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BAUM v. INVESTORS DIVERSIFIED SERVICES

May 17, 1968

BERNARD M. BAUM, PLAINTIFF,
v.
INVESTORS DIVERSIFIED SERVICES, INC., DEFENDANT.



The opinion of the court was delivered by: Marovitz, District Judge.

MEMORANDUM OPINION

   Defendant's Motions to Dismiss and for a Ruling Under Rule
                               23

This is a purported class action brought against Investors Diversified Services, Inc. (hereinafter known as "IDS"), by plaintiffs Bernard M. Baum and Daniel S. Shulman, under Section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(a). Defendant has moved to dismiss the complaint for its alleged failure to state a claim upon which relief may be granted. In the alternative, and only if the motion to dismiss is denied, defendant moves, under Rule 23(c)(1) of the Federal Rules of Civil Procedure, for a determination that the suit may not be maintained as a class action.

Plaintiffs are attorneys, who sue as purchasers of shares in Investors Variable Payment Fund, Inc. (hereinafter known as "Variable Fund"), a mutual fund, whose shares are distributed exclusively by defendant. Plaintiffs have invested approximately $4,000 in shares of the Variable Fund. The suit is brought as a class action on behalf of purchasers of shares in Variable Fund and four other mutual funds whose shares IDS also exclusively distributes, including Investors Mutual Fund, Inc., Investors Stock Fund, Inc., Investors Selective Fund, Inc., and Investors Inter-Continental Fund, Inc.*fn1 It charges a violation of the Robinson-Patman Act, by virtue of allegedly discriminatory quantity discounts granted by IDS to certain purchasers of shares in the five mutual funds.

Essentially, the complaint sets forth the following factual allegations, which must be accepted as true, for purposes of the motion to dismiss.

Pursuant to its contract, defendant acts as the sole investment adviser and exclusive distributor for the five named mutual funds. The five funds are "open end" funds, which means that their size is limited only by the total amount of monies invested in them, and that their shares are redeemable by the issuer at the shareholder's option. See 15 U.S.C. Sections 80a-5(a)(1) and (2); 80a-2(a) (31). The funds had total net assets of $5,335,195,327, as of December 31, 1965, and have been, and still are, managed by boards of directors composed, in part, of directors affiliated with defendant within the meaning of the Investment Company Act of 1940.

The investments of the five companies are selected, supervised, and changed by such companies based upon recommendations made by defendant pursuant to separate investment advisory agreements with each of the five mutual funds. These contracts provide for the performance of investment advisory and other services by defendant for a fee which is calculated daily on the basis of the total net assets of the respective funds at the close of business each day.*fn2 The amount of fees payable to defendant during any period is accordingly affected by changes in the net assets of the companies, which in turn are affected principally by changes in the market prices of the securities held by the companies, and by the volume of sales of the mutual fund shares, less the amounts paid out in redemptions. During the calendar year 1965, defendant received fees totalling $19,626,366 from the five companies.

Defendant has acted as sole distributor of the shares of each of the five mutual fund companies from the time of their organization. Distribution is accomplished through a sales force consisting of approximately 4,000 nationwide representatives who exclusively sell mutual fund securities of the five mutual fund companies.

A mutual fund share is a security reflecting undivided ownership in a mutual fund company. Such shares are not traded by shareholders but are redeemable upon their request. The shareholder need pay no commission upon redemption. The value of a share is determined by dividing the total number of shares outstanding into the market value of the securities held at any given point in time. Such value is deemed the "net asset value." Each share, therefore, represents an undivided interest in the total portfolio of the mutual fund company. Each share, at any point in time, has exactly the same value as any other share, and the shares themselves are fungible.

Mutual fund shares are sold by IDS at their current "net asset value," plus a sales commission or "sales load," which is based upon the amount of money invested by the customer. This "load" is graduated on a scale, which until October 15, 1964, ranged from a maximum of 7 1/2% of the amount invested on initial purchases of less than $15,000, to 1 1/2% on purchases aggregating $1,000,000, or over. The "load" was increased to a maximum of 8%, and decreased to a minimum of 1%, on purchases dated after October 15, 1964.*fn3

Customers are permitted to take advantage of what is termed the "accumulative load" feature, meaning that once purchases by any one customer and his family, of shares of any one or combination of the funds, aggregate $15,000 or more, the next purchase receives a discount under the reduced scale of commissions which is then effective as to additional purchases. We shall refer to this feature as the "cumulative quantity discount."

The discount commission structure, and concomitantly, the cumulative quantity discount, pursuant to which commissions on sales of the various Funds' shares are calculated, constitute the crux of the complaint. Plaintiffs charge that the cumulative quantity discount is a direct discrimination in price "between investor customers of Defendant who purchase commodities of like grade and quality. As a result of such discrimination, competition between investor customers of Defendant has been substantially lessened."*fn4 Plaintiff and other shareholders have assertedly been "deprived of" additional "dividends, increments of growth, and distribution of profits" by such "discriminatory" pricing, and have allegedly received a smaller number of shares than they would have received had they the benefit of the lower sales commissions charged to persons who made larger investments. Damages are sought on behalf of all shareholders in all five funds, who have paid more than the lowest percentage commission rate, allegedly totalling $450 million, after trebling under the Act.

In its motion to dismiss, defendant contends that there is no violation of the Robinson-Patman Act because mutual fund shares are not "commodities" within Sec. 2(a), and because no facts are alleged to support a probable effect upon competition as required by Sec. 2(a). Furthermore, defendant argues that cumulative quantity discounts are immune from attack under Sec. 2(a) because they have been approved by orders of the Securities and Exchange Commission, and are authorized under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.), and by the rules adopted by the SEC pursuant thereto.

Section 2(a) of the Robinson-Patman Act provides, in pertinent part:

  "It shall be unlawful for any person engaged in
  commerce, in the course of such commerce, either
  directly or indirectly to discriminate in price
  between different purchasers of commodities of
  like grade and quality, where either or any of
  the purchasers involved in such discrimination
  are in commerce, where such commodities are sold
  for use, consumption, or resale within the United
  States, and where the effect of such
  discrimination may be substantially to lessen
  competition or tend to create a monopoly in any
  line of commerce, or to injure, destroy or
  prevent competition with any person who either
  grants or knowingly received the benefit of such
  discrimination, or with customers of either of
  them * * *."

Defendant contends that mutual fund shares are not "commodities" within the meaning of the above section. It is conceded by plaintiffs that sales of "services" and "intangibles" are exempted from the statute. Columbia Broadcasting System, Inc. v. Amana Refrigeration, Inc., 295 F.2d 375 (7th Cir. 1961), cert. denied 369 U.S. 812, 82 S.Ct. 689, 7 L.Ed.2d 612 (1962) (sale of television broadcast time); Tri-State Broadcasting Co. v. United Press International, Inc., 369 F.2d 268, 270 n. 2 (5th Cir. 1966) (sale of network news service information). But they argue, mutual fund shares are tangible property and as such, "commodities" under the Act.

There is no case law which either includes or excludes mutual fund shares, or for that matter shares of stock, in or from the category of "commodities" in the Robinson-Patman Act. Plaintiffs suggest an interpretation based upon the literal understanding of the term, and essentially argue that a mutual fund share is a tangible movable article of commerce. No doubt a certificate of ownership in a mutual fund is "tangible" in the sense that it is an object "capable of being perceived, esp.(ecially) by the sense of touch." Webster's Seventh New Collegiate Dictionary, p. 901 (1965). However, plaintiffs' contention rests largely upon a semantic or dictionary interpretation of the word "commodity," and upon the definition given to "shares of stock," in several state court decisions having no relationship to the antitrust laws. E.g., People v. Federal Security Co., 255 Ill. 561, 99 N.E. 668 (1912); Pound v. Lawrence, 233 S.W. 359 (Tex.Ct.Civ.App. 1921).

  "* * * this bill insures to the independent
  dealer who buys one carload, whether of
  groceries, dry goods, hardware or any other
  commodity, the same price that is given to the
  chain buying 10 carloads of the same goods,
  unless that chain can show a concrete saving in
  cost resulting from its method of purchase and
  delivery, as compared with its independent
  competitor." 79 Cong. Rec. 9079, June 11, 1935
  (remarks of Rep. Patman.)

Representative Patman clearly emphasized the amendment's application to tangibles, such as merchandise, in the above remarks.

Plaintiffs have not demonstrated that mutual fund shares are "tangible" in any sense but the literal. Indeed, shareholders care little for the abstract value of the paper certificate which may reflect their share of ownership. For the paper itself has minimal value. It merely represents a tangible incident of the shareholder's undivided interest in the fund's ownership. The "essential nature" of a mutual fund share certificate is that of a piece of paper which represents ownership, and which is not the essence of the ...


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