ERISA Class Action Review – 2025

In recent years, many investors, individual and institutional alike, have begun to consider environmental, social, and corporate governance factors in selecting investment funds. This practice, which has been referred to as “ESG (Environmental, Social, Governance)” investing, or more generically described under the heading of “sustainability and risk management,” has proven to be controversial, and has attracted attention from the plaintiffs’ bar. As a recent case from the U.S. District Court for the Northern District of Texas suggests, consideration of these factors, rather than the exclusive consideration of fund profitability, could lead to exposure for employers and investment managers under the ERISA. In Spence, et al. v. American Airlines, Inc., 2024 U.S. Dist. LEXIS 30254 (N.D. Tex. Feb. 21, 2024), the plaintiff, an American Airlines pilot, filed a class action seeking to represent a class of participants in the company’s 401(k) plans. Id. at *2. The plaintiff argued that plan fiduciaries violated their duties of loyalty and prudence by investing in underperforming environmentally and socially conscious funds, and by choosing funds that are managed by investment firms that pursue such goals through proxy voting and shareholder activism. Id. at 2-3. According to the plaintiff, firms like BlackRock had cast proxy votes that caused ExxonMobil and Chevron to adopt environmentally and socially conscious policies. Id. at *11. Because these policies allegedly resulted in declining stock prices, the plaintiff asserted claims for breach of fiduciary duty based on his plan’s decision to invest in funds managed by these individuals. Id. Interestingly, the plaintiff challenged not only discrete investment decisions, but also the individuals who had made this decision. That is, he argued that investing in funds managed by individuals who have signaled their commitment to socially and environmentally conscious investment is itself a breach of fiduciary duty. Id. at *3-4. The court referred to this as the “Challenged Managers theory.” Id. at *4. The airline and its employee benefits committee moved to dismiss. Id. at *4. The defendants asserted that the plaintiff’s failure to provide meaningful comparisons between the airline’s plans and supposedly better- performing plans was fatal to his case. Id. at *11-12. Finally, they urged the court to reject the plaintiff’s “Challenged Manager theory,” which the defendants described as being “as wrong as it sounds.” Id. at *2. In denying the motion, the court held that the plaintiff had presented a plausible theory by arguing that ESG funds systematically underperform and that plan fiduciaries breached their duties by selecting these allegedly underperforming funds. Id. at *10. According to the court, “[f]ailure to consider [the alleged underperformance of environmentally and socially conscious funds] gives rise to a plausible inference that defendants’ conduct was imprudent.” Id. at 10. The court further held that the plaintiff was not required to provide detailed benchmarks at the motion to dismiss stage. Id. at *12-13. The court noted that the plaintiff articulated a plausible story: First, that the defendants’ public commitment to environmental and social initiatives motivated the disloyal decision to invest plan assets with managers who pursue such objectives when making investment decisions, and second, that these investments underperformed relative to funds focused exclusively on profitability. Id. Additionally, the court held that the plaintiff’s claims that plan managers failed to faithfully investigate the availability of investments managed by individuals whose exclusive focus would be on profitability were plausible. Id. This focus on the identity of fund managers, rather than on specific actions taken by those managers, was an innovative theory, and one that the court adopted in full. Id. at *17-18. Spence et al. v. American Airlines, Inc. could be a bellwether for liability to come for fiduciaries considering environmental, social, and governance factors in their investment of retirement plan monies. Although Spence’s claims merely survived a motion to dismiss, it is noteworthy that the court did find them plausible. Employers and fund managers should keep a close on this space to determine whether other courts will join the U.S. District Court for the Northern District of Texas in allowing such claims to proceed. The U.S. Supreme Court’s landmark decision in Loper Bright Industries v. Raimondo , et al., 144 S. Ct. 2244 (2024), may also have important ramifications on the propriety of this kind of investing. In Loper Bright , the Supreme Court overturned the longstanding doctrine set forth in Chevron USA, Inc. v. Natural Resources Defense Council , 467 U.S. 837 (1984). Under the Chevron doctrine, courts were required to defer to an agency’s reasonable interpretation of an ambiguity in a law that the agency is charged with enforcing. Loper Bright did away with Chevron deference, giving courts greater latitude to impose their own interpretations. The Loper Bright decision is central to the issue of ERISA liability related to a sustainability and risk management investment strategy because, in a rule published in 2022, the U.S. Department of Labor explicitly

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