July 19, 2024

Fifth Circuit overturns DOL’s ESG rule, cites recent SCOTUS ruling

The Court of Appeals for the Fifth Circuit tossed out the Biden administration’s ESG rule in a decision posted this morning.

In doing so, the court cited the recent Supreme Court ruling striking down the so-called Chevron doctrine. Justices overruled their landmark 1984 decision in Chevron v. Natural Resources Defense Council, which gave federal agencies broad power to interpret and administer laws.

“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,” the Fifth Circuit opinion states.

The decision bodes well for industry trade groups suing to stop the DOL’s latest fiduciary rule iteration. However, the Fifth Circuit called its decision a “limited remand” that does not fully speak to the core issues of the ESG rule.

“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,” today’s ruling states. “Their arguments have thus far significantly aided the appellate decision-making process, and there is no reason to start afresh with a new panel.”

What ESG rule addresses

The ESG rule addresses what fiduciaries can consider when making plan investments and outlines that they may, but are not required to, consider ESG [environmental, social, and governance] factors when evaluating plan investments.

In addition, the rule permits fiduciaries to use collateral factors as a tiebreaker between two or more investments when both investments equally serve the interests of the plan and for fiduciaries to use qualified default investment alternatives that use consider nonfinancial factors, if it is a prudent investment.

A group of 25 attorneys general, all from Republican states, filed the lawsuit against the rule. Plaintiffs, which include Liberty Energy, Inc., an energy company, and three individuals, had specifically asked the appeals court to wait to rule until after the Supreme Court had decided Chevron.

Key protections undermined, say plaintiffs

Plaintiffs say that the department’s ESG rule undermines key protections for retirement savings and oversteps the department’s statutory authority under a 1974 law known as the Employee Retirement Income Security Act, which governs a broad range of retirement and health benefit plans.

The lawsuit claims the ESG rule is “arbitrary and capricious” and a violation of both ERISA and the Administrative Procedure Act. U.S. District Judge Matthew Kacsmaryk threw out their lawsuit on Sept. 21.

As Politico reported in a recent story, the politically ripe ESG issue is set to land in multiple courts over the coming months. Judges in at least six states will weigh in on a wide range of ESG litigation this year.

The Labor Department’s ESG rule bounced from the Trump administration to Biden’s. The final rule that went into effect Jan. 30, 2023, peeled off some of the provisions that opponents found objectionable, but not enough for the plaintiffs.

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