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SCOTUS Rejects D.C. Circuit Notice & Comment Rulemaking Requirement for Changing Agency Interpretation

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

USSC SealThe United States Supreme Court (SCOTUS) held today, in Perez v. Mortgage Bankers Association, that an interpretative rule does not require advance notice and an opportunity for public comment under the Administrative Procedure Act (APA) no matter when the agency adopts the interpretation, unanimously reversing the contrary decision of the United States Court of Appeals for the District of Columbia Circuit. The decision ends nearly two decades of limitations on federal agencies in interpreting their programmatic statute and implementing regulations and opens the door to many reversals of prior administrative interpretations, even if relied upon by private parties now to their detriment. The decision leaves untouched, however, more complex problems for agency regulators and potential litigation over when a rule is interpretive or substantive, and whether courts should defer to those agency interpretations.

Short Background: The Fair Labor Standards Act (FLSA) generally requires that employers pay overtime wages to employees who work longer than 40 hours per week, but exempts individuals “employed in a bona fide executive, administrative, or professional” capacity. DOL revised its regulations in 2004 and these regulations are the subject of later interpretations. In 2006, DOL released an Opinion Letter advising that, on the facts presented, mortgage loan officers with archetypal job duties fell within the administrative exemption. In 2010, however, 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 interpretation withdrew the 2006 Opinion Letter.

Naturally, 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, but the D.C. Circuit, applied Paralyzed Veterans and Alaska Professional Hunters 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 Administrative Procedure Act (APA) without notice and comment rulemaking. The court of appeals was faced with a narrow 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 and remanded with instructions to vacate DOL’s 2010 interpretation, as discussed previously. DOL, through the Department of Justice (DOJ)’s Solicitor General, sought, and was granted, certiorari, and now, at least temporarily retains its current interpretation.

The Holding: Justice Sotomayor succinctly states the bottom line of a broader issue in Perez v. Mortgage Bankers Association (MBA) for a unanimous Court:

When a federal administrative agency first issues a rule interpreting one of its regulations, it is generally not required to follow the notice-and-comment rulemaking procedures of the Administrative Procedure Act (APA or Act). …. The United States Court of Appeals for the District of Columbia Circuit has nevertheless held, in a line of cases beginning with Paralyzed Veterans …, that an agency must use the APA’s notice-and-comment procedures when it wishes to issue a new interpretation of a regulation that deviates significantly from one the agency has previously adopted. The question in these cases is whether the rule announced in Paralyzed Veterans is consistent with the APA. We hold that it is not.

SCOTUS’s demise of the near-20-year-old D.C. Circuit Paralyzed Veterans doctrine was distilled in 32 words:

The Paralyzed Veterans doctrine is contrary to the clear text of the APA’s rulemaking provisions, and it improperly imposes on agencies an obligation beyond the “maximum procedural requirements” specified in the APA,

citing Vermont Yankee, in which SCOTUS held that the courts may not graft additional procedures on an agency that go beyond the APA. SCOTUS’ holding, for which MBA will most likely be cited, lies in 33 words:

Because an agency is not required to use notice-and-comment proce­dures to issue an initial interpretive rule, it is also not required to use those procedures when it amends or re­peals that interpretive rule.

SCOTUS’s decision has limited direct effect, partly because of its facts, partly because a statutory “safe harbor” limits private liability under the prior and now-defunct interpretation, and partly because DOL is in the process of revising the underlying regulation. The impact of the decision, however, is far broader.

Impact: The broader implication of MBA is that agencies are free to re-interpret their statutes and regulations rapidly and without the detailed and time-consuming procedures or substantive standards of judicial review of the APA. The Paralyzed Veterans doctrine tended to ossify some interpretations and given pause to agency reinterpretations – or at least required a formidable process to explain and change that interpretation. The freedom to alter interpretations after MBA will be welcomed and embraced by the Administration and the agencies, but they should not be too giddy. While the current Administration may embrace this freedom, the next Administration may as well – and undo with equal rapidity the current Administration’s interpretations. As the Chinese curse says, “Be careful what you wish for, you may get it.”

Whether advance notice and an opportunity for public comment on interpretive rules (and their implementing typology of published interpretative rules, policies, guidance, etc.) is good public policy – which SCOTUS notes may or may not be – the courts may not enforce such a requirement. The underlying policy values may be changed by each Administration. Some agencies publish guidance documents for public comment and consider the public’s comments; others do not.

Justice Sotomayor acknowledges that “There may be times when an agency’s decision to issue an interpretive rule, rather than a legislative rule, is driven primarily by a desire to skirt notice-and-comment provisions.” The “times” and the tools are both far more pervasive than Justice Sotomayor, or the majority of the Court, may believe.

MBA may trigger also serious new Congressional reflection on the scope and requirements for the APA’s “interpretative rules” although that seems less than likely. Nonetheless, modernizing a nearly 70-year old statute to reflect or adjust current standards and agency practice should be considered.

The Larger Interpretive / Substantive Problem: Administrations change and with them both regulations, that have been the subject of some of the most significant SCOTUS decisions, and interpretations. The distinction between a substantive or legislative regulation and an interpretation (or policy, guidance, etc.) is far more problematic. As Justice Sotomayor noted for the Court:

The term “interpretative rule,” or “interpretive rule,” is not further defined by the APA, and its precise meaning is the source of much scholarly and judicial debate. …. We need not, and do not, wade into that debate here. For our purposes, it suffices to say that the critical feature of interpretive rules is that they are “issued by an agency to advise the public of the agency’s construction of the statutes and rules which it administers.” …. The absence of a notice-and-comment obligation makes the process of issuing interpretive rules comparatively easier for agencies than issuing legislative rules. But that convenience comes at a price: Interpretive rules “do not have the force and effect of law and are not accorded that weight in the adjudicatory process.”

SCOTUS declined to consider whether DOL’s 2010 interpretation constituted a substantive or legislative rule – the issue was not raised below (the parties assumed the 2010 interpretation was an interpretive rule) and was therefore waived – but that issue must be raised in complaints against a policy, guidance, memorandum, or other “interpretation.” The distinction between legislative rules and interpretative rules or policy statements has been described at various times as “tenuous,” …, “fuzzy,” …, “blurred,” …, and, perhaps most picturesquely, “enshrouded in considerable smog.” … As [the late] Professor Davis puts it “the problem is baffling.”

The D.C. Circuit has, over a long history, applied several tests to distinguish between legislative and interpretative rules. One test considers the effects of an agency’s action, inquiring whether the agency has (1) imposed any rights and obligations, or (2) left the agency and its decisionmakers free to exercise discretion. The agency’s language is an important consideration in drawing that line. A second test looks to the agency’s expressed intentions and considers whether: (1) the agency’s own characterization of the action; (2) whether the action was formally published, i.e. in the Federal Register and the Code of Federal Regulations; and (3) whether the action has binding effects on private parties or on the agency. A third test looks to whether the expression is coming from the official’s regulatory authority.

This underlying issue pervades the regulatory practice whenever an agency opines in something less than a regulation (or an adjudication, if they can), from the Environmental Protection Agency (EPA)’s letters to a Senator to the Department of Homeland Security (DHS)’s memoranda ostensibly structuring prosecutorial discretion. Agencies and litigators face the issue of whether a pronouncement is a legislative rule and interpretive rule daily and often struggle drawing the line because it involves both the substance of the statutes and regulations and the underlying APA requirements and interpretations. MBA will naturally exacerbate the problems faced by the agencies and the courts in making this distinction.

Concurrences on Auer / Seminole Rock: The court was unanimous on the principle of the case, but fissures over the impact are apparent, particularly in the application of judicial deference to agency interpretation. As Justice Sotomayor suggested, in what might be considered a preemptive footnote:

MBA alternatively suggests that interpretive rules have the force of law because an agency’s interpretation of its own regulations may be entitled to deference under Auer v. Robbins, …, and Bowles v. Seminole Rock & Sand Co., …. Even in cases where an agency’s interpretation receives Auer deference, however, it is the court that ultimately decides whether a given regulation means what the agency says. Moreover, Auer deference is not an inexorable command in all cases. See Christopher v. SmithKline Beecham Corp., … (Auer deference is inappropriate “when the agency’s interpretation is plainly erroneous or inconsistent with the regulation” or “when there is reason to suspect that the agency’s interpretation does not reflect the agency’s fair and considered judgment” (internal quotation marks omitted)); Thomas Jefferson Univ. v. Shalala, … (“[A]n agency’s interpretation of a . . . regulation that conflicts with a prior interpretation is entitled to considerably less deference than a consistently held agency view” (internal quotation marks omitted)).

Justice Scalia, concurring in the judgment and specifically in the reasoning on the demise of the Paralyzed Veterans doctrine, continues to take issue with whether courts should defer at all to agency interpretations

Heedless of the original design of the APA, we have developed an elaborate law of deference to agencies’ interpretations of statutes and regulations. Never mentioning [5 U.S.C.] §706’s directive that the “reviewing court … interpret … statutory provisions,” we have held that agencies may authoritatively resolve ambiguities in statutes. Chevron, …. And never mentioning §706’s directive that the “reviewing court … determine the meaning or applicability of the terms of an agency action,” we have – relying on a case decided before the APA, Bowles v. Seminole Rock & Sand Co., … – held that agencies may authoritatively resolve ambiguities in regulations. Auer v. Robbins ….

* * * * *

I would therefore restore the balance originally struck by the APA with respect to an agency’s interpretation of its own regulations, not by rewriting the Act in order to make up for Auer, but by abandoning Auer and applying the Act as written. The agency is free to interpret its own regulations with or without notice and comment; but courts will decide – with no deference to the agency – whether that interpretation is correct.

Justice Thomas also concurred as to the Paralyzed Veterans doctrine, but provides a lengthy explanation of why “the entire line of [deference] precedent beginning with Seminole Rock raises serious constitutional questions and should be reconsidered in an appropriate case. Justice Alito concurred on the Paralyzed Veterans doctrine, but not the entire opinion, and affirms that he likewise awaits “a case in which the validity of Seminole Rock maybe explored through full briefing and argument.”