Written by Danielle Wiesner
(Reuters) – American Airlines Inc (NASDAQ:) violated federal law by basing investment decisions for its employee retirement plan on environmental, social and other non-financial factors, a Texas federal judge said on Friday.
The ruling by U.S. District Judge Reed O'Connor appears to be the first of its kind amid a growing backlash from conservatives over the rise in socially conscious investing.
O'Connor said American violated its legal duty to make investment decisions based solely on the financial interests of 401(k) plan beneficiaries by allowing BlackRock (NYSE:), its asset manager and major shareholder, to focus on environmental, social and industrial issues. Corporate Governance (ESG) factors.
“The evidence made clear that (U.S.)'s incestuous relationship with BlackRock and its corporate goals insincerely influenced the administration of the plan,” wrote O'Connor, who was appointed by former Republican President George W. Bush.
A BlackRock spokesperson said: “We always act independently and with a singular focus on what is in the best financial interests of our clients. Our sole agenda is to maximize returns for our clients, consistent with their choices.”
The judge ruled after holding a four-day trial without a jury in June in a class action lawsuit brought by American pilot Brian Spence on behalf of more than 100,000 retirement plan participants. O'Connor said he would later decide whether class members suffered financial damages and Americans should pay them damages.
American said in a statement that it is reviewing the decision. Spence's attorneys did not immediately respond to requests for comment.
BlackRock, which said on Thursday it was leaving an environmentally focused investment group under pressure from Republican politicians, did not participate in the lawsuit.
In November, 11 Republican-led states sued BlackRock and two competing asset managers, claiming the companies violated federal antitrust law through climate activism that reduced coal production and caused higher energy costs. BlackRock described these allegations as baseless.
Spence sued American in 2023, saying it violated the federal Employee Retirement Income Security Act (ERISA) by failing to remain loyal to 401(k) plan participants and prudently oversee their assets.
O'Connor last February rejected American's claims that the lawsuit should be dismissed because Spence couldn't prove the 401(k) plan's performance was poor, paving the way for trial.
The judge said Friday that American violated its duty of loyalty to retirement plan participants. But O'Connor said the company's decisions did not violate its duty of caution, because it was acting in accordance with prevailing industry standards.
O'Connor is known for repeatedly ruling in favor of conservative litigants challenging laws and regulations governing guns, LGBTQ rights, and health care.
The Biden administration in 2023 adopted a rule allowing 401(k) and other plans to consider ESG factors as the “divider” between financially equal investment options.
The rule replaces a regulation adopted during the first administration of Republican President-elect Donald Trump that prohibited consideration of any non-financial factors, which could be revived after Trump takes office for a second time later this month.
A federal judge in Texas is currently considering a legal challenge to the Biden administration's ruling by 25 Republican-led states and oil exploration company Liberty Energy.
