Defendant sponsor-fiduciaries move to dismiss in American Airlines ESG suit, raising issues about the viability of proxy voting claims generally
Spence v. American Airlinesis an ERISA fiduciary lawsuit filed by a participant in an American Airlines 401(k) plan on June 2, 2023, in the United States District Court for the Northern District of Texas (Fort Worth Division), against American Airlines, Inc., the American Airlines Employee Benefits Committee (the plan’s fiduciary committee), Fidelity Investments Institutional, and Financial Engines Advisors, LLC.
On August 4, 2023, defendant plan fiduciaries (American Airlines and the plan committee) filed a motion to dismiss in this case. In this note we very briefly review defendants’ motion to dismiss and note some issues defendants raise with respect to proxy voting/prudence complaints.
Plaintiff is challenging the inclusion in the plan as investment options of (1) funds that prioritize investments based on environmental, social and governance (“ESG”) principles (e.g., funds that pursue “investment strategies [that] exclude or screen out companies and potential investment opportunities that do not meet certain ESG standards”) and (2) funds/fund managers that exercise shareholder rights based on ESG principles. Plaintiff claims that selecting these sorts of funds/managers for the plan fund menu violates ERISA’s fiduciary duties of prudence and loyalty.
Defendants motion to dismiss
Defendants’ primary challenge to this lawsuit is that the plaintiff does not have standing to sue because (1) he has not invested in any of the complained of funds, and (2) all of the complained of funds are available only in a self-directed brokerage account (SDBA), for which plan fiduciaries have no ERISA fiduciary responsibility. With respect to issue (2), defendants quote plaintiff as conceding that “there is no fiduciary responsible for selecting or monitoring the investments within an SDBA.”
Unless plaintiff is able to allege that he did invest in one of the complained of funds, it is likely that his complaint will be dismissed for lack of standing. And even if he did invest in one, if that fund was available only through an SBDDBA, then most would agree that the plan fiduciaries have no fiduciary responsibility with respect to that investment.
Plaintiff’s proxy voting claim
The motion to dismiss does, however, have an interesting discussion of whether – if the plaintiff could overcome the standing issues – an ERISA prudence claim could be made against sponsor fiduciaries with respect to a fund manager’s proxy voting policy.
As we have noted, the issue of ESG proxy voting has gotten some attention (predictably, from Republicans) – see our article Criticism of current proxy voting policy – the Republican House Financial Services Committee Working Group. But under current law, it is unclear exactly how the proxy voting policy of a trustee or fund manager of, e.g., an S&P 500 fund could become an ERISA prudence issue for a plan sponsor.
As we noted in our article on it, plaintiff’s complaint is long on rhetoric but short on specifics. With respect to the proxy voting claim, plaintiff identifies a group of managers (styled the “Challenged Managers” by defendants) that “[p]roxy voting records reveal … pursue nonfinancial and nonpecuniary ESG objectives as investment managers for non-ESG branded funds that have been included as investment options in the Plan.” He then asserts that “ERISA plan participants then pay the price [for such proxy voting practices] in the form of lower returns. ESG mandates drag down corporate performance, and higher fees and lost business opportunities burden shareholder returns. … Depressed returns for ESG investing are predictable, given that the measures being pressed by left-leaning groups interfere with merit and performance standards, while contributing to lost opportunities.”
That is, pretty much, the substance of his complaint on this issue.
No specific claims of underperformance
Under Supreme Court precedent, to survive a motion to dismiss, the plaintiff must state “enough facts to state a claim to relief that is plausible on its face.” And “[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
Most would agree that, on the proxy voting issue at least, plaintiff’s complaint does not meet that pleading standard.
Critically, to support a claim for breach of the duty of prudence, a plaintiff must allege facts showing damages/loss to the plan. But, quoting defendants’ motion to dismiss:
Plaintiff says absolutely nothing about the performance of any of the products offered by the Challenged Managers, whether supposedly among the Plans’ Designated Investment Alternatives or not – much less try to connect the dots between specific proxy votes on shareholder resolutions he disfavors and the financial performance of the companies in the managers’ portfolios, or, in turn, the performance of the portfolios themselves relative to alternative products the Committee might have chosen.
As defendants note, previous complaints about the imprudence of fiduciary fund/manager selection have in nearly all cases included a table comparing performance of the fund that is a target of the litigation with alternative comparator funds. There’s nothing like that in this case: “The plaintiffs [in other cases] alleged some benchmark for judging the quality of the manager’s performance. Here, Plaintiff offers no such allegation – again, he does not even advert to how any of these managers’ products have performed.”
Interestingly, on this point defendants turn plaintiff’s around on him:
Indeed, Plaintiff has it backwards: Through his proxy-voting claim, he suggests that Defendants would be duty-bound to avoid funds sponsored by the Challenged Managers even if their financial performance was stellar, simply because the managers might use portfolio shares to lend support to a shareholder ESG proposal. But the broader premise of his Complaint – that ERISA fiduciaries must curate a menu of Designated Investment Alternatives based exclusively on the goal of “maximizing financial benefits” for participants – suggests otherwise. If, based on traditional risk and return measures, a reasonable fiduciary would judge an investment option to offer the best prospects for “maximizing financial benefits” for participants, that fiduciary would be no more justified in rejecting the option based on the manager’s ESG views than it would in excluding the option for any other non-pecuniary reason.
Long-run prospects for challenges to ESG proxy voting policies
In its current state, plaintiff’s complaint is unlikely to survive a motion to dismiss, including on the substance of his proxy voting claim. But, just how such a claim might be pleaded (and proved) in a situation where there is a legitimate question about the fiduciary’s conduct is an interesting question. Especially when the fund involved is an index fund.
The problem being complained of is that that the proxy votes (e.g., on a shareholder-raised ESG issue) depress the returns of the portfolio company. The comparator for that is not another fund, it’s a counter-factual – how the company would have performed if the ESG initiative had not passed. That performance-in-an-alternative-universe is not a “fact.” In the end, it is just speculation.
We will provide a more detailed discussion of this last issue in a subsequent article.