Klein v. Cadian Capital Management, LP et al
OPINION AND ORDER re: 37 MOTION to Substitute Party. Old Party: Terry Klein, New Party: Qlik Technologies Inc. filed by Terry Klein, 31 MOTION to Dismiss: Terry Klein ("Klein" or "Plaintiff") brings this action pu rsuant to Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) ("Section 16(b)"), on behalf of nominal defendant Qlik Technologies, Inc. ("Qlik"), seeking disgorgement of so-called "short-swing" profits by defendants Cadian Capital Management, LP ("CCM"), and its client funds, related entities, and founder (together, "Cadian"). Pending before the Court is Cadian's motion pursuant to Federal Rule of Civil Procedure 12 (b)(1) to dismiss the Complaint for lack of subject matter jurisdiction, Doc. 31, and Plaintiff's cross-motion to allow Qlik to be substituted as a plaintiff under Federal Rules of Civil Procedure 17(a)(3) and 25(c), Doc. 37. For the reasons sta ted above, Cadian's motion to dismiss the Complaint is GRANTED and Klein's motion to substitute Qlik is DENIED. The Clerk of the Court is respectfully directed to terminate the motions, Docs. 31 and 37, and close the case. (Signed by Judge Edgardo Ramos on 9/14/2017) (jwh)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
TERRY KLEIN, derivatively on behalf of QLIK
OPINION AND ORDER
15 Civ. 8140 (ER)
– against –
CADIAN CAPITAL MANAGEMENT, LP;
CADIAN FUND, LP; CADIAN MASTER
FUND, LP; CADIAN GP, LLC; CADIAN
CAPITAL MANAGEMENT GP, LLC; ERIC
BANNASCH; and QLIK TECHNOLOGIES,
Terry Klein (“Klein” or “Plaintiff”) brings this action pursuant to Section 16(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) (“Section 16(b)”), on behalf of nominal
defendant Qlik Technologies, Inc. (“Qlik”), seeking disgorgement of so-called “short-swing”
profits by defendants Cadian Capital Management, LP (“CCM”), and its client funds, related
entities, and founder (together, “Cadian”). 1 Pending before the Court is Cadian’s motion
pursuant to Federal Rule of Civil Procedure 12(b)(1) to dismiss the Complaint for lack of subject
matter jurisdiction, Doc. 31, and Plaintiff’s cross-motion to allow Qlik to be substituted as a
plaintiff under Federal Rules of Civil Procedure 17(a)(3) and 25(c), Doc. 37. 2
Specifically, the Cadian defendants are comprised of: CCM; CCM’s founder and portfolio manager, Eric
Bannasch; CCM’s general partner, Cadian Capital Management GP, LLC; certain of CCM’s related funds—Cadian
Fund LP and Cadian Master Fund LP, and the Cadian Funds’ general partner, Cadian GP, LLC. See Complaint
(“Compl.”) (Doc. 1) ¶¶ 3–8.
Qlik, the nominal defendant, joins Klein’s cross-motion for its substitution and opposition to Cadian’s motion to
dismiss. Doc. 38.
For the reasons discussed below, Cadian’s motion to dismiss is GRANTED, and
Plaintiff’s motion to substitute Qlik is DENIED.
Klein alleges that during the period between May 8, 2014 and December 31, 2014,
Cadian engaged in purchase and sale transactions in Qlik stock that resulted in disgorgeable
short-swing profits. Compl. ¶ 30. 4 On June 11, 2015, Klein demanded that Qlik sue Cadian
based on their alleged short-swing trading. Id. ¶ 36. On July 24, 2015, Qlik declined Klein’s
demand to sue. Id. Plaintiff commenced the instant suit on October 15, 2015. At the time of
filing, Klein was an owner of Qlik common stock. Id. ¶ 1. Plaintiff does not allege that she
owned any common stock during the period of the alleged short-swing trading, from May 8,
2014 to December 31, 2014. 5
After the Complaint was filed, Qlik went through a corporate reorganization which
cancelled all of the public shareholders’ stock and paid each shareholder cash in return.
Specifically, on June 2, 2016, Qlik announced that it was in the process of being acquired by an
affiliate of the private equity investment firm Thoma Bravo, LLC (“Thoma Bravo”). See
Declaration of Robert H. Pees in Support of Motion to Dismiss (“Pees Decl.”) (Doc. 33) Ex. B
(“June 2016 Form 8-K”). On August 22, 2016, the merger transaction closed. Pees Decl. Ex. C
The following facts, accepted as true for purposes of the instant motion, are based on the allegations in the
Complaint, Plaintiff’s opposition to Defendants’ motion to dismiss, exhibits attached to the Complaint and
opposition, and declarations submitted by the parties. See J.S. ex rel. N.S. v. Attica Cent. Sch., 386 F.3d 107, 110
(2d Cir. 2004) (citing Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir. 1998)) (evaluating a Rule
For purposes of this motion, at least, Cadian does not dispute that it is a “statutory insider” as that term is defined
in Section 16(b) because it was a greater than 10% beneficial owner of Qlik’s common stock. See 15 U.S.C. §
78p(a)(1) (defining a statutory insider as one “who is directly or indirectly the beneficial owner of more than 10
percent of any class of any equity security (other than an exempted security) which is registered pursuant to [15
U.S.C. § 78], or who is a director or an officer of the issuer of such security.”).
The Complaint does not indicate the date of her purchase of the stock, but rather that at the time of filing the
instant action, she was a stockholder. See Compl. ¶ 1.
(“August 2016 Form 8-K”). Under the terms of the merger agreement, each share of Qlik
common stock was cancelled and converted to the right to receive $30.50 in cash. Id. at 3. Qlik
is now a wholly owned subsidiary of Qlik Parent, Inc., which is, in turn, controlled by
investment funds affiliated with Thoma Bravo. Id.
In November 2016 6—nearly three months after the cash-out merger divested Klein of her
shares and thirteen months after she filed the lawsuit—nominal defendant Qlik retained Klein’s
counsel to litigate the § 16(b) claims on its behalf, and now requests that the Court substitute
Qlik as Plaintiff. Plaintiff’s Memorandum of Law in Opposition to Defendants’ Motion to
Dismiss and in Support of Plaintiff’s Cross-Motion for Substitution (“Pl.’s Mem.”) (Doc. 39) at
Cadian now moves to dismiss the action under Rule 12(b)(1) for lack of subject matter
jurisdiction, arguing that Klein lacked standing at the inception of the lawsuit, and even if she
had standing at the inception, she lacks standing now. Memorandum of Law in Support of the
Cadian Defendants’ Motion Under F.R.C.P. (12)(b)(1) to Dismiss the Complaint for Lack of
Standing (“Defs.’ Mem.”) (Doc. 32) at 1. Klein concedes that she lost her personal stake in the
outcome of this litigation and cross-moves to substitute nominal Defendant Qlik as plaintiff.
Motion to Dismiss Under Rule 12(b)(1)
A case is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1)
when the district court lacks the statutory or constitutional power to adjudicate it. See Fed. R.
On November 20, 2015, upon agreement of counsel, this case was stayed pending the Court’s decision on
Defendants’ motion to dismiss the complaint in Klein v. Cadian Capital Management, L.P. (Infloblox), 15 Civ. 4478
(ER). Doc. 17. The Court denied that motion on September 30, 2016, thereby lifting the stay.
Civ. P. 12(b)(1). A plaintiff asserting subject matter jurisdiction has the burden of proving by a
preponderance of the evidence that it exists. Makarova v. United States, 201 F.3d 110, 113 (2d
Cir. 2000). “In resolving a motion to dismiss under Rule 12(b)(1), the district court must take all
uncontroverted facts in the complaint (or petition) as true, and draw all reasonable inferences in
favor of the party asserting jurisdiction.” Tandon v. Captain’s Cove Marina of Bridgeport, Inc.,
752 F.3d 239, 243 (2d Cir. 2014). In resolving a motion to dismiss for lack of subject matter
jurisdiction under Rule 12(b)(1), a district court may refer to evidence outside the complaint.
Makarova, 201 F.3d at 113 (citing Kamen v. American Tel. & Tel. Co., 791 F.2d 1006, 1011 (2d
Cir. 1986); see also Zappia Middle E. Constr. Co. v. Emirate of Abu Dhabi, 215 F.3d 247, 253
(2d Cir. 2000) (“[T]he court may resolve the disputed jurisdictional fact issues by referring to
evidence outside of the pleadings, such as affidavits, and if necessary, hold an evidentiary
Motion to Substitute or Intervene
Plaintiff seeks to substitute Qlik under two separate Federal Rules of Civil Procedure:
Fed. R. Civ. P. 17(a)(3) – Joinder of the Real Party in Interest; and Fed. R. Civ. P. 25(c) –
Transfer of Interest. 7
Rule 17(a)(1) requires that an action “be prosecuted in the name of the real party in
interest.” Fed. R. Civ. P. 17(a)(1). However, Rule 17(a)(3) prohibits a court from dismissing an
action for failure to comply with subsection (a)(1) “until, after an objection, a reasonable time
has been allowed for the real party in interest to ratify, join, or be substituted into the action.”
Fed. R. Civ. P. 17(a)(3); see also Cortlandt St. Recovery Corp. v. Hellas Telecommunications,
Plaintiff also argues that under Fed. R. Civ. P. 15(c)(1) the claims of the proposed new plaintiff should be deemed
to “relate back” to the date of filing of the initial Complaint. Rule 15(c) governs when an amended pleading “relates
back” to the date of a timely filed original pleading and is thus itself timely even though it was filed outside an
applicable statute of limitations. Krupski v. Costa Crociere S. p. A., 560 U.S. 538, 541 (2010).
790 F.3d 411, 420 (2d Cir. 2015). “The real party in interest principle embodied in Rule 17
ensures that only a person who possesses the right to enforce a claim and who has a significant
interest in the litigation can bring the claim.” Cortlandt St. Recovery Corp., 790 F.3d at 420
(internal quotation marks and citations omitted). If a party successfully moves for ratification,
joinder, or substitution, “the action proceeds as if it had been originally commenced by the real
party in interest.” Fed. R. Civ. P. 17(a)(3). Crucially for statute of limitations purposes, the
claim of the real party in interest dates back to the filing of the complaint. Cortlandt St.
Recovery Corp., 790 F.3d at 421.
Rule 17 was initially adopted to ensure that assignees could bring suit in their own
names, contrary to the common-law practice. See Fed. R. Civ. P. 17 advisory committee’s notes,
1966 Amendment. However, “the modern function of the rule . . . is [ ] to protect the defendant
against a subsequent action by the party actually entitled to recover, and to insure generally that
the judgment will have its proper effect as res judicata.” Cortlandt St. Recovery Corp., 790 F.3d
at 421 (alterations in original). The dismissal provision in Rule 17(a)(3) was added later “to
avoid forfeiture and injustice when an understandable mistake has been made in selecting the
party in whose name the action should be brought.” Id. (citing 6A Charles Alan Wright et al.,
Fed. Prac. & Proc. Civ. § 1555 (3d ed. 2014)). “That provision codifies the modern judicial
tendency to be lenient when an honest mistake has been made in selecting the proper plaintiff.”
Rule 25(c) addresses the addition of a party pursuant to a transfer of interest that occurs
after the filing of the complaint. See Fed. R. Civ. P. 25(c). Rule 25(c) provides, in relevant part:
“If an interest is transferred, the action may be continued by or against the original party unless
the court, on motion, orders the transferee to be substituted in the action or joined with the
original party.” Fed. R. Civ. P. 25(c). In other words, the rule serves as a procedural mechanism
to bring a successor in interest into court when “it has come to own the property in issue.”
Negrón–Almeda v. Santiago, 579 F.3d 45, 53 (1st Cir. 2009). “The ‘primary consideration in
deciding a motion pursuant to Rule 25(c) is whether substitution will expedite and simplify the
action.’” Taberna Capital Mgmt., LLC v. Jaggi, No. 08 Civ. 11355 (DLC), 2010 WL 1424002,
at *2 (S.D.N.Y. Apr. 9, 2010) (quoting Banyai v. Mazur, No. 00 Civ. 9806 (SHS), 2009 WL
3754198, at *3 (S.D.N.Y. 2009) (collecting cases)). “‘Substitution of a successor in interest . . .
under Rule 25(c) is generally within the sound discretion of the trial court.’” Id.; see also State
Bank of India v. Chalasani, 92 F.3d 1300, 1312 (2d Cir. 1996) (“[G]ranting substitution of one
party in litigation for another under Rule 25(c) is a discretionary matter for the trial court.”).
Section 16(b) Generally
Section 16(b) requires, among other things, that a statutory insider surrender to the issuer
(that is, the corporation which issued the applicable equity security, also known as the “issuing
corporation”) “any profit realized by him [or her] from any purchase and sale, or any sale and
purchase, of any equity security of such issuer . . . within any period of less than six months . . .,
irrespective of any intention on the part of such [statutory insider] in entering into such
transaction. . . .” 15 U.S.C. § 78p(b). The statute “imposes a form of strict liability” on statutory
insiders rendering them liable “even if they did not trade on inside information or intend to profit
on the basis of such information.” Gollust v. Mendell, 501 U.S. 115, 122 (1991); see
Gwozdzinsky v. Zell/Chilmark Fund, 156 F.3d 305, 310 (2d Cir. 1998) (“The statute, as written,
establishes strict liability for all transactions that meet its mechanical requirements.”). In
enacting the statute, “‘Congress recognized that insiders may have access to information about
their corporations not available to the rest of the investing public. By trading on this
information, these persons could reap profits at the expense of less well informed investors.’”
Gollust, 501 U.S. at 121 (quoting Foremost–McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232,
In contrast to “most of the federal securities laws, Section 16(b) does not confer
enforcement authority on the Securities and Exchange Commission.” Gollust, 501 U.S. at 122.
Rather, the statute authorizes two categories of private persons to sue for relief: (1) “the issuer”
of the security traded in violation of Section 16(b); or (2) “the owner of any security of the issuer
in the name and in behalf of the issuer,” but only “if the issuer shall fail or refuse to bring such
suit within sixty days after the request or shall fail diligently to prosecute the same thereafter.”
15 U.S.C. § 78p(b). Thus, the statute recruits the issuer and its security holders as “policemen”
by providing them “a private-profit motive” to enforce the law’s prohibition on short-swing
trading by insiders. Gollust, 501 U.S. at 124–25 (quoting Hearings on H.R. 7852 and H.R. 8720
before House Committee on Interstate & Foreign Commerce, 73d Cong., 2d Sess. 136 (1934)).
Cadian asserts that Klein lacked standing at the inception of the lawsuit, and even if she
had standing at the inception, she lacks standing now. Defs.’ Mem. at 1. Specifically, Cadian
claims that the Court was stripped of its jurisdiction on the day of the merger in August 2016
when Klein’s shares were cashed out, and therefore it is now jurisdictionally prohibited from
substituting Qlik in place of Klein. Memorandum of Law in Opposition to Plaintiff’s CrossMotion for Substitution and in Further Support of the Cadian Defendants’ Motion Under
F.R.C.P. 12(b)(1) to Dismiss the Complaint for Lack of Standing (“Defs.’ Reply”) (Doc. 40) at
Before the Court may consider Klein’s request to substitute Qlik as plaintiff, it must first
determine that it has jurisdiction over the case. See Steel Co. v. Citizens for a Better Env’t, 523
U.S. 83, 94–95 (1998) (“The requirement that jurisdiction be established as a threshold matter is
. . . ‘inflexible and without exception.’”); see also Harrison v. Potter, 323 F. Supp. 2d 593, 598
(S.D.N.Y. 2004) (“A court should consider a motion under Federal Rule of Civil Procedure
12(b)(1) prior to the merits of a claim because the substantive merits thereafter “become moot
and do not need to be determined.”) (citing Rhulen Agency, Inc. v. Alabama Ins. Guar. Ass’n,
896 F.2d 674, 678 (2d Cir. 1990)).
Standing and Mootness
The Constitution limits the jurisdiction of Article III courts to matters that present actual
cases or controversies. See U.S. Const. Art. III, § 2, cl. 1. “This limitation means that when a
plaintiff brings suit in federal court, she must have standing to pursue the asserted claims. It also
generally means that if the plaintiff loses standing at any time during the pendency of the
proceedings in the district court or in the appellate courts, the matter becomes moot, and the
court loses jurisdiction.” Altman v. Bedford Cent. Sch. Dist., 245 F.3d 49, 69 (2d Cir. 2001). As
the Second Circuit has stated, “While the standing doctrine evaluates [a litigant’s] personal stake
as of the outset of the litigation, the mootness doctrine ensures that the litigant’s interest in the
outcome continues to exist throughout the life of the lawsuit . . . Thus, even as to claims that
plaintiffs originally had standing to assert, the court must determine whether those claims remain
live controversies or have become moot.” Id. (citing Cook v. Colgate, 992 F.2d 17, 19 (2d Cir.
1993)) (internal citation omitted).
“A case becomes moot when the issues presented are no longer live or the parties lack a
legally cognizable interest in the outcome.” Freedom Party of New York v. New York State
Board of Elections, 77 F.3d 660, 662 (2d Cir. 1996) (quoting New York City Employees’
Retirement System v. Dole Food Co., 969 F.2d 1430, 1433 (2d Cir. 1992) (internal quotation
marks omitted)). If a claim has become moot prior to the entry of final judgment, the district
court generally should dismiss the claim for lack of jurisdiction. See, e.g., Campbell v.
Greisberger, 80 F.3d 703, 705 (2d Cir. 1996) (affirming mootness dismissal).
Jurisdiction at the Inception of the Lawsuit
It is undisputed that the Complaint adequately alleges a Section 16(b) claim against
Cadian and that Klein, as a shareholder, is a person statutorily authorized to file such a claim.
See W.R. Huff Asset Mgmt. Co., LLC v. Deloitte & Touche LLP, 549 F.3d 100, 105, 106 (2d Cir.
2008) (distinguishing statutory securities fraud standing from constitutional standing). It is
similarly undisputed for purposes of this motion that Klein owned stock in Qlik at the time she
filed the instant suit. Cadian nevertheless contends that the district court lacks jurisdiction
because Klein does not allege that she owned Qlik stock at the time of the insider trading and
therefore has no standing to sue. Defs.’ Mem. at 1, 7 n.3. This argument is without merit.
The conclusion that Klein had standing to pursue the claim even though she did not hold
stock at the time of the short-swing trading is consistent with the Supreme Court’s determination
in Gollust. See Gollust, 501 U.S. at 123–26 (analyzing statutory and constitutional standing in a
Section 16(b) action and finding that because plaintiff was a shareholder at the time he instituted
the action, standing requirements were met, and noting that “the terms of the statute do not even
require that the security owner have had an interest in the issuer at the time of the defendant’s
Additionally, the Second Circuit’s decision in Donoghue v. Bulldog Inv’rs Gen. P’ship,
696 F.3d 170 (2d Cir. 2012), distinguished between statutory and constitutional standing and
recognized that a statutory violation can cause an injury in fact sufficient to establish standing.
In Bulldog Investors, the defendant argued that the plaintiff lacked standing because she “failed
to demonstrate that the proscribed short-swing trading caused [the issuer] actual injury as
necessary to satisfy the case-or-controversy requirement of Article III of the Constitution.” Id. at
172. There, the Second Circuit found that the plaintiff—who brought suit on behalf of an
issuer—had constitutional standing to bring an action under Section 16(b) based in part on its
conclusion that § 16(b) “created legal rights” that, in turn, “clarified the injury that would
support standing.” Id. at 180. Specifically, the Court held that Section 16(b) confers on issuers a
legal right to the short-swing profits of insiders sufficient to establish constitutional standing. Id.
at 175. The Second Circuit explained that under Section 16(b), a shareholder plaintiff pursues a
claim on behalf of an issuer, and thus the claim “is derivative in the sense that the corporation is
the instrument . . . for the effectuation of the statutory policy.” Id. (internal quotation marks and
Consistent with the Supreme Court’s decision in Gollust and the Second Circuit’s
decision in Bulldog Investors, the Court finds that Klein suffered an injury in fact that is
traceable to Cadian’s alleged short-swing trading. Here, as in Bulldog Investors, Klein filed this
lawsuit on behalf of Qlik to recover short-swing profits under Section 16(b). Unlike in other
derivative cases, a Section 16(b) plaintiff is not required to plead that she was an owner of
securities at the time of the alleged short-swing trading. Thus, although Bulldog Investors did
not specifically address the question of whether the plaintiff in that case owned stock of the
issuer at the time of the short swing transaction, “its holding as to the derivative nature of the
claim compels the conclusion that security ownership at the time of the underlying short swing
trading is not determinative of a shareholder plaintiff’s ability to assert a constitutionally
sufficient injury in a Section 16(b) lawsuit brought on behalf of the corporation.” Roth v. Scopia
Capital Mgmt. LP, No. 16 Civ. 6182 (LTS), 2017 WL 3242326, at *4 (S.D.N.Y. July 28, 2017)
(relying on Bulldog Investors in holding that a Section 16(b) derivative plaintiff had
constitutional standing even though he did not own stock at the time of the short-swing trading).
Accordingly, the Court finds that Klein had standing to bring this case because she owned Qlik
shares at the time the lawsuit was filed.
Cadian invokes the Supreme Court’s recent decision in Spokeo, Inc. v. Robins, 136 S. Ct.
1540 (2016), arguing that Klein lacks constitutional standing because she cannot demonstrate
that she, as an individual, suffered a concrete and particularized injury because she was not a
shareholder at the time of the alleged short-swing trading. Defs.’ Mem. at 7 n.3. In Spokeo, the
Supreme Court considered a case in which a plaintiff brought suit to enforce the Fair Credit
Reporting Act (FCRA), 15 U.S.C. § 1681e(b), a consumer protection statute. Spokeo was a
consumer reporting agency that operated a website through which users could search for
information about a person by inputting that person’s identifying information. Id. at 1544.
Spokeo would search its databases and provide detailed information to the user about the search
subject, such as his address, telephone number, marital status, or age. Id. at 1546. The plaintiff
sued Spokeo when he learned that the company incorrectly reported information about him,
which he claimed violated the FCRA. Id.
Plaintiff alleged that Spokeo violated his statutory rights and that his personal interests in
the handling of his credit information were individualized, and thus he had standing. Id.; see
also Robins v. Spokeo, Inc., No. Civ. 10-05306 (ODW), 2011 WL 597867, at *1 (C.D. Cal. Jan.
27, 2011). The district court dismissed plaintiff’s complaint for lack of subject matter
jurisdiction based on the absence of an injury in fact sufficient to confer constitutional standing
under Article III. Spokeo, 136 S. Ct. at 1543. The Ninth Circuit reversed, holding that based on
plaintiff’s allegation that Spokeo violated his statutory rights and the fact that his personal
interests in the handling of his credit information are individualized, he adequately alleged an
injury in fact. Id.
The Supreme Court reversed the Ninth Circuit, holding that standing requires an injury in
fact, and that Congress “cannot erase Article III’s standing requirements by statutorily granting
the right to sue to a plaintiff who would not otherwise have standing.” Id. at 1548 (citation and
internal quotation marks omitted). The injury-in-fact element requires a plaintiff to show that
she suffered “an invasion of a legally protected interest” that is “concrete and particularized” and
“actual or imminent, not conjectural or hypothetical.” Id. (citing Lujan v. Defs. of Wildlife, 504
U.S. 555, 560 (1992)). The Court reiterated that “Congress may ‘elevat[e] to the status of legally
cognizable injuries concrete, de facto injuries that were previously inadequate in law.’” Id. at
1549 (quoting Lujan, 504 U.S. at 578, 112 S.Ct. 2130). The Court added that “the violation of a
procedural right granted by statute can be sufficient in some circumstances to constitute injury in
fact” and in such circumstances, “a plaintiff . . . need not allege any additional harm beyond the
one Congress has identified.” Id. (emphasis in original).
The Supreme Court’s unanimous decision in Gollust and the Second Circuit’s decision in
Bulldog Investors both pre-date Spokeo. However, Cadian’s suggestion that Spokeo alters the
constitutional sufficiency of the statutory standing conferred by Section 16(b) on plaintiffs who
did not hold interests in an issuer at the time of the short-swing trading is unavailing. See Roth,
2017 WL 3242326, at *4 (considering the effect of Spokeo on Bulldog Investors in holding that a
Section 16(b) derivative plaintiff had constitutional standing even though he did not own stock at
the time of the short-swing trading). Spokeo addressed only the sufficiency of a claim brought
by an individual on his own behalf, not a derivative claim brought on behalf of the corporation.
Bulldog Investors is consistent with Spokeo in that the Second Circuit recognized that a statutory
violation serves as a basis for Article III standing only where a violation of a statute goes hand in
hand with a distinct, palpable and non-theoretical injury in fact, can. See 696 F.3d at 177–78. In
Bulldog Investors, the Court did not find standing on the basis of a statutory violation alone: it
recognized that the corporate issuer (and by extension, the derivative suit plaintiff) suffered
distinct and real injury in that case, since its reputation of integrity and marketability of its stock
were damaged by insider trading, which is a serious breach of fiduciary duty. Id. Moreover,
Spokeo does not even mention Gollust, much less overturn it. This Court could reject the
holdings in Gollust or Bulldog Investors if a showing is made that its rationale was overruled
either implicitly or expressly by the Supreme Court in Spokeo, but no such showing has been
made here. See United States v. Ianniello, 808 F.2d 184, 190 (2d Cir. 1986), abrogated on other
grounds by United States v. Indelicato, 865 F.2d 1370 (2d Cir. 1989).
Jurisdiction After the Cash-Out Merger
A more difficult constitutional question is whether the Court retained jurisdiction of the
action after the cash-out merger, which divested Klein’s interest in Qlik. Cadian argues that
Klein lost any possible economic interest in the lawsuit in late August 2016 when her shares
were cashed out. Defs.’ Mem. at 9. Notably here, Klein concedes that “the merger terminated
her right to continue this action because she lost her personal stake in the outcome.” Pl.’s Mem.
at 2. Klein contends, however, that the Section 16(b) claim, which was brought on Qlik’s behalf,
has not been resolved, and thus the controversy lives on in this derivative action because she is a
nominal plaintiff and her loss of economic interest is immaterial to Qlik’s recovery. Pl.’s Mem.
The Second Circuit has outlined that in a Section 16(b) derivative action, there are two
steps to the injury analysis. First, because a derivative action generally is “a mere procedural
device to enforce” substantive rights belonging to the issuer . . . there must be injury in fact to
that real party in interest.” Bulldog Inv’rs Gen. P’ship, 696 F.3d at 175–76. Second, the
Supreme Court has recognized that when an issuer’s interests are pursued derivatively by a
shareholder, a “serious constitutional question” would arise if the shareholder were allowed to
maintain the Section 16(b) claim even after losing all personal financial interest in the outcome
of the litigation. Id. (citing Gollust, 501 U.S. at 126).
Cadian argues that the Supreme Court’s decision in Gollust dictates dismissal. Defs.’
Mem. at 6–7. There, the Supreme Court addressed whether a plaintiff who properly files a
Section 16(b) lawsuit loses standing due to a corporate reorganization that occurs while the
action is pending. Gollust, 501 U.S. at 122. The plaintiff in Gollust was a shareholder of
Viacom International, Inc. (“Viacom”) at the time that he brought a Section 16(b) action on
Viacom’s behalf. Id. at 118. Viacom was then acquired by another company during the
pendency of the lawsuit, and Viacom’s shareholders “received a combination of cash and stock
in [the new acquiring parent company] in exchange for their [Viacom] stock.” Id. at 118–19.
The Court explained that a “plaintiff must maintain a ‘personal stake’ in the outcome of the
litigation throughout its course.” Id. at 125. Despite the fact that the plaintiff no longer owned
Viacom stock, the Supreme Court held that the plaintiff satisfied both the statutory and
constitutional standing requirements because “[h]e owned a ‘security’ of the ‘issuer’ at the time
he ‘instituted’ [the] action” and “retain[ed] a continuing financial interest in the outcome of the
litigation derived from his stock in International’s sole stockholder . . .” Id. at 127. Thus this
continuing—albeit indirect—interest sufficed to confer standing because the plaintiff would
benefit if the action succeeded. See id.
Further, in Gollust, the Supreme Court explained that “Congress must, indeed, have
assumed any plaintiff would maintain some continuing financial stake in the litigation . . . [f]or if
a security holder were allowed to maintain a § 16(b) action after he had lost any financial interest
in its outcome, there would be serious constitutional doubt whether that plaintiff could
demonstrate the standing required by Article III’s case-or-controversy limitation on federal court
jurisdiction.” Gollust, 501 U.S. at 125–26. 8 The Supreme Court did not need to reach that
question because it found that the plaintiff’s continuing financial interest in the acquiring
company was sufficient to satisfy the case and controversy requirement. The issue before this
Court is the precise question the Supreme Court did not reach—whether subject matter
jurisdiction still exists where it is undisputed that the individual plaintiff has lost her personal
financial stake in the outcome of the litigation due to divestment. 9
Here, unlike in Gollust, Klein has no continuing financial interest, direct or indirect, in
the issuer’s new parent corporation. Under the terms of the merger agreement, each share of
Qlik common stock was cancelled and converted to the right to receive $30.50 in cash with no
provision of stock in the surviving corporation. Thus, Klein concedes that because she received
The parties dispute the appropriate analytical framework the Court should apply here. Cadian argues that Klein
lacks standing, but Klein asserts that Cadian conflates standing and mootness because “standing refers to the interest
that the plaintiff must have at the inception of the litigation; mootness occurs when a plaintiff loses that interest
during the course of the case.” Pl.’s Mem. at 3. Klein argues this distinction is important because whereas a
plaintiff bears the burden of demonstrating standing, the defendant bears the burden of proving that a case has
become moot, and because Courts analyze the mootness doctrine with more “flexibility.” Id. at 3–4. While it may
be true that courts have distinguished between standing and mootness, the Supreme Court in analyzing whether a
“plaintiff would maintain some continuing financial stake” in a Section 16(b) litigation has indicated that the
applicable doctrine is that of standing. Gollust, 501 U.S. at 125–26.
In Bulldog Investors, the Second Circuit also did not address this constitutional question because there was no
dispute concerning the plaintiff’s continuing financial stake in the litigation. See Bulldog Inv’rs, 696 F.3d. at 176.
cash, she lost all personal financial interest in the outcome of the Section 16(b) litigation, and
this fact alone is dispositive of her lack of standing. See Gollust, 501 U.S. at 126 (“[T]he
plaintiff must maintain a ‘personal stake’ in the outcome of the litigation throughout its
course.”); Romeo & Dye § 9.03[a][iv] (“A plaintiff-security holder who institutes a Section
16(b) lawsuit must maintain a continuous financial interest in the lawsuit throughout the
Substitution Under Rule 17
The Court now must consider whether Klein is still able to substitute Qlik as a plaintiff
even though she lacks personal standing. Plaintiff argues that dismissing the action entirely due
to Klein’s loss of her shareholder interest undermines the public policy of Section 16(b). Pl.’s
Mem. at 12. While it may be true that the statute recruits the issuer or stockholders to enforce
the law’s prohibition on short-swing trading by insiders, even Congress cannot bypass the
constitutional requirements of standing. While “Congress may grant an express right of action
to persons who otherwise would be barred by prudential standing rules . . . Article III’ s
requirement remains: the plaintiff still must allege a distinct and palpable injury to himself.”
Robainas v. Metro. Life Ins. Co., No. 14 Civ. 9926 (DLC), 2015 WL 5918200, at *6 (S.D.N.Y.
Oct. 9, 2015), aff’d sub nom. Ross v. AXA Equitable Life Ins. Co., 680 F. App’x 41 (2d Cir.
2017) (internal quotation marks and citation omitted). “Cases recognizing that a federal statutory
violation can confer standing rely on finding a concrete injury in making that determination.” Id.
(listing cases). While it is well settled law that, since recovery is for the corporation, a
corporation is the real party in interest and the stockholder plaintiff is but ‘the mere vehicle of
recovery” in a Section 16(b) action, Blau v. Lamb, 314 F.2d 618, 619 (2d Cir. 1963), no authority
suggests that Congressional policy overrides Article III’s requirements. See Bulldog Inv’rs, 696
F.3d at 180 (“Although Congress had a “general interest in safeguarding the integrity of the stock
market” when it enacted Section 16(b) of the Securities Exchange Act of 1934 and required
short-swing profits to be disgorged, “it did not eliminate the injury requirement of standing.”).
For the same reason, Klein’s argument that Qlik should be allowed to substitute as the
“real party in interest” under Rule 17(a) even though she lacks a continuing personal interest in
the litigation also fails: Rule 17(a) cannot create jurisdiction that does not exist. Although the
Second Circuit has not considered the precise issue of whether a real party in interest may be
substituted under Rule 17 where an original Plaintiff loses her interest in the litigation after
commencement of the action, the recent case of Cortlandt St. Recovery Corp. v. Hellas
Telecommunications, 790 F.3d 411 (2d Cir. 2015), is instructive. In Cortlandt Street, the district
court held that the plaintiff lacked standing to pursue contract claims because of the lack of a
valid assignment. Id. at 418. On appeal, the plaintiff argued that even if it lacked constitutional
standing, the district court erred in denying its request to amend the complaint to cure that
deficiency by means of either a substitution or an assignment pursuant to Rule 17(a)(3). Id. at
420, 422. The Second Circuit did not reach the issue of whether a substitution under Rule 17 is
permissible even where a plaintiff lacks standing as to all of her claims because it found that
neither of the plaintiff’s contemplated substitution and assignments were allowed under Rule
17(a)(3). Id. at 423.
In dictum, however, Cortlandt Street considered whether a substitution, assignment or
ratification under Rule 17 would be permissible even where a plaintiffs lacked standing at the
time of the filing of the original complaint. Id. at 422–23. The majority opinion noted that the
Sixth Circuit in Zurich Insurance Co. v. Logitrans, Inc., 297 F.3d 528, 531 (6th Cir. 2002), held
that where a plaintiff has no standing at the outset of litigation, it cannot “make a motion to
substitute the real party in interest.” 790 F.3d at 423. The Second Circuit also noted that Zurich
has been “met with some criticism” and quoted a leading treatise that characterized it as
“troubling.” Id. (citing 13A Charles Alan Wright et al., Fed. Prac. & Proc. Civ. § 3531 n. 61 (3d
ed. 2014)). The author of the Cortlandt Street majority opinion also wrote a concurrence in
which he emphasized that Zurich was not the law of the Second Circuit, and suggested that it
should not be. See Cortlandt Street, 790 F.3d at 425 (Sack, J., concurring).
Despite the Second Circuit’s cautionary dictum regarding Zurich, the Second Circuit has
repeatedly emphasized that “Rule 17 does not … affect jurisdiction and relates only to the
determination of proper parties and the capacity to sue.” Oscar Gruss & Son, Inc. v. Hollander,
337 F.3d 186, 193–94 (2d Cir. 2003) (citing 4 James William Moore, et al., Moore’s Federal
Practice § 17.13 (3d ed. 1999)); Lunney v. United States, 319 F.3d 550, 557 (2d Cir. 2003)
(“Rule 17(a) cannot be construed to extend subject matter jurisdiction.”); Airlines Reporting
Corp. v. S and N Travel, Inc., 58 F.3d 857, 861 n. 4 (2d Cir. 1995) (“Rule 17(a) . . . is a
procedural rule which does not extend or limit the subject matter jurisdiction of a federal
court.”); see also Lincoln Prop. Co. v. Roche, 546 U.S. 81, 90 (2005) (Rule 17(a) “address[es]
party joinder, not federal-court subject-matter jurisdiction”). It is also well-settled law that the
Federal Rules of Procedure cannot expand jurisdiction beyond its constitutional limits. See Fed.
R. Civ. P. 82 (“[The Federal Rules of Civil Procedure] do not extend or limit the jurisdiction of
the district courts . . .”); Kent v. N. California Reg’l Office of Am. Friends Serv. Comm., 497 F.2d
1325, 1329 (9th Cir. 1974) (“There is no doubt that . . . the trustees are the real party in interest
by virtue of Fed. R. Civ. P. 17(a). But Rule 17(a) means only that the trustees have a real
interest in the trust fund. Rule 17(a) does not give them standing; ‘real party in interest’ is very
different from standing.”) (citing 6 C. Wright & A. Miller, Federal Practice and Procedure §
1542, at 641 (1971)). 10
Thus, even if the Court were to find that Qlik is a real party in interest, its amenability to
substitution under Rule 17(c) cannot alter Klein’s lack of constitutional standing. 11 No fewer
than four other district courts in the Second Circuit have reached similar conclusions. See TechSonic, Inc. v. Sonics & Materials, Inc., No. 3:12 Civ. 01376 (MPS), 2016 WL 3962767, at *15
(D. Conn. July 21, 2016) (analyzing opinions from district courts in the Second Circuit and
holding that “Rule 17 cannot cure a standing defect if, as here, a court lacks jurisdiction over all
the claims in the case”); Clarex Ltd. v. Natixis Sec. Am. LLC, No. 12 Civ. 0722 (PAE), 2012 WL
4849146, at *7-8 (S.D.N.Y. Oct. 12, 2012) (rejecting an argument that a plaintiff who lacked
standing could remedy the jurisdictional defect under Rule 17, and noting that “where courts in
this Circuit have used . . . Rule 17(a)(3) to remedy defects in standing they have generally done
so where the plaintiff clearly had standing on another claim that it brought.”); In re SLM Corp.
Sec. Litig., 258 F.R.D. 112, 116 (S.D.N.Y. 2009) (declining to approve assignment of claims
because “the majority of courts to allow an assignment of claims after the onset of litigation do
so only where plaintiff had constitutional standing on another claim”); Bd. for Managers of
Mason Fisk Condo. v. 72 Berry St., LLC, 801 F. Supp. 2d 30, 39-40 (E.D.N.Y. 2011) (Rule 17
Klein erroneously conflates the standing and real party in interest analyses. Standing and real party in interest
issues overlap “to the extent that the question in both is whether the plaintiff has a personal interest in the
controversy.” Whelan v. Abell, 953 F.2d 663, 672 (D.C. Cir. 1992) (citing 6A C. Wright, A. Miller & M. Kane,
Federal Practice and Procedure § 1524, at 329–30 (1990)).
The same is true for Klein’s motion for substitution under Rule 25(c). “As to subject matter jurisdiction, Rule
25(c) does not change the constitutional requirement that an actual case or controversy must exist throughout a
lawsuit.” Reibman v. Renesas Elecs. Am., Inc., No. 11 Civ. 03847 (JCS), 2014 WL 251955, at *7 (N.D. Cal. Jan. 7,
“cannot expand the Court’s jurisdiction” and cannot “retroactively cure [a] jurisdictional
Because Klein has no standing, there is no jurisdiction, and the action must be dismissed.
See In re Mercury Interactive Corp. Derivative Litig., 487 F. Supp. 2d 1132, 1134–35 (N.D. Cal.
2007) (in a Section 16(b) lawsuit, also initiated by Klein and her counsel, finding that plaintiff
was divested of any interest in the litigation by the sale of her shares in the issuer for cash, and
thus she lacked standing to pursue the action on behalf of that issuer); see also Blasband v.
Rales, 971 F.2d 1034, 1041 (3d Cir. 1992) (applying Delaware law and holding that “[w]here
there has been a cash-out merger, it is clear that a former shareholder may not maintain a
derivative action, for he or she would no longer have an interest in a subsequent corporate
recovery. However, where . . . the plaintiff receives shares of a new corporate entity, the
standing issue is less clear, as the plaintiff will have a financial interest in the derivative action.”)
(internal citation omitted).
Motion to Substitute the Plaintiff
For the reasons discussed above, because the Court no longer has jurisdiction over this
matter, the Court will not consider Plaintiff’s arguments on the merits regarding substitution of
Qlik as a Plaintiff. See Steel Co., 523 U.S. at 101–02 (“For a court to pronounce upon [the
merits] when it has no jurisdiction to do so . . . is . . . for a court to act ultra vires.”); Sikhs for
To be sure, there have been cases in which courts in this Circuit have used Rule 17(a) to cure standing
deficiencies. For example, in Digizip.com Inc. v. Verizon Services Corp., 139 F. Supp. 3d 670 (S.D.N.Y. 2015),
upon which Klein relies, the court held that the plaintiff had Article III standing, but lacked prudential standing,
which the court allowed plaintiff to cure through Rule 17. The Court noted that the “use of Rule 17(a)(3) does not
expand the constitutional limits of standing.” Id. at 679. See also In re Vivendi Universal, S.A. Secs. Litig., 605
F.Supp.2d 570, 584 (S.D.N.Y. 2009) (holding some plaintiffs had third party standing, and those who did not could
cure their standing problems with assignments). Subsequent courts have distinguished those decisions, noting that
“where courts in this Circuit have used of Rule 17(a)(3) to remedy defects in standing, they have generally done so
where the plaintiff clearly had standing on another claim that it brought.” Clarex, 2012 WL 4849146, at *8.
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