Court Hears Arguments on Bar Associations' Challenges to FTC's Financial Privacy Rules

June 2, 2003. The U.S. District Court (DC) heard oral argument in both New York State Bar Association v. FTC and ABA v. FTC. These suits challenge to the application of the financial privacy provisions of the Gramm Leach Bliley Act to practicing attorneys. The hearing was on the Federal Trade Commission's (FTC) motions to dismiss the complaints. The Court took the matter under advisement, but only after asking numerous questions to counsel for the government that reflect a skepticism about the merits of the government's position.

The Congress passed the Financial Modernization Act of 1999, Pub. L. No. 106-102, 113 Stat. 1338 (1999), which is better known as the Gramm Leach Bliley Act or GLB, to enable financial institutions, such as banks and insurance companies, to associate. In addition, since this process provides financial institutions with increased access to the personal financial information of customers, the Congress included provisions intended to protect financial privacy.

The GLB Act's privacy provisions apply only to "financial institutions". The definition does not reference law firms or lawyers. The entire legislative history is almost devoid of reference to lawyers. The Act also delegated authority to the FTC, and other government agencies, to promulgate implementing regulations.

The FTC wrote rules that extend the privacy provisions of the act to lawyers. Many lawyers, and legal associations, are displeased.

The New York State Bar Association (NYSBA) filed a complaint [34 page PDF scan] in U.S. District Court (DC) challenging the FTC's rules to the extent that they extend the GLB Act's privacy provisions to lawyers, on the grounds that the statute does not authorize the FTC to write such rules. The NYSBA also asserted that the relevant portions of the rules are unconstitutional under the Constitution's Commerce Clause and Tenth Amendment. Many other state bar associations have filed amicus curiae briefs in support of the NYSBA.

In addition, the American Bar Association (ABA) filed its own complaint in the U.S. District Court (DC) against the FTC. It mirrors the NYSBA's complaint on the statutory arguments, but contains no constitutional challenges. The two suits have not been consolidated.

Both cases have been assigned to Judge Reggie Walton. The FTC has moved to dismiss both complaints for failure to state a claim. Judge Walton (at right) held a joint hearing on both motions to dismiss on Monday, June 2, 2003. It lasted nearly two hours.

Warren Dennis of the law firm of Proskauer Rose argued the case for the NYSBA. David Roll of the law firm of Steptoe & Johnson argued the case for the ABA. To underscore the importance of this issue to the ABA, A.P. Carlton, President of the ABA, sat at counsel's table.

Michael Bergman of the FTC, argued the case for the FTC. Brian Sonfield, of the U.S. Attorneys Office, also argued for the FTC.

Bergman lead off. He had barely begun when Judge Walton interrupted, "the statute doesn't specifically identity lawyers". Bergman continued. Judge Walton interjected that lawyers have historically been subject to rules the protect the confidentiality of information obtained from clients.

Walton repeatedly asked where in the legislative history of the GLB Act is there anything that indicates that the Congress intended the statute to apply to lawyers. The FTC conceded that nothing in the legislative history reveals such an intent.

Judge Walton was concerned about the definition of "financial services". He asked "in what respect do you believe lawyers provide financial services?"

During argument on the Commerce Clause issue, the government argued that the authority for the GLB Act, and its regulation of financial privacy, is the Commerce Clause. Warren Dennis argued for the NYSBA that the Commerce Clause does not authorize regulation of privacy practices of lawyers. The government argued that the practice of law impacts interstate commerce, and cited Supreme Court cases in which the application of other statutes to lawyers was upheld.

Judge Walton questioned whether there is a "realistic impact", as opposed to a "theoretical impact" on interstate commerce. He reasoned that since lawyers are already subject to confidentiality rules, and face disbarment for violating them, they are not going to be engaging in activity prohibited by the FTC rule.

Dennis Roll also advanced the argument that in the cases cited by the government, the statutes at issue covered all "persons", while the GLB Act privacy provisions only cover "financial institutions".

Judge Walton frequently came back to what he saw as a conflict between the notice requirements of the FTC rules, and the fact that lawyers are already covered by confidentiality rules. For example, he asked the FTC's Bergman, "doesn't it trouble the FTC, given the historical nature of the attorney client relationship, that lawyers would be sending a notice to the client asking if he wants to opt out of that relationship."

He asked, "could a lawyer ask a client to opt out?" Judge Walton suggested that "it is problematic in and of itself."

Walton also asked that, given that the attorney client privilege "would categorically prohibit" a lawyer from disseminating information, why would the Congress pass a law requiring lawyers to send a notice to clients about this.

Judge Walton did not issue any rulings from the bench. However, he stated that he intended to rule by the end of the month of June.

A.P. Carlton spoke with reporters afterwards. He stated that "a lot of lawyers are complaining about this" and that it is one of the issues that he hears about most from practicing lawyers. He added that "it is very costly" and "you can't tell who it applies to".

He concluded, "we have got a good case here".

Moreover, if the bar associations loose this challenge, there is legislation pending in the Congress to exempt lawyers from the privacy provisions of the GLB Act. On February 13, 2003, Rep. Judy Biggert (R-IL), Rep. Carolyn Maloney (D-NY) and others introduced HR 781, the "Privacy Protection Clarification Act". See, story titled "Representatives Introduce Bill to Exempt Lawyers from GLB Privacy Provisions" in TLJ Daily E-Mail Alert No. 606, February 18, 2003.