Perez v. Mortgage Bankers Association (13-1041); Nickols v. Mortgage Bankers Association

Issues 

Is a federal agency required to engage in notice-and-comment rulemaking before it can alter an interpretive rule that articulates an interpretation of the agency’s regulation?

Oral argument: 
December 1, 2014

The Supreme Court will consider whether a significant change in an interpretive rule issued by the Department of Labor (“Department”) requires the Department to undergo the notice-and-comment process. The Department, Secretary of Labor Perez, and Nickols argue that the APA explicitly exempts interpretative rules from the notice-and-comment process. However, the Mortgage Bankers Association (“MBA”) argues that when an agency issues new interpretation that substantially changes a prior definitive interpretation and has the force of law, the agency has in fact engaged in substantive or legislative rulemaking and must undergo the notice-and-comment. The Supreme Court’s decision in this case may affect the extent to which agencies are held accountable for significant changes in their policy interpretations and the agencies’ power to amend rules that are ineffective or reflect an outdated view of the agency. 

Questions as Framed for the Court by the Parties 

Perez v. Mortgage Bankers Assn.

The Administrative Procedure Act (APA), 5 U.S.C. 551 et seq., generally provides that “notice of proposed rule making shall be published in the Federal Register,” 5 U.S.C. 553(b), and, if such notice is required, the rulemaking agency must give interested persons an opportunity to submit written comments, 5 U.S.C. 553(c). The APA further provides that its notice-and comment requirement “does not apply * * * to interpretative rules,” unless notice is otherwise required by statute. 5 U.S.C. 553(b) (A). No other statute requires notice in this case. The question presented is:

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

Nickols v. Mortgage Banker Assn.

The Administrative Procedure Act, 5 U.S.C. §§ 551-59, “established the maximum procedural requirements which Congress was willing to have the courts impose upon agencies in conducting rulemaking procedures.” Vt. Yankee Nuclear Power Corp. v. Natural Res. Def. Council, Inc., 435 U.S. 519, 524 (1978). Section 553 of the Act sets forth notice-and-comment rulemaking procedures, but exempts “interpretative rules,” among others, from the notice-and-comment requirement. 5 U.S.C. § 553(b). The D.C. Circuit, in a line of cases descending from Paralyzed Veterans of America v. D.C. Arena L.P., 117 F.3d 579 (D.C. Cir. 1997), has created a per se rule holding that although an agency may issue an initial interpretative rule without going through notice and comment, “[o]nce an agency gives its regulation an interpretation, it can only change that interpretation as it would formally modify the regulation itself: through the process of notice and comment rulemaking.” Id. at 586. In this case, the D.C. Circuit invoked the Paralyzed Veterans doctrine-which is contrary to the plain text of the Act, numerous decisions of this Court, and the opinions of the majority of circuit courts-to invalidate a Department of Labor interpretation concluding that mortgage loan officers do not qualify for the administrative exemption under the Fair Labor Standards Act.

The question presented is: 

Whether agencies subject to the Administrative Procedure Act are categorically prohibited from revising their interpretative rules unless such revisions are made through notice-and- comment rulemaking.

Facts 

Under the Fair Labor Standards Act (“FLSA”), Congress established federal overtime guarantees for employees who work more than forty hours per week. See Mortgage Bankers Association v. Harris (“Harris”), 720 F.3d 966, 968 (D.C. Cir. 2013). At the same time, the FLSA exempts certain employees from its overtime requirements, including those “employed in a bona fide executive, administrative, or professional capacity[,] . . . or in the capacity of [an] outside salesman.” See id. (quoting 29 U.S.C. 213(a)(1)). There is some question as to which employees fall within this “administrative exemption.” See id.

On September 8, 2006, Petitioner U.S. Department of Labor (“Department”) issued an administrator opinion letter (“2006 Opinion Letter”) to Respondent Mortgage Bankers Association (“MBA”), a national trade association representing the real estate finance industry. See Mortgage Bankers Association v. Solis (“Solis”), 864 F. Supp. 2d 193, 198; Harris, 720 F.3d at 968; see also Brief for Respondent, Mortgage Bankers Association et al., at 5. The letter stated that loan officers qualify as exempt employees under the administrative exemption, and thus are not owed overtime payments under the FLSA. See Mortgage Bankers Association v. Solis (“Solis”), 864 F. Supp. 2d 193, 198; Harris, 720 F.3d at 968; see also Brief for Respondent, Mortgage Bankers Association et al., at 5. On March 24, 2010, Deputy Administrator Nancy J. Leppink issued a new administrative interpretation (“2010 Administrator’s Interpretation”) explicitly withdrawing the 2006 Opinion Letter and concluding that mortgage loan officers performing their typical duties do not qualify for the administrative exemption. See Solis, 864 F. Supp. 2d at 199; Harris, 720 F.3d at 968. The Department issued the 2010 Administrator’s Interpretation without providing the public with prior notice and opportunity for comment. See Solis, 864 F. Supp. 2d at 201.

On January 12, 2011, MBA filed suit in U.S. District Court for the District of Columbia (“district court”) against the Department, Acting Secretary of Labor Hilda Solis, and Acting Wage and Hour Administrator Nancy J. Leppink. See Solis, 864 F. Supp. 2d at 193, 201. MBA argued that the Department violated the Administrative Procedure Act (“APA”) because Paralyzed Veterans and other case law establish that an agency’s “definitive interpretation” of a regulation must undergo notice-and-comment rulemaking before the agency may change its interpretation. See Harris, 720 F.3d at 968; see also Brief for Respondent at 9. Under the Paralyzed Veterans doctrine, an agency that significantly revises its prior “definitive interpretation” of a regulation effectively amends the regulation, which cannot be done without providing the public with notice and opportunity for comment. See Harris, 720 F.3d at 967. 

After the parties filed motions for summary judgment, three former mortgage loan officers—Petitioners Jerome Nickols, Ryan Henry, and Beverly Buck (“Nickols”)—successfully moved to intervene in the case. See Brief for Respondent at 9; see also Brief for Petitioners, Jerome Nickols et al., at ii. Nickols had sued their previous employer for overtime compensation under the FLSA following the release of the 2010 Administrator’s Interpretation. See Brief for Petitioners, Nickols at ii; see also Brief for Respondent at 9. Ultimately, the court rejected MBA’s argument, stating that MBA was required, and failed, to show a “substantial and justifiable reliance on well-established agency interpretation.” See Harris, 720 F.3d at 968–69. Thus the court granted the Department’s and Nickols’s motions for summary judgment. See Solis, 864 F. Supp. 2d at 210. 

On appeal, the U.S. Court of Appeals for the District of Columbia reversed. See Harris, 720 F.3d at 972. Specifically, the court rejected the “substantial and justifiable reliance” requirement, instead holding that under Paralyzed Veterans and Alaska Hunters, an agency must engage in notice-and-comment rulemaking if the agency issues “definitive interpretations” and the latter interpretation is a “significant revision” of the prior interpretation. See id. at 969–70. The court held that reliance was “but one factor courts must consider in assessing whether an agency interpretation qualifies as definitive or authoritative.” See id. at 970. On remand, the district court vacated the 2010 Administrator’s Interpretation. See Brief for Respondent at 12; see also Harris, 720 F.3d at 972 (remanding the case with instructions to vacate the 2010 interpretation). Petitioners Thomas E. Perez, Secretary of Labor, et al. (“Perez”) and Nickols filed petitions to the United States Supreme Court, which granted certiorari on June 16, 2014. See Brief for Petitioners, Thomas Perez et al., at 2; see also Brief for Respondent at 12.

Analysis 

The APA contains certain requirements for federal agencies, including the Department, regarding when agencies must engage in notice-and-comment rulemaking when promulgating regulations. See 5 U.S.C. § 553. The Paralyzed Veterans doctrine, a rule announced by the D.C. Circuit, establishes that “[w]hen 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.” Harris 720 F.3d at 967 (quoting Alaska Hunters, 177 F.3d at 1034). In this case, the Supreme Court will decide whether the Department was subject to the Paralyzed Veterans doctrine when it issued an informal interpretation letter, which substantially changed a previous interpretation. See Brief for Petitioners, Perez at 4; Brief for Petitioners, Nickols at 4; Brief for Respondent at 1. Perez and Nickols argues that the Paralyzed Veterans doctrine is inconsistent with the APA and thus invalid, while the MBA argues that the doctrine is not only consistent with the APA, but complements the APA’s purposes. See Brief for Petitioners, Perez at 16-17; Brief for Petitioners, Nickols at 29; Brief for Respondent at 14, 22-23.  

THE LANGUAGE OF THE APA 

Perez argues that the APA is unambiguous and states that an agency does not have to undergo the notice-and-comment period when issuing an interpretive rule that amends or supersedes an earlier one. See Brief for Petitioners, Perez at 16-17. Perez first notes that 5 U.S.C. § 553(b)(A) exempts interpretive rules from the APA’s notice-and-comment requirement (“APA’s interpretive rule exemption”). Id. at 16. Perez further asserts that the APA’s definition of rulemaking—an “agency process for formulating, amending, or repealing a rule”—shows that the APA’s interpretive rule exemption also applies to agencies when they amend or repeal an interpretive rule. Id. (quoting 5 U.S.C. § 551(5)). Moreover, Perez submits that the Court’s decision in FCC v. Fox Television Stations, Inc. and the Attorney General’s manual at the time of the APA’s adoption support the proposition that the APA’s language and application draws no distinction between the initial action of an agency and any subsequent action which undoes or revises it. Id. at 17 (citing FCC v. Fox Television Stations, Inc. 556 U.S. 502, at 515) (citing U.S. Dep’t of Justice, Attorney General’s Manual on the Administrative Procedure Act 5-6 (1947) (APA Manual)). Consequently, Perez argues, agencies do not need to initiate notice-and-comment rulemaking when issuing advice to the public. Id. Similarly, Nickols argues that § 553 draws no distinction between the initial promulgation of an interpretive rule and any subsequent interpretations, and that the language only requires that a rule is interpretive in nature for the notice-and-comment exception to apply. See Brief for Petitioners, Nickols at 29. Moreover, Nickols contends that if Congress wanted to include requirements like Paralyzed Veterans doctrine in the APA, Congress could have expressly said so, as it has in other statutes. Id. at 30-31 (referencing the Tariff Act of 1930 and the FDA Modernization Act). Finally, Nickols asserts that adopting the Paralyzed Veterans doctrine would improperly make the APA’s language exempting interpreting rules superfluous. Id. at 31.

On the other hand, MBA argues that the APA does not exempt all “interpretive rules” from the notice-and-comment requirement. See Brief for Respondent at 43. First, MBA, noting that the APA does not define “interpretative rule,” argues that “interpretive rule” must be defined by its common meaning at the time the APA was enacted. Id. at 38. At that time, according to MBA, interpretative rules were rules “of an advisory character, indicating merely the agency’s present belief concerning the meaning of applicable statutory language . . . and are not binding upon those affected.” Id. at 39 (citing Comm. on Admin. Proc., U.S. Att’y Gen., Administrative Procedure in Government Agencies, Final Report, S. Doc. No. 77-8, at 27 (1st Sess. 1941) [Final Report])). MBA asserts that if the meaning of interpretative rules were properly defined, as “non-authoritative interpretations of statues, or []interpretations of regulations issued at the same time as the regulations themselves,” then the 2010 Administrator’s Interpretation would be properly classified as a substantive or legislative rule, requiring notice-and-comment rulemaking before taking effect. Id. at 41-42. Thus, MBA submits, the function of the 2010 Administrator’s Interpretation, regardless of its label as an interpretative rule, makes it a substantive or legislative rule and thus not exempt from the notice-and-comment requirement for interpretive rules. Id. at 45.  

THE FUNCTION AND PURPOSES OF THE APA 

Perez and Nickols argue that the Paralyzed Veterans doctrine does not coalesce with the goals and designs of the APA. See Brief for Petitioner, Perez at 20; Brief for Petitioner, Nickols at 39-40. First, Perez argues that the Paralyzed Veterans doctrine undermines the APA, specifically the APA’s interpretive rule exemption. See Brief for Petitioner, Perez at 20, 24. According to Perez, the interpretive rule exemption was designed by Congress to encourage agencies to promulgate rules that would inform the public of new interpretations without the costs associated with a full notice-and-comment rulemaking. See id., Perez at 20-23. Perez suggests that the Paralyzed Veterans doctrine undermines this goal by triggering more procedural burdens and delays for agencies when agencies promulgate an interpretive rule. See id. at 25. Second, Perez argues that the Paralyzed Veterans doctrine fails to prevent agencies from “flip flopping on established positions” because reviewing courts already have the power to set aside arbitrary and capricious agency actions under the APA. Id. at 31 (citing 5 U.S.C. 706(2)(A)). Additionally, Nickols asserts that, given the numerous protections afforded by the APA already, the Paralyzed Veterans doctrine in effect “only serves to prevent agencies from correcting their own mistakes.” Brief of Petitioner, Nickols at 42-44. In any case, Nickols contends, the MBA’s argument is “inherently self-defeating” because the doctrine would also repeal the Department’s 2006 Opinion Letter, because of a 2004 rule that was already in effect. Id. at 54-55.

MBA, in contrast, argues that the Paralyzed Veterans doctrine furthers the fundamental goal of the APA and prevents agencies from circumventing APA requirements. See Brief for Respondent, at 19-20, 28. First, MBA defends the Paralyzed Veterans doctrine by explaining that it protects “industry reliance interests and, at a minimum, gives regulated entities notice of impending changes to the regulations under which they must operate,” thus promoting accountable and transparent government. Id. at 28-29. Second, MBA suggests that since Congress made notice-and-comment the default rule for rulemaking in the APA, this shows that Congress is concerned with “procedural fairness and uniformity” rather than agency flexibility when implementing statutes. Id. at 29. MBA also argues that the Paralyzed Veterans doctrine furthers the APA’s goals by preventing agencies from “flip-flopping on established positions.” Id. at 29-30. Furthermore, MBA contends that the doctrine is itself rooted in the APA, by preventing agencies from effectively making new rules, using “definitive and authoritative interpretations,” without the required notice and commenting. Id. at 20-21, 30. According to MBA, the Paralyzed Veterans doctrine merely recognizes the reality of agencies and serves as a prophylactic rule to prevent agencies from doing what they cannot otherwise do. Id. at 20-21. Thus, MBA asserts, the Paralyzed Veterans doctrine does not only encourages good government, but it is also necessary to prevent agencies from “promulgat[ing] a vague rule through notice and comment and then [go] back to ‘interpret’ that rule with the precision desired in the first instance.” Id. at 33. Finally, MBA asserts that the Court, in Shalala v. Guernsey Memorial Hospital, has supported the position that APA rulemaking may be required if an agency promulgates a substantial change to its interpretation. See id. at 24 (Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 100 (1995)).

VERMONT YANKEE

Perez and Nickols contend that Vermont Yankee establishes that “agencies should be free to fashion their own rules of procedure” and that the APA codified in § 553 establishes the “maximum procedural requirements which Congress was willing to have the courts impose upon agencies in conducting rulemaking.” See Brief for Petitioners, Perez at 27 (citing Vermont Yankee Nuclear Power Corp. v. NRDC, 435 U.S. 519 (1978)); see also Brief for Petitioners, Nickols at 38-39. Perez argues that the Paralyzed Veterans doctrine’s notice-and-comment requirement for interpretative rules is a serious violation of this basic principal governing administrative law. See Brief for Petitioners, Perez at 27-29. Nickols further argues that Vermont Yankee invalidates the Paralyzed Veteran doctrine because courts do not have the authority to impose procedures on agencies beyond the scope of the APA. See Brief for Petitioners, Nickols at 37.  

MBA contends that the Paralyzed Veterans doctrine does not run afoul with the holding of Vermont Yankee. Brief for Respondent at 24-25. MBA argues that the Paralyzed Veterans doctrine does not impose any new extrinsic procedures, but rather serves as a safeguard to the procedural notice and opportunity for public comment requirements already established by the APA. See id. at 25. Furthermore, MBA argues that the requirements set by the Paralyzed Veterans doctrine are not equal to those at issue in Vermont Yankee. Id. MBA states that in Vermont Yankee, the Court required an agency to hold a full adjudicatory hearing, a requirement clearly beyond the APA, but in this case the D.C. Circuit is only requiring a procedure already within the APA’s scope. Id. MBA also points out that Justice White—who voted with the Vermont Yankee majority—wrote an opinion, while sitting on the Ninth Circuit, rejecting “that every rule interpreting a statute or regulation need not provide for notice and comment.” Id. at 26 (quoting Chief Probation Officers of California v. Shalala, 118 F.3d 1327 (9th Cir. 1997)).

Discussion 

In this case, the Supreme Court will determine whether a federal agency may significantly revise an interpretive rule without engaging in notice-and-comment rulemaking. See Brief for Petitioners, Perez at I. Perez and Nickols argue that the APA explicitly permits interpretive rules to forego notice-and-comment rulemaking, and that the “Paralyzed Veterans doctrine,” requiring the Department to provide notice and opportunity for comment to the public before amending an interpretive rule, is contrary to the text of the APA and the policies Congress intended to promote. See id. at 15; see also Brief for Petitioners, Nickols at 28. On the other hand, MBA argues that the Department’s alteration of an authoritative interpretation of a regulation essentially serves the same function as an amendment to a legislative rule and should therefore be subject to notice-and-comment requirements. See Brief for Respondent at 22–23. The Supreme Court’s resolution of this case will have significant consequences for agencies and the people who are that are regulated by them. See Brief for Petitioners, Perez at 24; Brief for Petitioners, Nickols at 49.

IMPACT ON AGENCY INTERPRETATION

Perez argues that requiring an agency to follow notice-and-comment requirements for altering interpretive rules would discourage agencies from announcing their interpretations and would therefore inconvenience the public. See Brief for Petitioners, Perez at 24. Perez emphasizes that agencies should be encouraged to promptly and publicly declare their changed views because the public may be misled by following an earlier interpretive rule that the agency no longer finds accurate. See id. at 25. Following Paralyzed Veterans, Perez contends, would create procedural hurdles that incentivize agencies to avoid declaring new interpretive rules and delay corrections to those rules. See id. Nickols argues that such procedural hurdles “chill[] the interpretive dialogue between government, business, and citizen.” See Brief for Petitioners, Nickols at 49. Nickols also fears that if the Court upholds Paralyzed Veterans, agencies will be reluctant to provide public guidance through interpretive rules out of fear that the agency will be stuck with their first declared understanding. See id. at 51–52. Moreover, some law scholars, writing in support of the Court granting certiorari, expressed concern that following Paralyzed Veterans will increase the amount of cost and time agencies must spend to alter previously announced interpretations. See Amicus Curiae Brief of Administrative Law Scholars, in Support of The Petitions for Certiorari at 10.

MBA and supporting amici counter that notice-and-comment procedures for certain definitive interpretation rules serve the public interest. See Brief for Respondent at 17; Brief of Amici Curiae National Federation of Independent Business et al. (“NFIB”), in Support of Respondent at 14. The National Federation of Independent Business (“NFIB”) expresses concern that interpretive rule regulations, if unchecked, could upend the daily lives of millions of people who rely on such regulations. See Brief of NFIB at 14. NFIB maintains that an agency’s failure to follow notice-and-comment procedures generates confusion while amendments following such procedures serve the public because they lead to clearer and more effective regulations. See id. at 17, 26. MBA further contends that following Paralyzed Veterans will not prevent agencies from providing public guidance because the Paralyzed Veterans doctrine is limited to rules that are held out as definitive and modifications that are considered substantial. See Brief for Respondent at 33. The Washington Legal Foundation and other amici agree, emphasizing that Paralyzed Veterans is usually implicated where there are significant policy reversals created by a switch of control between political parties. See Brief of Amici Curiae Washington Legal Foundation et al., in Support of Respondent at 26.  

BALANCE OF POWERS

Nickols contends that the Paralyzed Veterans doctrine will undermine the balance between agency efficiency and public predictability that Congress sought to achieve in creating the APA. See Brief for Petitioners, Nickols at 40. Nickols emphasizes that following Paralyzed Veterans ignores numerous safeguards Congress already has in place to protect regulated communities. See id. Nickols fears that, by requiring notice-and-comment rulemaking, such statutory safeguards would lose their purpose. See id. at 48. Nickols further contends that, because of the safeguards already in place, the Paralyzed Veterans doctrine will not provide regulated communities greater protection and would only serve to limit agencies from correcting their own erroneous interpretations. See id. at 41.

MBA and amici, on the other hand, believe that Paralyze Veterans furthers Congress’s goals of safeguarding regulated communities by promoting fairness and uniformity. See Brief for Respondent at 28–29; Brief of NFIB at 7–8. Moreover, the Center for Constitutional Jurisprudence expresses concern that by permitting agencies to sidestep notice-and-comment requirements, the deference courts give to agency interpretations will violate constitutional separation of powers by transferring the constitutional power of the judiciary to the executive. See Brief of Amicus Curiae Center For Constitutional Jurisprudence, in Support of Respondent at 9. MBA maintains that Paralyzed Veterans ensures against such violations by protecting “against political overreach disguised as interpretation.” See Brief for Respondent at 36.

Conclusion 

The Supreme Court will decide whether a federal agency must provide the public with notice and opportunity for comment before the agency may significantly alter the same agency’s prior authoritative interpretation of a regulation. Perez and Nickols argue that the APA explicitly permits agencies to issue interpretive rules without requiring the agency to follow notice-and-comment procedures. MBA contends that the notice-and-comment requirements are necessary because the agency’s revision is functionally an amendment and does not fall within the APA’s exemption. The Court’s decision in this case implicates the public’s reliance on agencies’ interpretive rules and agencies’ power to amend those rules. 

Written by 

Edited by 

Acknowledgments 

The authors would like to thank Professor Cynthia Farina of Cornell Law School for her helpful insight into the issues of this case.

Additional Resources