On March 31, 2010, in Jones v. Harris Associates L.P., the U.S. Supreme Court clarified the standard for contesting excessive investment adviser fees by shareholders of mutual funds. Petitioners are shareholders in three different mutual funds and claimed that the Seventh Circuit Court of Appeals “erroneously held, in conflict with the decisions of three other circuits, that a shareholder’s claim that the fund’s investment adviser charged an excessive fee – more than twice the fee it charged to funds with which it was not affiliated – is not cognizable under §36(b), unless the shareholder can show that the adviser misled the fund’s directors who approved the fee.”

The Court rejected the standard used by the Seventh Circuit and held that the standard adopted in the 1982 Second Circuit case of Gartenberg v. Merrill Lynch Asset Management, Inc. is the appropriate standard. The Court concluded that in order to face liability under §36(b), 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 a unanimous decision, the Court remanded the case to the Seventh Circuit with the instruction to use the Gartenberg standard.