Red Flags Rule Battle Appears to Come to a Close

March 7, 2011

By William T. Koustas

We have previously reported on the long running legal battle between the Federal Trade Commission (“FTC”) and the American Bar Association (“ABA”) over the implementation of the FTC’s Red Flags Rule (“the Rule”).  Last Friday, the United States Court of Appeals for the District of Columbia Circuit (“the Court”) ruled that the case is moot.  ABA v. FTC, No. 1:09-cv-01636, Mar. 4, 2010.  The ruling stemmed from Congress' enactment of the Red Flag Program Clarification Act of 2010 (“Clarification Act”) on December 18, 2010, Public Law No. 111-319, 124 Stat. 3457. 

The Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”) directed the FTC to promulgate regulations that required creditors to enact procedures to prevent identity theft.  In 2007, the FTC adopted the Rule, which required creditors to implement these procedures to prevent identity theft.  16 C.F.R. § 681 et seq.  In April 2009, the FTC issued a document explaining that the Rule applied to various professions, including attorneys and healthcare providers because they bill their clients after services are rendered, thus extending credit.  The ABA filed suit against the FTC in August 2009 challenging the FTC’s application of the Rule to attorneys.  The ABA argued that the FTC was intruding on the regulation of the practice of law, which is an area of regulation traditionally left to the states.  The District Court enjoined the FTC from enforcing the Rule against lawyers.  ABA v. FTC, 671 F. Supp. 2d, 64 (D.D.C. 2009).  The FTC appealed that decision.  However, the Clarification Act was enacted shortly after the Court heard oral arguments. 

The Court ruled that passage of the Clarification Act rendered the case between the ABA and FTC moot.  The FACT Act defined the term “creditor” and “credit” such that attorneys and other professionals who bill their clients for services render could, according to the FTC, be considered creditors and required to comply with the Rule.  However, the Clarification Act defined a creditor such that the definition specifically exempts a person who “advances funds on behalf of a person for expenses incidental to service provide by the creditor to that person.”  Pub. L. No. 111-319, § 2(a).  As such, the issue at the center of the case, whether attorneys are considered creditors under the FACT Act, appears to have been mooted by the new statute.  Therefore, the Court vacated the District Court’s decision and remanded the case back to the District Court with instructions to dismiss the case as moot.

This ruling will end this litigation unless either party seeks further review from either the D.C. Circuit or the U.S. Supreme Court.


  • Statement by FTC Chairman Jon Leibowitz Regarding Court Ruling on Red Flags Rule
Categories: Miscellaneous