Nov. 18, 2014
By Carson Haddow, Senior Associate
On December 1, 2014, the United States Supreme Court will hear oral arguments in Perez v. Mortgage Bankers Ass’n, a case that presents a hot issue in contemporary administrative law. The Court will address whether an agency must follow notice-and-comment procedure when amending interpretive rules. Its decision could bolster a significant procedural safeguard against what some have labeled agency “flip-flopping.”
Under the Administrative Procedure Act (“APA”), when an agency formulates a rule with significant, far-reaching effects, it must provide notice and allow opportunity for regulated parties to submit comments and cooperate in the rulemaking process. Alternatively, the APA permits agencies to promulgate “interpretive” rules without undergoing the costly and cumbersome notice-and-comment process. Interpretive rules are non-substantive and their exemption from notice-and-comment provides agencies with flexibility in issuing statements designed to clarify regulations and tailor them to specific programs or fact scenarios.
Over the past few decades, however, some courts and scholars have noted regulators’ increasing reliance on interpretive rulemaking to establish policy and compliance standards. Regulators have faced criticism for taking advantage of the increased discretion afforded under interpretive rulemaking to spontaneously “flip-flop” on established standards without the procedural check of notice-and-comment.
Allowing agencies flexibility in issuing interpretive statements may be desirable from the point of view of both regulators and regulated parties, who value these informal guidance documents for planning and compliance. But should agencies be permitted to alter longstanding interpretations without warning to or feedback from the regulated public?
Inconsistent agency interpretations—“flip-flopping”—can render compliance costly or even impossible for regulated parties who must alter their practices with every unexpected agency “reinterpretation.” Heavily regulated industries face significant economic consequences when an agency decides how to enforce its regulations. When an agency flip-flops, costs can multiply exponentially.
Seeking to protect the regulated public from administrative ambivalence, the D.C. Circuit, in Paralyzed Veterans of America v. D.C. Arena Limited Partnership, read into the APA a requirement that regulators undergo notice-and-comment whenever an agency amends an existing “definitive” interpretation. Although the APA generally allows agencies to revoke and amend interpretive rules at will, the D.C. Circuit has required notice-and-comment when altering a prior interpretive rule that “is so closely intertwined with the regulation that it interprets that a significant change to the former constitutes a repeal or amendment of the latter.” This Paralyzed Veterans doctrine provides a major procedural check on agency flip-flopping and a mechanism for adversely affected parties to attack unfavorable reinterpretations. The doctrine has been adopted in the Fifth Circuit, but other circuits have rejected it.
Now, the Supreme Court must determine an appropriate balance between agency discretion, flexibility, and efficiency versus fairness, predictability, and due process for the regulated public. Judging by the record below and the questions presented for certiorari, the Court appears to be in a position to fully address the Paralyzed Veterans doctrine or at least the narrow question of whether the doctrine can apply absent a regulated party’s reliance on a prior interpretation.
In its petition to SCOTUS, the United States Department of Labor (the “Department”) has called on the Court to wholly overturn the Paralyzed Veterans doctrine. It argues that the doctrine flies in the face of the APA’s explicit exemption for interpretive rules and violates the prohibition on extra-textual procedural requirements established in Vermont Yankee Nuclear Power Corp. v. NRDC.
The Department petitioned the Court for certiorari after the D.C. Circuit voided a 2010 “Administrative Interpretation” of the agency’s overtime compensation regulations. The appellate court held the rule invalid under Paralyzed Veterans.
At trial and before the D.C. Circuit, the Department argued that for the Paralyzed Veterans doctrine to apply, the regulated party would have to prove reliance on a prior interpretive rule. The court rejected this argument and held that reliance merely speaks to the “definitiveness” of a prior interpretation, one of two elements required by Paralyzed Veterans.
 See Perez v. Mortgage Bankers Ass’n, SCOTUSblog, http://www.scotusblog.com/case-files/cases/perez-v-mortgage-bankers-association/, archived at http://perma.cc/PK9A-9QR8 (last visited Oct. 28, 2014).
 5 U.S.C. § 553 (2012).
 Id. § 553(d)(2). The APA itself actually uses the word “interpretative,” but courts have substituted the simpler “interpretive” when discussing these types of rulemakings. Id. See Ryan DeMotte, Interpretive Rulemaking and the Alaska Hunters Doctrine: a Necessary Limitation on Agency Discretion, 66 U. Pitt. L. Rev. 357, 359 (2004). “An interpretive rule is a statement informing regulated parties in advance of an agency’s interpretation of a particular legislative rule. . . . Interpretive rules come in a wide variety of formats, from official publications in the Code of Federal Regulations, to technical compliance manuals, to informal letters from agency personnel providing advice and guidance to regulated parties.” Id.
 See, e.g., DeMotte, supra note 3, at 360; Richard Murphy, Hunters for Administrative Common Law, 58 Admin. L. Rev. 917, 918–919 (2006); Mortgage Bankers Ass’n v. Harris, 720 F.3d 966, 971 (D.C. Cir. 2013).
 See, e.g., Paralyzed Veterans of Am. v. D.C. Arena L.P., 117 F.3d 579 (D.C. Cir. 1997); Alaska Prof’l Hunters Ass’n v. FAA, 177 F.3d 1030 (D.C. Cir. 1999); Mortgage Bankers, 720 F.3d 966 at 971; Shell Offshore Inc. v. Babbitt, 238 F.3d 622 (5th Cir. 2001); See DeMotte, supra note 3, at 359. But see Peter L. Strauss, Publication Rules in the Rulemaking Spectrum: Assuring Proper Respect for an Essential Element, 53 Admin. L. Rev. 803, 846 (2001); Richard J. Pierce, Jr., Distinguishing Legislative Rules from Interpretative Rules, 52 Admin. L. Rev. 547, 573 (2000).
 DeMotte, supra note 3, at 359.
 For example, an agency could decide to alter methods of payment or interest calculation, which dramatically affects ultimate costs. See Shell Offshore, 238 F.3d 622.
 See Paralyzed Veterans, 117 F.3d 579; see also Alaska Hunters, 177 F.3d 1030.
 See, e.g., Paralyzed Veterans, 117 F.3d 579; Alaska Hunters, 177 F.3d 1030; Shell Offshore, 238 F.3d 622. “When an agency has given its regulation a definitive interpretation, and later significantly revises that interpretation, the agency has in effect amended its rule, something it may not accomplish [under the APA] without notice and comment.” Alaska Hunters, 177 F.3d 1030 at 1034.
 Mortgage Bankers, 720 F.3d at 969 n.3.
 Shell Offshore, 238 F.3d 622.
 The circuits are split on this issue. The D.C. and Fifth Circuits expressly endorse the Paralyzed Veterans doctrine, while the First, Second, Fourth, Sixth, Seventh, and Ninth Circuits do not require notice-and-comment for changes to interpretative rules. Warshauer v. Solis, 577 F.3d 1330, 1338 (11th Cir. 2009).
 See DeMotte, supra note 3, at 361 (“Both regulated parties and agencies have a considerable stake in the resolution of this issue. From the perspective of regulated parties, imposing notice-and-comment on interpretive rules that amend or reverse definitive interpretations will place a significant procedural check on agency discretion. Regulated parties will be guaranteed the opportunity to participate in any significant interpretive changes, giving them greater input into the process of defining their duties and obligations. Conversely, agencies view maximum flexibility in interpretive rulemaking as necessary in order to ensure that legislative rules maintain effectiveness in the face of changed circumstances. From the agency perspective, any limit on the ability to amend or reverse interpretations necessarily hinders the ability of agencies to adapt to these changing circumstances.” (citations omitted)).
 The fundamental question presented is: “Whether a federal agency must engage in notice-and-comment rulemaking before it can significantly alter an interpretive rule that articulates an interpretation of an agency regulation.” Brief for Federal Petitioners at (I), Perez v. Mortgage Bankers Ass’n, Nos. 13-1041 and 13-1052 (D.C. Cir. Aug. 20, 2014).
 See Mortgage Bankers, 720 F.3d 966.
 Brief for the Federal Petitioners at 13, Perez v. Mortgage Bankers Ass’n, Nos. 13-1041 and 13-1052 (D.C. Cir. Aug. 20, 2014).
 Id. at 11–12.
 Mortgage Bankers, 720 F.3d 966, at 968.
 Id. at 971–72.
 Id. at 971.
 Id. The D.C. Circuit characterized the Paralyzed Veterans doctrine as a two-part test. Id. at 969. There must be (1) a “significant change” to (2) a “definitive” prior interpretation. Id.