Last week the American Institute of Certified Public Accountants (AICPA) filed papers seeking summary judgment in the lawsuit filed against the Federal Trade Commission (FTC) to exempt accountants from the FTC's Red Flags Rules. We first posted on this case in November, when the AICPA filed a complaint asking the federal court in Washington, D.C. to declare that accountants are not subject to the Red Flags Rules. This followed hot on the heels of the October ruling (.pdf) that lawyers were not required to comply with the Red Flags Rules in a lawsuit filed by the American Bar Association (ABA). It should be noted that the AICPA's motion will be heard by the same judge that issued the decision in favor of the ABA, Hon. Reggie B. Walton.
Since Judge Walton's preliminary ruling in the ABA case in October, the court published a lengthy opinion (.pdf) explaining his reasoning. In particular, the decision indicated that lawyers need not comply with the Red Flags rules because the Rules only apply to "financial institutions" and "creditors" and lawyers cannot be classified as such under the Fair and Accurate Credit Transactions Act (the FACT Act or FACTA) or the Equal Credit Opportunity Act (the ECO Act or ECOA). The FTC has taken the position that lawyers, accountants and anyone else that invoices a customer after services have been provided is extending credit and, which makes them "creditors" under the FACT Act, ECO Act and the Red Flags Rules. Judge Walton forcefully addressed this position in his opinion in favor of the ABA:
[T]he Commission is essentially taking the position that the period of time between when a service is provided to when a lawyer or law firm invoices a client for the service and the invoice is paid, amounts to a period during which credit was extended if there is any interval of time between the providing of the service and the payment of the invoice. . . This is clearly not what was intended by Congress by its use of the term credit in the ECO Act and its subsequent inclusion of the term in the FACT Act.
The Court further noted that noted that he found it persuasive that there is no evidence that identity theft is an actual problem in the legal profession, one that might necessitate the protections of the Red Flags Rules.
From the record before the Court (or more accurately the lack of a record), the best that can be gleaned is that identity theft in the attorney-client context is only a theoretical problem, especially given the role of state professional codes of conduct and other ethical codes to which attorneys must abide, and the Court cannot conclude that it is an actual problem given the absolute lack of any legislative, regulatory or other evidentiary findings that have been brought to the Court's attention.
The FTC will face the same arguments in the accountants' case. Will Judge Walton side with the AICPA and rule that accountants, like lawyers, are not subject to the Red Flags Rules as "creditors?" Or will the Court give the FTC more flexibility to extend the Red Flags Rules outside of the legal profession? Read the AICPA's papers below and let us know your thoughts.
The FTC's opposition papers are expected next week.