Gallus v. Ameriprise Fin., Inc., 11–1091.

• Decision Date: 30 March 2012
• Docket Number: No. 11–1091.,11–1091.
• Citation: 675 F.3d 1173
• Parties: John E. GALLUS; Alexandria Ione Faller, also known as Alexandria Ione Griffin; Diana J. Anderson, Now known as Diana J. Hood; RiverSource Balanced Fund, formerly known as AXP Mutual Fund; RiverSource Precious Metals Fund, formerly known as AXP Precious Metals Fund; RiverSource Mid Cap Growth Fund, formerly known as AXP Equity Select Fund; RiverSource Small Cap Advantage Fund, formerly known as AXP Small Cap Advantage Fund; RiverSource Small Cap Value Fund, formerly known as AXP Partners Small Cap Value Fund; RiverSource Mid Cap Value Fund, formerly known as AXP Mid Cap Value Fund; RiverSource Small Company Index Fund, formerly known as AXP Small Company Index Fund; RiverSource High Yield Bond Fund, formerly known as AXP High Yield Bond Fund; RiverSource Large Cap Equity Fund, successor by merger to RiverSource New Dimensions Fund and AXP Blue Chip Advantage Fund, formerly known as AXP Large Cap Equity Fund, Appellants, v. AMERIPRISE FINANCIAL, INC., formerly known as American Express Financial Corporation; Columbia Management Investment Advisors, LLC; Ameriprise Financial Services, Inc., formerly known as American Express Financial Advisors, Inc., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

675 F.3d 1173

John E. GALLUS; Alexandria Ione Faller, also known as Alexandria Ione Griffin; Diana J. Anderson, Now known as Diana J. Hood; RiverSource Balanced Fund, formerly known as AXP Mutual Fund; RiverSource Precious Metals Fund, formerly known as AXP Precious Metals Fund; RiverSource Mid Cap Growth Fund, formerly known as AXP Equity Select Fund; RiverSource Small Cap Advantage Fund, formerly known as AXP Small Cap Advantage Fund; RiverSource Small Cap Value Fund, formerly known as AXP Partners Small Cap Value Fund; RiverSource Mid Cap Value Fund, formerly known as AXP Mid Cap Value Fund; RiverSource Small Company Index Fund, formerly known as AXP Small Company Index Fund; RiverSource High Yield Bond Fund, formerly known as AXP High Yield Bond Fund; RiverSource Large Cap Equity Fund, successor by merger to RiverSource New Dimensions Fund and AXP Blue Chip Advantage Fund, formerly known as AXP Large Cap Equity Fund, Appellants,

v.AMERIPRISE FINANCIAL, INC., formerly known as American Express Financial Corporation; Columbia Management Investment Advisors, LLC; Ameriprise Financial Services, Inc., formerly known as American Express Financial Advisors, Inc., Appellees.

No. 11–1091.

United States Court of Appeals, Eighth Circuit.

Submitted: Nov. 17, 2011.Filed: March 30, 2012.

Guy M. Burns, argued, Tampa, FL, Karl L. Cambronne, Jeffrey D. Bores, Bryan L. Bleichner, Minneapolis, MN, Lynn Lincoln Sarko, Michael D. Woerner, Tana Lin, Gretchen Freeman Cappio, Benjamin Gould, Seattle, WA, Jonathan Strickland Coleman, Tampa, FL, Michael J. Brickman, James C. Bradley, Charleston, SC, Nina H. Fields, Mount Pleasant, SC, John M. Greabe, Hopkinton, NH, on the brief, for appellants.

Robert A. Skinner, argued, Boston, MA, John D. Donovan, Jr., Benjamin S. Halasz, Boston, MA, Douglas Hallward–Driemeier, Washington, D.C., Robert L. Schnell, Jr., Minneapolis, MN, on the brief, for appellees.

Before WOLLMAN, MURPHY, and BENTON, Circuit Judges.

WOLLMAN, Circuit Judge.

This appeal requires us to reconsider whether the mutual fund shareholder plaintiffs have set forth sufficient evidence to survive summary judgment on their claim that the mutual fund adviser defendants breached the “fiduciary duty with respect to the receipt of compensation for services” that is imposed by § 36(b) of the Investment Company Act of 1940(ICA), 15 U.S.C. § 80a–35(b). In light of the United States Supreme Court's decision in Jones v. Harris Associates L.P., ––– U.S. ––––, 130 S.Ct. 1418, 176 L.Ed.2d 265 (2010), we conclude that the plaintiffs have not met their burden, and thus we affirm the district court's ¹ grant of summary judgment in favor of the defendants.

I.

The factual background is fully set forth in our prior panel decision, Gallus v. Ameriprise Financial, Inc., 561 F.3d 816 (8th Cir.2009). The plaintiffs are shareholders of nine mutual funds (the Funds) that are registered investment companies under the ICA. The Funds are managed and distributed by affiliates of the defendants (collectively, Ameriprise). The complaint alleged that Ameriprise breached its fiduciary duty under § 36(b) of the ICA. Section 36(b) places the burden of proving a breach of fiduciary duty on the plaintiff and further provides, in part:

[T]he investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company or by the security holders thereof, to such investment adviser or affiliated person of such investment adviser.

15 U.S.C. § 80a–35(b). We summarized the plaintiffs claims as follows: (1) the fee negotiation was flawed because it was based on external factors—namely the fee agreements of similar mutual funds in the market; (2) Ameriprise provided comparable advisory services to institutional, non-fiduciary clients at substantially lower fees than it charged the plaintiffs; and (3) Ameriprise misled the Fund's board of directors (the Board) about its arrangements with non-fiduciary clients to prevent the Board from questioning the higher fees charged to the plaintiffs. Gallus, 561 F.3d at 818.

In its first decision, the district court granted summary judgment in favor of Ameriprise, holding that the plaintiffs failed to set forth a genuine issue of material fact that the fees Ameriprise charged “were so disproportionately large that they bear no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining.” D. Ct. Order of July 10, 2007, at 20. In doing so, the district court applied the standard set forth in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir.1982), and considered the factors enumerated therein.²

We reversed. We concluded that although “the Gartenberg factors provide a useful framework for resolving claims of excessive fees,” excessive fees were not the only way in which a fund adviser can breach its fiduciary duties. Gallus, 561 F.3d at 822. We held that § 36(b) “impose[d] on advisers a duty to be honest and transparent throughout the negotiation process.” Id. at 823. Accordingly, we concluded,

[T]he district court erred in holding that no § 36(b) violation occurred simply because Ameriprise's fee passed muster under the Gartenberg standard. Although the district court properly applied the Gartenberg factors for the limited purpose of determining whether the fee itself constituted a breach of fiduciary duty, it erred in rejecting a comparison between the fees charged to Ameriprise's institutional clients and its mutual fund clients.

Id. Moreover, we instructed the district court to determine “whether Ameriprise purposefully omitted, disguised, or obfuscated information that it presented to the Board about the fee discrepancy between different types of clients.” Id. at 824. Ameriprise petitioned for a writ of certiorari.

While the first appeal was pending before our court, the Supreme Court granted certiorari in Jones v. Harris Associates L.P., to consider “what a mutual fund shareholder must prove in order to show that a mutual fund investment adviser breached the ‘fiduciary duty with respect to the receipt of compensation for services' ” under § 36(b). 130 S.Ct. at 1422 (quoting § 36(b)). After our decision was filed, the Court issued its decision in Jones and thereafter granted Ameriprise's petition, vacated our panel opinion, and remanded the case to us for further consideration in light of Jones. Ameriprise Fin., Inc. v. Gallus, ––– U.S. ––––, 130 S.Ct. 2340, 176 L.Ed.2d 559 (2010). In turn, we remanded the case to the district court, which reinstated its earlier decision and reentered judgment in favor of Ameriprise. D. Ct. Order of Dec. 10, 2010.

II.

In Jones, the Supreme Court concluded that “ Gartenberg was correct in its basic formulation of what § 36(b) requires: 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.” 130 S.Ct. at 1426. The Court adopted the meaning of fiduciary duty set forth in Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939). When reviewing a claim for breach of fiduciary duty, “[t]he essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain.” Jones, 130 S.Ct. at 1427 (quoting Pepper, 308 U.S. at 306–07, 60 S.Ct. 238) (emphasis omitted). Accordingly, all relevant circumstances must be taken into account, and the benchmark for reviewing challenged fees is “the range of fees that might result from arm's-length bargaining.” Id. (citing Gartenberg, 694 F.2d at 929).

The Supreme Court found that “ Gartenberg 's approach also reflects § 36(b)'s place in the statutory scheme[.]” Id. Gartenberg directs courts to consider the conscientiousness of the board of directors in its decision to approve the adviser's fee, 694 F.2d at 930, and the ICA instructs courts to give the board's approval of adviser compensation “such consideration ... as is deemed appropriate under all the circumstances [,]” 15 U.S.C. § 80a–35(b)(2). From the statutory language, the Supreme Court drew the following inferences: “[A] measure of deference to a board's judgment may be appropriate in some instances,” but “the appropriate measure of deference varies depending on the circumstances.” Jones, 130 S.Ct. at 1428. We thus give deference to the board's approval “[w]here a board's process for negotiating and reviewing investment-adviser compensation is robust [.]” Id. at 1429. Where, however, “the board's process was deficient or the adviser withheld important information, the court must take a more rigorous look at the outcome.” Id. at 1430. Although § 36(b) is “sharply focused” on whether the fees are excessive, we evaluate the fee-negotiation process to determine the degree of deference that is due a board's decision to approve the adviser's fees. Id. (quoting Migdal v. Rowe Price–Fleming Int'l, Inc., 248 F.3d 321, 328 (4th Cir.2001)). The Court concluded that Gartenberg 's approach followed the ICA's directive. Id. at 1428; see Gartenberg, 694 F.2d at 930 (“[T]he expertise of the independent trustees of a fund, whether they are fully informed about all facts bearing on the adviser-manager's service and fee, and the extent of care and conscientiousness with which they perform their duties are important factors to be considered in deciding whether they and the adviser-manager are guilty of a breach of fiduciary duty in violation of § 36(b).”).

The Supreme Court also clarified that comparisons between the fees that an adviser charges its institutional clients and the fees it charges its mutual fund clients may be relevant. “[C]ourts may give such comparisons the weight that they merit in light of the similarities and differences...