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Plan should stick to financial factors, judge says

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Ruling is among first of its kind

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ESG investing facing backlash from conservatives

(Adds BlackRock spokesperson, paragraph 5)

By Daniel Wiessner

Jan 10 (Reuters) - A federal judge in Texas on Friday

said American Airlines ( AAL ) violated federal law by basing

investment decisions for its employee retirement plan on

environmental, social and other non-financial factors.

The ruling by U.S. District Judge Reed O'Connor appeared to

be the first of its kind amid growing backlash by conservatives

to an uptick in socially-conscious investing.

O'Connor said American had breached its legal duty to make

investment decisions based solely on the financial interests of

401(k) plan beneficiaries by allowing BlackRock ( BLK ), its

asset manager and a major shareholder, to focus on

environmental, social and corporate governance (ESG) factors.

"The evidence made clear that [American's] incestuous

relationship with BlackRock ( BLK ) and its own corporate goals

disloyally influenced administration of the Plan," wrote

O'Connor, an appointee of Republican former President George W.

Bush.

A BlackRock ( BLK ) spokesperson said: "We always act independently

and with a singular focus on what is in the best financial

interests of our clients. Our only agenda is maximizing returns

for our clients, consistent with their choices."

The judge ruled after holding a four-day non-jury trial in

June, in a class action by American pilot Bryan Spence on behalf

of more than 100,000 participants in the retirement plan.

O'Connor said he would decide later on whether class members

suffered financial harms and American must pay them damages.

American said in a statement that it was reviewing the

decision. Lawyers for Spence did not immediately respond to

requests for comment.

BlackRock ( BLK ), which on Thursday said it was leaving an

environmentally focused investor group under pressure from

Republican politicians, is not involved in the lawsuit.

In November, BlackRock ( BLK ) and two rival asset managers were

sued by 11 Republican-led states who claim the firms violated

federal antitrust law through climate activism that reduced coal

production and caused energy costs to increase. BlackRock ( BLK ) called

the claims baseless.

Spence sued American in 2023, saying it had violated the

federal Employee Retirement Income Security Act (ERISA) by

failing to remain loyal to 401(k) plan participants and to

prudently oversee their assets.

O'Connor last February rejected American's claims that the

lawsuit should be dismissed because Spence could not show that

the 401(k) plan had underperformed, paving the way for a trial.

On Friday, the judge said that American had breached its

duty of loyalty to retirement plan participants. But the

company's decisions did not violate its duty of prudence,

O'Connor said, because it was acting according to prevailing

industry standards.

O'Connor is known for frequently ruling in favor of

conservative litigants challenging laws and regulations

governing guns, LGBTQ rights and healthcare.

The Biden administration in 2023 adopted a rule allowing

401(k) and other plans to consider ESG factors as a "tiebreaker"

between financially equal investment options.

The rule replaced a regulation adopted during Republican

President-elect Donald Trump's first administration barring the

consideration of any non-financial factors, which could be

resurrected after Trump takes office for the second time later

this month.

A Texas federal judge is currently considering a legal

challenge to the Biden administration rule by 25 Republican-led

states and oil drilling company Liberty Energy.