New York

Eleven attorneys general sue asset managers, alleging ESG investment standards raise coal prices and violate antitrust laws

The ideological battle over the role of Environmental, Social and Governance (ESG) investment standards intensified last week, as the Texas Attorney General and 10 other Attorneys General sued three asset management companies, alleging that ESG strategies pursued by these companies in relation to coal production violated federal and state antitrust laws.

ESG is a set of standards or ideals that socially conscious investors seek out when choosing where to place their money. Over the past four years, ESG investment standards have become increasingly controversial. Some liberal and progressive advocates have sought to pressure large investors to consider issues such as racial justice, labor policies, and environmental stewardship when making investments in companies. At the same time, some conservative critics have opposed ESG as an attempt to inject ideology into investment decisions at the expense of shareholder value.

Allegations and Defenses

The tension is on full display in the Texas complaint. The complaint alleges that the three asset management companies—BlackRock, Vanguard, and State Street—violated Section 7 of the Clayton Act by acquiring minority interests in multiple competing coal-producing companies and then using governance rights (such as proxy votes) to influence the coal companies to reduce output in the name of environmental stewardship. The complaint alleges that this output reduction, in turn, raised the price of coal directly and consumer electric bills indirectly. The states claim that the agreement was reached through organizations committed to reducing carbon output, such as Climate Action 100+ and the Net Zero Asset Managers Initiative.

The investment firms likely will raise several defenses. Among other things, they likely will argue that the states have not plausibly alleged an agreement among the investment companies. The complaint relies heavily on public statements and on the involvement of the investment companies in industry organizations, but the law imposes a high pleading burden on Section 1 plaintiffs, and the absence of a plausible economic motive may prove problematic for the plaintiffs. The companies will likely also challenge the plaintiffs’ allegations of anticompetitive effect. The plaintiffs appear to allege that the agreement had the effect of increasing the price of coal, but given the nature of the alleged agreement, if proven, it likely would be assessed under the Rule of Reason. This means the alleged agreement’s pro-competitive justifications (disregarding any potential environmental benefits) would be weighed against the anti-competitive effects, and these types of cases are often difficult for plaintiffs to prove.

Similarly, the complaint’s Section 7 challenge to the acquisition of a minority interest by different investors in different coal companies may be difficult to prove. The companies will likely point out that the investors are not alleged to have controlled any of the acquired companies, either individually or collectively, and if accepted, the claims would represent an expansion of the antitrust laws. Under either claim, any economic analysis of a but-for world would be complicated by competing industry trends and regulations.

Broader Implications for ESG and Antitrust

Certainly, it is possible to imagine ESG efforts that would raise significant antitrust concerns, given that ESG goals often require industry collaboration. Notwithstanding the best intentions, case law has held that an effort to achieve social good through collusion or unlawful agreements does not provide a defense, let alone immunity, to an antitrust challenge. Nat’l Soc’y of Pro. Eng’rs v. United States, 435 U.S. 679 (1978) (rejecting the argument that safety concerns justified an agreement among engineers not to quote prices before being hired); In Re Processed Egg Prod. Antitrust Litig., 851 F. Supp. 2d 867, 877 (E.D. Pa. 2012) (industry agreement to improve the quality of life for animals may be alleged to increase prices or reduce output).

Government regulation may be an answer when an industry-wide agreement is needed to achieve a societal goal, but it is an imperfect one. The Noerr-Pennington doctrine holds that anticompetitive effects caused by petitioning the government are immune from antitrust liability. The state action doctrine holds that state actors, including state regulatory boards dominated by industry participants, are generally not subject to antitrust scrutiny. A regulator may choose standards that are not ideal for the industry, and unlike voluntary standards, companies cannot opt out of government-enforced regulations.

The heightened scrutiny of ESG means that any ESG effort must be approached with great care and sensitivity toward antitrust. Trade organizations can be alleged to be conduits for sharing sensitive information, and statements about intentions to adhere to policies or standards can be interpreted as signals or invitations to collude, even when made publicly. Accordingly, the compliance rules applicable to trade associations and public announcements of intentions should be observed diligently when the topic is ESG.

Conclusion: A Case to Watch

Finally, while ESG aspirations have not yet been tested as a defense to antitrust claims, there is no basis in antitrust law for targeting ESG goals as inherently suspect or deserving of greater antitrust scrutiny than other industry self-regulatory efforts. Given the controversial nature of ESG, this case will certainly be followed closely.

Cohen & Gresser is honored to be named to Global Investigations Review’s GIR 100 for the sixth year in a row, reaffirming its position as a leading international law firm for cross-border investigations.

The GIR 100, a definitive guide to the world’s top firms for investigations, recognized Cohen & Gresser for its exceptional representation of high-profile individuals and companies. The firm was highlighted for its strong team of renowned lawyers operating in key jurisdictions worldwide. The GIR 100 is based on comprehensive submissions and rigorous independent research, identifying the top 100 firms globally that excel in government-led, internal, and cross-border investigations.

Cohen & Gresser’s White Collar Defense and Regulation practice, which spans its offices in New York, Washington, D.C., Paris, and London, is central to its continued success. The practice boasts a highly experienced Internal Investigations team that advises global clients, including corporations, boards of directors, special committees, and audit committees.

The team’s work encompasses the full spectrum of investigations, from responding to discrete, anonymous employee complaints to managing complex, wide-ranging investigations tied to ongoing litigation or regulatory and criminal scrutiny.

This recognition underscores Cohen & Gresser’s dedication to providing clients with sophisticated, strategic counsel in even the most challenging investigative matters.

Cohen & Gresser is proud to announce that it has achieved Mansfield Certification for 2023-2024, a significant milestone that underscores the firm’s ongoing commitment to fostering diversity, equity, and inclusion within the legal profession.

Mansfield Certification is a year-long, structured certification process designed to ensure that all qualified talent at participating law firms has a fair and equal opportunity to be considered for leadership roles. The focus is on widening the pool of candidates for leadership positions and ensuring transparent, inclusive advancement processes. By requiring that at least 30% of talent considered for leadership roles consists of underrepresented groups, Mansfield Certification creates a more level playing field for all.

“Diversity, equity, and inclusion are not just values we talk about; they are integral to how we operate as a firm,” said Lawrence T. Gresser, the firm’s managing partner. “Achieving Mansfield Certification is a natural extension of our ongoing efforts to ensure that our leadership and decision-making structures reflect diverse perspectives and backgrounds. While we recognize there is more work to be done, we remain dedicated to making meaningful progress that benefits both our firm and the legal profession.”

Cohen & Gresser is deeply committed to fostering a workplace where every individual feels valued, supported, and empowered to succeed. The firm has taken meaningful steps to promote diversity and inclusion within the organization and across the legal community.

“Achieving Mansfield Certification reflects our commitment to making lasting changes within the firm,” said partner Karen Bromberg, co-lead of Cohen & Gresser’s Mansfield 2023-2024 initiative. “We believe that fostering a workplace where everyone has the opportunity to succeed strengthens our ability to serve our clients and communities. We are excited to continue this journey and look forward to the positive impact it will have on our firm, clients, and the broader community.”

By earning Mansfield Certification, Cohen & Gresser joins a distinguished group of over 360 certified law firms nationwide that are setting a new standard for diversity and inclusion, reinforcing the core value that everyone should have a fair opportunity for career advancement.

“The firm has renewed its commitment to the certification process for the 2024-2025 period, and will continue to track its progress to ensure these efforts lead to meaningful, sustainable change,” added Heather Kelly, the firm’s chief operating officer and co-lead of the Mansfield initiative.

For more information about Cohen & Gresser’s Mansfield Certification, please contact MansfieldWC@cohengresser.com.

Cohen & Gresser has been recognized for excellence in dispute resolution, and lawyers Mark S. Cohen, Douglas J Pepe, John Roberti, and Daniel Tabak have been named “Litigation Stars”, in the 2025 edition of Benchmark Litigation.

The “Stars” featured in the guide are recognized through Benchmark Litigation’s independent research as some of the foremost litigation practitioners in the United States. The selection process involves in-depth interviews with litigators, dispute resolution experts, and their clients, along with a thorough review of significant cases and firm developments. Lawyers named as “Stars” are highly respected by their peers and stand out for their impressive case track records and positive client feedback.

Since its inception in 2008, Benchmark Litigation has been the only publication on the market to focus exclusively on litigation in the United States.

Cohen & Gresser is proud to announce the appointment of Pere Puig Folch as the firm’s first Global Chief Innovation Officer (CIO). In this new role, Pere will lead the firm’s ongoing initiatives to drive innovation, streamline legal processes, and enhance efficiency across all its offices worldwide.

With over 20 years of experience in legal technology and innovation, Pere brings a wealth of expertise in designing and implementing cutting-edge solutions that optimize client outcomes and operational efficiency. He has played a pivotal role in advancing Cohen & Gresser’s technology over the past six years, particularly in the integration of machine learning for complex data analysis. His expertise in leveraging AI-driven tools has enabled the firm to streamline Big Data litigation and investigations, delivering more precise insights and improved outcomes for our clients.

“We are excited to have Pere step into this key leadership role,” said Lawrence T. Gresser, Cohen & Gresser’s Managing Partner. “His vision and expertise will be critical in advancing our commitment to innovation, enabling us to provide even better service and results for our clients. Pere’s appointment underscores our dedication to continually improving efficiency and staying ahead in an evolving legal landscape.”

“I am thrilled to take on the role of Global CIO and lead the firm’s innovation efforts,” said Pere Puig Folch. “Our goal is to ensure that our technology and processes not only meet but exceed the demands of our clients and the industry. I look forward to collaborating with our talented team to drive meaningful change across all our offices.”

Pere’s appointment reinforces Cohen & Gresser’s commitment to adopting the latest innovations in legal technology and process management, ensuring the firm remains a leader in delivering top-tier results to clients worldwide.

Press

Cohen & Gresser Appoints Data Director As Global CIO, Law360 (Oct. 30, 2024)

Vault has named Cohen & Gresser to its 2025 Top 150 Under 150 list, which recognizes the nation’s best law firms with 150 or fewer lawyers.

Vault praises C&G for its “White Collar Whizzes,” emphasizing the firm’s “strong reputation in this area.” The publication also recognizes the firm’s “bustling litigation practice,” noting its expertise in handling a broad range of matters, including “antitrust and bankruptcy, class actions and commercial litigation, directors and officers liability, products liability—and more.”

In addition to this recognition, Vault also named C&G on numerous quality-of-life lists, including Best Midsize Law Firms for Pro Bono, Best Midsize Law Firms for Firm Culture, Most Selective Midsize Law Firms, and Best Midsize Law Firms for Wellness.

Vault created the Top 150 Under 150 list to recognize outstanding small and midsize law firms that deliver big results. Vault editorial and research teams evaluated survey data, news stories, trade journals, and other legal publications; spoke with lawyers in the field; and reviewed other published rankings. Editors also assessed each firm for prestige, quality of life, and professional growth opportunities and then narrowed down the results to come up with the final list of recognized law firms.

 

Best Lawyers in America recognizes 12 Cohen & Gresser attorneys in its newly-published guide. The prestigious publication—now in its 31st edition—evaluates and selects lawyers through an extensive peer-review process, ensuring that the recognition reflects the consensus of top legal professionals regarding the expertise and abilities of their colleagues within the same geographic and practice areas.

Five C&G attorneys are recognized by their peers as “Best Lawyers” in their respective practice areas:

• Mark S. Cohen – Criminal Defense: White-Collar
• Lawrence T. Gresser – Commercial Litigation
• Jonathan S. Abernethy – Criminal Defense: White-Collar and Litigation - Regulatory Enforcement
• Jason A. Brown – Criminal Defense: White-Collar
• Mark Spatz – Product Liability Litigation - Defendants

Seven C&G attorneys are recognized as “Best Lawyers: Ones to Watch” in their respective practice areas:

• Luke Appling – Commercial Litigation and Litigation - Securities
• Sharon L. Barbour – Commercial Litigation and Criminal Defense: White-Collar
• William E. Kalema – Criminal Defense: White-Collar
• Phoebe King – Criminal Defense: White-Collar
• Barbara K. Luse – Commercial Litigation and Corporate Law
• Alexandra K. Theobald – Commercial Litigation and Corporate Law
• Benjamin Zhu – Criminal Defense: White-Collar

On July 8, 2024, the United States Court of Appeals for the Second Circuit delivered a significant win to Cohen & Gresser client, Eddystone Rail Co., by reversing a Southern District of New York decision that denied Eddystone’s motion to amend its complaint to assert subsequent transfer claims against lenders to Ferrellgas, the former corporate owner of Bridger Transfer Services, LLC (“BTS”), a contractual counterparty of Eddystone.

With the financial assurance of a multi-year take-or-pay contract that obligated BTS to make minimum monthly payments regardless of the services it used, Eddystone spent about $170 million to build a transloading facility that transferred oil from railcars to boats. Soon after the Eddystone transloading facility went into operation, BTS and many of its corporate affiliates were sold to Ferrellgas. At the time, BTS’s value was well over $200 million. Within months, though, the transloading arrangement became uneconomical for BTS’s corporate affiliates, so Ferrellgas stripped all of BTS’s assets and sold BTS for $10, causing BTS to default on its remaining obligations to pay Eddystone about $140 million. Eddystone brought an action in Philadelphia in 2017 to recover the fraudulent transfers involved in stripping BTS’s assets.

While the Philadelphia initial transfer action was pending, C&G filed an action for Eddystone in the Southern District of New York in 2019 alleging that Ferrellgas used former BTS assets to pay two groups of lenders, making the lenders subsequent transferees of the fraudulently transferred assets. Significantly, a protective order in the Philadelphia action barred Eddystone from using documents produced in that action in drafting its initial complaint against the lenders.

The Southern District granted the lenders’ initial motions to dismiss the complaint, finding that the complaint did not sufficiently demonstrate that the assets used to pay the lenders derived from former BTS assets. However, the court also rejected all of the lenders’ many additional arguments that the complaint was legally insufficient.

Following the dismissal of the initial complaint in September 2021, Eddystone overcame hard-fought opposition to get the protective order in the Philadelphia action modified in March 2022 to permit it to use discovery from that action to amend its Southern District complaint against the lenders. Eddystone then prepared a proposed amended complaint in April 2022 with charts showing specific cash transfers from BTS to one set of lenders through Ferrellgas and its subsidiaries. The proposed amended complaint also detailed how other specific BTS assets were assigned to corporate affiliates for no consideration at all and how the proceeds from later sales of those assets were transferred to another set of Ferrellgas lenders.

The Southern District nevertheless denied Eddystone leave to file the proposed amended complaint, finding that it would be futile because the factual allegations were still insufficient to show that assets from BTS reached the lenders. The court also found that the three years between Eddystone’s filing of its initial complaint and its request to amend was an undue delay that prejudiced the lenders.

Following oral argument that Judge Gerard Lynch of the Second Circuit called “great,” the Second Circuit reversed the District Court on both of its bases for denying Eddystone’s request to file an amended complaint. First, the Second Circuit found that Eddystone had alleged sufficient details to show that it was plausible that BTS’s assets were later transferred to the lenders. Then, the Second Circuit ruled that the District Court had exceeded its discretion in finding that undue delay and prejudice barred Eddystone’s effort to amend its complaint, finding that the District Court had not identified any prejudice to the lenders and that “Eddystone cannot be penalized for waiting until it received the District Court’s decision granting the motions to dismiss before determining what it needed to do to amend its Complaint, including modifying the protective order in the Pennsylvania litigation.”

The victorious C&G team includes Dan Tabak, Steve Sinaiko, Marvin Lowenthal, Ben Zhu, and Camille Delgado. Melissa Maxman was also part of the team that obtained the modification of the Pennsylvania protective order.

On June 24, 2024, the U.S. Court of Appeals for the Second Circuit decided Packer ex rel. 1-800-Flowers.com, Inc. v. Raging Capital Management, LLC, reversing a district court decision that had held that a shareholder plaintiff bringing short-swing profits claims under Section 16(b) of the Securities Exchange Act of 1934 did not have constitutional standing as a result of the U.S. Supreme Court’s decision in TransUnion LLC v. Ramirez.^[1]

In the year since the Packer district court decision was issued, a consensus of other district courts had come out the opposite way and concluded that TransUnion did not abrogate Second Circuit precedent on the requirements for Article III standing in the Section 16(b) context. The U.S. Securities and Exchange Commission (“SEC”) appeared as an amicus curiae in the Packer appeal to argue that affirming the Packer district court “would eviscerate Section 16(b)” because “few, if any plaintiffs, would be able to demonstrate standing, contrary to Congress’s intent to create a broad cause of action.”^[2]

The Second Circuit’s reversal settles uncertainty in Section 16(b) cases that had emerged since the initial Packer decision and gives Section 16(b) plaintiffs the green light to pursue claims (at least in the Second Circuit) unless and until the Supreme Court takes up the question.

Section 16(b) Short-Swing Liability

Congress enacted Section 16(b) in 1934 in response to widespread concern that insiders who “may have [had] access to information about their corporations not available to the rest of the investing public” were able to move quickly in and out of that corporation’s securities and “reap profits at the expense of less well informed investors.”^[3]

Once enacted, Section 16(b) created a pathway to require statutory insiders to disgorge the profits they made from short-swing trading. The statute defines insiders as officers, directors and 10% beneficial owners of the corporation.^[4] And it defines short-swing trading as the purchase and sale of securities of the corporation at issue when such purchase and sale were made within a six-month period.^[5]

One feature of Section 16(b) is particularly relevant here: Section 16(b) does not confer enforcement authority on the SEC but instead “recruits the issuer” or “its security holders” as its “policemen.”^[6] Specifically, Section 16(b) permits two types of plaintiffs to pursue relief: (1) the issuer of the security that was traded and (2) a shareholder of that issuer, but only in the event that the issuer fails or refuses to bring the suit within 60 days of a request by that shareholder.^[7] Permitting a shareholder plaintiff to bring a Section 16(b) claim in these circumstances recognizes that a company may be conflicted in pursuing claims against its own insiders.

Article III Standing in Section 16(b) Actions

Article III of the Constitution limits federal courts to the adjudication of “cases” and “controversies.” To meet the Article III requirement of a case or controversy, a plaintiff must demonstrate standing by showing “(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.”^[8] The first requirement of Article III standing—concrete injury-in-fact—ensures that “a litigant [has] a direct stake in the controversy and prevents the [federal] judicial process from becoming no more than a vehicle for the vindication of the value interests of concerned bystanders.”^[9]

Congress conferred exclusive jurisdiction on the federal courts to hear Section 16(b) claims.^[10] Accordingly, if a federal court holds that a Section 16(b) plaintiff does not have Article III standing for failure to show an injury-in-fact (or otherwise), that plaintiff could not then bring the same claim in state court.

          A. Second Circuit Law Under Bulldog

The Second Circuit’s leading case on assessing Article III standing and its injury-in-fact requirement for Section 16(b) claims—which predates the Supreme Court’s TransUnion decision—had been Donoghue v. Bulldog Investors General Partnership.^[11]

The Second Circuit in Bulldog affirmed a judgment in favor of the shareholder plaintiff, rejecting the defendants’ argument that the plaintiff could not demonstrate any injury to the issuer resulting from that trading.^[12] Bulldog explained that Section 16(b)

confer[s] on securities issuers a legal right, one that makes 10% beneficial owners constructive trustees of the corporation with a fiduciary duty not to engage in short-swing trading of the issuer’s stock …. It is the invasion of this legal right, without regard to whether the trading was based on inside information, that causes an issuer injury in fact and that compels our recognition of plaintiff’s standing to pursue a § 16(b) claim here.^[13]

Bulldog acknowledged that “[w]hile this particular legal right might not have existed but for the enactment of § 16(b), Congress’s legislative authority to broaden the injuries that can support constitutional standing is beyond dispute.”^[14] With this in mind, the Second Circuit drew upon an analogy developed by Judge Learned Hand in a 1951 Second Circuit decision between the harm redressed by Section 16(b) and that redressed by the claim of breach of trusts at common law:

Judge Hand observed that “[n]obody is obliged to become a director, an officer, or a ‘beneficial owner’; just as nobody is obliged to become the trustee of a private trust; but, as soon as he does so, he accepts whatever are the limitations, obligations and conditions attached to the position, and any default in fulfilling them is as much a ‘violation’ of law as though it were attended by the sanction of imprisonment.”

Thus, pursuant to § 16(b), when a stock purchaser chooses to acquire a 10% beneficial ownership stake in an issuer, he becomes a corporate insider and thereby accepts “the limitation[]” that attaches to his fiduciary status: not to engage in any short-swing trading in the issuer’s stock. At that point, injury depends not on whether the § 16(b) fiduciary traded on inside information but on whether he traded at all.^[15]

          B. The TransUnion Decision

In 2021, TransUnion expanded on prior Supreme Court precedent that had rejected the theory that Article III standing automatically exists where a statute provides for the plaintiff’s standing. As the Supreme Court explained, “we cannot treat an injury as ‘concrete’ for Article III purposes based only on Congress’s say-so.”^[16] Congress may “‘elevate’ harms that ‘exist’ in the real world before Congress recognized them to actionable legal status, [but] it may not simply enact an injury into existence.”^[17]

Under TransUnion (and certain of its predecessor decisions), federal courts have an independent obligation to decide whether a plaintiff has suffered a concrete harm under Article III even if that plaintiff has statutory standing to sue. ^[18] What that inquiry requires depends on the type of harm at issue. “[T]raditional tangible harms,” such as when “a defendant has caused physical or monetary injury to the plaintiff”—will “readily qualify.”^[19] On the other hand, TransUnion explained, “[v]arious intangible harms can also be concrete. Chief among them are injuries with a close relationship to harms traditionally recognized as providing a basis for lawsuits in American courts. Those include, for example, reputational harms, disclosure of private information, and intrusion upon seclusion.”^[20]

The Supreme Court’s application of this principle to the allegations of intangible harm in TransUnion is illustrative: The plaintiffs had brought a class action under the Fair Credit Reporting Act, with some plaintiffs asserting that misleading versions of their credit reports were provided to third-party businesses and others asserting that their credit files contained misleading alerts that were not disseminated to any third parties.^[21] The Court held that the first category of plaintiffs, those whose misleading reports were disclosed, had Article III standing because they alleged a concrete injury analogous to the harm associated with the tort of defamation.^[22] The second category of plaintiffs, whose credit files were not disseminated to third parties, lacked Article III standing because their claims based on the “retention of information lawfully obtained, without further disclosure” were not analogous to traditional harms.^[23]

          C. The District Court’s Decision in Packer

The complaint in Packer alleges that the defendants were 10% beneficial owners of a class of 1-800-Flowers.com, Inc. (“1-800-Flowers”) common stock and that they made both purchases and sales of 1-800-Flowers within a six-month period. ^[24] Packer, another holder of 1-800-Flowers common stock, brought suit on behalf 1-800-Flowers seeking disgorgement of the short-swing profits.^[25]

The district court in Packer held that Bulldog did not survive TransUnion, reasoning that

the notion in Bulldog that a violation of Section 16(b) alone sufficiently confers Article III standing upon the issuing corporation or derivative shareholder without more, cannot co-exist with TransUnion’s pronouncement that a statutory violation and a cause of action alone are insufficient to support Article III standing without a showing of concrete harm to the plaintiff. In that respect, Bulldog cannot be squared with TransUnion and TransUnion controls.^[26]

The district court acknowledged that for “intangible harms,” the “bedrock of the concrete injury inquiry is whether the alleged injury has a close relationship to a harm ‘traditionally’ recognized as providing a basis for a lawsuit in American court.”^[27]

As to Packer’s claim, the court concluded that because Packer failed “to point to or articulate any actual reputational harm” or other “actual injury allegations” accruing to 1-800-Flowers, Packer lacked Article III standing under TransUnion.^[28]

The Second Circuit’s Decision in Packer

Packer appealed the district court decision. In addition to the parties’ briefs, the SEC filed an amicus brief in support of plaintiff’s position that standing exists. The Second Circuit heard argument on May 6, 2024, and defendants-appellees conceded at the argument that they would necessarily lose if TransUnion did not abrogate Bulldog.

The Second Circuit issued its decision reversing the district court on June 24, 2024. The Second Circuit identified “several errors” with the district court’s decision.^[29]

First, the Second Circuit held TransUnion did not abrogate Bulldog because Bulldog’s analysis of the harm in Section 16(b) cases correctly identified, as TransUnion and its predecessors required, “‘a close historical or common-law analogue for the[] asserted injury’ to support constitutional standing.”^[30] As the Second Circuit explained:

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). The deprivation of these profits inflicts an injury sufficiently concrete to confer constitutional standing.^[31]

Second, although both the Second Circuit and district court acknowledged that plaintiff Packer did “not base his standing argument on a risk of harm,”^[32] the district court suggested that “some courts have framed the concrete harm associated with a Section 16(b) violation as grounded in the risk of harm,” which, in its view, was insufficient under TransUnion.^[33] The Second Circuit dispelled any notion that Section 16(b) standing was dependent on a risk of harm theory, explaining that the “concrete injury that confers standing on Packer is, as we recognized in [Bulldog], ‘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.’”^[34]

The Second Circuit noted that defendants-appellees’ remaining arguments attacked Bulldog itself, which the Circuit was bound to follow unless vacated en banc or by the Supreme Court. It nonetheless addressed a few of those arguments, including the argument that the defendants-appellees in the Packer case specifically could not be fiduciaries “because they did not exercise control over [the issuer], sit on its board of directors, or trade on inside information.”^[35] The Second Circuit in Packer embraced Bulldog’s response to this argument: While Section 16(b) may have been enacted to combat trading on inside information, the legal right enacted to remedy that wrong—imposing a fiduciary duty on 10% shareholders, irrespective of their actual access to information, to eschew any short swing trading—was broader.^[36]

Takeaways from the Second Circuit’s Packer Ruling

The Second Circuit’s ruling in Packer should not cause shockwaves among federal courts, particularly because the vast majority of courts addressing the standing issue in the year since the district court decision in Packer have held that TransUnion and Bulldog are reconcilable and that plaintiffs have constitutional standing to assert Section 16(b) claims.^[37] However, as the SEC noted, the ramifications of the potential adoption of the Packer district court’s conclusion were possibly huge because requiring a plaintiff to allege “actual reputational harm” flowing from a Section 16(b) breach (as the district court in Packer had) “would undercut Congress’s purpose by making actions to recover short-swing profits almost impossible.”^[38]

For Section 16(b) plaintiffs, the Second Circuit will remain a popular venue to file their claims, as they will be assured of getting past the standing question (absent an en banc hearing or Supreme Court intervention) and venue is often present as a result of listing on a New York-based exchange. For Section 16(b) defendants, while the standing argument will not work in the Second Circuit (again, absent en banc or Supreme Court intervention), the remaining toolkit for the procedural and merits-based defense against Section 16(b) claims is otherwise unchanged.

Endnotes:

[1] Packer ex rel. 1-800-Flowers.Com, Inc. v. Raging Cap. Mgmt., LLC, No. 23-367, --- F.4th ----, 2024 WL 3092561 (2d Cir. June 24, 2024) (“Packer Appellate Decision”) (citing TransUnion LLC v. Ramirez, 594 U.S. 413 (2021)).

[2] Br. of the SEC, Amicus Curiae, in Supp. of Pl.-Appellant at 9, Packer ex rel. 1-800 Flowers.com, Inc. v. Raging Cap. Mgmt., LLC, No. 23-367 (2d. Cir. filed June 29, 2023) (ECF No. 50) (“SEC Amicus Br.”).

[3] Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232, 243 (1976); see also Kern Cnty. Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 608 (1973) (“The congressional investigations that led to the enactment of the Securities Exchange Act revealed widespread use of confidential information by corporate insiders to gain an unfair advantage in trading their corporations’ securities.”).

[4] 15 U.S.C. § 78p(b).

[5] Id.

[6] Donoghue v. Bulldog Invs. Gen. P’ship, 696 F.3d 170, 174 (2d Cir. 2012) (citing 15 U.S.C. § 78p(b)).

[7] 15 U.S.C. § 78p(b).

[8] TransUnion, 594 U.S. at 423.

[9] United States v. Students Challenging Regul. Agency Procs. (SCRAP), 412 U.S. 669, 687 (1973).

[10] 15 U.S.C. § 78aa(a).

[11] 696 F.3d 170 (2d Cir. 2012).

[12] Id. at 172.

[13] Id. at 179 (cleaned up).

[14] Id.

[15] Id. at 177 (quoting Gratz v. Claughton, 187 F.2d 46, 49 (2d Cir. 1951)) (emphasis and alterations in original).

[16] TransUnion, 594 U.S. at 426 (internal citation omitted).

[17] Id. (internal citation omitted).

[18] Id.

[19] Id. at 425.

[20] Id. (internal citations omitted).

[21] Id. at 432–34.

[22] Id. at 432–33.

[23] Id. at 433–39.

[24] Packer District Court Decision, 661 F. Supp. 3d at 8.

[25] Id. at 8 & 13 n.10

[26] Id. at 17 (emphasis in original).

[27] Id. at 10.

[28] Id. at 14.

[29] Packer Appellate Decision, 2024 WL 3092561, at *4-7. In addition to its substantive analysis, the Second Circuit held that it was error for the district court in Packer to “preemptively declar[e] that our caselaw has been abrogated by intervening Supreme Court decisions,” rather than follow binding precedent until it has been overturned, except in “rare case[s]” unlike the one at hand. Id. at *4-5 & n.36. The Second Circuit further noted that TransUnion’s requirement of a concrete injury for constitutional standing even in the context of a statutory violation derived from an earlier Supreme Court decision, Spokeo Inc. v. Robins, 578 U.S. 330, 340-41 (2016), and that the Second Circuit had already reaffirmed Bulldog after Spokeo, in Klein v. Qlik Technologies, Inc., 906 F.3d 215, 220 (2d Cir. 2018). Packer Appellate Decision, 2024 WL 3092561, at *5.

[30] Id. at *5 (quoting TransUnion, 594 U.S. at 424) (alteration in original).

[31] Id. (internal quotations and citations omitted).

[32] Id. at *6; Packer District Court Decision, 661 F. Supp. 3d at 15 n.13.

[33] Packer District Court Decision, 661 F. Supp. 3d at 13.

[34] Packer Appellate Decision, 2024 WL 3092561, at *6.

[35] Id. at *6 n.55.

[36] Id. The Second Circuit also noted that TransUnion did not require that the statutory right “exact[ly] duplicate” its common-law analogue, so this broadening was not improper. Id. (quoting TransUnion, 594 U.S. at 433).

[37] See, e.g., Roth v. Armistice Cap., LLC, No. 1:20-CV-08872 (JLR), 2024 WL 1313817, at *10 (S.D.N.Y. Mar. 27, 2024) (Rochon, J.) (holding that plaintiff has standing because “breach of trust, by itself, is a concrete intangible injury”); Augenbaum v. Anson Invs. Master Fund LP, No. 22-CV-249 (AS), 2024 WL 263208, at *4 (S.D.N.Y. Jan. 24, 2024) (Subramanian, J.) (holding that Section 16(b) violations “are breaches of trust, which satisfies TransUnion’s search for a traditional injury” (cleaned up)); Microbot Med., Inc. v. Mona, No. 19-CV-3782 (GBD)(RWL), 2024 WL 564176, at *6 (S.D.N.Y. Jan. 30, 2024) (Lehrburger, M.J.) (“Microbot incurs a concrete injury while deprived of the constructive trust’s holdings. Microbot therefore has Article III standing.”), report and recommendation adopted, No. 19-CV-3782 (GBD)(RWL), 2024 WL 964594 (S.D.N.Y. Mar. 5, 2024) (Daniels, J.) (“Because Bulldog determined that § 16(b) plaintiffs suffer concrete harm analogous to the common law injury of breach of trust, Bulldog is compatible with TransUnion’s requirement that a plaintiff has suffered a harm with “a close historical or common-law analogue.” (cleaned up)); Avalon Holdings Corp. v. Gentile, No. 18-CV-7291 (DLC), 2023 WL 4744072, at *6 (S.D.N.Y. July 25, 2023) (Cote, J.) (“[T]he Second Circuit in Bulldog analyzed the harm suffered by a § 16(b) plaintiff and reasoned that it was akin to the common law injury of breach of trust arising from the 10% beneficial owner’s fiduciary duty to the issuer.”); Safe & Green Holdings Corp. v. Shaw, No. 23-CV-2244 (DLC), 2023 WL 5509319, at *2 (S.D.N.Y. Aug. 25, 2023) (Cote, J.) (incorporating Avalon); Revive Investing LLC v. Armistice Cap. Master Fund, Ltd., No. 20-CV-02849 (CMA)(SKC), 2023 WL 5333768, at *8 (D. Colo. Aug. 18, 2023) (“The Court finds that a harm suffered by a Section 16(b) plaintiff is analogous to the common law injury of breach of trust.”).

One decision, Avalon Holdings Corp. v. Gentile, noted that the plaintiff’s “pleadings describe dramatic fluctuations in stock prices caused by the defendants’ trading and illegally obtained profits accruing to the defendants in the millions of dollars,” which established “the concrete harm that Congress elevated to a legally cognizable injury.” 2023 WL 4744072, at *6.

We identified only one decision that followed the Packer district court and concluded that a Section 16(b) plaintiff had no standing. Forte Biosciences, Inc. v. Camac Fund, LP, No. 3:23-CV-2399-N, 2024 WL 2946584, at *3 (N.D. Tex. June 11, 2024). This decision from outside of the Second Circuit (where Bulldog is not binding) did not contain any reasoning, stating only that “Forte does not plead any injury to itself from the alleged section 16(b) violation.” Id. (citing the Packer District Court Decision and TransUnion).

[38] SEC Amicus Br. at 25.

The rumors of the death of price discrimination enforcement may have been greatly exaggerated. The Robinson-Patman Act (“RPA”) (15 U.S.C. §13), enacted in 1936, prohibits price discrimination by producers and resellers of goods between similarly situated purchasers. Government enforcement of the RPA has been infrequent during the last half-century, and non-existent since 2000. In 2007, the Antitrust Modernization Commission, a bipartisan group established by Congress to review federal antitrust laws, recommended repeal of the RPA, concluding that it disincentivized discounting and thereby harmed consumer welfare.

RPA enforcement, however, seems to be making a comeback. Antitrust enforcement under the Biden Administration has largely rejected the “consumer welfare standard”—which equates competition with harm to consumers, typically in the form of increased prices—in favor of a broader focus on excessive consolidation of private power and its longer-term economic implications. The RPA, enacted to protect smaller retailers from a competitive advantage that benefited chain stores and other larger competitors able to obtain lower wholesale prices, is consistent with this approach.

Recent press reports suggest the Federal Trade Commission (FTC) may be on the verge of an RPA enforcement action. These reports follow public statements by both FTC Chair Lina Khan and Commissioner Alvaro Bedoya emphasizing the RPA and indications that the FTC has opened at least two RPA investigations under Khan’s leadership. In March 2024, a group of 16 lawmakers, including some of the most prominent supporters of the Biden Administration’s enforcement agenda, urged the FTC to “revive enforcement” of the RPA in connection with consolidation and high prices in the food industry.

Moreover, the RPA remains enforceable through private actions. While such actions have been rare, and successful actions even more so, a federal court in California last month affirmed a jury verdict in favor of wholesalers of eye drops against distributors who were found to have sold the drops to Costco and Sam’s Club at a lower price than the plaintiffs received. In addition to the jury’s damages award, the court granted injunctive relief. L.A. Int’l Corp. v. Prestige Brands Holdings, Inc., 2024 WL 2272384 (C.D. Cal. May 20, 2024). Revived agency enforcement would likely lead to an increase in private actions as well.

Accordingly, businesses that sell and purchase goods should be familiar with the key provisions of the RPA:

• The RPA prohibits discrimination in price between at least two consummated sales to different purchasers. Mere offers to sell at a particular price or refusals to sell at all to a particular purchaser do not trigger RPA liability. Moreover, the RPA is limited to “commodities,” i.e., tangible goods sold for use, consumption, or resale within the United States. Services are excluded from the RPA’s ambit.
• The two sales must be reasonably contemporaneous, and the goods involved must be of “like grade and quality.”
• At least one of the sales must be in interstate commerce, i.e., across state lines.
• Prohibited discrimination includes the furnishing of services or facilities in connection with the sale of the commodity; any such services or facilities must be made available to all purchasers on proportionally equal terms. If a seller compensates its customer for services or facilities furnished in connection with the sale, such as marketing or promotion, it must make those payments available on proportionally equal terms to other purchasers that compete to distribute the same product.
• However, the RPA does not prohibit price differentials that merely allow for the differing methods or quantities in which the goods are sold or delivered to the respective purchasers or that result from a response to changing conditions affecting the saleability of goods (such as deterioration of perishable goods or obsolescence of seasonal goods).
• And there is no actionable price discrimination if the lower price was functionally available to the disfavored purchaser, provided that the disfavored purchaser was aware of the availability of the lower price and that such availability was not merely theoretical. For example, a volume-based discount might be facially available to all customers, but if the requisite volume threshold is higher than certain purchasers can realistically meet, it may not be considered functionally available to all purchasers.
• Unlike other antitrust statutes, the RPA does not require a showing of marketwide injury to competition. Rather, it is sufficient to show that the discrimination harmed a company’s ability to compete with the grantor of the discriminatory price, any person who knowingly received the benefit of the discriminatory price, or with customers of either. While the competitive injury ordinarily will occur at the buyer’s level, the RPA also permits claims for harm to competition between sellers, between customers of the favored and disfavored purchasers, or between customers even further downstream.
• A seller who is alleged to have discriminated in violation of the RPA may establish, as an affirmative defense, that it granted a lower price to the favored purchaser in order to meet (but not beat) the price of a competitor.
• Liability is not limited to sellers; the RPA also imposes liability on purchasers who knowingly induce or receive a favorably discriminatory price.
• A standalone provision of the RPA prohibits parties to a sale from granting or receiving any compensation, or any allowance or discount in lieu of compensation, except for services rendered.

The RPA is an oft-overlooked component of antitrust compliance, largely due to its infrequent enforcement. However, every company’s antitrust compliance program should include a review of its relationships with customers and suppliers to ensure that its pricing plans and pricing decisions comply with the RPA and that the reasons for any deviations from price, such as meeting competition, are well documented.