Here's my Jones v. Harris analogy: say on the University of Georgia's campus each Coke machine was set up by Coke as its own private corporation. Coke picked a board of directors for each Coke machine, and told that board to negotiate supply fees with Coke. Congress imposed on Coke a "fiduciary duty with respect to the receipt of compensation." Petitioners argue that fiduciary duty means a fair fee, which means a fee that would be obtained in an arm's length transaction. And they further argue that there's no arm's length bargaining here; although the Coke machine directors are not interested in the transaction, neither are they really independent--if they reject Coke's offer and ask Coke to lower its fee, then they'll basically be out of a job next year. And that Coke charges "non-captive" machines--i.e., machines in a rest stop or shopping mall--half the price of fees they charge on Georgia's campus. Easterbrook thinks that the fact that there's a soda machine market solves everything: consumers know how much they're paying for a can of Coke, and if they think the campus Cokes are too expensive, they can walk somewhere else. Petitioners disagree. I actually know very little about the Investment Company Act or mutual funds, so this analogy may be seriously flawed, and I invite people to tell me so.
As an independence maven, what interests me is the lack of traction this "can't be fired" argument seems to be have found with the Court. David Frederick (for the plaintiffs) tried to make the point to Justice Sotomayor, who appeared to ignore it. Justice Scalia asked Frederick questions indicated he didn't believe in the disparity of power between board and adviser:
JUSTICE SCALIA: Mr. Frederick, I don't understand your statement that they can't fire the investment adviser. Maybe they can't fire him, but they can insist that he accept a lower fee, right? Surely they can do that, can't they?
MR. FREDERICK: They --
JUSTICE SCALIA: Can they insist that he accept a lower fee? Can they do that.
MR. FREDERICK: In practical terms, no.
JUSTICE SCALIA: Why?
MR. FREDERICK: Because the adviser picks the board of directors.
JUSTICE SCALIA: Oh, no, that's something different. Let's assume you have a disinterested board of directors, which is what the statute requires. You tell me even though they are disinterested, they can't fire the adviser. It seems to me, while they can't fire him, they can say: We are going to cut your fee in half. Whereupon they don't have to fire him. He will pack up and leave, and they will get a new adviser. Doesn't that work?
MR. FREDERICK: There is actually no evidence in any record I am aware of where that has actually happened. The directors have no leverage.
And then Frederick ran out of time.
I was reminded of these acidic lines on independence from Aronson v. Lewis: "it is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election. That is the usual way a person becomes a corporate director." How much work is the concept of independence doing here? Does independence mean the power to act free from outside influence? Or the absence of conflict? Or something else?
As an aside, I was getting kind of anxious as I neared the end of the 50 page oral argument transcript. Could we possibly have a conversation about fiduciary duty and not mention Meinhard v. Salmon? But there on page 49 was the Cardozo shoutout, courtesy of Fredrick: "what Judge Cardozo, when he was on the New York Court of Appeals, said, a fiduciary represents the punctilio of honor, and that is contrasted with the morals of the marketplace operating at arm's-length."
As those of you familiar with Glom history know, this phrase resonates.
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