401(k) ESG lawsuit order cites 'cartel-like behavior,' could prompt more litigation

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Plaintiffs successfully sued American Airlines over an asset manager’s ESG considerations in the proxy-voting process, and that could get the plaintiffs’ bar quite interested in filing similar claims against 401(k) sponsors.

Plaintiffs in the first lawsuit over ESG in a 401(k) just saw a victory that could have enormous implications for asset managers and retirement plans.

Bạn đang xem: 401(k) ESG lawsuit order cites ‘cartel-like behavior,’ could prompt more litigation

In a long-awaited decision issued Friday, US District Court Judge Reed O’Connor found that American Airlines breached its fiduciary duties of loyalty to plan participants by choosing BlackRock as an asset manager within the firm’s $25 billion 401(k) plan system, “allowing their corporate interests, as well as BlackRock’s ESG interests, to influence management of the plan.”

It’s unclear whether the plaintiffs will be able to show the court that plan participants experienced any financial damages as a result of BlackRock’s inclusion and its use of ESG factors in deciding how to vote on proxy ballots. American Airlines, which is “reviewing the decision,” a spokesperson said in an email, could opt to appeal.

While the judge found a breach of fiduciary duty of loyalty, the same was not the case for an alleged breach of fiduciary duty of prudence.

“Put simply, loyalty serves as a critical backstop. In industries featuring oligopolist or cartel-like behavior – such as the retirement savings industry in which the largest investment managers own significant stakes in all of the relevant actors – industry norms are not enough to safeguard against breaches of loyalty,” O’Connor wrote. “Otherwise, such a low bar would encourage collusion, cause rampant evasion of ERISA’s stringent requirements, and wreak havoc for retirement plan beneficiaries.”

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The decision came a day after BlackRock announced its exit from the United Nations-convened Net Zero Asset Managers initiative. Numerous financial institutions have left net-zero groups in recent weeks, following pressure from Republicans, and ahead of President-elect Donald Trump’s return to office.

The court’s decision followed a four-day bench trial last summer.

“It’s a fascinating case – we’ve been tracking it very closely since it was first filed,” said Joshua Lichtenstein, partner at law firm Ropes & Gray. As it was initially brought, the lawsuit was broader in scope, he said.

In the end, it wasn’t about American Airlines making a deliberate decision on the use of environmental, social, or governance factors within the plan – it was about choosing a fund sponsor that considered those.

And in any case, nothing that was alleged was outside of industry norms, Lichtenstein said – and that is what makes the decision so potentially consequential. If the plaintiffs ultimately succeed, it may all but certainly encourage the plaintiff’s bar to bring claims against an untold number of 401(k) plans, much as has been done in regard to fees and investment selection.

“That’s a problem. That’s every 401(k) plan in America,” Lichtenstein said, referring to proxy-voting considerations by asset managers widely, not specific to BlackRock.

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There wasn’t any indication that American Airlines ever considered ESG factors in any decision, he said.

“The biggest question is: Are the damages large enough to make this type of claim appealing to the plaintiffs’ bar?” he said.

“While it’s clear this case is pretty politically motivated, those follow-up cases simply wouldn’t be.”

A single decision by a district-level court doesn’t necessarily mean there will be a deluge of successful cases brought on ESG within 401(k) plans, he said. And it’s impossible to know ahead of time the outcome of a potential appeal in the Fifth Circuit Court of Appeals, he said.

“It may be difficult to establish losses in this case, because the plaintiff’s case is premised primarily on the theory that BlackRock harmed retirement plan participants by voting for a slate of dissident directors at ExxonMobil in May 2021,” shareholder advocacy group As You Sow said in a statement. “Since the new board took over, XOM stock has more than doubled in value.”

Asset managers have long considered various ESG criteria within their broad investment decision-making process, even if funds do not hold themselves out as sustainable or ESG in nature. In part, that is because risks around ESG, especially climate change, are often considered financially material.

“If left to stand, the district court opinion in Spence v. American Airlines poses a serious threat to investors’ right to rely on financial advisors and asset managers or make their own informed decisions about how to invest their retirement savings,” said Danielle Fugere, president and chief counsel of As You Sow, in the group’s statement. “This decision is a threat to the fundamental tenets of capitalism.”

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