Class Action Challenging Private 401(k) Plan's ESG-Related Investments Moves Forward

In the latest legal challenge to the consideration of Environmental, Social, and Governance (ESG) factors in retirement investments, on February 21, 2024, the U.S. District Court for the Northern District of Texas denied American Airlines' motion to dismiss in Spence v. American Airlines, Inc., No. 4:23-cv-552 (N.D. Tex. June 2, 2023), a case alleging violations of fiduciary duties in the management of two of the company's 401(k) plans. As we previously discussed, this putative class action was brought by a plan participant in American Airlines' 401(k) Plan and its 401(k) Plan for Pilots (together, the Plan) against American Airlines, Inc. and the American Airlines Employee Benefits Committee. In his amended complaint, the plaintiff asserted two counts of fiduciary breach in connection with the selection and retention of ESG funds whose managers pursue non-economic ESG objectives instead of focusing exclusively on maximizing financial benefits for Plan participants. 

First, the plaintiff alleged that the defendants breached their fiduciary duty of prudence by (1) imprudently choosing to invest Plan assets with investment managers who pursue ESG objectives and (2) failing to monitor or stop these managers from pursuing objectives harmful to the Plan participants' investments. The plaintiff asserted that funds managed by ESG-focused investment managers have continually underperformed compared to other similarly situated funds due to investment managers casting proxy votes for ESG measures, for example. According to the plaintiff, the defendants knew or should have known of this underperformance, but they nonetheless selected and retained these investment managers despite knowledge that they pursued nonpecuniary ends. The defendants argued that the amended complaint failed to state a claim for breach of the duty of prudence because it provided no meaningful benchmark by which a court could conclude that the inclusion of ESG funds plausibly led to underperformance of the Plan. 

The court disagreed. It concluded that the plaintiff was not required to "plead the exact connection between the investment managers' alleged ESG proxy voting and the financial harm [he] suffered as a result," and requiring a benchmark for measuring performance was not required at this stage of the case, "given the inherent fact questions such a comparison involves." Instead, the court held that the amended complaint sufficiently alleged a breach of duty of prudence based on the allegation that, along with general reporting on the underperformance of ESG funds, the defendants should have considered various circumstances in which fund managers have cast proxy votes connected to ESG strategies that led to the decline in value of various stocks. "Failure to consider this information gives rise to a plausible inference that [d]efendants' conduct was imprudent."

The court also concluded that the plaintiffs had stated a claim for breach of the duty of loyalty, the second count of the amended complaint. The defendants had argued that the amended complaint lacked specific facts allowing for a conclusion that they chose "to invest Plan assets with investment managers who pursue ESG objectives instead of exclusively financial ends." The court found, however, that questions of motivation were also issues of fact not resolvable at this preliminary stage of the case. The court concluded that the plaintiff had met his pleading burden by "articulat[ing] a plausible story," i.e.: 

[d]efendants' public 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.

The plaintiff's victory may be short-lived, because on February 26, 2024, American Airlines quickly responded to the decision on the motion to dismiss by filing a motion for summary judgment, which will require the court to take another, more careful look at the plaintiff's allegations along with evidence presented by both sides in support of their respective positions. Though this case comes amid multiple ongoing legal and policy struggles over the role of ESG strategies in managed investments, Spence is one of the first private sector challenges to ESG fund performance. Because the case has survived a motion to dismiss, more plaintiffs will likely feel empowered to bring similar suits against ERISA plan fiduciaries. In particular, the court's focus on American Airlines' corporate ESG policies as relevant to its role as plan fiduciary raises the specter of suits seeking to draw similar connections between an employer's public commitments and its management of ERISA retirement plans. Though the plaintiff has far to go to reach a favorable judgment – and, it should be noted, plaintiffs seeking to bring similar suits may face higher hurdles in a different court with less conservative leanings – this latest development dampens the impact of the Biden Administration's recent win in the same court in Utah v. Walsh, No. 23-cv-16 (Jan. 26, 2023, N.D. Tex.), in which the Department of Labor's 2022 Rule permitting consideration of ESG factors that impact financial performance of investments in the management of ERISA plans was upheld.

Florida Office of Insurance Regulation Issues PBM Compliance Report 

Last year, Florida's Prescription Drug Reform Act (the Act) became effective. The law amended Florida's long-standing licensing regime for third-party administrators (TPAs) to include a host of provisions governing pharmacy benefit managers (PBMs), including a requirement that PBMs become fully regulated as insurance administrators. Last month, the Florida Office of Insurance Regulation (OIR) issued a report "to provide an implementation update on the status of all PBMs operating in th[e] state." In the report, OIR states that it has "taken numerous actions to ensure PBMs are in compliance with the new law including issuing official guidance, conducting public workshops and rulemaking, and making continued outreach" to PBMs. OIR also says it has "dedicated additional resources" to the application-review process. 

By January 1, 2024, all registered PBMs doing business in the state were required to have obtained certificates of authority (COAs) as insurance administrators in the state. Prior to the passage of the Act, 13 PBMs were authorized by the state as insurance administrators. Dozens of registered PBMs not previously authorized as insurance administrators applied for COAs prior to the deadline, a few surrendered their registrations, and several new PBMs sought COAs. State regulators have since initiated investigations for 10 entities that did not submit applications or take action before the deadline, and "[a]dditional regulatory or administrative actions will be based on the responsiveness of applicants, timeframes for information reported to OIR, and quality of the information reported by the applicant." According to the report, "OIR's greatest priority when monitoring and enforcing insurer and insurance-related entity compliance with statutory market conduct requirements is the protection of consumers. OIR's market regulation units monitor the conduct of insurers in the marketplace, enforcing Florida law through remediation and administrative action utilizing market conduct investigations and examinations."

Upcoming Speaking Engagements and Events

On March 7, Joanne Roskey will present the webinar "Are You Ready For It? Health Plan Fee Litigation (ERIC's Version)" in partnership with The ERISA Industry Committee (ERIC). 

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.