The U.S. Court of Appeals for the Second Circuit and the U.S. District Court for the Southern District of New York. (Photo: Ken Lund) The U.S. Court of Appeals for the Second Circuit and the U.S. District Court for the Southern District of New York. (Photo: Ken Lund)

The U.S. Court of Appeals for the Second Circuit on Tuesday revived a shareholder's securities lawsuit, reversing a district judge's decision to throw out the case after holding standing was destroyed by the company's sale.

The Second Circuit called the matter a case of mistaken standing.

Recognizing the “the sometimes incautious way the word 'standing' has been used,” the majority — composed of Circuit Judge Rosemary Pooler and District Judge Richard Sullivan of the Southern District of New York, sitting by designation — expressed understanding for U.S. District Judge Edgardo Ramos' decision to deny the appellant, Terry Klein, the ability to pursue her securities claim over alleged “short-swing” transactions against other investors in software company Qlik.

Yet the differences between standing and mootness were concrete enough to reverse Ramos' decision and remand back to the district court for further proceedings, the majority found. In a separate dissent, Circuit Judge Raymond Lohier said he would have affirmed the district court's ruling.

At issue before the court was Klein's status after she was bought out along with the rest of the investors in Qlik in 2016. The defendants in the underlying action, the Cadian Group, motioned for the suit to be dismissed shortly after, arguing Klein's lack of a financial interest in Qlik left her without standing. Klein, for her part, motioned to substitute Qlik, now under new ownership.

Ramos agreed with the Cadian Group that Klein's lack of continued financial interest in the litigation caused her to lose standing, which made the case moot. The district court was rendered powerless to rule on her motion as such. In the alternative, the federal substitution rule would not apply, as Klein did not make an “honest mistake” in failing to include Qlik as a plaintiff at the start of the litigation.

The majority opinion, written by Pooler, notes that “standing” has sometimes referred to a particular inquiry and, less formally, “as a synonym for the personal stake in a litigation.” This informal use was itself found in some of the cases the district court relied on, Pooler noted.

While the issue may seem like “mere taxonomic fussiness,” the majority found that standing and mootness inquiries differ critically and that difference is critical to a case like Klein's. Turning to class action jurisprudence, Pooler pointed to the regular dynamic of class members' ability to, under certain circumstances, seek standing even if class representatives or other critical members of the class drop out or are removed, rendering their interests moot. Supreme Court precedent even has allowed the federal government to step in under the right conditions, Pooler noted.

“A legal controversy is not like an electric circuit, such that a court's power switches off as soon as the personal stake of all of the name parties on either side of the controversy drop below the legally adequate threshold,” Pooler wrote.

Rather, the federal substitution rule “contemplates that federal courts maintain jurisdiction over an action” until a decision about about the “concrete adverseness” that launched the ligation is still an issue.

“Only if the answer is 'no' is there no longer a live case in front of the court,” Pooler stated. “And only then must a court dismiss the matter for want of jurisdiction.”

To the current case, Pooler noted that were the appellate court to dismiss Klein's claims without further inquiry, it would leave the court “powerless” to address similar situations where a defendant attempted to avoid liability by simply buying out derivative plaintiffs in the future — a potential instance of “skullduggery” that appears absent in the current case.

The district court, then, has the ability to consider Klein's substitution motion, as “a federal court considering whether a case has become moot already has jurisdiction over that case.” The substitution, Pooler wrote, would alter none of the factual allegations of the complaint. No evidence has been presented either Qlik or Klein is operating in bad faith. And there appears to be no unfairness to the Cadian Group defendants should the substitution go forward.

In his nine-page dissent, Lohier argued, critically, that recent Supreme Court precedent establishes that a more relaxed rule of mootness applies exclusively to class actions, and that the district court was correct on the “honest mistake” issue.

To the first issue, the majority found Lohier's arguments to be an “overreading of the relevant precedent,” while the latter appeared to be supported in only two Second Circuit interpretations of the federal substitution rule, neither of which established an honest mistake as a precondition for granting a substitution motion.

Klein was represented on appeal by a legal team led by private attorney Paul Wexler. In a statement, Wexler said he and his client were pleased with the result of the appeal.

“The opinion is significant not only on constitutional issues, but also for the vindication of the Federal Rules' policy of liberal substitution where there is no prejudice to the opposing party,” Wexler said in an email. “Also, it is strong support for the policy behind Sec. 16(b) of the Securities Exchange Act to require disgorgement of insider profits where it is appropriate to do so.”

The Cadian defendants were represented by Akin Gump Strauss Hauer & Feld partner James Tysse. A spokesman for the law firm, responding to a request sent to Tysse for comment, declined to provide one.

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