The FTC is once again delaying the enforcement date of its Identity Theft “Red Flags” regulation. After first postponing enforcement from November 1, 2008 to May 1, 2009, and next to November 1, 2009, the agency now says it won’t enforce the rule until June 1, 2010. This time, however, the agency is not just trying to accommodate entities apparently subject to the rule: Members of Congress have requested the enforcement delay.
As noted in our previous blog post, the House recently approved an amendment to exclude certain businesses, including legal, health care, and accounting professionals, from the scope of Red Flags regulation. House Members want the FTC to let that amendment work its way through the Senate and reach the President’s desk before any enforcement action is taken under the regulation. Out of respect for these Members’ views, the FTC will hold off at least until next June.
Not only do Members of Congress think the FTC made errors in crafting the rule, but a federal judge just this past week found the same. On October 29, Judge Reggie Walton of the Federal District Court for the District of Columbia ruled that the Red Flags regulation does not apply to lawyers (court order here). In an order granting partial summary judgment for the American Bar Association (ABA), which had challenged the FTC’s characterization of lawyers as “creditors” under the rule, Judge Walton held that the FTC exceeded its statutory jurisdiction and authority by applying the rule to lawyers.
Adopted at the direction of Congress, the Red Flags rule is designed to prevent identity theft by requiring certain “financial institutions” and “creditors” to establish and implement written programs to detect and respond to warning signs of identity theft. According to the FTC, the term “creditors” means just about anyone who provides a good or service prior to being paid, including, generally, lawyers.
In its lawsuit, the ABA filed a complaint against the FTC for this inclusive interpretation of “creditor.” The ABA argued that the FTC’s interpretation was contrary to congressional intent, and Judge Walton agreed, reasoning that under the FTC’s broad interpretation, even a plumber who charges a customer two days after service would count as a “creditor,” and that can’t be what Congress intended. The FTC may yet appeal Judge Walton’s ruling, but the agency can’t possibly ignore the “red flags” that its actions may have exceeded its authority.