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Court Limits Federal Preemption of Calif. Privacy Law

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The U.S. District Court in Sacramento, Calif., has ruled that the federal Fair Credit Reporting Act does not preempt California’s “affiliate-sharing” restrictions in Senate Bill 1.[@@]

S.B. 1 requires insurance companies to give California consumers notice and an opportunity to “opt-out” of financial information disclosures between affiliates for marketing purposes.

The decision does not affect affiliate information sharing for other purposes, which are excepted from the opt-out standard by S.B. 1.

The California law also generally provides that financial institutions may not disclose a consumer’s nonpublic personal information to any nonaffiliated third party without the consumer’s consent. The federal court decision is limited to a discussion of the preemptive effect of federal law on state “affiliate exchange” restrictions.

Banks and banking industry trade groups are expected to decide Friday whether they will seek an injunction against the decision and, if necessary, more time for financial institutions to adjust their activities. An expedited appeal to the 9th Circuit Court of Appeals in San Francisco also is expected.

“The court finds that the provisions of S.B. 1 are not preempted by the Fair Credit Reporting Act, whose overriding purpose is to regulate the use and dissemination of consumer reports,” the decision by Judge Morrison C. England Jr. concludes. “Instead, limitations on the sharing of personal financial information between financial institutions in non-credit reporting situations are specifically contemplated by the provisions of the Gramm-Leach-Bliley Act, which allows states to enact more stringent privacy regulations in that regard, therefore permitting state laws like S.B. 1.”

Stephen Zielezienski, vice president and associate general counsel with the American Insurance Association, Washington, says, “The AIA has not yet decided how to respond to the court’s decision or whether it would become involved in any appeal, but the decision is wrong and misreads the clear preemptive scope of federal law in this area. It takes a tortured path to reach a result that does not square with a reasonable reading of the law.”

Zielezienski adds that the decision affects all financial institutions because of the scope of S.B. 1 and that insurance companies “need to continue to evaluate their information-sharing policies in that context.”

Requests for comment from the American Council of Life Insurers, Washington, drew no response.