The opinion of the court was delivered by: SUSAN ILLSTON, District Judge
ORDER PARTIALLY GRANTING AND PARTIALLY DENYING DEFENDANTS' MOTION
FOR JUDGMENT ON THE PLEADINGS
On November 4, 2005, the Court heard oral argument on
defendants' motion to dismiss, which was re-noticed as a motion
for judgment on the pleadings pursuant to Federal Rule of Civil
Procedure 12(c). After careful consideration of the arguments of
counsel and the papers submitted, the Court hereby GRANTS
defendant's motion to the extent it seeks dismissal of defendant
Franklin Templeton Services with respect to plaintiffs' claims
under Section 36(b) of the Investment Company Act, and DENIES the
remainder of defendant's motion.
This action is brought by shareholders of several mutual funds
("Funds") created, sold, advised, and managed as part of the
Franklin Templeton fund family ("the Fund Complex").
Specifically, the Funds are Templeton Growth Fund, Franklin
Balance Sheet Investment Fund, Franklin Flex Cap Growth Fund,
Franklin Income Fund, Franklin Small-Mid Cap Growth Fund,
Franklin Biotechnology Discovery Fund, MutualShares Fund, and Franklin Utilities Fund. Third Am. Compl. ("Compl.") at
¶ 1.*fn1 Plaintiffs are nine individuals who bring suit both
in their own rights and for the use and benefit of the
aforementioned funds. Id. Plaintiff Susan Strigliabotti also
brings this case on behalf of a class consisting of all residents
of the State of California who were shareholders of the Templeton
Growth Fund, the Franklin Balance Sheet Investment Fund, and/or
the Franklin Flex Cap Growth Funds at any time from March 4, 2000
to the present. Id. at ¶ 45.*fn2
Defendants are Franklin Resources, Inc., Templeton Global
Advisors, Ltd., Franklin Advisory Services, LLC, Franklin
Advisers, Inc., Franklin Templeton Distributors, Inc., Franklin
MutualAdvisers, LLC, and Franklin Templeton Services, LLC. Id.
at ¶ 2. They are various investment advisors affiliated with a
single parent company, also a defendant, Franklin Resources, Inc.
("Franklin Resources"), a publicly traded company incorporated in
Delaware and headquartered in San Mateo, California. Id.
Plaintiffs allege that defendants receive advisory fees from
the Funds for investment advisory services and administrative
services, and these fees are based on a percentage of the net
assets of each of the Funds. Id. at ¶ 6. Defendants also charge
distribution fees for marketing, selling, and distributing mutual
fund shares to new shareholders under "Distribution Plans"
adopted pursuant to Rule 12b-1, 17 C.F.R. § 270.12b-1. Id. at ¶
9. These distribution fees are based on a percentage of the net
assets of each of the funds in the Fund Complex and amount to
more than $7 million annually. Id. Plaintiffs allege that the
advisory fees charged by defendants are higher than those for
other funds for which defendants perform equivalent services, and
that the distribution fees are excessive, in violation of Rule
12b-1 and § 36(b) of the Investment Company Act of 1940.
Plaintiffs specifically claim that, despite significant growth in
the Funds since 1983, they have not benefitted from the economies
of scale and instead have been charged advisory and distribution
fees that are disproportionately large in relation to the
services provided. Id. at ¶¶ 13-15.
Plaintiffs seek to either rescind the investment advisory
agreements and Distribution Plans and recover the total fees charged by defendants, or, in the alternative, to
recover the excess profits resulting from economies of scale
wrongfully retained by defendants, and any other excessive
compensation or improper payments received and retained by
defendants in breach of their fiduciary duty under § 36(b),
15 U.S.C. § 80a-35(b), and state law. Id. at ¶ 28. The Third
Amended Complaint alleges individual and derivative claims for:
(Count I) breach of fiduciary duty under § 36(b) for excessive
investment advisory fees; (Count II) breach of fiduciary duty
under § 36(b) for excess profits from economies of scale; and
(Count III) breach of fiduciary duty under § 36(b) for excessive
Rule 12b-1 distribution fees and extraction of additional
compensation for advisory services. The Complaint also alleges
individual, derivative, and class claims for: (Count IV) breach
of fiduciary duty under California law; (Count V) civil
conspiracy to breach fiduciary duty under California law; (Count
VI) common law aiding and abetting breaches of fiduciary duty by
Franklin Resources; (Count VII) "acting in concert" under §
876(b) of the Restatement (Second) of Torts; (Count VIII) breach
of Cal. Business & Professions Code § 17200; and (Count IX)
common law unjust enrichment.
Plaintiffs filed their complaint on March 4, 2004, and filed a
First Amended Complaint on June 3, 2004. Defendants filed a
motion to dismiss the First Amended Complaint pursuant to Federal
Rule of Civil Procedure 12(b)(6). In that motion to dismiss,
defendants contended, inter alia, that plaintiffs' claims in
Counts I, II, and III under Section 36(b) of the Investment
Company Act of 1940 were deficient because the complaint
contained vague allegations that did not sufficiently detail the
excessiveness of fees charged in relation to services provided.
In an order filed March 7, 2005, the Court rejected that argument
and held that plaintiffs had sufficiently pled their claims under
Section 36(b). The Court also dismissed certain claims without
leave to amend and dismissed other claims with leave to amend.
Plaintiffs filed a Second Amended Complaint on March 21, 2005.
That complaint made a few substantive changes in response to the
Court's March 7, 2005 order. Defendants filed an answer to the
Second Amended Complaint on April 11, 2005. Pursuant to a
stipulated order by the Court, plaintiffs filed a Third Amended
Complaint on August 17, 2005. The Third Amended Complaint is
identical to the Second Amended Complaint except for the addition
of class action allegations based on California law (Counts IV through IX), and the deletion of claims related to two funds.
On September 29, 2005, defendants filed a motion to dismiss the
Third Amended Complaint pursuant to Rule 12(b)(6). After
plaintiffs filed their opposition to the motion to dismiss, in
which they argue, inter alia, that the motion to dismiss is
procedurally improper, defendants filed an answer to the Third
Amended Complaint on October 20, 2005. Defendants also re-noticed
their Rule 12(b)(6) motion as an alternative motion for judgment
on the pleadings pursuant to Rule 12(c).
Defendants' instant motion contends that plaintiffs' Section
36(b) claims must be dismissed because plaintiffs have failed to
plead any facts that the fees charged to any particular fund
were excessive in relation to any particular fund. Defendants
also contend that plaintiffs' newly asserted California class
claims must be dismissed either for lack of jurisdiction
(assuming dismissal of the federal claims), or dismissed because
they are preempted by the Securities Litigation Uniform Standards
Act ("SLUSA"). Plaintiffs oppose defendants' motion on the
grounds that it is an improper "second bite at the apple" in
violation of Rule 12 and barred by the law of the case. On the
merits, plaintiffs contend they have adequately pled claims under
Section 36(b), and that their state law claims are not preempted
"After the pleadings are closed but within such time as not to
delay the trial, any party may move for judgment on the
pleadings." Fed.R.Civ.Proc. 12(c). Rules 12(b)(6) and 12(c)
are substantially identical. See William W. Schwarzer, A.
Wallace Tashima & James M. Wagstaffe, Federal Civil Procedure
Before Trial § 9:319. Under either provision, a court must
determine whether the facts alleged in the complaint, to be taken
for these purposes as true, entitle the plaintiff to a
legalremedy. Id. If the ...