When a plaintiff loses her individual stake in litigation through a transaction or intervening event, should her case be dismissed as moot or may the court retain jurisdiction to consider plaintiff substitution under Rule 17(a)(3) to avoid dismissal? As it turns out, the answer is “it depends.” The Supreme Court recently held that the flexible mootness inquiry that would allow for substitution in the class action context is unavailable for collective actions under the Fair Labor Standards Act and for criminal actions in which there is no claim aggregation mechanism. By contrast, earlier this month, the Second Circuit held that Rule 17 substitution was appropriate in certain actions styled as derivative actions under the Securities Exchange Act—even where the nominal corporate defendant had failed to join not due to an honest mistake, but because it refused demand. See Klein v. Qlik Techs., 2018 WL 4700200 (2d Cir. Oct. 2, 2018). The decision is notable because it addresses an issue of first impression over a spirited dissent by Judge Ray Lohier, and because it offers insight into the thinking of New York Southern District Judge Richard Sullivan, who sat on the panel by designation and has since been elevated to the Second Circuit.

Background

Section 16(b) of the Securities Exchange Act requires that any corporate insiders and beneficial owners of more than 10 percent of a company’s stock disgorge any so-called “short swing profits,” i.e., profits derived from the sequential sale and purchase (or purchase and sale) of that company’s securities within a six-month period. To guard against insider abuse, Congress chose to impose strict liability for short swing transactions and to create a private cause of action in the event that the issuer declined to bring suit upon demand. 15 U.S.C. §78p(b).