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THE GRAMM-LEACH-BLILEY ACT AND THE ATTORNEY-CLIENT RELATIONSHIP

With a faster, less expensive, and convenient means of transferring information, and with companies entering into a wider variety of business activities than ever, consumers have a very strong interest in who has access to their personal information. To put this in terms of a law-school hypothetical, is it reasonable for a MegaPriceMart to gain information about Steve through a legitimate business dealing, but then for MegaPriceMart to dispense this information to MegaSavingsMart, MegaDiscountMart, or any other unrelated third party without Steve's consent? Most consumers would agree that the answer is no.

But should a rule that requires "financial institutions" to make disclosures regarding their policies and activities also apply to attorneys who practice in areas with financial transactions, such as insurance, tax, or real estate? This leads to deeper questions: What is the scope of an attorney's job? Although the work of an attorney touches on a variety of areas, how far into these other areas does it really go? This article will discuss a recent attempt by the Federal Trade Commission to extend the Gramm-Leach-Bliley Act to cover attorneys in the practice of law.

Facts

The Gramm-Leach-Bliley Act (the GLBA) was passed in November 1999. The GLBA was particularly momentous because, for the first time since the Great Depression, it allowed companies to simultaneously engage in banking, insurance, and securities businesses. Congress infused the GLBA with broad privacy protections, and gave consumers the ability to protect their interests with respect to the distribution of their personal information from the financial institution to third parties.

Title V of the GLBA (Title V), 15 USC §§ 6801-6809, provides that "financial institutions" (which the act primarily describes as banks and similar organizations) must inform their customers, at the time of establishing a business relationship, and again every year, of the institution's policies regarding privacy and disclosure of nonpublic personal information to third parties. See 15 USC § 6803. Title V also provides consumers with an option to "opt out" of having information disclosed to these third parties. See 15 USC § 6802(b).

The Federal Trade Commission (FTC or "the Commission") enacted a rule that took effect on May 23, 2003, which required "attorneys engaged in the practice of law" (attorneys) to comply with the GLBA. The American Bar Association (ABA) requested that the FTC grant lawyers an exemption from the GLBA, but the FTC stated that under the GLBA it was not within the Commission's power to do so. As a result, the New York State Bar Association (NYSBA) and the ABA filed a complaint against the FTC alleging that the Commission's assessment that the GLBA extended to attorneys was outside of the FTC's statutory authority. New York State Bar Association v Federal Trade Commission, 276 F Supp 2d 110 (DC Cir 2004). Additionally, the NYSBA and ABA alleged that the commission's decision to include attorneys, and refusal to properly consider requests for exemption constituted arbitrary and capricious agency actions. The ABA and NYSBA complaints were filed pursuant to the Administrative Procedure Act, which allows courts to set aside agency actions if the actions are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with [the law.]" 5 USC § 706(2)(A), or if the agency has acted "in excess of statutory jurisdiction, authority, or limitations, or short of statutory right." 5 USC § 706(2)(C).

Analysis

The court used the test articulated in Chevron U.S.A., Inc. v Natural Resources Defense Council, Inc., 467 US 837, 104 S Ct 2778, 81 LEd2d 694 (S Ct 1984). Chevron posits that, although courts should show some deference to an administrative agency's findings, it is necessary to consider "whether Congress has directly spoken to the precise question at issue" 467 US at 842, because both the court and the agency must act consistently with the unambiguous will of Congress. If it is found that Congress did not address the question at issue, then the court must look to whether the "agency's answer is based on a permissible construction of the statute." Id at 843.

Under the first prong of analysis (legislative clarity) the court found that the purpose of the GLBA was straightforward, although the term "financial institution" was unclear: "The construction of the term 'financial institution' as used in the Act is [not straightforward]." The court looked to the "text, structure, purpose, and legislative history" Citizens Coal Council v Norton, 330 F3d 478, 481 (DC Cir 2003) (quoting Pharm. Research & Mfrs. of Am. v Thompson, 251 F3d 219, 224 (DC Cir 2001)) to determine if Congress had, indeed, spoken on this issue.

The FTC contended that the "plain language" of the phrase "financial institution" statute proved that Congress had intended the GLBA to apply to attorneys who participate in real estate settlement, tax planning, or tax preparation services. The court disagreed, stating that the language specifically referred to a "financial institution" and that it was impossible to regard attorneys this way, primarily because attorneys could not be held as institutions: "Even applying the broadest possible interpretation of the dictionary definitions of 'institution,' it would be a distortion for the court to conclude, for example, that unincorporated solo practitioners, fall under these definitions." New York State, 276 F Supp 2d at 117. The court went on to conclude that legislature had likely intended that attorneys not be included in the penumbra of the statute in light of related regulations: "[Not] only do attorneys appear to fall outside the definition of 'institutions' within the meaning of the GLBA, but the practice of law does not appear to be a financial activity within the meaning of the BHCA and Regulation Y." New York State, 276 F Supp 2d at 118.

The NYSBA and ABA noted that every state has its own legislative or judicial rules pertaining to the practice of law that prohibit lawyers from disclosing information about their clients to third parties and that the GLBA would not add anything to the local regulations: "As a consequence of the existence and enforcement of statutes and rules in every state protecting the privacy and confidentiality of information disclosed by clients to their attorneys, the application of law would add nothing to the accomplishments of the goals of the GLBA…." NYSBA Compl. ¶ 67. The court agreed, pointing out the ethical guidelines within the legal profession are very similar to the disclosure requirements of the GLBA, also pointing out that this area is typically left to states to enforce: "[Attorneys have] pre-existing state ethical rules that govern attorneys, would be prohibited from affiliating with financial institutions and, as a result of the affiliation, disclosing their clients' information without their clients' consent." New York State, 276 F Supp 2d at 121. Additionally, the Model Rules of Professional Conduct Rule 5.4 (professional independence of a lawyer) and Model Rules of Professional Conduct Rule 1.6 (attorney-client confidentiality), specifically prohibit attorneys from participating in the behavior described by the GLBA:

5.4. (b) A lawyer shall not form a partnership with a nonlawyer if any of the partnership consist of the practice of law.

5.4. (d) A lawyer shall not practice with or in the form of a professional corporation or association to practice law for a profit, if:

1. A nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of a lawyer for a reasonable time during administration.

 

2. A nonlawyer is a corporate director or officer thereof or occupies the position of similar responsibility in any form of association other than a corporation; or

 

3. A nonlawyer has the right to direct or control the professional judgment of a lawyer.

 

1.6. (a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

Illinois has adopted similar measures as the New York Bar Association. See ILCS S Ct Rules of Prof.Conduct, RPC Rule 5.4 (dealings with nonlawyers); ILCS S Ct Rules of Prof. Conduct, RPC Rule 1.6 (confidentiality of information). Indiana also has a set of professional conduct rules that protects the sanctity of the attorney-client relationship. See IN ST RPC Rule 1.6 (confidentiality of information). Wisconsin also has such rules governing attorneys. Wisconsin's rules are "patterned after the [ABA] rules." Piaskoski & Assoc. v Ricciardi, 2004 WL 1534151 (Wis App Ct 2004); WI ST RPC SCR 20:1.6 (confidentiality of information); WI ST RPCSCR 20:2.3 (disclosure of information to third persons).

However, New York State goes a step further. The court noted that New York State requires attorneys to make a materially equivalent disclosure as the one required by the GLBA to their clients. 22 NYCRR 1210.1 (posting a statement of client's rights):

1210.1. Every attorney with an office located in the State of New York shall ensure that there is posted in that office, in a manner visible to clients of the attorney, a statement of client's rights in the form set forth below. Attorneys in offices that provide legal services without fee may delete from the statement those provisions dealing with fees.

8. You have the right to privacy in your dealings with your lawyer and have your secrets and confidences preserved by the extent permitted by law.

[Numbers 1-7, 9, 10 omitted]

Thus, the court concluded, that the GLBA was not meant to apply to attorneys because it is nonsensical for Congress to purposefully enact redundant legislation. In a rather forceful statement, the court concluded that Congress did not intend for the GLBA to extend to attorneys: "[This] court finds . . . that Congress would alter a regulatory scheme that has always been under the authority of states without even a hint that newly enacted legislation was venturing into that area … the delegation of authority to the FTC by Congress to regulate the ethical conduct of attorneys in the face of approximately two hundred years of exclusive state regulation in such a subtle way would be, in the words of Justice Scalia, [like hiding an elephant in a mousehole]."Whitman v American Trucking Associations, Inc., 531 US 457, 468, 121 S Ct 903, 149 LEd2d 1 (S Ct 2001).

The court went on to note that even if Congress had been silent or ambiguous as to the question at issue, no deference would be given to the FTC decision because the FTC overstepped its boundaries as there was no evidence to show that that the FTC had reached its decision based on any sort of rational basis: "[It] is undisputed that the FTC's interpretation that attorneys are subject to the GLBA's privacy provisions was not the result of any notice and comment rulemaking or a formal adjudication … the total lack of a deliberative process by the FTC before reaching its decision on this is problematic."New York State, 276 F Supp 2d at 124.

Finally, the court determined that even if attorneys were subject to the GLBA, it was arbitrary and capricious for the FTC to refuse to consider the ABA's request for ade minimisexemption for attorneys under the GLBA. Contrary to the statement in the letter that the FTC sent to the ABA denying its request, there was a valid statutory means by which the FTC could grant exemptions to the GLBA. First, Section 6802 lists eight enumerated exceptions, and a broader exception rule in Section 6804(b) provides that exceptions may be granted by the FTC in circumstances that the FTC deems to be consistent with the purpose of the statute. Additionally, the court noted that "agencies typically have a 'residual' or 'inherentde minimis' authority to provide exemptions from a regulatory scheme it administers 'when the burdens of regulation yield a gain of trivial or no value.'"Envtl. Def. Fund, Inc. v EPA, 82 F3d 451, 466 (DC Cir 1996). Additionally, the ABA noted that the FTC had granted exceptions to the GLBA to certain institutions of higher education after the institutions made a comparable request: "[The FTC may] grantde minimisexemptions to the GLPA's privacy provisions, as the Commission has already granted such an exemptions to institutions of higher education that comply with the Federal Educational Rights and Privacy Act ("FERPA") … The Commission has already provided several reasons why subjecting to the GLBA universities that comply with FERPA provides little or no public benefit and therefore falls within the Commission's inherentde minimisauthority."New York State, 276 F Supp 2d at 138.

Holding

The court denied the FTC's FRCP 12(b)(6) motions to dismiss the NYSBA and ABA's claims. Instead, the court granted a declaratory judgment in favor of the NYSBA and the ABA. At the request of the ABA, the Commission issued a letter in which the FTC noted that it would not "bring any enforcement actions or conduct any investigations against practicing lawyers" under Title V of the GLBA, unless and until the decision in the district court was reversed.

Conclusion

The Federal Trade Commission overstepped its bounds when it construed the GLBA in such a way to apply to attorneys in the practice of law. The court made it clear, though, that it is possible that the government can regulate attorneys, but it is not possible for an administrative agency to commandeer the role of the legislature for the purpose of enacting regulations as was the case here.

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