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Klein v. Qlik Technologies, Inc.

United States Court of Appeals, Second Circuit

October 2, 2018

TERRY KLEIN, derivatively on behalf of QLIK TECHNOLOGIES, INC., Plaintiff-Appellant,
v.
QLIK TECHNOLOGIES, INC., Defendant-Appellant,
v.
CADIAN CAPITAL MANAGEMENT, LP, CADIAN FUND LP, CADIAN MASTER FUND LP, CADIAN GP, LLC, CADIAN CAPITAL MANAGEMENT GP, LLC, ERIC BANNASCH, Defendants-Appellees.

          Argued: May 14, 2018

         Appellant Terry Klein brought this suit derivatively as a shareholder of Qlik Companies. She alleges that Appellees, referred to collectively as the "Cadian Group," owned more than ten percent of Qlik and engaged in short- swing transactions in that stock in 2014, in violation of Section 16(b) of the Securities Exchange Act. While the action was stayed for reasons irrelevant to this appeal, Qlik was bought out in an all-cash merger, causing Klein to lose any financial interest in the litigation. After the stay was lifted, the Cadian Group moved to dismiss the action for lack of standing. Klein moved to substitute Qlik under Rule 17(a)(3) of the Federal Rules of Civil Procedure. The District Court for the Southern District of New York (Ramos, J.) found that Klein's lack of standing deprived it of jurisdiction to do anything other than dismiss the suit and that, in any case, Qlik could not be substituted under Rule 17 because it had not made an "honest mistake" when it failed to join the action earlier. We disagree. When Klein lost her personal stake in the litigation, the only jurisdictional question was whether the case had become moot. A district court has jurisdiction to determine whether substituting a plaintiff would avoid mooting the action. Rule 17(a)(3) allows substitution of the real party in interest so long as doing so does not change the substance of the action and does not reflect bad faith from the plaintiffs or unfairness to the defendants. There is no "honest mistake" requirement beyond that. The district court should have substituted Qlik and denied the Cadian Group's motion to dismiss for lack of jurisdiction.

         Vacated and remanded.

          PAUL DENNIS WEXLER (Glenn F. Ostrager, on the brief), New York, N.Y., for Appellants.

          JAMES E. TYSSE, Akin Gump Strauss Hauer & Feld LLP (Z.W. Julius Chen, Douglas A. Rappaport, Robert H. Pees, Jessica Oliff Daly, on the brief), Washington, D.C. for Appellees.

          Before: POOLER, LOHIER, Circuit Judges, and SULLIVAN, District Judge. [1]

          POOLER, CIRCUIT JUDGE:

         Appellant Terry Klein brought this suit derivatively as a shareholder of Qlik Companies. She alleges that Appellees, referred to collectively as the "Cadian Group," owned more than ten percent of Qlik and engaged in "short- swing" transactions in that stock in 2014, in violation of Section 16(b) of the Securities Exchange Act. While the action was stayed for reasons irrelevant to this appeal, Qlik was bought out in an all-cash merger, causing Klein to lose any financial interest in the litigation. After the stay was lifted, the Cadian Group moved to dismiss the action for lack of standing. Klein moved to substitute Qlik under Rule 17(a)(3) of the Federal Rules of Civil Procedure. The District Court for the Southern District of New York (Ramos, J.) found that Klein's lack of standing deprived it of jurisdiction to do anything other than dismiss the suit and that, in any case, Qlik could not be substituted under Rule 17 because it had not made an "honest mistake" when it failed to join the action earlier.

         We disagree. Klein's personal stake at the outset of the litigation established her standing. When she lost her personal stake as the action proceeded, the only jurisdictional question was whether the case had become moot. A district court determining whether a case has become moot maintains jurisdiction to determine whether a substitute plaintiff would avoid that result. Rule 17(a)(3) allows substitution of the real party in interest so long as doing so does not change the substance of the action and does not reflect bad faith from the plaintiffs or unfairness to the defendants. There is no "honest mistake" requirement beyond that. The district court should have substituted Qlik and denied the Cadian Group's motion to dismiss for lack of jurisdiction.

         Accordingly, we VACATE the district court's dismissal of the action for lack of subject matter jurisdiction and REMAND for substitution of Qlik and further proceedings consistent with this opinion.

         BACKGROUND

         Section 16(b) of the Securities Exchange Act requires corporate insiders, including owners of more than ten percent of a company's stock, to disgorge what are colloquially known as "short-swing profits," i.e., any profits made from buying and selling or selling and buying within a six-month period a security based on that company's stock. 15 U.S.C. § 78p(b). The statute imposes strict liability on insiders likely to have access to insider information in order to "tak[e] the profits out of a class of transactions in which the possibility of abuse was believed [by the Congress that passed it] to be intolerably great." Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 422 (1972). Suits under 16(b) can be brought by the company that issues the relevant stock or, "if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter," by any "owner of any security of the issuer." 15 U.S.C. § 78p(b).

         The Cadian Group allegedly owned more than ten percent of Qlik and engaged in short-swing transactions in that stock in 2014. Klein purchased some of Qlik's stock and made demand on Qlik on June 11, 2015. Qlik informed Klein that it did not intend to bring an action, so Klein filed a complaint against the Cadian Group on October 15.

         The case was stayed on November 20 pending resolution of a motion in a related case brought by the same plaintiff's attorneys against the same group of defendants who apparently engaged in similar transactions with another company. In the meantime, a private equity company that is not a party to this matter bought out Qlik in an all-cash merger. The agreement was signed on June 2, 2016, and checks were cut to shareholders on August 22.

         On November 11, 2016, the Cadian Group requested permission to file a motion to dismiss on the grounds that Klein no longer had standing after selling her shares in the merger.[2] Four days later, Klein requested permission to file a motion to substitute Qlik (now under new ownership) under Rule 17(a)(3) of the Federal Rules of Civil Procedure. The district court granted the Cadian Group's motion to dismiss and denied Klein's motion to substitute. Klein, 2017 WL 4129639, at *11. The court reasoned that Klein's lack of continuing financial interest in the litigation caused her to lose standing, which made the case moot. Id. at *8. According to this logic, Klein's lack of standing rendered the court powerless to rule on her motion to substitute. The district court found in the alternative that Rule 17(a)(3) does not actually apply to this situation because Klein did not make an "honest mistake" in failing to include Qlik as a plaintiff ab initio. Id. at *10 & n.13. Klein and Qlik timely appealed.

         DISCUSSION

         The district court should not have hesitated to substitute Qlik. It has the constitutional power to substitute a real party in interest to avoid mooting a case and Rule 17(a)(3) is an appropriate procedural mechanism for doing so.

         I. The Jurisdictional Consequence of Klein's Loss of a Personal Stake

         It is an elementary lemma of constitutional interpretation that Article III, Section 2 limits the power of federal courts to adjudicating "Cases" and "Controversies." In practice this means that the judicial power to articulate the law extends only to complaints from parties "seek[ing] redress for a legal wrong." Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 1547 (2016). In civil matters, federal courts will only hear from plaintiffs who clearly allege that one or more of a defendant's actions led to an "invasion of [the plaintiffs'] 'legally protected interest'" in a manner that makes it "likely that the injury will be redressed by a favorable decision." Bhatia v. Piedrahita, 756 F.3d 211, 218 (2d Cir. 2014) (quoting Lujan v. Defs. of Wildlife, 504 U.S. 555, 560 (1992)). We may, in short, only entertain complaints from a complainant with a concrete stake-and not just a "keen interest"-in the outcome of the litigation. Hollingsworth v. Perry, 570 U.S. 693, 700 (2013).

         We have previously found that there is a case or controversy in a Section 16(b) case so long as the party bringing suit is either the corporation that issued the securities in question or a current security holder of that corporation. See Donoghue v. Bulldog Inv'rs Gen. P'ship, 696 F.3d 170, 175 (2d Cir. 2012). At this stage of the litigation, nobody contests that Klein's interest in Qlik at the initiation of the suit and until the moment of the buyout was sufficient to empower the district court to hear her Section 16(b) action. The question in front of us is what that court has the power to do now that Klein no longer has any financial stake in Qlik.

         The district court concluded that, once Klein was bought out, it lost all power to do anything but declare that it no longer had subject-matter jurisdiction. Klein, 2017 WL 4129639, at *10. It reasoned that a derivative plaintiff in a Section 16(b) action who loses her stake in the corporation thereby loses her standing to maintain the action, id., which rendered "the only function remaining to the court . . . that of announcing [its lack of jurisdiction] and dismissing the cause."[3] Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94 (1998) (quoting Ex parte McCardle, 7 Wall. 506, 514 (1868)). According to the court below, "[w]hile 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." Klein, 2017 WL 4129639, at *7 n.8 (internal quotation marks omitted).

         Reviewing this determination de novo, we hold that it was erroneous. Cortlandt St. Recovery Corp. v. Hellas Telecomms., S.à.r.l., 790 F.3d 411, 417 (2d Cir. 2015). ("On appeal from a dismissal under Rule 12(b)(1) [including on mootness grounds], we review the court's factual findings for clear error and its legal conclusions de novo."). The district court's interpretation of the relevant precedent is understandable given the sometimes-incautious way the word "standing" has been used, but it is mistaken nevertheless. The consequences of losing a stake in ongoing litigation are ...


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