High court debates the limits of regulatory power

The Supreme Court on Monday heard arguments in a case that could have major repercussions for the way agencies interpret federal regulations.

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Delving into complicated procedural law, the justices questioned why the process for crafting regulations is different when agencies are issuing an interpretation of a rule, rather than writing new ones from legislation.

“How do you address the fundamental concern, which is that agencies are bypassing the notice and public comment by using interpretative rules when they should be using legislative rules,” Justice Sonia Sotomayor asked Deputy Solicitor General Edwin Kneedler.

The case, Perez v. Mortgage Bankers Association, stems from a longstanding Labor Department rule that determines which employees are eligible for overtime.

Without any action from Congress, the Labor Department changed its interpretation of the rule in 2010 to make mortgage loan officers eligible for overtime.

Because the rule was only an interpretation, the government did not issue a notice in advance of the policy change, nor did it request and accept comments from the public.

The American Bankers Association sued over the move, arguing the government should not be allowed to sidestep requirements under the Administrative Procedures Act.

Kneedler defended the process as Justice Antonin Scalia pressed him for a reason the two types of rules should be treated differently.

“Substantive rules or legislative rules themselves have the force and effect of law,” Kneedler said.

“They themselves define duties and obligations. Interpretative rules … are designed to inform the public of the agency's view of the statutes and rules.”

Scalia called that argument “nonsense” since both interpretive and legislative rules are given the same deference in court.

Some of the other justices appeared skeptical of the argument put forward by the American Bankers Association.

Justice Ruth Bader Ginsburg, who was back to work Monday after having a stent placed in her right coronary artery last week, asked why the procedural issue wasn’t raised in 2006, when the Department of Labor issued its first interpretation of the wage rule excluding mortgage loan officers from earning overtime.

“It seems to me that you want it to be interpretative when it favors you,” Ginsburg told Attorney Allyson Ho, who represented the Bankers Association.

Though Ho said the 2006 interpretation has characteristics of a legislative rule, she told Ginsburg that it was not the matter brought before the court.

“I think you could say, wipe it all out, start over, but I don't see how you can say the 2006 rule sticks when it has the same defect on your view [as] the 2010 did,” Ginsburg said.

A decision in favor of the Mortgage Bankers Association would clarify the limits of agencies’ rulemaking power and possibly give interest groups more influence over the process. If the Court rules in favor of the Department of Labor, however, agencies could assume more flexibility in interpreting their own rules.

Scalia said the case is ultimately over whether an interpretive rule that radically modifies a prior interpretive rule should be considered a substantive rule, backing up Justice Elena Kagan’s earlier critique of the interest group's arguments.

“Maybe you should have come in, in the first instance and said, really, we think this is a legislative rule and so it had to go through notice and comment,” Kagan told Ho.

“But you didn't do that. Everything that happened in this case happened on the view that this was an interpretative rule and the question is what followed from that classification.”

Brian Netter, Supreme Court and Appellate partner at Mayer Brown, said there are major disputes among the justices lurking beneath the surface of the case. 

"The court is ultimately going to have to revisit how and when it defers to agency interpretations," he said in a statement. "It’s just not clear whether the court can and will wade into that thicket here."