The 5th U.S. Circuit Court of Appeals has issued a ruling in response to the appeal of an Employee Retirement Income Security Act (ERISA) lawsuit involving American Airlines.

The ruling the 5th Circuit reviewed was filed in August 2020 after more than four years of litigation testing the question of whether American Airlines should have offered a stable value fund in its 401(k) plan rather than an allegedly poorly performing fund known as the AA Credit Union Fund. The prior ruling granted summary judgment to American Airlines.

The original complaint stated the following: “The AA Credit Union Fund effectively delivered, at all material times, the returns of a poorly managed checking account. The AA Credit Union Fund consistently failed to outpace inflation and was at all times thus a categorically imprudent retirement investment under ERISA. Therefore, the defendants violated their duties of prudence under ERISA by including it as a retirement investment option in the plan’s menu of investment options.”

Judge John McBryde of the U.S. District Court for the Northern District of Texas had previously denied class certification of the case, denied a motion to dismiss the case and rejected a proposed settlement as being insufficient. The August 2020 opinion and order addressed motions for summary judgment filed by American Airlines, its Pension Asset Administration Committee (PAAC) and American Airlines Federal Credit Union (AAFCU).

Now, the 5th Circuit has affirmed, vacated and reversed parts of that ruling. While this sounds like a mixed outcome, the appellate ruling benefits American Airlines.

Before getting into the legal analysis, the text of the appellate ruling scrutinizes the features of stable value investments compared with other capital preservation options, such as the allegedly underperforming AA Credit Union Fund.  

“A stable value fund exposes investors to greater risk than demand deposit accounts and provides only a contractually limited guarantee that participants may withdraw the book value of their accounts,” the ruling states. “And if the insurer of the fund defaults, the guarantee may be eliminated altogether. Additionally, a stable value fund contains liquidity restrictions. For instance, the fund may prohibit investors from transferring their investments into another low risk ‘competing’ option. It may also restrict when a retirement plan incorporating such a fund may withdraw its entire balance, often requiring at least 12 months’ notice before the plan can move funds into another investment vehicle. The plan added a stable value offering in late 2015.”

The appeals court then engages in some fairly complex legal analysis, starting by pointing out that it agrees with the District Court that the plaintiffs do not have standing regarding the first count in the complaint, though it reaches this conclusion for a different reason than the lower court.

“The plaintiffs’ purported injury is income that they would have received had American Airlines and the PAAC not offered the AAFCU option,” the ruling states. “Their expert has provided calculations for the returns that they would have earned had they not invested in the AAFCU option but had instead placed their money in a stable value fund. This ‘lost investment income’ is a ‘concrete’ and redressable injury for the purposes of standing. That said, another question we must ask is whether the plaintiffs would have in fact invested in a stable value fund to earn the higher returns had American Airlines and the PAAC never offered the AAFCU option. In other words, the question is whether the plaintiffs have demonstrated that it is substantially probable that the challenged acts of the defendant, not of some third party (including themselves), caused the injury. If anything, the record reveals that the plaintiffs would not have invested in a stable value fund in a counterfactual world since they did not place their money in one when given the opportunity to do so. … In sum, the District Court correctly concluded that the plaintiffs lacked standing as to Count I.”

The analysis of the lower court’s ruling on Count II goes much the same way.

“In contrast to the plaintiffs’ claims against American Airlines and the PAAC, the District Court determined that plaintiffs had standing to sue AAFCU,” the ruling states. “It reasoned that the plaintiffs incurred a cognizable injury by receiving a lower interest rate in the AAFCU option than they would have received had AAFCU not dealt with plan assets. The plaintiffs averred that AAFCU used plan assets to provide loans to other AAFCU members and to make other investments for which it earned substantial income, which in turn permitted it to offer substantially higher interest rates on similar demand deposit accounts to other customers than it provided to plan participants. The plaintiffs’ expert adduced the amount that they would have earned under those higher rates. Once again, the plaintiffs have shown that they were injured and that the injury is redressable. But, once more, the plaintiffs have failed to satisfy the element of causation.”

The ruling continues: “In short, the District Court erred in concluding that the plaintiffs had standing with respect to their claim against AAFCU. It is a settled rule that, in reviewing the decision of a lower court, it must be affirmed if the result is correct although the lower court relied upon a wrong ground or gave a wrong reason. Hence, we affirm the District Court’s dismissal of both Count I and Count II. Given that we lack jurisdiction over those claims, we do not reach the parties’ arguments as to the merits. … The plaintiffs additionally argue that the District Court abused its discretion in denying preliminary approval of the settlement. We disagree and affirm the District Court on this issue.”