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February 01, 2011

ABA Files Supplemental Brief in Red Flags Case

In a supplemental brief filed Feb. 3 with the U.S. Court of Appeals for the District of Columbia Circuit, the ABA maintained that the Red Flag Program Clarification Act of 2010 (P.L. 111-319), signed into law in December, reflects that Congress never intended to include lawyers in the practice of law as “creditors” under the Fair and Accurate Credit Transactions Act of 2003 (FACT Act).

Despite enactment of the clarification act, the Federal Trade Commission (FTC) is continuing its appeal of a decision issued by the U.S. District Court for the District of Columbia last fall that concluded that the commission had exceeded its authority by applying its “Red Flags Rule” to practicing lawyers.

The judge’s ruling was the result of a lawsuit filed by the ABA asking the district court to bar the FTC from including lawyers under the rule, which requires “financial institutions” and “creditors” to implement programs to detect, identify and respond to activities that signal possible identity theft. The FTC maintains that the term “creditor,” as defined by the act, covers all entities – including lawyers – that regularly provide services or goods before seeking payment.

In the supplemental brief, the ABA emphasized that the Clarification Act added several new requirements to the definition of “creditor” that narrowed the permissible scope of the Red Flags Rule. The brief explained that the law of the circuit provides that the commission may not regulate lawyers engaged in the practice of law unless Congress provides the commission with an unmistakable clear grant of statutory authority to do so. The text of the Clarification Act “contains not a single mention of lawyers or the practice of law,” resulting in the “inescapable conclusion that Congress agreed with the district court’s holding that lawyers were never intended to be covered,” according to the brief.

In a supplemental reply brief filed Feb. 10, the FTC stated that the Clarification Act narrowed the scope of entities subject to the FACT Act’s identity theft prevention provisions, but provided no categorical exemption for lawyers.   The FTC argued that lawyers may still be “creditors” under the Clarification Act in certain circumstances, including when they are acting as debt collectors. The ABA, according to the FTC brief, failed to rebut the commission’s showing that there are clearly legitimate applications of the Red Flags Rule to lawyers. 

Oral arguments in the appeal were heard just days before the Clarification Act was enacted. The ABA is urging the appeals court to affirm the district court’s judgment in ABA’s favor.

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