In an extraordinary move, a new panel of the Ninth Circuit Court of Appeals recently withdrew and replaced the opinion of a prior panel, holding that a class action settlement approved by the Delaware Chancery Court was entitled to full faith and credit and therefore barred plaintiffs from pursuing federal securities claims in the United States District Court for the Central District of California. The new decision brought to a conclusion a case as notable for its procedural peculiarities as for its statement of the law.
In 1990, Matsushita Electric Industrial Company ("Matsushita") made a tender offer for MCA, Inc. ("MCA"), which precipitated two class action lawsuits. In the first suit, filed in Delaware Chancery Court (the "State Action"), class members asserted that MCA's directors had breached their fiduciary duties to shareholders under Delaware law by failing to maximize shareholder value upon a change in corporate control. In the second suit, filed in the United States District Court for the Central District of California (the "Federal Action"), plaintiffs asserted violations of Rules 10b-3 and 14d-10 promulgated under the Securities Exchange Act of 1934. In April 1992, the district court refused to certify the federal plaintiffs as a class and granted summary judgment against them.
The federal plaintiffs appealed the adverse judgment to the Ninth Circuit. While the appeal was pending, the State Action was settled. The Delaware Chancery Court order and judgment approving the settlement (the "State Judgment") expressly released all federal claims. In the federal appeal, defendant-appellee Matsushita argued that the federal plaintiffs, as members of the class who had not opted out of the State Action, were bound by the State Judgment. Matsushita grounded its argument in the Full Faith and Credit Act, which provides that "judicial proceedings of any court of any such 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."
The Ninth Circuit held that the Full Faith and Credit Act could not apply to the State Judgment so as to bar the federal action, as the federal action involved claims exclusively within the jurisdiction of the federal courts. The Ninth Circuit then reversed on the merits the district court's entry of summary judgment and denial of class certification, thereby permitting the federal action to continue.
On certiorari, the United States Supreme Court reversed, holding that the Ninth Circuit could not withhold full faith and credit from the State Judgment since (i) the federal plaintiffs were bound by the State Judgment under Delaware law, and (ii) the grant of exclusive federal jurisdiction over the federal plaintiffs' claims did not partially repeal the Full Faith and Credit Act.
On remand, however, a panel of the Ninth Circuit held that the State Judgment still was not entitled to full faith and credit. The panel observed that the Supreme Court's holding was limited to the question of "[w]hether 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." The Ninth Circuit explained that the Supreme Court's decision left intact the Ninth Circuit's determinations with respect to the merits of the case, and left open the question of whether the settlement satisfied the requirements of due process. The Ninth Circuit panel concluded that the State Judgment could not bar the federal claims because the absent class members were inadequately represented, and the judgment therefore violated due process.
Two days after the decision was filed, a member of the panel that decided the case (and the author of the opinion) resigned from the Ninth Circuit. A newly constituted panel subsequently approved Matsushita's petition for rehearing, and withdrew and replaced the prior panel's opinion. Despite the findings of the predecessor panel, the new Ninth Circuit panel stated it was "somewhat perplexed" by the appellants' contention that the State Judgment violated their due process rights to adequate representation, "because [the Supreme Court]'s holding was explicitly and implicitly premised upon the validity of the Delaware judgment. The Supreme Court stated in Matsushita that the [federal] appellants were 'bound . . . by the judgment,' . . . and held that the exclusively federal claims released by that judgment were not exempt from full faith and credit. It should go without saying that we are not free to ignore the Court's determinations in Matsushita by holding that the . . . appellants are not bound by the judgment."
Because consideration of whether the State Judgment met due process requirements was outside the proper scope of inquiry, the new panel of the Ninth Circuit held that the State Judgment was entitled to full faith and credit, and that the federal claims were therefore barred. *
Epstein v. MCA, Inc., 179 F.3d 641 (9th Cir. 1999).