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The ERISA Edit: ESG Rulemaking Withstands States' Challenge

Employee Benefits Alert

Court Grants Summary Judgment to DOL in Contentious ESG Case

Late last week, the U.S. District Court for the Northern District of Texas allowed the Department of Labor's (DOL) amendments to its Investment Duties regulation, permitting consideration of environmental, social, and governance (ESG) factors, to stand. On September 21, 2023, Judge Matthew Kacsmaryk granted DOL's cross-motion for summary judgment in Utah v. Walsh, No. 23-cv-16 (Jan. 26, 2023, N.D. Tex.), a case filed by 25 states just days before the ESG amendments were set to go into effect in January 2023. Along with a single ERISA plan participant, several entities — Liberty Oilfield Services, LLC, an employer-sponsor of a 401(k) plan, and its publicly traded parent Liberty Energy, Inc., as well as Western Energy Alliance, a trade association representing 200 oil and gas companies — joined the states as co-plaintiffs in the lawsuit. We previously discussed the suit here. The amendments modified DOL's long-standing Investment Duties regulation, first issued in 1979, outlining the "appropriate consideration" an ERISA fiduciary must engage in when making investment or investment course of action decisions with respect to a plan.

The challenged regulation (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, including selecting qualified default investment alternatives, exercising shareholder rights, such as proxy voting, and the use of written proxy voting policies and guidelines." The amendments altered 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 indistinguishable investment options. 

In Utah v. Walsh, the plaintiffs claimed that the 2022 rule violated ERISA because it allegedly conflicted 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). The plaintiffs alleged that the new 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." 

The District Court disagreed. Applying the two-step framework established by Chevron USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the court concluded, first, that ERISA does not contemplate a "tie" between two financially equivalent investment options, meaning that Congress had not spoken directly to the issue. It then turned to the second question under Chevron: whether the agency's rule is "arbitrary or capricious in substance, or manifestly contrary to the statute." Here, the court held that the "reasonableness of DOL's interpretation is supported by its prior rulemakings," including the 2020 Rule, "which Plaintiffs approvingly h[eld] out as 'reflect[ing] ERISA's focus on financial benefits.'" As the court pointed out, "since at least 2015, DOL has posited that ESG factors 'may have a direct relationship to the economic value of the plan's investment," and the 2022 Rule "changes little in substance from the 2020 Rule and other rulemakings."

The District Court highlighted the 2022 Rule's explanation that 

fiduciaries remain free to "determine that an ESG-focused investment is not in fact prudent," and stresses that a "fiduciary's determination with respect to an investment . . . must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis." Hence, "[r]isk and return factors may include [ESG] factors on the particular investment," but "[w]hether any particular consideration is a risk-return factor depends on the individual facts and circumstances." And even where collateral benefits are considered as a tiebreaker, a fiduciary may not "accept expected reduced returns or greater risks to secure such additional benefits." 

In other words, "the 2022 Rule 'provides that where a fiduciary reasonably determines that an investment strategy will maximize risk-adjusted returns, a fiduciary may pursue the strategy, whether pro-ESG, anti-ESG, or entirely unrelated to ESG.'"

Judge Kacsmaryk's decision came as a bit of a surprise, given his record of overturning Biden-administration regulations. Meanwhile, a suit filed by a putative class of participants in two of American Airlines' 401(k) plans alleging imprudent investments based on ESG strategies remains pending before Judge Kacsmaryk. DOL is fending off another suit directly challenging the 2022 Rule in the Eastern District of Wisconsin. And we can't forget about Congress: even though President Biden has already exercised his veto power once to defend the 2022 Rule, House Republicans have advanced a bill (H.R. 5339) that would limit ERISA fiduciaries' ability to consider ESG factors in their investment decisions. For their part, Democrats in both houses of Congress have introduced the Freedom to Invest in a Sustainable Future Act (S. 523 and H.R. 1119), which would amend ERISA to permit ERISA fiduciaries to consider ESG or similar factors when carrying out an investment decision, strategy, or objective, or other fiduciary acts. As always, we will continue to report on the latest developments.

Court Narrows But Allows Health Plan "Savings Fee" Litigation to Proceed

The U.S. District Court for the Southern District of New York (SDNY) recently granted in part and denied in part a motion to dismiss a complaint alleging ERISA violations in connection with fees paid by self-funded health plans to a third-party claim administrator. Popovchak v. UnitedHealth Group, Inc., No. 22-cv-10756 (VEC) (Sept. 19, 2023, S.D.N.Y.). Plaintiffs in this putative class action, beneficiaries of plans sponsored by Morgan Stanley and Fresenius Medical Care, alleged that UnitedHealth Group, Inc. (UHG) and its subsidiaries (collectively, the defendants) as the plans' claims administrator, improperly repriced provider charges and charged "savings fees" to enrich themselves at the expense of beneficiaries and the plans. 

The allegations in the case focused on the defendants' Shared Savings Program that paid some benefits claims for out-of-network provider charges using repricing methodologies that plaintiffs asserted are contrary to plan terms and "designed to reduce reimbursement amounts" to increase the defendants' compensation. According to the decision, under the Shared Savings Program, the defendants charged plans a "savings fee" that is a percentage of the difference between the out-of-network provider charges and the "Eligible Expense" under the plan as determined by the defendants using discounted charge data from "Repricers." Plaintiffs claimed that repricing should not be done when data on providers' actual fees is available, such as through the non-profit FAIR Health database. The court stated that, according to the complaint, the plans gave the defendants discretion and authority to decide how "Eligible Expenses" would be determined and covered. 

Further, the court took note of the allegations that although the defendants represented to plans that they would negotiate discounts from out-of-network providers and that plan members would not be responsible for the unpaid provider charges, the providers who rendered the services at issue to the plaintiffs never agreed to discount their fees. In one instance, for example, a plaintiff "remains responsible for" over $50,000 in unpaid provider charges. While all the out-of-network provider's charges of $54,000 would have been an "Eligible Expense" under the plan using Fair Health data, the repricing methodologies allowed only $3,189. It is not clear whether the provider attempted to collect from the beneficiary.

The court permitted the bulk of the claims to proceed while noting that the defendants could well prevail, but that questions of fact precluded an early dismissal. The complaint contained ERISA claims for benefits, breaches of fiduciary duty, and self-dealing pursuant to ERISA sections 502(a)(1)(B), 502(a)(2), and 502(a)(3). After ruling in the plaintiffs' favor on the issues of the timeliness and administrative exhaustion of their claims, the court determined that the plaintiffs asserted viable claims for breach of the fiduciary duty of loyalty, self-dealing, and denial of benefits. According to the court, the plaintiffs "adequately alleged a claim for breach of the duty of loyalty because they accuse Defendants of using Repricer data to collect 'savings' fees, despite Defendants' failure to secure corresponding savings, for the primary purpose of enriching themselves at Plan members' expense." The court rejected the defendants' argument that the breach of loyalty claim under section 502(a)(3) should be dismissed as duplicative of plaintiffs' claim for benefits under section 502(a)(1)(B) and stated in one opaque passage in the decision that the claim could be pursued under either section 502(a)(1)(B) or 502(a)(3). However, the court dismissed the plaintiffs' fiduciary breach claims premised on a failure to act in accordance with and consistently apply plan terms, finding them repackaged claims for benefits and, hence, duplicative of their section 502(a)(1)(B) claims. The court permitted the plaintiffs to proceed on their breach of the duty of loyalty and self-dealing claims under ERISA section 502(a)(2), despite the defendants' argument that plaintiffs failed to allege any loss to the plans. 

The court also dismissed UHG and its affiliate United Health Insurance Company (UHIC) from the case. Claiming that plaintiffs "lacked standing" to sue UHG and UHIC, the court found the complaint did not contain sufficient allegations showing UHG and UHIC had "sufficient control" over the plaintiffs' benefit claims to render them a proper party in a case seeking to enforce plan terms under ERISA sections 502(a)(1)(B) or 502(a)(3). Regarding the plaintiffs' fiduciary breach claims, the court held that the complaint was devoid of factual allegations that UHG or UHIC engaged in the alleged conduct that gave rise to those claims. The other UHG defendants, United HealthCare Services, Inc., and United Healthcare Service, LLC, remain in the case to defend the claims that survived the motion to dismiss. The court also ruled in the defendants' favor on plaintiffs' request for a jury trial but did so without prejudice, thereby allowing plaintiffs to renew their jury demand in the event they seek "legal damages for their fiduciary duty claims."

The decision, while not the paradigm of clarity, illustrates one area – out-of-network claim repricing – that is ripe for health plan fee class action litigation. The court's ruling will allow the plaintiffs to begin the costly discovery process to develop their claims and to seek class certification. In the end, if the plaintiffs are successful, the self-funded plans will pay more for out-of-network benefits, the defendants will see their fees reduced, out-of-network providers will be paid more, and, to the extent those providers balance bill, plan members' out-of-pocket costs will be reduced. This case is one to watch and may very well end up before the Second Circuit on appeal.

Proposed Rulemaking Setting New No Surprises Act IDR Fees Announced

On September 26, the Departments of Labor, Treasury, and Health and Human Services (collectively, the Departments) proposed rules setting the fees charged for accessing the federal independent dispute resolution (IDR) process. Issued under the No Surprises Act (NSA), if the rule is finalized, effective January 1, 2024, the IDR administrative fee would be $150 per party, per dispute, three times higher than in 2022, but less than the $350 fee that was in effect for 2023. The $150 fee would remain in effect until changed by subsequent rulemaking. The fee may be updated at any time if the volume of IDR disputes grows, though the change will be subject to notice and comment.

Under the proposed rule, certified IDR entities could charge a fixed certified IDR entity fee for single determinations in the range of $200 to $840, which represents up to a 20 percent increase from the 2023 single determination fee range. Also starting in 2024, certified IDR entities would be permitted to charge a fixed certified IDR entity fee for batched determinations within the range of $268 to $1,173. Additional batched determination fees within the range of $75 to $250 are proposed for every additional 25 line items within a batched dispute, beginning with the 26th line item. IDR entities would be able to petition the Departments for approval to charge an alternative fee below or above the proposed ranges.

Comments are sought on all aspects of the rulemaking, including the calculations used to determine the appropriate fees. The comment deadline is October 26, 2023.

In the News

Joanne Roskey commented on a Texas federal judge's recent decision that a DOL socially conscious investing rule finalized in November 2022 did not violate ERISA or the Administrative Procedure Act (APA). "I think it goes to show that there was a lot of hype and rhetoric around the rule and the lawsuit when it got filed, and the judge was able to see through that, and address the issues on the merits, as they were presented… I'm sure DOL is very happy with it."  

In this PlanSponsor article, Joanne Roskey explains that plan sponsors, fiduciaries, and service providers to employee benefit plans covered by ERISA should prepare now for what could be a new wave of class-action ERISA fee and expense litigation - this one crashing down on health care plans.

Upcoming Speaking Engagements and Events

On October 17, Joanne Roskey will present, "Headaches, Heartburn, and Anxiety - Mental Health Parity Policy Implications," to members of the ERISA Industry Committee.

On October 31, Joanne Roskey and Dawn Murphy-Johnson will present, "State Legislative Activities Impacting Employee Benefits," an American Staffing Association webinar.

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