High Court Ruling Is Boon for Regulators, Snare for Business

At first glance, the Supreme Court’s decision in Perez v. Mortgage Bankers Association might not reveal much in the way of drama or surprises.

The case involved a challenge to a Labor Department decision requiring some in the mortgage industry to be paid overtime, hardly a headline-grabbing concern. The opinion was also unanimous; uniting the easily divided conservative and liberal justices at least on the facts and circumstances of the case.

The legal after-shocks, however, could dramatically change how government agencies craft regulation, both now and in the future.

“The Supreme Court essentially said that agencies can change or modify their policies—even if they are longstanding policies—without going through the burdensome, slow, and expensive notice and comment process for rulemaking,” says Seth Harris, a member of the law firm Dentons and a former Labor Department official in the Obama Administration. “Agencies can change their minds more easily, expand the scope of older guidance more easily, and modify prior pronouncements more easily.”

The case involved a Labor Department rule that established which employees are entitled to minimum wage and overtime pay and a subsequent “Administrator’s Interpretation” that removed a previously understood exemption for mortgage loan officers. The Court sided with the government’s stance that rulemaking interpretations are not bound by the congressional mandates of the Administrative Procedures Act, despite a lower court ruling in the D.C. Circuit Court that found otherwise.

The APA establishes the procedures federal agencies use for rulemaking. It distinguishes between “legislative rules” issued through notice-and-comment rulemaking, and the “force and effect of law” and “interpretive rules” issued “to advise the public of the agency’s construction of the statutes and rules it administers.” The Perez decision established that regulatory clarifications and alterations, made through the use of interpretive rules, are not subject to the public review process required by the APA.

“This decision puts that policy-making tool right at the center of any business’ focus.”
Seth Harris, Partner, Dentons

The ruling is a bit of a double-edged sword for the business community, especially for highly regulated industries such as finance and healthcare. “The opportunity is that they have the ability to go to executive branch agencies and seek to change or modify or expand policies that may be interfering with their business,” Harris says. “The risk is that with very little notice, and with no formal opportunity to participate in a stakeholder process, policies that businesses have relied upon, often for decades, can be changed at the whim of an executive branch official.”

The backdrop to all this, Harris says, is that formal rulemaking has become so costly and political that having an alternative will be an inviting prospect for regulators. “It is very difficult to get a formal regulation out of the executive branch in anything less than several years, and in some cases a decade or more,” he says. “This decision allows executive branch agencies to rethink their regulations. If they are interpreting their own regulations, they have broader leeway now.”

The decision may give regulators even more reason to keep outdated rules on their books, in the hopes they can be updated as needed through interpretive guidance. “It turns old regulations into a stockpile of ammunition for the executive branch and regulatory agencies,” says Patrick McLaughlin, a senior research fellow with the politically conservative Mercatus Center at George Mason University. “If there is any new situation they want to address quickly, or they don’t want to go through the normal rulemaking process, they can just dust off an old rule.”

That dusting off was already in evidence before the Supreme Court weighed in. The Federal Communications Commission’s controversial “net neutrality” rule that regulates the Internet as a utility is, in large part, an adaptation of a regulatory approach that dates back to 1934. Another recent example is the Federal Aviation Administration’s equating of drones to toy planes, limiting their commercial use because longstanding rules require they be “flown by sight” and not controlled beyond the physical sight of an operator.

“You would prefer to design regulations in a way that is optimized for the new situation at had not how something was addressed in the 1930s, but the temptation is always there for the agency to use the old stuff,” McLaughlin says.

Deal With It

Business must be better prepared to address even the minutiae of what is issued by regulators, says Stuart Gerson, a member of the law firm Epstein Becker & Green’s. “Highly regulated industries had better be on their toes,” he says. “You are not going to get notice of prospective rulemaking, so you really have to keep your government relations up.”

“I’m surprised by how few businesses fully understand the importance and power of sub-regulatory guidance,” Harris says. “This decision puts that policy-making tool right at the center of any business’ focus.”

Once again, the great bugaboo of managing a business—regulatory uncertainty—is to be reckoned with. “Businesses have notoriously been hesitant to make decisions before knowing what, for example, the Affordable Care Act was ultimately going to turn into,” McLaughlin says, adding that even subtle rule interpretations by the Centers for Medicare & Medicaid Services will affect many. “If you are worried about not just a set of regulations but also memos of interpretation, guidance documents, waivers and all sorts of other stuff that are back-door rules, how much more do you have to pay in legal fees just to have all that stuff processed on a real-time basis to make sure that you are in compliance?”

SCALIA OPINION

The following are excerpts from the opinion drafted by Justice Antonin Scalia in the case of Perez v. Mortgage Bankers Association.
The Administrative Procedures Act exempts interpretive rules from [notice and comment] requirements. But this concession to agencies was meant to be more modest in its effects than it is today. For despite exempting interpretive rules from notice and comment, the Act provides that “the reviewing court shall interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.” The Act thus contemplates that courts, not agencies, will authoritatively resolve ambiguities in statutes and regulations. In such a regime, the exemption for interpretive rules does not add much to agency power. An agency may use interpretive rules to advise the public by explaining its interpretation of the law. But an agency may not use interpretive rules to bind the public by making law, because it remains the responsibility of the court to decide whether the law means what the agency says it means.
By supplementing the APA with judge-made doctrines of deference, we have revolutionized the import of interpretive rules’ exemption from notice-and-comment rule-making. Agencies may now use these rules not just to advise the public, but also to bind them.
I would…restore the balance originally struck by the APA with respect to an agency’s interpretation of its own regulations, not by rewriting the act in order to make up for Auer, but by abandoning [Auer deference] and applying the act as written. The agency is free to interpret its own regulations with or without notice and comment; but courts will decide—with no deference to the agency—whether that interpretation is correct.
Source: Scalia Opinion.

On the other hand, as White House Administrations change and put new regulatory overseers in place, could there be an eventual upside for businesses from the Perez decision? Go back to the FAA’s regulations on drones as an example. Those rules might thwart the Amazons of the world right now, but some day in the future the FAA might just as well reinterpret “in sight of operators” to include the use of radar, for example. Wouldn’t a business group like the U.S. Chamber of Commerce have more opportunity to shape rulemaking through political pressure?

“It makes it easier for an agency or administration to hand out favors to whomever they want to,” McLaughlin warns. “But I don’t think it is good to avoid the analysis portion of rulemaking, even if it is going to aid some businesses in the short run.”

What’s next? The opinions drafted by the conservative justices, although not reaching the breaking point of dissent, signal that big changes could be on the horizon. Harris views the writings of Antonin Scalia, Clarence Thomas, and Samuel Alito in the case as an invitation for legal challenges to the “Auer deference,” a doctrine that says courts should defer to agencies’ interpretation of their own regulations.

“They were as clear as they possibly could be that they think it is wrong, want to reverse it, and invite litigants to bring the issue to the Supreme Court,” he says. “It is entirely possible that the end result of this case is a dramatic narrowing of regulatory agencies’ ability to change direction and have courts ratify that change of direction.”

Gerson agrees. “It’s clear that [the three] justices really want to go someplace with this,” he says. “The question is whether they will take other justices along with them. They are getting tired of convenient agency interpretations. They are begging for a case to sink their teeth into.”

McLaughlin wonders if the opinions could even encourage a rewrite of the APA. “That’s one of Scalia’s points in his opinion,” he says. “It could lead to changes at the congressional level.”