On July 2, in Mortgage Bankers Association v. Harris, No. 12-5426 (D.C. Cir. July 2, 2013), the D.C. Circuit upheld its long-standing rule that “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 Administrative Procedure Act (APA)] without notice and comment,” as established in Paralyzed Veterans of Am. C. D.C. Arena L.P., 117 F.3d 579 (D.C. Cir. 1997) and Alaska Prof. Hunters Ass’n v. FAA¸ 177 F.3d 1030 (D.C. Cir. 1999). Because agencies, including the Department of Labor (DOL), routinely issue interpretations, opinions, and guidance on regulations applicable to federal contractors, this decision reaffirms that contractors must be given the opportunity to provide comment before an agency makes a significant change to a definitive interpretation of its own regulations.

In this case, the Mortgage Bankers Association (MBA) challenged a change by the DOL in its interpretation of whether mortgage loan officers are employed in an “administrative” capacity as used in 29 U.S.C. § 213(a)(1) (under the Fair Labor Standards Act, 29 U.S.C. § 201 et seq.). In 2006, DOL had issued an Opinion Letter that mortgage officers fell within that definition and thus were exempt from the Act’s overtime wages requirement, but in 2010, DOL issued an “Administrator’s Interpretation” withdrawing the 2006 Opinion Letter and stating just the opposite – that mortgage officers do not fall within that exemption. The MBA alleged that DOL violated the APA by changing its 2006 interpretation without first undertaking notice-and-comment rulemaking. Ultimately, the court concluded that DOL’s 2010 interpretation was a significant change to the definitive 2006 interpretation and, therefore, that the agency was required to use notice and comment procedures.

The government asked the court to “lay the Paralyzed Veterans doctrine to rest,” but the three-judge panel declined to do so. Noting the consistency “in our treatment of these so-called agency flip-flops,” the court unanimously reaffirmed that, as the court had held in Paralyzed Veterans, the test for whether an agency must use notice and comment procedures has only two elements: the agency must have made (1) a significant change, (2) to a “definitive” interpretation. In so ruling, the court rejected the government’s argument that the plaintiff must also prove a third element by showing substantial and justified reliance on the original interpretation. The court held that reliance is not an independent third element, but just one factor courts use to determine whether an agency’s original interpretation was “definitive.” The court reversed the district court and remanded the case with instructions to vacate the 2010 interpretation. The court took no position on the substantive merits of the new interpretation, but stressed that DOL must conduct the required notice and comment rulemaking if it wished to readopt the new interpretation.

The court did note that while the Paralyzed Veterans doctrine is established law in the D.C. Circuit, other Courts of Appeals are split on the issue. Despite the government’s pleas to lay this doctrine to rest, with this opinion the court preserved the Paralyzed Veterans requirement that agencies give parties the opportunity for notice and comment before an agency makes a significant change to a definitive interpretation of a regulation. With little case law addressing this issue over the years since the Paralyzed Veterans decision, this new ruling not only preserves the Paralyzed Veterans holding, but also clarifies what is required (and what is not required) to trigger notice and comment procedures.