Dive Brief:
- A federal judge ruled on Friday that the Labor Department’s regulation allowing fiduciaries to consider ESG and other collateral factors as a tiebreaker does not violate the Employment Retirement Income Security Act of 1974, according to court documents.
- Texas Northern District Court Judge Matthew Kacsmaryk ruled in favor of Biden administration agency motion for summary judgment and found that the agency’s guidance is still valid under the Loper Bright ruling issued last year, which overturned that judicial standard of deferring to agencies’ interpretations of ambiguous statutes in laws.
- Kacsmaryk initially dismissed the lawsuit brought by a number of Republican-led states in September 2023 in a ruling relying on the now-overturned Chevron doctrine. The case was heard on appeal after Chevron’s demise and sent back down to Kacsmaryk to determine whether the rule could stand in a post-Chevron world.
Dive Insight:
The Labor Department rule in question, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” was finalized in 2022 and has been in effect since January 2023. The rule was designed to overturn guidance the agency issued in 2020 under the first Trump administration that forbade fiduciaries from utilizing “non-pecuniary” factors in investment decisions.
The 2022 rule was designed to overturn a “chilling effect” that the Biden administration’s Labor Department said was witnessed under the 2020 rule. The guidance revised the agency’s tiebreaker standard to allow for consideration of collateral benefits like ESG in the event that two or more investments would equally serve the plan’s best interests but it would be imprudent to invest in both or all options.
The DOL rule has been repeatedly challenged by a coalition of 26 Republican-led states, who argued it runs afoul of ERISA and exceeded the agency’s statutory authority. However, Kacsmaryk disagreed in his Feb. 14 ruling and said such a reading of the law “embodies the wooden textualism that courts should endeavor to avoid.”
“Under the rule, a fiduciary faced with choosing between investment options — that all equally serve the beneficiaries' financial interests — does not advance the interests of nonbeneficiaries nor act for a purpose other than their financial benefit when he chooses based on collateral factors,” the judge ruled. “Plaintiffs' interpretation of ERISA would demand arbitrary randomness to choose between such investment options.”
The Loper Bright Enterprises v. Raimondo case — which determined the fate of the Chevron doctrine — was decided in the time between Kacsmaryk’s initial dismissal of the case and when the plaintiffs and the Biden administration’s Labor Department argued before the U.S. Fifth Circuit Court of Appeals. The Supreme Court’s decision in June 2024 overturned the Chevron doctrine, which previously directed courts to give agencies deference in their interpretations of ambiguous law statutes.
While the parties had opposing views on how Chevron’s demise affected the case at hand, the Fifth Circuit refused to rule on the case, but vacated the initial dismissal and asked Kacsmaryk whether the rule can be squared with ERISA or the Administrative Procedure Act in light of Loper Bright.
Kacsmaryk said Loper Bright “did not disturb how courts evaluate a rule under the APA's arbitrary and capricious standard,” in his ruling Friday. He said the overturn of the Chevron doctrine should change how courts should interpret statutes, but not how they review the reasonableness of agency decisions.
The judge said that the tiebreaker standard in the 2022 rule does not violate ERISA’s duty of loyalty nor its requirement that fiduciaries act “solely” and for the “exclusive” benefit of the plan’s financial interests. Kacsmaryk said ERISA defines “whose interest the fiduciary must protect” and what their purpose is, but “says nothing of what they may consider.”
“Just as a driver, duty-bound to choose the fastest route to his destination, may choose the most scenic of two routes that each bring him to his destination at the same time, so too can a fiduciary choose a preferable investment option between two that will equally satisfy his duty of loyalty,” the judge wrote.
The coalition of Republican-led states were also joined in their lawsuit by public oilfield services company Liberty Energy, where Energy Secretary Chris Wright served as CEO at the time. The plaintiffs have previously signaled a willingness to fight the case all the way to the Supreme Court, but first it will return to the Fifth Circuit panel that initially heard the arguments.
However, it remains to be seen how the Trump administration’s Labor Department will handle the case. Experts have previously expressed concerns about the DOL’s rule being one of the Biden administration’s ESG-related regulations likely to be put on the chopping block under Trump.
