Strigliabotti v. Franklin Resources, Inc., C 04-00883 SI.
| Citation | 398 F.Supp.2d 1094 |
| Decision Date | 09 November 2005 |
| Docket Number | No. C 04-00883 SI.,C 04-00883 SI. |
| Court | U.S. District Court — Northern District of California |
| Parties | Susan STRIGLIABOTTI, et al., Plaintiffs, v. FRANKLIN RESOURCES, INC., et al., Defendants. |
Tana Lin, Keller Rohrback, L.L.P., Seattle, WA, James C. Bradley, Michael J. Brickman, Nina H. Fields, Richardson Patrick Westbrook & Brickman, LLC, Charleston, SC, Ron Kilgard, Keller Rohrback, P.L.C., Phoenix, AZ, for Plaintiffs.
Anthony Zaccaria, Daniel A. Pollack, Edward T. McDermott, Pollack & Kaminsky, New York, NY, Dale M. Edmondson, Meredith N. Landy, O'Melveny & Myers, Menlo Park, CA, Jessica Anne Hoogs, O'Melveny & Myers LLP, San Francisco, CA, for Defendants.
ORDER PARTIALLY GRANTING AND PARTIALLY DENYING DEFENDANTS' MOTION FOR JUDGMENT ON THE PLEADINGS
On November 4, 2005, the Court heard oral argument on defendants' motion to dismiss, which was re-noticed as a motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). After careful consideration of the arguments of counsel and the papers submitted, the Court hereby GRANTS defendant's motion to the extent it seeks dismissal of defendant Franklin Templeton Services with respect to plaintiffs' claims under Section 36(b) of the Investment Company Act, and DENIES the remainder of defendant's motion.
This action is brought by shareholders of several mutual funds ("Funds") created, sold, advised, and managed as part of the Franklin Templeton fund family ("the Fund Complex"). Specifically, the Funds are Templeton Growth Fund, Franklin Balance Sheet Investment Fund, Franklin Flex Cap Growth Fund, Franklin Income Fund, Franklin Small-Mid Cap Growth Fund, Franklin Biotechnology Discovery Fund, MutualShares Fund, and Franklin Utilities Fund. Third Am. Compl. ("Compl.") at ¶ 1.1 Plaintiffs are nine individuals who bring suit both in their own rights and for the use and benefit of the aforementioned funds. Id. Plaintiff Susan Strigliabotti also brings this case on behalf of a class consisting of all residents of the State of California who were shareholders of the Templeton Growth Fund, the Franklin Balance Sheet Investment Fund, and/or the Franklin Flex Cap Growth Funds at any time from March 4, 2000 to the present. Id. at ¶ 45.2
Defendants are Franklin Resources, Inc., Templeton Global Advisors, Ltd., Franklin Advisory Services, LLC, Franklin Advisers, Inc., Franklin Templeton Distributors, Inc., Franklin Mutual Advisers, LLC, and Franklin Templeton Services, LLC. Id. at ¶ 2. They are various investment advisors affiliated with a single parent company, also a defendant, Franklin Resources, Inc. ("Franklin Resources"), a publicly traded company incorporated in Delaware and headquartered in San Mateo, California. Id.
Plaintiffs allege that defendants receive advisory fees from the Funds for investment advisory services and administrative services, and these fees are based on a percentage of the net assets of each of the Funds. Id. at ¶ 6. Defendants also charge distribution fees for marketing, selling, and distributing mutual fund shares to new shareholders under "Distribution Plans" adopted pursuant to Rule 12b-1, 17 C.F.R. § 270.12b-1. Id. at ¶ 9. These distribution fees are based on a percentage of the net assets of each of the funds in the Fund Complex and amount to more than $7 million annually. Id. Plaintiffs allege that the advisory fees charged by defendants are higher than those for other funds for which defendants perform equivalent services, and that the distribution fees are excessive, in violation of Rule 12b-1 and § 36(b) of the Investment Company Act of 1940. Plaintiffs specifically claim that, despite significant growth in the Funds since 1983, they have not benefitted from the economies of scale and instead have been charged advisory and distribution fees that are disproportionately large in relation to the services provided. Id. at ¶¶ 13-15.
Plaintiffs seek to either rescind the investment advisory agreements and Distribution Plans and recover the total fees charged by defendants, or, in the alternative, to recover the excess profits resulting from economies of scale wrongfully retained by defendants, and any other excessive compensation or improper payments received and retained by defendants in breach of their fiduciary duty under § 36(b), 15 U.S.C. § 80a-35(b), and state law. Id. at ¶ 28. The Third Amended Complaint alleges individual and derivative claims for: (Count I) breach of fiduciary duty under § 36(b) for excessive investment advisory fees; (Count II) breach of fiduciary duty under § 36(b) for excess profits from economies of scale; and (Count III) breach of fiduciary duty under § 36(b) for excessive Rule 12b-1 distribution fees and extraction of additional compensation for advisory services. The Complaint also alleges individual, derivative, and class claims for: (Count IV) breach of fiduciary duty under California law; (Count V) civil conspiracy to breach fiduciary duty under California law; (Count VI) common law aiding and abetting breaches of fiduciary duty by Franklin Resources; (Count VII) "acting in concert" under § 876(b) of the Restatement (Second) of Torts; (Count VIII) breach of Cal. Business & Professions Code § 17200; and (Count IX) common law unjust enrichment.
Plaintiffs filed their complaint on March 4, 2004, and filed a First Amended Complaint on June 3, 2004. Defendants filed a motion to dismiss the First Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). In that motion to dismiss, defendants contended, inter alia, that plaintiffs' claims in Counts I, II, and III under Section 36(b) of the Investment Company Act of 1940 were deficient because the complaint contained vague allegations that did not sufficiently detail the excessiveness of fees charged in relation to services provided. In an order filed March 7, 2005, the Court rejected that argument and held that plaintiffs had sufficiently pled their claims under Section 36(b). The Court also dismissed certain claims without leave to amend and dismissed other claims with leave to amend.
Plaintiffs filed a Second Amended Complaint on March 21, 2005. That complaint made a few substantive changes in response to the Court's March 7, 2005 order. Defendants filed an answer to the Second Amended Complaint on April 11, 2005. Pursuant to a stipulated order by the Court, plaintiffs filed a Third Amended Complaint on August 17, 2005. The Third Amended Complaint is identical to the Second Amended Complaint except for the addition of class action allegations based on California law (Counts IV through IX), and the deletion of claims related to two funds.
On September 29, 2005, defendants filed a motion to dismiss the Third Amended Complaint pursuant to Rule 12(b)(6). After plaintiffs filed their opposition to the motion to dismiss, in which they argue, inter alia, that the motion to dismiss is procedurally improper, defendants filed an answer to the Third Amended Complaint on October 20, 2005. Defendants also re-noticed their Rule 12(b)(6) motion as an alternative motion for judgment on the pleadings pursuant to Rule 12(c).
Defendants' instant motion contends that plaintiffs' Section 36(b) claims must be dismissed because plaintiffs have failed to plead any facts that the fees charged to any particular fund were excessive in relation to any particular fund. Defendants also contend that plaintiffs' newly asserted California class claims must be dismissed either for lack of jurisdiction (assuming dismissal of the federal claims), or dismissed because they are preempted by the Securities Litigation Uniform Standards Act ("SLUSA"). Plaintiffs oppose defendants' motion on the grounds that it is an improper "second bite at the apple" in violation of Rule 12 and barred by the law of the case. On the merits, plaintiffs contend they have adequately pled claims under Section 36(b), and that their state law claims are not preempted by SLUSA.
"After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings." Fed. R. Civ. Proc. 12(c). Rules 12(b)(6) and 12(c) are substantially identical. See William W. Schwarzer, A. Wallace Tashima & James M. Wagstaffe, Federal Civil Procedure Before Trial § 9:319. Under either provision, a court must determine whether the facts alleged in the complaint, to be taken for these purposes as true, entitle the plaintiff to a legal remedy. Id. If the complaint fails to articulate a legally sufficient claim, the complaint should be dismissed or judgment granted on the pleadings.
While Rule 12(c) of the Federal Rules of Civil Procedure does not expressly provide for partial judgment on the pleadings, neither does it bar such a procedure; it is common to apply Rule 12(c) to individual causes of action. Moran v. Peralta Community College Dist., 825 F.Supp. 891, 893 (N.D.Cal.1993); Schwarzer et al., § 9:340 (1997) ().
Plaintiffs bring Counts I, II, and III under Section 36(b) of the Investment Company Act of 1940. Defendants' motion attacks these claims on the ground that plaintiffs have failed to plead any specific facts that the fees charged for each of the eight funds at issue are excessive. Instead, defendants contend, the Complaint simply contains a generalized attack on the Franklin Fund Complex, and that even if plaintiffs' allegations were true, they would not prove that the fees charged to any particular fund were excessive under Section 36(b). Defendants also contend that defendants Franklin Resources and Franklin Templeton should be dismissed with...
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