October 31, 2024
By Julie Reiser
The U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo surprised the legal world by overturning Chevron USA v. Natural Resources Defense Council, 467 US 837 (1984).1 For the past forty years, Chevron has required judicial deference to federal agencies’ reasonable interpretation of statutes that courts deem ambiguous. This departure from precedent left lawyers in every regulated industry pondering, with apologies to Tina Turner, “What’s Chevron got to do, got to do with it?”
At first glance, Loper Bright’s only connection to retirement benefits is that it involves fishing, a favored pastime for retirees. However, Loper Bright goes deeper, increasing the likelihood that federal agency regulations will be challenged and rejected. Loper Bright’s impact may extend to administrative agency interpretations across consumer protection, transportation, healthcare, energy, and banking. It will take years to get certainty about which regulations are at risk, under what circumstances the courts will side with agencies over regulated entities, how far the challenges will go through the courts, and what the impact all of this may have on how public pension funds operate and function.
For now, the judicial challenge to the Department of Labor’s (DOL) Employee Retirement Income Security Act (ERISA) guidance concerning private pension funds through its rule on “Prudence and Loyalty in Selecting Plan Investments” is farther along than most other post-Loper Bright challenges. While the viability of that rule is uncertain and its applicability to public pension systems is only instructive, basic fiduciary duties emanating from state law remain in place. Even though Chevron is just a sweet old-fashioned notion now, public pension fiduciaries, as they have done in the past, need to engage in a rigorous review of their decision-making processes and thoroughly document the steps taken to arrive at those decisions to allow them to continue rolling on the river of prudent decision-making amidst what could be years of uncertainty while legal challenges wend their way through the courts.
We Don’t Need to Follow Chevron: Loper Bright Reverses Administrative Deference
In Chevron, the U.S. Supreme Court held that federal administrative agency determinations were entitled to judicial deference if the interpretation of an ambiguous statute was challenged in court. The rationale underlying the so called “Chevron deference” was that federal agencies, with their specialized expertise and accountability to the elected president, were better equipped than judges to make policy choices left open by Congress. For forty years, courts have applied Chevron deference across regulated industries in such areas as food safety, pollution, and labor regulations. On June 28, 2024, as NAPPA was concluding its Legal Education Conference, the Supreme Court decided Loper Bright Enterprises v. Raimondo (No. 22-451, June 28, 2024) (and a companion case, Relentless, Inc. v. Department of Commerce). Loper Bright involved family fishing businesses that challenged a regulation requiring industry-funded ocean monitoring promulgated by the National Marine Fisheries Service as unauthorized by the Magnuson-Stevens Fishery Conservation and Management Act of 1976 and as contrary to the federal Administrative Procedure Act (APA).2 The U.S. District Court for the District of the District of Columbia, applying Chevron deference, granted summary judgment upholding the regulation and the U.S. Court of Appeals for the D.C. Circuit affirmed. The Supreme Court granted certiorari and reversed. Relentless, the companion case, followed a similar path through the First Circuit.
Chief Justice Roberts wrote the Loper Bright opinion that overruled Chevron and held that courts must determine whether an agency has acted within its statutory authority using “traditional tools of statutory construction” to ensure that the agency’s determination is the best interpretation of the law pursuant to the APA. Even though agency determinations might still be “especially informative” when arising from “factual premises” that the agency is uniquely qualified to assess, courts still must independently determine the meaning of the ambiguous statute as a matter of law. The Supreme Court also emphasized that although Chevron deference has been overruled, prior decisions that relied on Chevron deference remain valid.
Justice Thomas concurred, concluding that Chevron deference violated the separation of powers through executive overreach into the judicial function. Justice Gorsuch also wrote separately, agreeing with Justice Thomas in a lengthy concurrence that Chevron deference violated the separation of powers and explaining why stare decisis did not require following Chevron. Justices Kagan, Sotomayor, and Jackson (Jackson participating only in Relentless) dissented. Their dissent emphasized the expertise of administrative agencies and political accountability of the executive branch, as well as Congress’s failure for 40 years to cure any disagreement with the Chevron doctrine. They also warned that the Loper Bright majority opinion enables judges to insert themselves into policy decisions. Finally, their dissent expressed concerns about the chilling effect on agencies to offer their own interpretations of statutory ambiguities, knowing that well-resourced regulated entities will challenge their interpretation.
In the near term, regulatory guidance from agencies will remain in effect unless a court rejects it. However, when regulations are challenged, challengers and government agencies will be placed on equal footing in advancing their arguments about the best interpretation of ambiguous laws. There is no longer deference accorded agency determinations.
It May Seem to You That ERISA Guidance Is Acting Confused: Loper Bright’s Shake-Up of DOL Standards
In 2022, the Biden Administration promulgated a rule that required an ERISA fiduciary to make investment decisions, “based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis” and stated that, depending on the facts and circumstances, risk and return factors “may include” ESG factors. A coalition of 26 states challenged the DOL’s 2022 rule asserting that the rule “contravenes ERISA’s clear command that fiduciaries act with the sole motive of promoting the financial interests of plan participants and their beneficiaries” and complaining that it introduced “ill-defined, subjective ESG concerns” into the fiduciary framework. These challenges culminated in the 26 states filing the lawsuit Utah v. Walsh (No. 23-11097, N.D. Tex.).
Surprisingly, considering his prior decisions favored more conservative policy outcomes, in September 2023, U.S. District Judge Matthew Kacsmaryk upheld the DOL’s interpretation based on then-applicable Chevron deference.3 Unsurprisingly, the plaintiffs appealed the decision to the U.S. Court of Appeals for the Fifth Circuit. The plaintiffs argued that the 2022 Biden rule could not be supported without agency deference. The DOL countered, saying that the rule was consistent with ERISA itself and deference was unnecessary. Both parties agreed that the Fifth Circuit should assess whether the 2022 rule aligned with ERISA requirements. Then, less than two weeks before oral argument, the Supreme Court overturned Chevron deference. The Fifth Circuit, hearing the case with a new name, Utah v. Su, and new mandate (no Chevron deference), directed the District Court to independently interpret whether the 2022 rule was consistent with ERISA, with the instruction to Judge Kacsmaryk: “[W]e vacate and remand so that the district court can reassess the merits.”4 This case can be seen as a bellwether for how agency determinations will be reviewed under the Loper Bright holding.5
How Public Pension Funds Should Navigate the Waters Post-Loper Bright
Loper Bright is a “sea-change” decision, and public pension counsel needs to be alert to developments in federal administrative law because of the uncertainty it introduced. Despite this watershed alteration in administrative law, public pension fiduciaries’ duties of loyalty, prudence, and care as the primary drivers of their decisions remain the same. Public pension fiduciaries must still always exercise their duties consistent with the exclusive benefit rule as their guiding principle, acting solely in the interest, and with the exclusive purpose of providing benefits to members and beneficiaries of the plan.
Similarly, public pension fiduciaries must continue to exercise both procedural and substantive due diligence in their decision-making. Fiduciaries should continue to carefully document the information considered in making investment decisions, their reliance on experts, the reasoning behind their conclusions, and how they monitor these decisions to ensure they remain sound. Trustees who stay true to these responsibilities will find that these practices are “simply the best.”
Public pension attorneys will also need to be cognizant of impacts on investment and operating environments as the post-Chevron world evolves. Federal agencies with regulatory authority as diverse as the SEC, CFTC, IRS, FTC, CFPB, DOT, HHS and DOJ, among others, will be directly affected so that future regulatory schemes that affect public pension investments, partners, benefits, operations and even governance will need to be considered in this new context. Like-wise, states may be emboldened to adjust their regulatory review models to follow Loper Bright, which can have a more direct effect on public pension systems that are subject to state law requirements regarding their fiduciary duties.
The era of Chevron deference provided stability to the regulatory environment in which public pension systems operate. This new post-Chevron era promises uncertainty through trial and error that will, over time, define the way the judiciary and the legislature operate. While this plays out, public pension systems must be vigilant in observing and learning from related developments and, most importantly, must maintain focus on their basic fiduciary duties that prioritize the exclusive benefit rule for their members and beneficiaries. That is what Chevron has to do with it.
1 Loper Bright Enterprises v. Raimondo, 603 US ___(June 28, 2024).
2 5 U.S.C. §§ 551–559.
3 Utah v. Walsh, ___ F Supp3d ___, (N. D. Tex. 2:2023-cv-00016, Sept. 21, 2023), vacated and remanded sub. nom. Utah v. Su, ___ F4th ___ (23-11097, 5th Cir., July 18, 2024).
4 Utah v. Su, supra note 3.
5 It also should be noted that “more than 40 federal lawsuits citing the high court’s ruling in Loper Bright Enterprises v. Raimondo have been filed in the two-plus months since the decision. The suits—including those targeting firearm regulations, COVID-era loan programs, and Health and Human Services Department rules—show the wide range of court battles already prompted by the ruling.” Justin Henry, “Leading DC Firms Play Long Game in Life After Chevron Ruling,” Bloomberglaw.com (Sept. 13, 2024).
The article was selected for publication in the October 2024 Edition of The NAPPA Report and submitted by a member of NAPPA. NAPPA is a 501(c)(6) non-profit association providing continuing legal education to private and public attorneys whose primary practice is retirement law.