Red Flags Rule in Limbo Following Suits From Physicians, Lawyers
Today's post was authored by FHWN attorney Sue Nolan
Last week's announcement by the Federal Trade Commission (FTC) that it would delay implementation of the Red Flag Rule until January 1, 2011, marks the fifth time that the FTC has postponed the enforcement date. Although the FTC stated that it requested the lastest postponement in order to allow Congress time to pass legislation that would narrow the scope of the Rule, the decision was also influenced by pending litigation filed on behalf physicians, lawyers, and accountants against the FTC.
Specifically, on May 21, 2010, the American Medical Association, the American Osteopathic Association and the Medical Society for the District of Columbia ("Medical Associations") filed suit against the FTC seeking a decision that the Red Flags rule does not apply to physicians. The Medical Associations allege that the physicians are not creditors within the meaning of the Rule and that the FTC's rule as applied to physicians is "arbitrary, capricious and contrary to the law" and therefore unenforceable against physicians. The Medical Associations claim that physicians are not creditors under the rule merely because they bill patients and do not require upfront payment for their professional services.
Last week the Senate introduced a bill to provide exemptions from the Rule for those health care practices, legal practices, and accounting practices that have 20 or fewer employees. It also authorizes the FTC to grant an exemption to a business that has a low risk of identity theft. Such a business is one that either personally knows its customers, only provides services at a customers' residences or has not experienced any incidences of identity theft and identity theft is rare in businesses of its type. This bill is very similar to a bill that passed the House of Representatives in October of 2009.
After the jump - why the Medical Associations may prevail on their claims
These arguments advanced by the Medical Associations are similar to winning arguments made by the American Bar Association ("ABA") in its successful suit against the FTC. Last year, the ABA claimed that lawyers are not creditors merely because they provide professional services without collecting an upfront payment in full. The United States District Court for the District of Columbia agreed with the ABA, holding that simply failing to demand payment immediately upon the rendering of a service did not make a lawyer or law firm a creditor. Additionally, the Court held that Congress did not intend to regulate attorneys under the Fair and Accurate Credit Transactions ("Fact") Act and thus the application of the Rule to attorneys was arbitrary, capricious and contrary to law. Accordingly, the Rule was held not applicable to attorneys. However, the FTC has appealed the decision in this case.
Based on the ABA suit, the Medical Associations expect a favorable outcome for their suit. The Medical Associations' lawsuit requests a determination that the Rule is not applicable to all physicians. The pending legislation has a narrower scope. If passed, the legislation would automatically exempt healthcare practices with fewer than 20 employees. Larger healthcare practices would have to apply for an exemption.
Given the tenacity with which the FTC has fought to have physicians included within the reach of the Rule, the FTC may be reluctant to grant such exclusions. The legislation expresses a Congressional intent to bring healthcare practices within the purview of the Rule. The expression of such an intent takes away one of the grounds on which the United States District Court for the District of Columbia can hold that the Rule is inapplicable to physicians. The passage of the legislation would make it highly likely that the Rule will be interpreted to apply to healthcare practices. It remains to be seen whether the FTC would easily grant exclusions from the Rule to large healthcare practices.
