The Ninth Circuit Court of Appeals last week reversed a lowercourt ruling and said that portions of a strong California privacylaw are preempted by the Federal Fair Credit Reporting Act.

Ruling on an appeal from several financial servicesorganizations, including the American Bankers Association and theFinancial Services Roundtable, the court said the federal lawpreempted parts of the California privacy law known as SB 1 thatwould have required companies to obtain a consumer's permissionbefore sharing information between its affiliates.

However, the court's decision limited the types of informationthat might be shared to that involving the consumer's eligibilityfor credit and insurance.

The case now returns to the U.S. District Court in Sacramento,where Judge Morrison England will decide how much of SB 1 can beenforced. In the initial case last year, Judge England upheld theentire law, leading to the appeal to the San Francisco-basedappellate court.

"We are extremely pleased with the ruling," said Sam Sorich,vice president and Western regional manager for the Property andCasualty Insurers Association of America (PCI) and president of itsWestern affiliate, the Association of California InsuranceCompanies.

Mr. Sorich stated, "California law was overly restrictive andinconsistent with congressional intent to create national standardsregarding the sharing of customer information among the affiliatesof financial institutions.

"SB 1 forced insurers and other financial institutions todevelop processes designed solely for California. A state-by-stateapproach such as this significantly hinders the potential economicand service benefits a consumer could experience as a result of theresponsible sharing of information among affiliates," hecontinued.

Supporters of SB 1 took solace in the court's decision thatfederal law preempts only part of the bill.

"The court declined to issue the sweeping ruling againstCalifornia's financial privacy law that was sought by the banks,"said Gail Hillebrand, senior attorney with the West Coast office ofthe Consumers Union.

Ms. Hillebrand said the decision "recognizes that Congress didnot take away all of California's ability to protect its citizens'financial privacy when it comes to affiliate informationsharing."

SB 1 was approved by the California legislature in the summer of2003, and the financial services groups filed suit shortly after ittook effect in July of 2004.

The conflict between the state law and the FCRA was a point ofdebate at both the state level and in the halls of Congress, wherethe possibility of federal preemption of SB 1 provoked the state'stwo senators–Barbara Boxer, D-Calif., and Dianne Feinstein,D-Calif.–to oppose the legislation extending provisions of the FCRAknown as the Fair and Accurate Credit Transactions, or FACT Act, in2003.