Term: 2009
Docket: 08-586
Jerry N. Jones, Et Al. v. Harris Associates L. P.
- Pro
08-586 JONES V. HARRIS ASSOCIATES DECISION BELOW: 527 F.3d 627 CERT. GRANTED 3/9/2009 QUESTION PRESENTED: Congress enacted the Investment Company Act of 1940 to mitigate the conflicts of interest inherent in the relationship between investment advisers and the mutual funds they create and manage. See Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 536 (1984). Section 36(b) of that Act imposes on investment advisers "a fiduciary duty with respect to the receipt of compensation for services" and authorizes fund shareholders to bring a claim for "breach of [that] fiduciary duty." 15 U.S.C. § 80a-35(b). The Act further provides that, in such an action, "approval by the board of directors" of the fund is not conclusive, but "shall be given such consideration by the court as is deemed appropriate under all the circumstances." Id. § 80a-35(b)(2). The question presented is: Whether the court below erroneously held, in conflict with the decisions of three other circuits, that a shareholder's claim that the fund's investment adviser charged an excessive fee - more than twice the fee it charged to funds with which it was not affiliated - is not cognizable under §36(b), unless the shareholder can show that the adviser misled the fund's directors who approved the fee. LOWER COURT CASE NUMBER: 07-1624
The U.S. Supreme Court case Jerry N. Jones, et al. v. Harris Associates L.P., 2009 revolved around the issue of excessive fees charged by investment advisers to mutual funds and whether they violated fiduciary duties under Section 36(b) of the Investment Company Act of 1940. The plaintiffs, shareholders in several mutual funds managed by Harris Associates, argued that their adviser's compensation was disproportionately high compared to what independent clients were paying for similar services - thus breaching its fiduciary duty to act in their best interests. The court held that a claim for breach of fiduciary duty under Section 36(b) can be established only if an investment adviser charges a fee that is so disproportionately large or significantly higher than prevailing market rates as to amount to a 'gross disparity'. It rejected both parties' proposed standards for evaluating claims under this section and instead endorsed the approach taken by Judge Frank Easterbrook from Seventh Circuit which emphasized comparison with fees charged to other similar clients (i.e., arm’s-length bargaining). This ruling clarified how courts should evaluate such claims moving forward.
In the case of Jerry N. Jones, et al. v. Harris Associates L.P., Justice Thomas wrote a dissenting opinion in which he argued that the majority's decision to apply a standard from another area of law (antitrust) was inappropriate for this case involving mutual fund fees under Section 36(b) of the Investment Company Act. He contended that Congress intended for courts to defer to investment advisers' fee decisions unless they amounted to a "gross abuse of trust." The majority's new test, he believed, would lead courts into complex economic analyses beyond their expertise and contrary to congressional intent. Instead, Justice Thomas suggested that any comparison between what an adviser charges its captive mutual funds and independent clients should be left up to expert regulators at the Securities and Exchange Commission rather than judges.
