On May 19, 2008, the U.S. Court of Appeals for the Seventh Circuit, in the case of Jones v. Harris Associates, affirmed a district court decision granting summary judgment in favor of a mutual fund adviser in an excessive fee case brought by three individual shareholders. In his opinion, Chief Judge Easterbrook, a nationally respected jurist known for his use of economic analysis of law, expressly “disapproved” the approach taken by the Second Circuit in Gartenberg v. Merrill Lynch Asset Mgmt., which for more than 25 years has been the touchstone for nearly all judicial decisions involving allegations of excessive fees:
Having had another chance to study this question, we now disapprove the Gartenberg approach. A fiduciary duty differs from rate regulation. A fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation. The trustees (and in the end investors, who vote with their feet and their dollars), rather than a judge or jury, determine how much advisory services are worth.
Under the Harris approach, it is clear that absent some deceit on the part of the fund adviser in the negotiation or disclosure of its fees, courts should not be involved in a judicial review of the “reasonableness” of those fees, as they are under the Gartenberg approach.
Just how much of an impact the decision will have, however, remains to be seen. Harris is binding only on courts within the Seventh Circuit while Gartenberg appears to remain the standard in many other jurisdictions. The clear conflict between the two approaches leaves open the possibility that the U.S. Supreme Court may eventually step in to decide what the standard should be.