This Just In! Lawyers are not "Financial Institutions" and Congress has not Hidden any Elephants in a Mousehole!
Posted by Bruce Johnson
On December 6, 2005, the United States Court of Appeals for the District of Columbia Circuit affirmed the ruling of the U.S. District Court for the District of Columbia that lawyers who are merely practicing law are not subject to the privacy provisions of the Gramm-Leach-Bliley Act ("GLB"). The D.C. Circuit agreed with the district court's conclusion that the Federal Trade Commission's (FTC) attempt to regulate the practice of law under the Act fell outside its statutory authority.
The FTC's attempt to extend its jurisdiction over lawyers was one of the odder bureaucratic maneuvers in recent years.
First, it seemed unsupportable by the statute. GLB, enacted in 1999, required certain "financial institutions" to provide notice to their customers concerning their privacy policies and rules. Law firms do not appear to be "financial institutions" so the statutory language would have to be tortured considerably to apply it to lawyers.
Second, it was wholly unnecessary -- since the origins of the profession in Medieval England, lawyers have been required by their profession, and later by ample judicial and statutory authority, from disclosing their clients' confidences to anyone, on pain of disbarment. Presumably, given this long-established principle, members of the public, including potential clients, were aware of the existence of an attorney-client privilege.
Third, it was an affront to basic principles of federalism. This is because lawyers were already subject to plenary authority at the state level -- in which every American jurisdiction imposed stringent privacy regulations that prohibit lawyers and their firms, in the words of American Bar Association ("ABA") Model Rule 1.6, from disclosing any "information relating to the representation of a client" to anyone, except as authorized by law.
Yet, in April 2002, the FTC took the position that law firms, particularly those that provided income tax, estate planning, or real estate settlement services for individuals were "financial institutions" for purposes of GLB and therefore were required to send statutory privacy notices to clients. The ABA and the New York State Bar Association filed lawsuits seeking a declaratory judgment that the FTC lacked statutory authority to decide that lawyers were subject to the Act and that the decision itself was arbitrary and capricious. The district court agreed and granted their motions for summary judgment.
The FTC appealed this ruling and -- in the December 6th opinion by the D.C. Circuit -- lost. The D.C. Circuit found that Congress had left no ambiguity on the question of whether the FTC had authority to regulate the practice of law, and that no deference was due to the FTC's attempt to do so.
Quoting Regulation Y of the Federal Reserve Board, the basis for GLB's statutory definition of "financial institutions" (in a remarkable 14-page footnote, with the court noting that it was setting out the regulation in full, not because it was relevant but because it illustrated the "depths plumbed" by the FTC's efforts to extend its jurisdiction) that lawyers were "financial institutions" the court pointed out that nowhere in this verbiage was there any suggestion that Congress was intending to regulate the practice of law in any way.
In answering the FTC's arguments "in defense of its attempted turf expansion", the court adopted a simple rule of statutory interpretation: "[C]ongress does not . . . hide elephants in mouseholes."
The practice of law had always been regulated at the state level, and was ordinarily not the subject of federal regulation. So, any extension of FTC powers over lawyers as lawyers would be a major change in the law. But Congress had never mentioned law practice as one of its targets anywhere in the Act or its legislative history, the court observed,
The court noted: "To find [the FTC interpretation] deference-worthy, we 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." Given this major gap in the language of GLB and its legislative history, the court held that the FTC's interpretation of GLB was not reasonable, even were it entitled to deference.
This odd bureaucratic imbroglio -- with the FTC battling for three years over an unnecessary and unsupportable extension of its GLB jurisdiction, all in order to demand that thousands of law firms throughout the United States spend millions of dollars to send out useless piles of paper to their clients, who would likely then toss them out -- is not a hopeful sign that privacy regulation by the government will be done wisely, or even minimally rationally. (And, as Tom Burke noted in his Dec. 9 entry, the United States government has also not demonstrated basic competence in some of its activities promoting security regulation.)
But the danger of bureaucrats running astray is the issue here, and the language of this decision will be helpful in future cases, if and when regulators stray from their statutory goals, as the FTC obviously did here.
A copy of the D.C. Circuit's opinion is available here.
