Opinion analysis: The Court slays the D.C. Circuit’s Paralyzed Veterans doctrine, leaving bigger issues for another day
on Mar 10, 2015 at 9:22 am
The D.C. Circuit’s Paralyzed Veterans doctrine – which required federal agencies to engage in notice-and-comment rulemaking when they substantially altered an “interpretive” rule – is dead, the Supreme Court held yesterday. The decision in Perez v. Mortgage Bankers Association (consolidated with Nickols v. Mortgage Bankers Association), freed federal agencies from a judge-made rule that the federal government has long disliked and that virtually all administrative-law scholars believed was legally flawed. The Court’s rejection of the Paralyzed Veterans doctrine was unanimous, though, as we shall see, separate concurrences from Justices Scalia and Thomas promise fireworks to come.
The Administrative Procedure Act (APA) authorizes federal agencies to promulgate rules. The APA defines a “rule” as “an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy.”
Two kinds of rules are relevant here. The Supreme Court has said that a “legislative” or “substantive” rule “binds” the public, and, like a statute, has the “force and effect” of law. The APA generally requires that, to become effective, a legislative rule must go through what is known as notice-and-comment rulemaking – in which the public is given an opportunity to comment on a proposed version of the rule and the agency responds to the comments. The public-comment process matters because it sometimes significantly influences the content of legislative rules.
Interpretive rules are treated differently. The APA provides that the notice-and-comment requirement “does not apply” to interpretive rules, and, thus, agencies may issue interpretive rules without any public input. It is often said that an interpretive rule differs from a legislative rule because it does not bind the public or have the force and effect of law; instead, it states only the agency’s interpretation of its governing law or regulations. Interpretive rules include many agency pronouncements, issued with varying indicia of formality, such as guidance documents and interpretive bulletins and memos. Federal agencies operate under thousands of interpretative rules that do not go through notice-and-comment rulemaking.
Even though an interpretive rule need not go through the notice-and-comment process when it is first issued, the D.C. Circuit had long held, in a series of cases that became known as the Paralyzed Veterans doctrine, that an agency could not significantly revise an existing interpretative rule without taking the revision through the often lengthy and costly notice-and-comment rulemaking process.
The Fair Labor Standards Act (FLSA) requires that employees be paid overtime for working more than forty hours per week, but it exempts “any employee employed in a bona fide executive, administrative, or professional capacity.” In 2004, the Department of Labor (DOL), through notice-and-comment rulemaking, revised its regulations to require overtime pay for any “employee whose primary duty is selling financial products.”
In 2006, claiming to interpret the agency’s regulation, DOL issued an interpretive rule stating that the “primary duty” of mortgage-loan officers was not selling financial products and that, therefore, mortgage-loan officers were exempt from the FLSA’s overtime requirement. In 2010, however, claiming to interpret the same regulation, DOL withdrew its 2006 interpretation and issued a new interpretation stating that mortgage-loan officers were not exempt and so were entitled to overtime pay.
The Mortgage Bankers Association (MBA) sued DOL, arguing that the 2010 re-interpretation was invalid because it did not go through notice-and-comment rulemaking. The D.C. Circuit agreed with MBA, relying on the Paralyzed Veterans doctrine.
The Court’s opinion
In an opinion by Justice Sonia Sotomayor, speaking for five other Justices (and for Justice Alito for all but part III.B.), the Court thoroughly repudiated Paralyzed Veterans. Adopting the Solicitor General’s argument on behalf of DOL, the Court explained that the “[t]he text of the APA answers the question presented.” Quoting the APA, it noted that while a legislative rule requires notice and comment, that requirement “does not apply . . . to interpretative rules.” That was enough to bury Paralyzed Veterans. But there’s more.
In establishing the doctrine, the D.C. Circuit had relied on the APA’s definition of “rule making,” which covers “amending, or repealing a rule” as well as the issuance of a new rule. The D.C. Circuit said that amending an agency interpretation of a legislative rule effectively amends the rule itself (which, under the APA, would require notice-and-comment rulemaking). But according to the Court, that reasoning provided no defense for the result in Paralyzed Veterans. To the contrary, the text of the APA on which the D.C. Circuit had relied means only that agencies must “use the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance.”
The Court supplemented its plain-language holding with “longstanding principles of our administrative law jurisprudence” that prohibit courts from adding procedural requirements not found in the APA. Thus, although an agency may provide the public more procedural protections than the APA minimally requires, Paralyzed Veterans was an impermissible “judge-made procedural right,” and “imposing such an obligation is the responsibility of Congress or the administrative agencies, not the courts.”
The Court then went on to reject MBA’s “practical and policy” defenses of Paralyzed Veterans. In the section of the opinion not joined by Justice Alito, it explained that the public is not without recourse when an agency attempts to “skirt” the APA’s notice-and-comment requirement by classifying a legislative rule as interpretive. First, an agency rule is always subject to substantive challenge under the APA as “arbitrary and capricious.” Moreover, Congress itself, the Court observed, can establish “safe harbors” “that shelter regulated entities from liability when they act in conformance with previous agency interpretations.” That’s an interesting point because it seems to acknowledge that supposedly “interpretive” rules sometimes create “liability,” which sounds a lot like a “legislative” rule that has the force and effect of law. Finally, in what may prove to be an important footnote, the Court noted the acknowledgement at oral argument by Deputy Solicitor General Edwin Kneedler that, apart from any statutory safe harbor, “principles of retroactivity” (or perhaps, more precisely put, anti-retroactivity) may limit an agency’s ability to enforce a new interpretation against a private party whose conduct conformed with an agency’s earlier interpretation. This oral argument exchange, prompted by questioning from the Chief Justice and now enshrined in the decision, will no doubt be fodder for the law reviews and future litigation.
In the end, the Court’s opinion may prove more important (or at least more interesting) for what it refused to do – address the broader questions that MBA and its amici had attempted to smuggle into the case. At oral argument, MBA’s lawyer effectively acknowledged that Paralyzed Veterans was wrong – by admitting that revisions of rules that are truly “interpretive” need not go through notice and comment – thus appearing to concede that if the Court simply answered the question presented her client could not win. Instead, MBA argued that DOL’s 2010 overtime-pay pronouncement was a “legislative rule in interpretive clothing” and so should have been subjected to the APA’s notice-and-comment requirement. As it had done in its brief, MBA tried at argument to blur the difficult line between legislative and interpretive rules, noting that DOL had called its 2010 interpretive rule a “substantive change” entitled to “controlling deference.”
Given the power of the government’s textual argument, MBA’s tactic probably made sense. MBA was trying to pick up on the growing unease, and, in some quarters, outright disdain, for agencies’ success in obtaining judicial deference for their regulatory interpretations. In cases such as Auer v. Robbins and Chase Bank v. McCoy, the Court has deferred even to agency interpretations expressed for the first time in an agency amicus brief, so long as the interpretation was not “plainly erroneous.” That kind of judicial deference arguably gives an interpretative rule the force and effect of law without requiring it to go through notice-and-comment rulemaking.
One problem with this argument, as already suggested, is that MBA and its amici were trying to use their defense of the Paralyzed Veterans doctrine as a stalking horse for bigger, tougher administrative-law questions not presented by the case. And even taking MBA’s complaint about deference on its own terms, the argument proved too much. Judicial deference to agency interpretations, whatever one thinks of it, applies to brand-new interpretations as well as substantial revisions to them, and so upholding Paralyzed Veterans, which applies only to revisions, would be an odd, back-handed way to address concerns about deference.
The Court would have none of it. The litigation in the courts below had proceeded on the assumption that DOL’s pronouncement on overtime for mortgage-loan officers was an interpretive rule, and MBA did not challenge that characterization of the question presented in its opposition to certiorari. For the latter reason, even if not the former, the interpretive-vs.-legislative issue (and thus any supposedly related issue as to deference) had been waived.
The Scalia and Thomas concurrences
Did MBA lose the battle but plant important seeds in the war against judicial deference to interpretive rules? Concurring only in the judgment, both Justices Antonin Scalia and Clarence Thomas wrote separate concurrences, speaking for themselves alone. Both argued that judicial deference to an agency’s interpretive rule is impermissible.
Limited narrowly to the validity of Paralyzed Veterans, Justice Scalia was happy to concur in the result. But building on his earlier dissent in Decker v. Northwest Environmental Defense Center, he was decidedly unhappy with the overall gestalt: “Considered alongside our law of deference to administrative determinations, however, today’s decision produces a balance between power and procedure quite different from the one Congress chose when it enacted the APA.” Rejecting hornbook definitions of “interpretive” and “legislative,” and noting instead that “[i]nterpretive rules that command deference do have the force of law,” Justice Scalia put the problem succinctly:
By giving … interpretive rules [that interpret agency regulations] Auer deference, we do more than allow the agency to make binding regulations without notice and comment. Because the agency (not Congress) drafts the substantive rules that are the object of those interpretations, giving them deference allows the agency to control the extent of its notice-and-comment-free domain. To expand this domain, the agency need only write substantive rules more broadly and vaguely, leaving plenty of gaps to be filled in later, using interpretive rules unchecked by notice and comment. The APA does not remotely contemplate this regime.
The APA, Justice Scalia emphasized, says that “the reviewing court shall . . . interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.” The solution, he maintained, was not to “rewrite” the APA “to make up for Auer,” as the MBA had urged in its oblique defense of Paralyzed Veterans, but to “abandon Auer and apply the Act as written.” Agencies can interpret their own regulations, with or without notice and comment, to their hearts’ content, “but courts [should] decide – with no deference to the agency – whether that interpretation is correct.” No equivocation there. (Administrative-law nerds should note that Justice Scalia expressed antipathy toward Chevron as well as toward Auer, though he suggested that Chevron’s legal pedigree may prevent it from being “uprooted.”)
Justice Thomas’s twenty-three-page separate opinion is as self-confident as Justice Scalia’s, but is rooted in the constitutional separation of powers rather than in the APA. This brief analysis cannot do his opinion justice. So, just a couple points that might spur your appetite to dig in to the whole thing. Justice Thomas’s opinion placed the judiciary at the center of the Constitution’s “practical and real” protections for individual liberty. “The Judiciary – no less than the other two branches – has an obligation to guard against deviations from those” protections, and judicial deference to an agency’s view of its own regulations is an impermissible deviation. Because this type of judicial deference effectively transfers to the executive the judicial power to interpret regulations, it interferes with the judiciary’s authority to “independently” determine what those regulations mean, posing “serious” separation-of-powers concerns. Among other shortcomings, executive agencies “lack the structural protections for independent judgment adopted by the Framers, including the life tenure and salary protections of Article III.” Justice Thomas ended by calling for reevaluation of deference doctrine in an appropriate case and noting that stare decisis should not stand in the way. (Although Justice Thomas did not cite Chevron, in our view, at least some of his analysis appears to draw Chevron into question.)
Where do we go from here?
Let’s count the votes. Justices Scalia and Thomas want to jettison Auer deference (at least). In Decker, the Chief Justice and Justice Alito said that reconsideration of Auer may be appropriate when the issue is properly presented. Yesterday, the Chief was silent, but Justice Alito, in his short concurrence, appeared ready to revisit Auer, noting the “substantial[ity]” of Justice Scalia’s and Justice Thomas’s views. Well-advised litigants pained by agency interpretations – even perhaps companies that don’t like DOL’s 2010 overtime interpretation – will be teeing up the Auer question and, when it makes tactical sense, arguing that agency interpretations really are substantive rules. The Court realized that this case was never genuinely about those issues, but yesterday’s opinions show that they may be on the Court’s docket fairly soon.