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FTC Barred from Applying Red Flags Privacy Rule to Lawyers

By Lindsay M. Sestile, Litigation News Associate Editor – November 6, 2009

A federal judge ruled from the bench last week that the Red Flags Rule promulgated by the Federal Trade Commission (FTC) is not applicable to lawyers. During a hearing on a partial summary judgment motion, the Washington D.C. judge found the FTC exceeded its statutory authority when it tried to include lawyers in the definition of “creditors” to whom the rule applies.


The Red Flags Rule is an antifraud regulation adopted by the Federal Trade Commission as an amendment to the Fair and Accurate Credit Transactions Act of 2003 (FACTA). Although the FTC originally touted the rule to address the threat of consumer identity theft in the financial sector, earlier this year it announced its intention to apply the rule to the professions of law and medicine as well.


The FTC reasoned that lawyers and doctors are covered “creditors” under the rule because they provide a service and later bill for it. Many lawyers, on the other hand, viewed the rule as unnecessary, unduly burdensome, and overly expansive because they already comply with court-administered ethical rules and rules of professional conduct. (SeeThe Red Flags Privacy Rule: Are Lawyers Just Another Creditor,” [PDF] Litigation News, Fall 2009; membership required.)


Contending that Congress did not intend federal regulation of the practice of law under FACTA, the American Bar Association filed suit against the FTC on August 27, 2009 in the United States District Court for the District of Columbia.


In its complaint, the ABA sought a judicial declaration that the Red Flags Rule’s application to lawyers is unlawful and void. The ABA claimed the FTC exceeded its statutory authority, and that the FTC had failed to articulate either “a rational connection between the practice of law and identify theft [or] an explanation of how the manner in which lawyers bill their clients can be considered an extension of credit under FACTA.”


In an October 29, 2009, hearing on an ABA motion for partial summary judgment, Judge Reggie B. Walton ruled from the bench that Congress did not intend to regulate lawyers or consider them “creditors” under FACTA. A written order [PDF] was issued October 30.


Calling the win an important victory for American lawyers, ABA President Carolyn B. Lamm said, “The ABA applauds the outcome of the Red Flags Rule case. Lawyers, regulated by the state ethical rules, protect their clients’ identities and keep confidential their clients’ secrets. Such a rule at the federal level is not necessary, is burdensome, and does nothing to protect clients.”


Section of Litigation Chair Lorna G. Schofield agrees, adding, “This is a great victory for the profession and the ABA. It demonstrates that as an association, we are effective in advocating the views of our members, even in the face of tough and inflexible adversaries.”


The FTC has not yet indicated whether it will appeal the ruling. Even if it does not, other entities covered under the rule must still prepare for compliance with it. After several postponements by the FTC, the rule was slated to go into effect on November 1, 2009. The FTC has now further delayed enforcement to June 1, 2010. Because the ABA sought—and the court granted—declaratory relief from the rule only as it relates to the legal profession, all other covered entities can expect enforcement in less than seven months.


Keywords: Federal Trade Commission, Fair and Accurate Credit Transactions Act of 2003, creditors


 
  • November 11, 2009 – Kudos to the ABA and the federal court judge that ruled that these FTC regs will not apply to lawyers.

  • November 11, 2009 – Hooray! We may for yet a while clutch about our shoulders these victorious tatters of a threadbare professionalism.

 

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