On December 28, 2009, a Los Angeles federal district court ruled in favor of the defendants in the American Mutual Funds Fee Litigation case. Applying the Gartenberg standard to the plaintiff’s excessive fee claims under Section 36(b) of the 1940 Act, the court held that the plaintiffs failed to sustain their burden of proving that the fees charged were so disproportionately large that they bore no reasonable relationship to the services rendered and could not have been a product of arm’s-length bargaining. In citing Gartenberg, the court stated that the Jones v. Harris Associates standard is flawed because it ignores the plain language of Section 36(b) and essentially emasculates the statute. The court also stated that the Gallus v. Ameriprise Financial standard is flawed because it expands Section 36(b), providing for a cause of action even where a challenged fee passed muster under the Gartenberg standard.
As an aside, the court noted that the Gartenberg standard is a very high threshold for a plaintiff to overcome and that its holding should not be mistaken for a determination that the directors obtained the best possible deal for investors as suggested in the defendants’ proposed findings and conclusions of law. The court quoted Judge Posner’s dissent in Jones and observed that the directors had little incentive to police the compensation paid to the defendants. For instance, the court noted that the directors were never provided data showing the compensation paid to employees of the defendants as part of their review of profitability.