Issue
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.
Facts
In 1938 Congress passed the Fair Labor Standards Act FLSA, requiring that employers pay overtime to employees who work more than 40 hours a week. Section 213 of the act provided for certain situations in which employers are exempt from paying overtime. The Department of Labor DOL periodically issues regulations defining the interpretation of the regulations, including exemptions. The most recent regulations implemented in 2004 explain that the administrative “exemption is intended to be limited to those employees whose duties relate to the administrative as distinguished from the production operations of a business.” The regulation also included a caveat, stating, “[A]n employee whose primary duty is selling financial products does not qualify for the administrative exemption.”
The Mortgage Bankers Association MBA is a national trade association that represents the real estate finance industry. In 2006, MBA wrote a clarification letter to DOL about whether classified mortgage loan officers qualified under the exemption. DOL responded in a letter, stating that the mortgage officers did qualify for the exemption. Then, in 2010, DOL wrote another clarification letter recalling its previous statement and stating that the officers no longer qualified as exempt employees because their primary role is the sales of mortgage products. In issuing the letter, DOL failed to utilize the Administrative Procedure Act’s APA notice-and-comment process.
In response, Mortgage Bankers Association filed a complaint arguing that since DOL’s letter was given the force of law, DOL violated the APA by failing to follow the established procedure for modifying regulations. Second, MBA argued, “Because the AI [administrative interpretation] conflicts with existing DOL regulations, and because those regulations have been afforded the force of law by courts, DOL's issuance of the 2010 AI is arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law.”
The Court Below
The United States District Court for the District of Columbia was the first to hear the case. The court ruled in favor of the Department of Labor, holding that the 2006 clarification letter did not qualify as a “well-established agency interpretation,” and the 2010 interpretation did not substantively change the previous letter. See opinion below:
Mortgage Bankers Association v. Solis, 864 F.Supp.2d 193 D.D.C., 2012
MBA appealed to the D.C. Circuit Court. The court ruled in favor of MBA, holding that the 2006 regulatory letter was enforceable by law and could only be amended using the proper APA procedures. See opinion below:
Mortgage Bankers Association v. Harris, 720 F.3d966 D.C. Cir., 2013
The Department of Labor appealed to the Supreme Court and the Court granted certiorari. The Court reversed the decision of the circuit court, holding that the Paralyzed Veterans doctrine used in the circuit court was expressly contrary to the text of the APA and thus needed to be overturned. See opinion below:
Perez v. Mortgage Bankers Association, 135 S.Ct. 1199 2015
Question before the Court
"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.”
…
"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.”
CCJ filed an amicus curiae brief in support of the Mortgage Bankers Association
Summary:
The problem presented is rooted in the Court’s previous decisions to allow agencies to independently interpret the meaning of their rules through informal processes. This deference has allowed agencies to bypass both internal agency review and judicial review when reinterpreting regulations, violating the separation of powers, a bedrock of our constitutional system. Further, deference encourages agencies to enact vague regulations that can be reinterpreted when necessary. Vague regulations put the regulated community at risk of a loss of litigation in case of a dispute over interpretation, and unnecessarily raise administrative costs for the community. Finally, while agencies can issue “interpretive rules” without going through the APA’s notice-and-comment process, such rules cannot alter substitutive rights or reverse longstanding legal norms. Because DOL’s letter alters substantive rights, it is disqualified from being considered an interpretive rule and must go through the APA’s process.
In the case Bowels v. Seminole Rock and Sand Co. 1945, this Court held that an agency’s interpretation of its own regulations would be given “controlling weight.” This precedent was reiterated in Auer v. Bobbins 1997, and it has now become known as Auer deference. Auer deference allows agencies to redefine regulations via informal “interpretations,” bypassing the established procedures of notice-and-comment rulemaking. In this case, DOL established mortgage officers as exempt from overtime regulation in 2006, then simply reinterpreted regulation to un-exempt them in 2010. The irony is that final rules adopted pursuant to notice-and-comment rulemaking are subject to judicial review but the “interpretation” by the agency is not. Thus not only did DOL bypass its own departmental review, it also bypassed judicial review.
This deference violates the separation of powers, a principle fundamental to our constitutional system. The Framers and Ratifiers of the Constitution understood that separation of powers was necessary to protect individual liberty. James Madison in Federalist No. 48 reveals that the argument during the ratification debates was not whether to separate power, but whether power was separated enough. The Constitution was constructed to pit ambition against ambition. To preserve the structure set in the Constitution, and thus protect religious liberty, the pressures of each branch to exceed the limits of their authority must be resisted. Buckley v. Valeo 1976 held that when the competition of interests fails to prohibit encroachment, it is this Court’s duty to void acts that overstep boundaries of power. It is the judiciary’s responsibility to interpret the law, and it cannot abdicate that responsibility. While the executive does retain limited lawmaking power to fill the gaps left by Congress, once those gaps are filled, the agencies cannot continue reinterpreting regulations. If an agency needs to reverse previous policy it has the means to do so through the notice-and-comment process included in the APA. This process requires both a formal statement by the agency and judicial review. Through merely reinterpreting long standing legal rights, DOL is bypassing any explanation for its actions as well as judicial review.
Auer deference puts the private regulated community at risk of a loss of litigation in case of a dispute over interpretation. Christopher v. SmithKline Beecham Corp. 2012 held that there are certain times when Auer deference may be inappropriate, yet challenging deference places potentially wronged plaintiffs at risk if they are to try to claim an inappropriate use of Auer. Such vague regulation passed because of Auer deference also raises costs and burdens for the regulated community as parties expand resources to understand the ambiguous nature and changing requirements of regulations. When agencies can authoritatively interpret the meaning of their own regulations, an agency has little incentive to establish clear rules, and the community bears the cost of the resulting ambiguity. Furthermore, continual reinterpretation of regulations requires the regulated community to either expand expenditures to cover the new costs, or risk litigation for failing to comply with new interpretation.
Finally, while agencies can release “interpretive rules” without passing them through the notice-and-comment rulemaking process under the APA, such rules cannot alter substantive rights or reverse longstanding legal norms. Because the “Administrator’s Interpretation” given by the DOL does alter substantive rights, it is disqualified as an interpretive rule and must be passed through the normal rulemaking process. Shalala v. Gurnsey Mem’l Hosp. 1995 held that the purpose of an interpretive rule is to inform the public of the agency's understanding of its own regulations, not to create or alter substantive rights and duties under the laws. In this case, without any change to the regulation, the substantive legal rights of employees and obligations of employers have been altered dramatically. The Department has proclaimed that a regulation that meant one thing in 2006 now means precisely the opposite. Congress has provided an avenue through which the executive branch can alter its position on the meaning of a statute — notice-and-comment rulemaking. Apart from this process, the meaning of regulation should remain substantively unchanged.
Final Outcome
The Supreme Court, in a 9-0 decision, ruled in favor of the Department of Labor. The Court ruled contrary to CCJ’s argument, holding that the APA requires agencies to use the same method to amend or repeal a rule as to implement it, and exempts interpretive rules from having to be implemented through use of notice-and-command procedures. Because the 2006 interpretive rule was implemented by a clarification letter, it can also be reinterpreted by a clarification letter.
