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statutes. See, e.g., Welsh v. United States, 398 U.S. 333, 363

n. 15, 26 L. Ed. 2d 308, 90 S. Ct. 1792 (1970)(noting the Court's

more limited discretion "to extend a policy for the States even

as a constitutional remedy"). 

Both parties concede that the only means of severing the

unconstitutional portion of SB1 would be to accord a narrow

construction to the term “nonpublic personal information” by

striking those applications that are unconstitutional. 

Defendants are necessarily asking this Court to “dissect an

unconstitutional measure and reframe a valid one out of it by

inserting limitations it does not contain. This is legislative

work beyond the power and function of the court." Hill v.

Wallace, 259 U.S. 44, 70, 66 L. Ed. 822, 42 S. Ct. 453 (1922).

Even were any part of SB1's affiliate sharing provision spared

from constitutional infirmity, this Court lacks the power to

rewrite SB1 to excise those applications that are

unconstitutional.

The Court wishes to stress that the vast majority of

protections afforded by SB1 remain untouched by today’s decision. 

For example, the affirmative consent, or opt-in, requirement for

sharing nonpublic personal information with non-affiliated third

parties remains intact. Similarly, consumers’ retain the right

to preclude, or opt-out, of information sharing between joint

marketers. Moreover, while SB1's affiliate sharing provision is

unenforceable due to constitutional infirmity, the FCRA continues 

to provide consumers with the right to opt-out of most affiliate

sharing. In sum, the FCRA and those provisions of SB1 which

survive will continue to provide consumers with the protections

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intended by Congress and the California Legislature. 

CONCLUSION

The Court finds that a judgment in favor of Plaintiffs will

serve a useful purpose in clarifying and settling the scope of

FCRA preemption as it relates to SB1 and will terminate and

afford relief from the uncertainty, insecurity, and controversy

giving rise to this action. Accordingly, declaratory judgment is

appropriate and final judgement in favor of Plaintiffs is

therefore entered. In addition, the Court finds that Plaintiffs

have established actual success on the merits and are entitled to

injunctive relief as a matter of law. Defendants are hereby

permanently enjoined from enforcing SB1's affiliate sharing

provisions as codified in California Financial Code section

4053(b)(1) to the extent they are preempted by 15 U.S.C. section

1681t(b)(2).

IT IS SO ORDERED.

DATED: October 5, 2005

_____________________________

MORRISON C. ENGLAND, JR

UNITED STATES DISTRICT JUDGE

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