American Airlines Held Liable for ESG Investing in 401(k) Plan

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 one of the first major victories for opponents of the strategy.

The airline breached its fiduciary duty of loyalty—but not its fiduciary duty of prudence—in allowing its 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.

The trial included testimony from the airline’s asset management director, who said his team didn’t believe the negative press surrounding BlackRock Inc. 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 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.

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.