Dive Brief:
- A federal judge ruled last week that American Airlines must continue to fight a lawsuit from one of its pilots, Bryan Spence, that alleges the airline breached its duty as a fiduciary by investing company retirement funds with fund managers who have ESG initiatives.
- Spence’s amended complaint said the airline breached its duties in two ways under the Employee Retirement Income Security Act of 1974: its duty of loyalty and prudence and its duty to monitor. Judge Reed O’Connor, of the Northern District of Texas, denied American Airlines’ motion to dismiss on Feb. 21, finding Spence’s claim to be plausible enough “on its face” to proceed.
- While O’Connor ruled the claim can proceed, civil procedure rules do not require that the complaint contain factual allegations at this stage, and Spence did not need to show “the exact connection between the investment managers’ alleged ESG proxy voting and the financial harm” he’s alleged to have suffered.
Dive Insight:
Spence’s lawsuit alleges American Airlines violated its fiduciary duties under ERISA by investing with asset managers that have ESG objectives and “failing to monitor or stop these managers from pursuing objectives harmful to” the members of the company’s and the pilots’ 401k retirement plan, according to O’Connor’s ruling. Spence’s claim name-dropped BlackRock, specifically, as well as other investment managers.
The lawsuit was initially filed in June, and American Airlines filed its motion to dismiss in August. In its initial motion to dismiss, the airline alleged Spence’s goal was to “insert himself into the ongoing, politicized debate over the wisdom of ESG-themed investing.”
That initial motion to dismiss also claimed Spence’s theory about utilizing challenged funds lacked standing, as he admits he never invested in the funds. In a response, Spence dropped that claim and focused on his theory that the airline violated ERISA by working with funds who have non-financial motivations they pursue through proxy voting and shareholder activism.
O’Connor weighed in last week, after American Airlines submitted a response to Spence’s amended complaint in October, according to court records. The judge said the plaintiff “articulates a plausible story” and the airline’s public commitment to ESG “motivated the disloyal decision” to invest with funds and managers that pursue non-economic objectives and invest in funds that may be outperformed by non-ESG funds.
“Failure to consider this information gives rise to a plausible inference that Defendants’ conduct was imprudent,” O’Connor said in the ruling. “Just as continuing to invest Plan assets with investment managers despite their ESG objectives likewise allows for the plausible inference that [American Airlines] failed to ‘monitor investment and remove imprudent ones.’”
He added that, if the court is to take the allegations as true, they do more than just conclude that American Airlines “acted disloyally.” O’Connor said Spence laid out a “plausible theory” for how the airline “breached their duty of loyalty by allowing their corporate goals to influence their fiduciary goal.”
O’Connor briefly made an appearance in another ESG-related case, as ExxonMobil’s lawsuit against ESG-focused investors Arjuna Capital and FollowThis was initially filed in his court as well. The conservative-leaning judge — whose 2018 ruling that the Affordable Care Act was unconstitutional was eventually overturned by the U.S. Supreme Court — recused himself from that ongoing case.
American Airlines did not respond to a request for comment as of press time.
