March 19, 2009
The Seventh Circuit & Mutual Funds (Again).
Posted by William Birdthistle

As we saw last week, the Supreme Court will be reviewing the Seventh's Circuit decision in Jones v. Harris in a few months.  (Chief Judge Easterbrook held in Jones that an investment adviser did not violate its fiduciary duty under the Investment Company Act by charging excessive fees because the market for investment advisory fees is sufficiently competitive to ensure reasonable fees; and Judge Posner dissented vigorously from the denial of rehearing Jones en banc, arguing that the market is not sufficiently competitive.)  Now, in a timely coincidence, the Seventh Circuit finds itself with an immediate opportunity to revisit this question en banc before the Supreme Court will review their work in Jones.

In a new case called Hecker v. Deere, employees of Deere & Company charged their employer with violating its fiduciary duty under ERISA by failing to provide a prudent array of investment options in the company's 401(k) menu.  The Deere plan featured a number of Fidelity plans with higher-than-average fees plus a portal through which employees could access 2,500 publicly available funds.  About a month ago, Judge Diane Wood writing for unanimous panel of the Seventh Circuit ruled in favor of the defendants, Deere and Fidelity, holding that no fiduciary duty was violated because the portal allowed employees to enjoy the public market for investment advisory fees which, as Easterbrook argued in Jones, is sufficiently competitive to ensure reasonable fees. 

That means two Seventh Circuit panels have in the past year concluded that the mutual fund market is competitive, while five of the ten (or eleven, depending on when you count) active judges on the same court during the same period signed Judge Posner's dissent arguing exactly the opposite.  So a number of mutual fund and ERISA scholars and I filed an amicus brief in Hecker yesterday arguing that the Seventh Circuit should rehear the panel's decision to settle this intracircuit split.

Will the Seventh Circuit agree to rehear?  That's always a rarity, but this issue has already attracted an unusually high degree of judicial attention.  The grant of certiorari in Jones may be a sufficiently remarkable and relevant event to change the minds of some of those who voted against rehearing in Jones to vote in favor of rehearing in Hecker.  Plus, President Obama has just nominated a new Seventh Circuit judge, David Hamilton, who could provide a crucial vote for or against if he is confirmed soon enough.  (Hamilton, if confirmed, will replace Judge Ripple, who recused himself in Jones and has since taken senior status.)

If the court does agree to rehear the case, Judge Posner will have the en banc rehearing he wanted so much in Jones, and the Seventh Circuit will have the rare opportunity of reconsidering the same issue that the Supreme Court will soon be reviewing.  If the court declines to rehear the case, the plaintiffs will be able to file a petition for certiorari asking the Supreme Court to join their case to Jones, given the similarity of underlying issues.  In a sense, the Seventh Circuit has the chance either to double down by sending two similar cases to the Supreme Court or to try to defuse things by explaining and consolidating its position before its next performance review. 

We should see a ruling on the Hecker petition for rehearing within the next several weeks.

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