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Appellate Court Affirms That Lawyers Are Not Covered by GLBA

Bruce L. McDonald and Kirk J. Nahra
December 2005

On December 6, 2005, the U.S. Court of Appeals for the D.C. Circuit affirmed District Judge Reggie B. Walton's 2004 ruling, and held that lawyers engaged in the practice of law are not subject to the privacy and security provisions of the Gramm-Leach-Bliley Act (GLBA). Thus, the Federal Trade Commission's (FTC) implementing regulations do not apply. American Bar Association v. Federal Trade Commission, 2005 WL 3287968. Not only does the bar associations' success mean that lawyers escape FTC GLBA regulation, but others may also. As the FTC's reply brief itself declared, the "consequence of plaintiffs' argument would be to exclude not only lawyers but a variety of other entities from the governing rules." Only time will tell who these "other entities" may prove to be.

Background
This litigation traces back to the FTC's short April 8, 2002 letter responding to the American Bar Association's request that the FTC either deny GLBA jurisdiction or grant lawyers an exemption. The FTC did neither. Under the GLBA regime, lawyers engaged in providing specified types of services, such as real estate settlement services, tax-planning or tax-preparation services, would be required, in the FTC's judgment, to provide clients initial and annual notices of their practices regarding sharing clients' nonpublic personal information with affiliates and non-affiliated third parties. Disclosures to non-affiliated third parties would be prohibited if the clients "opted-out" of such disclosures.

Bar associations perceived that such a notice process would be confusing to clients and might well prove offensive if understood to suggest that lawyers intended to share client information with third parties. In that context, the New York State Bar Association and the American Bar Association each brought actions seeking review of the FTC determinations in the U.S. District Court for the District of Columbia, where both cases were assigned to Judge Walton. The FTC first moved to dismiss these actions for failure to state a claim upon which relief can be granted, a motion which Judge Walton denied on August 11, 2003. Thereafter, on April 30, 2004, Judge Walton granted the bar associations' motions for summary judgment, ruling that the FTC lacked jurisdiction under GLBA to regulate lawyers. The FTC appealed.

The Appeal
On appeal, the FTC argued that the key to the jurisdictional analysis is the GLBA definition of "financial institution," which boils down to whether the party in question is engaged in an activity listed in Federal Reserve Board Regulation Y. Regulation Y lists hundreds of activities. The FTC characterized this definition as very broad; it "includes various entities not traditionally recognized as financial institutions." The "statute's coverage is defined not by the nature of the entity being regulated but by the activities that are performed." The Commission noted that this logic had been sustained as to a "credit counseling corporation" in FTC v. Ameridebt, Inc., 343 F.Supp 2d 451 (D.MD 2004), and stressed that the U.S. Supreme Court had found lawyers, who regularly engaged in litigation to collect consumer debts, were "debt collectors" for purposes of the Fair Debt Collection Practices Act. Heintz v. Jenkins, 514 U.S. 291 (1995). The Commission also argued that there is a heavy presumption against implied exemptions, relying on the Supreme Court's decision in Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975), which held that preexisting state regulation did not exempt lawyers from the antitrust laws.

The bar associations asserted a number of arguments, including that nothing in the GLBA text or legislative history indicates a congressional intent to bring lawyers under this federal statute. Rather than focusing exclusively on the definition of "financial institution," they argued that the overall text, structure and purpose of the GLBA are inconsistent with finding a congressional intent to add a layer of federal regulation governing the confidential relationship between lawyer and client. They urged an approach similar to that adopted in FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000), where the Supreme Court rejected the U.S. Food and Drug Administration's assertion of jurisdiction over tobacco products even though a literal reading of the Federal Food, Drug, and Cosmetic Act's broad definition of "drug" might include them. They stressed that the GLBA privacy rules were thought necessary to control the increased likelihood of information-sharing flowing directly from the GLBA's "easing restrictions on the ability of banks, securities firms, insurance companies and other financial firms to affiliate." As the district court found, Congress "was not concerned about the dissemination by attorneys of nonpublic information communicated to them by their clients." The bar associations also criticized the FTC's use of Regulation Y, contending that the Commission overlooked the requirement that financial activities must be "closely related to banking," a determination that the Federal Reserve Board has not made as to the practice of law.

The Appellate Decision
The court of appeals' opinion was written by Judge David B. Sentelle and joined by Chief Judge Douglas H. Ginsburg. Judge John G. Roberts, Jr., had been a member of the panel, but, on being elevated to the Supreme Court, recused himself from participation in the decision.

Judge Sentelle's opinion is unsympathetic in tone to the FTC, making references to the Commission's "defense of its attempted turf expansion" and "the depths plumbed by the Commission in order to find authority to undertake the regulation of the practice of law." The court's opinion analyzes the issue using the framework prescribed in Chevron USA, Inc. v. National Res. Def. Council, Inc., 467 U.S. 837 (1984), under which the court is to determine first whether the statute is ambiguous, and, if so, whether the FTC's interpretation is reasonable, in which event it will be upheld.

Most of the opinion is devoted to the first step, determining if the GLBA is ambiguous as to whether attorneys engaged in the practice of law are covered. The court of appeals found the statute was not ambiguous. It was unwilling to conclude that there was any intent to regulate the practice of law when such regulation is never mentioned in the statute. The court "would have to conclude that Congress not only had hidden a rather large elephant in a rather obscure mousehole, but had buried the ambiguity in which the pachyderm lurks beneath an incredibly deep mound of specificity, none of which bears the footprints of the beast or any indication that Congress even suspected its presence." Additionally, Judge Sentelle found that the "language describing financial institutions makes an exceptionally poor fit with the FTC's apparent decision that Congress, after centuries of not doing so, has suddenly decided to regulate the practice of law."

Thus, the court concluded that there was no ambiguity entitling the Commission to act. Nevertheless, it went on to assess the FTC's action under the reasonableness standard, concluding that "the Commission's interpretation is not a reasonable one." This reflected the court's concern with using ambiguities as the basis for a federal administrative agency's reaching into areas of traditional state sovereignty. Additionally, it found that the Commission's interpretation of Regulation Y would imply that a bank or bank holding company could own "a law firm as its subsidiary," which it viewed as unprecedented and unreasonable.

Future Implications
By deciding the issue based primarily on lack of FTC authority to act, as distinct from the form of the FTC's action (a letter rather than a rulemaking) or how the Commission supported the expansive approach adopted, the court of appeals appears to have minimized the opportunities for the FTC to continue its jurisdictional quest. So, barring future Supreme Court review (which seems unlikely), or future action by Congress, lawyers engaged in the practice of law appear to be GLBA-free. Whether other groups will similarly attempt to escape may prove interesting.

For more information, please contact Bruce L. McDonald at 202.719.7014 or bmcdonald@wileyrein.com and Kirk J. Nahra at 202.719.7335 or knahra@wileyrein.com.

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