On February 14, 2018, a U.S. District Court judge for the Southern District of New York (the Court) granted a motion to dismiss a shareholder action brought under Section 36(b) of the Investment Company Act of 1940, as amended (the 1940 Act) against J.P. Morgan Investment Management Inc. (JP Morgan), the investment adviser to the JP Morgan U.S. Large Cap Core Plus Fund (the Fund), alleging that JP Morgan breached its fiduciary duty to the Fund by charging excessively high investment advisory fees. The plaintiff, a Fund shareholder, filed the suit in April 2017, claiming that the fee JP Morgan charges the Fund violates Section 36(b) because it is higher than the fees JP Morgan charges for advisory services it provides to other funds. The Court agreed with JP Morgan’s contention that the plaintiff’s complaint failed to allege facts demonstrating why the higher fee “bears no reasonable relationship to the services rendered” and falls “outside the range of what arm’s length bargaining could produce.” Consequently, the Court concluded that the plaintiff failed to state a claim for relief under Section 36(b).


Section 36(b) of the 1940 Act imposes a fiduciary duty on investment advisers with respect to the compensation they receive for providing advisory services to mutual funds, and it provides fund shareholders with an express private right of action to enforce this duty against advisers and their affiliates that receive compensation from funds. In such cases, the burden of proof rests on the plaintiffs to show, by a preponderance of the evidence, that the advisory fee is excessive, i.e., that the fee is “so disproportionate that it does not bear a reasonable relationship to the service the defendant rendered and could not have been negotiated at arm’s-length.”

To determine whether an advisory fee is excessive, courts consider the fee in light of the factors set forth in the 1982 decision of the U.S. Court of Appeals for the Second Circuit in Gartenberg v. Merrill Lynch Asset Management, Inc., which was cited with approval by the Supreme Court in Jones v. Harris

The Court’s Application of the Gartenberg Factors

Applying the “Gartenberg factors,” the Court concluded the following: 

  • Comparative Fee Structures: The plaintiff failed to plausibly suggest that the fees JP Morgan charged for the Fund are so disproportionately large that they are necessarily outside of the range of what would have been negotiated at arm’s length “merely because one or two mutual funds pay lower [fees].”
  • Economies of Scale: The plaintiff’s allegations, including that the “sharp growth” in the Fund’s net assets (from approximately $70 million in 2006 to almost $10 billion in 2016) was “not accompanied by a parallel growth in advisory services,” were “insufficient to show that the Fund achieved economies of scale because they do not address the Fund’s actual transaction costs and whether those costs increased or decreased as the assets under management grew.” Even if the Fund realized economies of scale, the Court concluded that the plaintiff failed to adequately allege that the benefits are not being shared with the Fund’s investors. In this regard, the Court noted that although the advisory agreement did not include breakpoints, JP Morgan had reduced and waived advisory fees in the past.
  • Nature and Quality of Services: The plaintiff’s reliance on the investment performance of the Fund alone— particularly since the performance was “about the same” as its peers—was inadequate to show that the nature and quality of JP Morgan’s services rendered the Fund’s fees excessive. 
  • Profitability: “[A]rmed with no evidence of the costs [that JP Morgan] incurs to provide the Fund with investment advisory services,” the plaintiff’s claim that, essentially, the Fund is profitable due to its high fees is “plainly insufficient to support liability under Section 36(b).” 
  • Fall Out Benefits: The Fund’s “captive relationship” with JP Morgan did create additional benefits to JP Morgan, including the ability to provide affiliated services to the Fund and create an additional sub-advised fund at low cost; however, these facts, according to the Court, did not favor either party.
  • Care and Conscientiousness of the Board’s Decision in Approving the Fund’s Fee Rate: The plaintiff failed to provide facts to support the claim that the Fund’s Board did not engage in a good-faith process designed to guard against excessive fees when it reviewed the Fund’s investment advisory agreement.