March 30, 2010
Keeping up with Jones.
Posted by William Birdthistle

The Supreme Court's unanimous ruling in Jones v. Harris this morning is surprising in a number of respects.  Not only is the decision unanimous, remarkably short, and almost entirely without fragmented opinions, but it also startles in a few other ways. 

First, the Court roundly rejects Chief Judge Easterbrook's Seventh Circuit opinion and smothers the lower court's market-oriented analysis.  To those who consider this Court conservative, the total lack of support for Easterbrook and neoclassical economic theory in a case that could have provided a dramatic embrace of them may come as a surprise, particularly after the majority's analysis in Citizens United.

Second, the Court essentially ruled in favor of shareholder plaintiffs against business in a case that could lead to more litigation.  Of course, had the Court ruled the other way, it would have been hard to imagine any plaintiff ever prevailing in these cases, and the judiciary would have read Section 36(b) out of the Investment Company Act.

Third, the Court declined to take up a host of related topics that might have made for fascinating reading: it completely abstained from the robust academic debate (mirrored by Easterbrook and Posner) regarding the competitiveness of the mutual fund industry; it avoided advancing its discussion of the conception of the corporation (or, in this case, the business trust) that made Citizens United so fascinating to corporate scholars; it gave little hint of its thoughts on the broader executive compensation debate; and it revealed little about its broader reaction to the financial crisis, notwithstanding the large number of major business cases on its docket this Term.

Essentially, the Court's ruling was quite modest: it upheld the totality-of-the-circumstances test of Gartenberg, but with the very important addition of emphasis on the comparison of different fees paid by institutional and retail shareholders.  The respondents had argued vigorously against such a comparison, preferring comparisons among different mutual funds. 

In my amicus briefs and recent article in the University of Illinois Law Review, I called for such a ruling, which I termed "Gartenberg-plus."  In Gartenberg, the Second Circuit in its third footnote contemplated institutional-retail comparisons in theory but rejected one in the particular case before it.  Today, the Supreme Court has plucked that footnote out of relative obscurity and given it pride of place in this ruling.  In an industry in which individual investors on average pay twice what institutions pay, making such a comparison a central component of the analysis clearly highlights the grievances of individuals.

Finally, the Thomas concurrence struck me as unusual inasmuch as it basically says not to consider the majority opinion an affirmation of pro-plaintiff elements of Gartenberg.  Presumably, that means one might have good reason for doing so, and that had the other justices agreed with Thomas, those sentiments would have been incorporated into the majority itself.

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