The Ninth Circuit Court of Appeals last week reversed a lower court ruling and said 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 and the Financial Services Roundtable, the court said the federal law preempted parts of the California privacy law known as SB 1 that would have required companies to obtain a consumer’s permission before sharing information between its 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, where Judge Morrison England will decide how much of SB 1 can be enforced. In the initial case last year, Judge England upheld the entire law, leading to the appeal to the San Francisco-based appellate court.

“We are extremely pleased with the ruling,” said Sam Sorich, vice president and Western regional manager for the Property and Casualty Insurers Association of America (PCI) and president of its Western affiliate, the Association of California Insurance Companies.

Mr. Sorich stated, “California law was overly restrictive and inconsistent with congressional intent to create national standards regarding the sharing of customer information among the affiliates of financial institutions.

“SB 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 a consumer could experience as a result of the responsible sharing of information among affiliates,” he continued.

Supporters of SB 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,” said Gail Hillebrand, senior attorney with the West Coast office of the Consumers Union.

Ms. Hillebrand said the 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.”

SB 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 of 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 the possibility of federal preemption of SB 1 provoked the state’s two senators–Barbara Boxer, D-Calif., and Dianne Feinstein, D-Calif.–to oppose the legislation extending provisions of the FCRA known as the Fair and Accurate Credit Transactions, or FACT Act, in 2003.