# Petitioners Brief — Matsushita Elec. Industrial Co. v. Epstein > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0598%3A09 ## Record - **Collection:** Supreme Court brief - **Document type:** Petitioners Brief - **Published:** January 1, 1996 - **Citation:** 516 U.S. 367 ## Text @) 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. BEST AVAILABLE COPY mame ‘a : teidites 2 . iitaitt sh Tuck The The Dela i QUESTION PRESENTED — pr ay se ps pc pg -arising out of the acquisition Suse sade aeuineen dale Gules tie tates included a release of exclusively federal claims. pre npr ssaperipe Fo senor B. $ = : z - } . } : , . ue” | : ; Mo ae a") - : . . ve . . : Se a —" ; ‘ . Sig, ve ek 3 5" - - : 7 os 3 Lics “ "= . Ff ; ae : oe me at $He p a * ete p9 ae 4 “$i a oe Fae aa ee ea TO AES NS AT : rt REN a ee Th $y : a ¢ 1 - 3 hey AO * { ~ A hae ee ee “yy i 4" ~ et a> a aa ce rinks sd ’ ; : 5 a NS wae So we = 8 : i peas Ras ee Ree, peat, PRE RT . it cate os te Rega” DAS oe as Sa ig “1 Beate yy, th Ace aeae tes gee } - nd, dn © wag) 7), a ee 4, A ~ ~ ‘ca * he. a oe, eias A ns \ ? a S oe “ j _ 7 ~ 2 ot A ! 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) 41 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) 42 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. 43 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) 44 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. 45 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. 46 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 © The decision below will affect a wide variety of cases in which facts 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). 47 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. 48 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 49 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. 50 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. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0598%3A09. Public record. Not legal advice.