Zoidis et al v. T. Rowe Price Associates, Inc.

Filing 91

MEMORANDUM AND ORDER DENYING 34 Motion to Dismiss; GRANTING IN PART AND DENYING IN PART 35 Request of Defendant for Judicial Notice in Support of Motion to Dismiss; Answer due 4/17/17. Signed by Judge Marvin J. Garbis on 3/31/2017. (hmls, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
CHRISTOPHER ZOIDIS, et al.
Plaintiffs
vs.

Defendant
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* CIVIL ACTION NO. MJG-16-2786

T. ROWE PRICE ASSOCIATES, INC.

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MEMORANDUM & ORDER DENYING MOTION TO DISMISS

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The Court has before it Defendant T. Rowe Price Associates,
Inc.’s Motion to Dismiss for Failure to State a Claim [ECF No.
34] and the materials relating thereto submitted by the parties.
The Court has held a hearing and has had the benefit of the
arguments of counsel.

I.

BACKGROUND
At all times relevant hereto, Defendant, T. Rowe Price

Associates, Inc. (“TRP”) has been an investment manager and
adviser to various mutual funds.1

Some 90 or so of these can be

referred to as “affiliated” mutual funds that TRP created, and
distributes and sells to the public.
1

Also, it advises funds

“A mutual fund is a pool of assets, consisting primarily of
[a] portfolio [of] securities, and belonging to the individual
investors holding shares in the fund.” Burks v. Lasker, 441 U.S.
471, 480 (1979). Typically, an investment adviser creates the
mutual fund, selects its directors, manages its investments, and
provides other services. Jones v. Harris Assocs. L.P., 559 U.S.
335, 338 (2010).

created by others, e.g., John Hancock, and is compensated for
services rendered to them.
Plaintiffs are seven individuals who, at times pertinent
hereto, have owned shares in eight2 of the affiliated mutual
funds3 advised and managed by TRP (“the Eight Funds”).
Plaintiffs, on behalf of the Eight Funds, filed this case
against TRP in the Northern District of California asserting
claims under Section 36(b) of the Investment Company Act4
(“ICA”), 15 U.S.C. § 80a-35(b).

Pursuant to 28 U.S.C. §

1404(a), the case has been transferred to the District of
Maryland, the location of TRP’s principal place of business.
Order, ECF No. 48.

2

One Plaintiff, Howard Gurwim is the owner of shares in two
of these funds; each of the six other plaintiffs own shares in
one such fund.
3
These are: (1) T. Rowe Price Blue Chip Growth Fund, (2) T.
Rowe Price Capital Appreciation Fund, (3) T. Rowe Price Equity
Income Fund, (4) T. Rowe Price Growth Stock Fund, (5) T. Rowe
Price International Stock Fund, (6) T. Rowe Price High Yield
Fund, (7) T. Rowe Price New Income Fund, and (8) T. Rowe Price
Small Cap Stock Fund.
4
The Investment Company Act of 1940 was adopted because of
concern over the potential for abuse inherent in the structure
of investment companies. Jones, 559 U.S. at 339. “Recognizing
that the relationship between a fund and its investment adviser
was ‘fraught with potential conflicts of interest,’ the
[Investment Company] Act created protections for mutual fund
shareholders.” Id. (quoting Daily Income Fund v. Fox, 464 U.S.
523, 536 (1984)).

2

By the instant motion, TRP seeks dismissal of all claims
pursuant to Rule 12(b)(6)of the Federal Rules of Civil
Procedure.5

II.

DISMISSAL STANDARD
A motion to dismiss filed pursuant to Rule 12(b)(6) tests

the legal sufficiency of a complaint.

A complaint need only

contain “‘a short and plain statement of the claim showing that
the pleader is entitled to relief,’ in order to ‘give the
defendant fair notice of what the . . . claim is and the grounds
upon which it rests.’”

Bell Atl. Corp. v. Twombly, 550 U.S.

544, 555 (2007) (alteration in original) (citations omitted).
When evaluating a 12(b)(6) motion to dismiss, a plaintiff’s
well-pleaded allegations are accepted as true and the complaint
is viewed in the light most favorable to the plaintiff.
However, conclusory statements or “a formulaic recitation of the
elements of a cause of action will not [suffice].”

Id.

A

complaint must allege sufficient facts “to cross ‘the line
between possibility and plausibility of entitlement to relief.’”
Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009)
(quoting Twombly, 550 U.S. at 557)).

5

All Rule references herein refer to the Federal Rules of
Civil Procedure.

3

Inquiry into whether a complaint states a plausible claim
is “‘a context-specific task that requires the reviewing court
to draw on its judicial experience and common sense.’”

Id.

(quoting Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)).

Thus, if

“the well-pleaded facts [contained within a complaint] do not
permit the court to infer more than the mere possibility of
misconduct, the complaint has alleged – but it has not ‘show[n]’
– ‘that the pleader is entitled to relief.’”

Id. (quoting

Iqbal, 556 U.S. at 679 (alteration in original)).

III. JUDICIAL NOTICE
TRP requests the Court to take judicial notice of various
documents [ECF No. 35].
In considering a Rule 12(b)(6) motion, the court may take
judicial notice of public records, including statutes, and “may
also ‘consider documents incorporated into the complaint by
reference,’ ‘as well as those attached to the motion to dismiss,
so long as they are integral to the complaint and authentic.’”
United States ex rel. Oberg v. Pennsylvania Higher Educ.
Assistance Agency, 745 F.3d 131, 136 (4th Cir. 2014) (citations
omitted).
Accordingly, the Court will take judicial notice of those
documents incorporated into the complaint by reference (ECF No.

4

34, Exs. A, B, D, and F).

The Court will also take judicial

notice of public documents filed with the Securities and
Exchange Commission (“S.E.C.”)6 (ECF No. 34, Exs. E, C, G, and H)
and publicly filed court documents in unrelated 36(b) actions
(ECF No. 34, Exs. I and K).
However, the Court will not take judicial notice of the
Morningstar documents (ECF No. 34, Exs. J1-J8).
are not referenced in the Complaint.

These documents

Moreover, they are not

warranted7 to be accurate. Opp’n 1-2, ECF No. 36.

IV.

DISCUSSION
A.

Investment Company Act Liability

Section 36(b) of the ICA provides that an investment
adviser, such as TRP, has a fiduciary duty with regard to
registered investment companies, such as the Eight Funds,
regarding compensation for services.

6

“Judicial notice is appropriate of the content of S.E.C.
filings, to the extent that this establishes that the statements
therein were made, and the fact that these documents were filed
with the agency. . . . The Court does not take judicial notice
of the truth of the underlying facts in such public documents.”
In re Mun. Mortg. & Equity, LLC, Sec. & Derivative Litig., 876
F. Supp. 2d 616, 653 n.7 (D. Md. 2012).
7
The “Terms of Use” contained in the documents specifically
states: “Neither Morningstar nor its Information Providers can
guarantee the accuracy, completeness, timeliness, or correct
sequencing of any of the Information . . . .” See Opp’n 1, ECF
No. 36.

5

[T]he investment adviser of a registered
investment company shall be deemed to have a
fiduciary duty with respect to the receipt
of compensation for services . . . paid by
such registered investment company . . . to
such investment adviser.
15 U.S.C. § 80a–35(b).
Moreover, § 36(b) provides that security holders, such as
plaintiffs, may sue the investment advisor for breach of that
fiduciary duty:
An action may be brought under this
subsection by . . . a security holder of
such registered investment company on behalf
of such company, against such investment
adviser . . . for breach of fiduciary duty
in respect of such compensation . . . paid
by such registered investment company . . .
to such investment adviser . . . .
Id.
“[T]o face liability under § 36(b), an investment adviser
must charge a fee that is so disproportionately large that it
bears no reasonable relationship to the services rendered and
could not have been the product of arm’s length bargaining.”
Jones v. Harris Assocs. L.P., 559 U.S. 335, 346 (2010); Migdal
v. Rowe Price-Fleming Int’l, Inc., 248 F.3d 321, 326 (4th Cir.
2001).

“That is, a breach [of fiduciary duty] occurs when the

fees charged are excessive or disproportionate to the services
rendered.” Migdal, 248 F.3d at 328–29.

6

To determine if fees are excessive or disproportionate to
the services rendered, it is necessary to consider all pertinent
facts and circumstances. Jones, 559 U.S. at 344.

In Jones, the

Supreme Court noted the approach of the Second Circuit utilized
in Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923,
928 (2d Cir. 1982) that includes consideration of such factors
as:
(1)

the nature and quality of the services
provided to fund shareholders;

(2)

the profitability of the fund to the
adviser-manager;

(3)

economies of scale of operating the
fund as it grows larger;

(4)

comparative fee structures;

(5)

fallout benefits, i.e., indirect
profits to the adviser attributable in
some way to the existence of the fund;
and

(6)

the independence and conscientiousness
of the directors.

Jones, 559 U.S. at 344, n.5 (citing Gartenberg, 694 F.2d at
928).

B.

Adequacy of Plaintiffs’ Allegations

Plaintiffs allege, in conclusory terms that the investment
management fees8 TRP charged the Eight Funds are “so

8

The word “fee” is often used herein to refer to the “fee

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disproportionately large that they bear no reasonable
relationship to the value of the services provided by Defendant
and could not have been the product of arm’s-length bargaining.”
Compl. ¶ 4.

Such conclusory statements are not adequate to

avoid dismissal.

Migdal, 248 F.3d at 327.

However, Plaintiffs

support the conclusory statement with factual allegations,
including those regarding plaintiffs’ contentions that:


TRP was paid disproportionally more by the Eight
Funds than by independent funds for properly
comparable services.



TRP did not appropriately share with the Eight Funds
the economies of scale resulting from substantial
increases in the size of the funds.



The TRP directors approving the fees charged to the
Eight Funds did not independently assess the
reasonableness of the fees charged to the Eight
Funds.

As discussed herein, the Court finds the factual
allegations in the Complaint adequate to present a plausible §
36(b) claim.

1.

Comparative Fees Charged

TRP provides investment management services to the Eight
Funds pursuant to Investment Management Agreements (“IMAs”).

rate” applied to Assets Under Management (“AUM”). The fee rate
is expressed in “basis points” so that a fee rate of 100 basis
points would mean a fee of 1% of the AUM.

8

TRP also provides investment management services to unaffiliated
funds pursuant to IMAs.
Plaintiffs assert an allegedly proper comparison between
investment management fees paid by the Eight Funds and those
fees paid to TRP by 24 identified unaffiliated funds (“the SubAdvised Funds”).

Compl. ¶¶ 79-90.

Plaintiffs allege that the

investment advisory services provided to the Sub-Advised Funds,
pursuant to their IMAs, are reasonably comparable, if not
essentially identical, to those provided to the Eight Funds.
Compl. ¶¶ 88-90.

The Sub-Advised Funds are alleged to be

sufficiently similar in pertinent respects9 to the Eight Funds to
render the comparisons meaningful.
91-93.

See, e.g., Compl. ¶¶ 46-48,

Plaintiffs present allegedly reasonable comparisons of

investment objectives, types of securities, investment
strategies, and various calculations. See id.
Plaintiffs allege that the Eight Funds pay TRP grossly
higher fee rates for services than do the Sub-Advised Funds for
comparable services. See, e.g., Compl. ¶¶ 118-119.
Specifically, based upon Plaintiffs’ comparisons, the fee rates
charged seven of the Eight Funds were from 33.7% to 73.0%
higher.

Moreover, Plaintiffs allege that one of the Eight Funds

9

Based upon such matters as their investment portfolios,
objectives, managers, etc.

9

- the T. Rowe Price New Income Fund - was charged a fee rate
206.4% more than a comparable Sub-Advised fund.
Of course, TRP denies that Plaintiffs’ alleged comparisons
are appropriate.

Certainly, as noted in Jones, where a

plaintiff seeks to rely upon comparisons such as asserted by
Plaintiffs, “[i]f the services rendered are sufficiently
different that a comparison is not probative, then courts must
reject such a comparison.” 559 U.S. at 350.
TRP presents various contentions to refute the alleged
validity of Plaintiffs’ comparisons.

For example, TRP contends

that even though the IMA’s for the Eight Funds and the SubAdvised funds use similar words to describe the services
provided, in fact the services are different.

TRP states that a

proper interpretation of the IMA’s requires consideration of
custom and usage in the industry.

Therefore, TRP asserts, the

IMA contract language does not necessarily describe what is
actually done.
TRP also asserts that Plaintiffs did not properly take into
account certain services provided to the Eight Funds that were
provided to the Sub-Advised Funds for additional charges.

In

this regard, Plaintiffs allege that they are properly adjusting
the comparison to take this into account.

Compl. ¶¶ 134-138.

Moreover, Plaintiffs allege that the Eight Funds pay fees for

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services beyond investment management that are in addition to
the fees charged for investment management services. Compl. ¶¶
139-146.
TRP asserts that Plaintiffs do not make factual assertions
sufficient to present a plausible claim that the fees paid by
the Eight Funds are beyond a range that would result from armslength bargaining.

However, taking Plaintiffs’ comparison

allegations as plausible, the Eight Funds were charged fee rates
from about a third to about two-thirds higher than comparable
Sub-Advised funds.10
The Court finds it plausible that, assuming Plaintiffs’
comparison allegations to be valid, the higher fee rates paid by
the Eight Funds could be found to be beyond a reasonable range
that would result from arms-length bargaining.

2.

Economies of Scale

Plaintiffs allege that TRP did not share the benefits of
economies of scale with the Funds.

In this regard, Plaintiffs

allege that the Eight Funds’ Assets Under Management (“AUM”)
increased, with corresponding increases in the management fees
paid by the Funds to TRP, but that TRP did not pass along the
economy of scale benefits to the Funds. Compl. ¶¶ 147-164.

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And in one instance more than double.

11

Plaintiffs acknowledge that there are certain breakpoints,
which reduce the fee rate as AUM increases but allege that the
spacing of the breakpoints and the amounts of fee reductions are
grossly inadequate.

3.

Compl. ¶¶ 165-175.

Board Approval

In determining the propriety of the fees at issue, “a
measure of deference to a board’s judgment may be appropriate in
some instances [, . . . and] the appropriate measure of
deference varies depending on the circumstances.”
U.S. at 349.

Jones, 559

As statutorily provided:

[A]pproval by the board of directors of [an]
investment company of . . . compensation [as
at issue herein] . . . shall be given such
consideration by the court as is deemed
appropriate under all the circumstances.
15 U.S.C. § 80a-35(b)(2).
In the instance case, a board of directors approved the
fees paid by the Eight Funds.

However, Plaintiffs allege that

the TRP Board approving the fees at issue did not devote the
time and attention necessary to independently assess the fee
rate paid by each Fund.

Compl. ¶¶ 227-244.

Plaintiffs allege that the directors serve part-time, hold
five meetings a year, and during those meetings, oversee not

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only the Funds but more than 82 other T. Rowe Associates-managed
mutual funds.

Compl. ¶¶ 230-231.

Plaintiffs also allege that the directors relied on
information provided by TRP, did not make adequate independent
assessments, and approved the fees on the terms proposed rather
than negotiating more favorable terms.

Compl. ¶¶ 232-238.

Certainly, TRP presents factual contentions that, if found
to be more accurate than Plaintiffs, would refute Plaintiffs’
allegations.

However, as noted above, in the instant dismissal

context, the Court does not resolve factual disputes.
Based on the allegations in the Complaint,11 it does not
appear that the Board’s approval of the fees at issue would
warrant substantial deference.

4.

Resolution

The ultimate question here presented is whether, taking
Plaintiffs’ factual allegations as true, considering all
pertinent facts and circumstances, Plaintiffs have asserted a
plausible claim that TRP violated its fiduciary duty in regard
to the fees at issue.
Of course, no one factor necessarily is conclusive.
However, the Court must, for present purposes, take as true
11

Of course, the case may well appear entirely different when
viewed in light of evidence as distinct from mere allegations.

13

Plaintiffs’ factual allegations that compare the fee rates
charged to the Eight Funds with those charged to the allegedly
comparable Sub-Advised Funds,12 supported by their allegations
related to economies of scale and directors’ allegedly
inadequate oversight.

On this basis, it is at least plausible

that TRP charged the Eight Funds fee rates that are “so
disproportionately large that [they bear] no reasonable
relationship to the services rendered and could not have been
the product of arm’s length bargaining.”

V.

Jones 559 U.S. at 346.

CONCLUSION
For the foregoing reasons:
1.

Defendant T. Rowe Price Associates, Inc.’s Motion
to Dismiss for Failure to State a Claim [ECF No.
34] is DENIED.

2.

Defendant T. Rowe Price Associates, Inc.’s
Request for Judicial Notice in Support of Motion
to Dismiss [ECF No. 35] is GRANTED IN PART AND
DENIED IN PART.
a.

The Court shall take judicial notice of
Exhibits A, B, C, D, E, F, G and H attached
to the Motion to Dismiss, ECF No. 34.

12

The Court bears in mind that it must take care not to give
too much weight to the fee comparison. See Jones, 559 U.S. at
349-50. In the instant case, however, taking the comparison
allegations as valid, and finding in the Complaint little, if
any, support for TRP’s position, the Court finds it appropriate
to give the comparison allegations substantial weight.

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b.

The Court shall not take judicial notice of
Exhibits J1 to J8 attached to the Motion to
Dismiss, ECF No. 34.

3.

Defendant shall file its Answer by April 17,
2017.

4.

Plaintiffs shall arrange a case planning
telephone conference to be held by April 28,
2017.

SO ORDERED, on Friday, March 31, 2017.

/s/___
__ _
Marvin J. Garbis
United States District Judge

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