The 9th Circuit Court of Appeals has reversed a lower court ruling and held that portions of a strong California privacy law are preempted by the Federal Fair Credit Reporting Act.[@@]

Ruling on an appeal from several financial services organizations, including the American Bankers Association, Washington, and the Financial Services Roundtable, Washington, the court said the federal law preempts parts of the California “S.B. 1″ privacy law that would have required companies to obtain a consumer’s permission before sharing information between their affiliates.

However, the court’s decision limited the types of information that might be shared to that involving the consumer’s eligibility for credit and insurance. The case now returns to the U.S. District Court in Sacramento, Calif., where Judge Morrison England will decide how much of S.B. 1 can be enforced. In the initial case last year, England upheld the entire law, leading to the appeal to the San Francisco-based appellate court.

“We are extremely pleased with the ruling,” says Sam Sorich, vice president and western regional manager for the Property and Casualty Insurers Association of America, Des Plaines, Ill., and president of its western affiliate, the Association of California Insurance Companies. “S.B. 1 forced insurers and other financial institutions to develop processes designed solely for California. A state-by-state approach such as this significantly hinders the potential economic and service benefits consumer could experience as a result of the responsible sharing of information among affiliates.”

Supporters of S.B. 1 took solace in the court’s decision that federal law preempts only part of the bill.

“The court declined to issue the sweeping ruling against California’s financial privacy law that was sought by the banks,” says Gail Hillebrand, senior attorney with the West Coast office of the Consumers Union, Yonkers, N.Y. “Today’s decision recognizes that Congress did not take away all of California’s ability to protect its citizens’ financial privacy when it comes to affiliate information sharing.”

S.B. 1 was approved by the California Legislature in the summer of 2003, and the financial services groups filed suit shortly after it took effect in July 2004. The conflict between the state law and the FCRA was a point of debate at both the state level and in the halls of Congress, where, in 2003, the possibility of federal preemption of S.B. 1 provoked the state’s Senators, Barbara Boxer, D-Calif., and Dianne Feinstein, D-Calif., to oppose a bill extending some FCRA provisions.