High Court's Surprising Take on Key Regulatory Powers Case

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Supreme Court justices appeared skeptical of both sides during oral arguments on Monday in a case that could shape whether regulators have to ask for public feedback before significantly changing a rule.

At issue is a lawsuit by the Mortgage Bankers Association to strike down a 2010 ruling by the Labor Department that said loan officers are entitled to overtime pay. That decision effectively overturned a 2006 decision under the Bush administration which said loan officers were not due compensation for overtime.

But in both cases, the Labor Department made the switch without seeking public comment — a fact several high court justices seized on during questioning of the government and the MBA.

"So is it a second flip-flop?" asked Justice Antonin Scalia. "Maybe we shouldn't give deference to agency interpretations of its own regulations. That would solve the problem of this case. For me it would be easy."

Indeed, the questioning by the justices indicated some were inclined to strike down both the 2010 and 2006 interpretations because neither one went through the notice-and-comment process. (Until 2006, loan officers were entitled to minimum wage and overtime under the Fair Labor Standards Act, unless they worked outside their employer's office.)

"If the interpretation has been unstable over time and if the interpretation has created a kind of unfair surprise for private parties," said Justice Elena Kagan, "those interpretations do not get…deference."

The high court opted to hear the case because of lower court rulings over when and how an agency must follow the Administration Procedures Act in releasing or changing a regulation.

The U.S. Appeals Court for the District of Columbia has ruled that several agencies have overstepped their bounds in issuing interpretations when they must first be put out for notice and submitted for comment.

In this case, Perez v. Mortgage Bankers Association (Tom Perez is the Labor Secretary), the D.C. court invoked the so-called Paralyzed Veterans doctrine in striking down the Labor Department's 2010 ruling. The court said the switch was a substantive change in the rules and required public comment and notice, handing the MBA a court victory.

But high court justices on Monday suggested that both the 2006 and 2010 interpretations failed the "Paralyzed Veterans" doctrine.

"The 2006 interpretation was equally defective because there was no notice and comment for the 2006," said Justice Ruth Bader Ginsburg. "I don't see how you can say the 2006 rule sticks when it has the same defect."

The MBA has tried to argue that the 2006 ruling was just an interpretation of the law, not a significant change, but the 2010 switch was an alteration that required notice-and-comment.

But Ginsburg accused the MBA of trying to pick and choose which interpretations it liked.

"It seems to me that that you want it to be interpretative when it favors you," she told Allyson Ho, the attorney representing MBA, who is with the law firm of Morgan, Lewis & Bockius in Dallas.

Justice Kagan also warned that a strict adherence to the Paralyzed Veterans doctrine would undermine the MBA's case for the 2006 interpretation to be reinstated.

Chief Justice John Roberts, meanwhile, indicated that whatever the court decides, the Labor Department could go back and re-issue its 2010 interpretation for notice-and-comment, resolving the legal issue hanging over it. But the high court's decision could still have a significant impact, observers said.

Steven Schwinn, an associate professor at John Marshall Law School said that the Perez case tests the scope of an agency's authority to issue interpretations.

"If the court upholds the D.C. Circuit ruling and its application of its Paralyzed Veterans doctrine, this could restrict how agencies use interpretations and force them to submit to notice and comment rulemaking," he wrote in an American Bar Association preview of Supreme Court case.

"On the other hand, if the court reverses, and alters or overturns the Paralyzed Veterans doctrine, agencies would have a freer hand in issuing interpretations like the DOL's 2010 interpretation."

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