Court denies motion to dismiss claims in novel anti-ESG investing lawsuit

On February 21, 2024, the US District Court for the Northern District of Texas denied a motion to dismiss a novel lawsuit against American Airlines, Inc., and their Employee Benefits Committee (together, American Airlines), which challenges American Airlines’ environment, social, and governance (ESG) investment policies.[1]

Bryan T. Spence, an American Airlines pilot and instructor, sued the airline under the Employee Retirement Income Security Act of 1974 (ERISA) for breach of the fiduciary duties of loyalty and prudence. Spence alleges that by investing his 401(k) plan(s) in ESG initiatives, American Airlines “violated their fiduciary duty by knowingly including funds ‘that are managed by investment managers that pursue non-financial and nonpecuniary ESG policy goals through proxy voting and shareholder activism’ on their investment portal… .”

At the motion to dismiss stage, a court takes all undisputed facts from a plaintiff’s complaint as true. It then views them in the most favorable light to determine whether the plaintiff has put forth sufficient facts for the case to proceed. Here, the District Court analyzed Spence’s duty of loyalty claim and duty of prudence claim separately and held that Spence alleged sufficient facts for both claims, allowing his case against American Airlines to proceed.

Duty of prudence

The duty of prudence requires a fiduciary to exercise prudence in selecting and managing investments, which includes the duty to monitor investments and remove imprudent ones. Here, Spence alleged that American Airlines failed to consider that ESG funds are “known [to have] poor performance [] relative … to similar … investments available in the marketplace” and that funds were harmed by “the particular proxy voting and shareholder activism of the investment managers that American Airlines selected, included and retain in the Plan.”

In evaluating a motion to dismiss, the court held that it consider circumstantial factual allegations. From these, it inferred that the selection and monitoring process is flawed. The court found that Spence’s allegations are sufficient to “reasonably infer that [American Airlines’] process is flawed.” Spence did not need to allege facts “specifically showing how investment managers’ funds underperformed nor [] facts connecting the investment managers’ proxy votes for ESG measures to the alleged underperformance.”

Duty of loyalty

Under ERISA, the duty of loyalty requires that a fiduciary discharge its duties “for the exclusive purpose of providing benefits to participants and their beneficiaries.” 29 U.S.C. § 1104(a). Here, the court stated that Spence’s allegations, based solely on American Airlines’ public commitment to ESG initiatives, stated a plausible claim of violation of the duty of loyalty.

The court held, “Plaintiff articulates a plausible story: [American Airlines’] commitment to ESG initiatives motivated the disloyal decision to invest Plan assets with managers who pursue non-economic ESG objectives through select investments that underperform relative to non-ESG investments, all while failing to faithfully investigate the availability of other investment managers whose exclusive focus would maximize financial benefits for Plan participants.”

Key takeaways

Investment fiduciaries – including non-ERISA fiduciaries – are encouraged to pay close attention to this case and how it develops. Although this case arose under ERISA, courts often look to ERISA as persuasive authority when evaluating investment fiduciary duties under state law.

Further, the Securities and Exchange Commission (SEC) often takes an expansive view of the scope of the federal fiduciary duty under the Investment Advisers Act of 1940. In this regard, the SEC has proposed a rule designed to enhance disclosures by certain investment advisers and investment companies about ESG investment practices, which demonstrates the SEC’s focus on these areas.[2]

If you have any questions regarding this case and its implications, please contact the authors.


^{[1] Spence v. American Airlines, Inc., No. 4:23-cv-005520-O (N.D. Tex. Feb. 21, 2024) (order denying motion to dismiss).
[2] See https://www.sec.gov/rules/2022/05/enhanced-disclosures-certain-investment-advisers-and-investment-companies-about#33-11068.}