The Imminent American Airlines ESG Decision and the Overall ESG Litigation Landscape
In late June 2024, a four-day bench trial was held in the U.S. District Court for the Northern District of Texas to determine if American Airlines had violated its duties to employees by allowing the asset managers of its employees’ 401(k) plans to pursue environmental, social and governance (“ESG”) goals. The case was brought in June 2023 by an American Airlines pilot seeking to represent a class of participants in the airline’s $26 billion retirement plan.[1] The plaintiff claimed that the decision to pursue ESG-friendly investments resulted in plan beneficiaries suffering “substantial financial losses” relative to traditional non-ESG investment options.[2] The imminent decision in the American Airlines trial will set a precedent for cases involving allegations of the breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA) resulting from ESG-focused investing.
Class actions of this type represent just one of several categories in the burgeoning landscape of ESG-related litigation. As consumers have become more conscious of the potential social and environmental impacts of their purchasing decisions, companies have responded by undertaking and promoting ESG initiatives. These developments have led to a surge in ESG-related litigation, including class actions. A prominent litigation trends survey of the in-house counsels of businesses in the US and Canada found that one in ten organizations had experienced ESG litigation in 2023, up from just two percent in 2022.[3]
Companies are increasingly facing ESG-related litigation brought on behalf of consumers, shareholders, and employees. Plaintiffs in these cases have accused companies of making false or misleading statements about the environmental or social impacts of their products or practices, or of the breach of their fiduciary duty to investors. Defendants include major players across an array of industries including, but not limited to, airlines, beverages, mining and metals, and agriculture.
Figure 1 below broadly categorizes ESG-related suits by plaintiff and allegation type.
In this article, I focus on recent notable cases to provide an overview of the different types of ESG litigation with an eye on how the landscape is expected to evolve.
Greenwashing: Consumer Class Actions
Greenwashing refers to the falsification or exaggeration by a company of the environmentally friendly nature of its products or practices. Consumer class actions alleging false or misleading environmental claims constitute the bulk of ESG-related exposure for companies and they are on the rise.[4]
In a class action filed in November 2023, a plaintiff alleged that United Airlines had falsely claimed that it used sustainable aviation fuel under its “Eco-skies” program, violating the Maryland Consumer Protection Act (“MCPA”).[5] According to the filing, only a small amount (0.025 percent) of United’s fuel usage came from sustainable sources, with the vast majority coming from non-renewable fossil fuels.[6] The plaintiff argued that the airline’s claims misled them into believing that United’s commercial flights had a general environmental benefit, and that the misrepresentations resulted in class members paying a price premium for United Airlines flights.[7] In August 2024, the court dismissed the claim on grounds that it was preempted by the federal Airline Deregulation Act (“ADA”), which “expressly prohibits states from ‘enact[ing] or enforc[ing] any law, rule, regulation, standard, or other provision having the force and effect of law relating to rates, routes, or services of any air carrier.’ 49 U.S.C. § 41713.”[8]
In October 2022, plaintiffs seeking to represent a class of consumers filed a complaint in the District Court for the Southern District of New York, claiming that Danone Waters had falsely represented its Evian bottled water product as being “carbon neutral.”[9] Plaintiffs claimed that consumers understood “carbon neutral” to mean that no carbon dioxide was emitted during the product’s life cycle.[10] Plaintiffs claimed that, had they known about the misrepresentation, they would have paid a lower price for the product or not purchased it at all.[11] Defendants argued that the term was certified by a third-party agency, the Carbon Trust, which defined a product to be carbon neutral if it did not result in any net addition of carbon dioxide gas into the atmosphere. In its January 2024 ruling, the court denied Defendants’ motion to dismiss the claim, stating that reasonable consumers may be confused about the term’s meaning, and that consumers were not required to research the meanings of representations on the front of product containers.[12]
In another January 2024 ruling, the district court for the Northern District of California declined to grant defendant Rust-Oleum a summary judgment with regards to a putative false advertising class action alleging the company greenwashes its “Krud Kutter” degreasing products as “non-toxic” and “Earth friendly.”[13] The court ruled that “[W]hether the plaintiff’s asserted definitions are reasonable will be for the jury to decide as part of the overall reasonable-consumer test.” The defendant contended that the term “Earth friendly” was “not actionable under the reasonable-consumer test because it was mere puffery.”[14] Subsequently, the court ruled that the term “Earth friendly” was not so general as to render any consumer reliance on it to be “extremely unlikely.”
As these rulings indicate, consumer class actions alleging greenwashing span a range of industries. Moreover, businesses are finding it difficult to have them dismissed, except in very specific circumstances where other laws provide refuge.
Greenwashing: Shareholder Class Actions
A second category of greenwashing actions are those brought on behalf of shareholders alleging that a company’s ESG-related misrepresentations artificially inflated the value of the company’s stock.
For example, in October 2021, a shareholder of Danimer Scientific Inc., a manufacturer of so-called polyhydroxyalkanoates—or PHA products—sued the company for making misleading claims about the biodegradability of its signature bioplastic product, Nodax which, allegedly inflated the value of the company’s stock.[15] The plaintiff claimed that when the science behind the product’s biodegradability was questioned in an investigative news article, its stock dropped by almost 13 percent in a single day, causing substantial losses to investors.[16] In September 2023, the court dismissed the claims, ruling, among other things, that plaintiffs had not established scienter. In other words, they had failed to show that the company’s management was motivated by the intention to defraud investors, and not just by the incentive to sustain the appearance of corporate profitability.[17]
In a similar matter, a shareholder brought a class action suit in November 2022 against Enviva Inc., a Maryland-based producer of wood pellets, and several of its senior officers and underwriters for allegedly making misleading statements about its sustainability practices. In October 2022, the investment firm, Blue Orca had published a short-sellers report asserting that Enviva, which “claim[ed] to be a pure play ESG company” was “flagrantly greenwashing its wood procurement.”[18] That same day, Enviva’s stock dropped by 13 percent.[19] A few weeks later, the company’s stock dropped 9 percent in a single day in response to a whistleblower report that also contended that the firm’s ESG claims were false.[20] The plaintiff alleged that Enviva had misled investors by making numerous material misrepresentations about the environmental sustainability with regards to its wood sourcing, greenhouse gas emissions, and support for forest growth. In July 2024, the court dismissed the case against the individual and underwriter defendants finding that Enviva had either previously disclosed much of the information that appeared in the third party reports,[21] or that the challenged statements were “too vague, aspirational, and non-verifiable to be materially misleading to a reasonable investor.”[22] Finally, as in the Danimer case, the court found that the plaintiff had failed to adequately prove that defendants had intentionally made misleading statements for their own personal benefit.[23]
While courts appear to generally set a high bar for greenwashing-related securities fraud litigation, the increasing prominence of ESG investing is likely to result in a rise of the number of these suits.
“Anti-ESG” Cases: Breach of Fiduciary Duty
In recent years, another category of cases has arisen in which organizations are being sued, not by consumers and investors demanding more environmental responsibility—as in greenwashing cases—but by plaintiffs claiming injury caused by the organization’s overcommitment to ESG values. This includes class actions in which beneficiaries of pension funds have sued the funds alleging that they have breached their fiduciary duty to plan beneficiaries by pursuing environmentally conscious investments at the expense of higher yields.
For example, in May 2023, four New York City workers and a nonprofit group brought a suit in state court against three New York City pension funds claiming that their divestment from fossil fuels had led to lower financial returns for subway operators, school staff and other city workers.[24] Plaintiffs alleged that defendants had breached their fiduciary duty through their divestment actions.[25] In July 2024, the court dismissed the case stating that the pension plans at issue were “defined benefit” retirement plans entitling beneficiaries to a fixed payment each month that did not fluctuate with investment decisions and outcomes.[26] Because plaintiffs could not demonstrate injury, the court found that they lacked standing.[27]
Whereas most fiduciary-related anti-ESG cases have not fared well in courts, the American Airlines matter discussed above represents an exception.[28] In that case, the Texas district court found sufficient evidence of losses to the plan and certified a class of potentially 100,000 pilots, sending the parties to trial. Following the recent bench trial, the plaintiff urged the court to grant damages in excess of $15 million for breaching its fiduciary duties under ERISA. Regardless of the decision, some observers have said that the court appears to have implicitly assumed that ESG goals may not be compatible with the financial interests of plan participants. The impact the court’s decision will have on such cases going forward remains to be seen.
“DEI”-Related Shareholder Class Actions
Investors have also sued companies for misrepresenting their commitment to racial, ethnic or gender diversity metrics or failing to address harmful work environments. In June 2022, Wells Fargo investors filed a securities class action alleging that the bank interviewed candidates for already filled positions to meet the bank’s stated DEI policy goals. Investors claimed that they suffered financial losses when the bank’s stock dropped by more than 10 percent over two days following the publishing of a report on the bank’s practices in a May 2022 New York Times article.[29] The court denied Wells Fargo’s motion to dismiss in a July 2024 finding that plaintiffs had provided “sufficient reasons as to why Defendants’ statements were misleading.”[30]
Similarly, Signet Jewelers Ltd., the parent company of Jared and Kay Jewelers, was sued in 2016 for violating its code of ethics, which promised a safe and fair workplace, while ignoring alleged widespread sexual harassment of female employees at all levels of the company.[31] After a Washington Post article revealing the employees’ allegations was published in February 2017, Signet’s stock fell 13 percent at close and plaintiffs claimed that its investors suffered losses.[32] In July 2020, the court approved a $240 million cash payment to the class of investors, making it the 76th largest U.S. securities class action settlement of all time.[33]
In sum, companies that seek to meet the increasing demand from consumers for environmentally and socially responsible practices and products find themselves caught between forces that may sometimes be directionally opposed. On the one hand, firms face the risk of litigation resulting from alleged exaggeration of their efforts to satisfy consumers, and, on the other, they face the risk of suits claiming that such practices may cause financial losses for their investors. Changes in regulations and pending court rulings, including the imminent American Airlines decision, are likely to affect future trends in these areas.
Edgeworth experts Marlon Brooks and Linjie Wang contributed to this piece.
CITATIONS
[1] Spence v. American Airlines, Inc., Complaint, June 2, 2023.
[2] Spence v. American Airlines, Inc., Complaint, ¶100.
[3] 2024 Annual Litigation Trends Survey, p. 7.
[4] 2024 Annual Litigation Trends Survey, pp. 16-17.
[5] Zajac v. United Airlines, No. 8:23-cv-03145-PX, (D. Md. Nov. 19, 2023), Class Action Complaint, ¶¶18-25.
[6] Zajac v. United Airlines, No. 8:23-cv-03145-PX, (D. Md. Nov. 19, 2023), Class Action Complaint, ¶¶39-40.
[7] Zajac v. United Airlines, No. 8:23-cv-03145-PX, (D. Md. Nov. 19, 2023), Class Action Complaint, ¶112.
[8] Zajac v. United Airlines, No. 8:23-cv-03145-PX, (D. Md. Aug. 13, 2024), Memorandum Opinion, p. 4.
[9] Dorris v. Danone Waters of Am., No. 22 CIV. 8717 (NSR Jan. 5, 2023), First Amended Class Action Complaint, ¶7.
[10] Dorris v. Danone Waters of Am., No. 22 CIV. 8717 (NSR Jan. 10, 2024), Opinion and Order, pp. 39-41.
[11] Dorris v. Danone Waters of Am., No. 22 CIV. 8717 (NSR Jan. 10, 2024), Opinion and Order, pp. 54.
[12] Dorris v. Danone Waters of Am., No. 22 CIV. 8717 (NSR Jan. 10, 2024), Opinion and Order, pp. 8-16.
[13] Bush v. Rust-Oleum Corp., No. 3:20-cv-03268, (U.S. District ND. Cal. Jan 26, 2024), Order Denying Motion For Summary Judgment.
[14] Bush v. Rust-Oleum Corp., No. 3:20-cv-03268, (U.S. District ND. Cal. Jan 26, 2024), Order Denying Motion For Summary Judgment, p. 5.
[15] Perri v. Stephen E. Croskrey et al., No. 1:2021cv01423, (US District Court for the District of Delaware Oct 6, 2021) Verified Stockholder Derivative Complaint.
[16] Perri v. Stephen E. Croskrey et al., No. 1:2021cv01423, (US District Court for the District of Delaware Oct 6, 2021) Verified Stockholder Derivative Complaint, ¶¶47-48.
[17] In Re: Danimer Scientific, Inc. Securities Litigation, Memorandum & Order, September 30, 2023, pp. 21-24.
[18] Blue Orca Capital Research Report, October 11, 2022, p. 1.
[19] Fanucchi v. Enviva, Inc., U.S. District Marlyand, Memorandum Opinion, p. 4.
[20] Fanucchi v. Enviva, Inc., U.S. District Marlyand, Memorandum Opinion, pp. 19, 22.
[21] Fanucchi v. Enviva, Inc., U.S. District Marlyand, Memorandum Opinion, pp. 4-5. Enviva filed for bankruptcy protection in March 2024 and the court stayed all claims against it.
[22] Fanucchi v. Enviva, Inc., U.S. District Marlyand, Memorandum Opinion, p. 30.
[23] Fanucchi v. Enviva, Inc., U.S. District Marlyand, Memorandum Opinion, pp. 32-44.
[24] Wong v. New York City Employees’ Retirement System et al., Complaint.
[25] Wong v. New York City Employees’ Retirement System et al., Complaint, ¶1.
[26] Wong v. New York City Employees’ Retirement System et al., No. 652297/2023, (Supreme Court of the State of New York, New York County July 3, 2024) Decision and Order on Motion.
[27] Wong v. New York City Employees’ Retirement System et al., No. 652297/2023, (Supreme Court of the State of New York, New York County July 3, 2024) Decision and Order on Motion.
[28] Kevin LaCroix, “ESG Backlash ERISA Lawsuit Survives Dismissal Motion”, March 13, 2024 (https://www.dandodiary.com/2024/03/articles/esg/esg-backlash-erisa-lawsuit-survives-dismissal-motion/)
[29] SEB Investment Management AB, et al., v. Wells Fargo & Company, et al., Complaint, ¶¶15-16.
[30] SEB Investment Management AB, et al., v. Wells Fargo & Company, et al., Order Denying MTD, pp. 15-16.
[31] In re: Signet Jewelers Ltd. Sec. Litig., 2018 U.S. Dist. LEXIS 199809 (S.D.N.Y. Nov. 26, 2018).
[32] In re: Signet Jewelers Ltd. Sec. Litig., 2018 U.S. Dist. LEXIS 199809 (S.D.N.Y. Nov. 26, 2018), Fifth Amended Class Action Complaint for Violations of the Federal Securities Laws. ¶¶21-23.
[33] ISS SCAS, “The Top 100 U.S. Class Action Settlements of All Time,” as of December 31, 2022.
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