Thumbnail image for Supreme Court building.JPGIn a case we labeled one of the “cases to watch” this term, a relatively unified Supreme Court decided in Perez v. Mortgage Bankers Association that a federal agency does not need to engage in notice-and-comment rulemaking pursuant to the Administrative Procedure Act (APA) before it can significantly alter an interpretive rule of an agency regulation, even if parties have relied on that rule to their detriment. Put simply, the Supreme Court agreed with the DOL that federal agencies can indeed “flip flop” their interpretations with each new administration without first going through the more laborious process of promulgating new regulations. Although not entirely unexpected, the decision is nonetheless a disappointment for employers (and employees) who continue to get whipsawed by ever-changing administrative interpretations at the DOL, NLRB, and other agencies. However, there is a silver lining. With the ability to issue interpretations without engaging the formal rulemaking process, agencies are likely to continue to issue such guidance and interpretations. In other words, while you still may be subject to the whims of whatever administration is currently in power, you are at least likely to understand those whims more fully.

The Case

Perez v. Mortgage Bankers Association and its companion case, Nickols v. Mortgage Bankers Association, were brought, respectively, by the Secretary of Labor and an intervening mortgage loan officer. In 2006, the Bush administration’s DOL issued an opinion letter in which it announced an interpretation of the revamped 2004 FLSA rules as applied to mortgage loan officers. Under those rules, the DOL opined that mortgage loan officers would be exempt from overtime under the administrative exemption. Then four years later, in 2010, the DOL did an about-face and issued a new Administrative Interpretation in which it withdrew its 2006 opinion letter and announced a contrasting interpretation, namely that the loan officers were not exempt from overtime after all.

The Mortgage Bankers Association sued to overturn the DOL’s 2010 interpretation, but the D.C. district court dismissed the challenge. The D.C. Circuit reversed the lower court ruling, relying on a series of rulings and other dicta dating to 1997, holding that an agency may not change any interpretation of a rule without engaging in the notice and comment rulemaking process. The Fifth Circuit had also adopted the same doctrine, but the First, Second, Fourth, Sixth, Seventh, and Ninth Circuits had rejected it.

The Supreme Court’s Decision

In an opinion written by Justice Sotomayor, and joined in the judgment by a unanimous Court, the D.C. Circuit’s decision was overturned. The Court wrote that:

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 [D.C. Circuit’s] 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.

Relying on a 1978 case, Vermont Yankee, the Court reiterated that the APA “clearly” says that unless a notice or hearing is required by statute, the law’s notice-and-comment requirement does not apply to interpretative rules. “This exemption of interpretive rules from the notice-and-comment process is categorical, and it is fatal to the” D.C. Circuit’s rationale. The Court wrote that imposing judge-made procedures when a court disagrees with the wisdom of a policy would violate “the very basic tenet of administrative law that agencies should be free to fashion their own rules of procedure.”

“In the end, Congress decided to adopt standards that permit agencies to promulgate freely such rules—whether or not they are consistent with earlier interpretations,” the Justices ruled. Extending that point to the Mortgage Bankers Association case, the Court held that “[b]ecause 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.”

The Blurry Line Between “Interpretation” and “Rulemaking”

The larger underlying problem raised by Mortgage Bankers Association is that administrations frequently change, meaning that interpretations of regulations change with them. Drawing the distinction between “interpretation” and “regulation” is not as simple in practice as it seems on paper. As the Association argued, an agency’s interpretations are entitled to (some) deference under two seminal cases, including one decided before the APA was even enacted. Accordingly, the distinction between “interpretation” and “regulation” is more academic.

Whether before the EEOC (which has issued guidance on pregnancy discrimination, background checks, and more), the NLRB (whose Division of Advice and General Counsel routinely issue opinions), DHS (establishing criteria for prosecutorial discretion), the DOL or other agencies, whenever an agency opines about a subject in something other than a regulation, it necessarily blurs the line between mere interpretation and rulemaking. Mortgage Bankers Association does nothing to resolve this problem. Courts will continue to struggle drawing the line between interpretations requiring deference and interpretations that rise to the level of rulemaking.

The Concurrences and the Future of Agency Deference

But do not despair; it is not all bad news for employers. While Justices Alito, Scalia, and Thomas all joined in the judgment, they wrote separate occurrences strongly suggesting that they were open to reevaluating whether to give any deference to agency interpretations of regulations. A footnote in Justice Sotomayor’s opinion recognizes in dicta, in an apparent nod to the concurrences, that “[e]ven in cases where an agency’s interpretation receives…deference, however, it is the court that ultimately decides whether a given regulation means what the agency says. Moreover,… deference is not an inexorable command in all cases.” 

Justice Scalia specifically criticized the deference given to agencies, writing in his concurrence that the Court has:

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.

Justice Scalia “would therefore restore the balance originally struck by the APA with respect to an agency’s interpretation of its own regulations… [by] 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 in the judgment, but provided his own 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, too, affirmed that he would entertain “a case in which the validity of Seminole Rock may be explored through full briefing and argument.”

Employer Insights

Put simply, the bottom line for employers is that Mortgage Bankers Association confirms that federal agencies are still free to reinterpret their statutes and regulations at any time, even if successive interpretations are incompatible. Furthermore, agencies need not go through the detailed and time-consuming procedures (or judicial review) required by the APA. Largely, the status quo employers have come to expect will continue: agencies will be free to interpret and reinterpret regulations as they see fit, even if that means overturning longstanding interpretations that employers have relied on, as in this case. By failing to provide any additional clarity on these issues, the Supreme Court’s decision also further complicates courts’ ability to draw the already-fuzzy line between substantive regulations and “lesser” interpretations, policies, or guidance.

Notably, the Court was not entirely unanimous on every point, though. The silver lining here is that Justices Alito, Scalia, and Thomas all raised broader questions in separate concurrences about whether any deference to agencies is appropriate under the APA. Albeit in dicta, even the Court’s opinion written by Justice Sotomayor and joined by the remaining Justices raises questions about the long term vitality of judicial deference to interpretations like the DOL’s here. While this case did not present the Court with the appropriate opportunity to reconsider its longstanding agency deference doctrine, it appears that the Justices are open to doing so in a future case.