March 11, 2015

Supreme Court Rejects Paralyzed Veterans Doctrine and Forecasts Additional Questions Regarding Agencies' Interpretive Rules in Perez v. Mortgage Bankers Ass'n

5 min

On March 9, the Supreme Court issued its long-awaited decision in Perez v. Mortgage Bankers Ass'n, which unanimously invalidated a control mechanism the lower federal courts had created to allow regulated entities to resist agencies' abuse of their power to interpret their own rules. Three members of the Court, however, invited regulated companies to bring legal challenges based on a broader and potentially more effective ground—that federal courts have acted improperly since 1945 in deferring to agency interpretations of ambiguities in their rules that have the force of law. The suggestion by Justices Alito, Scalia, and Thomas that federal courts should stop the practice of deferring to agency interpretations of their rules, and reclaim for themselves the power to decide whether a regulation means what the agency says it means, likely will trigger a wave of litigation that, if successful, could force important changes in the way agencies draft rules.

The Perez Decision

Regulated entities have long complained of agency abuses of their power to issue interpretive rules. In implementing the authority delegated to them by Congress, agencies typically are required to follow the notice and comment procedures under the Administrative Procedure Act (APA) in promulgating so-called "legislative rules," which have the force and effect of law. Once those rules are issued, agencies frequently issue "interpretive rules" (including guidance documents, agency manuals, and interpretative bulletins) to explain how the legislative rules will be applied and to resolve ambiguities in the meaning of those rules. Interpretive rules technically do not have the force and effect of law, and thus can be issued without public notice and comment. But agencies can and do apply these "interpretations" as if they are binding. Regulated companies have long complained that agencies use the "interpretive rule" pathway to change the meaning of their legislative rules without going through the required procedures. To curb this abuse of agency authority, in Paralyzed Veterans v. of Am. v. D.C. Arena L.P., the D.C. Circuit held that an agency may not significantly revise a prior, definitive interpretation of its legislative rules without going through the notice and comment process.

The Perez decision arose from revisions, by three successive Administrations, of the Department of Labor's (DOL's) interpretive rule determining whether, under the agency's legislative rule, mortgage loan officers are entitled to overtime pay if they work more than 40 hours per week. An industry trade association challenged DOL's 2010 interpretation, issued without notice and comment, which reversed a Bush Administration decision and concluded that these employees were entitled to overtime pay. The Supreme Court unanimously overturned the Paralyzed Veterans doctrine and held that federal agencies do not have to provide notice and comment before significantly revising an existing interpretation. It therefore reversed the decision of the court of appeals.

In the majority opinion, Justice Sotomayor found that the Paralyzed Veterans doctrine was "contrary to the clear text" of the APA's rulemaking provisions and "improperly imposes on agencies an obligation beyond the 'maximal procedural requirements' specified in the APA." 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."

Key Questions

The Court's decision leaves several key questions unanswered. How the lower courts address these issues will determine the practical effects of Perez moving forward.

Deference to Interpretive Rules: The most significant feature of the decision is the separate opinions concurring in the judgment filed by Justices Alito, Scalia, and Thomas. They agreed that the Paralyzed Veterans doctrine was unlawful but recognized that it had addressed legitimate concerns about agency abuses in issuing interpretive opinions. These Justices identified a possible alternative solution for this problem. They invited regulated entities to file litigation challenging agency interpretations of their legislative rules and to argue explicitly that such interpretations are not subject to judicial deference. Rather, they suggested that federal courts should determine de novo, and without deferring to the agency, whether the agency's current interpretation is consistent with the text of the legislative rule that was adopted after notice and comment. The approach of the concurring Justices would have the Court abandon a long line of precedents, dating back to Bowles v. Seminal Rock & Sand Co., that affords deference to agency interpretations of its own rules.

Corporate counsel will not refuse this invitation. This issue will be heavily litigated over the next few years.

Legislative vs. Interpretive Rules: The term "interpretive rule" is not defined in the APA. The Court's decision did not address the dividing line between legislative and interpretive rules, and did not provide guidance for the courts, the agencies, and industry in distinguishing between the two categories. This issue also is likely to become a focus of future litigation.

Retroactive Application and Enforcement: The Court's opinion noted that at oral argument, the government had acknowledged that an agency's ability to pursue enforcement actions against regulated entities for conduct in conformance with prior agency interpretations may be limited by principles of retroactivity. By flagging this issue, the majority ensured that there will be extensive litigation on the question of whether federal courts should decline on reliance grounds to apply a new agency interpretation retrospectively to conduct that complied with the then-existing agency interpretation at the time the action was taken.

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For more information regarding this case and its impact on regulated industries, please contact the authors.