Lawyers e-Journal

Thursday, Aug. 27, 2009

American Bar Association files suit against Federal Trade Commission's "Red Flags Rule"

Rule burdens lawyers with no client benefit and invades state regulation of lawyers

The American Bar Association today asked the U.S. District Court for the District of Columbia to bar the Federal Trade Commission from applying its Red Flags Rule, designed to prevent identity theft, to practicing lawyers. Because the FTC is exceeding the powers delegated to it by Congress and misinterpreting the Rule, the ABA is seeking declaratory and injunctive relief in advance of pending FTC Rule enforcement on Nov 1, 2009.

The ABA complaint, prepared on a pro bono basis by Proskauer Rose, states that the application of the Rule to practicing lawyers is "arbitrary, capricious and contrary to law," and that the FTC has 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 FACTA; or any legally supportable basis for application of the Red Flags Rule to lawyers engaged in the practice of law."

The rule requires creditors to develop and implement plans to detect and respond to activity signaling possible identity theft. The FTC's original enforcement policy in October 2008 and subsequent updates provided no indication that lawyers engaged in the practice of law fell within the definition of "creditor." Only after implementation of the Rule was delayed again in April 2009 - just one day before the expiration of an initial six-month extension - did the FTC publicly announce its position that lawyers were subject to the Rule.  

Today's suit follows months of outspoken concern by the ABA regarding the unintended consequences of the Red Flags Rule. Nearly 30 state and local bar associations also have officially registered their opposition.

The ABA is seeking to have the Red Flags Rule's application to lawyers engaged in the practice of law declared unlawful and void. The Rule "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 association noted in its complaint.  

Click here for a copy of the complaint.

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