Packer v. Raging Capital Management LLC

Appeal from the United States District Court for the Eastern District of New York No. 15-cv-5933, James M. Wicks, Magistrate Judge In Donoghue v. Bulldog Investors General Partnership, 696 F.3d 170 (2d Cir. 2012), we evaluated whether the plaintiff had constitutional standing to bring a suit under Section 16(b) of the Securities Exchange Act of 1934, which requires owners of more than ten percent of a company’s stock (“10 percent beneficial owners”) to disgorge profits made by buying and selling that company’s stock within a six-month window. If the company does not promptly sue to recover these so-called “short-swing” profits, a shareholder may sue the 10 percent beneficial owner on the company’s behalf. We held that a violation of Section 16(b) inflicts an injury that confers constitutional standing. This case, on appeal before us for the second time, presents the same question as Donoghue. The United States District Court for the Eastern District of New York (James M. Wicks, Magistrate Judge) reached the opposite conclusion as our panel, however. It determined that TransUnion LLC v. Ramirez, 594 U.S. 413 (2021), which elaborated on the “concrete injury” requirement of constitutional standing, abrogated Donoghue. The District Court thus dismissed Plaintiff-Appellant Brad Packer’s Section 16(b) derivative suit against Defendants-Appellees Raging Capital Management, LLC, Raging Capital Master Fund, Ltd., and William C. Martin, reasoning that Packer lacked constitutional standing because he did not allege a concrete injury. Packer appealed the judgment directly to our Court, as opposed to a District Judge, because the parties had agreed to Magistrate Judge jurisdiction pursuant to 28 U.S.C. §636(c)(1). Accordingly, we must decide whether Magistrate Judge Wicks is correct that TransUnion abrogated our decision in Donoghue. We disagree. TransUnion did not abrogate Donoghue, and the District Court erred in holding that it did. First, a District Court must follow controlling precedent — even precedent the District Court believes may eventually be overturned — rather than preemptively declaring that our caselaw has been abrogated. Second, TransUnion did not cast doubt on, much less abrogate, Donoghue. To determine whether an intangible injury is sufficiently concrete to confer constitutional standing, TransUnion instructed courts to identify a “close historical or common-law analogue for the[] asserted injury.” 594 U.S. at 424. In Donoghue, we had identified such an analogue for a Section 16(b) injury: breach of fiduciary duty. Because nothing in TransUnion undermines Donoghue, the District Court erred in dismissing Packer’s Section 16(b) suit. Accordingly, we REVERSE the March 13, 2023 judgment of the District Court dismissing the action for lack of constitutional standing and REMAND for further proceedings consistent with this opinion. JOSE CABRANES, C.J. In Donoghue v. Bulldog Investors General Partnership, 696 F.3d 170 (2d Cir. 2012), we evaluated whether the plaintiff had constitutional standing to bring a suit under Section 16(b) of the Securities Exchange Act of 1934 (“Exchange Act”), which requires owners of more than ten percent of a company’s stock (“10 percent beneficial owners”) to disgorge profits made by buying and selling that company’s stock within a six-month window.¹ If the company does not promptly sue to recover these so-called “short-swing” profits, a shareholder may sue the 10 percent beneficial owner on the company’s behalf.² We held that a violation of Section 16(b) inflicts an injury that confers constitutional standing.³ This case, on appeal before us for the second time, presents the same question as Donoghue. The United States District Court for the Eastern District of New York (James M. Wicks, Magistrate Judge) reached the opposite conclusion as our panel, however. It determined that TransUnion LLC v. Ramirez, 594 U.S. 413 (2021), which elaborated on the “concrete injury” requirement of constitutional standing, abrogated Donoghue. The Court thus dismissed Plaintiff-Appellant Brad Packer’s Section 16(b) derivative suit against Defendants-Appellees Raging Capital Management, LLC, Raging Capital Master Fund, Ltd., and William C. Martin (jointly, “Appellees”), reasoning that Packer lacked constitutional standing because he did not allege a concrete injury.⁴ Packer appealed the judgment directly to our Court, as opposed to a District Judge, because the parties had agreed to Magistrate Judge jurisdiction pursuant to 28 U.S.C. §636(c)(1). Accordingly, we must decide whether Magistrate Judge Wicks is correct that TransUnion abrogated our decision in Donoghue. We disagree. TransUnion did not abrogate Donoghue, and the District Court erred in holding that it did. First, a District Court must follow controlling precedent — even precedent the District Court believes may eventually be overturned — rather than preemptively declaring that our caselaw has been abrogated. Second, TransUnion did not cast doubt on, much less abrogate, Donoghue. To determine whether an intangible injury is sufficiently concrete to confer constitutional standing, TransUnion instructed courts to identify a “close historical or common-law analogue for the[] asserted injury.”⁵ In Donoghue, we had identified such an analogue for a Section 16(b) injury: breach of fiduciary duty.⁶ Because nothing in TransUnion undermines Donoghue, the District Court erred in dismissing Packer’s Section 16(b) suit. Accordingly, we REVERSE the March 13, 2023 judgment of the District Court dismissing the action for lack of constitutional standing and REMAND for further proceedings consistent with this opinion. I. BACKGROUND Unless otherwise noted, the relevant facts in this appeal are undisputed. We summarize them below. Brad Packer, a shareholder of 1-800-Flowers.com, Inc. (“FLWS”), alleges that during a six-month period in 2014 and 2015, Appellees bought and sold FLWS stock while they were 10 percent beneficial owners of FLWS.⁷ After FLWS declined to sue Appellees, Packer filed a shareholder derivative suit in the Eastern District of New York alleging that Appellees violated Section 16(b) of the Exchange Act. In 2020, we vacated the judgment of the District Court (Gary R. Brown, Magistrate Judge) granting summary judgment to Packer, holding that questions of material fact remained as to Raging Capital’s beneficial ownership status and discussed those questions.⁸ On remand, the District Court (James W. Wicks, Magistrate Judge) granted Appellees’ motion to dismiss.⁹ The Court reasoned that Packer lacked constitutional standing to bring a Section 16(b) suit because Packer did not allege that he suffered a “concrete” injury.¹⁰ The case returns to us on appeal. II. DISCUSSION In reviewing de novo the District Court’s decision to dismiss for lack of constitutional standing, we “borrow from the familiar [Federal] Rule [of Civil Procedure] 12(b)(6) standard” to “constru[e] the complaint in plaintiff’s favor and accept[] as true all material allegations contained therein.”¹¹ We have appellate jurisdiction to review the dismissal order under 28 U.S.C. §1291. In Donoghue, a comprehensive and unanimous opinion for our Court, we held that a violation of Section 16(b) of the Exchange Act “causes injury…sufficient for constitutional standing.”¹² The question before us is whether the Supreme Court’s decision in TransUnion abrogated Donoghue. We hold that it did not. A. Article III’s Concrete Injury Requirement After TransUnion Article III of the Constitution requires that plaintiffs establish standing to sue in federal court.¹³ The Supreme Court has instructed that, to establish Article III standing — also known as constitutional standing — “a plaintiff must show (i) that he suffered an injury in fact that is concrete, particularized, and actual or imminent; (ii) that the injury was likely caused by the defendant; and (iii) that the injury would likely be redressed by judicial relief.”¹⁴ Injuries may be “tangible harms, such as physical harms and monetary harms,” or — as here — “intangible harms,” such as “reputational harms, disclosure of private information, and intrusion upon seclusion.”¹⁵ In determining whether an intangible injury is sufficiently “concrete” to satisfy Article III, the Supreme Court, in the 2016 case Spokeo, Inc. v. Robins, advised courts to consider “history and the judgment of Congress,” as well as whether the injury “has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.”¹⁶ Although “Congress may ‘elevate to the status of legally cognizable injuries concrete, de facto injuries that were previously inadequate in law,’” a statutory violation alone does not establish constitutional standing.¹⁷ Five years later, in TransUnion LLC v. Ramirez, the Supreme Court elaborated on Spokeo by instructing plaintiffs to identify “a close historical or common-law analogue for their asserted injury.”¹⁸ But the analogue need not be an “exact duplicate in American history and tradition.”¹⁹ TransUnion further held that “in a suit for damages, the mere risk of future harm, standing alone, cannot qualify as a concrete harm — at least unless the exposure to the risk of future harm itself causes a separate concrete harm.”²⁰ This Circuit’s approach to constitutional standing prior to TransUnion had distinguished between “substantive” and “procedural” rights.²¹ But TransUnion “eliminated the significance of such classifications” by clarifying that whether a statute protects against substantive or procedural harm “is of little (or no) import.”²² Instead, TransUnion underscored Spokeo’s holding that what matters is “whether the alleged injury to the plaintiff has a ‘close relationship’ to a harm ‘traditionally’ recognized as providing a basis for a lawsuit in American courts.”²³ B. Section 16(b) and Donoghue This is not the first time we have addressed a challenge to a shareholder’s constitutional standing to sue under Section 16(b). We rejected a near-identical challenge to a Section 16(b) action in 2012. In Donoghue v. Bulldog Investors General Partnership, we categorically held that “short-swing trading in an issuer’s stock by a 10 percent beneficial owner in violation of Section 16(b) of the Securities Exchange Act causes injury to the issuer sufficient for constitutional standing.”²⁴ In reaching this conclusion, we looked to the history and the judgment of Congress, noting that the enacted purpose of Section 16(b) is “to prevent ‘the unfair use of information which may have been obtained by [a] beneficial owner, director, or officer by reason of his relationship to the issuer.’”²⁵ We explained that the “flat rule” of Section 16(b) “impose[s] a form of strict liability” by effectively prohibiting “an entire ‘class of transactions’…'in which the possibility of abuse’ of inside information ‘was believed to be intolerably great.’”²⁶ Its broad scope and strict liability are prophylactic. As Judge Learned Hand observed nearly 75 years ago, “if only those persons were liable, who could be proved to have a bargaining advantage, the execution of [Section 16(b)] would be so encumbered as to defeat its whole purpose.”²⁷ Thus, Section 16(b) “effectively makes 10 percent ‘beneficial owners [into] fiduciaries’…at least to the extent of making all short-swing transactions by such persons in the issuer’s stock ‘breaches of trust.’”²⁸ Under the statute, 10 percent beneficial owners become “constructive trustee[s] of the corporation” irrespective of “whether the statutory fiduciaries were actually privy to inside information or whether they traded with the intent to profit from such information.”²⁹ In other words, Section 16(b) imposes a “fiduciary duty” on 10 percent beneficial owners, confers on securities issuers “an enforceable legal right to expect [the fiduciary] to refrain from engaging in any short-swing trading,” and “compensates them for the violation of that right by allowing them to claim any profits realized from such trading.”³⁰ “The deprivation of this right,” we concluded, “establishes Article III standing.”³¹ C. TransUnion Did Not Abrogate Donoghue The District Court determined that Section 16(b) merely protects against “speculative harm,” and found that the alleged violation did not pass Article III muster in light of TransUnion’s holding that “risk of harm” alone does not qualify as “concrete” harm.³² The District Court acknowledged that Donoghue “unequivocally” held that a violation of Section 16(b) can establish constitutional standing, but it predicted that “the Second Circuit would likely come to the same conclusion if presented with the opportunity to reconsider its holding” in Donoghue.³³ Presented with the “opportunity to reconsider” our holding in Donoghue, we part ways with the District Court’s prediction, which rested on several errors. First, the District Court declined to follow Donoghue because it found that “TransUnion and progeny…cast doubt on that controlling precedent.”³⁴ That is the standard by which this Court reconsiders its own precedent.³⁵ District Courts, by contrast, are “obliged to follow our precedent, even if that precedent might be overturned in the near future.”³⁶ Indeed, we have cautioned District Courts against preemptively declaring that our caselaw has been abrogated by intervening Supreme Court decisions. In United States v. Polizzi, the District Court had concluded that intervening Supreme Court decisions had “effectively rejected” ostensibly controlling Second Circuit caselaw.³⁷ We repudiated the District Court’s approach, labeling it “less an application of existing precedent than a prediction of what the Supreme Court will hold when it chooses to address this issue in the future.”³⁸ As in Polizzi, the District Court should have applied controlling precedent — Donoghue — rather than try to read the Second Circuit’s tea leaves. Second, the District Court compounded the error by misreading those tea leaves. TransUnion requires “a close historical or common-law analogue for the[] asserted injury” to support constitutional standing.³⁹ As Donoghue made clear, because Section 16(b) makes 10 percent beneficial owners into statutory fiduciaries, a close historical or common-law analogue to short-swing trading by a 10 percent beneficial owner is breach of fiduciary duty.⁴⁰ Just as a common-law fiduciary who “deals with the trust estate for his own personal profit” must account to the beneficiary “for all the gain which he has made,” a statutory fiduciary who engages in short-swing trading owes its gains to the corporation under Section 16(b).⁴¹ The deprivation of these profits inflicts an injury sufficiently concrete to confer constitutional standing.⁴² Nothing in TransUnion undermined the analogue we identified in Donoghue. What’s more, Article III’s historical-analogue requirement did not originate in 2021 with TransUnion. The Supreme Court in TransUnion merely elaborated on its 2016 decision in Spokeo Inc. v. Robins, which directed courts “to consider whether an alleged intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.”⁴³ And in 2018, in Klein v. Qlik Technologies, Inc., we reaffirmed that Donoghue remained good law after Spokeo.⁴⁴ So what changed between Spokeo and TransUnion to make the District Court believe that Donoghue had been abrogated? “[T]he lesson from TransUnion,” the District Court wrote, “is that ‘Article III standing requires a concrete injury even in the context of a statutory violation.’”⁴⁵ But this “lesson” derives from Spokeo, not TransUnion.⁴⁶ And as we noted in Donoghue, “it has long been recognized that a legally protected interest may exist solely by virtue of statutes creating legal rights, the invasion of which creates standing, even though no injury would exist without the statute.”⁴⁷ The Supreme Court reaffirmed this principle in TransUnion itself.⁴⁸ Next, the District Court pointed to TransUnion’s pronouncement that “in a suit for damages, the mere risk of future harm, standing alone, cannot qualify as a concrete harm — at least unless the exposure to the risk of future harm itself causes a separate concrete harm.”⁴⁹ But the District Court was mistaken in determining that Section 16(b) protects against the risk of harm alone. Packer does not base his standing argument on a risk of harm, nor did we rely on a risk-of-harm theory to find constitutional standing in Donoghue.⁵⁰ The concrete injury that confers standing on Packer is, as we recognized in Donoghue, “the breach by a statutory insider of a fiduciary duty owed to the issuer not to engage in and profit from any short-swing trading of its stock.”⁵¹ Finally, the District Court noted that TransUnion had eliminated the distinction — previously employed by this Circuit in evaluating constitutional standing — between “substantive” and “procedural” rights.⁵² But nothing in Donoghue turned on whether the right conferred by Section 16(b) is substantive or procedural. In short, “because no intervening Supreme Court decision undermines the rationale relied on by the panel,”⁵³ Donoghue remains good law. Appellees’ remaining arguments attack our rationale in Donoghue. But “we remain bound by a prior decision of this Court until it is overruled either by this Court sitting en banc or by the Supreme Court, or until an intervening Supreme Court decision casts doubt on the prior ruling such that the Supreme Court’s conclusion in a particular case broke the link on which we premised our prior decision or undermined an assumption of that decision.”⁵⁴ Neither the Supreme Court nor this Court sitting en banc has overruled Donoghue, and for the reasons set forth above, TransUnion casts no doubt on our holding. In any event, we conclude that Appellees’ remaining arguments, most of which Donoghue already rejected, are without merit.⁵⁵ Appellees acknowledge that their challenge to Packer’s constitutional standing requires us to hold that Donoghue is no longer good law.⁵⁶ We decline the invitation. Accepting as true the complaint’s allegation, as we must on a motion to dismiss, that Appellees are 10 percent beneficial owners, Packer has established constitutional standing to bring a Section 16(b) suit against them. III. CONCLUSION To summarize: (1) Donoghue v. Bulldog Investors General Partnership, 696 F.3d 170 (2d Cir. 2012), which held that a violation of Section 16(b) of the Securities Exchange Act inflicts an injury that confers constitutional standing, remains good law. (2) We do not suggest that Plaintiff-Appellant Brad Packer will ultimately prevail in his lawsuit. But at this stage in the litigation, he has adequately alleged constitutional standing to bring a Section 16(b) suit against Appellees. Accordingly, we REVERSE the March 13, 2023 judgment of the District Court dismissing the action for lack of constitutional standing and REMAND for further proceedings consistent with this opinion.