Appendix — Epstein v. Matsushita Electric Industrial Co.

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IN THE

Supreme Court of the United States

LAWRENCE EPSTEIN, et al.,

Petitioners,

MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD.

and MATSUSHITA HOLDING CORPORATION,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CourRT OF APPEALS FOR THE NINTH CIRCUIT

APPENDIX

ROGER W. KirBy HENRY PAUL MONAGHAN

Counsel of Record HAROLD EDGAR

PETER S. LINDEN 435 West 116th Street

KirBy McINERNEY & Squire, LLP New York, New York 10027

830 Third Avenue (212) 854-2644

New York, New York 10022

(212) 371-6600

Attorneys for Petitioners

a te ES RL et

154358 @ Counsel Press LLC

FORMERLY LUTZ APPELLATE SERVICES

(800) 274-3321 + (800) 359-6859

TABLE OF APPENDICES

Appendix A — Order And Opinion Of The United

States Court Of Appeals For The Ninth Circuit

Dated And Filed June 7, 1999 ...............

Appendix B — Opinion Of The United States Court

Of Appeals For The Ninth Circuit Dated And Filed

oe ER > SSCS ee ee ol eee

Appendix C — Memorandum Opinion Of

The Court Of Chancery Of Delaware, New Castle

County Dated And Filed February 16, 1993 ....

Appendix D — Excerpts From Official Transcript

Proceedings Of The Supreme Court Of The United

States Dated November 27, 1995 .............

Page

32a

96a

teeta Se ee

APPENDIX A — ORDER AND OPINION OF THE

UNITED STATES COURT OF APPEALS FOR THE

NINTH CIRCUIT DATED AND FILED JUNE 7, 1999

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

LAWRENCE Epstein; JoHn LINDER;

JANE ROCKFORD, as trustee of the

Michael J. Rockford Trust;

Maurice Karin; RuTH KARLIN;

Betu ANN Karun; Bert P.

KARLIN, No. 92-55675

Plaintiffs-Appellants, D.C. No.

v. CV-90-6451-R

MCA, INc.; MATSUSHITA ORDER AND

ACQUISITION CORPORATION; OPINION

MATSUSHITA ELECTRIC INDUSTRIAL

Co., Ltp.; MatsusHtTA HoLpInG

CorPORATION; LEw WASSERMAN;

Sipney J. SHEINBERG,

Defendants-Appellees.

On Remand from the United States Supreme Court

Argued and Submitted

September 4, 1996—San Francisco, California

Opinion Filed October 22, 1997

Petition for Rehearing Granted June 8, 1998

Reargued and Resubmitted

August 21, 1998—San Francisco, California

Opinion Withdrawn June 7, 1999

Filed June 7, 1999

Before: Charles E. Wiggins, Diarmuid F. O’Scannlain, and

Sidney R. Thomas, Circuit Judges.

Appendix A

Opinion by Judge O’Scannlain;

Concurrence by Judge Wiggins;

Dissent by Judge Thomas

SUMMARY

Securities/Class Actions

The court of appeals affirmed a judgment of the district

court. On remand from the United States Supreme Court, the

court held that in a class action by shareholders of a takeover

target corporation alleging inequality of treatment among ten-

dering shareholders, a state court judgment that determines

the fairness of a settlement is entitled to full faith and credit

when the judgment is based on procedures that satisfy due

process requirements.

In 1990, appellee Matsushita Acquisition Corporation made

a tender offer for appellee MCA, Inc. A class of Delaware

shareholders brought claims in state court alleging that

MCA’s directors breached their fiduciary duties under Dela-

ware law by failing to maximize shareholder value on a

change in corporate control. While the Delaware action was

pending, appellant Lawrence Epstein and other dissident

shareholders filed a federal class action alleging that Mat-

sushita’s tender offer violated federal securities laws.

The district court refused to certify the Epstein group as a

class, and granted summary judgment against them. While the

Epstein group appealed, the Delaware class action settled. The

judgment approving the settlement expressly provided for the

release of the federal claims that were before the Ninth Cir-

cuit.

Noting that the Epstein appellants were members of both

the state class and the proposed federal class and did not opt

Appendix A

out of the Delaware settlement, Matsushita contended before

the Ninth Circuit that their federal claims were barred by the

Delaware judgment under the Full Faith and Credit Act.

In Epstein I, the Ninth Circuit held that the Full Faith and

Credit Act did not apply because the Delaware settlement

released claims exclusively within the jurisdiction of the fed-

eral courts under the Securities Exchange Act. The Supreme

Court granted certiorari to determine whether the Ninth Cir-

cuit could withhold full faith and credit from the Delaware

judgment.

The Supreme Court reversed in Matsushita Electric Indus-

trial Co. v. Epstein, 516 U.S. 367 (1996), holding that the

Ninth Circuit could not deny full faith and credit to the Dela-

ware judgment. The Court concluded that the Delaware judg-

ment was entitled to full faith and credit because (1) under

Delaware law, the Epstein appellants were bound by the Dela-

ware settlement; and (2) the grant of exclusive federal juris-

diction in § 27 of the Exchange Act did not partially repeal

the Full Faith and Credit Act.

On remand, the Ninth Circuit held in Epstein II that the

Delaware judgment was not entitled to full faith and credit

because it violated due process in the inadequacy of the class

representation. The panel reversed and remanded the action to

the district court. However, a reconstituted panel granted Mat-

sushita’s petition for rehearing. On rehearing, the court of

appeals withdrew its opinion in Epstein II.

[1] The first step of the analysis employed by the Supreme

Court to determine whether the Delaware judgment could bar

litigation of exclusively federal claims required the Court to

look to the law of the rendering state to ascertain the effect of

the judgment. [2] The Court reviewed Delaware law on the

preclusive effect of settlement judgment, and concluded that

a Delaware court would have afforded preclusive effect of the

settlement judgment in this case. [3] Turning to the due pro-

4a -

Appendix A

cess requirements for binding absent class members, the

Court [4] satisfied itself that they were met.

[5] Matsushita necessarily entailed a determination of

whether the judgment was constitutionally infirm. If it were,

the judgment could not be binding under Delaware law; nor

could a federal court afford it full faith and credit. The

Supreme Court’s holding that under Delaware law the Epstein

appellants were bound by the judgment was necessarily prem-

ised on the constitutional validity of the Delaware judgment.

[6] The Supreme Court’s determination of the preclusive

effect of the judgment under Delaware law did not leave open

consideration on remand of the adequacy of representation.

[7] The absent class members’ due-process right to adequate

representation is not protected by collateral review, but by the

certifying court initially, and thereafter by appeal within the

state system, and by direct review in the Supreme Court. [8]

imited collateral review would be appropriate to consider

whether the procedures in the prior litigation afforded the

party against whom the judgment is asserted a full and fair

Opportunity to litigate the claim or issue. However, this

review would not include reconsideration of the merits.

Judge Wiggins concurred separately to explain why he

changed his vote in the case.

Judge Thomas dissented, concluding that the majority inap-

propriately sanctioned a class settlement obtained without

record evidence that the class representatives were even mem-

bers of the class.

COUNSEL

Henry P. Monaghan (argued), Kaufman & Kirby, New York,

New York; Roger W. Kirby, Kaufman Malchman Kirby &

Squire, New York, New York, for the plaintiffs-appellants.

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—eearvmyHeoeooeeoereree eee ee

Appendix A

Barry R. Ostrager (argued), Simpson Thacher & Bartlett, New

York, New York, for the defendants-appellees.

Richard A. Samp, Washington Legal Foundation, Washing-

ton, D.C.; Jan T. Chilton, Severson & Werson, San Francisco,

California, for amici curiae.

ORDER

The opinion filed on October 22, 1997, and reported at 126

F.3d 1235 (9th Cir. 1997), is withdrawn, and the attached

opinion filed in its place.

OPINION

O’SCANNLAIN, Circuit Judge:

We reconsider our decision in this case which is stil] before

us on remand from the United States Supreme Court.

In 1992, the United States District Court for the Central

District’ of California entered summary judgment against

plaintiffs-appellants (“the Epstein appellants”). In Epstein v.

MCA, Inc., 50 F.3d 644 (9th Cir. 1995) (“Epstein I’). we

reversed the District Court, and held, among other rulings,

that because it released exclusively federal claims, a Delaware

State judgment was not entitled to full faith and credit. In

Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367

(1996) (“Matsushita”), the Supreme Court reversed our deci-

sion in Epstein | and remanded for proceedings consistent

with its opinion. On remand we again held, in Epstein v.

MCA, Inc., 126 F.3d 1235 (9th Cir. 1997) (“Epstein IT’), that

the Delaware state judgment was not entitled to full faith and

credit. We thereafter granted defendants-appellees’

(“Matsushita”) petition for rehearing, and the case was rear-

Appendix A

gued. We now withdraw our previous opinion, Epstein I], and

substitute this opinion for it in all respects.

In 1990, Matsushita made a tender offer for (and subse-

quently acquired) MCA, Inc. The tender offer precipitated

two lawsuits. On September 26, 1990, a Delaware class

brought claims in Delaware’s Chancery Court asserting that

MCA’s directors breached their fiduciary duties to sharehold-

ers under Delaware law by failing to maximize shareholder

value upon a change in corporate control. On December 3,

1990, while the Delaware class action was pending, the

Epstein appellants filed this class action in federal district

court asserting that Matsushita’s tender offer violated Securi-

ties and Exchange Commission Rules 10b-3 and 14d-10 pro-

mulgated under the Securities Exchange Act of 1934

(“Exchange Act”).

On April 16, 1992, after extensive proceedings, the District

Court declined to certify the Epstein appellants as a class and

entered summary judgment against them. See Second

Amended Order, No. 90-6451 (C.D. Cal. filed April 16,

1992). On October 22, 1992, while the appeal of the District

Court’s decision was pending before us, the Delaware class

action was settled. The order and final judgment of the Dela-

ware Chancery Court approving the settlement explicitly pro-

vided for the release of the federal claims raised in this action.

See In re MCA, Inc. Shareholders Litig., 1993 WL 43024

(Del. Ch. Feb. 16, 1993). Because the Epstein appellants were

members of both the state class and the proposed federal class

and did not opt out of the Delaware settlement, Matsushita

argued before us on appeal that the Epstein appellants’ federal

claims were barred by the Delaware judgment under the Full

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

In Epstein I, we rejected Matsushita’s argument, and held

that the Full Faith and Credit Act did not apply because the

Appendix A

Delaware settlement released claims exclusively within the

jurisdiction of the federal courts. Addressing the merits, we

reversed the district court’s entry of summary judgment and

denial of class certification.’ The Supreme Court granted cer-

tiorari to decide whether this court could withhold full faith

and credit from the Delaware state judgment releasing claims

within the exclusive jurisdiction of the federal courts under

the Exchange Act.

The Supreme Court held that we could not, concluding that

the Delaware judgment was entitled to full faith and credit

because (1) under Delaware law, the Epstein appellants were

bound by the Delaware class settlement releasing the federal

claims, and (2) the grant of exclusive federal jurisdiction in

§ 27 of the Exchange Act did not partially repeal the Full

Faith and Credit Act. The Supreme Court therefore reversed

our decision in Epstein ] and remanded. See Matsushita, 516

U.S. at 387.

On remand, a divided panel in Epstein I] held that despite

the Court’s holding in Matsushita, the Delaware judgment

was not entitled to full faith and credit because it violated due

process based on the inadequacy of the class representation.

The panel therefore reversed and remanded for proceedings

consistent with those portions of Epstein i that were not

reversed by the Supreme Court.

On October 24, 1997, two days after the filing of Epstein

II, Judge Norris, the author of both Epstein J and Epstein II,

resigned from this court. Matsushita filed a petition for

rehearing on November 5, 1997. On January 9, 1998, Judge

Thomas was drawn to replace Judge Norris and the reconsti-

tuted panel granted the petition for rehearing on June 8, 1998.

Following rehearing, we now withdraw our opinion in Epstein

"We affirmed the dismissal of an aiding and abetting claim that was

conceded by the Epstein appellants.

Appendix A

II and consider anew whether the Epstein appellants are

bound by the Delaware judgment.

The Epstein appellants assert that, despite the Supreme

Court’s holding in Matsushita, we cannot accord full faith and

credit to the Delaware judgment because it violated their due

process rights to adequate representation in and judicial super-

vision of the Delaware proceedings. We are somewhat per-

plexed by this contention, because Matsushita’s holding was

explicitly and implicitly premised upon the validity of the

Delaware judgment. The Supreme Court stated in Matsushita

that the Epstein appellant’s were “bound .. . by the

judgment,” 516 U.S. at 379, and held that the exclusively fed-

eral claims released by that judgment were not exempted from

full faith and credit, see id. at 385-87. It should go without

saying that we are not free to ignore the Court’s determina-

tions in Matsushita by holding that the Epstein appellants are

not bound by the judgment.

[1] In Matsushita, the Supreme Court commenced its anal-

ysis by quoting the Full Faith and Credit Act’s mandate “that

the ‘judicial proceedings’ of any State ‘shall have the same

full faith and credit in every court within the United States . . .

as they have by law or usage in the courts of such State... .

from which they are taken.” ” 516 U.S. at 373 (quoting 28

U.S.C. § 1738). Accordingly, the first step of the Marrese

analysis employed by the Court to determine whether the Del-

aware judgment could bar the litigation of exclusively federal

claims required the Court to “look to the law of the rendering

State to ascertain the effect of the judgment.” Matsushita, 516

U.S. at 375 (citing Marrese v. American Academy of Ortho-

paedic Surgeons, 470 U.S. 373, 381-382 (1985)).

[2] Following Marrese’s instructions, the Court reviewed

Delaware law on the preclusive effect of settlement judg-

eT nr nnn es ee

PAM Od Aha a BE ne

Appendix A

ments. The Court’s canvas revealed that “[t]he Delaware

Supreme Court has [ ] manifested its understanding that when

the Court of Chancery approves a global release of claims, its

settlement judgment should preclude on-going or future fed-

eral court litigation of any released claims.” Jd. at 377. The

Court further noted that under Delaware law, a state court set-

tlement of a class action could release or preclude claims only

where that settlement was “determined to be fair and to have

met all due process requirements.” /d. at 377-78 (quoting Jn

re MCA, Inc. Shareholders Litig., 598 A.2d 687, 691 (Del.

Ch. 1991)). The Court then concluded that “a Delaware court

would afford preclusive effect to the settlement judgment in

this case.” Jd. at 378.

[3] The Epstein appellants make much of this conditional

language, but it merely reflects that the Court had yet to sat-

isfy itself that the proceedings in Delaware had met all the

due process requirements for binding absent class members.”

Turning to these due process requirements, the Court pro-

ceeded to march through Delaware Chancery Rule 23, which

is, as the Court noted, “modeled on Federal Rule of Civil Pro-

cedure 23.” Jd. at 371.

The Court stated that:

As required by Delaware Court of Chancery Rule

23, see Prezant v. De Angelis, 636 A.2d 915, 920

(1994), the Court of Chancery found, and the Dela-

ware Supreme Court affirmed, that the settlement

was “fair, reasonable and adequate and in the best

interests of the . . . Settlement class” and that notice

We further believe that the Court’s conditional language here and else-

where, see Matsushita, 516 U.S. at 380 (stating that “it appears that the

settlement judgment would be res judicata under Delaware law”) (empha-

sis added), reflects the Court’s recognition that the Delaware Supreme

Court is the ultimate authority on matters of Delaware law. See, e.g.,

Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 413 n.7

(1984).

10a

Appendix A

to the class was “in full compliance with . . . the

requirements of due process.” In re MCA, Inc.

Shareholders Litigation, C.A. No. 11740 (Feb. 22,

1993) .. . . The Court of Chancery “further deter-

mined that the plaintiffs[,] . . . as representatives of

the Settlement Class, have fairly and adequately pro-

tected the interests of the Settlement Class.” Jn re

MCA, Inc. Shareholders Litigation, supra, reprinted

in App. to Pet. for Cert. 73a. Cf. Phillips Petroleum

Co., supra, at 812, 105 S. Ct., at 2974 (due process

requires “that the named plaintiff at all times ade-

quately zepresent the interests of the absent class

members”).

Id. at 378-79.

[4] Having satisfied itself that the due process requirements

necessary to bind absent class members were met, the Court

stated its conclusion:

Respondents do not deny that, as shareholders of

MCA’s common stock, they were part of the plain-

tiff class and that they never opted out; they are

bound, then, by the judgment.

Id. at 379 (emphasis added). There was nothing conditional

about this holding. The Court then proceeded to the second

step of the Marrese analysis.

[5] While the Court’s explicit consideration in Matsushita

of the due process requirements to bind absent class members

admittedly did not include an express statement that the Dela-

ware judgment in question did not violate due process, that

conclusion was logically necessary to the Court’s holding. In

Kremer v. Chemical Construction Corp., the Supreme Court

made plain that “[a] State may not grant preclusive effect in

lla

Appendix A

its Own courts to a constitutionally infirm judgment, and other

State and federal courts are not required to accord full faith

and credit to such a judgment.” 456 U.S. 461, 482 (1982).

Thus in Matsushita, any resolution of the preclusive effect to

be afforded under Delaware law to the Delaware judgment

necessarily entailed a determination of whether the judgment

was “constitutionally infirm.” If the judgment were constitu-

tionally infirm, the judgment could not be binding under Del-

aware law, nor could a federal court accord it full faith and

credit. The Supreme Court’s holding in Macsushita that under

Delaware law the Epstein appellants were “bound, then, by

the judgment,” Matsushita, 516 U.S. at 379, was thus neces-

sarily premised upon the constitutional validity of the Dela-

ware judgment.’

It is further worth noting that if, as the Epstein appellants

contend, the Delaware judgment violated due process and was

invalid, the Court would have had no reason to proceed to

Step two of the Marrese analysis. The Court stated that it

would proceed to step two only “{i]f state law indicates that

the particular claim or issue would be barred from litigation

in a court of that state.” Jd. at 375. Delaware law would bar

the federal claims at issue only if the state settlement was

*The Epstein appellants themselves recognize and employ similar logic

in their papers. Matsushita cited Snider v. City Of Excelsior Springs,

Missouri, 154 F.3d 809 (8th Cir. 1998), as supplemental authority demon-

strating that the broad collateral review sought by the Epstein appellants

is also precluded by the Rooker-Feldman doctrine. In response, the

Epstein appellants asserted that the Court’s decision in Matsushita neces-

sarily subsumed a determination that the Rooker-Feldman doctrine was

inapplicable and federal jurisdiction existed, because Rooker-Feldman

limits the subject matter jurisdiction of the lower federal courts and thus

must be addressed prior to any discussion of preclusion law. (See

Plaintiffs-Appellants’ Rule 28(j) Submission of Sept. 15, 1998, at 1-2.) In

light of this argument, the Epstein appellants should similarly recognize

that the Court's determination that they were bound by the Delaware judg-

ment necessarily subsumed a determination that the Delaware judgment

was constitutionally valid, because states cannot give preclusive effect to

constitutionally infirm judgments.

12a

Appendix A

“determined to be fair and to have met all due process

requirements.” Jn re MCA, Inc. Shareholders Litig., 598 A.2d

687, 691 (1991). Thus, if the Delaware judgment had not met

all due process requirements, the question decided by

Matsushita would not have been reached, or even presented."

In fact, if the Epstein appellants’ contention that the Dela-

ware judgment is constitutionally infirm were true,

Matsushita would be an advisory opinion. The Court’s hold-

ing would have answered the purely hypothetical question of

the full faith and credit to be accorded a valid state judgment

releasing exclusively federal claims within the Exchange Act,

regardless of the fact that no such valid judgment was before

the Court. We will not presume that the Court violated Article

III by rendering an advisory opinion. See, e.g., Mills v.

Rogers, 457 U.S. 291, 305 (1982) (declining to consider

merely hypothetical issues in light of the prohibition against

advisory opinions); Flast v. Cohen, 392 U.S. 83, 96 (1968)

(noting the Article III prohibition against advisory opinions).

The Epstein appellants assert, however, that the opinion

explicitly left the validity of the judgment open, pointing to

statements by Justice Ginsburg in her dissent, and by the

Court in footnote five. See Matsushita, 516 U.S. at 379 n.5.

We are not persuaded.

[6] The Epstein appellants rely heavily on Justice Gins-

burg’s statement that because “the Ninth Circuit decided the

case without reaching the due process check on the full faith

“Again, this logic should be familiar to the Epstein appellants. Just as

the Epstein appellants asserted that consideration of a court’s jurisdiction

under Rooker-Feldman is logically prior to consideration of preclusion

law, (see Plaintiffs-Appellants’ Rule 28(j) Submission of Sept. 15, 1998,

at 1-2), consideration of the validity of a state judgment under step one of

the Marrese analysis is logically prior to consideration under step two of

whether au exception to full faith and credit exists.

13a

Appendix A

and credit obligation, that inquiry remains open for consider-

ation on remand.” Jd. at 389. This belief. however, was not

Shared by the majority.* As Justice Stevens stated in his dis-

sent, he could “join neither [the Court’s determination of Del-

aware preclusion law] nor the Court’s judgment” because he

agreed with Justice Ginsburg “that the Ninth Circuit remains

free to consider whether Delaware courts fully and fairly liti-

gated the adequacy of class representation.” Jd. at 387. This

statement demonstrates that the Court’s determination of the

preclusive effect of the judgment under Delaware law did not

leave consideration of the adequacy of representation open on

remand.

Justice Ginsburg similarly stated that she concurred only

“to the extent that [the Court’s judgment] remands the case to

the Ninth Circuit,” because she objected to the Court’s con-

sideration of the content of Delaware preclusion law.

Matsushita, 516 U.S. at 388. Thus her statement that the due

process issue “remains open for consideration on remand,” id.

at 389, is properly viewed as part of her dissent, and has no

bearing on whether Matsushita’ s holding was premised on the

validity of the Delaware judgment. Moreover, Justice Gins-

burg dissented because she evidently believed that the Court

should not have endeavored “to speak the first word on the

content of Delaware preclusion law.” Jd. at 388. This state-

ment confirms that the Court did determine the content of

Delaware preclusion law, which necessarily included a deter-

mination of the judgment’s constitutional validity. See

Kremer, 456 U.S. at 482.

The Epstein appellants also rely on the Court’s now famous

footnote five, in which the Court declined to address the

Epstein appellants’ contention “that the settlement proceed-

ings did not satisfy due process because the class was inade-

*Which had, as noted previously, seemingly just performed this “due

process check” in considering the preclusive effect of the judgment under

Delaware law.

l4a

Appendix A

quately represented.” Jd. at 379 n.5. They ignore, however,

the fact that the Court’s statements in footnote five were in

reference to a due process challenge “{a] part [sic] from any

discussion of Delaware law.” Jd. The footnote does not indi-

cate that the Court had not considered any due process con-

cerns, nor would any such reading of the footnote be tenable

in the face of the Court’s explicit contemplation of the due

process requirements to bind absent class members under Del-

aware law. Nor does the footnote in any way indicate that the

Delaware courts had not resolved the issue, or that this deter-

mination would not be binding upon the Epstein appellants.

Instead, the footnote implies that this determination would be

binding by stating that the Epstein appellants “make this

claim in spite of the Chancery Court’s express ruling, follow-

ing argument on the issue, that the class representatives fairly

and adequately protected the interests of the class.” Jd.

Moreover, that the Court declined to address a due process

“claim . . . outside the scope of the question presented,” id.,

did not necessarily leave the due process issues the Epstein

appellants seek to raise open on remand. While the Court may

not have wished to analyze independently every due process

challenge to the Delaware judgment available under Kremer,

its statement in footnote five did not preclude the implicit res-

olution of such a challenge by the Court’s opinion, particu-

larly where the issue the Epstein appellants sought to raise

was necessarily intertwined with the Court’s holding and dis-

cussion of other issues.

We further note that where the Court leaves an issue open

on remand, it often expressly states that it has done so. See,

e.g., United States v. O'Hagan, 117 S. Ct. 2199, 2220 (1997)

(stating that petitioner’s “other arguments . . . remain open for

consideration on remand”); United States v. Lanier, 117 S. Ct.

1219, 1228 n.7 (1997) (“We also leave consideration of other

issues that may remain open to the Court of Appeals on

remand.”). Such express statements in the Court’s opinions

are obviously of far greater weight than a statement in dissent

ee Se ee ee

15a

Appendix A

such as Justice Ginsburg’s, and are different in kind from the

Matsushita majority’s statement in footnote five merely

declining independently to address the Epstein appellants’ due

process claim.

IT]

Apart from any statements in Matsushita that the Epstein

appellants believe explicitly left open their due process objec-

tions on remand, the Epstein appellants assert that Phillips

Petroleum Co. v. Shutts, 472 U.S. 797 (1985), and Kremer

create a largely unfettered right to challenge collaterally the

adequacy of representation in class actions.*

Shutts does not support the broad collateral review that the

Epstein appellants seek. In Shutts, the Court identified various

“We note that Delaware law provides no basis for the collateral review

that the Epstéin appellants seek. As the Court stated in Matsushita, “a Del-

aware court would afford preclusive effect to the settlement judgment in

this case.” 516 U.S. at 378. The Delaware Supreme Court has explained

that under Delaware law:

Class members . . . will, in all cases, have their interests protected

by the requirement that their claims cannot be compromised

without . . . a judicial determination that the Rule 23 critena have

been satisfied . . . . Defendants will be protected from a possible

collateral attack on the validity of the settlement by a class mem-

ber claiming the settlement did not meet the requirements of Rule

23. This protection will help insure that the final release sought

by defendants in settlements is indeed final.

Prezant, 636 A.2d at 925-26 (emphasis added).

As noted by the Court in Matsushita, the Delaware Chancery Court

made the requisite findings, see 516 U.S. at 378-79. thus under Prezant,

Matsushita is protected from a collateral attack on the validity of the set-

tlement. See also Hynson v. Drummond Coal Co., Inc., 1997 WL 741507,

1-2 (Del. Ch. Nov. 24, 1997) (rejecting class members’ attempt to collater-

ally attack a Delaware judgment on due process grounds under Shutts).

16a

Appendix A

procedural safeguards that are necessary to bind absent class

members, including notice, the opportunity to be heard, the

Opportunity to opt out, and adequate representation. 472 U.S.

at 812. However, nowhere in Shutts did the Court state or

imply that where the certifying court makes a determination

of the adequacy of representation in accord with Shutts, this

determination is subject to collateral review. Shutts in fact

implies that such review is unwarranted by emphasizing that

the certifying court is charged with protecting the interests of

the absent class members. See id. at 809.

[7] Simply put, the absent class members’ due process right

to adequate representation is protected not by collateral

review, but by the certifying court initially, and thereafter by

appeal within the state system and by direct review in the

United States Supreme Court. See, e.g., Grimes v. Vitalink

Comm. Corp., 17 F.3d 1553, 1558 (3rd Cir. 1994) (refusing

to allow absent class members collaterally to challenge ade-

quacy of representation because the opportunity to challenge

that determination by appeal to Delaware Supreme Court, and

thereafter to the United States Supreme Court, “granted all the

process that was due”); Nottingham Partners v. Trans-Lux

Corp., 925 F.2d 29, 33 (1st Cir. 1991) (holding that so long

as procedural safeguards were employed, objections to the

determinations of a certifying court had to be remedied on

appeal to the state supreme court or the United States

Supreme Court, and not by recourse to the “federal courts in

the vain pursuit of back-door relief”).

As the Court stated in Hansberry v. Lee, “there has been a

failure of due process only in those cases where it cannot be

said that the procedure adopted, fairly insures the protection

of the interests of absent parties who are to be bound by it.”

311 U.S. 32, 42 (1940) (emphasis added). Due process

requires that an absent class member’s right to adequate rep-

resentation be protected by the adoption of the appropriate

procedures by the certifying court and by the courts that

17a

Appendix A

review its determinations; due process does not require collat-

eral second-guessing of those determinations and that review.

Kremer does not indicate otherwise. As we have noted pre-

viously, Kremer held that neither state nor federal courts are

required to give full faith and credit to a constitutionally

infirm judgment. See Kremer, 456 U.S. at 482. The extent of

collateral review is, however, limited.

[8] Kremer merely recognized that a judgment is not enti-

tled to full faith and credit “if there is reason to doubt the

quality, extensiveness, or fairness of procedures followed in

prior litigation.” Jd. at 481 (quoting Montana v. United States,

440 U.S. 147, 164 n.11 (1979)) (emphasis added). Limited

collateral review would be appropriate, therefore, to consider

whether the procedures in the prior litigation afforded the

party against whom the earlier judgment is asserted a “full

and fair opportunity” to litigate the claim or issue. Jd. at 480.

This review would not, however, include reconsideration of

the merits of the claim or issue, see id. at 483-85 (declining

to reexamine the facts underlying or the merits of Kremer’s

claim, and instead examining the procedures provided), and

such a challenge would most likely fail because “state pro-

ceedings need do no more than satisfy the minimum proce-

dural requirements of the Fourteenth Amendment’s Due

Process Clause in order to qualify for the full faith and credit

guaranteed by federal law.” Jd. at 481.

Matsushita itself indicates that broad collateral review of

the adequacy of representation (or of the other due process

requirements for binding absent class members) is not avail-

able. Matsushita made plain that class action judgments are

accorded full faith and credit like other judgments:

Appendix A

That the judgment at issue is the result of a class

action, rather than a suit brought by an individual,

does not undermine the initial applicability of

§ 1738. The judgment of a state court in a class

action is plainly the product of a “judicial

proceeding” within the meaning of § 1738. There-

fore, a judgment entered in a class action, like any

other judgment entered in a state judicial proceeding,

is presumptively entitled to full faith and credit

under the express terms of the Act.

Matsushita, 516 U.S. at 373-74 (citations omitted).

The Court did, of course, address the additional due process

requirements for binding absent class members, stating, by

way of example, that “due process for class action plaintiffs

requires ‘notice plus an opportunity to be heard and partici-

pate in the litigation,’ and “ ‘that the named plaintiff at all

times adequately represent the interesis of the absent class

members.’ ” /d. at 378-79 (quoting Shutts, 472 U.S. at 812).

The Court, however, satisfied itself that these requirements

had been met by referencing the Delaware courts’ findings on

these matiers, rather than by independently determining

whether the requirements were met. See id.’

After this analysis, the Court stated the seemingly uncon-

troversial proposition that:

Under Delaware Rule 23, as under Federal Rule of

Civil Procedure 23, “[ajll members of the class,

whether of a plaintiff or a defendant class, are bound

by the judgment entered in the action unless, in a

Rule 23(b)(3) action, they make a timely election for

"We further note that the Court's citation of Shutts, immediately after

referencing the findings of the Delaware courts’ regarding the due process

requirements, belies the Epstein appellants’ assertion that Shutts supports

collateral review of these determinations.

19a

Appendix A

exclusion.” 2 H. Newberg, Class Actions § 2755, p.

1224 (1977).

Id. at 379. The Court also cited Cooper v. Federal Reserve

Bank of Richmond for the proposition that “{t}here is of

course no dispute that under elementary principles of prior

adjudication a judgment in a properly entertained class action

is binding on class members in any subsequent litigation.”

467 U.S. 867, 874 (1984).

The Court's statements in no way imply that a class mem-

ber who fails to opt out is not bound until collateral review of

the adequacy of representation reveals that due process has

been satisfied. Nor is there any indication that a “properly

entertained” class action is other than one in which a certify-

ing court employs the appropriate procedures to determine

that the due process requirements embodied in Rule 23 have

been met. Any such implication would be belied by the

Court’s analysis of the issue because these statements fol-

lowed on the heels of the Court’s review of the Delaware

courts’ determinations that the Rule 23 requirements were sat-

isfied.

Even footnote five, so heavily relied upon by the Epstein

appellants, makes the same point. There, the Court specifi-

cally noted that the Epstein appellants sought to challenge

collaterally the adequacy of representation “in spite of the

Chancery Court’s express ruling, following argument on the

issue, that the class representatives fairly and adequately pro-

tected the interests of the class.” Matsushita, 516 U.S. at 379

n.5. The Court then cited Prezant v. De Angelis for the propo-

sition that the “constitutional requirement [of adequacy of

representation] is embodied in [Delaware] Rule 23(a)(4).” Id.

(alterations in the original). These statements indicated that

the Epstein appellants’ challenge to the adequacy of represen-

tation in the Delaware proceedings was answered by specific

reference to the findings made on the issue in those proceed-

ings.

20a

Appendix A

For the foregoing reasons, the Delaware judgment was not

constitutionally infirm and must be accorded full faith and

credit. The district court’s decision of April 16, 1992 is

AFr. «MED.

WIGGINS, Circuit Judge, concurring:

I concur in the result of Judge O’Scannlain’s majority opin-

ion. I write separately to explain why I changed my vote in

this appeal.

The long history of this case evinces the complexity of the

issues involved. In our original disposition, we found that the

Delaware judgment was not a bar to further prosecution of the

federal action under the Full Faith and Credit Act, 28 U.S.C.

§ 1738. See Epstein v. MCA, Inc., 50 F.3d 644 (9th Cir. 1995).

The Supreme Court reversed, concluding that the Delaware

judgment was entitled to full faith and credit even if it

released claims within the exclusive jurisdiction of the federal

courts. See Matsushita Elec. Indus. Co., Ltd. v. Epstein, 516

U.S. 367 (1996)(“Matsushita”). Following remand, we were

presented with the issue that is the subject of this appeal.

After our initial consideration of this appeal, I joined Judge

Norris’ well-written opinion. See Epstein v. MCA, Inc., 126

F.3d 1235 (9th Cir. 1997). We found that the adequacy of rep-

resentation issue was left open by the Supreme Court and was

not fully and fairly litigated in state court. See id. at 1237-48.

Proceeding to the merits of the adequacy of representation

issue, the opinion convincingly concluded that Delaware

counsel provided inadequate representation: “This was not

merely ‘inadequate’ representation, it was hostile representa-

tion that served the interests of counsel in getting a fee, but

2la

Appendix A

did not serve the interests of the MCA shareholders in getting

a settlement based upon a thorough and fair assessment of

their Exchange Act claims.” Jd. at 1255.

I remain troubled by the substance of the Delaware settle-

ment. Soon after the opinion was filed, however, I began to

have grave doubts about the conclusion that the adequacy of

representation issue was not fully and fairly litigated in the

Delaware courts. It is this issue that led me to change my

vote.

I now believe that, while the Supreme Court did not con-

Clusively resolve the due process issue before the remand, it

did send unmistakable signals on that very issue. In three sep-

arate passages, the Court indicated that the Delaware courts

likely had already conclusively resolved the due process issue.

Our original majority disposition in this appeal did not give

sufficient weight to these admonitions.

The Supreme Court’s conclusion is clearly supported by the

record. One of the objectors, William Krupman, explicitly

opposed the proposed settlement because “the purported class

representatives . . . had proposed a settlement that benefitted

no one but their own attorneys. They did not provide adequate

‘First, in Part I of it opinion, as it described the procedural posture of

the case it stated that “[a)ficr argument from several objectors, the [Chan-

cery} court found the class representation adequate . . . .” Matsushita, 516

U.S. at 371. Later, in explaining why it believed that the Delaware courts

would afford preclusive effect to the settlement judgment, the Supreme

Court explained that “[t}he Court of Chancery ‘further determined that the

plaintiffs[,] . . . as representatives of the Settlement Class, have fairly and

adequately protected the interests of the Settlement Class.” Jd. at 378

(quoting Order and Final Judgment at 2, In re MCA, Inc. Shareholders

Litig., Civ. A. No. 11740, 1993 WL 43024 (Del.Ch. Feb. 22, 1993))(inter-

nal quotation marks omitted). Finally, the Court expressed its astonish-

ment at plaintiffs’ decision to assert their due process claim “in spite of

the Chancery Court's express ruling, following argument on the issue, that

the class representatives fairly and adequatcly protected the interests of the

class.” Id. at 379 n.5.

22a

Appendix A

representation to the class.” Affidavit of William A Krupman

at 2-3, In re MCA, Inc. Shareholders Litig., Civ. A. No.

11740, 1993 WL 43024 (Del. Ch. Feb. 16, 1993) (emphasis

added). In considering Krupman’s objection, the Chancery

Court felt that his objection concerning the adequacy of the

class representatives’ representation of the class members was

similar to the objection raised by another objector, Pamela

Minton de Ruiz, who objected to the settlement “on the basis

that the settlement is collusive.” Jn re MCA, Inc. Shareholders

Litig. 1993 WL 43024 *3. The Chancery Court nonetheless

approved the settlement because the settlement was “in the

best interest of the class,” notwithstanding these objections to

the adequacy of the class representatives’ representation. /d.

Because the adequacy of representation issue was fully and

fairly litigated and necessarily decided in the Chancery Court,

the Delaware courts would give preclusive effect to that deter-

mination. See Messick v. Star Enter., 655 A.2d 1209, 1211

(Del. 1995). The Full Faith and Credit Act, 28 U.S.C. § 1738,

requires that we “treat a state court judgment with the same

respect that it would receive in the courts of the rendering

state.” Matsushita, 516 U.S. at 373. As such, we are required

to give preclusive effect to the Chancery Court’s judgment

that class representation was adequate irrespective of whether

we agree with that determination. I therefore concur.

THOMAS, Circuit Judge, dissenting:

Amchem Prods., Inc. v. Windsor, 521 U.S. 59: (1997) her-

alded a new era of judicial scrutiny of class action certifica-

tion and settlement. The majority opinion marks a significant

retreat from that philosophy, sanctioning a class settlement

obtained without any record evidence that the class represen-

tatives were even members of the class. Because the Delaware

judgment extinguished the rights of absent class members

ee nner

23a

Appendix A

without affording them due process of law, I respectfully

dissent." -

]

Before hedging its bet by reaching the merits, the majority

first concludes that we are precluded from deciding the due

process questions presented to us because the Supreme Court

has already done so. The opening passage of Matsushita Elec-

tric Industrial Co. v. Epstein, 516 U.S. 367 (1996) belies this:

This case presents a question whether a federal court

may withhold full faith and credit from a State-court

| judgment approving a class-action settlement simply

: because the settlement releases claims within the

| exclusive jurisdiction of the federal courts.

Id. at 369.

The Court further explained:

We need not address the due process claim fof inad-

quate representation] . . . because it is outside the

scope of the question presented in this Court. See

Yee v. Escondido, 503 U.S. 519, 533 (1992). While

it is true that a respondent may defend a judgment on

alternative grounds, we generally do not address

) arguments that were not the basis for the decision

below. See Peralia y. Heights Medical Center, Inc.

485 U.S. 80, 86 (1988).

Id. at 379, n.5 (1996).

"Insofar as is possible, I shall not repeat Judge Norris’s forceful analy-

sis, as detailed in the panel opinion on remand. See Epstein v. MCA, Inc.,

126 F.3d 1235 (9th Cir. 1997). It demands an independent and careful

examination and is, in my vicw, dispositive.

24a

Appendix A

If the majority’s recognition of the scope of its holding

were not already plain, Justice Ginsburg’s partial concurrence

makes it pellucid:

Although the Ninth Circuit decided the case without

reaching the due process check on the full faith and

credit obligation, that inquiry remains open for con-

sideration on remand.

Id. at 389.

The nuances that the majority strains to draw from the

opinion simply cannot bear the weight placed on them. There

is nothing in the opinion that relieves us of our responsibility

to examine the merits of the due process argument fully and

fairly. Indeed, if any unmistakable signal were sent by the

opinion, it was to do just that.

Judgments binding absent litigants in class action suits are

an exception to the general rule that one is not bound by a

judgment in personam in a litigation to which he or she is not

a party. See Hansberry v. Lee, 311 U.S. 32, 40-41 (1940).

Absent class members may be bound by the judgment if they

have, in fact, been adequately represented by parties who are

present. Jd. at 42-43. Due process requires that the procedure

employed to reach a binding judgment “fairly insures the pro-

tection of the interests of absent parties who are to be bound

by it.” Jd. at 42.

This is, in the words of the Hansberry court almost sixty

years ago, a “familiar doctrine.” Jd. Yet its import seems lost

in this case. In order for absent class members to have

“adequate representation” within the meaning of the Due Pro-

cess Clause, the class must be free of structural conflict.

Although analyzed in the context of Fed. R. Civ. P. 23, this

propesition was central to the seminal analysis in Amchem.

25a

Appendix A

521 U.S. at 625-628. In a class settlement, there must be

“structural assurance of fair and adequate representation for

the diverse groups and individuals affected.” Jd. at 627. The

class representative “must possess the same interest and suffer

the same injury shared by all members of the class he

represents.” Schlesinger v. Reservists to Stop the War, 418

U.S. 208, 216 (1974),

In the case at hand, there were three different types of

shareholders who were part of the class: (a) those who traded

on the open market; (b) those who tendered their shares; and

differences among the class members as to the legal theories

available. The interests of the Epstein plaintiffs in advancing

the federal claims were directly antagonistic to those of the

Delaware class representatives, who were precluded by fed-

eral securities law from asserting those claims in state court.

By the time settlement occurred, the statute of limitations pre-

vented the Delaware class from litigating the federal claims in

any court. Thus, there were irreconcilable differences in

claims and damages among the class members. These struc-

tural conflicts should have actuated an inquiry by the Dela-

ware Vice-Chancellor, and should have resulted in the

creation of sub-classes to assure the adequate representation

of absent class members.

The conflict prior to settlement approval was palpable.

Because they could not assert federal causes of action, those

claims were of no value to the class representatives and their

counsel except as a bargaining chip to enhance the value of

their state claims. Indeed, settlement of the federal action was

the only method by which the Delaware class could receive

any money from the federal claims. Thus, it was plainly in the

best interest of class representatives to settle the federal

claims at any price. Class representatives had absoluteiy no

incentive to obtain fair valuation of the federal claims,

because of their inability to assert the claims.

26a

Appendix A

The divergence of class interests quickly manifested itself.

While Delaware counsel was admitting to the Chancery Court

that they had reviewed the Wasserman claim “relatively

quickly” and in the complete absence of discovery, before

concluding that the claim was “frivolous,” the MCA share-

holders were extensively litigating that very claim in federal

district court in this Circuit. And while the Delaware counsel

was arguing before the Chancery Court that the Ninth Circuit

was “unlikely” to overturn the district court’s dismissal of the

Wasserman claim, the MCA shareholders were in the process

of successfully appealing that decision before this court. In

addition to the inadequate representation of the Wasserman

issue, it is also noteworthy that there is not a single mention

of the $21 million payment to Sheinberg in the Delaware

counsel’s memoranda or arguments to the Chancery Couit,

although it is clear that Delaware counsel was aware of this

claim, which had a potential value of $17.80 per share.

“[A]dequate representation . . . depends on .. . an absence

of antagonism.” Brown v. Ticor Title Insurance Co., 982 F.2d

386, 390 (9th Cir. 1992). In this case, the antagonistic inter-

ests, injury and claims among the class members resulted in

significant structural conflicts. Because these conflicts were

unresolved, the class representation was constitutionally

infirm and cannot bind absent class members.

In addition, the actual representation provided by Delaware

class counsel was inadequate for reasons persuasively detailed

in Judge Norris’s opinion on remand. See Epstein, 126 F.3d

at 1251-55, Class counsel did not investigate or properly eval-

uate the federal claims. Class counsel provided a misleading

and incorrect analysis of the claims to the Chancery Court.

The interests of the Epstein plaintiffs were not represented

adequately by class counsel; indeed, their interests were

undermined by the antagonistic strategy of class counsel.

Finally, there is no record evidence that the lass represen-

talives were even members of the putative class. A non-

27a

Appendix A

waivable prerequisite to approval of a class settlement binding

absent class members is that the class representative be a

member of the class. See East Motor Freight System, Inc. v.

Rodriquez, 431 U.S. 395, 403 (1977) (“As this Court has

repeatedly held, a class representative must be part of the

class ... .”). The best argument that the class representatives

could offer was that such an allegation was contained in the

complaint, that there were a large number of law firms

involved and that the settlement was accepted by class

members.’ None of this, of course, comes close to being

record evidence. This explanation can be credited only if one

believes that representational adequacy or adherence to proce-

dural due process may be established by circumstantial evi-

dence.

The majority decision correctly observes that Phillips

Petroleum Co. v. Shutts, 472 U.S. 797 (1985), enumerated

“various procedural safeguards that are necessary to bind

*The class representatives did not reply to this charge in their briefs. At

oral argument, the following colloquy occurred:

“Question: Where is there evidence in the record that any of the

named representatives were actually members of the class?

Answer: In the Delaware proceeding, there were twelve different

Class representatives, represented by twenty different law firms

and all of them were possessed of the state and federal claims that

were resolved in the Delaware action.

Question: Is your answer basically that there is nothing of evi-

dence in the record, but everyone was on notice and you are rely-

ing on that?

Answer: I'm certainly relying on the fact that a notice went to

every single class member outlining the settlement, the pendency

of the federal action, the pendency of state action, what each

class member would receive and what each member would for-

feit, and I’m relying on the fact that the settlement proceeds

which were accepted by all class members, including thé Epstein

plaintiffs, were only paid to shareholders who tendered pursuant

to the tender offer and I'm relying on the fact that the Delaware

complaint was brought on behalf of all MCA sharcholders.”

28a

Appendix A

absent class members.” In fact, Shutts specifically indicates

that “the Due Process Clause of course requires that the

named plaintiff at all times adequately represents the interests

of the absent class members.” 472 U.S. at 812 (citing

Hansberry v. Lee, 311 U.S. 32, 42-43 (1940)). The litigation

leading up to the Delaware settlement thus violated the

“minimal procedural due process protection” due to the

Epstein plaintiffs: adequate representation “‘at all times.”

“UI)f the plaintiff was not adequately represented in the

prior action, or there was a denial of due process, then the

prior decision has no preclusive effect.” Brown, 982 F.2d at

386. Thus, the Epstein plaintiffs are entitled as a matter of

federal law to assert their claims in this action.

III

In addition to federal due process concerns, the Delaware

Supreme Court’s own interpretation of Delaware Chancery

Courts Rule 23, as articulated in Prezant v. De Angelis, 636

A.2d 915 (Del. 1994), requires us to address the Epstein

plaintiffs’ collateral attack of this settlement on the grounds

of inadequate representation. Under Delaware law, issue pre-

clusion attaches only when a question of fact essential to the

judgment actually has been litigated and determined by a

valid and final judgment. Messick v. Star Enterprise, 655

A.2d 1209, 1211 (Del. 1995): Orange Bowl Corp. vy. Jones,

1986 WL 13095, at *2 (Del. Super. 1986); Evans v. Frank E.

Basil, Inc., 1986 WL 3973, at *2 (Del. Super. 1986). The Del-

aware record shows that the issue of adequacy of representa-

tion was not litigated during the settlement proceedings.

The notice to the class members regarding the settlement

hearing did not indicate that the issue of adequacy of repre-

sentation, either by class representative or by class counsel,

would be addressed.

Perhaps as a consequence of the absence of notice, the four

objectors who participated in the Delaware proceedings did

7, ae en

29a

Appendix A

not litigate the question of the adequacy of representation. In

addressing the concerns that were litigated by the objectors,

the Delaware Chancery Court first determined that the fact

that few small shareholders would actually opt out of the set-

tlement, as was their right, did not undermine the validity of

the settlement agreement. Jn re MCA, Inc. Shareholders’

Litigation, 1993 WL 43024, at *4. Second, it determined that

it did not need to await the Ninth Circuit's appellate decision

in the Epstein matter in order to approve the settlement. Jd. at

*5. Third, the Chancery Court concluded that those sharehold-

ers who received delayed notice had assumed the risk of such

delays in holding their shares under a “street name.” Jd. And

finally, it determined that there was insufficient evidence to

Support the objectors’ claim that the agreement was a collu-

sive means of obtaining settlement of the federal claims. /d.

Of these four explicit findings, it is clear that only the sec-

ond and fourth claim are even tangentially relevant to the

claims raised by the Epstein plaintiffs before this court today.

The second finding indicated that the valuation of the state

claims were not dependant upon the resolution of the federal

matter. But the Chancery Court did not assert that the plain-

tiffs raising the federal claims were adequately represented in

the Delaware action. The fourth finding simply makes clear

the fact that there was no collusive settlement “deal” between

the plaintiffs and attormeys on both sides of the state court

matter. The fact that there was no finding of wrongdoing cer-

tainly does not preclude a finding that the federal plaintiffs

were inadequately represented by the settling class.

In short, none of the Chancery Court's findings address the

claim of the plaintiffs before this court today: namely, that the

federal plaintiffs were inadequately represented before the

Delaware court, and that, consequently, a decision to bind

them to the terms of the settlement would violate their rights

to due process.

The Epstein plaintiffs correctly argue that to be bound by

the settlement decision they are entitled under Delaware law

30a

Appendix A

to specific findings that they were adequately represented in

the Delaware Chancery Court. Such findings are required in

order to bind the federal litigants to the settlement terms. In

Prezant, 636 A.2d at 924, the Delaware Supreme Court

explicitly held that a Court of Chancery is required to

“articulate on the record its findings regarding the satisfaction

of the Rule 23 criteria and supporting reasoning.” Yet the

statement offered by the Delaware Chancery Court asserting

that the plaintiffs in the action “fairly and adequately pro-

tected the interests of the Settlement Class” offers no

“supporting reasoning” aside from that offered to address the

challenges raised by the four objectors. No findings exist in

the Chancery Court’s decision that would indicate that the

representation of the absent federal plaintiffs was adequate,

because the matter was never actually litigated before that

court.

Thus, while the Supreme Court decision in Matsushita

makes it clear that the objectors will be bound by the judg-

ment of the Delaware court with respect to the matters litigated,°

the Delaware court’s decision cannot be read to bind those

whose claims were simply never represented before it. The

individual objectors who voluntarily appeared at the fairness

hearing were not authorized by the absent class members to

represent their interests, nor were they certified by the state to

do so. Their appearance at the hearing could therefore not

bind other parties with respect to the issue of adequacy of

representation.* Thus, the majority’s determination today also

runs against the settled law of Delaware.

*Thus, interpreting the Matsushita decision to leave the Epstein plain-

tiffs’ due process claim open for determination on remand does not, as the

majority contends, render Matsushita an “advisory decision.” On the con-

trary, the Court’s decision makes it clear that all participants in the Dela-

ware action will be bound by the judgment in spite of the exclusively

federal nature of any claims they sought to raise elsewhere.

“This conclusion does not undermine the finality of a class action settle-

ment to any degree greater than that already permissible under the law. In

Prezant, the Delaware Supreme Court pointed out that prudent class action

defendants can foreclose subsequent collateral action absolutely by asking

for a judicial finding, supported through reasoning and evidence, that all

plaintiffs’ “due process right to adequate representation has been

satisfied.” 636 A.2d at 925-26. Such a finding simply was not made in this

case.

3la

Appendix A

Providing the Epstein plaintiffs with the opportunity to

raise their due process claims does not, as the majority claims,

result in the “collzteral second guessing” of the determina-

tions and review of the Delaware courts. Those determina-

tions are valid, and, to the extent that they comply with due

process protections afforded by the Constitution, they are

binding upon this court. Thus, the result originally reached by

the panel on remand was not violative of cooperative federal-

ism or comity. The majority today gives license to those who

would run to a favorable and remote state court to obtain set-

tlements premised on bargain-basement valuations of federal

claims, even when those claims clearly predominate over

potential state causes of action. This result must be especially

discouraging to responsible law firms specializing in class

action suits, who assiduously and carefully construct sub-

classes to assure adequate representation of diverse interests,

even at the expense of their own fees.

The Epstein plaintiffs seek to raise claims that received nei-

ther determination nor review in the Delaware courts. Struc-

tural conflicts of interest precluded adequate representation of

absent class members. The Epstein plaintiffs were not ade-

quately represented in the Delaware state court proceedings

by either the class representatives or the objectors, and their

claim was never litigated in Delaware state court. In denying

them the right to bring their meritorious federal claims before

us, we deny them due process of law. We also significantly

diminish the proper oversight role of the judiciary over class

action settlements.

I respectfully dissent.

32a

APPENDIX B — OPINION OF THE UNITED STATES

COURT OF APPEALS FOR THE NINTH CIRCUIT

DATED AND FILED OCTOBER 22, 1997

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

No. 92-55675

D.C. No. CV-90-6451-R

LAWRENCE EPSTEIN; JOHN LINDER; JANE

ROCKFORD, as trustee of the Michael J. Rockford Trust;

MAURICE KARLIN; RUTH KARLIN; BETH ANN

KARLIN; BERT P. KARLIN,

Plaintiffs — Appellants,

Vv.

MCA, INC.; MATSUSHITA ACQUISITION

CORPORATION; MATSUSHITA ELECTRIC

INDUSTRIAL CO., LTD; MATSUSHITA HOLDING

CORPORATION; LEW WASSERMAN; SIDNEY J.

SHEINBERG,

Defendants — Appellees.

OPINION

On Remand from the United States Supreme Court

Argued and Submitted September 4, 1996

San Francisco, California

Filed October 22, 1997

33a

Appendix B

Before: NORRIS, WIGGINS, and O’SCANNLAIN, Circuit

Judges.

NORRIS, Circuit Judge:

This case is before us on remand from the United States

Supreme Court. In Matsushita Electric Industrial Co. vy.

Epstein, 116 S. Ct. 873 (1996) (“Matsushita”), the Court

reversed our judgment in Epstein v. MCA, Inc., 50 F.3d 644

(9th Cir. 1995) (“Epstein I’), and remanded “for proceedings

consistent with this opinion.” Matsushita, 116 S. Ct. at 884.

The case is a class action brought by former MCA

shareholders who surrendered their stock in response to a

tender offer by Matsushita. In Epstein J, the named plaintiffs

(“the Epstein plaintiffs”) contended, inter alia, that

Matsushita’s tender offer violated the so-called “all-holder,

best-price” rule of SEC Rule 14d-10! by paying a premium

for the stock of MCA’s chairman and chief executive officer,

Lew Wasserman, and MCA’s chief operating officer, Sidney

Sheinberg.? The district court awarded summary judgment

to the defendants, and the Epstein plaintiffs appealed.

1. Rule 14d-10, 17 C.F.R. § 240.14d-10 (1994), is promulgated

under Section 14(d)(7) of the 1968 Williams Act Amendments

[hereinafter “The Williams Act”] to the Securities Exchange Act of

1934, 15 U.S.C. § 78n(d)(6)-(7) (1994) (hereinafter “The Exchange

Act”.

2. The Epstein plaintiffs also claimed that the premiums paid

to Messrs. Wasserman and Sheinberg violated SEC Rule 10b-13,

17 C.F.R. § 240.10b-13 (1994). We did not consider the Rule 10b-

13 claim in Epstein J because any relief that the Epstein plaiutiffs

could have obtained under Rule 10b-13 was also available under

Rule 14d-10. See Epstein J, 50 F.3d at 648 n.5.

34a

Appendix B

In Epstein I we reversed the summary judgment for

Matsushita, holding that its agreement to purchase Mr.

Wasserman’s stock for consideration different from what it

offered other shareholders violated Rule 14d-10, see Epstein

I, 50 F.3d at 653-57, and that there was a material issue of

fact as to whether a $21-million dollar payment to Mr.

Sheinberg was legitimately made as incentive compensation

for past services or was a premium for his stock paid in

violation of Rule 14d-10. See id. at 657-59. We rejected

Matushita’s argument that there was no private right of action

under § 14(d)(7) of the Williams Act, following the decisions

of the Second and Third Circuits on that point.’ See id. at

649-52. We also rejected Matsushita’s argument that its

purchase of Mr. Wasserman’s stock could not have violated

Rule 14d-10 because his stock was not exchanged until one

hour after Matsushita accepted the tendered MCA shares for

payment. See id. at 654-57. We also held that the district

court had abused its discretion in refusing to certify the class

because “(t]he claims of every tendering shareholder turn

on identical facts and law — regardless of the identity or

circumstances of the particular shareholder.” Jd. at 668.

Finally, we affirmed the district court’s dismissal of the

“aiding and abetting” claims against MCA and Messrs.

Wasserman and Sheinberg personally in light of the Epstein

plaintiffs’ concession on the issue. See id. at 665 n.29.

None of these rulings on the merits of the Rule 14d-10

claims were disturbed by the Supreme Court in Matsushita.

The Court reversed our judgment and remanded for further

3. See Polaroid Corp. v. Disney, 862 F.2d 987, 996 (3d Cir.

1988); Field v. Trump, 850 F.2d 938, 946 (2d Cir. 1988).

35a

Appendix B

proceedings solely on the basis of the first question presented

in Matsushita’s petition for the writ of certiorari: “Whether

a federal court can withhold full faith and credit from a state

court final judgment approving a class action settlement

simply because the settlement released exclusively federal

claims.”* Matsushita Electric Indus. Co. vy. Epstein, 115

S. Ct. 2576 (1995) (granting certiorari limited to Question |

presented by the petition for writ of certiorari); see also

Matsushita, 116 S. Ct. at 884 (remand order).

On remand, the Epstein plaintiffs press anew an

argument that we found unnecessary to address in Epstein I:

that we should withhold full faith and credit from the

Delaware judgment because it was entered into in violation

of the due process right of the absent class members to

adequate representation at all times. We now turn to that

question.

Matsushita contends that we are barred from addressing

the merits of the Epstein plaintiffs’ claims of inadequate

representation. Matsushita makes three arguments in support

of this contention:

4. The Supreme Court accepted Matsushita’s statement of the

question presented even though that statement mischaracterized our

holding. We did not withhold full faith and credit “simply” because

the Delaware judgment released exclusively federal claims. Rather,

we withheld full faith and credit because the great disparity between

the state and federal claims — there were no overlapping issues of

fact whatsoever (see Epstein | at 665-66) — meant that a judgment

based upon an adjudication of the state claims could have no issue

preclusive effect on the federal claims.

36a

Appendix B

(1) The Supreme Court’s decision in Matsushita did not

leave the issue open on remand;

(2) The issue of the adequacy of representation was fully

and fairly litigated in the Delaware Court of Chancery;

(3) The Epstein plaintiffs are estopped from raising the

adequacy of their representation collaterally because they

did not raise it by intervening in the Delaware proceeding.

In arguing that the “[t]he opinion of the Supreme Court

leaves no issue open on remand,” Appellees’ Br. at 1,

Matsushita either mischaracterizes or disregards the

unambiguous statements in the record to the contrary:

1. Matsushita fails to cite the Court’s order granting

certiorari, which limited the question it would review to

Question 1 in Matsushita’s petition. See Matsushita Electric

Industrial Co. v. Epstein, 115 S. Ct. 2576 (1995); see also

Matsushita, Pet. for Cert., at i (“1. Whether a federal court

can withhold full faith and credit from a state court final

judgment approving a class action settlement simply because

the settlement includes a release of exclusively federal

claims.”).

2. Matsushita fails to include the first sentence of the

Court’s opinion which limited the question presented

precisely the way Matsushita stated it in its petition for

certiorari:

37a

Appendix B

This case presents the question whether a

federal court may withhold full faith and credit

from a state-court judgment approving a class-

action settlement simply because the settlement

releases claims within the exclusive jurisdiction

of the federal courts.

Matsushita, 116 S. Ct. at 875-76.

3. Matsushita, although quoting various excerpts from

the Court’s opinion, fails to quote the following explicit

statement by the Court that it did not address the due process

claim:

We need not address the due process claim

[of inadequate representation] ... because it is

outside the scope of the question presented in this

Court. See Yee v. Escondido, 503 U.S. 519, 533,

112 S. Ct. 1522, 1531, 118 L.Ed.2d 153 (1992).

While it is true that a respondent may defend a

judgment on alternative grounds, we generally do

not address arguments that were not the basis for

the decision below. See Peralta v. Heights

Medical Center, Inc., 485 U.S. 80, 86, 108 S. Ct.

896, 899, 99 L.Ed.2d 75 (1988).

Id. at 880, n.5.

4. Matsushita also fails to cite the explicit statement in

Justice Ginsburg’s separate opinion that the due process

question of adequate representation remained open on

remand, a statement that went unchallenged by any member

of the Court:

38a

Appendix B

Mindful that this is a court of final review and

not first view, I do not address the merits of the

Epstein plaintiffs’ contentions [regarding the

adequacy of representation], or Matsushita’s

counterargument that the issue of adequate

_representation was resolved by full and fair

litigation in the Delaware Court of Chancery.

These arguments remain open for airing on

remand.

Id. at 890 (Ginsburg, J., concurring in part and dissenting in

part) (emphasis added).

5. Finally, in arguing that the due process question is

not open on remand, Matsushita ignores its own assertions

to the Court that the question was not before it for decision.

In their brief, the Epstein plaintiffs invited the Court to

address the adequacy of representation issue, notwithstanding

that it was outside the scope of the sole question on which

the Court had granted certiorari. See Matsushita Resp. Br.

at 34-45. In its Reply Brief, Matsushita responded:

A. The Ninth Circuit Opinion is Not

Predicated Upon Any Due Process Issue.

Respondents invite this Court to find

constitutional infirmity in the Delaware

proceedings based on alleged inadequate

representation and judicial supervision. Resp. Br.

at 34-45. As respondents concede, the Ninth

Circuit’s holding is not predicated on these fact-

39a

Appendix B

specific issues. Resp. Br. at 8. Accordingly, this

Court should decline to address them.

Matsushita Reply Br. at 13.

Given this state of the record, we must agree with the

Epstein plaintiffs that Matsushita’s argument that the due

process question is not open on remand is “inexplicable.”

Reply Br. at 4. Matsushita attaches no weight to the Supreme

Court’s clear disclaimer that “We need not address the due

process claim,” Matsushita, 116 S. Ct. at 880, n.5., and all

the other references in the record that reaffirm this disclaimer.

Instead, Matsushita attempts to get aroundtthe Court’s

unambiguous disclaimer. First, it seizes upon language in

the Court’s opinion concerning Delaware preclusion law and

lifts it out of context. “State-court approval of the settlement

would have the collateral effect of preventing class members

from prosecuting their claims in federal court.” Matsushita,

116 S. Ct. at 879; accord Appellees’ Br. at 12. While an

accurate summary of the Supreme Court’s reading of

Delaware preclusion law, this passage lends no support to

the argument that the Supreme Court addressed, let alone

disposed of, the Epstein plaintiffs’ inadequate representation

claim.

Matsushita’s position that the Court in Matsushita

implicitly held that the Delaware proceeding satisfied due

process reads volumes between the lines. When taken in the

face of the Court’s explicit announcement that it did nor

render such a holding, we agree with the Epstein plaintiffs

that it becomes nothing less than “incomprehensible.”

Appellants’ Br. at 5.

40a

Appendix B

Matsushita’s second ground for arguing that adequacy

of representation is not open on remand rests on the very

footnote — from which it selectively excerpts — in which ,

the Court expressly stated that it was not addressing due

process. Matsushita misleading quotes only the first part of

the footnote, which reads as follows:

A part [sic] from any discussion of Delaware

law, respondents contend that the settlement

proceeding did not satisfy due process because

the class was inadequately represented. ...

Respondents make this claim in spite of the

Chancery Court’s express ruling, following

argument on the issue, that the class

representatives fairly and adequately protected the

interests of the class. ...

FE ee Pe ee te MOTTE Le, Pan

Id. at 880, n.5 (citations omitted). Matsushita omits the very

next sentence of the footnote, however, in which the Court

made clear that it was not disposing of the due process claim.

We need not address the due process claim,

however, because it is outside the scope of the

question presented in this Court.

Id. ;

Matsushita would have us believe that the Court was

“winking” at us — saying that it was not doing exactly what

it was doing. The only reasonable interpretation of these ;

sentences, however, is that the Court was simply stating the

claim of the Epstein plaintiffs that their representation in

the Delaware proceeding was constitutionally inadequate.

4la

Appendix B

In sum, we reject Matsushita’s argument that the

Supreme Court did not leave the due process issue open on

remand. The Court laid out an unambiguous contrary

intention in its statement of the question presented and in

footnote five, and no voice was raised against Justice

Ginsburg’s explicit statement that the issue of adequacy of

representation “remain[ed] open for airing on remand.” /d.

at 890 (Ginsburg, J., concurring in part and dissenting in

part).

Next we address Matsushita’s argument that the

Delaware settlement judgment precludes the Epstein

plaintiffs from “relitigating” the issue of adequacy of

representation under Delaware issue preclusion law. It claims

that adequacy of representation was actually litigated by

objectors at the Delaware fairness hearing, and that other

Delaware courts would therefore give preclusive effect to

the Chancery Court’s determination that representation of

the absent class members was adequate. Appellees’ Br. at

16-18, 21-24, 22 n.6. Therefore, Matsushita argues, under

28 U.S.C. § 1738, we too must attach issue preclusion. See

id. at 23.

The Epstein plaintiffs argue in response that the

Delaware judgment raises no issue preclusion bar to the

question of constitutional adequacy of representation. First,

they contend, the objectors did not actually litigate the issue

at the Delaware fairness hearing, as is required under

Delaware issue preclusion law. See Appellants’ Br. at 21-

23; Reply Br. at 10. More broadly, the Epstein plaintiffs

42a

Appendix B

contend that individual, uncertified objectors in a class action

cannot constitutionally bind absent class members on the

issue of adequacy of representation. See id. at 17-18. We

consider each contention in turn.

Under Delaware law, issue preclusion attaches only

when a question of fact essential to the judgment has been

actually litigated and determined by a valid and final

judgment. See Messick v. Star Enterprise, 655 A.2d 1209,

1211 (Del. 1995) (“The test for applying collateral estoppel

requires that (1) a question of fact essential to the judgment,

(2) be litigated and (3) determined (4) by a valid and final

judgment.”) (internal quotations omitted) (emphasis added);

Orange Bowl Corp. v. Jones, 1986 WL 13095, at * 2 (Del.

Super. 1986); Evans v. Frank E. Basil, Inc., 1986 WL 3973,

at * 2 (Del. Super. 1986). The Delaware record shows clearly

that the issue of adequacy of representation was not litigated

during the settlement proceedings.

First, the notice to class members said nothing about

adequacy of representation. Instead, the notice stated that

the purpose of the settlement hearing was to determine “(a)

the fairness, reasonableness, and adequacy of the terms of

the ... Settlement, and (b) whether an order and final

judgment should be entered approving the proposed

settlement.” Supplemental Record (“SR”) 354 (emphasis

added). Whether the class was adequately represented by the

named plaintiffs or by class counsel was not an issue noticed

for hearing. Thus, absent class members were not on notice

that they could have objected to the adequacy of

representation at the settlement hearing.

43a

Appendix B

Not surprisingly, the objectors who did appear at the

settlement hearing did not litigate the adequacy of their

representation. Objector Marion Minton focused solely on

the issue of inadequate notice. See SR 375. Objector Pamela

Minton de Ruiz, in her memorandum to the Chancery Court,

framed her objection in terms of collusion, arguing that “(t]he

second proposed settlement is collusive and should not be

approved.” SR 402. Likewise, the Minton objectors argued

at the settlement hearing that “this two-cent settlement is

collusive.” SR 574. Neither of the Minton objectors focused

on the much broader issue of whether representation was

constitutionally adequate. See SR 402-09.‘ Finally, objector

William A. Krupman did submit an affidavit to the Chancery

Court stating that he opposed the settlement because “the

purported class representatives . . . had proposed a settlement

that benefitted no one but their own attorneys. They did not

provide adequate representation.” SR 422-23. However, this

single blanket statement conflating the non-constitutional

question of the fairness of the settlement with the

constitutional question of the adequacy of representation

hardly qualifies as “actual litigation” of the constitutional

issue. Indeed, in his argument at the settlement hearing,

objector Krupman did not address the constitutional

adequacy of the representation, but argued only that the terms

of the settlement were unfair. See SR 589-91.

Since the issue of adequacy of representation was never

actually litigated in Chancery Court, no Delaware court

5. Since the Chancery Court could have found that

representation was inadequate without also finding that it was

collusive, litigation of the collusion issue would not constitute

“actual litigation” of adequacy of representation.

44a

Appendix B

would attach preclusion to the issue of acGzquate

representation of the absent class members. See Star

Enterprise, 655 A.2d at 1211. Under § 1738, neither may

we. See, e.g., Migra v. Warren City School Dist. Bd. of Educ.,

465 U.S. 75, 88 (1984) (White, J., concurring) (collecting

cases).°

Even if adequacy of representation had actually been

litigated by objectors at the fairness hearing, and even if

Delaware law would allow an individual objector to bind an

absentee on the issue of adequacy of representation —

however improbable that might seem — we still could not

6. It also appears that Delaware courts would not attach

preclusion to the Delaware judgment because the Vice Chancellor

failed to make a finding, supported by reasons and evidence on the

record, that the requirements of Delaware Rule 23 were satisfied.

In Prezant v. De Angelis, 636 A.2d 915 (Del. 1994), the Delaware

Supreme Court held that a Court of Chancery is required to

“articulate on the record its findings regarding the satisfaction of

the Rule 23 criteria and supporting reasoning” before it approves a

class action settlement. Jd. at 925. The only mention of Rule 23 that

the Chancery Court ever made in this case was contained in a pro

forma statement supported by neither reasons nor evidence in the

record. See Chancery Court’s Order and Final Judgment, at 2 (“[I]t

4s hereby ... determined that the plaintiffs in these Actions, as

representatives of the Settlement Class, have fairly and adequately

protected the interests of the Settlement Class and that the

maintenance of this action as a class action meets all the requirements

of Rule 23(a) and (b)(3) of the Court of the Chancery”). While we

need not decide the issue, we are doubtful that this pro forma recital

satisfies Prezant.

———

45a

Appendix B

give full faith and credit to such a judgment because it would

violate due process of law. As the Epstein plaintiffs aptly

put it, “/o]bjectors are objectors, not class representatives.”

Reply Br. at 17-18. Binding absentees to any part of a class

action judgment “is an act of judicial power,” Epstein I, 50

F.3d at 667, and that power can only be exercised over

absentees when their interests have, in fact, been adequately

represented by parties lawfully authorized to represent them.

See, e.g., Richards v. Jefferson Cty., Ala., 116 S. Ct. 1761,

1766 (1996) (“[O)]ne is not bound by a judgment in personam

in a litigation in which he is not designated as a party...

[except, in a class action, where he] has his interests

adequately represented.”). It would defy this fundamental

principle of our jurisprudence to allow the due process right

of absent class members to adequate representation to be

litigated by random, volunteer objectors.’

Not surprisingly, Matsushita offers no persuasive

authority in its attempt to argue against this basic principle.

Some of the cases that it cites involve individual litigants,

not class members. In Durfee v. Duke, 375 U.S. 106 (1963),

for example — upon which Matsushita relies heavily —

the Supreme Court held that an individual who has

unsuccessfully challenged subject matter jurisdiction in an

initial action can be precluded from raising the issue in a

collateral attack on the judgment. Durfee was not a class

action and says nothing about the rights of absent class

members. Some of Matsushita’s other cases pre-date Philips

7. Absent class members are, of course, bound by a judgment

on the merits of the class action issues, as for example, the fairness

of the settlement.

46a

Appendix B

Petroleum v. Shutts, 472 U.S. 797 (1985), the controlling

Supreme Court precedent on the rights of absent class

members. See infra, Section 1.C. See, e.g., Laskey v.

International Union, United Auto., Aerospace & Agric.

Implement Workers (UAW), 638 F.2d 954 (6th Cir. 1981).

The only case Matsushita cites that offers any help on its

proposition that volunteer objectors can litigate the due

process rights of absent class members is Grimes v. Vitalink

Communications, 17 F.3d 1553 (3d Cir. 1994). In Grimes,

the Third Circuit held that objectors may litigate the due

process rights of absent class members who have sufficient

minimum contacts to support an exercise of personal

jurisdiction over them by the forum. It reasons that, so long

as an absentee has “minimum contacts” with the forum, he

can be bound by the judgment without receiving SAutts’

safeguards. See Grimes, 17 F.3d at 1558-59, 1560 & n.8.

There is nothing in Shutts, however — or in any other case

— to suggest that Shutts offers protection only to those

absentees who are beyond the in personam reach of the

forum. Because Grimes conflates the requirements of in

personam jurisdiction with the due process safeguards that

Shutts guarantees to absent class members, we respectfully

decline to follow it.

Finally, Matsushita raises the alarmist cry that it will

sound the death knell to finality in class actions if individual

objectors cannot bind absentees on the issue of adequate

representation. See Appellees’ Br. at 2. We of course reject

this hyperbole. So does Delaware. In Prezant v. De Angelis,

636 A.2d 915 (Del. 1994), the Delaware Supreme Court

points out that prudent class action defendants can protect

themselves from collateral attack. Although they cannot

47a

Appendix B

foreclose a subsequent collateral action absolutely, they can

minimize the risk by asking for a judicial finding, supported

by reasons and evidence in the record, that the plaintiffs’

“due process right to adequate representation has been

satisfied.” Prezant, 636 A.2d at 925-26. Such a finding will

“help insure” that judgments will be subject to collateral

attack only under extraordinary circumstances like those that

exist in this case. See id. Thus, we disagree with Matsushita

that finality of settlements will come to an end if volunteer

objectors are not vested with the authority to bind absentees

on the issue of the adequacy of class representation.

To repeat, “[o]bjectors are objectors, not class

representatives.” Reply Br. at 17-18 (emphasis removed).

The individual objectors who voluntarily appeared at the

fairness hearing were not authorized by the absentees to

represent their interests, nor were they certified by the state

to do so. Their appearance at the hearing did not bind anyone

but themselves to an adjudication of adequacy of

representation.

Finally, Matsushita argues that because of the procedures

used in the Delaware Chancery Court, the Epstein plaintiffs

cannot bring a collateral attack on adequacy of

representation. This argument comes in two parts. First,

Matsushita argues, the settlement hearing provided a “full

and fair opportunity” for absentees to contest the adequacy

of their representation. Appellees’ Br. at 25. The absentees

had a duty to intervene in that hearing if they wished to

protect their rights, Matsushita claims, and having failed to

Sat

48a

Appendix B i

do so, they are estopped from bringing a collateral challenge.

Second, and more broadly, Matsushita argues that the

procedures Delaware had in place foreclose us from ever

hearing a collateral challenge to adequacy of representation.

Matsushita argues that we are limited to reviewing the

sufficiency of the procedures that Delaware had in place to

ensure adequate representation, rather than the adequacy of

the representation itself. “[T]he Chancery Court’s adherence

to Rule 23 procedures satisfies the Due Process_Clause as a

matter of law,” Matsushita continues, and an absent class

member’s claim on “the merits” of inadequate representation

“is far outside the scope of the [collateral] review permitted

by... the case law of this Vourt.” Appellee’s Br. at 30. We

agree with the Epstein plaintiffs that both of these arguments

are meritless.

Matsushita argues that class members who wish to

contest adequacy of representation must intervene during the

course of the class action proceedings and do battle with

their own representatives in an adversarial contest over the

way they are discharging their fiduciary duties. This

argument ignores the clear teaching of Phillips Petroleum

Co. v. Shutts, 472 U.S. 797 (1984), that a class member is

not required to do anything during the course of a class-action

proceeding. He is free to sit it out, assured that he will be

bound by the result if, but only if, the proceeding comports

with the special due process requirements designed to

safeguard the interests of absent class bers. As the Court

put it in Shutts, “Unlike a defendant in a normal civil suit,

an absent class-action plaintiff is not required to do anything. |

49a

Appendix B

He may sit back and allow the litigation to run its course,

content in knowing that there are safeguards provided for

his protection.” Id. at 810 (emphasis added). Those

“safeguards”, as enumerated in Shutts, are ( 1) “notice,” (2)

“an opportunity to be heard and participate in the litigation,”

(3) “an opportunity to remove himself from the class” by

opting out, and (4) “adequate represent[ation]” “at all times.”

Id. at 812 (emphasis added). Thus, Shutts admonishes absent

class members that they will be bound vy the merits of a

judgment — including the fairness of a court-approved

settlement — if it is a product of adequate representation

and their other due process safeguards. But Shutts promises

in return that they need not monitor this proceeding from

afar: if the litigation culminating in the judgment violated

their due process rights, then absent class members will not

be bound by it.

Gonzales v. Cassidy, 474 F.2d 67 (5th Cir. 1973) —

a precursor to Shutts — is square authority against

Matsushita’s intervene-or-be-estopped argument. In

Gonzales, the Fifth Circuit rejected the very argument that

Matsushita now urges upon us: “[The defendants] advance

an estoppel-type argument to support the proposition that

[the absent class member] cannot raise the inadequate

representation issue [on collateral review]. Their position is

that [the absent class member] is estopped to attack the

judgment because he should have intervened.” Jd. at 76.

In rejecting this argument and holding that an absent

class member may collaterally attack a judgment on the

ground that he was not adequately represented, the Fifth

Circuit reasoned that the question “whether counsel’s

50a

Appendix B

conduct of the entire suit was such that due process would

not be violated by giving res judicata effect to the judgment

in that suit,” id. at 74, “necessarily requires a hindsight

approach.” Id. at 73 n.11 (emphasis added). As the court

went on to say, “The purpose of Rule 23 would be subverted

by requiring a class member who learns of a pending suit

involving a class of which he is a part to monitor that

litigation to make certain that his interests are being protected

....” Id. at 76.°

A hypothetical based on the facts of our case serves to

illustrate the common sense soundness of Shutts and

Gonzales and the impracticality of Matsushita’s argument

that the Epstein plaintiffs are now estopped from challenging

the adequacy of representation because they failed to

intervene at the fairness hearing. Suppose a class member

did appear as an objector at the hearing and challenged the

fairness of the settlement on the ground that it had not taken

into account the claim that a $21-million payment to

Sheinberg was in reality a premium for his stock. See infra,

Section II.B.2. Suppose further that the objector produced

evidence in the form of deposition testimony and documents

— perhaps discovered in a parallel federal class action —

casting doubt on the real purpose of the $21-million payment.

Suppose still further that Delaware counsel had never heard

of the $21-million payment before the objector reported it at

the fairness hearing.

8. Delaware’s class action provision is modeled after its federal

counterpart. Compare Del. Chancery Court Rule 23 with Fed. R.

Civ. Proc. 23. See also Hoffman v. Cohen, 538 A.2d 1096, 1098

(Del. 1988) (“[T]he construction of [the Federal Rules of Civil

Procedure] by the federal judiciary is of great persuasive weight in

the construction of the [Delaware Rules].”) (citation omitted).

LCN te la ity lt ad ba

Sla

Appendix B

The question is: bow should class counsel have

responded to this new evide «» about the Sheinberg payment

during the middle of 2: fairness hearing, given their

fiduciary duty to look after the interests of all members of

the class? The obvious answer would seem to be to ask the

Vice Chancellor to continue the fairness hearing until they

had a chance to learn more about the Sheinberg payment

and consider its potential settlement value. After all, if there

was evidence to prove that the $21-million payment was a

premium to get Mr. Sheinberg to support the tender offer, it

would take only a simple calculation to determine that other

shareholders would be entitled to a substantial recovery. See

infra, Section II.B.2.

Let us suppose, however, that for whatever reason —

perhaps the irresistability of a quick fee on claims they could

not litigate — counsel stuck to their guns and got the

proposed settlement — 2¢ per share (less attorneys fees) —

approved and cast into a judgment. Could the law possibly

be that all the class members who failed to intervene at the

fairness hearing are estopped from challenging the judgment

collaterally on the ground that they were not provided

adequate representation? Common sense as well and Shutts

and Gonzales dictate that the answer must be that they are

not.

This dilemma is the driving force behind Gonzales’

reasoning. The impracticality of assessing the adequacy of

ongoing representation “live-time” is the very reason that

the Fifth Circuit in Gonzales insisted that the challenge must

be conducted with a “hindsight” approach, as on collateral

review. Matsushita attempts to turn this around and limit

52a

Appendix B

Gonzales’ scope to cases in which it was “impossible to

raise” the constitutional claim in the original proceeding.

See Appellees’ Br. at 35-26 (“Gonzales also turns on the

impossibility of participation in the original proceeding. .. .

Gonzales thus stands for the limited proposition that

{collateral attack is limited to] due process violations that

could not have been presented in the rendering court oe

to the entry of judgment.”’).

This is not what Gonzales held. On the contrary, it held

that even claims that were not “impossible” to have been

raised in the initial proceedings are entirely appropriate for

collateral review:

To answer the question whether the class

representatives adequately represented the class

so that the judgment in the class suit will bind the

absent members of the class requires a two-

pronged inquiry: (1) did the trial court in the first

suit correctly determine, initially, that the

representative would adequately represent the

class? and (2) Does it appear, after the termination

of the suit, that the class representative adequately

protected the interest of the class?

Gonzales, 474 F.2d at 72.

To hold otherwise — with respect to either prong of the

inquiry — would be to require absent class members to

monitor the proceedings in order to secure their rights to

adequate representation. Absent class members are not

required to bear this burden. See Shutts, 472 U.S. at 810;

53a

Appendix B

Gonzales, 474 F.2d at 76 (“The [adequate representation

safeguard] would be subverted by requiring a class member

... to monitor the litigation . . . .”). They may rest secure in

the knowledge that they can attack the judgment in a

subsequent action if their due process rights are in fact

violated. “Due process of law would be violated for the

judgment in a class action suit to be res judicata to the absent

class members unless the court applying res judicata can

conclude that the class was adequately represented in the

first suit.” Gonzales, 474 F.2d at 74 (citing Hansbury v. Lee,

311 U.S. 32 (1940)) (emphasis added).’ Indeed, to permit

such a due process challenge to be definitively resolved in

the initial proceeding would effectively permit an initial court

to pronounce the preclusive effect of its own judgment. See

Matsushita, 116 S. Ct. at 888 (Ginsburg, J., concurring in

part and dissenting in part) (“A court conducting an action

cannot predetermine the res judicata effect of the judgment;

that effect can be tested only ina subsequent action.”) (citing

7B Charles A. Wright, Arthur R. Miller & Mary Kay Kane,

Federal Practice and Procedure § 1789, at 245 (2d ed.

1986)).

9. Matsushita offers yet another argument in its attempt to

foreclose us from making this assessment. It claims that, because

we are a federal tribunal, § 1738 forecloses us from reviewing the

adequacy of the representation afforded absent class members in a

state proceeding, even though another state court would be able to

hear the claim. The Supreme Court has rejected this argument. See

Kremer v. Chemical Construction Corp., 456 U.S. 461, 482 (1982)

(“A state may not grant preclusive effect in its own courts to a

constitutionally infirm judgment, and other state and federal courts

are not required to accord full faith and credit to such a judgment.”)

(emphasis added) (footnote omitted).

54a

Appendix B

In adopting Gonzales’ reasoning (and rejecting

Matsushita’s spin on it), we bring our circuit into line with

settled law that forecloses Matsushita’s intervene-or-be-

estopped theory. As the Court stated in Shutts, “an absent

class-action plaintiff is not required to do anything.” Shutts,

472 U.S. at 810. Rather, it is the prerogative of absentees to

remain just that: absent from a proceeding in which they are

“parties” only virtually, through their class representatives.

The “continuing solicitude for their rights” entitles absent

class members to refrain from intervening, “content in

knowing that there are safeguards provided for [their]

protection.” /d. at 810. By forcing an absent class member

to monitor a proceeding and intervene to challenge the

adequacy of representation that he is still in the process

of receiving would defeat the purpose of having such

safeguards. As Justice Ginsburg further made clear in her

separate opinion in Matsushita: “[An absent class member]

may avoid being bound either by appearing in the action

before rendition of the judgment or by attacking the judgment

by subsequent proceedings.” Matsushita, 112 S. Ct. at 888

(Ginsburg, J., concurring in part and dissenting in part) (first

emphasis in original, second emphasis added) (quoting

Restatement (Second) of Judgments § 41, Comment a,

p. 394); see also 18 Charles A. Wright, Arthur R. Miller &

Edward H. Cooper, Federal Practice and Procedure § 4455,

at 479 (1981) (“[Adequate representation] ordinarily is . . .

determin[ed] in defining any class that is certified. The

question remains open to redetermination in a subsequent

action, however, since nonparties can be bound only if some

party adequately represented their interests.”) (emphasis

added); Gonzales, 474 F.2d at 76 (absent class member has

no duty to monitor class action proceeding); cf. Martin v.

NAN a Cr Baie Stl le GB AL ie! aya

et a bE SA NOE sik be OOC elbOS:

55a

Appendix B

Wilks, 490 U.S. 755, 762-65 (failure to intervene did not

estop non-parties from suing parties to consent decree that

adversely affected their interests).

Matsushita attempts to avoid Shutts by arguing that

Kremer v. Chemical Constr. Corp., 456 U.S. 461 (1982)

prevents absentees from ever collaterally challenging

adequacy of representation when the forum state uses a

procedure like Delaware Chancery Court Rule 23. This

attempt gets Matsushita nowhere. We reiterate the

fundamental principle that Shutts established: absent class

members have a right to adequate representation “at all

times,” and they have no duty to intervene in the initial

proceeding in order to protect that right. Shutts, 472 U.S. at

812. There is nothing in Kremer to the contrary.

In Kremer, the Court reaffirmed the bedrock principle

that a judgment must satisfy the requirements of due process

in order to receive full faith and credit. In the specific case

before it, the Court held that a New York administrative

proceeding was entitled to full faith and credit because the

procedures it employed satisfied due process. Matsushita

argues that Kremer likewise limits absent class members to

a “procedures only” approach when they seek to challenge

adequacy of representation. It points to passages in Kremer

that ask whether the New York administrative proceeding

provided the “minimum procedural requirements” of due

process. Kremer, 461 U.S. at 481. It then argues that the

mere existence of Rule 23 satisfies the “minimum procedural

requirements” for protecting adequacy of representation.

56a

Appendix B

That being so, Matsushita concludes, Kremer never permits

a collateral challenge that alleges that absent class members

in fact received inadequate representation.

We categorically reject this simplistic application of

Kremer to the class action context. The Court fashioned

Kremer’s “procedures only” approach to apply to collateral

challenges of judgments in traditional litigation, where

individual parties are bound by virtue of their presence before

the court. Kremer was not a class action and did not address

the special due process problems of binding persons not

parties to the action. Shutts, in contrast, which was a class

action, held that absentees have a right to adequate

representation “at all times,” 472 U.S. at 812, and that they

need not intervene to enforce that right. No procedure can

reliably protect an absent plaintiff who does not in fact have

an adequate representative in court championing his cause.

The Court recognized this salutary principle in Hansbury v.

Lee, 311 U.S. 32 (1940), and it has never retreated from it.

See id. at 41-42 (“members of a class not present as parties

to the litigation may be bound by the judgment where they

are in fact adequately represented”) (emphasis added).

Nonetheless, Matsushita argues, the absent class

members in this case received notice, an opportunity to be

heard (at the objection hearing), and the right to opt out of

both the class action proceeding and the proposed settlement.

Surely, Matsushita complains, these protections fully

satisfied the “miniz1um procedural requirements” of Kremer,

and due process does not require anything more.

The Supreme Court, however, could not have been more

clear in requiring more. Indeed, if settled law defeats

A IE Nt tl al i a A a i 7

57a

Appendix B

Matsushita’s contention that absent class members have a

duty to intervene or be estopped from challenging the

adequacy of their representation, then this contention faces

a veritable fortress of authority. In Shutts, the Court echoed

the language of Kremer when it laid out the “minimum

procedural due process protection” due to absent class

members, including “adequate represent[ation]” “at all

times.” Shutts, 472 U.S. at 811-12. In addition to Shutts, the

case law is consistent that adequate representation in fact is

required to bind absent plaintiffs. See Richards v. Jefferson

Cty., 116 S. Ct. 1761, 1766 (1996); Matsushita, 116 S. Ct.

at 885 (Ginsburg, J., concurring in part and dissenting in

part); Hansbury, 311 U.S. at 41-43: Crawford v. Honig, 37

F.3d 485, 487 (9th Cir. 1994); Brown v. Ticor Title Ins. Co.,

982 F.2d 386, 390 (9th Cir. 1992); Class Plaintiffs v. City of

Seattle, 955 F.2d 1268, 1278 (9th Cir. 1992); In re Real

Estate Title and Settlement Services Antitrust Litig., 869 F.2d

760, 769 (3d. Cir. 1989); see also Restatement (Second) of

Judgments §§ 41 & 42 (1982); 18 Charles A. Wright, Arthur

R. Miller, and Edward H. Cooper, Federal Practice and

Procedure § 4455, at 477 (1981) (“Adequate representation

[in fact] is required to support preclusion by judgment in a

class action.”).

None of the cases cited by Matsushita offer support for

its position that absent class members who receive notice

and a chance to opt out of a settlement are foreclosed from

challenging adequacy of representation. Matsushita places

particular reliance upon two Ninth Circuit cases — Torrisi

v. Tucson Electric Power Co., 8 F.3d 1370 (9th Cir. 1993),

and Marshall vy. Holiday Magic, Inc., 550 F.2d 1173 (9th

Cir. 1977). Neither of these cases speak to the rights of absent

58a

Appendix B

class members, however; they involve challenges by persons

who represented themselves before the court in class action

proceedings.

Torrisi involved a direct appeal of a settlement judgment

by class members who chose to participate in the trial court

proceedings as objectors to the settlement, rather than resting

on their Shutts right to be represented as absentees. See

Torrisi, 8 F.3d at 1370, 1375 n.2 (9th Cir. 1993) (noting

that litigants filed objections, opposed settlement, and

“participated in the settlement hearing and argued against

approval of the settlement”). Thus, 7orrisi stands for the

unremarkable proposition that class members who choose

to protect their interests by intervening in she trial court

proceedings — instead of relying on the representation of

class counsel — are bound to the resulting judgment and

may not get a second bite at the apple by attacking it

collaterally. See also Matsushita, 116 S. Ct. at 888 (Ginsburg,

J., concurring in part and dissenting in part) (“[T]he

represented person may avoid being bound either by

appearing in the action before rendition of judgment or by

attacking the judgment by subsequent proceedings.”).

Torrisi does not discuss or even allude to the rights of

absent class members. Indeed, Torrisi does not even cite

Shutts, the leading authority on the due process rights of

absent class members. Faced with the task of explaining this

omission, Matsushita attempts to distinguish Shutts from

Torrisi on the ground that Shutts did not involve a settlement,

but rather an adjudication of a class action. Matsushita fails

to cite a single case in support of its argument that Shutts’

requirement of adequate representation “at all times,” Shutts,

Nesbit spades

59a

Appendix B

472 U.S. at 812, may be diluted in class settlement

proceedings. Nothing in Shutts suggests a “sub-class” of

settlement class actions in which class members are only

entitled to lesser due process protections, and we see no

principled basis for so limiting Shutts. Quite to the contrary,

Matsushita’s argument regarding settlement class actions was

rejected by the Supreme Court in Amchem Products v.

Windsor, 117 S. Ct. 2231 (1997).

In Amchem, the Court reviewed a settlement class action

certified by the Third Circuit in asbestos litigation. In the

course of its analysis, the Court held that the safeguards

designed for the protection of absent class members —

including adequate representation — “demand undiluted,

even heightened, attention in the settlement context.” /d. at

2248. As the Court explained, such heightened attention is

necessary because a court that certifies a class for the purpose

of settling claims rather than litigating them will “lack the

opportunity, present when a case is litigated, to adjust the

class, informed by the proceedings as they unfold.” Jd. at

2248. Moreover, to collapse absentees’ right of adequate

representation into their right to review and opt out of the

settlement would be to “substitute for Rule 23’s certification

criteria a standard never adopted — that if a settlement is

“fair,” then certification is proper.” Jd. at 2249. “Federal

courts ... lack authority” to make such a substitution. Jd.

See also Prezant, 656 A.2d at 924 (rejecting proposition that

notice and opt out rights, without adequate representation,

satisfy due process for settlement class actions). Matsushita’s

attempt to read into Torrisi a reduced standard of protection

for absentees in settlement class actions is foreclosed by

Amchem.

60a

Appendix B

Matsushita also cites Holiday Magic for the proposition

that notice and opt out rights may substitute for the right of

absent class members to adequate representation in a

settlement class action. Holiday Magic, however, is

inapposite for the same reason as Torrisi: it did not involve

absent class members. As did Torrisi, Holiday Magic

involved an appeal of a class settlement judgment by class

members who appeared in the trial proceedings — in this

case, as parties to the original action. See Holiday Magic,

550 F.2d at 1175 (“Appellants . . . filed as cross-plaintiffs

[below].”). In Holiday Magic, our court addressed and

rejected the merits of the appellants’ claim that they had been

inadequately represented. See id. at 1176-79. It then added

— in dictum, and over the objection of then-Judge Anthony

Kennedy — that it did not think that individuals who had an

opportunity to opt out of the settlement after receiving notice

of its terms should be allowed to “play the role of spoilers

for a class of more then 31,000 people” by challenging the

validity of the entire settlement on grounds of inadequate

representation. /d. at 1177; see also Holiday Magic, 550 F.2d

at 1179-80 (Kennedy, J., concurring) (agreeing that

representation was in fact adequate but rejecting suggestion

of majority that opt-out rights can substitute for adequate

representation). To the extent that the panel was concerned

by the prospect that an uncertified class member could

forcibly bind the entire class to the result of his own claim

of inadequate representation, we agree, and have held that

individual objectors may not bind anyone but themselves on

that issue. See supra, Section 1.B.2."°

10. In any event, Holiday Magic was superseded by Shutts,

which is now the controlling authority on the rights of absent class

(Cont'd)

6la

Appendix B

All the other cases that Matsushita cites in support of its

position suffer from similar problems. Many involve

individual litigation and do not speak at al) to the rights of

absent class members. See, e.g., Kremer, 456 U.S. at 461;

Durfee v. Duke, 375 U.S. 106 (1963); Osborn v. Ashland

Cty. Bd. of Alcohol, Drug Addiction & Mental Health Svcs.,

979 F.2d 1131 (6th Cir. 1993). Some are like Torrisi — class

actions in which the collateral attack was launched by class

members who appeared and represented themselves in the

initial action. See, e.g., Nottingham Partners v. Trans-Lux

Corp., 925 F.2d 29 (ist Cir. 1991); Sandler Assoc. v.

BellSouth Corp., 818 F. Supp. 695 (D. Del. 1993), aff'd, 26

F.3d 123 (3d Cir. 1994). And some are like Holiday Magic

— they pre-date Shutts, the controlling authority on the due

process rights of absent class members. See, e.g., Laskey v.

UAW, 638 F.2d 954 (6th Cir. 1981). None speaks

authoritatively to the rights of absent class members who

claim inadequate representation by their class fiduciaries.

In sum, neither caselaw nor common sense supports

Matsushita’s position that the mere existence of procedures

like Rule 23 can foreclose an absentee from receiving his

day in court on the issue of adequacy of representation.

Rather, the established practice of our circuit is exemplified

(Cont'd)

members. Tc the extent that Holiday Magic is inconsistent with

Shutts, we must, of course, follow the latter. See Catli v. Catli, 999

F.2d 1405, i408 n.5 (9th Cir. 1993) (“Although we must ordinarily

adhere to Ninth Circuit precedent, we may reexamine that precedent

without the convening of an en banc panel! where our precedent has

been nullified by a subsequent Supreme Court decision.”) (citation

omitted).

62a

Appendix B

by Brown v. Ticor Title. In that case, we entertained the

merits of a collateral challenge by absent class members to

adequacy of representation, stating unequivocally that “if

the plaintiff was not adequately represented in the prior action

or there was a denial of due process, then the prior decision

has no preclusive effect.” Brown v. Ticor Title Ins. Co. at

390 (citing Hansbury v. Lee, 311 U.S. 32 (1940)). Matsushita

simply cannot overcome the settled law that absent class

members need not do anything during the course of the

proceeding, “content in knowing that there are safeguards

provided for [their] protection,” including the requirement

that they be “adequately represented” “at all times.” Shutts,

472 U.S. at 811-12.

We now turn to the merits of the adequacy of

representation issue. Following the model provided by

Gonzales, we conduct a “two-pronged inquiry,” Gonzales,

474 F.2d at 72.'' First, we determine whether there was a

disabling conflict of interest between Delaware counsel and

the MCA shareholders who tendered their shares. Second,

we review the actual conduct of Delaware counsel in

11. In Brown v. Ticor Title Ins. Co., 982 F.2d 386 (9th Cir.

1992), our Circuit adopted Gonzales’ model for conducting an

analysis of adequacy of representation (although distinguishing

Gonzales’ result), with one additional requirement. We held that,

on collateral attack, “a party must show .. . that the opposing party

was on notice of facts making [the alleged inadequacy of the

representation] apparent.” /d. at 390-91. In this case, that requirement

is easily met, as Matsushita was on notice of all the information in

the record on which we base our analysis.

63a

Appendix B

discharging their fiduciary duty to protect the interests of

those shareholders. See id. at 72-77.

The essence of the Epstein plaintiffs’ position on the

claimed conflict of interest is that the Delaware settlement

was the product of a one-sided bargaining process because

their representatives went to the table with no credible

bargaining power. Not surprisingly, Matsushita makes no

serious attempt to challenge this position, relying almost

exclusively on their arguments as to why we cannot reach

the merits. See Appellees’ Br. at 41-44. It is axiomatic that a

plaintiff's power to negotiate a reasonable settlement derives

from the threat of going to trial with a credible chance of

winning. As the Supreme Court has said, permitting class-

action settlements in which class counsel are disabled from

litigating the case renders:

both class counsel and court . . . disarmed. Class

counsel confined to settlement negotiations could

not use the threat of litigation to press for a better

offer, see Coffee, Class Wars: The Dilemma of

the Mass Tort Class Action, 95 Colum. L.Rev.

1343, 1379-1380 (1995), and the court would have

to face a bargain proffered for its approval without

the benefit of adversarial investigation, see, e.g.,

Kamilewicz v. Bank of Boston Corp., 100 F.3d

1348, 1352 (C.A.7 1996) (Easterbrook, J.,

dissenting from denial of rehearing en banc)

(parties “may even put one over on the court, ina

staged performance”), cert. denied, 520 U.S. __,

117 S.Ct. [sic] 1569, 137 L.Ed.2d 714 (1997).

64a

Appendix B

Amchem, 117 S. Ct. at 2248-49 (1997) (per Ginsburg, J.);

see also Kamilewicz, 100 F.3d at 1352 (Easterbrook, J.,

joined by Posner, C.J., and Manion, Rovner, and Diane P.

Wood, JJ., dissenting from denial of rehearing en banc) (“The

lawyers support the settlement to get fees; the defendants

support it to evade liability; the court can’t vindicate the

class’s rights because the friendly presentation means that it

lacks essential information.”).”

The Delaware class plaintiffs and their counsel could

not carry out a threat to litigate the federal claims in this

case, and Matsushita knew it.

The inability of the class representatives to exercise any

leverage on behalf of the Epstein plaintiffs was the resuit of

three basic facts. First, they could not litigate the federal

claims because Congress has said that Exchange Act claims

may not be litigated in state courts. Thus, the claims that

Matsushita viclated SEC Rule 14d-10 by paying premiums

to Messrs. Wasserman and Sheinberg were not and could

not have been pleaded in the Delaware action. Moreover,

there was no discovery on those claims; indeed, the Delaware

plaintiffs probably were unable to conduct any discovery on

the federal claims because the facts relevant to those claims

had no apparent relevance to the subject matter of the state

law claim that the MCA directors had breached their fiduciary

duties in failing to maximize shareholder value upon a change

of corporate control. See Epstein I, 50 F.3d at 659; Del.

Chancery Court Rule 26(b)(1). Finally, Matsushita would

have had reason to discount the value of any settlement made

with the state plaintiffs against the risk that a state court

judgment releasing Exchange Act claims would not survive

ee FE Se eae tn att ane eee ee ee

65a

Appendix B

a collateral attack on the ground that the Delaware courts

had no jurisdiction to release exclusively federal claims

especially in light of the absence of any overlapping issues

of fact between the state and federal claims. See Epstein I,

50 F.3d at 662-65.'? Matsushita must have recognized that it

would subject itself to a substantial risk by settling the federal

claims in state court rather than federal court, and would

have had to discount its bottom line in the state settlement

negotiations accordingly. The denouement was predictable:

Matsushita used its infinitely superior bargaining power vis-

a-vis the state class representatives to settle the Exchange

Act claims at a rock bottom price."

12. We note that this additional factor, though instructive in

giving a full picture of the relative bargaining strength of the parties

in this case, is not necessary to our holding that Delaware counsel’s

representation of the Epstein plaintiffs was inadequate.

13. Indeed, it would not be an exaggeration to say that the

Delaware plaintiffs were kept in state court entirely at the sufferance

of Matsushita. As we discuss below, the Delaware Vice Chancellor,

in rejecting the first settlement, determined that the state law claims

were “extremely weak” and had “little or no value” because no such

State cause of action existed. See Jn re MCA Shareholders Litigation,

598 A.2d 687, 694 (Del. Ch. 1991); infra, Section II.B.2. Matsushita

could have, but did not move the Chancery Court to dismiss the

State action. Rather, it chose to use it as a vehicle for seeking an

inexpensive release of the federal claims. See also 18 Charles A.

Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice

and Procedure § 4470, at 526 (Supp. 1997) (“In approving the

settlement, the Delaware Vice Chancellor observed that the

defendants seemed more bent on escaping potential liability under

federal law than on avoiding state-law claims that the Vice

Chancellor had earlier characterized as extremely weak.”).

66a

Appendix B

Second, the class representatives not only lacked the

bargaining power that comes with a credible threat of going

to tria! and winning, they also lacked the ability to make a

credible threat that they could put Matsushita at risk by going

to trial on the state claims and proving facts material to the

federal claims that would be binding upon Matsushita

through issue preclusion. Because the state and federal claims

shared no common issues of material fact, a judgment on

the state claims could not be used as an “offensive” estoppel

in future litigation of the federal claims. See Epstein I, 50

F.3d at 665-55. While the Delaware class representatives

lacked the muscle to put Matsushita at risk on the federal

claims, the existence of their state class action, however

worthless standing alone, served to provide Matsushita with

an opportunity to try to get rid of the federal claims at a

bargain basement price. If the parties could get court approval

of a settlement that released the federal claims, Matsushita

would have at least a fair shot of using the judgment to block

the federal! action with a full faith and credit argument. That

is, of course, exactly what Matsushita did as soon as the

judgment became final. We had the Epstein plaintiffs’ appeal

of the district court’s summary judgment under submission

when Matsushita notified us of the Delaware settlement

judgment and argued that we should give it preclusive effect.

Third, Matsushita had a further bargaining advantage,

quite apart from its knowledge that the Delaware plaintiffs

could not put it at risk on the federal claims. Matsushita also

knew that class counsel had an extraordinary incentive to

settle and settle quickly because that was the only way they

could extract a fee out of the federal claims. Class counsel

could not benefit from the federal claims by going to trial

Sa Uist ected ss itl te DNAS RIAD be het aa a DORE Marebutwad

& E

67a

Appendix B

for the obvious reason that the federal claims could not be

litigated in state court. Moreover, the pendency of a parallel

action in federal court — the Epstein case -— meant that

Delaware class counsel were at risk of being “beaten to the

punch” and getting no return on the federal claims at all.

Matsushita knew that it was negotiating a release of the

federal claims with class counsel who could not liti gate those

claims and whose self-interest gave them an incentive to

settle and settle fast.

What all this demonstrates is <at there was a jarring

misalignment of interests between class counsel and

members of the federal class. It was plainly in the best interest

of counsel to settle the federal claims at any price. For them,

any settlement was better than no settlement because

settlement was the only way they could make any money on

the federal claims — indeed, given that the state claims were

essentially worthless, it was the only way that Delaware

counsel could get any compensation at all. Delaware counsel

were not, after all, serving as pro bono counsel to the MCA

shareholders who tendered their shares.

It was not, in contrast, in the best interest of the clients

— the MCA shareholders — to settle their Exchange Act

claims at any price. Their interest lay in settling those claims

for a sufficient amount to make it imprudent to take the risk

of litigation. That risk, of course, would have to be

realistically assessed in terms of the chances of prevailing

on either or both of their claims that Matsushita had violated

SEC Rules 10b-13 and 14d-10 in paying premiums to Messrs.

Wasserman and Sheinberg. Indeed, the misalignment of

interests and incentives between class counsel and their

68a

Appendix B

clients in these extraordinary circumstances was so great that

it is fair to say that counsel’s interests were more in line

with the interests of Matsushita than those of their clients.

This was not the adequate representation of absent class

members that due process requires “at all times.” Shutts, 472

U.S. at 812. As we have said, “An adequate representative

must. . . be free from economic interests that are antagonistic

to the interests of the class.” Larson v. Dumke, 900 F.2d

1363, 1367 (9th Cir. 1990). The interests of Delaware counsel

in this case were nothing but antagonistic to the interests of

the MCA shareholders who tendered their shares. As a result

of the three factors described above, which make this case

extraordinary on its facts, Delaware counsel’s overriding

economic interest lay in settling the federal claims at any

price and winning the race to judgment. The interests of the

MCA shareholders who tendered their shares, in contrast,

lay in pursuing those claims vigorously and either obtaining

a reasonable settlement or litigating the claims in federal

court. Their interests certainly did not lie in agreeing to a

settlement that gave the attorneys a $1,000,000 fee but

nothing for themselves — the settlement originally proposed

by Delaware counsel — nor in agreeing to a settlement of

2¢ per share, inclusive of attorneys’ fees — the settlement

Delaware counsel ultimately persuaded the Vice Chancellor

to approve. The inability of Delaware counsel to litigate the

federal claims, their further inability even to obtain a

judgment on the state law claims that could have had issue

preclusive effect on the federal claims, and the pendency of

a competing parallel class action in federal court caused the

economic interests of Delaware counsel to be fundamentally

“antagonistic to the interests” of the Epstein plaintiffs. Jd.

Fas Leaman

acl bites

69a

Appendix B

As we have previously said — and as pure common sense

dictates — “Adequate representation . . . depends on... an

absence of antagonism.” Brown v. Ticor Title Ins. Co., 982

F.2d 386, 390 (9th Cir. 1992). Here, there is no question

that there was antagonism between the interests of the

lawyers and the interests of their clients. That antagonism

made their representation of the MCA shareholders who

tendered their shares inadequate as a matter of law.

In addition to the argument that Delaware counsel had a

disabling conflict of interest, the Epstein plaintiffs contend

that the actual conduct of Delaware counsel in settling the

federal claims fell far short of the representation that due

process requires. Rather, they claim, Delaware counsel

completely failed to investigate or develop their federal

claims and basically “rolled over” during settlement

negotiations, ultimately entering into a settlement that was

essentially worthless except for their own fees. This course

of conduct, they conclude, falls well below the level of

representation that is required to bind absentees. We agree.

Adequate representation requires that counsel

“vigorously and tenaciously protect[ ] the interests of the

class.” Gonzales, 474 F.2d at 75. “Vigorous” and “tenacious”

proteciion requires, at a minimum, that counsel pursue their

clients’ claims, make a reasonable effort to assess the fair

settlement value of those claims, and pursue a settlement

that approximates that value, always taking into account the

ever-present risks of litigation. The inadequacy of Delaware

counsel’s representation is brought into sharp focus by their

70a

Appendix B

vigorous disparagement of the federal claims throughout the

course of the settlement proceedings. Indeed, Delaware

counsel’s representation of those claims surpassed

inadequacy and sank to the level of subversion. Counsel

consistently sought to convince, not only their clients, but

their adversaries and the Chancery Court itself that the federal

claims had no merit. They repeatedly and summarily

dismissed those claims as “frivolous” without ever

conducting any discovery or any meaningful analysis of the

legal issues, much less presenting the claims in a favorable

light. See SR 171-72. In sharp contrast, the Epstein counsel

earnestly pursued those same claims in federal court,

recognizing their merit and successfully demonstrating that

merit in persuading this court to reverse an adverse summary

judgment ruling below. This contrast makes it all the more

clear that Delaware counsel’s representation of the MCA

shareholders who tendered their shares fails even the most

minimal standards of adequacy.

]

Barely fifteen days after the Epstein counsel filed a class

action in federal court on the exclusively federal claims,

Delaware counsel negotiated the release of those claims. This

first Delaware settlement proposed to release all claims, state

and federal, arising out of the Matsushita~-MCA merger, in

exchange for $1 million in attorney fees, no monetary

compensation for shareholders, and an amended poison pill

provision of dubious value. See Epstein J, 50 F.3d at 660;

SR 75-76. In its notice to the class members regarding this

settlement, Delaware counsel explained that the plaintiffs in

the federal action alleged that Matsushita had violated SEC

red ay tty

71a

Appendix B

Rule 14d-10 by offering Wasserman different and more

valuable consideration for his shares than it offered to other

tendering shareholders.'* In recommending the settlement

of those claims, counsel told their clients that “the substantial

benefits the plaintiffs and the other members of the Class

can expect to receive by virtue of the Settlement” outwei ghed

“the risks, burdens and costs of continued litigation . . . [and

the] uncertainties relating to proof of the allegations

contained in the various actions.” SR 76. Counsel put no

flesh on this bare-bones analysis. In particular, they never

explained why litigation of the state law claims would put

the federal claims at “risk.” Moreover, the notice for the

settlement hearing offered no defense of the proposition that

the benefits of the settlement were “substantial” in relation

to the value of the federal claims it released. Rather, the

notice merely assured class members that counsel had

conducted “extensive investigation of the facts and

examination of the law involved,” SR 76, and had concluded

that the settlement was fair. It is hard to imagine what

Delaware counsel meant by an “extensive investigation,”

since the record shows no discovery at all on the facts

underlying the federal claims. Indeed, this lack of discovery

is hardly surprising. As discussed above, Delaware counsel

were probably disabled from developing the federal claims

through traditional discovery, since discovery in state court

was limited to matters relevant to the subject matter of the

State claims — that the MCA directors had violated their

fiduciary duty to attempt to secure a better deal than the one

14. At the time of the hearing on the first settlement proposal,

the Epstein plaintiffs had not yet pled the Sheinberg claim. They

did so some time after the Vice Chancellor rejected the first proposed

settlement.

72a

Appendix B

Matsushita offered the shareholders. See Del. Chancery Court

Rule 26(b)(1); supra, Section II.A.

Indeed, the record is clear that Delaware counsel had

not conducted an extensive investigation into the merits of

the federal claims in order to determine their fair settlement

value. Delaware counsel admitted to the Chancery Court that

they had reviewed the Wasserman claim “relatively quickly”

before concluding that the claim was “frivolous” and would

be “a waste of our time.” SR 171-72. In fact, in their cursory

review, Delaware counsel simply adopted two of the defenses

raised by Matsushita in federal court. First, Delaware counsel

took Matsushita’s position that claims under Rule 14d-10

should be limited to actions taken within a rigidly defined

“tender offer period.” SR 123-28; see also Epstein I, 50 F.3d

at 653-54. Matsushita had claimed that this “pure timing”

rule allowed it to give additional consideration to Wasserman

by timing the exchange of his stock to occur immediately

after Matsushita’s acceptance for payment of all other shares

tendered. See Epstein I, 50 F.3d at 653. Delaware counsel

accepted Matsushita’s “pure timing” rule uncritically and

used it to disparage the Wasserman claim. SR 123-28.

Second, Delaware counsel agreed with Matsushita’s

position that the Wasserman agreement did not violate Rule

14d-10 because Wasserman actually received “substantially

less than the cash consideration received by MCA’s other

stockholders.” SR 129. Once again, the record shows no

discovery activity at all. Instead, Delaware counsel simply

accepted at face value Matsushita’s position that “the

Wasserman deal was less valuable than that provided to the

other shareholders in the form of cash.” SR-185. Epstein

73a

Appendix B

counsel, in contrast, produced evidence and expert testimony

in arguing that Wasserman’s deal was structured in order to

confer upon him considerable tax benefits, and that the after-

tax value that Wasserman would receive was actually much

greater than the value of the tender offer to the average

shareholder. See Epstein I Appellants’ Br. at 15-16, 55.

Despite the best efforts of Delaware counsel to disparage

the Exchange Act claims of the absentees they were

“representing,” the Chancery Court rejected the first

settlement because the Wasserman claim had “significant

value” while the state law claims had “little or no merit.” Jn

re MCA Shareholders Litig., 598 A.2d at 690. On the merits

of the federal claim, the Chancery Court was far from

convinced that Delaware counsel’s pure timing rule

controlled: “This issue has not yet been definitively

addressed by the courts and therefore this [Rule 10b-13]

claim . . . clearly has arguable merit.” /d. at 695.'5 In addition,

the Chancery Court refused to accept Delaware counsel’s

uncritical account of the value of Wasserman’s deal:

“Although it is claimed that the value of the consideration

given to Wasserman had less value than the cash offered to

the other stockholders, the true economic value of the

Wasserman consideration is uncertain.” Jd at 695.'° In light

15. Matsushita offered no authority and not much reasoning

in support of this hypertechnical rule, while we offered reasons and

contrary authority for rejecting it in a five page analysis. See Epstein

I, 50 F.3d at 653-57.

16. In the summary judgment proceedings in federal district

court, Matsushita did not controvert the allegation in the Epstein

(Cont'd)

74a

Appendix B

of the “substantial merit” of the Wasserman claim, the court

held that it would be unfair to release all federal claims in a

settlement that offers “no real monetary benefit to the Class”

but awards the attorneys $1 million in fees. Jd. at 695-96.

The court dismissed the value of the revised poison pill

provision as “illusionary [sic].” Jd. at 696.

The record of the Delaware action shows no activity for

the ten months following April 25, 1991. The case lay

dormant until the district court in Los Angeles entered

summary judgment on February 10, 1992.'’ See SR 625.

During the same interval, Epstein counsel were vigorously

pursuing the federal claims, as demonstrated by over ten

pages of docket entries in district court. See SR 803-13. Eight

months later, Delaware counsel agreed to settle the

(Cont'd)

plaintiffs’ complaint that Wasserman’s consideration had a greater

per share value than that received by other shareholders. The Epstein

plaintiffs produced evidence on this issue, see Epstein J, 50 F.3d at

657 n.9, and we left the issue open for redetermination on remand,

see id. at 657.

17. Matsushita also exhibited a curious degree of inaction

during this period. Specifically, following the Chancery Court’s

determination that the state claims had “little or no merit,” Jn re

MCA, 598 A.2d at 690, Matsushita did not take the action that would

seem to have been most advisable and move the Chancery Court to

dismiss the claim. While we do not rest our holding in this case on

any finding that there was collusion between Matsushita and

Delaware counsel, we note the Chancery Court’s comment that

“suspicions abound.” /n re MCA Shareholders Litigation, 1993 WL

43024 (Del. Ch.) (Feb. 16, 1993), at *5.

75a

Appendix B

exclusively federal claims for the sum of $2 million — a

bare 2¢ a share, inclusive of attorney fees. See SR 352, 356.

In advocating the second settlement to the class and the Vice

Chancellor, Delaware counsel continued to disparage the

federal claims. They rested their disparagement primarily

on the position that the district court’s entry of summary

judgment was “dispositive as to [the federal claims’ ] lack of

substantial merit.” SR 460. They failed to point out, however,

that the Ninth Circuit affords no deference to a district court’s

decision on summary judgment, but reviews such

determinations de novo. See, e.g., Bagdadi v. Nazar, 84 F.3d

1194, 1197 (9th Cir. 1996). Nor did Delaware counsel make

any effort to assess the likelihood of reversal by the Ninth

Circuit. They merely reiterated Matsushita’s arguments in

an effort to convince the Chancery Court once again that the

federal claims were worthless. In fact, Delaware counse!

specifically urged the Chancery Court “not [to] delve into

the ultimate merits of [the federal] claims upon appeal as if

it were reviewing de novo the dismissal,” but instead that it

treat the district court’s decision as “dispositive.” SR 460.

Delaware counsel argued without explanation that it was

“doubtful” that the Ninth Circuit would reverse the district

court to hold either that there is a private right of action under

Rules 10b-13 and Rule 14d-10, or to reject Matsushita’s strict

timing rule. SR 461-64. They urged the Chancery Court to

give the dismissal of the federal claims “presumptive effect.”

SR 553. Counsel claimed to have “reviewed the law and...

reviewed the briefs and . . . looked at the findings of fact”"®

18. A district court does not, of course, make “findings of fact”

in ruling on a swamary judgment motion. F indings of fact are made

(Cont'd)

76a

Appendix B

in the federal action before determining that the federal

claims were “so fraught with uncertainty, that those claims

are so weak, that the record in that proceedings ... is so

horrendous, that the prospect of anything emerging from that

case is so remote, that $2 million more than adequately

compensates — much more than adequately compensates

for the release of all the federal and state claims.” SR 555-

56.'° Without citing any caselaw regarding private rights of

action under Rule 10b-13 or Rule 14d-10, Delaware counsel

reasoned that, as a general matter, the Supreme Court and

the Ninth Circuit had drastically narrowed the bases upon

which private rights will be implied under any statute. See

SR 461. Based on these generalizations and their reading of

Rule 10b-13 and the implementing statute of Rule 14d-10,

(Cont'd)

on the basis of evidentiary hearings and usually involve credibility

determinations, which explains why they are reviewed deferentially

under the clearly erroneous standard. See Fed. R. Civ. Proc. 52(a).

As we have said, summary judgments are reviewed de novo by the

Ninth Circuit.

19. Similarly, in their notice to the class members, Delaware

counsel used the sarne boilerplate language found in the first notice

of settlement, claiming that they had conducted “extensive

investigation of the facts and examination of applicable law,” and

that they recommended settlement “after considering (i) the

substantial monetary benefits that [class members] will receive

pursuant to the Settlement; ... [and] (iii) the attendant risks and

delays of continued litigation.” SR 353. Once again, counsel did

not identify the “risks” involved in litigating the state law claims,

nor did they explain why the benefits of settlement were

“substantial,” especially in relation to the value of the federal claims.

See supra, Section II.B.1.

————eEw

77a

Appendix B

counsel concluded that the “weight of authority” suggested

that neither Rule 10b-13 nor Rule 14d-10 authorizes a private

right, SR 461-62, and characterized the federal claims as

“lacking in substantial merit.” SR 546.

Counsel’s “analysis,” however, disregarded two cases,

from the Second and Third Circuits, that are square holdings

that there is a private right of action under Rule 14d-10. See

Polaroid Corp. v. Disney, 862 F.2d 987, 991, 997 (3d Cir.

1988); Field v. Trump, 850 F.2d 938, 946 (2d Cir. 1988).

Counsel’s failure to report these cases to class members and

to the Vice Chancellor is even more astonishing given that

they actually cited Field on the issue of the timing of the

Wasserman transaction. For counsel not to cite F ield on the

private right of action issue, or to cite Polaroid at all, is

inexcusable. Needless to say, Epstein counsel cited these

cases to us on appeal, see Epstein J Appellants’ Br. at 52-55,

and we followed them and brought the Ninth Circuit into

line with the Second and Third Circuits, finding that a private

right of action does exist under Rule 14d-10. See Epstein I,

50 F.3d at 652.

Delaware counsel also stated without explanation that

the Ninth Circuit was “unlikely” to overturn the district

court’s holding that the Wasserman transaction took place

after the expiration of the tender offer period, or that

Wasserman did not receive greater consideration for his

shares than the other MCA shareholders received. See SR

464-67. Once again, counsel declined to mention that we

would review the district court’s summary judgment rulings

de novo. As it did in the first settlement proceedings, counsel

accepted without question Matsushita’s self-serving

valuation of the Wasserman deal, stating in a conclusory

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Appendix B

fashion that the “lack of negotiability and relative risk” of

Wasserman’s preferred stock “more than sufficiently

outweigh whatever tax benefits Wasserman may have

derived.” SR 467. Without discussing whether the value of

the Wasserman consideration might present a genuine issue

of fact, counsel simply stated that the district court’s decision

regarding the timing and value of the Wasserman transaction

“would seem most unlikely to be overturned on appeal.” SR

465.

Finally, to cap off their disparagement of their clients’

Exchange Act claims, Delaware counsel asserted generally

that the federal claims should not stand in the way of

settlement because “damages on the federal claims are highly

uncertain.” SR 468. Counsel simply ignored the obvious:

that damages on the Sheinberg claim, at least, were both

easily calculable and uncontested. Matsushita paid Sheinberg

$21 million in addition to the $66 in cash per share of MCA

stock that it paid other shareholders. When divided by the

number of shares that Sheinberg tendered, this $21-million

payment would equal a premium of $17.80 per share. See

Epstein I, 50 F.3d at 657. Thus, a simple calculation of $17.80

multiplied by the total number of shares outstanding —

approximated as 78,000,000, see SR 556, 568-69 — would

yield damages of about $1.4 billion on a successful Sheinberg

claim. Even so, counsel stuck to its strategy of disparaging

the federal claims in their effort to get the Vice Chancellor

to approve the settlement that would produce them a fee.

In fact, there is not a single mention of the $21 million-

payment to Sheinberg in Delaware counsel’s memoranda or

arguments to the Chancery Court. See SR 458-70; SR 538-

63; 591-99. In their representations to the court concerning

79a

Appendix B

the pending federai action, Delaware counsel stated only that

the federal complaint “alleg{ed] that the arrangement

whereby defendant Wasserman exchanged his MCA stock

for preferred stock in the merged entity (1) violated SEC

Rule 10b-13. . . and (2) violated SEC Rule 14d-10.” SR 439-

40. They did not even mention the claim on the $21 million

payment that had been pleaded in the Epstein plaintiffs’

amended complaint.

It is clear, however, that Delaware counsel was aware

of the Sheinberg claim. Counsel described that claim, if only

briefly, in their notice to the class members as “a payment

to defendant Sheinberg, which defendants asserted was...

incentive compensation,” SR 346, but which plaintiffs

alleged was a “covert premium ... designed to induce

Sheinberg to tender his shares.” Epstein I, 50 F.3d at 657. In

contrast, Epstein counsel learned about the $21 million

payment and investigated it, questioning both Wasserman

and Sheinberg about it at their depositions. See Epstein TER

357, Ex. V:51-53 (deposition of Wasserman), Ex. W:193-

95 (deposition of Sheinberg). Their answers revealed that

no MCA board documents Prior to the date of the tender

offer referred to any such payment to Sheinberg. See id.2°

20. Matsushita and MCA have contended that Sheinberg was

entitled to incentive compensation for past services in the form of

stock options, but the Epstein plaintiffs discovered that the minutes

of MCA’s board meetings contained no reference to any such stock

options to Sheinberg prior to the time Matsushita made its tender

offer. The evidence that does exist shows the payment to Sheinberg

was to be made two days after Matsushita accepted the MCA shares

for payment and that Matsushita approved the agreement to make

the payment. See Epstein I, 50 F.3d at 65 7-59.

80a

Appendix B

Epstein counsel relied in part on this evidence to argue the

existence of a genuine issue of material fact and convince

this court to reverse the summary judgment on this claim.

See Epstein I, 950 F.3d at 658; Epstein J Appellants Br. at

32 (citing Wasserman and Sheinberg depositions conducted

by Delaware counsel). Yet, despite the $17.80 per share value

of the Sheinberg claim if a trier of fact were to find that the

$21 million was a premium paid to induce Sheinberg to

support the tender offer and not incentive compensation for

past services, Delaware counsel stood mute on the claim

while urging the Vice Chancellor to approve the settlement

of $2 million, or 2¢ per share, inclusive of attorneys fees.

Once again, the conduct of Delaware counsel in the

performance of their fiduciary duties was inexcusable.

In sum, the only “vigorous” and “tenacious” work,

Gonzales, 474 F.2d at 75, that Delaware counsel performed

on behalf of the Epstein plaintiffs was to convince the

Chancery Court to adopt their adversary’s position and view

the federal claims as essentially worthless. This was not

merely “inadequate” representation, it was hostile

representation that served the interests of counsel in getting

a fee, but did not serve the interests of the MCA shareholders

in getting a settlement based upon a thorough and fair

assessment of their Exchange Act claims. To bind the

Epstein plaintiffs to the Delaware judgment under these

circumstances would viv.ate their due process right to have

their interests adequately represented at all times.

Ill

The Epstein plaintiffs also contend that we may withhold

full faith and credit from the Delaware judgment because

8la

Appendix B

the Vice Chancellor did not adequately supervise the

settlement proceedings. They argue that adequacy of judicial

Supervision is intricately bound up with adequacy of

representation and, hence, that it rises to the level of a due

process requirement. See Appellants’ Br. at 31-37. In effect,

they argue that we should add adequacy of judicial

supervision to the four safeguards that Shutts guarantees to

absent class members.

The Epstein plaintiffs cite no authority for their

argument, however. They merely point us to various cases,

including Epstein J, that have spoken in general terms about

the importance of the court’s role in supervising a class action

proceeding. See Epstein I, 50 F.3d at 667; In re General

Motors Pick-Up Fuel Tank Prod. Liab. Litigation, 55 F.3d

768, 805 (3d Cir.), cert. denied, 116 S. Ct. 88 (1995)

(describing “fiduciary responsibility” of courts in class

actions); Prezant, 636 A.2d at 921 (stressing “fiduciary

nature of the class action”). Because we hold that the absent

class members were denied due process because of

inadequate representation, we need not reach this novel

constitutional question.

CONCLUSION

Our decision that the Delaware judgment deprived the

Epstein plaintiffs of their due Process rights to adequate

representation is the product of an extraordinary set of

circumstances. Delaware counsel suffered from a conflict

of interest: they could not litigate the Exchange Act claims

of the absent class members, could not extinguish those

claims by the issue preclusive effect of a judgment based

82a

Appendix B

upon the state claims, and were in competition with a parallel

class action in federal court which threatened to destroy their

chances of securing a fee. Not surprisingly, their conduct in

the Delaware action reflected this disabling conflict.

Delaware counsel disparaged the Exchange Act claims of

their own clients at every turn — to the clients themselves,

to their adversaries, and even to the Chancery Court.

These extraordinary circumstances provide a sufficient

answer to Matsushita’s concern that our decision will pose a

grave threat to the finality of class action judgments. The

reality of the matter is that it is the rare exception for

representation in a class action even to approach the point

where an absentee will have a colorable claim for inadequacy.

The small handful of cases that have come to our attention

in which absentees have successfully challenged adequacy

of representation bears this observation out. The paucity of

such cases is to be expected. With rare exceptions, trial judges

do their jobs and certify class representatives capable of

representing the interests of absent class members. And,

again with rare exceptions, the class representatives

(including their counsel) faithfully discharge their fiduciary

duties to the class. This case presents one of those rare

exceptions.

We REVERSE the judgment and REMAND for

proceedings consistent with Parts I, II, III, V & VI of Epstein

83a

Appendix B

Epstein v. MCA, Inc., No. 92-55675

O’SCANNLAIN, Circuit Judge, dissenting:

Because | wholeheartedly agree with the Supreme

Court’s determination that the adequacy of representation

issue was fully and fairly litigated and necessarily decided

in the Delaware courts, I must respectfully dissent from the

opinion this court announces today. In fashioning its own

version of the events as they unfolded before the Delaware

courts, the majority posits that the plaintiffs’ adequacy claims

were neither “actually litigated” before the Chancery Court

nor “finally decided” by that court. With all deference, |

believe that the undisputed facts tell a different story.

The argument urged upon us by the Epstein plaintiffs

certainly engenders Sympathy and has some force.

Irrespective of whether the Delaware attorneys’ conduct in

the state court rose to the level of constitutional deprivation,

their act of referring, in a single breath, to their own clients’

Claims as “fraught with uncertainty,” “weak,” and

“horrendous” Suggests less than dynamic advocacy.

Regrettably, however, and unlike my colleagues, I do not

believe that we are in a position to pass judgment on the

merits of this appeal. The very issue presented to our court

for decision today — whether or not the Epstein plaintiffs

received constitutionally adequate representation in the

Delaware courts — has been fully and fairly liti gated before

a state court of competent jurisdiction and finally decided

by that court. Consequently, under the Full F aith and Credit

Act, 28 U.S.C. § 1738, and the policies of federalism, comity,

and finality that give it life, our court is not, in my mind,

free simply to revisit the issue.

84a

Appendix B

I do agree with my colleagues that the Supreme Court

did not conclusively resolve the due process issue before it

remanded the case to us. Indeed, as our court’s opinion points

out, the Supreme Court specifically disclaimed any interest

in resolving the merits of the inadequacy claim. See

Matsushita Elec. Indus. Co. v. Epstein, 116 S. Ct. 873, 880

n.5 (1996). However, the fact that the Supreme Court chose

not to reach the due process challenge does not inexorably

lead to the conclusion that this court may decide the issue.

Quite the contrary, after reviewing the record, the Supreme

Court concluded — in three separate passages and in no

uncertain terms — that the Delaware courts had already

conclusively resolved the due process issue. First, in Part I,

in which it described the procedural posture of the case, the

Court stated, rather matter-of-factly, that “[a]fter argument

from several objectors, the [Chancery] Court found the clas$

representation adequate ....” Id. at 876 (emphasis added).

Several pages later, the Court reiterated its conclusion: citing

the decisions of the Delaware courts approving the second

MCA settlement, the Supreme Court specifically found that

the Chancery Court, in accordance with Delaware Court of

Chancery Rule 23, had “determined that the plaintiffs [,] . . .

as representatives of the Settlement Class, have fairly and

adequately protected the interests of the Settlement Class.”

Id. at 880 (quoting Order and Final Judgment at 2, Jn re

MCA, Inc. Shareholders Litig., C.A. No. 11740, 1993 WL

43024 (Del. Ch. Feb. 22, 1993)) (internal quotation marks

omitted) (emphasis added). Finally, in its now famous

footnote five, the Court expressed its skepticism at plaintiffs’

decision even to press the due process issue “in spite of the

Chancery Court's express ruling, following argument on the

issue, that the class representatives fairly and adequately

85a

Appendix B

protected the interests of the class.” Jd. at 880 n.5 (emphasis

added).

Consequently, it is scarcely debatable that in the eyes

of the Supreme Court, the Epstein plaintiffs’ due process

challenge was presented to and rejected by the Delaware state

courts. The trouble, I suppose, is that the majority and the

Supreme Court do not share the same vision.

In support of its “no-actual-litigation” argument, the

majority first complains that, despite the fact that the form

of notice sent to class members explicitly provided the rights

to opt out and to object,' that notice “said nothing about

adequacy of representation.” Slip Op. at 11. Of course, the

first, most obvious, and most decisive response to the

majority’s complaint is that the doctrine of collateral estoppel

simply does not demand that an issue be actually noticed for

argument, only that it be actually litigated at argument. See.

e.g., Messick v. Star Enter., 655 A.2d 1209, 1211 (Del. 1995)

(“The test for applying collateral estoppel requires that (1) a

question of fact essential to the judgment, (2) be litigated

and (3) determined (4) by a valid and final judgment.”

(quoting Taylor v. State, 402 A.2d 373, 375 (Del. 1979))).

Secondly, even if lack of notice were somehow independently

1. A number of the class plaintiffs exercised their procedural

rights pursuant to the notice: eighteen shareholders opted out of the

class, and three class members appeared in the Delaware Chancery

Court to object to the settlement. See In ve MCA, Inc. Shareholders

Litig., Civ. A. No. 11740, 1993 WL 43204, at *3 (Del. Ch. Feb. 16,

1993).

86a

Appendix B

relevant to a proper collateral estoppel analysis, the court’s

no-notice argument fails to account for the fact that the form

of notice mailed to each of the class members detailed the

precise terms of the settlement. The very terms of that

settlement — so pungently characterized by the majority as

“a bare 2¢ a share, inclusive of attorneys’ fees” and a release

of all claims, state and federal — are prima facie evidence

that something was amiss. See Slip Op. at 46. That fact —

that the settlement on its face raises eyebrows — was no

less true on October 27, 1992, when the notice was mailed,

than our court finds it today. Consequently, the Epstein

plaintiffs “were not forced into a position of having to predict

whether their interests would be adequately represented.

They could determine whether there had been adequate

representation of their interests by reviewing the terms of

the settlement.” Marshall v. Holiday Magic, Inc., 550 F.2d

1173, 1177 (9th Cir. 1977); accord In re Four Seasons Sec.

Laws Litig., 502 F.2d 834, 843 (10th Cir. 1974). They knew

that they could object in the Delaware courts to the

settlement, and, by implication, to the representation that

had produced the settlement; they simply declined to do so.’

Closer to the heart of the appropriate collateral estoppel

standard, the court claims — inexplicably, in my view —

that the objectors who did elect to appear at the settlement

hearing did not “actually litigate” the adequacy of their

representation. To the contrary, one of the objectors, William

2. I might add that the Epstein plaintiffs’ counsel’s candid

admission to the Supreme Court that his clients stayed out of the

Delaware proceedings for purely strategic reasons, see infra pages

10 - 11, is conclusive proof that any perceived notice failure was

illusory.

87a

Appendix B

Krupman, explicitly stated (as the majority itself

acknowledges) that he opposed the settlement because “the

purported class representatives. . . had proposed a settlement

that benefitted no one but their own attorneys. They did not

provide adequate representation to the class.” Affidavit of

William A. Krupman at 2 - 3, Jn re MCA, Inc. Shareholders

Litig., Civ. A. No. 11740, 1993 WL 43024 (Del. Ch. Feb.

16, 1993) (emphasis added). The majority attempts to cushion

the blow of Mr. Krupman’s explicit statement by accusing it

of “conflating the non-constitutional question of the fairness

of the settlement with the constitutional question of the

adequacy of representation.” Slip Op. at 12. Its criticism,

however, rings particularly hollow for one salient reason,

alluded to briefly above: the court’s own conclusion of

inadequacy rests substantially on precisely the same logic,

namely, that, under the terms of the settlement, the Delaware

plaintiffs’ attorneys who profited so well did so at the

expense of their class-member clients. See generally Slip

Op. at 37 - 52.

The majority dismisses the arguments of another of the

objectors, Pamela Minton de Ruiz, out of hand because she

failed to use the magic word “inadequacy.” Rather, the court

notes, Minton de Ruiz “framed her objection in terms of

collusion.” Slip Op. at 12 (emphasis added). The court simply

brushes Minton de Ruiz’s objection aside because, it

complains, she did not “focus[ ] on the much broader issue

of whether representation was constitutionally adequate.”

Slip Op. at 12. Formalistic labels and logic games? aside,

3. The majority would have us read Minton de Ruiz’s objection

as if it belonged in a Venn diagram: “All collusion is inadequacy;

some inadequacy is collusion... .”

88a

Appendix B

however, it appears that the court has either failed to

recognize for itself or failed to admit to itself that the Epstein

plaintiffs bottom their inadequacy of representation argument

on virtually the identical factual predicate upon which

Mi. iton de Ruiz based her “collusion” objection. For instance,

the Delaware Chancery Court characterized Minton de Ruiz’s

argument in the following terms:

She argues . . . that the Delaware plaintiffs have

colluded with the defendants to settle this action

and dispose of the supposedly meritorious federal

claims in exchange for an award of attorneys’ fees

and a de minimis benefit to the class.

In re MCA, Inc. Shareholders Litig., Civ. A. No. 11740, 1993

WL 43024, at *3 (Del. Ch. Feb. 16, 1993). When one

compares Minton de Ruiz’s contention with one of the

plaintiffs’ central arguments from their opening brief in this

appeal, the perceived distinction between “inadequacy of

representation” and “collusion” quickly begins to fade:

Delaware counsel — paid only on a contingency

basis — had no incentive other than to

“compromise " other litigants’ substantial federal

claims. Counsel knew that, if they settled the

federal claim they would get paid; if they

attempted to litigate, they would get nothing. Such

a one-sided incentive structure is surely a

constitutionally disabling conflict of interest... .

Appellants’ Opening Brief at 27 (emphasis in original). And

once one recognizes that even this court’s own inadequacy

89a

Appendix B

holding invokes the very same attorney-client antagonism,

the majority’s effort to obscure substantive identity in

semantic minutiae is laid bare:

Matsushita ... knew that class counsel had an

extraordinary incentive to settle and settle quickly

because that was the only way they could extract

a fee out of the federal claims.

... Indeed, the misalignment of interests and

incentives between class counsel and their clients

in these circumstances was so great that it is fair

to say that counsel’s interests were more in line

with the interests of Matsushita than those of their

clients.

Slip Op. at 37 - 38 (emphasis in original). In sum, try as it

may to “label aw

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