Just a few years ago, ESG was one of the most important themes in the corporate and securities world. Companies were under pressure to demonstrate their sustainability qualifications and otherwise establish their ESG credentials. But then came the ESG backlash, and many companies found (and, indeed, continue to find) themselves attacked for their ESG efforts. The backlash has taken the form both of legislation and litigation. And while the ESG backlash litigation claimants have not always done well, there have also been some notable recent successes.

The most recent ESG backlash litigation success is in the ERISA liability action that an American Airlines pilot filed against American Airlines and its Employee Benefits Committee. In a January 10, 2025, post-trial decision (here), the court ruled, following a four-day evidentiary hearing, that the defendants had violated their duties of loyalty by encouraging employee 401(k) investment in BlackRock ESG funds. The court’s opinion is harsh in its criticism of the airline for advancing its corporate interest in ESG over the interests of the plan participants and for failing to examine and address the company’s conflicted relationship with BlackRock.  

Background

On June 2, 2023, an American Airlines pilot filed an ERISA class action lawsuit in the Northern District of Texas against American Airlines and its Employee Benefits Committee. The gist of the complaint is that the defendants “breached their fiduciary duties in violation of ERISA by investing millions of dollars of American Airlines employees’ retirement savings 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 complaint alleges that the defendants breached their fiduciary duties of prudence and loyalty to the Plan and the Plan participants and beneficiaries by selecting ESG funds and funds that are managed by investment companies – and, specifically, BlackRock — that pursue ESG objectives through proxy voting and shareholder activism.

As discussed here, in a February 21, 2024, opinion, Northern District of Texas Judge Reed O’Conner denied the defendants’ motion to dismiss, finding that “at this stage” in the proceedings, the plaintiff “has provided sufficient facts to support his breach of prudence claim.” The court also denied the defendants’ motion to dismiss the plaintiff’s claims that the defendants also breached their duty of loyalty in choosing to invest Plan assets with investment managers who pursue ESG objectives instead of exclusively financial ends.

The Court’s Post-Trial Findings and Conclusions

In a 70-page January 10, 2025, statement of Findings of Fact and Conclusions of Law, written after a four day bench trial, Judge O’Conner concluded that “the facts compellingly demonstrated that Defendants breached their fiduciary duty by failing to act to loyally act solely in the retirement plan’s best financial interests by allowing their corporate interests, as well as Black Rock’s ESG interests, to influence the management of the plan.”

However, Judge O’Conner also held that “the facts do not compel the same result for the duty of prudence.” The defendants, the court said, “acted according to the prevailing industry practices, even if leaders in the fiduciary industry contrived to set the standard.” This, the court said, is “fatal to the Plaintiff’s breach of prudence claim.”

In his review of the factual record, several of Judge O’Conner’s factual findings proved to be crucial to his ultimate legal conclusions. The first it that American Airlines had a corporate ESG commitment and had concluded that ESG efforts are “a key part of its success and an important part of its long-term strategy.” Consistent with this strategy, “American officials with fiduciary responsibilities expressed a positive view of ESG investing” and “express[ed] support for BlackRock’s ESG objectives.” Judge O’Conner also extensively reviewed BlackRock’s publicly stated corporate commitment to ESG goals. The extent of BlackRock’s commitment to ESG is a recurring theme and a steady undercurrent in the court’s post-trial conclusions.

However, Judge O’Conner found, “in addition to its corporate ESG goals, American also entrusted certain individuals with conflicting responsibilities.” The individual responsible for day-to-day oversight of the Plan’s investment managers also managed the corporate relationship between American and BlackRock. BlackRock holds over $400 of American’s fixed income debt and is the company’s fourth largest equity holder; the company also invests over $10 billion with BlackRock in 401(k) and pension plans. This individual described the company’s relationship with BlackRock as “circular.”

The court clearly was troubled by the company’s relationship with BlackRock and other aspects of the situation, but he ultimately concluded that the plaintiff had not established that the defendants had breached their duty of prudence. In order to find that the defendants breached their duty of prudence, the court would have had to have concluded that the defendants acted inconsistently with “prevailing industry standards.”

There is, the court said, “no evidence that a prudent fiduciary adhering to its monitoring processes would have taken some action that the defendants did not with respect to Black Rock.” He added that this absence of such proof is perhaps a reflection of a “degree of conformity” within the 401(k) community that appears to be “due to BlackRock exercising an alarming degree of control and influence over the industry, and as a result, can effectively rig the process in a cartel-like manner to insulate against removal.”

Right or wrong, the court said, the defendants acted consistently with prevailing industry standards. Judge O’Conner characterized this conclusion on the breach of the duty of prudence claims as both a “shocking” and “unconscionable” result, but one that Fifth Circuit precedent requires.

The court reached a different conclusion with respect to the plaintiff’s breach of the duty of loyalty claims. The plaintiff, the court said, “demonstrated by a preponderance of the evidence that Defendants breached the duty of loyalty.”

The defendants, the court said, “acted disloyally by allowing their various ties to BlackRock to influence management of the Plan.” The defendants knew that the plan’s largest investment manager, BlackRock, was also one of American’s largest shareholders. BlackRock also financed approximately $400 million of American’s corporate debt at a time when American as experiencing financial difficulties. It is, the court said, “no wonder that Defendants repeatedly attempted to signal alignment with BlackRock.” Judge O’Conner said that the plaintiff had provided evidence demonstrating that the defendants “acted disloyally because of BlackRock’s outsized influence.”

The court also found that the defendants acted “disloyally” by “allowing American’s corporate goals to influence management and oversight of the Plan.” There was, Judge O’Conner said, no clear separation between the company’s commitment to ESG goals and ESG strategies and the plan fiduciaries’ responsibilities. The failure to maintain this “critical divide” resulted in the defendants’ “willingness to allow BlackRock to use Plan assets with little or no accountability in the pursuit of ESG investing.” It became clear during trial, the court said, that “officials tasked with wearing both corporate and fiduciary hats failed to maintain the appropriate level of separation in their dual roles.” Failing to keep corporate and fiduciary duties sufficient separate caused “conflicts of interest to go unchecked.”

The defendants, the court said, “utterly failed to loyally investigate BlackRock’s ESG investment activities.” There was “no formal evaluation or assessment of BlackRock’s ESG crusade.” The defendants “permitted BlackRock to continue to manage Plan assets without a second thought and without expressing any hesitation that ESG investing might not be the most financially beneficial to the Plan.” The defendants, the court said, “acted disloyally by failing to ensure BlackRock acted in the best financial interests of the Plan.”

This conclusion, the court said, is “particularly alarming given that BlackRock’s investment strategy during the Class Period was focused on ESG investing.” This pursuit of “non-pecuniary interests … was an end in itself rather than a means to some financial end.” This, the court said, was “a major red flag that Defendants wholly ignored.” While it is “permissible to consider ESG risks when done through a strictly financial lens, this does not describe BlackRock’s activities.” The most obvious explanation for the defendants “lack of accountability” with respect to BlackRock is that the defendants “approved of BlackRock’s activities,” whether “because of the shared belief that ESG is a noble pursuit or because of the ‘circular’ relationship with a large shareholder.”

Finally, the court noted that it is possible to conclude that the defendants acted disloyally even though using the BlackRock funds benefited the plan in some ways, such as comparatively lower fees. The fact of the lower fees “does not cancel out Defendants’ disloyal behavior as it relates to BlackRock’s ESG investing.” One might wonder, the court said, why the defendants “disregarded these conflicts of interest and failed to appropriately monitor BlackRock.” The answer, the court said, “was made clear during trial: American’s own corporate interests and the influence of a major industry player.” The evidence, the court said, “made clear that Defendants’ incestuous relationship with BlackRock and its own corporate goal disloyally influenced administration of the Plan.”

In the end, however, the court deferred the question of remedies and damages might be available. The court ordered the parties to submit additional briefing by the end of the month on the question of whether damages or injunctive relief are appropriate. Among other questions the court asked the parties to address is with respect to the evidence of financial underperformance by the funds.

Discussion

Judge O’Conner’s opinion is hot, to say least. Smoking hot. It is full of strong adjectives and adverbs. It is also full of harsh invective against American Airlines as well as against some of the individual executives who testified on American’s behalf. Judge O’Conner specifically found that one American executive had testified falsely and had attempted to “hide (and perhaps event to cover up)” his lack of oversight of a particular investment manager. In a separate footnote, Judge O’Conner described the court’s “shocking back-and-forth” between the court and another company witness, who was “wholly unwilling to concede that ESG factors should not be considered” when they do not serve a financial purpose.

But more to the point, Judge O’Conner appears deeply troubled that the company’s commitment to ESG goals and its conflicted relationship with BlackRock seems to have superseded any consideration of what was in the best interests of the Plan. His concern – indeed, his apparent disbelief – about this situation pervades his opinion.

This aspect of the opinion is worth consideration. I suspect strongly that American is far from the only company that has some form of the kind of “incestuous” (Judge O’Conner’s word) relationship American had with BlackRock. Because of its sheer size, BlackRock is almost certainly one of the largest shareholders of many U.S. companies. I also suspect that many companies have BlackRock funds among the available options for its employees in their defined contribution plans. If Judge O’Conner is correct that these circumstances created a potential conflict of interest, many companies could be potentially be subject to many of the same questions as was American Airlines.

Even though Judge O’Conner concluded that the plaintiff had not established a breach of the duty of prudence, this aspect of his opinion is worth further consideration. Judge O’Conner’s conclusion that the plaintiff had not established a breach of the duty of prudence was not keyed to a conclusion that the defendants had not acted imprudently; it was, rather, keyed to the apparent absence of evidence that any other company would have acted differently. Judge O’Conner was deeply trouble by this evidence (or perhaps by this lack of evidence). He was clearly deeply troubled by the “alarming degree of control and influence” that BlackRock exercises over the benefits industry. He noted that he “would be remiss” if he did not “remark on the problematic nature of this outcome.” By simply “mirroring the prevailing practices” in the industry – “even if those practices are not in the best financial interest of a retirement plan”—the defendants were able to “escape liability under the prudence standard.” Judge O’Conner called this a “shocking” result. It remains, he said, “within the province of the legislature change the legal landscape to avoid future unconscionable results like those here.”

It is relevant to observe here that BlackRock was not a party to this case. In a sense, however, BlackRock was clearly in the dock. It is also clear that Judge O’Conner takes strong exception to BlackRock’s approach in emphasizing ESG as an end itself, at least according to his interpretation of what BlackRock was doing at the relevant time. In a way, Judge O’Conner seems to have acted as a sort of commission of inquiry on BlackRock’s very presumption to have taken the approach that it did to ESG.

That Judge O’Conner’s take on the circumstances of this case might reflect a larger world view on his part might be gleaned from his recent actions in another case in his court. As the Wall Street Journal noted in its January 11, 2025, article commenting on his rulings in the American Airlines case (here), the Journal also noted in December Judge O’Conner rejected a plea deal between Boeing and the Justice Department relating to Boeing’s involvement in two deadly air crashes. Judge O’Conner (who is, by the way, a judicial appointee of George W. Bush) objected to the plea deal’s requirement to consider diversity in selecting a compliance monitor to oversee Boeing, saying that decision should be made based “solely on competency.”

So it is possible to view Judge O’Conner’s perspective on this case as a reflection of a particular kind of world view. But even if that is so, his opinion represents a verdict on relationships and structures in the financial industry. His opinion, along with the currently predominant political view on ESG issues in the United States, could have important implications for other companies and in other contexts. I suspect strongly that Judge O’Conner’s opinion will encourage other activists like the plaintiff here to challenge other companies’ efforts with respect to ESG, particularly with respect to ESG-related activities in connection with defined benefit plans.

One final note. I began my discussion of this case by noting it as an example of, and in the context of, the phenomenon of ESG backlash litigation. And this case certainly is an example of that. However, the issues Judge O’Conner raised – having to do with the “incestuous” relationship and the “cartel” like nature of the benefits industry – arguably raise larger issues. Indeed, Judge O’Conner clearly signaled his belief in the need for Congressional action to address the issues he raised. So while this case indeed is an ESG backlash case, the issues involved arguably represent and involve an even larger context. The case arguably goes to larger issues of fiduciary duties and ERISA liability.