In Spence v. American Airlines, Inc., after a four-day bench trial in the Northern District of Texas, U.S. District Court Judge O’Connor ruled that American Airlines breached its fiduciary duty of loyalty under the Employee Retirement Income Security Act of 1974 (“ERISA”) by allowing BlackRock Institutional Trust Company, Inc. (“Blackrock”), as manager of all its passively managed non-ESG investments in American Airlines 401(k) plans, to use proxy voting policies to further environmental, social, and governance (“ESG”) objectives. (Spence v. Am. Airlines, Inc., No. 4:23-CV-00552-O, (Dkt. 157) (N.D. Tex. Jan. 10, 2025) (Findings of Fact and Conclusions of Law) (“Am. Airlines II”).) 

This case differs from the typical 401(k) plan “excessive fee” case where participants argue that an ERISA plan paid too much for investment management. On the contrary, here the district court acknowledged that American Airline’s plans paid low rates for investment management fees, and focused instead on the relationship between American Airlines and BlackRock, and BlackRock’s ESG policies for proxy voting. In an unusual ruling, the Court found American Airlines acted prudently in selecting and maintaining BlackRock as its investment manager, but also found that it (counterintuitively) acted disloyally by allowing its own corporate interests to affect its fiduciary role in monitoring BlackRock. 

Background

In American Airlines, a former pilot brought a class action lawsuit on behalf of 100,000 American Airline employees and pilots, accusing American Airlines and its Employee Benefits Committee (“EBC”) of mismanaging their 401(k) plans by allowing BlackRock, as the investment manager, to pursue a “pervasive” ESG policy agenda through shareholder activism and proxy voting of shares that it holds by virtue of managing the plans’ passively managed non-ESG funds.

The plaintiff argued that BlackRock had influence over American Airlines’decisions related to ESG because it managed approximately $11 billion of assets in their plans. At the same time, it was one of the largest owners (about 5%) of American Airlines stock and owned $400 million of American Airlines fixed income debt. BlackRock was also one of the largest owners of Aon Investments, USA (“Aon”), the company American Airlines hired to help monitor its plan investments and their managers ₋ including BlackRock. The district court referred to this as an “incestuous” relationship. 

Understand that investment managers do not “own” shares of companies the way one would typically think of ownership; they manage investments for other investors, including but not limited to participants in various ERISA plans to which they provide services. However, because those investment managers are able to use proxies to vote the shares, they can use their significant voting power to impact company policy and, as was the case in a 2021 Exxon proxy vote, that can sometimes have an outcome determinative vote.

In the Exxon proxy vote, Engine No. 1, an activist and impact-focused investment firm, published a letter to Exxon’s Board of Directors asking them to explore clean energy options. At a shareholder meeting, BlackRock voted for the Engine No. 1 dissident director candidates and three of them were elected to Exxon’s Board of Directors. The district court noted that the three dissident directors would not have been elected but for BlackRock’s votes in their favor. According to the plaintiff, shares in Exxon dropped after this vote, causing the American Airline plans damages (although the Exxon shares quickly rebounded).

Court Finds Breach of Fiduciary Duty of Loyalty, But Not of Duty of Prudence

In American Airlines,the district court was persuaded that BlackRock’s influence caused American Airlines and the EBC to breach their ERISA fiduciary duty of loyalty, but not their fiduciary duty of prudence.

Duty of Prudence

Under the ERISA duty of prudence, a plan fiduciary must discharge its responsibilities using “the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” (29 U.S.C. § 1104(a)(1)(B).)

The district court acknowledged that American Airlines and its EBC acted consistent with the prevailing industry standards for the duty of prudence, and in many ways actually “exceeded th[os]e standards.” (Am. Airlines, Inc., at pp. 47-52.) For example: 

  • EBC held quarterly meetings;
  • EBC “hired a well-qualified advisor by engaging in a competitive process involving several leading investment firms, all of whom provided extensive information regarding their experience, resources, and manager-research procedures;” 
  • EBC received written and oral reports from that advisor quarterly; and
  • American Airlines had internal investment professionals supplement external monitoring by independently meeting with investment managers, conducting independent due diligence, and reviewing and assessing quarterly reports before they went to the EBC.

The district court commented that the last step was “another layer of review that few large-plan fiduciaries replicate.” It conceded that “there is no evidence that a prudent fiduciary adhering to its monitoring processes would have taken some action that Defendants did not with respect to BlackRock.” The district court further acknowledged that most fiduciaries do not monitor proxy voting policies, and that the duty of prudence looks to what prudent fiduciaries would do in similar circumstances. Normally that would be the end of the analysis; however, the court found that this gold standard process could not protect American Airlines with respect to the duty of loyalty. 

Duty of Loyalty

Under the duty of loyalty, an ERISA fiduciary must act “solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of (i) providing benefits to participants and their beneficiaries and (ii) defraying reasonable expenses of administering the plan.” (29 U.S.C. § 1104(a)(1)(A).) The Supreme Court has interpreted “benefits” as used here to mean “financial benefits,” not “non pecuniary benefits.” (Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 421 (2014).)

The district court found “ERISA does not permit a fiduciary to pursue a non-pecuniary interest no matter how noble it might view the aim.” The district court relied on emails American Airlines executives sent in a non-fiduciary capacity to find that the EBC and American Airlines allowed corporate policies and BlackRock to influence the management and oversight of the Plan. According to the district court, the defendants failed to take necessary precautions to separate their publicly stated corporate agenda of pursuing ESG objectives from their separate ERISA fiduciary duty to maintain the plan for the exclusive purpose of providing benefits to its participants and defraying expenses.

The district court found it significant that American Airlines “officials regularly discussed ESG in favorable terms without identifying the economic basis for such a view.” It focused on communications among EBC members and American Airlines officials regarding BlackRock’s publicly stated ESG investing policies, but noted there was no formal evaluation or assessment done by the EBC of those policies. When BlackRock expanded its proxy-voting choices to allow participants more control in how their proxy votes are cast, the EBC did not discuss BlackRock’s new proxy voting options. The district court found the “absence of any internal analysis and monitoring of BlackRock’s proxy voting to pursue ESG further suggests that Defendants took insufficient precautions [to] keep the corporate and fiduciary duties separate.” The district court chastised American Airlines and the EBC for not closely monitoring plan proxy voting – something the district court acknowledges ERISA fiduciaries typically do not closely monitor. The district court found that, even though defendants use of BlackRock resulted in “comparatively lower fees,” American Airlines and EBC acted disloyally as it relates to BlackRock’s ESG investing because of their conflicting corporate and fiduciary interests.

The district court deferred its ruling on the issue of whether the plans suffered any damages, which has been fully briefed. If a judgment is issued, American Airlines may appeal the decision to the Fifth Circuit, but that circuit is generally not friendly to ESG policies. 

The American Airlines decision comes a few months after the Fifth Circuit remanded Utah v. Su

(109 F.4th 313, 322 (5th Cir. 2024)), a case challenging the DOL’s ESG-friendly investment rule, back to the Northern District of Texas to reconsider its decision in light of Loper Bright Enterprises (Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024)), overruling Chevron (Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 866 (1984), overruled by Loper Bright, 603 U.S. 369.)

On February 14, 2025, the Northern District of Texas district court upheld the ESG-friendly rule a second time, finding it is consistent with ERISA in saying that, between equal investment options, plan fiduciaries can choose “all valid options.” (Utah v. Micone, No. 2:23-CV-016-Z, 2025 WL 510331, at *1 (N.D. Tex. Feb. 14, 2025).) That case may also be appealed to the Fifth Circuit.

Summary

The American Airlines decision is a highly unusual ruling that finds a breach of the duty of loyalty but also holds that there was no breach of the duty of prudence. It remains to be seen whether this is an outlier decision that may be overturned on appeal or that may be applicable only in the Fifth Circuit if it is upheld. It seems unlikely to us that the case is the potential start of a larger trend. In any event, the case does provide a good primer on the procedural steps that a plan committee should follow to fulfill its duty of prudence regarding plan investments.