Every year millions of workers set aside their hard-earned dollars to save for retirement. To protect the interests of these workers, Congress passed the Employee Retirement Income Security Act of 1974 (“ERISA”), to remedy “the great personal tragedy” caused by mismanagement of retirement plans that left workers with little to no savings.
This class action lawsuit is about whether American Airlines (“American”) and the American Airlines Employee Benefits Committee (“EBC” and, together with American, “Defendants”) breached certain fiduciary duties under ERISA when investing—or relying on others to invest—their employees’ retirement assets towards environmental, social, and governance (“ESG”) objectives. In response to Defendants’ ESG-focused investment practices, Plaintiff Bryan Spence, on behalf of the class members, asserts two causes of action under ERISA: (1) Defendants breached their duties of loyalty and prudence and (2) Defendants breached their duty to monitor.
Plaintiff argued that Defendants violated these fiduciary duties by mismanaging the retirement plan when they utilized “investment managers pursuing non-financial and non-pecuniary ESG policy goals through proxy voting and shareholder activism” — specifically, BlackRock Institutional Trust Company, Inc. According to Plaintiff, BlackRock pursues a pervasive ESG agenda that “covertly converts the [retirement] [p]lan’s core index portfolios to ESG funds.”
As a result, Plaintiff contended that BlackRock’s inclusion as an investment manager harmed the financial interests of retirement plan participants and their beneficiaries due to pursuing socio-political outcomes rather than exclusively financial returns.
Defendants filed a motion to partially exclude Plaintiff’s expert witness, J.B. Heaton.
Finance Expert Witness
James Breckenridge Heaton, III received Ph.D. and MBA degrees from respected programs at the University of Chicago Booth School of Business. He likewise graduated from the University of Chicago School of Law. His professional experience includes publishing extensively in several peer-reviewed journals on finance topics, including key issues in this case: asset management, index investing, shareholder activism, hedge fund activism, event studies and price impact in securities litigation, corporate finance, corporate governance, and ESG investing. Given his expertise in these subject areas, Heaton has also taught law and finance courses at law schools and business schools across the nation. Beyond his academic experience, Heaton practiced law at the litigation boutique Bartlit Beck LLP for nearly two decades and even served as a fiduciary member of Bartlit Beck’s 401(k) plan committee. During his fiduciary tenure, he monitored the 401(k) plan’s investment options and performance.
Discussion by the Court
Defendants’ motion largely challenged Heaton’s methodology for calculating losses to the Plan as well as the economic value of a potential injunction. Defendants also sought exclusion of any testimony from Heaton about whether Defendants met their fiduciary obligations in accordance with then-prevailing standards and practices, as well as how BlackRock would have responded to a hypothetical proxy voting intervention.
It should be noted that the the standards for admitting expert testimony in a bench trial are lower than a jury trial.
Qualifications
Starting with Heaton’s qualifications, the Court held that his research and background fit squarely with Plaintiff’s theory of the case and his expert testimony is precisely what the Federal Rules of Evidence contemplate by requiring an “expert by knowledge, skill, experience, training, or education” who will apply that “specialized knowledge” to “help the trier of fact to understand the evidence or to determine a fact in issue.”
Due to his extensive education, research, and overall experience, it should be noted that Heaton has developed particular skills and specialized knowledge to help the Court—the trier of fact in this case—understand the evidence and determine facts in issue.
Relevance
Plaintiff has shown by a preponderance of the evidence that both the nature of Heaton’s testimony and purpose for which he offers it are relevant to key issues in this case, including whether BlackRock engaged in ESG activism through proxy voting and whether any losses occurred as a result. The Court held that such testimony can properly be applied to the facts at issue and will assist the Court with understanding the evidence. To the extent Heaton’s testimony could be viewed in any way as attempting to opine on whether Defendants qualified as ERISA fiduciaries or whether they breached their fiduciaries duties, those are questions of law for the Court to determine—not Heaton.
According to the Court, the closest any expert testimony may permissibly get to these legal questions is by offering an opinion as to whether a particular party’s conduct fell short of prevailing fiduciary practices. Because Heaton’s reports offered no such opinions and his testimony at trial focused on (1) “whether and how BlackRock engaged in ESG-driven proxy voting and shareholder activism, and (2) “whether that ESG-driven proxy voting and shareholder activism injured [P]lan participants,” there is no reason to exclude Heaton’s non-existent testimony regarding prevailing fiduciary standards.
Reliability
Plaintiff has proved by a preponderance of the evidence that Heaton’s testimony is reliable. The Court held that many of Heaton’s opinions are based on, among other things, his clear experience in asset management and research on shareholder activism. His opinions regarding BlackRock’s ESG activism do not require specific scientific support because Heaton relies on his personal observations, professional experience, training, and education. Given Heaton’s qualifications, the Court found him sufficiently qualified to opine on this topic. As to his opinions regarding the economic effects of BlackRock’s ESG activism on the Plan, the event studies used by Heaton are widely accepted. Even Defendants’ own expert uses the event study methodology. Courts across the country have also cited Heaton’s article regarding statistical power.
Although Defendants challenged the statistical significance of Heaton’s results and argued his methodology diverges from standard scientific practices, the Court held that these arguments are more properly applied to the weight of Heaton’s testimony rather than its admissibility.
While the Court takes note of Defendants’ arguments—particularly those regarding the reliability and relevance of Heaton’s expert testimony—these are not grounds for exclusion.
Held
The Court therefore denied Defendants’ motion to partially exclude and admitted J.B Heaton as an expert.
Key Takeaway:
The Court concluded that Heaton’s testimony is unquestionably relevant to this case and sufficiently reliable to permit admission. Instead, Defendants’ arguments (and any counter-expert testimony) bear on the weight assigned to Heaton’s testimony, which will matter when the Court addresses in a subsequent ruling the deferred issues of any losses suffered by the Plan and the appropriateness of an injunction.
Case Details:
| Case Caption: | Spence V. American Airlines, Inc., Et Al |
| Docket Number: | 4:23cv552 |
| Court: | United States District Court, Texas Northern |
| Order Date: | January 10, 2025 |
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