Dive Brief:
- The Department of Labor responded last week to an appeal from 26 Republican attorneys general, after their lawsuit challenging a rule allowing employee retirement plans to consider ESG factors when making investments was dismissed in September.
- Liberty Energy, which also has an ongoing petition to the Securities and Exchange Commission’s climate disclosure rule, joined the Republican-led states in the appeal, filed to the U.S. Fifth Circuit of Appeals Jan. 18. Liberty Oilfield Services — a subsidiary of the Colorado-based onshore oil and natural gas services provider — and energy trade association Western Energy Alliance also joined the appeal to the lower court’s dismissal arguing the rule is unlawful.
- The Labor Department asserted the rule is consistent with the Employment Retirement Income Security Act of 1974 and is both “reasonable and reasonably explained,” in its March 21 response. However, both sides agree that there should be oral arguments in the case, given its importance, according to their filings.
Dive Insight:
The rule in question, the Labor Department’s “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” has been in effect since Jan. 2023. The Labor Department said the rule “reaffirms that fiduciaries may consider all factors, including ESG factors, that are relevant to investment risk and return,” in the filing.
Utah and Texas Attorneys General Sean Reyes and Ken Paxton led the original lawsuit challenging the rule, which alleged the rule ran afoul of ERISA and exceeds the agency’s statutory authority. U.S. District Court Judge Matthew Kacsmaryk, of Texas’ Northern District Court, disagreed with both allegations, as well as an additional claim that the rule was “arbitrary and capricious” in his September dismissal. The 26 states first appealed the decision in October.
In the January appeal to the Fifth Circuit, the coalition of attorneys general, Liberty Energy and Western Energy Alliance argue the rule is unlawful and the agency violated ERISA in its guidance on allowing other employee retirement fund managers to consider “collateral factors” as a tiebreaker when making investment decisions.
“Allowing consideration of collateral factors as a tiebreaker violates ERISA because fiduciaries must act ‘solely’ and ‘for the exclusive purpose’ of providing financial benefits to plan participants,” the Jan. 18 appeal said.
However, the agency countered that claim in its response. The Labor Department said the rule reaffirms that ERISA allows for fiduciaries to consider factors unrelated to the expected risk and return of an investment only as a tiebreaker for options that “equally serve the financial interests of the plan.”
The agency also said in the filing that the tiebreaker framework does not raise any issues of the Major Questions Doctrine, which the lower court agreed with, and said the standard is “valid” even aside from the Chevron Doctrine, “because it is not just a reasonable construction but the best construction of ERISA.”
Kacsmaryk’s ruling had cited the doctrine, an administrative law theory that federal courts should defer to agency interpretations of federal statutes in issues of language ambiguity, in his September dismissal. The doctrine, which dates to a 1984 U.S. Supreme Court ruling, is in limbo after the Supreme Court heard oral arguments in January on a pair of cases that could influence its outcome: Loper Bright Enterprises Inc. v. Raimondo, where Secretary of Commerce Gina Raimondo is the named defendant, and Relentless v. Department of Commerce.
During the arguments, the nation’s top court seemed mixed on whether to retain the administrative law doctrine. The final decision, which is expected to hinge on Chief Justice John Roberts and Associate Justice Amy Coney Barrett, could potentially eliminate or substantially limit its use and require courts to resolve any statutory ambiguities as agencies promulgate rules.
Attorneys general from Alabama, Alaska, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, Oklahoma, Ohio, South Carolina, North Dakota, Tennessee, Virginia, West Virginia and Wyoming were on the appeal. All 26 states were parties in the original suit filed in January 2023.
Reyes said in October that the group was willing to fight the case all the way up to the Supreme Court.
