American Airlines Found Liable for Fiduciary Breach in ESG Lawsuit

On January 10, 2025, a federal court in Texas ruled that American Airlines, Inc. (American) and its employee benefits committee (EBC) violated their fiduciary duty of loyalty to an American 401(k) Plan (the Plan) by "investing—or relying on others to invest—their employees' retirement assets towards environmental, social, and governance ('ESG') objectives." The case, Spence v. American Airlines, Inc., No. 4:23-cv-552, (N.D. Tex.), has generated significant attention as one of the first private-sector challenges to ESG-related investments brought under ERISA's fiduciary duty provisions. The ruling in favor of the class of Plan participants is notable in multiple respects and emphasizes the need for plan sponsors to separate their corporate and fiduciary roles and decision-making. 

The court concluded that the plaintiff had successfully demonstrated that American and the EBC breached their ERISA duty of loyalty, but failed to demonstrate that the defendants breached their duty of prudence. The split decision on the duties of loyalty and prudence rested heavily on the court's understanding of American's relationship with BlackRock, one of the Plan's investment managers. Although the ruling states that the "duties of prudence and loyalty comprise two sides of the same coin," it found in this case, where "the largest investment managers own significant stakes in all of the relevant actors—industry norms [that set the bar for the duty of prudence] are not enough to safeguard against breaches of loyalty."

The ruling explains in some detail the court's understanding of "ESG investing" and BlackRock's – and, to a lesser extent, American's – "positive view" of the same. In the court's view, "an investment strategy assumes an ESG label when it is aimed at, in whole or in part, bringing about certain types of societal change." The court contrasted "ESG investing" with "[i]nvesting that aims to reduce material risks or increase return for the exclusive purpose of obtaining a financial benefit." The ruling goes on to recount BlackRock's "parabolic" ESG activism during the relevant time period, particularly as related to its proxy-voting practices. The decision details evidence demonstrating that American executives with fiduciary responsibilities to the Plan were aware of and evinced support for BlackRock's ESG-related activities, "despite acknowledging that ESG investments are known to have low performance."

On the duty of prudence, the court concluded that the defendants' practices regarding selection and oversight of investment managers including BlackRock met or surpassed prevailing industry standards, noting that "Plaintiff identified not one fiduciary with a more rigorous monitoring process than Defendants." However, the court opined that it found it "problematic" that the "incestuous" nature of the retirement plan industry permitted continuance of ESG investing despite evidence, not discussed in the opinion, that such investments were not in the financial best interest of retirement plans.

On the duty of loyalty, however, the court found that the evidence showed that American "acted disloyally by failing to keep American's own corporate interests separate from their fiduciary responsibilities." The court pointed to BlackRock's "outsized influence" on defendants as a major investment manager and a major American shareholder. The court also found that American's own ESG-related corporate goals influenced the management of the Plan, pointing to statements of certain corporate executives who also provided fiduciary oversight to the Plan that "made clear that officials regularly discussed ESG in favorable terms without identifying the economic basis for such a view." The court asserted: 

It is this evidentiary combination—Defendants' undeniable corporate commitment to ESG plus the endorsement of ESG goals by those responsible for overseeing the Plan plus the influence of and conflicts of interests with BlackRock plus the lack of separation between the corporate and fiduciary roles that reveals Defendants' disloyalty. Taken together, the evidence paints a convincing picture that Defendants breached the duty of loyalty—either in service of BlackRock's demands, in pursuit of American's own corporate goals, or both.

The court deferred addressing actual losses and remedies pending further briefing from the parties. The Department of Labor's (DOL) 2022 Rule permitting consideration of ESG factors in certain situations was not mentioned in the ruling. An appeal is expected following issuance of a final judgment.

Supreme Court Issues Decisions on Two Petitions for Certiorari Impacting Benefits 

On January 10, 2025, the U.S. Supreme Court granted the government's petition for certiorari in Becerra v. Braidwood Mgmt, Inc., No. 24-316, to review the Fifth Circuit's decision finding that the appointment of members of the U.S. Preventive Services Task Force (PSTF) violates the Appointments Clause of the U.S. Constitution. As previously discussed, the Fifth Circuit reversed the district court's nationwide injunction in this case, significantly limiting the lower court's ruling such that the injunction only pertains to the plaintiffs in the case and keeping the preventive services mandate of the Affordable Care Act (ACA) in force. The resolution of this case will be important to the future fate of the preventive services mandate given that mandatory coverage of preventive services turns, in part, on the PSTF's recommendations. It could also spur other Appointments Clause challenges to other federal appointments.
 
In addition, on January 13, 2025, the Court denied a petition for certiorari filed by Tenneco, Inc. and several of its subsidiaries urging the repudiation of the "effective vindication" doctrine in the context of an ERISA breach of fiduciary duty claims. As previously discussed, the district court and Sixth Circuit determined that the arbitration provision in the plan document was improper because it required plan participants to act in their individual capacity and therefore prospectively waive their statutory right under ERISA § 502(a)(2) to bring claims on behalf of the entire plan. The Sixth Circuit decision in this case is aligned with cases within the Second, Third, and Tenth Circuits upholding the doctrine and finding that rights under ERISA to represent the plan to seek monetary relief should displace the fundamental right to contract to arbitrate under the Federal Arbitration Act (FAA). 

DOL Issues Update to Voluntary Fiduciary Correction Program

On January 14, 2025, the Employee Benefits Security Administration (EBSA) published amendments to its Voluntary Fiduciary Correction Program (VFC Program), which are expected to take effect on or around March 15, 2025. The VFC Program is designed to encourage correction of fiduciary breaches and compliance with the law by permitting persons to avoid potential EBSA civil enforcement actions and penalties if they voluntarily correct eligible transactions in a manner consistent with the VFC Program. The amendments add a self-correction feature for delinquent transmittal of participant contributions and loan repayments to a pension plan under certain circumstances, clarify and expand transactions eligible for correction, and simplify requirements for participation in and correction of transactions under the VFC Program. In addition, the amendments implement provisions of the SECURE 2.0 Act by adding a self-correction feature for certain participant loan failures self-corrected under the Internal Revenue Service's (IRS) Employee Plans Compliance Resolution System (EPCRS). These amendments were accompanied by amendments to Prohibited Transaction Exemption (PTE) 2002-51, an exemption for certain transactions identified in the VFC Program.

DOL Issues Field Assistance Bulletin Addressing Transfers to State Unclaimed Property Funds

On January 14, 2025, EBSA issued Field Assistance Bulletin (FAB) 2025-01 announcing a temporary enforcement policy applicable to small pension benefit payments owed to missing participants or beneficiaries paid over to a state unclaimed property fund. The FAB sets forth five conditions that must be satisfied for the temporary enforcement relief. According to the FAB:

Pending further guidance, the Department will not pursue violations under ERISA section 404(a) in connection with the voluntary decision to transfer retirement benefit payments (including uncashed checks) owed to a missing participant or beneficiary from an ongoing pension benefit plan to a state unclaimed property fund, provided the present value of the participant's or beneficiary's nonforfeitable accrued benefit is $1,000 or less and the plan fiduciary complies with the applicable conditions set forth in this memorandum. For purposes of determining the present value of the benefit, the fiduciary must disregard the amount of any outstanding plan loans but must include rollover contributions described in Internal Revenue Code section 411(a)(11)(D).

IRS Releases 2025 Multiplication Factors for No Surprises Act QPA Increases

The IRS issued Notice 2025-12, effective January 1, 2025, with annual and cumulative percentage increase multiplication factors for calculating qualified payment amounts (QPA) under the No Surprises Act (NSA) for 2025. A plan or issuer may choice whether to use the cumulative percentage increase or the percentage increase, but the selected method must be applied consistently for all QPAs for items and services furnished in 2025. 

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