In the tidal wave of litigation launched by the plaintiffs' bar against employer-sponsored benefit plans over the last several years, there have been many cases that have escaped early dismissal despite very thin allegations of supposed harm to plan participants.
These claims are often based on assertions that mutual funds offered as plan investment options have higher fees and/or worse performance than alternatives the plaintiffs believe should have been offered instead, showing a breach of the sponsor's fiduciary duties under ERISA. At the early pleading stage, plaintiffs benefit from the court rules requiring judges to give the complaint the benefit of the doubt on factual matters like whether a proposed alternative option is indeed an apt comparison.
The Supreme Court addressed the pleading standards for such cases in Hughes v. Northwestern University, where it held that at least some level of deference to fiduciary decision-making is warranted. The unanimous court acknowledged how "the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise."
Despite the Supreme Court's guidance, a February 21 decision by a Texas federal court has taken fanciful legal theories and threadbare allegations to another level. In Spence v. American Airlines, Inc., the plaintiff claims that plan fiduciaries at American Airlines breached their duties of prudence and loyalty merely by offering funds managed by advisers that engage with companies on ESG-related issues and on occasion vote proxies in support of ESG-related proposals. As American spelled out in its motion to dismiss, the complaint did not allege any facts about how the plans' investment products actually performed, and therefore no plausible basis to conclude that participants were harmed in any way or that it was imprudent to make those investments available. The plaintiffs also failed to establish benchmark investments for comparison purposes, which is normally a key part of any claim that a plan fiduciary acted imprudently.
In short, the plaintiff's point is political, mirroring the common refrain of anti-ESG elected officials that any proxy voting based on ESG considerations is necessarily in pursuit of a social agenda rather than financial returns. This same false premise underpins the state attorneys general and U.S. House investigations of ESG investing practices, as well as a recent suit by Tennessee against a manager under the state consumer protection statute.
The plaintiff is transparently trying to bring additional anti-ESG pressure to bear on asset managers by insisting that their clients – fiduciaries at employer plan sponsors – have an obligation under ERISA to prevent the external managers from casting proxy votes in support of ESG-related proposals. The complaint goes so far as to allege that, in failing to prevent such proxy voting, the plan fiduciaries at American must be acting in their own self-interest (in breach of their duty of loyalty) because American as a company has expressed its corporate commitment to sustainability and other ESG-friendly goals.
This far-fetched legal theory finds no support in established precedent, as the plaintiff's allegations don't remotely connect the dots with plausible factual allegations between the proxy votes he doesn't like and any tangible impact on the retirement savings of American's plan participants. Indeed, the plan investment offerings at issue are all index funds and target date funds, and there could be no colorable basis to suggest they under-performed a relevant comparator or benchmark (to the detriment of participants' retirement savings) as a result of an adviser's proxy voting.
Remarkably, however, the Northern District of Texas judge has allowed the case to proceed, denying American's motion to dismiss. Ignoring clear precedent requiring factual support for a plausible inference of liability, the court simply accepted the plaintiff's conclusory assertions that ESG-related proxy voting is harmful to investment returns and motivated by social agendas. This conclusion turns a blind eye not only to the established standards for what is required for a viable pleading, but also to another recent decision of the same district court acknowledging that ESG considerations further financial goals.
This decision is troubling, but not a cause for undue alarm just yet. This is only round one in the case procedurally, assessing whether the pleading is sufficient to allow the case to proceed. While the court has given the plaintiff an early free pass on his complaint that he didn't deserve, now the plaintiff must come forward with evidence to actually prove his theory. On its face, this promises to be a very difficult proposition.
Asset managers and plan fiduciaries surveying the landscape should bear in mind that the weight of legal authority and real-world evidence continues to support the basic truth that ESG considerations support financial returns, and we do not expect this litigation to turn that tide.
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