Reply Brief — Ross v. Bernhard

4 TABLE OF CONTENTS

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PAGE

z

{—A corporation’s legal cause of action is tri: ble to

) a jury whether it is asserted by the corporation

itself or by a stockholder derivatively on its behalf 1

The underlying causes of action of the Corpora-

. tion are legal claims triable by jury .............. 7

TasLe or CasEs

Beacon Theatres v. Westover, 359 U.S. 500 (1959) .... s

Brown v. Bullock, 294 F. 2d 415 (2 Cir. 1961) ...... 9

Cates v. Allen, 149 U.S. 451 (1893) ............... 5

Curriden v. Middleman, 232 U.S. 633 (1914) ........ 10

Dairy Queen v. Wood, 369 U.S. 469 (1962) ...... 8, 9, 10, 11

DePinto v. Provident Security Life Ins. Co., 323 F. 2d

826 (9 Cir. 1963), cert. den. 376 U.S. 950 ...... eo

Dodge v. Woolsey, 59 U.S. (18 How.) 331 (1855) .... 5

Fanchon & Marco v. Paramount Pictures, 202 F. 2d

ns canadaknéeG6sedsse0eu been ase 6

Fleitmann v. Welsbach Street Lighting Co., 240 US.

Ce sicdscnascastesdesvaciassenes aé 1, 2, 3, 4,5

Gomberg v. Midvale Co., 157 F. Supp. 132 (E.D. Pa.

TE Ruthk dns dengnddedbks cednsedas sss 7

Goodrich Co., B. F. v. Naples, 121 F. Supp. 345 (S.D.

SE siuvecasRasddddddtdedusdadnsuneess 9

Gottfried v. Gottfried, 269 App. Div. 413, 56 N.Y.S. 2d

Miche hensaknecans scbenesasheeeeéca 9

Belpern v. Pennsylvania R. Co., 189 F. Supp. 494

ERE a 6

_ Hawes v. Oakland, 104 U.S. 450 (1882) ............. 5, 6

‘Hazard v. Wight, 201 N.Y. 399, 94 N.E. 855 (1911) 89

RED RR herr ema acranepe =

‘Save:

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Supreme Court of the United States

October Term, 1968

No. 992

.

me 3

Howarp Ross and Bexxarp Ross, as Trustees for

Lexa Rosensaum,

Petitioners,

—_—vV =

Roserer A. Berwnann, ef al.,

Respondents,

and

Pavut L. Davies, et al.,

Defendants.

»™

7

REPLY BRIEF FOR PETITIONERS

L

A corporation’s legal cause of action is triable

to a jury whether it is asserted by the corpora-

tion itself or by a stockholder derivatively on

its behalf.

The nub of respondents’ argument, and of the decision

below, is that a corporation’s legal claim, triable by jury,

is transmuted into an equitable cause when a stockholder

asserts it derivatively on behalf of the corporation. The

proposition, we submit, is contrary to reason and controlling

precedent.

1. Fleitmann v. Welsbach Street Lighting Co., 240 Us

27 (1916), was a stockholder’s derivative action for trebh

damages under the antitrust laws. The Court noted that

“‘the claim set up is that of the corporation alone;” jf

asserted by the corporation, it would be at law and triable

to a jury (p. 28). This raised the question of whether “the

defendants’ right to a jury trial should be taken away”

just because a stockholder, unable to induce action by his

corporation, brought the suit derivatively on its behalf

The Court, by Mr. Justice Holmes, answered the ques.

tion in the negative. The damage claim was at law. It did

not lose its legal nature through assertion in a derivative

suit. The derivative suit did not transmute the legal into

an equitable claim. The right to jury trial remained intact

and inviolate.

Under then existing procedure, this conclusion was fatal

to the plaintiff. In 1916 law and equity were separate.

Fleitmann had brought his suit on the equity side of the

district court. Equity alone gave him standing to sue on

behalf of the corporation. But an equity court could not

conduct a jury trial. The complaint thus had to be dis

missed.

So far as Fleitmann dealt with the jury issue, it controls

the present case. Here, as in Fleitmann, a stockholder as-

serts his corporation’s legal claims derivatively on its

behalf. Here, as in Fleitmann, the claims, no matter how

asserted, remain what they are, claims at law belonging to

the corporation. Here, as in Fleitmann, the derivative

action does not impair the parties’ right to jury trial of

the legal claims.

What has changed since the days of Fleitmann are the

consequences flowing from this state of affairs. Law

and equity have been merged by the adoption of the Federal

Rules in 1938. The same court can now administer legal

and equitable relief in the same case. The equitable issues

are tried by the court, the legal issues by a jury. Under

its equity powers, the court determines, without a jury,

whether the complaining stockholder has the requisite stand-

ing to sue derivatively on behalf of the corporation. In the

same suit, however, the court can try the corporation’s

legal cause of action to a jury. No more room, therefore,

is left today for a dismissal such as was necessary in the

pre-merger era of Fleitmann. The right to jury trial,

recognized by this Court in Fleitmann, can now be given

full scope and effect.

9. The decision below misconceived the impact of

Fleitmann. The majority of the court read the case as

holding that ‘‘there could be no right to a jury trial in the

equitable derivative action’? (A67). The opinion over-

looked that Fleitmann sustained the right to jury trial; it

merely held that an equity court could not administer it.

This obstacle has disappeared under the Federal Rules.

The majority below also sought to distinguish Fleitmann

as relating ‘‘only to the statutory right to jury trial created

by the Sherman Act’’ (A68; emphasis by the court). The

attempted distinction between the constitutional and the

statutory jury right rests on several erroneous premises.

In the first place, the antitrust laws create no right to

jury trial. In fact, neither the Sherman Act nor the Clayton

Act so much as mentions trial by jury. The two Acts do

create the right to treble damages; but it is the Seventh

Amendment to the Constitution which provides for the

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trial of the claim by jury. 5 Moore’s Fed. Pr. § 38.11[5] at

113-14 (2d Ed. 1968).*

Secondly. even if the right to jury trial of treble

claims had a statutory basis, it is difficult to see why the

statutory right should enjoy greater sanctity than the Con.

stitutional right to a jury. If a statutory jury right sur.

vives in a derivative suit, the jury right created by the

Coustitution cannot be more fragile.

Finally, if the Sherman and Clayton Acts were thought

to imply a statutory right to jury trial, the same must be

said of the Investment Company Act, under which the

present action is brought (A20). Section 44 of that Act,

15 USC § 80a-43, expressly provides for ‘actions at lay

brought to enforce any liability or duty created by”? the

Act. If the statutory basis of the jury right be relevant

at all, the Investment Company Act provides that basis

no less than the Sherman and Clayton Acts.**

We submit, therefore, that Fleitmann cannnot be dis.

tinguished from the present case. It clearly establishes

petitioners’ right to a jury trial of the underlying cor-

porate claim.

* See Leimer v. Woods, 196 F. 2d 828, 834 (8 Cir. 1952): The

right to jury trial of double damage claims under the Emergency

Price Control Act falls within the jury trial guaranty of the Sev-

enth Amendment.

** The majority below refused to consider this argument in the

belief that it had not been raised in the district court and that the

record was insufficient to enable the court to address the issue (A68,

n. 1). In fact, however, petitioners had raised the same argument

in their district court brief of August 25, 1967 (p. 7). Moreover,

since petitioners had prevailed in the district court, they were free

to advance any arguments, even new ones, to sustain that court's

decision; Letulle v. Scofield, 308 U.S. 415, 421, at n. 8 (1940).

Finally, it is obscure in what respects the record below is supposed

to have been insufficient ; the effect of § 44 of the Investment Com-

pany Act is a pure question of law.

—

5

3” Respondents maintain (Br. 10-11) that the two ele-

ments of a derivative suit—the corporation’s cause of ac-

tion and the stockholder’s right to assert it—-were never

deemed to be separate for jury trial purposes. Prior to

1938, they say, legal and equitable claims could not be

joined in one equity action; Scott v. Neely, 140 U.S. 106

(1891) ; Cates v. Allen, 149 U.S. 451 (1893). Yet the fed-

eral courts did accept jurisdiction of derivative suits. It

follows, according to respondents, that this Court must

have rejected the notion that derivative suits can involve

separate legal and equitable rights.

Respondents’ syllogism is faulty. In the two decisions

of this Court which they cite—Dodge v. Woolsey, 59 US.

(18 How.) 331 (1855), and Hawes Vv. Oakland, 104 U.S. 400

(1882)—the underlying claims, seeking an injunction, were

equitable, so that the problem of combining legal with

equitable claims in a single derivative suit did not arise.

The one case in which the problem did arise was Flettmann;

and there the Court did bar the assertion of a legal claim

as incompatible with the equitable character of a deriva-

tive suit.

In this context, Mr. Justice Holmes addressed himself

to the very point which respondents raise here: If a cor-

poration’s legal claim could not be asserted in an equity

suit such as a stockholder’s action, how could the federal

courts ever accept jurisdiction of derivative suits? The

answer was simple. In other derivative cases, the under-

lying corporate claim had been equitable; or, if it was

legal, the defendants had not insisted on their jury rights.

As stated by Justice Holmes ( Fleitmann, 240 U.S. at 28-29) :

‘‘No doubt there are cases in which the [equit-

able] nature of the right asserted for the company,

we

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or the failure of the defendants concerned to jp.

sist upon their [jury] rights, or a different stat

system, has led to the whole matter being dispose

of in equity; * * *’’ [Parenthetical interpolations

added]

In short, for purposes of determining the right to jury

trial, it was well settled even before 1938 that the corpors-

tion’s underlying claim presented issues wholly separate

from those pertaining to the stockholder’s standing. In.

deed, the recognition of the dual nature of the derivative

suit has its root in Hawes v. Oakland, 104 U.S. 450, 452-53

(1882), where the Court viewed the stockholder’s derivative

action as combining ‘‘two causes of action’’:

‘fone against his own company, of which he is a

corporator, for refusing to do what he has requested

them to do; and the other against the party which

contests the matter in controversy with that cor.

poration.’’

Accord: Ballantine, Corporations, § 145 at 343-44 (Rev. Ed.

1946) ; 13 Fletcher, Corporations, § 5946 at 429 (M. Wolf

Ed. 1961) (both with numerous citations) ; Halpern v. Penn.

sylvania R. Co., 189 F. Supp. 494, 498 (E.D.N.Y. 1960);

Riviera Congress Associates v. Yassky, 18 N.Y. 2d 540, 541,

277 N.Y.S. 2d 386, 392, 223 N.E. 2d 876 (1966).

The adoption of the Federal Rules in 1938 has not changed

the dual nature of the derivative suit; but it has eliminated

the procedural impediments to jury trial of the legal issues

involved in such an action. The leading case on the subject,

Fanchon & Marco v. Paramount Pictures, 202 F. 2d 731, 735

(2 Cir. 1953), so held; and it has been consistently followed

by later decisions. Rogers v. American Can Co., 305 F. 2d

—

7

997, 307-8 (3 Cir. 1962) ; Ramsburg v. American Investment

Co., 231 F. 2d 333, 339 (7 Cir. 1956) ; DePinto v. Provident

Security Life Ins. Co., 393 F. 2d 826, 836-37 (9 Cir. 1963),

cert. den. 376 U.S. 950; Schechtman v. Wolfson, 244 F. 2d

537, 589 (2 Cir. 1957); Kogan v. Schenley Industries, 20

FR.D. 4 (D. Del. 1956) ; Gomberg v. Midvale Co., 157 F.

Supp. 182, 140-41 (E.D. Pa. 1955).

We submit that petitioners’ right to trial by jury of the

corporation’s cause of action is not to be denied just be-

cause the claim is asserted in a stockholders’ derivative

action.

Il.

The underlying causes of action of the corporation

are legal claims triable by jury.

The District Court held that this action, viewed as one

brought by the Corporation, is ‘‘a suit at common law”’

within the meaning of the Seventh Amendment (A46-48).

The majority of the Court of Appeals did not reach the

question (A64), but the dissenting Judge agreed with the

District Court that the action is at law because it is ‘‘for

a money judgment for unlawful conversicn, breach of

fiduciary duty, fraud and gross negligence’’ (A72-73).

Respondents contend that an action against corporate

directors for breach of fiduciary duty cannot be brought at

law and that, in any event, the complexity of this action

would force it into equity.

1. Contrary to respondents’ assertion, damage claims

for breaches of duty by corporate directors are tradition-

ally at law, unless the legal remedy is inadequate. In

SIE aE DEAE STOLE EGER OES REE

8

Hazard v. Wight, 201 N.Y. 399, 94 N.E. 855 (1911), the

defendant president and director caused his corporation t)

pay him pari of its capital. The court held (201 NY. at

402):

‘‘The defendant thereby violated the statute [cita-

tion] and the principles of the common law and

became liable in an action at law to the corporation

for wasting its assets.’’

Accord, e.g., DePinto v. Provident Security Tife Ins. Co,

323 F. 2d 826, 836-37 (9 Cir. 1963), cert. den. 376 U.S, 95

(1964); Kelly v. Dolan, 233 Fed. 635, 637 (3 Cir. 1916);

O’Brien v. Fitegerald, 143 N.Y. 377, 380-81, 38 NE. 311

(1894) ; Potter v. Walker, 276 N.Y. 15, 26, 11 N.E. 2d 3%,

337 (1937); Kocon v. Cordeiro, 98 R.I. 772, 200 A. 2d 708,

710-11 (1964) ; Minister L. & 8S. Co. v Laufersweler, 37 Ohic

App. 375, 36 N.E. 2d 895 (1940).

The present action alleges a claim for damages. The legal

remedy is adequate. In light of the discovery procedures

of the Federal Rules, neither an equitable discovery nor an

equitable accounting is necessary. The prayer of the com-

plaint for an accounting may be ignored. Dairy Queen v.

W 00d, 369 U.S. 469, 477-78 and n. 19 (1962) ; Beacon Theatres

v. Westover, 359 U.S. 500, 509-10 (1959).

2. Respondents suggest (Br. 16) that an action at law lies

only for negligent (as distinguished from willful) fiduciary

breaches. The present complaint does allege negligence

(A26). The scope of the action at law is not, however,

limited to negligence. The notion that a jury may find a fidu-

ciary to be negligent but must bow out if it finds a higher

degree of fault defies both reason and authority. In Schine

v. Schine, 367 F. 2d 685 (2 Cir. 1966)—a case invoked by

a

-

respondents—the second count of the complaint sought

damages for the fraud of the defendant fiduciaries; the

court held that the claim was at law and triable by jury.*

Willful conversion, such as is here alleged (A26), is like-

wise a familiar area of jury competence, United States v.

Bitter Root Dev. Co., 200 U.S. 451, 472 (1906). A fiduciary

chargeable with conversion, see Brown v. Bullock, 294 F. 2d

445, 420 (2 Cir. 1961), cannot sidestep a jury just because

he is a fiduciary. This is equally true of a claim for waste

of corporate assets ; Hazard v. Wight, supra, 201 N.Y. 399,

402, 94 N.E. 855.

3. Respondents’ liability for the profits they derived

from their breaches of duty is likewise cognizable at law. Al-

though claims of that character have often been entertained

in equity, Schine v. Schine, supra; In re The Van Sweringen

Co., 119 F. 2d 231, 235 (6 Cir. 1941), they need not be. A

fiduciary who profits from his breach of duty is unjustly

enriched. He is liable in assumpsit for money had and re-

ceived. B. F. Goodrich Co. v. Naples, 121 F. Supp. 345,

347-48 (S.D. Cal. 1954) ; Gottfried v. Gottfried, 269 App.

Div. 413, 56 N.Y.S. 2d 50, 56 (1945); Wagner v. Armsby,

264 App. Div. 379, 35 N.Y.S. 2d 488, 489 (1942). Although

this quasi-contractual form of action employs equitable

principles, it is, nevertheless, an action at law, one of the

common counts, and hence is triable by jury. See Myers v.

Hurley Motor Co., 273 US. 18, 24 (1927); Okeechobee

County v. Nuveen, 145 F. 2d 684, 687 and n. 5 (5 Cir. 1944) ;

Restatement, Restitution, pp. 5-9 (1937). In fact, the ac-

counting claim in Dairy Queen, supra, which this Court held

9

*The fourth count, seeking an accounting of profits, was held to

be equitable. The nature of the second and fourth counts appears

from the record of the Schine case.

10

Di sistsinsioi i ak th sh ak i tla ‘i ws ise i

to be triable to a jury, sought ‘‘an accounting of profits”.

see the lower court’s decision in that case, McCullough y

Dairy Queen, 194 F. Supp. 686, 687 (E.D. Pa. 1961).*

4. Respondents argue that the complexity of the clains

necessitates their trial in equity. Complexity as such js

not, however, an obstacle to jury trial. Curriden y. Midd.

man, 232 U.S. 633, 636 (1914) :

‘6 * & &

mere complication of facts alone and dif.

culty of proof are not a basis of equity jurisdiction,”

Accord: United States vy. Bitter Root Dev. Co., 200 US.

451, 472 (1906).

An exception to this broad rule used to apply where “the

accounts between the parties’? were of such a complicated

nature that only a court of equity could satisfactorily w-

ravel them. Kirby v. Lake Shore & M.S.R. Co., 120 US.

130, 134 (1887); Dairy Queen vy. Wood, 369 U.S. 469, 478

(1962). Respondents themselves do not contend that this

action is based on ‘‘the accounts between the parties”. An

account could arise, as it did in Kirby, from a long-drawn

contractual relationship between the parties. By contrast,

a mere multiplicity of torts, such as is here alleged, was

never thought to create an ‘‘account’’ and never afforded

the wrongdoer an escape from the jury.

In any case, equity’s jurisdiction of complicated accounts

has, under modern practice, shrunk to the point of disap-

pearance; Dairy Queen v. Wood, supra, 369 U.S. at 478:

‘In view of the powers given to District Courts by

Federal Rule of Civil Procedure 53(b) to appoint

masters to assist the jury in those exceptional cases

where the legal issues are too complicated for the

* See also p. 6 of the Brief for Respondents in this Court in Dairy

Queen.

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SDE OLE ELON ENE OE LORS RED AG Ty ; —EE

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jury adequately to handle alone, the burden of such

a showing [that only equity can unravel the com-

plicated accounts} is considerably increased and it

will indeed be a rare case in which it can be met.’’

(Parenthetical interpolation added; footnotes omit-

ted)

11

The present action is not that ‘rare case’. The ex-

perienced trial judge below held that ** [t]he issues are not

so complicated as to make it impracticable for a jury to

ascertain the amount, if any, to which plaint*= may be

entitled’? (A47). Judge Smith in the Cou’ « Appeals

agreed tha ‘«[t]he issues are not so complex as to be beyond

the competence of a trial jury”’ (A73).

Respondents’ apprehension that ‘‘many thousands of

separate portfolio transactions’’ must be scrutinized would

not take the case into equity and is, in any event, un-

founded. Petitioners do not propose to present their evi-

dence in such piecemeal fashion. They propose to prove,

from respondents’ own admissions, that respondents en-

gaged deliberately and systematically in the improper prac-

tices here alleged. If persistent wrongdoing on respondents’

part emerges, the Corporation’s damages may well be

measured by the readily ascertainable amount of respond-

ents’ compensation, Wilshire Oil Co. v. Riffe, 406 F. 2d 1061

(40 Cir. 1969) ; and the same will be true if the illegal com-

position of the Corporation’s board of directors (Compl.

par. 19; A25-26) invalidates the Corporation’s relationship

to the respondent broker, see Phillips v. S.E.C., 388 F. 2d

964, 966 (2 Cir. 1968).

None of these issues presents inordinate difficulties for a

jury. If unexpected complications were to develop, the jury

might receive the help of a master, Rule 53(b) FRCP;

Dairy Queen, supra. These and other details may safely be

12

left to the trial court and can be dealt with at the pre-trig

conference, Rule 16 FRCP. The time, we submit, has passe

when technicalities of that nature could stand in the way

of the constitutional right to jury trial.

CONCLUSION

The judgment of the Court of Appeals for the Second

Circuit should be reversed.

Dated: October 14, 1969.

Respectfully submitted,

Wuuum E. Havpex

Attorney for Petitioners

295 Madison Avenue

New York, N. Y. 10017

Of Counsel

ApsraHaM L. PoMERANTZ

Ricuarp M. Meyer

Srantey M. Grossman

Pomerantz Levy Havupex & Buock

295 Madison Avenue

New York, N. Y. 10017

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{ (atest

OPINION

: opinion is sub, to formal revision before tion

sere rint of apse ated States Reports. Readers are re-

to notify the Reporter of Decisions, Supreme Court of the

nited States, ashington, D.C. 20543, of any typogre ical or other

h . in order that corrections may made ‘ore the pre-

e pre-trial iiminary print goes to press.

’ has Passed

SUPREME COURT OF THE UNITED STATES

No. 42.—Octoser TERM, 1969

Howard Ross and Bernard)

Ross, as Trustees for Lena

Rosenbaum, Petitioners,

v

Robert A. Bernhard et al.

[February 2, 1970]

Mr. Justice Wuire delivered the opinion of the Court.

The Seventh Amendment to the Constitution provides

that in “Suits at common law, where the value in con-

troversy shall exceed twenty dollars, the right of trial

by jury shall be preserved.” Whether the Amendment

guarantees the right to a jury trial in stockholders’ deriv-

ative actions is the issue now before us.

Petitioners brought this derivative suit in federal

court against the directors of their closed-end investment

company, The Lehman Corporation, and the corpora-

tion’s brokers, Lehman Brothers. They contended that

Lehman Brothers controlled the corporation through an

illegally large representation on the corporation’s board

of directors, in violation of the Investment Company Act

of 1940, 15 U. S. C. § 80a-1 et seq, and used this control

to extract excessive brokerage fees from the corporation.

The directors of the corporation were accused of convert-

ing corporate assets and of “gross abuse of trust, gross

misconduct, willful misfeasance, bad faith, gross negli-

gence.” Both the individual defendants and Lehman

Brothers were accused of breaches of fiduciary duty. It

was alleged that the payments to Lehman Brothers con-

stituted waste and spolietion, and that the contract be-

tween the corporation and Lehman Brothers had been

violated. Petitioners requested that the defendants

On Writ of Certiorari to

the United States Court

of Appeals for the Sec-

ond Circuit.

he Second

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. Y. 10017

A; ay BOYS ae

2 ROSS v. BERNHARD

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“account for and pay to the Corporation for their profits

and gains and its losses.” Petitioners also demanded ,

jury trial on the corporation’s claims.

On motion to strike petitioners’ jury trial demand, the

District Court held that a shareholder’s right to a jury

on his corporation’s cause of action was to be judged gs

if the corporation were itself the plaintiff. Only the

shareholder’s initial claim to speak for the corporation

had to be tried to the judge. 275 F. Supp. 569. Cop.

vinced that “there are substantial grounds for difference

of opinion as to this question and . . . an immediate ap.

pea: would materially advance the ultimate termination

of this litigation,” the District Court permitted an inter.

locutory appeal. 28 U. S. C. §1292(b). The Court

of Appeals reversed, holding that a derivative action

was entirely equitable in nature, and no jury was avail-

able to try any part of it. 403 F.2d 909. It specifically

( disagreed with DePinto v. Provident Security Life Ins.

: Co., 323 F. 2d 826 (C. A. 9th Cir. 1963), cert. denied,

376 U. S. 950 (1964), on which the District Court had

relied. Because of this conflict, we granted certiorari,

394 U.S. 917 (1969).

We reverse the holding of the Court of Appeals that

‘ in no event does the right to a jury trial preserved by

the Seventh Amendment extend to derivative actions

brought by the stockholders of a corporation. We hold

that the right to jury trial attaches to those issues in

derivative actions as to which the corporation, if it had

been suing in its own right, would have been entitled

to a jury.

The Seventh Amendment preserves to litigants the

right to jury trial in suits at common law—

“not merely suits, which the common law recognized

i among its old and settled proceedings, but suits in

4 which legal rights were to be ascertained and deter-

: mined, in contradistinction to those, where equitable

s rights alone were recognized, and equitable remedies

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_—_—

ROSS v. BERNHARD 3

were administered .. . . In a just sense, the amend-

ment then may well be construed to embrace all

suits, which are not of equity and admiralty juris-

diction, whatever may be the peculiar form which

they may assume to settle legal rights.” Parsons v.

Bedford, 3 Pet. 433, 446 (1830).

However difficult it may have been to define with

precision the line between actions at law dealing with

legal rights and suits in equity dealing with equitable

matters, Whitehead v. Shattuck, 138 U. S. 146, 151

(1891), some proceedings were unmistakably actions at

law triable to a jury. The Seventh Amendment, for ex-

ample, entitled the parties to a jury trial in actions for

damages to a person or property, for libel and slander.

for recovery of land, and for conversion of personal

property.’ Just as clearly, a corporation, although an

artificial being, was commonly entitled to sue and be

sued in the usual forms of action, at least in its own

State. See Paul v. Virginia, 8 Wall. 168 (1868).

Whether the corporation was viewed as an entity separate

from its stockholders or as a device permitting its stock-

holders to carry on their business and to sue and be sued,

a corporation’s suit to enforce a legal right was an action

at common law carrying the right to jury trial at the time

the Seventh Amendment was adopted.’

The common law refused, however, to permit stock-

holders to call corporate managers to account in actions

at law. The possibilities for abuse, thus presented, were

not ignored by corporate officers and directors. Early

in the 19th century, equity provided relief both in

this country and in England. Without detailing these

1See, e. g., Curriden v. Middleton, 232 U. S. 633 (1914) ; White-

head y. Shattuck, 138 U.S. 146 (1891) ; 5 J. Moore, Federal Practice

$38.11[5].

2] W. Blackstone, Commentaries *475; ef. Bank of Columbia

y. Patterson’s Adm’r, 7 Cranch 299 (1813) ; Bank of Kentucky v.

Wister, 2 Pet. 318 (1829).

ee Pe ORL TIIEE LIS AES I Gi Rds —

LS IESE LT RG IE TE ABO TET TREE ER

: CRS. a TS Tee aR

4 ROSS v. BERNHARD

developments,’ it suffices to say that the remedy in this

country, first dealt with by this Court in Dodge y.

Woolsey, 18 How. 331 (1856), provided redress not only

against faithless officers and directors but against third

parties who had damaged or threatened the corporate

properties and whom the corporation through its man-

agers refused to pursue. The remedy made available in

equity was the derivative suit, viewed in this country asa

% suit to enforce a corporate cause of action against officers.

‘ directors and third parties. As elaborated in the cases

one precondition for the suit was a valid claim on which

the corporation could have sued; another was that the

corporation itself had refused to proceed after suitable

j demand, unless excused by extraordinary conditions:

Thus the dual nature of the stockholders’ action: first the

plaintiff's right to sue on behalf of the corporation and

second the merits of the corporation claim itself.’

Derivative suits posed no Seventh Amendment prob-

lems where the action against the directors and third

4

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8 Prunty, The Shareholders’ Derivative Suit: Notes on Its Deriva-

tion, 832 N. Y. U. L. Rev. 980 (1957), treats the development of

the equitable remedy.

* Delaware & Hudson Co. v. Albany & S. RR. Co., 213 U. 8. 435

(1909); Doctor v. Harrington, 196 U. S. 579 (1905); Quincy v.

Steel, 120 U.S. 241 (1887) ; Hawes v. Oakland, 104 U. S. 450 (1881).

Soon after Hawes v. Oakland, supra, the preconditions to a share-

holder’s suit were promulgated as Equity Rule 94, 104 U. S. 1,

which became Equity Rule 27, 226 U. S. 656 (1912), then Fed.

Rule Civ. Proc. 23 (b), 308 U. 8. 690 (1938), and is now Fed. Rule

Civ. Proc. 23.1, 383 U. S. 1050 (1966).

4 5See Koster v. Lumbermens Mut. Cas. Co., 330 U. S. 5l8,

522-523 (1947); Ashwander v. TVA, 297 U. S. 288. (1936). See

also 13 W. Fletcher, Cyclopedia Corporations § 5941.1 (1961 ed.);

2 G. Hornstein, Corporation Law and Practice § 716; 4 J. Pomeroy,

Equity Jurisprudence § 1095, at 278 (5th ed.). Insofar as the

stockholders may have been asserting their own direct interest, they

closely resemble other class action plaintiffs who could proceed,

before merger, only in equity.

:

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—

ROSS v. BERNHARD 5

parties would have been by 4 bill in equity had the cor-

poration brought the suit. Our concern is with cases

based upon & legal claim of the corporation against

directors Or third parties. Does the trial of such claims

at the suit of a stockholder and without a jury violate

the Seventh Amendment?

The question arose in this Court in the context of a

derivative suit for treble damages under the antitrust

laws. Fleitmann V. Welsbach Street Lighting Co., 240

U. 8. 27 (1916). Noting that the bill in equity set

up a claim of the corporation alone, Mr. Justice Holmes

observed that if the corporation were the plaintiff, “no

one can doubt that its only remedy would be at law,”

and inquired “why the defendants’ right to a jury trial

should be taken away because the present plaintiff

cannot persuade the only party having an interest in

the cause of action to sue—how the liability which is

the principal matter can be converted into an incident

of the plaintiff's domestic difficulties with the company

that has been wronged”? His answer was that the bill

did not state a good cause of action in equity. Agree-

ing that there were “eases in which the nature of the

right asserted for the company, or the failure of the

defendants concerned to insist on their rights, or @

different state system, has led to the whole matter being

disposed of in equity,” he concluded that when the

penalty of triple damages is sought, the antitrust statute

plainly anticipated a jury trial and should not be read

as “attempting to authorize liability otherwise than

through the verdict of a jury in a court of common law.”

Although the decision had obvious Seventh Amendment

overtones, its ultimate rationale was grounded in the

antitrust laws.°

¢The dilemma of the stockholder seeking treble damages for the

corporation became real and complete in United Copper Sec. Co. v.

ROSS v. BERNHARD

Where penal damages were not involved, b>wever.

there was no authoritative parallel to Fleitmann in the

federal system squarely passing on the applicat lity of

the Seventh Amendment to the trial of a legal claim

presented in a pre-merger derivative suit. What can

be gleaned from this Court’s opinions ‘ is not inconsistent

with the general understanding, reflected by the state

court decisions and secondary sources, that equity could

properly resolve corporate claims of any kind without a

jury when properly pleaded in derivative suits complying

with the equity rules.*

Amalgamated Copper Co., 244 U. S. 261 (1917), where the stock-

holder-plaintiff sought treble damages in an action at law. The

Court rejected the claim by reiterating the traditional view that

a shareholder was without standing to sue at law on a corporate

cause. The treble damage action was a legal proceeding and only

the corporation could bring it. The Court of Appeals for the

Second Circuit has held that the federal rules have resolved the

dilemma and that derivative actions for treble damages under the

anti-trust laws are now proper. Fanchon & Marco, Inc. v. Para-

mount Pictures, Inc., 202 F. 2d 731 (C. A. 2d Cir. 1953). Cf.

Ramsburg v. American Inv. Co. of Ill., 231 F. 2d 333 (C. A. 7th

Cir. 1956). See generally, Comment: Federal Antitrust Law—

Stockholders’ Remedies For Corporate Injury Resulting From Anti-

trust Violations: Derivative Antitrust Suit and Fiduciary Duty, 59

Mich. L. Rev. 904 (1961).

* For example, in Amalgamated Copper the Court noted that in

Quincy v. Steel, 120 U. 8. 241 (1887), a shareholder’s bill in equity

which sought to enforce “a purely legal claim of the corporation—

damages for breach of contract” was dismissed “not because the

suit should have been at law, but because the bill failed to show

that complainant had made sufficient effort to induce the directors

to enter suit.” 244 U.S, at 264, n. 2. Delaware & Hudson (o.

v. Albany & Susquehanna R. Co., supra, n. 4, involved a derivative

suit for money damages due under a lease. The stockholders’ right

to sue was sustained; no jury trial issue appears to have been raised.

8 See, e. g., Goetz v. Manufacturers’ & Traders’ Trust Co.. 154

Mise., 733, 277 N. Y. Supp. 802 (Sup. Ct. 1935); Isaac v. Marcus,

258 N. Y. 257, 179 N. E. 487 (1932); Morton v. Morton Realty

ws

ROSS v. BERNHARD 7

Such was the prevailing opinion when the Federal

Rules of Civil Procedure were adopted in 1938. It con-

tinued until 1963 when the Court of Appeals for the

Ninth Circuit, relying on the Federal Rules as construed

and applied in Beacon Theatres Inc. v. Westover, 359

U.S. 500 (1959), and Dairy Queen Inc. V. Wood, 369

U.S. 469 (1962), required the legal issues in a derivative

suit to be tried to a jury. DePinto v. Provident Se-

curity Life Ins. Co., 323 F. 2d 826. It was this decision

which the District Court followed in the case before us

and which the Court of Appeals rejected.

Beacon and Dairy Queen presaged DePinto. Under

those cases, where equitable and legal claims are joe!

in the same action, there is a right to jury trial on une

legal claims which must not be infringed either by trying

the legal issues as incidental to the equitable ones or

by a court trial of a common issue existing between the

claims. The Seventh Amendment question depends on

the nature of the issue to be tried rather than the

character of the overall action.” See Simler v. Conner,

Co. 41 Idaho 729, 241 P. 1014 (1925); Neff v. Barber, 162 N. W.

667 (Sup. Ct. Wis. 1917) ; Robinson v. Smith, 3 Paige 222, 231, 233

(N. Y. 1832); 4 W. Cook, Corporations § 734 (1923 ed.) ;

§. Thompson & J. Thompson, Law of Corporations § 4661 (Supp.

1931); 6 S. Thompson & J. Thompson, Law of Corporations § 4653

(1927 ed.).

*The possibility that the merged federal practice altered the

procedures in derivative suits was early recognized, Fanchon &

Marco, Inc. v. Paramount Pictures, Inc., supra, 0. 6, but until

the action of the District Court below DePinto was alone in holding

that a right to a jury trial existed in derivative actions. Cf. Rich-

land v. Crandall, 259 F. Supp. 274 (D. C. 8. D. N. Y. 1966). See

also Metcalf v. Shamel, 166 Cal. App. 2d 789, 323 P. 2d 857 (1959) ;

Steinway v. Griffith Consol. Theatres, 273 P. 2d 872 (Okla., 1954).

1 As our cases indicate, the “legal” nature of an issue is deter-

mined by considering, first, the pre-merger custom with reference

to such questions; second, the remedy sought; and, third, the

practical abilities and limitations of juries. Of these factors, the

8 ROSS v. BERNHARD

372 U.S. 221 (1963). The principle of these cases bears

heavily on derivative actions.

We have noted that the derivative suit has dual as.

pects: first, the stockholder’s right to sue on behalf of the

corporation, historically an equitable matter: second, the

claim of the corporation against directors or third parties

on which, if the corporation had sued and the claim pre.

sented legal issues, the company could demand 4 jury

trial. As implied by Mr. Justice Holmes in Fleitman,,

legal claims are not magically converted into equitable

issues by their presentation to a court of equity in 4

derivative suit. The claim pressed by the stockholder

against directors or third parties “is not his own but the

corporation’s.” Koster v. Lumbermens Mut. Cas. Co.

330 U. S., at 522. The corporation is a necessary party

to the action; without it the case cannot proceed. Al-

though named a defendant, it is the real party in interest,

the stockholder being at best the nominal plaintiff. The

proceeds of the action belong to the corporation and it

is bound by the result of the suit."' The heart of the

action is the corporate claim. If it presents a legal issue.

one entitling the corporation to a jury trial under the

Seventh Amendment, the right to a jury is not forfeited

merely because the stockholder’s right to sue must first

be adjudicated as an equitable issue triable to the court.

P| Beacon and Dairy Queen require no less.

3 If under older procedures, now discarded, a court of

3 equity could properly try the legal claims of the corpora-

tion presented in a derivative suit, it was because irrep-

arable injury was threatened and no remedy at law

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first, requiring extensive and possibly abstruse historical inquiry, is

i obviously the most difficult to apply. See James, Right to a Jury

3 Trial in Civil Actions, 72 Yale L. J. 655 (1963).

1 See Koster v. Lumbermens Mut. Cas. Co., 330 U. 8. 518 (1947):

Meyer v. Fleming, 327 U. 8. 161, 167 (1946); Davenport v. Dows.

18 Wall. 626 (1873).

— a

ROSS v. BERNHARD 9

existed as long as the stockholder was without standing

to sue and the corporation itself refused to pursue its

own remedies. Indeed, from 1789 until 1938, the judicial

code expressly forbade courts of equity from entertaining

any suit for which there was an adequate remedy at

iw? This provision served “to guard the right of trial

by jury preserved by the Seventh Amendment and to

that end it shall be liberally construed.” Schoenthal v.

Irving Trust Co., 287 U. S. 92, 94 (1932). If, before

1938, the law had borrowed from equity, as it borrowed

other things, the idea that stockholders could litigate for

their recalcitrant corporation, the corporate claim, if

legal, would undoubtedly have been tried to a jury.

Of course, this did not occur, but the Federal Rules

had a similar impact. Actions are no longer brought as

sctions at law or suits in equity. Under the Rules there

is only one action—a “eiyil action”—in which all claims

may be joined and all remedies are available. Purely

procedural impediments to the presentation of any issue

by any party, based on the difference between law and

equity, were destroyed. In a civil action presenting a

stockholder’s derivative claim, the court after passing

upon the plaintiff's right to sue on behalf of the corpora-

tion is now able to try the corporate claim for damages

with the aid of a jury.” Separable claims may be tried

2 The Judicial Code of 1911, § 267, 36 Stat. 1163, re-enacting the

Act of Sept. 24, 1789, ¢. 20, § 16, 1 Stat. 82, provided: “Suits im

equity shall not be sustained in any court of the United States in

any case where a plain, adequate, and complete remedy may be had

at law.”

31t would appear that the same conclusions could have been

reached under Equity Rule 23 and the Law and Equity Act of

1915, Act of March 3, 1915, c. 90, 38 Stat. 956. See Southern Ry.

Co. v. City of Greenwood, 40 F. 2d 679 (D. C. W. D. 8. C. 1928);

2 J. Moore, Federal Practice { 2.05. Rule 23 provided:

“If in a suit in equity a matter ordinarily determinable at law arses,

such matter shall be determired in that suit according to the

10 ROSS v. BERNHARD

separately, Fed. Rule Civ. Proc. 42 (b), or legal ang

equitable issues may be handled in the same trial. Fan.

chon & Marco, Inc. vy. Paramount Pictures, Inc., 202 7

2d 731 (C. A. 2d Cir. 1953). The historical rule pre.

venting a court of law from entertaining a shareholder's

suit on behalf of the corporation is obsolete; it is no

longer tenable for a district court, administering both

law and equity in the same action, to deny legal remedies

to a corporation, merely because the corporation’s spokes.

men are its shareholders rather than its directors. Under

the rules, law and equity are procedurally combined;

nothing turns now upon the form of the action or the

procedural devices by which the parties happen to come

before the court. The “expansion of adequate legal

remedies by . . . the Federal Rules necessarily affects

the scope of equity.” Beacon Theatres, Inc. v. Westover,

359 U. S., at 509.

Thus, for example, before merger class actions were

largely a device of equity, and there was no right toa

jury even on issues which might, under other circum-

stances, have been tried to a jury. 5 J. Moore, Federal

Practice { 38.38[2]; 3B J. Moore, Federal Practice

23.02 [1}. Although at least one post-merger court

held that the device was not available to try legal

issues,’ it now seems settled in the lower federal courts

that class action plaintiffs may obtain a jury trial on

any legal issues they present. Montgomery Ward &

Co. v. Langer, 168 F. 2d 182 (C. A. 8th Cir. 1948) ; see

Oskoian v. Canuel, 269 F. 2d 311 (C. A. Ist Cir. 1959),

aff'ing 23 F. R. D. 307, Syres v. Oil Workers Int'l Union,

Local 23, 257 F. 2d 479 (C. A. 5th Cir. 1958), cert. denied,

principles applicable, without sending the case or question to the

law side of the court.”

* Farmers Co-operative Oil Co. vy. Socony-Vacuum Oil Co., 8

F. Supp. 735 (D. C. N. D. Io. 1942).

_—

ROSS v. BERNHARD 11

958 U.S. 929. 2 W. Barron & A. Holtzoff, Federal Prac-

tice and Procedure § 571 (Wright ed.).

Derivative suits have been described as one kind of a

“true” class action. 2 W. Barron & A. Holtzoff, Federal

Practice and Procedure § 562.1 (Wright ed.). We are

inclined to agree with the description, at least to the

extent it recognizes that the derivative suit and the

class action were both ways of allowing parties to be

heard in equity who could not speak at law.*® 3B

J. Moore {| 23.02 [1], 23.1.16 [1]. After the rules there

15 Other equitable devices are used under the rules without depriv-

ing the parties employing them of the right to a jury trial on legal

issues. For example, although the right to intervene may in some

cases be limited, United States ex rel. Browne & Bryan Lumber Co.

y. Massachusetts Bonding & Ins. Co., 303 F. 2d 823 (C. A. 3d Cir.

1962); Dickinson v. Burnham, 197 F. 2d 973 (C. A. 2d Cir. 1952),

cert. denied 244 U. S. 875, when intervention is permitted generally,

the intervenor has a right to a jury trial on any legal issues he

ts. See 3B J. Moore, Federal Practice, $24.16 [7]; 5 J.

Moore, Federal Practice, {38.38 [3]. 4 uumilar development seems

to be taking place in the lower courts in interpleader actions. Before

merger interpleader actions lay only in equity, and there was no

right to a jury even on issues which might, under other circum-

stances, have been tried to a jury. Liberty Oil Co. v. Condon Nat.

Bank, 260 U. S. 235 (1922). This view continued for some time

after merger, see Bynum v. Prudential Life Ins. Co., 7 F. R. D. 585

(D. C. FE. D. 8. C. 1947), but numerous courts and commentators

have now come to the conclusion that the right to a jury should

not turn on how the parties happen to be brought into court. See

Pan American Fire & Cas. Co. v. Revere, 188 F. Supp. 474 (D. C.

E. D. La. 1960); Savannah Bank & Trust Co. v. Block, 175 F. Supp.

798 (D. C. S. D. Ga. 1959); Westinghouse Elect. Corp. v. United

Elect. Radio & Mach. Workers of America, 99 F. Supp. 597

(D. C. W. D. Pa. 1951); John Hancock Mut. Life Ins. Co. v.

Yarrow, 95 F. Supp. 185 (D. C. E. D. Pa. 1951); 2 W. Barron

& A. Holtzoff, Federal Practice and Procedure § 556 (Wright ed.) ;

3A J. Moore, Federal Practice { 22.14[4]. But see Pennsylvama

Fire Ins. Co. v. American Airlines, Inc., 180 F. Supp. 239 (D. C.

E. D. N. Y. 1960) ; Liberty Nat. Life Ins. Co. v. Brown, 119 F. Supp.

920 (D. C. M. D. Ala. 1954).

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12 ROSS v. BERNHARD

is no longer any procedural obstacle to the assertion of

legal rights before juries, however the party may haye

acquired standing to assert those rights. Given the

availability in @ derivative action of both legal and

equitable remedies, we think the Seventh Amendmen

preserves to the parties in a stockholder’s suit the same

In the instant case we have no doubt that the cc.

poration’s claim is, at least in part, a legal one. The

relief sought is money damages. There are allegations

in the compaint of a breach of fiduciary duty, but there

are also allegations of ordinary breach of contract and

gross negligence. The corporation, had it sued on its

own behalf, would have been entitled to a jury's deter.

mination, at a minimum, of its damages against its

broker under the brokerage contract and of its rights

against its own directors because of their negligence

Under these circumstances it is unnecessary to decide

whether the corporation's other claims are also properly

triable to a jury. Dairy Queen v. Wood, 369 U. 8. 460

(1962). The decision of the Court of Appeals is reversed.

It is so ordered.

—

SUPREME COURT OF THE UNITED STATES

No. 42.—Octoser Term, 1969

On Writ of Certiorari to

Rosen 4 the United States Court

pe of Appeals for the Sec-

ond Circuit.

Me. Justice STEWART, with whom Tue Cuter Justice

and Mr. Justice HARLAN join, dissenting.

In holding as it does that the plaintiff in a share-

holder’s derivative suit is constitutionally entitled to a

jury trial, the Court today seems to rely upon some sort

of ill-defined combination of the Seventh Amendment

and the Federal Rules of Civil Procedure. Somehow the

Amendment and the Rules magically interact to do what

each separately was expressly intended not to do; namely,

to enlarge the right to a jury trial in civil actions brought

in the courts of the United States.

The Seventh Amendment, by its terms, does not extend,

but merely preserves the right to a jury trial “in suits at

common law.” All agree that this means the reach of

the Amendment is limited to those actions which were

tried to the jury in 1791 when the Amendment was

adopted.' Suits in equity, which were historically tried

to the court, were therefore unaffected by it. Similarly,

Rule 38 of the Federal Rules has no bearing on the right

to a jury trial in suits in equity, for it simply preserves

inviolate “the right of a trial by jury as declared by the

‘Where a new cause of action is created by Congress, and nothing

is said about how it is to be tried, the jury trial issue is determined

by fitting the cause into its nearest historical analogy. Luna v.

United States, 231 U. S. 9; see James, Right to a Jury Trial in

Civil Actions, 72 Yale L. J. 655.

2 ROSS v. BERNHARD

Seventh Amendment.” Thus this Rule, like the Amenj.

ment itself, neither restricts nor enlarges the right to jury

trial.” Indeed nothing in the Federal Rules can rightly

be construed to enlarge the right of jury trial, for in the

legislation authorizing the Rules, Congress expressly pro-

vided that they “shall neither abridge, enlarge nor modify

the substantive rights of any litigant.” 48 Stat. 1064

See 28 U. S. C. § 2072. I take this plain, simple, and

straightforward language to mean that after the pro-

mulgation of the Federal Rules, as before, the constitu-

tional right to a jury trial attaches only to suits at

common law. So, apparently, has every federal court

that has discussed the issue.’ Since, as the Court con-

cedes, a shareholder’s derivative suit could be brought

only in equity, it would seem to me to follow by the most

elementary logic that in such suits there is no constitu-

tional right to a trial by jury. Today the Court tosses

* See, e. g., Ettelson v. Metropolitan Life Ins. Co., 137 F. 24 62,

65; 5 J. Moore, Federal Practice $ 38.07 [1] and cases cited therein.

*The principle that the Rules effected no enlargement or restric-

tion of the right of jury trial has “received complete judicial appro-

bation.” 5 J. Moore, Federal Practice § 38.07 [1] and cases cited

therein.

* Virtually every state and federal court which has faced this

issue has similarly reasoned to the same conclusion. See, e¢. 9.

Goetz v. Manufacturers’ & Traders’ Trust Co., 154 Mise., 733, 27

N. Y. Supp. 802; Metcalf v. Shamel, 166 Cal. App. 2d 789, 333 P.

2d 857; Liken v. Shaffer, 64 F. Supp. 432; Miller v. Weiant, 42 F.

Supp. 760. The equitable nature of the derivative suit has been

recognized in several decisions of this Court. See, e. g., Cohen v.

Beneficial Industrial Loan Corp., 337 U. S. 541, 547-548. It was slso

reflected in the adoption of Equity Rule 94 in 1882, and Rule 27 of

the Equity Rules of 1912 which established the preconditions to

bringing shareholder's derivative suits in the federal courts. These

rules are the forerunners of Rule 23 (b) of Fed. Rule Civ. Proe. of

1938, and of Fed. Rule Civ. Proc. 23.1 (1966), which now controls the

initiation of such suits. See 3 J. Moore, Federal Practice £23.15 [1].

a

ROSS v. BERNHARD 3

aside history, logic, and over 100 years of firm precedent

to hold that the plaintiff in a shareholder’s derivative

suit does indeed have a constitutional right to a trial by

jury. This holding has a questionable basis in policy °

and no basis whatever in the Constitution.

The Court begins by assuming the “dual nature” of the

shareholder’s action. While the plaintiff’s right to get

- into court at all is conceded to be equitable, once he is

there the Court says his claim is to be viewed as though

it were the claim of the corporation itself. If the cor-

poration would have been entitled to a jury trial on such

— qclaim, then it is said, so is the shareholder. This con-

ceptualization is without any historical basis. For the

fact is that a shareholder’s suit was not originally viewed

in this country, or in England, as a suit to enforce a

corporate cause of action. Rather, the shareholder’s suit

was initially permitted only against the managers of the

corporation—not third parties—and it was conceived of

as an equitable action to enforce the right of a beneficiary

against his trustee. The shareholder was not, therefore,

in court to enforce indirectly the corporate right of action,

but to enforce directly his own equitable right of action

against an unfaithful fiduciary. Later the rights of the

shareholder were enlarged to encompass suits against

third parties harming the corporation, but “the postu-

‘See, e. g., Frank, Courts on Trial 110-111 (1949). Certainly

there is no consensus among commentators on the desirability of

jury trials in civil actions generally. Particularly where the issues

in the case are complex—as they are likely to be in a derivative

suit—much can be said for allowing the court discretion to try

the case itself. See discussion in 5 J. Moore, Federal Practice

$38.02 [1].

‘Robinson v. Smith, 3 Paige Ch. R. 222; Attorney General v.

Utica Ins. Co., 2 Johns Ch. R. 371, discusse¢ in Prunty, The Share-

holders’ Derivative Suit: Notes on its Derivation, 32 N. Y. U. L.

Rev. 980.

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4 ROSS v. BERNHARD

lated ‘corporate cause of action’ has never been thought

to describe an actual historical class of suit which was

recognized by courts of law.’ Indeed the commenta-

tors, including those cited by the Court as postulating

the analytic duality of the shareholder’s derivative suit,

recognize that historically the suit has in practice always

been treated as a single cause tried exclusively in equity,

They agree that there is therefore no constitutional right

to a jury trial even where there might have been one

had the corporation itself brought the suit.*

This has been not simply the “general” or “prevailing”

view in the federal courts as the Court says, but the

unanimous view with the single exception of the Ninth

Circuit's 1963 decision in De Pinto vy. Provident Security

Life Ins. Co., 323 F. 2d 826, a decision that has since

been followed by no court until the present case.

The Court would have us discount all those decisions

rendered before 1938, when the Federal Rules of Civil

Procedure were adopted, because it says that before the

promulgation of the Rules, “purely procedural impedi-

ments” somehow blocked the exercise of a constitutional

right. In itself this would seem a rather shaky premise

upon which to build an argument. But the Court’s posi-

tion is still further weakened by the fact that any

“purely procedural impediments” to a jury trial in a

derivative suit were eliminated not in 1938, but at least

as early as 1912. For Rule 23 of the Equity Rules of

that year provided that if a “matter ordinarily determi-

nable at law” arose in an equity suit it should “be

determined in that suit according to the principles ap-

plicable, without sending the case or question to the

7 Note, 74 Yale L. J. 725, 730.

8 See, e. g., N. Lattin, Corporations ¢. 8 § 3; 2 G. Hornstein, Co:

poration Law and Practice § 730; 13 W. Fletcher, Cyclopedia Cor-

poration § 5931; 5 J. Moore, Federal Practice § 38.38 [4].

—

ROSS v. BERNHARD 5

law side of the court.” 226 U.S. 654. These applicable

principles included the right of jury trial. Consequently,

when the Court said in United Copper Co. V. Amal

Copper Co., 244 U. S. 261, 264, that “it is clear” that the

remedy of a stockholder seeking to enforce the rights

of a corporation—whatever their nature—is not in law

but in equity, it was not because there were “procedural

impediments” to a jury trial on any “Jegal issues.”

Rather it was because the suit itself was conceived of

as a wholly equitable cause of action.

This was also true in Fleitmann v. Welsbach Street

Lighting Co., 240 U. S. 27, on which the Court so

heavily relies even though it was a pre-Federal Rules

ease. In Fleitmann the plaintiff sued derivatively to en-

foree a corporate right of action for treble damages under

the antitrust laws. Treble damages were considered

punitive, and the statute was read to imply a right in

the defendant to a jury trial. In his opinion for the

Court, Mr. Justice Holmes recognized the potential for

abuse: derivative rather than corporate actions could be

brought in order to deprive the defendant of his right

to a jury trial. The Court’s solution was to dismiss the

bill because the antitrust statute “should not be read as

attempting to authorize liability to be enforced other-

wise than through the verdict of a jury in a court of

common law.” I do not see how the Court today can

draw sustenance from this decision. Rather, the Fleit-

mann case seems to me to stand for a proposition dia-

metrically opposed to that which the Court seeks to

establish; namely, for the proposition that because a

derivative action is wholly equitable, there is no right to

a jury trial. The Court in Fleitmann simply held that

since there was a statutory right to a jury in all actions

for treble damages under the antitrust laws, a derivative

°See Southern R. Co. v. City of Greenwood, 40 F. 2d 679.

6 ROSS v. BERNHARD

suit seeking such damages could not be maintained,

Thus the bill had to be dismissed.*°

These pre-1938 cases, then, firmly establish the Uni-

tary, equitable basis of shareholders’ derivative suits and

in no way support the Court’s holding here. But, the

Court says, whatever the situation may have been be-

fore 1938, the Federal Rules of Civil Procedure of that

year, at least as construed in our decisions more than

20 years later in Beacon Theatres, Inc. v. Westover, 359

U. S. 500, and Dairy Queen, Inc. v. Wood, 369 U. §.

469, in any event require the conclusion reached today,

I can find nothing in either of these cases that leads

to that conclusion.

In Beacon the plaintiff sought both an injunction pre-

venting the defendant from instituting an antitrust action

and a declaratory judgment that certain moving picture

distribution contracts did not violate the antitrust laws.

The defendant answered and counterclaimed for treble

damages under the antitrust laws. He demanded a jury

trial on the factual issues relating to his counterclaim.

The district court held that even though there were

factual issues common to both the complaint and the

counterclaim, it would first hear the plaintiff’s suit for

equitable relief before submitting the counterclaim to a

jury. The Court of Appeals affirmed, and this Court re-

versed, upon the ground that if the equitable claim were

tried first, there might be an estoppel which would defeat

the defendant’s right to a full jury trial on all the factual

issues raised in his counterclaim. Similarly in Dairy

Queen the Court simply held that a plaintiff could not

*° Moreover, since the suit was brought after the promulgation

of Equity Rule -23 it seems evident that here, too, it was not merely

“procedural impediments” that prevented the antitrust claim from

being tried to a jury, but presumably the fact that no matter arising

in a derivative suit—whatever its “inherent nature”—was considered

to be one “ordinarily determinable at law.”

a

ROSS v. BERNHARD 7

avoid a jury trial by joining legal and equitable causes

of action in one complaint.

It is true that in Beacon it was stated that the 1938

Rules did diminish the scope of federal equity juris-

diction in certain particulars. But the Court's effort to

force the facts of this case into the mold of Beacon and

Dairy Queen simply does not succeed. Those cases in-

yolved a combination of historically separable suits, one

in law and one in equity. Their facts fit the pattern of

cases where, before the Rules, the equity court would

have disposed of the equitable claim and would then

have either retained jurisdiction over the suit, despite

the availability of adequate legal remedies, or enjoined

a subsequent legal action between the same parties in-

volving the same controversy."

But the present case is not one involving traditionally

equitable claims by one party, and traditionally legal

claims by the other. Nor is it a suit in which the

plaintiff is asserting & combination of legal and equitable

claims. For, as we have seen, a derivative suit has

always been conceived of as a single, unitary, equitable

cause of action. It is for this reason, and not be-

cause of “procedural impediments,” that the courts of

equity did not transfer derivative suits to the law side.

Inshort, the cause of action is wholly a creature of equity.

And whatever else can be said of Beacon and Dairy

Queen, they did not cast aside altogether the historic

division between equity and law.

If history is to be so cavalierly dismissed, the derivative

suit can, of course, be artificially broken down into sep-

arable elements. But so then can any traditionally

equitable cause of action, and the logic of the Court’s

position would lead to the virtual elimination of all equity

jurisdiction. An equitable suit for an injunction, for

11 See discussion in 74 Yale L. J., at 736-737.

8 ROSS v. BERNHARD

instance, often involves issues of fact which, if d

had been sought, would have been triable to a jury,

Does this mean that in a suit asking only for injunctive

relief these factual issues must be tried to the jury, with

the judge left to decide only whether, given the jury's

findings, an injunction is the appropriate remedy? (ee.

tainly the Federal Rules make it possible to try a suit for

an injunction in that way, but even more certainly they

were not intended to have any such effect. Yet the

Court’s approach, it seems, would require that if any

“legal issue” procedurally could be tried to a jury, it

constitutionally must be tried to a jury.

The fact is, of course, that there are, for the most

part, no such things as inherently “legal issues” or in-

herently “equitable issues.” There are Only factual

issues, and, “like chameleons [ they] take their color from

surrounding circumstances.” ** Thus the Court’s “nature

of the issue” approach is hardly meaningful.

As a final ground for its conclusion, the Court points

to a supposed analogy to suits involving class actions,

It says that before the Federal Rules such suits were

considered equitable and not triable to a jury, but that

since promulgation of the Rules the federal courts have

found that “plaintiffs may obtain a jury trial on any

legal issue they present.” Of course the plaintiff may

obtain such a trial even in a derivative suit. Nothing

in the Constitution or the Rules precludes the judge

from granting a jury trial as a matter of discretion.

1? James, supra, n. 1, at 692. As Professor Moore has put it,

“Whether issues are legal or equitable may, of course, depend upon

the manner in which they are presented ....” 5 J. Moore, Fed-

eral Practice $ 38.04 [1], n. 40. And he, along with virtually every

other commentator, concludes that if the issues are presented in a

shareholder's derivative suit they are equitable and the plaintiff has

no constitutional right to have them tried by a jury. 5 J. Moore,

Federal Practice € 38.38 [4].

_

ROSS v. BERNHARD 9

But even if the Court means that some federal courts

have ruled that the class action plaintiff in some sit-

uations has @ constitutional right to a jury trial, the

analogy to derivative suits is wholly unpersuasive. For

it is clear that the draftsmen of the Federal Rules in-

tended that Rule 23 as it pertained to class actions should

be applicable, like other rules governing joinder of claims

and parties, “to all actions, whether formerly denomi-

nated legal or equitable.” '* This does not mean that

a formerly equitable action is triable to a jury simply

because it is brought on behalf of a class, but only that

a historically legal cause of action can be tried to a

jury even if it is brought as a class action. Since a

derivative suit is historically wholly a creation of equity,

the class action “analogy” is in truth no analogy at all.

The Court’s decision today can perhaps be explained

as a refleetion of an unarticulated but apparently over-

powering bias in favor of jury trials in civil actions. It

certainly cannot be explained in terms of either the Fed-

eral Rules or the Constitution.

13 Qriginal Committee Note of 1937 to Rule 23. Moreover, as

Professor Moore points out, certain class actions could be main-

tained at law in the federal courts even before the Federal Rules.

5 J. Moore, Federal Practice { 38.38 [2].

ame ——

REET EAD

. one Cs