On Monday, March 9, 2009, the United States Supreme Court granted the plaintiffs’ petition to review the case of Jones, Jerry N., et al. v. Harris Associates, L.P. In that case, the plaintiffs (shareholders of the Oakmark Funds) alleged that Harris Associates, L.P. (the investment adviser to the Oakmark Funds) breached its fiduciary duties to the Oakmark Funds imposed by Section 36(b) of the Investment Company Act of 1940 by charging excessive advisory fees.  

In granting summary judgment in favor of Harris Associates in 2007, the United States District Court for the Northern District of Illinois followed the so-called “Gartenberg” standard, which provides that an investment adviser has not violated its Section 36(b) fiduciary duties unless the fee that it accepts from an investment company is so disproportionate to the value of the services the adviser has rendered that the fee could not have been the product of arms-length bargaining. That standard was first established in a 1981 New York case and has been followed by many federal courts.  

On appeal, the Seventh Circuit Court of Appeals in 2008 upheld the District Court’s grant of summary judgment, but disapproved of the use of the “Gartenberg” test. The Seventh Circuit believed that the “Gartenberg” test relies too little on markets, and held that competition and the marketplace, rather than the judiciary, should determine whether an adviser’s advisory fee is reasonable. In comparing an investment adviser’s fees and fiduciary duties to those of lawyers and trustees of common law trusts, the Seventh Circuit determined that, unless an investment adviser has deceived or otherwise hindered the ability of an investment company’s independent directors to negotiate a favorable price for advisory services, the investment adviser has not breached its Section 36(b) fiduciary duties.  

The United States Supreme Court granted the plaintiffs’ petition to hear the issue of whether the Seventh Circuit erroneously held that there can be no shareholder claim that an investment company’s investment adviser charged an excessive fee under Section 36(b), unless the shareholder can show that the adviser misled the investment company’s directors who approved the fee.