Shareholder derivative action; standing; embedded harm
By: Frank Tantone | Staff Writer
Defendants were the holders of the sole Master License to manufacture apparel bearing the trademarks of the US Polo Association, including the “Double Horseman” mark. This mark had been distinguished in the past from the single polo player mark historically associated with Polo Ralph Lauren. Plaintiff was a clothing company whose managing member was offered an opportunity to join Defendants’ family business of manufacturing, selling, and distributing home-textile goods with the Double Horseman mark. In doing so, Defendants’ managing member formed a new LLC (“Newco”) that took an assignment of an old LLC’s interest to use the Double Horseman mark on certain home goods.
Plaintiff, then, alleged misrepresentation on the part of Defendants because it was demonstrated to Newco that Polo Ralph Lauren would not interfere in the venture, and Newco would be given five years to develop products under the deal, despite Defendants’ alleged knowledge that the production of the Double Horseman goods would be shut down within 12 months of the transaction. Plaintiff also pointed to an injunction that prohibited the use of the Double Horseman mark on home goods. Plaintiff brought this action in connection to its “material losses” as a result of Defendants’ actions.
The court found Plaintiff’s arguments to be unavailing. It first noted that under New York law, a shareholder ordinarily must assert a claim derivatively if pursuing a direct claim to redress wrongs suffered by the corporation. The court, then, laid out the test articulated in Tooely v. Donaldson, Lufkin & Jenrette, Inc., to determine if the claim should be a direct or derivative claim. Under the test, the court looks at: (1) who suffered the harm; and (2) who would receive any benefit of recovery or other remedy. The court reasoned that the alleged harm at issue was clearly suffered by Newco in the first instance. Further, the alleged harm to Plaintiff was also “embedded in the harm borne primarily to Newco.” As such, this harm could not separately stand apart from the harm to Newco. Therefore, the court held that Plaintiff lacked standing to sue Defendants based on direct claims arising out of the alleged harm to Newco. Accordingly, Defendants’ motion to dismiss was granted based on lack of standing.
H & M Trading Co. LLC v. Jordache Ltd., Index No. 650118/2015, 11/6/15 (Ramos, J.).