The U.S. Department of Labor faces an unwelcome deja vu litigation case as its attempt to implement a climate-friendly retirement investment rule runs into legal peril in a known Texas federal court jurisdiction. for invalidating subsequent regulations on employee benefits.
More than two dozen Republican state attorneys general are hoping history will repeat itself in their quest to kill off a DOL final rule, one that allows private sector employers to take environmental, social and governance factors into account. business when choosing retirement investments.
The policy, currently under review by the U.S. District Court for the Northern District of Texas, is expected to go into effect Jan. 30. But the AG trial filed late Thursday sought to freeze the rule and ultimately prevent regulators from enforcing it.
It’s a difficult scenario for the DOL Employee Benefits Security Administration, which saw similar lawsuits filed in Texas federal court undermine the historic Obama-era fiduciary rule in 2018. A hostile court could disrupt a years-long effort by the Biden administration to eliminate stigma. surrounding ESG pension investing and at the same time providing traction to a growing red state-led effort to crush “woke” investments in public sector portfolios.
“There is a big picture issue here about the role of the federal government versus the role of the states,” said Brad Campbell, Employee Benefits Partner of Faegre Drinker Biddle & Reath LLP and former DOL Assistant Secretary for Employee Benefits. “Jurisdiction is key here.”
On-site shopping
Thursday’s lawsuit in Texas, brought by a group co-led by state Attorney General Ken Paxton (right), is a clear signal that the 25 red states suing the department sought a friendly venue, Campbell said.
The case now falls within the ultimate jurisdiction of the United States Court of Appeals for the Fifth Circuit, which in 2018 struck down a major DOL rule redefining an investment advisory fiduciary under the 1974 Investment Advisory Act. employee retirement income security (Pub.L. 93-406). Like Thursday’s trial, plaintiffs challenging the fiduciary rule accused EBSA of overstepping its statutory authority by proposing an arbitrary and capricious rule.
“What happened with the fiduciary rule was devastating to the Department of Labor,” said Josh Lichtensteinbenefits partner at Ropes & Gray LLP.
Meanwhile, the Northern District of Texas is already considering a challenge that a consumer rights group has brought against the department over its exemption from the fiduciary rule that would require newly regulated brokers to consider the best interests of participants. to the plan and beneficiaries transferring their assets into an annuity or other standard financial product.
Judge Matthew J. Kacsmaryk, a Trump appointee who was assigned to the state-led ESG suit in district court, was responsible for reversing a series of federal actions by Biden, including including an attempt by the Department of Health and Human Services to ban family planning providers from notifying parents that their children are seeking birth control and an effort by Biden to ban LGBTQ discrimination in health care settings.
The Fifth Circuit bench, already considered one of the most conservative in the nation, also landed a handful of key Trump administration appointees.
The Department of Labor referred Bloomberg Law’s requests for comment on the ESG case to the U.S. Department of Justice, which is charged with defending the agency. DOJ officials did not immediately respond to a similar request. Lead state plaintiffs in the case either did not respond or declined to comment on Bloomberg Law.
When asked if the plaintiffs intentionally sought the Fifth Circuit, an attorney representing a pension plan investor said the complaint “speaks for itself.” the lawyer, Anna Saint-Jeanpresident and CEO of the Hamilton Lincoln Law Institute, reported cases of Democratic attorneys general seeking liberal courts.
Any federal judge should attempt to be impartial, said Kristina Zanottia partner in K&L Gates LLP, but the Labor Department’s track record in the Fifth Circuit courts lends credence to the emerging perception that this is where the Labor Department’s retirement rules will die.
“It draws attention to a case like this for sure,” Zanotti said.
Permanent question
But the Labor Department may have an easier time defending its ESG rule than its fiduciary rule, even in an often hostile circuit, ERISA lawyers say.
The fiduciary rule was intended to extend the DOL’s regulatory authority to financial advisers and brokers who typically operated beyond its reach, said Campbell, who ran the benefits agency under former President George W. Bush.
“Rather than having a game of political ping-pong over whether ESG is good or bad, the Biden administration’s proposal restores the traditional approach of government neutrality,” he said.
The final ESG rule eliminated a proposed provision that would have “often required” an ERISA plan trustee to consider socially responsible investment factors.
This DOL ruling may make it harder for plaintiffs to prove they have suffered reparable damage, as the rule returns control of investments to pension plans that have historically been held to duties of care and loyalty.
The question of standing persists when considering the identity of the plaintiffs – 25 state governments. State pensions are specifically excluded from ERISA regulation. Plaintiffs in the ESG case claim “particular solicitation” to sue because their residents could suffer financial harm under the department’s rule, and it could impact state tax results.
Many of the same states suing the department are simultaneously ridding their own government-sponsored pension plans of any ESG investment criteria and even shunning companies that market socially and environmentally responsible funds. So far, asset managers like BlackRock Inc. and State Street Corp. received the brunt of the red state’s anti-ESG rhetoric, but the motivation behind the retrial may be purely political, Lichtenstein said.
“These states are looking at the same standards of care and loyalty as the DOL and they’re coming out in a radically different direction,” he said. “If they succeed in having this rule rejected in court, it makes their interpretation more credible. But even if they don’t succeed, they have this idea of an absolute ban on investing in ESG in the public discourse. »
The deal is Utah vs. WalshND Tex., No. 2:23-cv-00016.