# Appendix — Epstein v. Matsushita Electric Industrial Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_0004%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1999 - **Citation:** 528 U.S. 1004 ## Text ~~ Supreme Court, US ee FILED “/ @8 417 sep 031999 No. — Sa IN THE Supreme Court of the United States LAWRENCE EPSTEIN, et al., Petitioners, V. 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 la 32a 96a teeta Se ee la 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Petition for Rehearing Granted June 8, 1998 Reargued and Resubmitted August 21, 1998—San Francisco, California Opinion Withdrawn June 7, 1999 Filed June 7, 1999 Before: Charles E. Wiggins, Diarmuid F. O’Scannlain, and Sidney R. Thomas, Circuit Judges. 2a Appendix A Opinion by Judge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 3a 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. ee a we —eearvmyHeoeooeeoereree eee ee Sa 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- 6a Appendix A gued. We now withdraw our previous opinion, Epstein I], and substitute this opinion for it in all respects. I 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 Ta 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. 8a Appendix A II and consider anew whether the Epstein appellants are bound by the Delaware judgment. I] 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. A [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 9a 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. B [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). C 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.* A 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. B 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. C 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 IV 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. II 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 (c) those who received spin-off shares. In addition, there were 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 IV 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. I 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. A 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. 4 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). B 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. 1 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).° 2 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. Cc 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). 2 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. II 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. A 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 x 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