Opposition Brief — California Public Employees' Retirement System v. Felzen

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No. 97-1732

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1997

CALIFORNIA PUBLIC EMPLOYEES’

RETIREMENT SYSTEM and

FLORIDA STATE BOARD OF ADMINISTRATION,

ie Petitioners,

PAUL FELZEN, et al.,

Respondents.

On Petition for a Writ of Certiorari to the United

States Court of Appeals for the Seventh Circuit

BRIEF OF DIRECTORS OF

ARCHER DANIELS MIDLAND COMPANY

IN OPPOSITION

THOM W. Moss

Counsel of Record

BICKES, WILSON & MOSS

101 South Main Street

Suite 600

Decatur, Illinois 62523

(217) 423-3614

Counsel for Directors of

Archer Daniels Midland

Company

Midwest Law Printing Co., Chicago 60610, (312) 321-0220

QUESTIONS PRESENTED

1. Whether a court of appeals, in a derivative action

brought on behalf of a corporation, had jurisdiction to

hear the appeal of nonparty shareholders from the

district court’s order approving settlement of the action.

2. Whether a court of appeals, when ruling that it

does not have jurisdiction in a case, properly declined to

make its decision prospective only.

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED ..............00.:. i

TABLE OF AUTHORMITIMO cc cscnceckivecves iv

STATEMENT OF THE CASE .............00:. 1

REASONS FOR DENYING THE PETITION ...... 3

I. PETITIONERS’ BACKGROUND STATE-

MENT OF FACTS IS NOT RELEVANT TO

THE LEGAL ISSUES INVOLVED HERE .... 4

Il. PETITIONERS HAVE NOT IDENTI-

FIED A CONFLICT IN THE CIRCUITS

CONCERNING THE RIGHT OF NON-

PARTY SHAREHOLDERS TO APPEAL

FROM SETTLEMENT OF A DERIVA-

BEV UES i 00 é ccce the panel 6

A. This Court’s Holding in Marino v.

Ortiz Is Determinative .............. 6

B. The Seventh Circuit’s Ruling Does

Not Raise a Conflict Among the Cir-

Pe ee eee Or Ger a eS cen ys 8

1. The Purported Split of Author-

Tc actovciece Cues eecsees 9

2. The State of the Law in the Sev-

Onis CHO ok o's cde eens 11

a. Gee ies ne ca ene eee 12

iil

C. The Seventh Circuit’s Decision Re-

quiring Intervention Is Consistent

with Rule 23.1 and with Traditional

Common Law and Federal Practice .

1. Participation By Nonparty Share-

A re er ee

2. Rule 23.1 and Common Law ......

Ill. THE SEVENTH CIRCUIT'S DECISION

TO APPLY ITS RULING RETROACTIVE-

LY IS DICTATED BY PRECEDENT OF

THIS COURT, RAISES NO CONFLICT IN

THE CIRCUITS, AND CAUSES NO UN-

FORESEEABLE HARM TO PETITION-

DT Wkwiece We ben Pewee ccevesececnr

TABLE OF AUTHORITIES

Cases PAGE(S)

Ace Heating & Plumbing Co. v. Crane Co.,

453 F.2d 30 (Sd Cir. 1971) ............. 9, 10

Allen v. Wright,

Ge es EE i as, ca cbaue ewes 22, 23

Bell Atlantic Corp. v. Bolger,

2 F.3d 1304 (3d Cir. 1993) ........... passim

Bennett v. Spear,

See Se, ED 4n0 ch cake Ae keene 22

Budinich v. Becton Dickinson & Co.,

Gee Wee CD Soo ei ca kecwiens 21, 24, 25

Christianson v. Colt Indus. Operating Corp.,

Ce Wee. akedibuaceons oases 21, 25

Farmland Dairies v. Comm’r of New York

State Dep’t of Agric. & Markets,

847 F.2d 1038 (2d Cir. 1988) .............. 15

Firestone Tire & Rubber Co. v. Risjord,

— 2, > & 7. Se ae passim

George v. Camacho,

119 F.3d 1393 (9th Cir. 1997) ............. 21

Gottlieb v. Wiles,

11 F.3d 1004 (10th Cir. 1993) ........ 9, 12, 13

Harper v. Virginia Dep't of Taxation,

Sa es ED a wlaceks tua ca sheen 19

In Re Brand Name Prescription

Drugs Antitrust Litigation,

115 F.3d 456 (7th Cir. 1997) ...... 8, 12, 19, 22

Jones v. Caddo Parish Sch. Bd.,

736 F.2d 923 (Gth Cir. 1964) ... 2... cc cece: 15

Marino v. Ortiz,

GG Ws SE CUED ov wee eesowetsunns passim

Northern Pipeline Construction Co.

v. Marathon Pipe Line Co.,

Se es PED nia bn endhanecenbdsaar 23, 24

Pettyjohn v. Shalala,

23 F.3d 1572 (10th Cir. 1994) .......... 20, 21

Ragsdale v. Turnock,

941 F.2d 501 (7th Cir. 1991),

cert. denied, 502 U.S. 1035 (1992) .......... 15

Research Corp. v. Asgrow Seed Co.,

425 F.2d 1059 (7th Cir. 1970) ............. 11

Rosenbaum v. MacAllister,

64 F.3d 1439 (10th Cir. 1985) ........ 9, 12, 13

Tryforos v. Icarian Development Co.,

518 F.2d 1258 (7th Cir. 1975) ....... 11, 12, 13

United States ex rel. Louisiana v. Jack,

i EO re aks pee ee wet 17

Statute

Se Crees OE “en's vac Wk be cae hs ke 22, 24

Court Rules

Federal Rule of Appellate Procedure 3(c)..... 18, 19

Federal Rule of Civil Procedure 23 ........ passim

Federal Rule of Civil Procedure 23.1....... passim

A —

STATEMENT OF THE CASE

Petitioners are two nonparty shareholders of Archer

Daniels Midland Company (“ADM”) who filed objections

to a proposed settlement of this derivative action but

failed to file a motion to intervene and, as a conse-

quence, had no right to appeal from the district court

order approving the settlement. Respondents filing this

brief were members of the Board of Directors of ADM in

1995 who were named as defendants in the derivative

suits filed in Illinois and Delaware.' These suits were

settled in a consolidated process before the Honorable

Harold A. Baker, United States District Judge for the

Centra! District of Illinois, on July 7, 1997, when plain-

tiffs in all pending derivative actions appeared before

Judge Baker and agreed to be bound by any settlement

which the court approved. Petitioners, who hold less

than one percent of the stock of ADM, objected to the

proposed settlement below, which was predicated upon

substantial changes to the way in which ADM governs

itself and the creation of an Audit Committee of inde-

pendent directors to monitor the company’s compliance.

Petitioners chose not to intervene below but, when the

' Respondents (hereinafter referred to as the “Directors”) are

Dwayne O. Andreas, Lowell W. Andreas, Martin Andreas,

Michael D. Andreas, Shreve M. Archer, Jr., Ralph Bruce,

Howard G. Buffett, John H. Daniels, Ray A. Goldberg, H.D.

Hale, F. Ross Johnson, M. Brian Mulroney, James R. Randall,

Margaretta Rockefeller, Robert S. Strauss, John K. Vanier,

and O. Glenn Webb. Gaylord O. Coan joined the Board of

Directors after the events complained of in the action and was

erroneously added to some of the suits filed in Delaware. Of

Se ye ee

district court overruled their objections and approved a

settlement, Petitioners sought to appeal.

Plaintiffs below moved to dismiss Petitioners’ appeal.

The Court of Appeals for the Seventh Circuit (the “Sev-

enth Circuit”) dismissed Petitioners’ appeal for the very

basic reason that they were not parties to the case, and

thus the Court had no jurisdiction over their appeal

from approval of the settlement. In reaching this deter-

mination, the Seventh Circuit relied on law well settled

not only in this Court but among the circuits. The Sev-

enth Circuit also persuasively articulated the reasons

that a shareholder is especially unqualified to appeal as

a nonparty:

... in a shareholders’ derivative action, the in-

dividual investor is not an injured party and is

not entitled to litigate. A derivative suit is

brought by an investor in the corporation’s (not

the investor’s) right to recover for injury to the

corporation .. . . So it cannot be surprising that

stockholders other than named plaintiffs are not

treated as parties in derivative litigation—their

citizenship is ignored when determining diversi-

ty ... and they are not allowed to opt out ....

Shareholders have no more the attributes of par-

ties when managers settle derivative litigation

than when managers settle antitrust litigation.

(Petition at 5a)

Now, having forfeited any right to appeal by failing

to intervene as parties—all in defiance of ample prece-

dent pointing the way—Petitioners seek a grant of

certiorari. Meanwhile, ADM’s directors have appointed

an independent Audit Committee, consisting of directors

who joined the board after the events of which plaintiffs

below complained and await resolution of Petitioners’

efforts to undo the settlement before the Audit Commit-

tee takes steps to implement the settlement terms. For

the reasons that follow, the Petition should be denied.

REASONS FOR DENYING THE PETITION

The Petition here stands as a model for advocacy by

deception and diversion. Among other things, the Peti-

tion:

(1) unfairly conjures up from two circuit court cases,

each distinguishable from the instant case, an “irrecon-

cilable split” among the circuits;

(2) interposes a long statement of background facts

and fervent complaints about the fairness of a court-ap-

proved shareholders’ derivative suit, neither of which

has any bearing upon the narrow and strictly legal

issues involved here;

(3) confuses the essentially different natures of a class

action under Rule 23 of the Federal Rules of Civil Pro-

cedure, where corporate shareholders allege injury to

themselves, from a derivative suit under Rule 23.1 of

the Federal Rules of Civil Procedure, where the corpora-

tion itself holds the legal claim and may receive dam-

ages;

(4) belittles this Court’s holding in Marino v. Ortiz,

484 U.S. 301 (1988), almost to the point of denying its

existence;

(5) misrepresents the state of the case law in the Sev-

enth Circuit at the time Petitioners made their decision

to forego intervention in the action below and thereby

CN ee

assumed the obvious risk that they would not have a

right to appeal;

(6) cites voluminous authority for sweeping state-

ments concerning the importance of participation by

nonparty shareholders in the judicial settlement process

without ever acknowledging that the cited authority

generally references proceedings only at the district

court level; and

(7) offers numerous examples of appeals by nonparty

“privies” that are “routinely permitted,” even though

each example involves a party over whom a court had

already exercised jurisdiction.

I. PETITIONERS’ BACKGROUND STATEMENT OF

FACTS IS NOT RELEVANT TO THE LEGAL ISSUES

INVOLVED HERE

The first indicator of the Petition’s weakness is its

highly charged statement of background facts, none of

which is necessary for this Court’s consideration of the

well-defined legal issues involved here. Petitioners lay

out the origins of the derivative suit in terms of FBI

“raids,” a criminal “probe,” conspiracy with “foreign

companies,” “national media attention,” “corporate

cronyism,” and “waves of negative publicity.” (Petition

at 4-5) Turning to the derivative suit itself, Petitioners

complain that plaintiffs’ counsel “did almost nothing to

prosecute the case” and focused “what little energy they

expended on settlement.” (Petition at 6) The settlement,

according to Petitioners, did not return “one dime” and

“provided no material benefit to shareholders,” allocat-

ing a payment “exclusively to pay for attorneys’ fees.”

(Petition at 6-7; emphasis in original) This narrative,

even if not discounted for distortions of rhetoric, has

nothing to do with the right of nonparty shareholders to

appeal from a settlement of a derivative suit.

Petitioners’ background statement is, however, in-

structive on two counts. First, it shows that ADM’s

nonparty shareholders were in fact accorded the partici-

pation in the judicial settlement review process that

Petitioners regard as “a key procedural countermeasure”

against derivative settlements too heavily weighted with

attorneys’ fees. (Petition at 14) The district court fol-

lowed standard procedure in tentatively approving a set-

tlement and inviting shareholders—whether parties or

not—to show why the proposed settlement should not be

finally approved. (Petition at 7) In response, the Peti-

tioners filed written objections to the proposed corporate

governance changes and appeared at a hearing where

they asked the district court to reject or revise the set-

tlement. (/d.)

Second, Petitioners’ background statement reveals

their underlying motivation for challenging the settle-

ment and, ultimately, in making the Petition: they are

members of the Council of Institutional Investors, “an

association of more than one hundred corporate, public,

and union pension funds... .” (Petition at 5) The

“standards for corporate independence” which Petition-

ers sought to include in the settlement agreement were

based on standards developed by the Council of Insti-

tutional Investors which, according to an unsupported

assertion in the Petition, have been “adopted by most or

many of the nation’s largest companies.” (Petition at 5)

Petitioners objected that the governance standards in

the proposed settlement, which the district court found

consistent with established concepts of corporate govern-

ance, did not parrot the definitions which Petitioners

had recently published. Hence, Petitioners’ participation

in the proceedings derives at least in part from their

interest in seeking judicial leverage to impose the pen-

sion funds’ governance standards on a large company.

(Petition at 7)

Il. PETITIONERS HAVE NOT IDENTIFIED A CON-

FLICT IN THE CIRCUITS CONCERNING THE

RIGHT OF NONPARTY SHAREHOLDERS TO AP.-

PEAL FROM SETTLEMENT OF A DERIVATIVE

SUIT

A. This Court’s Holding in Marino v. Ortiz Is

Determinative

Petitioners’ treatment of Marino v. Ortiz, supra, is the

centerpiece of their efforts to fabricate a conflict in the

circuits on the issue of nonparty shareholder standing.

Marino stands as an unyielding barrier to certiorari,

and Petitioners seem to recognize it as such, because

they do little more than call it names. A portion of

Marino which the Seventh Circuit quoted, for example,

is dubbed “a gloss of inessential language,” and “a single

aside.” (Petition at 9) Later, the same language becomes

“a lone paragraph,” (Petition at 12) and then “unneces-

sary.” (Petition at 19)

What Petitioners seek to obscure is the very real force

of Marino. There, this Court first stated:

[WJe hold that because petitioners were not

parties to the underlying lawsuit, and because

they failed to intervene for purposes of appeal,

they may not appeal from the consent decree ap-

proving that lawsuit’s settlement;

484 U.S. at 304. In the next sentence of the opinion, this

Court emphasized the lack of controversy over this prin-

ciple:

The rule that only parties to a lawsuit, or those

that properly become parties, may appeal an ad-

verse judgment, is well settled.

Id. The Court then addressed the view of the court of

appeals and politely rejected it:

The Court of Appeals suggested that there may

be exceptions to this general rule, primarily

“when the nonparty has an interest that is af-

fected by the trial court’s judgment.” 806 F.2d at

1152. We think the better practice is for such a

nonparty to seek intervention for purposes of

appeal; denials of such motions are, of course,

appealable.

Id.

It is the last quoted sentence that Petitioners identify

as the basis for the Seventh Circuit’s ruling here be-

cause, when read in isolation, the words may suggest

that an appellate court can exercise discretion in

permitting a nonparty’s appeal. The preceding sen-

tences, however, show that this Court made no such

suggestion. After holding without reservation that

nonparties may not appeal from approval of a settle-

ment, this Court underscored the point by noting that

the rule is well settled. Then, turning to the court of

appeals’ conflicting view, this Court rejected it by

endorsing intervention as the “better practice.” This

Court did not say intervention was the “better practice”

only under the facts presented in Marino or in any other

particular kind of case. The words were simply a

reiteration of what this Court had just held:

because petitioners were not parties to the

underlying lawsuit ... they may not appeal

from the consent decree approving the lawsuit’s

settlement.

484 U.S. at 304.

In view of Marino’s mandate alone, the prudent course

for Petitioners would have been to intervene in the

district court before final approval of the settlement.

They gambled on whether the Seventh Circuit would

follow Marino and, not unpredictably, they lost. They

should now have no recourse in a writ of certiorari.

B. The Seventh Circuit’s Ruling Does Not Raise a

Conflict Among the Circuits

Petitioners characterize the circuits as “irreconcilably

split over whether nonparty shareholders must inter-

vene as parties in order to appeal adverse judgments.”

(Petition at 11) According to Petitioners, “(t]he Third,

Tenth, and (until now) Seventh Circuits have all ap-

proved nonparty shareholder appeals.” (Petition at 12)

These statements are wrong, first, in exaggerating

whatever inconsistency exists among the circuits and

second, in suggesting that the Seventh Circuit abruptly

and independently changed its view on the issue. In

fact, only one decision from the Third Circuit, which

failed to follow this Court’s holding in Marino and is in

any event distinguishable, differs from the result in the

Seventh Circuit. Moreover, the Seventh Circuit very

predictably followed Marino and even heralded the

outcome below by following Marino in another case,

decided prior to the district court’s approval of the

settlement here, where the court dismissed appeals of

nonparty class members. See In Re Brand Name

Prescription Drugs Antitrust Litigation, 115 F.3d 456

(7th Cir. 1997).

1. The Purported Split of Authority

The sole case forming the basis for Petitioners’ claim

of an “irreconcilable split” in the circuits is Bell Atlantic

Corp. v. Bolger, 2 F.3d 1304 (3d Cir. 1993). Petitioners,

however, boldly misrepresent to this Court that another

case, Gottlieb v. Wiles, 11 F.3d 1004 (10th Cir. 1993), is

also in conflict with the Seventh Circuit. (Petition at 2,

8, 12) Gottlieb involved settlement of a class action

under Rule 23, which, as both the Gottlieb court and the

Seventh Circuit here noted, is quite different from

settlement of a derivative action. 11 F.3d at 1010-11;

Petition at 4a-5a. More important, while Petitioners

may attempt to rely upon Gottlieb’s dicta concerning

derivative suits, the Tenth Circuit’s holding is “that

standing is dependent upon a grant of interven-

tion... .” 11 F.3d at 1006. Gottlieb is thus not only off

point but also contrary to the outcome which Petitioners

advocate. Petitioners also seem to infer a conflict from

Rosenbaum v. MacAllister, 64 F.3d 1439 (10th Cir.

1985), but that case involved an appeal from an award

of attorneys’ fees, not approval of a settlement. No

Tenth Circuit case, then, is at odds with the Seventh

Circuit here. This leaves only Bell Atlantic.

The court in Bell Atlantic was faced with nonparty

appeals from approval of a derivative suit settlement,

but the result it reached was based on Rule 23 class

action precedent and analysis. In fact, as the court

began that analysis, it noted that “we need not decide

whether different rules apply to objector appellate

standing in class and derivative suits.” 2 F.3d at 1307,

n.4. After reviewing the cases in other circuits concern-

ing class action settlements, the court turned to its own

decision in Ace Heating & Plumbing Co. v. Crane Co.,

453 F.2d 30 (3d Cir. 1971)—also a class action case. Ace,

which involved settlement of nationwide antitrust

litigation, raised issues concerning the effect of class

members’ failure to opt out of the settlement upon their

right to appeal. The Bell Atlantic court, after consider-

ing the “broad view of objector standing embodied in

Ace,” concluded that the shareholders “had standing to

appeal” the order approving settlement. 2 F.3d at 1310.

The Bell Atlantic court did raise policy consider-

ations—shareholders’ difficulty in monitoring and con-

trolling their attorney, collective action of plaintiffs’

attorneys and defendants, and “informational con-

straints” when the attorneys for both sides present a

settlement to the court for approval—but none of these

considerations is peculiar to derivative actions. See

2 F.3d at 1309-10. The Third Circuit did not address the

factors which the Seventh Circuit considered determina-

tive in a strict derivative suit context, i.e., the derivative

claim belongs to the corporation not the shareholders,

the shareholders are not the injured parties, and as a

consequence, their citizenship is ignored when deter-

mining diversity, and they are not allowed to opt out.

(Petition at 4a-5a)

Bell Atlantic, then, stands not so much as a counter-

point to the Seventh Circuit’s rule disallowing nonparty

appeals in derivative suits as another opinion treating

the issue of such appeals in a broader context including

class actions. Moreover, the Bell Atlantic court did not

take a position directly opposing the Seventh Circuit on

the impact of Marino. Where the Seventh Circuit found

Marino controlling, the Third Circuit merely quoted it

for the general rule that only parties may appeal an ad-

verse judgment, 2 F.3d at 1307, before moving on to its

own analysis of the issue. Bell Atlantic thus never came

to grips with Marino; the opinion does not reject an

argument that Marino is controlling, nor does it hold

that an exception to the Marino rule exists for non-

settling parties in derivative actions. Any court in the

future considering those issues thus should have no

difficulty in reconciling Bell Atlantic with the Seventh

Circuit’s rule. Bell Atlantic is readily viewed as essen-

tially a class action opinion that in any event did not

directly address Marino, whereas the Seventh Circuit's

opinion strictly focused upon a derivative action scenario

and firmly held that Marino controls.

2. The State of the Law in the Seventh Circuit

Petitioners attempt to bolster a weak Bell Atlantic

argument and enhance the appearance of a split in the

circuits by noting that the Seventh Circuit had formerly

approved nonparty appeals, apparently suggesting that

a split exists because the Seventh Circuit is in conflict

with itself. (Petition at 12) Apart from making no sense

in terms of assessing whether a split in the circuits

exists, Petitioners’ suggestion distorts what the Seventh

Circuit actually accomplished in this case. Faced with

the issue of nonparty shareholder appeals, the court

first found Marino controlling and then of necessity

overruled a case predating Marino, Tryforos v. Icarian

Development Co., 518 F.2d 1258 (7th Cir. 1975), which

had stated that the right of nonparty shareholders to

appeal was “clear.” The court also formally overruled

Research Corp. v. Asgrow Seed Co., 425 F.2d 1059 (7th

Cir. 1970), “and any other case in this circuit .. . that

permits nonparties to appeal from a decision of any kind

in a class action.” (Petition at 4a) Thus, the Seventh

Circuit did not raise a conflict with an earlier opinion;

it quite logically ruled so as to avoid one.

The Seventh Circuit’s ruling in this case should have

come as no surprise inasmuch as it is consistent with

the court’s opinion last year in In Re Brand Name

Prescription Drugs Antitrust Litigation, supra. There

the panel, following Marino, held that a nonparty in a

class action could not appeal from an order granting

summary judgment to the defendant. The Brand Name

ruling came six weeks prior to the district court’s fair-

ness hearing in this case, which makes Petitioners’ fail-

ure to intervene all the more daring. In any event, none

of Petitioners’ discourse on the Seventh Circuit’s own

decisions on jurisdiction over nonparties can transform

those decisions into a conflict among the circuits.

3. Conclusion

The hollowness of Petitioners’ split-in-the-circuits

argument may be discerned in just one paragraph of the

Petition:

Nor can the split of authority be reconciled. The

Third, Tenth, and (until now) Seventh Circuits

have all approved nonparty shareholder appeals.

See, e.g., Bell Atlantic Corp. v. Bolger, 2 F.3d

1304; Gottlieb v. Wiles, 11 F.3d 1004; Rosen-

baum v. MacAllister, 64 F.3d 1439 (10th Cir.

1985); Tryforos v. Icarian Dev. Co., 518 F.2d

1258. The Seventh Circuit now demands formal

intervention, in express “disagree[ment]” with

these courts. Pet. App. 7a. [footnote]

(Petition at 12) Petitioners appear to set up a conflict

involving three circuits and four separate opinions. The

cases, however, are: Bell Atlantic, discussed at length

above; Gottlieb, the class action case which does not

follow Bell Atlantic and in fact rejects the notion of

nonparty appeals; Rosenbaum, which is distinguishable

on its facts; and, finally, Tryforos, the case overruled by

the Seventh Circuit because it predated Marino. In

short, the case for a split of authority boils down to Bell

Atlantic alone. The last sentence of the quoted para-

graph misrepresents what the Seventh Circuit itself

said about a conflict, as Petitioners pluck the word

“disagree” from a sentence where the court said only

that it disagreed with the conclusion in Bell Atlantic

and transform it into the Seventh Circuit’s “disagree-

ment” with the plural, “these courts.” The footnote to

the paragraph contains only a lengthy citation to what

are admittedly Rule 23 class action cases. Such artifice

cannot support a grant of certiorari.

C. The Seventh Circuit’s Decision Requiring Inter-

vention Is Consistent with Rule 23.1 and with

Traditional Common Law and Federal Practice

Petitioners warn that their imaginary split in the

circuits has “tremendous practical consequences for all

nonparty shareholders and the integrity of the share-

holder derivative suit process.” (Petition at 13) Petition-

ers argue (1) that requiring intervention is contrary to

an overall policy favoring participation by nonparty

shareholders in the judicial settlement process (Petition

at 14); and (2) that the “Seventh Circuit’s shareholder

intervention mandate is wrong as a matter of law,”

being contrary to both Rule 23.1 and common law.

(Petition at 17-18) Neither of these arguments is per-

suasive.

1. Participation By Nonparty Shareholders

Petitioners fill a large segment of their Petition with

lengthy citations to authority for the proposition that

participation of nonparty shareholders in the judicial

settlement process is “a key procedural countermeasure

for exposing and preventing . . . corruption.” (Petition at

14-15) ADM’s Directors do not dispute that general

proposition, as far as it goes. The problem with Petition-

ers’ argument, however, is that the general principle

does not, under Marino, extend to an appeal by nonpar-

ty shareholders who have not intervened as parties. The

authority Petitioners cite merely endorses the system

mandated by Rule 23.1 where nonparty shareholders

are given notice and an opportunity to be heard prior to

the district court’s ruling on a proposed settlement. If a

nonparty shareholder seeks involvement beyond that

stage, intervention is the obvious next step.

Petitioners complain, however, that intervention im-

poses a hugely increased financial burden on a share-

holder. (Petition at 15-16) To whatever extent such a

burden actually exists, Petitioners again miss the point.

Intervention is necessary because Marino directs that a

court of appeals cannot have jurisdiction over a nonpar-

ty’s appeal from a district court’s order approving set-

tlement. Petitioners’ argument, then, boils down to the

illusory conflict among the circuits in which Petitioners

posit that shareholders are faced with a dilemma over

intervention. No such dilemma exists; intervention is re-

quired.”

2 Petitioners cite to three circuit court cases which supposedly

stand for the “settled law in the Seventh Circuit and else-

(continued...)

EEE ee

2. Rule 23.1 and Common Law

Petitioners argue that the Seventh Circuit’s “newly

fashioned rule” is inconsistent with the purposes of Rule

23.1 and “in tension with common law practice.” (Peti-

tion at 17-18) On the first point, Petitioners merely

reiterate that the rule does not encourage fair settle-

ment. On the second point, Petitioners cite to a treatise

by “English legal scholar Frederic Calvert” published in

1846 and another treatise by Joseph Story published in

1840. As the Seventh Circuit observed concerning sim-

ilar efforts by Petitioners, they “boil down to a claim

that erroneous decisions should be reversed, but argu-

ments of this stripe do not justify omitting the step of

intervening as a party.” (Petition at 3a) The Seventh

Circuit understood that, in a derivative action, “the in-

dividual investor is not an injured party and is not en-

titled to litigate.” (Petition at 5a) Rather, suit is brought

* (...continued)

where [which] strongly disfavors intervention after a tentative

settlement is reached.” (Petition at 16 n.18, citing Farmland

Dairies v. Comm’r of New York State Dep't of Agric. &

Markets, 847 F.2d 1038, 1043-44 (2d Cir. 1988); Jones v.

Caddo Parish Sch. Bd., 735 F.2d 923 (5th Cir. 1984); Ragsdale

v. Turnock, 941 F.2d 501, 504 (7th Cir. 1991). None of these

cases, however, involved a derivative suit or class action set-

tlement, and, more important, none contains any general

statement that intervention is disfavored after a settlement is

reached. Each case simply considers the attempted interven-

tion before it and applies the standards of Rule 24, which re-

quire that intervention be timely. In any event, Marino makes

intervention the only course for nonparty shareholders who

wish to preserve their right to appeal. So long as that course

is followed in a timely way, courts may permit a nonparty to

intervene, and of course denial of intervention is subject to

appeal.

“in the corporation’s (not the investor’s) right to recover

for injury to the corporation.” (/Jd.) Analogizing to a qui

tam action, the court noted that the investors “just get

the ball rolling” and that shareholders “have no_more

the attributes of parties . . . than when managers settle

. . . litigation.” (/d.) Thus, courts focus on the fairness of

the derivative settlement to the corporation. Petitioners’

personal effort to challenge that fairness on appeal—

when no appeal was taken by the defendants, the cor-

poration, or the plaintiffs representing the interests of

the overwhelming majority of shareholders who did not

object (all of whom were parties to the actions)—is

simply misplaced.

Petitioners make one final assault on Marino, suggest-

ing that the Seventh Circuit should have placed more

weight on nineteenth century commentary than upon

this Court’s ruling. (Petition at 18) Petitioners first

argue that the language of Marino relied upon by the

Seventh Circuit (“the better practice is to seek interven-

tion”) is “unnecessary” to the holding. As explained in

section II.A of this brief, however, it is the holding of

Marino, not the “better practice” language, which dooms

Petitioners here. It was the holding in Marino upon

which the Seventh Circuit expressly relied. (Petition at

2a) The “better practice” language was simply a reitera-

tion of the holding.

Petitioners attempt to distinguish Marino on its facts,

arguing that the nonparties there were not members of

“the class whose rights are directly affected by any judg-

ment entered in the case... .” (Petition at 19) Again,

Petitioners have scrambled Rule 23 analysis and a Rule

23.1 case: shareholders in a derivative suit are not

direct parties in interest. In any event, the holding of

iii i i aaa Mei Ta

Marino cuts across both kinds of cases. A court of ap-

peals has no jurisdiction over any appeal by a nonparty

from approval of a settlement.

Petitioners point to United States ex rel. Louisiana v.

Jack, 244 U.S. 397 (1917), the “lone case” cited in

Marino, as establishing that “partlies) and priv/ies] to

the record” may appeal an adverse decision. (Petition at

19; emphasis by Petitioners) According to Petitioners,

“nonparty shareholders are at least ‘privy to the record’

in derivative suits,” although they cite no authority for

that proposition, nor offer any definition of the term.

(Petition at 20) Petitioners contend that “much settled

law would have to be over-turned” if only parties to law-

suits may appeal, and proceed to cite numerous exam-

ples where “[njonparties affected by trial court judg-

ments are treated by the federal courts as ‘de facto’

parties and permitted to appeal without intervention

....”" Ud.) The trouble with Petitioners’ examples is

that each involves a court order formally addressed to

a nonparty, thus providing appellate jurisdiction.

In one of Petitioners’ examples, where a court held a

nonparty witness in contempt, the court exercised its

contempt jurisdiction over the witness. (Petition at 21

n.22) In another set of examples, Petitioners rely on de-

cisions in which courts that denied an award of attor-

neys’ fees had exercised jurisdiction over the attorneys.

(Petition at 21 n.23) And finally, Petitioners point to

decisions where a court heard a nonparty who was ob-

ligated to the defendant for amounts paid under the

court’s judgment, after the court had gained jurisdiction

by reason of the judgment. (Petition at 21 n.24) None of

these examples is affected by the Marino rule; each

affected “nonparty” had a separate avenue of appeal to

protect his personal interests.

The whole point of Marino and the Seventh Circuit

here is that an appellate court must have jurisdiction

over a person in some individual capacity before that

person can participate in appellate proceedings; whether

that jurisdiction arises from the court’s initiative or

action by a potential party is irrelevant. Even Petition-

ers, as preface to a string citation of cases purporting to

support their position, state that “federal courts routine-

ly permit nonparty appeals from judgments that bind

the nonparty by name.” (Petition at 20; emphasis added)

Petitioners thus acknowledge that the court involved

must take some action relating to a particular individu-

al for appellate jurisdiction to arise.

Petitioners next criticize the Seventh Circuit’s reliance

on Federal Rule of Appellate Procedure 3(c), which pro-

vides that a “notice of appeal must specify the party or

parties taking the appeal. . . .” (Petition at 2a; empha-

sis the court’s) It was Marino, however, not the rule,

that formed the basis for the court’s ruling. The rule

merely reflects the settled principle stated in Marino.

Petitioners are correct in saying that Rule 3(c) “hardly

purports to delineate what matters are inherently eli-

gible or ineligible for appeal” (Petition at 22), but that

delineation, contained in Marino and elsewhere, draws

one bright line: only parties may appeal from approval

of a settlement.

Petitioners also seek to use Rule 3(c) affirmatively,

first by arguing from provisions concerning class ac-

tions, which have no application here and then, incredi-

bly, by redrafting the rule:

. .. a nonparty shareholder can strictly comply

with the Rule’s language simply by “specify[ing]”

that no party is taking the appeal, and “naming

each [nonparty] appellant in either the caption

or the body of the notice of appeal.”

(Petition at 23) Aside from its boldness in adding new

terms to the rule, this statement belies Petitioners’

statement, made only a page earlier, that “Rule 3(c)

hardly purports to delineate what matters are inher-

ently eligible or ineligible for appeal.” (Petition at 22)

Whether viewing the rule as it is written or as edited by

Petitioners, this Court’s soundly reasoned opinion in

Marino takes precedence.

Ill. THE SEVENTH CIRCUIT’S DECISION TO APPLY

ITS RULING RETROACTIVELY IS DICTATED BY

PRECEDENT OF THIS COURT, RAISES NO CON-

FLICT IN THE CIRCUITS, AND CAUSES NO UN.

FORESEEABLE HARM TO PETITIONERS

Petitioners argue that the Seventh Circuit’s “newly

formulated” prohibition of nonparty appeals should be

applied only prospectively because Petitioners relied on

“settled” Seventh Circuit appellate procedures at the

time they appealed. (Petition at 23-24) This approach

ignores the controlling precedent of this Court and what

should have been the obvious import of Marino and In

Re Brand Name Prescription Drugs.

In beginning their argument, Petitioners attempt to

color the situation with a quote from Justice O’Connor’s

dissent in Harper v. Virginia Dep’t of Taxation, 509 U.S.

86, 113 (1993): “[t]his Court’s retroactivity jurisprudence

has become somewhat chaotic in recent years.” (Petition

at 23) Harper, however, was a case involving the ret-

roactivity of a Virginia statute taxing federal retirees.

There was no jurisdictional issue, and this Court cited

no cases dealing with the retroactive application of a

decision that an order is not appealable. This Court’s

jurisprudence on retroactivity in those kind of cases is

a model of clarity which even Petitioners do not chal-

lenge directly.

The Seventh Circuit followed those clear rules in

relying principally on Firestone Tire & Rubber Co. v.

Risjord, 449 U.S. 368, 379 (1981), where this Court held

that a “court lacks discretion to consider the merits of a

case over which it is without jurisdiction, and thus, by

definition, a jurisdictional ruling may never be made

prospective only.” (Petition at 7a) In the face of Fire-

stone, Petitioners again contrive a momentous split in

the circuits, yet once again the “split” shrinks to insig-

nificance upon scrutiny. One case supposedly “in conflict

with the decision here” is Pettyjohn v. Shalala, 23 F.3d

1572 (10th Cir. 1994), which, according to Petitioners,

held “that nothing in Firestone requires retroactivity in

jurisdictional disputes where appellants would be barred

from ever raising their issues before a court of appeals.”

(Petition at 25) That characterization is pure fiction.

First, Pettyjohn was not even a case involving a jur-

isdictional dispute; at issue was the timeliness of an

attorney’s application for fees under the Equal Access to

Justice Act. The decision turned on characterization of

a remand from the district court to the administrative

agency hearing the plaintiff's application for social

security disability benefits. The Tenth Circuit’s opinion

does not even mention Firestone. Firestone is cited only

in the dissent by a district judge sitting by designation

and then only to say that “new rules—especially juris-

dictional rules—are to be applied retroactively.” 23 F.3d

at 1575. That sentiment, of course, was shared by the

Seventh Circuit here.

The only other case purported to raise a conflict in the

circuits is George v. Camacho, 119 F.3d 1393 (9th Cir.

1997), v here the court overruled an earlier case holding

that plaintiffs in the Northern Mariana Islands are

afforded a seven-day extension for filing notices of ap-

peal, and gave only prospective effect to a new rule that

notices must be filed within the time allotted by the

Federal Rules of Appellate Procedure. The Ninth Circuit

distinguished Firestone as concerning “a different kind

of jurisdictional issue than is present in the case before

us.” 119 F.3d at 1397. The court believed that Firestone

was based on the lack of finality of the order appealed

from and thus there was “no question in Firestone of

forfeiting anyone’s right to appeal permanently.” Jd. The

Ninth Circuit simply refused to hold “that appeals that

were timely filed under the law in effect at the time of

the filing may retroactively be deemed untimely.” 119

F.3d at 1404. Not surprisingly, five of the eleven mem-

bers of the court sitting en banc dissented, adhering to

Firestone’s binding mandate.

George is incorrectly decided, but its peculiarity

should not deter other courts from following so coherent

a precedent as Firestone, particularly in view of its sim-

ilarly forceful progeny, Budinich v. Becton Dickinson &

Co., 486 U.S. 196 (1988) and Christianson v. Colt Indus.

Operating Corp., 486 U.S. 800 (1988). In any event, a

court faced with a nonparty shareholder seeking to ap-

peal in the context of a derivative action should have no

difficulty distinguishing George as a case strictly limited

to a change in the time allowed for filing an appeal from

a distant territory. There is, after all, not even the ap-

pearance of a conflict among the circuits on the Rule

23.1 issue addressed by the Seventh Circuit here.

Petitioners offer up various nightmare scenarios that

they say will result from the rule that findings of no

jurisdiction apply retroactively: systematic denial of re-

view, litigants relying on settled law only to be barred

from appeal when that law is overturned in their own

cases, and “a bizarre incentive for litigants to file every

conceivable paper and motion . . . solely as an insurance

policy against a possible change in law.” (Petition at 25-

26) What Petitioners would have this Court lose sight

of, however, is that a single piece of paper would have

provided them with that very insurance policy—a peti-

tion to intervene. Amid all of their rhetoric about pro-

moting reliance on settled law, Petitioners never face up

to Marino and In Re Brand Name Prescription Drugs,

the settled law that existed when they decided not to

become parties to this litigation.

In another attempt to evade Firestone, Petitioners

challenge the Seventh Circuit’s “premise” that “[A] court

may not in any case, even in the interest of justice,

extend its jurisdiction where none exists.” (Petition at

10a, 27) According to Petitioners, a court of appeals has

“adjudicatory power,” deriving from Article III of the

Constitution and 28 U.S.C. § 1291, which extends to any

person who has the unusual status of “prudential”

standing. (Petition at 27-28) In support of this theory,

Petitioners cite this Court’s decisions in Bennett v.

Spear, 520 U.S. 154 (1997), and Allen v. Wright, 468

U.S. 737 (1984). Bennett held that plaintiffs had stand-

ing under the “zone of interests” test to bring a citizen

suit under the Endangered Species Act. In Allen v.

Wright, this Court ruled that parents of African-Ameri-

can school children did not have standing to bring a

class action against the Internal Revenue Service for

failing to deny tax-exempt status to racially discrimina-

tory private schools. In each case, the issue was one of

standing, i.e., whether or not plaintiffs met the “case or

controversy” requirement of Article III. Petitioners’ re-

liance on these cases reflects their inability (or unwill-

ingness) to distinguish between standing issues and the

more fundamental concept of jurisdiction. The Seventh

Circuit here had no such difficulty:

Standing means injury in fact, and a reduction

in the market price of one’s stock is injury.

Parties are a subset of injured persons. Equating

injury with party status is exactly the approach

disapproved by Marino.

(Petition at 7a) In other words, even if a court found

that Petitioners have standing because of alleged injury,

that status is of no avail unless the court has “adjudica-

tory power” over Petitioners by reason of their more

particular status as parties in the case. As the Seventh

Circuit put it: “If the shareholders had appealed to the

House of Lords, that tribunal would have dismissed the

appeal out of hand. An appeal by nonparties is no dif-

ferent in effect.” (Petition at 10a)

In another shot far wide of the mark, Petitioners

assert that the Seventh Circuit’s opinion can in no event

“be squared with” Northern Pipeline Construction Co. v.

Marathon Pipe Line Co., 458 U.S. 50 (1982), where this

Court held the Bankruptcy Act of 1978 unconstitutional

because it violated Article III’s provision that the judi-

cial power of the United States must be vested in courts

whose judges enjoy Article III protections and safe-

guards. The Court made its decision prospective only to

avoid inequitable results. (Petition at 28) Northern Pipe-

line, however, was far different in character from a case

like Firestone, where this Court considered whether a

court of appeals—whose constitutionality was unques-

tioned—could apply a new jurisdictional rule only pro-

spectively. As this Court stated in declining to apply

Northern Pipeline retroactively, “It is plain that Con-

gress’ broad grant of judicial power to non-Article III

bankruptcy judges presents an unprecedented question

of interpretation of Article III.” 458 U.S. at 64.

It is equally plain from this Court’s rulings both be-

fore and after Northern Pipeline that purely juris-

dictional decisions must be applied retroactively. Peti-

tioners particularly challenge one of these decisions,

Budinich v. Becton Dickinson & Co., supra. (Petition at

29-30) There, this Court followed Firestone in holding

that a jurisdictional ruling may never be made prospec-

tive only:

Since the Court of Appeals properly held peti-

tioner’s notice of appeal from the decision on the

merits to be untimely, and since the taking of an

appeal within the prescribed time is mandatory

and jurisdictional, . . . the Court of Appeals was

without jurisdiction to review the decision on the

merits.

486 U.S. at 202. Petitioners argue first that Budinich

reflected an exercise of the court’s statutory authority

under 28 U.S.C. § 1291 as opposed to its “prudential”

authority. (Petition at 29) As explained earlier in this

section of the brief, Petitioners’ reliance on “prudential

authority” is misplaced because it may come into play

only when standing is the issue. Next, Petitioners claim

that “because Budinich announced no new rule of law,

it was not eligible for purely prospective application.”

(Petition at 29) That statement flies directly in the face

of this Court’s holding, which stated that a jurisdictional

ruling may never be made prospective only, “/rj/egardless.

of whether today’s decision works a change.” 486 U.S. at

202 (emphasis added). Finally, Petitioners attempt to

distinguish the “inequitable results” in Budinich from

those it claims would “flow from retroactive application”

here. (Petition at 30) The readiest answer to that

argument lies in Christianson v. Colt Indus. Operating

Corp., supra, upon which the Seventh Circuit relied but

which Petitioners do not seek to distinguish or even

address. There this Court again followed Firestone and

laid to rest whatever doubts may have remained about

the place of inequitable results—whatever their charac-

ter—in determining to apply a jurisdictional ruling

retroactively:

The age-old rule that a court may not in any

case, even in the interest of justice, extend its

jurisdiction where none exists has always

worked injustice in particular cases.

486 U.S. at 818. The Seventh Circuit thus correctly fol-

lowed a strong line of decisions by this Court which hold

that, regardless of any other consideration, jurisdictional

rulings by their very nature must be retroactively ap-

plied. There is no reason for this Court to grant certio-

rari to alter the decision below.

CONCLUSION

For the foregoing reasons, this Court should deny the

Petition for Writ of Certiorari.

July 15, 1998

Respectfully submitted,