For the past two years, Encore’s Fid Guru Blog has been tracking and reporting on an unprecedented lawsuit seeking to infuse the already troubling onslaught of ERISA litigation with the politically charged debate regarding the extent to which retirement plan fiduciaries may incorporate environmental, social, and corporate governance (ESG) factors into their investment decisions. ESG investing has long been the subject of regulatory ping ponging between Democratic and Republican administrations in Washington, but until recently, that broader debate has managed to stay out of the lawsuits that have been brought against ERISA fiduciaries.
This all changed in 2023 when American Airlines was targeted in the first lawsuit (“The First ESG Breach of Fiduciary Duty Lawsuits”) specifically challenging an ERISA fiduciary’s potential consideration of ESG factors. And since its initial filing, that case has repeatedly defied expectations and common sense at each stage of litigation (“Open Borders Standard in American Airlines ESG Case”).
Most significantly, this past January, the United States District Court for the Northern District of Texas ruled (“American Airlines is Collateral Damage in Judicial Backlash Against ESG Investing – Four Thoughts and Recommendations for Plan Sponsors to Consider”) that American Airlines breached its fiduciary duty of loyalty by failing to hold its investment manager, BlackRock, accountable for BlackRock’s so-called ESG activism. Because the investments at issue were comprised of index funds, the district court’s ruling did not object to BlackRock’s management (and American Airlines’ oversight) of any fund’s portfolio. Rather, the district court’s ruling criticized BlackRock’s proxy voting practices, which it determined were influenced by ESG goals, and found American Airlines liable for a breach of its duty of loyalty because it knew about BlackRock’s proxy voting practices but failed to appropriately question or stop such practices.
Even putting that ruling aside, the ESG lawsuit against American Airlines has been remarkable for a myriad of other reasons. For example, in this case of first impression on the merits of ESG investing, the plaintiff’s claims did not challenge any ESG-themed funds. Rather, the plaintiff’s challenge centered on a suite of target date funds that were comprised exclusively of passive investments. Also, notwithstanding the court’s ruling against American Airlines on its fiduciary duty of loyalty, the court fully rejected the plaintiff’s claims rooted in the duty of prudence and ruled that a prudent fiduciary would not have reviewed BlackRock’s proxy voting, because it was common practice for fiduciaries not to scrutinize such voting. Furthermore, this case has been remarkable because of the district court’s scathing assessment of the retirement industry, stating that the industry demonstrates “oligopolist” and “cartel-like behavior” because the largest asset managers for the largest retirement plans own shares of their corporate plan sponsor clients. In the court’s view, this circumstance creates conflicts of interest that improperly influence employer decisions impacting oversight of asset manager actions, such as proxy voting.
Most recently, at the end of September, this case delivered yet another remarkable development when the district court issued its final judgment and, in doing so, refused to grant any monetary award in favor of the plaintiff. In this regard, the court rejected the plaintiff’s request for damages based on alleged losses to the plans and the plaintiff’s request for the disgorgement of alleged “ill-gotten gains” (more on these theories later). According to the court’s September order, the “Plaintiff failed to establish actual monetary losses to the Plan.”
In the end, the final judgment obtained by the plaintiff’s politically charged crusade against American Airlines has an unfortunate streak of irony. That is, the plaintiff’s lawsuit alleging that American Airlines engaged in political activism with no monetary benefit for the plan turned out to itself be a form of political activism with no monetary benefit for the plan.
Because of this final judgment, American Airlines will dodge the more than $1 billion in damages that the plaintiff requested. By rejecting all monetary awards for the plaintiff, this judgment was initially viewed as an important step in deterring future ESG litigation against similarly situated plan sponsors that used BlackRock and other investment managers that have been criticized for their alleged ESG activism. While the court’s final judgment did provide for equitable relief, including orders specifically directing American Airlines to take certain actions impacting the management of its plans, these equitable remedies pale in comparison to the wildly speculative monetary awards that the plaintiff sought.[1]
Unfortunately for American Airlines and other plan sponsors, the court’s final judgment is not actually the last word in this troubling case. Following the court’s September order, the plaintiff’s attorneys filed a motion asking the court to award nearly $8 million in attorneys’ fees. If the court grants the millions of dollars requested in attorneys’ fees, it will provide plenty of incentives for copycat lawsuits against similarly situated plan sponsors.
Key Point #1: The final judgment confirms that the American Airlines case should never have advanced this far.
After two years of litigation, the district court’s final judgment eventually recognized that the plaintiff’s theory was missing one very important element that should have prevented this case from ever advancing – i.e., the plaintiff could not identify actual monetary losses for the plans or their participants. Of course, it is better that the court reached this conclusion later rather than never, but the plaintiff’s and court’s inability to identify cognizable losses is very telling that the case against American Airlines should have never advanced this far. Moreover, it raises serious questions about the extent to which the plaintiff ever had the standing necessary to bring this case in the first place.
For two years, American Airlines has been tied up in court filings, has had its executives tied up in discovery requests, has been labeled as putting “wokeness” above its employees’ well-being, and, presumably, has spent millions of dollars in defense costs. And for what? Absent any finding of losses to the plan, it appears that American Airlines’ only mistake was having its own corporate ESG objectives, which the district court emphasized in its January order, and failing to confront BlackRock about its proxy voting practices as aggressively as a .[2] In its January order, the district court pointed to those efforts as examples of how American Airlines should have carried out its fiduciary duties under ERISA.
As the final judgment demonstrates, this theory of liability was flawed from the beginning because, regardless of how other actors may have responded to BlackRock’s proxy voting practices, American Airlines prudently managed its plans’ investments, and, according to the court’s ultimate ruling, it never allowed ESG considerations to result in any actions that caused a loss to the plans or their participants. In effect, this inability to identify any losses for the plans reveals that the court’s earlier findings were really a way to admonish American Airlines and BlackRock, rather than righting a wrong being done to the plan.
This should not, however, be the basis for fiduciary liability under ERISA. Furthermore, as discussed below, such an approach would also empower plaintiffs and plaintiffs’ attorneys to second guess fiduciary decisions at great cost to the defendants and the court system, even when the plan and participants have not been harmed and thus do not have standing to bring a suit.
Key Point #2: The final judgment appropriately rejected the plaintiff’s wildly speculative damage calculations.
The district court’s January order clearly expressed the court’s disapproval of the general concept of ESG investing, BlackRock’s ESG-influenced proxy voting practices, and what the court characterized as American Airlines’ indifference to, if not support for, those practices. And while the court was willing to accept the plaintiff’s imaginative construction of these circumstances to a point, its final judgment correctly recognized that the plaintiff’s damage calculations were far too speculative and could not justify any monetary award for the plaintiff.
Shortly after the court’s January order finding American Airlines liable for a breach of fiduciary duty of loyalty, the plaintiff filed a supplemental brief requesting that the court award monetary damages based on three theories.[3] First, the plaintiff sought damages equal to the amount that American Airlines paid to BlackRock for investment management fees ().[4] Second, the plaintiff sought damages equal to the temporary drop in the price of Exxon stock following BlackRock’s ESG-influenced proxy challenges against Exxon (approximately $9-16 million).[5] And third, the plaintiff sought damages of more than $1 billion, which in the plaintiff’s view, equaled the economic benefit that American Airlines received by declining to challenge BlackRock’s proxy voting practices.[6]
With regard to this third theory of damages, which was clearly the most outlandish, the plaintiff argued that American Airlines, as the sponsor for its retirements plans, was afraid to challenge BlackRock’s proxy voting practices because BlackRock is one of American Airlines’ largest shareholders. The argument was that if American Airlines had challenged BlackRock’s proxy voting practices, as a major shareholder, BlackRock would have retaliated through a proxy fight against American Airlines. That action, in the plaintiff’s view, would have caused American Airlines’ stock price to drop, thereby reducing American Airlines’ market capitalization by more than $1 billion (at least temporarily). According to the plaintiff, by avoiding such a challenge, American Airlines should be viewed as receiving “ill-gotten gains” for the same amount.
Although the court provided very little explanation for why it rejected all these theories, through its final judgment, the court determined that each of these awards were unwarranted. Even without an explanation, however, one can surmise that the court simply found each of these calculations far too attenuated and far too speculative. Moreover, the alleged damage calculations regarding Exxon stock were especially unfounded because they were based on a temporary drop in Exxon’s stock price. Because the BlackRock funds were index funds and retained Exxon holdings throughout the challenged period, it has been very difficult to envision any damages based on temporary price drops for Exxon – in fact, Exxon’s stock prices have dramatically increased over the past few years. Furthermore, it is not difficult to assume that the court simply found that argument to be too fantastical to justify any monetary award damage calculation tied to an imaginary proxy fight between American Airlines and BlackRock.
As noted earlier in this post, it is better that the court rejected these damage theories later, rather than never, but it is still very concerning that the case was allowed to advance all the way through trial in the absence of any monetary losses beyond the speculative and debunked awards described in the preceding paragraphs. Courts should not be entertaining abstract fiduciary challenges by waiting until after trial to evaluate the plausibility of actual damages.
Key Point #3: The final judgment is practically helpful and analytically alarming.
So, what are we to make of a case in which an employer is found liable for a fiduciary breach, but the plaintiff is unable to identify any monetary damages? The answer depends on whether you are looking at the case from an immediate practical perspective or an analytical perspective.
From an immediate practical perspective, the court’s denial of a monetary award in favor of the plaintiff is a helpful first step in deterring copycat lawsuits from being filed in the future. However, as discussed further below, this will only remain helpful to the extent that the court also rejects the millions of dollars requested in attorneys’ fees.
The theory accepted by the district court’s January order was that American Airlines failed to hold BlackRock accountable for its ESG-influenced proxy voting practices and, at a minimum, American Airlines should have monitored BlackRock more closely and asked more exacting questions about BlackRock’s focus on ESG factors. However, as demonstrated in the court’s January findings of fact, American Airlines implemented an extremely rigorous fiduciary process and utilized multiple experts to help it comply with its fiduciary duties.
Given these robust procedures, if American Airlines was ordered to compensate the plaintiff for its oversight of BlackRock’s proxy voting practices, virtually every other employer who invested in BlackRock funds during the same period is similarly at risk of being named in a lawsuit with these same allegations. And obviously, a large monetary award in favor of the plaintiff would have turbocharged litigation against these similarly situated plan sponsors.
Fortunately, by limiting its remedies exclusively to equitable (i.e., non-monetary) relief for the plaintiff, the court has, at least for now, been able to calibrate the impact of its ruling. The court was able to admonish BlackRock for its ESG-influenced proxy voting practices and American Airlines for its failure to challenge those practices. Injunctions and other equitable remedies addressing how retirement plan committees vote proxies, select committee members, manage potential conflicts, and report on corporate financial relationships do not drive waves of litigation.
In sharp contrast to the immediate practical impact of the court’s final judgment, the court’s overall approach to the American Airlines case represents a very concerning development from an analytical perspective. And if adopted more widely, this approach would enable plaintiffs to pursue fiduciary breach claims without ever identifying monetary damages. That is, if plaintiffs must only show that a fiduciary breach occurred in the abstract, without any showing of monetary damages or standing, unhappy plan participants could file lawsuits seeking nothing more than changes to the processes used by plan fiduciaries and investment committees.
Consider, for example, a hypothetical retirement plan for which the investments perform in the top one percent of all plans and the investment fees are the lowest in the market. The district court’s approach to the American Airlines case suggests that a dissatisfied plan participant could bring a lawsuit to compel the plan’s fiduciaries to somehow enhance their fiduciary process. For example, under the district court’s approach, even if a plaintiff could not identify any financial losses to the plan or its participants, unhappy participants could nevertheless bring lawsuits to require plan committees to meet more frequently, hire independent experts, conduct RFPs on a more frequent basis, or provide other court-fashioned disclosures to participants. Rather than showing any losses to the plan or any individual account, the plaintiffs would only need to show that the fiduciary process allegedly could have been improved in some way. This is a clear violation of the constitutional requirement that, in order to have standing to sue, plaintiffs must be harmed in some way that can be remedied by a court.
Key Point #4: Stand-alone attorneys’ fees could propel copycat litigation.
As noted above, although the court was unable to find any losses to the plan and it fully denied any monetary award for the plaintiff, the plaintiff’s attorneys have requested that the court order American Airlines to pay $8 million in attorneys’ fees. According to their filing, this request reflects the three years and more than 6,000 hours that the attorneys spent litigating the case.
For a case in which the plaintiff attorneys were unable to secure any financial award for the plan and its participants, this $8 million request is a stunning amount. The typical contingency fee model for class action litigation, where plaintiff attorneys keep 1/3 of the monetary award or settlement intended for plan participants, has been a tremendous drain on the employer-sponsored retirement plan system. It takes substantial portions of any recovery away from the employees and retirees who would otherwise benefit and provides it to the plaintiff attorneys.
If the court grants the request in this case, plaintiff attorneys would still profit even when the plaintiffs they represented incurred no financial losses and recovered no financial award.
Moreover, if the plaintiff’s attorneys are ultimately able to collect substantial fees, it will create strong incentives for plaintiff firms to bring copycat lawsuits against similarly situated employers. If the lawyers who brought this ESG suit are successful in receiving the amount requested, a new wave of ERISA class litigation could cut the plan participants out completely and focus solely on the plaintiff attorneys seeking a financial award. Contrary to the purpose of ERISA, which is intended to protect the participants of retirement plans, the only monetary awards in these cases would benefit plaintiff firms.
ERISA is intended to protect employee benefits and ensure that employees can vindicate their rights. It is not intended to manufacture attorneys’ fees that are fueled by meritless litigation.
[1] For example, the court’s final judgment: (i) prohibits American Airlines from permitting any proxy voting activities on behalf of the plan that are directed towards non-pecuniary ends; (ii) requires American Airlines to appoint at least two independent members of its plan committee; (iii) requires American Airlines to produce an annual report identifying any financial relationships between American Airlines and its investment managers; (iv) requires American Airlines to publicly disclose on its website its membership in any organization devoted to diversity, equity, and inclusion (DEI), ESG, or climate-focused objectives; and (v) prohibits American Airlines from using BlackRock, or any other asset manager that is a significant shareholder of American Airlines (who owns more than 3% of the airline’s shares) or who holds any of the airline’s fixed debt, without policies preventing those who maintain the corporate relationship with the asset manager from also being plan fiduciaries or playing a role in managing the plan.
[2] As an example, in 2021, Texas passed a law preventing its state pension funds from investing with financial companies that boycott energy companies.
[3] See Plaintiff’s Supplemental Brief, Case No. 4:23-cv-00552-O (Filed February 14, 2025).
[4] Id. at 25.
[5] Id. at 6-8.
[6] Id. at 25.
