On March 13, 2023, Magistrate Judge James M. Wicks of the United States District Court for the Eastern District of New York dismissed a derivative action brought on behalf of an online flower company against certain of its beneficial owners, seeking disgorgement of profits from alleged short-swing transactions under Section 16(b) of the Securities Exchange Act of 1934. Packer ex rel. 1-800 Flowers.com, Inc. v. Raging Capital Mgmt., LLC,—F. Supp. 3d—, 2023 WL 2484442 (E.D.N.Y. 2023). The Court held that, because plaintiff failed to allege a concrete harm that the company suffered from the transactions in question, plaintiff lacked standing to pursue the claim.
Plaintiff alleged that defendants placed improper short-swing trades in violation of Section 16(b) of the Exchange Act, which prohibits beneficial owners of greater than 10% of shares of an issuer from purchasing and selling that issuer’s securities within a six-month period. Id. at *2. By pursuing the claim derivatively, plaintiff effectively argued that the insiders owed the corporation the proceeds of their trading. See id.
The Court, however, assessed plaintiff’s claims in the context of TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021), in which the Supreme Court held that standing requires a plaintiff to have suffered a concrete injury and not just complain about a statutory violation. 1-800 Flowers, 2023 WL 2484442 at *5. While the Second Circuit had held previously in Donoghue v. Bulldog Investors Gen. P’ship, 696 F.3d 170 (2d Cir. 2012), that plaintiffs generally had standing to pursue Section 16(b) claims, the Court determined that this ruling was superseded by the Supreme Court’s decision in TransUnion. See 1-800 Flowers.com, 2023 WL 2484442 at *6.
In reaching this conclusion, the Court explained that the Second Circuit in Bulldog had held that through Section 16(b), Congress imposed a fiduciary duty upon statutory insiders and granted the corporation a legal right to expect them to refrain from any short-swing trading. Id. While the Second Circuit found that “deprivation of this right establishes Article III standing,” Bulldog, 696 F.3d at 177, the Court found that this holding was overruled by TransUnion’s holding that a plaintiff must suffer a concrete harm. 1-800 Flowers.com, 2023 WL 2484442, at *6. The Court emphasized that there was nothing in TransUnion that cabined its holding to particular statutes and that TransUnion broadly stood for the proposition that “[a] statutory violation, of whatever statute, does not automatically establish injury in fact unless the plaintiff has suffered concrete harm.” 1-800 Flowers, 2023 WL 2484442 at *8–10.
The Court explained that plaintiff only alleged injury from the statutory violation and not any specific concrete harm distinctly suffered by the corporation. Id. at *7-8. Moreover, the Court rejected plaintiff’s argument that “reputational harm is presumed” from short-swing trading; rather, the Court emphasized that plaintiff must allege “actual reputational harm to [the company] flowing from [d]efendants’ breach of Section 16(b).” Id. Thus, while the Court emphasized that it was not ruling that “a plaintiff could never show concrete harm flowing from a violation of Section 16(b),” the Court held that plaintiff failed to do so here, and therefore dismissed the action.