Seventh Circuit Affirms District Court on Remand in Jones v. Harris Associates
On August 6, 2015, on remand from the U.S. Supreme Court, the Court of Appeals for the Seventh Circuit affirmed the 2007 decision by the District Court granting summary judgment to defendant Harris Associates in Jones v. Harris Associates, which had found that investors in the Oakmark mutual funds failed to establish that they had been charged excessive advisory fees. In a four-page order (including an acknowledgment that the Seventh Circuit’s opinion was delayed following the Supreme Court’s remand due to misplaced papers and a tracking system gap), the Seventh Circuit applied the Gartenberg standard embraced by the Supreme Court in a unanimous decision issued in March 2010: to face liability under §36(b) of the 1940 Act, an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining. In this connection, the Seventh Circuit turned aside the plaintiffs’ contention that Harris’s fees should be deemed excessive because they were not approved through proper procedures, explaining that a process-based failure alone does not constitute an independent violation of §36(b). Instead, Circuit Judges Frank Easterbrook and Michael Kanne stated in the opinion, “we have been instructed that §36(b) is sharply focused on the question of whether the fees themselves were excessive” (citing Gallus v. Ameriprise Financial).
The Seventh Circuit’s decision further states that although the district court applied a legal standard similar to the one eventually adopted by the Supreme Court, the standards are “not identical, because the Supreme Court’s approach does not allow a court to assess the fairness or reasonableness of advisers’ fees; the goal is to identify the outer bounds of arm’s length bargaining and not engage in rate regulation. This means that the Supreme Court’s standard is less favorable to plaintiffs than the one the district court used- yet plaintiffs lost even under the district court’s approach.” Turning to the District Court’s findings, the Seventh Circuit noted that there was no material dispute about four propositions, “which collectively require a decision for Harris”: (1) Harris’s fees were in line with those charged by advisers for other comparable funds; (2) Harris provided accurate information to the funds’ boards, whose disinterested members approved the fees; (3) the fee schedules included breakpoints; and (4) the fees could not be called disproportionate in relation to the value of Harris’s work because the funds’ returns (net of fees) “exceeded the norm for comparable investment vehicles.” The Seventh Circuit added that the plaintiffs “seek to avoid the implications of [the foregoing] facts” by comparing the fees that Harris charged the Oakmark funds with the fees that Harris charged some of its other clients, such as pension funds. However, the Circuit Judges stated that their initial opinion rejected this contention and the “Supreme Court did not disagree with us,” noting the Supreme Court’s position that “courts may give such comparisons the weight that they merit in light of the similarities and differences between the services that the clients in question require,” but courts must be “wary of inapt comparisons” between fees charged to different types of clients. The Seventh Circuit concluded that because the plaintiffs did not provide any evidence that “would tend to show that Harris provided pension funds (and other non-public clients) with the same sort of services that it provided to the Oakmark funds, or that it incurred the same costs when serving different types of clients,” it had no basis to justify “a further inquiry” of these comparisons under the Supreme Court’s approach.