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From Banking and Finance Law Daily, March 9, 2015

High Court OK’s DOL reversal on loan officers’ exempt status without notice and comment

By Lisa Milam-Perez, J.D.

In a case of enormous importance for all federal regulatory agencies, a Department of Labor Wage and Hour Division “Administrator Interpretation,” which reversed the agency’s stance on whether the Fair Labor Standard Act’s administrative exemption applied to mortgage loan officers, was a valid agency interpretation notwithstanding that it was issued without undertaking notice-and-comment procedures, the Supreme Court has ruled. In a unanimous decision, the High Court rejected the Mortgage Bankers Association’s (MBA) challenge to the DOL’s about-face under the Administrative Procedure Act. Concluding that the plain text of the APA does not require federal agencies to undertake notice-and-comment rulemaking when merely promulgating “interpretive rules” such as the DOL issuance in dispute here, the Court reversed the D.C. Circuit’s grant of summary judgment in the industry trade group’s favor (Perez v. Mortgage Bankers Association., March 9, 2015, Sotomayor, S.).

In so ruling, the High Court resoundingly overturned the D.C. Circuit’s decision in Paralyzed Veterans of Am. v. D.C. Arena L.P., concluding that the circuit court’s 1997 ruling was contrary to the plain text of the APA and imposed procedural obligations on the agencies that went beyond what the APA requires.

The majority opinion was authored by Justice Sotomayor; separate concurring opinions were issued by Justices Alito (concurring in the judgment), Scalia, and Thomas.

DOL flip-flops. The Wage and Hour Division had issued two opinion letters—one in 1999, another in 2001—asserting that mortgage loan officers were not exempt from overtime under the FLSA’s administrative exemption. In 2004, though, the DOL revised the FLSA white-collar regulations, adding a section that set forth examples of employees who fall within the exemption. Among them: employees “in the financial service industry,” provided they satisfy the exemption’s duties requirement. Yet at the end of this example, the agency cautioned that “an employee whose primary duty is selling financial products does not qualify for the administrative exemption.”

The MBA asked the DOL for a revised interpretation of the loan officers’ status under the new regs. Thus, in 2006, the agency issued another opinion letter, now finding that, under the regs as revised in 2004, the loan officers were exempt. But in 2010 (eschewing the use of opinion letters and issuing instead a broader “Administrator Interpretation”) the agency altered its position, concluding that loan officers’ primary duty is making sales and thus, they did not fall within the administrative exemption; thus, it withdrew its 2006 opinion letter. As with its previous opinion letter issuances, the agency did so without offering formal notice or an opportunity for comment.

Legal challenge. Contending that the DOL’s latest iteration was inconsistent with the 2004 rule revision that it was purporting to interpret—and, as such, was arbitrary and capricious—the MBA filed suit. Backed by a flood of amicus briefs from the regulated community, the MBA urged that the APA requires the DOL (indeed, all federal agencies) to engage in notice-and-comment procedures whenever they seek to issue a new interpretation of a regulation “that deviates sharply from a previously adopted interpretation.” The DOL’s Administrator Interpretation was also invalid under the Paralyzed Veterans doctrine, the plaintiffs asserted, which stood for the notion that if “‘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.’”

The district court rejected the MBA’s challenge, unconvinced that the trade group had actually relied on the contrary 2006 interpretation of the agency rule, and finding too that the 2010 interpretation was consistent with the text of the 2004 FLSA rules. As such, the agency action did not run afoul of Paralyzed Veterans.Rejecting the government’s plea that it abandon the Paralyzed Veterans doctrine altogether, the D.C. Circuit reversed. It stood fast on its precedential holding and concluded that, under Paralyzed Veterans, the MBA was not required to show its reliance on the prior interpretation in order to state a claim.

“The Paralyzed Veterans 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,” the Supreme Court wrote, reversing.

Conflating the APA’s provisions. Section 4 of the APA prescribes a three-step procedure for notice-and-comment rulemaking. However, not all agency rules require the use of the notice-and-comment procedure. Specifically, APA Section 4(b)(A) states that, unless another statute provides otherwise, the rulemaking procedure is inapplicable to “‘interpretive rules, general statements of policy, or rules of agency organization, procedure, or practice,’” the Court noted, quoting the text of the statute. “This exemption of interpretive rules from the notice-and-comment process is categorical, and it is fatal to the rule announced inParalyzed Veterans.

In that case, the D.C. Circuit looked to the definition of “rulemaking” in APA Section 1, which encompasses not only the issuance of new regulatory provisions, but also agency actions to repeal or amend existing rules. With its sights set on this broad construction, the appeals court reasoned that the same notice-and-comment obligations would apply to subsequent agency actions to amend or repeal a rule as were required in the first instance. It would “undermine the APA’s procedural framework” to let an agency so fundamentally alter an interpretation of a substantive rule without notice and comment, it concluded. But that’s where the D.C. Circuit went astray, the Supreme Court explained: by focusing on Sec. 1 and giving short shrift to Sec. 4(b)(A) of the Act, and conflating the statutory purposes behind these two provisions. Section 1 describes what rulemaking is, but Sec. 4 describes the procedures that an agency is to undertake when engaging in rulemaking—and that provision “specifically exempts interpretive rules from the notice-and-comment requirements that apply to legislative rules [i.e., those that, unlike interpretive rules, have ‘the force and effect of law”].”

The bottom line, the Court stated: “Because 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.”

Vermont Yankee controls. Trumping Paralyzed Veterans, then, is Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., the Supreme Court’s 1978 administrative law decision. There, the High Court stated that courts lack authority to impose their own notions of which procedures are “best” (beyond the APA’s basic procedural requirements, of course) citing “the very basic tenet of administrative law that agencies should be free to fashion their own rules of procedure.”

Congress, in APA Sec. 4, set forth the “maximum procedural requirements” that courts would be allowed to impose upon federal agencies in carrying out their rulemaking procedures. And Paralyzed Veterans violated this principle; the circuit court imposed an obligation on the administrative agencies that only Congress may mandate.

“Interpreting” is not “amending.” The Court was not persuaded by the MBA’s own attempt at conflation by muddying the terms “amend” and “interpret.” MBA argued that an agency effectively amends a regulation when it issues an interpretive rule that changes the manner in which the regulation is interpreted. The act of “amending” and the act of “interpreting” are separate and distinct, though, both in common parlance and in legal usage, the Court pointed out; just as a court isn’t “amending” a statute when it interprets it, an agency may well “interpret” a regulation without amending it. And the MBA’s assertion to the contrary could not be reconciled with “the longstanding recognition that interpretive rules do not have the force and effect of law,” the Court said.

Appeals to pragmatism fail. Nor was the High Court swayed by the MBA’s contention that the Paralyzed Veterans doctrine satisfies the more “functional” approach that the Court had taken to interpreting the APA, and the plaintiff’s attempt to justify the doctrine’s use on pragmatic or policy grounds. The MBA also contended to no avail that the doctrine furthers the goal of “procedural fairness” in that it curtails agency attempts to alter their interpretations of the regulations in a unilateral and unexpected fashion.

Other recourse. But the High Court noted that the regulated community has other options at its disposal on those occasions when an agency issues an interpretive rule in order to evade notice-and-comment rulemaking. “The APA contains a variety of constraints on agency decision making—the arbitrary and capricious standard being among the most notable,” and which mandates that agencies provide more substantial rationale when a new interpretation or rule “rests upon factual findings that contradict those which underlay its prior policy; or when its prior policy has engendered serious reliance interests that must be taken into account. It would be arbitrary and capricious to ignore such matters,” the Court wrote, here quoting its 2009 decision in FCC v. Fox Television Stations, Inc..

The Court also cited safe-harbor provisions, which serve to protect the reliance interests that can be undermined when agencies flip-flop in the manner challenged here. While not a feature of every piece of legislation, the FLSA (as amended by the Portal to Portal Act) has one, and it shields an employer from liability for violations based on an act or omission that was carried out in good faith, in conformity with a DOL issuance, even when that guidance is later modified or even rescinded.

No changing legal theory end-stream. The Court declined to entertain the MBA’s alternative argument that the disfavored 2010 Administrator Interpretation should be deemed a legislative rule, not an interpretive rule, and thus subject to notice-and-comment requirements even if Paralyzed Veterans were to fall. The parties had taken the stance from the onset that the DOL issuance was an interpretive rule. “Indeed, if MBA did not think the Administrator Interpretation was an interpretive rule, then its decision to invoke the Paralyzed Veterans doctrine in attacking the rule is passing strange,” the Court remarked.

Alito balks. While he concurred in the majority holding, Justice Alito was not so quick to pile judicial invective on the Paralyzed Veterans decision. He conceded that the D.C. Circuit’s holding was incompatible with the APA, but put the decision in its context: a reaction to concerns about “the aggrandizement of the power of administrative agencies as a result of the combined effect of (1) the effective delegation to agencies by Congress of huge swaths of lawmaking authority, (2) the exploitation by agencies of the uncertain boundary between legislative and interpretive rules, and (3) this Court’s cases holding that courts must ordinarily defer to an agency’s interpretation of its own ambiguous regulations.” Nonetheless, the Paralyzed Veterans doctrine “is not a viable cure for these problems,” he wrote, then passed the baton to his concurring colleagues to flesh out the argument for an alternative solution.

Scalia: these rules have force of law. Justice Scalia, concurring too, noted that the APA’s exemption of interpretive rules from the notice-and-comment mandate was “meant to be more modest in its effects than it is today,” and argued that the courts have a more of a hands-on role to play in scrutinizing such agency action than the majority opinion suggests. “Heedless of the original design of the APA, we have developed an elaborate law of deference to agencies’ interpretations of statutes and regulations,” Scalia wrote, and have allowed agencies to “authoritatively resolve ambiguities in regulations.” And by a grant of deference to interpretive rules, agencies have used them “not just to advise the public, but also to bind them.” As such, these rules do have the force of law, he argued; “The Court’s reasons for resisting this obvious point would not withstand a gentle breeze.”

With free rein to engage in interpretive rulemaking without notice or comment, agencies need only “write substantive rules more broadly and vaguely” to expand this domain, “leaving plenty of gaps to be filled in later, using interpretive rules unchecked by notice and comment,” Scalia lamented. “The APA does not remotely contemplate this regime.” Like Alito, then, he saw Paralyzed Veterans as an unworkable (in fact, “brazen,” in his view) solution to a real problem. His solution to the problem (short of uprooting Chevron)? To abandon Auer v. Robbins, in which the High Court held “that agencies may authoritatively resolve ambiguities in regulations.”

“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.”

Thomas cites constitutional concerns. Chagrined by what he characterized as “a transfer of the judicial power to an executive agency” and the constitutional concerns therein, Justice Thomas warned that such deference to agency administrative interpretations “undermines our obligation to provide a judicial check on the other branches, and it subjects regulated parties to precisely the abuses that the Framers sought to prevent.”

Thomas traced the historical underpinnings of this “steady march toward deference” to Bowles v. Seminole Rock & Sand Co., a 1945 Supreme Court decision that predates the APA. The doctrine of deference was “constitutionally suspect from the start,” he argued, in that, instead of judges using recognized tools of interpretation to determine the best meaning of an agency regulation, courts must accord “controlling weight” to the agency’s interpretation (save only for those interpretations that are “plainly erroneous or inconsistent with the regulation.”) This is problematic because the agencies lack the “structural protections for independent judgment adopted by the Framers,” such as life tenure. “Because the agency is thus not properly constituted to exercise the judicial power under the Constitution, the transfer of interpretive judgment raises serious separation-of-powers concerns,” he argued. Agency deference, as originated in Seminole Rock, also undermines the judicial check on the executive branch.

Fast forward to Paralyzed Veterans—a decision that, “though legally erroneous,” was “practically sound,” in Thomas’ view. To regulated parties, whether an interpretative reversal of the sort effectuated by the DOL here is technically an amendment or an interpretation, “the new interpretation might as well be a new regulation,” and it “turns on its head the principle that the United States is ‘a government of laws, and not of men.’”

“By my best lights, the entire line of precedent beginning with Seminole Rock raises serious constitutional questions,” Thomas urged, “and should be reconsidered in an appropriate case.” The case at hand, however, is not the one.

A broader war? “In winning this battle against the D.C. Circuit's efforts to rein in agency flip-flopping, DOL and the Executive Branch may have inadvertently triggered a broader war regarding deference to agency interpretations,” Paul DeCamp, a shareholder in the Washington, D.C. office of Jackson Lewis and head of the firm’s Wage and Hour Practice Group, told Employment Law Daily. (DeCamp is a former DOL Wage and Hour Administrator.) He notes that the three concurring opinions are “all but begging for someone to bring the Court a good case for revisiting the 1945 Seminole Rock decision, which gave rise to the rule of deference to an agency's interpretation of its own ambiguous regulations. The concurrences identify Seminole Rock and its progeny as the root cause of the type of agency mischief that the D.C. Circuit sought to address through its Paralyzed Veterans line of cases. Although the Court has now rejected Paralyzed Veterans, there is much more litigation to be had over the ongoing viability of Seminole Rock,” DeCamp predicts.

No surprise here? Today’s decision is “not all that surprising,” DeCamp continued, “insofar as the Administrative Procedure Act specifically addresses the process required in an agency’s use of ‘interpretive rules.’ In this case, that ruling seems to flow mainly from the MBA's choice to concede in the lower courts that the Administrator Interpretation was interpretive rather than substantive.”

“At first glance, you might think a 9-0 decision from the Supreme Court in an employment case would be a complete outlier,” noted Eric B. Meyer, a partner in the Philadelphia office of Dilworth Paxson LLP and a member of the Employment Law Daily Advisory Board. “But Integrity Staffing Solutions, Inc. v. Busk, an FLSA case which was decided in December 2014, was also 9-0. Going back a year before that, the Supreme Court decided another FLSA case, Sandifer v. United States Steel Corp., unanimously.” Such accord is in fact not so rare of late.

All bets are off. “Serendipitously, employers may wonder how today’s decision will affect the President’s directive to the Secretary of Labor to ‘modernize and streamline the existing overtime regulation’” Meyer added. “If these changes take the form of ‘legislative rules,’ then there will be opportunity for notice and comment. If, instead, the Secretary of Labor issues ‘interpretive rules’ as he did in Perez v. Mortgage Bankers Assn. (or like the EEOC did recently with its policy guidance on pregnancy discrimination), then the law does not require notice-and-comment rulemaking.”

“The White House and Federal agencies won the day—and many more to come,” said Keith Watts, a shareholder in the Costa Mesa, California office of Ogletree Deakins (also an ELD Advisory Board member). As Citizens United threw off the shackles of fiscal regulation and forever altered the course of campaign finance, this unanimous decision heralds an unfettered “golden age” for regulators, no longer constrained by “notice and comment” periods.

Each administration now appears to “stand on its own,” Watts continued. “If the NLRB and its broad brush approach to implementing and interpreting regulations is a harbinger, employers can count on less certainty across all Federal agencies, including the DOL and EEOC. Unconstrained by previous administrations’ prior interpretative rulings means “all bets are off.”

The case number is 13-1041.

Attorneys: Donald B. Verrilli, Jr., Solicitor General, U.S. Department of Justice, for Thomas E. Perez. Allyson N. Ho (Morgan, Lewis & Bockius) for Mortgage Bankers Association.

Companies: Mortgage Bankers Association

MainStory: TopStory EnforcementActions

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