In American Bar Association v. Federal Trade Commission, No. 04-5257 (D.C Cir. 2005), the Court of Appeals for the District of Columbia federal Circuit refused to allow the Federal Trade Commission (“Commission”) to regulate the handling of client confidential information by attorneys engaged in certain legal practices. Although certain regulations included in the statute by reference had listed “real estate settlement services” and “tax planning and tax preparation services” as activities in which a financial institution may engage, the court held that the statute itself had no provision that could.

In 1999, Congress passed the Gramm Leach Bliley Act (“the Act”), which allowed the FTC to “prescribe . . . such regulations as may be necessary to carry out the purposes of this subchapter with respect to the financial institutions subject to their jurisdiction under section 6805 of this title.” Section 6805 institutions are institutions and persons governed by “federal functional regulators.” The Act defined “financial institution” as ‘any institution the business of which is engaging in financial activities as described in section 1843(k) of Title 12.” Pursuant to 1843(k), the Federal Reserve Board had issued Regulation Y, which had listed nonbanking activities in which banks could engage, including real estate settlement servicing and providing tax-planning and tax preparation services.

After the passage of the Act, the FTC commenced a rulemaking, which, in 2000, defined financial institution as “an institution the business of which is engaging in financial activities.” Although the neither the regulation nor the act mentioned the words “practice of law” and only mentioned the word “attorney” in other contexts, the American Bar Association (“ABA”) wrote to the Commission, asking whether 1) the regulations covered attorneys and 2), if so, whether attorneys could obtain an exemption from the provisions of the Act.

The Director of the Bureau of Consumer Protection responded to the ABA’s letter in April 2002, and stated that the statute did not authorize an exemption for lawyers and, implicitly, the Act authorized the FTC to regulate lawyers providing those specified services. Displeased with this answer, the ABA and the New York Bar Association sued, challenging the validity of the FTC regulation.

The district court denied the Commission’s motion to dismiss, and granted summary judgment to the bar associations. The district court held that Congress did not intend the Act’s provisions to apply to attorneys and that, even if the Act were ambiguous on that point, the court owed the commission’s decision no deference, because it had not established the rule during the formal rulemaking, but rather only after the rulemaking was done. The FTC appealed.

A panel of the Court of Appeals, consisting of Chief Judge Ginsburg, and Judges Sentelle and Roberts (now Chief Justice of the U.S. Supreme Court), affirmed the district court’s decision. The decision began by listing all of the activities regulated by 12 C.F.R. 225.28(a) “to demonstrate the depths plumbed by the Commission in order to find authority to undertake the regulation of the practice of law.” Listing the activities alone took 13 full pages. The Court immediately indicated that it felt the FTC’s use of the Act to regulate lawyers was outside its bounds, noting that “As we analyze the FTC’s arguments . . . we are reminded repeatedly of a recent admonition from the Supreme Court: ‘Congress does not . . . hide elephants in mouseholes.'”

The Court first looked at whether the Act was ambiguous as to whether Congress intended to apply it to lawyers. “Deference to the agency’s interpretation under Chevron is warranted only where ‘Congress has left a gap for the agency to fill pursuant to an express or implied ‘delegation of authority to the agency.'” The Court then determined that the Act was not ambiguous, as it did not mention “the practice of law” anywhere. Although the Act had not exempted the practice of law, “if we were ‘to presume a delegation of power’ from the absence of ‘an express withholding of such power, agencies would enjoy virtually limitless hegemony.'”

The Court also noted that the tortured means by which the Commission had come to its conclusion, traveling through the Act from one statute to another statute to a regulation that covered permissible activities in which banks could engage, indicated that Congress had not intended the Act to allow the Commission to regulate lawyers. “To find this interpretation deference-worthy, we would have to conclude that Congress had not only 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.” Finally, the court noted that law firms did not fit within the definition of “business of which is engaging in financial activities” as “the ‘business’ of a law firm (if the practice of a profession is properly viewed as business) is the practice of the profession of law.”

The Court also upheld the dismissal of the Commission’s interpretation by noting that it violated the “plain meaning rule.” “‘[I]f Congress intends to alter the usual constitutional balance between the states and the Federal Government,’ it must make its intention to do so ‘unmistakably clear in the language of the statute. . . . By now it should be abundantly plain that Congress has not made an intention to regulate the practice of law ‘unmistakably clear.'” The Court held that because the states had always regulated the practice of law, if Congress intended to take regulate it as well, it would need to express this desire clearly. “This is not to conclude that the federal government could not do so. We simply conclude that it is not reasonable for an agency to decide that Congress has chosen such a course of action in language that is, even charitably viewed, at most ambiguous.”

The Commission may not, therefore, regulate lawyers’ use of clients’ confidential information through the Gramm-Leach-Bliley Act.

Authored by:
Christopher Bowen