District Court Again Backs Biden-Era ESG Rule, but Its Future Remains Unclear

U.S. District Judge Matthew Kacsmaryk once again denied an attempt by 26 Republican attorneys general and several conservative interest groups to reverse the 2022 rule that allows environmental, social and governance factors to be considered when selecting retirement plan investments.

Kacsmaryk held Friday, in the U.S. district court for the Northern District of Texas in Amarillo, that the rule is not contrary to the Employee Retirement Income Security Act of 1974 under a “post-Chevron” analysis.

In July 2024, the U.S. 5th Circuit Court of Appeals remanded the case back to the district court after the Supreme Court overturned the longstanding Chevron standard, which required federal courts to be deferential to federal agencies’ interpretations of ambiguous language. The Supreme Court ruled on June 28, 2024, in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce et al. that the Chevron doctrine would no longer apply to cases involving rulemakings of the federal bureaucracy and that the court should use its independent judgment instead.

Loper Bright overturned a legal precedent which had required federal courts to defer to administrative agencies. Courts now hold more power in how to rule on challenges to agency rulemaking, including rules from the Securities and Exchange Commission and the Department of Labor.

The ESG rule implemented by the administration of former President Joe Biden stated that rate of return needs to be the primary factor when deciding between investment options included in a 401(k) plan, but if there are two investment options that are basically equally in terms of rate of return, a plan sponsor can consider ESG factors as a tiebreaker. The prior rule, under the first administration of President Donald Trump, stated a fiduciary must strictly consider “pecuniary factors” when determining what investments to include in a 401(k) plan.

The 26 state attorneys general first challenged the DOL rule in January 2023, arguing that the tiebreaker provision in the rule violates ERISA and requested the district court find the rule “arbitrary, capricious and unlawful.”

Kacsmaryk granted the Department of Labor’s cross-motion for summary judgment in September 2023, and the plaintiffs appealed. In July 2024, after Chevron was overturned, the 5th Circuit vacated the district court’s decision and remanded the case to be reconsidered.

In motions filed prior to the January change in presidential administration, the Department of Labor countered that the Loper Bright decision has “no relevance” to the prior holdings that the 2022 rule is “not arbitrary and capricious nor violative of the major questions doctrine.” However, the plaintiffs maintained that the Chevron doctrine’s demise undercuts all these holdings.

In Kacsmaryk’s latest decision to grant summary judgment in favor of the DOL, he stated that the demise of the Chevron standard changed how courts should interpret statutes—not how they review agency decisions for unreasonableness—and that Loper Bright “did not disturb the arbitrary and capricious review standard.”

As a result, he rejected the plaintiffs’ request to expand the scope of the 5th Circuit’s limited remand and to interpret Loper Bright to “affect standards it does not effect.”

“It is not the province of the court to decide the wisest outcome. Rather, it interprets the law as it finds it,” Kacsmaryk wrote. “The 2022 rule does not permit a fiduciary to act for other interests than the beneficiaries’ or for other purposes than the beneficiaries’ financial benefit. For that reason, under the Loper Bright standard, it is not contrary to law.”

The court reaffirmed that the 2022 rule does not violate ERISA’s text because it never allows fiduciaries to deviate from exclusively achieving financial benefits for the beneficiaries alone.

“[The rule] bars a fiduciary from ever accepting lower investment returns or higher risks to promote anything that is not in the beneficiaries’ sole interest,” Kacsmaryk wrote.

It is unclear, as of Tuesday, whether the plaintiff attorneys general plan to appeal the decision back to the 5th Circuit. Importantly, it is also unclear whether the current Trump administration will take the Biden-era rule off the books and either revert to its earlier rule or propose a new approach.

Trump’s nominee for secretary of labor, Lori Chavez-DeRemer, is scheduled for a nomination hearing on Wednesday before the U.S. Senate Committee on Health, Education, Labor and Pensions.