Attorneys Are Not ‘Creditors,’|American Bar Association Tells FTC

WASHINGTON (CN) - The American Bar Association sued the Federal Trade Commission in Federal Court, challenging its "Red Flags Rule" that includes attorneys in the Fair and Accurate Credit Transactions Act's category of "creditors." As creditors, lawyers will be required to create written identity-theft prevention programs, under an FTC final ruling whose enforcement has been repeatedly delayed.

The FTC issued a final rule to implement the FACTA on Nov. 7, 2007, at which time it gave no indication that the FTC or its sister agencies believed lawyers fell within the definition of creditor, according to the complaint.

On Oct. 22, 2008, the FTC suspended enforcement of the Red Flags Rule until May 1, 2009, to "give creditors and financial institutions additional time in which to develop and implement written identity theft programs."

An FTC press release said the delay was motivated in part by confusion concerning the scope of the Final Red Flags Rule and the definition of creditor.

On April 30 this year, the FTC issued a press release extending the Red Flags Rule enforcement deadline until Aug. 1, noting an "ongoing debate" concerning the scope of the FACTA. In this statement, the FTC announced publicly for the first time its belief that lawyers engaged in the practice of law are creditors subject to the Final Red Flags Rule.

"For example," the FTC press release stated, "creditors ... include professionals, such as lawyers or health care providers, who bill their clients after services are rendered."

On July 29, three days before the Extended Enforcement Policy was scheduled to take effect, the FTC issued delayed the Red Flags Rule enforcement deadline again, until Nov. 1. The FTC said the latest extension was "consistent with the House Appropriations Committee's recent request that the Commission defer enforcement in conjunction with additional efforts to minimize the burdens of the Rule on health care providers and small businesses with a low risk of identity theft problems."

The ABA says that its nearly 400,000 members already are subject to its Model Rules of Professional Conduct in every state except California, whose rules are under review. The state rules generally prohibit lawyers from receiving compensation before services are rendered. Moreover, the Tenth Amendment provides that "powers not delegated to the United States ... nor prohibited by it to the States, are reserved to the States."

The ABA says that compliance with the Red Flag Rules "imposes significant burdens upon lawyers, particularly sole practitioners and those practicing in small firms, who comprise the majority of the lawyers in the United States."

The complaint claims that "many of the ABA's members have already been forced to dedicate significant resources to prepare for this eventuality. Because of the Federal Government's sovereign immunity, the ABA's members will be unable to obtain money damages from the FTC in the event the application of the Red Flags Rule to lawyers is declared unlawful."

The ABA seeks declaratory and injunctive relief. It is represented by James F. Segroves with Proskauer Rose.

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