Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-04-05258/USCOURTS-caDC-04-05258-0/pdf.json

Parties Involved:
Federal Trade Commission
Appellant
New York State Bar Association
Appellee

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 5, 2005 Decided December 6, 2005

No. 04-5257

AMERICAN BAR ASSOCIATION,

APPELLEE

v.

FEDERAL TRADE COMMISSION,

APPELLANT

Consolidated with

04-5258

Appeals from the United States District Court

for the District of Columbia

(No. 02cv00810)

(No. 02cv01883)

Stephanie R. Marcus, Attorney, U.S. Department of Justice,

argued the cause for appellant. With her on the briefs were

Gregory G. Katsas, Acting Assistant Attorney General, Mark B.

Stern, Attorney, Kenneth L. Wainstein, U.S. Attorney, Brian J.

Sonfield, Assistant U.S. Attorney, John D. Graubert, Acting

General Counsel, Federal Trade Commission, John F. Daly,

Deputy General Counsel, and Michael D. Bergman, Attorney.

R. Craig Lawrence and Michael J. Ryan, Assistant U.S.

Attorneys, entered appearances.

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1

Then Judge, now Chief Justice, Roberts was a member of the

panel that originally heard this appeal. He is now recused and took no

part in the final decision.

David L. Roll argued the cause for appellee American Bar

Association. With him on the brief was Rhonda M. Bolton.

Steven C. Krane argued the cause and filed the brief for

appellee New York State Bar Association.

Peter Buscemi was on the brief for amici curiae State and

Local Bar Associations in support of appellees.

George T. Patton, Jr. and Bryan H. Babb were on the brief

for amicus curiae The Conference of Chief Justices in support

of appellee American Bar Association.

Before: GINSBURG, Chief Judge, and SENTELLE and

ROBERTS,

1 Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge: The Federal Trade Commission

(“FTC” or “the Commission”) appeals from an order of the

District Court granting summary judgment in consolidated cases

brought by the appellees American Bar Association and the New

York State Bar Association (collectively, “ABA” or “the Bar

Associations”). The Bar Associations sought a declaratory

judgment that the FTC’s decision that attorneys engaged in the

practice of law are covered by the Gramm-Leach-Bliley Act

(“GLBA” or “the Act”) exceeded the statutory authority of the

Commission and was therefore invalid as a matter of law.

Because we agree with the District Court that the Commission’s

attempt to regulate the practice of law under the Act fell outside

its statutory authority, we affirm the judgment under review.

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I. Background

A. Statutory Framework

Effective November 12, 1999, Congress enacted the

Gramm-Leach-Bliley Financial Modernization Act, Pub. L. No.

106-102, 113 Stat. 1338. The Act declared it to be “the policy

of the Congress that each financial institution has an affirmative

and continuing obligation to respect the privacy of its customers

and to protect the security and confidentiality of those

customers’ nonpublic personal information.” 15 U.S.C. §

6801(a). To further that goal, Congress enacted broad privacy

protective provisions, described by one Member of the House of

Representatives as “represent[ing] the most comprehensive

federal privacy protections ever enacted by Congress.” 145

Cong. Rec. H11, 544 (daily ed. Nov. 4, 1999) (statement of Rep.

Sandlin). 

The privacy provisions empowered the Federal Trade

Commission, along with other federal regulatory agencies, 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.” 15 U.S.C. § 6804(a)(1). The cited section, 6805,

outlines the institutions and persons subject to the jurisdiction of

“Federal functional regulators,” and in section 6805(a)(7)

assigns enforcement “[u]nder the Federal Trade Commission

Act . . . [to] the Federal Trade Commission for any other

financial institution or other person that is not subject to the

jurisdiction of any agency or authority under” the preceding

paragraphs of the subsection. The definitional section of the

statute, section 6809, defines “financial institution” as “any

institution the business of which is engaging in financial

activities as described in section 1843(k) of Title 12.” Id. §

6809(3)(A). Other subsections of section 6809 create

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2

Section 1843(a) provides other exceptions and limitations not

pertinent to the present controversy.

exceptions and modifications to the general definition of

“financial institution.” See id. § 6809(3)(B)-(D). 

Title 12 U.S.C. § 1843(k), referenced in section 6809(a), is

a part of the Bank Holding Company Act of 1956, Pub. L. No.

109-41, 70 Stat. 133 (codified as amended at 12 U.S.C. §§ 1971-

1978, 1841-1850) (“BHCA”). The BHCA, in section 1843,

limits the ability of the bank holding companies regulated under

that statutory scheme to hold interests in nonbanking

organizations. Specifically, section 1843(a) provides that 

[e]xcept as otherwise provided in this chapter, no bank

holding company shall . . . retain direct or indirect

ownership or control of any voting shares of any company

which is not a bank or bank holding company or engage in

any activities other than (A) those of banking or of

managing or controlling banks and other subsidiaries

authorized under this chapter or of furnishing services to or

performing services for its subsidiaries, and (B) those

permitted under [other subsections of the statute].2

 

12 U.S.C. § 1843(a). However, section 1843(k) limits the effect

of the general prohibition created by section 1843(a) by

providing that 

[n]otwithstanding subsection (a) of this section, a financial

holding company may engage in any activity, and may

acquire and retain the shares of any company engaged in

any activity, that the [Federal Reserve] Board . . .

determines (by regulation or order)-- (A) to be financial in

nature or incidental to such financial activity; or (B) is

complementary to a financial activity and does not pose a

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substantial risk to the safety or soundness of depository

institutions or the financial system generally.

Id. § 1843(k)(1).

The BHCA declares to be financial in nature activities listed

in section 1843(k)(4), to wit: 

(A) Lending, exchanging, transferring, investing for

others, or safeguarding money or securities.

 (B) Insuring, guaranteeing, or indemnifying against

loss, harm, damage, illness, disability, or death, or

providing and issuing annuities, and acting as principal,

agent, or broker for purposes of the foregoing, in any State.

 (C) Providing financial, investment, or economic

advisory services, including advising an investment

company (as defined in [section 80a-3 of Title 15]).

 (D) Issuing or selling instruments representing interests

in pools of assets permissible for a bank to hold directly.

 (E) Underwriting, dealing in, or making a market in

securities.

Id. § 1843(k)(4).

Following the list of activities that “shall be considered”

financial in nature, the BHCA enacted the following category of

activity, which is most pertinent to the current case:

 (F) Engaging in any activity that the Board has

determined, by order or regulation that is in effect on

November 12, 1999, to be so closely related to banking or

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3

In paragraph (b), referenced above, Regulation Y sets forth

the following list:

(1) Extending credit and servicing loans. Making,

acquiring, brokering, or servicing loans or other extensions of

credit (including factoring, issuing letters of credit and

accepting drafts) for the company’s account or for the account

managing or controlling banks as to be a proper incident

thereto (subject to the same terms and conditions contained

in such order or regulation, unless modified by the [Federal

Reserve] Board).

The phrase “order or regulation that is in effect on November

12, 1999” adopts a Federal Reserve Board (“Board”) regulation

published at 12 C.F.R. § 225.28 (2000), commonly known as

Regulation Y. Regulation Y, as is to be expected, deals with the

subject matter of section 1843(k), that is, “nonbanking activities

and acquisitions by bank holding companies”: It lists

“permissible nonbanking activities.” That list is described in the

regulation as activities that are

 (a) Closely related nonbanking activities. The activities

listed in paragraph (b) of this section are so closely related

to banking or managing or controlling banks as to be a

proper incident thereto, and may be engaged in by a bank

holding company or its subsidiary in accordance with the

requirements of this regulation.

12 C.F.R. § 225.28(a). We set forth the entire text of the

relevant subsection in the footnote below not because it is all in

itself relevant, but in order to demonstrate the depths plumbed

by the Commission in order to find authority to undertake the

regulation of the practice of law, which we will discuss further,

infra.

3

 

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of others.

(2) Activities related to extending credit. Any activity

usual in connection with making, acquiring, brokering or

servicing loans or other extensions of credit, as determined by

the Board. The Board has determined that the following

activities are usual in connection with making, acquiring,

brokering, or servicing loans or other extensions of credit:

(i) Real estate and personal property appraising.

Performing appraisals of real estate and tangible and

intangible personal property, including securities.

(ii) Arranging commercial real estate equity

financing. Acting as intermediary for the financing of

commercial or industrial income-producing real estate by

arranging for the transfer of the title, control, and risk of such

a real estate project to one or more investors, if the bank

holding company and its affiliates do not have an interest in,

or participate in managing or developing, a real estate project

for which it arranges equity financing, and do not promote or

sponsor the development of the property.

(iii) Check-guaranty services. Authorizing a

subscribing merchant to accept personal checks tendered by

the merchant’s customers in payment for goods and services,

and purchasing from the merchant validly authorized checks

that are subsequently dishonored.

(iv) Collection agency services. Collecting overdue

accounts receivable, either retail or commercial.

(v) Credit bureau services. Maintaining information

related to the credit history of consumers and providing the

information to a credit grantor who is considering a

borrower’s application for credit or who has extended credit

to the borrower.

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(vi) Asset management, servicing, and collection

activities. Engaging under contract with a third party in asset

management, servicing, and collection of assets of a type that

an insured depository institution may originate and own, if the

company does not engage in real property management or real

estate brokerage services as part of these services.

(vii) Acquiring debt in default. Acquiring debt that

is in default at the time of acquisition, if the company:

(A) Divests shares or assets securing debt in default

that are not permissible investments for bank holding

companies, within the time period required for divestiture of

property acquired in satisfaction of a debt previously

contracted under § 225.12(b);

(B) Stands only in the position of a creditor and does

not purchase equity of obligors of debt in default (other than

equity that may be collateral for such debt); and

(C) Does not acquire debt in default secured by shares

of a bank or bank holding company.

 (viii) Real estate settlement servicing. Providing real

estate settlement services.

(3) Leasing personal or real property. Leasing

personal or real property or acting as agent, broker, or adviser

in leasing such property if:

(i) The lease is on a nonoperating basis;

(ii) The initial term of the lease is at least 90 days;

(iii) In the case of leases involving real property:

(A) At the inception of the initial lease, the effect of

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the transaction will yield a return that will compensate the

lessor for not less than the lessor’s full investment in the

property plus the estimated total cost of financing the property

over the term of the lease from rental payments, estimated tax

benefits, and the estimated residual value of the property at

the expiration of the initial lease; and

(B) The estimated residual value of property for

purposes of paragraph (b)(3)(iii)(A) of this section shall not

exceed 25 percent of the acquisition cost of the property to the

lessor.

(4) Operating nonbank depository institutions–

(i) Industrial banking. Owning, controlling, or

operating an industrial bank, Morris Plan bank, or industrial

loan company, so long as the institution is not a bank.

(ii) Operating savings association. Owning,

controlling, or operating a savings association, if the savings

association engages only in deposit-taking activities, lending,

and other activities that are permissible for bank holding

companies under this subpart C.

(5) Trust company functions. Performing functions

or activities that may be performed by a trust company

(including activities of a fiduciary, agency, or custodial

nature), in the manner authorized by federal or state law, so

long as the company is not a bank for purposes of section 2(c)

of the Bank Holding Company Act.

(6) Financial and investment advisory activities.

Acting as investment or financial advisor to any person,

including (without, in any way, limiting the foregoing):

(i) Serving as investment adviser (as defined in

section 2(a)(20) of the Investment Company Act of 1940, 15

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U.S.C. 80a-2(a)(20)), to an investment company registered

under that act, including sponsoring, organizing, and

managing a closed-end investment company;

(ii) Furnishing general economic information and

advice, general economic statistical forecasting services, and

industry studies;

(iii) Providing advice in connection with mergers,

acquisitions, divestitures, investments, joint ventures,

leveraged buyouts, recapitalizations, capital structurings,

financing transactions and similar transactions, and

conducting financial feasibility studies;

(iv) Providing information, statistical forecasting, and

advice with respect to any transaction in foreign exchange,

swaps, and similar transactions, commodities, and any

forward contract, option, future, option on a future, and

similar instruments;

(v) Providing educational courses, and instructional

materials to consumers on individual financial management

matters; and

(vi) Providing tax-planning and tax-preparation

services to any person.

(7) Agency transactional services for customer

investments–

(i) Securities brokerage. Providing securities

brokerage services (including securities clearing and/or

securities execution services on an exchange), whether alone

or in combination with investment advisory services, and

incidental activities (including related securities credit

activities and custodial services), if the securities brokerage

services are restricted to buying and selling securities solely

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as agent for the account of customers and do not include

securities underwriting or dealing.

(ii) Riskless principal transactions. Buying and

selling in the secondary market all types of securities on the

order of customers as a “riskless principal” to the extent of

engaging in a transaction in which the company, after

receiving an order to buy (or sell) a security from a customer,

purchases (or sells) the security for its own account to offset

a contemporaneous sale to (or purchase from) the customer.

This does not include:

(A) Selling bank-ineligible securities at the order of

a customer that is the issuer of the securities, or selling bankineligible securities in any transaction where the company has

a contractual agreement to place the securities as agent of the

issuer; or

(B) Acting as a riskless principal in any transaction

involving a bank-ineligible security for which the company or

any of its affiliates acts as underwriter (during the period of

the underwriting or for 30 days thereafter) or dealer.

(iii) Private placement services. Acting as agent for

the private placement of securities in accordance with the

requirements of the Securities Act of 1933 (1933 Act) and the

rules of the Securities and Exchange Commission, if the

company engaged in the activity does not purchase or

repurchase for its own account the securities being placed, or

hold in inventory unsold portions of issues of these securities.

(iv) Futures commission merchant. Acting as a

futures commission merchant (FCM) for unaffiliated persons

in the execution, clearance, or execution and clearance of any

futures contract and option on a futures contract traded on an

exchange in the United States or abroad if:

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(A) The activity is conducted through a separately

incorporated subsidiary of the bank holding company, which

may engage in activities other than FCM activities (including,

but not limited to, permissible advisory and trading activities);

and

(B) The parent bank holding company does not

provide a guarantee or otherwise become liable to the

exchange or clearing association other than for those trades

conducted by the subsidiary for its own account or for the

account of any affiliate.

(v) Other transactional services. Providing to

customers as agent transactional services with respect to

swaps and similar transactions, any transaction described in

paragraph (b)(8) of this section, any transaction that is

permissible for a state member bank, and any other

transaction involving a forward contract, option, futures,

option on a futures or similar contract (whether traded on an

exchange or not) relating to a commodity that is traded on an

exchange.

(8) Investment transactions as principal–

(i) Underwriting and dealing in government

obligations and money market instruments. Underwriting and

dealing in obligations of the United States, general obligations

of states and their political subdivisions, and other obligations

that state member banks of the Federal Reserve System may

be authorized to underwrite and deal in under 12 U.S.C. 24

and 335, including banker’s acceptances and certificates of

deposit, under the same limitations as would be applicable if

the activity were performed by the bank holding company’s

subsidiary member banks or its subsidiary nonmember banks

as if they were member banks.

(ii) Investing and trading activities. Engaging as

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principal in:

(A) Foreign exchange;

(B) Forward contracts, options, futures, options on

futures, swaps, and similar contracts, whether traded on

exchanges or not, based on any rate, price, financial asset

(including gold, silver, platinum, palladium, copper, or any

other metal approved by the Board), nonfinancial asset, or

group of assets, other than a bank-ineligible security, if:

(1) A state member bank is authorized to invest in the

asset underlying the contract;

(2) The contract requires cash settlement; or

(3) The contract allows for assignment, termination,

or offset prior to delivery or expiration, and the company

makes every reasonable effort to avoid taking or making

delivery; and

(C) Forward contracts, options, futures, options on

futures, swaps, and similar contracts, whether traded on

exchanges or not, based on an index of a rate, a price, or the

value of any financial asset, nonfinancial asset, or group of

assets, if the contract requires cash settlement.

(iii) Buying and selling bullion, and related activities.

Buying, selling and storing bars, rounds, bullion, and coins of

gold, silver, platinum, palladium, copper, and any other metal

approved by the Board, for the company’s own account and

the account of others, and providing incidental services such

as arranging for storage, safe custody, assaying, and shipment.

(9) Management consulting and counseling activities–

(i) Management consulting.

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(A) Providing management consulting advice:

(1) On any matter to unaffiliated depository

institutions, including commercial banks, savings and loan

associations, savings banks, credit unions, industrial banks,

Morris Plan banks, cooperative banks, industrial loan

companies, trust companies, and branches or agencies of

foreign banks;

(2) On any financial, economic, accounting, or audit

matter to any other company.

(B) A company conducting management consulting

activities under this subparagraph and any affiliate of such

company may not:

(1) Own or control, directly or indirectly, more than

5 percent of the voting securities of the client institution; and

(2) Allow a management official, as defined in 12

CFR 212.2(h), of the company or any of its affiliates to serve

as a management official of the client institution, except

where such interlocking relationship is permitted pursuant to

an exemption granted under 12 CFR 212.4(b) or otherwise

permitted by the Board.

(C) A company conducting management consulting

activities may provide management consulting services to

customers not described in paragraph (b)(9)(i)(A)(1) of this

section or regarding matters not described in paragraph

(b)(9)(i)(A)(2) of this section, if the total annual revenue

derived from those management consulting services does not

exceed 30 percent of the company’s total annual revenue

derived from management consulting activities.

(ii) Employee benefits consulting services. Providing

consulting services to employee benefit, compensation and

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insurance plans, including designing plans, assisting in the

implementation of plans, providing administrative services to

plans, and developing employee communication programs for

plans.

(iii) Career counseling services. Providing career

counseling services to:

(A) A financial organization and individuals currently

employed by, or recently displaced from, a financial

organization;

(B) Individuals who are seeking employment at a

financial organization; and

(C) Individuals who are currently employed in or who

seek positions in the finance, accounting, and audit

departments of any company.

(10) Support services–

(i) Courier services. Providing courier services for:

(A) Checks, commercial papers, documents, and

written instruments (excluding currency or bearer-type

negotiable instruments) that are exchanged among banks and

financial institutions; and

(B) Audit and accounting media of a banking or

financial nature and other business records and documents

used in processing such media.

(ii) Printing and selling MICR-encoded items.

Printing and selling checks and related documents, including

corporate image checks, cash tickets, voucher checks, deposit

slips, savings withdrawal packages, and other forms that

require Magnetic Ink Character Recognition (MICR)

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encoding.

(11) Insurance agency and underwriting–

(i) Credit insurance. Acting as principal, agent, or

broker for insurance (including home mortgage redemption

insurance) that is:

(A) Directly related to an extension of credit by the

bank holding company or any of its subsidiaries; and 

(B) Limited to ensuring the repayment of the

outstanding balance due on the extension of credit in the event

of the death, disability, or involuntary unemployment of the

debtor.

(ii) Finance company subsidiary. Acting as agent or

broker for insurance directly related to an extension of credit

by a finance company that is a subsidiary of a bank holding

company, if:

(A) The insurance is limited to ensuring repayment of

the outstanding balance on such extension of credit in the

event of loss or damage to any property used as collateral for

the extension of credit; and

(B) The extension of credit is not more than $10,000,

or $25,000 if it is to finance the purchase of a residential

manufactured home and the credit is secured by the home;

and

(C) The applicant commits to notify borrowers in

writing that:

(1) They are not required to purchase such insurance

from the applicant; 

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(2) Such insurance does not insure any interest of the

borrower in the collateral; and

(3) The applicant will accept more comprehensive

property insurance in place of such single-interest insurance.

(iii) Insurance in small towns. Engaging in any

insurance agency activity in a place where the bank holding

company or a subsidiary of the bank holding company has a

lending office and that:

(A) Has a population not exceeding 5,000 (as shown

in the preceding decennial census); or 

(B) Has inadequate insurance agency facilities, as

determined by the Board, after notice and opportunity for

hearing.

(iv) Insurance-agency activities conducted on May 1,

1982. Engaging in any specific insurance-agency activity if

the bank holding company, or subsidiary conducting the

specific activity, conducted such activity on May 1, 1982, or

received Board approval to conduct such activity on or before

May 1, 1982. A bank holding company or subsidiary

engaging in a specific insurance agency activity under this

clause may:

(A) Engage in such specific insurance agency activity

only at locations:

(1) In the state in which the bank holding company

has its principal place of business (as defined in 12 U.S.C.

1842(d));

(2) In any state or states immediately adjacent to such

state; and

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(3) In any state in which the specific insuranceagency activity was conducted (or was approved to be

conducted) by such bank holding company or subsidiary

thereof or by any other subsidiary of such bank holding

company on May 1, 1982; and

(B) Provide other insurance coverages that may

become available after May 1, 1982, so long as those

coverages insure against the types of risks as (or are otherwise

functionally equivalent to) coverages sold or approved to be

sold on May 1, 1982, by the bank holding company or

subsidiary.

(v) Supervision of retail insurance agents.

Supervising on behalf of insurance underwriters the activities

of retail insurance agents who sell:

(A) Fidelity insurance and property and casualty

insurance on the real and personal property used in the

operations of the bank holding company or its subsidiaries;

and 

(B) Group insurance that protects the employees of

the bank holding company or its subsidiaries.

(vi) Small bank holding companies. Engaging in any

insurance-agency activity if the bank holding company has

total consolidated assets of $50 million or less. A bank

holding company performing insurance-agency activities

under this paragraph may not engage in the sale of life

insurance or annuities except as provided in paragraphs

(b)(11)(i) and (iii) of this section, and it may not continue to

engage in insurance-agency activities pursuant to this

provision more than 90 days after the end of the quarterly

reporting period in which total assets of the holding company

and its subsidiaries exceed $50 million.

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(vii) Insurance-agency activities conducted before

1971. Engaging in any insurance-agency activity performed

at any location in the United States directly or indirectly by a

bank holding company that was engaged in insurance-agency

activities prior to January 1, 1971, as a consequence of

approval by the Board prior to January 1, 1971. 

(12) Community development activities–

(i) Financing and investment activities. Making

equity and debt investments in corporations or projects

designed primarily to promote community welfare, such as

the economic rehabilitation and development of low-income

areas by providing housing, services, or jobs for residents.

(ii) Advisory activities. Providing advisory and

related services for programs designed primarily to promote

community welfare.

(13) Money orders, savings bonds, and traveler’s

checks. The issuance and sale at retail of money orders and

similar consumer-type payment instruments; the sale of U.S.

savings bonds; and the issuance and sale of traveler’s checks.

(14) Data processing.

(i) Providing data processing and data transmission

services, facilities (including data processing and data

transmission hardware, software, documentation, or operating

personnel), data bases, advice, and access to such services,

facilities, or data bases by any technological means, if:

(A) The data to be processed or furnished are

financial, banking, or economic; and

(B) The hardware provided in connection therewith

is offered only in conjunction with software designed and

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marketed for the processing and transmission of financial,

banking, or economic data, and where the general purpose

hardware does not constitute more than 30 percent of the cost

of any packaged offering.

(ii) A company conducting data processing and data

transmission activities may conduct data processing and data

transmission activities not described in paragraph (b)(14)(i) of

this section if the total annual revenue derived from those

activities does not exceed 30 percent of the company’s total

annual revenues derived from data processing and data

transmission activities.

12 C.F.R. § 225.28(b) (2001) (footnotes omitted).

To recapitulate: The GLBA contains extensive privacy

protection provisions that apply to “financial institutions.” In

section 6809, the Act defines “financial institution” as “any

institution the business of which is engaging in financial

activities as described in section 1843(k) of Title 12.” The

referenced section of Title 12 is contained in the BHCA.

Specifically, that section identifies institutions engaged in

nonbanking activities that are financial in nature, such that bank

holding companies may retain ownership interests in institutions

engaged in their pursuit. The section of the BHCA defining

those activities incorporates by reference Regulation Y, which

offers an extensive list of examples of such “financial activities”

so closely related to banking as to be permissible.

B. The Commission’s Interpretation

Upon the passage of the Act, the FTC, pursuant to the

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authority granted it in 15 U.S.C. § 6805(a)(7), undertook a

rulemaking. In May 2000, the FTC concluded the rulemaking

and issued regulations published at 65 Fed. Reg. 33,646

(codified at 16 C.F.R. pt. 313). Although the FTC relied in the

first instance on Congress’s definition of “financial institution”

as “an institution the business of which is engaging in financial

activities,” the Commission restated the definition: “An

institution that is significantly engaged in financial activities is

a financial institution.” 16 C.F.R. § 313.3(k)(1). 

Like the statute, the regulations at no point describe the

statutory or regulatory scheme as governing the practice of law

as such. Indeed, the phrase “practice of law” never appears in

part 313, and the word “attorneys,” while present in two places,

appears in the context of describing persons to whom financial

institutions can make release of customer information, if

authorized, not in the context of defining “financial institutions”

as including attorneys. Nonetheless, the breadth of the FTC’s

regulation, apparently taken in conjunction with statements to or

by news media, caused concern among representatives of the

bar. Therefore, various bar associations, including the American

Bar Association, made inquiry of the Commission as to whether

the Commission was taking a position that privacy provisions of

the GLBA and the regulations made pursuant thereto governed

attorneys engaged in the practice of law. 

On April 8, 2002, the Director of the Bureau of Consumer

Protection at the Commission sent a letter to the President and

the Director of Governmental Affairs of the ABA “in response

to your correspondence regarding the application of Title V,

Subtitle A, of the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et

seq. . . . and the Federal Trade Commission’s Rule, Privacy of

Consumer Financial Information . . . to attorneys at law.”

(Citations omitted.) As part of the inquiry, the ABA had also

requested exemption from the Act if the Commission purported

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22

to regulate the practice of law under the Act. That position has

been abandoned by the bar associations during the course of this

litigation, but was still a live question between the parties at the

time of the FTC’s communication to the ABA. Although

recognizing that the bar associations’ letters had “question[ed]

the appropriateness and utility of applying the GLB Act’s

privacy provisions to attorneys engaged in the practice of law,”

the Director only directly addressed the ABA’s request for

exemption. However, in rejecting that request, the Director

made it plain that the Commission was purporting to regulate

attorneys engaged in the practice of their profession and asserted

that “the GLB Act itself states that entities engaged in ‘financial

activities’ are subject to the Act.” (emphasis supplied).

After some further negotiation, the bar associations brought

the present litigation. 

II. The Litigation

The New York State Bar Association and the American Bar

Association separately filed actions for declaratory judgment.

While the prayers for relief in the two complaints are differently

worded, the gist is the same, in that each seeks, inter alia, a

declaratory order that, in the words of the ABA complaint: 

(a) Congress did not in the GLBA confer authority on

the FTC to regulate the confidentiality, privacy and security

of information disclosed by clients to their attorneys;

(b) The FTC’s decision that attorneys engaged in the

practice of law are covered by the GLBA is unlawful and

hereby set aside; . . . .

Although the district judge never formally ordered the two

actions consolidated, he dealt with them together and ultimately

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disposed of them in a single opinion and order. The FTC moved

to dismiss the actions under Federal Rule of Civil Procedure

12(b)(6), on the theory that the complaints failed to state a claim

for relief. The District Court denied the motion. N.Y. State Bar

Ass’n v. FTC, 276 F. Supp. 2d 110 (D.D.C. 2003). In that

opinion, the court reasoned that Congress did not intend

GLBA’s privacy provisions to apply to attorneys. Further, the

court reasoned, even if the GLBA were ambiguous on that point,

the court should not defer to the FTC’s interpretation applying

the Act to attorneys because the interpretation was not the

product of notice and comment rulemaking, did not appear to

have been made with any degree of deliberation, and was

supported only by post hoc rationalization. The court held that

the Commission’s attempt to regulate attorneys under the

privacy provisions of the GLBA was not only inconsistent with

the statute, but also arbitrary and capricious in violation of the

Administrative Procedure Act.

After the denial of the motion to dismiss, the parties

proceeded with cross-motions for summary judgment. The

District Court found no genuine issues as to any material fact

and, incorporating its earlier decision on the motion to dismiss,

again held that Congress in 5 U.S.C. § 706(2)(C) did not intend

the GLBA’s privacy provisions to apply to attorneys engaged in

the practice of law.

The current appeal followed.

III. Analysis

As we analyze the FTC’s arguments for the proposition that

Congress in the privacy provisions of the GLBA enabled the

Commission to regulate the practice of law, we are reminded

repeatedly of a recent admonition from the Supreme Court:

“[Congress] does not . . . hide elephants in mouseholes.”

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Whitman v. Am. Trucking Ass’ns, 531 U.S. 457, 468 (2001).

The FTC begins its defense of its attempted turf expansion in the

correct place, that is, by recognizing that “the starting point in

any case involving the meaning of a statute[] is the language of

the statute itself.” Group Life & Health Ins. Co. v. Royal Drug

Co., 440 U.S. 205, 210 (1979). The Commission argues, as it

did before the District Court, that the language of the statute

evidences a congressional intent to empower the Commission to

regulate attorneys engaged in certain types of law practice as

“financial institutions” under the privacy regulations

promulgated pursuant to the GLBA privacy provisions. More

specifically, the Commission notes that the legislation defines

“financial institution” quite broadly as “any institution the

business of which is engaging in financial activities as described

in section 1843(k) of Title 12.” The statute in turn deems as

“financial in nature” various listed activities, together with those

not expressly listed but theretofore listed by the Federal Reserve

Board in Regulation Y. Regulation Y, set forth at its staggering

full-length above, includes the activities “[p]roviding real estate

settlement services,” and “[p]roviding tax-planning and taxpreparation services to any person.” 12 C.F.R. §

225.28(b)(2)(viii), (b)(6)(vi) (2001). The Commission then

asserts, “[t]hus, under the terms of the statute, any institution

that is in the business of engaging in a financial activity listed in

section 4(k) of the BHCA, including those set forth in

Regulation Y, qualifies as a ‘financial institution.’” Appellant’s

Brief at 16. That statement by the Commission is unassailable:

Indeed, it does no more than restate the provisions of that

statute. That is precisely the problem. The Commission’s

reasoning, doing no more than restating the statute, leaves as

open as ever the question of whether an attorney practicing law

is an “institution engaging in the business of financial

activities.” 

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The statute certainly does not so plainly grant the

Commission the authority to regulate attorneys engaged in the

practice of law as to entitle the Commission to what is called a

“Chevron One” disposition. That is, rather simply we cannot

hold that Congress has directly and plainly granted the

Commission the authority to regulate practicing attorneys as the

Commission attempts. See Chevron U.S.A. Inc. v. Natural Res.

Def. Council, Inc., 467 U.S. 837, 842-43 (1984). Indeed, such

professionals are subject to regulation under the words of the

statute only if they are “institutions” and if they are “engaged in

the business of financial activity.” It is not plain at all to us that

Congress has entered such a direct regulatory command by plain

language of a statute, a lengthy statute incorporated by

reference, and an even more lengthy and detailed regulation

incorporated by reference in the second statute, none of which

ever mentioned attorneys engaged in the practice of law.

Therefore, if the Commission is to prevail, it must do so under

a deferential standard of review. That is, to uphold the

Commission’s regulatory decision, we must conclude first that

the words of the statute are ambiguous in such a way as to make

the Commission’s decision worthy of deference under the

second step of Chevron. Id. at 843. If we so hold, we will then

uphold the agency’s interpretation of the ambiguous statute if

that interpretation is “permissible,” that is, if it is “reasonable.”

Id. at 845. 

A. Chevron Step One

The first question, whether there is such an ambiguity, is for

the court, and we owe the agency no deference on the existence

of ambiguity. 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.’” Ry. Labor Exec. Ass’n v. Nat’l

Mediation Bd., 29 F.3d 655, 671 (D.C. Cir. 1994) (en banc)

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(internal citation omitted). The Commission argues along the

line suggested by the scant reasoning in the letter announcing its

decision. The opinion letter had directed its language

principally toward the question of whether the Commission

should “exempt attorneys at law from the application of the

Privacy Rule.” True, the Bar Association had requested such an

exemption, but only as a conditional request if the Commission

held in the first instance that the privacy provisions of the

GLBA covered attorneys engaged in the practice of law, a

proposition that the association resisted. The Commission’s

letter, while claiming that “[w]e have carefully considered your

concerns, and recognize the issues you have raised regarding the

application of the GLB Act to attorneys at law,” addressed only

the “significant questions as to the legal authority of the

Commission to grant the exemption you request.” 

The Commission apparently assumed–without

reasoning–that it could extend its regulatory authority over

attorneys engaged in the practice of law with no other basis than

the observation that the Act did not provide for an exemption.

Before the District Court and before us, the Commission has

persisted in this style of reasoning. While there is limited post

hoc rationalization in the Commission’s brief addressing the

inclusion of attorneys in the definition of “financial institution,”

which we will discuss infra, the Commission repeatedly repairs

to the position that no language in the statute exempts attorneys

from regulation. That is not the question. As we have often

cautioned, “[t]o suggest, as the [Commission] effectively does,

that Chevron step two is implicated any time a statute does not

expressly negate the existence of a claimed administrative

power . . . is both flatly unfaithful to the principles of

administrative law . . . and refuted by precedent.” Ry. Labor

Exec. Ass’n, 29 F.3d at 671 (emphasis in original). Plainly, if

we were “to presume a delegation of power” from the absence

of “an express withholding of such power, agencies would enjoy

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27

virtually limitless hegemony . . . .” Id. (emphasis in original).

Therefore, if there is the sort of ambiguity that supports an

implicit congressional delegation of authority to the agency to

make a deference-worthy interpretation of the statute, we must

look elsewhere than the failure to negate regulation of attorneys.

That failure does not advance the Commission’s cause at all.

Otherwise put, the question is not whether the statute permits

exemption from regulation for attorneys, but whether it supports

such regulation at all. We will defer to the agency’s

interpretation on that subject only if the statute “is silent or

ambiguous with respect to the specific issue.” Barnhart v.

Walton, 535 U.S. 212, 218 (2002) (internal quotation marks and

citation omitted).

We further recognize that the existence of ambiguity is not

enough per se to warrant deference to the agency’s

interpretation. The ambiguity must be such as to make it appear

that Congress either explicitly or implicitly delegated authority

to cure that ambiguity. “Mere ambiguity in a statute is not

evidence of congressional delegation of authority.” Michigan v.

EPA, 268 F.3d 1075, 1082 (D.C. Cir. 2001) (citations omitted).

The deference mandated in Chevron “comes into play, of

course, only as a consequence of statutory ambiguity, and then

only if the reviewing court finds an implicit delegation of

authority to the agency.” Sea-Land Serv., Inc. v. Dep’t of

Transp., 137 F.3d 640, 645 (D.C. Cir. 1998) (emphasis added).

When we examine a scheme of the length, detail, and intricacy

of the one before us, we find it difficult to believe that Congress,

by any remaining ambiguity, intended to undertake the

regulation of the profession of law–a profession never before

regulated by “federal functional regulators”–and never

mentioned in the statute. To find this interpretation deferenceworthy, 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

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an incredibly deep mound of specificity, none of which bears the

footprints of the beast or any indication that Congress even

suspected its presence. We therefore seriously doubt that

Congress intended to empower the Commission to undertake

that regulation, and we are reluctant to even afford the

regulation the deference due agency action that survives the

analysis at the first step of Chevron. See FDA v. Brown &

Williamson Tobacco Corp., 529 U.S. 120, 160-61 (2000). 

By way of comparison, in California Independent System

Operator Corp. v. FERC, 372 F.3d 395 (D.C. Cir. 2004)

(“CAISO”), we reviewed an order of the Federal Energy

Regulatory Commission (“FERC”) purporting to replace the

governing board of a nonprofit, “public benefit” corporation

created by the State of California pursuant to statutes of that

state. FERC claimed Chevron deference for its action, pointing

specifically to the language of 16 U.S.C. § 824e(a), which

empowered FERC, upon a finding that “any rule, regulation,

practice, or contract affecting [a] rate, charge, or classification

is unjust, unreasonable, unduly discriminatory or preferential,”

to “determine the just and reasonable rate, charge, classification,

rule, regulation, practice, or contract to be thereafter observed

and in force . . . .” FERC construed the word “practice” to be

sufficiently ambiguous to allow it, under the deferential formula

of Chevron, to set aside and replace the state-imposed method

for selecting the corporation’s board.

On review, we noted that the sort of ambiguity giving rise

to Chevron deference “‘is a creature not of definitional

possibilities, but of statutory context.’” 372 F.3d at 400

(quoting Brown v. Gardner, 513 U.S. 115, 118 (1994)). In

granting review and setting aside the FERC order, we

concluded, inter alia, that the intent of Congress in the statutory

section before us was “actually quite plain: the grant of

authority to regulate rates, charges, classifications, and closely

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related matters.” Id. We further concluded that it was “quite a

leap to move” from the context of transactional terms used in the

statute to an implication that, by the ambiguity inherent in the

word “practice,” Congress intended to grant to the Commission

not merely the power “to effect a reformation of some ‘practice’

in a more traditional sense,” but also “to reform completely the

governing structure of the utility . . . .” Id.

We further held that such an extraordinary construction of

“practice” in such a discrete regulatory context was a

“sufficiently poor fit with the apparent meaning of the statute

that the statute is not ambiguous on the very question before us,”

as would be necessary to afford Chevron deference at the first

step of the two-step inquiry. Id. at 401.

We were instructed in our CAISO reasoning by the Supreme

Court’s decision in Brown v. Gardner, 513 U.S. 115 (1994). In

Gardner, the Court considered an interpretation by the Veterans

Administration of statutory language requiring the VA to

compensate for “an injury, or an aggravation of an injury,” that

occurs “as a result of” VA treatment. 38 U.S.C. § 1151(a)

(1994) (amended 1996). The Veterans Administration, in 38

C.F.R. § 3.358(c)(3), interpreted the compensation requirement

as covering an injury only if it resulted from negligent treatment

by the VA or an accident occurring during treatment. The lower

courts held that the statute imposed no such fault-or-accident

requirement and found the regulation invalid. The Supreme

Court affirmed and, in language followed by us in CAISO, noted

the “poor fit of this language with any implicit requirement of

VA fault . . . .” 513 U.S. at 120. We find a similarly poor fit

between the statutory language and the Commission’s

interpretation in this case. 

Lest it be forgotten, the basic language in which the

Commission finds the ambiguity permitting it to regulate the

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practice of law is that of § 6805 empowering the Federal Trade

Commission and other “federal functional regulators” to enforce

the statute and regulations prescribed under it with respect to

“financial institutions and other persons subject to [the

Commission’s] jurisdiction . . . .” 15 U.S.C. § 6805(a). That

language, even with–perhaps especially with–the layers of

incorporated statutory and regulatory 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.

This fit is helped but little, if at all, by the congressional

definition of “financial institution” as “an institution the

business of which is engaging in financial activity.” 15 U.S.C.

§ 6809(3)(A). An attorney, or even a law firm, does not fit very

neatly into the niche of a “financial institution.” Even if one

concedes–and it is quite a concession–that Congress would have

intended the word “institution” to include an attorney, or even

a law firm, it still requires quite a stretch to conclude that such

an institution is a “financial institution.” It trims the stretch

little, if at all, to read the entire statutory definition of “financial

institution” as “any institution the business of which is engaging

in financial activities as described in section 1843(k) of Title 12”

(set forth above). Without reiterating the language of the

incorporated statute, attorneys and law firms, even if viewed as

“institutions,” are not institutions “the business of which is

engaging in financial activities,” as defined in the statute. The

Commission itself seems to recognize the improbability of

Congress’s having intended to include law firms within the

designation “institutions” in the letter under review, in which it

conspicuously substituted the word “entities” for “institutions.”

Such a dramatic rewriting of the statute is not mere

interpretation. Even if we accept the inclusion of “entities” such

as law firms within the meaning of “institutions,” 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. 

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The Commission distorts the definition slightly but

improves the fit but little by its regulatory definition that a

financial institution is “an institution that is significantly

engaged in financial activities,” as opposed to requiring that the

institution must be one the business of which is engaging in

financial activities. Building on this stretch, the Commission, in

its brief, supplies reasoning conspicuously lacking from the

letter of determination that we review. Although we cannot

affirm an agency’s actions based on the post hoc rationale of its

litigating position, see, e.g., Motor Vehicle Mfrs. Ass’n v. State

Farm Mut. Auto. Insurance Co., 463 U.S. 29, 50 (1983), even if

we charitably construe the letter to imply the reasoning, it is still

inadequate.

The reasoning in the brief relies on the language of

Regulation Y, the second tier incorporation. As noted above,

Regulation Y, in its original application, described the “closely

related nonbanking activities” in which a bank holding company

or its subsidiaries might engage. Within that voluminous listing,

the regulation included two activities, “[p]roviding real estate

settlement services,” and “[p]roviding tax-planning and taxpreparation services,” in which attorneys sometimes, and

apparently in the view of the Commission, significantly engage.

See 16 C.F.R. § 313.3(k)(1). Again, if Congress intended to

empower a federal financial regulator to undertake regulation of

the practice of law, this seems a strangely unclear method of

doing so. The statute after all defined a “financial institution”

as “an institution the business of which is engaging in financial

activities.” Congress did not adopt the approach of the

Commission by covering “an institution that is significantly

engaged in financial activities.” Certainly it did not extend that

definition to cover all “entities.” In sum, Congress did not leave

an ambiguity on the question before us– that is, the power of the

Commission to regulate the practice of law–sufficient to compel

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4

We note that the bar associations have preserved on appeal

the additional argument that Chevron deference is unwarranted

because “[i]nterpretations such as those in opinion letters,” which

were not arrived at by means of a formal adjudication or notice and

comment rulemaking, “do not warrant Chevron-style deference.”

Christensen v. Harris County, 529 U.S. 576, 587 (2000). Given our

disposition of the case, we need not address that argument.

deference to the Commission’s determination to do so.4

We further determine that even if we err in our conclusion

that the regulation fails at Chevron Step One, we are satisfied

that the interpretation afforded by the Commission is not

sufficiently reasonable to survive that deference at Step Two.

B. Chevron Step Two

All the reasons set forth above for our determination that

Congress did not intend to leave sufficient ambiguity to support

deferential review return to convince us that the interpretation is

not reasonable even if we afford it deference. But our analysis

under Chevron Step Two need not end there. It is undisputed

that the regulation of the practice of law is traditionally the

province of the states. Federal law “may not be interpreted to

reach into areas of State sovereignty unless the language of the

federal law compels the intrusion.” City of Abilene v. FCC, 164

F.3d 49, 52 (D.C. Cir. 1999). Otherwise put, “if 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.’”

Will v. Michigan Dep’t of State Police, 491 U.S. 58, 65 (1989)

(quoting Atascadero State Hospital v. Scanlon, 473 U.S. 234,

242 (1985)). By now it should be abundantly plain that

Congress has not made an intention to regulate the practice of

law “unmistakably clear” in the language of the GLBA. In

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Gregory v. Ashcroft, 501 U.S. 452 (1991), citing, inter alia, Will

and Atascadero State Hospital, the Supreme Court held that 

[t]his plain statement rule is nothing more than an

acknowledgment that the States retain substantial sovereign

powers under our constitutional scheme, powers with which

Congress does not readily interfere. 

501 U.S. at 461. 

The Commission contends that this plain statement rule of

Gregory is not applicable, arguing that Gregory, which concerns

a determination of qualification for state officials, involved a

“decision of the most fundamental sort for a sovereign entity.”

Id. at 460. According to the Commission, the present regulation,

“by contrast . . . regulates the conduct of private entities or

individuals; there is no regulation of States or state officials.”

Reply Brief at 27. This response does not pass muster. Gregory

itself quoted from Will the language in which the Supreme Court

rejected an argument that the plain statement rule applied only

in an Eleventh Amendment context. “‘Atascadero was an

Eleventh Amendment case, but a similar approach is applied in

other contexts.’” Gregory, 501 U.S. at 461 (quoting Will, 491

U.S. at 65). We see no reason why the reasoning should not

apply in the present context. The states have regulated the

practice of law throughout the history of the country; the federal

government has not. 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.

Finally, the original context of the language of Regulation

Y argues against the Commission’s application in the present

context. That regulation sets out the “[c]losely related

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34

nonbanking activities,” which “are so closely related to banking

or managing or controlling banks as to be a proper incident

thereto.” (emphasis added). The effect of the regulation was to

establish what activities “may be engaged in by a bank holding

company or its subsidiary in accordance with the requirements

of this regulation.” Granted, banks and bank holding companies

may at times engage in “providing real estate settlement

services, and providing tax planning and tax preparation

services.” We know of no instance in which banks or bank

holding companies have engaged in the practice of law. We

know of no state in which state bar regulations would permit

such practice. We know of no instances in which the

Commission has approved a bank holding company owning a

law firm as its subsidiary. We are not prepared to hold on the

basis of the present record that it would be lawful for a bank or

a bank holding company to do so; nonetheless, that result would

seem to flow from the holding the Commission seeks to have us

enter today. We cannot hold that an interpretation compelling

that result is reasonable, even if the Commission’s letter order

survives Chevron Step One and earns deference. 

V. Conclusion

For the reasons set forth above, we hold that the

Commission’s interpretation is not entitled to Chevron

deference. We further hold that, even if we afford the

interpretation deference, the Commission’s interpretation is not

a reasonable one. We therefore conclude and hold that the

judgment appealed from is affirmed.

So ordered.

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