Argument analysis: “Interpretive rules,” notice-and-comment rule making, and the tougher issues waiting in the wings

The Court heard argument Monday in Perez v. Mortgage Bankers Association (consolidated with Nickols v. Mortgage Bankers Association). Here is the question presented in the Solicitor General’s cert. petition:

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.

Keep that question in mind. As we will see, whether the Court answers that question alone, or also delves into other, arguably related questions of administrative law, was on the Justices’ minds at yesterday’s argument. First, some background.

Background

Under the Administrative Procedure Act (APA), federal agency rules can be “legislative” or “interpretive.” A legislative rule, like a statute, is said to bind the public and have the “force of law.” Under the APA, a legislative rule generally cannot be issued without notice and comment, a lengthy process in which an agency publishes a proposed rule and gives the public a chance to comment on it. The agency must give serious consideration to the comments before the rule may be finalized. Public comments sometimes significantly affect the content of legislative rules. The APA provides that when an agency amends a legislative rule, the amendment must go through notice and comment, just like the original rule.

By contrast, an interpretive rule is said only to advise the public of an agency’s view of what a law or regulation means. Supposedly, an interpretive rule does not bind the public or have the force of law. Interpretive rules come in many forms, such as guidance documents, agency manuals, and interpretive bulletins. The APA expressly provides that an interpretive rule need not go through notice and comment. An amendment of an interpretive rule is exempt from the notice-and-comment requirement, just like an original interpretive rule—at least, it seems, according to the APA’s text.

But in a series of cases known collectively as the Paralyzed Veterans doctrine, 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. In the case before the Court, in 2006, the Department of Labor (DOL) issued, without notice and comment, an interpretive rule which stated that mortgage-loan officers are not entitled to overtime pay under the Fair Labor Standards Act. In 2010, the DOL changed course and said, again without notice and comment, that mortgage-loan officers are entitled to overtime pay. Applying the Paralyzed Veterans doctrine, the D.C. Circuit below held that the 2010 interpretive rule significantly revised the 2006 interpretive rule and so is invalid because it was issued without notice and comment. One point to keep in mind: The D.C. Circuit assumed that the 2010 DOL rule is an interpretive rule, not a legislative rule.

As discussed in our preview, respondent Mortgage Bankers Association (MBA) maintains in the Supreme Court that the 2010 DOL rule is a “legislative rule in interpretive clothing.” And, to be sure, in other litigation, DOL has claimed that its interpretative rule is “substantive” and entitled to deference in the courts. That sounds like a rule intended to bind the public. Along the same lines, more generally, federal agencies repeatedly have received judicial deference for their regulatory interpretations, most prominently (and controversially) in the Court’s Auer v. Robbins decision, so long as those interpretations are not “plainly erroneous.” That kind of judicial deference seems like giving an interpretative rule the force of law without requiring it to go through notice-and-comment rulemaking. So, perhaps there’s something to the notion that the rule at issue here – and other so-called interpretive rules – are really legislative rules.

The argument

Unfortunately for MBA, however, the question presented assumes exactly what the D.C. Circuit below had assumed – that the rule at issue here is an interpretive rule. At argument, Deputy Solicitor General Edwin Kneedler reminded the Court of this point right out of the blocks. “[T]he question of whether this is an interpretive rule … is not before the Court,” Kneedler said, to which Justice Anthony Kennedy replied, “correct.”

But some members of the Court expressed concern with the deference issues raised by MBA. Justices Elena Kagan and Sonia Sotomayor wondered whether the government was seeking an “end run” around the notice-and-comment process. Why, after all, would an agency go through the cumbersome process of legislative rulemaking if interpretive rules are given controlling deference and yet are much easier to promulgate? Kneedler tried to deflect this line of questioning by relying simply on the formal distinctions between legislative rules – which, he claimed, have the “force and effect of law” and “define duties and obligations” – and interpretive rules – which, as Kneedler put it, are “designed [only] to inform the public of the agency’s view of the statutes and rules.” Justice Antonin Scalia, who has called on the Court to abandon Auer deference, would have none of it: “Nonsense. [W]hether it’s an interpretative rule or a substantive rule, … you want us to give the same deference to both.” “Yes, yes,” Kneedler agreed.

Sensing that the discussion was veering away from the question presented, Justice Stephen Breyer cut off this line of questioning, perhaps signaling the ruling to come. He noted that the deference question was interesting and nuanced. But presumably because the question presented assumed that the rule at issue is interpretive, he noted that “we need not go into those [deference] matters in this case and I surely hope we don’t.” This comment gave Kneedler another opportunity to remind the Court that the case concerned only the validity of the Paralyzed Veterans doctrine, and not the dividing line between interpretive and legislative rules or the deference due those rules when they are challenged in court.

MBA’s lawyer, Allyson Ho, faced tough questioning from the start. She began by resisting the question presented. The revised DOL interpretation, she claimed, amounted to a “substantive change in the law” – that is, a legislative rule. Justice Kagan wasn’t buying: “Everything that happened in this case happened on the view that this was an interpretative rule and the question is what followed from that classification.”

Ho’s exchange with Justice Scalia was perhaps most telling. Justice Scalia asked whether it was “absolutely essential” to MBA’s case that the rule at issue be classified as “substantive.” Ho agreed. Justice Scalia continued: “And if we disagree with that, you acknowledge that Paralyzed Veterans is wrong.” “Yes,” Ho replied. At that point, Justice Kagan jumped in: “Well … I think that you’ve just said Paralyzed Veterans is wrong then.” Ho then doubled down: “The question in this case is whether [the 2010 DOL rule] is, in fact, an interpretive rule” or, as MBA now maintains, a legislative rule. That’s effectively a concession that MBA loses if the Court is unwilling to go beyond the question presented in the government’s petition.

Kneedler’s rebuttal was taken up largely with concerns from several Justices about the perceived unfairness of retroactive application of changes in interpretive rules. It was one thing, those Justices suggested, to bless an agency’s changed interpretive rule for prospective application, even a rule issued without notice and comment, and quite another to apply a new rule to business decisions made in reliance on the old rule. Kneedler would not answer these concerns for all agencies and all fact patterns, but he assured the Court that the 2010 DOL rule would not be applied retroactively. The Justices seemed satisfied.

 ***

 The argument reinforces our view that the Court will bury the Paralyzed Veterans doctrine and hold that a revised interpretive rule need not go through notice-and-comment rulemaking. It is likely that one or more members of the Court will voice concern over the deference given to interpretive rules and, perhaps, the difficulty distinguishing between interpretive and legislative rules. But we think the Court will leave those broader and more difficult issues for another day (or two).