Low-Profile Cases Could Have Wide Impact, Law Professors Say

The U.S. Supreme Court's decisions in the wide array of financial and corporate law cases it will review in its new term could quietly reshape the playing field for American businesses, a group of Delaware law professors has predicted.

At a briefing for the Philadelphia-area news media in Wilmington Oct. 1, members of the faculty at Widener University School of Law outlined the issues and possible impact of cases scheduled for argument before the high court this term.

While the justices' decisions in some cases may have a readily discernable, immediate effect and get wide attention in the media, their rulings on larger issues in lower-profile cases often have far-reaching effects on the lower courts and on legal thinking, the professors said.

Although the docket is heavy with business and finance cases as new Justice Sonia Sotomayor joins the high court, the faculty said, she probably will change the balance of the court in only a few cases because in most cases it will not split along traditional liberal-conservative lines.

Fiduciary Duty of Mutual Fund Managers

Corporate law professor Lawrence Hamermesh said one of the less-publicized but potentially far-reaching cases is Jones v. Harris Associates, No. 08-586, to be argued Nov. 2.

That appeal asks the high court to decide whether mutual fund managers have a fiduciary duty to investors to refrain from charging excessive fees.

A majority of a deeply divided 7th U.S. Circuit Court of Appeals said those investors do not need the same protection as shareholders of public companies, who can sue if their corporate officers do not put the interests of the investors above their own.

As long as the mutual fund investors get full disclosure before purchase, they cannot claim to be victimized by excessive fees because there is pressure on the fund managers to remain competitive, renowned economist and Chief Judge Frank Easterbrook said in the majority opinion.

The 7th Circuit minority, led by equally renowned corporate law titan Richard Posner, said some added regulation of the fund managers is needed because the free market is, in effect, broken.

Investors cannot put real economic pressure on the managers to charge competitive rates because, in a practical sense, investors seldom have a lower cost alternative, he said.

"You might see a reversal in this one," Hamermesh predicted, "because the justices may not be persuaded that the free market continues to act as a check on mutual funds."

However, comparing fees to what other advisers charge "is not conclusive on the fairness issue," he cautioned.

The bigger question, Hamermesh said, is whether the lower courts will apply the justices' decision in this case to the bigger issue of excessive corporate officer compensation.

"I personally think it would be a stretch," he added.

Class-Wide Arbitration

Another low-profile but potentially high-impact decision could come in Stolt-Nielsen S.A. v. Animal Feeds International, No. 08-1198, an appeal of a 2nd Circuit decision on the use of class-wide arbitration, associate professor Stephen Friedman said.

The issue there is whether class-wide arbitration can be invoked if there is no specific wording about it in the arbitration agreement.

The case is important because anyone with a complaint about a job, credit cards, investments, mortgage or consumer purchases often is required to resolve the dispute through arbitration, Friedman noted.

"We don't notice how much fine print we've agreed to" he said. "Arbitration agreements are almost universal.

"But, although you must arbitrate, if the decision that you get could affect 50,000 or more other people that were situated like you, imagine the impact," Friedman theorized.

Credit card companies, employers, financial advisers and a wide variety of other companies routinely require dispute resolution through arbitration. Consumer advocates say the odds favor the companies because of restrictions on discovery, tactics and appeals.

Those companies are very nervous about class-wide arbitration because the stakes would be very high, just as they are in class-wide litigation, Friedman said.

The 'Honest Services' Statute

The central issue in an appeal by former media mogul Conrad Black is whether government prosecutors overstretched the use of the so-called "honest services" statute to send Black to prison for looting his newspaper empire. Black et al. v. United States, No. 08-876. Oral argument is scheduled for Dec. 8.

The same statute was used to jail former Enron officer Jeffrey Skilling. Many of the business groups that filed friend-of-the-court briefs in support of Black's appeal have argued that the honest-services statute is being misused to turn a simple breach-of-duty charge into criminal fraud.

Those groups say the honest-services statute could become a way for the federal government to circumvent the business judgment rule, which gives the decisions of officers and directors the benefit of the doubt even if their actions were disastrous.

Shareholder advocacy groups say the business judgment rule has insulated officers and directors who wrecked their companies in the self-interested pursuit of short-term profits from risky, subprime-mortgage-based securities.

Even if the high court upholds the 7th Circuit's decision, it is not likely it will advocate the use of a federal statute to outflank state law, Hamermesh said.

"However," he added, "I've been surprised before by the Supreme Court."

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