DOL Takes On Lawsuit Challenging Its ESG Rule

The Department of Labor responded last week to a lawsuit challenging the legality of the DOL rule which permits the use of environmental, social and governance factors in fiduciary decision making. The complaint was brought in January in the U.S. District Court for the Northern District of Texas, Amarillo Division, by 25 states, joined by fossil fuel industry actors and individual retirement plan participants.

The DOL’s response brief, filed on March 28, argued that the plaintiffs did not have standing to bring the suit, because the damages they claim are speculative. In the case of the state plaintiffs, the DOL argued they cannot assume that permitting the use of ESG factors in retirement plan investment decisions will reduce economic growth and taxable retirement income. Additionally, this harm would in any case be indirect, and allowing the claim would subject all federal rules with economic impact to judicial review.

The DOL added that the ESG rule does not require anybody to use ESG factors, but simply permits it, and so any subsequent loss of investment in the fossil fuel industry would more directly result from fair fiduciary decisions to reduce investment in that sector rather than from the rule.

The DOL’s filing emphasized many times that the rule was neutral and was not an ESG mandate. The DOL stressed that fiduciaries cannot take on additional risk or compromise performance to chase alternative goals.

Additionally, the DOL argued that the rule will not cause irreparable harm to the plaintiffs and, thus, they cannot seek a preliminary injunction. The federal response noted that the plaintiffs waited three months after the rule was finalized to bring the suit one day before the rule’s enforcement date.

The DOL defended all elements of the rule as “reasonable” in light of the authority delegated to the department by Congress.

The previous rule, set down under the administration of President Donald Trump, had banned the use of any non-pecuniary factors in the choosing of a qualified default investment alternative in a retirement plan. The rule in question in this litigation reversed that, at the request of many public commenters, to permit the use of ESG factors in choosing a QDIA if that would serve the best interests of the plan. The DOL referenced these comments in its filing more than once to highlight that it was responding to industry requests to loosen QDIA rules for fiduciaries that might prefer to use an ESG fund as their QDIA.

The DOL also defended the rule change which permits fiduciaries to include ESG funds based on employee demand if a fiduciary believes it would increase participation and income deferral in the plan, and therefore also improve retirement security.

On the same day the DOL filed its response, U.S. District Judge Matthew Kacsmaryk, appointed by Trump in 2020, denied an earlier motion in the case from the DOL to move the venue away from the Northern District of Texas. The DOL had requested that the case be moved to the US District Court for the District of Columbia or a district where one the plaintiffs resides. The department argued that if the case is going to be argued in Texas, where it was filed, it should take place in the state capital of Austin, where the state of Texas, a plaintiff, “resides.”

The DOL added that the Amarillo Division only has one judge, so the plaintiffs not only got to pick their court, but also their judge. If the case were moved to a division with multiple judges, then the case would be assigned randomly, thereby reducing the impression of judge-shopping.

Kacsmaryk refused to move the venue. “Texas resides everywhere in Texas,” the judge wrote, and therefore the case can be heard anywhere in that state, since Texas is a plaintiff. He also noted that Alex Fairly, one of the individual plaintiffs, resides in Amarillo. The case could have been brought in Washington, D.C., but it did not need to be, Kacsmaryk wrote.