Judge Blocks Laws Banning ATM Surcharges

A federal judge Monday blocked laws in Santa Monica and San Francisco that prevent banks from imposing surcharges on the use of their automated teller machines by customers of other banks.

The preliminary injunction by U.S. District Court Judge Vaughn R. Walker that will allow banks to continue charging their fees will last until he can hold a full trial on the matter. But, in granting the order, Walker ruled that the banks are likely to prevail in their constitutional challenge to the Santa Monica ordinance and a nearly identical law passed by San Francisco voters earlier this month.

Despite the ruling, Bank of America and Wells Fargo will not immediately reopen their 33 ATMs in Santa Monica to all consumers. Several legal details remain to be worked out before the machines can be reopened, a spokesman for Bank of America said.

Last week, in a surprising and controversial move, the banks moved against Santa Monica’s law by shutting off ATM service to non-customers. Bank of America threatened a similar move in San Francisco next month, when that city’s law was set to take effect.

The case, brought by Bank of America and Wells Fargo, the state’s two largest banks, has drawn national attention since Santa Monica and San Francisco became the first two cities in the country to pass laws prohibiting banks from levying surcharges, typically about $1.50 per transaction, when customers of other banks use their machines. The law does not affect the separate charges that banks impose on their own customers for using the machines.

In blocking enforcement of the laws, Walker said the ordinances “cannot under a reasonable stretch” be considered consumer protection measures. Instead, he said, they appear to have restricted consumer choices.

“Without the injunction,” Walker said, “thousands of dollars of revenue will be lost each month, and [the banks] have no feasible means of recovering later.”

Legally, however, Walker’s granting of the injunction turned on a constitutional issue: Do the two cities’ laws conflict with the federal government’s right to regulate nationally chartered banks? Walker agreed with the banks--and with federal officials--that the local laws appear to do so and therefore cannot be enforced.

In the event a full trial leads to a different conclusion, Walker ordered the banks to keep fees charged to non-clients in an escrow account so that they could be refunded.

Most other large financial institutions, such as Washington Mutual, Union Bank of California and California Federal Bank, were complying with the Santa Monica law. But with Monday’s ruling, they will be free to begin charging fees again.

Attorneys for the two cities vowed to press ahead in defense of the measures.

“Bank customers in San Francisco have taken a clear stand against these double charges. They have appropriately used the ballot box to allocate the resources of the city to redress their grievances, and that is what we will continue to do,” said Louise H. Renne, San Francisco city attorney.

Adam Radinsky, deputy city attorney of Santa Monica, said he will file an appeal to the U.S. 9th Circuit Court of Appeals. “We are here to fight for a law that our elected representatives passed, and we’re in it for the long haul.”

But Radinsky conceded that a hearing by the appeals court could be delayed for months. In the meantime, Walker’s injunction would stand.

Walker handed down the injunction after a two-hour hearing in which a lawyer for the banks warned that Los Angeles, San Diego and Berkeley would pass similar ordinances if the current laws were not blocked.

“There’s more coming down the road,” lawyer E. Edward Bruce told the judge.

Other cities were already considering following the lead of Santa Monica and San Francisco. Walker’s ruling will probably discourage them from doing so, at least until the issue is resolved.

The fee debate has been raging since 1996, when the major ATM networks dropped their prohibition on surcharges. Since then, about 99% of California banks began assessing the fees, surveys show.

Consumer advocates call the surcharges excessive, insisting it only costs banks 25 cents to process the transactions. Also, critics say banks are “double-dipping” because they already share a separate fee, typically $2, which is charged by a consumer’s bank when an outside ATM is used.

Banks insist they are not getting rich from ATM fees. Wells Fargo said the fees account for less than 1% of its total revenue. Banks also say they need to recoup the millions of dollars they have spent building a national ATM network--totaling nearly 200,000 machines nationwide--which permits consumers to get instant cash virtually everywhere, from the supermarket to the ski slopes.

Beyond those policy issues, though, the banks argue that they cannot effectively carry out their business if each city in the country is allowed to set its own rules.

The industry is getting support from one of the top federal banking regulators, the Office of the Comptroller of the Currency. Just as they have in a similar legal battle in Connecticut, federal officials are siding with the banks in California, arguing that they, not municipalities and states, should have sole power over bank fees.

Moves to limit the ATM fees appear to have substantial political popularity. San Francisco’s ordinance passed overwhelmingly as a ballot initiative earlier this month. And in Santa Monica, Councilman Kevin McKeown said that since the law passed last month, he has received a deluge of e-mails and phone calls from consumers saying they support the city’s stance.

Judging by the public’s reaction, he said, he believes Santa Monica will receive a groundswell of support from consumers. “I challenge banks to reopen ATMs, charge their double fees and see what the public reaction would be now,” McKeown said.

In the end, supporters of the law insisted, their side will prevail. “Clearly, this is the first step in a long national process,” added City Councilman Michael Feinstein. “But the No. 1 thing is that we have educated the public about the excessive ATM fees.”

But opponents of the city’s ordinance say the judge’s ruling was exactly what they had predicted from the beginning. “I think we’re just starting to see the chaos that’s being caused by this decision made by the council,” said City Councilman Paul Rosenstein, who was one of three members of the seven-person Council to vote against the ban.

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Dolan reported from San Francisco and Sanders from Los Angeles. Times Community News reporter Deanna Welch in Santa Monica contributed to this story.