A Texas federal judge ruled Friday that American Airlines breached federal benefits law by emphasizing environmental, social, and governance (ESG) factors in managing its 401(k) plans. However, the court postponed deciding whether retirees suffered financial losses and what remedies, if any, are appropriate.

U.S. District Judge Reed C. O'Connor issued a 70-page order in a proposed class action brought by American Airlines pilot Bryan Spence, who claimed the airline violated the Employee Retirement Income Security Act (ERISA). The ruling follows a four-day bench trial after Spence initiated the lawsuit in June 2023.

The court found that American’s ESG-driven strategy, including its reliance on investment manager BlackRock, violated ERISA’s fiduciary duty of loyalty. Judge O’Connor noted the company prioritized corporate interests and BlackRock's ESG agenda over its fiduciary obligations.

“Defendants turned a blind eye to BlackRock’s ESG activism,” Judge O’Connor said, citing evidence of a conflicted relationship between American Airlines and BlackRock that influenced plan administration.

While the court ruled that American breached ERISA’s duty of loyalty, it dismissed claims that the airline’s actions violated the duty of prudence, finding that its overall investment practices met industry standards. Judge O’Connor noted testimony from American’s expert supported the conclusion that the company’s investment processes were adequate.

The judge also rejected arguments that American failed to properly monitor BlackRock’s proxy voting activities. He emphasized that while outsourcing oversight to Aon mitigated prudence concerns, the duty of loyalty imposes stricter standards.

On the issue of damages, Judge O’Connor deferred a decision pending additional briefs from both parties. The judge requested arguments on whether ESG practices caused financial losses, the impact of a 2021 BlackRock proxy vote that affected Exxon stock, and the necessity of an injunction against ESG-focused strategies if no losses are proven.

American Airlines spokesperson Jessica Johnson said the company is reviewing the decision. BlackRock spokesperson Amanda Friedman emphasized the firm's focus on maximizing client returns and acting independently.

The proposed class is represented by attorneys from Hacker Stephens LLP and Sharp Law LLP. American Airlines is defended by Kelly Hart & Hallman LLP and O’Melveny & Myers LLP.

The case is Spence v. American Airlines Inc. et al., case number 4:23-cv-00552, in the U.S. District Court for the Northern District of Texas.