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ABA Takes on the FTC

Earlier this month, the Federal Trade Commission once again delayed enforcement of its "Red Flags Rule," which requires creditors and financial institutions more time to develop and implement written identity theft prevention programs. As discussed here, the FTC considers lawyers to be creditors and therefore subject to the red flag rules because they extend credit to clients by rendering services first and issuing fees after the work is completed.

The ABA opposes the FTC's rules but has attempted to resolve the matter amicably. Now, tired of playing wait and see, the ABA yesterday filed suit against the FTC in federal district court in the District of Columbia, asking the court to enjoin the FTC from applying the Red Flags Rule to lawyers, reports The National Law Journal and The Am Law Daily. As summarized by the NLJ, the ABA complaint contends that:

applying the rule to 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 [Fair and Accurate Credit Transaction Act]; or any legally supportable basis for application of the Red Flag Rule to lawyers engaged in the practice of law.”

Of course, the ABA's true concern isn't that the FTC may have violated the tenets of administrative law in promulgating the Red Flags Rule. Rather, the ABA's real beef is that the FTC's action encroaches on the ABA's role in regulation of the profession, as well as the traditional role of the states. And the ABA has a point; the ABA's Model Rule of Professional Responsibility and every state ethics code mandate that lawyers safeguard client information and keep it confidential. This obligation encompasses the sensitive, financial information that the FTC seeks to protect through the Red Flags Rule. 

Over at The Volokh Conspiracy, Jonathan Adler suspects that the ABA has the upper hand in this smackdown. Four years ago, the ABA and FTC battled over whether the FTC could regulate lawyers under the Financial Services Modernization Act. There, the FTC argued that because lawyers engage in "financial transactions" and provide "financial services," they were "financial institutions" and could be subject to the privacy provisions of the Act. But the D.C. Circuit disagreed, finding that the Act did not expressly say that it applied to lawyers and that the FTC stretched the meaning of "financial institutions" beyond the scope of what was intended by the statute. The same argument applies today; the FTC contorted the definition of creditor beyond what was intended by the Fair and Accurate Credit Transactions Act.

Adler also believes that the FTC has gotten cold feet, which explains why it has extended the enforcement deadline three times. We'll see if the FTC decides to continue with this suit or agrees to modify the rule to exempt lawyers.

Posted by Carolyn Elefant on August 28, 2009 at 02:35 PM | Permalink | Comments (1)


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