Petition for Writ of Certiorari — Summa Corp. v. Trans World Airlines, Inc.

Supreme Court brief1988

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Text

. Suoreme Court, U.S,

88-149 alae

- fot2/7 1988

IN THE YOSEPH F. SPANTOL, JR

‘ CLERK

Supreme Court of the United

OCTOBER TERM, 1987

SUMMA CORPORATION and WILLIAM R. LuMMIS,

Delaware Ancillary Administrator

of the Estate of Howard R. Hughes,

Petitioners,

TRANS WORLD AIRLINES, INC.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF DELAWARE

WILLIAM T. COLEMAN, JR.

Counse! of Record

DONALD T. BLISS

CarRL R. SCHENKER, JR.

STEPHEN J. HARBURG

O’MELVENY & MYERS

555 13th Street, N.W.

Washington, D.C. 20004

(202) 383-5325

Of Counsel:

ARTHUR M. TAYLOR

SUMMA CORPORATION

3800 Howard Hughes

Parkway

Las Vegas, Nevada 89109

(702) 791-4288

MILTON H. WEST, Jr.

ANDREWS & KURTH

4200 Texas Commerce

Tower

Houston, Texas 77002

(713) 220-4200

ANDREW B. KIRKPATRICK, JR.

EDMOND D. JOHNSON

Morris, NICHOLS, ARSHT

& TUNNELL

1105 North Market Street

Wilmington, Delaware 19899

(302) 658-9200

Counsel for Petitioners

QUESTIONS PRESENTED

Petitioners (collectively ““Toolco”) formerly controlled re-

spondent (““TWA”’) through majority stock ownership, pursuant

to orders of the Civil Aeronautics Board (““CAB”’) authorizing

Toolco “ ‘to dictate the complete corporate activities’ ” of TWA.

Hughes Tool Co. v. TWA (“Toolco T’), 409 U.S. 363, 372

(1973). When that CAB-approved control ended, TWA filed

(1) a federal action claiming that certain CAB-approved activi-

ties of Toolco violated the antitrust laws and (2) a Delaware

action claiming that the same CAB-approved activities violated

fiduciary duties owed by Toolco to TWA. In Toolco IJ, this Court

held that TWA’s federal action was barred by section 414 of

the Federal Aviation Act (“FAA”), which immunized CAB-

approved activities “from the operations of the ‘antitrust laws’

... and of all other restraints or prohibitions made by, or imposed

under, authority of law.” See 49 U.S.C.A. § 1384 (1976)

(emphasis added). Notwithstanding Toolco J and the section

414 immunity from “all” legal restraints and prohibitions, the

Delaware courts have now awarded TWA nearly $50,000,000

in damages, based on the very same transactions and damages

theory at issue in Toolco J. The questions presented therefore

are:

(1) Under the Supremacy Clause, may Delaware

refuse collateral-estoppel effect to this Court’s holdings in

Toolco J that FAA § 414 bars liability on TWA’s allegations

and specifically bars damages predicated on TWA’s dam-

ages theory?

(2) Under the Supremacy Clause and FAA § 414, may

Delaware negate CAB orders and punish the conduct found

in Toolco I to be approved by the CAB and hence

immunized?

(3) Under the Supremacy Clause, was Delaware

obliged to give res-judicata effect to Toolco J so as to bar

litigation of state-court theories for which TWA could

have but failed to invoke the pendent jurisdiction of the

federal courts?

RULE 28.1 LISTING

Pursuant to Supreme Court Rule 28.1, petitioner Summa

Corporation provides the following information:

Parent Companies

The Hughes Corporation

Hughes Aviation Services, Inc.

H/S Las Vegas Associates

Howard Hughes Realty, Inc.

Hughes Entertainment Corporation

Affiliates and Subsidiaries (Except Wholly Owned

Subsidiaries )

Hughes Properties, Inc.

Harolds Club, inc.

Playa Vista Corporation

H.T.C. de Mexico, B.A. de C.V.

H-Tex, Inc.

Summa International Corporation

Hughes Aviation Services, Limited Partnership

Playa Vista Limited Partnership

Howard Hughes Properties, Limited Partnership

Hughes Entertainment, Ltd.

Hughes Parkway Associates

Park 2000 Associates

6701 Center Drive West, A California Limited Partnership

Wilshire Plaza Building Co., A California Limited Partnership

Husite, Inc.

Summerlin, Inc.

ill

TABLE OF CONTENTS

ame PPUMRRTINS o..0is...sserscesncrrcceccescrnecccescescescssessnseese

NN I I csi cescasinnsssieersencnccnnstanccescnsssecnnnsseccsescnsans

Table of Contents of Appendix ...............::ccccceeeeeeeeeeeeeeees

a, sa ase aniensnlsbuseensannenensnnnsannenne’

CD BI ancssnescicssescscnssscecccnssonscnssecsccrsosenrssncnsncosnnces

a asl cine aueniinenbathninnsbhinaneainnons

Constitutional Provisions, Statutes, and Federal Rules

ET SE SEE SA RS ea

IIIT sx snansctisaachanvecssconosensacopssessonscnenscrsnsaneccnncnscnees

A. Relevant Statutes, Background, And Com-

SII sctukacsessccensciassnsseseannnssesnanainassnacermenencsascasens

B. Federal Proceedings And This Court’s

C. Delaware Proceedings And The Opinions

nha ics cath ea acila ain snababeanieienetnenassenebtenecess

ESC ESE NST [Ue a RN ae

2. 1988 Opinion Of The Delaware Supreme

RT aries ccna ahenaenbiniindahaganannadeereantanannvene

REASONS FOR GRANTING THE WRIT....................

Il.

THE DECISION BELOW CONFLICTS WITH

LONGSTANDING ESTOPPEL PRECEDENTS

OF THIS COURT AND DISREGARDS THE

TOOLCO I HOLDINGS ON THE SCOPE OF

TOOLCO’S SECTION 414 DEFENSE....................

A. Toolco I Held All Pertinent Toolco Activities

To Be Within The Section 414 Defense ..........

B. Toolco I Held That Section 414 Immunized

The Specific Transactions On Which Damages

Were Predicated Below ..................cccccceeeeeeeeeees

IN VIOLATION OF THE SUPREMACY

CLAUSE, DELAWARE NEGATED CAB

ORDERS, PENALIZED TOOLCO’S EXERCISE

OF CAB-APPROVED CONTROL, AND DIS-

PLACED THE CONGRESSIONAL FRAME-

WORK GOVERNING CONTROL OF AIR CAR-

SINE iii sidehiaanunnhanneaannanennsinbintoaniennmansensatansnasatoeneess

Page

Ill. THE DECISION BELOW CONFLICTS WITH

NUMEROUS STATE AND FEDERAL DECI-

SIONS AS TO THE RES-JUDICATA EFFECT

OF A FEDERAL-COURT JUDGMENT ON A

SUBSEQUENT ACTION RAISING STATE-

LAW THEORIES PREDICATED ON THE

OEE RFI vicinceteaiciieeesittaniahigbitidamaasiniuminniaiatiinans 21

A. In Conflict With Numerous State And Federal

Court Decisions, Delaware Held That TWA

Was Not Obliged To Invoke The Pendent

Jurisdiction Of The Federal Court Over Its

RNR III ksh ncicinipinseictainadcntidnieeenietiainiauees 22

B. Delaware’s Purported Alternative Holding On

Res Judicata Is Entirely Specious .................... 2

a cilicistthsnitniahipidtntsnniataliabicheabisieihb lactation 28

TABLE OF CONTENTS OF APPENDIX

Appendix A appears following the petition.

Appendices B through H are separately bound.

Appendix A

Opinion of Supreme Court of Delaware, dated Apr.

REE NE n eNCIC NLL SN Ne Nr LEN

Opinion of Supreme Court of Delaware, dated Feb.

Si. TD vicianinleiiniinnstiiuntcigiaipiscisanninapniadeoladalias ghana

Mandate of Supreme Court of Delaware, issued

EF Fi ea iictahicicaniniciisecnerieticineiliahddioacasintcanlasingtinhesnitiit

Appendix B

Opinion and Order of Delaware Court of Chancery,

dated Feb. 19, 1974 and Mar. 19, 1974.00.00...

Opinion and Order of Delaware Court of Chancery,

dated May 10, 1977 and June 6, 1977..................

Opinion and Order of Delaware Court of Chancery,

QS TEs. Tile, re incicinacaiasiieiaenienicieniasinpiiaithhainnin

Opinion and Interim Order of Delaware Court of

Chancery, dated May 15, 1986 and June 9, 1986

Opinion of Delaware Court of Chancery, dated Jan.

Fg. CIEE wianciusaccninesansinnssscnatiinauieiidainbibeiiaianialapiesiaesibises

Judgment of Delaware Court of Chancery, dated

Fc Sets, WONT susncninshanaseeackimnstiemeieinaitdadaieadalaainita

Appendix C

Opinion and Order of United States District Court

for the Southern District of New York, dated May

a FT seeicdanentanisvesenniscsieniaepiniladadiaanmdeiaiiptiaeatctie

Appendix D

CAB Opinion and Order, dated Oct. 17, 1944.........

CAB Opinion and Order, dated Oct. 6, 1950...........

CAB Order, dated Feb. 26, 1959 ...............ccscssssssceses

CAB Order, dated May 15, 1959.0...

CAB Cirier, Gann Bly 6, PSD ..ccscccssssccrceccsicssscsescces

CAB Order, dated Sept. 30, 1959.0... eee

CAB Crder, dated Jan. 29, 1960...................ccscseseeees

CAB Order, dated June 23, 1960.................ccceeceeeeee

CAB Order, dated July 21, 1960...

CAB Order, dated Dec. 29, 1960................ccccccsssseees

Appendix E

Order of Supreme Court of Delaware denying

motion for reargument, dated May 5, 1988......... 229a

Order of Supreme Court of Delaware denying

motion for stay, dated May 5, 1988............::0.008 230a

Order of Supreme Court of the United States deny-

ing application for stay, dated May 13, 1988....... 23la

Mandate of Supreme Court of Delaware, issued

May 9, 1988.............ccsccsssssesscscsensensensssesensesssnssenses 232a

Appendix F

Constitutional Provisions, Statutes and Federal

Reaades TmVOUVO ........00.cercssscssscsesnssoescossssconccsssescseceee 233a

Appendix G

TWA Federal Complaint, dated June 30, 1961....... 237a

TWA State Complaint, dated Apr. 18, 1962............ 269a

Federal Answer of Hughes Tool Company, dated

rete. 12, BOGE scccrccecceresccsrsreccissecesnenscascscicnnvessssnssnses 296a

State Answer of Hughes Tool Company, dated May

ZO, BOG cacsnrcervssscrcserrcccsecsenrsessiectunrensenemnnnscennnstencnns 299a

Amended State Answer of Hughes Tool Company,

Gared Doc. 3, 1D7S ......ccccccccccrrerssccrrercossrrsecesccsseseses 30la

Amended State Answer of Howard R. Hughes, filed

Bee, © BOTS cccrcrveccecessrscerscencecnsacseesnasersasnssnsiennsantnns 304a

Appendix H

Report of Herbert Brownell, Special Master, dated

Sept. 21, 1968 .............cecccscsersesccessnesensesssncseesenssnnss 307a

Brief for Petitioners Hughes Tool Company and

Raymond M. Holliday in Supreme Court of the

United States, October Term 1971 .............:::0000+ 31la

Petition for Certiorari of Summa Corporation and

Howard R. Hughes, dated June 30, 1975............. 313a

TWA Discovery Responses, dated Oct. 11, 1977.... 315a

Defendants’ Post-Trial Brief in Delaware Court of

Chancery, dated Sept. 3, 1985..............cccseeseeeeees 320a

Opening Brief of Defendants Below-Appellants in

Supreme Court of Delaware, dated Apr. 27, 1987 324a

vil

TABLE OF AUTHORITIES

Page

CASES:

Anderson v. Phoenix Inv. Counsel of Boston, Inc..

440 N.E.2d 1164 ( Mass. 1982) .......cccee 24

Angel v. Bullington, 330 U.S. 183 (1947) oo... 27

Baldwin v. Iowa State Travelling Men’s Ass’n,

es HE PE Ditcibiiiteeniilnintisentienctisienlestncentnn 11

Baltimore S.S. Co. v. Phillips, 274 U.S. 316

SUEY Py scchclonssiioeithabialieiiabilaatainitiehaidieidcitdnineiibansinnin 22,23

Belliston v. Texaco, Inc., 521 P.2d 379 (Utah

PoP Uacensibsniscccenilbabesaanhicietaesbtisiaitsitinassintasteiniactabeinn 24

Boccardo v. Safeway Stores, Inc., 184 Cal. Rptr.

Ue CM Ws GN, HUI BD rcscnsnnsrccsccssnnncnsessensssnee 24

Boyle v. United Technologies Corp., 56 U.S.L.W.

ETO © Sdn GUD 0a, WIE D scnntnctsnecersnsrrasinrrenracer 18

Brown v. Felsen, 442 U.S. 127 (1979) ..ccccccccccccese 22

Century 21 Preferred Properties, Inc. v. Alabama

Real Estate Comm’n, 401 So. 2d 764 (Ala.

| RED EIRER SS RE RENN Rein Pas ee Nee OG 24

Dakota County v. Glidden, 113 U.S. 222 (1885). 2

Deen v. Hickman, 358 U.S. 57 (1958) ...cccccccccseeee 12,14,28

Deposit Bank v. Frankfort, 191 U.S. 499 (1903) 11,13

Des Moines Navigation Co. v. lowa Homestead

Mee hi) es; : Renee 12,14-15,

16,22

Embry v. Palmer, 107 U.S. 3 (1882) ....cccccccccceeeeee 13

Fairmont Aluminum Co. v. Commissioner, 222

F.2d 622 (4th Cir. ), cert. denied, 350 U.S. 838

Dt BREE aren one ecers DETR ie ena 27

Farmers Union v. WDAY, Inc., 260 U.S. 525

£ _. RRERSEREnn ReHeR eTE Ts Sy eT 18

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

i.) RRB gleres Mer eet eee OT 12,25,26

Gelston v. Hoyt, 16 U.S. (3 Wheat.) 246 (1818). 13

Hancock Nat’l Bank v. Farnum, 176 U.S. 640

hed cl SARS Mat tl inh ier Orn Se YO 22

Harper Plastics v. Amoco Chems. Corp., 657 F.2d

Ee Sts UNE TE calinnctacinniciseiasaimcasodanntinnaenas 25,27

Vili

Hart Steel Co. v. Railroad Supply Co., 244 U.S.

SEI Oe SITTEAT Ph caicotartinstasiicchatanensinniseineianniagsaiiaiineenns

Hi!l v. Wooten, 279 S.E.2d 227 (Ga. 1981).........

Hughes v. TWA, 336 A.2d 572 (Del.), cert.

Gamba, BS UB. BOI C IGS ) vccsscerercccececessereaceess

Hughes Tool Co. v. TWA, 409 U.S. 363 (1973)..

Hurn v. Oursler, 289 U.S. 238 (1933) ..............0.

Jeanes v. Henderson, 688 S.W.2d 100 ( Tex. 1985)

Juneau Square v. First Wisconsin Nat’l Bank, 364

N.W.2d 164 ( Wis. Ct. App. 1985)...

Kremer v. Chemical Constr. Corp., 456 U.S. 461

IP Eo anptctslicdiehanenanhbelaenedcaunentactisnaniisisansnsanedtsibinnnadan

SD cddicosanenenahiemsiticeecensietssteninetinneeptinnntnesentncs

ie TR cerstacicicacsesenensevnninsicasichieneclinanisananilibnnibiieannenisen

Mississippi Power & Light Co. v. Mississippi, 56

U.S.L.W. 4751 (U.S. June 24, 1988) ...............

Montana v. United States, 440 U.S. 147 (1979).

Myers v. International Trust Co., 263 U.S. 64

i Mesa sled ahiannsichieeshasbenietenbibennaiidneninteeiliieciniimeatiteaaasinnis

Nantahala Power & Light Co. v. Thornburg, 476

RUT aan OTN I

Norman Tobacco & Candy Co. v. Gillette Safety

Razor Co., 295 F.2d 362 (Sth Cir. 1961 ).........

Parsons Steel, Inc. v. First Alabama Bank, 474

EE, ER ee Oe

Reece v. Georgia, 350 U.S. 85 (1955)...

Rennie v. Freeway Transport, 656 P.2d 919 (Or.

ESAT CERT RE aa en a

(1986)...... etoesi bhsliaeesinnennsaananeebenseinanesdaninechashatnnains

Seaboard Air Line R.R. Co. v. Daniel, 333 U.S.

I a a

Silkwood v. Kerr-McGee Corp., 464 U.S. 238

i PUPS coacnsshidappalinianiicagincaiiahacibiesaahniianiigialaarieuimusseke:

FIMITE D cihscshisiininshanenpiaoaiepiiaenniaaaaiisaunmeiianaanenies

Page

passim

12,19,21

7,11,13,

14,16,26

24,25,27

14,1921

Stoll v. Gottlieb, 305 U.S. 165 (1938) 0.0...

Summa Corp. v. TWA, 540 A.2d 403 ( Del. 1988)

Transcontinental & Western Air, Inc., Control By

Hughes Tool Co., 6 C.A.B. 153 (1944) ..........

Trans World Airlines, Inc., Further Control By

Hughes Tool Co., 12 C.A.B. 192 (1950) ..........

TWA v. Hughes, 515 F.2d 173 (2d Cir. 1975),

cert. denied, 424 U.S. 934 (1976)................08

TWA v. Hughes, 449 F.2d 51 (2d Cir. 1971),

og Ag Ee. | ener

TWA v. Hughes, 332 F.2d 602 (2d Cir. 1964),

cert. dismissed, 380 U.S. 248 (1965) ................

TWA v. Hughes, 1974-1 Trade Cas. (CCH)

Dy Pe CUE. Es BOPP cectricttincinccnstevieeeneess

TWA vy. Hughes, 359 F. Supp. 783 (S.D.N.Y.

PPI P caivicuaiibeninceectbaanhisalataiennnhaipbndautdaaneseannanianee

TF OD P sensernaxeasnnennesercensenatiannnennnignnnsiensnnibabentenansasee

SPD) wccensesngatereinnianersnnsnncerevesnanenanianaaennsennecnnsnnnnes

TOT P asiccnsinnihinsichinsnesaninnssienhabshnuniiatebemabanassseuaninanaanes

TWA v. Hughes, 38 F.R.D. 499 (S.D.N.Y. 1965)

TWA v. Hughes, 1963 Trade Cas. (CCH)

mB & cg oi & Ag: | Paeeane eee

TWA v. Hughes, 29 F.R.D. 523 (S.D.N.Y. 1961)

TWA v. Hughes, 317 A.2d 114 (Del. Ch. 1974).

TWA v. Summa Corp., No. 1607 (Del. Ch. Jan.

Big UTEP jiinsibieipcinsinineshedleinsectinaeiiintaaduanenanlintein vinden

TWA v. Summa Corp., No. 1607 (Del. Ch. May

Soa MINE cacdadicacesbetasiheaiekicinaionanihieibicieaniiineiphabasineen

TWA v. Summa Corp., No. 1607 (Del. Ch. Mar.

Rs I Wesdssuiathiciuacten cisncebipcaniesnceiiolinnbitisiigeiceiaiaiisae

TWA v. Summa Corp., 374 A.2d 5 (Del. Ch.

PTT iccishritisaienieianntigeabnetigiannigitieiaiaaabandeiaivintn

United Mine Workers v. Gibbs, 383 U.S. 715

I IIIT akabadan vichsbasistsstslnaibinididdedinininiasghbicaiin siete saiaianes

Page

11,13

passim

4,5

5,19,20

United Staics v. California & Oregon Land Co.,

PE Wais See A ROM eicenchecepimntuniscderecsesintdatunaseses

United States v. Kras, 409 U.S. 434 (1973) ...0....

United States v. Stauffer Chem. Co., 464 U.S. 165

SIE deck des eincirancacuneouta Redan Reema cert

Urie v. Thompson, 337 U.S. 163 (1949) ..............

West Side Belt R.R. v. Pittsburgh Constr. Co., 219

Rh aaes Ee A RIE Vcciscacons icdoneacnecniduienkaumnanincionianeeavs

Woods Explor. & Prod. Co. v. Aluminum Co. of

America, 438 F.2d 1286 (Sth Cir. 1971), cert.

Gaba, SG US. FOF CERT D wcccssevscccoccctsscenssess

CONSTITUTION, STATUTES, AND RULES:

cee; es I lace nian

Airline Deregulation Act of 1978, Pub. L. No.

95-504, 92 Stat. 1705

§ 3,49 U.S.C. App. § 1302 (1982)...

§ 26, 49 U.S.C. App. § 1378 (1982).............

§ 30, 49 U.S.C. App. § 1384 (1982).....00....

§ 40, 49 U.S.C. App. § 1551 (1982 & Supp.

Re eS ahs ina scictlaldethiccitantadnvintinekeniahenninmnas

Civil Aeronautics Act of 1938, § 414, Pub. L. No.

Fae Fy TD 0 BEEP iisentacnsdcssotcnnssnconesens

Emergency Railroad Transportation Act of 1933,

§ 10, Pub. L. No. 73-68, 48 Stat. 211 (codified

as amended at 49 U.S.C. § 11341 (1982))......

Federal Aviation Act of 1958, Pub. L. No. 85-

726, 72 Stat. 731

§ 102, 49 U.S.C.A. § 1302 (1976)..........0.....

§ 408, 49 U.S.C.A. § 1378 (1976)................

§ 414, 49 U.S.C.A. § 1384 (1976)...

§ 1006, 49 U.S.C.A. § 1486 (1976)...

rae BBN ome oy a Ek |: | ne Er ee

Pe ea pidinincincmreiscticscnnevotnnlesnantctansiaintarieoes

SS SE AE. SERRE Rca CE ONE CN OmE Minn

SN Te I isn cr nscdacs Sosa s casbersnonetasmecalenensestuunie

Be Ne hate sickeacroscns ccoiencatianuadecstesuendypibbonseiadises

Page

13,14

3,14

3,14,21

14,21

3,19

3,4,14,19

passim

Page

MISCELLANEOUS:

Restatement (Second ) of Judgments § 25 (1982) 26

Note, The Res Judicata Implications of Pendent

Jurisdiction, 66 Cornell L. Rev. 608 (1981)... 26

R. Stern, E. Gressman & S. Shapiro, Supreme

Court Practice § §.12(c)(7)(b) (6thed. 1986) 28

C. Wright, The Law of Federal Courts ( 4th ed.

FOIE Wiisalilsssiti cet scelassiaseeaasmidamadibansnan tmuioddiustesieers 27

18 C. Wright, A. Miller & E. Cooper, Federal

Practice & Procedure §§ 4435, 4468 (1981).... 11,27

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i ‘

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

No. 87-

SUMMA CORPORATION and WILLIAM R. LUMMIS,

Delaware Ancillary Administrator

of the Estate of Howard R. Hughes,

Petitioners,

TRANS WORLD AIRLINES, INC.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF DELAWARE

Defendants below, Summa Corporation and William R.

Lummis (collectively “Toolco’’), hereby petition for a wnt of

certiorari to review the judgment of the Supreme Court of

Delaware in favor of plainuff below, Trans World Airlines, Inc.

(“TWA”’).'

OPINIONS BELOW

Two opinions of the Supreme Court of Delaware ( appended

hereto) are pertinent. The more recent (dated Apmil 4, 1988)

is reported at 540 A.2d 403 (App. la). An earlier opinion

(dated Feb. 26, 1975) is reported at 336 A.2d 572 (App. !3a).

' The complaint herein named as defendants Hughes Tool Company and

its sole stockholder Howard R. Hughes. Hughes Tool changed its name to

Summa Corporation in December 1972. Mr. Hughes died in 1976; petitioner

William R. Lummis is the Delaware Ancillary Administrator of the Estate of

Howard R. Hughes. The earlier federal action also named Hughes Tooi and

Mr. Hughes as defendants, but Mr. Hughes was never served.

Five opinions of the Delaware Court of Chancery are set forth

in the separately bound Appendix.”

The pertinent opinions from the related federal action are

this Court’s decision at 409 U.S. 363 (1973); the court of appeals

decision reviewed and reversed therein, 449 F.2d 51 (2d Cir.

1971); and the tnal court decision dismissing the federal com-

plaint on remand from this Court. 359 F. Supp. 783 (S.D.N.Y.

1973), App. 117a. In addition, ten pertinent orders of the Civil

Aeronautics Board are reprinted at App. 121a-228a.

JURISDICTION

The decision of the Supreme Court of Delaware was ren-

dered on April 4, 1988. A timely motion for rehearing was

denied on May 5, 1988 (App. 229a).? Final judgment was

entered on May 9, 1988 (App. 232a). The jurisdiction of this

Court 1s invoked under 28 U.S.C. § 1257(3) (1982); see also

Limbach v. Hooven & Allison Co., 466 U.S. 353, 361-62 (1984).

CONSTITUTIONAL PROVISIONS, STATUTES,

AND FEDERAL RULES INVOLVED

The constitutional and statutory provisions involved are set

forth in the Appendix beginning at page 233a. They include

the following:

> The opinion denying Toolco’s motion to dismiss (dated Feb. 19, 1974)

is reported at 317 A.2d 114 (App. 28a). The opinion granting TWA’s motion

for summary judgment as to liability (dated May 10, 1977) is reported at 374

A.2d 5 (App. 45a). The opinions setting out issues for trial (dated March

12, 1985) (App. 62a), awarding damages (dated May 15, 1986) ( App. 67a),

and awarding interest (dated Jan. 2!, 1987) (App. 99a) are unreported.

* Also on May 5, 1988, the Supreme Court of Delaware denied Toolco’s

Motion in the Alternative to Stay Issuance of the Mandate (App. 230a). On

May 9, 1988, Toolco presented to Justice Brennan, as Circuit Justice, an

Application to Stay Mandate of Supreme Court of the State of Delaware

Pending Certiorari (No. A-859). That application was denied on May 13,

1988 (App. 23la). The judgment below has only been paid pending appeal,

so the controversy remains alive. See, e.g., Dakota County v. Glidden, 113

U.S. 222, 224 (1885).

1. United States Constitution, art. VI, cl. 2;

2. Sections 102, 408, and 414 of the Federal Aviation

Act of 1958, 49 U.S.C.A. §§ 1302, 1378, 1384

(1976);* and

3. Federal Rule of Civil Procedure 41(b).

STATEMENT

This case, here from the Supreme Court of Delaware, is a

clone of Hughes Tool Co. v. TWA, 409 U.S. 363 (1973) (“ Toolco

I’), which came here from the United States Court of Appeals

for the Second Circuit. The case raises fundamental issues as to

the supremacy of federal court judgments, federal statutes, and

federal regulatory orders in state common-law litigation.

Both Toolco J and this case (‘‘ Toolco IT’) involve the same

parties, the same timeframe and underlying facts, and the same

supposed damages to plaintiff below, TWA. In Toolco I, this

Court held that the Toolco actions upon which TWA sued were

under the control and surveillance of the Civil Aeronautics Board

(“*CAB”’) and that various CAB orders immunized Toolco from

Suit pursuant to section 414 of the Federal Aviation Act of 1958

(“FAA”), 49 U.S.C.A. § 1384 (1976) (quoted ovelow ). In utter

disregard of Toolco I, the Supreme Court of Delaware has now

upheld a damages award to TWA, of nearly $50,000,000,

predicated upon the same Toolco activities that were found in

Toolco I to be approved by the CAB and immunized from suit.

Review by this Court is urgently needed to protect the preclusive

effects of this Court’s judgments in related state proceedings, as

well as to protect the power of Congress to immunize from suit

business activities that have been considered and approved by

a federal regulatory agency and the reliance interests of regulated

entities on such agency approvals.

“Sections 102, 408, and 414 of the Federal Aviation Act have since been

amended and are codified as amended at 49 U.S.C. App. §§ 1302, 1378, 1384

(1982). Unless otherwise noted, all references herein to Federal Aviation Act

provisions are to those before this Court in Toolco J, found at utle 49 of the

current U.S.C.A. (1976) and set forth in the Appendix. See also p. 14 n.26

& p. 21 infra.

A. Relevant Statutes, Background, And Complaints.

At the relevant times, section 408 of the FAA (App. 234a)

empowered the CAB to approve acquisitions of control over an

air carrier, if found to be in the “public interest.” In turn, section

414 immunized CAB-approved conduct from the operation of

the antitrust laws “‘and of all other restraints or prohibitions”:

Any person affected by any order made under sec-

tion[ ] [408] . . . shall be, and is hereby, relieved from

the operations of the “antitrust laws”, as designated

in section 12 of Title 15, and of all other restraints or

prohibitions made by, or imposed under, authority of

law, insofar as may be necessary to enable such person

to do anything authorized, approved, or required by

such order.

In 1944, after adversary hearings, the CAB authorized

Toolco to acquire control over TWA (in the form of 46 percent

ownership). App. 12la.° In 1950, after further adversary

proceedings, the CAB approved expansion of Toolco’s control

(up to 80 percent ownership). App. 13la.° Toolco’s control

ended on December 30, 1960, when its TWA shares were

committed to a voting trust in connection with certain third-

party financing for TWA (all as authorized by CAB order).

App. 220a.’

After Toolco’s operating control ended, TWA filed parallel

lawsuits against Toolco in federal court (June 1961) and in

Delaware (April 1962), each complaint alleging that Toolco

had injured TWA in the amount of $35 million.’ As now

relevant, each complaint focused exclusively on events occurring

in the period 1955-60—i.e., when TWA was entering the jet age

* See T I, 409 US. at 369; T IJ, App. 3a. The control order strictly limited

transactions between Toolco and TWA to nominal amounts, to “insure against

any temptation which may later come to [Toolco] to take advantage of the

relationship to its own profit and to the detriment of the public interest.” 6

C.A.B. 153, 156 (1944), App. 126a-127a; see T I, 409 U.S. at 370, 375.

* See T I, 409 US. at 373-76; T IJ, App. 3a.

” See T I, 409 US. at 376-77; T II, App. 3a.

* See T I, 409 US. at 377; T II, App. 3a; App. 237a (federal) & 269a

( state ).

under the CAB-approved control of Toolco.2, TWA claimed

that, from 1955-60, Toolco was slow to order then novel jet

airplanes (‘“‘jetcraft”), bought jetcraft in Toolco’s name for lease

or resale to TWA, diverted to other airlines sixteen of 63 jetcraft

once on order, caused delays in delivery of other jetcraft, and

improperly handled financing arrangements for TWA.'° The

federal complaint alleged that Toolco’s actions in 1955-60 vio-

lated the federal antitrust laws, while the Delaware complaint

alleged that the same actions breached Toolco’s state-law fidu-

ciary duty as TWA’s 78-percent shareholder. '!

In each case, Toolco interposed as a principal defense the

FAA § 414immunity denving from the CAB’s two control orders

(1944 and 1950) and various modifications thereof. App. 296a

(federal) & 299a (state). The most pertinent modifications

arose in 1959-60, when the CAB several times amended its

control order specifically to permit Toolco and TWA to enter

into leases about which TWA’s lawsuits complained. The CAB

had determined that the terms and conditions of each proposed

lease were “just and reasonable and in the public interest.”

B. Federal Proceedings And This Court’s Opinion.

For twelve years, TWA pursued its claim in the federal

courts to the exclusion of the state action. See Toolco II, App.

3a.'° The matter came to this Court after a default judgment

* See T I, 409 U.S. at 377; T Ii, App. 3a, 9a; App. 7la-76a (Del. Ch.

1986). See also n.11 infra.

'° See T I, 409 US. at 377-82; 449 F.2d 51, 65-66, 71-78 (2d Cir. 1971);

T Il, App. 3a, 7a-9a; App. 246a-254a ( federal) & 271a-287a (state ).

'' See T I, 409 US. at 364, 366; T IJ, App. 2a-3a. However, it is pertinent

to the res-judicata issue raised herein to note that the federal complaint also

contained allegations as to certain Toolco activities after December 30, 1950,

the date on which Toolco’s CAB-approved control ended. As to those post-

1960 activities, the federal complaint alleged both antitrust violations and

pendent state-law claims for tortious interference with TWA’s business. See

Toolco II, App. 20a; App. 263a-266a ( federal complaint).

'? See T I, 409 US. at 375-76, 379, 383, 387; T IJ, App. 6a; App. 201a,

203a, 206a, 209a, 21 la. See also p. 4n.5 supra.

‘> In 1963, Toolco moved to stay the Delaware proceedings due to the

pendency of the federal action on the same claim. The stay was denied but

shortly thereafter proceedings were suspended, not to resume until 1973. See

App. 108a-109a ( Del. Ch. 1987).

on liability and protracted damage proceedings that foreshad-

owed in nearly every detail the more recent damage proceedings

in Delaware.

As described by this Court, TWA was awarded damages in

the federal action based primarily on “profits lost” as a result

of “five transactions” whereby TWA came to have (1) only 47

jetcraft, (2) available later than TWA would have liked, and

(3) provided by Toolco pursuant to leases (pnor to January

1961). 409 U.S. at 378-79; see also 449 F.2d 51, 65-66 (2d Cir.

1971).'* The damages were measured by the difference between

TWA’s actual profits (for the period 1959-63) and the profits

that TWA hypothetically would have earned (1) with a 63-jet

fleet, (2) earlier acquired, and (3) owned outright by TWA

rather than leased from Toolco. The damages witnesses, the

mode of proof, and the alleged injuries are set forth in detail in

the opinion by the Second Circuit (449 F.2d at 65-66, 71-78)

and were summarized by this Court at 409 US. at 378-79.

In Toolco I, this Court ruled squarely that a// pertinent

Toolco activities had been under the “control and surveillance”

of the CAB and were necessary to effectuate what the CAB had

found to be the “public interest.” 409 U.S. at 366, 369, 378-79.

388-89. Suit by the newly independent TWA on Toolco’s actions

would “negate” CAB orders and “penalize” CAB-approved

conduct. Jd. at 388. Hence, section 414 barred liability for all

“{t]hat TWA charged in its complaint’”—including the “five

transactions” upon which damages had been predicated. Id. at

378-79, 388-89; see also pp. 16-17 infra. This Court therefore

reversed the damages award and directed that TWA’s complaint

be dismissed. 409 U.S. at 389. The trial court duly dismissed

in May 1973 (359 F. Supp. 783 (S.D.N.Y. 1973), App. 117a),

whereupon another fifteen years of litigation ensued in state

court over the same claim, resulting in a virtually identical

damages award.

'* These “five transactions” involved “diversion” of six Convair jets to

Northeast Airlines, lease of four other Convairs to Northeast, “diversion” of

six Boeing jets to Pan Amencan Airways, “late delivery” of various jetcraft,

and the 1989-60 jetcraft leases between Toolco and TWA. See 409 USS. at

378-79.

C. Delaware Proceedings And The Opinions Below.

The prolonged state proceedings led to two pertinent deci-

sions by the Supreme Court of Delaware.

1. 1975 Opinion Of The Delaware Supreme Court.

In the wake of Toolco I, Toolco moved for dismissal on

grounds of res judicata and federal preemption. See App. 30a.'*

The motion was denied on the merits by the trial court ( App.

28a (Del. Ch. 1974)), and Toolco appealed, raising the same

points. See App. 15a, 23a. The Delaware supreme court

affirmed in its 1975 opinion. App. 13a.

On res judicata, Toolco urged that the Delaware action

should be dismissed because TWA had impermissibly split a

single claim for relief between the federal and the state actions.

See App. |5a, 19a. The Delaware supreme court agreed that

“the facts alleged [in the Delaware action] are substantially the

same as those pleaded in the anti-trust action.”'® The court

held, however, that TWA had not been obliged to present its

fiduciary-duty theory to the federal courts and that, in any event,

the judgment in Joolco J was not entitled to res-judicata effect.

See App. 15a-22a; see also pp. 24 & 26 infra.

On preemption, Toolco urged that, contrary to the Suprem-

acy Clause and FAA § 414, a state fiduciary action on TWA’s

allegations would negate the CAB orders at issue in Joolco J

and punish Toolco’s CAB-approved activity. See App. 23a. On

this issue, the Delaware supreme court limited itself to a very

narrow ruling reflecting the undeveloped condition of the state-

court record. The court concluded only that section 414 does

'S This Court has separately defined and applied the res-judicata and

collateral-estoppel principles pertinent to this case. “Under res judicata, a

final judgment on the menits of an action precludes the parties or their privies

from relitigating issues that were or could have been raised in that action.

Under collateral estoppel, once a court decides an issue of fact or law necessary

to its judgment, that decision precludes relitigation of the same issue on a

different cause of action between the same parties.” Kremer v. Chemical

Constr. Corp., 456 U.S. 461, 467 n.6 (1982) (citations omitted); see, e.g.,

Montana v. United States, 440 U.S. 147, 153 (1979).

'° App. 15a; see also App. 107a-108a (Del. Ch. 1987); App. 46a ( Del.

Ch. 1977); App. 30a (Del. Ch. 1974).

not “preempt [all] state regulation of the intra-corporate affairs

of those subject to CAB jurisdiction” and therefore held that

“TWA may proceed with the litigation.”” App. 24a-25a. At

the same time, the Delaware court acknowledged Delaware’s

obligation on a fully developed record to “give deference to

all that the CAB approves.” App. 25a. The court further

acknowledged the likely collateral-estoppel implications of

Toolco I in that context, stating that “whether any particular

issues were finally determined in the Federal action is not at

issue in this appeal.” Jd."’

2. 1988 Opinion Of The Delaware Supreme Court.

Thereafter, by amended answer to the complaint, Toolco

pleaded as affirmative defenses both that Toolco J barred TWA

“from maintaining this action embracing the same subject matter

and seeking damages for the same alleged injunes to TWA’s

business” and that section 414 immunized the Toolco actions

sued upon. App. 302a, 305a. In 1977, on TWA’s motion for

summary judgment on the pleadings and over Toolco’s federal

defenses, the tral court held that Toolco’s exercise of CAB-

approved control over TWA constituted actionable self-dealing

under Delaware law. See App. 50a-54a (Del. Ch. 1977)

However, the tnal court noted that, in the damages phase,

“specific transactions approved by the Board [would

be] ...immune from further attack on the basis of State fidu-

'’ Toolco filed a petition for certiorari in this Court, limiting the petition

to the res-judicata issue (that TWA had impermissibly split a claim for relief)

in view of Delaware’s apparent acknowledgment that section 414 would be

applied and Toolco J be given collateral-estoppel effect on a fully developed

record. See App. 313a. The petition was denied by this Court (see 423 U.S.

84! (1975) (No. 74-1653)), but the res-judicata issue remains open for

review. First, as noted in Toolco J itself, a denial of certiorari does “not

establish the law of the case or amount to res judicata on the points raised.”

409 U.S. at 365 n.1; see, e.g., United States v. Kras, 409 U.S. 434, 461 (1973)

(Marshall, J., dissenting) (“[w]hen we deny certiorari, no one, not even

ourselves, should think that the denial indicates a view on the merits of the

case’). Second, this Court has “jurisdiction to consider all the substantive

federal questions determined in the earlier stages of the litigation.” Reece v.

Georgia, 350 U.S. 85, 87 (1955); see Urie v. Thompson, 337 U.S. 163, 172-73

(1949).

ciary law by reason of the provisions of Section 414 of the

{[FAA].” See App. 53a-54a.

That acknowledgment of section 414 proved hollow. In

subsequent damages discovery, TWA stated flatly that it would

“claim the same damages in this action that [were] .. . awarded

[ plaintiff] in the Federal action.” App. 317a. At the bench

trial, before a new trial judge, TWA relied on the same witnesses

to adduce the same damages theory, again focusing on the very

same “transactions” at issue in Toolco J.'* In short, the record

lacking on the 1975 Delaware appeal fully revealed Toolco I]

to be a virtual carbon copy of Toolco I. Toolco renewed its

federal defenses before and after tral. See App. 63a-64a, 320a-

323a. But the trial court ruled that none of the damages sought

by TWA were immunized ( App. 63a-64a ( Del. Ch. 1985) ) and

awarded TWA $48.3 million in damages (including interest),

predicated upon the profits TWA would have earned (from

1959-63) with (1) a hypothetical 52-jet fleet, (2) earlier ac-

quired, and (3) owned instead of leased. App. 68a-69a, 76a,

79a, 8la, 85a, 9la-95a (Del. Ch. 1986); App. 115a (Del. Ch.

1987).

This Delaware damages award is indistinguishable from

that in the federal action, except that the state court found that

an independent TWA would have acquired no more than 52

jetcraft (as opposed to the 63 hypothesized in the federal

damages award). See App. 84a-85a, 91a-94a (Del. Ch. 1986).

On its second Delaware appeal, Toolco contended that the

transactions on which damages were predicated were “immune

from plaintiff's attack,” due “not only [to] the CAB proceedings

and the immunity of FAA § 414 but [also to] the [ Toolco

I) decision ... holding the immunity appiicable to the very

- transactions involved here.” See App. 326a. As in 1975, the

Delaware supreme court acknowledged that the section 414

defense applies to a state fiduciary action. Toolco II, App. 4a-

6a. The court also divided the Delaware damages award into

five “categories” of damages that equate unmistakably to the

“five transactions” at issue in Tooico I. Compare App. 8a-9a

'§ Compare T I, 409 U.S. at 378-79; 449 F.2d at 65-66, 71-78 with T II,

App. 8a-lla; App. 68a-87a ( Del. Ch. 1986); App. 107a-110a ( Del. Ch. 1987);

App. 315a-319a (TWA discovery responses). See also pp. 16-18 infra.

with Toolco I, 409 U.S. at 378-79; see also pp. 16-18 infra. By

force of collateral estoppel, Toolco J should have been held to

establish conclusively that section 414 barred liability in each

Delaware damages “category.” Instead, the Delaware court

upheld the damages award in full, in an opinion that reflects a

shocking failure to give any collateral-estoppel or precedential

effect whatever to Toolco I. Compare Teolco II, App. 8a-lla

with Toolco I, 409 U.S. at 378-79, 388-89; see pp. 16-18 infra.

The pertinent portion of the Delaware opinion is only two

paragraphs long and offers not one word of explanation as to

why, in the face of collateral-estoppel principles, a Delaware

fiduciary action may predicate damages upon the very same

transactions that Joolco J held to be immune. Rather, the

Delaware court simply considered itself free to determine ab

initio what “conduct” was the “subject of CAB review or

approval” and asserted, without reasons or analysis, that the

transactions on which damages were predicated were not immu-

mized by CAB action. Toolco I], App. 4a-6a. This was precisely

the same conclusion reached by the Second Circuit in the federal

liugation and emphatically rejected by this Court. 409 US. at

378-86.'°

'* On its face, the Delaware opinion may create a false impression that

Delaware at least gave effect to the CAB-approved leases of jetcraft from

Toolco to TWA. In this regard, the Delaware court stated that Toolco ] heid

CAB-approved leases to be immunized by section 414 and hence Toolco had

not been required to account in Delaware for “profits” enjoyed in such

transactions. Toolco 1], App. 4a-6a. But Delaware's asserted deference to the

CAB’s leasing orders is purely formal and semantic and illustrates vividly how

Delaware did violence to this Court’s holdings in Toolco J. While Delaware

did not oblige Toolco to pay damages measured by lease “profits,” the same

result was achieved by another means. One-third of the Delaware damages

award (approximately $5.6 million without interest or $15.6 million with

interest) was predicated on Toolco-TWA ivase transactions and expressly

sought to recompense TWA for the “[i]ncreased expenses” resulting from

jetcraft leases as opposed to the lower costs of ownership. Toolco 1],

App. 8a; see App. 69a (Del. Ch. 1986). The very same damages had been

sought and awarded in the federal action (in the amount of $5.3 million) and

were held by this Court to be barred by section 414, with repeated notations

that each lease transaction had been specifically approved by the CAB. See

409 US. at 375-76, 379, 383, 387; see also id. at 405 n.18 (Burger, C.J.,

dissenting ); 449 F.2d at 75; Special Master Report at 185 ( App. 308a).

REASONS FOR GRANTING THE WRIT

It is impossible to gainsay that Toolco IJ is completely

contrary to this Court’s opinion and judgment in Toolco I.

Review therefore is urgently needed to protect the collateral-

estoppel and res-judicata effects of Toolco J, as well as the

supremacy of federal statutes and agency orders.

Delineating the preclusive effects of federal judgments in

subsequent state actions has been an important responsibility of

this Court throughout its history.2° And the Court’s ongoing

attention to such issues is imperative for the sound administration

of justice in our federal system. First, under the Supremacy

Clause, the preclusive effect of federal court judgments is of

constitutional dimension. Thus, “[i]t would be unthinkable to

suggest that state courts should be free to disregard the judgments

of federal courts.”” 18 C. Wright, A. Miller & E. Cooper, Federal

Practice and Procedure § 4468, at 648 (1981 ); see, e.g., Limbach

v. Hooven & Allison Co., 466 U.S. 353, 361-62 (1984); Stroll v.

Gottlieb, 305 U.S. 165, 170-71 (1938); Deposit Bank v. Frankfort,

191 U.S. 499, 517-21 (1903). Second, and more generally,

collateral estoppel and res judicata are both “fundamental

precept[s] of common-law adjudication,” which are “central to

the purpose for which civil courts have been established, the

conclusive resolution of disputes within their jurisdictions.”” Mon-

tana v. United States, 440 U.S. 147, 153 (1979). These preclu-

sion rules bring “an end of litigation” ?' and “foster[ ] reliance

on judicial action by minimizing the possibility of inconsistent

decisions.” *

Here, the unthinkable has occurred in Delaware’s failure to

give collateral-estoppel effect to Toolco J. In that decision, the

Supreme Court of the United States upheld a defense predicated

on a federal statute and said definitively which Toolco conduct

was immunized by FAA § 414. The same federal defense was

then implicated again in Delaware litigation between the same

°° See the cases, dating from 1818, cited at p. 13 n.25 & p. 22 n.32 infra.

*! Baldwin v, lowa State Travelling Men's Ass'n, 283 U.S. 522, 525 (1931);

see Stol! v. Gottlieb, 30S U.S. at 172 (“It is just as important that there should

be a place to end as that there should be a place to begin litigation”).

>? Montana, 440 U.S. at 153-54.

— ee a a ae

parties on the same facts. Under the Supremacy Clause, it is

difficult to conceive where collateral-estoppel principles could

apply with greater force, for the discharge of this Court’s unique

duties demands that its judgments on federal questions be both

supreme and conclusive. See Limbach v. Hooven & Allison

Co., 466 U.S. at 361-62; Des Moines Navigation Co. v. Iowa

Homestead Co., 123 U.S. 552, 553-55, 559 (1887); Deen v.

Hickman, 358 U.S. 57, 58 (1958). Yet Delaware failed to give

preclusive effect to Toolco I on the section 414 issue, and failed

to explain why it might be thought free so to proceed. As shown

in Part I below, such an affront to this Court cannot be allowed

to stand uncorrected. See, e.g., Des Moines, 123 U.S. at 559;

Deen v. Hickman, 358 U.S. at 58. Review is especially important

here oecause, as shown in Part II below, Delaware’s decision on

the merits itself violates the Supremacy Clause by negating

CAB orders, penalizing CAB-approved conduct, and seeking to

displace federal regulation over control relationships in the air-

carrier industry. See Mississippi Power & Light Co. v. Mississippi,

56 U.S.L.W. 4751, 4755-57 (U.S. June 24, 1988).

This case also presents an important and recurring issue

under the res-judicata prohibition against the splitting of claims.

As shown in Part III below, TWA chose not to invoke the

pendent jurisdiction of the federal courts over a state-law theory

applicable to the facts alleged in the federal action. Now, after

TWA’s federal theory failed in federal court, Delaware has

allowed TWA to recover on its state-law theory in a second

action premised on the same facts. Delaware’s res-judicata

holding conflicts squarely with at least nine decisions, by state

supreme courts and federal appellate courts, barring unsuccessful

federal litigants from going to state court to litigate state-law

theories for which federal pendent jurisdiction could have been

(but was not) invoked.”’? Plainly, this has become a frequent

tactic of unsuccessful litigants, presenting a recurring question

that has not been but should be decided by this Court.

> The authorities in conflict with Delaware are cited at p. 24 n.36 &

p. 25 n.37 infra. See also Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394

(1981) (majority did not reach issue but three Justices wnting separately

would have barred subsequent state action for plaintiffs’ failure to invoke

federal pendent jurisdiction over state-law theory ).

Not only are the issues here “‘special and important” ones

meriting review under Sup. Ct. R. 17.1, they make a unique and

compelling claim for review. Prior to the final disposition of

Toolco I, these parties, these facts, and these damage claims had

been in the federal courts for a dozen years, resulting in twelve

published opinions ** and consuming more than 100,000 attorney

hours and $15 million in legal fees. See Toolco I, 409 U.S. at

393 (Burger, C.J., dissenting). Yet those federal-court labors

counted for naught when, as do so many defeated civil litigants,

TWA sought a second chance in a state court, which impermis-

sibly proceeded as though Toolco J had never been decided by

this Court.

I. THE DECISION BELOW CONFLICTS WITH LONG-

STANDING ESTOPPEL PRECEDENTS OF THIS

COURT AND DISREGARDS THE TOOLCO I HOLD-

INGS ON THE SCOPE OF TOOLCO’S SECTION 414

DEFENSE.

For two centuries, this Court has held that, in a second

action, a state court must give collateral-estoppel effect to specific

issues resolved in a prior federal adjudication.”> In Montana v.

United States, 440 U.S. at 154-55, and United Siates v. Stauffer

Chemical Co., 464 U.S. 165, 169 (1984), this Court recently

identified two prerequisites for an estoppel in subsequent litiga-

tion between the same parties—constancy of “controlling facts

or legal principles . . . since the [ first] action” and an attempt to

relitigate issues “in substance the same as those [already]

resolved.”” Montana, 440 U.S. at 154-55; see Stauffer, 464 U.S.

*4 In addition to this Court’s opinion, these were as follows: 515 F.2d 173

(2d Cir. 1975), cert. denied, 424 U.S. 934 (1976); 449 F.2d 51 (2d Cir. 1971),

rev'd, 409 U.S. 363 (1973); 332 F.2d 602 (2d Cir. 1964), cert. dismissed, 380

U.S. 248 (1965); 1974-1 Trade Cas. (CCH) 9 74,889 (S.D.N.Y. 1974); 359

F. Supp. 783 (S.D.N.Y. 1973); 314 F. Supp. 94 (S.D.N.Y. 1970); 312 F.

Supp. 478 (S.D.N.Y. 1970); 308 F. Supp. 679 (S.D.N.Y. 1969); 38 F.R.D.

499 (S.D.N.Y. 1965); 1963 Trade Cas. (CCH) 9 70,767 (S.D.N.Y. 1963);

29 F.R.D. 523 (S.D.N.Y. 1961).

>* See, e.g., Gelston v. Hoyt, 16 U.S. (3 Wheat.) 246, 311-22 (1818);

Embry v. Palmer, 107 U.S. 3, 9-10 (1882); Deposit Bank v. Frankfort, 191

U.S. at 514-20; Myers v. International Trust Co., 263 U.S. 64, 69 (1923); Stoll

v. Gottlieb, 305 U.S. at 170-71; Limbach v. Hooven & Allison Co., 466 U.S. at

361-62.

at 169. Under those standards, there is no conceivable basis in

fact or law for Delaware’s unexplained failure to give preclusive

effect to Toolco J on the issues presented by Toolco’s section 414

defense.

The Delaware courts have repeatedly acknowledged that

the facts are the same here as in Joolco I ( see p. 7 & n.16 supra),

and the two actions have in common the section 414 defense.

On its face, section 414 immunizes covered activity equally

from the “operations of the ‘antitrust laws’... and of all other

restraints or prohibitions made by, c* imposed under, authority

of law.” FAA § 414, 49 U.S.C.A. § 1384 (1976). And, as

already noted, the Delaware supreme court twice acknowledged,

albeit failing to follow through, that transactions exempt from

the antitrust laws under FAA § 414 also are exempt from the

reach of a state fiduciary action. See Toolco II, App. 6a; App.

25a; see also p. 10 n.19 supra.”®

This Court’s entire inquiry in Toolco I was to determine

which Toolco activities were within the scope of the section 414

defense. When the same issues arose again in TJoolco II,

Delaware was obliged to give preclusive effect to a prior adjudi-

cation of that issue, especially one carrying the imprimatur of

this Court. See, e.g. Stauffer, 464 U.S. at 169-72; Montana, 440

U.S. at 153-54; Deen v. Hickman, 358 U.S. at 58; Des Moines,

° Notably, FAA § 414, originally enacted as section 414 of the Civil

Aeronautics Act of 1938, Pub. L. No. 75-706, 52 Stat. 973, 1004, was modelled

upon section 10 of the Emergency Railroad Transportation Act of 1933, Pub.

L. No. 73-68, 48 Stat. 211,215 (1933), a provision now codified ( as amended )

at 49 U.S.C. § 11341 (1982). The latter section has beeu applied by

this Court to immunize transactions approved by the Interstate Commerce

Commission from the operation of state-law “restraints or prohibitions.” See,

e.g., Seaboard Air Line R.R. Co. v. Daniel, 333 U.S. 118, 126 (1948).

Subsequent to Toolco J, Congress phased the CAB out of existence and

amended FAA §§ 408 and 414, by sections 26, 30 and 40 of the Airline

Deregulation Act of 1978, Pub. L. No. 95-504, 92 Stat. 1705, 1726-28, 1731,

1744-47 (codified as amended at 49 U.S.C. App. §§ 1378, 1384, 1551(a)(7),

(b)(1)(C) (1982 & Supp. III 1985)). As the Delaware supreme court

implicitly recognized, those 1978 amendments are not pertinent to the effect

of the CAB’s control and surveillance in the period 1944 to 1960. See also

p. 21 infra. Nor has this Court ever called into question its holding in Toolco

J, contrary to the situation in Limbach v. Hooven & Allison Co., 466 U.S. at

360-61.

123 U.S. at 553-55. Instead, without ever giving one word of

explanation as to why collateral-estoppel principles might be

thought inapplicable, the Delaware court ignored Toolco J and

determined ab initio what had been “approved” by the CAB

and which “transactions were immunized by CAB authority.”

Toolco II, App. 6a. In so proceeding, Delaware disregarded

Toolco I adjudications, both broad and narrow, that required

reversal of the trial court judgment in its entirety.

A. Toolco I Held All Pertinent Toolco Activities To Be

Within The Section 414 Defense.

In applying section 414 in Toolco J, this Court placed great

emphasis on the CAB’s 1950 order authorizing expansion of

Toolco’s control (from 46 to 80 percent ownership). See 409

U.S. at 371-76, 381-82. Aware of Toolco-TWA differences

concerning “the type, quantity, timing, and financing of new

equipment acquisitions,” the CAB nonetheless determined that

Toolco’s operational and financial contributions to TWA were

“essential to both TWA and the public interest.” Jd. at 375,

381, 388.

Standing alone, these 1950 determinations by the CAB

persuaded this Court that the Second Circuit had “erred... in

construing § 414” to allow suit on TWA’s allegations:

[T]he Board not only approved Toolco’s ownership

of TWA stock but it also contemplated actual and

legal control of TWA by Toolco. The Board made it

as plain as possible that Toolco’s [80 percent] stock

ownership would inevitably result in Toolco’s exercis-

ing authority over the day-to-day affairs of TWA,

including the acquisition and financing of equipment.

It was precisely this kind of control the Board ap-

proved. Toolco’s power of decision with respect to

these matters was central to the public-interest issue.

What is more, the Board . . . concluded that Toolco’s

stewardship [as a 46-percent owner]... had been a

great benefit to TWA and to “he public [and]... that

the additional control sought by Toolco and continua-

tion of the TWA-Toolco relationships were essential

to the public interest.

Id. at 386. Damage actions concerning Toolco’s conduct toward

TWA would “negate what the Board, after full investigation,

had found consistent... with the public interest” and would

‘penalize the type of conduct which the Board expressly contem-

plated and preferred would continue unless and until a different

order from the Board was forthcoming.” Jd. at 388. Accordingly,

Toolco I held that section 414 immunized all “[{t}hat TWA

charged in its complaint.” Jd.

The Delaware courts have always acknowledged that the

state-court complaint alleges the same damages, ansing out of

the same activities, as did the federal complaint. See p. 7 &

n.16 supra. Moreover, discovery and trial fully confirmed the

copycat nature of Toolco II. See p. 9 supra. Hence, the

Delaware court should have reversed on the ground that Toolco

I broadly barred any recovery on TWA’s state complaint. See,

e.g., Montana, 440 U.S. at 156-58; Des Moines, 123 U.S. at 553-

55.

B. Toolco I Held That Section 414 Immunized The Specific

Transactions On Which Damages Were Predicated

Below.

In any event, Joolco I specifically reversed a damages

award based on “profits lost” as a result of “five transactions”

whereby TWA came to have (1) only 47 jetcraft out of 63 once

on order, (2) available later than TWA would have liked, and

(3) provided by Toolco pursuant to leases (prior to January

1961). See 409 U.S. at 378-79. Thus, even if read as narrowly

as possible, Toolco J held that section 414 barred an award of

damages predicated on those transactions, precluding relitigation

of those issues. Yet, in utter disregard of Toolco I, the Delaware

supreme court has ruled that TWA may have nearly $50 million

in damages (including interest) predicated on the very same

transactions and the very same damages theory at issue in Toolco

I. Compare Toolco II, App. 5a, 8a-1la with Toolco I, 409 U.S.

at 378-79. Lest there be any doubt on this score:

Fleet Size. This Court held that, under section 414, damages

could not be had for “profits lost” due to three transactions

which “diverted” to other airlines sixteen of the 63 Convair and

Boeing jets that Toolco once had on order for possible use by

TWA. See Toolco I, 409 U.S. at 378. That holding ruled out

damages predicated on the claim that Toolco should have

supplied to TWA more than 47 of the 63 jetcraft once on order.

Nonetheless, the Delaware court upheld approximately $12

million in damages for ““Decreases in TWA’s operating income

as a result of being limited to a smaller total fleet of [47] jet

aircraft.”” Toolco II, App. 8a. As in the federal action, those

damages were measured by the additional profits TWA would

have earned with a larger “pro forma [52] jet fleet” that

included five of the diverted jets at issue in Toolco I. Toolco Il,

App. 10a; see App. 81a, 94a (Del. Ch. 1986).

Delays. This Court further held that, under section 414,

damages could not be had for “profits lost” due to “[t]he late

delivery” of jetcraft. Toolco I, 409 U.S. at 378-79. Nonetheless,

the Delaware court upheld approximately $19.2 million in dam-

ages for “Decreases in TWA’s operating income for delayed

delivery” of the very same jetcraft. Toolco II, App. 8a; see App.

8la, 94a (Del. Ch. 1986).

Leases. This Court held that, under section 414, damages

could not be had for “profits lost” due to “[t]he lease, instead

of outright sales, of jets in 1959-1960.” See Toolco I, 409 U.S.

at 378-79. The Court also noted repeatedly thai the CAB had

approved the terms and conditions of each Toolco-TWA lease

as “just and reasonable and in the public interest.” Jd. at 375-

76, 379, 387. This Court thus ruled out damages predicated on

the claim that TWA should have been allowed to own the

jetcraft leased from Toolco in 1959-60. Nonetheless, the Dela-

ware supreme court upheld approximately $15.6 million in

damages for “‘Increased expenses from being denied the nght

to acquire ownership of jet aircraft pnor to December 30, 1960.”

Toolco II, App. 8a; see also p. 10 n.19 supra.*’

?” In each action, TWA also was awarded more than $500,000 in damages

(more than $1.5 million after Delaware interest) for what the Delaware

supreme court referred to as ““Consequential damages, other than decreases

in Operating income, attributable to delayed delivery of Convair jet aircraft.”

Toolco II, App. 8a, 11a; see Special Master Report at 301 (App. 310a). This

In short, Delaware’s contradiction of Toolco I on damage

issues is not open to the slightest doubt or qualification. TWA

stated that it would seek the same damages as in the federal

action (see p. 9 supra) and, as shown above, the $48.3 million

damage award here consisted entirely of damages held to be

barred in Joolco I. Had Delaware applied Toolco I, the

Delaware damages award would have fallen in its entirety. Thus,

in upholding this award of damages over Toolco’s collateral-

estoppel defense, Delaware has perpetrated a shocking and

intolerable affront to this Court and has subverted gravely the

policies served by the Supremacy Clause and coliateral estoppel.

II. IN VIOLATION OF THE SUPREMACY CLAUSE,

DELAWARE NEGATED CAB ORDERS, PENALIZED

TOOLCO’S EXERCISE OF CAB-APPROVED CON-

TROL, AND DISPLACED THE CONGRESSIONAL

FRAMEWORK GOVERNING CONTROL OF AIR

CARRIERS.

As already shown, Toolco IJ not only failed to give collater-

al-estoppel effect to Toolco I but also proceeded to uphold

damages that Toolco I said would “‘negate” CAB orders and

“penalize” Toolco for carrying out CAB-approved activities. See

409 U.S. at 388. Thus, Delaware’s error in withholding collater-

al-estoppel effect from Toolco I was compounded by ments

holdings that independently raise important issues under the

Supremacy Clause concerning the effect of federal statutes and

federal agency orders in state common-law litigation.”* Indeed,

if left standing, the opinion of this influential state court will

encourage the various states to make common-law fiduciary

Court did not specifically refer to this comparatively minor damage item but

clearly was cognizant of it. See Toolco I, 409 U.S. at 378 (damages “pnmanily”

based on “profits lost”); Tooleco Op. Br. in No. 71-827, at 21 (App. 3lla).

The judgment in Toolco J] thus barred damages on this item as well. Moreover,

damages for this item obviously fall due to the inability to sue for delayed

delivery of the Convair jetcraft.

?® This Court has regularly reviewed cases where common-law causes of

action allowed by the states were claimed to intrude impermissibly on regula-

tory programs enacted by Congress or on agency decisions. See, e.g., Bayle v.

United Technologies Corp., 56 U.S.L.W. 4792 (U.S. June 27, 1988); Silkwood

v. Kerr-McGee Corp., 464 U.S. 238 (1984); Farmers Union v. WDAY, Inc.,

360 U.S. 525, 535 (1959).

actions into engines of regulation intended to displace and

contradict federal statutes by which Congress has given jurisdic-

tion to a federal agency to determine what regulated activities

are just and reasonable and in the public interest.

Under FAA § 408(b), the CAB was empowered to autho-

rize Toolco control over TWA, if in the “public interest” and

“upon such terms and conditions as it shall find to be just and

reasonable.” See App. 234a. Relevant considerations for the

CAB included the “‘foster[ing of] sound economic conditions”

in TWA, the “promotion of adequate, economical, and efficient

service” by TWA, and TWA’s competitiveness. See FAA

§ 102(b)-(d), 49 U.S.C.A. § 1302(b)-(d) (1976), App. 233a.

In 1950, the CAB found it “essential to the best interests of the

carrier and the public” to authorize Toolco’s complete control

over TWA (12 C.A.B. 192, 224 (App. 194a) ); see Toolco I, 409

U.S. at 375), deliberately giving Toolco “power of decision”

over “the acquisition and financing of equipment.” Jd. at 386.

In 1959-60, the CAB specifically found that it would be “just

and reasonable” to permit the jetcraft leases at issue in Toolco

Jand IJ. See Toolco I, 409 U.S. at 375-76, 379, 383, 387; App.

201a, 203a, 206a, 209a, 21 1a.

In section 414, Congress expressly addressed the preemptive

effects of CAB control orders, providing that no “restraints or

prohibitions” were to impede effectuation of what the CAB had

approved. See Seaboard Air Line R.R. Co. v. Daniel, 333 U.S.

118, 124-27 (1948) (applying similar statute); see also p. 14

n.26 supra. But even in the absence of a preemption provision

such as section 414 in a federal statute, there “‘ ‘can be no divided

authority over interstate commerce... the acts of Congress on

that subject are supreme and exclusive.’ Mississippi Power &

Light Co. v. Mississippi, 56 U.S.L.W. at 4757. In Mississippi

Power, this Court recently held that a state had impermissibly

exercised “divided authority” over a federally-regulated activity

when it “alter[ed] FERC-ordered allocations of [electric] power

by substituting [its] own determinations of what would be just

and fair.” Jd. at 4756; see also Nantahala Power & Light Co. v.

Thornburg, 476 U.S. 953 (1986). Here, equally impermissibly,

Delaware has sought through a fiduciary action to exercise a

“divided authority” over the Toolco-TWA control relationship

by substituting Delaware determinations for determinations by

the CAB that Toolco’s control over TWA was in the public

interest and on just and reasonable terms.

Toolco II characterized Toolco’s transgression under Dela-

ware fiduciary law as “‘den[ ying] TWA the control required to

be competitive in the airline industry.”” App. 6a (emphasis

added ). And the Delaware damages award sought to put TWA

in the position it would have occupied had Toolco not acquired

or exercised “five areas of control’ over jetcraft acquisition in

1955-60. App. 5a (emphasis added); see App. 68a-69a ( Del.

Ch. 1986). The damages award thus sought to undo the CAB’s

1944 and 1950 control orders and the lease approvals. See

Toolco II, App. 6a-lla. In place of the CAB’s determination

that Toolco control was “essential to the best interests of the

carrier and the public,” 7? Delaware substituted a determination

that TWA would have been better off free of Toolco’s control.

See, e.g., App. 7a. Likewise, in place of the CARB’s determinations

that each Toolco-TWA lease at issue was “‘just and reasonable

and in the public interest,” *° Delaware substituted its determina-

tion that the leases did not “comport” with concepts of “fair

dealing under the fiduciary standards of Delaware corporation

law.” App. 7a; see p. 10 n.19 & p. 17 supra.

Delaware’s efforts to regulate the Toolco-TWA control

relationship patently “ ‘conflict with [and] interfere with federal

authority over the [federally regulated] activity.’”’ Mississippi

Power, 56 U.S.L.W. at 4757. It was the CAB, not the Delaware

courts, that Congress charged to determine whether Toolco

control would advance or impede TWA’s efficiency, competi-

tiveness, and other interests and whether Toolco control was on

“just and reasonable” terms. The CAB approved complete

control, retained continuing jurisdiction over the control relation-

ship, approved Toolco-TWA leases, and was never overturned

on direct judicial review. See Toolco I, 409 U.S. at 381-83, 386-

88; FAA § 1006, 49 U.S.C.A. § 1486 (1976) (exclusive review

of CAB orders in federal courts of appeals ). Delaware therefore

acted impermissibly when it “regulate[d] in areas where [the

°° 12 C.A.B. at 224 (App. 194a); see Toolco I, 409 U.S. at 375.

206a, 209a, 21 1a.

CAB] ha[d] properly exercised its jurisdiction to determine

just and reasonable” control relationships, ‘“conduct[ed]...

proceedings that challenge[d] the reasonableness” of the CAB’s

actions, and collaterally attacked the CAB orders. Mississippi

Power, 56 U.S.L.W. at 4757; see Seaboard Air Line, 333 U'S. at

124-26.

In papers filed with Justice Brennan,*' TWA has asserted

that Toolco I] does not merit review because the Airline Deregu-

lation Act of 1978 amended section 414 to delete the statutory

immunity from “all other restraints or prohibitions,” thereby

limiting the section 414 immunity to antitrust actions. See 49

U.S.C. App. § 1384 (1982); see p. 14 n.26 supra. But the

certworthiness of this case is not affected by the 1978 amendment,

which was part of a broad overhaul in which the CAB itself,

and its regulatory responsibilities, were phased out of existence.

See 49 U.S.C. App. § 1551 (1982 & Supp. III 1985). First, the

1978 amendment was not retroactive, does not apply to the facts

at issue, and thus is irrelevant to the questions presented for

review. Those questions involve Delaware’s obligation to give

collateral-estoppel and res-judicata effect to a decision of this

Court, and its independent obligation under the Supremacy

Clause to give effect to applicable federal statutes and regulatory

orders. See Mississippi Power, 56 U.S.L.W. at 4757. Second,

provisions like section 414 serve important purposes by expressly

delineating the preemptive effects of regulatory decisions. At

least one similar federal statute is still in effect (see p. 14 n.26

supra), and the decision below should not be allowed to stand

as a precedent or as an impediment to similar congressional

enactments.

Ill. THE DECISION BELOW CONFLICTS WITH NU-

MEROUS STATE AND FEDERAL DECISIONS AS TO

THE RES-JUDICATA EFFECT OF A FEDERAL-

COURT JUDGMENT ON A SUBSEQUENT ACTION

RAISING STATE-LAW THEORIES PREDICATED ON

THE SAME FACTS.

As on collateral-estoppel issues, the states have long been

obliged under the Supremacy Clause to give res-judicata effect

>! See TWA’s Opposition to Application to Stay Mandate of Supreme

Court of the State of Delaware Pending Certioran in No. A-859 (May 12,

1988), p. 4; see also p. 2 n.3 supra.

to federal-court judgments.*? The fundamental purpose of

federal res-judicata doctrine is “to require a plaintiff to try his

whole... case at one time” and not to “split up his claim.”

United States v. California & Oregon Land Co., 192 U.S. 355,

358 (1904); Baltimore S.S. Co. v. Phillips, 274 U.S. 316, 320

(1927). If a plaintiff does split a claim for relief between two

actions, the first action to proceed to final judgment “on the

merits” bars continuation of the other action on “all grounds

for... recovery that were previously available to the part[y],

regardless of whether they were asserted or determined in the

prior proceeding.” Brown v. Felsen, 442 U.S. 127, 131 (1979).

Under these federal res-judicata principles, this Court’s

judgment in Toolco J should have barred further proceedings in

Toolco II—TWA could have invoked (but did not invoke)

federal pendent junsdiction to litigate its state fiduciary-duty

theory, as well as its federal antitrust theory, in the federal

action.**> In permitting TWA to proceed in Delaware after

Toolco I (see p. 7 & p. 8 n.17 supra), Delaware held that

TWA had been under no obligation to invoke federal pendent

jurisdiction over its state-law theory. Delaware’s decision is

squarely in conflict with decisions by at least seven state supreme

courts and two federal courts of appeals on the important

federal question of the appropriate relationship between pendent

jurisdiction and the prohibition against claim-splitting.

A. In Conflict With Numerous State And Federal Court

Decisions, Delaware Held That TWA Was Not Obliged

To Invoke The Pendent Jurisdiction Of The Federal

Court Over Its State-Law Theory.

As to Toolco’s 1955-60 activities, TWA’s federal complaint

(1961) and its state complaint (1962) alleged the same facts,

* See, e.g., Des Moines, 123 U.S. at 559; Hancock Nat'l Bank v. Farnum,

176 U.S. 640, 641-42 (1900); West Side Belt R.R. v. Pittsburgh Constr. Co.,

219 U.S. 92, 99, 102 (1911); Parsons Steel, Inc. v. First Alabama Bank, 474

U.S. 518 (1986).

*> This res-judicata effect should have been recognized wholly independent

of the collateral-estoppel effect of Toolco J on the issues raised by Toolco’s

section 414 defense. In other words, under res-judicata principles, it is the fact

of this Court’s final judgment in Toolco J, rather than the Court’s specific

holding, that precludes further ligation of unraised theories applicable to the

same facts. See pp. 26-28 infra.

ea eel

collaterally attacked the same CAB orders, and sought the same

damages for the same allegedly wrongful conduct, respectively

invoking a federal antitrust theory and a state fiduciary-duty

theory. See pp. 4-5 supra. It is evident that TWA thus split

between the federal action and the state action a single claim

for relief based on Toolco’s allegedly improper exercise of CAB-

approved control from 1955-60.** This claim-splitting was

not forced upon TWA (and thus possibly excused) by some

insuperable limitation on the federal court’s jurisdiction. To the

contrary, under the doctrine of pendent jurisdiction, the federal

court in Joolco J plainly had power to adjudicate both the

federal theory and the state theory applicable to the “common

nucleus of operative fact[s]” alleged in TWA’s two complaints.

United Mine Workers v. Gibbs, 383 U.S. 715, 725 (1966); see

Hurn v. Oursler, 289 U.S. 238, 245-47 (1933).

TWA clearly recognized the availability of pendent jurisdic-

tion when the federal complaint was filed in 1961. As noted

above, while alleging only a federal theory as to the years 1955-

60 now at issue, the federal complaint presented both federal

antitrust and pendent state tort theories as to certain Toolco

activities in 1961 (after Toolco’s CAB-approved control ended ).

See p. 5 n.11 supra. The federal trial court proceeded to exercise

its pendent jurisdiction over TWA’s post-1960 state-law theory

(awarding no damages). See Toolco II, App. 20a; TWA v.

Hughes, 359 F. Supp. at 785, App. 118a. Hence, there is every

reason to believe that the federal court would have exercised

pendent jurisdiction over TWA’s state fiduciary-duty theory as

to the period 1955-60, if asked to do so. This is especially true

because of the close nexus between TWA’s fiduciary-duty theory

(predicated upon use of Toolco’s CAB-approved control) and

Toolco’s section 414 defense ( predicated upon the CAB’s control

orders ). See United Mine Workers, 383 U.S. at 727 (when state

theory is “closely tied to questions of federal policy... the

argument for exercise of pendent junsdiction is particularly

strong”).

** See, e.g., Baltimore S.S. Co. v. Phillips, 274 U.S. at 321; see also Woods

Explor. & Prod. Co. v. Aluminum Co. of America, 438 F.2d 1286, 1314-15

(5th Cir. 1971), cert. denied, 404 U.S. 1047 (1972); Norman Tobacco & Candy

Co. v. Gillette Safety Razor Co., 295 F.2d 362, 363-64 ( Sth Cir. 1961).

aerial

Given the compelling indications that the federal trial court

would have exercised pendent junsdiction over TWA’s fiduciary-

duty theory, Delaware should have held that TWA had imper-

missibly split a claim for relief and that the final judgment in

Toolco I barred litigation on the state theory. Instead, while

agreeing that a claim had been split, Delaware found the splitting

to be permissible because the exercise of pendent jurisdiction is

discretionary, there was “uncertain[ty]”’ as to whether jurisdic-

tion would have been exercised by the federal court,** and doubt

on that question was to be resolved in favor of allowing TWA

to litigate anew in Delaware. App. 19a-22a. In short, Delaware

held that TWA’s failure to invoke federal pendent junsdiction

was not pertinent to the res-judicata issue because the trial court

might have declined junsdiction.

In this regard, Delaware is squarely in conflict with res-

judicata decisions of at least seven state supreme courts *° and

**In stating reasons why pendent jurisdiction might not have been

exercised over the fiduciary-duty theory, the Delaware court disregarded

completely the actual course of the litigation and indulged in counterfactual

speculation. In fact, two lower federal courts rejected Toolco’s section 414

defense, and Toolco was obliged to endure a dozen years of merits and

damages litigation in the federal courts over the federal antitrust theory

applicable to the years 1955-60. Thus, had TWA’s federal complaint invoked

pendent jurisdiction over the fiduciary-duty theory applicable to those years,

TWA could have had twelve years in court on its state theory. Yet, in assessing

whether the district court would have exercised pendent jurisdiction over the

state theory as to 1955-60, Delaware concluded that analysis should be

predicated on the fanciful hypothesis that the federal claims had been dismissed

as insubstantial at the outset of the action. See Toolco II, App. 20a-22a.

Plainly, however, in assessing whether the district court would have exercised

pendent junsdiction over TWA’s fiduciary-duty theory, the relevant perspective

is what the federal courts actually did with TWA’s federal claims from 1961

to 1973, not what a tnal court might have done with similar claims, involving

other litigants, after this Court had decided Toolco J.

Comm'n, 401 So.2d 764, 768-69 ( Ala. 1981); Hill v. Wooten, 279 S.E.2d 227,

228-29 (Ga. 1981); Silver v. Queen’s Hosp., 629 P.2d 1116, 1122 (Haw. 1981);

Anderson v. Phoenix Inv. Counsel of Boston, Inc., 440 N.E.2d 1164, 1169

(Mass. 1982); Rennie v. Freeway Transp., 656 P.2d 919, 923 (Or. 1982);

Jeanes v. Henderson, 688 S.W.2d 100, 104 (Tex. 1985); Belliston v. Texaco,

Inc., 521 P.2d 379, 380 (Utah 1974); see also Boccardo v. Safeway Stores,

Inc., 184 Cal. Rptr. 903, 911-14 (Cal. Ct. App. 1982); McCann v. Whitney,

25 N.Y.S.2d 354, 357 (N.Y. Sup. Ct. 1941); Juneau Square v. First Wisconsin

Nat'l Bank, 364 N.W.2d 164, 170 ( Wis. Ct. App. 1985).

two federal courts of appeals,” illustrated by Rennie v. Freeway

Transport, 656 P.2d 919 (Or. 1982). There, after plaintiff lost

a securities action in federal court, the Supreme Court of Oregon

held that res judicata precluded related state proceedings because

plaintff could have invoked federal pendent junsdiction over

his state-law theory (but failed to do so). In rejecting plaintiff's

argument that the federal court might have declined to exercise

pendent jurisdiction, the Oregon court stated:

We are convinced that the [ appropriate ] rule, the one

more consonant with the policies behind res judicata,

is that a plaintiff must attempt to have all claims

against a defendant arising out of one transaction

adjudicated in one court in one proceeding, at least

insofar as possible, despite the fact that the various

claims may be based on different sources of law.

Id. at 924 (second emphasis added). Similarly, the United

States Court of Appeals for the Seventh Circuit has stated that

the “uncertainty over whether a [federal] trial judge would

exercise pendent jurisdiction does not justify permitting the

institution of a multiplicity of proceedings which may have the

effect of harassing defendants and wasting judicial resources.”

Harper Plastics v. Amoco Chemicals Corp., 657 F.2d 939, 946

(7th Cir. 1981). Under the approach in Rennie and Harper

Plastics, TWA’s failure to invoke federal pendent jurisdiction

should not have been forgiven on Delaware’s analysis that the

federal court might have declined to exercise juris<'iction.

This Court should resoive this fundamental conflict over an

important and frequently recurring issue of federal res-judicata

doctrine.** First, it is imperative that there be certainty in res-

” See Harper Plastics v. Amoco Chems. Corp., 657 F.2d 939, 946 (7th

Cir. 1981); Woods Explor. & Prod. Co., 438 F.2d at 1315. These holdings

arose in the context of attempts to enjoin state-court proceedings due to the

res-judicata effect of 2 pnor federal judgment.

** This question was not reached in Federated Department Stores, Inc. v.

Moitie, 452 U.S. 394 (1981), but three Justices would have followed the

approach of Rennie and Harper Plastics. See 452 U.S. at 404 (Blackmun &

Marshall, JJ., concurring) (“Since there is no reason to believe that it was

clear at the outset of this litigation that the District Court would have declined

judicata law so it is desirable to extinguish any conflict pitting a

state court of last resort against other state or federal courts. See

Federated Department Stores, Inc. v. Moitie, 452 U.S. 394, 401

(1981). Second, res judicata “is a rule of fundamental and

substantial justice, ‘of public policy and of private peace,’ which

should be cordially regarded and enforced by the courts.” Hart

Steel Co. v. Railroad Supply Co., 244 U.S. 294, 299 (1917); see

Federated Department Stores, 452 U.S. at 401. The Delaware

court’s holding frustrates federal res-judicata policies by subject-

ing winning federal litigants like Toolco to “the expense and

vexation attending multiple lawsuits” and to the risk (here the

reality ) of “inconsistent decisions.” Montana v. United States,

440 U.S. at 153-54. Moreover, by encouraging claim-splitting

in the pendent-jurisdiction context, the approach adopted below

deprives the federal-court victor of the surer-footed federal

interpretation of federal defenses, such as section 414, that are

relevant to both the federal theory and the state theory.

B. Delaware’s Purported Alternative Holding On Res Judi-

cata Is Entirely Specious.

In res-judicata terminology, preclusive effect such as that

asserted here by Toolco attaches only to a final judgment that

is “on the merits.” See, e.g., Federated Department Stores, 452

U.S. at 398. In what purported to be an alternative ground to

its pendent-jurisdiction holding, the Delaware supreme court

held that Toolco J was not an adjudication “‘ ‘on the merits’ of

the same claims alleged here to be violations of Delaware

fiduciary law.” Toolco II, App. 17a. In so holding, Delaware

cited no federal authority and simply ignored the settled rule

that a federal judgment bars a second suit as to all theories that

could have been raised in the first action, as well as those that

were actually raised.

to exercise pendent jurisdiction over state claims, respondents were obligated

to plead those claims if they wished to preserve them”); id. at 411 ( Brennan,

J., dissenting). The American Law Institute also supports this approach. See

Restatement (Second) of Judgments § 25, Comment e and Reporter’s Note

(1982); Note, The Res Judicata Implications of Pendent Jurisdiction, 66

Cornell L. Rev. 608, 619 (1981).

TWA had only one c/aim (or cause of action) here, based

on allegations that Toolco acted wrongfully toward TWA in jet-

related activities from 1955-60. In Toolco I, TWA advanced a

federal theory on that claim; in Toolco II, TWA advanced a state

theory on the same claim. It is incontrovertible that Toolco J

rejected TWA’s federal theory on substantive grounds, squarely

holding that section 414 and the pertinent CAB orders barred

liability predicated on TWA’s factual allegations and federal-

law theory. For res-judicata purposes, such a judgment is

plainly “on the merits” because it was “based on legal rights as

distinguished from mere matters of practice, procedure, jurisdic-

tion or form.” Fairmont Aluminum Co. v. Commissioner, 222

F.2d 622, 625 ( 4th Cir. ), cert. denied, 350 U.S. 838 (1955).°?

Contrary to the views of the Delaware court, there simply

is NO requirement in res-judicata law that the first judgment, if

“on the merits” as to the theories presented in the first action,

also address the substance of unraised theories. See, e.g., Harper

Plastics, 657 F.2d at 943-44; Rennie v. Freeway Transport, 656

P.2d at 925-27.” Indeed, in the ordinary case, there is a high

likelihood that a disposition “on the merits” of the theories

raised would not fully meet the substance of unraised theories.

Res-judicata principles nonetheless dictate preclusion of any

unraised theory because the fact that the first court reached

the merits of the theories raised shows that plaintiff had the

opportunity to present unraised theories. See, e.g., Rennie v.

Freeway Transport, 656 P.2d at 921-22; C. Wright, The Law of

** The district court’s 1973 opinion upon dismissing the federal complaint

states expressly that the dismissal of TWA’s federal antitrust claims was “upon

the ments.” TWA v. Hughes, 359 F. Supp. at 785, App. 119a. Upon TWA’s

motion, however, the district court further stated that the dismissal might not

be “a bar to [TWA’s] nonfederal claims.” Jd. In this regard, the district court

expressly left it to the Delaware courts, with review in this Court, to determine

the res-judicata effect of Toolco J. Thus, the court’s dismissal order in no way

limits the res-judicata effect of the dismissal mandated by this Court.

“ See, e.g., Angel v. Bullington, 330 U.S. 183, 190 (1947) (“[i]t is a

misconception of res judicata to assume that the doctrine does not come into

operation if a court has not passed on the ‘merits’ in the sense of the ultimate

substantive issues of a litigation”); 18 C. Wright, A. Miller & E. Cooper, supra,

§ 4435, at 330 (“itis clear that an entire claim may be precluded by a judgment

that does not rest on any examination whatsoever of the substantive rights

asserted”). See also Fed. R. Civ. P. 41(b).

Federal Courts 680-81 (4th ed. 1983) (“*[iJ]t is sufficient that in

the first litigation there was an opportunity to get to the menits”’).

Thus, Delaware’s ruling that the disposition in Toolco I was not

“‘on the merits” for res-judicata purposes is wholly specious. At

bottom, then, Delaware’s res-judicata holding presents only the

single question whether a state may withhold res-judicata effect

from Toolco I simply because of the theoretical possibility that

the federal trial court might have declined to exercise pendent

jurisdiction over TWA’s state fiduciary-duty theory had that

theory been presented in the federal action.

CONCLUSION

For all of the foregoing reasons, a writ of certiorari should

issue to review the judgment and opinions of the Supreme Court

of Delaware. Toolco further respectfully submits that Delaware

is so clearly in error on the collateral estoppel and preemption

points ( see Parts I and II above) that the Court should consider

summary reversal. See S. Ct. R. 23.1; R. Stern, E. Gressman &

S. Shapiro, Supreme Court Practice § 5.12(c) (7)(b) (6th ed.

1986); Rose v. Arkansas State Police, 107 S. Ct. 334 (1986);

Deen v. Hickman, 358 U.S. at 57-58.

Respectfully submitted,

WILLIAM T. COLEMAN, JR.

Counsel of Record

Of Counsel:

ARTHUR M. TAYLOR

SUMMA CORPORATION

3800 Howard Hughes

Parkway

Las Vegas, Nevada 89109

(702) 791-4288

MILTON H. WEST, Jr.

ANDREWS & KURTH

4200 Texas Commerce

Tower

Houston, Texas 77002

(713) 220-4200

Dated: July 27, 1988

DONALD T. BLISS

CARL R. SCHENKER, JR.

STEPHEN J. HARBURG

O’MELVENY & MYERS

555 13th Street, N.W.

Washington, D.C. 20004

(202) 383-5325

ANDREW B. KIRKPATRICK, JR.

EDMOND D. JOHNSON

Morris, NICHOLS, ARSHT

& TUNNELL

1105 North Market Street

Wilmington, Delaware 19899

(302 ) 658-9200

Counsel for Petitioners

APPENDIX A

IN THE

SUPREME COURT OF THE STATE OF DELAWARE

No. 73, 1987

Court Below:

Court of Chancery of the State of Delaware

In and for New Castle County

Civil Action No. 1607

SUMMA CORPORATION and WILLIAM R. LuMMIS,

Delaware Ancillary Administrator

of the Estate of Howard R. Hughes,

Defendants Below,

Appellants,

TRANS WORLD AIRLINES, INC.,

Plaintiff Below,

Appellee.

Submitted: September 22, 1987

Decided: April 4, 1988

Before CurisTiE, Chief Justice, HorRSEY and Moore, Justices.

Upon appeal from the Court of Chancery. AFFIRMED.

Andrew B. Kirkpatrick, Jr., Esquire (argued), Martin P. Tully,

Esquire, Thomas Reed Hunt, Jr., Esquire, and Edmond D.

Johnson, Esquire, of Morris, Nichols, Arsht & Tunnell,

Wilmington; David A. Jenkins, Esquire, of Lassen, Smith,

Katzenstein & Furlow, Wilmington, for Appellants.

Louis J. Finger, Esquire, and Allen M. Terrell, Jr., Esquire, of

Richards, Layton & Finger, Wilmington; William E. He-

garty, Esquire (argued), Dudley B. Tenney, Esquire,

Marshall Cox, Esquire, Michael P. Tierney, Esquire, and

Dierdre A. Burgman, Esquire, of Cahill, Gordon & Rein-

del, New York, Of Counsel, for Appellees.

Moore, Justice

This accounting action has consumed more than twenty-

five years of litigation between Trans World Airlines, Inc.

(“TWA”), and the late Howard R. Hughes and his wholly

owned enterprise, Hughes Tool Company (“Tcolco”).' In

length of time, although certainly not in other respects, it may

almost seem reminiscent of Jarndyce and Jarndyce.2 The end,

however, is in sight.

In 1962 TWA sued Hughes and Toolco in the Court of

Chancery alleging that the defendants had breached their

fiduciary duty of loyalty by deliberately interfering with TWA’s

commercial success to benefit themselves. After trial the Court

of Chancery assessed damages plus interest of $48,349,022.48

against Toolco. The defendants challenge several aspects of the

award, and the plaintiff appeals the calculation of post-

judgment interest.

We find no error in the trial court’s calculation of damages

and interest. Accordingly, we affirm.

The background of this case has been developed in earlier

court opinions. See Trans World Airlines, Inc. v. State ex rel.

Porterie, Dei. Supr., 183 A.2d 174 (1962); Trans World

Airlines, Inc. v. Hughes, Del. Ch., 185 A.2d 762 (1962); Hughes

v. Trans World Airlines, Inc., Del. Supr., 185 A.2d 886 (1962);

Trans World Airlines, Inc. v. Hughes Tool Co., Del. Ch., 187

A.2d 350 (1962); Hughes Tool Co. v. Trans World Airlines,

Inc., 409 U.S. 363, 93 S.Ct. 647 (1973); Trans World Airlines,

Inc. v. Hughes, Del. Ch., 317 A.2d 114 (1974); Hughes v. Trans

World Airlines, Inc., Del. Supr., 336 A.2d 572 (1975); Trans

World Airlines, Inc. v. Summa Corp., Del. Ch., 374 A.2d 5

(1977). We review only those facts now essential to our

decision.

1 Summa Corporation, the named defendant, is the successor in interest

to Toolco. William R. Lummis is the Delaware ancillary administrator of the

estate of Howard R. Hughes. For purposes of convenience we will refer to

both defendants as “Toolco”.

2 The fabled and interminable litigation described in C. Dickens, Bleak

House (C. Dickens ed. 1868).

In 1939 Howard R. Hughes, through Toolco, began

acquiring stock in TWA. In i942 Toolco had working control

of TWA, owning 40% of its common stock. By 1958, Toolco

had increased its holdings to 78%, and exercised control over

TWA’s day-to-day operations. Because Toolco was engaged in

experimentation in aviation, and in the manufacture of airplane

parts for the military services, its interest in TWA was closely

scrutinized by the Civil Aeronautics Board (““CAB”’). Pursuant

to the Federal Aviation Act, 49 U.S.C. § 1300 (1982),

(“FAA”), the CAB was empowered to regulate the sale,

control, or other acquisition of an air carrier by “any person

engaged in any other phase of aeronautics.” Thus, all transac-

tions which were likely to affect the nature of TWA’s control by

Toolco were subject to CAB approval.

Between 1950 and 1960 Toolco used its control position to

TWA’s detriment. Because of Hughes’ evasive nature and

difficult temperament, Toolco was slow to order the then novel

jet airplanes which TWA needed to remain competitive.

Toolco refused to allow TWA to purchase its own aircraft,

preferring instead to buy ihe planes and sell or lease them to

TWA at a profit. Several of the planes ordered for TWA, once

delivered, were diverted to other airlines. Some planes never

arrived due to Toolco’s deliberate efforts to delay or stop their

production. Many of those actions were designed to minimize

both Hughes’ and Toolco’s tax exposure, but they also resulted

in losses of profits to TWA.

In 1960, pursuant to a financing agreement between TWA

and several banks, Toolco was forced to place its TWA stock in

a voting trust controlled by the banks. Soon thereafter, in 1961

TWA sued Toolco in the United States District Court for the

Southern District of New York (the federal action), alleging

that Toolco had violated federal antitrust laws by refusing to

allow TWA to purchase aircraft from other suppliers. In 1962,

TWA brought the present suit in the Court of Chancery,

alleging that Toolco breached its fiduciary duty by engaging in

transactions tainted by self-interest. However, this case re-

mained dormant pending the outcome of the federal action,

which was concluded in 1973 when the United States Supreme

Court rejected TWA’s federal antitrust claims. See Hughes

Tool Co. v. Trans World Airlines, Inc., 409 U.S. 363, 93 S.Ct.

647 (1973).

Thereafter, Toolco revived the present action by promptly

moving for summary judgment, based upon res judicata

grounds, arguing that under the Federal Aviation Act the

Supreme Court of the United States’ decision in the federal

action rendered Toolco’s transactions immune from all laws,

including the fiduciary principles of Delaware corporate law.

This Court rejected that contention, and held that under the

United States Supreme Court’s decision only those transactions

which were specifically approved by the CAB were immune

from all other restraints imposed by law. Hughes v. Trans

World Airlines, Inc., Del. Supr., 336 A.2d 572 (1975). Toolco

then filed an answer admitting the well pleaded allegations of

the complaint.

Both Toolco and TWA moved for summary judgment.

Defendants again claimed transactional immunity on the theory

that the damages which TWA sought arose out of the transac-

tions approved by the CAB. The Court of Chancery rejected

this defense. While the defendants were not required to

account for profits realized in connection with the CAB ap-

proved acts, they were liable to TWA because there had been

“no general approval by the Civil Aeronautics Board of the

overall conduct of the defendants vis a vis plaintiff.” Trans

.World Airlines, Inc. v. Summa Corp., Del. Ch., 374 A.2d 5, 12

(1977).

Applying the intrinsic fairness test, the court granted

partial summary judgment to TWA and ordered an accounting,

holding that Toolco had not met its burden respecting the

fairness of the transactions. See Sinclair Oil Corp. v. Levien,

Del. Supr., 280 A.2d 717 (1971). However, the court denied

TWA’s claim that Toolco was liable for damages resulting from

the sale or lease of airplanes to air carriers other than TWA,

because TWA had failed to show that Toolco had derived a

benefit which was detrimental to TWA. See Summa, 374 A.2d

at 10, 12.

The tral court recognized that Toolco could not be held

accountable for profits realized from transactions specifically

approved by the CAB, but ruled that if the transactions were

part of an “overall control pattern” which harmed TWA, the

latter was entitled to damages for such conduct. The court

delineated five areas of control in which Toolco was subject to

liability if damages were proven.

After nearly ten years of discovery, and trial on the issue of

damages, the Court of Chancery awarded TWA $17,238,366

plus pre-judgment interest of $31,108,234. Post judgment

interest was allowed only on the damage award.

Toolco’s appeal raises four issues. First, it reurges the

transactional immunity defense which both this Court and the

Court of Chancery have previously rejected. Second, Toolco

argues that its failure to place an earlier order for Boeing jets

was not a breach of its fiduciary duty to TWA because TWA

did not need that type of jet. Third, Toolco disputes the

inclusion in the damage calculation of accounting changes

made by TWA in late 1963. Finally, Toolco argues that the use

of an interest rate in excess of the legal rate was erroneous.

TWA has cross appealed the calculation of post-judgment

interest, contending that it should be based upon both the

damage and pre-judgment interest awards.

Il.

The Federal Aviation Act, 49 U.S.C. § 1300 (1982)

created the Civil Aeronautics Board to oversee and regulate the

rapidly expanding airline industry. Pursuant to this authority

the CAB could exempt transactions which were otherwise

subject to antitrust or other laws. Thus § 414 of the FAA, 49

U.S.C. § 1384, provides:

Any person affected by any order made under sec-

tions 1378, 1379 or 1382 of this title shall be, and is

hereby, relieved from the operations of the “antitrust

laws’’, as designated in section 12 of title 15, and of

all other restraints or prohibitions made by, or im-

posed under, authority of law, insofar as may be

necessary to enable such person to do anything

authorized, approved, or required by such order.

Because the sales and leases of airplanes between Toolco and

TWA were approved by the CAB, the Supreme Court of the

United States decided in the federal action that those transac-

tions were exempt from the antitrust laws and “all other

restraints or prohibitions made by, or imposed under, authority

of law.” However, as this Court held in Hughes v. Trans World

Airlines, Del. Supr., 336 A.2d 572, 579 (1975), that did not

confer a “blanket immunity” upon the actions of Toolco.

Although specific transactions were immunized by CAB author-

ity, Toolco’s conduct which was not the subject of CAB review

or approval, when taken as a whole, could involve violations of

its fiduciary duties to TWA under Delaware law. The Court of

Chancery later found such violations to the nghts of the TWA

minority.

Although Toolco was not held accountable for profits

resulting from the specific transactions approved by the CAB,

TWA claimed a loss of profits resulting from Toolco’s inaction,

rather than its actions. Thus, by failing to purchase jets in the

early 1950’s Toolco denied TWA the opportunity to be com-

petitive and profitable. Moreover, Toolco’s general conduct

was actionable. By leasing planes to TWA, rather than selling

them, and by selling planes to TWA only at a profit, Toolco

had denied TWA the control required to be competitive in the

airline industry. The CAB did not consider or approve any of

those matters. As a whole, Toolco acted for its sole benefit at

the expense of its fiduciary duties to TWA’s minority share-

holders. Merely because certain specific transactions were

immunized by CAB approval did not relieve Toolco of its

general fiduciary duties of loyalty and care.

Il.

It is well established in Delaware that one who stands on

both sides of a transaction has the burden of proving its entire

fairness. Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701,

710 (1985); Sterling v. Mayflower Hotel Corp., Del. Supr., 93

A.2d 107, 110 (1952). In the absence of arms length bargain-

ing, clearly the situation here, this obligation inheres in, and

invanably amses from the parent-subsidiary relationship.

Weinberger v. UOP. Inc., at 709, n.7, 709-710; Rosenbdiatt v.

Getty Oil Co., Del. Supr., 493 A.2d 929, 937-38 (1985). This

rule applies when “the parent, by virtue of its domination of the

subsidiary, causes the subsidiary to act in such a way that the

parent receives something from the subsidiary to the exclusion

of, and detriment to the minority stockholders of the subsidi-

ary.” Sinclair Oil, 280 A.2d at 720.

Toolco was a 78% shareholder in TWA, and, exerting its

control position, Toolco refused to allow TWA to purchase its

own jets, delayed the production of jets which were ordered,

unjustifiably rejected acceptable aircraft, forced TWA to enter

into leases for aircarft, and sold airplanes to TWA at a

profit—all to Toolco’s benefit, but maternally detrimental to the

productivity and effectiveness of TWA. By fixing the terms of

the leases and sales to TWA, Toolco thereby accrued substan-

tial profits, reportable as capital gains, as well as other tax

benefits. Furthermore, Toolco structured the transactions to

minimize its exposure to risk at the expense of TWA’s profits.

Such conduct hardly comports with basic concepts of fair

dealing under the fiduciary standards of Delaware corporation

law.

Toolco’s defense is essentially one of minimizing its ac-

tions. For example, it argues that TWA had no need for a full

fleet of certain jet aircraft in 1955 because those planes did not

have non-stop transatlantic capability. Thus, Toolco contends,

it should not be held accountable for TWA’s lost profits due to

Toolco’s failure to order such aircraft.

However, this argument, like Toolco’s others, ignores the

fact that the intrinsic fairness test placed the burden upon

Toolco to prove that it was not the cause of TWA’s lost profits.

It could have done so by showing that the outcome of the

transaction, had it been approved by an independent board of

directors, would have been the same. The trial court found,

and we agree, that Toolco failed to meet that burden.

Mr. Robert W. Rummel, a longtime employee of Toolco

and TWA, testified that Hughes would not allow him to

negotiate with one aircraft manufacturer because it refused to

give Toolco the highest priority for delivery. The record also

{

———Errereree

demonstrates that this manufacturer found Hughes to be a very

difficult person. This adversely affected TWA because it caused

Toolco to lose the little prnority it did establish for delivery of

the aircraft. Substantial evidence indicates that had Toolco

been willing to negotiate, TWA would have had a delivery

pnonty competitive with other airline companies. Toolco’s

argument that it was waiting for jets with true transatlantic

capability is ‘without merit. Other airlines, who were willing to

negotiate with this particular manufacturer put the same planes

to use on their transatlantic routes until the later models were

available. When updated transatlantic jets were produced, the

manufacturer negotiated with the airlines to “roll over” the

earlier models for the later ones. Thus, for reasons clearly

attnibutable to the eccentric or idiosyncratic business methods

of Howard Hughes, TWA was unable to establish a jet fleet as

quickly as its competitors. Given this record, it is manifest that

no independent board of directors could have taken such action

in good faith and in the honest belief that it was in the best

interests of TWA. See Aronson v. Lewis, Del. Supr., 473 A.2d

805, 812 (1984). That point becomes even more apparent

when one considers the application of the intrinsic fairness test

here, and Toolco’s failure to meet its burden of proof in that

regard.

IV.

The specific damage issues upon which the Court of

chancery focused at tnal were:

1. Decreases in TWA’s operating income for delayed

delivery of Boeing jet aircraft.

2. Decreases in TWA's operating income for delayed

delivery of Convair jet aircraft.

3. Decreases in TWA’s operating income as a result

of being limited to a smaller total fleet of jet aircarft.

+. Consequenual damages. other than decreases in

perating income, attmbutable to delayed delivery of

Convaur jet aircraft.

S. Increased expenses from being demied the nght to

acguire ownership of jet aircraft pnor to December

30, 1960

Trans World Airlines, Inc. v. Summa Corp., Del. Ch., No. 1607

(March 12, 1985) (Letter Opinion). After trial the court held

that Toolco had failed to meet its burden of demonstrating that

it did not cause damages to TWA in each of the foregoing

categories. Trans World Airlines, Inc. v. Summa Corp., Del.

Ch., No. 1607 (May 15, 1986) (Opinion). If the trial court’s

findings are sufficiently supported, as here, by the record and

are the product of an orderly and logical deductive process, in

the exercise of judicial restraint we accept them. Levitt v.

Bouvier, Del. Supr., 287 A.2d 671, 673 (1972).

A. Delayed Delivery of Aircraft and the Resulting Smaller

Fleet.

The record fully supports the Court of Chancery’s con-

clusion that Toolco delayed the growth of TWA’s fleet of

aircraft. Rummel testified that due to Howard Hughes’ idiosyn-

cratic temperament Toolco did not order planes for TWA until

well after the other major airlines had done so. In late 1955

Toolco finally ordered eighteen Boeing 707-320’s, fifteen

Boeing 707-120’s and thirty Convair CV-880’s.

Of these sixty-three planes only forty-five were eventuaily

delivered to TWA. This reduction in the size of the fleet was

deliberately caused by Toolco, who placed its order late and

failed to negotiate for priority, thus putting TWA behind all of

its competitors on Boeing’s delivery schedule. Before the

Boeing aircraft were delivered, Toolco sold the rights to six of

the planes to Pan Am because Toolco was unable to obtain the

necessary financing. Toolco had consistently refused to allow

TWA to purchase any of the planes directly, choosing instead to

lease them to TWA on a day-to-day basis. As to the CV-880’s,

Toolco intentionally interfered with their production, causing

substantial delays in delivery, and diverted six of the planes to

Northeast Airlines. Toolco’s actions resulted in TWA having a

forty-five, rather than the intended fifty-two, plane fleet, all to

TWA’s substantial detriment.

The calculation of TWA’s lost profits was the central issue

at tnal. To prove its damages TWA presented Edward L.

Wemple, a transportation engineer and consultant, who testi-

fied regarding revenues and projected revenues at various times

10a

between 1956 and 1986. Much of Wemple’s testimony regard-

ing the probable success of TWA during the period at issue was

corroborated by Rummel, the TWA-Toolco employee. These

witnesses testified, based partially upon a 1959 report of

Wemple’s consulting firm, Coverdale & Colpitts, that TWA’s

passenger load factor wouid have increased substantially had

TWA received delivery of all fifty-two jets.

In addition to testifying to the success of TWA in the

airline industry generally, Wemple constructed a pro forma jet

fleet which he used to calculate the net revenue effect of a

smaller fleet. Based upon TWA’s revenue and operating

experience in the subject years, Wemple calculated the loss of

profits due to the delay in delivery of the Boeings and Convair

aircraft, and the loss due to the non-delivery of five Convair

880’s. Wemple concluded that TWA suffered a loss of $33.9

million in revenue.

Finally, TWA called Joseph J. Rigney of Price, Water-

house, an accounting firm, to reconstruct the financial records of

TWA to determine the net effect on equity of the $33.9 million

revenue loss. Using Wemple’s figures and Rummel’s operating

expenses, as well as a pro forma financing plan presented by

Dillon, Reed & Co., Inc., an investment banking firm, Rigney

determined that the operation of a fifty-two plane fleet would

have increased TWA’s equity by $16.7 million. Based upon a

careful study of the facts and figures presented, and after

assessing the credibility of each of the expert witnesses, the trial

judge determined that Toolco caused this loss in equity. Given

our scope and standard of review, Levitt v. Bouvier, 287 A.2d at

673, the trial court’s decision is fully supported by the record,

and we accept its findings.

Toolco argues that the damages are inflated by $5.8

million because Rigney of Price, Waterhouse included in his

calculation certain accounting changes made in the last quarter

of 1963. Before 1963 TWA charged overhaul expenses to a

reserve on the basis of the number of hours flown. In 1963

TWA began charging the overhaul expenses as operating costs.

This eliminated the overhaul reserve and created additional

equity. Toolco objects to Rigney’s inclusion of this sum in his

damage calculations.

lla

The trial judge was satisfied that the use of this increased

equity in calculating the damages was appropriate. We agree.

The damage period selected by the court extended to the end of

1963. The selection of a 5% year damage period is supported

by substantial evidence, and there was no error or abuse of

discretion by the inclusion of the accounting changes in calcu-

lating damages through 1963.

B. Disruption of Business.

Because the CV-880’s were delivered late, TWA had to

pay idle flight crews, and once the CV-880’s were delivered,

TWA was forced to provide refresher training courses for both

flight and ground crews. The trial judge concluded, based upon

competent evidence, that TWA suffered a loss of $538,366..

Again, the record fully supports that ruling.

In calculating the pre-judgment interest the trial court used

a rate of 7.32% based on the average of the legal rate of

interest, 6%, and the composite interest rate for TWA’s historic

cost of borrowing, 8.64%. This rate of 7.32% was applied to the

damage award over a 27 year period from 1960 until 1986,

resulting in pre-judgment interest of $31,108,234. Trans World

Airlines, Inc. v. Summa Corporation, Del. Ch., No. 1607

(January 21, 1987) (Opinion on Interest).

Toolco argues that the trial court erred by using a rate

other than the legal interest rate, and by including in the pre-

judgment interest calculation the period during which the case

lay dormant. While the legal rate of interest has historically

been the benchmark for pre-judgment interest, Rollings Envtl.

Serv., Inc. v. WSMW Indus., Del. Supr., 426 A.2d 1363, 1366

(1980), a court of equity has broad discretion, subject to

principles of fairness, in fixing the rate to be applied. Lynch v.

Vickers Energy Corp., Del. Supr., 429 A.2d 497, 506 (1981);

Sinclair Oil Corp., v. Levien, Del. Supr., 332 A.2d 139 (1975).

In the Court of Chancery the legal rate is a mere guide, not an

inflexible rule. Missouri-Kansas Pipeline Co. v. Warrick, Del.

Supr., 22 A.2d 865, 868 (1941).

12a

In selecting the interest rate the trial court considered the

nature of the plaintiff, the nature of the wrong to be remedied,

and the peculiar facts of the case. Each of those factors was

appropriate, and there was no abuse of discretion in the court’s

choice of rate.

Nor did the court abuse its discretion in including the years

of 1962-1973 as part of the pre-judgment interest calculation.

A successful plaintiff is entitled to interest on money damages as

a matter of right from the date liability accrues. Metropolitan

Mut. Fire Ins. Co. v. Carmen Holding Co., Del. Supr., 220 A.2d

778, 781-82 (1966). However, a court may, in its discretion,

deny a plaintiff interest if he delayed prosecution of his claim.

Moskowitz v. Mayor of Wilmington, Del. Supr., 391 A.2d 209,

211 (1978); Maryland Casualty Co. v. Hamby, Del. Supr., 301

A.2d 286, 288 (1973). The trial court found that the ten year

delay was due to the nature and tactics of the defendant,

Howard Hughes, and to acquiescence by both parties. The

plaintiffs did not unilaterally delay the litigation.

VI.

Finally, TWA’s cross-appeal seeks to have post-judgment

interest calculated upon both the damage award and pre-

judgment interest. TWA cites no Delaware authori‘y for its

position. In Francis I. duPont & Co. v. Universal City Studios,

Inc., Del. Ch., 343 A.2d 629 (1975), the court specifically

refused to apply post-judgment interest to an award of pre-

judgment interest. The Delaware courts have traditionally

disfavored the practice of compounding interest, and we see no

reason to depart from that rule here. Thus, TWA’s cross claim

is without menit.

The judgment of the Court of Chancery is AFFIRMED.

13a

IN THE

SUPREME COURT OF THE STATE OF DELAWARE

No. 90, 1974

HowarpbD R. HUGHES and HUGHES TOOL COMPANY,

Defendants Below,

Appellants,

TRANS WORLD AIRLINES, INC.,

Plaintiff Below,

Appellee,

and

THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED

STATES, METROPOLITAN LIFE INSURANCE COMPANY, IRVING

Trust COMPANY, Harry C. HAGERTY, ERNEST R. BREECH

and CHARLES C. T&LLINGHAST, JR.,

Certain Additional

Defendants Below,

Appellees

(Argued September 25, 1974 Decided February 26, 1975.)

Before:

Durry, Justice, MCNEILLY, Justice, and

BIFFERATO, Judge.

Upon appeal from the Court of Chancery. Affirmed.

George Tyler Coulson, of Morris, Nichols, Arsht & Tunnell,

Wilmington, and Chester C. Davis and Maxwell E. Cox, of

Davis & Cox, New York City, for defendants below,

appellants.

l4a

Louis J. Finger, of Richards, Layton & Finger, Wilmington,

and Dudley B. Tenney, Paul W. Williams, Marshall Cox

and Michael P. Tierney, of Cahill Gordon & Reindel, New

York City, for plaintiff below, appellee.

Leroy A. Brill, of Bayard, Brill & Handelman, Wilmington, and

Marvin Schwartz, of Sullivan & Cromwell, New York City,

for Ernest R. Breech, additional defendant below, ap-

pellee.

William Prickett, of Prickett, Ward, Burt & Sanders, Wilming-

ton, and John R. Hupper and Andrew P. Tashman, of

Cravath, Swaine & Moore, New York City, for certain

other additional defendants below, appellees.

Durry, Justice:

This appeal brings up for review an order of the Court of

Chancery denying 4 motion to dismiss the complaint and

granting motions to dismiss certain counterclaims.

The case involves a contest, long in litigation, between

Howard R. Hughes and Hughes Tool Company (Toolco)

(defendants ), on the one side, and Trans World Airlines, Inc.,

( plaintiff), on the other.’ The pertinent facts are stated in the

opinion of the Vice Chancellor, 317 A.2d 114 (1974), and we

will restate them only to the extent necessary as we consider

defendants’ argument for reversal.2

' Privity between Hughes and Toolco is conceded by each side and for

present purposes their positions are indistinguishable.

2 See also the many opinions in the Federal Courts; thus: Hughes Tool

Co. v. Trans World Airlines, Inc., 409 U.S. 363, 93 S. Ct. 647 (1973);

rehearing den. 410 U.S. 975, 93 S. Ct. 1435 (1973); cert. granted 405 U.S.

915, 92S. Ct. 960 (1972); 2 Cir., 449 F.2d 51 (1971); S.D.N.Y., 359 F. Supp.

783 (1973); S.D.N.Y., 312 F. Supp. 478 (1970); S.D.N.Y., 308 F. Supp. 679

(1969). Earlier opinions are reported at 380 U.S. 248, 85S. Ct. 934 (1965);

379 U.S. 912, 85 S. Ct 261 (1964); 2 Cir., 332 F.2d 602 (1964); S.D.N.Y.,

214 F. Supp. 106 (1963); see also: Del. Supr., 185 A.2d 886 (1962).

lSa

In Hughes Tool Co. v. Trans World Airlines, Inc., supra

(1973 opinion), the Supreme Court of the United States

concluded that TWA’s complaint against Toolco for alleged

anti-trust violations and damages should be dismissed and, in

accordance with its mandate, the United States District Court

for the Southern District of New York entered a judgment of

dismissal.

Briefly, the complaint in this action is based on alleged

violations of fiduciary duties to the corporation and its minority

stockholders by corporate officers and the majority stockholder.

For present purposes, it appears that the facts alleged are

substantially the same as those pleaded in the anti-trust action.

Defendants argue that the Federal judgment bars prosecution

of this case. They say that judgment was valid, final, personal

and on the merits of the same claims asserted here (and which

could have been asserted there). In so contending, they invoke

the familiar doctrine of res judicata.

Res judicata embodies a rule of public policy that courts as

well as litigants should have rest and repose from vexatious

renewal of the same lawsuit. Epstein v. Chatham Park, Inc.,

Del. Super., 153 A.2d 180 (1959). It precludes a second

attempt to litigate the same “cause of action” and, under certain

circumstances, matters which might have been litigated in the

prior suit. Ezzos v. Ackerman, Del. Supr., 234 A.2d 444

(1967). Clearly, a valid, final and personal iudgment entered

on the merits of a controversy puts to rest all matters litigated.

Restatement of Judgments § 48 (1942).

Central in the rule is the rationale that a person is entitled

to an opportunity to once litigate a claim on its merits, and once

only. Renewal of the same claim after disposition on its merits

is not permissible, whatever the theory. But basic to the

principle of rest and repose is the notion that one is entitled to

his day in court on the merits of a claim. This means that a

judgment for a defendant, which is valid and final but not “on

the merits,” is conclusive only as to what is actually decided.

Restatement, supra, § 49.3

3'We do not consider such matters as jurisdiction and capacity. See

Comment a to § 49.

l6a

These principles are well known and, indeed, there is little,

if any, dispute about them as long as they remain in abstraction.

But our duty is to test them against the submissions in the

dispute, and now we do so.

As we have noted, the Toolco (and Hughes )-TWA litiga-

tion has been on-going for years but, beyond doubt in deciding

this case, the key opinion is the 1973 decision by the United

States Supreme Court. That was dispositive of all litigation in

the Federal Courts and it mooted all that had gone before

which was inconsistent with the result. The default by Toolco

and the entry of a money judgment were among the casualties

of the Supreme Court mandate.

The Supreme Court opinion considers many matters but

our reading persuades us of two things which are significant for

present purposes: first, the Court considered the controversy

only and entirely in the context of the Federal anti-trust

statutes; and, second, it did not consider whether the complaint

stated a cause of action under those statutes.

As to the first of these, an extended review of the opinion

by Justice Douglas is not needed to document the conclusion

that the Court disposed of the litigation entirely on the basis of

anti-trust principles, statutory and decisional.

“It is our view,” he wrote, “that the Court of Appeals

erroneously rejected” Toolco’s defense that the transactions

attacked in the complaint “were under the control and surveil-

lance of the Civil Aeronautics Board and by virtue of the

Federal Aviation Act of 1958 these transactions have immunity

from the anti-trust laws.” He discussed the Federal Aviation

Act, the duty and authority of the Civil Aeronautics Board, the

relationship of Toolco and TWA and the Board’s duty to

supervise it, and specific transactions approved by the Board.

Following the Court’s earlier decision in Pan American World

Airways Inc. v. United States, 371 U.S. 296, 83 S. Ct. 476

(1963), he found that CAB jurisdiction “pre-empts the anti-

trust field.” In shori, Justice Douglas found that the way in

which control of an air carrier is exercised is under CAB

surveillance, “not in the hands of those who can invoke the

sanctions of the anti-trust laws.”

17a

And then, as to the Federal complaint on which the case

reached the Supreme Court, Justice Douglas wrote: ““Whether

or not that complaint states a cause of action under the anti-

trust laws is a question we do not reach.” Since the Court did

not reach even the allegations of the complaint, it obviously did

not consider the merits of the proof offered by TWA in support

thereof.4

Given the basis on which the Supreme Court ordered

termination of the litigation in the Federal Courts, we cannot

say (in either law or justice) that the merits of the controversy

were reached. The merits were reached in the District Court

where a default had been entered, evidence had been received

and a money judgment entered (and affirmed by the Circuit

Court). But all of that was made irrelevant by what the

Supreme Court decided. Certainly it made no factual adjudica-

tion. And it disposed of the litigation, not on the basis of

default or evidence or money judgment, but on the transac-

tional immunity conferred by the CAB under the Federal

Aviation Act to a complaint founded on a Federal anti-trust

statute.

In this context we conclude that the decision by the United

States Supreme Court was not “on the merits” of the same

claims alleged here to be violations of Delaware fiduciary law.

Thus a significant requirement for a bar by res judicata is

missing. Epstein v. Chatham Park, Inc., supra; Restatement,

supra, § 49, and that defense does not stop the litigation.

There are other arguments to consider and weigh, and we

now turn to defendants’ contention that, under Rule 41(b) of

the Rules of Civil Procedure, the dismissal by the District Court

in New York was an adjudication on the merits.

4 The Court did discuss five transactions which were a basis of damages

awarded by the District Court but it did so only for the purpose of

determining whether such transactions were “neutralized” by CAB approval.

18a

Chancery Rule 41(b), like the Federal Rule, provides that

““...[u]nless the Court in its order for dismissal

otherwise specifies, a dismissa! under this subdivision

and any dismissal not provided for in this rule, other

than a dismissal for lack of jurisdiction or for im-

proper venue, or for failure to join a party under Rule

19, operates as an adjudication upon the merits.”

To the extent defendants argue that the Supreme Court

opinion directing dismissal was an adjudication on the merits,

for purposes of this case, the contention is without merit for

reasons already stated. But it was the District Court which

entered the dismissal order and the argument by defendants

obliges us to examine what was done in and by that Court.

Judge Metzner filed an opinion with the order of dismissal

so we have the benefit of his view of what was done, and that is

particularly significant since Rule 41(b) attaches consequences

to a dismissal “[u]nless the Court. . . otherwise specifies.”

First, it is clear that the dismissal was upon the merits “‘as

far as the federal claims are concerned.” But, in our view, a fair

reading of Judge Metzner’s opinion does not lead to the same

conclusion about the non-federal claims. On the contrary, we

are satisfied that he believed such claims are not barred by his

order. Thus, he wrote that “it does not follow that such a

dismissal [in the Federal Court] would be a bar to the

nonfederal claims” and then discussed Calderone Enterprizes

Corp. v. United Artists Theater Circuit, Inc., 2d Cir., 454 F.2d

1292 (1971), cert. den. 406 U.S. 930 (1972). In that case the

Second Circuit stated that since “federally-based claims were

dismissed prior to trial,... pendent state claims must also be

dismissed and the plaintiff relegated to the state courts for

relief.” Judge Metzner particularly noted that the dismissal in

Calderone had not been made without prejudice, and then he

said this:

““...I gather from this that such a safeguard is not

necessary to protect whatever nghts plaintiff may

have in this regard. It might also be argued that,

standing alone, the court is without jurisdiction of the

19a

state claims and thus the dismissal is for lack of

subject matter jurisdiction which is not on the merits

under Rule 41(b).”

The Court was under a mandate from the United States

Supreme Court “to dismiss the complaint” and its reluctance to

amend that directive was explicit, while observing that there is

doubt as to whether an amendment “‘is necessary to protect the

interests of the parties.”

Under Rule 41(b) a prior dismissal operates as an adjudi-

cation upon the merits unless the court in its dismissal order

otherwise specifies. We are satisfied that the District Court

intended that its order would not settle non-federal claims and,

to that significant extent, it otherwise specified. Thus, neither

the order nor the Rule, singly or in combination, operates as an

adjudication to bar assertion of the claims here.

We turn now to defendants’ argument that the claims

alleged in the complaint could have been asserted in the

Federal action under the theory now advanced. In brief, they

say that the Federal Court would have taken pendent jurisdic-

tion of the claims based upon violation of fiduciary duties and

the right to litigate such claims in the state forum terminated

with the judgment in that Court.

Acceptance of pendent jurisdiction by a Federal Court is a

matter of judicial discretion. While such jurisdiction has been

taken by those Courts for many years, the key opinion defining

it was written by Justice Brennan after the TWA-Toolco-

Hughes litigation had been on-going for some five years. In

United Mine Workers of America v. Gibbs, 383 U.S. 715, 86

S. Ct. 1130 (1966), the court stated:

“... Pendent jurisdiction, in the sense of judicial

power, exists whenever there is a claim ‘arising under

[the] Constitution, the Laws of the United States,

and Treaties made, or which shall be made, under

their authority * * *,’...and the relationship be-

20a

tween that claim and the state claim permits the

conclusion that the entire action before the court

comprises but one constitutional ‘case.’ The federal

claim must have substance sufficient to confer subject

matter jurisdiction on the court.... The state and

federal claims must derive from a common nucleus of

operative fact. But if, considered without regard to

their federal or state character, a plaintiff's claims are

such that he would ordinarily be expected to try them

all in one judicial proceeding, then, assuming

substantiality of the federal issues, there is power in

federal courts to hear the whole.

That power need not be exercised in every case

in which it is found to exist. It has consistently been

recognized that pendent jurisdiction is a doctrine of

discretion, not of plaintiff's right. Its justification lies

in considerations of judicial economy, convenience

and fairness to litigants; if these are not present a

federal court should hesitate to exercise jurisdiciton

over state claims, even though bound to apply state

law to them,.... Needless decisions of state law

should be avoided both as a matter of comity and to

promote justice between the parties, by procuring for

them a surer-footed reading of applicable law. Cer-

tainly, if the federal claims are dismissed before trial,

even though not insubstantial in a jurisdictional

sense, the state claims should be dismissed as well.”

(Citations and footnotes omitted. )

We are asked to hold now that if the District Court had

been requested in 1961 to exercise its discretion and take

jurisdiction of the non-federal claims based upon violation of

Delaware fiduciary duties, it would have done so; and we are

further asked to hold now that had it done so the Federal

Courts would in some way or other have dealt with the claims.

It is true that the District Court was asked to and did

accept jurisdiction of TWA’s (non-federal) claim for tortious

interference with its business, but in divining what might have

been a dozen years ago we cannot ignore what has taken place

in the law since then.

2la

In Gibbs the Supreme Court “completely reformulat[ed ]

the doctrine; [and] greatly expanded the permissible exercise

of pendent jurisdiction” in the Federal Courts, UMW vy. Gibbs

and Pendent Jurisdiction, 81 Harv. L. Rev. 657 (1968). But

even with that expansion, Gibbs makes clear that if Federal

claims, which are substantial in a jurisdictional sense, are

dismissed before trial, “the state claims should be dismissed as

well.” While in one sense the TWA claims in the Federal Court

were not dismissed before trial, the result of the Supreme Court

opinion (which in no way deals with the merits of the claims)

surely gives that effect. To state the point somewhat differently,

if an action for alleged violation of an anti-trust statute is now

filed in a Federal Court and if the transactions in question have

been approved by the CAB, there can be no doubt that the

complaint will be dismissed and, under Gibbs, the Court will nor

assume jurisdiction of pendent (state) claims.5

5 Defendants rely upon Rosado v. Wyman, 397 U.S. 397, 90 S. Ct. 1207

(1970) and Hagans v. Lavine, US. , 94S. Ct. 1372 (1974), in

support of a contrary proposition. In both of those cases the pendent

(statutory) claim was Federal (appended to Federal constitutional claims),

not state, and the distinction is significant in the process of conjecturing

whether or not a Federal Court will entertain a pendent claim. As Justice

Douglas said in his concurring opinion in Rosado:

“The main distinction between this case and Gibbs is that the

pendent claim here was one of federal rather than state law. And

it is clear from the opinion in Gibbs that the factor of federal-state

comity is highly relevant in deciding whether or not the exercise

of pendent jursidiction is proper. Thus the Court stated: ‘There

may, on the other hand, be situations in which the state claim is

so closely tied to questions of federal policy that the argument for

exercise of pendent jursdiction is particularly strong.’ Jd., at 727,

86 S.Ct., at 1139. Since the claim involved here is one of federal

law, the reasons for the exercise of pendent jursdiction are

especially weighty, and exceptional circumstances should be

required to prevent the exercise.”

Hagans discussed state claims but only in the context of attachment to Federal

constitutional claims, thereby invoking the preference for first deciding non-

constitutional issues. As the Hagans Court said:

“... [T]he rationale of Gibbs centers upon considerations of

comity and the desirability of having a reliable and final determi-

nation of the state claim by state courts having more familiarity

(footnote continues )

COO

22a

In short, we have the benefit of hindsight in deciding

whether the TWA claims alleged for violation of Delaware

fiduciary duties should be regarded as ones over which the

Federal Court would have assumed jurisdiction (as it did with

the claim for tortious interference ), and we cannot ignore what

the United States Supreme Court decided both in this case and

in Gibbs. Admittedly, the issue has its uncertain aspects

because the court did take on the claim for tortious interference.

But, in our view, it would elevate speculation over reality to

now dispose of this case by theonzing about what might have

been (had the State claims been raised pendently in 1961).

And if there were any doubt about what ruling should be

made the commands of justice require us to give TWA its days

in court on the claims.

It should also be noted that the Chancery complaint was

filed in 1962 and defendants did nothing to either bring it on

for disposition or to ask the Federal Court to accept jurisdiction

of the claims. On the contrary, in 1963 defendants joined TWA

in persuading the Vice Chancellor to let the case (and, neces-

sarily, the claims made herein) rest while awaiting determina-

tion of the Federal case. The court did so and defendants

acquiesced therein for ten or eleven years.

In sum, we decline to deny TWA all opportunity to litigate

its claims on the theory that the Federal Court would have

taken jurisdiction of them.

(footnote continued)

with the controlling principles and the authority to render a final

judgment. These considerations favoring state adjudication are

wholly irrelevant where the pendent claim is federa/ but is itself

beyond the jurisdiction of the District Court for failure to satisfy

the amount in controversy. In such cases, the federal court’s

rendition of federal law will be at least as sure-footed and lasting

as any judgment from the state courts.”

It is Gibbs which deals explicitly with a pendent state claim, and we

follow its rule.

23a

Next, we consider defendants’ argument that the CAB

orders, which the Supreme Court held were a defense to the

Federal action, likewise bar this action.

Section 414 of the Federal Aviation Act, 49 U.S.C. § 1384,

provides that any person affected by an order under § 408 is

relieved

“..from the operations of the anti-trust laws...

and of all other restraints or prohibitions made by, or

imposed under, authority of iaw, insofar as may be

necessary to enable such person to do anything

authorized, approved, or required by such order.”

The Vice Chancellor found that neither the purpose of the

Act nor its case history bars a state action based on breach of a

fiduciary duty.

Essentially, defendants argue that § 414 means what it says

and that, once CAB approval is given, all other restraints or

prohibitions are barred.

Locating state law in areas subject to Federal regulatory

jurisdiction is difficult, but that does not mean it has vanished.

Certainly state power (and responsibility) does not disappear

merely because there is Federal regulation in an area of

commerce. The guiding principle was restated by the Supreme

Court in Merrill Lynch Pierce, Fenner & Smith, Inc. v. Ware,

414 U.S. 117, 94 S. Ct. 383 (1973), when it considered the

extent to which authority delegated under a Federal regulatory

statute (Securities Exchange Act of 1934 § 6, 15 U.S.C. § 78(f)

preempts state (labor) law; the Court quoted from an earlier

opinion by Justice Brennan, thus:

“The principle to be derived from our decisions

is that federal regulation of a field of commerce

should not be deemed preemptive of state regulatory

power in the absence of persuasive reasons—either

that the nature of the regulated subject matter

permits no other conclusion or that the Congress has

unmistakably so ordained.”

24a

As the Vice Chancellor stated, the purpose of the Federal

Aviation Act is to centralize power in the public interest so that

rules may be made for the “safe and efficient use of the nation’s

air space.” Air Line Pilots Association, International v. Ques-

ada, 2 Cir., 276 F.2d 892 (1960). Section 414 must be read in

light of that purpose and the specific preservations of common

law (and statutory) remedies by § 1106 of the Act, 49 U.S.C.

§ 1506, which provides:

“Nothing contained in this Chapter shall in any

way abridge or alter the remedies now existing at

common law or by statute, but the provisions of this

Chapter are in addition to such remedies.”

We deal here with an intra-corporate conflict. The claims

are large, the events are dated and complex; but in essence, the

contest simply invokes standards of conduct applicable to

corporate fiduciaries and litigated over the years in Delaware

Courts. Nothing has been called to our attention which

persuades us that the Congress intended to preempt State

power to regulate such conduct (as part of our “housekeeping”

function, if nothing more) and vest it in the CAB. What

remedies would the Board provide? What judgments would it

render? What protection would it accord to minority stock-

holders, and by what process?

The short of it is that the CAB’s basic mission and

competency is, as Chief Justice Burger emphasized in his dissent

in Hughes Tool, supra, the regulation of entry into and com-

peution within the air transportation industry. There has been

here no showing that any general Federal purpose is vested in

the CAB to preempt state regulation of the intra-corporate

affairs of those subject to CAB jurisdiction for airline regulation

purposes. See Newmark vy. RKO General Inc., S.D.N.Y., 294

F. Supp. 358, aff'd 2 Cir., 425 F.2d 348 (1970); and Colorado

Anti-Discrimination Commission y. Continental Air Lines, Inc.,

372 U.S. 714, 83 S. Ct. 1022 (1963); and compare Colonial

Airlines v. Janas, 2 Cir., 202 F.2d 914 (1953), in which the

Court noted that it is “clear from .. . the Act,” 49 U.S.C. § 676,

that the CAB had not made any determination of state law

liability running to a corporation from its officers on charges of

defalcations.

25a

We must, and of course do, give deference to all that the

CAB approves within the jurisdiction assigned it by the Con-

gress. And we specifically refrain from any comment as to the

significance of CAB approval of any specific transaction upon

liability of defendants. As TWA concedes in its brief, whether

any particular issues were finally determined in the Federal

action is not at issue in this appeal. We are concerned here only

with defendants’ contention that a blanket immunity flows from

§ 414, no matter the circumstances. We decide that TWA may

proceed with the litigation.

Finally, we take up the counterclaims defendants filed

against The Equitable Life Assurance Society of the United

States, Metropolitan Life Insurance Company, Irving Trust

Company, Harry C. Hagerty, Ernest R. Breech and Charles

Tillinghast, Jr. (additional defendants) seeking injunctive and

other relief. The Vice Chancellor ordered dismissal of the

counterclaims on the ground that they are barred by the

doctrine of res judicata.

As we understand defendants’ argument, they say that if

the Vice Chancellor’s order stands and the Federal order is not

a bar to TWA’s action, this Court should require an even-

handed result; that is, “Both should be dismissed or neither.”

In our opinion the Vice Chancellor was right in dismissing

the counterclaims. Defendants’ argument assumes that the

rationale for dismissals by the Federal Court of the complaint

and the counterclaims was the same, and that is not so. We

have already discussed at some length the basis for dismissal of

the complaint as ordered by the United States Supreme Court.

The counterclaims were dismissed, not on the absence of a

statutory remedy or CAB approval, but specifically on their

merits and “with prejudice” because of Toolco’s “willful and

deliberate disobedience of and failure and refusal to comply

with” certain discovery orders of the District Court. The Court

® As to the first five Federal counterclaims; the sixth counterclaim was

disposed of on the merits, TWA’s motion for summary judgment being

granted by the District Court. These six Federal counterclaims are identical! in

scope to the four counterclaims asserted in this Chancery action.

26a

of Appeals affirmed, 2 Cir. 332 F.2d 602 (1964), and its

decision became final when the United States Supreme Court

dismissed its writ of certiorari as improvidently granted. 380

U.S. 249, 85 S. Ct. 934 (1965).

o * * * *

Affirmed.

27a

MANDATE

THE SUPREME COURT

OF THE STATE OF DELAWARE

To the Honorable the Judges of the Court of Chancery of

the State of Delaware in and for New Castle County:

Greeting:

WHEREAS, before you or some of you in a cause entitled as

follows:

C. A. 1607

HOWARD R. HUGHES, et al.

Vs. .

TRANSWORLD AIRLINES, INC.

a certain judgment or order was entered on the 19th day of

March 1974, to which reference is hereby made; and

WHEREAS, by appropriate proceedings the said cause was

duly appealed to this Court, and after hearing has been finally

determined, as appears from the opinion of this Court filed in

the cause on February 27, 1975, a certified copy of which is

attached hereto;

ON CONSIDERATION WHEREOF IT IS ORDERED AND ADJUDGED

that the said judgment or order be and it is hereby affirmed.

Wrrnegss the Honorable D. L. Herrmann our Chief Justice,

at Dover, the First day of January, A. D. 1975.

Issued April 1 1975

T. E. TOWNSEND, JR.

Clerk of the Supreme Court

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.