The California Implications Of Perez v. Mortgage Bankers Association

On Monday, the U.S. Supreme Court heard oral arguments in Perez v. Mortgage Bankers Ass'n et al.  The case, if decided against the Department of Labor (Thomas E. Perez is the Secretary of Labor), will have a significant impact on all federal administrative agencies.  But what, if any, will be its impact on California state agencies?

The Perez case has its roots in a DOL interpretive opinion issued in 2006 concluding that mortgage-loan officers are exempt administrative employees under the DOL's regulations adopted in 2004 pursuant to the Fair Labor Standards Act.  In 2010, the DOL revisited the question, decided its 2006 opinion was wrong and withdrew the 2006 opinion.  Although the DOL adopted the 2004 regulations pursuant to the notice and comment procedures of the Administrative Procedure Act, it did not employ notice and comment either in 2006 when it issued the opinion letter or in 2010 when it withdrew that letter.  When the MBA sued, the Court of Appeals for the District of Columbia Circuit held that the DOL's withdrawal was invalid because the failure to follow the APA's notice and comment procedures. Mortgage Bankers Ass’n v. Harris, 720 F.3d 966 (D.C. Cir. 2013).

As I've mentioned in prior posts, agencies generally have three ways of making rules under the APA - Formal rulemaking (a rara avis in the 21st century), notice and comment rulemaking and publication.  There are, as one might expect, several exceptions.  One specific exception from notice and comment rulemaking is for "interpretative rules".  5 U.S.C. § 553(b).  My former students can probably attest that it isn't easy to distinguish interpretative rules from legislative rules.

California's Administrative Procedure Act is doesn't have a similar exception for interpretative rules.   California defines "regulation" broadly to include "every rule, regulation, order, or standard of general application or the amendment, supplement, or revision of any rule, regulation, order or standard adopted by any state agency to implement, interpret, or make specific the law enforced or administered by it, or to govern its procedure".  Cal. Gov. Code § 11342.600 (emphasis added).  Thus, an agency must comply with rulemaking whenever adopts an interpretation that is a standard of general application. That seems much cleaner than the federal legislative/interpretative distinction.  However, the California Supreme Court has observed that interpretations arising in the course of case-specific adjudications are not regulations even though they may be persuasive as precedents in similar proceedings and that agencies may provide private persons with advice letters without complying with the APA.  Tidewater Marine Western, Inc. v. Bradshaw, 14 Cal. 4th 557, 571 (1996).  Thus, California has not disposed entirely of the murky question of when an interpretation becomes a regulation.

Turning back to Perez, one might ask why did the DOL reverse itself?  Presidential historians will note that George W. Bush was President in 2006 and Barack Obama was President in 2010.  Therefore, the DOL's about face is most plausibly viewed as a change in policy rather than a correction of an erroneous interpretation.  This isn't to say that policy changes after an election are illegitimate.  However, the means by which agencies change policy is a different question.  When an agency changes course without giving public notice and receiving public comments, it is deciding to forego important benefits.  Agencies never know it all.  Through notice and comment, an agency can receive important factual information, additional policy concerns, and alternative solutions.  More importantly,

[H]ighhanded agency rulemaking is more than just offensive to our basic notions of democratic government; a failure to seek at least the acquiescence of the governed eliminates a vital ingredient for effective administrative action. See Hahn, Procedural Adequacy in Administrative Decisionmaking: A Unified Formulation (pt. 1), 30 Ad.L.Rev. 467, 500-04 (1978). Charting changes in policy direction with the aid of those who will be affected by the shift in course helps dispel suspicions of agency predisposition, unfairness, arrogance, improper influence, and ulterior motivation.

Chamber of Commerce of the United States v. OSHA, 636 F.2d 464, 470 (D.C. Cir. 1980). [Careful readers may wonder why I used "interpretative" rather than "interpretive".  It is not a mistake.  "Interpretative" is the word that appears in 5 U.S.C. § 553(b)(3)(A).  Moreover, it is the correct form of the word.  It is derived from the Latin interpretari meaning to expound or explain.  According to H.W. Fowler, -ive adjectives are normally formed on the Latin past participle stem  - i.e., interpretat-.]