NEW ORLEANS – The ripple effects of the U.S. Supreme Court’s recent decision to strike down the Chevron doctrine have materialized in an opinion from a federal appellate court, which puts in jeopardy one of President Joe Biden’s first actions after he took office in January 2021.
On July 18, the U.S. Court of Appeals for the Fifth Circuit, citing the Supreme Court’s recent overruling of its own 1984 ruling in Chevron v. Natural Resources Defense Council – which provided federal agencies broad power to interpret and administer laws – chose to vacate and remand State of Utah Et.Al v. Su back to the U.S. District Court for the Northern District of Texas.
The trial court will now hear renewed arguments against the U.S. Department of Labor’s regulation permitting environmental, social and governance factors to be considered in matters of investment involving private-sector retirement accounts.
U.S. Court of Appeals for the Fifth Circuit Judge Don R. Willett authored the Court’s opinion in this matter.
“On Inauguration Day 2021, President Biden signed a flurry of executive orders, including one meant to neutralize a Department of Labor rule that had taken effect eight days earlier. That Trump-era rule – ‘Financial Factors in Selecting Plan Investments’ – forbade Employee Retirement Income Security Act of 1974 fiduciaries from considering ‘non-pecuniary’ factors when making investment decisions. The Biden order – ‘Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis’ – counteracted the Trump rule by, among other things, directing the Department of Labor to reexamine the Financial Factors Rule that had eschewed so-called ‘political investing’ and directed ERISA retirement fund managers to consider solely economic factors that materially affect financial risk or return,” Willett stated.
“10 months after President Biden’s day-one executive order, the Department of Labor released a final rule that attempts to guide ERISA fiduciaries on when they may consider ‘collateral benefits’ when making investment decisions on behalf of the pension plans they manage. According to the rule, an ERISA fiduciary may consider ‘the economic effects of climate change and other environmental, social, or governance factors’ in the event that competing investment options ‘equally serve the financial interests of the plan.’ Simply put: The Department’s rule permits ERISA fiduciaries to consider ESG objectives when there is a purported ‘tie’ between two or more investment options.”
A combination of more than two dozen states, corporations, trade associations and other parties challenged the Biden Administration rule, arguing it not only counteracted the tenets of ERISA, but was also “arbitrary and capricious” according to the Administrative Procedure Act.
However, the District Court rejected their challenge, opting to defer to the Department of Labor’s interpretation of ERISA under Chevron – leading the plaintiffs to appeal to the Fifth Circuit.
While the instant appeal was pending, the Supreme Court decided two consolidated cases in the interim, Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce – where the Court overruled Chevron, finding the deference it called for could not be reconciled with either the APA or the independent function of the judiciary.
In light of those decisions, the Fifth Circuit thought it most prudent for the case to be remanded, now that the “legal landscape” on this question has changed dramatically.
“Presidents exiting and entering the White House are prone to issuing whipsawing pronouncements. This case pits an outgoing president’s ‘midnight regulation’ against an incoming president’s ‘day one executive order’ and poses a weighty question: Does ERISA allow retirement plan managers to consider factors that are not material to financial performance when making investment decisions affecting workers’ retirement savings,” Willett said.
“We do not venture an answer – at least not yet. This case, while featuring two administrations’ ping-ponging directives, turns fundamentally on the words that Congress chose: What investment duties does ERISA prescribe and proscribe for plan fiduciaries? In upholding the Department of Labor’s reading, the District Court relied upon the decades-old Chevron deference doctrine. But 11 days before we heard oral argument in this appeal, the Supreme Court decided two landmark cases that discarded Chevron and pared back agencies’ leeway to interpret their own statutory authority. Given the upended legal landscape, and our status as a court of review, not first view, we vacate and remand so that the District Court can reassess the merits.”
Willett added that “the parties can rest assured, however, that in leaving the District Court to address the important statutory issues in the first instance, we have not completely thrown the values of efficiency and economy to the wind.”
“Their arguments have thus far significantly aided the appellate decision-making process, and there is no reason to start afresh with a new panel. We therefore think a limited remand is appropriate under the circumstances. Just as the panel can have the benefit of the District Court’s ‘independent judgment’ as to whether the Department’s new rule can be squared with either ERISA or the APA, the parties can have the benefit of a panel already acquainted with the briefs and argument of counsel. This disposition, we believe, strikes the right balance between the competing demands on the parties’ time and the court’s interest in the correct pronouncement of law,” Willett stated.
U.S. Court of Appeals for the Fifth Circuit case 23-11097
U.S. District Court for the Northern District of Texas case 2:23-cv-00016
From the Southeast Texas Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com