On March 9, the Supreme Court issued its ruling in Perez v. Mortgage Bankers Association. The decision that may not have seized headlines, but it has significant consequences for industries regulated by the federal government, both because of its holding that an agency need not go through notice-and-comment rulemaking to change an interpretive rule and because it signals the Court’s possible interest in reconsidering the degree of deference courts should give to agency interpretations of their regulations.

In Mortgage Bankers, the Court considered the following important question of administrative law: Was the D.C. Circuit correct when it ruled in 1997 in Paralyzed Veterans of America v. D.C. Arena L.P.that a federal agency may not change its interpretation of a statute (i.e., change a non-binding “interpretive” rule) unless it goes through notice-and-comment rulemaking (i.e., issues a binding “legislative” rule)? This is sometimes referred to as the Alaska Hunters doctrine.  The Court unanimously ruled that the answer is no. Although the ruling was unanimous, it revealed an intriguing split within the Court about a related question of administrative law.

To back up, here are the key facts of Mortgage Bankers. The Department of Labor had on various occasions addressed whether mortgage loan officers fell within a statutory exemption from the minimum wage and overtime compensation requirements of the Fair Labor Standards Act of 1938. Of particular note, in 2006, the Department issued an opinion letter interpreting the statutory exemption to include mortgage loan officers. But, in 2010, it issued an Administrator’s Interpretation – without notice and an opportunity to comment – reversing that interpretation and withdrawing the 2006 opinion letter. The Supreme Court held in Mortgage Bankers that, contrary to the D.C. Circuit’s Paralyzed Veterans doctrine, there was no requirement under the Administrative Procedure Act that the 2010 Administrator’s Interpretation undergo notice-and-comment rulemaking.

What’s the significance of this holding? The Paralyzed Veterans doctrine served as a procedural check on federal agencies in the exercise of their regulatory power. Federal agencies often seek to change their policies by re-interpreting the statutes that they administer. Of course, such changes in policy are often consequential for regulated entities. By requiring federal agencies to undergo notice-and-comment rulemaking in such circumstances, the Paralyzed Veterans doctrine was a powerful tool that could be used to ensure that regulated entities at least had a voice in the process. Notably, because venue is proper in D.C. under many federal schemes, the Paralyzed Veterans doctrine was effectively applicable nationwide.

Now that this tool is no longer available, is there any remaining check? This is the issue on which the justices engaged in a lively debate. In separate opinions concurring in the judgment, Justices Scalia and Alito each expressed concern that even judicial review wouldn’t serve as a meaningful check on federal agencies in light of the principle established by the Supreme Court in Bowles v. Seminole Rock & Sand Co., which is sometimes referred to as Auer deference. Under Seminole Rock, the Court established that, where a federal agency interprets its own regulation, a court must afford a level of deference to that interpretation. Justice Scalia noted that Seminole Rock empowers federal agencies to promulgate ambiguous regulations that are amenable to changes in interpretation, which do not need to go through notice-and-comment rulemaking in the absence of the Paralyzed Veterans doctrine, and to which reviewing courts must afford deference – giving federal agencies virtual carte blanche with respect to such changes. Justices Scalia and Alito – as well as Justice Thomas, who concluded, in yet another opinion concurring in the judgment, that Seminole Rock raises separation-of-power concerns – expressly invited litigation that could serve as a vehicle for overturning Seminole Rock.

So should regulated entities now be developing such litigation? On the one hand, overturning Seminole Rock would empower courts to curb the ability of federal agencies to decline to adopt the best interpretations of their regulations. On the other hand, there may be situations in which it’s in the interest of a regulated entity for a federal agency to be able to adopt an alternative interpretation. The answer can cut either way.

In the meantime, in Mortgage Bankers, the Court recognized a few existing limitations on Auer deference, of which regulated entities should be aware. Writing for the majority, Justice Sotomayor acknowledged that “Auer deference is not an inexorable command in all cases.” In doing so, she cited circumstances under which “the agency’s interpretation is plainly erroneous or inconsistent with the regulation,” or “there is reason to suspect that the agency’s interpretation does not reflect the agency’s fair and considered judgment,” and noted that “[a]n agency’s interpretation of a . . . regulation that conflicts with a prior interpretation is entitled to considerably less deference than a consistently held agency view.” In addition, Justice Thomas noted two situations in which Auer deference is inapplicable: “[w]here . . . an agency’s pronouncement of its interpretation is preceded by a very lengthy period of conspicuous inaction,” and “[t]he language the [interpretation of the regulation] addresses comes from Congress, not the [federal agency].”

Like other decisions in other areas of law, the decision in Mortgage Bankers could end up being one in a series of decisions that re-examines longstanding tenets of administrative law. For industries regulated by the federal government, it’s something to continue to watch.