The U.S. Court of Appeals for the Tenth Circuit has affirmed the lower court’s trial ruling in the Section 36(b) lawsuit, Obeslo v. Great-West Capital Management, LLC et al.¹ The ruling comes at the tail end of a wave of Section 36(b) litigation filed following the Supreme Court’s 2010 opinion in Jones v. Harris Associates.² The Tenth Circuit’s opinion was notable both for its complete repudiation of Plaintiffs’ claims and for the emphasis it placed on the care and conscientiousness of the board of the funds in question, which the opinion described as “the most important” of the Gartenberg factors. 

Background

On August 7, 2020, following a bench trial from January 13-28, 2020, the U.S. District Court for the District of Colorado issued its 18-page trial ruling in favor of the adviser, concluding that Plaintiffs failed to meet their burden of proof that the adviser breached its fiduciary duty under Section 36(b).³ More specifically, the trial court held that Plaintiffs had “failed to meet their burden of proof with respect to all of the Gartenberg factors (emphasis in original).” Moreover, the court held that “even though they did not have the burden to do so, Defendants presented persuasive and credible evidence that overwhelmingly proved that their fees were reasonable and that they did not breach their fiduciary duties.” With respect to the Gartenberg factors, the court found:

• The Board was independent, qualified and engaged in a robust process in approving Defendants’ fees. As a result, the court granted substantial deference to the Board’s decision to approve the fees at issue.
• The advisory and administrative fees challenged by Plaintiffs were within the range of fees paid by comparable funds.
• Plaintiffs failed to quantify any alleged economies of scale or show that those economies were not adequately shared with shareholders.
• Defendants’ profits were within the range of their competitors.
• Defendants provided extensive, high-quality services in exchange for their fees.
• Plaintiffs failed to identify any significant fall-out benefits that Defendants acquired.

The court separately held that Plaintiffs failed to prove they suffered actual damage due to the allegedly excessive fees. Accordingly, the court held that Great-West was entitled to judgment in its favor.

Tenth Circuit Ruling

Plaintiffs appealed from the lower court’s ruling to the Tenth Circuit, and on July 26, 2021, the Tenth Circuit affirmed the lower court’s opinion. In affirming the lower court ruling in its entirety, the Tenth Circuit emphasized shareholders’ burden of satisfying the “arduous standard” set forth in Jones v. Harris and remarked upon the historical track record of adviser victories in Section 36(b) cases. The Court explained that “[b]ecause no single factor is dispositive, plaintiffs must convince this panel that the district court erred on enough issues to justify overturning a multifactor balancing test on clear error review. They cannot carry such a heavy burden.” Further, the Court emphasized that “[t]he record is so flush with support for the district court’s factual findings that plaintiffs are left with little recourse beyond relitigating facts decided in district court. The substantial deference this court affords the district court’s factual conclusions dooms this effort.” 

The Tenth Circuit also highlighted the fact that plaintiffs never presented evidence establishing the outer bounds of arm’s-length bargaining, nor showed why defendants’ fees are outside that range. 

The Fund Board of Directors was also viewed in a positive light by both the lower court and the Tenth Circuit, both noting that the “evidence makes clear that the directors closely scrutinized fees, resulting in numerous fee reductions.” In fact, the Tenth Circuit focused on the fact that the Board “asked about breakpoints or fee reductions at nearly every meeting dating back to at least 2013,” and engaged in a “robust push and pull process . . . with the Board continuing to press for reductions and breakpoints even when GWCM provided industry data showing the Funds were not typical candidates for breakpoints, and even when Lipper . . . agreed with that data.” 

Indeed, the Tenth Circuit pointed to “the level of expertise, conscientiousness, independence, and information with which the board acts” and stated that the “emphasis this factor received in Jones, and its unique basis in the statutory text, suggest it is the most important” of the Gartenberg factors. Based on this analysis, the Tenth Circuit supported the District Court’s finding that “the Board’s decision to approve the fees is entitled to substantial deference” because it “engaged in a robust process in approving Defendants’ fees.”

Thus, after reviewing the district court’s factual findings and legal conclusions at great length, the Tenth Circuit affirmed the district court’s findings on all Gartenberg factors.

Conclusion

By affirming the lower court’s judgment in favor of Great-West, the Tenth Circuit’s ruling has once again strengthened the recent line of Section 36(b) opinions culminating in victory for the adviser. The Tenth Circuit placed significant importance on the fact that the lower court record was “so flush with support for [its] factual findings.” and that the board engaged in a robust 15(c) process. The opinion again highlights the difficulties that a plaintiff faces in overcoming the required deference to be given to an informed and independent board’s approval of advisory fees. From a litigation perspective, the opinion also reinforces the importance of developing a strong record in discovery to rebut Plaintiff’s claims, whether at the summary judgment stage, or as here, at trial.