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 New Orleans-based 5th U.S. Circuit Court of Appeals will hear arguments on Tuesday in a lawsuit by 25 Republican-led states challenging the U.S. Department of Labor rule, which says 401(k) and other plans can consider environmental, social and corporate governance (ESG) factors as a "tiebreaker" in making investment decisions.
U.S. District Judge Matthew Kacsmaryk in Amarillo, Texas, refused to block the 2022 rule last year, citing a 40-year-old doctrine known as Chevron deference, named for a 1984 Supreme Court case, which had 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.
The high court did just that in a June ruling in Loper Bright Enterprises v. Raimondo, saying judges instead should exercise their independent judgment in evaluating agency rules.
That decision is expected to have a widespread impact on the government's ability to adopt new rules such as environmental, securities and labor regulations, and is part of a broader effort by conservative groups to rein in the powers of what they call "the administrative state."
And the case over the ESG rule will give the 5th Circuit a chance to unpack the Supreme Court's directive that courts should exercise their independent judgment and consider what framework the appeals court will apply to cases challenging agency rules moving forward.
"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 lawyer with the firm Morgan Lewis & Bockius who represents employers.
Lawyers for the states that sued over the ESG rule and the U.S. Department of Justice, which is defending it, did not respond to requests for comment.
In a June 28 letter to the 5th Circuit, the states said the Supreme Court decision released earlier that day bolstered their lawsuit. Citing the ruling, they said courts should consider deferring to agencies only when regulations are adopted shortly after the laws they interpret and remain consistent over time.
Under that standard, the Labor Department is not owed deference because its position on whether a 1974 law regulating employee benefit plans permits ESG investing has shifted multiple times, the lawyers wrote.
The Justice Department in a filing responding to the states said it had not cited Chevron in its court briefs and that the 5th Circuit panel should use its independent judgment in determining whether the rule is valid.
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The key issue in the case is whether the 1974 law, the Employee Retirement Income Security Act, allows retirement plans to consider nonpecuniary factors in making investment decisions. The Labor Department in adopting the rule said the law is silent on the issue and that considering ESG topics is allowed as long as financial factors come first.
The 5th Circuit is widely regarded as the most conservative U.S. appeals court and in recent years had largely abandoned the Chevron doctrine while blocking a number of Biden administration regulations. All 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)."
