Opinion of Federal Judge Striking Applicabilty of Red Flag Rules to Lawyers Released

By at 2 December, 2009, 10:51 am

Law.com, in picking up a story from The BLT: Blog for Legal Times  has a post regarding  District Judge Reggie Walton's written opinion of his October 29, 2009 decision that the FTC's Red Flag Rules did not apply to lawyers and their clients.

In Federal Judge Releases Written Opinion on 'Red Flags Rule' by Jordan Weissmann of The National Law Journal, the post provides brief commentary on the ruling and the decision as well as linking to a PDF of the decision found here. The opinion is interesting and so are many of the footnotes found in it..

On page 17 of his decision, Judge Walton writes:

Attorneys are not known for maintaining credit or debit accounts on behalf of their clients. Moreover, attorneys provide services to clients, and do not engage in transactions with deposit account holders or consumers, and the Court is aware of no source of authority insinuating that these terms are interchangeable with the term "client," especially given special doctrines that shape the unique relationships between lawyers and their clients, such as the age-old common law attorney-client privilege doctrine. See, e.g., Upjohn Co. v. U.S., 449 U.S. 383, 389 (1981) (remarking that "[t]he attorney-client privilege[,] is the oldest of the privileges for confidential communications known to the common law" (citing 8 J. Wigmore, Evidence § 2290 (McNaughton rev. 1961))). This distinction is significant given the specially designed codes of professional conduct to which attorneys must abide and the special fiduciary and other responsibilities attorney must adhere to when interacting with clients. The Court is confident in concluding that the term attorney-client is nuanced enough that if Congress, which is comprised of many members who are themselves attorneys, intended to regulate attorneys and their invoiced billing practices it would have used the appropriate terminology to denote that intent and not hidden it in a statute expressly targeted at the credit industry. See Whitman v. Am. Trucking Ass'ns, 531 U.S. 457, 468 (2001) ("[Congress] does not . . . hide elephants in mouseholes.").

And in Footnote 12:

12 The Commission maintains that there are no existing rules of professional or ethical conduct that directly address identity theft and therefore its regulation fills a regulatory void to protect the interests of third-party victims, interests that would otherwise go without protection absent the application of the Red Flags Rule to attorneys. Def.'s Opp'n at 32. For several reasons, the Court rejects this position. First, this position is flawed by the Commission's supposition that attorneys can bill their clients so as not to be brought within the purview of the Rule. Id. at 11-12, 21. However, putting that fact aside, the Commission's position, while literally valid, does not persuade the Court that the plethora of rules already in existence do not sufficiently protect the concerns identified by the Commission. In fact, the same rules that protect clients by holding attorneys to mandatory ethical and professional standards appear to both directly and indirectly protect potential third-party victims from any potential for identity theft. For example, pursuant to the plaintiff's Model Rules of Professional Conduct, attorneys are obligated to "provide competent representation," meaning that they must possess "the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation." Model Rules of Prof'l Conduct R. 1.1. Based on a plain reading of this rule, attorneys would be acting in defiance of this rule if they blindly proceeded to represent a client without knowing exactly who they are representing. The Rules also obligate attorneys to respect the interests of third-parties, including theoretically, potential victims of identity theft. Specifically, "[i]n representing a client, a lawyer shall not use means that have no substantial purpose other than to embarrass, delay, or burden a third person, or use methods of obtaining evidence that violate the legal rights of such a person." Id. at R. 4.4(a). Further, lawyers are obligated to never "make a false or misleading communication about . . . the lawyer's services," i.e. a communication that "contains a material misrepresentation of fact or law." Id. at R. 7.1; see also id. at R. 3.3 (addressing candor attorneys owe to tribunals). The Court assumes that it would be nothing other than a material misrepresentation for a lawyer misrepresented the identity of a client. And finally, attorneys are obligated not to use the attorney-client relationship to perpetrate a fraud or to advance any other illegal activity and must "disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client." Id. at R. 4.1(b). These rules make it patently clear that attorneys are already obligated to conduct themselves in a manner that promotes the objectives of the Red Flags Rule, and the Commission's position that its regulation is needed to protect third-parties against identity theft is just not the case.

As a rule that has potentnaily far reaching impact on the legal profession, it's well worth the time to at least glance through this decision and Judge Waltons reasoning behind it.

Categories : Ethics | Practice Management


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