March 8, 2011 – Federal Judge in the United States District Court, Western District of Pennsylvania, rules that future damages in actions under Section 36(b) of the Investment Company Act are recoverable.


PITTSBURGH, Pennsylvania, March 8, 2011 – In a decision issued today, the Honorable David Stewart Cercone denied a motion for summary judgment filed by defendants and ruled that damages for claims under Section 36(b) of the Investment Company Act (“ICA”) are recoverable post-filing of the derivative complaint. The decision, which was issued in In re Federated Mutual Funds Excessive Fee Litig., a matter currently pending in the Western District of Pennsylvania, is an important decision for plaintiffs seeking to sue investment advisers/managers for breach of fiduciary duty for charging excessive advisory fees under ICA § 36(b) because it broadens the scope of recoverable damages under the statute.

The ICA, enacted in 1940, was designed to regulate and curb abuses inherent in the structure of the mutual fund industry. Section 36(b), which was added to the ICA in 1970 primarily to remedy excessive fees charged by mutual funds, created a federal cause of action for breach of fiduciary duty by investment advisers. This provision was enacted to provide shareholders with an effective means to redress breaches of fiduciary duty where self-dealing by an investment adviser resulted in unfair and excessive fees. Section 36(b) therefore imposes a fiduciary duty on mutual fund investment managers (and their affiliates) with respect to the receipt of compensation for services. With respect to the damages for claims under ICA § 36(b), ICA § 36(b)(3) provides that: “No award of damages shall be recoverable for any period prior to one year before the action was instituted.”

Defendants in In re Federated Mutual Funds argued that both the statutory language in ICA § 36(b)(3) and congressional intent authorizes the recovery of only those damages incurred within the one-year pre-filing period and precludes recovery for any damages incurred after the filing of the derivative complaint. Defendant argued that post-filing damages are barred because “nothing in the statute authorizes recovery of damages subsequent to the filing of [p]laintiffs’ respective actions” and that permitting such recovery would violate congressional intent to prohibit recovery for any period other than the statutorily defined one-year period.

In ruling against defendants, the court concluded that the plain language of the statute does not support the interpretation advanced by defendants. The court held that the “plain and unambiguous words of the statute cannot bear the weight defendants seek to place upon them and nothing in the statute expressly precludes the recovery of post-filing damages.” In rejecting the position advanced by the defendants, the court noted that the statute is silent as to post-filing damages. Thus, while the text of ICA § 36(b)(3) unequivocally bars the recovery of any damages incurred prior to the one-year pre-filing window, the text does not explicitly or implicitly preclude the recovery of damages incurred after the filing of the complaint. The statute provides that damages may not be awarded for “any period” of whatever duration that is prior to one year before the action was instituted. The court held that this is the only temporal limitation on damages that the statute imposes.

Additionally, the court rejected the defendant’s argument that interpreting the statute to allow for post-filing damages is contrary to congressional intent because a court may only look beyond a statute when the plain meaning produces “a result that is not unwise but is clearly absurd.” The court held that the plain language of Section 36(b)(3) does not produce a result that is “clearly absurd” and that post-filing damages are recoverable.

According to a class action attorney at Levy Konigsberg LLP, the Federated ruling is an important decision for shareholders seeking to bring claims against investment advisers for excessive fees pursuant to ICA § 36(b), because this ruling allows recovery of future damages as the one-year pre-filing damages provision (ICA § 36(b)(3)) is the only damages limitation on such claims.




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