Biden Administration And Republicans Trade Motions In ESG Rule Lawsuit

Attorneys have filed dueling motions seeking to claim victory in a federal lawsuit over the Department of Labor’s 2022 environmental, social, and governance rule. Both sides agree on the facts of the case, now it is up to Judge Matthew Kacsmaryk to decide how the law is applied.

ESG is a type of investing where factors beyond strictly financial matters are considered. In concept, ESG is about giving investors the ability to choose how their money is used. Republicans argue it is a way for fund managers to force liberal policies on companies. The lawsuit, brought by 25 Republican led states, revolves around the United States Department of Labor’s passage of a rule allowing ESG factors to be consider in retirement funds.

When Congress passed the Employee Retirement Income Security Act in 1974, they delegated authority to the DOL to regulate standards for pension plans and retirement funds. This process is known as rulemaking, and falls under the Administrative Procedure Act. This delegation of authority and rulemaking process has been the focus of a number of recent opinions by the Supreme Court of the United States.

In 2020, the Trump Administration DOL issued a rule that said investments should be made based on “pecuniary factors” only. The rule was intended to be anti-ESG, however experts felt the rule caused more confusion as the pecuniary factors test was considered vague. In 2022, the Biden Administration DOL issued a new rule saying that investments can consider ESG as a tiebreaker. Only if two funds are projected to produce the same returns, then could the fund manager consider ESG. The new rule allows for the consideration of ESG factors if they are going to make the investment more profitable. How that is factored is yet to be determined. Congress tried to override the new rule, but Biden issued his first veto and reinstated it.

In January, a coalition of Republican states filed litigation in a Texas federal court asserting that the DOL 2022 rulemaking process was improper. Specifically, they stated that the reversal was arbitrary and capricious, language from the APA referring to the need for rulemaking by agencies to be based on facts and with a logical reason.

On May 12, the plaintiffs filed a motion for summary judgement. Unlike a motion to dismiss where the court throws out the litigation, a summary judgment is a final opinion by the judge. A summary judgement is appropriate when the “what happened” part of a case is not disputed. Instead, the argument is over how the law is applied to those facts. The states believe that the facts show the process used by the DOL was in violation of the APA. On June 2, the Department of Justice, which handles all litigation against the Federal Government, responded with their own summary judgement arguing that the DOL process was proper and within their authority granted by Congress.

Notably, the motions were planned in a prior hearing before the judge. The parties agreed that the facts were not in dispute, but the DOL was ordered to turnover their internal rulemaking records. Once the Plaintiffs received the records on May 2, they found nothing in the process that was notably new and quickly filed the motion. This agreement on the facts and process indicates that the judge will choose a side and issue a summary judgement. However, expect the decision to be quickly appealed and work its way to the Supreme Court.