Lawyers Cleared From Accountability for Identity Theft

By Patricia Sallen, Senior Ethics Counsel
December 21, 2010

Lawyers will not have to comply with the so-called Red Flags Rule, which would have imposed potentially burdensome requirements on them to develop programs to protect consumers against identity theft.

President Obama on Saturday, Dec. 18, signed S. 3987, the "Red Flag Program Clarification Act of 2010," which narrows the definition of "creditor" in the Fair and Accurate Credit Transactions Act of 2003 (FACTA). To implement FACTA, the Federal Trade Commission (FTC) developed guidelines that required financial institutions and creditors to establish policies and procedures to mitigate identity theft risks. The FTC had interpreted "creditor" to include lawyers who bill clients after having provided them services.

"Identity theft is clearly a problem in our society, but the attorney-client relationship does not present the type of harm that Congress was seeking to remedy by enacting FACTA," John Phelps, Chief Executive Officer at the State Bar of Arizona. "Lawyers do not extend credit to clients by providing services before billing the client for those services," he adds.

The Red Flags Rule took effect Jan. 1, 2008, with full compliance for all covered entities, including lawyers, originally required by Nov. 1, 2008. The FTC delayed enforcement several times, most recently Jan. 1, 2011, at the request of several members of Congress.

Under the leadership of past and current presidents Ed Novak (2008-09), Ray Hanna (2009-10), Alan Bayham (2010-11), the State Bar of Arizona was among many bar associations that urged the FTC in the summer of 2009 to exempt lawyers from the proposed regulations.

On Aug. 27, 2009, the American Bar Association (ABA) filed suit against the FTC in federal court for declaratory and injunctive relief. After the ABA won on summary judgment, the FTC appealed.  The State Bar of Arizona was among 54 state and local bar associations that joined the New York State Bar Association's amicus brief that supported the ABA's position against the Red Flags Rule.

The matter had been briefed and argued in the U.S. District Court for the District of Columbia. However, on Nov. 30 legislation was introduced in and passed by the Senate to narrow the definition of creditor to exclude professionals and other service providers. The House of Representatives approved the legislation on Dec. 7.