• September 21, 2010

We approach the 6th birthday of Gallus v. Ameriprise, U.S. District. Court. (D. Minn.) Civ. File No. 04-cv-4498 (DWF/SRN), filed on October 14, 2004 (pending before U.S. District Court Judge Donovan W. Frank).   The case has been up to the U.S. Court of Appeals for the Eighth Circuit (where summary judgment for the defendants was reversed) and back to Judge Frank.  In the mean time, the U.S. Supreme Court has weighed in on the case’s key issue, which had been the subject of a circuit split between the U.S. Court of Appeals for the Second Circuit (“the Gartenberg case“) and the Seventh Circuit (“the Harris Associates case“).

Here, in a nutshell, is the issue:  imagine a case where “Service Provider” (here, Ameriprise-related entities) provides services to Entity A (instutional investors, like pension funds) for $X and provides arguably very similar services to Entity B (mutual funds) for more than twice $X (mutual funds are made up of thousands of individuals who cannot negotiate on their own but who negotiate with Service Provider services through a “middle man,” closely related to Service Provider, but who owes the thousands of individual investors the highest duty of loyalty and good faith – a so-called fiduciary duty).

Is the price differential OK on its face? Not OK on its face? If the answers to these questions are “no” and “no,” how to determine if this disparity is appropriate versus constituting a breach of fiduciary duty?

What do those thousands of individuals need to show a breach of fiduciary duty?  Can Service Provider defend by arguing that other service providers offer the same price range to mutual funds vs. institutional investors?  Can Service Provider defend by arguing that all the information was disclosed all along?  Is it appropriate to have a Court essentially set the appropriate price for Service Provider’s work (i.e., “$2X is too much but given the added costs of dealing with a fund like entity B, $1.6X would be fair”)?

In March, the U.S. Supreme Court weighed in, siding with the Second Circuit’s Gartenberg position, rejecting the Seventh Circuit’s decision in the Harris Associates case (and siding with the dissent from denial of en banc rehearing at the Seventh Circuit by famed jurist, Richard Posner).

Now the issue has gone back to Judge Frank, informed by both the 8th Circuit opinion in his specific case and by the U.S. Supreme Court in the Harris Associates case.  What is Judge Frank to make of the 8th Circuit decision, as read to be in line with the U.S. Supreme Court decision?  Plaintiffs and defendants, unsurprisingly have different views (see here vs. here).

Hearing on “what next?” is set for 9/22/2010 at 02:00 PM in Courtroom 7C (St. Paul) before Judge Frank.

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