Profs. Sign Amicus Brief

Four Harvard Law School professors signed a statement in support of the defendant in a case regarding executive pay that will be heard by the Supreme Court next week.

In the case, Jones et al. v. Harris Associates, several mutual fund investors charged that the fund had overpaid its advisors. The Seventh Circuit Court of Appeals in Chicago dismissed a full court rehearing of the lawsuit in May 2008.

Law professors John C. Coates, Robert C. Clark, Allen Ferrell, and J. Mark Ramseyer signed an amicus brief earlier this month in support of the defendant, Harris Associates, along with more than 20 other corporate law and finance professors.

According to Coates, the brief agrees with Seventh Circuit Chief Judge Frank H. Easterbrook’s ruling that the court should not be involved in determining the compensation of investment advisors.

Coates said he was motivated in part to contribute to the amicus brief because his research on competition in the mutual fund industry had been incorporated into several earlier briefings in the case.

“I didn’t think the research I had worked on was presented fairly in the other briefs,” Coates said. “I wanted to make sure the Supreme Court understood what the research out there really meant.”

The case has caught the spotlight in the legal community because of public discussion surrounding executive pay.

But even if the Supreme Court were to overturn the Seventh Circuit’s decision and side with the shareholders—which could hold symbolic meaning—the implications of the case are limited because the law is only applicable to mutual funds, said Coates and Ramseyer.

The case also sparked an extremely rare disagreement between Easterbrook and Judge Richard A. Posner, who typically vote together, according to Ramseyer.

Easterbrook sided with the majority, saying that fee levels should be determined by the market, while Posner—who wrote a dissent—argued that compensation has become excessive and the courts should intervene.

According to Coates, lower courts that have affirmed shareholder complaints have asserted that mutual funds rates are not determined by the market and should thus be externally regulated because the funds do not compete with each other.

“Mutual funds are often in price wars,” Coates said. “Courts should not turn a blind eye [to the competition between funds]. “

“Courts ought to look at this competition no matter what the [Supreme Court’s] decision is.”