ALERT: FTC Announces Delay in Red Flags Enforcement Until November 1, 2009.

Posted on July 29, 2009 by Gabriel M. Helmer

Amidst calls from the legal community, the Federal Trade Commission's (FTC) announced this morning that it was delaying enforcement of the FTC's Red Flag Rules until November 1, 2009.  The FTC's announcement of the delay emerged almost as a footnote to a public statement devoted largely to the FTC's "redoubled" efforts to "provid[e] additional resources and guidance to clarify whether businesses are covered by the Rule and what they must do to comply."  The FTC appears to be stepping up its outreach efforts with an "Expanded Business Education Campaign" that is intended to address those businesses that "remain uncertain about their obligations."  This seems aimed at the recent statements from the American Bar Association (ABA), which has called on the FTC and Congress to exempt lawyers from the FTC's Red Flags Rules and threatened to sue the FTC to stop any enforcement action against the legal industry.  

To recap the events leading up to this postponement: in April, the ABA received word that the FTC intended to enforce the FTC's Red Flags Rule, 16 CFR Part 681, against lawyers.  The ABA immediately asked the FTC to extend the May 1, 2009 deadline and the FTC obliged by postponing the deadline until August 1, 2009 (see our post on this topic).  After a few months of thought, the ABA publicly called on the FTC and Congress to exempt lawyers from the Red Flags Rule.  The ABA's June report on "Why the Red Flags Rule Should Not Apply to Lawyers" lays out a legal argument for why billing a client is not really an extension of credit that turns every lawyer and law firm into a "creditor" under Red Flags Rule and the Fair and Accurate Credit Transactions Act (the FACT Act).  More recently, ABA President H. Thomas Wells, Jr. told the Blog of Legal Times that the ABA plans on filing a federal lawsuit during the this week to block enforcement of the Red Flags Rule, if "we don’t get some kind of sign."  And, perhaps on the ABA's urging, a House Appropriations subcommittee apparently asked the FTC to postpone its deadline yet again.  Other blogs and websites have been abuzz with "sources" close to the discussions between the ABA and the FTC and then today, the FTC announced that  delayed the enforcement deadline yet again.

Lest anyone think that the ABA is on its own on this issue, the Massachusetts Bar Association sent the FTC a letter objecting to the application of the Red Flags Rules to lawyers and the New York County Lawyers Association also issued a report objecting to enforcement against lawyers.  State bar associations are joining the ABA in calling on the FTC to excuse them from the reach of the "new" regulations (which are, in fact, more than a year old at this point, after numerous delays in enforcement by the FTC).  

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ABA Urges Congress and FTC to Exempt Lawyers from Red Flags Rules

Posted on June 26, 2009 by Gabriel M. Helmer

Earlier this week, on Monday, June 22, 2009, the American Bar Association (ABA) President H. Thomas Wells, Jr. issued a public statement urging Congress and the FTC to exempt lawyers from the requirements of the federal Red Flags Rules, stating:

The Rule, adopted under the Fair and Accurate Credit Transactions Act, or FACT Act, is noble in its intent.  However, the Commission’s application of the Rule to lawyers is unnecessary and not supported by law.  Lawyers are not engaged in the type of commercial activity that Congress was attempting to regulate with the FACT Act and should not be considered creditors under the Red Flags Rule.

In support of this position, the ABA President references federal caselaw suggesting that lawyers are not "creditors" under federal law and suggests that forcing lawyers to comply would be costly and pointless.  "Compliance with the Act would complicate client arrangements and require a major commitment of lawyers’ time, yet the FTC has failed to identify a single case of identity theft in the legal service context, suggesting that such a scenario is far-fetched, if not impossible."

As we reported in our earlier post on this topic, the ABA has been considering what action to take since it asked the FTC to delay enforcement of the Red Flags Rules in April and the FTC complied, postponing broad enforcement until August 1, 2009.  The ABA statement further suggests that the ABA may already be lobbying Congress behind the scenes to relieve the legal industry from the burden of compliance.

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ABA to Consider Asking FTC and Congress to Exempt Lawyers from Red Flags Rules

Posted on June 10, 2009 by Gabriel M. Helmer

A contact at the American Bar Association (ABA) confirmed by telephone today that the ABA Board of Governors is meeting this Saturday, June 13, 2009 to determine what position the ABA will take on whether lawyers and law firms are (or should be) considered "creditors" subject to federal Red Flags Rules.  Many among the legal community are hoping that the ABA urges the FTC and Congress to exempt lawyers from compliance with federal Red Flags Rules or takes some other action to limit the scope of the FTC's enforcement.  (For background on the Red Flag Rules, see our prior postings here, here and here). 

The FTC has previously indicated that it plans to enforce the Red Flags Rules against lawyers along with any other business that sells goods or services now and bills its customers later (see our prior discussion here).  However, according to the ABA, the first it heard of this issue was when federal regulators notified the ABA of the government's position on April 23, 2009.  This was just a week before the FTC was to begin enforcement of the Red Flags Rules.  The next day, after the FTC attended an emergency meeting with the ABA Government Affairs Office, President H. Thomas Wells, Jr. directed a letter to FTC Chairman Jonathan D. Leibowitz (.pdf) requesting an additional three to six months delay in enforcement so that the ABA could consider its stance on this issue.  The FTC appears to have acquiesced to the ABA request a few days later, when the FTC postponed the May 1, 2009 enforcement deadline until August 1, 2009 . 

In the president's letter as well as a separate public statement (.pdf), the ABA indicated that "some" believe that federal precedent contradicts the FTC's expansive interpretation of the law (for more information, see our detailed discussion of the caselaw here and here).  The ABA has also noted that "the FTC has no examples of identity theft arising from an attorney-client relationship." 

Given the looming compliance deadline, it seems likely that we will hear from the ABA shortly -- possibly as early as next week.  In view of the FTC's response (.pdf) to the public objection raised by the American Medical Association (.pdf), the ABA may need to take a different tack to effect a change in the FTC's enforcement policy.

[I should note that an attorney in California called me up yesterday to discuss the FTC's view that that lawyers should be considered "creditors" subject to federal Red Flags Rules.  Thanks are owed to her for raising the question of whether the ABA has articulated a view on this issue.]

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