In an opinion that applies across the spectrum of federal administrative agencies, on March 9, 2015, the U.S. Supreme Court handed down its long awaited decision inPerez vs. Mortgage Bankers Assoc.1 holding that administrative agencies may issue interpretive rules that modify existing interpretive rules without – and thus avoiding – the full-blown notice-and-comment rulemaking under Section 4 of the Administrative Procedure Act (“APA”) required for legislative or substantive regulations. In so doing, the Court adhered to a strict application of the exemption in the APA’s Section 4 from such rulemaking for interpretive rules and simultaneously overturned the long-standing decision of the U.S. Court of Appeals for the District of Columbia in Paralyzed Veterans of Am. v. D.C. Arena L.P.2 which had mandated notice-and-comment rulemaking when an interpretive rule significantly changed a prior one. In removing this significant barrier, Mortgage Bankers Assoc. thus clearly expands the substantial discretion of administrative agencies in the area of formulating interpretations and interpretive rules. Still, a close reading shows that the Court may have been less expansive than might first appear in an opinion that was expected by many interested court watchers to address head on the contours of what is an acceptable interpretive rule. Thus, the majority avoided, at least for the time being, the broader concern raised in the concurring opinions that the current widespread judicial deference to agency actions may justify further review and consideration.

The case before the Court involved a 2010 Administrative Interpretation of an underlying Labor Department regulation (the “2010 Interpretation”) that concluded that mortgage loan officers did not qualify for an exemption from the overtime pay requirements under the federal Fair Labor Standards Act of 1938 – meaning, in simple terms, that they must be paid overtime after working 40 hours in a week. The 2010 Interpretation revoked a 2006 Opinion Letter that had reached the opposite interpretation.

The Mortgage Bankers Association (“MBA”), a trade association of mortgage companies that presumably would be required to pay such overtime, challenged the 2010 Interpretation to the District Court on the grounds that the Paralyzed Veterans of Am. doctrine required that such a profound change from an existing interpretive policy undergo full-blown notice-and-comment procedures under the APA. The District Court upheld the Agency on dual grounds that the new interpretation was not arbitrary and capricious and that, no reliance being actually shown, the Paralyzed Veterans doctrine could not be invoked to strike down the Interpretation on grounds that it lacked notice-and-comment rulemaking. On appeal by the MBA, the D.C. Circuit Court of Appeals overturned the 2010 Interpretation on the grounds that the District Court improperly incorporated a reliance standard into the Paralyzed Veterans doctrine.

The Department appealed, and the Supreme Court overturned the Court of Appeals, holding that the clear text of Section 4 of the APA expressly exempts all interpretive rules from the full-blown notice-and-comment rulemaking.3 And “[b]ecause 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.” As a consequence, the Court, including the concurring justices, held that Paralyzed Veterans doctrine is contrary to this clear text of Section 4 by improperly imposing on agencies an obligation beyond the APA’s procedural requirements. In upholding the strict application of the Section 4 exemption and in removing the significant barrier inherent in theParalyzed Veterans doctrine, Mortgage Bankers Assoc. clearly expands the substantial discretion residing in administrative agencies in the area of formulating interpretations and interpretive rulemaking.

However, a close reading of the opinion shows that the Court may have been less expansive than might first appear. First, on the grounds that the parties had clearly admitted in the courts below that the 2010 Interpretation was, in fact, an interpretive rule, the majority opinion flatly declined to address the strict application of the Section 4 exemption in the context of a substantive or legislative rule cloaked in the guise of an interpretation to avoid notice and comment procedures.

Secondly, while the majority opinion and three concurring opinions, by Justices Alito, Scalia and Thomas, suggest that a number of justices perceive a problem with the expansive use of interpretive rules by agencies, the majority opinion did not contend with the underlying issue of widespread judicial deference to agency action, but rather confined its dismissive discussion to a footnote.  To the contrary, the concurring opinions each clearly set forth their authors’ view that, in Justice Alito’s words, there is frequent “exploitation by agencies of the uncertain boundary between legislative and interpretive rules” and questioned the role of widespread judicial deference, arising from a string of Court opinions, in giving rise to the expansive agency use of interpretive rules. Justice Thomas’s lengthy analysis of the history of this judicial deference, largely as a creature of prior Court pronouncements, found it inconsistent with constitutional separation of powers.

The majority opinion itself pointedly noted that “[t]here may be times when an agency’s decision to issue an interpretive rule, rather than a legislative rule, is driven primarily by a desire to skirt notice-and-comment provisions.” However, rather than engage in analysis of this agency skirting – including any need for correction or the role of judicial deference in its existence – the majority opinion merely reiterated a time-worn palliative to aggrieved parties that “regulated entities are not without recourse in such situations,” without engaging in any analysis of such alternative recourse. Notably, Justice Thomas’s concurrence pointed out that formal rulemaking has become the “Yeti of administrative law” that is “elusive” outside of “isolated sightings” in the ratemaking process.

Thus, there is a pervasive sense, one expressly stated by Justice Thomas in his closing sentence, that several of the justices may be seeking a more appropriate case as a vehicle for a significant review, if not overhaul of the current judicially created doctrine of extensive judicial deference to administrative agencies in interpreting not only statutes but also their own regulations.  Still, the narrowness of the majority opinion masks, if not leaves it doubtful how many of the justices are willing to engage in a meaningful review of judicial deference, even in the context of a so-called “interpretive rule” that may be issued by an agency seeking to evade the APA’s notice and comment requirements.