UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

____________________________________ ) AMERICAN BAR ASSOCIATION, ) ) Plaintiff, ) ) v. ) ) Civil Action No. 09-1636 (RBW) FEDERAL TRADE COMMISSION, ) ) Defendant. ) ____________________________________) MEMORANDUM OPINION On August 27, 2009, the plaintiff, the Am erican Bar Association, filed a threecount complaint against the Federal Trade Co mmission (the "Commission"), alleging that the Commission's application of Final Rule, Identity Theft Re d Flags and Address Discrepancies Under the Fair and Accurate Credit Transactions Act of 2003, 72 Fed. Reg. 63,718 (Nov. 9, 2007) (the "Red Flags Rule" or the "Rule"), to attorneys exceeds the Commission's statutory au thority under the Fair and Accura te Credit Transactions Act of 2003 ("the FACT Act"), see Pub. L. No. 108-159, 117 Stat. 1952 (codified at 15 U.S.C. §§ 1681-1681x (2006); 20 U.S.C. §§ 9701-8 (200 6)), and therefore the Commission's actions in implementing the Red Flags Rule vi olates the Administrative Procedure Act, 5 U.S.C. §§ 702-706 (2006) ("APA"), see Complaint for Declarator y and Injunctive Relief ("Compl."). Specifically, the plaintiff allege s that the Commission's application of the Red Flags Rule to attorneys viol ates 5 U.S.C. § 706(2)(C), as it is "in excess of statutory jurisdiction, authority, or limitations, or short of statutor y right," Compl. ¶¶ 54-60 (Count I), and 5 U.S.C. § 706(2)(A), and is "arbitra ry, capricious, an abuse of discretion, or

otherwise not in ac cordance with law," id. ¶¶ 61-64 (Count II), enti tling the plaintiff to adeclaratory judgment under 28 U.S.C. § 2201 (2006), id. ¶¶ 65-67 (Count III). On September 23, 2009, the plaintiff filed a motion for partial summary judgment in this case on Count I of its three-count complaint, Plai ntiff's Motion for Part ial Summary Judgment ("Pl.'s Mot.") at 1, which the defendant opposes, 1 Defendant’s Memorandum of Points and Authorities in Opposition to Plainti ff’s Motion for Partial Summary Judgment ("Def.'s Opp'n"). The parties came before the Court on October 29, 2009, for a hearing on the plaintiff's motion for partial summary judgmen t. Upon consideration of the parties’ written submissions, the applicable legal au thority, the oral arguments presented by the parties, and for the reasons set forth below, the Court held that the plaintiff's motion for summary judgment on Count I of its complaint must be granted. This opinion is being issued to supplement the Court's oral ruling.

II. BACKGROUND

A review of the relevant statutory and regulatory histor y underlying this action is the first step necessary to understanding the nature of this controversy. A. The Equal Credit Opportunity Act The first congressional enactment pertinent to this matter is the Equal Credit Opportunity Act, 15 U.S.C. § 1691 (2006) (“ ECO Act”). The ECO Act was passed by Congress in 1974 to eliminate discrimination by creditors against cred it applicants on the basis of sex or marital status with respect to all aspects of credit tr ansactions, Pub. L. No.

1 The Court also considered the following documents in ruling on the motion: Memorandum of Points and Authorities in Support of Plaintiff’s Mo tion for Partial Summary Judgment ("Pl.'s Mem."); Plaintiff’s Statement of Material Facts not in Disp ute; Reply Memorandum of Points and Authorities in Support of Plaintiff’s Motion for Partial Summary Ju dgment; and Brief Amicus Curiae of The American Association for Justice in Support of Plaintiff’s Motion for Partial Summary Judgment.

293-495, § 502, 88 Stat. 1500, 1521 (1974) (codified as Note, Congressional Findings and Statement of Purpose, 15 U.S.C. § 1691). The ECO Act defines "creditor" as "any person who regularly extends, renews, or continues cr edit; any person who regularly arranges for the extension, renewal, or continuation of credi t; or any assignee of an original creditor who participates in th e decision to extend, renew, or c ontinue credit." 15 U.S.C. § 1691a(e). Therefore, implicitly significant to the definition of creditor is the term "credit," and the ECO Act defines "credit" as "the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefor." 15 U.S.C. § 1691a(d) (emphasis added). 2

B. Fair and Accurate Credit Transactions Act of 2003 In 2003, Congress passed the FACT Act, which incorporated by reference the

definitions of "creditor" and "credit" found in the ECO Act, see 15 U.S.C. § 1681a(r)(5). The aim of the FACT Act is "to prevent iden tity theft, improve re solution of consumer disputes, improve the accuracy of consumer records, make improvements in the use of, and consumer access to, credit informa tion." H.R. Rep. N o. 108-396, at 65-66 (2003) (Conf. Rep.), reprinted in 2003 U.S.C.C.A.N. 1753-54. In furthering Congress's expressed aim, the FACT Act provides, in pe rtinent part, that agencies, including the Commission, shall: (A) establish and maintain guidelines for use by each financial institution and each creditor regarding identity theft with respect to account holders at, or customers of, such entities, and update su ch guidelines as often as necessary;

2 These definitions have remained unchanged since the ECO Act’s enactment in 1974. See Pub. L. No. 93-495, § 503, 88 Stat. at 1522.

3(B) prescribe regulations requi ring each financial institution and each creditor to establish reasonable policies and procedures for implementing the guidelines established pursuant to subparagraph (A), to identify possible risks to account holders or customers orto the safety and soundness of the institution or customers . . . . 15 U.S.C. § 1681m(e)(1)(A)-(B). Congress gr anted agencies the authority to enforce

their administrative rules and regulations adopted to advan ce the objectives of the FACT Act through injunctive relief and the imposition of civil monetary penalties on violators.

See 15 U.S.C. § 1681m(h)(8)(B) (incorporati ng enforcement scheme established by 15 U.S.C. § 1681s). 1. The Commission's Rulemaking: The Red Flags Rule Pursuant to the congressional grant of authority provided in the FACT Act, on July 18, 2006, the Commission, along with se veral other agencies (including the Department of the Treasury's Office of the Comptroller of the Currency and Office of Thrift Supervision, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Nati onal Credit Union Administration) took the first step in the administrative rulemaking pr ocess by publishing in the Federal Register a joint notice of proposed rulemaking to im plement sections of the FACT Act. See Identity Theft Red Flags and Address Discrepancies U nder Fair Accurate Credit Transactions Act of 2003, Proposed Rule, 71 Fed. Reg. 40,786 (July 18, 2006) ("Proposed Red Flags Rule"). As the FACT Act directed, the Propos ed Red Flags Rule indicated that "[t]he Agencies . . . [were] proposing joint regula tions requiring each financial institution and

creditor to establish reasona ble policies and procedures for implementing the guidelines, including a provision requiring cr edit and debit card issuers to assess the validity of a request for a change of address under certain circumstances." Id. at 40,786.

4On November 9, 2007, after the period for notice and comment expired, the agencies issued their final rule. See the Red Flags Rule. According to the Commission, the following obligations are imposed on cred itors and financial institutions by the Red Flags Rule:

Each creditor or financial institution "must periodically determine whether it offers or maintains covered accounts . . ." 16 C.F.R. § 681.1(c). If it does, the covered entity must develop and implement a written identity theft prevention program to identify, detect and respond to possible risks of identity theft applicable to them. 16 C.F.R. § 681.1(d). The program would need to specify measures implemented to prevent identity theft, for example by checking a government-issued picture ID card for new accounts or customers. The program would also need to indicate how the entity will respond if a red flag has been detected so as to mitigate the risks of ID theft, such as not billing the client or cons umer whose identity was compromised, ensuring that information relating to the identity thief is not commingled with that of the victim, or reporting incidents of identity theft to law enforcement agencies. The covered entity needs to update its program periodically to guard against current ID theft risks, and provide for the continued administration of the program. 16 C.F.R. § 681.1(e). Def.'s Opp'n at 9. It is important to note that no statem ent indicating that the Rule would be applicable to the legal profession accompanied either the Proposed Red Flags Rule or its final version, or was included in the co mments accompanying the rulemaking. Indeed, with respect to the definition of credit a nd creditor, the Rule reiterated that the Commission was adopting by reference the defini tions of these terms as set forth in the ECO Act, 15 U.S.C. § 1681a(r)(5), see 72 Fed. Reg. at 63,722, and added that creditors subject to the regulations "include[d] lenders such as banks, finance companies,

5automobile dealers, mortgage brokers, utility companies, and telecommunications companies," 16 C.F.R. § 681.1(b)(5). Similarly, with respect to the "cover ed account[s]" governed by the Red Flags Rule, the agencies stated that the foll owing types of account s were covered: [a]n account that a financial in stitution or cred itor offers or maintains, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions, su ch as a credit card account, mortgage loan, automobile loan, margin account, cell phone account, utility account, checking account, or savings account. 16 C.F.R. § 681.1(b)(3)(i). However, the Ru le also provided that a "covered account" could include "[a]ny other account that the fi nancial institution or creditor offers or maintains for which there is a reasonably foreseeable risk to customers or to the safety

and soundness of the financial institution or creditor from identity theft, including financial, operational, compliance, reput ation, or litigation risks." 16 C.F.R. § 681.1(b)(3)(ii). 2. Delays in Implementation of the Red Flags Rule The Red Flags Rule was scheduled to take effect on January 1, 2008, with a "mandatory compliance" date of November 1, 2008. 72 Fed. Reg. at 63,718. However, on October 22, 2008, the Commission i ssued a press releas e indicating that it would institute a six-month delay in the enforcement of the Rule until May 1, 2009, see Press Release, FTC Will Grant Six-Month Dela y of Enforcement of 'Red Flags' Rule Requiring Creditors and Financial Institutio ns to Have Identity Theft Prevention Programs (Oct. 22, 2008), 3 due to what the Commission perceived as confusion by

3 Available at http://www.ftc.gov/opa/2008/10/redflags.shtm (last visited Sept. 23, 2009).

6entities as to whether they were subject to the Rule. The Commission stated that despite its outreach efforts, many en tities and industries that th e Commission viewed as being covered by the Final Red Flags Rule "were [still] uncertain about their coverage under

the Rule" and therefore needed additiona l time to comply with the Rule. Id. The Commission reiterated in its October 22, 2008 press release that the ECO Act's definition of creditors would govern and added the follo wing statement for clarification: "Some examples of creditors are finance companies, automobile dealers, mortgage brokers, utility companies, teleco mmunications companies, and non-profit and government entities that defer payment for goods or services." Id. Again, the Commission made no mention of attorneys. For a second time enforcement of the Red Flags Rule did not go forward as planned because on April 30, 2009, the Comm ission issued a second press release postponing the May 1, 2009 enforcement date until August 1, 2009, again due to what the Commission perceived as confusion by entities as to whether they were creditors for purposes of the Rule. See Press Release, FTC Will Grant Three-Month Delay of Enforcement of ‘Red Flags’ Rule Requiring Cr editors and Financial In stitutions to Adopt Identity Theft Prevention Programs (Apr. 30, 2009). 4 And, in an attempt to again clarify what entities were subject to the Rule, al ong with its April 30, 2009 press release, the

Commission issued a document entitled "FTC Extended Enforcement Policy: Identity Theft Red Flags Rule, 16 CFR 681.1" (A pril 30, 2009) ("Extended Enforcement

4 Available at http://www.ftc.gov/opa/2009/04/redflagsrule.shtm (last visited Sept. 23, 2009).

7Policy"). 5 It was in this document that the Commission indicated for the first time that attorneys and other professionals "who bill thei r clients after services are rendered" are subject to the Final Red Flags Rule. Id. at 1 n.3. Specifically, the Commission stated: In [the FACT Act], Congress imported the definition of creditor from the [ECO Act] for purposes of the Fair Credit Reporting Act. This definiti on covers all entities that regularly permit deferred payments for goods or services. The definition thus has a broad scope and may include entities that have not in the pa st considered themselves to be creditors. For example, creditors under the ECO[ Act] include professionals, such as lawyers or health care providers, who bill their clients after services are rendered. Similarly, a retailer or service provider that, on a regular basis, allows its customers to make purchases or obtain services and then bills them for payment at the end of each month would be a credit or under the ECO[ Act].

Id. (emphasis added). But again, the Rule was not implemented as planned, and on July 29, 2009, the Commission issued a third pr ess release delaying enforcement of the Red Flags Rule from August 1, 2009, until November 1, 2009, based on its continued assessment that many entities, particularly small businesses, we re still unsure whether they were subject

to the Rule and thus needed additional time to bring their practices into compliance. See Press Release, FTC Announces Expanded Bu siness Education Campaign on 'Red Flags' Rule (July 29, 2009). 6 The press release referenced a document created by the Commission that provided answers to freque ntly asked questions which confirmed its

5 Available at http://www.ftc.gov/os/2009/04/P095406redflagsextendedenforcement.pdf (last visited Sept. 23, 2009) (the "Extended Enforcement Policy"). The Commission subsequently revised the Extended Enforcement Policy on July 29, 2009. See Fed. Trade Comm’n, FTC Extended Enforcement Policy: Identity Theft Red Flags Rule, 16 CFR 681.1 at 1 n.2 (J uly 29, 2009). For all purposes of this action, the subsequent revision merely reiterated the rationale for the Commission's position.

6 Available at http://www.ftc.gov/opa/2009/07/redflag.shtm (last visited Sept. 23, 2009).

8position, first articulated in its April 30, 2009 Extended Enforcement Policy, that attorneys engaged in the practice of law are required to comply with the Red Flags Rule when their billing arrangements qualify them as creditors under the FACT Act and the

ECO Act. Id. According to the Commission's Fre quently Asked Questions Web site: Under the [Red Flags] Rule, the definition of "creditor" is broad, and includes businesse s or organizations that regularly provide goods or services first and allow customers to pay later. . . . Examples of groups that may fall within this definition are utilities, health care providers, lawyers, accountants, and other professionals, and telecommunications companies. FTC, The Red Flags Rule: Frequently Asked Questions ¶ B.1 (footnote omitted). 7 The plaintiff represented at the hearing on the motion that it attempted to informally meet with the Commission to di scuss the Commission's interpretation of the FACT Act and application of the Red Flags Rule to attorneys, but no fruitful discussion occurred as a result of its attempts, and therefore on August 27, 2009, the plaintiff's filed

this action. II. STANDARD OF REVIEW Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits , if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." When ruling on a motion for summary judgment, the C ourt must view the evidence in the light most favorable to the non-moving party. Holcomb v. Powell , 433 F.3d 889,

7 Available at http://www.ftc.gov/bcp/edu/microsites/redflagsrule/faqs.shtm (last visited Sept. 23, 2009).

9895 (D.C. Cir. 2006). The Court must also dr aw "all justifiable in ferences" in the nonmoving party’s favor and accept the non-m oving party’s evidence as true. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 255 (1986). Howeve r, the non-moving party cannot rely on "mere allegations or denials," Burke v. Gould , 286 F.3d 513, 517 (D.C. Cir. 2002), because “conclusory allegations unsuppor ted by factual data will not create a triable issue of fact,” Pub. Citizen Health Research Group v. FDA , 185 F.3d 898, 908 (D.C. Cir. 1999) (internal citation and quotatio n marks omitted). If the Court concludes that "the non-moving party has failed to make a sufficient showing on an essential element of [its] case with respect to which [ it] has the burden of proof," then the moving party is entitled to summary judgment. Celotex Corp. v. Catrett , 477 U.S. 317, 323 (1986). Count I of the plaintiff's complaint seeks to have the Commission's application of the Red Flags Rule to attorneys deemed a violation of 5 U.S.C. § 706(2)(C) on the basis

that the Commission's action is "in excess of statutory jurisd iction, authority, or limitations, or short of statutory right." Co mpl. ¶¶ 54-60. The plaintiff relies primarily upon the District of Columbia Circuit Court's decision in American Bar Ass'n v. Federal

Trade Commission , 430 F.3d 457 (D.C. Cir. 2005), in wh ich the Circuit Court found that that the Commission's interpretation of the te rm "financial institution" in the GrammLeach-Bliley Act, 15 U.S.C. § 6801, to include attorneys was impermissible. Specifically, the Circuit held that Congress did not "by any remaining ambiguity, intend[] to undertake the regulation of the profession of law – a profession never before regulated by 'federal functional regulators' – a nd never mentioned in the statute," id. at 469.

10In determining whether an administrative agency has acted in a manner adverse to 5 U.S.C. § 706(2)(C), the Court must gi ve deference to any agency regulatory interpretation when deference is warrante d. The level of deference that must be accorded, if any, varies depending on the manner in which the agency has acted or what source of authority the agency has interpreted. For example, an agency's interpretation is "entitled to respect" to the extent that it holds the "power to persuade" if the agency is acting without implicit or explicit congressional authorization. Skidmore v. Swift & Co. , 323 U.S. 134, 140 (1944) (stating that in dete rmining whether the agency's position is compelling where the agency is not acting with congressional authority, the court should consider "the thoroughness evident in its c onsideration, the validity of [the agency's] reasoning, [and] its consistency with earlier and later pronouncements"), cited in Gonzales v. Oregon , 546 U.S. 243, 268 (2006). One of the key factors is whether the agency has articulated a reasona ble rationale for its decision. Tripoli Rocketry Ass'n, Inc. v. Bureau of Alcohol, Tobacco, Firearms, & Explosives , 437 F.3d 75, 77 (D.C. Cir. 2006) ("'Not only must an agency's decreed result be within the scope of its lawful authority, but the process by which it reaches that re sult must be logical and rational [or no deference is warranted].'" (quoting Allentown Mack Sales & Serv., Inc. v. NLRB , 522 U.S. 359, 374 (1998))). On the other hand, an agency's interp retation of its own ambiguous regulation promulgated pursuant to a congressional grant of authority is "controlling unless plainly erroneous or inconsistent with the regulation." Auer v.

Robbins , 519 U.S. 452, 461 (1997) (citations and internal quotations omitted). But in determining whether any degree of deference should be accorded to agency action, the Court must first determine whether Congress ha s delegated authority to the agency to act

11either in accordance with an express congressi onal objective or to fi ll in any regulatory gaps left unaddressed by Congress. That dete rmination is guided by the now familiar test

set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. , 467 U.S. 837 (1984). 8 Under Chevron , the Court must first determine "whether Congress has directly spoken to the precise question at i ssue[, and i]f the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Id. at 842-43. If, however , "the statute is silent or ambiguous with respect to the spec ific issue, the ques tion for the court is whether the agency's answer is based on a permissible construction of the statute." Id. at 843.

8 It is worth noting that the Commission contends that the plaintiff's first count of its complaint being a facial challenge to its regulation, the Court, to invalidate the Red Flags Rule, must find that the Rule cannot be applied to attorneys under any circumstan ce. See Def.'s Opp'n at 35. The Court finds that it need not go so far to side with the plaintiff. As the Circuit has stated: The Supreme Court has never adopted a 'no set of circumstances' test to assess the validity of a regulation challenged as facially incompatible with governing statutory law. Inde ed, the Court in at least one case, Sullivan v. Zebley , 493 U.S. 521 . . . (1990), upheld a facial challenge under normal Chevron standards, despite the existence of clearly valid applications of the regulation. Nat'l Mining Ass'n v. U.S. Army Corps of Eng'rs , 145 F.3d 1399, 1407-1408 (D.C. Cir. 1998); see also Mineral Policy Ctr. v. Norton , 292 F. Supp. 2d 30, 38-40 (D.D.C. 2003) ("Thus, based upon the uneven application of the no-set-of-circ umstances test [set forth in United States v. Salerno , 481 U.S. 739 (1987)], the confusion surrounding the doctrine, and this court's own view that Chevron is adequately deferential to the decisions of administrative agencies , the court declines to rely upon Salerno here."). But see Amfac Resorts, L.L.C. v. U.S. Dep't of Interior , 282 F.3d 818, 827 (D.C. Cir. 2002) (noting that the Circuit's application of Chevron in Nat'l Mining Ass'n may not have been appropriate, but as of yet it has been a "question unnecessary for [the Circuit] to answer"), rev'd on other grounds , sub nom. Nat'l Park Hospitality Ass'n v. Dep't of Interior , 538 U.S. 803 (2003). Indeed, attorneys as a whole should not be left to wonder about the applicability of the Red Flags Rule and the potentially of resulting civil monetary liability for non-compliance. The problem, as explained below, is that no attorney could know whether the Rule will apply to that attorney's billing practices under the Commission's interpretation, given the fact that clients' ability to make immediate payments will always be a factor, an intangible over which an attorney has no control. Further, an attorney compelled to represent a client by a tribunal who is oblig ed to pay the attorney all or part of the attorney's services, would not be able to termin ate the relationship simply because th e attorney feared that the client might not make immediate payments, subjecting the attorney to potential liability under the Rule for reasons totally beyond th e attorney's control.

12In applying this two-step an alysis, the Supreme Court in Chevron recognized that "'[t]he power of an administrative agency to administer a congressionally created . . . program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.'" Id. (quoting Morton v. Ruiz , 415 U.S. 199, 231 (1974)). However, it also put the judi ciary in the position of being "the final authority on issues of statutor y construction," instructing cour ts to "reject administrative constructions which are contrary to clear congressional intent." Id. at 843 n.9. Indeed, "[i]f a court, employing traditional tools of statutory construction, ascertains that Congress had an intention on the precise question at issue, th at intention is the law and must be given effect." Id.

The Chevron doctrine also recognizes that a c ongressional grant of authority can be implicit or explicit, and like the deferen ce given to agencies to interpret their own regulations, it commands that if courts reach the second Chevron question, they must give "considerable weight . . . to an executi ve department's constr uction of a statutory scheme it is entrusted to administer[.]" Id. at 844 ("[A] court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency."). The obligation to accord deference to administrative interpretations is important because an agency is in the best position, often based on its "knowledge respecting the matters subjected to agency regulati ons," to make "decision[s] as to the meaning or reach of a statute" and "reconcile[e] conflicti ng policies" that may have developed. Id. (internal quotation omitted). Thus, if the agency's "choice represents a reasonable accommodation of conflicting polic ies that were committed to the agency's care by the statute, [a court] should not disturb it unless it ap pears from the statute or its

13legislative history that the accommodati on is not one that Congress would have

sanctioned." Id. at 845. However, not just any ambi guity in a congressional statute will do, as "the existence of ambiguity is not enough per se to warrant deference to the agency's interpretation. The ambiguity must be such as to make it appear that Congress either explicitly or implicitly delegate d authority to cure that ambiguity." Am. Bar Ass'n

v. F.T.C. , 430 F.3d at 469. III. LEGAL ANALYSIS In answering the first question of Chevron , the logical place to start is with the ECO Act and the FACT Act, and "[t]he starti ng point in [construing] . . . the meaning of [these] statute[s] is the language of the statute[s] [themselves]." Group Life & Health Ins. Co. v. Royal Drug Co. , 440 U.S. 205, 210 (1979). Even a cursory review of the language of these Acts and the purposes underl ying their enactment l eads the Court to the

conclusion that it was not "the unambi guously expressed intent of Congress," Chevron , 467 U.S. at 842-43, to bring attorneys within the purview of the FACT Act and thus subject them to regulation by the Commission' s Red Flags Rule. Plainly, neither the

FACT Act nor the ECO Act contains an "unmis takably clear" grant of statutory authority allowing the Commission's venture into th e regulation of the practice of law. Am. Bar

Ass'n v. F.T.C. , 430 F.3d at 471-72 (citation and internal quotations omitted). Even if it could be said that Congress left some ambi guity as to whether attorneys were to be regulated by not explicitly extracting attorney s from the definition of creditors, that lack of clarity in the statute cannot reasonably be interpreted as either an explicit or implicit grant to the Commission to "cure th[e] ambigu ity" by regulating attorneys, given that the regulation of the legal profession has been left to the prerogative of the states. Id. at 467,

14469, 471-72 ("[I]f Congress intends to alter the usual constitutional balance between the States and the Federal Government, it must make its intention to do so unmistakably clear in the language of the statute." (i nternal quotations omitted) (quoting Will v. Mich. Dep’t

of State Police , 491 U.S. 58, 65, (1989))). But, for the sake of argument, even if the Court were to reach question two of Chevron by finding that the FACT Act did not foreclose the Commission's regulation of attorneys, it would still find that the Commission's interpretation of the FACT Act and its resulting application of the Red Flags Rule to attorneys is unreasonable a nd therefore undeserving of deference. Accordingly, under either analys is, the Court must grant the plaintiff's motion for partial summary judgment on Count I of its compla int because the Red Flag Rule cannot be lawfully extended to reach attorneys.

A. Whether Congress Granted the Commission the Authority to Regulate Attorneys As Cred itors Under the FACT Act 1. The Language and Purpose of the FACT Act Does Not Extend to the Regulation of Attorneys Words take meaning from their ordinary usage, any statutor ily defined meaning, and "the natural reading of the word w ithin the context of [a statute]." Carcieri v.

Salazar , __ U.S. __, __, 129 S. Ct. 1058, 1064 (2009). Context and assigned definitions are relevant because courts "are obliged to give effect, if possible, to every word Congress used." Id. at 1066 (citation and quotations omitted). Therefore, if Congress used a term, the term means what it ordinarily means, unless it is prescribed a different statutory meaning, and how that term is used in the context of the st atute further indicates its intended meaning.

15Applying these principles to this case, a number of conclusions become selfevident. First, the context is inconsistent with the regulation of attorneys. The FACT Act, the act that authorizes the Commission to implement regulations to protect against identity theft, speaks in terms of "financial in stitution[s] and . . . creditor[s]," and "theft with respect to account holders at, or customers of, such entities." 15 U.S.C. § 1681m(e)(1)(A)-(B) (emphasis added) . The selection of "financial institution" along with "creditor" as the targets of the legislation im plies that the FACT Act was created to apply

to entities involved in ba nking, lending, or financial re lated business. Further underscoring this conclusion is the fact that the ECO Act, from which the definition of "creditor" was derived, was a statute promulgated to protect credit applicants from specified forms of discrimination. See 15 U.S.C. § 1691. Therefore, at least with respect to the provisions at issue in this case (and even as the name of the Act itself implies: The

Fair and Accurate Credit Transactions Act), it cannot be that the Act was created as a means of eliminating all types of identity thef t, but rather to eliminate a specific kind of identity theft: iden tity theft in th e credit industry. Second, the targeted population the FACT Act identifies does not correlate with the regulation of attorneys. The target ed population speaks of account holders and customers, and the ECO Act, which focuses on credit applicants and appraisal reports, do not aim their reach expressly to the legal pr ofession. Nor do the terms used to identify the targeted population correspond to the terms used in the le gal profession context. Credit applications, appraisal reports, account holders and customers are all concepts foreign to the practice of law, not squarely fa lling within the universe of terms used to describe participants in the legal profe ssion or the types of activities conducted by

16attorneys, nor the types of re lationships attorneys have with their clients. An example

described in the FACT Act itself underscor es this point. Congress instructed the

Commission to consider including reasonable guidelines providing that when a transaction occurs with resp ect to a credit or deposit account that has been inactive for more than 2 years, the creditor or financial institution shall follow reasonable policies and procedures that pr ovide for notice to be given to a consumer in a manner reasonably designed to reduce the likelihood of identity theft with respect to such account. 15 U.S.C. § 1681m(e)(2)(B) (emphasis added). To start, this example presupposes a preexisting credit relationship. Attorneys are not known for maintaining credit or debit

accounts on behalf of their clients. Mo reover, attorneys pr ovide services to clients , and do not engage in transactions with deposit acco unt holders or consumers, and the Court is aware of no source of authority insinuating th at these terms are interchangeable with the term "client," especially given special doc trines that shape th e 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 attorney s must abide and the special fiduciary and other responsibilities attorney must adhere to when interacti ng with clients. The Court is confident in concluding that the term attorn ey-client is nuanced e nough that if Congress, which is comprised of many members who are themselves attorneys, intended to regulate attorneys and their invoiced billing practices it would ha ve used the appropriate

17terminology to denote that intent and not hidden it in a statute expres sly 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."). Third, the definitions of the statutory la nguage do not apply to attorneys. The

statute states that the term "creditor" applies to "any person who regularly extends, renews, or continues credit; any person w ho regularly arranges for the extension, renewal, or continuation of credit; or any assi gnee of an original cr editor who participates in the decision to extend, renew, or continue credit." 15 U.S.C. § 1691a(e). Inherently important then to this definition is the term credit, which is defined to "mean[] the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or serv ices and defer payment therefor." Id. § 1691a(d) (emphasis added). Again, these definitions do not equate to concepts associated with the legal profession. Nor did Congress make a ny contemporaneous findings in the ECO Act or the FACT Act, or the Commission itself in its Red Flags Rule rulemaking, that lawyers regularly extend the right to thei r clients to defer payments.

The Commission's assertion to th e contrary that attorneys " regularly extend[], renew[], or continue[] credit . . . [or] regularly arrange[] for the extension, renewal, or

continuation of credit" to th eir clients, 15 U.S.C. § 1691a(e) (emphasis added), and therefore should be governed by the regulations promulgate d pursuant to the FACT Act is unsupported by either legislative or admini strative findings. Nonetheless, it is the Commission's position that the Rule's applic ation to attorneys wa s obvious based on the text of the ECO Act, the FACT Act, and the Red Flags Rule. Def.'s Opp'n at 15. But that interpretation was certainl y not obvious to the plaintiff, nor is it obvious to this

18Court. The Commission ha s not identified anything in the legislative history – not even a floor statement by one member of Congress – where the problem of identity theft in the legal profession was addressed, or in the rulemaking record process where even one attorney either commented on the Rule on be half of the legal profession or questioned whether the Rule applied to attorneys. See id. at 7 ("The agencies collectively received a total of 129 comments after a 60-day comment period. While certain commenters responding to the [joint notice of proposed rulemaking, including debt collectors and realtors, neither of whom were specifica lly mentioned in the regulation,] noted the potentially broad scope of the proposed 'creditor' definition, no attorneys or bar associations submitted comments regarding whether attorneys should or should not be covered as 'creditors' under the Act." (footnote omitted)). Indeed, the Commission has identified nothing in the legi slative or administrative record where either Congress or the Commission made any factual fi ndings that there is a significant (or for that case any) problem of identity theft associated with the legal profession to warra nt application of the Red Flags Rule to attorneys. Therefore, neither the language nor the purpose for the enactment of the Rule or the legislative hi story of the FACT Act or the ECO Act gave attorneys any constructive no tice either. The Commission has attempted to offer some post hoc rationalization in its briefing that th ere has been incidents of identity theft associated with the legal profession, id. at 35-36 (representing that "evidence of identity theft in legal services 'is easy to find,'"), but not only is such post hoc rationalization not compelling for the purpose of providing justif ication for the Commission's interpretation, Fed. Power Comm'n v. Texaco, Inc. , 417 U.S. 380, 397 (1974) ("[The Court] cannot 'accept appellate counsel's post hoc rationalizations for agency action'; for an agency's

19order must be upheld, if at all, 'on the same basis articulated in the order by the agency itself.'" (citations omitted)), but it is also unconvincing, as it appears that the examples offered by the Commission may have stemmed mo re from a notary failing to exercise due diligence than any failings of attorneys that contributed to those incidents of purported identity theft, see Def.'s Opp'n at 35 (describing two incidents reported in a legal publication entitled The Connecticut Law Tribune that "imposters forged signatures on mortgage documents for properties that subseque ntly went into foreclosure"). And even with this last-minute effort to provi de support for its decision, the Commission acknowledged at the motion's hearing and in its opposition to the plaintiff's motion, as it must, that the legal profession is at best a "low-risk" i ndustry for identity theft. Id. at 37. 2. The Sources of Legal Authority Relied Upon by the Commission Do Not Support the Regulation of Attorneys Under the FACT Act The sources of legal authority reli ed upon by the Commission to support its interpretation of the applicability of the Re d Flags Rule to attorneys consist of case law and a 1985 interpretation of the ECO Act by the staff of the Federal Reserve Board. As for the case law authority, the Commission relies upon cases from the Sixth Circuit,

federal district courts in Ohio and Washi ngton, and a federal bankr uptcy court of Ohio,

all which the Commission cont ends have construed the EC O Act consistent with its position. Def.'s Opp'n at 16-17. The first co ncern the Court has w ith the Commissions

reliance on these cases is that some of them do not actually construe the ECO Act itself, but instead the provisions of the Federal Re serve Board's regulations implementing the ECO Act, commonly referred to as "Regulation B," see 40 Fed. Reg. 49,298 (Oct. 22, 1975) (codified as amended at 12 C.F.R. pt. 202). See, e.g. , Mays v. Buckeye Rural Elec. Coop., Inc. , 277 F.3d 873, 878 (6th Cir. 2002); Barney v. Holzer Clinic, Ltd. , 110 F.3d

201207, 1209 (6th Cir. 1997) (noting that the defi nition in Regulation B "differs slightly" from that in ECO Act); see also Williams v. AT & T Wireless Servs., Inc. , 5 F. Supp. 2d 1142, 1144 (W.D. Wash. 1998) (relying in part on Regulation B's interpretation of what is a credit transaction). The question in this case is not whether Regulation B was interpreted correctly in those cases, but what was Congress's intended applicab ility of the FACT Act. While Regulation B may have some relevancy to the re solution of the issue before the Court, it is limited "to the exte nt [that it] shed[s] li ght on [the] meaning" Congress intended to import by its use of the terms "creditor" and "credit" in the ECO Act, and the FACT Act's subseque nt adoption of those terms. Weaver's Cove Energy, LLC v. R.I. Coastal Res. Mgmt. Council , __ F.3d __, __, No. 08-2440, 2009 WL 3416164, at *11 (1st Cir. Oct. 26, 2009) ("[C ]omplementary regulatory schemes" by other agencies are only relevant "to the extent they shed light on [a statute's] meaning.");

accord Fed. Election Comm'n v. Democra tic Senatorial Campaign Comm. , 454 U.S. 27, 32 (1981) ("[T]he courts are the final authoriti es on issues of statut ory construction. They must reject administrative constructions of th e statute, whether reached by adjudication or by rule-making, that are inconsistent with th e statutory mandate or that frustrate the policy that Congress sought to implement."); cf. Envtl. Def. v. Duke Energy Corp. , 549 U.S. 561, 576 (2007) (finding that an agency n eed not have interpre ted a statutory term consistent with previous regulatory interpreta tions, so long as the agency's interpretation was ultimately reasonable). And the sec ond concern the Court has with the case authority relied on by the Commission is that none of the cases had as their backdrop the legal profession; rather, with the exception of Barney , the cases involve utility providers, Mays , 277 F.3d at 875; a cellular phone service provider, Williams , 5 F. Supp. 2d at

211144; and public and private gas suppliers, Mick v. Level Propane Gases, Inc. , 183 F. Supp. 2d 1014, 1016 (S.D. Ohio 2000); In re Brazil , 21 B.R. 333, 334 (Bankr. N.D. Ohio 1982), all which logically fit the notion of the type of entities that provide services to

customers and account holders

. 9 The Commission also relies upon the absence in these cases of any industry-based exception to the ECO Act. Def.'s Opp'n at 17. The Court agrees that there is no express industry-based exception provide d in either the ECO Act or the FACT Act, nor is there any need for one for the reasons already e xplained – attorneys simply do not meet the overly broad definition of credito rs adopted by the Commission.

The Commission's reliance on the Federal Reserve Board's staff notes to Regulation B is also not pers uasive. Def.'s Opp'n at 17- 18. The Federal Reserve Board first issued Regulation B in 1975. See 40 Fed. Reg. 49,298 (Oct. 22, 1975) (codified as amended at 12 C.F.R. pt. 202). In 1985, the Federal Reserve Board published its staff's interpretations of Regulation B as a suppl ement to the Board’s regulations, which explained that "[g]ood-faith compliance with the commentary affords creditors protection from civil liability." 50 Fed. Reg. 48,018, 48,024 (Nov. 20, 1985). While Regulation B adopted, as required, the definitions of credit and creditor contained in the ECO Act, the staff interpretations were interpretations of Regulation B , not the ECO Act. 50 Fed. Reg.

9 The Court is not persuaded that the Commission's reliance on Barney v. Holzer Clinic, Ltd. , 110 F.3d 1207 (6th Cir. 1997), is sound given that the Sixth Circuit expressly refused to address the question of whether a medical services provider was a creditor under ECO Act, id. at 1209 ("We need not address either of these propositions, however, because plai ntiffs are not 'applicants' under the ECO[ Act] and therefore cannot invoke the Act's protections."), and made findings to the contrary, id. at 1211 ("The provision of medical treatment under this program is not a credit transaction, either under the technical language of the ECO[ Act] or in the more common se nse of the term, any more than is a court-appointed attorney's agreement to represent an indigent defendant.").

22at 48,048 (codified at 12 C.F.R. pt. 202, App. D, ¶ 1). In providing an example of its application, the staff interpretation cited by the Commission reads: Examples. If a service provider (such as a hospital, doctor, lawyer or retailer) allows the client or customer to defer the payment of a bill, this deferral of debt is credit for purposes of the [“incidental credit”] regulation, even though there is no finance charge and no agreement for payment in installments. Because of the exceptions provided by this section, however, these particular credit extensions are excepted from compliance with certain procedural requirements as specified in the ["incidental credit"] regulation. 50 Fed. Reg. at 48,049 (emphases added) (codified at 12 C.F.R. pt. 202, Supp. I, § 202.3, ¶ 3(c)1 (2009)). Therefore, it is the Commission's positi on that when Congress enacted the FACT Act in 2003, it was aware of and thereby acquies ced to the Federal Reserve Board’s staff interpretation of Regulation B’ s "incidental credit" provision, and thus attorneys should be brought within the definition of creditors. See Def.'s Opp'n at 21-25. It is telling that the Commission has cite d to nothing in the ECO Act's legislative history to support its position, and for a cour t to "give weight to a contemporaneous

construction of a reenacted statute . . . th ere [must be an] indication [that] Congress considered the interpretation." Koszola v. F.D.I.C. , 393 F.3d 1294, 1299 (D.C. Cir. 2005) (citation omitted); see also 2B Norman J. Singer & J.D. Shambie Singer, Sutherland Statutes and Statutory Constr uction § 49:9 at 134- 35 (7th ed. 2008) (explaining that the congressi onal-acquiescence argument is inapplicable "where nothing indicates that the legislature had its attenti on directed to the administrative interpretation upon reenactment"). The Commission cites a Supreme Court case for the proposition that "Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interp retation when it re-enacts a stat ute without change." Def.'s

23Opp'n at 24 (citing Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran , 456 U.S. 353, 382 n.66 (1982) (citation omitted)). The passage from Merrill Lynch cited by the Commission goes on to say, however, that "where . . . Congress adopts a new law incorporating sections of a pr ior law, Congress normally can be presumed to have had knowledge of the interpretation gi ven to the incorporated law, at least insofar as it affects

the new statute." Merrill Lynch , 456 U.S. at 382 n.66 This situation is analogous to the one presented to the Court here. When Congr ess enacted the FACT Act, it incorporated sections of a prior law, the ECO Act, and in doing so presumably knew how interpretations of the prior statute would affect the new statute. However, the Supreme Court's presumption of knowledge rule is not applicable to the Fe deral Reserve Board's staff's interpretations in Regulation B becau se those interpretations were made in a context totally unrelated to identity theft, a nd therefore the Court is not convinced that it is proper to presume that Congress intended to adopt the Regulation B interpretations when it enacted the FACT Act. Accordingly then, absent any legisl ative history showing that the Federal Reserve Board's staff's interpretation of Regulation B was actually considered by Congress when enacting the FACT Act, and given that the purposes of the FACT Act and Regulation B do not square with one another, the Court cannot draw the inference the Commission urges. In affirming a district court's finding th at a law firm and its members were not creditors under the ECO Act, see Riethman v. Berry , 113 F. Supp. 2d 765, 768-69 (E.D. Pa. 2000) (finding that the attorney defendant s and their law firm were not “creditors”

under the ECO Act because "it is insufficient to trigger [ECO Act] coverage to show that a debtor failed to pay a debt or that a creditor voluntarily chose to delay collection and

24continue to perform work on behalf of the debtor. The key element which must be shown is whether, under the agreement between the debtor and the creditor, the debtor has a right to defer payment of existing debt or to incur future debt and defer payment at its sole discretion."), the Third Circuit stated that "Regulat ion B presupposes an already existing credit relationship between the partie s," and was therefore inapplicable to the situation before it, Riethman v. Berry , 287 F.3d 274, 279 (3d Cir. 2002). Indeed, although the Third Circuit did not go so far as to conclude that attorneys were "ipso facto" exempt from the ECO Act, the Cour t found that "[u]nless the fee agreements themselves are credit transactions, the failure of [a law firm] to collect after 'maturity' cannot be an extension of credit. [Therefo re b]ecause the fee agreements [did] not themselves extend credit, failure to enfor ce them was not the c ontinuance of existing

credit." Id. Of particular significance to this cas e was the Third Circuit's observation that the attorneys' "right to prompt and full pa yments" from their clients under "the express terms of their fee agreements" was determina tive, and "the fact that [the attorneys] permitted their clients to pay by check or credit card, or provided legal services prior to receiving a retainer, [did] not alone bring them within the ECO[ Act]." 10 Id. at 278.

This discussion leads to another point: even suppos ing that Regulation B has relevance considering the purpose for the pass ing of the FACT Act, therefore requiring that the Federal Reserve Board's staff interpretation be examined, this Court concludes that it is not legally obliged to defer to th e staff's interpretation that the term creditor applies to attorneys. First, while not nece ssarily adverse to the plaintiff's position, the

10 The Commission's advocacy for a case-by-case appr oach, Def.'s Opp'n at 20, would have attorneys guessing as to whether they fall within the purview of the Red Flags Rule. Attorneys should not be exposed to a sea of uncertainty, esp ecially one that hinges to a signif icant degree on whether a client is capable of paying immediat ely upon the performance of the attorney's services.

25staff interpretation does not actua lly define attorneys as cred itors, and it merely conveys the idea that attorneys are capable of ex tending credit. 12 C.F.R. pt. 202, Supp. I, § 202.3, ¶ 3(c)1 ("If a service provider (such as a . . . lawyer . . . ) allows the client or customer to defer the payment of a bill, this deferral of debt is credit for purposes of the regulation . . . ."). Therefore, even under the staff's interpretation, merely because an entity or individual is capable of providing cr edit does not necessarily render it a creditor

under the ECO Act. Creditor status under th e Act attaches only to a "person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continua tion of credit; or any assignee of an original creditor who participates in the decision to extend, rene w, or continue credit." 15 U.S.C. § 1691a(e) (2006) (emphases added). Second, the staff' s interpretation extends the congressional mandate to "client[s]" as well as "customer[ s]," an impermissible reach given that, as already explained, the terms are not s ynonymous. 12 C.F.R. pt. 202, Supp. I, § 202.3, ¶ 3(c)1. It is also logically unsound for the Co mmission to extrapolat e that attorneys are creditors subject to the FACT Act based on th e Federal Reserve Board's staff assessment that when "a . . . lawyer . . . [who] allows the client . . . to defer the payment of a bill" that lawyer is providing "incidental credit ," 12 C.F.R. pt. 202, Supp. I, § 202.3(c)(1) (Regulation B), and therefore attorneys can be required to comply with the Red Flags Rule if they provide what the Federal Reserve Board staff considered "incidental credit." Def.'s Opp'n at 24. For the reasons just expl ained, this reading of the staff interpretation is inconsistent with the FACT Act, and mo reover, Regulation B, the regulation the staff was interpreting, provides a good-faith exempti on to its application. To come to the conclusion it has reached, the Commission is essentially taking the position that the

26period of time between when a service is prov ided 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. Def.'s Opp'n at 18; Extended Enforcement Policy at 1 n.3. This is clearly not what was intende d 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 ordinary meaning of "defer" is to postpone or delay. See Webster's Third New Int'l Dictionary 591 (1981); see also Black's Law Dictionary 486 (9th ed. 2009) . As the Second Circuit has observed: [T]he proposition that '[e]very contract for labor, not paid for in advance, is necessarily a contract upon credit, because the labor, when once performed, cannot be recalled[, must be rejected]. ' If this proposition were strictly applied . . . countless transactions in which compensation for services is not instantaneous would be characterized as credit transact ions. Such indiscriminate application of the ECO[ Act] is not appropriate. Shaumyan v. Sidetex Co. , 900 F.2d 16, 18-19 (2d Cir. 1990) (citation omitted). And, in the end, as instructive as it might be, one agency's interpretati on of a congressional statute is "not controlling" on another agency's interpretati on of that same statute. Am.

Mun. Power-Ohio v. E.P.A. , 98 F.3d 1372, 1375 (D.C. Cir. 1996); cf. Brock v. L.R. Willson & Sons, Inc. , 773 F.2d 1377, 1383, n.7 (D.C. Cir. 1985) (declining to decide who

deserves deference when the Labor Secretar y's interpretation of a Labor Department regulation conflicts with th at of the Occupational Sa fety and Health Review Commission). The Commission also relies upon two cases, Heintz v. Jenkins , 514 U.S. 291 (1995), and Goldfarb v. Virginia State Bar , 421 U.S. 773 (1975), for the position that attorneys are creditors under the ECO Act. Def.'s Opp'n at 28-30. This reliance is

27misplaced. In Heintz , the Supreme Court considered whether 15 U.S.C. § 1692a(6), which defines "debt collector" as "any person . . . who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another," could lawfully be applied to an attorne y. 514 U.S. at 294. The Court found that the statute was indeed intended to regulate atto rneys, first because "[ i]n ordinary English, a lawyer who regularly tries to obtain pa yment of consumer debts through legal proceedings is a lawyer who regularly 'attemp ts' to 'collect' those consumer debts," and

also because an earlier draft of the stat ute that contained language exempting "any attorney-at-law collecting a debt as an attorney on behalf of and in the name of a client,"

which was omitted from the final version. Id. Neither of these fact ors is present here. As the plaintiff correctly posits: "In 'ordin ary English,' no one would assume that a lawyer engaged in the practice of law is a 'cre ditor' simply because the lawyer bills clients

for services rendered and does not demand im mediate payment." Pl.'s Reply at 11. Moreover, the legislative histories of the ECO Act and the FACT Act are devoid of any

indication that the statutes were in tended to apply to attorneys.

As for Goldfarb , there the Supreme Court considered whether it should find a "learned professions" exemption to § 1 of the Sherman Act, 15 U.S.C. § 1, an act that

creates criminal and civil liab ility for "every person" who e ngages in any combination or conspiracy to restrain "trade or commerce," given state regulation of the legal profession. 421 U.S. at 775, 788. In rejecti ng the attorneys' argument that the practice of law was not "trade or commerce," the Court looked to the purpose of the statute, finding that "Congress intended to strike as broadly as it co uld in § 1 of the Sherman Act, and to read into it so wide an exemption as that urge d on us would be at odds with that purpose." Id.

28at 787. "Whatever else it may be," the Court explained, "the examination of a land title is a service; the exchange of such a service for money is 'commerce' in the most common usage of that word." Id. at 787-88. While the Court will not challenge the Commission's representations that Congress also intended th e term credit to be broadly defined, Def.'s Opp'n at 4 n.7, it is nevertheless a term that encompasses substantially less activity than

the term commerce. And as broad as the te rm credit may be defined, it surely does not have the reach that Congress intended by inclusion of the te rm commerce in the Sherman Act. Indeed, credit is a specific subset of activity that falls within the notion of commerce, a subset which does not logically or commonly apply to attorney billing practices. Invoicing clients for services previously rendered, instead of demanding immediate payment when service is provided is more likely an outgrowth of practicality and necessity, rather than an attempt to provide clients credit. Again, the "hallmark of 'credit' under the ECO[ Act] is the rightof one party to make deferred payment." Riethman , 287 F.3d at 277 (emphasis added). Simply because a lawyer or law firm fails to demand paym ent immediately upon rendering a service does not make the lawyer or law firm a creditor or amount to the granting of a "right" to defer payment. Id. ; accord Lewis v. ACB Bus. Servs., Inc. , 135 F.3d 389, 408 (6th Cir. 1998) (holding that lawyer-defendant was not a "c reditor" under the ECO Act simply because he offered to settle preexisting claims agai nst the debtor-plaintiff, explaining that, "[o]therwise, an attorn ey would be a creditor under the ECO[ Act] anytime the attorney offered to settle a case"); see also Mick’s at Pennsylvania Ave., Inc. v. BOD, Inc. , 389 F.3d 1284, 1289 (D.C. Cir. 2004) (finding that "t here [was] no evidence that . . . [two] restaurant business[es], 'regularly' extend[ed] or arrange[d] credit" so as to bring them

29within the purview of the ECO Act); Shaumyan , 900 F.2d at 18 (finding that a home improvement contract that provided for progress payments by homeowners was not a "credit transaction" subject to the ECO Act because it did not grant the homeowners "a right to defer payment for a monetary debt, prope rty or services;" instead "it set forth a payment schedule that obligated the [homeowner s] to make incremental payments as the work progressed[,] . . . [payments] substantia lly contemporaneous with [the contractor's] performance under the contra ct" (emphasis added)). Given the plain-meaning and statutorily assigned definitions of the terms interpreted by the Commission, the aim of the legislation, a nd the ill-adapted application of these terms to the legal profession, it beco mes clear that the in tent of Congress is unambiguous: it did not grant to the Commission the broa d authority to exercise regulatory control over attorneys pursuant to the FACT Act, and accordingly the Red Flags Rule similarly cannot be properly pr omulgated in such a broad manner. The Commission was never charged with the author ity to reconcile any conflicting policy or gap in policy left by Congress, and thus its ac tions are entitled to de ference only so far as they have the "power to persuade." Skidmore , 323 U.S. at 140. Therefore, without the authority to act, and given the fact that attorneys do not easily fit within the framework of who commonly are thought to be credito rs, the Court cannot find the Commission's position persuasive and therefore controlling. Having concluded that the Commission's app lication of the Red Flags Rule is not

entitled to deference under Chevron because it was not Congre ss's clear intent for the Commission to regulate lawyers when it en acted the FACT Act, 467 U.S. at 843, the Court's analysis could end here. But to make it absolutely clear that the Commission has

30acted beyond its authority, the Court will assume for the sake of argument that Congress' failure to specifically indicate whether lawyer s qualify as creditors under the FACT Act raises sufficient ambiguity as to whether Congress intended that result. And therefore, the Court will examine the second question of Chevron : whether the Commission's conclusion that attorneys can be subjected to complying with the Red Flags Rule is "a permissible construction of the statute." Id.

B. Whether the Commission's Construction of the FACT Act is Permissible For the reasons already state d, even if the Court were compelled to defer to the Commission's interpretation that attorneys c ould be regulated under the FACT Act based upon a congressional grant of authority to the Commission to regulate attorneys, the Commission's application of the Red Flags Rule to attorneys who invoi ce their clients is not reasonable, Am. Bar Ass'n , 430 F.3d at 471, and therefore not "entitled to respect" because it lacks the "power to persuade," 11 Skidmore , 323 U.S. at 140. As a prelude to its analys is of the second prong of Chevron , the Court notes that it is immaterial whether, as the Commis sion contends, the burden of compliance on attorneys will be de minimis because the practi ce of law is a "low-risk" industry. Def.'s Opp'n at 37. The issue is not the ease in which compliance can be achieved, but only whether the legal profession can be regulated in the manner the Commission seeks to do.

11 The Commission's interpretation of the Red Flags Rule, as set forth in the Extended Enforcement Policy, is not entitled to any heightened deference other than to the degree provided in Skidmore , 323 U.S. at 140, because "the underlying regulation[, the Rule,] does little more than restate the terms of the [FACT Act] itself," Gonzales , 546 U.S. at 256. Where "[t]he language [at issue] . . . comes from Congress, . . . the near equivalence of the [term in the] statute and regulation belies the [Commission's] argument for . . . deference[,]" because "the question . . . is not the mean ing of the regulation but the meaning of the statute." Id. at 257. "An agency does not acquire special author ity to interpret its own words when, instead of using its expertise and experience to form ulate a regulation, it has elected me rely to paraphrase the statutory language." Id.

31According to the Commission, the statut ory definition of "creditor" under the ECO Act, which is incorporated into the FA CT Act, "covers all entities that regularly permit deferred payments for goods or services," and can include "a retailer or service provider that, on a regular basi s, allows its customers to make purchases or obtain

services and then bills them for payment at the end of each month . . . ." Extended Enforcement Policy at 1 n.3. While, as both parties concede, attorneys may derive payment from their clients th rough all sorts of arrangements (e.g. retainer agreements, contingency agreements, or invoiced billing), Pl .'s Mem. at 21; Def.'s Opp'n at 21, it is the Commission's position that only one of th ese billing practices brings an attorney within the purview of the Red Flags Rule – billing by monthly invoice – because it

amounts to an extension of credit to a client for the time between when the service is provided and when payment for the service is made. Def.'s Opp'n at 10, 21 (referencing The Extended Enforcement Policy at 1 n.3). Specifically, the Comm ission states that "creditors under the ECO[ Act] include professionals, such as lawyers . . . who bill their

clients after services are rendere d. . . . or . . . that, on a regular basis, allow[] its customers

to . . . obtain services and then bills them for payment at the end of each month." The Extended Enforcement Policy at 1 n.3. This interpretation of the ECO Act's definitio ns of credit and creditor is too broad. The primary problem lies in the Commission's interpretation of what it means to defer payment. "Defer," in it ordinary meaning, means to postpone or delay. See Webster's Third New Int'l Dictionary 591 (1981); see also Black's Law Dictionary 486 (9th ed. 2009). To invoice client at the end of each month is not delaying payment or giving a

client a right to postpone payment. As a practical matter in the legal context, legal

32services are not the type of services that can in may instances be billed and payment received simultaneously with th e occurrence of the services, as can be done, for example, when one's furnace is repaired or catering se rvices are provided for a wedding. Therefore the Commission's distinction between continge ncy payments, retainer fees, and invoiced billing makes little sense. As the plain tiff points out, in the context of the legal profession "there [really] is no functional difference between fees paid by retainer, contingency arrangements and invoice." Pl.'s Mem. at 23. Because of ethical constraints, attorneys cannot exercise owne rship interests over funds rece ived from a client before their services are actually rendered or expenses are incurred even if funds are provided to attorneys in advance of the services being re ndered or the expenses being incurred. In such situations, the f unds must be maintained in a se parate client trust account. See Model Rules of Prof'l Conduct R. 1.15(c) (2009 ) ("A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are ea rned or expenses incurred."); see also Id. at R. 1.19 (2009) (indicating that a lawyer must "refund[] any a dvance payment of fee or expense that has

not been earned or incurred" at the terminati on of the representation). And as a practical matter, it would be unreasonable to expect a ttorneys to bill for services in any manner other than periodically, especi ally given the frequent unant icipated services attorneys have to perform for their client s or the practical reality that clients may lack the ability to immediately access funds when legal services unexpectedly have to be performed without delay. Not only would immediate billi ng and collection of fees and expenses be impractical, considering the unique nature of the practice of law, but contrary to the Commission's position, conducting a legal practic e in that manner would be extremely

33costly and time consuming. It does not take much imagination to appreciate the added cost and burden attorneys would incur if they were required to immediately calculate, bill

and collect their fees after each task is performed or else run afoul of the Commission's construction of the FACT Act through its adoption of the Red Flags Rule. This point brings the Court to the second problem with the Commission's interpretation: it does not take into consideration how legal services must be tabulated and billed. In essence, the Co mmission's view classifies each task attorneys complete as a distinct service, which fails to take into account the nature of the relationship that exists between attorneys and their clients. Usuall y, they are relationships that exist over an extended period of time, during which servic es may be provided on a continuous basis that can last for days, weeks and even months or longer. This is particularly true when a case is in litigation. Accordi ngly, an end-of-the-month bill w ill frequently not reflect the completion of the services provided to a cl ient, but rather an interim submission for payment due at that time based on services provided throughout the billing period. Another problem then with the Commi ssion's interpretation in its Extended Enforcement Policy is that its monthly bill ing cycle policy for determining who is a creditor seems completely arbitrary. With the absence of any fact-finding conducted during the rulemaking process, the Court canno t assess why the Commission selected this time frame over another. And considering that the monthly time period seems to have been plucked out of thin air, what w ould stop the Commission from arbitrarily concluding in the future that another period of time, like bi-m onthly or weekly, should be employed? In fact, the Commission's attorney represented at the hearing on the plaintiff's motion for partial summary judgment that any b ill not submitted to a client immediately

34upon rendering a service and not paid virt ually simultaneously upon its submission creates a debtor-creditor relationship. This position is extreme and clearly could not have been a result anticipated by Congress gi ven the obvious intrusion the Commission's approach would have into th e relationships between attorn eys and their clients. The Commission's interpretation is also not dispositive of the issue because it represents an interpretation that evolved af ter the period for notice and comment closed, and without any fact-finding ju stification for the decision. Tripoli Rocketry Ass'n , 437 F.3d at 83 ("But where an agency has articu lated no reasoned basis for its decision – where its action is founded on unsupported asserti ons or unstated inferences – we will not abdicate the judicial duty caref ully to review the record to ascertain that the agency has

made a reasoned decision based on reasonabl e extrapolations from some reliable evidence." (citation and internal quotation omitted)). To be clear, the Court is not saying that an agency with congressional aut hority cannot develop, apply, or adapt any reasonable interpretation it deems appropriate. See Rust v. Sullivan , 500 U.S. 173, 186 (1991) (finding that an agency's revised inte rpretation may still receive deference because "[a]n agency is not required to establish rule s of conduct [that once established must] last forever" (citations and internal quotations omitted)); see also Skidmore , 323 U.S. at 140 (indicating that whether an agen cy's interpretation of a regulation is "consisten[t] with earlier and later pronouncements" may factor in to whether an agency's interpretation has the "power to persuade"). Rather, it is the Court's conclusion that the Commission's interpretation is not persuasi ve because it does not corres pond with any agency factual findings supporting the need to redress identity theft associat ed with the legal profession and why existing regulations of the professi on are inadequate, assuming a problem even

35exists. See Tripoli Rocketry Ass'n , 437 F.3d at 81 ("The fatal shortcoming of [the agency's] position is that it never reveals how it determin es that [the standard it employed] . . . . reflects reasoned decisionmaki ng."). From the record before the Court (or more accurately the lack of a record), the be st that can be gleaned is that identity theft in the attorney-client context is only a theore tical problem, especially given the role of state professional codes of conduct and othe r ethical codes to wh ich attorneys must abide, 12 and the Court cannot conclude that it is an actual problem give n the absolute lack of any legislative, regulatory or other eviden tiary findings that have been brought to the

Court's attention. Id. at 83 ("It is well understood in administrative law that the 'focal point for judicial review shoul d be the administrative record already in existence, not some new record completed initially in the reviewing court.'" (citation omitted)).

12 The Commission maintains that there are no existing rules of professional or ethical conduct that directly address identity theft and therefore its regulatio n 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 seve ral 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 knowin g exactly who they are repr esenting. 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, lawyer s 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 alawyer misrepresented the identity of a client. And finally, attorneys are obligated not to use the attorneyclient 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 crimin al or fraudulent act by a client." Id. at R. 4.1(b). These rules make it patently clear that attorneys are alre ady 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-pa rties against identity theft is just not the case.

36There is another procedural problem as we ll: at no time in the rulemaking process did the Commission provide any indication that the definition of creditor was to include attorneys who invoice their clie nts, so its post-rulemaking in terpretation first disclosed on April 30, 2009 (almost a year and a half after the final Rule was issued) came out-of-theblue. The Commission's final Rule issued in November 2007, indi cated that creditors covered by the Rule "include[d] lenders such as banks, finance companies, automobile dealers, mortgage brokers, utility companies, and telecommunications companies," 16 C.F.R. § 681.1(b)(5), and the Co mmission reiterated nearly a y ear later that the definition

of creditors included entities such as "finan ce companies, automobile dealers, mortgage brokers, utility companies, telecommunications companies, and non-profit and government entities that defer pa yment for goods or services." Id. Never in the rulemaking process did the Commission even mention attorneys who bill their clients through monthly invoices. While the Commissi on's examples were just that, examples, and therefore the principle of construction inclusio unius, exclusio alterius (i.e. the listing of some things implies that all things not included in the list were purposefully excluded, Robinson v. Napolitano , 554 F.3d 358, 365 (3d Cir. 2009)) is not dispositive of the issue, Helvering v. Morgan's, Inc. , 293 U.S. 121, 126 n.1 (1934), the examples do give some

indication as to the entities that the Commi ssion intended the Rule to cover. None of these entities and entities that they intera ct with in operating their businesses even marginally resemble the relationship attorneys have with their clients. The Commission argument that the FACT Act should be applied to attorneys just like other acts of general applicability (i.e. statutes that "cover[] 'any person,'" Def.'s Opp'n at 31), is not compelling given that the FACT Act adopted a specific use of the term credit and

37creditor, and unlike universal coverage connot ed from the use of the word person, the FACT Act does not inherently bring within it s purview attorneys fo r the reasons already expressed. Rulemaking conducted in the manne r employed in this situation would totally defeat the entire purposes for the notice and comment requirement. In short, the Commission's Extended Enforcement Policy is not supported by either the plain language of the ECO Act (and therefore also not the plain language of the FACT Act) or the applicable case law. Nor was the Extended Enforcement Policy the product of notice-and-comment rulemaking, but rather it appears that the decision was made without any degree of deliberation or comment from the public, nor is it supported by anything other than post hoc rationalizations. That no reco rd has been developed even showing that identity theft is a problem in the attorney-client context is telling and defeats the Commission's position to the contrary.

An additional concern of the Court is th at state-level authorities have throughout the history of our nation regulated the conduct of attorneys, not the federal government.

Am. Bar Ass'n , 430 F.3d at 472. The Commission is correct in noting that Congress may regulate some state matters dire ctly, Def.'s Opp'n at 33, but it is also true that Congress does not tend to interject itself into an arena where it hasn't generally ventured without explicit explanation hoping that the states w ill not notice the usurpation of their authority,

Am. Bar Ass'n , 430 F.3d at 472. As recently pronounced by the Circuit in a case involving another attempt by the federal government to regulate the conduct of attorneys: The states have regulated the practice of law throughout the history of the country; the fede ral government has not. This is not to conclude that the federal government could not do so. We simply conclude that it is not reasonable for an agency to decide that Congress has chosen such a course of

38action in language that is, even charitably viewed, at most ambiguous

. Id. (emphasis added). As the Commission notes , this "plain statement rule is nothing more than an acknowledgment that the Stat es retain substantial sovereign powers under our constitutional scheme, powers with whic h Congress does not r eadily interfere." Def.'s Opp'n 25 (citing Gregory v. Ashcroft , 501 U.S. 452, 461 (1991)). The observation

underlies the delicate bala nce that exists between the two sovereigns, and like the Circuit, the Court will not infer that Congress transg ressed into a tradi tional area of state regulation predicated on nothing mo re than silence and conjecture. One final difficulty the Court has in a ccepting the Commission's position is that application of the Red Flags Rule creates anot her barrier for attorneys to build the level of trust necessary for clients to feel th at they can openly communicate with their attorneys. And without the free flow of info rmation between an atto rney and his or her client, surely the quality of representation an attorney can provide will be adversely impacted. This is particularly true in crim inal cases, as anyone who has ever represented criminal defendants appreciates. Many such defendants do not believe at the onset that their attorneys have their best interest at hear t. And questions by atto rneys at the onset of the relationship designed to conf irm that the client (or poten tial client) is who he or she purports to be will likely be construed by the cl ient as a challenge to his or her integrity and undercut the ability to deve lop a relationship of trust. For the reasons already set forth above, attorneys are already obligated, at least im plicitly, by the rules of professional conduct to know who they are repres enting, so forcing attorneys to test their clients' assertions of who they are is an intr usion into the attorney-client relationship that is not only unnecessary, but also unwise. Regulation of the complexities of the

39relationship are best left to the well-developed ethical a nd professional codes of conduct and the expertise of associated state disciplin ary tribunals tasked with the obligation of enforcing them, not the Commission.

It follows then that the Commission's inte rpretation of its own regulation, the Red Flags Rule, as set forth in the Extended En forcement Policy is both plainly erroneous and inconsistent with the pur pose underlying the enactment of the FACT Act. The Commission not only seeks to extend its re gulatory power beyond that authorized by Congress, but it also untimely and arbitrar ily selects monthly invoice billing as the activity it seeks to regulate. Moreover, for all the reasons set forth in this Memorandum Opinion, the Commission's position l acks the "power to persuade," Skidmore , 323 U.S. at 140, and is undeserving of deference. Accordingly, the Court finds that the

Commission's actions violate th e APA and must be rejected because the Red Flags Rule cannot be properly applied to attorneys in the overly broad manner in which the

Commission seeks to enforce it. 13 _______/s/_____________ REGGIE B. WALTON United States District Judge

13 An Amended Order consistent with the Court’s ruling accompanies this Memorandum Opinion.

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