Petitioners Brief — Matsushita Elec. Industrial Co. v. Epstein

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No. 94-1809

IN THE

Supreme Court of the United States

OCTOBER TERM, 1995

MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. and

MATSUSHITA HOLDING CORP.,

Petitioners,

vs.

LAWRENCE EPSTEIN, et ai.,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE NINTH CIRCUIT

BRIEF FOR THE PETITIONERS

BARRY R. OSTRAGER

Counsel of Record

GEOFFREY C. HAZARD, JR. SIMPSON THACHER &

Of Counsel BARTLETT

Trustee Professor of Law (a partnership which includes

University of Pennsylvania professional corporations)

3400 Chestnut Street 425 Lexington Avenue

Philadelphia, PA 19104 New York, New York 10017

(215) 898-7494 (212) 455-2000

Attorneys for Matsushita Electric Industrial Co., Ltd.

and Matsushita Holding Corp.

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included a release of exclusively federal claims.

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PARTIES TO THE PROCEEDING TABLE OF CONTENTS

The named plaintiffs in the federal class action et

al. v. MCA INC., et al., Docket No. 92-55675 (C.D. Cal.), are

Lawrence Epstein, John Linder, Jane Rockford (as trustee of QUESTION PRESENTED..........:.soss:sssssssessessnneeeeesse

the Michael J. Rockford Trust), Maurice Karlin, Ruth Karlin,

Beth Ann Karlin, and Bert P. Karlin. The plaintiff in Minton . PARTIES TO THE PROCEEDING .................c.cc0000«

v. MCA INC., et al., Docket No. 92-55632 (C.D. Cal.), is

Walter Minton. These two cases were consolidated by the CL

district court and the court of appeals and were treated as one

case for purposes of the petition for a writ of certiorari. Walter TABLE OF AUTHORIT!

Minton and Jane Rockford opted out of the Delaware settle- CT A AE

ment and are not bound by the Delaware judgment and re-

lease. Therefore, neither Walter Minton nor Jane Rockford is tetera

a respondent for purposes of this proceeding.

TUTORY PROVISION INVOLVED................

The defendants in the consolidated federal action were -_

MCA, Matsushita Acquisition Corp., Matsushita Electric In- STATEMENT OF THE CASE...............1sssssss00ess000es

dustrial Co., Ltd., Matsushita Holding Corp., Lew R. Was- | ae en

serman, and Sidney J. Sheinberg. The Ninth Circuit affirmed | A. Matsushita’s Acquisition of MCA.................

the dismissal of all claims against MCA and Messrs. Was- ,

serman and and those defendants are no | B. The State Court Class Actions ......................

parties. Matsushita Acquisition Corp. no longer exists by vir- C. Respondents File a Federal Action That

tue of being merged into MCA. | Also Purports to Represent the MCA

RULE 29.1 LISTING | ES See

Pursuant to Supreme Court Rule 29.1, petitioners Mat- irst Delaware Settlement.........c0.0-.-

sushita Electrical Industrial Co., Ltd. and Matsushita Holding . oe

Corp. hereby state that their only parent or subsidiary that is E. The District Court Dismisses the Federal

not wholly owned is Cineplex Odeon Corp. On June 5, 1995, Action on the Merits...

Matsushita sold eighty percent of its interest in MCA to The

Seagram Company, Ltd. F. The Second Delaware Settlement .................

1. The Notice to the Class.......................

2. The Opt Outs and Objectors................

3. The Delaware Courts Approve the

Settlement....................... ities

G. The Ninth Circyit Decision

a fo OO DH

A STATE COURT FROM APPROVING

A CLASS ACTION SETTLEMENT

THE FULL FAITH AND CREDIT ACT

REQUIRED THE NINTH CIRCUIT TO

GIVE EFFECT TO THE DELAWARE

JUDGMENT, AND THE RELEASE IT

—ae

DELAWARE LAW .

A The Ninth Ciscuit Decision Undermines

Basic Principles of Federalism _.

B The Grant tw Federal Courts of Exclu-

sve Jumsdicnon two Adjudicate Ex-

change Act Clamms Does Not Create an

impbhed Repeal of § | 73% for a State

_ourt Judgment Entered on a Settie-

mem Reteasing Exchusrvety Federal

aur

\”A

C. Respondents Were Barred from Initiat-

ing, and the Ninth Circuit Should Not

Have Entertained, a Collateral Attack

See Cee eee eee eee

. THE NINTH CIRCUIT TEST FOR DE-

TERMINING THE PRECLUSIVE EF-

FECT OF A STATE COURT

ee ee ee ee

CONCLUSION

vii

TABLE OF AUTHORITIES

Abramson v. Pennwood Inv. Corp., 392

F.2d 759 (2d Cir. 1968) .......ccccceceesercereereeseseneees 15

Air Lines Stewards & Stewardesses Ass'n

v. Trans World Airlines, Inc., 630 F.2d

1164 (7th Cir. 1980), aff'd, 455 U.S.

SOB CODD caceccccccstzsctencssesccstesomnesercrcncscesvevecsesecsee 47

Allen v. McCurry, 449 U.S. 90 (1980).....-.....-0cec000 27, 32, 34

American Airlines, Inc. v. Wolens, 115 S.

Ca, GBP CI ccrcrsnrencescenvenqnesnzscsnsssesszscscsscssse0s 29

Angelastro v. Prudential Bache Sec., Inc.,

764 F.2d 939 (3d Cir.), cert. denied,

Po Eee 12

Armstrong v. Board of Sch. Directors, 616

F.2d 305 (7th Cir. 1980) ... ee 47

Ashbrook v. a

1990)... pails oe ee 11-12

Atlantic Coast Line R.R. Co. v

yy * rnb’

398 U.S. 281 (1970)... ' “98 MEINE %6

Bear v. Nix, 977 F.2d 1291 (8th Cir. 1992) ....... 48

Becher v. Contoure Labs, Inc , 279 US

388 (1929)... ae aS 19

Bement v. National Harrow Co , 186 U5

ll es 19

Bernstein v Mediobanca Banca di ( redito

Finanziario-Societa per Aziom., 7%

FRD.1(S.DN_Y. 1978) 17

Boothe v. Baker Indus., Inc., 262 F. Supp.

OGD ORs Gh, BI aiieeee hesicieietnietlaeetentons

Brown v. Felsen, 442 U.S. 127 (1979).......cccccccceceees

Building & Constr. Trades Council of the

Metro. Dist. v. Associated Builders &

Contractors of Mass./R.1., 113 §. Ct.

BB Ge renceseuenncdemnenesiitiinhainiviniiatrtintinentncen

Burford v. Sun Oil Co., 319 U.S. 315

Central Bank v. First Interstate Bank, 114

Se, Oa Se

Chicot County Drainage Dist. v. Baxter

State Bank, 308 U.S. 371 (1940) .0........:cccccecceee

Citron v. Steego Corp., Civ. A. No. 10171,

1988 WL 94738 (Del. Ch. Sept. 9,

RRS SO: (ST

Class Plaintiffs v. City of Seattle, 955 F.2d

1268 (9th Cir.), cert. denied, 113 S. Ct.

Cohen v. Resolution Trust Corp., Nos. 94-

55209, 95-55218, 1995 WL 444436

Colorado River Water Conservation Dist

v. United States, 424 U.S. 800 (1976) ...............

CSX Transp.. Inc. v. Easterwood, \13 S.

0 ae

CTS Corp. v. Dynamics Corp. of America,

EE CES

Dacanay v. Mendoza, 573 F.2d 1075 (9th

Ce FIP Up cccnscsnsscctnasecitanmunctebtetietessencsstncscsscrsees

Davis v. Davis, 305 U.S. 32 (1938) ...ccccccccecesereesenene

Delaware v. Mid-Atlantic Paving Co., Civ.

A. No. 7197, 1983 WL 14930 (Del.

Be A

Digital Equip. Corp. v. Desktop Direct,

me ST, nO

District of Columbia Court of Appeals v.

Feldman, 460 U.S. 462 (1983) ..........ccccccccccceeeee

Durfee v. Duke, 375 U.S. 106 (1963) ........cccceceeeeee

Eisen v. Carlisle & Jacquelin, 417 U.S.

a ee csteediidienstntieiternetitinansitdantienenccccccsescesseses

Endervelt v. The Nostalgia Network, Inc.,

Civ. A. No. 11415, 1991 WL 137148

(Del. Ch. July 23, 1991)... daha

English v. General Elec. Co., 496 U.S. 72

ERE Bare el ccxternsonussannsnsesnenvecorannesensesvesceensescesensesee

Estrada-lzquierdo v. Aponte-Roque, 850

Federated Dep't Stores, Inc. v. Moitie, 452

Gabelli v. Sikes Corp., No. 90 Civ. 4904,

1990 WL 213119 (S.D.N.Y. Dec. 14,

Se ae DIL at ia is hla

General Telephone Co. of the Southwest v.

Falcon, 457 U.S. 147 (1982) ........cccccccceeeeseeeeeees

Georgine v. Amchem Prods., Inc., 157

F.R.D. 246 (E.D. Pa.), app. docketed,

POOR Cr el SEED centttetindenreentetcergeernesins

Grimes v. Vitalink Communications Corp.,

17 F.3d 1553 (3d Cir.), cert. denied,

ti) fe 0. Se

Growe v. Emison, 113 S. Ct. 1075 (1993)............00

Hathorn v. Lovorn, 457 U.S. 255 (1982)..........:00000

Hough v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 757 F.Supp. 283

(S.D.N.Y.), aff'd, 946 F.2d 883 (2d

CF Fie hceciveenencedenisidiiatnanitintienianccsnnapenssssesisine

OO RERE ESI SST E

In re Corrugated Container Antitrust

Litig., 643 F.2d 195 (Sth Cir. 1981)..........0cce000

In re Four Seasons Sec. Laws Litig., 502

F.2d 834 (10th Cir.), cert. denied, 419

UB. GBS (EGP) ncccsccccensccsrcscsseccsssnsecsecssvcnsocssees

In re General Motors Corp. Pick-up Truck

Fuel Tanks Prods. Liab. Litig., 55 F.3d

FOB COB Cas. TID cccccsrcsevcccesseccvscsesscsscssvsssscevevees

In re MCA, Inc. Shareholders Litig., 598

A.2d 687 (Del. Ch. 1991) ......ccccccccessessereeeeneenes

In re Nat'l Smelting, 722 F. Supp. 152

GIS. WGGB) ccscrevsccseserscenssscecssvescesessencesssssnessases

9, 15-16,

SS See ee ee eee

Page

In re Salomon Inc. Shareholders

Derivative Litig., No. 91 Civ. 5500

(RPP), 1994 WL 533595 (S.D.N_Y.

5 SEE oe 18

In re TransOcean Tender Offer Sec. Litig.,

427 F. Supp. 1211 (N.D. Ill. 1977) oe. 33

In re Union Square Assocs. Sec. Lit., Civ.

A. No. 11028, 1993 WL 220528 (Del.

ee 25, 26

In re United Energy Corp. Solar Power

Modules Tax Shelter Inv. Sec. Litig.,

122 F.R.D. 251 (C.D. Cal. 1988) 00000... 40

In re United States Oil & Gas Litig. , 967

Fe SEP C0 BE COe, TGF) oncncceccecscccecseccesevccecceees 47

Insurance Corp. of Ireland, Ltd. v.

Compagnie des Bauxites de Guinee,

SI Bs Ge Ci ececccecnscseccccnesscvcccstocsseeeseceees 36

Juidice v. Vail, 430 U.S. 327 (1977)...ccccccccccceseseeeees 29

Kahn v. Virginia Retirement System, 13

F.3d 110 (4th Cir. 1993), cert. denied,

114.S. Ct. 1834 (1994)... cccescceceeeeeees 12

Kalb v. Feuerstein, 308 U.S. 433 (1940) .......ccccc.e. 36

Kokkonen v. Guardian Life Ins. Co. of

Am., 114 S. Ct. 1673 (1994) oo. cccccccccccccceeeseees 37

Kremer v. Chemical Constr. Corp., 456

OE ET ee 25, 26, 27,

31, 32, 34

Lehman v. Lycoming County Children’s

Servs. Agency, 458 U.S. 502 (1982) ....cccccccccccee. 28

xii

Lockman Foundation v. Evangelical

Alliance Mission, 930 F.2d 764 (9th

Lorentzen v. Levolor Corp., 754 F. Supp.

GBT CRBDIL Y.. 1GDG) acccnssccccnsapsorccctescsnscsccsssescoess

Lowenschuss v. Resorts Int'l, Inc., Civ. A.

No. 89-1071, 1989 WL 73254 (E.D.

Pa. June 29, 1989), aff'd without op.,

947 F.2d 936 (3d Cir. 1991) .........ccccccceesseseeeeees

Malcolm v. National Gypsum Co., 995

Pb Tf: lo SE ers

Marrese v. American Academy of

Orthopaedic Surgeons, 470 U.S. 373

CR Paccecicccncocercancinntnncsiiincsnnnensessaeteomescossesennineds

Marshall v. Holiday Magic, Inc., 550 F.2d

fas] ts 3.

Mattoon v. City of Norman, 633 P.2d 735

CER, FIRE) cccccnnncsnpscstininsestnscsitemitocnstetecsncsasineues

McCarren v. Town of Springfield, 464

ib Gf | ee silianibeaeien

McCleskey v. Zant, 499 U.S. 467 (1991) ..cccsssssssesee

McDermott, Inc. v. AmClyde, 114 S. Ct.

BD Cee cesesnsiscnsebsitentctinesiinizensintmannancenens

Michigan v. Long, 463 U.S. 1032 (1983) -..coocsosss+0

Middlesex County Ethics Comm. v.

Garden State Bar Ass'n, 457 U.S. 423

(BDZ) acccccccvececccscescesestnssersconstsncssnnensvesionseosssesseses

14, 25, 31,

32, 34, 38

a eee

Page

Migra v. Warren City Sch. Dist. Bd. of

Educ., 465 U.S. 75 (1984) ..cccccccccccccsscceseeseeeeeeee 23, 33-34

Mills v. Duryee, 11 U.S. (7 Cranch) 481

AES PEE 25

Minnesota v. Mid-Minn. Associated

Physicians, No. C7-91-558, 1991 WL

340170 (Minn. Dist. Ct. July 2, 1991) 0000000000... 46

Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614

PE ee 19

Murphy v. Gallagher, 761 F.2d 878 (2d

KE a 31, 32

National Super Spuds, Inc. v. New York

Mercantile Exchange, 660 F.2d 9 (2d

aR nec NE 38, 39,

40, 41

New York State Conference of Blue Cross

& Blue Shield Plans v. Travelers Ins.

Co., 115 S. Ct. 1671 (1995) ooo cccccccccccceceseeeees 30

Newton v. Rumery, 480 U.S. 386 (1987) .......cccccco00. 34

Nottingham Partners v. Dana, 564 A.2d

I 15, 25, 26

Nottingham Partners v. Trans-Lux Corp.,

FES FA AP (EEE CU. BGT) .acceccaceccovccoccececcsecees 16, 23, 24,

26, 36, 38,

Officers for Justice v. Civil Serv. Comm'n,

688 F.2d 615 (9th Cir. 1982), cert.

denied, 459 U.S. 1217 (1983) .o.c.ccccccccccccececesceees 39-40

Page Page

Parker v. Anderson, 667 F.2d 1204 (Sth Sandler Assoc. L.P. v. BellSouth Corp.,

Cir.) cert. denied, 459 U.S. 828 (1982) ............. 15 818 F. Supp. 695 (D. Del. 1993), aff'd,

26 F.3d 123 (3d Cir.), cert. denied, 115

Parklane Hosiery Co. v. Shore, 439 U.S. fv SS] 16, 23,

De icniciitticiticsteatniiiidiaibadiiiieninemntabinatinaneniteinen 37-38 49-50

Parsons Steel Inc. v. First Alabama Bank, ae Schlaeppi v. Delaware Trust Co., 525

op ef RE 4 A.2d 562 (Del. Ch. 1986), aff'd, 523

Pennzoil Co v. Texaco, Inc., 481 U.S. 1 A.2d 981 (Del.), cert. denied, 484 U.S.

ee acnesiticictiesiiciiiesimdenclaghabieilddbadtitinaitiaeansnayivi 29 EA NE 26

Phillips Petroleum Co. v. Shutts, 472 U.S. Schreiber v. Burlington Northern, Inc.,

pe RUE ST TS CE = SCNT eR 10, 13, ERSTE 33

41,2 Seagoing Uniform Corp. v. Texaco, Inc.,

PMX Indus., Inc. v. LEP Profit Int'l, 31 705 F. Supp. 918 (S.D.N.Y. 1989) 0.0.00... 16-17

Sy Fs | ee 37, 47 Shearson v. MacMahon, 482 U.S. 220

Raskin v. Birmingham Steel Corp., Civ. A. SS a a 19

ad a ee 18 Sosna v. lowa, 419 U.S. 393 (1975) cecsessssssesseseeee 41

, , ; Sternberg v. O'Neil, Civ. A. No. 8592

Reiter v. Universal Marion Corp., 299 ’ ,

PF Cs Se isiceiernebiecihiclneniailiomens 26 1989 WL 137932 (Del. Ch. Nov. 9,

ee eee ee Nn gn 25-26

may te hi a Stoll v. Gottlieb, 305 U.S. 165 (1938) sescecsoceesoseoe 36

2 EERE SE i 20 Stone v. Powell, 428 U.S. 465 (1976) cecccccccocsosoee 32

Rooker v. Fidelity Trust Co., 263 U.S. 413 TBK Partners, Lid. v. Western Union

(Cpe incssiblehiceteliapititaectiiihecaiebdiiadidieabirisisuiihehiniiin 28, 35 Corp., 675 F.2d 456 (2d Cir. 1982) cccccccccccsssee 16, 38,

Roosevelt v. El. Du Pont de Nemours & 40, 41

Co., 958 F.2d 416 (D.C. Cir. 1992).................. 11

; Texas v. Coca-Cola Bottling Co. of the

Ruskay v. Waddell, 552 F.2d 392 (2d Cir.), Southwest, No. 84C1-15586, 1986 WL

cert. denied, 434 U.S. 911 (1977).............::00000 48 22186 (Tex. Dist. Ct. July 1, 1986) ..cceccccccsesooee 46

Sanders v. United States, 373 U.S. 1 Thompson v. Edward D. Jones & Co., 992

GRIT secrsevccininnnssiaitnnnnsiapdatiadimbltinnaniniivionlieeninttien 32 ol) OY an aa 22, 48

xvi

Three Rivers Motor Co., Inc. v. Ford

Motor Co., 522 F.2d 885 (3d Cir.

1DTS) .<<reversescasevsicncinsietesiniaigesitiiibteatasamatinagaaias 26

Underwriters Nat'l Assurance Co. v.

North Carolina Life & Accident &

Health Ins. Guar. Ass'n, 455 U.S. 691

(19BZ) .acrcecsccescesenisssitneseeenineenesbiemansigtibenianaats 27, 28,

University of Tennessee v. Elliot, 478 U.S.

FOB (2 9CD sexceseccevecsesesissibisilisienisailaiaaiiaiiaiialie 32

Valerio v. Boise Cascade Corp., 80 F.R.D.

626 (N.D. Cal. 1978), aff'd and op.

adopted, 645 F.2d 699 (9th Cir.), cert.

denied, 454 U.S. 1126 (1981) ........cccceeeeeeeeeeeees 22

Weiner v. Shearson, Hammill & Co., 521

F.2d S17 CG Ge. COCR ccccritecintimininn 19

Will v. Calvert Fire Ins. Co., 437 U.S. 655

| a ee 19

Younger v. Harris, 401 U.S. 37 (1971).....c:cccsceeeeee 28, 29

Constitutions, Statutes, Regulations &

Rules

U.S. Comst.. ant. £, & &, Gb. Qrecsccsssvevsssboctenbacssnanennnns 30

ik fo 8A) eee ee 27

7 UBC. 8 BOER) cccocesscssesensccesetncssiereetamannnmainnention 46

BS UBC, 6 8 ccccrccccessscsctessinctusvennteataciannmammmmeninain 46

15 U.S.C. § Than (Bese SF) veccesecseessesensinscesstnsernen 33, 46

15 U.S.C. § 78bb(a) (Section 28(a)) ..........:ccccceeeeee 30, 31

2B U.S.C. § 181 ..ccccocccorsceroncsonescsosonssbaneentonensoeninnens 30

xvii

Page

I l

a 13

EE 46

a 46

TS Saitlinideiapemiecnsnenes 28

ceric cerencennes 28

28 U.S.C. § 1738...........: edutedammnatimeeenaesatnecmasmnsesess passim

ET ee 28

ee 28

Ee 46

a rerece ce tennccenesnsnaresnans 34

a 46

17 C.F.R. § 240.14d-10 (SEC Rule 14d-

EE es 4

EEE 9,21, 39

CS EES 18

Delaware Court of Chancery Rule 23...................... 9,21

Be, BP I ccccsccnccccscssecscssesesenessesooess 33

| ce 33

| 33

S. Doc. No. 185, 73rd Cong., 2d Sess. 23

EE A 33

H.R. 7852, 73d Cong., 2d Sess., § 25

iar ititeradeeeiretehartinennateatereenennenenenccnccetneenscsees 33

Page

H.R. 7924, 73rd Cong., 2d Sess., § 6(a)

(19GB 4) .xacccecccscsseecscscsecescssssssoscossssocensscssensonensesesees 33

H.R. 9323, 73d Cong., 2d Sess., § 26

(BGO vaccecccaescessccsnscssescenesesnsnescsnsnssssnsesenscsesenssnees 33

S. 3420, 73rd Cong., 2d Sess., § 26 (1934) .........0.. 33

Books, Treatises & Periodicals

American Law Institute, Study of the

Division of Jurisdiction Between State

and Federal Courts (1969) ..........ccc-eeceeeeeeenees 33

Black’s Law Dictionary (6th ed. 1990)................00-+ 37

Federalist No. 42 (James Madison)

(Clinton Rossiter ed., 1961)............s-s-esesereeerens 27

Thomas Hazen, The Law of Securities

Regulation (1985) ........-.--ssessreeneesesenenenersnnenens 34

1B J. Moore, J. Lucas & T. Currier,

Federal Practice, 4 0.405[2] (2d ed.

BODO ccecercocsecnesscensecsncssnessenrensenaeesessescsnssccocsceseses 48

1, 2 Herbert B. Newberg & Alba Conte,

Newberg on Class Actions §§ 3.13,

11.41 (3d dd. 1992) ........cccceccsvsesserensenserreneeesereoee 40, 47

Note, The Securities Exchange Act and the

Rule of Exclusive Federal Jurisdiction,

89 Yale L.J. 95 (1979) .......cccccecccerseeseernennnnennnens 34

18 Charles A. Wright, Arthur R. Miller &

E. H. Cooper, Federal Practice and

Procedure § 4470 (1981) .......-.-cceeeeeeesereneeneennees 17

No. 94-1809

Supreme Court of the Huited States

OCTOBER TERM, 1995

MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. and

MATSUSHITA HOLDING CORP.,

Petitioners,

vs.

LAWRENCE EPSTEIN, et ai,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE NINTH CIRCUIT

BRIEF FOR THE PETITIONERS

OPINIONS BELOW

The opinion of the court of appeals . la-44a) i

reported at $0 F-3d 644” The findings of fact and conclusions

of law of the district court (Pet. App. 45a-61a) are unreported.

JURISDICTION

The court of appeals entered its judgment on February

1995 (Pet. App. Ia) and denied a timaly potion for seheacing

and rejected a suggestion for rehearing in banc on April 6, 1995

(Pet. App. 62a). The petition for a writ of certiorari was filed on

May 3, 1995, and was granted on June 19, 1995. The jurisdic-

tion of this Court is invoked under 28 U.S.C. § 1254(1).

References to documents contained in the ix to Petition

Writ of Certiorari | are designated ne tg lag 7 Phe a ag

ments contained in the Joint Appendix are designated as “J.A. _.” Ref-

erences to documents contained in the record of the district court and

court of appeals are designatedas“R..”

STATUTORY PROVISION INVOLVED

Section 1738 of Title 28 provides with respect to the authen-

ticated acts, records and judicial proceedings of any State:

Such Acts, records and judicial proceedings, or copies

thereof, so authenticated, shall have the same full faith

and credit in every court within the United States and

its Territories and Possessions as they have by law or

usage in the courts of such State, Territory or Posses-

sion from which they are taken.

STATEMENT OF THE CASE

The Delaware Chancery Court approved an “opt out” set-

tlement of a class action arising out of Matsushita's 1990 ac-

quisition of MCA. The Chancery Court entered a judgment on

the settlement that incorporated a release of all claims relating

to the acquisition, including the exclusively federal securities

law claims asserted here by ts. The Delaware Su-

preme Court affirmed the judgment. The Ninth Circuit re-

fused to give full faith and credit to the judgment on the

that “a court’s jurisdiction to extinguish claims by

class settlement should not exceed its jurisdiction to extin-

guish claims by adjudication.” Epstein v. MCA INC., 50 F.3d

644, 664 (9th Cir. 1995) (reprinted at Pet. App. la) (emphasis

added).

The Ninth Circuit decision nullified the state court judg-

ment and freed the class members from their obligations un-

der the court-approved contract of settlement. The Ninth Circuit

thus countenanced a collateral attack on the state judgment by

respondents who neither objected to nor opted out of the state

court settlement. The Ninth Circuit decision undermines fun-

damental interests of federalism and the fostering of settle-

ments, encourages the type of inefficient litigation strategies

adopted by respondents, and forces complex class action liti-

gations into the federal courts.

A. Matsushita’s Acquisition of MCA

Matsushita purchased MCA for $6.6 billion on December

29, 1990. The acquisition involved a tender offer to the public

shareholders and a privately negotiated purchase of shares

owned by MCA founder Lew Wasserman. The tender offer

price of $66 cash per share gave tendering shareholders close

to a 100% premium over the market price. J.A. 166. More

than ninety percent of all MCA shares were tendered in re-

sponse to Matsushita’s offer. Pet. App. 49a.

The Wasserman transaction consisted of a tax-free ex-

change of Mr. Wasserman’s MCA shares for an illiquid pre-

ferred stock in a Matsushita subsidiary. The preferred stock

was structured to be no more valuable than the tender offer

consideration. Pet. App. 13a, 50a. By design, the Wasserman

transaction was entered into before the tender offer com-

menced and was consummated shortly after the tender offer

expired. Pet. App. 48a-50a.

B. The State Court Class Actions

On September 26, 1990, the day after the Wall Street Jour-

nal reported that Matsushita might seek to acquire MCA,

counsel for respondents and many other law firms filed com-

plaints in the Delaware Chancery Court on behalf of a class of

all MCA shareholders. These complaints and others filed there-

after were consolidated by order of the Delaware court.” The

consolidated complaint sought injunctive relief against Mat-

sushita’s proposed acquisition of MCA. R.57, Exh. A, at 20-22.

On November 30, Matsushita issued a Schedule 14D-1

disclosing the terms of its tender offer to acquire MCA. On

December 4, 1990, the Delaware plaintiffs amended the alle-

gations of their complaint pursuant to a stipulated procedure.

See J.A. 211. The Delaware plaintiffs added Matsushita as a

defendant and alleged that (1) Matsushita and MCA were

jointly responsible for misleading disclosures in the tender

offer documents; (2) the MCA Board of Directors failed to

maximize shareholder value because Matsushita had cor-

rupted Mr. Wasserman and Sidney Sheinberg (MCA’s chief

operating officer) by offering them preferential treatment in

? By order of the Chancery Court dated October 2, 1990, four law firms

were designated as plaintiffs’ Co-Lead Counsel, and sixteen additional

firms were designated as the plaintiffs’ Committee of the Whole. Counsel

for respondents was named to the Committee of the Whole. J.A. 131-32.

the form of, respectively, the preferred stock and a multimil-

lion dollar bonus, and (3) Mr. Wasserman “impermissibly ne-

gotiated preferential arrangements in connection with the

transaction by which he will exchange [MCA] stock for [the

preferred] stock and avoid costly capital gains taxes to which

all other stockholders are subject.” J.A. 217. On December

14, the Delaware plaintiffs filed a formal amended complaint

elaborating on these allegations: “Matsushita willingly agreed

to pay, and encouraged the payment of [the preferred stock to

Mr. Wasserman and the bonus to Mr. Sheinberg] because of

its expectation that this would vastly limit the independence

of senior management and the MCA Board in negotiating

with Matsushita and thereby save the purchaser potentially

hundreds of millions or billions of dollars in acquisition

costs.” J.A. 147.

C. Respondents File a Federal Action That Also

Purports to Represent the MCA Shareholders

On December 3, 1990, after the designation of Lead Coun-

sel in the consolidated Delaware class action, see note 2,

supra, and during the pendency of settlement negotiations in

the Delaware action, see Pet. App. 83a, counsel for respon-

dents filed this Epstein class action in a federal district court

in California seeking to enjoin the Matsushita acquisition. The

complaint was filed on behalf of all MCA shareholders own-

ing stock subject to Matsushita’s tender offer -- a class sub-

sumed in the class for whose benefit the Delaware action was

being prosecuted. The federal complaint, together with sev-

eral subsequent related actions, alleged that the preferred

stock Mr. Wasserman would receive was more valuable than

the $66 per share tender offer price and that the Wasserman

transaction therefore violated Securities and Exchange

Commission Rule 14d-10, which requires an equal price to be

paid for all stock purchases made “during [a] tender offer.”

See 17 C.F.R. § 240.14d-10. The Epstein complaint was later

amended to assert that Matsushita also violated Rule 14d-10

by paying Mr. Sheinberg preferential consideration for his

MCA shares by “ostensibly” compensating him for entering

into a long-term employment contract. J.A. 91-92.

D. The First Delaware Settlement

m a BW oe, the parties to the consolidated

ware action to a settlement. The non-opt out set-

tlemen a for the release of all shareholder claims

arising out o acquisition, in exchange for the payment of

attorneys’ fees and the modification of a “poison pill” in the

charter of an MCA subsidiary that was spun off to the share-

holders. J.A. 161, 165, 170-71. Notice was sent to all MCA

shareholders describing the nature of the state and federal liti-

gations, explaining that the settlement would release all

claims arising out of the acquisition, including those in the

Epstein action, and advising shareholders of their right to ob-

ject to the settlement. R. 57, Exh. D.’

On April 22, 1991, the Delaware Chancery Court rejected

the proposed settlement as inadequate. J.A. 159-71, The Chan-

cery Court found that the state law claims asserted in the

amended complaint were weak, and that the value of the set-

tlement consideration was minimal. J.A. 165-67, 170-71. Ad-

dressing the federal securities law claims, the court noted that

they had “not yet been definitively addressed” by the federal

courts and therefore had “at least arguable merit.” J.A. 169-70.

The Chancery Court concluded “that it would be unfair to com-

pel the release of the federal claims by approving the settlement

in its present form,” which did not provide class members an

opportunity to opt out. J.A. 171.4

When a state court settlement of a class action releases all claims

which arise out of the challenged transaction and is determined to

be fair and to have met all due process requirements, the class

(Footnote continued)

E. The District Court Dismisses the Federal Action

on the Merits

Thereafter, on February 10, 1992, the federal district court

granted Matsushita’s motion for summary judgment, holding

that the Wasserman transaction did not violate Rule 14d-10

because stipulated facts established that the Wasserman trans-

action was agreed to and consummated when no tender offer

was pending. Pet. App. 49a-50a, 52a-55a. The district court

found tnat the preferred stock received by Mr. Wasserman

was not more valuable than the $66 per share being offered to

the public shareholders. Pet. App. 50a, 58a-59a. The district

court also dismissed the claim challenging the payment to Mr.

Sheinberg on substantive grounds. Pet. App. 5la, 59a. Re-

spondents’ appeal to the Ninth Circuit followed.

F. The Second Delaware Settlement

Subsequent to the dismissal of the federal action, and dur-

ing the pendency of respondents’ appeal to the Ninth Circuit,

the parties to the Delaware action negotiated an opt-out set-

tlement. The settlement provided for a payment by Matsushita

of $2 million to the class in exchange for a release of all

claims arising out of the MCA acquisition, including the fed-

eral securities law claims that had been dismissed in Califor-

nia. J.A. 187-88. By order dated October 27, 1992, the Chan-

cery Court certified the Delaware action as a class action for

purposes of settlement, and authorized the named plaintiffs

and lead counsel to represent the interests of the class at the

hearing which the court scheduled to consider the fairness of

the settlement. J.A. 198-203.

1. The Notice to the Class

The court-approved notice of the proposed settlement

mailed to each class member described the state court

proceedings, the federal court proceedings, the appeal in the

members are bound by the release or the doctrine of issue preclu-

sion. Class members cannot subsequently relitigate the claims

barred by the settlement in a federal court.

J.A. 163 (citations omitted).

Ninth Circuit, and the terms of the proposed settlement. Pet.

App. 78a-94a. The Notice also:

¢ Advised that, if approved, the settlement would release all

claims relating to Matsushita’s acquisition of MCA, spe-

cifically including the securities law claims in the federal

actions. /d. at 93a-94a.

e Informed each class member of the right to object to the

settlement, id. at 97a-99a, and stated that any class mem-

ber who failed to object would “be deemed to have

waived such objections and shall be forever barred from

raising such objection in this or any other action or pro-

ceeding,” id. at 99a (emphasis added).

e Explained that class members could opt out of the settle-

ment and that by doing so could preserve their state and

federal claims. Jd. at 96a.°

2. The Opt Outs and Objectors

The court-approved notice was mailed to the class mem-

bers, and a summary form of notice was published in the Wall

Street Journal. J.A. 199-200. More than 25,000 shareholders

were notified. Pet. App. 69a. Only 19 members of the class

exercised the right to request exclusion from the settlement.

Pet. App. 69a. Respondents did not opt out. Nor did

In a section titled “RIGHT TO REQUEST EXCLUSION,” the No-

tice stated:

All members of the Settlement Class have the option of excluding

themselves from the Settlement Class by mailing a timely and

valid Request for Exclusion . . . . By filing a valid Request for

Exclusion, a member of the Settlement Class will not be pre-

cluded by the Settlement from individually seeking to pursue the

claims alleged in the Delaware Actions, the California Federal

Actions . . . or any other claim relating to the events at issue in

the Delaware Actions.

Pet. App. 96a.

“ Those who chose to opt-out included Walter Minton, five Minton fam-

ily members and trusts, and Jane Rockford. See Parties to the Proceeding,

(Footnote continued)

respondents choose to object to the settlement in the Delaware

Chancery Court.

The three people who did object to the settlement con-

tended that the settlement fund was inadequate and that the

settlement was the result of “collusion” between_class counsel

and counsel for defendants. Pet. App. 69a-70a.’ None of the

objectors asserted that the Delaware Court lacked the author-

ity to approve a class action settlement that releases exclu-

sively federal claims.

3. The Delaware Courts Approve the Settlement

The Chancery Court held a fairness hearing on January 21,

1993. Counsel for the objectors appeared and were heard. In

its decision approving the settlement, the Chancery Court re-

affirmed its prior determination that state court class action

settlements can release exclusively federal claims, Pet. App.

63a, and noted that a “Court must be particularly careful in

reviewing a proposed settlement that has the effect of barring

claims of at least arguable merit that are not asserted in Dela-

ware but are being asserted in another forum.” Pet. App. 67a.

The Chancery Court again found the state law claims of “little

or no value.” Pet. App. 68a. As to the federal claims, the court

referenced its prior opinion, but noted that “[nJow, however,

there has been a full hearing on the federal claims and those

claims have been rejected on both legal and factual grounds in

the U.S. District Court.” Pet. App. 68a. Acknowledging the

possibility of a reversal by the Ninth Circuit, the Chancery

Court observed that “the determination of the federal district

court that the claims lack merit must be accorded substantial

weight in determining the present settlement value of those

claims” and concluded that the federal claims therefore had

supra. Only 4 of the 19 opt-outs have pursued their claims individually:

three Minton family members and Rockford. J.A. 182, 184.

’ The three objectors were Walter Minton’s wife (Marion Minton) and

daughter (Pamela Minton) and one Mr. William Krupman, who was coun-

seled by respondents’ attorneys prior to filing his objection. J.A. 233,

248-51.

“minimal economic value.” Pet. App. 68a. 69a

added).* - a

Weighing the state claims having “little or no value” and

the federal claims of “minimal economic value” against the

$2 million benefit to the class, the Chancery Court approved

the settlement as “fair, reasonable and adequate and in the

best interests of the plaintiffs and the Settlement Class.” Pet.

App. 74a. The court also found that the settlement was fair

because “[t]he availability of the right to opt-out of the class

protects the ability of class members who find the proposed

settlement inadequate to continue the district court litigation.”

Pet. App. 69a.

The Chancery Court found that the representation of the

class was adequate, that the notice to the class the “best practi-

cable” notice, and that all the requisites of due process had been

satisfied. Pet. App. 73a-74a.” The Chancery Court also found

that the objectors “ha[d] offered no evidence of any collusion.”

Pet. App. 70a. The court’s final judgment, entered on February

22, 1993, implemented the settlement agreement by providing

for the release of all state and federal claims held by all mem-

bers of the settlement class who did not opt out arising from,

inter alia, Matsushita’s tender offer, the Wasserman transac-

tion, any of the “matters, transactions or occurrences” referred

x . :

Regarding the objectors’ argument that it should await the decision of

the Ninth Circuit -- which would not be rendered for another two years --

the Chancery Court observed: “If this Court rejects the settlement, the $2

million dollar benefit will vanish. . . . Unless fair settlements are promptly

approved, the settlement process will be adversely impacted. Therefore,

the Objectors’ request that this Court indefinitely delay its review of the

settlement must be denied.” Pet. App. 69a.

The Chancery Court found that the Delaware plaintiffs “as representa-

tives of the Settlement Class, have fairly and adequately protected the

En een ene te maaan oats atten 0

ac action meets requirements of Rule 23(a) and (b)(3) of the

Court of Chancery.” Pet. App. 73a-74a. ae

Significantly, Delaware Court of Chancery Rule 23 and Fed. R. Civ. P.

23 are virtually identical. Cf Grimes v. Vitalink Communications Corp.,

17 F.3d 1553, 1555 n.2 (3d Cir.), cert. denied, 115 S.Ct. 480 (1994).

to in the Delaware pleadings, and all the claims asserted in re-

spondents’ federal actions. Pet. App. 74a-75a.

On September 21, 1993, the Delaware Supreme Court af-

firmed the Chancery Court on the basis of the lower court’s

opinion. Pet. App. 76a.

G. The Ninth Circuit Decision

Upon the issuance of the Delaware Supreme Court affir-

mance, Matsushita invoked the Delaware final judgment as a

bar to the continued prosecution of the appeal in the Ninth

Circuit on behalf of any shareholder who had not opted out of

the Delaware settlement. Matsushita relied on the Full Faith

and Credit Act and this Court’s decision in Phillips Petroleum

Co. v. Shutts, 472 U.S. 797 (1985), concerning the binding

effect of an opt out class action settlement. Respondents --

who had neither opted out of nor objected to the settlement --

appeared before the Ninth Circuit and attacked the Vice

'© The release language incorporated in the final judgment provided:

All claims, rights and causes of action (state or federal, including

but not limited to claims arising under the federal securities laws,

any rules or regulations promulgated thereunder, or otherwise),

whether known or unknown that are, could have been or might in

the future be asserted by any of the plaintiffs or any member of

the Settlement Class (other than those who have validly requested

exclusion therefrom) . . . in connection with or that arise now or

hereafter out of the Merger Agreement, the Tender Offer, the

Distribution Agreement, the Capital Contribution Agreement [the

agreement governing the Wasserman transaction], the employee

compensation arrangements [the agreements governing the pay-

ment to Mr. Sheinberg] . . . this Settlement . . . or any matters,

transactions or occurrences referred to in the December 4, 1990

Claim Letter and the Amended Complaint in the [Delaware] Ac-

tion . . . including without limitation the claims asserted in the

California Federal Actions [a defined term encompassing the Ep-

stein, Linder, Karlin, and Minton actions, see Pet. App. 88a). +

are hereby compromised, settled, released and discharged with

prejudice by virtue of the proceedings herein and this Order and

Final Judgment.

Pet. App. 74a-75a.

Chancellor of the Delaware Chancery Court as obtuse and

“passive,” R. 57 at 19, 28; characterizing Delaware represen-

tatives and their counsel as corrupt, id. at 4, 17-18, 24, 27-28:

and impugning the integrity of the Delaware state court sys-

tem, id. at 31 (“The Delaware proceedings are little more than

a sham.”). Respondents also argued, for the first time, that a

state court lacks the power to approve the release of

“exclusively federal” claims. /d. at 31-34.

The Ninth Circuit denied full faith and credit to the Dela-

ware final judgment, asserting a “policy” requiring that ex-

clusively federal claims of a class be resolved by settlement

only in federal court. Pet. App. 40a n.33. The court held that

“a state court cannot require passive class members to con-

tractually release their exclusively federal claims in order to

enjoy the benefits of a state class action, when the court has

no jurisdictional power to dispose of those claims either di-

rectly or indirectly through the doctrine of issue preclusion.”

Pet. App. 40a. The Ninth Circuit acknowledged that

“individual plaintiffs may release whatever claims they

choose in settling traditional non-class litigation,” and that the

same was true of derivative actions, but held that “the settle-

ment of a class action is fundamentally different.” Pet. App.

37a-38a & n.32.

With respect to the merits of respondents’ federal securities

claims, the Ninth Circuit held that there is an implied private

right of action under Rule 14d-10, and that Rule 14d-10 cov-

ers transactions occurring not only “during [a] tender offer”--

as the Rule provides -- but also any transaction that is “an in-

tegral part” of a tender offer regardless of when it occurs. Pet.

App. 17a." Applying its expansive interpretation of Rule

'' The Ninth Circuit held that every regulation promulgated under a stat-

ute that has been held to be privately enforceable automatically confers its

own private right of action -- regardless of the language or purpose of the

regulation. Pet. App. 5a n.8. This holding is at odds with “settled interpre-

tive principles regarding implied causes of action,” Central Bank v. First

Interstate Bank, 114 S. Ct. 1439, 1455 (1994), and conflicts with the law

of three circuits. See Roosevelt v. El. Du Pont de Nemours & Co., 958

F.2d 416 (D.C. Cir. 1992); Ashbrook v. Block, 917 F.2d 918 (6th Cir.

(Footnote continued)

14d-10 to the Wasserman transaction, the Ninth Circuit con-

cluded that, notwithstanding that the Wasserman transaction

took place when no tender offer was pending, it should be

deemed an integral part of the tender offer. Pet. App. 18a.

The court entered summary judgment for respondents and re-

manded for a trial to determine damages, if any. The Ninth

Circuit found that the “claims of every tendering shareholder

turn on identical facts and law,” Pet. App. 41a, and directed

the district court to certify a class consisting of all MCA

shareholders.

On May 3, 1995, Matsushita filed a petition in this Court

for a writ of certiorari seeking review of the Ninth Circuit's

holdings that (1) the Delaware judgment was not entitled to

full faith and credit, (2) the Wasserman transaction violated

Rule 14d-10, and (3) there is an implied private right of action

under Rule 14d-10. This Court granted the petition with re-

spect to the first issue.

1990); Angelastro v. Prudential Bache Sec., Inc., 764 F.2d 939 (3d Cir.),

cert. denied, 474 U.S. 935 (1985).

With respect to the merits of the Rule 14d-10 claim, the Ninth Circuit

held that because the Wasserman transaction was “conditioned” on the

successful completion of the public tender offer, it would be “deemed” to

have taken place during the tender offer even though it did not in fact take

place at that time. Pet. App. 17a-18a. This ruling directly conflicts with

the holding in Kahn v. Virginia Retirement System, 13 F.3d 110 (4th Cir.

1993), cert. denied, 114 S. Ct. 1834 (1994), in which the Fourth Circuit

recognized that Rule 14d-10 operates only during the defined period of

time when a tender offer is actually taking place.

2 Regarding the bonus payment by MCA to Mr. Sheinberg, the Ninth

Circuit held that there was a genuine issue of fact whether the payment

constituted “an inducement to support the tender offer and tender his own

shares.” Pet. App. 23a. The court vacated summary judgment for Mat-

sushita on this claim and remanded for a determination of liability. Pet.

App. 23a.

"3 Previously, the district court twice denied respondents’ motions for

class certification on the ground that respondents could not satisfy the

elements of Federal Rule of Civil Procedure 23. See R. 98, 171.

SUMMARY OF THE ARGUMENT

The Delaware court approved the consensual settlement of

a class action properly before it. In so doing, it exercised the

established power of a court to approve a settlement of all

claims arising from the controversy before it, including ex-

clusively federal claims. Contrary to the Ninth Circuit's

analysis, a class action settlement, like any other settlement, is

a private contractual agreement between the parties upon

which a judgment can be entered. When a state court enters a

judgment upon a settlement, no legitimate federal interest is

implicated that can justify intrusion by a federal court on state

judicial processes. This is particularly so where, as here, the

state settlement is subjected to a state court approval process

that provides an opportunity for all class members who wish

to pursue their claims -- state or federal -- to opt out of the

settlement and do so.

. I. The Ninth Circuit’s decision vacated the considered

judgments of a state supreme court and state trial court. The

Ninth Circuit justified its interference with the finality of the

state court judgment on the basis of an expressed concern for

absent class members. But this Court’s decision in Phillips

Petroleum Co. v. Shutts, 472 U.S. 797 (1985), has defined the

procedural protections necessary for absent class members.

When absent class members are afforded full notice of a set-

tlement, an opportunity to be heard with respect thereto, the

right to opt out, and the guardianship of the settling and appel-

late courts -- and ultimately this Court on direct appeal under

28 U.S.C. § 1257(a) -- no more is required, or reasonably

should be. Indeed, since avoidance of duplicative litigation is

an impetus for the class action mechanism, courts should en-

courage class action settlements releasing the broadest possi-

ble range of claims. The Ninth Circuit evidently distrusted the

state court’s evaluation of the fairness of the settlement, but

such distrust has no place in our system of federalism.

Il. The Delaware judgment is final and may not be un-

dermined through collateral attack in a federal court. The Full

Faith and Credit Act, 28 U.S.C. § 1738, so requires. Exceptions

to the Full Faith and Credit Act are rare. This case involves

neither an express nor implied repeal of § 1738. See, e.g., Mar-

rese V. American Academy of Orthopaedic Surgeons, 470 US.

373, 381 (1985). There is no basis for i a congressional

intent that claims under the Securities Exchange Act of 1934

may not be settled and released by agreement of private par-

ties in state court litigation.

Ill. The Ninth Circuit established a novel test for deter-

mining the preclusive effect of a state court judgment entered

on a class action settlement releasing federal claims. Under

the Ninth Circuit’s analysis, a state court can approve a class

settlement only of claims that it can adjudicate. This test con-

flates the entirely separate concepts of release and issue pre-

clusion and strips state courts of the power to resolve disputes

properly before them.

IV. State court judgments are given preclusive effect in

federal court through the Full Faith and Credit Act in order to

advance the interests of federalism, comity, finality of judg-

ments, and judicial efficiency. The costs of the Ninth Circuit's

disturbance of the relationship between state and federal

courts are enormously high:

e The right of parties to resolve a legal dispute by contract

is undermined. When a judgment is entered on a settle-

ment, full faith and credit has the added effect of holding

parties to their bargain. The Ninth Circuit decision allows

parties to renege on a court-approved contract.

e The legal system depends upon the finality of judgments.

The Ninth Circuit decision eliminates finality with respect

to prior state court class action settlements releasing federal

claims as to which the statute of limitations has not run.

° The Ninth Circuit decision allows class members to by-

pe Oi Gs See Se ee oe

objections, and then collaterally attack state court

judgment in federal court. No litigant should be permitted

to intentionally sit on its arguments while a class action

settlement hearing goes forward in one (state) court and

then, if the judgment of that court is not to its liking, col-

laterally raise its objections in a second (federal) court.

e The court of appeals’ decision requires parties to class ac-

tion litigation to seek a federal forum because it will now

be improvident for a defendant to settle a state class action

involving facts that could be the basis for an exclusively

federal claim. Thus, state class actions are radically

discouraged, while all class action litigation that arguably

contains the seed of an exclusively federal claim will be

channeled into federal court.

ARGUMENT

I. A GRANT OF “EXCLUSIVELY FEDERAL”

JURISDICTION TO ADJUDICATE CLAIMS

DOES NOT PRECLUDE A STATE COURT

FROM APPROVING A CLASS ACTION SET-

TLEMENT THAT INCLUDES A RELEASE

OF “EXCLUSIVELY FEDERAL” CLAIMS

A court approving a settlement voluntarily reached by the

parties before it does not adjudicate the rights and liabilities

of the parties. Rather, the settlement agreement defines the

approves a settlement releasing exclusively federal claims, the

court does not adjudicate those claims. See Nottingham Part-

ners Vv. Dana, 564 A.2d 1089, 1104 (Del. 1989) (“Dana”)

clusively federal claim. The former is within a state court’s

power, the latter is not.”); see also Parker v. Anderson, 667

F.2d 1204, 1209 (Sth Cir.) (“In determining the adequacy and

reasonableness of the proposed settlement, the court does not

adjudicate the dispute.”), cert. denied, 459 U.S. 828 (1982);

Abramson v. Pennwood Inv. Corp., 392 F.2d 759, 762 (2d

Cir. 1968) (“Although the state court could not adjudicate the

federal claim, it was within its powers over the

and the parties to approve the release of that claim as a condi-

tion of settlement of the state action.”).

Thus, a court need not have subject matter jurisdiction over

a claim in order to approve a settlement incorporating its re-

lease. See Grimes v. Vitalink Communications Corp., 17 F.3d

1553, 1564 (3d Cir.) (state courts have the power “to approve

and enforce settlements which reflect the parties’ intent to re-

lease all claims arising from a transaction regardless of

whether the class action court has jurisdictional competency

to hear those claims”), cert. denied, 115 S. Ct. 480 (1994);

Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1288 (9th

Cir.) (“{I}t was not necessary . . . to actually exercise subject

matter jurisdiction over the claims to approve their release.”’),

cert. denied, 113 S. Ct. 408 (1992); Nottingham Partners v.

Trans-Lux Corp., 925 F.2d 29, 34 (ist Cir. 1991) (“[A]s a

matter of federal law, a state court can approve and enforce a

settlement which requires a party to release claims actually

brought, or potentially ‘bringable,’ in federal court under

‘exclusive jurisdiction’ federal statutes even though the state

court could not adjudicate claims arising under such stat-

utes.”); Jn re Corrugated Container Antitrust Litig., 643 F.2d

195, 221 (Sth Cir. 1981) (“[E]}ven when the court does not

have power to adjudicate a claim, it may still ‘approve release

of that claim as a condition of settlement of [an] action

[before it].’ ”) (citations omitted) (alteration in original);

Sandler Assoc. L.P. v. BellSouth Corp., 818 F. Supp. 695, 704

(D. Del. 1993) (The Delaware Chancery Court has the “power

to approve a release encompassing federal securities law

claims . . . not within the subject matter jurisdiction of the

Delaware State courts.”), aff’ d, 26 F.3d 123 (3d Cir.), cert.

denied, 115 S. Ct. 481 (1994).'

See also TBK Partners, Lid v. Western Union Corp., 675 F.2d 456,

460 (2d Cir. 1982) (“[W]e have recognized the authority of a state court to

approve a settlement that releases a claim within the exclusive jurisdiction

of the federal courts.”); Gabelli v. Sikes Corp., No. 90 Civ. 4904, 1990

WL 213119, at *5 (S.D.N.Y. Dec. 14, 1990) (staying federal securities

action pending court approval of Florida state court class settlement be-

cause “of the imminent possibility that the Florida courts will dispose of

the exclusive federal issue by approving the settlements and its attendant

releases”); Lowenschuss v. Resorts Int'l, Inc., Civ. A. No. 89-1071, 1989

WL 73254, at *6, *9 n.15 (ED. Pa. June 29, 1989) (determining that state

court settlement and release bars exclusively federal claims), aff'd without

op., 947 F.2d 936 (3d Cir. 1991); Seagoing Uniform Corp. v. Texaco, Inc.,

705 F. Supp. 918, 923 (S.D.N.Y. 1989) (recognizing that release in “class

(Footnote continued)

__ The principal federal interest in a grant of exclusive federal

jurisdiction is to achieve uniformity in adjudications of the

rights and liabilities arising under a particular area of federal

law. See Michigan v. Long, 463 U.S. 1032, 1041 (1983); 18

Charles A. Wright, Arthur R. Miller & E. H. Cooper, Federal

Practice and Procedure § 4470, at 679 (1981). That federal

interest is not implicated when a state court approves a set-

tlement including a release of federal claims, because in per-

forming that function the state court neither exercises

jurisdiction over nor adjudicates the federal claims.

A settlement is ordinarily impractical unless it covers all

claims, actual and potential, state and federal, arising out of

the transaction at issue. A defendant would accomplish little

by settling an action alleging state law claims if a federal

claim arising from the same transaction could then be prose-

cuted on behalf of the same individuals with whom the defen-

dant had settled. See McDermott, Inc. v. AmClyde, 114 S. Ct.

1461, 1467 (1994) (noting that defendants have no incentive

to settle unless settlement agreement precludes possibility of

further liability); Jn re Nat'l Smelting, Inc., 722 F. Supp. 152,

178 (D.N.J. 1989) (there would be “absolutely no incentive to

settle with the plaintiff [where] a settlement would be accom-

panied by no repose”); Boothe v. Baker Indus., Inc., 262 F.

Supp. 168, 174 (D. Del. 1966) (noting that it is “incon-

vo aan One defendant would have “surrendered” certain

rights in the state settlement unless the plaintiff corporation and

its stockholders “were barred once and for all from relitigating

action derivative suit” in Delaware could foreclose Exchange Act claims);

Bernstein v. Mediobanca Banca di Credito Finanziario-Societa per Azi-

oni, 78 F.R.D. 1, 5 (S.D.N.Y. 1978) (finding that general release in state

point is indeed one of hornbook law: “Apart from claim preclusion as

such, settlement of state court litigation has been held to defeat a subse-

quent federal action if the settlement was intended to apply to claims in

exclusive federal jurisdiction as well as other claims. . . . These rulings are

surely correct.” 18 Charles A. Wright, Arthur R. Miller & E. H. Cooper,

Federal Practice and Procedure § 4470, at 688-89 (1981) (emphasis

the transactions which were the subject of” the prior proceed-

ing); Raskin v. Birmingham Steel Corp., Civ. A. No. 11365,

1990 WL 193326, at *7 (Del. Ch. Dec. 4, 1990) (stating that

without “the release of federal securities law claims arising

from [a] merger .. . [s]ettlement . . . would hardly be practi-

cable”).

A. The Ninth Circuit Erroneously Concluded That

a Class Action Settlement Is Analytically Differ-

ent From an Individual or Derivative Settlement

The Ninth Circuit’s rationale for denying full faith and

credit to the Delaware judgment is that an unparticularized

“public policy” concern for the rights of absent class members

precludes a state court from requiring “passive class members

to contractually release their exclusively federal claims in or-

der to enjoy the benefits of a state class action [settlement).”

Pet. App. 40a & n.33. The court recognized that state courts

have the power to approve the settlement of exclusively fed-

eral claims in an individual or derivative action, but held that

the “settlement of a class action is fundamentally different

from the settlement of a traditional litigation.” Pet. App. 37a-

38a & n.32.'° Thus, the “policy” that motivated the Ninth

Circuit is that only a federal court can approve a class action

settlement that releases a federal securities law claim, even

though:

'S Oddly, the court failed to note that derivative claims are pursued

through much the same mechanism as class suits. Like class actions, deriva-

tive suits cannot be maintained or settled unless the court determines that the

poration or association.” Fed. R. Civ. P. 23.1. See In re Salomon Inc. Share-

holders Derivative Litig., No. 91 Civ. 5500 (RPP), 1994 WL 533595, at *7

(S.D.N.Y. Sept. 30, 1994) (“[D]erivative suits, like class actions, are com-

plex litigations of a representative nature which the Judicial Conference has

determined present the necessity of close and careful court supervision to

ensure in part that the interests of absent shareholders are protected.”).

¢ a state court can determine factual issues that preclude

subsequent prosecution of exclusively federal causes of

action; and

° non-federal and even non-judicial fora can resolve causes

of action that are within the exclusive jurisdiction of the

federal courts; ' and

¢ a state court-approved release terminates exclusively fed-

eral causes of action in individual and derivative actions,

Pet. App. 37a-38a & n.32; and

° See, e.g., Hathorn v. Lovorn, 457 U.S. 255, 266 n.18 (1982) (“We fre-

quently permit state courts to decide ‘collaterally’ issues that would be

reserved for the federal courts if the cause of action arose directly under

—— pw J, wy y vancneg Labs., Inc., 279 U.S. 388, 391-92

° validating or invalidating patents be-

long to the Courts of the United States does not give sacrosanctity to facts

that may be conclusive upon the question in issue. A fact is not prevented

from being proved in any case in which it is material, by the suggestion

that if it is true an important patent is void.”). Indeed, federal courts have

stayed class actions alleging exclusively federal securities law claims pur-

suant to Colorado River Water Conservation Dist. v. United States, 424

U.S. 800 (1976), pending a final determination of paralle| state court pro-

ceedings, on the ground that disposition of the state action might compel

dismissal of the federal action. See, e.g., Lorentzen v. Levolor Corp., 754

F. Supp. 987, 992 (S.D.N.Y. 1991); Gabelli, 1990 WL 213119, at *5.

'” (1) Exclusively federal claims may be decided in arbitration. See, e.¢.,

Shearson v. MacMahon, 482 U.S. 220, 238 (1987) (Exchange Act

claims); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473

U.S. 614, 633-34 (1985) (federal antitrust claims). A judgment entered on

an arbitration award resolving an exclusively federal claim is entitled to

preclusive effect in a subsequent federal action. See, e.g, Hough v. Mer-

rill Lynch, Pierce, Fenner & Smith, Inc., 757 F.Supp. 283, 291-92

(S.D.N.Y.), aff'd, 946 F.2d 883 (2d Cir. 1991). (2) State courts may ad-

judicate federal securities law defenses raised in response to state claims.

See, e.g., Will v. Calvert Fire Ins. Co., 437 U.S. 655, 658-59 (1978), We-

iner v. Shearson, Hammill & Co., 521 F.2d 817, 821-22 (9th Cir. 1975);

cf Bement v. National Harrow Co., 186 U.S. 70, 87-88 (1902) (antitrust

defenses). (3) Under principles of forum non conveniens, a foreign sov-

ereign that has legal competence to adjudicate “somewhat similar” claims

may adjudicate exclusively federal claims. See, e.g, Lockman Foundation

v. Evangelical Alliance Mission, 930 F.2d 764, 766 (9th Cir. 1991)

(holding that “Japan is the more convenient forum” to adjudicate copy-

right claims).

e a state court judgment can determine or resolve any non-

exclusive federal cause of action (e.g., a securities claim

under the Securities Act of 1933).

The Ninth Circuit determined that class actions are

“fundamentally different” because class members “do not in-

dividually consent” to a settlement. Pet. App. 38a-39a. How-

ever, in a decision issued subsequent to Epstein, the Ninth

Circuit rejected this reasoning, holding:

A class action settlement, like the settlement of any

other legal claim, is a “private consensual agreement

negotiated between the parties”. . . . The fact that it is

approved by the court does not change the fact that the

settlement is essentially a private, contractual agree-

ment between the parties.

Cohen v. Resolution Trust Corp., Nos. 94-55209, 94-55218,

- inth Circuit's decision is anomalous because it would permit

me... an to approve settlements releasing 1933 Act claims, over which

the state courts have concurrent jurisdiction, see Rodriguez De Quijas v.

Shearson/American Express, Inc., 490 U.S. 477, 482 (1989), but not

claims under the Securities Exchange Act of 1934. This ruling collides

with

the principle that the 1933 and 1934 Acts should be construed

emeentonsty because Gey “eonstitate interrelated components of

the federal regulatory scheme governing transactions in secur-

than another.

484-85 (emphasis added) (citations omitted). If, as is often the case,

dhe cme conden or wansnstion gives sie to chains under both to 1933

Act and the 1934 Act, the Ninth Circuit’s decision would permit a state

court to approve a settlement releasing claims (asserted or unasserted)

under the 1933 Act, but not the 1934 Act.

1995 WL 444436, at *3 (9th Cir. July 28, 1995) (citations

omitted).

Here, the “private, contractual agreement” releasing the

claims was negotiated on behalf of the class by class counsel

acting pursuant to Delaware class action law. Thus, pursuant

to Delaware Chancery Rule 23 -- which is virtually identical

to Fed R. Civ. P. 23, see note 9, supra -- class members, all of

whom had an opportunity to either object to or opt out of the

settlement agreement, consented to the contract when it was

approved by the Chancery Court upon notice to the class

members. In nullifying the release that is an integral part of

the settlement agreement, the Ninth Circuit ignored Delaware

procedures that are designed to assure that a class action set-

tlement is not “fundamentally different” from an individual

settlement for purposes of preclusion analysis.

The Epstein court’s conclusion simply cannot be reconciled

with Shutts. In Shutts, this Court held that an opt-out right

satisfies the requirements of due process and permits a state

court class action to bind out-of-state class members who do

not affirmatively consent to the state court’s jurisdiction. 472

U.S. at 812-14; see also id. at 813 (“[T]he Constitution does

not require more to protect what must be the somewhat rare

species of class member who is unwilling to execute an ‘opt

out’ form, but whose claim is nonetheless so important that he

cannot be presumed to consent to being a member of the class

by his failure to do so.”). If, as Shutts holds, a class member’s

decision not to opt out constitutes “consent” to the jurisdic-

tion of the state court, surely a failure to opt out of a state

court class action settlement likewise constitutes effective

consent to the settlement.'? See Eisen v. Carlisle & Jacquelin,

417 U.S. 156, 176 (1974) (stating that class action procedure

° Contrary to this Court’s reasoning in Shutts, the Ninth Circuit stated

that “we would be blind to reality to think that any consent implied by

class members in deciding not to opt out is comparable to the consent

given by individual plaintiffs in settling their own lawsuits.” Pet. App.

39a-40a. Compare Shutts, 472 U.S. at 811 (rejecting argument that class

members must “opt in” to be bound).

was intended to “bind all class members who did not request

exclusion from the suit”).

As the Ninth Circuit has held elsewhere:

[A]ll class members were given the right to opt out

after being apprised of the terms of the settlement.

Appellants were not forced into a position of having to

predict whether their interests would be adequately

represented. They could determine whether there had

been adequate representation of their interests by re-

viewing the terms of the settlement. If they were dis-

satisfied, they could opt out of the class.

Marshall v. Holiday Magic, Inc., 550 F.2d 1173, 1177 (9th

Cir. 1977). See Thompson v. Edward D. Jones & Co., 992

F.2d 187, 191-92 (8th Cir. 1993); In re Four Seasons Sec.

Laws Litig., 502 F.2d 834, 843 (10th Cir.) (A right to opt out

affords the class “the unique opportunity of judging, retro-

spectively, whether its interests had been adequately repre-

sented at a time when it was capable of excluding itself if not

satisfied.”) (emphasis added), cert. denied, 419 U.S. 1034

(1974); Valerio v. Boise Cascade Corp., 80 F.R.D. 626, 640

n.9 (N.D. Cal. 1978), aff'd and op. adopted, 645 F.2d 699

(9th Cir.), cert. denied, 454 U.S. 1126 (1981).

A settlement releasing federal claims on notice and provid-

ing a right to opt out works no unwanted or unintended con-

sequences on absent class members. Parties may be unable to

predict the future issue or claim preclusive effect of an adju-

dication, but parties to a settlement know precisely what

rights they relinquish. Thus, the members of the class partici-

pating in an opt-out settlement make a uniquely informed and

voluntary choice. See In re General Motors Corp. Pick-Up

Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 792 (3d Cir.

1995) (“Since the plaintiff is offered the opportunity to opt

out of the class simultaneously with the opportunity to accept

or reject the settlement offer . . . the plaintiff knows exactly

what result he or she sacrifices.”) (emphasis added).

Significantly, prior decisions recognizing that a state court

may approve a class settlement releasing exclusively federal

claims involved non-opt-out settlements. See, e.g., Grimes, 17

F.3d at 1555; Nottingham, 925 F.2d at 32; Sandler, 818 F.

Supp. at 700. A fortiori, a state court class action settlement

that affords opt-out rights precludes further litigation by class

members who fail to opt out of the settlement.’

B. Outside the Ninth Circuit It Is Uniformly Held

That a State Court May Approve a Class Action

Settlement That Includes a Release of Exclusively

Federal Claims

Prior to the Ninth Circuit’s decision, state and federal case

law uniformly held that a state court has authority to approve,

as part of a class settlement, a release of exclusively federal

claims arising out of the same transaction or subject matter

that is the basis of the action before it. In Nottingham, share-

holder class actions were filed first in federal court and later

in Delaware Chancery Court. 925 F.2d at 30. The Delaware

class representatives agreed to a non-opt out settlement pro-

viding non-monetary consideration in exchange for a global

release of all state and federal claims arising out of the trans-

actions “referred to in the complaint or the settlement docu-

mentation.” /d. at 31. The federal plaintiffs objected to the

settlement in Chancery Court and appealed that court’s ap-

proval of the settlement to the Delaware Supreme Court,

- Due Process is not at issue here. First, the Ninth Circuit decision is not

predicated on any due process concern. Second, the questions of adequacy

of representation, notice, and the provision of all requisite due process

protections were litigated and decided in the Delaware Chancery Court,

which held that the class representation was adequate, notice the best

practicable, and the requirements of due process fully satisfied. See Pet.

App. 73a-74a. These findings are entitled to issue preclusive effect. See

Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984);

Nottingham, 925 F.2d at 32. Significantly, because the Delaware action

sought primarily equitable relief, no opt-out right was required. See

Grimes, 17 F.3d at 1560 (“[T]he Delaware state court need only have

provided ‘notice plus an opportunity to be heard and participate in the

litigation’ in order to satisfy due process.”) (quoting Shutts, 472 U.S. at

812). Since class members were afforded an opportunity both to object or

opt out, the Delaware proceeding afforded more than adequate due proc-

ess. See Shutts, 472 U.S. at 811-12; Eisen, 417 U.S. at 176.

which rejected their argument that the Chancery Court lacked

the jurisdictional power to approve the release of the federal

securities law claims. /d. (citing Dana, 564 A.2d at 1104-05).

The federal district court thereafter found that the release

validly encompassed the federal claims and granted summary

judgment for defendants. The First Circuit affirmed and held:

It is beyond cavil that a suit can be barred by the ear-

lier settlement of another suit in either of two ways: res

judicata or release. The defenses are separate and dis-

tinct. . .. The release contained in the Dana settlement,

by its terms, met all the criteria necessary to engage

the gears of the release defense for purposes of this

suit: it (1) applied to appellants, (2) encompassed the

claims asserted below, and (3) was legally enforceable.

[Thus,] further prosecution of appellants’ federal suit is

foreclosed by the release defense . . . .

Id. at 31-32 (citations omitted). The First Circuit — rs

“jejune” the contention that a state court cannot appro

Ew action settlement releasing exclusively federal claims:

[A]s a matter of federal law, a state court can approve

and enforce a settlement which requires a party to re-

lease claims actually brought, or potentially

“bringable,” in federal court under “exclusive jurisdic-

tion” federal statutes even though the state court could

not adjudicate claims arising under such statutes.

Id. at 33-34.

In Grimes, the Third Circuit likewise enforced a state court

non-opt out class action settlement releasing exclusively fed-

eral claims pending in a federal court action brought by other

members of the settlement class. Affirming the dismissal of

the federal claims on the basis of a Delaware release, the

Third Circuit honored the parties’ intent “to settle all disputes

that did or might arise out of the merger transaction and

“interpret[ed] the settlement agreement to release all potential

causes of action, even those like the present claims that can

only be brought in federal court.” 17 F.3d at 1561 n.10. The

Court observed that “[a]s a judgment, the settlement and re-

lease of claims is a contract that not only is agreed upon by

the parties, but also is stamped with the imprimatur of the

court with jurisdiction over the parties and the subject matter

of the lawsuit.” Jd. at 1557. Like the First Circuit, the Third

Circuit concluded that “as a matter of federal law a state court

has the power to enter a settlement negotiated by the parties

as a judgment which releases exclusive federal claims that the

State court could not itself entertain.” Jd at 1563-64; see also

note 14, supra, and accompanying text.

fl. THE FULL FAITH AND CREDIT ACT RE-

QUIRED THE NINTH CIRCUIT TO GIVE

EFFECT TO THE DELAWARE JUDGMENT,

AND THE RELEASE IT INCORPORATES, AS

REQUIRED BY DELAWARE LAW

The Full Faith and Credit Act requires federal courts to

give the Delaware judgment the same effect it would be

given in a Delaware state court. See Mills v. Duryee, 11 U.S.

(7 Cranch) 481, 484-85 (1813) (“[W]e can perceive no ra-

tional interpretation of the act of congress, unless it declares

a judgment conclusive when a Court of the particular state

where it is rendered would pronounce the same decision.”);

see also Parsons Steel Inc. v. First Alabama Bank, 474 U.S.

518, 525-26 (1986) (reversing and remanding for determi-

nation under state preclusion rules of the effect of state court

judgment on federal Bank Holding Company Act claim);

Marrese v. American Academy of Orthopaedic Surgeons,

470 U.S. 373, 386-87 (1985) (reversing and remanding for

determination under state preclusion rules of the effect of

state court judgment on exclusively federal antitrust claim);

Kremer v. Chemical Constr. Corp., 456 U.S. 461, 481-82

(1982).

Under Delaware preclusion law -- ignored by the Ninth

Circuit -- a judgment entered on a settlement bars subsequent

proceedings resolved by the terms of the settlement, including

exclusively federal claims. Dana, 564 A.2d at 1105; In re

Union Square Assocs. Sec. Litig., Civ. A. No. 11028, 1993

WL 220528, at *3 (Del. Ch. June 16, 1993); Sternberg v.

O'Neil, Civ. A. No. 8592, 1989 WL 137932, at *4 (Del. Ch.

Nov. 9, 1989).7!

“{I]n order to qualify for the full faith and credit guaranteed

by federal law,” the state judgment need only satisfy the

minimum procedural due requirements. Kremer, 456

U.S. at 481; see also Parsons Steel, 474 U.S. at 523; note 20,

supra. The law of Delaware is consistent with the general rule

that a judgment entered on a settlement is entitled to full ef-

fect. See In re Union Square Assocs. Sec. Litig., 1993 WL

220528, at *3; Sternberg, 1989 WL 137932, at *4; Schlaeppi

v. Delaware Trust Co., 525 A.2d 562, 565 (Del. Ch. 1986),

aff d, 523 A.2d 981 (Del.), cert. denied, 484 U.S. 826 (1987);

Estrada-Izquierdo v. Aponte-Roque, 850 F.2d 10, 13, 19 (ist

Cir. 1988); Reiter v. Universal Marion Corp., 299 F.2d 449,

452-53 (D.C. Cir. 1962). There is no different rule for judg-

ments incorporating a release. See, e.g., Nottingham, 925 F.2d

at 34; Three Rivers Motors Co., Inc. v. Ford Motor Co., 522

F.2d 885, 891-92 (3d Cir. 1975). Thus, through the Full Faith

and Credit Act, the release embodied in the Delaware judg-

ment operates to bar all former MCA shareholders who did

not opt out of the Delaware settlement from prosecuting the

claims in this suit.

The Ninth Circuit essentially questioned the fairness of the

Delaware court’s decision. But this is precisely what the Full

Faith and Credit Act prohibits. Fairness must be considered ex

ante, not after a subsequent reversal on a point of law by an

intermediate appellate court. Cf Federated Dep't Stores, Inc.

v. Moitie, 452 U.S. 394, 398-401 (1981). Moreover, real

is determined to be fair and to have met all due process requirements, the

class members are bound by the release or the doctrine of issue preclu-

sion. Class members cannot subsequently relitigate the claims barred by

the settlement in a federal court.” Jn re MCA, Inc. Shareholders Litig. ,

A.2d 687, 691 (Del. Ch. 1991) (citations omitted); see also Dana,

A.2d at 1104 (law “uniformly” holds that state court can release exclu-

sively federal claims).

fairness and justice lie in holding parties to their bargains and

choices, and respecting the finality of judgments. /d at 401

(“This Court has long recognized that ‘[p]ublic policy dictates

that there be an end of litigation; that those who have con-

tested an issue shall be bound by the result of the contest, and

that matters once tried shall be considered forever settled as

between the parties.’ ”’) (citations omitted).

A. The Ninth Circuit Decision Undermines Basic

Principles of Federalism

_ The principles underlying full faith and credit are constitu-

tional. The Framers understood that fil! recognition of sister

state judicial proceedings was an essential component of fed-

eralism. See Underwriters Nat'l Assurance Co. v. North

Carolina Life & Accident & Health Ins. Guar. Ass'n, 455

US. 691, 703-04 (1982). To encourage the sense of federa-

tion among the states, the Framers included a clause in the

Constitution requiring each state to give “Full Faith and

Credit . . . to the public acts, records, and judicial proceedings

of every other state.” U.S. Const., art. IV, § 1. James Madison

argued that the Full Faith and Credit clause was indispensable

to promote “harmony and proper intercourse among the

States” and was “a very convenient instrument of justice.”

The Federalist No. 42, at 267, 271 (James Madison) (Clinton

Rossiter ed., 1961).

The first Congress enacted the Full Faith and Credit Act in

1790 “specifically to insure that federal courts . . . would be

bound by state judgments.” Kremer, 456 U.S. at 483 n.24; see

also Davis v. Davis, 305 U.S. 32, 40 (1938). The Act ensures

the “comity between state and federal courts that has been

recognized as a bulwark of the federal system.” Allen v.

MeCurry, 449 U.S. 90, 96 (1980); see also Growe v. Emison,

113 S. Ct. 1075, 1082 (1993) (Full Faith and Credit Act em-

bodies “elementary principles of federalism and comity”).

Mindful of the federalist plan, this Court has consistently

sought to promote:

the notion of “comity,” that is, a proper respect for

state functions, a recognition of the fact that the entire

country is made up of a Union of separate state gov-

ernments, and a continuance of the belief that the Na-

tional Government will fare best if the States and their

institutions are left free to perform their separate func-

tions in their separate ways. This, perhaps for lack of a

better and clearer way to describe it, is referred to by

many as “Our Federalism,” and one familiar with the

profound debates that ushered our Federal Constitution

into existence is bound to respect those who remain

loyal to the ideas and dreams of “Our Federalism.”

Younger v. Harris, 401 U.S. 37, 44 (1971); see also Under-

writers Nat'l Assurance Co., 455 U.S. at 703-04 (“Ours is a

union of states, each having its own judicial system capable of

adjudicating the rights and responsibilities of the parties

brought before it.”).~ The primary interest of the states in

certain matters, including the regulation of corporate affairs of

entities transacting business under state auspices, heightens

the need for state court autonomy. See CTS Corp. v. Dynam-

ics Corp. of Am., 481 U.S. 69, 89 (1987) (“No principle of

corporation law and practice is more firmly established than a

State’s authority to regulate domestic corporations.”).

Recognizing that “an intrusion upon state judicial authority

deeply implicates the principles of comity and may impair the

smooth workings of our federal system,” Lehman v. Lycoming

County Children’s Servs. Agency, 458 U.S. 502, 513 n.17

(1982), this Court historically has sought to protect state sov-

ereignty against unwarranted federal encroachment in a broad

variety of contexts:

e Holding that lower federal courts have no oN

authority to directly or indirectly review state court judg-

ments. See, e.g., Rooker v. Fidelity Trust Co., 263 U.S.

413, 416 (1923).

” Congress has advanced these principles by codifying statutory limitations

on federal court power to disrupt or review state court proceedings. See, e.g,

28 U.S.C. § 2283 (the Anti-Injunction Act); 28 U.S.C. § 2254(b) (the statu-

tory branch of the habeas corpus exhaustion requirement), 28 U.S.C. § 1341

(the Tax Injunction Act); 28 U.S.C. § 1342 (the Johnson Act).

e Limiting the availability of federal injunctive or declara-

tory relief against state civil and criminal

See, e.g., Pennzoil Co v. Texaco, Inc., 481 U.S. 1, 11 n.9

(1987) (abstention doctrines “reflect a complex of consid-

erations designed to soften the tensions inherent in a sys-

tem that contemplates parallel judicial processes”);

Middlesex County Ethics Comm. v. Garden State Bar

Ass'n, 457 U.S. 423, 432-34 (1982) (state attorney disci-

plinary proceedings); Juidice v. Vail, 430 U.S. 327, 338

(1977) (state civil contempt proceedings); Younger, 401

U.S. at 43-44 (state criminal proceedings).

e Abstaining from the exercise of federal jurisdiction to al-

low state courts to function without interference. See, e.g.,

Colorado River Water Conservation Dist. v. United

States, 424 U.S. 800, 817 (1976) (“‘[wlise judicial ad-

ministration . - conservation of judicial resources and

comprehensive disposition of litigation’” counsel staying

federal action where a related state proceeding is is pend-

ing); Burford v. Sun Oil Co., 319 U.S. 315, 334 (1943) (“a

sound respect for the independence of state action requires

the federal equity court to stay its hand”).

e Requiring litigants to exhaust state remedies before seek-

ing relief in federal court. See, e.g, Huffman v. Pursue,

Lid., 420 U.S. 592, 610 (1975).

The Ninth Circuit held that “federal pre-emption” overrides

the Full Faith and Credit Act and permits a federal court to

deny full faith and credit to a state court judgment incorporat-

img a class release of exclusively federal claims where

“Congress has expressly denied state courts jurisdiction over

an important area of federal law.” Pet. App. 28a n.25. But

federal preemption is not implicated by the judicial approval

of a settlement. The mechanism by which the federal claims

were released here is the execution by private parties of a

contract which was approved by the court. See American Air-

lines, Inc. v. Wolens, 115 S. Ct. 817, 824 (1995) (courts

should be reluctant to imply federal preemption that would

nullify enforcement of private parties’ contracts); cf Cohen,

1995 WL 444436, at *3. Federal preemption is implicated

when the scope of a federal statute indicates that Congress

intended to centralize al/ authority over the regulated area in

the federal government. See Building & Constr. Trades

Council of the Metro. Dist. v. Associated Builders & Contrac-

tors of Mass./R.1, 113 S. Ct. 1190, 1194 (1993).

This Court has found preemption of state court adjudica-

tory authority only in rare instances required by a congres-

sional scheme. Thus, in Brown v. Felsen, 442 U.S. 127

(1979), this Court found that the grant of exclusive jurisdic-

tion under § 17 of the former Bankruptcy Act “require(d]

creditors to apply to the bankruptcy court for adjudication of

certain dischargeability questions,” id at 129-130, because

Congress had manifested an unequivocal intention “to take

these § 17 claims away from state courts.” Id. at 136. Since

the Constitution vests in Congress plenary authority, exclu-

sive of the states, to make uniform bankruptcy laws, see U.S.

Const., art. I, § 8, cl. 4, and since Congress has established

specialized bankruptcy courts to develop and apply uniform

bankruptcy law, see 28 U.S.C. § 151, et seg., giving full faith

and credit to the state court judgment adjudicating discharge-

does not intend to

Biue Cross & Blue Shield Plans v.

1671, 1676 (1995); see CSX Transp., Inc. Vv.

ORE

as Bs octane ee tn eee

The factors that in Brown warranted a departure from stan-

dard preclusion principles have no analog in the case of a

state court judgment approving a private contract of release.

Congress has manifested no intent to oust state courts of their

authority to approve class settlements -- and only class set-

tlements -- in cases properly pending before them. See 15

U.S.C. § 78bb(a) (rights and remedies created by Exchange

Act are in addition to those existing independent of the Act).

No conceivable federal interest could be advanced by with:

holding full faith and credit from a state court judgment en-

tered upon a class action settlement that permits class members

to preserve their ability to assert federal securities law claims

by opting out of the settlement. Indeed, undoing the state class

action settlement would unjustifiably eviscerate the federal

policy of promoting consensual resolutions of disputes.

B. The Grant to Federal Courts of Exclusive Juris-

diction to Adjudicate Exchange Act Claims Does

Not Create an Implied Repeal of § 1738 for a

State Court Judgment Entered on a Settlement

Releasing Exclusively Federal Claims

The Ninth Circuit never undertook to determine whether

the text or legislative history of the Exchange Act or Williams

Act, the amendment to the Exchange Act pursuant to which

Rule 14d-10 was promulgated, see note 25, infra, could sup-

port a finding of an implied repeal of the Full Faith and Credit

Act for state court j approving opt-out class action

settlements. They do not. Nor does anything inherent in an

“exclusive” grant of federal jurisdiction even remotely sug-

gest an implied repeal of the Full Faith and Credit Act in the

context of a court-approved settlement releasing federal

claims.

Section 1738 presumptively applies to al/ state judgments.

Marrese, 470 U.S. at 381; Kremer, 456 U.S. at 468, 481-82.

“[AJn exception to § 1738 will not be recognized unless a

later statute contains an express or implied partial repeal.”

Kremer, 456 U.S. at 468; see also Marrese, 470 U.S. at 381.

The Exchange Act does not expressly repeal § 1738. See

Murphy v. Gallagher, 761 F.2d 878, 884-86 (2d Cir. 1985).

Implied repeals “are not favored.” Kremer, 456 U.S. at 468

(quoting Radzanower v. Touche Ross & Co., 426 U.S. 148,

154 (1976)). Congress is deemed aware of § 1738 and its

consistent application in the courts when enacting federal

laws subsequent to passage of the Full Faith and Credit Act.

See, e.g., University of Tennessee v. Elliot, 478 U.S. 788, 796-

97 (1986); Allen, 449 U.S. at 97-98. Thus, absent a clear indi-

cation that Congress intended a repeal of § 1738, or a

“manifest incompatibility” between § 1738 and a later statute,

the Court will infer that Congress did not intend to disturb the

operation of § 1738. See, e.g., Kremer, 456 U.S. at 473 (no

implied repeal unless a court finds that “Congress considered

it necessary or desirable to provide an absolute right to reliti-

gate an issue resolved by a state court”).” This presumption

imposes a “rigorous standard” for parties seeking to establish

an implied repeal, and any doubts should be resolved against

“overrid[ing] the historic respect that federal courts accord

state court judgments.” Jd. at 471-72 & n.10; see also Mar-

rese, 470 U.S. at 381 (presumption favoring § 1738 governs

even “in a lawsuit involving a claim within the exclusive ju-

risdiction of the federal courts”).

The legislative history of the Exchange Act provides no

suggestion that Congress intended to create an exception to

§ 1738 for a state court judgment entered on a settlement re-

leasing exclusively federal claims. See Murphy, 761 F.2d at

885 (Exchange Act does not impliedly repeal § 1738). Indeed,

it is recognized that the creation of exclusive jurisdiction in

* The habeas corpus exception to the mandate of Full Faith and Credit --

the only express statutory exception to § 1738 recognized by this Court --

“finds its source in the unique purpose of habeas corpus -- to release the

applicant for the writ from unlawful confinement.” Allen, 449 U.S. at 98

n.12; see also Sanders v. United States, 373 US. 1, 8 (1963)

(“Conventional notions of finality of litigation have no place where life or

liberty is at stake and infringement of constitutional rights is alleged.”).

But even in the habeas corpus context, Congress and this Court have care-

fully circumscribed the sccpe of federal habeas corpus review in defer-

ence to the integrity of state courts and to avoid unnecessary state-federal

friction. See Coleman v. Thompson, 501 U.S. 722, 731 (1991); Stone v.

Powell, 428 U.S. 465, 494 n.35 (1976).

Section 27 of the Exchange Act, 15 U.S.C. § 78aa, was “pure

happenstance.” American Law Institute, Study of the Division

of Jurisdiction Between State and Federal Courts 183 (1969)

(calling for elimination of exclusive federal jurisdiction under

the 1934 Act); see also In re TransOcean Tender Offer Sec.

Litig., 427 F. Supp. 1211, 1219 (N.D. Ill. 1977) (legislative

history of 1934 Act is “unedifying as to the Congressional mo-

tive for vesting exclusive jurisdiction in the federal courts”).”°

This Court has consistently rejected arguments that federal

statutes limit the scope of § 1738. See Migra, 465 U.S. at 84

** Early versions of the House bill failed to indicate whether jurisdiction

was to be exclusive or concurrent. See H.R. 7852, 73rd Cong., 2d Sess.,

§ 25 (1934). An intermediate version explicitly mandated concurrent Ex-

change Act jurisdiction. See H.R. 7924, 73rd Cong., 2d Sess., § 6(a)

(1934). The bill finally reported out of the House Committee on Interstate

and Foreign Commerce simply provided that “[t)he district courts of the

United States . . . shall have jurisdiction of violations of this Act...” H.R.

9323, 73rd Cong., 2d Sess., § 26 (1934). With virtually no floor debate,

the bill was amended to authorize exclusive federal jurisdiction. See 78

Cong. Rec. 8099 (1934); H.R. 9323, 73rd Cong., 2d Sess., § 26 (1934) (bill

passed by House). The language of the Senate bill specified neither exclu-

sive federal jurisdiction nor concurrent jurisdiction. See S. 3420, 73rd

Cong., 2d Sess., § 26 (1934). During the debate the Senators were unable to

determine the intent of the Committee on Banking and Currency. Aware of

ate decided to leave the ambiguity for the Conference Committee to resolve.

78 Cong. Rec. 8571 (1934) (remarks of Senators Steiwer, Fletcher and

Byres). Without debate, the Conference Committee adopted the House

version which became § 27 of the 1934 Act. See 78 Cong. Rec. 9939

(1934); S. Doc. No. 185, 73rd Cong., 2d Sess., § 23 (1934).

Congress enacted the Williams Act in 1968 as an amendment to the

Exchange Act. See Schreiber v. Burlington Northern, Inc., 472 U.S. |, 12

(1985). Neither the express terms of the Williams Act nor its legislative

history makes reference to the jurisdiction of the federal courts. And, this

Court has recognized that the Williams Act does not preempt state regula-

tion of tender offers. See CTS Corp., 481 U.S. at 86 (“The longstanding

prevalence of state regulation in this area suggests that, if Congress had

intended to pre-empt all state laws that delay the acquisition of voting

control following a tender offer, it would have said so explicitly.”)

(emphasis added). Thus, the Williams Act furnishes no basis for an im-

plied repeal of § 1738 independent of the Exchange Act.

(the interplay between § 1738 and 42 U.S.C. § 1983

“embodies the view that it is more important to give full faith

and credit to state court judgments than to ensure separate fo-

rums for federal and state claims”);”° see also Marrese, 470

U.S. at 385-86 (the force of § 1738 “certainly [is] not made

less compelling because state courts lack jurisdiction over

federal antitrust claims”); Kremer, 456 U.S. at 463, 476 (Title

VII does not “supersede the principles of comity and repose

embodied in § 1738”); Allen, 449 U.S. at 97-98 (no basis to

find that the creation of a federal cause of action under § 1983

impliedly repeals the Full Faith and Credit Act).”’

C. Respondents Were Barred from Initiating, and

the Ninth Circuit Should Not Have Entertained,

a Collateral Attack on the Delaware Court’s De-

termination of Its Own Authority to Approve the

Settlement

Respondents chose to stand by and not object to the settle-

ment in the Delaware court, after receiving notice of the set-

tlement and an opportunity to be heard. * These strategic

480 U.S. 386, 392 (1987), for the proposition that a release need not be

enforced if the public interest in favor of settlements was outweighed by a

competing federal interest. Pet. App. 40a n.33. Newton involved “a ques-

tion important to the administration of criminal justice,” namely an indi-

vidual’s release of potential 42 U.S.C. § 1983 claims in exchange for the

dismissal of pending criminal charges. 480 U.S. at 392. This Court never-

theless enforced the release. See Newton, 480 U.S. at 394-97.

” The competence of the state courts to address securities law issues can-

not be questioned. Every state has enacted a securities act, see Thomas

Hazen, The Law of Securities Regulation 219 (1985), and a majority of

states has adopted the Uniform Securities Act, which borrows much of its

language and many of its standards from the federal securities laws. See

Note, The Securities Exchange Act and the Rule of Exclusive Federal Ju-

risdiction, 89 Yale L.J. 95, 112 (1979).

?® Respondents’ counsel characterized their decision not to appear in

Delaware as follows:

We thought about opposing in Delaware. If we went to Delaware

to oppose it what prevents defendants from offering these same

lawyers a better settlement, but one we still consider inadequate. .

(Footnote continued)

decisions bar respondents from mounting any “back door”

challenge to the terms of the settlement in federal court. If re-

spondents had objections to the authority of the Delaware

courts to release federal claims, they should have raised them

in the Delaware courts.”” Having failed to raise an appropriate

direct challenge to the authority of the Delaware courts, re-

spondents are foreclosed from collaterally attacking the

Delaware judgment.” “The need for finality within our federal

. - Frankly, we thought it unlikely that Vice Chancellor [now Jus-

tice] Hartnett would approve such a settlement.

R. 57 at 16 (emphasis added).

* By in effect overruling the Delaware courts’ determinations regarding

the capacity of the parties to contract, the adequacy of representation and

the fairness of the settlement (and directing the certification of a federal class

consisting almost entirely of MCA shareholders who had released their

claims for consideration), the Ninth Circuit exercised appellate review of the

final judgment of the Delaware Supreme Court in derogation of the Rooker-

Feldman doctrine. See Rooker, 263 U.S. at 415 (state court's “decision,

whether right or wrong, was an exercise of jurisdiction. If the [state court]

decision was wrong, that did not make the judgment void, but merely left

it open to reversal or modification in an appropriate and timely appellate

proceeding”) (emphasis added); District of Columbia Court of Appeals v.

Feldman, 460 U.S. 462, 483 (1983) (lower federal courts “possess no

power whatever to sit in direct review of state court decisions” and may

not review any issue actually decided by a state court or any issue

“inextricably intertwined with the state court’s” determination).

*° The Ninth Circuit recognized that (1) a collateral attack on a state

court's determination of its own authority is not generally permitted, Pet.

App. 28a n.25 (citing Durfee v. Duke, 375 U.S. 106, 111 (1963)), and (2)

that the Delaware court had “determined that it was jurisdictionally com-

petent to enter a judgment settling the class action.” /d. Nevertheless, the

Ninth Circuit concluded that “the policy of finality of judgments is plainly

outweighed” when a state court “exercise[s] judicial power over” exclu-

sively federal claims. /d. However, no federal interest is implicated when

a state court approves a release of a federal claim. See Point I, supra.

Moreover, this Court has confirmed that the rule that jurisdictional de-

“exclusive jurisdiction over the subject matter of th[e] litigation.” Under-

writers Nat'l Assurance Co., 455 U.S. at 705 n.11. While Durfee recog-

nized that extraordinary circumstances might exist in which the doctrine

of federal preemption would override the general rule of finality, this

Court has actually recognized such an exception only in the context of

(Footnote continued)

system ... applies with equal force to questions of jurisdic-

tion.” Underwriters Nat'l Assurance Co., 455 U.S. at 706

n.13; see Atlantic Coast Line R.R. Co. v. Brotherhood of Lo-

comotive Eng'rs, 398 U.S. 281, 296 (1970) (if a party to a

state court proceeding “was adversely affected by the state

court’s decision, it was free to seek vindication of its federal

right in the [state] appellate courts and ultimately, if neces-

sary, in this Court.”); Nottingham, 925 F.2d at 33 (“If, having

objected and been overruled, appellants were still dissatisfied

with the Delaware judgment, their recourse was to the United

States Supreme Court by means of certiorari, not to the lower

federal courts in the vain pursuit of back-door relief.”).

Respondents should not be permitted to deliberately wait

out the state court i . “A party cannot escape the

requirements of full faith and credit and res judicata by assert-

ing its own failure to raise matters clearly within the scope of

a prior proceeding.” Underwriters Nat'l Assurance Co., 455

U.S. at 710. As was held with similar force in /nsurance

Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee:

A party that has had an opportunity to litigate the

question of subject-matter jurisdiction may not, how-

ever, reopen that question in a collateral attack upon an

adverse judgment. It has long been the rule that prin-

ciples of res judicata apply to jurisdictional determina-

tions -- both subject matter and personal.

456 U.S. 694, 702 n.9 (1982) (emphasis added) (citing Chicot

County Drainage Dist. v. Baxter State Bank, 308 U.S. 371,

376 (1940); Stoll v. Gottlieb, 305 U.S. 165 (1938)).

In short, respondents were “obliged to advance [their] ar-

gument that the [Delaware] Court did not have the authority

to settle [the exclusively federal claims] when it was given the

opportunity to do so” in Delaware. Underwriters Nat'l Assur-

ance Co., 455 U.S. at 710. Respondents, self-styled fiduciar-

ies, regarded the Delaware proceedings dismissively. With

proceedings under the Bankruptcy Act and only then when a state court

to adjudicate matters within the federal courts’ plenary author-

ity. See Kalb v. Feuerstein, 308 U.S. 433, 439 (1940).

full knowledge of their opportunity to object to or opt out of

the Delaware proceedings, they chose to do neither. The con-

sequences of that arrogant strategy cannot later be remedied

on collateral attack and cannot serve as the predicate for the

Ninth Circuit’s erroneous and unprecedented interference

with the Delaware judgment.

fil. THE NINTH CIRCUIT TEST FOR DETER-

MINING THE PRECLUSIVE EFFECT OF A

STATE COURT SETTLEMENT RELEASING

FEDERAL CLAIMS IS ENTIRELY MISDI-

RECTED AND UNWORKABLE

The Ninth Circuit held that “a court’s jurisdiction to extin-

guish claims by class settlement should not exceed its juris-

diction to extinguish claims by adjudication.” Pet. App. 34a.

Thus, under the Ninth Circuit’s analysis a state court could

approve the release of exclusively federal claims in individual

and derivative suits, but it could not do so in class suits unless

such claims “would have been extinguished by the issue

preclusive effect of an adjudication of the state claims.” Pet.

App. 33a (emphasis added).

The Ninth Circuit’s analysis conflates the separate concepts

of release and issue preclusion. A release is the contractual

relinquishment of a right by a party or its representative.

Black’s Law Dictionary 1289 (6th ed. 1990). A release is

given legal effect under the regime of state contract law.

Digital Equip. Corp. v. Desktop Direct, Inc., 114 S. Ct. 1992,

2003 (1994); Kokkonen v. Guardian Life Ins. Co. of Am., 114

S. Ct. 1673, 1677 (1994) (“enforcement of settlement agree-

ment is for state courts”); PMX Indus., Inc. v. LEP Profit

Int'l, 31 F.3d 701, 703 (8th Cir. 1994) (“A release or settle-

ment agreement is a contract, and is construed under the legal

principles applicable to the construction and interpretation of

contracts.”). When a release is embodied in a state court

judgment it must be accorded full faith and credit. See

Grimes, 17 F.3d at 1561-63. In contrast, issue preclusion is a

judicial doctrine that bars “relitigation of issues actually liti-

gated and necessary to the outcome of the first action.”

Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979)

(emphasis added) (citations omitted); see also Marrese, 470

U.S. at 376 n.1.

The Ninth Circuit’s analysis is thus fundamentally misdi-

rected: if what a court can adjudicate controls the parameters

of what the parties can consensually decide to release, the

defense of release will be subsumed by issue preclusion. Not-

tingham, 925 F.2d at 34 (“[uJnless the [release] defense is to

be written off as some vestigial remnant of an abandoned ju-

risprudence -- and we think any such suggestion is fanciful” --

independent effect must be given to a release of federal

claims). The invalidity of the Ninth Circuit’s “jurisdictional”

analysis is underscored by the court’s acknowledgement that

state courts have the power to approve the settlement of ex-

clusively federal claims in individual and shareholder deriva-

tive suits. See Pet. App. 37a-38a & n.32. If the Supremacy

Clause prohibited a state court from resolving exclusively

federal claims as a matter of jurisdictional power, a state court

plainly could not approve the settlement of exclusively federal

claims in any context, including in individual and derivative

actions.

A. The Ninth Circuit’s Limitation on the Preclusive

Effect of a Negotiated Release Has No Basis in

Prior Law

The Ninth Circuit asserted that National Super Spuds, Inc.

v. New York Mercantile Exchange, 660 F.2d 9 (2d Cir. 1981),

and TBK Partners, Lid. v. Western Union Corp., 675 F.2d 456

(2d Cir. 1982), “together provide the doctrinal framework for

using issue preclusion” to limit the authority of a state court to

approve a negotiated release. Pet. App. 33a. This assertion is

demonstrably wrong. National Super Spuds and TBK address

the authority of class representatives, not the power of a state

court. Moreover, these cases confirm the capacity of author-

ized class representatives to release on behalf of class mem-

bers any claims that they possess in common with other class

members -- even in the absence of an opt-out right. Nothing in

National Super Spuds or TBK remotely suggests that issue

preclusion has any bearing on -- much less restricts -- the

scope of class action releases that may be negotiated by

authorized representatives.

In National Super Spuds, a federal district court certified a

class of persons who liquidated certain potato future contracts

between April 13 and May 7, 1976. See 660 F.2d at 16.

Thereafter, a state court class action was brought on behalf of

persons who held unliquidated potato future contracts after

May 7, 1976. /d. at 13. Although the federal class representa-

tives “did not purport to represent members of the class or

anyone else with respect to [state] claims based on unliqui-

dated contracts,” they entered into a settlement agreement and

release that purported to encompass the unliquidated con-

tracts. /d. at 17. The consideration paid for the release did not

reflect any additional payment for the release of claims based

on unliquidated contracts. /d. at 18. Since the settlement no-

tice was sent to the class consisting of persons who liquidated

their potato future contracts, members of the state class were

unaware that approval of the federal settlement would result

in the release of claims relating to the unliquidated contracts.

Id. at 16. Enforcing a cardinal principle of due process (embo-

died in the commonality and typicality requirements of Fed. R.

Civ. P. 23) that “named plaintiffs in a class action ‘cannot rep-

resent a class of whom they are not a part,’” the Second Circuit

held that the federal district court could not approve a settle-

ment releasing claims based on unliquidated contracts because

no a representative held such a claim. /d at 17 (citation

omitted).

National Super Spuds forbade the release of claims that

“were not within the description of claims assertable by the

class,” id. at 19, as against absent members whom the named

plaintiffs did not represent in connection with those claims

and who received no notice of the proposed release. National

Super Spuds thus demonstrates the established principle, fully

applicable here, that class settlements may only discharge

claims which the class representatives “possess in common

with other members of the class” based upon the same set of

facts. Id. at 16. See also Officers for Justice v. Civil Serv.

Comm'n, 688 F.2d 615, 632 n.18 (9th Cir. 1982) (“where a

particular type of relief potentially available to the class

members is compromised in the settlement process, it is

mainly irrelevant whether or not that relief was specifically

requested in the complaint”), cert. denied, 459 U.S. 1217

(1983).

In TBK, the Second Circuit reaffirmed the holding of Na-

tional Super Spuds in the context of a non-opt-out settlement

that released claims of class members that the court assumed

it could not adjudicate. TBK, 675 F.2d at 459-60 (“in order to

achieve a comprehensive settlement that would prevent reliti-

gation of settled questions at the core of a class action, a court

may permit the release of a claim based on the identical fac-

tual predicate [i.e., the merger transaction at issue in both

cases] as that underlying the claims in the settled class action

even though the claim was not presented and might not have

been presentable in the class action”) (emphasis added); ac-

cord National Super Spuds, 660 F.2d at 18 n.7 (“We assume

that a settlement could properly be framed so as to prevent

class members from subsequently asserting claims relying on

a legal theory different from that relied upon in the class

action complaint but depending upon the very same set of

facts”). As long as “all class members ha[ve] the same interest

in maximizing the value” of the released claims, and “the set-

tlement treats all class members identically,” TBK, 675 F.2d

at 462, the settlement is effective.’ As TBK makes clear,

>! Adequacy of representation is not an issue in this case. Adequate repre-

sentation requires that the named parties must “‘be part of the class and

possess the same interest and suffer the same injury’ as the class mem-

bers,” General Tel. Co. of the Southwest v. Falcon, 457 U.S. 147, 156

(1982) (citation omitted), so “that the interests of the class members will

be fairly and adequately protected in their absence.” /d, at 158 n.13. Here,

the state class (all MCA shareholders as of September 25, 1990, and

thereafter) included the federal class (all MCA shareholders as of Novem-

ber 3, 1990). And, as the Ninth Circuit acknowledged, “[t}he claims of

every tendering shareholder turn on identical facts and law.” Pet. App.

41a. By advancing their own interests, the named plaintiffs furthered the

interests of the class: maximizing the award they could obtain regardless

of legal theory. See Jn re United Energy Corp. Solar Power Modules Tax

Shelter Inv. Sec. Litig., 122 F.R.D. 251, 256 (C.D. Cal. 1988), | Herbert

B. Newberg & Alba Conte, Newberg on Class Actions, § 3.13 at 3-75 (3d

ed. 1992).

(Footnote continued)

National Super Spuds does not support “applying an issue

preclusion test to limit the preclusive effect of a judgment

approving a class settlement” — as the opinion below errone-

ously asserts. Pet. App. 31a. National Super Spuds rejected a

class settlement that purported to extinguish certain claims

that could not have been extinguished by a judgment after

trial for the reason that the named plaintiffs did not possess

the claims and the claims arose out of separate transactions.**

Adequate representation also requires that class counsel be competent

to pursue the action. General Tel, 457 U.S. at 157-58 n.13; Sosna v.

lowa, 419 U.S. 393, 403 (1975). The Delaware Chancery Court author-

ized the class representatives to represent all former MCA shareholders at

the hearing scheduled to consider the fairness of the settlement. The pro-

fessional competence of the court-appointed Delaware class counsel to

prosecute a securities class action is indisputable. Court-appointed co-lead

counsel for the Delaware class included two of the most preeminent

shareholder litigation firms in the nation. These law firms are reported on

Westlaw as having been court-approved plaintiff class representatives in

scores of cases. Moreover, based on pretrial discovery in the Delaware

action and their own analysis of the governing law, the co-lead counsel

(and the other law firms comprising the Delaware plaintiffs’ Committee of

the Whole) were in a position to evaluate the merit -- and lack thereof - of

the Rule 14d-10 claim. See J.A. 273. If Delaware class counsel had con-

cluded that the federal claims had greater value than the settlement consid-

eration, it would have been in the interests of the class they represented,

which included respondents -— as well as their own financial interest — to

reject the settlement and to assert the federal claim in federal court.

** The Ninth Circuit appropriated the “identical factual predicate” lan-

guage of 7BK as support for its doctrinally invalid fusion of issue preclu-

sion and release. 7BK employed the “identical factual predicate” inquiry

only to ensure, as a matter of due process, that a commonality of interest

existed among class members such that “the settlement treats all class

members identically.” 675 F.2d at 462. TBK looked to ascertain whether

the “core” or “the gravamen” of the claims possessed by the class repre-

sentative were “realistically identical” to those held by other class mem-

bers, to insure that their interests coalesced. /d at 460-61. The Second

Circuit's statement in National Super Spuds that “[i)f a judgment after

trial cannot extinguish claims not asserted in the class action complaint, a

judgment approving a settlement in such action ordinarily should not be

able to do so either,” 660 F.2d at 18, does not support the Ninth Circuit's

issue preclusion restriction on the effect of a release. As the Second Cir-

cuit made clear in 7BK, its comment in National Super Spuds was

(Footnote continued)

The Ninth Circuit also mischaracterized Grimes and Not-

tingham by stating that those courts applied an issue preclu-

sion test (ie. an “identical factual predicate” test) to

determine the preclusive effect of a release. Pet. App. 33a.

But Grimes and Nottingham specifically rejected the notion

that other preclusion doctrines could limit the scope of a ne-

gotiated release. Grimes, 17 F.3d at 1563 (“We need not ad-

dress [res judicata effect of state court settlement] because the

district court expressly ruled that the federal claims had been

released as a part of the state court judgment”); Nottingham,

925 F.2d at 34 (“since the Delaware class action settlement

could release federal claims over which the state court had no

jurisdiction, i.e., claims which would not be barred by the res

judicata effect of the judgment containing the release . . . the

effect of the release was not circumscribed by the doctrine of

res judicata”) (emphasis added). In accordance with the man-

date of the Full Faith and Credit Act, Grimes and Nottingham

properly applied Delaware preclusion principles to contractual

releases of federal securities claims incorporated in non-opt

out state court judgments independent of any issue preclusive

effect of the state litigations.

B. The Ninth Circuit’s “Issue Preclusion” Test Is

Unworkable

The Ninth Circuit’s issue preclusion test is not only doctri-

nally unsupportable, it is also unworkable, as the court’s de-

cision illustrates. The Ninth Circuit decision recognizes that

the Delaware state claims included the claim that the MCA

officers had “breached their fiduciary duty of loyalty by

making preferential arrangements for themselves as part of

the tender offer.” Pet. App. 36a. The decision likewise ac-

knowledges that “[ajt first glance” this claim “appears to be at

least in the same ball park as the Rule 14d-10 claim.” Jd The

opinion then sought to escape from the issue preclusion test it

had fashioned (“would have been extinguished by the issue

preclusive effect of an adjudication of the settlement claims”).

The escape, oddly, was that the state court would not and

could not have occasion to adjudicate an issue that would also

arise in the exclusively federal claim. As the court stated, “no

Delaware statutory or common law rule . . . prohibits a share-

holder from obtaining the best deal possible for himself as

part of a change of corporate control,” and therefore con-

cluded that “adjudication of the claim would not have raised a

question of fact concerning whether Wasserman or Sheinberg

received preferential treatment from Matsushita.” Jd at 36-

37a (emphasis added). Thus, in the Ninth Circuit’s view, in

order to determine the preclusive effect of a state court class

settlement, the federal court must engage in an exceedingly

detailed, post hoc hypothetical reconstruction of how the state

action would have been “adjudicated” had it not been set-

tled.’* As noted, however, concepts of preclusion predicated

Credit Act required the Ninth Circuit to apply Delaware preclusion law.

See Point Il, supra, at 25. Delaware gives effect to a release according to

its terms and recognizes a release of all state and federal claims arising

from the same transaction. See Point II, supra, at 25-26. The Ninth Circuit

acknowledged that the state and federal claims here arise from the same

transaction. See Pet. App. 34a.

. Contrary to the Ninth Circuit analysis, Delaware law prohibits a corpo-

rate officer or director from using his position to obtain preferential treat-

ment to the disadvantage of the shareholders in a change of corporate

(Footnote continued)

on adjudication are simply not germane to the effect of a re-

lease which, by definition, is a contractual undertaking that

involves no adjudication.

The Ninth Circuit’s issue preclusion test would place fed-

eral courts in the impossible position of having to determine

which state claims would have been adjudicated by the state

court on a /egal basis and which on a factual basis (and, pre-

sumably, on which basis the hypothetical “adjudicating” state

control. See Citron v. Steego Corp., Civ. A. No. 10171, 1988 WL 94738,

at *7 (Del. Ch. Sept. 9, 1988) (holding that a director-shareholder may not

use “his corporate office to advantage himself in a way denied to other

shareholders”); see also Endervelt v. The Nostalgia Network, Inc., Civ. A.

No. 11415, 1991 WL 137148, at *4 (Del. Ch. July 23, 1991) (citing Cit-

ron). Thus, there is no basis for the Ninth Circuit's assumption that the

factual issue of preferential treatment would not have been adjudicated in

state court. A factual finding of no preferential treatment would have pre-

cluded liability on the class's duty of loyalty claim. Moreover, Matsushita

and the other defendants in the Delaware action were fully prepared to

argue, in defense of the state fiduciary duty claim, not only that as a legal

on ,

lude the recovery of damages under the federal Rule 14d-10 claim.

Similarly, the Delaware non-disclosure claims alleging, inter alia, a fail

proof of the predicate fact of higher value, an issue that is central to re-

spondents’ Rule 14d-10 claim. Finally, the defendants in Delaware were

prepared to demonstrate that the Sheinberg payment was not in consid-

eration for his MCA shares -- a conclusion that would negate any Rule

14d-10 claim based on that payment. Thus, the core factual predicate un-

derlying the state claims embodies essential elements of the federal

claims. As pleaded and released, the state claims depended on, inter alia,

whether “the [acquisition] also provides for substantial payments and

other benefits for [Wasserman and Sheinberg] that will not be shared by

i : i including Mr. Wasserman’s

predicate facts necessary to support the federal claims and would thus lead

to issue preclusion in the federal court had they been adjudicated.

court would have ruled upon a claim challenged on both

grounds). The federal court would be required to undertake

this inquiry regardless of the stage at which the state action

was settled, even if no discovery had occurred to develop and

test the allegations of the complaint. Under this test, -he pre-

clusive effect of a state court settlement would then depend on

the outcome of some federal court’s resolution of these hypo-

theticals. The decision thus injects a vast element of uncertainty

and intricacy into the previously straightforward task of meas-

uring the preclusive effect of state court class settlements.

The Ninth Circuit’s issue preclusion analysis of a negoti-

ated release thus operates to defeat the expectations and in-

tentions of the parties to a consensual settlement. One of the

chief advantages of a volitional settlement is that it permits

the parties to define their rights precisely, and eliminate as

completely as the negotiated language they employ permits,

any unintended consequences that may follow adjudications,

such as the uncertain issue preclusive effect of an adjudication

in subsequent proceedings. By introducing the uncertainties

surrounding the preclusive effect of an adjudication into a ne-

gotiated settlement, the Ninth Circuit's decision directly inter-

feres with the ability of settling parties to determine

conclusively the meaning of their agreement and embody that

meaning in a court-approved settlement.

IV. THE NINTH CIRCUIT’S DECISION DISCOUR-

AGES COMPREHENSIVE CLASS ACTION

SETTLEMENTS, UNDERMINES THE FINAL-

ITY OF JUDGMENTS, PERMITS PARTIES TO

ABROGATE THEIR SETTLEMENT CON-

TRACTS, AND PROMOTES UNNECESSARY

LITIGATION IN THE FEDERAL COURTS

In addition to advancing comity, the recognition of state

court judgments approving class action settlements promotes

consensual resolution of complex litigation, advances finality

interests, holds litigants to the bargains they voluntarily make,

conserves federal judicial resources and discourages duplica-

tive and vexatious litigation. The Ninth Circuit’s decision un-

dermines each of these objectives.

A. Encouraging Settlements

Federal courts should facilitate -- not undermine -- the set-

tlement of litigation. See, e.g., McDermott, 114 S. Ct. at 1467-

69 (adopting proportionate share approach to judgment re-

duction because, inter alia, it promotes “public policy [that]

wisely encourages settlements” and unitary disposition of liti-

gation). There is no reason to believe that class action settle-

ments reached under the supervision of state courts are in any

respect less important, less reasonable or less fair than those

reached under federal supervision. The Ninth Circuit’s deci-

sion, however, assures that there will be fewer state court

class action settlements. Simply stated, the Ninth Circuit de-

cision prevents parties to a state class action from achieving a

comprehensive settlement whenever the transactions and

events at issue might also form the basis for an exclusively

federal claim.”®

Settlements are an important mechanism for resolving

“mass litigation.” See, e.g., Jn re General Motors Corp., 55

F.3d at 778, 784 (“[I]ncreased use of settlement classes has

proven extremely valuable for disposing of major and com-

plex national and international class actions in a variety of

substantive areas ranging from toxic torts (Agent Orange) and

medical devices (Dalkon Shield, breast implant), to antitrust

cases (the beef or cardboard container industries) . . . . Courts

underlying state law claims may also form the basis of exclusively federal

claims, such as Admiralty, 28 U.S.C. § 1333; Antitrust, 15 U.S.C. § 1;

Commodity Exchanges, 7 U.S.C. § 25(c); CERCLA, 42 U.S.C. § 9613(b);

Patent and Copyright, 28 U.S.C. § 1338; Securities, 15 U.S.C. § 78aa; and

Single Employer Plans Under ERISA, 29 U.S.C. § 1370 (West Supp.

1995). See, e.g., Minnesota v. Mid-Minn. Associated Physicians, No. C7-

91-558, 1991 WL 340170, at *3 (Minn. Dist. Ct. July 2, 1991) (consent

judgment releasing, inter alia, federal antitrust claims); Texas v. Coca-

Cola Bottling Co. of the Southwest, No. 84C1-15586, 1986 WL 22186, at

*3 (Tex. Dist. Ct. July 1, 1986) (final judgment releasing, inter alia, fed-

eral antitrust claims); Delaware v. Mid-Atlantic Paving Co., Civ. A. No.

7197, 1983 WL 14930, at *2 (Del. Ch. June 24, 1983) (final judgment and

consent decree releasing, inter alia, federal antitrust claims).

should favor the use of devices that tend to foster negotiated

solutions to these actions”); cf Malcolm v. National Gypsum

Co., 995 F.2d 346, 348 (2d Cir. 1993) (“One of the greatest

challenges facing both state and federal courts is the crush of

tort suits arising from the extensive use of asbestos .. .

much of this century”); see generally Mattoon v.

City of Norman, 633 P.2d 735, 737 (Okla. 1981) (class actions

assumed additional importance “when it became apparent that

judicial efficiency in meeting present-day litigation explosion

demanded that, as far as possible, multiple suits arising from

the same facts and involving like questions of law be reduced in

number or eliminated”). *”

B. Honoring the Right of Parties to Contract

Defendants are entitled to rely on the binding effect of a ne-

gotiated release. See v. Mendoza, 573 F.2d 1075,

1078 (9th Cir. 1978) (“a litigant can no more repudiate a com-

promise agreement than he could disown any other binding

contractual relationship”), cf’ PMX Indus., 31 F.3d at 703 (8th

Cir. 1994) (holding that parties are bound to the broad terms of

an unambiguous release, regardless of subjective intent). This

reliance interest is destroyed if class members are permitted to

accept the benefit of a settlement and renege on their promise

not to sue. The Ninth Circuit’s decision intruded upon the par-

ties’ consummated and court-approved agreement, and vitiated

an integral part of the bargained-for consideration to be re-

ceived by Matsushita.

”” See Air Line Stewards & Stewardesses Ass'n v. Trans World Airlines,

Inc., 630 F.2d 1164, 1167 (7th Cir. 1980) (the preference for settlement

has particular force regarding class action lawsuits”), aff'd, 455 U.S. 385

(1982); In re United States Oil & Gas Litig., 967 F.2d 489, 493 (11th Cir.

1992) (“Public policy strongly favors the pretrial settlement of class action

lawsuits.”) (citation omitted); Armstrong v. Board of Sch. Directors, 616

F.2d 305, 313 (7th Cir. 1980) (“there is an overriding public interest in

favor of settlements”); Georgine v. Amchem Prods., Inc., 157 F.R.D. 246,

338 (E.D. Pa.) (approving mass asbestos settlement), app. docketed, 94-

1927 (3d Cir. 1994); 2 Newberg on Class Actions § 11.41 at 11-85.

This Court has enforced in a variety of contexts the principle

that litigants must be bound by the litigation judgments that

they make. See, e.g., McDermott, 114 S. Ct. at 1471 (adopting

proportionate share method of judgment reduction after partial

settlement because the plaintiff's recovery had been limited

“not by outside forces but by its own agreement to settle”);

Moitie, 452 U.S. at 401-02 (parties should be held to their “free,

calculated, deliberate choice not to appeal”) (quotations omit-

ted). The Ninth Circuit’s decision defeats the intent of the par-

ties in entering into the Delaware settlement and allows

litigants to break their contractual commitments with impunity.

See, e.g., Thompson., 992 F.2d at 191 n.5. (“To the extent that

the preclusion of ‘all claims of any nature whatsoever’ is an

integral part of the settlement bargain entered into for

[defendant] and the class representatives, this Court cannot now

modify the terms of that bargain at the insistence of one class

member.”); Bear v. Nix, 977 F.2d 1291, 1295 (8th Cir. 1992);

Ruskay v. Waddell, 552 F.2d 392, 398 (2d Cir.) (“One who

gives a general release has had his opportunity to press his

claim . . . . Once the decision to settle is made, a party must

abide by it.”), cert. denied, 434 U.S. 911 (1977).

C. Preserving the Finality of Judgments

The public policy favoring finality of judgments entered on

class action settlements is at least as strong as the policy regard-

ing the finality of judgments entered on a trial verdict. As a

matter of immediate concern, the Ninth Circuit decision retro-

actively threatens the finality and repose of any fully con-

summated state class action settlement that released claims

which the court approving the settlement did not have jurisdic-

tion to adjudicate and which are not time-barred. Cf McCleskey

v. Zort, 499 U.S. 467, 493 (1991) (noting “the law’s interest in

finality”); 1B J. Moore, J. Lucas & T. Currier, Federal Prac-

tice, J 0.405[2], at 189-90 (2d ed. 1984) (underlying policy of

preclusion “is the objective of judicial finality”).

The Ninth Circuit decision also opens the door to manipula-

tion by class members who, as in this case, can obtain a settle-

ment in state court and thereafter litigate in federal court. This

threat is not confined to the securities field; the Ninth Circuit

invites collateral attacks on any case in which the state class re-

leases claims within the exclusive jurisdiction of the federal

courts, such as claims arising under the antitrust, patent, and en-

vironmental laws. See note 36, supra.

D. Minimizing Unnecessary Litigation in the

Federal Courts

The Ninth Circuit’s decision will increase class action liti-

gation in the lower federal courts. Defendants will be uninter-

ested in negotiating incomplete releases in state cases. Class

action plaintiffs will, in turn, be required to file any colorable

federal claim in federal court so that global disposition of

cases may be achieved. Federal courts thus will become the

forum for litigation traditionally handled by state courts, even

when the core of the parties’ dispute centers on such tradi-

tional state law claims as breach of directors’ fiduciary duties.

See McCarren v. Town of Springfield, 464 U.S. 942, 944

(1983) (“At a time when judges and observers are increas-

ingly concerned with the work load of the federal courts, the

application of principles of res judicata to disputes such as

this might both conserve the time of the federal courts and

make for a more orderly resolution of this and similar dis-

putes.”) (Rehnquist, J., dissenting from denial of certiorari).

***

In sum, Matsushita negotiated a consensual settlement of

the Delaware action, paid money for a comprehensive release,

assumed the risk that shareholders might opt out and continue

to prosecute their claims, and participated in a process in

which the settlement was subjected to a fairness review by the

Chancery Court and the Supreme Court of Delaware. In deny-

ing full faith and credit to the judgment entered upon the Dela-

ware settlement, the Ninth Circuit announced a new rule which

radically and improvidently redefines the relationship between

state and federal courts. As stated in Sandler Associates:

[T]he state court-approved release forecloses this fed-

eral action based on principles of comity between state

and federal courts. To deny effect to a release of claims

merely because it was given in an action commenced in

state court would invite unprecedented consequences.

Such a doctrine would unjustifiably proliferate litiga-

tion, defeat legitimate expectations of settling parties,

engender uncertainty among class members and defen-

dants as to their ability to retain the benefit of settle-

ments, discourage settlements altogether and create

unwarranted conflict between state and federal courts.

818 F. Supp. at 705.

CONCLUSION

For all of the foregoing reasons, the judgment of the Ninth

Circuit Court of Appeals should be reversed. The case should

be remanded with instructions to dismiss the complaints with

prejudice as to those plaintiffs who failed to opt out of the

Delaware settlement.

August 3, 1995

Respectfully submitted,

/s/ BARRY R. OSTRAGER

BARRY R. OSTRAGER

Counsel of Record

MARY KAY VYSKOCIL

PAUL C. CURNIN

JOSEPH M. MCLAUGHLIN

SIMPSON THACHER & BARTLETT

(a partnership which includes

professional corporations)

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

Of Counsel

PROFESSOR GEOFFREY C. HAZARD, JR.

Trustee Professor of Law

University of Pennsylvania

3400 Chestnut Street

Philadelphia, PA 19104

(215) 898-7494

Attorneys for Petitioners Matsushita Electric Industrial Co.,

Ltd. and Matsushita Holding Corp.

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