954 F.3d 852
6th Cir.2020Background:
- Plaintiffs Goodman and Campbell are shareholders in five JPMorgan mutual funds advised by J.P. Morgan Investment Management (JPMIM); they sued under §36(b) of the Investment Company Act alleging excessive advisory fees.
- JPMIM served as the adviser to the Funds and received annual fees (2014 rates ranged ~0.30%–0.65% of AUM); JPMIM also acted as a subadviser to other institutional clients (the “Subadvised Funds”).
- Plaintiffs argued the fees charged to the Funds were excessive because JPMIM charged lower fees to the Subadvised Funds despite using the same investment strategy, and urged comparison to those subadvisory contracts as arm’s‑length benchmarks.
- JPMIM defended by showing (a) the Funds’ fees and net performance were in line with peer funds (using Lipper data), (b) adviser responsibilities and risks differ between adviser and subadviser roles, (c) some economies of scale were shared via fee waivers, and (d) the independent Board robustly reviewed fees.
- The district court applied the Gartenberg factors as refined by Jones v. Harris, granted summary judgment to JPMIM, and the Sixth Circuit affirmed: plaintiffs failed to show a genuine issue that fees were "so disproportionately large" as to violate §36(b).
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether JPMIM’s advisory fees violated §36(b) (i.e., were "so disproportionately large" under Jones v. Harris) | Fees are excessive because JPMIM charged lower fees to Subadvised Funds for the same strategy, showing the Funds’ fees fall outside arm’s‑length range | Fees do not violate §36(b) because (1) Funds’ fees align with comparable mutual funds and (2) Funds delivered strong net performance; adviser vs. subadviser services differ materially | Held for JPMIM: plaintiffs failed to show fees were so disproportionate; comparison to subadvised clients was inapt because services/risks differ |
| Whether comparisons to Subadvised Funds’ fees are probative | Such comparisons establish the arm’s‑length bargaining range and show disparity | Inapt comparison: adviser role entails greater responsibilities, risks, and compliance obligations than subadviser role | Held for JPMIM: courts must reject comparisons where services differ; here differences made the comparison not probative |
| Whether economies of scale were realized and adequately shared | JPMIM realized economies of scale (across funds) and did not sufficiently share savings with shareholders | JPMIM shared economies of scale for funds that realized them (via fee waivers); other funds did not realize economies during the relevant period | Held for JPMIM: evidence showed some sharing via waivers and no genuine dispute that board could have approved waivers; economies factor favors JPMIM |
| Whether the Board’s review process was adequate (Gartenberg factor six) | Board process had informational gaps and procedural flaws that merit closer scrutiny | Board consisted of independent, experienced trustees who reviewed third‑party data (Lipper, Casey Quirk), counsel, and JPMIM inputs; process was robust | Held for JPMIM: Board oversight was sufficiently diligent; plaintiffs’ criticisms were "nit‑picking" and not legally significant |
Key Cases Cited
- Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010) (§36(b) test: fee actionable if "so disproportionately large" it bears no reasonable relationship to services; courts consider all relevant factors but must avoid rate‑setting)
- Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982) (articulates multi‑factor test—nature/quality of services, profitability, fall‑out benefits, economies of scale, comparative fees, board oversight)
- Burks v. Lasker, 441 U.S. 471 (1979) (mutual‑fund structure limits arm’s‑length bargaining; independent directors as primary protections)
- Gallus v. Ameriprise Fin., Inc., 675 F.3d 1173 (8th Cir. 2012) (courts should sharply focus on whether fees themselves were excessive under Jones)
- Migdal v. Rowe Price–Fleming Int’l, Inc., 248 F.3d 321 (4th Cir. 2001) (discusses economies of scale and need to pass savings to fund investors)