In State of Utah v. Walsh, 2:23-CV-016-Z, 2023 WL 6205926 (N.D. Tex. Sep. 21, 2023), twenty-six states and a number of private parties (“plaintiffs”) sought to overturn the United States Department of Labor’s (“DOL’s”) latest environmental, social, and governance (“ESG”) investment rule (“Rule”) issued pursuant to the DOL’s administrative authority under the Employment Retirement Income Security Act of 1974 (“ERISA”). In upholding the Rule, the district court rejected in a footnote plaintiffs’ attempt to invoke the major questions doctrine, offering guidance as to the types of cases in which courts are more likely to apply the doctrine following the United States Supreme Court’s decision last year in West Virginia v. EPA (2022).
The Rule at issue in Walsh related to the circumstances in which ERISA plan sponsors may consider ESG issues in making investment decisions. ERISA protects the interests of employee benefit plan participants and beneficiaries, including by imposing fiduciary duties on plan sponsors to act for the exclusive purpose of increasing financial benefits to the plan. For the past few decades, the DOL has permitted plan sponsors to consider collateral or non-financial benefits in selecting between competing investments, known as the tiebreaker rule. The DOL has stated that ESG issues may be considered as either tiebreakers or, in certain cases, as purely financial factors, depending on whether they are part of the fiduciary’s primary analysis of the economic merits of an investment.
In 2020, DOL issued the first iteration of the Rule, which clarified that tiebreakers could be used only when the fiduciary was “unable to distinguish” investments on the basis of pecuniary factors alone. The initial version also required specific documentation of the tiebreaker decision.
After receiving substantial feedback that the first iteration of the Rule had a chilling effect on ESG investments, the DOL reformulated the Rule’s language in 2022. Among other changes, the 2022 Rule eliminated the pecuniary/non-pecuniary distinction and specific documentation requirement in favor of language instructing fiduciaries to base their investment decisions on factors that they reasonably determine to be relevant to a risk and return analysis, which can include ESG considerations.
Plaintiffs filed suit and sought a preliminary injunction in early 2023, arguing that the updated Rule violated ERISA and the APA. In their motion for a preliminary injunction, later incorporated into their summary judgment papers, plaintiffs argued that the 2022 Rule “fails under the major questions doctrine” because the Rule was of such “vast economic and political significance” that it required clear authorization from Congress. The Rule, plaintiffs argued, applies to retirement savings of over two-thirds of the United States adult population, totaling more than $12 trillion in assets, and promotes the Biden Administration’s climate change agenda.
In granting summary judgment against plaintiffs, the court rejected in a footnote the application of the major questions doctrine to this case. The court did not refute the Rule’s economic and political significance but relied on the fact that the DOL had maintained since at least 2015 that ERISA fiduciaries may need to consider ESG issues in making investment choices and are free to do so for risk-return purposes in other appropriate circumstances. Therefore, quoting West Virginia, the court concluded that the “history and breadth of the authority that [the agency] has asserted” in the 2022 Rule does not provide a “reason to hesitate before concluding that Congress” meant to confer such authority.
The court then applied the traditional two-step analysis from Chevron v. Natural Resources Defense Counsel, 467 U.S. 837 (1984), notwithstanding plaintiffs’ argument that Chevron should be limited or overruled, because Chevron is to be applied in appropriate circumstances “until and unless it is overruled by our highest Court,” the court explained. The court concluded based on Chevron that the Rule did not violate ERISA because the statute does not speak directly to the issue of a tiebreaker between investment options, and the Rule is a reasonable interpretation of that statutory ambiguity in light of the DOL’s prior rulemakings on the subject.
Finally, turning to the APA analysis, the court reasoned that the Rule was not arbitrary and capricious because the DOL responded appropriately to commenters’ concerns and explained its reasons for deviating from the first iteration.
As federal courts across the country continue to wrestle with what constitutes a “major question,” the Northern District of Texas’s analysis in Walsh indicates that a critical consideration is whether the agency rule in question represents a significant departure from the agency’s prior assertions of regulatory authority. It will be interesting to see whether this view is widely adopted by other courts, particularly if the United States Supreme Court reconsiders Chevron as some pundits predict, which was central to the analysis and outcome in Walsh.