(Reuters) – A challenge to a Biden administration rule allowing socially conscious investing by employee retirement plans will present an early test of how courts will scrutinize federal regulations after the U.S. Supreme Court said they no longer have to defer to the expertise of the agencies that issued them.
The 5th U.S. Circuit Court of Appeals, based in New Orleans, will hear arguments on Tuesday in a lawsuit filed by 25 Republican-led states challenging a US Department of Labour rule that allows 401(k) and other plans to use environmental, social, and corporate governance (ESG) factors as a “tiebreaker” in investment decisions.
Last year, U.S. District Judge Matthew Kacsmaryk in Amarillo, Texas, declined to block the 2022 rule, citing a 40-year-old doctrine known as Chevron (NYSE:CVX) deference, named after a 1984 Supreme Court case that directed courts to uphold agencies’ reasonable interpretations of the laws they enforce.
Kacsmaryk, an appointee of Republican former President Donald Trump, is the lone active judge in Amarillo and his courthouse has become a favored venue for conservative litigants suing to block Biden administration policies. But in the challenge to the ESG rule, the judge said he was bound to apply Chevron until the Supreme Court overturns it.
That decision is expected to have a wide-ranging impact on the government’s ability to enact new rules such as environmental, securities, and labour regulations, and it is part of a larger effort by conservative groups to limit the powers of what they call “the administrative state.”
And the case over the ESG rule will allow the 5th Circuit to unpack the Supreme Court’s directive that courts exercise independent judgement and consider what framework the appeals court will use in future cases challenging agency rules.
“The trial court expressly relying on Chevron in upholding the ESG regulation… puts this case on track to be an early harbinger of how courts will address pending cases,” said Julie Stapel, a Chicago-based employer lawyer with Morgan Lewis & Bockius.
Lawyers for the states that sued over the ESG rule and the US Department of Justice, which is defending it, did not return calls for comment.
In a letter to the 5th Circuit dated June 28, the states stated that the Supreme Court decision issued earlier that day strengthened their lawsuit. Citing the ruling, they stated that courts should only defer to agencies when regulations are issued soon after the laws they interpret and remain consistent over time.
Under that standard, the Labour Department is not entitled to deference because its position on whether a 1974 law governing employee benefit plans permits ESG investing has shifted several times, according to the lawyers.
The Justice Department responded to the states by stating that it had not cited Chevron in its court briefs and that the 5th Circuit panel should use its independent judgement to determine whether the rule is valid.
$12 Trillion
The central issue in the case is whether the Employee Retirement Income Security Act of 1974 allows retirement plans to consider non-monetary factors when making investment decisions. In adopting the rule, the Labour Department stated that the law is silent on the matter and that considering ESG issues is permissible as long as financial considerations come first.
Conservatives have sharply criticised the rule, claiming that infusing a political agenda into investment decisions jeopardises workers’ retirement savings. The rule applies to plans that invest a combined $12 trillion on behalf of more than 150 million workers and retirees.
The 5th Circuit is widely regarded as the most conservative appeals court in the United States, having largely abandoned the Chevron doctrine in recent years and blocking a number of Biden administration regulations. The three judges on Tuesday’s panel were appointed by Republican presidents.
The fact that the ESG rule is coming before the 5th Circuit may blunt the impact of the Supreme Court ruling on the case, said Katherine Kohn, a Washington, D.C.-based lawyer at the firm Thompson Hine who counsels companies on employee benefits issues.
“If the 5th Circuit is inclined to vacate the rule, there is probably a path for that even if we were still living under Chevron,” she said, “although the Loper Bright decision certainly makes it simpler for the 5th Circuit to side with the (states).”