5th Circuit Appeals Court Sends DOL ESG Case Back to Texas Court

A Texas district court will rehear a challenge to the Department of Labor’s environmental, social and governance rule for investing in defined contribution retirement plans after the U.S. 5th Circuit Court of Appeals remanded the case due to a recent Supreme Court decision.

In a ruling published on July 18, U.S. Circuit Judge Don R. Willett cited the Supreme Court overturning of the longstanding Chevron standard, claiming that in initially upholding the DOL’s rule, the district court had relied upon the decades-old Chevron deference doctrine.

“Given the upended legal landscape, and our status as a court of review, not first view, we vacate and remand so that the district court can reassess the merits,” Willett wrote.

The Chevron doctrine, so-called for its establishment in a 1984 Supreme Court decision, required federal courts to be deferential to federal agencies’ interpretations of ambiguous language. The Supreme Court ruled on June 28 in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, et al. that the Chevron Doctrine would no longer apply to cases involving rulemakings of the federal bureaucracy, and the court should use its independent judgment instead. 

The 2022 DOL rule—allowing ESG factors to be considered when electing retirement plan investments— is the first case concerning ESG to go before a judge in the post-Chevron era.

Utah v. Su Heads Back to Texas

A three-judge panel of the 5th Circuit heard oral arguments in Utah v. Su in New Orleans on July 9 in the bid by 29 Republican state attorneys general to block the DOL rule.

Craig Leen, a partner in K&L Gates who has experience passing DOL regulation during his time as the director of the Office of Federal Contract Compliance Programs, says the ruling makes sense in light of the new standard established in Loper Bright.

“Now the judge in the district court can exercise independent judgment,” Leen says. “The 5th Circuit specifically wants the judge to exercise independent judgment and determine whether to uphold the rule.”

Leen also argues that Chevron was “significantly relied upon” in the district court decision by U.S. District Judge Matthew Kacsmaryk and, now that Chevron deference has been removed, “the case could go another way.”

The DOL stated in a filing made before oral arguments that it did not rely on Chevron during the course of litigation, writing that “the court should itself resolve the issue of statutory interpretation that this case presents.”

In a March filing, the DOL did reference Chevron, but noted the then-pending Supreme Court decision on the doctrine, writing that “the tiebreaker standard is valid even aside from the Chevron framework, because it is not just a reasonable construction but the best construction of ERISA. … There is no basis for plaintiffs’ view that ERISA requires fiduciaries to break a tie among investments by choosing randomly.”

The 5th Circuit opinion also addressed a concern about rules “ping-ponging” between administrations. Leen explains that when presidents leave office, rules they issued are often changed when a new president comes in.

“I think that’s one thing the district court will consider very carefully: … the fact that you had a [former President Donald] Trump administration rule that was almost immediately replaced by a [President Joe] Biden administration rule,” Leen says.

No More Duty to Defer

The rules issued by both administrations were fairly similar but include some key differences in wording. For example, the Trump administration rule stated a fiduciary must consider pecuniary factors when determining what investments to include in a 401(k) plan. The Biden administration rule similarly said that rate of return needs to be the primary factor when deciding on an investment, but if there are two investments that are basically equal in terms of rate of return, a plan sponsor can consider ESG factors as a tiebreaker.

While ERISA does not mention considering other factors besides rate of return when making investment decisions, courts were previously bound to, under Chevron, defer to a reasonable agency directing fiduciaries to consider ESG factors as a tiebreaker. Now that Chevron deference has been overturned, Leen says there is no duty to defer.

“What the court will do is look at the rule, look at the support for the rule and the fact that [it] changed very quickly, and make a determination whether that was within the authority of … the Department of Labor to [pass],” he says.

Going forward, Leen predicts that any existing cases that have relied on Chevron deference will likely be sent back to lower courts to allow district judges to exercise their independent judgment. The 5th Circuit stated in its opinion that when there is a change in the law, such as the one in the Supreme Court’s Loper Bright ruling, and an appeal is pending, the appellate court has to consider the Supreme Court’s change.

In terms of any existing decisions in which Chevron deference was applied, Leen says litigants may go to other circuit courts where there is not a binding precedent in place and challenge those rules, because the Supreme Court has ruled that the statute of limitations for challenging the rule runs from the time of injury to a new potential litigant.

“I think for existing cases which have been upheld by Chevron, but are already closed [from] maybe five, 10, 15 years ago, there’s still a chance that those rules may be challenged,” Leen says.

Leen says it is likely that Congress will start writing more specific laws and be clearer in specifying its intentions, recognizing it cannot keep guidance ambiguous and rely on an administrative agency to interpret it.

“When you look at all of this together, I think you’ll see the courts enhancing authority of the president, of Congress and of the courts … at the expense of administrative agencies,” Leen says.