Jones v. Harris Associates L. P.

559 U.S. 335 (2010)

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Nature of the Case

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Facts

Ps are shareholders in three different mutual funds managed by respondent D, an investment adviser. Ps filed this §36(b) action seeking damages, an injunction, and rescission of advisory agreements between D and the mutual funds. Ps allege that D was charging fees that were “disproportionate to the services rendered” and “not within the range of what would have been negotiated at arm's length in light of all the surrounding circumstances.” The District Court granted summary judgment for D under Gartenberg v. Merrill Lynch Asset Management, Inc. It ruled that Ps had failed to raise a triable issue of fact as to “whether the fees charged . . . were so disproportionately large that they could not have been the result of arm's-length bargaining.” The court compared the challenged fees with those that D charged its other clients. Those comparisons as well as comparisons with fees charged by other investment advisers to similar mutual funds, the court held that it could not reasonably be found that the challenged fees were outside the range that could have been the product of arm's-length bargaining. Ps appealed. The Seventh Circuit affirmed but explicitly “disapproved of the Gartenberg approach.” Looking to trust law, the panel noted that, while a trustee “owes an obligation of candor in negotiation,” a trustee, at the time of the creation of a trust, “may negotiate in his own interest and accept what the settlor or governance institution agrees to pay.” It held that a fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation. It reasoned that the amount of compensation would be relevant only if the compensation were “so unusual” as to give rise to an inference “that deceit must have occurred, or that the persons responsible for decision have abdicated.” The Court firmly rejected a comparison between the fees that D charged to the funds and the fees that D charged other types of clients, observing that “different clients call for different commitments of time” and that costs, such as research, that may benefit several categories of clients “make it hard to draw inferences from fee levels.” The Supreme Court granted certiorari.