Fifth Circuit Panel Grapples with ESG Case in the Wake of Chevron's Demise

On July 9, 2024, a three-judge panel of the Court of Appeals for the Fifth Circuit heard oral argument in a much-watched case concerning whether ERISA plan fiduciaries may consider environmental, social, and governance (ESG) factors when selecting plan investment options. The case, Utah v. Su, No. 23-11097, is one of the first administrative challenges to reach oral argument since the Supreme Court overturned the Chevron doctrine two weeks ago in Loper Bright Enterprises, Inc. v. Raimondo (discussed here). Chevron previously required courts to defer, in large part, to reasonable federal agency interpretations of ambiguous statutes administered by those agencies. Under Loper Bright, courts are now instructed to "exercise their independent judgment in deciding whether an agency has acted within statutory authority" and, under the Administrative Procedure Act (APA), they "may not defer to an agency interpretation of the law simply because a statute is ambiguous." 

As previously reported, 25 states and several other parties representing oil and gas interests invoked the APA and sued the Department of Labor (DOL) to vacate DOL's 2022 regulatory amendments to its Investment Duties regulation (the 2022 Rule). The 2022 Rule was intended to "clarify the application of ERISA's fiduciary duties of prudence and loyalty to selecting investments and investment courses of action." The amendments revised certain changes to the Investment Duties regulation adopted during the Trump administration (the 2020 Rule), which allowed fiduciaries to consider non-pecuniary factors when making investment decisions only as a "tiebreaker" among economically indistinguishable investment options. In their suit, the plaintiffs claimed that the 2022 Rule violates ERISA because it allegedly conflicts with the statutory requirement that fiduciaries must manage plan assets "solely in the interest of the participants and beneficiaries and... for the exclusive purpose of... providing benefits to participants and their beneficiaries." 29 U.S.C. § 1104(a)(1). According to the plaintiffs, the 2022 Rule "contravenes ERISA's clear command that fiduciaries act with the sole motive of promoting the financial interests of plan participants and their beneficiaries" by eliminating the "objective pecuniary/nonpecuniary standard in the 2020 rule and instead formally incorporates ill-defined, subjective ESG concepts into ERISA regulations."

In late September 2023, the District Court for the Northern District of Texas ruled in favor of DOL, permitting its regulation allowing consideration of ESG factors to stand. In reaching its decision, the district court found the Rule did not violate the APA and that it satisfied the now-overturned, two-step Chevron framework. On October 30, 2023, the plaintiffs appealed to the Fifth Circuit. Although the 2022 Rule makes clear that ERISA plan fiduciaries may consider ESG factors, but are not required to do so, the plaintiffs argued that ESG factors should not be allowed to take precedence over other factors, in contravention of ERISA. DOL countered that ERISA plan fiduciaries should be permitted to consider whatever factors are best for the plan. Utah v. Su has been a heavily contested case and more than a dozen amici have filed briefs since early 2024.

Less than two weeks before oral argument, the Supreme Court overturned Chevron. Mere hours after Loper Bright was decided, counsel for plaintiffs filed a letter arguing that the 2022 Rule cannot be upheld under the APA without relying on agency deference. In response, DOL noted that they never invoked Chevron in their appellate brief and that, regardless, Loper Bright still encourages courts to consider the body of interpretation developed by agencies with experience interpreting ambiguous statutes. Both parties agreed that the Fifth Circuit "should itself resolve the issue of statutory interpretation that this case presents" by addressing the underlying legality of the 2022 Rule and its consistency with ERISA. 

On July 9, Judges Catharina Haynes, Don R. Willett, and Andrew S. Oldham heard oral argument as scheduled. In recent years, the Fifth Circuit has not favored the DOL in ERISA matters. In this case, however, the three-judge panel did not seem inclined to vacate the 2022 Rule. For instance, when the attorney arguing on behalf of the states indicated that the 2022 Rule permits "the fiduciary to essentially substitute its own policy preferences" for the preferences of the plan, Judge Haynes quickly interrupted and, potentially indicating support for upholding the 2022 Rule, noted that "if you're a fiduciary, you can't do that. If you're a fiduciary, you have to do the best for your people." All three judges, however, were troubled by the 2022 Rule's "tiebreaker" standard, pursuant to which a fiduciary may consider collateral factors unrelated to the expected risk and return of an investment when choosing among investments that "equally serve the financial interests of the plan." The panel questioned whether that authorization could be consistent with ERISA's fiduciary duty to focus only on a participant's financial or pecuniary benefit. 

Overall, the panel seemed inclined to remand the case because the district court "plainly relied on Chevron." In fact, Judge Willett asked: "We've got precedent galore that sends cases back for reconsideration when the district court relied on an overruled case — why wouldn't we do so here? What are the drawbacks?" Both parties responded similarly, asserting that relitigating the case at the district court would produce the same result, even without relying on Chevron, and therefore, the Fifth Circuit should directly address the 2022 Rule's legality now.

A decision to remand could come swiftly, but a decision on the merits would likely take months. Either way, the Fifth Circuit's decision could be significant due both to the contentious challenge to the 2022 Rule and the Fifth Circuit's potential trailblazing approach in the new post-Chevron legal landscape. 

District Court Gives No Deference to HHS, Halts Implementation of Federal Gender-Identity Protections under the ACA

On July 3, 2024, the District Court for the Southern District of Mississippi enjoined, nationwide, the implementation and enforcement of a final rule (Rule) issued by the Department of Health and Human Services (HHS) meant to prohibit discrimination in healthcare on the basis of gender identity. Tennessee v. Becerra, No. 24-cv-161, --- F.Supp.3d ----, 2024 WL 3283887 (S.D. Miss. July 3, 2024). The Rule, entitled "Nondiscrimination in Health Programs and Activities," was intended to implement the anti-discrimination provision found in section 1557 of the Affordable Care Act (ACA), which, in turn, incorporates the anti-discrimination provisions of Title IX. Title IX provides that "[n]o person... shall, on the basis of sex... be subjected to discrimination under any education program or activity receiving Federal financial assistance." The Rule, which prohibits discrimination on the basis of sex, including gender identity and sexual orientation, was set to go into effect on July 5, 2024, but the injunction prevents HHS from enforcing the Rule nationwide while the underlying lawsuit continues to play out.

In the case, 15 states brought suit against HHS alleging that the agency sought to supplant their health regulations with a regime that "sides with HHS's commitment to gender ideology over medical reality." The complaint asserted that the Rule would require the states to spend taxpayer money on "unproven and costly gender-transition interventions through Medicaid and state health plans — even for children who may suffer irreversible harms," and that the Rule unlawfully coerces their compliance on threat of having billions of dollars in federal funding taken away. The states said that they could not have foreseen that section 1557 would have been implemented in this manner and claimed that they had accepted the federal funds and used them to build "extensive health programs" with billion-dollar budgets. 

HHS countered that the Rule merely clarifies that sex discrimination in section 1557 necessarily includes discrimination as interpreted by the Supreme Court in Bostock v. Clayton Cnty., Ga., 590 U.S. 644 (2020). In Bostock, the Supreme Court held that an employer who fires an individual merely for being gay or transgender violates Title VII, which makes it unlawful for an employer to fire someone "because of such individual's... sex." According to the Supreme Court, because discrimination on the basis of homosexuality or transgender status requires an employer to intentionally treat individual employees differently because of their sex, an employer who intentionally penalizes an employee for being homosexual or transgender therefore violates Title VII. HHS adopted Bostock's reasoning and interpreted it to mean that section 1557's prohibition on discrimination "on the basis of sex" includes discrimination on the basis of sexual orientation and gender identity.

After finding that the states had standing because they had shown that the Rule would cause "concrete, imminent injury in the form of compliance costs," the court addressed the four traditional requirements for entering a preliminary injunction. It found that the states had satisfied all of them, but focused largely on whether the states had established a substantial likelihood of success on the merits, i.e., showing that HHS exceeded its statutory authority when it used Bostock, a discrimination case involving Title VII's language "because of such individual's... sex," to interpret section 1557. 

The court began by discussing Loper Bright and held that HHS is no longer entitled to deference under Chevron. Thus, the court declined to defer to HHS's decision to apply Bostock's Title VII analysis "to Section 1557's incorporation of Title IX." From there, the court found that HHS had "no basis" for applying Bostock and held that "HHS acted unreasonably" when it did so. 

In its analysis, the district court focused particularly on the differences between Title VII's causation language and Title IX's causation language. In Bostock, the Supreme Court explained that "[s]o long as the plaintiff's sex was one but-for cause of that [employment] decision, that is enough to trigger the law." According to the district court, this "sweeping standard" led to the Supreme Court's holding that an employer who fires a person for being homosexual or transgender violates Title VII because, in that circumstance, the termination is "for traits or actions [the employer] would not have questioned in members of a different sex." But, the district court found, "Bostock's ruling concerning Title VII does not apply to Title IX because Congress used different causation language in Title IX ('on the basis of sex') and Title VII ('because of... sex')." The district court also pointed to the statutes' different constitutional origins. Whereas Title VII was enacted pursuant to the Commerce Clause, which, the district court said, "grants Congress 'expansive' regulatory power," Title IX and section 1557 were enacted pursuant to Congress's authority under the Spending Clause. 

Additionally, because Title VII is a "vastly different" statute from Title IX, both in language and origin, the district court declined to follow decisions from the Fourth and Seventh Circuits in which those courts applied Bostock in the context of Title IX. The district court pointed out that in Bostock itself, the Supreme Court expressly limited its holding to Title VII claims when it stated, "[N]one of these other [sex discrimination] laws are before us; we have not had the benefit of adversarial testing about the meaning of their terms, and we do not prejudge any such question today."

Ultimately, the district court held that "HHS acted unreasonably when it relied on Bostock's analysis in order to conflate the phrase 'on the basis of sex' with the phrase 'on the basis of gender identity.'" Echoing the Supreme Court's suggestion in Loper Bright, the district court said that if Congress and the executive branch disagree, "they are of course always free to act by revising the statute." It will be interesting to see whether HHS takes a chance with the Fifth Circuit or starts the rulemaking process anew. 

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