Mortgage Bankers Association v. Solis

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
_____________________________________________
)
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MORTGAGE BANKERS )
ASSOCIATION, )
)
Plaintiff, )
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v. ) Civil Action No. 11-0073 (RBW)
)
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HILDA SOLIS, Secretary of Labor; )
NANCY LEPPINK, )
Acting Wage and Hour Administrator; and )
THE UNITED STATES DEPARTMENT OF LABOR, )
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Defendants. )
)
_____________________________________________)
MEMORANDUM OPINION
The plaintiff, the Mortgage Bankers Association (“Association”), seeks declaratory and
injunctive relief in this civil lawsuit brought against the defendants, Hilda Solis, in her official
capacity as Secretary of the United States Department of Labor (“DOL”), Nancy Leppink, in her
official capacity as Deputy Administrator of the Wage and Hour Division of the DOL, and the
DOL itself, under the Administrative Procedure Act (“APA”), 5 U.S.C. § 702 (2006). Complaint
for Declaratory and Injunctive Relief (“Compl.”) ¶ 1. Specifically, the plaintiff seeks judicial
review of the defendants’ issuance of DOL Administrative Interpretation 2010-1 (“2010 AI”),
which conflicts with a prior position taken by the DOL. Id. ¶¶ 2, 26-27. Currently before the
Court is the Association’s Motion for Summary Judgment and the DOL’s Cross Motion to
Dismiss or, in the Alternative, for Summary Judgment. Upon consideration of the complaint, the
parties’ cross-motions, all memoranda of law and the exhibits submitted with the motions, and
the administrative record, 1 the Court concludes that it must grant in part and deny in part the
DOL’s cross-motion and deny the Association’s motion for summary judgment.
I. BACKGROUND
A. Statutory and Regulatory Framework
This case concerns the Fair Labor Standards Act (“FLSA” or “Act”), 29 U.S.C. §§ 201-
219 (2006), and the regulations promulgated by the DOL to implement the Act. See Defendants’
Cross Motion to Dismiss or, in the Alternative, for Summary Judgment (“Defs.’ Mot.”) at 1.
Enacted by Congress in 1938, Compl. ¶ 14, the FLSA generally requires that covered employers
pay overtime wages to their employees who work more than 40 hours per week, unless they are
exempted by the Act from this requirement. 29 U.S.C. § 207(a)(1). Section 213(a)(1) of the
FLSA provides for such an exemption, stating that “any employee employed in a bona fide
executive, administrative, or professional capacity[,] . . . or in the capacity of outside salesman
(as such terms are defined and delimited from time to time by regulations of the Secretary[,] . .
.)” is exempt from the “[m]inimum wage and maximum hour requirements” otherwise required
by the Act. 29 U.S.C. § 213(a)(1).
The Wage and Hour Division of the DOL (“Wage and Hour Division”) is responsible for
“administering and enforcing the FLSA, and it periodically issues regulations that define the
scope of the FLSA’s exemptions and interpretations of those regulations.” Defs.’ Mot. at 4.
1
In addition to the documents already identified, the Court considered the following submissions in reaching its
decision: (1) the Memorandum of Points and Authorities in Support of Plaintiff’s Motion for Summary Judgment
(“Pl.’s Mem.”), (2) the Defendants’ Cross-Motion to Dismiss or, in the Alternative, for Summary Judgment (“Defs.’
Mot.”), (3) the Plaintiff’s Reply in Support of its Motion for Summary Judgment and Opposition to Defendants’
Motion to Dismiss or in the Alternative for Summary Judgment (“Pl.’s Reply”), and (4) the Defendants’ Reply to
Plaintiff’s Opposition to Defendants’ Cross Motion to Dismiss or, in the Alternative, for Summary Judgment
(“Defs.’ Reply”).
2
After the passage of the FLSA, the Wage and Hour Division “promulgated regulations defining
and delimiting the FLSA’s exemptions from overtime pay requirements.” Compl. ¶ 14. Those
regulations were most recently amended on August 23, 2004. See Administrative Record
(“A.R.”) at 8-78 (Defining and Delimiting the Exemptions for Executive, Administrative,
Professional, Outside Sales and Computer Employees, 69 Fed. Reg. 22122-191 (Apr. 23, 2004)
(codified at 29 C.F.R. § 541)). As revised, the regulations state that the administrative
exemption of section 213(a)(1) of the FLSA applies to an employee:
(1) Compensated on a salary or fee basis at a rate of not less than $455 per week .
..;
(2) Whose primary duty is the performance of office or non-manual work directly
related to the management or general business operations of the employer or the
employer’s customers; and
(3) Whose primary duty includes the exercise of discretion and independent
judgment with respect to matters of significance.
29 C.F.R. § 541.200(a). The 2004 regulations were accompanied by a preamble “Summary,”
whose duties relate to the administrative as distinguished from the production operations of a
which explained that the administrative “exemption is intended to be limited to those employees
business.” 69 Fed. Reg. 22122, 22141 (internal quotation marks omitted). The 2004 regulations
also provide examples that illustrate how the administrative duties exemption can be applied to
employees in various occupations, including the following example regarding the financial
services industry:
Employees in the financial services industry generally meet the duties
requirements for the administrative exemption if their duties include work such as
collecting and analyzing information regarding the customer’s income, assets,
investments or debts; determining which financial products best meet the
customer’s needs and financial circumstances; advising the customer regarding
the advantages and disadvantages of different financial products; and marketing,
servicing or promoting the employer’s financial products. However, an employee
whose primary duty is selling financial products does not qualify for the
administrative exemption.
3
29 C.F.R. § 541.203(b) (entitled “Administrative exemption examples”).
B. Factual and Procedural Background
1. Pre-2004 Interpretation of the Administrative Exemption
The following facts are not in dispute and are taken from either the Association’s
complaint or the administrative record filed in this case.
The plaintiff is a national trade association that represents the real estate finance industry.
Compl. ¶ 7. The Association “has over 2,200 member companies, including all elements of real
estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance
companies, and others in the mortgage lending field.” Id. These companies employ over
280,000 individuals throughout the United States. Id. The Association’s primary goals are “to
ensure the continued strength of the nation’s residential and commercial real estate market, to
expand home ownership and extend access to affordable housing to all Americans.” Id.From as early as 1964, and until March 24, 2010, the DOL announced its interpretation of
the FLSA through the issuance of “[o]pinion [l]etters.” Id. ¶ 15. These opinion letters were
written in response to inquiries from private parties seeking guidance about the application of the
FLSA to their business activities. Id. Access to the opinion letters was available through several
avenues, including, in recent years, electronic legal research databases and the DOL’s own
website. See id. And as the plaintiff correctly points out, the District of Columbia Circuit has
held that “DOL Opinion Letters . . . constitute final agency action subject to judicial review.” Id.¶ 16 (citing Nat’l Automatic Laundry & Cleaning Council v. Shultz, 443 F.2d 689, 701-02 (D.C.
Cir. 1971) (holding that although the opinion letters lack formality, they are intended as a
“deliberative determination of the agency’s position” and thus are subject to judicial review)).
4
The administrative record in this case contains two opinion letters issued by the DOL
prior to the 2004 amendment of its regulations. The first, dated July 23, 1997, discussed whether
a wholesale salesman is exempt from the FLSA’s overtime requirements. A.R. at 1-3 (Opinion
Letter, 1997 WL 970727 (DOL WAGE-HOUR)). This opinion letter concluded that “[t]he
decisions of wholesale salesmen typically do not involve matters of policy or significant
importance, but are limited to routine day-to-day operational matters.” Id. at 2-3. While the
Wage and Hour Division did not come to an ultimate conclusion on the exemption question, the
opinion letter suggested that wholesale salesmen are not covered by the administrative
exemption.2 Id. The second pre-2004 opinion letter found in the administrative record, dated
May 17, 1999, determined that “loan officers are engaged in carrying out the employer’s day-to-
day activities rather than in determining the overall course and policies of the business” and were
therefore non-exempt employees entitled to overtime. See id. at 5 (Opinion Letter, 1999 WL
1002401 (DOL WAGE-HOUR) (“1999 Opinion Letter”)).
Effective August 23, 2004, the DOL amended its regulations interpreting the wage and
hour requirements set forth by the FLSA. Compl. ¶ 21. As noted earlier, the amended
regulations, as they pertain to the financial service industry, provide:
Employees in the financial services industry generally meet the duties
requirements for the administrative exemption if their duties include work such as
collecting and analyzing information regarding the customer’s income, assets,
investments or debts; determining which financial products best meet the
customer’s needs and financial circumstances; advising the customer regarding
the advantages and disadvantages of different financial products; and marketing,
servicing or promoting the employer’s financial products. However, an employee
2
If the party does not provide the DOL with sufficient facts regarding the nature of their inquiry, the DOL will not
provide an ultimate conclusion; rather, it will state what set of facts would need to exist in order for the employee to
be exempt. See generally Defs.’ Mot. at 11-12 (citing A.R. at 87-93 (Opinion Letter FLSA2006-31 (“2006 Opinion
Letter”))) (providing an opinion that an employee would be exempt if the assumptions provided by the requestor and
other relevant facts are true).
5
whose primary duty is selling financial products does not qualify for the
administrative exemption.
Id. (citing 29 C.F.R. § 541.203(b)). And as already noted, the amended regulations included a
preamble, id. ¶ 22, which makes it clear that “many financial services employees qualify as
exempt administrative employees, even if they are involved in some selling to consumers.” 69
Fed. Reg. at 22146.
2. The 2006 Opinion Letter
On September 8, 2006, the DOL issued an opinion letter to the Association (“2006
Opinion Letter”), see A.R. at 87-93 (Opinion Letter FLSA2006-31 (“2006 Opinion Letter”)), at
the Association’s request. Defs.’ Mot. at 11 n.6. 3 In requesting the letter, the Association asked
the DOL to assume that the mortgage loan officers who were the subject of the letter spent less
than fifty percent of their working time on “customer-specific persuasive sales activity.” Id. at
11-12 (internal quotation marks and citation omitted). The 2006 Opinion Letter began by
reminding the Association that an employee’s exempt status is “determined by analyzing each
particular employee’s actual job duties and compensation under the applicable regulations.”
A.R. at 87 (2006 Opinion Letter).
The Association also asked whether the DOL’s analysis of the administrative exemption
was altered by the 2004 regulations. Id. at 88-89. In response, the DOL noted that “[b]ecause
the criteria in the duties test for the administrative exemption in the 2004 revised final
regulations are substantially the same as under the prior rule, the outcome of this opinion would
be essentially identical under either version of the regulations.” Id. at 89 (citation omitted).
3
Generally, the DOL does not release the name of the requestor for an opinion letter. Defs.’ Mot.. at 11 n.6.
However, the Association has acknowledged that it requested the 2006 opinion letter. Id.
6
The 2006 Opinion Letter reinforced that the 2004 revised regulations made the
administrative exception applicable to employees when their employment satisfied the following
three components:
(1) Compensated on a salary or fee basis at a rate of not less than $455 per week .
. ., exclusive of board, lodging or other facilities;
(2) Whose primary duty is the performance of office or non-manual work directly
related to the management or general business operations of the employer or the
employer's customers; and
(3) Whose primary duty includes the exercise of discretion and independent
judgment with respect to matters of significance.
Id. (citation omitted). With regard to the second prong of this test, the letter defined “[w]ork that
is ‘directly related to the management or general business operations’ of the employer . . . as
‘work directly related to assisting with the running or servicing of the business, as distinguished,
for example, from working on a manufacturing production line or selling a product in a retail or
service establishment.’” Id. (citation omitted). As to the third component of the test, the term
“primary duty” is defined in the letter as “the principal, main, major or most important duty that
the employee performs.” Id. (quoting 29 C.F.R. § 541.700(a)). The letter explained that the
amount of time an employee spends performing exempt work is a factor to consider in assessing
the applicability of the exemption, but time alone “is not the sole test.” Id. (quoting 29 C.F.R. §
541.700(b)).
The 2006 Opinion Letter further noted that although employees whose primary duty
involves sales cannot qualify for the administrative exemption, many financial services
employees could and had been found to fall under this exemption. Id. at 90 (citing 29 C.F.R. §
541.700(b)). Accordingly, the DOL concluded that the loan officers who were the subject of the
2006 Opinion Letter
ha[d] a primary duty other than sales, as their work include[d] collecting and
analyzing a customer's financial information, advising the customer about the
7
risks and benefits of various mortgage loan alternatives in light of their individual
financial circumstances, and advising the customer about avenues to obtain a
more advantageous loan program.
Id. at 90-91. The letter concluded that “the use of software programs or tools to assess risk and
to narrow the scope of products available to the customer does not necessarily disqualify the
employees from the administrative exemption for lack of discretion and independent judgment.”
Id. at 91. Finally, the letter noted that its “opinion [was] based exclusively on the facts and
circumstances described in [the Association’s] request and is given based on [the Association’s]
representation, express or implied, that [the Association] ha[d] provided a full and fair
description of all the facts and circumstances that would be pertinent to [the DOL’s]
consideration of the question presented.” Id. at 93.
According to the Association, relying on the 2006 Opinion Letter, many members of the
financial services industry, including many of the Association’s members, classified mortgage
loan officers as exempt employees. Compl. ¶ 24. Thus, mortgage loan officers were not
compensated with overtime pay. Id. ¶ 25. Rather, the members of the Association ensured that
their mortgage loan officers were well compensated through other means, like competitive
salaries, bonuses, and commissions. Id.
3. The 2010 Administrative Interpretation
On March 24, 2010, the DOL, “sua sponte,” issued an Administrative Interpretation, the
2010 AI, expressly withdrawing the 2006 Opinion Letter. Id. ¶ 26. Nancy Leppink, Acting
Administrator of the Wage and Hour Division, issued the 2010 AI. See A.R. at 102 (U.S.
Department of Labor, Administrator’s Interpretation No. 2010-01 (“Administrator’s
Interpretation No. 2010-01”)). The 2010 AI focuses on “[w]hether the primary duty of
employees who perform the typical job duties of a mortgage loan officer is office or non-manual
8
work directly related to the management or general business operations of their employer or their
employer’s customers.” Id. at 103. The 2010 AI expressed that to qualify for the exemption, an
employee’s “[w]ork [must be] directly related to management or general business operations of
an employer[, which] includes work in functional areas such as accounting, budgeting, quality
control, purchasing, advertising, research, human resources, labor relations, and similar areas.”
Id. (citation omitted). In essence, the 2010 AI states that the administrative exemption was
designed for “employees whose work involves servicing the business itself[.]” Id. at 104.
The 2010 AI relies on a District of Minnesota decision, Casas v. Conseco Finance Corp.,
No. Civ.00-1512, 2002 WL 507059 (D. Minn. March 31, 2002) in addition to several other
cases, as support for its position that mortgage loan officers are non-exempt employees. Id. at
105. In Casas, loan originators asserted they were entitled to overtime compensation from the
defendants under the FLSA, requiring the court to decide whether the plaintiffs were exempt
from FLSA overtime pay provisions. The court found that because “Conseco’s primary business
purpose [was] to design, create and sell home lending products,” the mortgage loan officers’
primary duty was to sell those lending products on a day-to-day basis, not “‘the running of [the]
business [itself]’ or determining its overall course or policies.” Casas, 2002 WL 507059, at *9
(citation omitted) (alterations in original). Relying on the ruling in Casas, the 2010 AI reasons
that “because Conseco’s loan officers’ duties were ‘selling loans directly to individual
customers, one loan at a time,’” the administrative exemption did not apply to them. A.R. at 105
(Administrator’s Interpretation No. 2010-01) (internal citation omitted). The 2010 AI further
notes that the 2004 amended regulations examined the difference between mortgage loan officers
who spend the majority of their time selling mortgage products to consumers, like the Casas
plaintiffs, as compared to those who “promot[e] the employer’s financial products generally,
9
decid[e] on an advertising budget and techniques, run[] an office, hir[e] staff and set[] their pay,
service[] existing customers . . . , and advis[e] customers.” Id. at 105 (citing 69 Fed. Reg. at
22145-46). The 2010 AI concluded that in order for mortgage loan officers to be properly
classified as exempt employees, their primary duties must be administrative in nature. Id. at 105.
Relying on the facts that a significant portion of mortgage loan officers’ compensation is
composed of commissions from sales, that their job performance is evaluated based on their sales
volume, and that much of the non-sales work performed by the officers is completed in
furtherance of their sales duties, the 2010 AI concluded “that a mortgage loan officer’s primary
duty is making sales.” Id. at 106-07. And because their primary duty is making sales, the 2010
AI further concludes that “mortgage loan officers perform the production[, not the
administrative,] work of their employers.” Id. at 107.
After concluding that the work of mortgage loan officers is not related to the general
business operation of their employers, the 2010 AI considered another factor that could provide
the basis for finding that mortgage loan officers are subject to the administrative exemption. Id.
at 108. The AI states that “[t]he administrative exemption can also apply if the employee’s
primary duty is directly related to the management or general business operations of the
employer’s customers.” Id. In making this assessment, the 2010 AI notes that “it is necessary to
focus on the identity of the customer.” Id. The 2010 AI finds that “work for an employer’s
customers does not qualify for the administrative exemption where the customers are individuals
seeking advice for their personal needs, such as people seeking mortgages for their homes.” Id.
However, it recognizes that a mortgage loan officer “might qualify under the administrative
exemption” if the customer that the officer is working with “is a business seeking advice about,
for example, a mortgage to purchase land for a new manufacturing plant, to buy a building for
10
office space, or to acquire a warehouse for storage of finished goods.” Id. Nevertheless, the
2010 AI concludes that the typical mortgage loan officers’ “primary duty is making sales for the
employer [to homeowners], and because homeowners do not have management or general
business operations, a typical mortgage loan officer’s primary duty is not related to the
management or general business operations of the employer's customers.” Id. at 109.
Finally, the 2010 AI took exception with the 2006 Opinion Letter’s apparent assumption
“that the example provided in 29 C.F.R. § 541.203(b) creates an alternative standard for the
administrative exemption for employees in the financial services industry.” Id. Rather, the 2010
AI states that 29 C.F.R. § 541.203(b) merely illustrates an example of an employee who might
otherwise qualify for the exemption based on “the requirements set forth in 29 C.F.R. §
541.200.” Id. Thus, the 2010 AI clarifies that “the administrative exemption is only applicable
to employees that meet the requirements set forth in 29 C.F.R. § 541.200.” Id. In providing this
clarification, the 2010 AI states, “[t]he fact example at 29 C.F.R. § 541.203(b) is not an
alternative test, and its guidance cannot result in it ‘swallowing’ the requirements of 29 C.F.R. §
541.200.” 4 Id.In summation, the DOL through the issuance of the 2010 AI explicitly withdrew the 2006
Opinion Letter “[b]ecause of its misleading assumption and selective and narrow analysis[.]” Id.Before taking this action, the DOL did not utilize the APA’s notice and comment process.
Compl. ¶¶ 32-33.
Following the issuance of the 2010 AI, the Association filed its Complaint in this case on
January 12, 2011, asserting that the DOL violated the APA by issuing the 2010 AI. Id. ¶¶ 36-52.
4
The 2010 AI also “expressly withdrew . . . 2001 Opinion Letter.” Pl.’s Mem. at 13; Defs.’ Mot. at 14 (“[T]he Wage
and Hour Division withdrew the 2001 Opinion Letter as inconsistent with the analysis in the 2010 AI, inasmuch as it
had erroneously concluded that mortgage loan officers performed work that was directly related to the management
or general business operations of the employer or the employer’s customers.”).
11
First, the Association argues that “[o]nce an agency gives its regulation an interpretation, it can
only change that interpretation as it would formally modify the regulation itself: through the
process of notice and comment rulemaking.” Id. ¶ 36 (citing Paralyzed Veterans of Am. v. D.C.
Arena, 117 F.3d 579, 586 (D.C. Cir. 1997)). Second, the Association argues that “[b]ecause the
AI conflicts with existing DOL regulations, and because those regulations have been afforded the
force of law by courts, DOL’s issuance of the 2010 AI is arbitrary, capricious, an abuse of
discretion, and otherwise not in accordance with law.” Id. ¶ 50. The Association seeks to have
the 2010 AI “[v]acat[ed] and set aside” and the defendants “[e]njoin[ed] and restrain[ed] . . .
from enforcing, applying, or implementing . . . the AI.” Id. at 12 (Prayer for Relief). 5
The Association filed its Motion for Summary Judgment simultaneously with the
Complaint. In response, the DOL has filed a Cross Motion to Dismiss, or, in the Alternative,
Motion for Summary Judgment. 6
II. STANDARD OF REVIEW
The DOL has moved for dismissal under Federal Rule of Civil Procedure Rule 12(b)(6),
and alternatively moves for summary judgment under Rule 56. Rule 12(d) provides that “[i]f, on
a motion under Rule 12(b)(6) . . . matters outside the pleadings are presented to and not excluded
by the court, the motion must be treated as one for summary judgment under Rule 56. [And if
the motion is considered under Rule 56, a]ll parties must be given a reasonable opportunity to
present all the material that is pertinent to the motion.” Fed. R. Civ. P. 12(d). Here, because
both parties have presented materials outside the pleadings (namely, the administrative record)
5
The Association also seeks an award of its litigation costs and attorney’s fees. These requests are not addressed in
this opinion.
6
In resolving these motions, the Court also considered the memorandum of law submitted on behalf of the three
intervenors, Ryan Henry, Beverly Buck, and Jerome Nichols.
12
for the Court to consider in adjudicating their motions, the Court deems it appropriate to treat
both submissions as motions for summary judgment. See Marshall Cnty. Health Care. Auth. v.
Shalala, 988 F.2d 1221, 1226 & n.5 (D.C. Cir. 1993) (noting that a district court considering a
Rule 12(b)(6) motion “can consult the [administrative] record to answer the legal question[s]
before the court,” but that “[i]t is probably the better practice for a district court always to
convert to summary judgment”).
“Summary judgment is the proper mechanism for deciding, as a matter of law, whether
an agency action is supported by the administrative record and consistent with the APA standard
of review.” Loma Linda Univ. Med. Ctr. v. Sebelius, 684 F. Supp. 2d 42, 52 (D.D.C. 2010)
(citing Stuttering Found. of Am. v. Springer, 498 F. Supp. 2d 203, 207 (D.D.C. 2007)); see also
Richards v. INS, 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977). However, due to the limited role
of a court in reviewing the administrative record, the typical summary judgment standards set
forth in Rule 56(c) are not applicable. Stuttering, 498 F. Supp. 2d at 207 (citation omitted).
Rather, “[u]nder the APA, it is the role of the agency to resolve factual issues to arrive at a
decision that is supported by the administrative record, whereas ‘the function of the district court
is to determine whether or not as a matter of law the evidence in the administrative record
permitted the agency to make the decision it did.’” Id. (quoting Occidental Eng'g Co. v. INS, 753
F.2d 766, 769-70 (9th Cir. 1985)).
A reviewing court will “hold unlawful and set aside agency action, findings, and
conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with the law.” Ludlow v. Mabus, 793 F. Supp. 2d 352, 354 (D.D.C. 2011) (quoting 5
U.S.C. § 706(2)(A) (2006)). In Motor Vehicle Manufacturers Ass’n of U.S. v. State Farm
Mutual Automobile Insurance Co., the Supreme Court explained the “arbitrary and capricious”
13
review by noting that “an agency rule would be arbitrary and capricious if the agency has relied
on factors which Congress has not intended it to consider, entirely failed to consider an important
aspect of the problem, offered an explanation for its decision that runs counter to the evidence
before the agency, or is so implausible that it could not be ascribed to a difference in view or the
product of agency expertise.” 463 U.S. 29, 43 (1983). However, the “standard of review is a
narrow one.” Citizens to Pres. Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971). “The
court is not empowered to substitute its judgment for that of the agency.” Id. “[T]he party
challenging an agency’s action as arbitrary and capricious bears the burden of proof,” San Luis
Obispo Mothers for Peace v. U.S. Nuclear Regulatory Comm’n, 789 F.2d 26, 37 (D.C. Cir.
1986), and the APA directs a reviewing court to “review the whole record or those parts of it
cited by a party” in making this assessment, 5 U.S.C. § 706.
III. ANALYSIS
The plaintiff seeks relief based on two distinct theories. First, relying on Paralyzed
Veterans, 117 F.3d at 586, the plaintiff argues that once an agency issues an authoritative
interpretation of its own regulation, it must utilize the notice and comment process if it desires to
modify that interpretation. Compl. ¶ 36. Second, the plaintiff argues that the 2010 AI does not
comport with the 2004 regulations and is therefore “arbitrary, capricious, an abused of discretion,
and otherwise not in accordance with law.” Compl. ¶ 50. The Court will analyze each argument
in turn. 7
7
The Court notes that the plaintiff contends, and, in fact, takes the position that the 2010 AI is an “interpretation of
[the Agency’s] own regulation[], as it was signed by the Administrator of the Wage and Hour Division, published on
DOL’s website, and held out to employees as guidance for complying with the FLSA.” Pls.’ Mem. at 1. The
defendants do not take exception with this position, indeed, they endorse it. Specifically the defendants state, “the
2010 interpretation corrected a short-lived 2006 issuance,” Defs.’ Mem. at 1 (emphasis added), and further concedes
that it cannot be construed as a legislative rule, see id. at 14-16, 16 n.9 (stating that the 2010 AI is an interpretive
rule as opposed to substantive rule, and therefore, notice and comment is not necessary). The Court agrees that the
2010 AI is an interpretive rule and will accordingly conduct its analysis from that perspective.
14
A. The Paralyzed Veterans and Alaska Professional Hunters Cases
It is well established that there is “no barrier to an agency altering its initial interpretation
to adopt another reasonable interpretation—even one that represents a new policy response
generated by a different administration.” Paralyzed Veterans, 117 F.3d at 586 (citing Chevron
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 863 (1984)). However, the District
of Columbia Circuit has held that “[o]nce an agency gives its regulation an interpretation, it can
only change that interpretation as it would formally modify the regulation itself: through the
process of notice and comment rulemaking.” Id. at 586; Transp. Workers Union of Am. v.
Transp. Sec. Admin., 492 F.3d 471, 475 (D.C. Cir. 2007) (“[A]n agency cannot significantly
change its position, cannot flip-flop, even between two interpretive rules, without prior notice
and comment.”).
The District of Columbia Circuit had the opportunity to reexamine its holding in
Paralyzed Veterans in Alaska Professional Hunters Ass’n v. FAA, 177 F.3d 1030, 1033-34 (D.C.
Cir. 1999). Alaska Professional Hunters concerned an interpretation by the Federal Aviation
Administration (“FAA”) that several provisions of its regulations that “applied to (among others)
‘commercial operator[s]’” did not “govern guide pilots whose flights were incidental to their
guiding business and were not billed separately.” Id. at 1031. The FAA’s position was based on
its reading of the Civil Aeronautics Board’s decision in Administrator v. Marshall, 39 C.A.B.
948 (1963). Id. “Although the [agency] never set forth its interpretation of [the several
regulations at issue] in a written statement,” the parties “agree[d] that [the] FAA personnel in
Alaska consistently followed the interpretation in official advice to guides and guide services.”
Id. at 1031-32.
15
In January 1998, the FAA reversed course and published a “Notice to Operators” that
“required the[] guide pilots to abide by FAA regulations applicable to commercial air
operations.” Id. at 1030. Drawing on its decision in Paralyzed Veterans, 117 F.3d at 586, the
Circuit found that this modification of the FAA’s longstanding policy exempting the guide pilots
from the FAA regulations mandated the use of notice and comment rulemaking. Id. at 1035-36.
The Circuit concluded that “current doubts about the wisdom of the regulatory system followed
in Alaska for more than thirty years does not justify disregarding the requisite procedures for
changing that system.” Id. at 1035.
1. Is Paralyzed Veterans still good law?
The defendants argue that two Supreme Court cases conflict with Paralyzed Veterans and
Alaska Professional Hunters. Defs.’ Mot. at 15-17. First, they argue that Paralyzed Veterans
cannot be reconciled with the holding in Vermont Yankee Nuclear Power Corp. v. Natural
Resources Defense Council, Inc., 435 U.S. 519, 524 (1978). Defs.’ Mot. at 15-17. In Vermont
Yankee, the Supreme Court reiterated its previous conclusion “that generally speaking,” the
APA’s notice and comment requirements “established the maximum procedural requirements
which Congress was willing to have the courts impose upon agencies in conducting rulemaking
procedures.” Vermont Yankee, 435 U.S. at 524. The Supreme Court further stated that
“[a]gencies are free to grant additional procedural rights in the exercise of their discretion, but
reviewing courts are generally not free to impose [additional procedural requirements] if the
agencies have not chosen to grant them.” Id. (emphasis added). The defendants argue that this
limitation imposed on courts by Vermont Yankee conflicts with the requirements imposed by
Paralyzed Veterans; namely, the requirement that an agency must employ the notice and
comment process if they wish to change a prior interpretation of their own regulations, Defs.’
16
Mot. at 16-17, since the Supreme Court observed that only in “extremely rare” circumstances
may courts impose “procedures beyond those required by the statute,” Vermont Yankee, 435
U.S. at 524; see Defs.’ Mot. At 16-17.
This Court is “obligated to follow controlling [C]ircuit precedent until either [the
Circuit], sitting en banc, or the Supreme Court, overrule it.” United States v. Torres, 115 F.3d
1033, 1036 (D.C. Cir. 1997). Thus, even if this Court “disagree[d] with circuit precedent” its
“obligation” to follow such precedent would not be relieved. Id. Moreover, having been decided
nearly twenty years before Paralyzed Victims, the District of Columbia Circuit was presumably
aware of the existence of Vermont Yankee when it authored its opinion in Paralyzed Veterans.
And this Court is not prepared to find that the Circuit disregarded Supreme Court precedent
when it decided Paralyzed Victims.
The defendants are correct in stating that seven courts of appeals have held that the notice
and comment provisions found in section 553 of the APA do not apply to interpretative rules.
Defendants’ Reply to Plaintiff’s Opposition to Defendants’ Cross Motion to Dismiss or, in the
Alternative, for Summary Judgment (“Defs.’ Reply”) at 9. However, this Circuit, in deciding
Paralyzed Veterans, Alaska Professional Hunters, and other cases that have addressed the same
subject, see, e.g., Kelley v. EPA, 15 F.3d 1100, 1108 (D.C. Cir. 1994); Am. Mining Cong. v.
MSHA, 995 F.2d 1106, 1109 (D.C. Cir. 1993), has ruled that if an interpretation of a statute or
rule “itself carries the force and effect of law,” Paralyzed Veterans, 117 F.3d at 588 (quotation
marks and citations omitted), the agency is required to use notice and comment procedures. And
this Court had the occasion to apply Paralyzed Veterans in a case with similarities to this case.
See Tripoli Rocketry Ass’n v. Bureau of Alcohol, Tobacco, Firearms & Explosives, 337 F. Supp.
2d. 1, 13 (D.D.C. 2004), rev’d on other grounds, 437 F.3d 75 (D.C. Cir. 2006) (Walton, J.)
17
(“[B]efore the [agency] could alter[] its earlier interpretation of the [regulation], it was required
to undertake notice-and-comment rulemaking as required by the APA[.]”). Thus, this Court
cannot, and will not, find that Vermont Yankee commands that it refuse to follow a Circuit case
that was decided two decades later, and has remained good law in this Circuit for almost fifteen
years.
Second, the DOL argues that Paralyzed Veterans and Alaska Professional Hunters were
overturned by the recent Supreme Court decision in FCC v. Fox Television Stations, Inc., 556
U.S. 502 (2009). The DOL relies on language from Fox Television, stating that the APA “makes
no distinction . . . between initial agency action and subsequent agency action undoing or
revising that action.” Defs.’ Mot. at 15 (quoting Fox Television, 556 U.S. at 515). Fox
Television concerned two television live broadcasts during which expletives were used, resulting
in the Federal Communication Commission’s (“FCC”) issuance of two “[n]otices of [a]pparent
[l]iability” based on the FCC’s finding that the two occurrences were “actionably indecent.” 556
U.S. at 508-512. Prior to the commission of these two incidents, the FCC had permitted
networks to broadcast “fleeting” expletives without punishment. Id. The FCC reversed course
with regard to the two incidents in question, finding that the broadcasts were indecent, even
though both contained only “fleeting” expletives. Id. at 512, 530. The Second Circuit found that
the FCC’s decision changing its policy was not in compliance with the APA due, in part, to its
failure to provide an adequate reason for the change. Id. at 513-514; see 5 U.S.C. § 706(2)(A).
On review of that ruling, the Supreme Court rejected the Second Circuit’s position, “find[ing] no
basis in the [APA] or in [its] opinions for a requirement that all agency change be subjected to
more searching review.” Fox Television, 556 U.S. at 514.
18
The language in Fox Television which the defendants contend invalidates Paralyzed
Veterans, when considered in conjunction with the entire majority opinion in Fox Television,
implicates the APA’s arbitrary and capricious review, not its notice and comment process. In
fact, the Supreme Court made perfectly clear the question it was addressing, holding that “we
find the [FCC’s] orders neither arbitrary nor capricious.” Id. at 530. So what the defendants are
seeking to do is have this Court expand the reach of Fox Television beyond the question the
Supreme Court actually addressed. That, this Court cannot do, as the Fox Television decision
has no bearing on whether an agency must employ the notice and comment process before
changing its policies. The answer to that question requires this Court to look to Paralyzed
Veterans and its progeny, in the absence of en banc Circuit authority or Supreme Court
repudiation of those decisions. Torres, 115 F.3d at 1036. Neither has occurred, so Paralyzed
Veterans and its line of cases remains controlling authority in this Circuit.
2. The Paralyzed Veterans Doctrine and Alaska Professional Hunters Rationale
Having determined that Paralyzed Veterans remains controlling authority in this Circuit,
the Court must now turn its attention to the exceptions to Paralyzed Veterans, which the
defendants contend have been recognized by the Circuit and are relied upon by the defendants in
this litigation. As the alternative position to their argument that this Court should not follow
Paralyzed Victims, the defendants argue that these two purported exceptions to the applicability
of Paralyzed Veterans weigh in favor of granting them summary judgment. First, they contend
that MetWest Inc. v. Secretary of Labor, 560 F.3d 506 (D.C. Cir. 2009), alleviates the
requirement of utilizing notice and comment when a party did not “substantially and justifiably”
rely upon an earlier agency interpretation. Defs.’ Mot. at 22-26. Second, the defendants argue
19
that the “invalid prior interpretation” exception purportedly recognized in Monmouth Med. Ctr.
v. Thompson, 257 F.3d 807 (D.C. Cir. 2001), applies here. Id. at 18-22.
The MetWest case raised the question of whether MetWest could “be held liable for
violating a regulation governing the removal of needles from equipment used to extract blood.”
560 F.3d at 507-508. Dating back to 1991 when the needle removal regulation was adopted, the
Occupation, Safety and Health Administration (“OSHA”) “declined to enforce [the regulation]
against employers who supplied their employees with reusable blood tube holders.” Id. at 508-
09. In October 2003, OSHA changed its policy through the issuance of a “guidance document,”
which stated that the use of reusable blood holders “likely violated” the regulation. Id. at 509.
MetWest brought suit following the change, arguing that the agency was required to employ
notice and comment rulemaking before altering its interpretation of the needle removal
regulation. Id.The Circuit in MetWest reiterated that its holding in Alaska Professional Hunters was
“that an agency’s practice of advising affected entities—in a prior agency adjudication and the
consistent advice of agency officials over a 30-year period—that a regulation did not apply to
them established ‘an authoritative departmental interpretation’ that could not be changed without
notice and comment.” Id. at 511 (citation omitted). 8 The MetWest court emphasized that “[a]
fundamental rationale of Alaska Professional Hunters was the affected parties’ substantial and
justifiable reliance on a well-established agency interpretation.” Id. (emphasis added). The
Circuit noted that “[t]his is a crucial part of the analysis” and that “[t]o ignore it is to
misunderstand Alaska Professional Hunters to mean that an agency’s initial interpretation, once
informally adopted, freezes the state of agency law, which cannot subsequently be altered
8
The MetWest opinion was authored by Judge Raymond Randolph, who also authored the Alaska Professional
Hunters opinion.
20
without notice-and-comment rule-making.” Id. at 511 n.4 (citations and internal quotation marks
omitted). And in Alaska Professional Hunters, notice and comment rulemaking was deemed
necessary before an interpretation of a regulation could be changed, because, in that case, people
had moved to Alaska and started businesses with the understanding that an agency’s regulations
did not apply to an essential component of their operations due to the position the agency had
taken over a 30-year period. Id. at 511 (citing Alaska Professional Hunters, 177 F.3d at 1035(alterations in original)). Concluding that “[t]he situation [in MetWest was] not comparable” to
the situation in Alaska Professional Hunters, MetWest’s challenge to the Agency action was
rejected because “OSHA never established an authoritative interpretation of its regulation on
which MetWest justifiably relied to its detriment.” Id.The plaintiff takes exception to the defendants’ claim that MetWest limits the
applicability of Paralyzed Veterans to cases where a “party’s reliance upon a prior interpretation
[of an agency’s regulation] was both substantial and justifiable.” Plaintiff’s Reply in Support of
its Motion for Summary Judgment and Opposition to Defendants’ Motion to Dismiss or in the
Alternative for Summary Judgment (“Pl.’s Reply”) at 15 (internal quotation marks omitted). The
plaintiff argues that “some new reliance exception to Paralyzed Veterans” was not created by
MetWest because “MetWest’s discussion of substantial and justifiable reliance was in the
content of assessing whether an informal interpretation by [OSHA] could even be an
authoritative departmental interpretation” Id. (internal quotation marks omitted).
While it is true that the court in MetWest noted that the agency “never established an
authoritative interpretation of its regulation on which MetWest justifiably relied to its detriment,”
the court’s holding was not grounded solely on that fact. MetWest, 560 F.3d at 511. Rather, the
ruling of the circuit was also based on the assessment of whether there had been “substantial and
21
justifiable reliance on a well-established agency interpretation” by MetWest, which was essential
to imposing the notice and comment obligation on the agency. Id. (emphasis added). So
regardless of whether MetWest carved out an exception to Paralyzed Veterans or just clarified
what the court intended to convey when it said in Alaska Professional Hunters that the plaintiffs
there had “relied” on the agency’s initial interpretation, 177 F.3d at 1035, this Court is convinced
that MetWest intended to set the bar for what a plaintiff must establish to satisfy the reliance
component of the Paralyzed Veterans doctrine.
The plaintiff argues alternatively that even if MetWest did add a substantial and
justifiable reliance component to the Paralyzed Veterans doctrine, they “quite plainly relied,
substantially and justifiably so, on the 2006 Opinion Letter.” Pl.’s Reply at 17. The Association
relies in part upon the Portal-to-Portal Act of 1947 for this position, id. at 17-25, which gives
employers a complete defense to liability if they rely in good faith on the opinion of the
Administrator of the Wage and Hour Division. This Act states that
no employer shall be subject to any liability or punishment for or on account of
the failure of the employer to pay . . . overtime compensation under the [FLSA], if
he pleads and proves that the act or omission complained of was in good faith in
conformity with and in reliance on any written administrative regulation, order,
ruling, approval, or interpretation . . . .”
29 U.S.C. § 259(a) (2006). In a footnote, the plaintiff points to a number of other trade
associations that have been sued since the issuance of the 2010 AI, and purportedly relied upon
the 2006 Opinion Letter as a defense under 29 U.S.C. § 259(a). Pl.’s Reply at 19 n.26. And the
plaintiff takes exception to what it claims is the defendants’ position that reliance must equate to
circumstances analogous to those in Alaska Professional Hunters, opining that “[i]t would thus
be quite odd to read the APA as requiring notice and comment only where an industry can
demonstrate it will be put out of business.” Id. at 20. In opposition, the defendants argue that
22
“[t]he contrast between Alaska Professional Hunters and the present matter is stark.” Defs.’
Reply at 5. They note that in Alaska Professional Hunters, “people uprooted their lives, moved
across the country, and spent 30 years building up an entire industry in particularly substantial
and justifiable reliance on an agency interpretation.” Id. They further posit that it was precisely
this reliance that “stirred the [District of Columbia] Circuit to act.” Id. The defendants opine
that “at most [the Association] and its members operated under the misapprehension that
mortgage loan officers were administratively exempt for four years, and structured their pay
systems accordingly, before [the] DOL corrected th[e] error.” Id.The Court agrees with the defendants. As noted above, the MetWest court stressed that a
core tenant of the Alaska Professional Hunters decision was “substantial and justifiable reliance
on a well-established agency interpretation.” MetWest, 560 F.3d at 511. The interpretation
allegedly relied upon by the Association and its members here was only in effect for a period of
four years, from 2006 to 2010. See A.R. 87-93 (2006 Opinion Letter). Prior to that, the DOL
had taken the position that mortgage loan officers were not exempt employees, and were
therefore entitled to overtime pay. See, e.g., A.R. 4-5 (1999 Opinion Letter). Unlike the
plaintiffs in Alaskan Professional Hunters, here the Association does not allege that any of its
members uprooted their families and moved to a new location in search of business
opportunities. Pl.’s Reply at 23. Rather, in the words of the Association itself, employees of
financial service firms have merely “become accustomed to the freedom to control their own
hours and breaks.” Id. While the Court appreciates that having to keep accurate time records
may impose an additional burden on the Association’s members and their employees, the loss of
the freedom to control one’s work hours and break times is not the kind of “substantial and
justifiable reliance” that Alaskan Professional Hunters had in mind, especially when such
23
reliance was short lived given the many years that the parties had previously relied upon the
interpretation that mortgage loan officers were not covered by the administrative exemption.
Further, the argument that the Association makes under the Portal-to-Portal Act actually
weakens its overall position. See Pl.’s Reply at 17-18. As the Association points out, the Portal-
to-Portal Act provides that, if the employer “proves that the [failure to pay overtime] was in good
faith in conformity with and in reliance on any written administrative . . . interpretation,” then the
employer “shall [not] be subject to any liability or punishment.” 29 U.S.C. § 259(a). Thus,
assuming this provision applies, the plaintiff could not be said to have relied upon the prior
interpretation to its detriment, as its members will not be liable for any damages resulting from
the prior interpretation due to their good faith reliance. Id. While the Court need not reach that
conclusion, it is at least worth nothing that the Association’s invocation of the Portal-to-Portal
Act undermines its position that it “substantial[ly] and justifiabl[ly]” relied upon the 2006
Opinion Letter to the level required by the Circuit in MetWest, 560 F.3d at 511.
Having concluded that the association has failed to satisfy the standard for demonstrating
reliance recognized in MetWest, the Court need not address the defendants’ additional argument
that notice and comment was not required for the 2010 AI based on the Circuit’s decision in
Monmouth, 257 F.3d at 807.
B. Is the 2010 AI Inconsistent with the DOL’s 2004 Regulations?
The plaintiff argues that even if the 2010 AI was lawfully adopted, it is “inconsistent with
the plain language of 29 C.F.R. § 541.203(b),” Memorandum of Points and Authorities in
Support of Plaintiff’s Motion for Summary Judgment (“Pl.’s Mem.”) at 26, and thus “it is
arbitrary, capricious, and contrary to law,” id. at 3. In essence, the plaintiff argues that the work
performed by mortgage loan officers discussed in the 2010 AI are identical to the job duties
24
discussed in 29 C.F.R. § 541.203(b), which provides examples of job duties that are exempt from
the FLSA’s overtime pay requirement. Pl.’s Mem. at 26-27. 29 C.F.R. § 541.203(b)
contemplates that an employee who “collect[s] and analyz[es] information regarding the
customer’s income, assets, investments or debts,” “determin[es] which financial products best
meet the customer’s needs and financial circumstances,” and “advis[es] the customer regarding
the advantages and disadvantages of different financial products” might be found exempt under
the administrative exemption. In its memorandum submitted in support of its motion, the
plaintiff notes that very similar language was used in the 2010 AI, but that in the 2010 AI, the
DOL reached a different result in finding mortgage loan officers non-exempt from the FLSA’s
overtime requirement. Pl.’s Mem. at 26-27.
The DOL does not dispute that the language found in the two documents is similar.
Defs.’ Reply at 15. However, it contends that the job duties found in 29 C.F.R. § 541.203(b) are
merely intended to provide examples of when a financial services employee might be exempt
under the administrative exception. Id. The defendants argue that by “[a]pplying the general
administrative duties test in § 541.200(a), in conjunction with the financial services example in §
541.203(b),” the 2010 AI came to the conclusion that the mortgage loan officers in question were
not exempt from the FLSA’s overtime pay requirement. Id. (citing A.R. 105-108
(Administrator’s Interpretation No. 2010-01)). 9
9
The defendants have offered supplemental authority—Lewis v. Huntington National Bank, No. C211CV0058,
2012 WL 765077 (S.D. Ohio Mar. 12, 2012)—as additional support for their position that the 2010 AI is not
arbitrary and capricious. See Defendants’ Notice of Supplemental Authority. Although the case is distinguishable
from this case for a variety of reasons, the Southern District of Ohio did find that “because the [2010 AI] applies the
test set forth in § 541.200(a), consistently with the example contained in § 541.203(b), there can be no serious
argument that [the 2010 AI] was either erroneous or inconsistent with the 2004 revised regulations.” Lewis, No.
C211CV0058, 2012 WL 765077 at 32 (S.D. Ohio Mar. 12, 2012).
25
The Court finds the DOL’s argument persuasive. The administrative exemption of 29
C.F.R. § 541.200, entitled “General rule for administrative employees,” provides in part that an
“employee employed in a bona fide administrative capacity” is one “[w]hose primary duty is the
performance of office or non-manual work directly related to the management or general
business operations of the employer or the employer’s customers.” 29 C.F.R. § 541.200(a)(2).
The language relied upon by the plaintiff is found in 29 C.F.R. § 541.203(b), which is entitled
“Administrative exemption examples,” and it provides, in part, that “[e]mployees in the financial
services industry generally meet the duties requirements for the administrative exemption . . . .
However, an employee whose primary duty is selling financial products does not qualify for the
administrative exemption.” 29 C.F.R. § 541.203(b) (emphasis added). On its face, and
considering the title of the provision, it is clear that § 541.203(b) was intended to provide
examples, not an alternative test for the applicability of the administrative exception. Id. Thus,
while financial services employees who perform the duties listed in § 541.203(b) are “generally”
able to qualify for the administrative exemption, the DOL is still tasked with determining
whether specific employees’ “primary duty is selling financial products.” Id. If so, the employee
“does not qualify for the administrative exemption.” Id. Given the DOL’s reasoning for why the
exemption does not apply here, the Court must find that the 2010 AI is not inconsistent with the
2004 regulations; thus, the 2010 AI is not arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with the law. 10
10
The Court is aware that there is currently a dispute between the defendants and the intervenors as to whether the
2010 AI applies both prospectively and retroactively. In resolving this case, however, the Court need not reach a
conclusion on that issue, as the intervenors, the plaintiff, and the defendants acknowledge. See Intervenors’
Memorandum of Points and Authorities in Opposition to Plaintiff’s Motion for Summary Judgment and in Support
of Defendants’ Motion to Dismiss at 31-32 n.12; Defendants’ Reply to Intervenors’ Memorandum in Opposition to
Plaintiff’s Motion for Summary Judgment and in Support of Defendants’ Motion to Dismiss at 1; Plaintiff’s Reply
in Support of its Motion for Summary Judgment (Response to Intervenors filed on March 14, 2012) at 3. The Court
agrees with the parties and, therefore, declines to address the issue.
26
IV. CONCLUSION
The Association has failed to satisfy the Paralyzed Veterans doctrine of substantial and
justifiable reliance, which was also recognized in MetWest; thus, both their arguments as to
reliance and as to notice and comment procedures must fail. Further, § 541.203(b) was not
intended to serve as an alternative test for the applicability of the administrative exception. As
such, the 2010 AI is not inconsistent with the 2004 regulations and is not arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with the law. Accordingly, the Court must
grant in part and deny in part the Defendants’ Cross-motion to Dismiss or, in the Alternative for
Summary Judgment and deny the Plaintiff’s Motion for Summary Judgment.
SO ORDERED. 11
REGGIE B. WALTON
United States District Judge
11
The Court will issue an Order contemporaneously with this Memorandum Opinion.
27