Texas Lawsuit Alleges ERISA Violations Related to ESG Funds

American Airlines, Inc., along with its benefits committee and two outside investment advisors, Fidelity Investments Institutional and Financial Engines Advisors, LLC, were sued on June 2, 2023 in a putative class action alleging they violated ERISA by including underperforming environmental, social, and governance (ESG) investment funds in two of the company's 401(k) plans. Spence v. American Airlines, Inc., No. 23-cv-552 (N.D. Tex. June 2, 2023). The lawsuit also claims the defendants misused proxy voting to steer investments to "ESG proposals advanced by leftist activist groups which do not seek to maximize profits or shareholder returns." The case was filed in the same federal judicial district in Texas that is hearing cross-motions for summary judgment in Utah v. Su, No. 23-cv-16 (N.D. Tex.), where 25 states and several other parties representing oil and gas interests sued the U.S. Department of Labor (DOL) under the Administrative Procedures Act (APA), seeking to vacate DOL's 2022 regulatory amendments related to ESG investments.

The American Airlines lawsuit alleges, among other things, that the defendants breached their ERISA duties of prudence and loyalty by selecting and retaining ESG funds and failing to investigate and monitor proxy voting. According to the complaint, the defendants "selected the ESG funds and included them as investment options with knowledge of their nonfinancial investment objectives, higher costs of owning ESG funds, poor financial performance of ESG funds, and ESG fund shareholder activism to achieve social policy changes rather than maximize the risk adjusted financial returns." The complaint, which contains lists of the objected-to funds and fund managers whom the plaintiffs allege pursue "non-financial" and "non-pecuniary" ESG objectives – standards disavowed by the most recent regulatory amendments – is light on specific factual averments on how losses to the plans or to participants resulted from the inclusion of the listed funds in the plans or from any specific actions on the part of the listed investment managers. Instead, the complaint asserts generally that ESG funds have a record of underperformance. Judge Reed C. O'Connor, who in recent months has been in the news for striking down part of the Affordable Care Act's (ACA) preventive services mandate, has been assigned the case and will surely be hearing a motion to dismiss it in the coming months.

The lawsuit likely signals the beginning of a new and not unexpected course in the 401(k) retirement plan ERISA class action space focused on ESG fund performance, and, although different legal issues are involved, is symbiotic with the pending legal challenge facing DOL's ESG regulations. Also on June 2, DOL filed its opposition to the plaintiffs' motion for summary judgment and a cross-motion for summary judgment in Utah v. Su, arguing that its 2022 regulation "clarifies that risk and return factors may include the economic effects of [ESG] factors where appropriate given the relevant facts and circumstances." Those cross-motions will be decided by Judge Matthew J. Kacsmaryk, who has also recently been in the news for issuing a stay of the U.S. Food and Drug Administration's (FDA) approval of the medical abortion drug mifepristone.

House Judiciary Committee Takes on Chevron Deference and "Major" Administrative Rules 

Judicial deference to federal government agencies is under attack on multiple fronts. The Supreme Court recently agreed to reconsider its decision in Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), which has governed the federal courts' review of implementing agencies' interpretations of purportedly ambiguous statutes for almost four decades. Now, the U.S. House of Representatives has pounced on so-called "Chevron deference," too. The Separation of Powers Restoration Act of 2023 (SOPRA) would amend the APA "to clarify the nature of judicial review of agency interpretations of statutory and regulatory provisions." In its report accompanying SOPRA, the House Judiciary Committee expressly stated that it seeks to legislatively override Chevron, as well as the judicial deference doctrines established by the Supreme Court in Auer v. Robbins, Kisor v. Wilkie, and Skidmore v. Swift & Co. In short, the Judiciary Committee believes these Supreme Court cases "have turned the APA's statutory scheme — and the Constitution's separation of powers — on its head," and, furthermore, "increasing the power of the administrative state further removes and insulates policymakers from electoral accountability because, unlike Congress and the [p]resident, federal agencies are not directly accountable to the people."  

The proposed solution — i.e., SOPRA — would require courts "to decide de novo all questions of law, including the interpretation of statutes, rules, and guidance," without deference to agency interpretations of ambiguous statutes. The Committee believes that "this standard would restore the courts' role as the branch that interprets the law under the Constitution and the APA," and that SOPRA, which has been bouncing around the legislature in various incarnations since at least 2016, "would 'level the playing field' for Americans in litigation against their government."  

The House Judiciary Committee is also targeting federal rulemaking from an additional angle. On June 1, 2023, the Committee issued a separate report in connection with the Regulations from the Executive in Need of Scrutiny Act of 2023 (REINS Act). Like SOPRA, the REINS Act also targets federal rulemaking – it would amend the Congressional Rules Act to require affirmative congressional approval of a "major rule," including an agency rule with an annual effect on the economy of at least $100 million, before such a rule can take effect. Under the REINS Act, within 70 session or legislative days after a major rule is issued, the House and Senate must pass a joint resolution approving of the rule — otherwise, the rule would be rejected automatically.

According to the Committee's report, "the administrative state has consolidated the powers of the federal government in itself," with federal agencies exercising: (i) legislative power by issuing rules with the force of law, (ii) executive power by enforcing those rules, and (iii) judicial power by adjudicating disputes under them. According to the Committee, by requiring affirmative congressional approval before a major rule takes effect, the American people will be given "a voice in major policy decisions." 

SOPRA and the REINS Act are winding their way through the legislative process in the House. We'll keep an eye on both bills and report back with any developments.

Subjectively False Medicare and Medicaid Claims are Actionable under the False Claims Act, Regardless of What an Objectively Reasonable Person May Have Believed

Under Medicare and Medicaid, pharmacies cannot collect more from the federal government than the "usual and customary" (U&C) price for a drug, which is defined as the cash price charged to the general public. Plaintiffs in two cases — Schutte and Proctor — were qui tam whistleblowers who brought claims under the False Claims Act (FCA) alleging that SuperValu and Safeway overcharged those programs for prescription medications. Plaintiffs claimed that after Wal-Mart reduced its prices for several popular generic drugs, SuperValu and Safeway matched, but they knowingly did not report those lower prices to the government as U&C (meaning that they overbilled). The pharmacies argued that the term "usual and customary" was objectively ambiguous, but plaintiffs presented evidence that the pharmacies actually knew that the discounted rates should have been included in their U&C price.

Last week, in United States ex rel. Schutte v. SuperValu Inc. (No. 21-1326), the Supreme Court sided with the plaintiffs. The district court had granted summary judgment to the pharmacies on the issue of scienter, concluding that "willful" violations of the FCA include reckless violations, but that a party does not act recklessly if it merely followed a reasonable interpretation of the FCA and no authoritative guidance warned the party away from that interpretation. The Seventh Circuit affirmed, but in a unanimous decision, covered here by our Government Contracts Counseling & Litigation practice, the Supreme Court reversed and vacated. The Court held that the FCA's scienter element "refers to respondents' knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed." Thus, if a defendant subjectively believes its claims are false, the scienter element of the FCA is satisfied. Because the FCA scienter element incorporates not just actual knowledge but also deliberate ignorance or reckless disregard of falsity, the Supreme Court said that the scienter element can also be met by showing that defendants were aware of a "substantial and unjustifiable risk" that the claims were false. At the end of the day, FCA defendants will no longer be able to argue that, regardless of what they may have subjectively believed at the time of the alleged false claims, their interpretation of the law is nonetheless objectively reasonable.

In the News

In Bloomberg Law, Joanne Roskey was quoted on a U.S District Court ruling finding the ACA's preventive services mandate, including the requirement that health plans cover medication that helps prevent HIV, violated employers' Religious Freedom Restoration Act rights. The decision is "significant for people that want to have access to the drug and work for an employer who has a religious objection to providing this type of coverage," Roskey said.

Joanne Roskey was quoted in Bloomberg Law on the lack of clarity over whether regulations can mandate access to information critical for comparative analyses as DOL prepares for new mental health parity guidance.  It's difficult for the DOL to get plan administrators to give information to plans, she said.

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