Epstein v. MCA, Inc.

Opinion by Judge O’SCANNLAIN; Concurrence by Judge WIGGINS; Dissent by Judge THOMAS.

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The opinion filed on October 22, 1997, and reported at 126 F.3d 1235 (9th Cir.1997), is withdrawn, and the attached opinion filed in its place.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

We reconsider our decision in this case which is still 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 /”), 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., Ltd. v. Epstein, 516 U.S. 367, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996) (“Matsushita”), the Supreme Court reversed our decision in Epstein I and remanded for proceedings con*643sistent with its opinion. On remand we again held, in Epstein v. MCA, Inc., 126 F.3d 1235 (9th Cir.1997) (“Epstein II”), that the Delaware state judgment was not entitled to full faith and credit. We thereafter granted defendants-appellees’ (“Mat-sushita”) petition for rehearing, and the case was reargued. We now withdraw our previous opinion, Epstein II, and substitute this opinion for it in all respects.

I

In 1990, Matsushita made a tender offer for (and subsequently 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 shareholders 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 Securities and Exchange Commission Rules 10b-3 and 14d-10 promulgated 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 Delaware Chancery Court approving the settlement explicitly provided 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, Matsushi-ta 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 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.1 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 I and remanded. See Matsushita, 516 U.S. at 387, 116 S.Ct. 873.

On remand, a divided panel in Epstein II 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 *644author of both Epstein I 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 reconstituted panel granted the petition for rehearing on June 8, 1998. Following rehearing, we now withdraw our opinion in Epstein II and consider anew whether the Epstein appellants are bound by the Delaware judgment.

II

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 supervision of the Delaware proceedings. We are somewhat perplexed 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, 116 S.Ct. 873, and held that the exclusively federal claims released by that judgment were not exempted from full faith and credit, see id. at 385-87, 116 S.Ct. 873. It should go without saying that we are not free to ignore the Court’s determinations in Matsushita by holding that the Epstein appellants are not bound by the judgment.

A

In Matsushita, the Supreme Court commenced its analysis 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, 116 S.Ct. 873 (quoting 28 U.S.C. § 1738). Accordingly, the first step of the Marrese analysis employed by the Court to determine whether the Delaware 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, 116 S.Ct. 873 (citing Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 381-382, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985)).

Following Marrese’s instructions, the Court reviewed Delaware law on the pre-clusive effect of settlement judgments. 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 federal court litigation of any released claims.” Id. at 377, 105 S.Ct. 1327. The Court further noted that under Delaware law, a state court settlement 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.” Id. at 377-78, 105 S.Ct. 1327 (quoting In 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.” Id. at 378, 116 S.Ct. 873.

The Epstein appellants make much of this conditional language, but it merely reflects that the Court had yet to satisfy itself that the proceedings in Delaware had met all the due process requirements for binding absent class members.2 Turning to these due process requirements, the Court proceeded to march through Delaware Chancery Rule 23, which is, as the *645Court noted, “modeled on Federal Rule of Civil Procedure 23.” Id. at 371, 116 S.Ct. 873.

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 Delaware Supreme Court affirmed, that the settlement was “fair, reasonable and adequate and in the best interests of the ... Settlement class” and that notice to the class was “in full compliance with ... the requirements of due process.” In re MCA, Inc. Shareholders Litigation, C.A. No. 11740, 1993 WL 43024 (Feb. 16, 1993).... The 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.” In 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 adequately represent the interests of the absent class members”).

Id. at 378-79, 116 S.Ct. 873.

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 plaintiff class and that they never opted out; they are bound, then, by the judgment.

Id. at 379, 116 S.Ct. 873 (emphasis added). There was nothing conditional about this holding. The Court then proceeded to the second step of the Marrese analysis.

B

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 Delaware 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 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, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982). Thus in Matsushita, any resolution of the pre-clusive 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 constitutionally infirm, the judgment could not be binding under Delaware law, nor could a federal court accord it full faith and credit. The Supreme Court’s holding in Matsushita that under Delaware law the Epstein appellants were “bound, then, by the judgment,” Matsushita, 516 U.S. at 379, 116 S.Ct. 873, was thus necessarily premised upon the constitutional validity of the Delaware judgment.3

*646It 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 Mamse 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.” Id. at 375, 105 S.Ct. 1327. Delaware law would bar the federal claims at issue only if the state settlement was “determined to be fair and to have met all due process requirements.” In 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.4

In fact, if the Epstein appellants’ contention that the Delaware judgment is constitutionally infirm were true, Matsushita would be an advisory opinion. The Court’s holding 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, 102 S.Ct. 2442, 73 L.Ed.2d 16 (1982) (declining to consider merely hypothetical issues in light of the prohibition against advisory opinions); Flast v. Cohen, 392 U.S. 83, 96, 88 S.Ct. 1942, 20 L.Ed.2d 947 (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, 116 S.Ct. 873. We are not persuaded.

The Epstein appellants rely heavily on Justice Ginsburg’s statement that because “the Ninth Circuit decided the case without reaching the due process check on the full faith and credit obligation, that inquiry remains open for consideration on remand.” Id. at 389, 116 S.Ct. 873. This belief, however, was not shared by the majority.5 As Justice Stevens stated in his dissent, he could “join neither [the Court’s determination of Delaware 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 litigated the adequacy of class representation.” Id. at 387, 116 S.Ct. 873. 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 consideration of the content of Delaware preclusion law. Matsushita, 516 U.S. at 388, 116 S.Ct. 873. Thus her statement that the due process issue “remains open for consideration on remand,” id. at 389, 116 S.Ct. 873, 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 Ginsburg dis*647sented because she evidently believed that the Court should not have endeavored “to speak the first word on the content of Delaware preclusion law.” Id. at 388, 116 5.Ct. 873. This statement confirms that the Court did determine the content of Delaware preclusion law, which necessarily included a determination of the judgment’s constitutional validity. See Kremer, 456 U.S. at 482, 102 S.Ct. 1883.

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 proceedings did not satisfy due process because the class was inadequately represented.” Id. at 379 n. 5, 116 S.Ct. 873. 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.” Id. The footnote does not indicate that the Court had not considered any due process concerns, 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 Delaware law. Nor does the footnote in any way indicate that the Delaware courts had not resolved the issue, or that this determination 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, following argument on the issue, that the class representatives fairly and adequately protected the interests of the class.” Id.

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 resolution of such a challenge by the Court’s opinion, particularly where the issue the Epstein appellants sought to raise was necessarily intertwined with the Court’s holding and discussion 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, 521 U.S. 642, 678, 117 S.Ct. 2199, 2220, 138 L.Ed.2d 724 (1997) (stating that petitioner’s “other arguments ... remain open for consideration on remand”); United States v. Lanier, 520 U.S. 259, 272 n. 7, 117 S.Ct. 1219, 1228 n. 7, 137 L.Ed.2d 432 (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 such as Justice Ginsburg’s, and are different in kind from the Matsu-shita majority’s statement in footnote five merely declining independently to address the Epstein appellants’ due process claim.

Ill

Apart from any statements in Matsushita that the Epstein appellants believe explicitly left open their due process objections on remand, the Epstein appellants assert that Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985), and Kremer create a largely unfettered right to challenge collaterally the adequacy of representation in class actions.6

*648A

Shutts does not support the broad collateral review that the Epstein appellants seek. In Shutts, the Court identified various 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, 105 S.Ct. 2965. 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, 105 S.Ct. 2965.

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 Communications Corp., 17 F.3d 1553, 1558 (3rd Cir.1994) (refusing to allow absent class members collaterally to challenge adequacy 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 backdoor relief’).

As the Court stated in Hansbem’y 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, 61 S.Ct. 115, 85 L.Ed. 22 (1940) (emphasis added). Due process requires that an absent class member’s right to adequate representation be protected by the adoption of the appropriate procedures by the certifying court and by the courts that review its determinations; due process does not require collateral second-guessing of those determinations and that review.

B

Kremer does not indicate otherwise. As we have noted previously, 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, 102 S.Ct. 1883. The extent of collateral review is, however, limited.

Kremer merely recognized that a judgment is not entitled to full faith and credit “if there is reason to doubt the quality, extensiveness, or fairness of procedures followed in prior litigation.” Id. at 481, 102 S.Ct. 1883 (quoting Montana v. United States, 440 U.S. 147, 164 n. 11, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979)) (emphasis added). Limited collateral review would be *649appropriate, 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. Id. at 480, 102 S.Ct. 1883. This review would not, however, include reconsideration of the merits of the claim or issue, see id. at 483-85, 102 S.Ct. 1883 (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 proceedings need do no more than satisfy the minimum procedural requirements of the Fourteenth Amendment’s Due Process Clause in order to qualify for the full faith and credit guaranteed by federal law.” Id. at 481, 102 S.Ct. 1883.

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 available. Matsushita made plain that class action judgments are accorded full faith and credit like other judgments:

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. Therefore, 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, 116 S.Ct. 873 (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 participate in the litigation,’ ” and “ ‘that the named plaintiff at all times adequately represent the interests of the absent class members.’ ” Id. at 378-79, 116 S.Ct. 873 (quoting Shutts, 472 U.S. at 812, 105 S.Ct. 2965). The Court, however, satisfied itself that these requirements had been met by referencing the Delaware courts’ findings on these matters, rather than by independently determining whether the requirements were met. See id.7