A legal challenge to a Biden administration rule allowing retirement plans to prioritize environmental, social, and corporate governance policies is set to be one of the first tests of how courts decide lawsuits against federal regulations in the post-Chevron era.
The 5th U.S. Circuit Court of Appeals in New Orleans on Tuesday will hear arguments in a lawsuit brought by 25 Republican-led states that takes aim at a rule from the Department of Labor that lets 401(k) and other retirement plans use ESG factors as a “tiebreaker” to help decide where to invest. The hearing comes just two weeks after the Supreme Court issued a ruling in Loper Bright Enterprises v. Raimondo, which held that courts no longer need to defer to the expertise of federal agencies automatically.
Last year, U.S. District Judge Matthew Kacsmaryk in Amarillo, Texas, declined to block the rule, citing a legal principle known as Chevron deference. This principle, derived from a 1984 Supreme Court case, instructed courts to uphold reasonable interpretations of laws by federal agencies.
But with that precedent now overturned by a 6-3 decision at the highest court, some legal and industry experts believe the GOP-backed case, which is led by Utah and known as Utah v. Su, now has an even stronger footing to challenge the ESG rule.
“It is likely the first test post-Chevron, primarily because the district court judge, his primary ruling for the government, was that he was relying on Chevron doctrine as it specifically applied to the [Labor Department rule],” Will Lofland, managing director of investment distribution at GuideStone Funds, told the Washington Examiner.
The primary issue for the three-judge panel is whether the 1974 Employee Retirement Income Security Act permits retirement plans to consider investment strategies that may prioritize ESG factors above pecuniary, or money-related, incentives. For this to happen, there is a so-called tiebreaker test that comes into play between two competing investments only when ESG factors do not negatively affect the risk/return analysis.
GOP states that oppose the rule argued the Labor Department is attempting to infuse politically fueled climate and social agendas into investment decisions that could ultimately damage or endanger retirement savings. The rule covers plans that altogether invest up to $12 trillion on behalf of more than 150 million retirement accounts.
In a letter led by attorneys for Utah just hours after the Loper Bright decision, the states argued that the ESG rule created by the Department of Labor’s Employee Benefits Security Administration cannot hold up under the Administrative Procedure Act. They referenced District Judge Kacsmaryk’s reliance on agency deference to support their claim.
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“[Labor Department’s] interpretations of ERISA that authorized nonpecuniary tiebreaker considerations came well after enactment, equivocated over time, and lacked thorough statutory analysis,” attorneys for the state of Utah told the 5th Circuit.
The 5th Circuit is considered one of the most conservative appellate courts in the nation and has in recently taken a more critical lens to agency deference. The panel that will weigh the case at issue on Tuesday is composed of three judges who were appointed by Republican presidents.
