Court of Appeals Analyzes Red Flag Program Clarification Act

In the first case to discuss the Red Flag Program Clarification Act of 2010, the Court of Appeals dismissed the American Bar Association’s lawsuit against the Federal Trade Commission (FTC) as moot.  The American Bar Association filed suit in 2009 after the FTC issued an Extended Enforcement Policy, explaining that “professionals, such as lawyers or health care providers, who bill their clients after services are rendered,” would be considered “creditors” under the statute and, therefore, subject to the Rule’s requirements.  The Court determined that the Red Flag Program Clarification Act mooted the case because “the Clarification Act . . . clarifies that, to be a ‘creditor’ subject to the Red Flags Rule requirements, one must not only regularly extend, renew, or continue credit . . . , but must also ‘regularly and in the ordinary course of business,’ (i) obtain or use consumer reports, (ii) furnish information to consumer reporting agencies, or (iii) advance funds with an obligation of future repayment.”  The Court continued: “Most importantly, at least with respect to the matters in dispute in this case, the Clarification Act makes it plain that the granting of a right to ‘purchase property or services and defer payment therefore’ is no longer enough to make a person or firm subject to the FTC’s Red Flags Rule – there must now be an explicit advancement of funds.  In other words, the FTC’s assertion that the term ‘creditor,’ as used in the Red Flags Rule and the FACT Act, includes ‘all entities that regularly permit deferred payments for goods or services,’ . . .  is no longer viable.” 

Thus, the Court of Appeals confirmed the analysis of the Red Flag Program Clarification Act discussed in the previous blog posting.  Although the case involved the application of the Red Flags Rule to lawyers, the Court’s analysis should be equally applicable to municipal utilities, which were previously subject to the Red Flags Rule because of deferred payment for goods and services. 

However, the Court also noted that it would not prematurely comment on new rules that the FTC might promulgate to regulate lawyers.  As stated in the previous blog posting, the FTC has the authority to engage in rulemaking to include entities within the coverage of the Red Flags Rule that maintain accounts subject to a reasonably foreseeable risk of identity theft. 

A link of the Court’s opinion is provided here.

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