The Department of Labor must convince a Texas judge that federal welfare law gives it clear authority to enact its sustainable 401(k) investment rules after the Fifth Circuit remanded a lawsuit challenging the rule to the trial court.

Defending the 2022 rule that makes it easier for pension plans to consider factors such as sustainability when selecting investments will become more difficult for the Labor Department after the U.S. Supreme Court struck down a longstanding agency deference standard in Loper Bright Enterprises v. Raimondo.

Judge Matthew Kacsmaryk’s earlier decision to uphold the rule relied heavily on the agency’s restraint under the abolished Chevron doctrine. The U.S. Court of Appeals for the Fifth Circuit remanded the case to Kacsmaryk following the Supreme Court’s ruling.

The next phase of the case will be a crucial first test for Loper BrightImpact on regulatory challenges.

The DOL had previously informed Kacsmaryk that it was entitled to restraint under Chevron when the case was first argued in district court. It changed course when it argued on appeal that its sustainable investment rule was closely aligned with the Employee Retirement Income Security Act and did not require the latitude previously granted under the deference doctrine..

The agency must now convince Kacsmaryk without being able to rely on the rejected doctrine that courts rely on a reasonable interpretation by the agency when the law is unclear or ambiguous.

The group of more than two dozen Republican state attorneys general who filed the lawsuit and appealed Kacsmaryk’s initial ruling from the U.S. District Court for the Northern District of Texas to the Fifth Circuit argues that the Labor Department violated the Administrative Procedure Act by adopting the regulation. Their appeal focused on the legality of its “tiebreaker standard” under ERISA.

The Labor Department could stay the course, arguing that it needs no deference, even in maintaining the standard that allows pension plans to favor one retirement investment over another when economic parity exists on the basis of “collateral benefits.”

The agency can still rely on another Supreme Court precedent that requires judges to give weight to agencies’ positions according to their persuasiveness, known as Skidmore Teach.

“The one big issue that was not included in her brief for the Fifth Circuit, but which Loper Bright Is Skidmore Respect,” said Danielle Desaulniers Stempel, senior associate at Hogan Lovells LLP. “Many of the arguments the DOL made were Skidmore-ish, they talked a lot about history and consistency and the formality that comes with it, and these are factors that courts traditionally pay attention to Skidmore.”

Emphasizing the few scenarios in which the tiebreaker standard applies could also bolster the Labor Department’s argument for remanding the case and signal to Kacsmaryk that another decision in the agency’s favor would not have a broad impact on the way fiduciaries handle pension plans.

The attorneys general who filed the lawsuit expressed concern, according to Desaulnier’s stamp, that fiduciaries could exploit this aspect of the rule to advance their interests in the plans rather than seeking returns for retirement savers.

“If a court is concerned about the application of a rule, it can reassure the court by emphasizing that it is marginal and does not affect the vast majority of cases. Because that means that whatever it does is necessarily narrower and more limited,” she said.

Spokespeople for the Labor and Justice ministries declined to comment on the litigation.

Turn to Skidmore

The Ministry of Labour has “proactively” reduced its previous dependence on Chevron In an appeal brief, Fifth District Court Judge Don R. Willett stated in his opinion that the case should be sent back to Kacsmaryk.

Fearing that the Supreme Court would undermine this form of restraint, the agency decided not to Chevron-based argument in support of the rule, but left Skidmore as an alternative on the table.

“We can see courts, whether they call it Skidmore or they simply talk about it in terms of the realities of the world and let the agency’s expertise inform the analysis to some extent, especially where the text is silent on the subject,” said Desaulnier’s Stempel.

Skidmore allows courts to use compelling agency interpretations as guidelines to support informed judgments, rather than simply relying on agencies, as judges under Chevron.

“People have long been skeptical that Skidmore does any independent work, because if you are already convinced, you can simply say “Skidmore”, Desaulnier’s stamp said: “Skidmore might be something that courts are more likely to use to justify their decisions, but I don’t know how much independent value it will have in the decision-making framework.”

If the DOL wants to influence Kacsmaryk, Skidmore For these reasons, they would likely have to explicitly mention the doctrine and try to convince the judge that their interpretation is consistent with the law, Desaulniers Stempel said.

Social Security lawyers say the Labor Department will likely reconsider arguments that the rule, including the tiebreaker standard, clearly fits within the scope of fiduciary considerations under ERISA.

It is possible that the lack of a clear standard of respect through Chevronand the widespread uncertainty that judges would be influenced by an argument based on Skidmorethe Agency would only have the text of the law itself as a means of maintaining the regulation.

“All of these things will bolster their argument that they don’t deserve any deference, but that this is the best interpretation of ERISA and that it is fully consistent with ERISA,” said Joanne Roskey, a member of Miller & Chevalier’s employee benefits practice.

Respect in doubt

Kacsmaryk’s original decision showed that he was open to the arguments of the red states and that he was primarily focused on Chevron in upholding the rule itself, a decision that surprised those who otherwise viewed his court as an appropriate forum for overturning the Biden administration’s rulemaking.

“In a footnote he said: ‘Although I can agree with the plaintiffs’ arguments here, I am stuck in Chevron unless it’s overturned,” said Julie Stapel, a partner at Morgan Lewis & Bockius LLP. “I think that’s an indication that it’s probably going to be a tough road for the DOL on pretrial detention.”

The DOL appears prepared to argue, as it did in the Fifth Circuit, that ERISA incorporates environmental, social, and governance considerations as factors material to financial performance that may be considered in investment decisions.

ERISA expressly allows fiduciaries to consider collateral factors – factors unrelated to risk and return – under narrowly limited circumstances, the agency argued.

The U.S. Department of Labor has long believed – even before its recent efforts to create new regulations – that ESG factors could be directly related to the economic value of a pension plan.

“If I were the DOL, I would argue that there is no reason for restraint, but that the core idea of ​​this rule is that ESG factors are indeed appropriate considerations among many when a fiduciary makes investment decisions,” she said. “I don’t know if any form of restraint will stand anymore, they have Chevron But I would be concerned about putting too many eggs in a basket that depends on some other kind of respect.”

The case is Utah v. Su, ND Tex., No. 2:23-cv-00016.