July 9 (Reuters) - A U.S. appeals court on Tuesday

considered blocking the Biden administration from allowing

socially conscious investing by employee retirement plans,

though the judges seemed unsure of the impact the rule would

have.

A three-judge panel of the 5th U.S. Circuit Court of Appeals

in New Orleans heard oral arguments in a bid by 25

Republican-led states and oil drilling company Liberty Energy

to block the U.S Department of Labor rule pending the

outcome of their legal challenge.

The rule, which took effect in February 2023, allows 401(k)

and other plans to consider environmental, social, and corporate

governance (ESG) factors as a "tiebreaker" between two or more

financially equal investment options. It replaced a Trump

administration rule that barred plans from considering any

non-financial factors.

The 5th Circuit judges seemed to struggle with when

investments are truly equal and a tiebreaker is allowed under

the rule. The scope of the rule could be key to the case, since

Liberty and the states claim that it allows plan administrators

to substitute political agendas for traditional financial

decisionmaking.

Circuit Judge Andrew Oldham seemed skeptical of what he said

was the department's argument that a tiebreaker would be rare

and happen in "one in a trillion" cases.

"There seems to be a massive disconnect between the

department's view that this is a nothing burger and (the

argument that) this is a monumental deal," Oldham said to Daniel

Winik of the U.S. Department of Justice, who argued in defense

of the rule.

Winik maintained that the rule would apply in rare

circumstances where multiple investments are projected to have

an exactly equal performance.

"If you think one (investment) or the other over ten years

is likely to produce a penny greater return, then it's not

equal," he said.

Jonathan Berry, who represents Liberty and also argued on

behalf of the states, told the court that the rule was clearly

meant to have a broader impact. He noted that President Joe

Biden, a Democrat, first called for the Labor Department to

adopt an ESG investing rule in a 2021 executive order about

climate change.

"Biden's executive order ... was not about resolving ties in

the one-in-a-trillion case," Berry said.

Liberty and the states are appealing a ruling by U.S.

District Judge Matthew Kacsmaryk in Amarillo, Texas, that said

the rule did not violate the federal law regulating retirement

plans.

Kacsmaryk cited a 40-year-old legal doctrine known as

Chevron deference that required courts to defer to agencies'

interpretations of unclear laws that they enforce. The U.S.

Supreme Court in a decision last month that is expected to

significantly limit the power of federal agencies eliminated

Chevron deference, saying courts should instead use their

independent judgment in deciding whether agency rules are valid.

The judges on Tuesday questioned the impact of that ruling

on the case involving the ESG rule and whether they should send

it back to Kacsmaryk to rethink his decision.

"We've got precedent galore that sends cases back for

reconsideration when the district court relied on an overruled

case," Circuit Judge Don Willett said. "Why wouldn't we do so

here?"

Winik said that Kacsmaryk would have come to the same

conclusion without Chevron because the judge found that federal

law does not speak to how plans can break a tie between equal

investments, leaving the Labor Department room to fill in the

gaps.

And Berry told the panel that remanding the case was

unnecessary because the 5th Circuit can block the rule on other

grounds, including that it lacks a reasoned analysis of the law

governing retirement plans.

Like Kacsmaryk, Oldham and Willett are appointees of

Republican former President Donald Trump. The panel also

includes Circuit Judge Catharina Haynes, who was appointed by

Republican former President George W. Bush.

The case is Utah v. Su, 5th U.S. Circuit Court of Appeals,

No. 23-11097

For the states: Utah Solicitor General Melissa Holyoak;

Jonathan Berry of Boyden Gray

For the Labor Department: Daniel Winik of the U.S.

Department of Justice

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