Targeting the tie-breaker provision (still) contained in the so-called ESG rule, the 25 Attorneys General plaintiffs (along with some others) have formally appealed the district court’s support of the rule.
The group filed a notice of their intent to appeal (Utah v. Walsh, N.D. Tex., No. 2:23-cv-00016, notice of intent to appeal, 10/26/23)—last fall in the U.S. District Court for the Northern District of Texas—roughly a month after Judge Matthew J. Kacsmaryk surprised many by ruling against the coalition of attorneys general, concluding that the Labor Department didn’t exceed its regulatory limits or violate federal benefits law in establishing the regulation.
The coalition[i] that brought the suit in January 2023, alleged that the 2022 Rule “undermines key protections for retirement savings of 152 million workers—approximately two-thirds of the U.S. adult population and totaling $12 trillion in assets—in the name of promoting environmental, social, and governance (‘ESG’) factors in investing, including the Biden Administration’s stated desire to address climate change.”
After a brief summary of the actions taken by the Labor Department, and the legal challenge mounted thus far, the motion (Utah v. Su, 5th Cir., No. 23-11097, brief 1/18/24) filed in the US Court of Appeals for the Fifth Circuit states that “The 2022 Rule is unlawful,” going on to note that, “Allowing consideration of collateral factors as a tie breaker violates ERISA because fiduciaries must act ‘solely’ and ‘for the exclusive purpose’ of providing financial benefits to plan participants.” The motion goes on to assert that “Fiduciaries cannot serve two masters, no matter how limited or (allegedly) benign the circumstances.”
The Arguments
First citing the Supreme Court’s decision in Fifth Third v. Dudenhoeffer (that noted that ERISA requires fiduciaries to act in the financial interests of plan participants), the motion asserts that that the nation’s highest court “has read nearly identical language to prohibit collateral considerations, even when doing so ostensibly wouldn’t harm plan participants at all.” They further assert that, “when Congress has allowed fiduciaries to act with an eye toward collateral considerations, it has been explicit, but no such exceptions apply here.”
Ultimately, the motion argues that as “ERISA applies to trillions of dollars in retirement savings across nearly the entire U.S. population,” the “pursuit of collateral benefits with that enormous sum of money—especially ESG objectives—is the subject of intense political debate, and Congress has repeatedly failed to adopt bills that would allow such investing with ERISA funds.” They go on to note that the 2022 rule itself was subject to rejection under the Congressional Review Act, save for a presidential veto.
The motion challenges the statutory authority for the tiebreaker provision of the 2022 Rule, rejecting the notion that “DOL has previously blessed tiebreakers because past practice cannot defeat the plain language of ERISA as interpreted by the Supreme Court.” The motion also argues that the tiebreaker provision has always been “controversial and thus does not reflect any settled understanding of ERISA.”
If that were not sufficient, the motion revives the argument that the so-called ESG rule is “arbitrary and capricious,” calling it “internally inconsistent and unreasonable” as the “DOL posits the need for tiebreakers, but then concedes that “no two investments are the same in each and every respect.” The motion also criticizes the use of the “pecuniary/non-pecuniary distinction despite the Supreme Court’s clear statement in Dudenhoeffer that ERISA prohibits consideration of “nonpecuniary benefits.”
Tie ‘Breaking’
The motion also asserts that the Labor Department’s rule “relies on factors Congress never intended DOL to consider,” by both expanding the definition of a “tie” and removing documentation requirements to “shield fiduciaries from the burdens of scrutiny and litigation and clear the way for collateral considerations.”
The motion says that is “not a proper purpose under ERISA, which expressly says that its sole purpose is to protect plan participants, not fiduciaries.” Instead, they claim this “inversion of fiduciaries’ interests over those of plan participants permeated the rulemaking process,” and that the Labor Department “repeatedly emphasized the supposed need to ease the burdens on fiduciaries to consider ESG and other collateral factors, and went so far as to codify that ESG considerations can be permissible, rather than emphasizing the need to focus solely and exclusively on maximizing benefits for plan participants.”
Finally, the motion claims that the Labor Department “never reckoned with the reality that the 2022 Rule now requires sponsors and participants to spend additional resources to monitor fiduciaries,” and that the agency has “failed to acknowledge and confront its past finding that generic recitations of the fiduciary duties in sections 403 and 404 of ERISA were insufficient to protect participants and their retirement income, especially in the context of ESG.”
And thus—“from expanding the tiebreaker provision, to removing documentation requirements, to lifting other restrictions meant to protect the retirement income of participants and beneficiaries, the 2022 Rule systematically expands the ability of fiduciaries to consider ESG with limited oversight.”
Chevon Cited
The motion concludes by criticizing the district court’s failure to “follow the plain language of ERISA and apply the major-questions doctrine” in concluding that “the statute is silent about using collateral considerations as a tiebreaker,” and then deferring to the Labor Department under the so-called Chevron doctrine—a matter recently considered by, and widely expected to be limited, if not eliminated, by the Supreme Court. The motion says the district court’s decision “glossed over DOL’s failure to engage in reasoned decision-making, accepting superficial justifications while ignoring the agency’s inconsistent explanations, impermissible considerations, and failure to consider important aspects of the problem.”
Concluding that, “while arbitrary-and-capricious review may be deferential to federal agencies, it is not “toothless”—and that “this Court should reverse with instructions to vacate the 2022 Rule.”
We’ll see what the court makes of this appeal.
[i] The states participating in the suit were Utah, Texas, Virginia, Louisiana, Alabama, Alaska, Arkansas, Florida, Georgia, Indiana, Idaho, Iowa, Kansas, Kentucky, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Carolina, Tennessee, West Virginia, and Wyoming.
