Justices to Review If DOL Agency Must Use Rulemaking to Change FLSA Interpretation

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By Kevin P. McGowan  

June 16 — Granting petitions filed by the Labor Department and three mortgage loan officers, the U.S. Supreme Court June 16 agreed to review whether the DOL must engage in formal notice-and-comment rulemaking to change its interpretation of Fair Labor Standards Act regulations.

In seeking review for the Labor Department, the solicitor general said a U.S. Court of Appeals for the District of Columbia Circuit ruling “raises a fundamental and recurring question” about the Administrative Procedure Act's “structure and meaning” and the “obligations that Congress elected to impose on administrative agencies.”

In consolidated cases, the justices will review a D.C. Circuit decision vacating a 2010 administrative interpretation by the DOL's Wage and Hour Division that mortgage loan officers aren't exempt from the FLSA's minimum wage and overtime pay requirements because the DOL had switched its position from a 2006 opinion letter that loan officers were exempt without allowing public comment through formal rulemaking (720 F.3d 966, 20 WH Cases2d 1527 (D.C. Cir. 2013).

Circuit Conflict Alleged

The D.C. Circuit said the APA requires notice-and-comment rulemaking because the DOL's 2010 guidance was a “definitive” regulatory interpretation that significantly reversed the agency's stance expressed in the 2006 opinion letter.

The appeals court rejected the DOL's argument that the Mortgage Bankers Association (MBA), which had sued to challenge the 2010 interpretation, could prevail only if it showed “substantial and justifiable reliance” on a “well-established agency interpretation.”

The D.C. Circuit decision conflicts with the APA, which says an agency's ‘interpretive” rules are exempt from notice-and-comment rulemaking, as well as with rulings from other federal circuits that have held the APA allows agencies to modify interpretive rules without notice and comment, the solicitor general said in petitioning for review.

Even if a circuit conflict exists, Supreme Court review is unwarranted, the MBA said in opposing review, because of President Barack Obama's March 2014 instructions to the Labor Department to “modernize and streamline” its existing overtime regulations through formal rulemaking, including the exemption at issue in the loan officers' case.

Broad Impact, Solicitor General Warns

But the solicitor general said the legal issue under the APA is broader than the DOL's interpretation of the specific FLSA exemption involved in the loan officers' case.

The D.C. Circuit cited its decisions in Paralyzed Veterans of America v. D.C. Arena, 117 F.3d 579, 6 AD Cases 1614 (D.C. Cir. 1997), and Alaska Professional Hunters Association v. FAA, 177 F.3d 1030 (D.C. Cir. 1999), to hold a regulated entity's reliance on a federal agency's prior interpretation is just “one factor” in determining whether an agency has significantly revised a “definitive interpretation” of an agency regulation and therefore must engage in formal rulemaking.

The D.C. Circuit said courts “must weigh the role reliance plays on a case-by-case basis” and that inquiry is “more art than science.”

But the D.C. Circuit said once a court has classified an agency interpretation as “definitive,” that interpretation can't be “significantly revised” without notice-and-comment rulemaking under the APA, as construed in Paralyzed Veterans.

[T]he solicitor general said the D.C. Circuit's ruling “raises a fundamental and recurring question” about the APA's “structure and meaning” and the “obligations that Congress elected to impose on administrative agencies.”

Because the DOL acknowledged its 2010 guidance was a “definitive” interpretation of the FLSA's administrative exemption as applied to mortgage loan officers that conflicts with the agency's 2006 opinion letter, the D.C. Circuit said no independent inquiry was needed on whether the MBA substantially and justifiably relied on the 2006 interpretation and a federal district court must vacate the DOL's 2010 guidance.

A federal district court in 2012 had granted the Labor Department summary judgment on the MBA's challenge.

D.C. Circuit Ruling at Odds With APA

In seeking Supreme Court review, the solicitor general said the “adverse impact” from the D.C. Circuit's Paralyzed Veterans doctrine is “especially significant because nearly all federal agencies are subject to suit in the District of Columbia and because of the prominent role that the D.C. Circuit plays in federal administrative law as a result.”

The Paralyzed Veterans doctrine conflicts with the APA, which “expressly exempts” an agency's formulation, amendment and repeal of “interpretative” rules from notice-and-comment rulemaking, the solicitor general said.

The APA's directive exempting interpretive rules from formal rulemaking is “unambiguous” and the Supreme Court has “repeatedly made clear that ‘interpretive rules do not require notice and comment,' ” the solicitor general said.

That principle makes sense because an interpretive rule is “a statement ‘issued by an agency to advise the public of an agency's construction of the statutes and rules which it administers' ” and such a rule lacks the force and effect of law, the solicitor general said.

Since such agency statements aren't “binding legislative rules” with the force of law, “Congress presumably determined it would be an unwarranted encroachment” to force federal agency decision-makers “to dedicated limited agency time and resources” to formal rulemaking “simply to inform the public of the agency's views” on relevant statutes and regulations, the solicitor general said.

That conclusion “carries particular force” when an agency acts to correct what it deems an erroneous existing interpretation of agency regulations, as the DOL did in this case, the solicitor general said.

“Agencies should be encouraged to announce their changed views promptly and publicly, rather than to allow the public to be misled by an earlier agency interpretation,” the solicitor general said. “It is ‘no favor to the public to discourage the announcement of agencies' interpretations by burdening the interpretive process with cumbersome formalities,' ” the solicitor general said, citing Hoctor v. Department of Agriculture, 82 F.3d 165 (7th Cir. 1996).

The Paralyzed Veterans doctrine also contradicts Supreme Court rulings that an executive department shouldn't be stopped from changing its interpretation of agency regulations when it believes a prior interpretation is legally mistaken, the solicitor general said.

The solicitor general called “incorrect” the D.C. Circuit's “operative assumption” that an agency change in interpretation is “so closely intertwined” with the substantive regulation that it amounts to a regulatory change for which notice-and-comment rulemaking is required.

Instead, the solicitor general said, an “interpretive” rule is a change in the agency's interpretation of existing regulations that lacks the effect or force of law but puts the public on notice of how that agency will proceed.

“Accordingly, as explained above, the APA by its terms defines ‘rule making' to include the ‘amend[ment] or repeal' of an interpretive rule but specifically exempts such rulemaking from mandatory notice-and-comment procedures,” the solicitor general said.

Solicitor General Donald B. Verrilli Jr. was counsel of record for the Labor Department.

Three mortgage loan officers who had intervened as defendants in the district court also sought review of the D.C. Circuit decision, citing the federal circuit split and asserting the Paralyzed Veterans doctrine is “plainly wrong.”

Adam W. Hansen of Nichols Kaster in San Francisco was counsel of record for the loan officers.

Case May Be Moot, MBA Says

Opposing review, the MBA said the underlying dispute over whether notice-and-comment rulemaking is required to change the DOL's interpretation of its 2004 FLSA white-collar exemptions may be moot given Obama's recent instruction that the DOL engage in new rulemaking regarding those exemptions.

“The underlying issue in this case is the application of the FLSA with respect to loan officers,” the MBA said. “Adoption of a new regulation to that end—through notice and comment rulemaking—obviates the need for the Department of Labor to defend its 2010 administrator interpretation” that mortgage loan officers are not FLSA-exempt.

“At the very least, there is a serious concern that the new rulemaking will moot the issue of the validity of the [DOL]'s 2010 administrative interpretation on the same subject,” the MBA said. “That alone militates strongly against this [Supreme] Court's review at this time.”

‘Rarely Used' Doctrine Doesn't Need Review

The MBA also said the “rarely used” Paralyzed Veterans doctrine “has not caused any deep rift” among federal appeals courts.

Although “some tension” may exist among the federal circuits about when notice-and-comment rulemaking is required, the MBA said “careful inspection of the [petitioners'] cited cases confirms the conclusion that the split is largely illusory.”

Rather, the circuit courts' different results can be explained by different factual situations and wouldn't have come out differently under Paralyzed Veterans, the MBA said.

“That is because the cases cited by petitioners as evidence of a split were mostly decided on the grounds that the prior agency interpretation was not substantially different than the later interpretation, or not definitive in the first place, so that one or more of the prerequisites to triggering notice and comment under Paralyzed Veterans was lacking,” the MBA said.

The issue's “practical importance” is limited because the D.C. Circuit has used Paralyzed Veterans only three times in almost 20 years to invalidate an agency's interpretive rule, the MBA said.

“Given that track record, it is hard to see how Paralyzed Veterans ‘can present a formidable in terrorem barrier for agencies,' ” the MBA said, quoting the solicitor general's petition. “There is simply no need for this [Supreme] Court to review a doctrine so sparingly applied, even if the circuits were so deeply divided on the question, which they are not.”

Allyson N. Ho of Morgan Lewis & Bockius in Dallas was counsel of record for the Mortgage Bankers Association.

To contact the reporter on this story: Kevin P. McGowan in Washington at kmcgowan@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

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