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March 01, 2011

Appeals Court Dismisses FTC Appeal in Red Flags Case; Seals ABA Victory in Fight Against Coverage of Lawyers

The U.S. Court of Appeals for the District of Columbia Circuit agreed with the ABA’s position this month that the Federal Trade Commission (FTC) cannot regulate lawyers under the Red Flags Rule that requires “creditors” to establish and implement programs to detect, identify, and respond to activities that signal possible identify theft.

ABA President Stephen N. Zack emphasized that the circuit court’s decision “confirmed that Congress rejected the FTC’s logic for imposing the Red Flags Rule on lawyers, which is that lawyers are creditors by billing clients after serving them.” The association, in addition to filing suit against the FTC, was instrumental in enactment last December of the Red Flags Clarification Act, which the circuit court cited in its March 4 decision.

The court found that the Clarification Act altered the definition of “creditor” under the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) to make clear that a creditor’s allowance of deferred payment alone could not trigger the identify theft protection requirements. The court also vacated an October 2009 district court ruling that the FTC exceeded its authority by applying its Red Flags Rule to practicing lawyers.

“There can be no confusion here that the Clarification Act served to moot the ABA’s claims in this case,” the court stated. “The new legislation is clearly aimed at the precise matter in dispute.” The court explained that it is well established that a case must be dismissed as moot if new legislation addressing the matter in dispute is enacted while the case is still pending.

The case began in August 2009 when the ABA filed a complaint stating that the FTC’s application of the Red Flags Rule to lawyers was “arbitrary, capricious and contrary to law” and that the FTC had “failed to articulate, among other things: a rational connection between the practice of law and identity theft; an explanation of how the manner in which lawyers bill their clients can be considered an extension of credit under the FACT Act; or any legally supportable basis for application of the Red Flags Rule to lawyers engaged in the practice of law.”

The FTC argued that the term “creditor,” as defined by the act, covers all entities – including lawyers – that regularly provide services or goods before seeking payment. The commission appealed the district court’s ruling in the ABA’s favor and maintained that the Clarification Act, while narrowing the scope of entities subject to the FACT Act’s identify theft prevention provisions, provided no categorical exemption for lawyers.

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