Implementation of the Red Flag Rules has been postponed again—until June 1, 2010—as legislation is snaking through Congress that would allow the Federal Trade Commission (FTC) to exempt healthcare and legal professions of 20 or fewer employees from the rule mandated by the 2003 Fair and Accurate Credit Transactions Act.

 

This legislation, however, opens the door to showing how the FTC's broad interpretation of the act intended for doctors, lawyers and accountants to be classified as creditors, provides little more than a small business exception for those professionals.

 

Adding a twist to the debate, the U.S. District Court for the District of Columbia granted on Oct. 29 the American Bar Association's (ABA) request for summary judgment in a case challenging the FTC's application of the 2003 Fair and Accurate Credit Transactions Act to lawyers. The decision, handed down just days before the Red Flag Rules were scheduled to go into effect, prohibits the FTC from imposing new identity theft regulations on lawyers, who would have been forced to verify the identities of potential clients.

 

ABA president Carolyn B. Lamm called the ruling "an important victory for American lawyers and the clients we serve."

 

Represented by a Proskauer Rose team led by partner Steven Krane, the ABA 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 attorneys should be considered creditors because many of their billing practices, such as charging clients on a monthly basis rather than up front, classified them as such.

 

Judge Reggie Walton said he had trouble accepting the FTC's definition of a creditor because their interpretation would also apply to other professionals such as plumbers, who charge customers after-the-fact for work spanning several days.

 

"I have a real problem with concluding that Congress intended to regulate lawyers when these statutes were enacted," Walton said.

 

The court's ruling may only be a temporary victory on the Red Flag Rules, said Memphis healthcare attorney Walt Schuler.

 

"If the legislature passes the House Bill or something similar with the small business exemption for lawyers, doctors, and accountants, it still has the effect of implying that these professions are 'creditors' under the 2003 Fair and Accurate Credit Transactions Act," he said. "Otherwise, why would they need an exemption of any kind?"

 

The 2003 law requires businesses that act as creditors to undergo burdensome reporting requirements, including establishing programs for identity theft prevention, ascertaining potential areas of vulnerability within the business, and including policies for detecting and responding to red flags.

 

Defining "creditors" has stirred much debate. The FTC, charged with protecting consumers, has ruled that lawyers, doctors, and other professionals are defined as "creditors" because these groups invoice customers only after providing services.

 

"The repeated delays in implementation show the FTC is hearing our message that physicians are not creditors, but we'll keep all options on the table, including a potential lawsuit with ABA and other groups affected by the rule, if the issue is not resolved," said Cecil Wilson, MD, president-elect of the American Medical Association, an internist from Winter Park, Fla. 

 

Even though Krane was pleased the judge's ruling granted the relief the ABA sought in the case, he anticipated the FTC would appeal, particularly after FTC general counsel William Tom said "there's no reason lawyers should be exempt."

 

"It's safe to assume the commission is going to consider its options very seriously," said Tom.