March 11, 2015

U.S. Supreme Court Issues Long-Awaited Association Ruling on Industries' and Professions' Ability to Challenge Their Federal Regulators' Actions

5 min

On March 9, 2015, the U.S. Supreme Court (Court) handed down a unanimous opinion in Perez v. Mortgage Bankers Association, 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. The Court overturned a line of cases from the D.C. Circuit, known as the Paralyzed Veterans doctrine, after its title case, Paralyzed Veterans of Am. v. D. C. Arena L.P., 117 F. 3d 579 (D.C. Cir. 1997), through which the D.C. Circuit has held that when an agency issues an interpretive rule that significantly revises an existing interpretive rule, the agency must take the revision through notice-and-comment rulemaking before the revision can take effect. 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 Court's ruling, and discussions in the concurrences, will shift arguments regarding agency interpretations to questions of deference and the division between legislative and interpretive rules.

Associations and other regulated entities have struggled with federal agencies' ability 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. Associations seeking to challenge agency policies and actions have long complained that agencies use the "interpretive rule" pathway to change the meaning of their legislative rules without going through the required procedures.

The Perez decision arose from revisions, by three successive Administrations, of the U.S. Department of Labor's (DOL) 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 the 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 Court found the Paralyzed Veterans doctrine "contrary to the clear text of the APA's rulemaking provisions," and held that "it improperly imposes on agencies an obligation beyond the 'maximum procedural requirements' specified in the APA." The Court opined that because Section 4 of the APA specifically exempts the promulgation of interpretive rules from notice-and-comment requirements, the section also exempts later stages of interpretive rulemaking, such as amending or repealing interpretive rules, from notice-and-comment requirements.

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." Under the ruling in Perez, the agencies may amend previous interpretive rules without notice and comment. 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 lower courts address these issues in relation to the Court's decision today will likely control the effect 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.
  • Legislative vs. Interpretive Rules: The term "interpretive rule" is not defined in the APA. The Court did not address the dividing line between legislative and interpretive rules, and did not provide guidance for agencies and industry in distinguishing between the two. This issue also is likely to become a focus of future litigation, when organizations see an advantage to arguing an agency rule is a substantive, legislative rule, rather than interpretive.
  • Retroactive Application & 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.