The ink was barely dry on the denial of a motion to dismiss the suit, when American Airlines filed a motion of summary judgement, claiming that “there is no genuine issue as to any material fact and the [movant] is entitled to judgment as a matter of law.”
Where We’ve Been
Participant-plaintiff (and pilot) Bryan P. Spence filed suit in the U.S. District Court for the Northern District of Texas in June 2023 against Defendants American Airlines, Inc., American Airlines Employee Benefits Committee, Fidelity Investments Institutional, and Financial Engines Advisors, LLC (he subsequently dropped the latter two). The suit alleged that they “breached their fiduciary duties in violation of ERISA by investing millions of dollars of American Airlines employees’ retirement savings[i] with investment managers and investment funds that pursue leftist political agendas through environmental, social and governance (‘ESG’) strategies, proxy voting, and shareholder activism—activities which fail to satisfy these fiduciaries’ statutory duties to maximize financial benefits in the sole interest of the Plan participants.” The suit had also challenged “the unlawful decision to pursue unrelated policy goals over the financial health of the Plan.”
Since then, the two parties have gone back and forth (and back and forth…)—American Airlines filing a motion to dismiss, plaintiff Spence challenging that, and amending the suit, and the American Airlines defendants pushing back on those claims—arguing, among other things, that the plaintiff hadn’t even been invested in those particular funds.
Most recently Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas (Spence v. Am. Airlines, Inc., N.D. Tex., No. 4:23-cv-00552, 2/21/24) outlined two issues raised by participant-plaintiff Spence that constituted a breach of the duties of loyalty and prudence; first that by including the (allegedly underperforming) ESG funds in the plan the defendants failed to act in the best interests of participants—though Judge O’Connor noted that the plaintiff had since dropped this “Challenged Fund Theory to streamline this case and focus on the primary issue.”
And then, in an extraordinary “pivot” in a case chock full of these types of abrupt shifts, noted that the suit now alleges that “Defendants 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 (the ‘Challenged Manager Theory’).”
More specifically, Judge O’Connor noted that Spence’s argument was that the plan “primarily contains funds administered by investment management firms like BlackRock, Inc.,” and that those firms “pursue pervasive ESG agendas”—an “engagement strategy” that “. . . covertly converts the Plan’s core index portfolios to ESG funds”—which, in turn, harms participant financial interests “because BlackRock focuses on socio-political outcomes instead of exclusively on financial returns.” The suit also claimed that American Airlines’ corporate embrace of ESG principles had permeated the perspectives/judgement of the plan’s investment committee.
The Motion for Summary Judgement
Which brings us to the current motion for summary judgement by the American Airlines defendants—basically asking the court to rule in their favor without having a trial.
Right off the bat, American Airlines called out the “shifts,” commenting that “through his expert’s reports, Plaintiff has instead shifted to a new theory found nowhere in the Amended Complaint (and was thus not addressed in the Court’s Order on Defendants’ motion to dismiss). Under this new theory, Defendants’ supposed breach was not the selection or retention of any managers or funds but instead the EBC’s failure to demand that one particular manager—BlackRock—change its proxy voting activity.”
More particularly, that their failure to do so with regard to a May 2021 Exxon board election had a negative impact on the value of energy stocks (ultimately reducing the value of the Plans’ index funds that held positions in energy stocks). Or at least in an eight-day window following that meeting, as that is (apparently) the only period for which the plaintiff’s expert provided any analysis.[ii]
Acknowledging the recent decision (by the same judge who will rule on this motion for summary judgement), American Airlines stated that “…while the Court recently held that Plaintiff adequately pleaded the Amended Complaint’s separate theory that Defendants improperly offered funds with traditional strategies whose managers nevertheless pursue illicit ESG objectives through proxy voting (the “Challenged Manager Theory”), Plaintiff has not developed any evidence in support of that theory in discovery. To the contrary, the record establishes that Defendants’ process[iii] for selecting and monitoring investment options was at all times state of the art[iv] and Defendants secured contractual commitments from all investment managers to pursue investors’ financial interests when voting the Plans’ proxies. There is no evidence, in particular, that the Plans’ fiduciaries were motivated in their investment decision making by any improper considerations—including American Airlines’ business goals (ESG-related or not).”
Ultimately, the defendants noted that “Plaintiff has simply failed to compile proof to substantiate the allegations the Court found sufficient to survive Defendants’ motion to dismiss. Defendants are accordingly entitled to summary judgment on all theories actually set forth in the Amended Complaint. And that should be the end of this case, as a Plaintiff obviously cannot avoid summary judgment by relying on claims or a theory found nowhere in his complaint.”
‘An Unpleaded Theory’
Indeed, the argument continues that, “unable to prove the complaint’s allegations, Plaintiff has pivoted (through his expert’s report) to an unpleaded theory that Defendants should have maintained their investments in managers with misguided proxy votes and capitalized on the Plans’ continuing investment with one such manager—BlackRock Inc.—in order to change a single BlackRock proxy vote in a May 2021 election of Exxon board members. Plaintiff speculatively contends that, facing pressure from Defendants alone, BlackRock would have voted the shares it held for all BlackRock fund investors differently in that election. Like his pleaded theories, however, Plaintiff’s unpleaded theory fails for want of proof”—and, as they then note, for lack of evidence of any loss as a result. “Although Plaintiff’s expert purports to calculate how much Exxon shares moved in the few days around the vote, his own admissions make clear that he has been unable to assess whether the vote has had any enduring effect on the Plans’ level of wealth today.”
American Airlines noted that it had, “consistent with the Plans’ investment policy statement,” delegated the responsibility for proxy voting to the Plans’ investment managers, explaining that such delegations are “commonplace,” due to the sheer volume of proxy votes. They did, however, outline a process in place to review due diligence efforts regarding investment managers’ proxy voting, and “Aon confirmed that, as part of its due diligence in evaluating Aon-rated investment strategies, Aon had an established process for monitoring proxy voting that included, among other things, reviewing the proxy voting decision making process and noting whether and why votes deviated from the ‘default position.’”
Moreover, American Airlines noted that “Aon further explained that, in response to recent Department of Labor ‘guidance,’ Aon would present additional information to the EBC regarding the results of its proxy voting due diligence on an annual basis.”
And then—arguing that the plaintiff had failed to establish a case—submitted a motion to the court for summary judgement.
Stay tuned.
[i] Ironically, in a footnote in the motion for summary judgement, American Airlines notes that, “In or around February 2020, the EBC considered the possibility of adding a fund with an ESG-focused investment mandate to the lineup in light of a desire expressed by the Allied Pilots Association (the pilot’s union) for such a fund. The Chair of the EBC, Elise Eberwein, expressed reluctance to offer an ESG fund if it did not have excellent performance and asked American’s asset management group to help her ‘understand general trends as it relates to ESG in the investment arena.’ Per Eberwein’s request, the asset management group researched ESG trends among 401(k) Plans, solicited information from Aon, the Plans’ recordkeeper, Fidelity, and American’s defined benefit plan investment advisor, American Beacon, and prepared a short presentation for the EBC’s March 2, 2020 meeting. The presentation emphasized that Plan fiduciaries may not put other considerations ahead of pecuniary factors such as risk-adjusted investment returns. Ultimately, the EBC did not include an ESG fund in the Plans’ core investment lineups.”
[ii] American Airlines later notes that “this is important because substantial information has arisen since the May 2021 Exxon board election that has calmed any initial market concerns that the dissident directors would cause Exxon to pursue environmentally-friendly policies at the expense of financial performance or that BlackRock would support similar shareholder actions at other energy companies. Though Heaton (the plaintiff’s expert) conceded that these events would logically have a positive influence on the energy companies’ stock prices, he did not attempt to take these events into account so as to measure the net effect of BlackRock’s Exxon proxy vote on the value of the Plan’s shareholdings today.”
[iii] To further emphasize the prudence of their process, American Airlines explained that “as the Plans assets have grown over time, the EBC has used their increasing assets under management to obtain better economic terms for participants in the Plans. For instance, in 2017, the asset management group, on behalf of the EBC, negotiated for reduced asset-based fees from BlackRock. In 2018, American’s asset management group again negotiated with BlackRock to obtain even more favorable fee terms, including an increase in the Plans’ share of securities lending revenues. In 2022, the EBC, with Aon’s assistance, conducted a competitive RFI for index fund providers and evaluated Vanguard, State Street, BlackRock, and Mellon Capital Management across numerous metrics, including fees, performance, assets under management, and securities lending returns. The RFI confirmed that BlackRock’s fees were generally lower than its competitors across nearly all strategies and that BlackRock offered more favorable projected securities lending yields.”
[iv] First, the EBC relied upon the “well-established and highly respected investment consulting firm,” Aon Investments USA, Inc. to act as the Plans’ investment advisor. Second, the EBC also received advice from an internal team of investment professionals in American’s asset management group, who provided their own expertise and served as an additional layer of oversight over Aon’s work. The asset management group met with all the Plans’ investment managers (as well as prospective investment managers) on at least a quarterly basis to better understand their investment strategies. They also met with Aon regularly, reviewed extensive quantitative data and qualitative information, and conducted their own independent analyses…”
