A federal judge has ruled that the Federal Trade Commission exceeded its authority by applying its “Red Flags Rule” to practicing lawyers.

Acting on a request from the ABA, U.S. Judge Reggie B. Walton of the District of Columbia granted a motion for partial summary judgment finding that Congress did not intend lawyers to be considered “creditors” under the Fair and Accurate Credit Transactions Act.

“This ruling is an important victory for American lawyers and the clients we serve,” said ABA President Carolyn B. Lamm. “The court recognized that the Federal Trade Commission’s interpretation of the Fair and Accurate Credit Transactions Act over-reaches, and its application to lawyers is unreasonable. By voiding the FTC’s interpretation of a statute that was clearly not intended to apply to the legal profession, the court has ensured that lawyers stay focused on the mission of their work: providing aid and counsel to the individuals and organizations that need us.”

The ABA complaint, prepared on a pro bono basis by Proskauer Rose, argued that the application of the rule to practicing lawyers was “arbitrary, capricious, and contrary to law,” and that the FTC has failed “to articulate, among other things: a rational connection between the practice of law and identity theft; an explanation of how the manner in which lawyers bill their clients can be considered an extension of credit under the FACTA; or any legally supportable basis for application of the Red Flags Rule to lawyers engaged in the practice of law.”

At its meeting in July, The Florida Bar Board of Governors adopted as a Bar legislative position the ABA’s position to oppose having lawyers and law offices covered under FACTA (see “Bar objects to including lawyers under FTC’s new Red Flags Rule” in the August 1 News).

The rule requires creditors to develop and implement plans to detect and respond to activity signaling possible identity theft. The FTC’s original enforcement policy in October 2008 and subsequent updates provided no indication that lawyers engaged in the practice of law fell within the definition of “creditor.” Only after implementation of the rule was delayed again in April 2009 — just one day before the expiration of an initial six-month extension — did the FTC publicly announce its position that lawyers were subject to the rule.

The FTC is widely expected to appeal.

The order was handed down October 30 in ABA v FTC, Civil Action no. 09-1636 (RBW).