Spence v. American Airlines, Inc.

More than eight months after finding that American Airlines, Inc. (American) and the American Airlines Employee Benefits Committee (EBC) breached their fiduciary duty of loyalty under the Employee Retirement Income Security Act of 1974 (ERISA) by allowing corporate interests in environmental, social, and governance (ESG) objectives and their investment manager’s ESG interests to influence their management of employee retirement plans, the federal district court for the Northern District of Texas denied the plaintiff’s request for monetary damages. The court concluded that the plaintiff failed to sufficiently establish actual monetary losses to the retirement plans (Plan). The court determined, however, that it was necessary to award equitable relief “to ensure that Defendants and their investment managers act solely for the pecuniary benefit of the [retirement plans] and implement compliance measures to ensure fidelity to ERISA’s fiduciary standards.” The court permanently enjoined the defendants from permitting “any proxy voting, shareholder proposals, or other stewardship activities on behalf of the Plan that are motivated by or directed towards non-pecuniary ends, including but not limited to ESG-oriented investment management and objectives, that are not in the exclusive best financial interest of Plan participants and beneficiaries.” The injunction also required appointment of two independent members of the EBC without any connection to any administrator, advisor, or investment manager of retirement plan assets. The injunctive relief also required annual certification to each retirement plan participant that the EBC and each manager of plan assets “will only and solely pursue investment objectives based on provable financial performance, not DEI, ESG, sustainability, or any other nonfinancial criteria” and will only allow proxy votes to be cast on behalf of plan participants “solely to maximize the long-term financial returns of Plan participants’ investments, and not DEI, ESG, sustainability, or other non-financial criteria.” In addition, American must post information concerning any membership in organizations “principally devoted to achieving DEI, ESG, climate-focused investment or stewardship objectives,” including UN PRI, Net Zero Asset Managers Initiatives, and Ceres Investor Network, and link to the terms and conditions of such memberships.

After a four-day bench trial, the federal district court for the Northern District of Texas found that the facts “compellingly demonstrated” that American Airlines, Inc. (American) and the American Airlines Employee Benefits Committee had breached their fiduciary duty of loyalty under the Employee Retirement Income Security Act of 1974 (ERISA) by allowing corporate interests in environmental, social, and governance (ESG) objectives and their investment manager’s ESG interests to influence their management of employee retirement plans. The court found that a preponderance of the evidence demonstrated that the defendants acted disloyally by allowing ties to the investment manager (BlackRock)—which was also one of American’s largest shareholders—to influence management of the plan. In addition, the court concluded that the defendants acted disloyally by allowing corporate goals, including sustainable aviation fuel and climate change initiatives, to influence management and oversight of the retirement plans. The court found that the defendants failed to maintain the “critical divide” between these corporate goals and their fiduciary obligations. The court also found that the defendants “utterly failed to loyally investigate BlackRock’s ESG investment activities.” The court concluded, however, that the plaintiff did not prevail on the claim that the defendants violated the duty of prudence under ERISA because the defendants had acted “according to prevailing industry practices, even if leaders in the fiduciary industry contrived to set the standard.” The court described its conclusion that there was no violation of the duty of prudence a “shocking result given that the evidence revealed ESG investing is not in the best financial interests of a retirement plan” but found that “faithful application of the law” required the court to find that the defendants oversaw and monitored the plan consistent with existing industry standards. The court directed the parties to submit supplemental briefing regarding issues related losses suffered by the class members.

The federal district court for the Northern District of Texas found that there were genuine issues of material fact as to whether American Airlines, Inc. and the American Airlines Employee Benefit Committee violated their duties of prudence and loyalty under the Employee Retirement Income Security Act of 1974 (ERISA) by including funds in an employee retirement plan that were managed by investment managers that pursued environmental, social, and governance (ESG) policy goals. Regarding the duty of prudence, the court said a factfinder could find that the defendants breached their duty by “failing to monitor investment managers and failing to address the facts and circumstances of ESG proxy voting and shareholder activism.” Regarding the duty of loyalty, the court concluded a factfinder could find that the defendants “allowed their corporate ESG goals and/or the goals of a large shareholder to influence the Plan by allowing assets to pursue ESG objectives through proxy voting and shareholder activism.” The court further found that there were factual disputes as to the losses suffered by the retirement plan.

The federal district court for the Northern District of Texas certified a class to pursue an action alleging that American Airlines, Inc. and related defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by allowing funds that manage American Airlines employees’ retirement savings to vote proxies in support of ESG objectives. (The court noted that the plaintiff had decided to forgo a theory of liability based on the defendants’ inclusion of ESG funds as investment options.)

The federal district court for the Northern District of Texas denied a motion by American Airlines, Inc. and related defendants to dismiss a class action complaint alleging that they breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by investing American Airlines employees’ retirement savings “with investment managers and investment funds that pursue leftist political agendas through environmental, social and governance (‘ESG’) strategies, proxy voting, and shareholder activism.” The complaint alleged that the defendants included ESG funds as investment options that “pursue nonfinancial and nonpecuniary ESG policy agendas as part of their investment strategies,” as well as funds not branded as ESG funds that were “managed by investment companies who have voted for many of the most egregious examples of ESG policy mandates, on issues such as divesting in oil and gas stocks, banning plastics, requiring ‘net zero’ emissions, and imposing ‘diversity’ quotas in hiring.” The court found that the plaintiff adequately alleged that the defendants breached their duty of prudence and duty to monitor “by selecting, including, and retaining investment managers who pursue ESG objectives rather than focusing exclusively on maximizing financial benefits” and by failing to monitor those responsible for retirement plan assets. The court also found that the plaintiff adequately alleged a breach of the duty of loyalty with the complaint’s “plausible story” that the defendants’ “public commitment to ESG initiatives motivated the disloyal decision to invest Plan assets with managers who pursue non-economic ESG objectives through select investments that underperform relative to non-ESG investments, all while failing to faithfully investigate the availability of other investment managers whose exclusive focus would maximize financial benefits for Plan participants.”