American Airlines Judgment Leaves Room for More ESG 401(k) Suits

A final ruling in a pilot’s novel suit attacking socially conscious investing in American Airlines Inc.'s 401(k) plan shows ESG critics can reap change to company policies through the courts, even if monetary damages remain out of reach.

US District Court for the Northern District of Texas Judge Reed O’Connor Sept. 30 ordered the airline to revamp and remove ties to environmental, social, and corporate governance goals from its retirement plan after finding in January the company acted disloyally by favoring such objectives. He declined to award monetary damages because he found no evidence of financial loss to the plan.

The judgment put employers on alert that courts may still scrutinize how plans’ ESG ties, including through investment managers, impact their fiduciary responsibilities under the Employee Retirement Income Security Act, even without proof of harm to workers’ accounts, benefits attorneys said.

The injunctive relief banning non-pecuniary activities like ESG proxy voting and requiring American Airlines to appoint independent members of its benefits committee unrelated to BlackRock or similar investment managers are practical measures to ensure regulatory consistency and defend against ESG-related attacks and litigation, the lawyers said.

“This court at least made it very clear that you should not be incorporating those sorts of non-financial initiatives and when making your investment decisions you should only be looking at financial issues that are in the best interests of the participants,” said Steven W. Day, a Jackson Walker LLP partner who advises employers on ERISA.

O’Connor said American Airlines’ hiring of BlackRock to manage plan retirement assets, despite the firm’s ESG-oriented proxy voting, violated ERISA. BlackRock, which was not a party to the suit, also held shares in the airline.

Restricting an employer’s ability to use asset managers that have a certain level of holdings in the employer could create new barriers between companies and the largest asset managers, said Joshua A. Lichtenstein, head of Ropes & Gray LLP’s ERISA fiduciary practice.

“That seems very troubling if I’m a large 401(k) plan,” he said.

If the liability standard involves working with an asset manager or plan sponsor that has previously made ESG-aligned statements, that’s “not a rare fact pattern,” Lichtenstein said.

Representatives for American Airlines, BlackRock, and the plaintiff didn’t respond to requests for comment.

Risks and Rewards

The January order following a bench trial held American Airlines liable for breaching its fiduciary duty of loyalty and created anew potential ERISA legal risk for companies that work with giant Wall Street asset managers.

Many of these firms embraced ESG in proxy voting and external investment strategies, though they’ve recently stepped back, including by exiting climate-investment groups.

O’Connor’s ruling of no monetary damages might discourage plaintiffs’ attorneys from bringing similar lawsuits, benefits attorneys said. But, they added that could change based on how the political and regulatory environment evolves around ESG.

The Trump administration plans to replace a Biden-era rule that permitted companies sponsoring plans to consider eco-friendly factors as “tiebreakers” when selecting investments on behalf of workers and retirees.

It also eased the path earlier this year for corporations to jettison ESG-related shareholder proposals.

There’s a “real concern that even if this case today doesn’t create an attractive target for the plaintiffs’ bar as a whole, if rules shift more in this direction, the plaintiffs’ bar may see this as an attractive theory where maybe there would be greater potential for monetary damages,” Lichtenstein said.

If O’Connor awards substantial attorneys’ fees to the pilot’s lawyers, it could provide some incentive for plaintiffs’ lawyers said Andrew Holly, a Dorsey & Whitney LLP partner.

“It’s hard to see these kinds of proxy voting cases becoming a big deal if there’s not a huge pot of money at the end of them,” he said.

Proving financial harm in a case like this can be difficult, benefits attorneys said.

It must be shown that the fund’s return was lower than the return of an alternative fund that a court has identified as an appropriate benchmark, said Jerome Schlichter, managing partner of plaintiffs’ firm Schlichter Bogard LLC.

“One possibility is using a comparison to an S&P 500 index fund,” he said.

‘Fuzzy’ Line

The injunction increases compliance and disclosure requirements for American Airlines’ plan. It also potentially limits BlackRock or others holding 3% or more of the company’s shares or any of its fixed debt from managing its plan investments if certain conditions are unmet.

“This was an unusually prescriptive injunction, and probably the most notable outcome of the case,” said Jeff Hahn, a Stris & Maher LLP partner and former US Labor Department attorney. “But I think it is more reflective of Judge O’Connor’s particular hostility to ESG and his desire to award some type of remedy where monetary relief was unavailable, rather than a harbinger for a broader trend.”

At times throughout the litigation and four-day trial, there was disagreement on whether ESG considerations actually factored into American Airlines’ 401(k) plan investments.

Ambiguity about what qualifies as an “ESG fund” may hinder compliance, as investment products differ in ESG criteria and some aren’t labeled.

“The difficulty lies in distinguishing ESG factors as ends in themselves, and ESG factors as being relevant to investment performance, which even Judge O’Connor acknowledged is permissible,” said Hahn. “That line is a fuzzy one and presumably will complicate complying with this injunction.”

Danielle Fugere, president and chief counsel of As You Sow, which advocates for progressive proxy proposals, said the ruling is unlikely to hold up if appealed because it second-guessed American Airlines and BlackRock’s decisions on how best to manage retirement savings, despite finding no harm to plan participants.

She agreed with the judge that fiduciaries must provide adequate oversight, however.

O’Connor took issue with BlackRock’s ESG proxy voting guidelines, as well as American Airlines’ lack of awareness and failure to follow up on them.

Knowing that, plan sponsors should actively monitor voting guidelines for investment funds and stay informed of updates, Day said.