Court Rules American Airlines Breached Fiduciary Duty in ESG Case

A Texas federal court ruled that American Airlines Inc. and its employee benefits committee violated their fiduciary duty of loyalty under the Employee Retirement Income Security Act by prioritizing environmental, social and governance investment goals ahead of the financial interests of their employees’ retirement plans.

The Plaintiffs “proved by a preponderance of the evidence that American disloyally acted with an intent to benefit a party other than Plan participants and in a manner that was not wholly focused on the best financial benefit to the Plan,” U.S. District Judge Reed O’Connor wrote in a finding filed on Friday in U.S. District Court for the Northern District of Texas, Fort Worth Division.

The decision stems from a class action lawsuit filed by former pilot Bryan Spence on behalf of American Airlines employees in June 2023. In Spence v. American Airlines Inc., et al., Spence accused the airline and its benefits committee of mismanaging 401(k) funds by allowing investment managers, specifically BlackRock Institutional Trust Co. to pursue ESG-focused agendas through proxy voting and shareholder activism.

According to the lawsuit, BlackRock’s strategies covertly shifted core index portfolios within the retirement plan toward ESG funds, potentially jeopardizing financial returns for sociopolitical objectives. American Airlines sought to have the case dismissed, arguing in part that the investments in question were not in the 401(k) plan’s core fund lineup. American Airlines said in an emailed response that it is reviewing the decision.

The court’s four-day bench trial involved testimony from multiple witnesses and a review of evidence.

O’Connor determined that American Airlines and its employee benefits committee breached their duty of loyalty, which requires fiduciaries to act solely in the best financial interests of retirement plan participants. The court found that the defendants allowed corporate interests and BlackRock’s ESG agenda to influence the plan’s management, failing to prioritize employees’ financial well-being.

“The facts here compellingly established fiduciary misconduct in the form of conflicts of interest and the failure to loyally act solely in the Plan’s best financial interests,” O’Connor wrote. “BlackRock’s ESG influence is evident throughout administration of the Plan. The belief that ESG considerations confer a license to ignore pecuniary benefits is mistaken. ERISA does not permit a fiduciary to pursue a non-pecuniary interest no matter how noble it might view the aim.”

However, O’Connor ruled against Spence’s claim that American Airlines and its benefits committee breached their duty of prudence. While the defendants followed prevailing industry practices, the court acknowledged that those practices might have been influenced by broader trends within the fiduciary industry. Nonetheless, adherence to these standards shielded the defendants from liability for imprudence.

As a result, O’Connor concluded that the defendants violated only their fiduciary duty of loyalty. The ruling underscores the ongoing tension between ESG investment strategies and the legal obligations of fiduciaries managing retirement plans.