The Red Flags Rule: controversy over application to physicians.

LEGAL CHALLENGES UPDATE Our article in the June issue of JNIS described the legal challenges against the Federal Trade Commission’s Red Flags Rule, which requires “creditors” to adopt programs to protect their customers from identity theft. Specifically, on November 29, 2009, the US District Court for the District of Columbia ruled that the FTC had improperly applied the Red Flags Rule to lawyers in a case brought by the American Bar Association. The FTC appealed the decision. While the appeal was pending the President signed into law the Red Flag Program Clarification Act of 2011 (the “Clarification Act”). On March 4, 2011, the US Court of Appeals for the District of Columbia dismissed the ABA case as moot based on the passage of the Clarification Act. The US Court of Appeals found that the statute changed the definition of “creditor” in a way that vitiated the basis for the FTC’s application of the Red Flags Rule to lawyers. Specifically, the Act defeated the FTC’s conclusion that the definition of creditor includes someone who defers payment for services rendered. The US Court of Appeals stated: 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 Ruled 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,” including professionals “such as lawyers or healthcare providers, who bill their clients after services are rendered,” Extended Enforcement Policy at 1 n.3, J.A. 76, is no longer viable. However, the US Court of Appeals did acknowledge that it is possible that the FTC could modify its rule to change the basis for applying the law to lawyers (or physicians). The FTC could do this by taking the position that lawyers (and physicians) are covered to the extent that they do advance funds to their clients (or patients). Further, the FTC could invoke clause (C) of the Clarification Act to cover lawyers (and physicians). Clause (C) gives the FTC broad discretion to define other entities as creditors if the FTC determines that “such creditor offers or maintains accounts that are subject to a reasonably foreseeable risk of identity theft.” The Court of Appeals refused to speculate on whether the Clarification Act definition of creditor could be applied to lawyers (or physician), finding that this issue was not before it because it was not part of the regulation and had not been raised in the complaint or briefs. The decision in the lower court was thus vacated in order to allow the parties to refile if the FTC issues regulations that cover lawyers (and physicians) under the Clarification Act’s definition of creditor. Relying on the ABA case, the American Medical Association, as well as the coalition of 26 medical specialty societies represented by our firm, submitted a joint stipulation in April to dismiss the parallel AMA case (described in our article) as moot for the same reasons applied in the ABA case.