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SCOTUS Argument Preview: Must Agencies Use Notice and Comment Rulemaking to Change Interpretation

Posted in Judicial Process, Judicial Review & Remedies, Regulatory Process

Next Monday, the United States Supreme Court (SCOTUS) will hear argument in Perez v. Mortgage Bankers Association, No. 13-1041, asking whether a federal agency must engage in advance notice and public comment rulemaking pursuant to the Administrative Procedure Act (APA) before it can significantly alter an established interpretive rule articulating the agency’s interpretation of an agency regulation.  Although the case presents a narrow set of factual circumstances over the Department of Labor (DOL) application of the Federal Labor Standards Act (FLSA), as amended, the implications for federal agency rulemaking and guidance of a SCOTUS decision are far reaching and could alter fundamentally the way that agencies regulate.

Factual & Legal Premise:  The FLSA generally requires that employers pay overtime wages to employees who work longer than 40 hours per week.  The FLSA, however, includes several exceptions, including “employed in a bona fide executive, administrative, or professional” capacity.  DOL revised its exception regulations in 2004 and these regulations are the subject of later interpretations.  Whether mortgage loan officers qualify for this “administrative exemption” has left DOL on both sides of the debate.  In 2006, the Bush Administration DOL issued an opinion letter concluding on the facts presented that mortgage loan officers with archetypal job duties fell within the administrative exemption.  In 2010, however, the Obama Administration DOL issued an “Administrator’s Interpretation” advising that “employees who perform the typical job duties” of the hypothetical mortgage loan officer “do not qualify as bona fide administrative employees.”  The 2010 Administrative Interpretation withdrew the 2006 Opinion Letter.

After the 2010 Administrative Interpretation came to light, the Mortgage Bankers Association sought declaratory and injunctive relief, specifically, that the adoption of the 2010 Administrative Interpretation violated the APA and the 2010 Administrative Interpretation conflicted with the 2004 regulations.  The district court rejected both notions on narrow grounds and the bankers appealed.

The United States Court of Appeals for the District of Columbia Circuit followed two prior decisions in Paralyzed Veterans of America v. D.C. Arena L.P. and Alaska Professional Hunters Ass’n v. FAA for the proposition that when an agency has given its regulation a definitive interpretation, and later significantly revises that interpretation, the agency has in effect amended its rule, something it may not accomplish under the APA without notice and comment rulemaking.  The court of appeals, like the district court, was faced with a much narrower question:  whether reliance on the prior interpretation is a “separate and independent requirement” or is it just one of several factors for determining whether an agency’s interpretation qualifies as definitive, and decided that there is no discrete reliance element.  On that narrow basis, the panel reversed the district court denial of the Mortgage Bankers Association motion for summary judgment and remanded with instructions to vacate DOL’s 2010 Administrator Interpretation as discussed in an earlier post.  Whether an intercircuit conflict exists over the application of the APA requirements to second interpretations is subject to debate, often based on how narrowly or broadly the question is focused.

The Department of Justice (DOJ)’s Solicitor General used this case as his forum for asking whether the underlying and well-established Paralyzed Veterans / Alaska Hunters proposition is valid:

Whether a federal agency must engage in notice-and-comment rulemaking pursuant to the Administrative Procedure Act before it can significantly alter an interpretive rule that articulates an interpretation of an agency regulation.

Shortly after the Department of Justice (DOJ)’s Solicitor General filed the petition for certiorari, President Obama (POTUS) directed the Secretary of Labor to “modernize and streamline” the regulations – perhaps what DOL should have done in the first place.  SCOTUS granted certiorari last June and will decide the case not later than next June.

United States Position:  The Solicitor General – representing the interests of the United States, not just the interests of DOL – argues that an agency may adopt an interpretive rule altering its prior interpretation of an agency regulation without notice-and-comment rulemaking.  First, the APA categorically exempts interpretive rules from its own notice and comment requirement and the 2010 2010 Administrator Interpretation is exempt from notice and comment requirements.  The Solicitor General argues that Congress designed the APA’s exemption for interpretive rules to encourage the public’s access to agency interpretations, rather than discourage clear regulations.  Moreover, the APA specifies the maximum procedural requirements that courts may enforce for agency rulemaking under SCOTUS precedent in Vermont Yankee, and therefore the D.C. Circuit may not impose the Paralyzed Veterans / Alaska Hunters requirements.

The Opposition:  Although the respondents sought to distinguish and narrow the understanding of the case from the court of appeals, SCOTUS’s grant of review requires them to argue more broadly in support of the Paralyzed Veterans / Alaska Hunters doctrine.  The Mortgage Bankers take a “good government” view that Paralyzed Veterans / Alaska Hunters doctrine is faithful to the functional approach that SCOTUS has taken in the past to the APA, not a rigid reading.  In a narrower perspective, the respondents argue that the 2010 Administrative Interpretation should not even qualify as an “interpretive rule” under the APA, which they argue includes only those “rules” that do not bind private parties but only indicate the way the agency views the authorizing statute, not its view of its own regulations.  Here, they argue, DOL established a substantive rule in the 2010 Administrative Interpretation, raising the complex set of issues of when a rule is substantive rather than merely interpretive, and further raising the problem of when the courts should defer to an agency’s interpretation of its own ambiguous regulations under SCOTUS’s decision in Auer v. Robbins.

Implications:  The Solicitor General seeks a narrow termination of the D.C. Circuit’s doctrine and agency freedom to implement regulations by guidance; the Mortgage Bankers seek a confirmation of the specific decision on a wider range of grounds to limit agency pressure to comply with its less-than-regulatory statements.  Without question, agencies seek to operate with the least possible constraints and even the minimal requirements of the APA are constraints that require time and energy that an agency may seek to avoid (or evade).  The root of the problem was well eloquently summarized in another case decided by the D.C. Circuit:

The phenomenon we see in this case is familiar.  Congress passes a broadly worded statute.  The agency follows with regulations containing broad language, open-ended phrases, ambiguous standards and the like.  Then as years pass, the agency issues circulars or guidance or memoranda, explaining, interpreting, defining and often expanding the commands in the regulations.  One guidance document may yield another and then another and so on.  Several words in a regulation may spawn hundreds of pages of text as the agency offers more and more detail regarding what its regulations demand of regulated entities.  Law is made, without notice and comment, without public participation, and without publication in the Federal Register or the Code of Federal Regulations.  With the advent of the Internet, the agency does not need these official publications to ensure widespread circulation; it can inform those affected simply by posting its new guidance or memoranda or policy statement on its web site.  An agency operating in this way gains a large advantage.  ….  The agency may also think there is another advantage – immunizing its lawmaking from judicial review.

A number of amici take up this cudgel to support affirmance.  Here DOL takes advantage of what it perceives to be ambiguity in its own regulations to adopt an interpretation for which it implicitly seeks judicial deference under Auer v. Robbins, holding that courts should defer to an agency’s interpretation of its own regulations unless that interpretation is “plainly erroneous.”  Some have argued that SCOTUS should tie reversal of Mortgage Bankers to the reversal of Auer, but even lesser positions make Auer a pervasive issue in briefing in support of the D.C. Circuit’s decision.

SCOTUS’s affirmance of the D.C. Circuit’s Mortgage Bankers decision could require agencies to be much more disciplined in their promulgation of regulations and their post-promulgation interpretation of those regulations.  That discipline may affect also the speed at which a new Administration can change course.

SCOTUS’s reversal of Mortgage Bankers could permit agencies to wider latitude to alter the guidance that they use to fill in the gaps in regulations, sometimes gaps that could not be foreseen, or by inadvertence, but also gaps left purposely.  That freedom could spawn a new wave of litigation over when substantive regulations are required.

How the Justices view the issues may or may not become clearer in next Monday’s argument, but both sides can expect strenuous challenges.  SCOTUS’s decision may be one of the most significant regulatory decisions in recent years, whether giving agencies freedom or imposing discipline.