American Airlines Inc. violated federal law by filling its 401(k) plan with funds from investment companies that pursue environmental, social, and corporate governance goals, a Texas federal judge ruled Friday in the biggest victory yet for opponents of the strategy.
The airline breached its fiduciary duty of loyalty—but not its fiduciary duty of prudence—in allowing its $26 billion retirement plan to be influenced by corporate goals unrelated to workers’ best financial interests, Judge Reed O’Connor of the US District Court for the Northern District of Texas said after a four-day, non-jury trial.
The 2023 lawsuit, which says the airline wrongly offered 401(k) funds managed by companies that pursue ESG policy goals through proxy voting and shareholder activism, is the latest battle in the broader debate over socially conscious investing.
A decision on the validity of these investment strategies in 401(k) plans would have ripple effects, particularly within the US Court of Appeals for the Fifth Circuit, which recently sent a case seeking to prevent enforcement of the Labor Department’s ESG-friendly investing rule back to district court.
According to O’Connor, the American pilots proved that the airline’s activities—which included hiring BlackRock Inc. to manage billions of dollars in plan assets despite its “ESG-oriented investing and proxy voting activism"—violated the Employee Retirement Income Security Act’s directive to act loyally and in the best interests of plan participants.
“ERISA does not permit a fiduciary to pursue a non-pecuniary interest no matter how noble it might view the aim,” O’Connor said, asserting that ESG investments “often underperform traditional investments by approximately 10%.”
But the pilots failed to prove a violation of the statute’s prudence rule, he said, because the airline “acted according to prevailing practices and in a manner similar to other fiduciaries in the industry.” That’s true even though those standards may stem from BlackRock’s “alarming degree of control and influence over the retirement industry"—an industry O’Connor described as “incestuous” and full of “oligopolist or cartel-like behavior.”
The pilots’ prudence claim is best understood as an attempt to “shift industry standards” to better prioritize proxy voting oversight as an avenue for protecting workers’ financial interests, O’Connor said.
“Perhaps that shift should occur,” he continued. “And maybe at some point it will. But this future-looking goal reveals the fatal flaw underlying Plaintiff’s prudence claim: Defendants’ practices were not incongruent with the prevailing industry standards at the time.”
O’Connor is a George W. Bush appointee who critics say has been a subject of “forum shopping” by conservative plaintiffs seeking a sympathetic court in challenges to federal policies.
O’Connor’s prior rulings in the case denied the airline’s motion to dismiss, certified a class of as many as 100,000 plan participants, and allowed the plaintiffs to present their claims at trial.
The June 2024 trial he oversaw included testimony from the airline’s asset management director, who said his team didn’t believe the negative press surrounding BlackRock and proxy voting was a reason for the airline to be concerned over the firm’s handling of pilot retirement plans.
An expert witness for the pilots testified that BlackRock’s May 2021 proxy vote at ExxonMobil, which focused on ESG priorities, devalued energy stocks and caused the airline’s 401(k) plan to suffer more than $15 million in losses, an estimate American called “deeply flawed.”
O’Connor’s post-trial opinion, which resolves questions of liability but not potential damages, includes a lengthy discussion of which types of investments fall within the ESG rubric.
According to O’Connor, ESG investing “considers or pursues a non-pecuniary interest as an end itself rather than as a means to some financial end.” Investing aimed at reducing material risks or increasing returns for the sole purpose of seeking financial benefits “is not ESG investing,” he said.
O’Connor instructed the parties to file briefs on damages and other outstanding issues by Jan. 31.
BlackRock isn’t a party to the suit.
O’Melveny & Myers LLP and Kelly Hart & Hallman LLP represent American. Hacker Stephens LLP and Sharp Law LLP represent the pilots.
The case is Spence v. Am. Airlines, Inc., N.D. Tex., No. 4:23-cv-00552, 1/10/25.
