Reply Brief — Arthur Andersen & Co. v. Stewart

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7 FILED

> 3"17B§ RS Sk

In THE |

Supreme Court of the Anited Statew™ 26 1980 |

Ocroser Term, 1979 — RCHSRL RO0AK, '., CLERR

ARTHUR ANDERSEN & CO. ;

Petitioner

Vv.

DAVID STEWART and

CHANNING SECURITIES, INC.

Respondents

ARTHUR ANDERSEN & CO.

Petitioner

v.

JULES SANDERS and MADALYNN SANDERS

Respondents

AND THREE OTHER ACTIONS

REPLY TO BRIEF IN OPPOSITION TO PETITION

FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

Grorce H. LEwaLp

Tomas G. Dicnan, JB.

Ropes & Gray

Of Counsel: 225 Franklin Street

Boston, Massachusetts 02110

Wri F. McCartxy (617) 423-6100

Sreven T. Hoort

Jess T. FaARDELLA Cartes W. Boanp

Ropes & Gray Wilson & McIlvaine

995 Franklin Street 135 South LaSalle Street

; Boston, Chicago, Illinois 60603

, Massachusetts 02110 (312) 263-1212

; (617) 423-6100 Aitorneys for Petitioner

PRESS OF GEORGE H. DEAN CO., BOSTON

i

TABLE OF CONTENTS

Page

REPLY TO RESPONDENTS’ STATEMENT AS TO

CUFT 5. os nev bs bids ts ieee me 1

REPLY TO RESPONDENTS’ STATEMENT OF

REASONS FOR DENYING THE WRIT ............ 1

COR in he ee eae

Te) PS eck a ci Se ee

(c) Issues Concerning the Form and Method of

Notice to Class Members ...................... 5

PUTO. Sri hsv at enna onan aa ee

TABLE OF CITATIONS

CasEs

Bankers Trust Co. v. Mallis, 485 U.S. 381 (1978) reh.

dented. 436 U.S. 915 (1978) ............. ccc cece eee. 5

Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541

GUE hice s 4b vied bale's o's 754s ss Seen ee Se

1

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) ....... 3, 6

Gillespie v. United States, 379 U.S. 148 (1964) ......... 1

Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340 (1978) 1,5

United States v. Indrelunas, 411 U.S. 216 (1973) ........ 5

MISCELLANEOUS ;

te ee ee ee ee Ce Ree Passim

REPLY TO BRIEF IN OPPOSITION TO PETITION FOR

A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIRST CIRCUIT

This brief is submitted by Arthur Andersen & Co. (“An-

dersen”) in reply to respondent’s brief in opposition to

Andersen’s Petition for a Writ of Certiorari to the United

States Court of Appeals for the First Cireuit. This reply

will address particular matters raised by respondents’ in

their brief in opposition.

REPLY TO RESPONDENTS’ STATEMENT

AS TO JURISDICTION

Respondents state that the Court of Appeals concluded

it was unnecessary to decide the question of appellate juris-

diction. Although stating this was its conclusion, the Court

of Appeals nonetheless went on to hold that Andersen was

estopped from asserting that class members identified after

the initial notice in 1974 must be provided with individual

notice of their rights to intervene in the class action or to

opt out from the class. This holding by the Court of Ap-

peals, the same as the decision of the District Court, is

itself a final decision on an issue collateral to the merits

on a substantial question of federal law and subject to

immediate interlocutory review pursuant to the collateral

order doctrine. Cohen v. Beneficial Industrial Loan Corp.,

337 U.S. 541 (1949); Gillespie v. United States, 379 U.S.

148, 153 (1964); Cf. Oppenheimer Fund, Inc. v. Sanders,

437 U.S. 340, 347, n. 8 (1978) (order allocating the cost of

class notice subject to immediate interlocutory review).

REPLY TO RESPONDENTS’ STATEMENT OF

REASONS FOR DENYING THE WRIT

(a) Standing:

Respondents assert that neither of the questions pre-

sented for review “challenges the correctness of the ruling

that Andersen lacked standing to attack the 1979 orders.”

2

Brief in Opposition, p. 9. This assertion is incorrect. The

Court of Appeals concluded that Andersen had no standing

to challenge the 1979 orders on two separate grounds. It

held first that insofar as the 1979 orders approved a notice

of partial settlement that Andersen had no standing be-

cause Andersen was not a party to the settlement. The

second basis for its decision, and the issue before this

Court, is the Court of Appeals’ conclusion that Andersen's

standing to raise issues regarding the notice requirements

of Fed. R. Civ. P. 23(¢)(2) extended only to the proceed-

ings approving the initial notice to the class in 1974. See

Appendiz to Petition for Writ of Certiorari to the United

States Court of Appeals for the First Circuit (hereinafter

“App.”), pp. 6-7. Both of the “Questions Presented for

Review” are addressed specifically to the Court of Appeals’

latter conclusion that Andersen could not assert in 1979

that class members identified subsequent to the notice in

1974 must also be provided with individual notice of their

ayy to intervene or to opt out as mandated by Fed R. Civ.

P. 23(¢) (2).

(b) Estoppel:

Respondents assert that this case provides no basis for

elaboration of any general rule of estoppel because the

Court of Appeals relied on the specific facts of the present

record to conclude an estoppel existed. The ruling of the

Court of Appeals was to the contrary, and this case pre-

sents the issue of whether a litigant may be estopped from

asserting that class members identified after an initial

notice in a class action for damages must nonetheless be

provided with individual notice of their rights as class

members.

The record of the proceedings below amply depicts the

generality of the issues before this Court. Andersen as-

serted before the Court of Appeals that the record of the

proceedings in 1979 demonstrated that beneficial purchaser

3

class members to whom individual notice had not been di-

rected in 1974, were identifiable inasmuch as 4,600 bene-

ficial purchasers had been identified and provided with in-

dividual notice of the partial settlement in 1979. Andersen

argued that under Fed. R. Civ. P. 23(¢)(2) and this Court’s

decision in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 176

(1974), these class members who were identified in 1979

must be provided with individual notice of their right to

intervene in the action or to exclude themselves from the

class. The Brief for Appellant, pp. 32-34, provided specifi-

cally in part as follows:

“[ ARGUMENT]

Il. THe BeENeFiciaL Purcwasers Have Not BEEN Provivep

witH INpivipuAL Notice or Tuer RIGHT AND AFFORDED

AN OPPORTUNITY TO ExCLUDE THEMSELVES FROM THE

Respective Ciasses As REQuiRED BY RULE 23 AND THE

Due Process CLAUSE OF AMENDMENT V TO THE CONsTI-

TUTION OF THE UNITED STATES.

The district court has never directed that any of the

beneficial purchasers of Viatron securities be provided

with notice of their right, and afforded an opportunity,

to exclude themselves from the respective class actions.

The joint notice of pendency of class actions in 1974,

which provided members of the respective classes with

the only notice of and opportunity to exclude themselves,

was directed solely to the record holders of Viatron secu-

rities, including those nominees holding securities regis-

tered in ‘street names’ on behalf of the beneficial

purchasers.

The record of the proceedings in 1979 with respect to

the notice of the proposed settlement with the under-

writers demonstrates that some of the beneficial pur-

chasers could have been provided with individual notice

of their right, and afforded an opportunity, to exclude

4

themselves from the respective classes in conformance

with Rule 23(c)(2)(A), (B), (C), Fed. R. Civ. P.

Rule 23(¢)(2, Fed. R. Civ. P., requires that individual

notice of their right to be excluded be provided to these

identified class members and to all other members of the

respective classes who can be identified through reason-

able efforts.”

The Court of Appeals rejected this argument. It con-

cluded that even though a substantial number of class mem-

bers were identified for the first time in 1979, this fact was

not a circumstance which warranted consideration of

whether these class members must be provided with in-

dividual notice of their right to intervene or to opt out as

required by Fed. R. Civ. P. 23(¢)(2). This conclusion is

made apparent by its refusal to review the adequacy of the

initial 1974 class notice in light of the subsequent identifi-

cation of additional class members (see App., pp. 5-6,

where the Court of Appeals states that Andersen’s interest

in maximizing the res judicata effect of any judgment in its

favor provides it with standing only to challenge the ade-

quacy of the initial notice in 1974), and by the Court of

Appeals’ specific statement that Andersen is now estopped

to raise issues regarding the adequacy of notice under Fed.

R. Civ. P. 23(¢c)(2) because:

“({ Andersen] is not in the position of being able to

proffer any excuse for its long delay in recognizing what

it now claims to be a major defect in the 1974 notice, .. .”

(App., p. 7, emphasis added)

The two “Questions Presented for Review” and the “Rea-

sons for Granting the Writ” set forth in the petition demon-

strate that under prior decisions of this Court and of other

Circuits, estoppel principles are wholly inapplicable and do

not preclude reconsideration of an issue in light of a ma-

terial change in the circumstances upon which resolution of

the issue depends. See Petition for Writ of Certiorari,

4)

pp. 12-14. The Court of Appeals holding in this case

squarely presents the question of whether under Fed. R.

Civ. P. 23(c)(2) and due process the fact of class mem- °

bers being specifically identified for the first time is a ma-

terial circumstance which requires consideration of whether

such class members must be provided with individual notice

of their rights under Fed. R. Civ. P. 23(e)(2)(A)(B)(C).

See Petition for Writ of Certiorari, pp. 7-10. Resolution of

this issue does not depend on any circumstances peculiar to

this case but, rather, on circumstances which are common to

all class actions for damages.

The effect of the Court of Appeals’ holding as to estoppel

would appear to preclude Andersen from raising on appeal,

after the trial in progress in the event of an adverse judg-

ment, the inadequacy of the 1974 notice, in the light of the

1979 data, order and notice, despite the fact that no judg-

ment has been entered on the 1974 order approving the 1974

notice and that the time for appeal with respect to the 1974

order and notice will not commence to run until final judg-

ment is entered on the trial in progress. See United States

v. Indrelunas, 411 U.S. 216, 219-221 (1973) ; Bankers Trust

Co. v. Mallis, 485 U.S. 381, 384-385 (1978), reh. denied 436

U.S. 915 (1978). See also Petition for Writ of Certiorari,

p. 12, n. 3.

(c) Issues Concerning the Form and Method of Notice to

Class Members:

Respondents assert that there is no practical way to dis-

tinguish class members who may have received the 1974

notice, by publication or otherwise, from those class mem-

bers who did not, and that this administrative consideration

should excuse not providing individual notice pursuant to

Fed. R. Civ. P. 23(¢)(2) to the class members identified for

the first time in 1979. Fed. R. Civ. P. 23(¢) (2), however, re-

quires that the District Court “shall direct” notice to the

class, “. . . including individual notice to all members who

6

can be identified through reasonable efforts.” See Oppen-

heimer Fund, Inc. v. Sanders, 437 U.S. 340, 354, n. 21

(1978) ; Hisen v. Carlisle & Jacquelin, 417 U.S. at 176. It is

undisputed that in 1974 the District Court directed individ-

ual notice only to those persons holding record title to

securities of Viatron Computer Systems Corporation. App.

pp. 18, 15-16." It is likewise undisputed that 4,600 persons

who allegedly purchased Viatron securities but who did not

hold record title to the securities were identified for the first

time in 1979 and that the District Court has never directed

that individual notice be provided to any of these class

members of their right to intervene or to opt out as re-

quired by Rule 23(¢)(2)(A)(B)(C). The clear language of

Fed. R. Civ. P. 23(¢)(2) resolves any doubts as to whom

such individual notice was required to be provided in 1979.

1 Respondents’ assertion in their Brief in Opposition, p. 13, that

“at least 12,880 of the 13,960 persons to whom the 1974 notice was

mailed were in fact beneficial owners” is a mischaracterization ap-

parently calculated to mislead this Court. The persons to whom

notice was directed in 1974 were strictly record holders of Viatron

securities, and not beneficial purchasers. Some of these record

holders may in fact have been the owners of the securities recorded

in their names, but the 1974 notice was directed solely to these

persons and not to any of the class members whose securities were

recorded in street names by brokerage houses, banks and other

entities as nominees of beneficial purchasers.

7

CONCLUSION

The Petition for a Writ of Certiorari should be granted.

Respectfully submitted,

ARTHUR ANDERSEN & Co.

Of Counsel: GrorGE H. Lewaup

WituiaMm F.. McCartruy _ acnd . rise AN, JR.

Sreven T. Hoorr on wenn

Jess T. Farpe.ua 225 Franklin Street

Ropes & Gray Boston, Massachusetts 02110

225 Franklin Street (617) 423-6100

Boston, CHARLES W. Boanp

Massachusetts 02110 Wilson & McIlvaine

(617) 423-6100 135 South LaSalle Street

Chicago, Illinois 60603

(312) 263-1212

June 25, 1980