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Here are highlights of this month's climate litigation update. The full update is available here:
Second Circuit Said Connecticut’s Climate Case Against Exxon Belonged in State Court
The Second Circuit Court of Appeals affirmed an order remanding to state court the State of Connecticut’s lawsuit alleging that Exxon Mobil Corporation (Exxon) violated the Connecticut Unfair Trade Practices Act (CUTPA) by misleading and deceiving consumers about Exxon’s fossil fuel products’ impacts on climate. The Second Circuit first rejected Exxon’s arguments that there were exceptions to the well-pleaded complaint rule beyond the three established exceptions for cases (1) where a federal statute explicitly provides for removal of state law claims, (2) where federal law completely preempts state law claims, and (3) where a state-law right necessarily turns on a question of federal law. The Second Circuit said its precedent “squarely foreclosed” Exxon’s argument that the “artful pleading doctrine” provided a “broad, flexible exception … that extends beyond the bounds” of those three exceptions; the Second Circuit said the artful pleading doctrine was “simply a label for the first two of the three exceptions to the well-pleaded complaint rule.” The Second Circuit also rejected the argument that there was a fourth exception to the well-pleaded complaint rule for claims that may arise under federal common law. The Second Circuit further concluded that the third exception to the well-pleaded complaint did not apply because Connecticut’s deception and unfairness claims under CUTPA did not necessarily raise a federal issue because they could be resolved without reaching the federal common law of transboundary pollution. In addition, the Second Circuit found that Exxon did not establish that removal was authorized under the federal-officer removal statute or the Outer Continental Shelf Lands Act. Connecticut v. Exxon Mobil Corp., No. 21-1446 (2d Cir. Sept. 27, 2023)
Federal Court Upheld ERISA Regulation Allowing Benefit Plan Fiduciaries to Consider ESG Factors
The federal district court for the Northern District of Texas ruled that the U.S. Department of Labor’s 2022 amendments of its Investment Duties regulation that governs private-sector employee benefit plans did not violate the Employee Retirement Income Security Act of 1974 (ERISA) or the Administrative Procedure Act. The 2022 amendments included provisions that clarified that fiduciaries could consider environmental, social, and governance (ESG) factors such as climate change in risk and return analyses for investment decisions. The court rejected the argument by 26 states and several private plaintiffs that ERISA’s plain text foreclosed consideration of such “non-pecuniary” factors. The court also concluded that the 2022 amendments were not “manifestly contrary to the statute.” In finding that the amendments were not arbitrary and capricious, the court noted that it was “not unsympathetic to Plaintiffs’ concerns over ESG investing trends,” but that the Department of Labor had provided the required “minimal level of analysis” from which the agency’s reasoning in support of the regulation could be discerned. Utah v. Walsh, No. 2:23-cv-016 (N.D. Tex. Sept. 21, 2023)
United Kingdom’s High Court Dismisses ClientEarth’s Application for Derivative Claim Against Shell Directors over Climate Change Strategy
ClientEarth held shares in Shell plc and was therefore a member of Shell. In that capacity it applied for permission to bring a derivative claim against Shell’s directors under section 260 of the Companies Act 2006. The claim concerned Shell’s climate change risk management strategy, as well as its response to the Milieudefensie v Royal Dutch Shell plc ruling.
In respect of these, ClientEarth alleged the directors had breached their general duties to promote the success of Shell (section 172) and to exercise reasonable care, skill, and diligence (section 174), along with certain specific or “incidental” duties formulated by ClientEarth (such as a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion). The various alleged breaches of these duties were grouped by the court under the following headings: failure to set an appropriate emissions target; failure of the strategy to manage climate risk to establish a reasonable basis for achieving the net zero target and align with the 1.5°C pathway; and failure to comply with the Milieudefensie ruling.
The court’s permission is required to continue a derivative claim of this nature. An application for permission cannot proceed if it appears to the court that it does not show a prima facie case for giving permission. On May 12, 2023, having reviewed the case papers, the High Court dismissed ClientEarth’s application because no such prima facie case had been shown. ClientEarth exercised its right for that decision to be reconsidered at a hearing, following which the High Court reaffirmed its original decision, refusing permission and dismissing the claim. The court’s reasons are set out in its judgment of July 24, 2023.
The High Court found that there were a number of fundamental reasons why the breaches alleged did not establish a prima facie case. Firstly, very little weight could be given to ClientEarth’s witness evidence, which did not amount to expert evidence. Secondly, that evidence did not support a prima facie case that there is a universally accepted methodology as to the means by which Shell might be able to achieve its reductions targets. This meant it was very difficult to treat what was said as providing a proper evidential basis for alleging no reasonable board of directors could properly conclude that the pathway to achievement is the one they adopted. Thirdly, ClientEarth accepted the directors do have policies and targets to achieve net zero. Its case ignored the fact that the management of a business of the size and complexity of that of Shell will require the directors to take into account a range of competing considerations, the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere. (Judgment paragraphs 46 to 48.)
As to the Milieudefensie ruling, the Dutch court accepted that Shell is not currently acting unlawfully and recognized that it is a matter for Shell to decide on how it exercises its discretion to comply with reduction obligations imposed by Dutch law. There was no prima facie case that the directors had breached their duties in respect of the Dutch order (Paragraphs 49 to 54).
As to the relief sought, ClientEarth had failed to make out a prima facie case that the court should grant the request. A mandatory injunction was sought that Shell (a) adopt and implement a strategy to manage climate risk in compliance with its statutory duties and (b) comply immediately with the Dutch order. This was too imprecise to be suitable for enforcement. A declaration was also sought—that the directors had breached their duties in the manner described. Whilst this did not suffer from imprecision, it was difficult to see what legitimate purpose it would fulfill. It was not the court’s function to express views on the directors’ conduct, which have no substantive effect and fulfill no legally relevant purpose. The proper forum for generating those types of views as to the directors’ conduct was by vote of the members in the general meeting (Paragraphs 55 to 59).
It was also appropriate to regard certain discretionary factors in section 263 of the Act. These pointed to no prima facie case for granting permission (paragraphs 60 to 70). In a costs judgment of August 31, 2023 the High Court confirmed its refusal of ClientEarth’s application for permission to appeal to the Court of Appeal. ClientEarth may still apply directly to the Court of Appeal for permission, and it appears that is what it intends to do. That indication was given in a ClientEarth press release of July 24, 2023. ClientEarth v. Shell’s Board of Directors (High Court of Justice, United Kingdom)
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