§1.2 Federal Regulation

• Jurisdiction: Washington

II. FEdERAL REGULATION

The federal courts are given authority by congressional act to regulate lawyers practicing before them.⁵⁷ Federal legislation conferring rule-making authority on the courts provides additional authority to regulate lawyers, as has been done, for example, under Federal Rules of Civil Procedure 11 and 26. As another example, at least two federal appellate courts, including the U.S. Court of Appeals for the Ninth Circuit, have concluded that lawyers not licensed in a particular state may nonetheless practice bankruptcy law in that state if permitted to do so by the U.S. Bankruptcy Court rules.⁵⁸ Whether Congress might be more assertive in the future and lay down specific rules for lawyers—through a national code of conduct, for example—remains unclear. (In addition, in a number of instances courts have held that federal law clearly preempts state law in regulating lawyers. These cases will be examined later in this book, as the subject matter warrants. See Chapter 2.)

Congress and the regulatory agencies have only rarely attempted to assert direct control over lawyers. As a consequence, the federal courts have not had much occasion to question such attempts. But there have been indications that considerable deference would be paid to Congress. In one early decision, the U.S. Supreme Court went so far as to state that "the legislature may undoubtedly prescribe qualifications for the office" of lawyer.⁵⁹ Consistent with this apparent deference, the Court has had little difficulty in concluding that the federal antitrust laws apply to lawyers⁶⁰ and that Congress may regulate the practice of nonlawyers before the Patent Office.⁶¹ There have been a number of occasions when a debate has emerged over the power of government agencies to preempt state ethics rules. The first involved regulations initiated by the U.S. Department of Justice (DOJ); the second involved regulations issued by the Securities and Exchange Commission (SEC) in response to congressional mandate; and the third, still ongoing, relates to the power of the Internal Revenue Service (IRS). Two additional controversies have tested federal authority over the legal profession in connection with credit practices and bankruptcy practice.

In a series of moves from 1989 until 1994, the DOJ attempted to assert its right to exempt Justice Department lawyers from state ethics rules that circumscribed their ability to communicate with targets of criminal investigation known to be represented by counsel.⁶² These efforts culminated in the promulgation of regulations by the DOJ in 1994 purporting to permit federal lawyers enforcing various federal laws to contact represented parties or persons without their lawyers' consent.⁶³ But in United States ex rel. O'Keefe v. McDonnell Douglas Corp.,⁶⁴ the Eighth Circuit upheld a district court ruling that the DOJ lacked authority to issue the regulations exempting its lawyers from state ethics rules. Following closely on the heels of this decision, Congress enacted the Citizens Protection Act, which provides in relevant part: "(a) An attorney for the [federal] Government shall be subject to State laws and rules, and local Federal court rules, governing attorneys in each State where such attorney engages in that attorney's duties, to the same extent and in the same manner as other attorneys in that State."⁶⁵

Author's Commentary The 1994 attempt by the DOJ to preempt state regulation of lawyers thus was rather dramatically rejected by Congress. So far as we are aware, there has been no assertion that Congress lacked authority (relative to the executive or, more importantly, the judicial branch) to make such a pronouncement.

On the other hand, in 2002, in the wake of the Enron debacle, Congress enacted the Sarbanes-Oxley Act.⁶⁶ Section 307 of the Act mandated that the SEC issue regulations within six months, setting forth "minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers."⁶⁷ The SEC did issue such regulations,⁶⁸ and they depart in significant ways from the ethics codes in force in many states. The SEC regulations governing lawyers have not yet been tested in court. See the discussion of the interplay between the SEC regulations and the Washington Rules of Professional Conduct (RPC) in Section III., below.

In another development, in 2004, the IRS amended Circular 230 to impose additional requirements on lawyers who give opinions on "tax shelters."⁶⁹ Indirectly, the IRS has broadened immensely the concept of a tax shelter. Written opinions are now regulated as tax shelter opinions if they pertain to an "arrangement or plan" the "principal purpose" of which is tax avoidance and in some cases if tax avoidance is only a "significant purpose."⁷⁰ If an opinion is covered by the revised rules, the facts and law on which it is based and the precise nature of the legal opinion being given must be stated with great particularity. In addition, the level of "due diligence" required has been greatly heightened.⁷¹If the attorney drafting such an opinion cannot advise the taxpayer that the plan is more likely than not to succeed with the IRS as to any tax issue, the attorney must include in the opinion a statement that it cannot be relied on to avoid tax penalty provisions.⁷²

Lawyers reacted with great alarm to Circular 230.⁷³As a consequence, the IRS amended the circular again in May 2005 to make clear that a plan does not have tax avoidance as its "principal purpose" if it has "as its purpose the claiming of tax benefits in a manner consistent with the statute and Congressional purpose."⁷⁴

In 2009, the ABA managed to defeat (at least for the time being) an attempt by the Federal Trade Commission (FTC) to regulate lawyers. The FTC had promulgated regulations (the so-called "Red Flag Rules") in 2007 under the Fair and Accurate Credit Transactions Act. The Red Flag Rules would have classified lawyers as "creditors" subject to certain disclosure requirements if they "regularly extended credit" to clients.⁷⁵ The legal profession in general, and the ABA in particular, quickly took issue with the FTC's attempt to apply these regulations to lawyers and ultimately filed suit to enjoin their application to the legal...