FTC Appeals Judge Walton's Decision on Red Flags Rule
Yesterday, February 25, 2010, the Federal Trade Commission filed notice of appeal to the DC Circuit Court of Appeals to attempt to reverse Judge Walton’s ruling late last year that the FTC cannot require practicing lawyers to comply with the Red Flags Rule. In August 2009, the American Bar Association challenged the applicability of the Red Flags Rule to lawyers, arguing that it would impose a serious burden on law firms. At that time, the ABA sought an injunction and declaratory judgment finding that lawyers were not covered. The FTC replied that lawyers should be covered because billing practices, such as charging clients on a monthly basis rather than upfront, made them “creditors” under the plain language of the Red Flags Rule. Judge Walton ruled from the bench in late October and issued his Order and Memorandum Opinion in December.
In the Memorandum Opinion, citing to Chevron, Judge Walton determined that the FTC's application of the Red Flags Rule was not entitle to deference, and stated that "[e]ven a cursory review of the language of these Acts [Equal Credit Opportunity Act and FACTA] and the purposes underlying their enactment leads the Court to the conclusion that it was not 'the unambiguously expressed intent of Congress,' Chevron, 467 U.S. at 842-43, to bring attorneys within the purview of the FACT Act and thus subject them to regulation by the Commission's Red Flags Rule." Judge Walton goes on to state that the FTC's position that attorneys regularly extend or arrange for credit is unsupported by either legislative or administrative findings. Likewise, Judge Walton was not persuaded by the FTC's reliance on the Federal Reserve Board's staff notes to Regulation B of the Equal Credit Opportunity Act.
The Court then discussed the lack of any record in the FTC's rulemaking process to support a determination that existing regulation of attorneys did not address identity theft, the arbitrary selection of monthly invoicing as the activity to regulate, the failure to put attorneys on notice that the rule would apply to them, the balance between state and federal regulation and the effect that the Red Flags Rule rule would have on the attorney client relationship. Considering all of these factors, the Court rejected the FTC’s position, ruling that the Commission's interpretation of its Red Flags Rule applying to practicing attorneys is both plainly erroneous and inconsistent with the purpose underlying the FACT Act.