On January 10, 2025, the U.S. District Court for the Northern District of Texas found that American Airlines and its employee benefit committee (EBC) breached their fiduciary duty of loyalty under the Employee Retirement Income Security Act of 1974 (ERISA) by acting with an intent to benefit a party other than its 401(k) plan participants and in a manner that was not wholly focused on the best financial benefit to the retirement plans at issue.

Senior pilot Bryan Spence filed the class action lawsuit, Spence v. American Airlines, back in June 2023 on behalf of more than 100,000 participants in two company 401(k) plans (referred to as, “the plan”). Spence alleged that defendants violated their fiduciary duties of prudence and loyalty by mismanaging the plan when they utilized “investment managers pursuing non-financial and nonpecuniary ESG policy goals through proxy voting and shareholder activism”—specifically, BlackRock Institutional Trust Company, Inc.

According to Spence, “BlackRock pursues a pervasive ESG agenda that ‘covertly converts the [retirement] [p]lan’s core index portfolios to ESG funds’” and, as a result, “BlackRock’s inclusion as an investment manager harmed the financial interests of retirement plan participants and their beneficiaries due to pursuing socio-political outcomes rather than exclusively financial returns.”

It should be noted that BlackRock’s role in American’s 401(k) plan was limited to managing passive index funds, and American says the company has never offered ESG investment options in its 401(k) plans. The ruling instead focuses on the company’s oversight of BlackRock’s proxy voting, which the company argues aligns with industry best practice.

The court first rejected plaintiff’s claim that defendants breached their duty of prudence. In its complaint, the plaintiff argued that defendants’ monitoring process was inadequate because the EBC members did not personally review investment managers’ proxy voting activities, relying instead on Aon, its external consultant, to integrate this review as part of its broader process for monitoring the performance of investment managers.

However, the court found that defendants’ actions were “consistent with and, in many aspects, exceeded the processes of other fiduciaries.” Specifically, the court pointed to the EBC’s regular meetings to review the plan's investment performance, and the EBC’s use of internal and external experts to review, monitor and evaluate the plan's invest options and investment managers.

But the court did find that the defendants breached their duty of loyalty “by failing to keep American’s own corporate interests separate from their fiduciary responsibilities, resulting in impermissible cross-pollination of interests and influence on the management of the Plan.” 

In reaching this conclusion, in addition to noting American’s own public commitment to ESG, the court noted the company’s “incestuous relationship” with BlackRock, including BlackRock’s position as one of the plan's largest managers, its status as one of American’s largest shareholders (holding 5% of the company’s stock), and its having financed approximately $400 million of American’s corporate debt.

While noting that “BlackRock’s large ownership of American shares and debt financing are not enough on their own to constitute disloyalty,” the court found that the plaintiff provided sufficient evidence that defendants “turned a blind eye to BlackRock’s ESG activism [through delegated proxy voting authority and related activism] because of BlackRock’s outsized influence.”

The court also pointed to evidence raised at trial that one of the members of American Airlines’ fiduciary committee also managed the corporate financial relationship between American and BlackRock—and testimony by this individual that a “failure to signal that American was actively complying with ESG disclosure requirements, for example, would potentially undermine the company’s ability to obtain billions of dollars in essential loans from BlackRock.” 

To further support its conclusion that defendants breached their duty of loyalty, the court noted that while members of the asset management group (responsible for providing internal advice regarding the plan to the EBC) met with BlackRock on some occasions, at no point was there specific discussion concerning BlackRock’s proxy voting activities or ESG investing, nor did the EBC charge Aon with reviewing BlackRock’s proxy voting and ESG investing. The court also pointed to evidence presented at trial that American’s fiduciaries had not received required quarterly reports from BlackRock on its proxy voting attestations, some of which included guidelines that expressly incorporated ESG considerations, according to the ruling. 

In its opinion, the court details BlackRock’s (who is not a party to this lawsuit) shift to ESG activism beginning in 2017 and its support for ESG proposals at major energy companies. Specifically, the court focused on pro-ESG statements made by CEO Larry Fink, letters sent by BlackRock to companies urging them to report climate change dangers, a shift to more ESG-friendly proxy voting guidelines and stewardship expectations, and BlackRock’s membership in Climate Action 100+, a group focused on pressing the world’s biggest emitters of greenhouse gases to change their ways, according to the court.

The court also noted BlackRock’s support of climate change-related shareholder proposals, including proposals at Occidental Petroleum and Exxon Mobil Corp., as well as BlackRock’s support for a May 2021 proxy vote at Exxon, which ultimately installed three dissident directors on Exxon's board. While the court acknowledged that “it is permissible to consider ESG risk when done through a strictly financial lens,” it found that BlackRock’s focus on ESG initiatives were not in line with maximizing the plan's financial benefits, pointing specifically to the Exxon case where the court noted the inherent conflict between an energy company that derives its profits from fossil fuels and BlackRock’s climate change expectations for the company.

The court rejected American’s argument that it could not be held liable as a fiduciary when the plan's governing documents only explicitly named the EBC, holding that an ERISA “fiduciary” is anyone or any entity who exercises discretionary control over plan administration, which captures those who appoint, retain, or remove a fiduciary.

The court determined that—alongside EBC, Aon, and the Asset Management Group—American was also responsible for overseeing the plan's managers, in addition to communicating with the plan's advisors, preparing materials for EBC meetings, and raising any concerns of issues concerning the plan with EBC members. The court also noted how American, along with the EBC, signed the master consulting agreement with Aon and is listed as the named fiduciary in that agreement’s investment policy statement. Based on these facts, the court concluded that American functionally serves as an ERISA fiduciary.

The court deferred ruling on the question of losses and remedies and is seeking supplemental briefings from the parties on these questions by January 31. American has not yet indicated whether it will appeal the decision. However, the court’s final decision on losses and remedies (as well as the outcome of any appeal), if substantial, could open the door to a floodgate of ESG-themed 401(k) lawsuits.