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Judge Rules FTC Cannot Make Lawyers Comply With Identity Theft Laws

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The new Red Flags Rules which went into effect on November 1, 2009 were supposed to apply to lawyers, according to the FTC. Just two days ahead of the deadline, a federal judge at the U.S. District Court for the District of Columbia granted lawyers a reprieve.

The American Bar Association, represented by a Proskauer Rose team led by partner Steven Krane, filed a complaint which argued that the rules would impose a serious burden on law firms, and sought an injunction and declaratory judgment finding that lawyers were not covered by the rule. The FTC contended that lawyers should be covered, because many of their billing practices, such as charging clients on a monthly basis rather than up front, made them “creditors.”

In a statement, Carolyn Lamm, president of the ABA and a White & Case partner, said “Congress did not intend to cover lawyers under the Rule. The FTC’s decision to apply the Rule to lawyers is contrary to an unbroken history of state regulation of lawyers and intrudes on traditional state responsibilities. The Rule requires extensive reporting and bureaucratic compliance that would unnecessarily increase the cost of legal services. This kind of unauthorized and unjustified federal regulation of law practice threatens the independence of the profession and the lawyer’s role as client confidante and advocate.”

In an October 30, 2009 article in the National Law Journal, it was reported that Judge Reggie Walton said he had trouble accepting the FTC’s definition of a creditor. He said that under their interpretation, a plumber who charges a customer after working on a toilet for two days would be also be considered a “creditor.” “I have a real problem with concluding that Congress intended to regulate lawyers when these statutes were enacted,” Walton said. Proskauer’s Krane said the judge’s ruling granted all of the relief the ABA sought in the case, but that he expected the FTC to try and appeal. Asked whether they would appeal the ruling, FTC General Counsel Willard Tom said, “It’s safe to assume the commission is going to consider its options very seriously. We think there is no reason lawyers should be exempt.”

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