A U.S. appeals court on Tuesday considered blocking the Biden administration from allowing socially conscious investing by employee retirement plans, though the judges seemed unsure of the impact the rule would have.
A three-judge panel of the 5th U.S. Circuit Court of Appeals in New Orleans heard oral arguments in a bid by 25 Republican-led states and oil drilling company Liberty Energy (LBRT.N) to block the U.S Department of Labor rule pending the outcome of their legal challenge.
The rule, which took effect in February 2023, allows 401(k) and other plans to consider environmental, social, and corporate governance (ESG) factors as a "tiebreaker" between two or more financially equal investment options. It replaced a Trump administration rule that barred plans from considering any non-financial factors.
The 5th Circuit judges seemed to struggle with when investments are truly equal and a tiebreaker is allowed under the rule. The scope of the rule could be key to the case, since Liberty and the states claim that it allows plan administrators to substitute political agendas for traditional financial decisionmaking.
Circuit Judge Andrew Oldham seemed skeptical of what he said was the department's argument that a tiebreaker would be rare and happen in "one in a trillion" cases.
“There seems to be a massive disconnect between the department’s view that this is a nothing burger and (the argument that) this is a monumental deal,” Oldham said to Daniel Winik of the U.S. Department of Justice, who argued in defense of the rule.
Winik maintained that the rule would apply in rare circumstances where multiple investments are projected to have an exactly equal performance.
“If you think one (investment) or the other over ten years is likely to produce a penny greater return, then it’s not equal,” he said.
Jonathan Berry, who represents Liberty and also argued on behalf of the states, told the court that the rule was clearly meant to have a broader impact. He noted that President Joe Biden, a Democrat, first called for the Labor Department to adopt an ESG investing rule in a 2021 executive order about climate change.
“Biden’s executive order ... was not about resolving ties in the one-in-a-trillion case,” Berry said.
Liberty and the states are appealing a ruling by U.S. District Judge Matthew Kacsmaryk in Amarillo, Texas, that said the rule did not violate the federal law regulating retirement plans.
Kacsmaryk cited a 40-year-old legal doctrine known as Chevron deference that required courts to defer to agencies’ interpretations of unclear laws that they enforce. The U.S. Supreme Court in a decision last month that is expected to significantly limit the power of federal agencies eliminated Chevron deference, saying courts should instead use their independent judgment in deciding whether agency rules are valid.
The judges on Tuesday questioned the impact of that ruling on the case involving the ESG rule and whether they should send it back to Kacsmaryk to rethink his decision.
“We’ve got precedent galore that sends cases back for reconsideration when the district court relied on an overruled case,” Circuit Judge Don Willett said. “Why wouldn’t we do so here?”
Winik said that Kacsmaryk would have come to the same conclusion without Chevron because the judge found that federal law does not speak to how plans can break a tie between equal investments, leaving the Labor Department room to fill in the gaps.
And Berry told the panel that remanding the case was unnecessary because the 5th Circuit can block the rule on other grounds, including that it lacks a reasoned analysis of the law governing retirement plans.
Like Kacsmaryk, Oldham and Willett are appointees of Republican former President Donald Trump. The panel also includes Circuit Judge Catharina Haynes, who was appointed by Republican former President George W. Bush.
The case is Utah v. Su, 5th U.S. Circuit Court of Appeals, No. 23-11097
For the states: Utah Solicitor General Melissa Holyoak; Jonathan Berry of Boyden Gray
For the Labor Department: Daniel Winik of the U.S. Department of Justice
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