Supreme Court Reverses 7th Circuit in Jones v Harris

In the case of Jones et al. v. Harris Associates L.P. (No. 08-586, March 30, 2010), the United States Supreme Court has vacated the decision of the Court of Appeals for the Seventh Circuit in Harris Assocs. v. Jones.

The case was previously discussed on the Forum here and here. The Seventh Circuit Decision case was discussed on the Forum here; another post relating to the decision can be found here.

The petitioners were shareholders in mutual funds managed by Harris Associates L.P., an investment adviser. They filed suit alleging that Harris Associates violated §36(b)(1) of the Investment Company Act of 1940, which imposes a “fiduciary duty [on investment advisers] with respect to the receipt of compensation for services”.

The District Court granted Harris Associates summary judgment, concluding that the shareholders had not raised a triable issue of fact under the applicable standard set forth in Gartenberg v. Merrill Lynch Asset Management, Inc.:

“[T]he test is essentially whether the fee schedule represents a charge within the range of what would have been negotiated at arm’s-length in light of all of the surrounding circumstances. . . . To be guilty of a violation of §36(b), . . . the adviser must charge a fee that is so disproportionately large it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.”

Rejecting the Gartenberg standard, the Seventh Circuit panel affirmed the District Court decision based on different reasoning.

In a unanimous opinion written by Justice Alito (Justice Thomas writing a concurring opinion), the Supreme Court found that, based on §36(b)’s terms and the role that a shareholder action for breach of the investment adviser’s fiduciary duty plays in the Investment Act’s overall structure, Gartenberg applied the correct standard.

The decision is available here.