The lawsuit — State of Utah et al. v. Su et al. — was filed in January 2023 in U.S. District Court in Amarillo, Texas, and argued that the Labor Department's rule undermines key protections for retirement savers, oversteps the department's authority under ERISA, and is arbitrary and capricious.
Department officials and retirement experts contend that the rule — Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights — which took effect January 2023 and allows ERISA fiduciaries to consider environmental, social and governance factors, is neutral and maintains the department's position that fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals.
In a September decision, Judge Matthew J. Kacsmaryk agreed with the department.
Now, the Republican attorneys general are calling on the Fifth Circuit to review the decision and focused a majority of their appeal on the rule's tiebreak provision. In the rule, the Labor Department amended language in the tiebreaker test that allows fiduciaries to consider collateral benefits that are not related to the risk-return analysis when weighing different investment options in the event of a tie.
The new tiebreaker standard requires a fiduciary to conclude prudently that competing investments, or competing investment courses of action, "equally serve the financial interests of the plan over the appropriate time horizon." In such cases, the fiduciary is not prohibited from selecting the investment or investment course of action based on collateral benefits, meaning benefits other than investment returns, according to the Labor Department.
In their appeal, the Republican attorneys general argued that "allowing consideration of collateral factors as a tiebreaker violates ERISA because fiduciaries must act 'solely' and 'for the exclusive purpose' of providing financial benefits to plan participants," they said, citing the U.S. Code.
Jason Levy, of counsel at law firm Covington & Burling LLP, said he was struck that the brief focused on the tiebreaker provision because it's seldom used by fiduciaries and a minor part of the Labor Department's rule.
"We see this appeal as being focused on an aspect of the rule that has very little practical implication," Levy said.
Even if the Fifth Circuit takes issue with the tiebreaker provision, Levy said he expects the court would then sever the provision from the rest of the rule, thus allowing the bulk of the rule to stay in place.
Covington served as legal counsel for a brief filed in April in support of the Labor Department's position by retirement expert J. Mark Iwry.
The attorneys general also claimed in their brief that the district court erred when it "invoked Chevron and deferred to DOL's interpretation of ERISA, concluding that Congress had not spoken directly on the use of tiebreakers because the statute did not 'contemplate the possibility of a 'tie' between two financially equivalent investment options.'"
Chevron deference is a 40-year precedent that says courts should defer to regulatory agencies' interpretation and administration of laws that are ambiguous or unclear as long as the interpretation is reasonable.
The U.S. Supreme Court on Jan. 17 heard oral arguments in a case seeking to overturn Chevron deference.