ESG Investing Rule Survives Loper Bright Challenge

On February 14, 2025, the U.S. District Court for the Northern District of Texas found, for the second time, that a 2022 Department of Labor (DOL) rule permitting ERISA fiduciaries to consider non-pecuniary – including environmental, social, and governance (ESG) – factors when selecting among financially equal investment options was not contrary to the text of ERISA and, hence, not a violation of the Administrative Procedures Act (APA) on that basis. The case, Utah v. Micone, No. 2:23-cv-00016, had been remanded by the Fifth Circuit for reconsideration after the Supreme Court's decision in Loper Bright overruling Chevron deference, as the original lower court decision upholding the 2022 Rule relied in part on deference to the DOL's interpretation of ERISA's fiduciary duty provisions. In its latest ruling, the court again upheld the 2022 Rule, holding that "the rule is not contrary to ERISA under a post-Chevron analysis" because "[a] fiduciary has acted in full accord with his ERISA duty of loyalty when he chooses between investment options that all are valid options because they each maximize the beneficiaries' financial benefits."

The opinion by Judge Matthew Kacsmaryk emphasized that its reconsideration of plaintiffs' challenge to the 2022 Rule under Loper Bright was limited to the APA claim that the rule was "contrary to law" by flouting the requirements of ERISA. The court declined to revisit its prior holdings finding that the 2022 Rule was neither arbitrary and capricious nor a violation of the major questions doctrine, as "[Chevron's] demise changed how courts should interpret statutes - not how they review agency decisions for unreasonableness." 

The opinion rejected plaintiffs' claim that the 2022 Rule's "tiebreaking provision" violates ERISA's text. The "ordinary meaning" of ERISA's fiduciary provisions, the court explained, requires that "a fiduciary must always discharge his duties in the interest of the beneficiary alone and only for the purpose of gaining financial benefits," but the provisions do not put limitations on what fiduciaries may consider in discharging those duties. When "collateral considerations" are taken into account only in the pursuit of maximizing beneficiaries' financial benefits, a fiduciary satisfies ERISA's requirements. The 2022 Rule, the opinion concludes, "recognizes these textual realities" by prohibiting a fiduciary from acting in the interest of someone other than beneficiaries while providing guidance on choosing between equal investments. The opinion characterized the plaintiffs' interpretation of ERISA as "advanc[ing] a reading that forbids considering anything but arbitrariness" when choosing among equal investment options, which, the court opined, "embodies the wooden textualism that courts should endeavor to avoid."

Repled 401(k) Plan Forfeiture Claims Dismissed with Prejudice

On February 5, 2025, the U.S. District Court for the Northern District of California dismissed with prejudice a putative class action filed against HP, Inc., alleging breach of fiduciary duty and prohibited transaction claims arising out of allegedly improper use of 401(k) plan forfeitures. Hutchins v. HP Inc., No. 5:23-cv-05875-BLF. The plaintiff was given the opportunity to replead these claims after they had been dismissed without prejudice in June 2024. 

In again rejecting the putative class's breach of the duty of prudence and loyalty claims, the court referred to plan language that "[t]he Company shall have complete and unfettered discretion whether an expense of the Plan or Trust shall be paid by the Participating Companies or out of the Trust Fund..." and rejected the allegation that another plan term – stating that plan forfeitures "may be used to reduce employer contributions, to restore benefits previously forfeited, to pay Plan expenses, or for any other permitted use" – somehow alters HP's discretion over how to allocate forfeitures as set forth in the plan or creates an additional benefit (the reduction of administrative expenses). As it had with its previous June 2024 decision, the court rejected as without merit the general allegation that plan forfeitures can only be used to pay administrative expenses. 

In reaching its decision, the court cited Wright v. Oregon Metallurgical Corporation, 360 F.3d 1090, 1100 (9th Cir. 2004), for the principle that the duty to act in accordance with a plan document does not require that "every issue of interpretation" be resolved in favor of plan beneficiaries. The court clarified that, "[i]nstead, an ERISA fiduciary's duty is to ensure that all participants have received the full benefit guaranteed to them by the plan documents[,]" and found that the putative class did not allege that any plan participant received less than the full amount of employer contributions promised nor that the administrative costs charged to the plan were excessive or unnecessary. The court also cited Wright for the principle that a self-dealing claim based on 29 U.S.C. § 1106(b) requires the identification of a specific qualifying transaction, and rejected the plaintiff's argument that he can maintain a section 1106(b) claim "even to non-transactional 'dealing' with account assets." The court referenced proposed Department of the Treasury regulations that would allow forfeitures to be used "for one or more purposes" as stated in a plan including the payment of administrative expenses, to reduce employer contributions, or to increase benefits in other participants' accounts as illustrating "the difficulty with Plaintiff's theory." As to the breach of loyalty claims, the court found the plaintiff's averments lacking in "specific facts that move the needle... from 'speculative' to plausible," noting an absence of allegations that HP failed to fulfill the plan terms, "which might permit a court to infer that the plan fiduciary engaged in an improper decisionmaking process." 

This time around, the district court dismissed the ERISA claims with prejudice, thereby eliminating the opportunity for the plaintiff to replead the claims again. The plaintiff has already appealed the decision to the U.S. Court of Appeals for the Ninth Circuit. 

DOJ Requests Stay of Two Fifth Circuit Appeals Concerning 2024 DOL Fiduciary Rule 

On February 11, 2025, the Department of Justice (DOJ) filed an unopposed motion to hold two appeals in abeyance pending in the U.S. Court of Appeals for the Fifth Circuit concerning the 2024 DOL Fiduciary Rule that redefines an ERISA investment advice fiduciary and creates amendments to certain prohibited transaction exemptions. The cases consolidated for appeal are Federation of Americans for Consumer Choice, Inc. v. U.S. Department of Labor, No. 24-40637, and American Council of Life Insurers v. U.S. Department of Labor, No. 24-10890. DOJ cites the recent change in administration and that "[n]ew agency officials are still in the process of onboarding and familiarizing themselves with all of the issues presented by pending litigation." The district courts stayed implementation of the rule in July 2024. 

Upcoming Speaking Engagements

Joanne and Elizabeth will speak at the ABA 2025 Midyear Tax Meeting on February 20. 

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