Court Opinion

ID: 2825264
Source: CourtListenerOpinion
Date Created: 2015-08-11 06:02:53.147531+00
Date Added: 2024-06-11T13:24:20.079338
License: Public Domain

NONPRECEDENTIAL  DISPOSITION  
                                                                             To  be  cited  only  in  accordance  with  Fed.  R.  App.  P.  32.1

                                                               United States Court of Appeals
                                                                                                     For  the  Seventh  Circuit
                                                                                                     Chicago,  Illinois  60604  
  
                                                                                                           August  6,  2015  
  
  
                                                                                                               Before  
  
                                                                                               FRANK  H.  EASTERBROOK,  Circuit  Judge  
  
                                                                                               MICHAEL  S.  KANNE,  Circuit  Judge*  
  
  
No.  07-­‐‑1624  

JERRY  N.  JONES,  MARY  F.  JONES,  
                                                                                                                                On   Remand   from   the   Su-­‐‑
and  ARLINE  WINERMAN,  
                                                                                                                                preme   Court   of   the   United  
       Plaintiffs-­‐‑Appellants,  
                                                                                                                                States.  
                                               v.  

HARRIS  ASSOCIATES  L.P.,  
      Defendant-­‐‑Appellee.  
  
                                                                                                                Order  
  
    Plaintiffs  contend  that  Harris  Associates  charged  excessive  fees  for  advising  mutual  
funds  in  the  Oakmark  complex.  The  district  court  rejected  this  contention,  Jones  v.  Harris  
Associates  L.P.,  2007  U.S.  Dist.  LEXIS  13352  (N.D.  Ill.  Feb.  27,  2007),  and  although  we  dis-­‐‑
agreed  with  the  legal  standard  the  district  court  had  used  we  nonetheless  affirmed.  
Jones  v.  Harris  Associates  L.P.,  527  F.3d  627  (7th  Cir.  2008).  The  Supreme  Court  in  turn  
disagreed  with  our  legal  standard  and  remanded  for  application  of  the  approach  that  
the  Justices  adopted:  “[T]o  face  liability  under  §  36(b)  [15  U.S.C.  §80a–35(b)],  an  invest-­‐‑
                                                                                                 
           *   Circuit   Judge   Evans,   a   member   of   the   panel   that   originally   decided   this   appeal,   died   after   the   re-­‐‑

mand  from  the  Supreme  Court.  The  case  is  being  decided  by  a  quorum.  28  U.S.C.  §46(d).  

                                                                                                                                                                        
No.  07-­‐‑1624                                                                                       Page  2  

ment  adviser  must  charge  a  fee  that  is  so  disproportionately  large  that  it  bears  no  rea-­‐‑
sonable  relationship  to  the  services  rendered  and  could  not  have  been  the  product  of  
arm’s  length  bargaining.”  Jones  v.  Harris  Associates  L.P.,  559  U.S.  335,  346  (2010).  
       
     After  the  case  returned  to  this  court,  the  parties  filed  statements  under  Circuit  Rule  
54  (and  we  allowed  a  second  round  of  statements,  so  that  each  side  could  address  the  
other’s  position).  Plaintiffs’  statement  principally  contended  that  Harris’s  fees  should  be  
deemed  excessive  because  they  were  not  approved  through  proper  procedures.  The  
procedural  problem,  plaintiffs  maintained,  is  that  Victor  Morgenstern,  the  CEO  of  one  
of  Harris’s  partners,  was  deemed  to  be  among  the  funds’  disinterested  trustees  after  he  
retired.  That  was  improper,  plaintiffs  contend,  because  his  deferred  compensation  could  
have  been  curtailed  if  Harris  failed  to  meet  certain  revenue  targets.  This  argument  was  
presented  and  rejected  on  the  initial  appeal,  527  F.3d  at  629–30,  where  we  held  that  the  
funds’  decisions  were  procedurally  sound,  and  plaintiffs  omitted  the  subject  from  their  
petition  for  certiorari.  The  only  question  the  Supreme  Court  remanded  to  us  for  deci-­‐‑
sion  is  the  one  we  quoted  above.  “[A]fter  Jones,  a  process-­‐‑based  failure  alone  does  not  
constitute  an  independent  violation  of  §36(b).  Instead,  we  have  been  instructed  that  
§36(b)  ‘is  sharply  focused  on  the  question  of  whether  the  fees  themselves  were  exces-­‐‑
sive.’”  Gallus  v.  Ameriprise  Financial,  Inc.,  675  F.3d  1173,  1179  (8th  Cir.  2012).  
       
     The  district  court  granted  summary  judgment  to  Harris  after  applying  a  legal  stand-­‐‑
ard  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.  
       
     The  district  court  found  that  there  is  no  material  dispute  about  four  propositions,  
which  collectively  require  a  decision  for  Harris:  first,  Harris’s  fees  were  in  line  with  
those  charged  by  advisers  for  other  comparable  funds;  second,  Harris  provided  accu-­‐‑
rate  information  to  the  funds’  boards,  whose  disinterested  members  approved  the  fees;  
third,  the  fee  schedules  reduced  the  applicable  percentage  charge  as  funds’  assets  rose  
(for  example,  Harris’s  fee  for  one  fund  was  1%  of  assets  up  to  $2  billion  but  0.75%  of  as-­‐‑
sets  over  $5  billion);  fourth,  the  fees  could  not  be  called  disproportionate  in  relation  to  
the  value  of  Harris’s  work,  as  the  funds’  returns  (net  of  fees)  exceeded  the  norm  for  
comparable  investment  vehicles.  2007  U.S.  Dist.  LEXIS  13352  at  *23.  
       
     Plaintiffs  do  not  raise  any  factual  question  about  any  of  these  points,  the  first  and  
fourth  of  which  jointly  suffice  under  the  Supreme  Court’s  standard.  The  Justices  ask  
No.  07-­‐‑1624                                                                                       Page  3  

whether  a  fee  is  so  large  that  it  could  not  have  been  the  result  of  arm’s  length  bargain-­‐‑
ing.  This  record  shows  that  Harris’s  fee  was  comparable  to  that  produced  by  bargaining  
at  other  mutual-­‐‑fund  complexes,  which  tells  us  the  bargaining  range.  If  evidence  im-­‐‑
plied  that  Harris’s  services  were  worth  less  than  the  services  that  other  advisers  provide  
for  other  funds,  that  would  imply  that  arm’s  length  bargaining  would  produce  a  lower  
fee.  But  the  undisputed  evidence  shows  that  Harris  delivered  value  for  money;  the  
funds  it  was  advising  did  as  well  as,  if  not  better  than,  comparable  funds.  
       
     As  they  did  in  the  district  court,  plaintiffs  seek  to  avoid  the  implications  of  these  
facts.  Instead  of  comparing  the  fees  Harris  received  from  public  mutual  funds  with  the  
fees  that  other  similar  funds  have  paid  to  different  advisers  (the  Supreme  Court’s  ques-­‐‑
tion  about  arm’s  length  bargaining),  plaintiffs  want  us  to  compare  the  fees  that  Harris  
charged  the  Oakmark  funds  with  the  fees  that  Harris  charged  some  of  its  other  clients,  
such  as  pension  funds.  Our  initial  opinion  rejected  this  contention,  527  F.3d  at  634–35,  
and  the  Supreme  Court  did  not  disagree  with  us:  

       Since  the  Act  requires  consideration  of  all  relevant  factors,  15  U.S.C.  §80a-­‐‑
       35(b)(2);  see  also  §80a-­‐‑15(c),  we  do  not  think  that  there  can  be  any  categorical  
       rule  regarding  the  comparisons  of  the  fees  charged  different  types  of  clients.  
       Instead,  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.  As  the  panel  
       below  noted,  there  may  be  significant  differences  between  the  services  pro-­‐‑
       vided  by  an  investment  adviser  to  a  mutual  fund  and  those  it  provides  to  a  
       pension  fund  which  are  attributable  to  the  greater  frequency  of  shareholder  
       redemptions  in  a  mutual  fund,  the  higher  turnover  of  mutual  fund  assets,  the  
       more  burdensome  regulatory  and  legal  obligations,  and  higher  marketing  
       costs.  If  the  services  rendered  are  sufficiently  different  that  a  comparison  is  
       not  probative,  then  courts  must  reject  such  a  comparison.  Even  if  the  services  
       provided  and  fees  charged  to  an  independent  fund  are  relevant,  courts  
       should  be  mindful  that  the  Act  does  not  necessarily  ensure  fee  parity  between  
       mutual  funds  and  institutional  clients  contrary  to  petitioners’  contentions.  
  
559  U.S.  at  349–50  (internal  citations  and  quotations  omitted).  
     
   Plaintiffs  have  not  proffered  evidence  that  would  tend  to  show  that  Harris  provided  
pension  funds  (and  other  non-­‐‑public  clients)  with  the  same  sort  of  services  that  it  pro-­‐‑
vided  to  the  Oakmark  funds,  or  that  it  incurred  the  same  costs  when  serving  different  
types  of  clients.  They  therefore  lack  the  sort  of  evidence  that  might  justify  a  further  in-­‐‑
quiry  under  the  Supreme  Court’s  approach.  The  Supreme  Court  did  not  disapprove  our  
No.  07-­‐‑1624                                                                                       Page  4  

analysis  of  this  aspect  of  plaintiffs’  contentions,  so  we  have  no  reason  to  reopen  the  mat-­‐‑
ter  on  remand.  
       
     The  district  court’s  decision  has  held  up  well.  
       
     We  close  with  an  apology  to  the  parties.  After  the  Rule  54  statements  were  received,  
the  papers  were  placed  in  the  wrong  stack  and  forgotten.  The  court’s  internal  system  for  
tracking  cases  under  advisement  does  not  include  remands  from  the  Supreme  Court,  so  
the  normal  process  of  alerts  and  ticklers  failed.  We  will  see  to  it  that  this  is  fixed.  That  
may  be  small  comfort  to  these  litigants  and  their  lawyers,  but  at  least  some  good  will  
come  from  the  delay.  

                                                                                                  AFFIRMED