OCTOBER TERM, 1995
Syllabus
MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD., ET AL.
v.
EPSTEIN ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH
CIRCUIT
No. 94-1809. Argued November 27, 1995-Decided February 27,
1996
A tender offer resulting in petitioner Matsushita Electric
Industrial Coo's acquisition of MCA, Inc., a Delaware corporation,
precipitated two lawsuits on behalf of MCA's stockholders. While
the first, a Delaware class action based purely on state-law
claims, was pending, the second suit was filed in a California
federal court, alleging that Matsushita's tender offer violated
certain Securities and Exchange Commission Rules promulgated under
the Securities Exchange Act of 1934 (Exchange Act). Section 27 of
that Act confers exclusive jurisdiction upon the federal courts in
such suits. Matsushita prevailed in the federal case, and while
that judgment was on appeal, the parties to the state action
reached a settlement, agreeing,
inter alia, that class
members who did not opt out of the class would waive all claims in
connection with the tender offer, including those asserted in the
California federal action. The Chancery Court approved the
agreement, and the Delaware Supreme Court affirmed. Respondents are
members of both the state and federal classes who did not opt out
of the settlement class. In the instant case, the Ninth Circuit
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, and fashioned a test limiting the
preclusive force of a state-court settlement judgment to those
claims that could "have been extinguished by the issue preclusive
effect of an adjudication of the state claims."
Held: The Delaware settlement judgment is entitled to
full faith and credit, notwithstanding the fact that it released
claims within the exclusive jurisdiction of the federal courts. Pp.
373-387.
(a) Section 1738-which directs federal courts to treat a
state-court judgment with the same respect that it would receive in
the rendering State's courts-is generally applicable in cases in
which the state-court judgment incorporates a class-action
settlement releasing claims solely within the federal courts'
jurisdiction. The judgment of a state court in a class action is
plainly the product of a "judicial proceeding" within the meaning
of § 1738, and the fact that the judgment might bar litigation of
exclusively federal claims does not necessarily make § 1738
inap-
368
plicable, Marrese v. American Academy of Orthopaedic Surgeons,
470
(b)
Marrese provides the analytical framework for
deciding whether the Delaware judgment precludes this exclusively
federal action. A federal court must first determine whether the
rendering State's law indicates that the claim would be barred from
litigation in a court of that State; if so, the federal court must
decide whether, as an exception to § 1738, it should refuse to give
preclusive effect to the state-court judgment. P. 375.
(c) Delaware Supreme Court cases have provided rules regarding
the preclusive force of class-action settlement agreements in
subsequent state-court suits and have also spoken to the effect of
such judgments in federal court, indicating that when the Chancery
Court approves a global release of claims, its settlement judgment
will preclude ongoing or future federal-court litigation of any
released claims. Thus, it appears that a Delaware court would give
this settlement judgment preclusive effect in a subsequent
proceeding, notwithstanding the fact that respondents could not
have pressed their Exchange Act claims in the Chancery Court. The
release in the judgment specifically refers to this lawsuit, the
state courts found the settlement fair and the class notice
adequate, and respondents acknowledge that they did not opt out of
the class. Pp.375-379.
(d) Because it appears that the judgment would be res judicata
under Delaware law, this Court must proceed to the second step of
the
Marrese analysis and ask whether § 27 of the Exchange
Act partially repealed § 1738. Any such modification must be
implied, but this Court has seldom, if ever, held that a federal
statute impliedly repealed § 1738. There is no suggestion in § 27
that Congress meant to contravene the common-law rules of
preclusion or to repeal § 1738's express statutory requirement. Nor
does § 27 evince any intent to prevent a state-court litigant from
voluntarily releasing Exchange Act claims in judicially approved
settlements. Assuming that § 27 is intended to serve at least the
general purposes of achieving greater uniformity of construction
and more effective and expert application of the Exchange Act, a
state court threatens neither purpose when it upholds a settlement
releasing Exchange Act claims. In addition, other provisions of the
Exchange Act suggest that Congress did not intend to create an
exception to § 1738 for suits alleging violations of the Act, and
precedent supports the conclusion that the concerns underlying the
grant of exclusive jurisdiction in § 27 are not undermined by
state-court approval of settlements releasing Exchange Act claims.
Even when exclusively federal claims are at stake, there is no
universal right to litigate such claims in federal court. See,
e. g., Allen v.
McCurry, 449 U. S. 90, 105.
Pp.380-386.
369
(e) The subject-matter jurisdiction exception to full faith and
credit, relied on by the Ninth Circuit in this case, is inapposite
here, where the rendering court had subject-matter jurisdiction
over the underlying suit and the defendants. pp. 386-387.
50 F.3d
644, reversed and remanded.
THOMAS, J., delivered the opinion of the Court, in which
REHNQUIST, C. J., and O'CONNOR, SCALIA, KENNEDY, SOUTER, and
BREYER, JJ., joined, and in which STEVENS, J., joined as to Parts
I, II -A, and II
-C. STEVENS, J., filed an opinion
concurring in part and dissenting in part,
post, p. 387.
GINSBURG, J., filed an opinion concurring in part and dissenting in
part, in which STEVENS, J., joined, and in which SOUTER, J., joined
as to Part II-B,
post, p. 388.
Barry R. Ostrager argued the cause for petitioners. With
him on the briefs was
Geoffrey C.
Hazard, Jr.
Henry Paul Monaghan argued the cause for respondents.
With him on the brief were Harold Edgar, Roger W Kirby, and
Irving Malchman.
*
JUSTICE THOMAS delivered the opinion of the Court.
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. The answer is no. Absent a partial repeal of the Full Faith
and Credit Act, 28 U. S. C. § 1738, by another federal statute, a
federal court must give the judgment the same effect that it would
have in the courts of the State in which it was rendered.
I
In 1990, petitioner Matsushita Electric Industrial Co. made a
tender offer for the common stock of MCA, Inc., a
* Daniel J. Popeo and
Richard A.
Samp filed a brief for the Washington Legal Foundation et al.
as
amici curiae urging reversal.
Thaddeus Holt filed a brief for C. L. Grimes as
amicus
curiae urging affirmance.
370
Delaware corporation. The tender offer not only resulted in
Matsushita's acquisition of MCA, but also precipitated two lawsuits
on behalf of the holders of MCA's common stock. First, a class
action was filed in the Delaware Court of Chancery against MCA and
its directors for breach of fiduciary duty in failing to maximize
shareholder value. The complaint was later amended to state
additional claims against MCA's directors for,
inter alia,
waste of corporate assets by exposing MCA to liability under the
federal securities laws. In addition, Matsushita was added as a
defendant and was accused of conspiring with MCA's directors to
violate Delaware law. The Delaware suit was based purely on
statelaw claims.
While the state class action was pending, the instant suit was
filed in Federal District Court in California. The complaint named
Matsushita as a defendant and alleged that Matsushita's tender
offer violated Securities and Exchange Commission (SEC) Rules
10b-13 and 14d-10.1 These Rules were created by the SEC pursuant to
the 1968 Williams Act Amendments to the Securities Exchange Act of
1934 (Exchange Act), 48 Stat. 881, as amended, 15 U. S. C. § 78a
et seq. Section 27 of the Exchange Act confers exclusive
jurisdiction upon the federal courts for suits brought to enforce
the Act or rules and regulations promulgated thereunder. See 15 U.
S. C. § 78aa. The District Court declined to certify the class,
entered summary judgment for Matsushita, and dismissed the case.
The plaintiffs appealed to the Court of Appeals for the Ninth
Circuit.
After the federal plaintiffs filed their notice of appeal but
before the Ninth Circuit handed down a decision, the parties
1 We express no opinion in this case on the existence of a
private cause of action under §§ 14(d)(6) and (7) of the Securities
Exchange Act of 1934, 15 U. S. C. §§ 78n(d)(6) and (7), the
statutory authority for Rule 14d-l0.
371
to the Delaware suit negotiated a settlement.2 In exchange for a
global release of all claims arising out of the Matsushita-MCA
acquisition, the defendants would deposit $2 million into a
settlement fund to be distributed pro rata to the members of the
class. As required by Delaware Chancery Rule 23, which is modeled
on Federal Rule of Civil Procedure 23, the Chancery Court certified
the class for purposes of settlement and approved a notice of the
proposed settlement. The notice informed the class members of their
right to request exclusion from the settlement class and to appear
and present argument at a scheduled hearing to determine the
fairness of the settlement. In particular, the notice stated that
"[b]y filing a valid Request for Exclusion, a member of the
Settlement Class will not be precluded by the Settlement from
individually seeking to pursue the claims alleged in the ...
California Federal Actions, ... or any other claim relating to the
events at issue in the Delaware Actions." App. to Pet. for Cert.
96a. Two such notices were mailed to the class members and the
notice was also published in the national edition of the Wall
Street Journal. The Chancery Court then held a hearing. After
argument from several objectors, the court found the class
representation adequate and the settlement fair.
The order and final judgment of the Chancery Court incorporated
the terms of the settlement agreement, providing:
"All claims, rights and causes of action (state or federal,
including but not limited to claims arising under the federal
securities law, any rules or regulations promulgated thereunder, or
otherwise), whether known or unknown that are, could have been or
might in the future be asserted by any of the plaintiffs or any
member of the Settlement Class (other than those who have
val-
2 A previous settlement was rejected by the Court of Chancery as
unfair to the class. See
In re MeA, Inc.
Shareholders Litigation, 598 A. 2d 687 (1991).
372
idly requested exclusion therefrom), ... in connection
with or that arise now or hereafter out of the Merger Agreement,
the Tender Offer, the Distribution Agreement, the Capital
Contribution Agreement, the employee compensation arrangements, the
Tender Agreements, the Initial Proposed Settlement, this Settlement
... and including without limitation the claims asserted in the
California Federal Actions ... are hereby compromised, settled,
released and discharged with prejudice by virtue of the proceedings
herein and this Order and Final Judgment." In re MCA, Inc.
Shareholders Litigation, C. A. No. 11740 (Feb. 22, 1993),
reprinted in App. to Pet. for Cert. 74a-75a (emphasis added).
The judgment also stated that the notice met all the
requirements of due process. The Delaware Supreme Court affirmed.
In re MCA, Inc., Shareholders Litigation, 633 A. 2d 370
(1993) (judgt. order).
Respondents were members of both the state and federal plaintiff
classes. Following issuance of the notice of proposed settlement of
the Delaware litigation, respondents neither opted out of the
settlement class nor appeared at the hearing to contest the
settlement or the representation of the class. On appeal in the
Ninth Circuit, petitioner Matsushita invoked the Delaware judgment
as a bar to further prosecution of that action under the Full Faith
and Credit Act, 28 U. S. C. § 1738.
The Ninth Circuit rejected petitioner's argument, ruling that §
1738 did not apply.
Epstein v.
MCA, Inc., 50 F.3d
644, 661-666 (1995). Instead, the Court of Appeals fashioned a
test under which the preclusive force of a state-court settlement
judgment is limited to those claims that "could ... have been
extinguished by the issue preclusive effect of an adjudication of
the state claims."
Id., at 665. The lower courts have taken
varying approaches to determining the preclusive effect of a
state-court judgment, entered in a class
373
or derivative action, that provides for the release of
exclusively federal claims.3 We granted certiorari to clarify this
important area of federal law. 515 U. S. 1187 (1995).
II
The Full Faith and Credit Act mandates 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." 28 U. S. C. § 1738. The Act thus directs all courts to
treat a state-court judgment with the same respect that it would
receive in the courts of the rendering State. Federal courts may
not "employ their own rules ... in determining the effect of state
judgments," but must "accept the rules chosen by the State from
which the judgment is taken."
Kremer v.
Chemical Constr.
Corp., 456 U. S. 461, 481-482 (1982). Because the Court of
Appeals failed to follow the dictates of the Act, we reverse.
A
The state-court judgment in this case differs in two respects
from the judgments that we have previously considered in our cases
under the Full Faith and Credit Act. As respondents and the Court
of Appeals stressed, the judgment was the product of a class action
and incorporated a settlement agreement releasing claims within the
exclusive jurisdiction of the federal courts. Though respondents
urge "the irrelevance of section 1738 to this litigation," Brief
for Respondents 25, we do not think that either of these features
exempts the judgment from the operation of § 1738.
That the judgment at issue is the result of a class action,
rather than a suit brought by an individual, does not under-
3 Compare the decision below with Grimes v. Vitalink
Communications Corp.,
17 F.3d
1553 (CA3), cert. denied, 513 U. S. 986 (1994); Nottingham
Partners v. Trans-Lux Corp.,
925 F.2d
29 (CA1 1991); and Abramson v. Pennwood Investment Corp.,
392 F.2d
759 (CA2 1968).
374
mine 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. Cf.
McDonald v.
West Branch, 466 U. S. 284, 287-288
(1984) (holding that § 1738 does not apply to arbitration awards
because arbitration is not a "judicial proceeding"). 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.
Further, § 1738 is not irrelevant simply because the judgment in
question might work to bar the litigation of exclusively federal
claims. Our decision in
Marrese v.
American Academy of
Orthopaedic Surgeons, 470 U. S. 373 (1985),
made clear that where § 1738 is raised as a defense in a subsequent
suit, the fact that an allegedly precluded "claim is within the
exclusive jurisdiction of the federal courts
does not
necessarily make § 1738
inapplicable." Id., at 380
(emphasis added). In so holding, we relied primarily on
Kremer v.
Chemical Constr. Corp., supra, which held,
without deciding whether claims under Title VII of the Civil Rights
Act of 1964 are exclusively federal, that state-court proceedings
may be issue preclusive in Title VII suits in federal court.
Kremer, we said, "implies that absent an exception to §
1738, state law determines at least the ... preclusive effect of a
prior state judgment in a subsequent action involving a claim
within the exclusive jurisdiction of the federal courts."
Marrese, 470 U. S., at 381. Accordingly, we decided that "a
state court judgment may in some circumstances have preclusive
effect in a subsequent action within the exclusive jurisdiction of
the federal courts."
Id., at 380.
In
Marrese, we discussed
Nash County Bd. of Ed. v.
Biltmore Co., 640 F.2d
484 (CA4), cert. denied, 454 U. S. 878 (1981), a case that
concerned a state-court settlement judgment. In
Nash, the
question was whether the judgment, which approved the settlement of
state antitrust claims, prevented the litigation of exclusively
federal antitrust claims.
375
See 470 U. S., at 382, n. 2. We suggested that the approach
outlined in
Marrese would also apply in cases like
Nash that involve judgments upon settlement: that is, § 1738
would control at the outset. See 470 U. S., at 382, n. 2. In accord
with these precedents, we conclude that § 1738 is generally
applicable in cases in which the state-court judgment at issue
incorporates a class-action settlement releasing claims solely
within the jurisdiction of the federal courts.
B
Marrese provides the analytical framework for deciding
whether the Delaware court's judgment precludes this exclusively
federal action. When faced with a state-court judgment relating to
an exclusively federal claim, a federal court must first look to
the law of the rendering State to ascertain the effect of the
judgment. See
id., at 381-382. If state law indicates that
the particular claim or issue would be barred from litigation in a
court of that State, then the federal court must next decide
whether, "as an exception to § 1738," it "should refuse to give
preclusive effect to [the] state court judgment."
Id., at
383. See also
Migra v.
Warren City School Dist. Bd. of
Ed., 465 U. S.
75, 81 (1984) ("[I]n the absence of federal law modifying the
operation of § 1738, the preclusive effect in federal court of [a]
state-court judgment is determined by [state] law").
1
We observed in
Marrese that the inquiry into state law
would not always yield a direct answer. Usually, "a state court
will not have occasion to address the specific question whether a
state judgment has issue or claim preclusive effect in a later
action that can be brought only in federal court." 470 U. S., at
381-382. Where a judicially approved settlement is under
consideration, a federal court may consequently find guidance from
general state law on the preclusive force of settlement judgments.
See,
e. g., id., at
376
382-383, n. 2 (observing in connection with
Nash that
"[North Carolina] law gives preclusive effect to consent
judgment[s]"). Here, in addition to providing rules regarding the
preclusive force of class-action settlement judgments in subsequent
suits in state court, the Delaware courts have also spoken to the
particular effect of such judgments in federal court.
Delaware has traditionally treated the impact of settlement
judgments on subsequent litigation in state court as a question of
claim preclusion. Early cases suggested that Delaware courts would
not afford claim preclusive effect to a settlement releasing claims
that could not have been presented in the trial court. See
Ezzes v.
Ackerman, 234 A. 2d 444, 445-446 (Del. 1967)
("[A] judgment entered either after trial on the merits or upon an
approved settlement is
res judicata and bars subsequent suit
on the same claim .... [T]he defense of
res judicata ... is
available if the pleadings framing the issues in the first action
would have permitted the raising of the issue sought to be raised
in the second action, and if the facts were known, or could have
been known to the plaintiff in the second action at the time of the
first action"). As the Court of Chancery has perceived, however,
"the
Ezzes inquiry [was] modified in regard to class
actions,"
In re Union Square Associates Securities
Litigation, C. A. No. 11028, 1993 WL 220528, *3 (June 16,
1993), by the Delaware Supreme Court's decision in
Nottingham
Partners v.
Dana, 564 A. 2d 1089 (1989).
In
Nottingham, a class action, the Delaware Supreme Court
approved a settlement that released claims then pending in federal
court. In approving that settlement, the
Nottingham court
appears to have eliminated the
Ezzes requirement that the
claims could have been raised in the suit that produced the
settlement, at least with respect to class actions:
"'[I]n order to achieve a comprehensive settlement that would
prevent relitigation of settled questions at the
377
core of a class action, a court may permit the release of a
claim based on the identical factual predicate as that underlying
the claims in the settled class action even though the claim was
not presented and might not have been presentable in the class
action.'" 564 A. 2d, at 1106 (quoting TBK Partners, Ltd. v.
Western Union Corp., 675 F.2d
456, 460 (CA2 1982)).
See
Union Square, supra, at *3 (relying directly on
Nottingham to hold that a Delaware court judgment settling a
class action was res judicata and barred arbitration of duplicative
claims that could not have been brought in the first suit). These
cases indicate that even if, as here, a claim could not have been
raised in the court that rendered the settlement judgment in a
class action, a Delaware court would still find that the judgment
bars subsequent pursuit of the claim.
The Delaware Supreme Court has further manifested its
understanding that when the Court of Chancery approves a global
release of claims, its settlement judgment should preclude ongoing
or future federal-court litigation of any released claims. In
Nottingham, the Court stated that "[t]he validity of
executing a general release in conjunction with the termination of
litigation has long been recognized by the Delaware courts. More
specifically, the Court of Chancery has a history of approving
settlements that have implicitly or explicitly included a general
release, which would also release federal claims." 564 A. 2d, at
1105 (citation omitted). Though the Delaware Supreme Court
correctly recognized in
Nottingham that it lacked actual
authority to order the dismissal of any case pending in federal
court, it asserted that state-court approval of the settlement
would have the collateral effect of preventing class members from
prosecuting their claims in federal court. Perhaps the clearest
statement of the Delaware Chancery Court's view on this matter was
articulated in the suit preceding this one: "When a state court
settlement of a class action releases all claims which arise out of
the challenged transaction and is determined to
378
be fair and to have met all due process requirements, the class
members are bound by the release or the doctrine of issue
preclusion. Class members cannot subsequently relitigate the claims
barred by the settlement in a federal court."
In re MCA, Inc.
Shareholders Litigation, 598 A. 2d 687, 691 (1991).4 We are
aware of no Delaware case that suggests otherwise.
Given these statements of Delaware law, we think that a Delaware
court would afford preclusive effect to the settlement judgment in
this case, notwithstanding the fact that respondents could not have
pressed their Exchange Act claims in the Court of Chancery. The
claims are clearly within the scope of the release in the judgment,
since the judgment specifically refers to this lawsuit. 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 (Feb. 22, 1993),
reprinted in App. to Pet. for Cert. 73a, 74a. Cf.
Phillips
Petroleum Co. v.
Shutts, 472 U. S. 797, 812 (1985)
(due process for class-action plaintiffs requires "notice plus an
opportunity to be heard and participate in the litigation"). The
Court of Chancery "further determined that the plaintiffs[,] ... as
representatives of the Settlement Class, have fairly and adequately
protected the
4 In fact, the Chancery Court rejected the first settlement,
which contained no opt-out provision, as unfair to the class
precisely because it believed that the settlement would preclude
the class from pursuing their exclusively federal claims in federal
court. See
In re MeA, Inc. Shareholders
Litigation, 598 A. 2d, at 692 ("[I]f this Court provides for
the release of all the claims arising out of the challenged
transaction, the claims which the Objectors have asserted in the
federal suit will likely be forever barred").
379
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 (due
process requires that "the named plaintiff at all times adequately
represent the interests of the absent class members").5 Under
Delaware Rule 23, as under Federal Rule of Civil Procedure 23,
"[a]ll 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 exclusion." 2
H. Newberg, Class Actions § 2755, p. 1224 (1977). See also
Cooper v.
Federal Reserve Bank of Richmond, 467 U. S. 867, 874 (1984)
("There 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").
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.6
5 Apart from any discussion of Delaware law, respondents contend
that the settlement proceedings did not satisfy due process because
the class was inadequately represented. See Brief for Respondents
34-45. 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. Cf.
Prezant v.
De Angelis, 636 A. 2d 915,
923 (Del. 1994) ("[The] constitutional requirement [of adequacy of
representation] is embodied in [Delaware] Rule 23(a)(4), which
requires that the named plaintiff 'fairly and adequately protect
the interests of the class' "). We need not address the due process
claim, however, 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
Peralta v.
Heights Medical Center, Inc., 485 U. S. 80, 86
(1988).
6 Respondents argue that their failure to opt out of the
settlement class does not constitute consent to the terms of the
settlement under traditional contract principles. Brief for
Respondents 16-25. Again, the issue raised by respondents-whether
the settlement could bar this suit
380
As a historical matter, we have seldom, if ever, held that a
federal statute impliedly repealed § 1738. See
Parsons Steel,
Inc. v.
First Alabama Bank, 474 U. S. 518, 523-525
(1986) (Anti-Injunction Act does not limit § 1738);
Migra v.
Warren City School Dist. Bd. of Ed., 465 U. S., at 83-85 (42
U. S. C. § 1983 does not limit claim preclusion under § 1738);
Kremer v.
Chemical Constr. Corp., 456 U. S., at
468-476 (Title VII of the Civil Rights Act of 1964 does not limit §
1738);
Allen v.
McCurry, 449 U. S. 90, 96-105
(1980) (§ 1983 does not limit issue preclusion under § 1738). But
cf.
Brown v.
Felsen, 442 U. S. 127, 138-139
(1979) (declining to give claim preclusive
as a matter of contract law, as distinguished from § 1738 law-is
outside the scope of the question on which we granted certiorari.
We note, however, that if a State chooses to approach the
preclusive effect of a judgment embodying the terms of a settlement
agreement as a question of pure contract law, a federal court must
adhere to that approach under § 1738.
Kremer v.
Chemical
Constr. Corp., 456 U. S. 461, 481-482
(1982).
381
effect to prior state-court debt collection proceeding in
federal bankruptcy suit, without discussing § 1738, state law, or
implied repeals). The rarity with which we have discovered implied
repeals is due to the relatively stringent standard for such
findings, namely, that there be an "'irreconcilable conflict'"
between the two federal statutes at issue.
Kremer v.
Chemical Constr. Corp., supra, at 468 (quoting
Radzanower v.
Touche Ross &
Co., 426 U. S. 148, 154
(1976)).
Section 27 provides that "[t]he district courts of the United
States ... shall have exclusive jurisdiction ... of all suits in
equity and actions at law brought to enforce any liability or duty
created by this chapter or the rules and regulations thereunder."
15 U. S. C. § 78aa. There is no suggestion in § 27 that Congress
meant for plaintiffs with Exchange Act claims to have more than one
day in court to challenge the legality of a securities transaction.
Though the statute plainly mandates that suits alleging violations
of the Exchange Act may be maintained only in federal court,
nothing in the language of § 27 "remotely expresses any
congressional intent to contravene the common-law rules of
preclusion or to repeal the express statutory requirements of ...
28 U. S. C. § 1738."
Allen v.
McCurry, supra, at
97-98.
Nor does § 27 evince any intent to prevent litigants in state
court-whether suing as individuals or as part of a classfrom
voluntarily releasing Exchange Act claims in judicially approved
settlements. While § 27 prohibits state courts from adjudicating
claims arising under the Exchange Act, it does not prohibit state
courts from approving the release of Exchange Act claims in the
settlement of suits over which they have properly exercised
jurisdiction, i.
e., suits arising under state law or under
federal law for which there is concurrent jurisdiction. In this
case, for example, the Delaware action was not "brought to enforce"
any rights or obligations under the Act. The Delaware court
asserted judicial power
382
over a complaint asserting purely state-law causes of action7
and, after the parties agreed to settle, certified the class and
approved the settlement pursuant to the requirements of Delaware
Rule of Chancery 23 and the Due Process Clause. Thus, the Delaware
court never trespassed upon the exclusive territory of the federal
courts, but merely approved the settlement of a common-law suit
pursuant to state and nonexclusive federal law. See
Abramson
v.
Pennwood Investment Corp., 392 F.2d
759, 762 (CA2 1968) ("Although the state court could not
adjudicate the federal claim, it was within its powers over the
corporation and the parties to approve the release of that claim as
a condition of settlement of the state action"). While it is true
that the state court assessed the general worth of the federal
claims in determining the fairness of the settlement, such
assessment does not amount to a judgment on the merits of the
claims. See
TBK Partners, Ltd. v.
Western Union
Corp., 675 F.2d
456, 461 (CA2 1982) (" 'Approval of a settlement does not call
for findings of fact regarding the claims to be compromised. The
court is concerned only with the
likelihood of success or
failure; the actual merits of the controversy are not to be
determined''') (quoting Haudek, The Settlement and Dismissal of
Stockholders' Actions-Part II: The Settlement, 23 Sw. L. J. 765,
809 (1969) (footnotes omitted)). The Delaware court never purported
to resolve the merits of the Exchange Act claims in the course of
appraising the settlement; indeed, it expressly disavowed that
purpose. See
In re MCA, Inc. Shareholders Litigation, C. A.
No. 11740 (Feb. 16, 1993), reprinted in App. to Pet. for Cert. 68a
("In determining whether a settlement should be approved, a court
should not try the merits of the underlying claims. This principle
would seem to be especially appropriate where the under-
7 Though the plaintiff class premised one of its claims of
fiduciary breach on the allegation that MCA wasted corporate assets
by exposing the corporation to liability under the federal
securities laws, the cause pleaded was nonetheless a state
common-law action for breach of fiduciary duty.
383
lying claims, like the federal claims here, are outside the
jurisdiction of this Court" (citation omitted)).
The legislative history of the Exchange Act elucidates no
specific purpose on the part of Congress in enacting § 27. See
Murphy v.
Gallagher, 761 F.2d
878, 885 (CA2 1985) (noting that the legislative history of the
Exchange Act provides no readily apparent explanation for the
provision of exclusive jurisdiction in § 27) (citing 2 & 3 L.
Loss, Securities Regulation 997, 2005 (2d ed. 1961)). We may
presume, however, that Congress intended § 27 to serve at least the
general purposes underlying most grants of exclusive jurisdiction:
"to achieve greater uniformity of construction and more effective
and expert application of that law."
Murphy v.
Gallagher,
supra, at 885. When a state court upholds a settlement that
releases claims under the Exchange Act, it threatens neither of
these policies. There is no danger that state-court judges who are
not fully expert in federal securities law will say definitively
what the Exchange Act means and enforce legal liabilities and
duties thereunder. And the uniform construction of the Act is
unaffected by a state court's approval of a proposed settlement
because the state court does not adjudicate the Exchange Act claims
but only evaluates the overall fairness of the settlement,
generally by applying its own business judgment to the facts of the
case. See,
e. g., Polk v.
Good, 507 A.
2d 531, 535 (Del. 1986).
Furthermore, other provisions of the Exchange Act suggest that
Congress did not intend to create an exception to § 1738 for suits
alleging violations of the Act. Congress plainly contemplated the
possibility of dual litigation in state and federal courts relating
to securities transactions. See 15 U. S. C. § 78bb(a) (preserving
"all other rights and remedies that may exist at law or in
equity"). And all that Congress chose to say about the consequences
of such litigation is that plaintiffs ought not obtain double
recovery. See
ibid. Congress said nothing to modify the
background rule that where a state-court judgment precedes that of
a federal
384
court, the federal court must give full faith and credit to the
state-court judgment. See
Murphy v.
Gallagher, supra,
at 884.
Finally, precedent supports the conclusion that the concerns
underlying the grant of exclusive jurisdiction in § 27 are not
undermined by state-court approval of settlements releasing
Exchange Act claims. We have held that statecourt proceedings may,
in various ways, subsequently affect the litigation of exclusively
federal claims without running afoul of the federal jurisdictional
grant in question. In
Becher v.
Contoure Laboratories,
Inc., 279 U. S.
388 (1929) (cited in
Marrese, 470 U. S., at 381), we
held that state-court findings of fact were issue preclusive in
federal patent suits. We did so with full recognition that "the
logical conclusion from the establishing of [the state law] claim
is that Becher's patent is void." 279 U. S., at 391.
Becher
reasoned that although "decrees validating or invalidating patents
belong to the Courts of the United States," that "does not give
sacrosanctity to facts that may be conclusive upon the question in
issue."
Ibid. Similarly, while binding legal determinations
of rights and liabilities under the Exchange Act are for federal
courts only, there is nothing sacred about the approval of
settlements of suits arising under state law, even where the
parties agree to release exclusively federal claims. See also
Brown v.
Felsen, 442 U. S., at 139, n. 10 (noting
that "[i]f, in the course of adjudicating a state-law question, a
state court should determine factual issues using standards
identical to those of § 17, then collateral estoppel, in the
absence of countervailing statutory policy, would bar relitigation
of those issues in the bankruptcy court");
Pratt v.
Paris
Gas Light &
Coke Co., 168 U. S. 255, 258 (1897)
(when a state court has jurisdiction of the parties and the subject
matter of the complaint, the state court may decide the validity of
a patent when that issue is raised as a defense).
We have also held that Exchange Act claims may be resolved by
arbitration rather than litigation in federal court.
385
In
Shearson/American Express Inc. v.
McMahon,
482 U. S. 220
(1987), we found that parties to an arbitration agreement could
waive the right to have their Exchange Act claims tried in federal
court and agree to arbitrate the claims.
Id., at 227-228. It
follows that state-court litigants ought also to be able to waive,
or "release," the right to litigate Exchange Act claims in a
federal forum as part of a settlement agreement. As
Shearson/American Express Inc. demonstrates, a statute
conferring exclusive federal jurisdiction for a certain class of
claims does not necessarily require resolution of those claims in a
federal court.
Taken together, these cases stand for the general proposition
that even when exclusively federal claims are at stake, there is no
"universal right to litigate a federal claim in a federal district
court."
Allen v.
McCurry, 449 U. S., at 105. If
class-action plaintiffs wish to preserve absolutely their right to
litigate exclusively federal claims in federal court, they should
either opt out of the settlement class or object to the release of
any exclusively federal claims. In fact, some of the plaintiffs in
the Delaware class action requested exclusion from the settlement
class. They are now proceeding in federal court with their federal
claims, unimpeded by the Delaware judgment.
In the end, §§ 27 and 1738 "do not pose an either-or
proposition."
Connecticut Nat. Bank v.
Germain,
503 U. S. 249,
253 (1992). They can be reconciled by reading § 1738 to mandate
full faith and credit of state-court judgments incorporating global
settlements, provided the rendering court had jurisdiction over the
underlying suit itself, and by reading § 27 to prohibit state
courts from exercising jurisdiction over suits arising under the
Exchange Act. Cf. 18 C. Wright, A. Miller, & E. Cooper, Federal
Practice and Procedure §4470, pp. 688-689 (1981) ("[S]ettlement of
state court litigation has been held to defeat a subsequent federal
action if the settlement was intended to apply to claims in
exclusive federal jurisdiction as well as other claims .... These
rulings
386
are surely correct"). Congress' intent to provide an exclusive
federal forum for adjudication of suits to enforce the Exchange Act
is clear enough. But we can find no suggestion in § 27 that
Congress meant to override the "principles of comity and repose
embodied in § 1738,"
Kremer v.
Chemical Constr.
Corp., 456 U. S., at 463, by allowing plaintiffs with Exchange
Act claims to release those claims in state court and then litigate
them in federal court. We conclude that the Delaware courts would
give the settlement judgment preclusive effect in a subsequent
proceeding and, further, that § 27 did not effect a partial repeal
of § 1738.
C
The Court of Appeals did not engage in any analysis of Delaware
law pursuant to § 1738. Rather, the Court of Appeals declined to
apply § 1738 on the ground that where the rendering forum lacked
jurisdiction over the subject matter or the parties, full faith and
credit is not required. 50 F. 3d, at 661,666. See
Underwriters
Nat. Assurance Co. v.
North Carolina Life &
Accident &
Health Ins. Guaranty Assn., 455 U. S. 691, 704-705
(1982) (" '[A] judgment of a court in one State is conclusive upon
the merits in a court in another State only if the court in the
first State had power to pass on the merits-had jurisdiction, that
is, to render the judgment''') (quoting
Durfee v.
Duke, 375 U.
S. 106, 110 (1963)). The Court of Appeals decided that the
subject-matter jurisdiction exception to full faith and credit
applies to this case because the Delaware court acted outside the
bounds of its own jurisdiction in approving the settlement, since
the settlement released exclusively federal claims. See 50 F. 3d,
at 661-662, and n. 25.
As explained above, the state court in this case clearly
possessed jurisdiction over the subject matter of the underlying
suit and over the defendants. Only if this were not so-for
instance, if the complaint alleged violations of the Exchange Act
and the Delaware court rendered a judgment
387
on the merits of those claims-would the exception to § 1738 for
lack of subject-matter jurisdiction apply. Where, as here, the
rendering court in fact had subject-matter jurisdiction, the
subject-matter-jurisdiction exception to full faith and credit is
simply inapposite. In such a case, the relevance of a federal
statute that provides for exclusive federal jurisdiction is not to
the state court's possession of jurisdiction
per se, but to
the existence of a partial repeal of § 1738.8
***
The judgment of the Court of Appeals is reversed, and the case
is remanded for proceedings consistent with this opinion.
It is so ordered.
JUSTICE STEVENS, concurring in part and dissenting in part.
While I join Parts I, II -A, and II -C of the Court's opinion,
and while I also agree with the Court's reasons for concluding that
§ 27 of the Securities Exchange Act of 1934 does not create an
implied partial repeal of the Full Faith and Credit Act, I join
neither Part II-B nor the Court's judgment because I agree with
JUSTICE GINSBURG that the question of Delaware law should be
addressed by the Court of Appeals in the first instance, and that
the Ninth Circuit remains free to consider whether Delaware courts
fully and fairly litigated the adequacy of class
representation.
8 Kalb v.
Feuerstein, 308 U. S. 433 (1940), is
not to the contrary. In that case, the federal statute at issue
expressly prohibited certain common-law actions from being either
instituted or maintained in state court.
Id., at 440-441.
Thus, by merely entertaining a common-law foreclosure suit, over
which it otherwise would have had jurisdiction, the state court
violated the terms of the Act. That is not the situation here,
where there is no contention that just by entertaining the class
action the Delaware court acted in violation of federal law.
388
JUSTICE GINSBURG, with whom JUSTICE STEVENS joins, and with whom
JUSTICE SOUTER joins as to Part II-B, concurring in part and
dissenting in part.
I join the Court's judgment to the extent that it remands the
case to the Ninth Circuit. I agree that a remand is in order
because the Court of Appeals did not attend to this Court's reading
of 28 U. S. C. § 1738 in a controlling decision,
Kremer v.
Chemical Constr. Corp., 456 U. S. 461 (1982). But
I would not endeavor, as the Court does, to speak the first word on
the content of Delaware preclusion law. Instead, I would follow our
standard practice of remitting that issue for decision, in the
first instance, by the lower federal courts. See,
e. g.,
Marrese v.
American Academy of Orthopaedic Surgeons,
470 U. S. 373,
387 (1985).
I write separately to emphasize a point key to the application
of § 1738: A state-court judgment generally is not entitled to full
faith and credit unless it satisfies the requirements of the
Fourteenth Amendment's Due Process Clause. See
Kremer, 456
U. S., at 482-483. In the class-action setting, adequate
representation is among the due process ingredients that must be
supplied if the judgment is to bind absent class members. See
Phillips Petroleum Co. v.
Shutts, 472 U. S. 797, 808, 812
(1985);
Prezant v.
De Angelis, 636 A. 2d 915, 923-924
(Del. 1994).
Suitors in this action (called the "Epstein plaintiffs" in this
opinion), respondents here, argued before the Ninth Circuit, and
again before this Court, that they cannot be bound by the Delaware
settlement because they were not adequately represented by the
Delaware class representatives. They contend that the Delaware
representatives' willingness to release federal securities claims
within the exclusive jurisdiction of the federal courts for a
meager return to the class members, but a solid fee to the Delaware
class attorneys, disserved the interests of the class,
particularly, the absentees. The inadequacy of representation was
apparent, the Epstein plaintiffs maintained, for at the time of the
settle-
389
ment, the federal claims were
sub judice in the proper
forum for those claims-the federal judiciary. 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
consideration on remand. See
ante, at 379, n. 5 (due process
"w[as] not the basis for the decision below," so the Court "need
not address [it]").
I
Matsushita's acquisition of MCA prompted litigation in state and
federal courts. A brief account of that litigation will facilitate
comprehension of the Epstein plaintiffs' position. On September 26,
1990, in response to reports in the financial press that Matsushita
was negotiating to buy MCA, a suit was filed in the Court of
Chancery of Delaware, a purported class action on behalf of the
stockholders of MCA. Naming MCA and its directors (but not
Matsushita) as defendants, the complaint invoked state law only. It
alleged that MCA's directors had failed to carry out a market check
to maximize shareholder value upon a change in corporate control, a
check required by
Revlon, Inc. v.
MacAndrews
& Forbes Holdings, Inc., 506 A. 2d 173, 182 (Del.
1986). For this alleged breach of fiduciary duty, the complaint
sought,
inter alia, an injunction against Matsushita's
proposed acquisition of MCA.
Matsushita announced its tender offer on November 26, 1990. It
offered holders of MCA common stock $71 per share, if they tendered
their shares before December 29, 1990. The owners of 91 % of MCA's
common stock tendered their shares and, on January 3, 1991, for a
price of $6.1 billion, Matsushita acquired MCA.
On December 3,1990, a few days after the required Securities and
Exchange Commission (SEC) filings disclosed the terms of the tender
offer, several MCA shareholders filed suit in the United States
District Court for the Central Dis-
390
trict of California.1 Based solely on federal law, their
complaints alleged that Matsushita, first named defendant, violated
SEC Rules 14d-10, 17 CFR §240.14d-10 (1994), and 10b-13,
id., § 240.10b-13, by offering preferential treatment in the
tender offer to MCA principals Lew Wasserman and Sidney Sheinberg.
As stated in the complaint, the public tender offer included a
special tax-driven stock swap arrangement for Wasserman, then MCA's
chairman and chief executive officer, and a $21 million bonus for
Sheinberg, then MCA's chief operating officer and owner of
1,170,000 shares of MCA common stock. These arrangements allegedly
violated,
inter alia, the SEC's "all-holder best-price" rule
(Rule 14d-10), which requires bidders to treat all shareholders on
equal terms. The claims of federal securities law violations fell
within the exclusive jurisdiction of the federal court. See 15 U.
S. C. § 78aa. The Epstein plaintiffs also sought class
certification to represent all MCA shareholders at the time of the
tender offer.
Two days later, counsel in the Delaware action advised MCA's
counsel that the Delaware plaintiffs intended to amend their
complaint to include additional claims against MCA and its
directors and to add Matsushita as a defendant. The additional
claims alleged that MCA wasted corporate assets by increasing the
corporation's exposure to liability for violation of Rules 10b-13
and 14d-10, that MCA failed to
1 Two sets of plaintiffs filed complaints in the Central
District of California: the Epstein plaintiffs (including Lawrence
Epstein, John Linder, Jane Rockford, Maurice Karlin, Ruth Karlin,
Beth Karlin, and Bert Karlin) sued both individually and on behalf
of all MCA shareholders at the time of the tender offer; Walter
Minton brought suit in his individual capacity. All had tendered
their shares for the $71 tender price. The District Court
consolidated the two cases. Minton and, it appears, Rockford opted
out of the Delaware class-action settlement. Matsushita does not
contest the qualification of Minton and Rockford, as individuals,
to pursue federal claims unimpeded by the settlement in Delaware.
See Brief for Petitioners ii. Matsushita does contest any
class-action initiative in federal court.
391
make full disclosure of the benefits MCA insiders would receive
from the takeover, and that directors Wasserman and Sheinberg
breached their fiduciary duties by negotiating preferential deals
with Matsushita. Matsushita, the amended complaint alleged, had
conspired with and aided and abetted MCA directors in violation of
Delaware law.
Within days, the Delaware parties agreed to a settlement and, on
December 17, 1990, submitted their proposal to the Delaware Vice
Chancellor. The agreement provided for a modification of a "poison
pill" in the corporate charter of an MCA subsidiary,2 and for a
fees payment of $1 million to the class counsel. The settlement
agreement required the release of all claims, state and federal,
arising out of the tender offer.
The Vice Chancellor rejected the settlement agreement on April
22, 1991, for two reasons: the absence of any monetary benefit to
the class members; and the potential value of the federal claims
that the agreement proposed to release. The "generous payment" of
$1 million in counsel fees, the Vice Chancellor observed,
"confer[red] no benefit on the members of the Class."
In re
MeA, Inc. Shareholders Litigation, 598 A. 2d 687, 695
(Del. Ch. 1991). And the value of the revised poison pill to the
class, the Vice Chancellor said, was "illusionary[,] ... apparently
... proposed merely to justify a settlement which offers no real
monetary benefit to the Class."
Id., at 696. The Vice
Chancellor described the state-law claims as "at best, extremely
weak and, therefore, [of] little or no value."
Id., at 694.
"[T]he only claims which have any substantial merit," he said, "are
the claims ... in the California federal suit that were not
asserted in this Delaware action."
Id., at 696. After the
rejection of
2 The subsidiary in question was spun off from MCA during the
merger because it owned a television station that federal law
prohibited Matsushita from acquiring. The $71 tender offer price
included $5 worth of stock in this new corporation.
392
the settlement, the Delaware lawsuit lay dormant for more than a
year.
The federal litigation proceeded. In various rulings, the
District Court denied the federal plaintiffs' motion for partial
summary judgment, denied the Epstein plaintiffs' motion for class
certification, and granted Matsushita's motion for summary judgment
dismissing the claims. On April 15, 1992, the District Court
entered its final judgment, which the Epstein plaintiffs appealed
to the Ninth Circuit.
On October 22, 1992, after the federal plaintiffs had filed
their notice of appeal, the Delaware parties reached a second
settlement agreement. Matsushita agreed to create a $2 million
settlement fund that would afford shareholders 2 to 3 cents per
share before payment of fees and costs. The Delaware class counsel
requested $691,000 in fees. In return for this relief, the Delaware
plaintiffs agreed to release "all claims, rights and causes of
action (state or federal, including but not limited to claims
arising under the federal securities laws, and any rules or
regulations promulgated thereunder, or otherwise) ... in connection
with or that arise now or hereafter out of the [tender offer] ...
including without limitation the claims asserted in the California
Federal Actions .... " App. 187-188. Unlike the first settlement
proposal, the second agreement included an opt-out provision.
This time the Vice Chancellor approved the settlement.
He stated: "[I]t is in the best interests of the class to settle
this litigation and the terms of the settlement are fair and
reasonable-although the value of the benefit to the class is
meager."
In re MeA, Inc. Shareholders
Litigation, C. A. No. 11740, 1993 WL 43024, *1 (Del. Ch., Feb.
16, 1993). He found the class members' recovery of 2 to 3 cents per
share "adequate (if only barely so) to support the proposed
settlement."
Id., at *4. The federal claims, he reasoned,
having been dismissed by the District Court, "now have minimal
economic value."
Ibid. And he gave weight to the pres-
393
ence in the second settlement agreement of an opt-out provision.
Ibid.
Addressing the objectors' contention that the proposed
settlement was "collusive," the Vice Chancellor recalled that "the
settling parties ha[d] previously proposed a patently inadequate
settlement," and he agreed that "suspicions abound."
Id., at
*5. Nevertheless, he noted, the "[o]bjectors have offered no
evidence of any collusion," so he declined to reject the settlement
on that ground.
Ibid. Reducing the counsel fees from the
requested $691,000 to $250,000, the Vice Chancellor offered this
observation: "[T]he defendants' willingness to create the
settlement fund seems likely to have been motivated as much by
their concern as to their potential liability under the federal
claims as by their concern for liability under the state law claims
which this Court characterized as 'extremely weak.'"
Id., at
*6. In a brief order, the Delaware Supreme Court affirmed "on the
basis of and for the reasons assigned by the Court of Chancery ....
"
In re MeA, Inc. Shareholders Litigation, C.
A. No. 126,1993, 1993 WL 385041, *1 (Sept. 21, 1993), judgt. order
reported at 633 A. 2d 370.
Before the Ninth Circuit, Matsushita argued that the Delaware
class-action settlement barred litigation of the federal claims
raised in the Epstein action. The Ninth Circuit disagreed. Relying
on Federal Circuit Court decisions,3 the Court of Appeals held that
state courts lack plenary power to approve settlements that
effectively extinguish exclusively federal claims. Only if federal
and state claims rest on the "identical factual predicate," the
Ninth Circuit concluded, could a state-court settlement subsume an
exclusively federal claim. It was not enough, in the Ninth
Circuit's view, that the discrete federal and state claims stem
from the
3 Closest in point, the court said, were Grimes v. Vitalink
Communications Corp.,
17 F.3d
1553 (CA3 1994), and Nottingham Partners v. TransLux Corp.,
925 F.2d
29 (CA1 1991). See Epstein v. MCA, Inc.,
50
F.3d 644, 662 (CA9 1995).
394
"same transaction," the test Matsushita urged. 50 F. 3d, at
661-665. The federal securities claims did not turn on the same
operative facts as the state claims pleaded in Delaware, the Ninth
Circuit found; accordingly, the federal claims could not have been
extinguished by the issue-preclusive effect of an adjudication of
the state claims. This analysis led the Ninth Circuit to declare
that the Delaware decree "exceed[ed] the jurisdiction of the state
court and, therefore, is not entitled to full faith and credit."
Id., at 666.
On the merits, the Ninth Circuit held, first, that a private
right of action could be maintained to redress Rule 14d-10
violations.
Id., at 652. The court next held that Matsushita
violated Rule 14d-10 by paying Wasserman consideration not offered
to other shareholders,
id., at 657; reversing the District
Court's disposition of this matter, the Ninth Circuit held that
plaintiffs were entitled to summary judgment on liability and
remanded for a determination of damages,
ibid. Regarding
plaintiffs' claim that the $21 million payment to Sheinberg
violated Rule 14d-10, the Ninth Circuit vacated the summary
judgment for Matsushita and remanded for a determination whether
the payment was in fact made to encourage Sheinberg to tender his
shares.
Id., at 659.
II A
Section 1738's full faith and credit instruction, as the Court
indicates, requires the forum asked to recognize a judgment first
to determine the preclusive effect the judgment would have in the
rendering court. See
Kremer, 456 U. S., at 466;
Marrese, 470 U. S., at 381. Because the Ninth Circuit did
not evaluate the preclusive effect of the Delaware judgment through
the lens of that State's preclusion law, I would remand for that
determination. See
id., at 386-387;
Migra v.
Warren City School Dist. Bd. of Ed., 465 U. S. 75, 87 (1984)
("Prudence ... dictates that it is the District Court, in the
395
first instance, not this Court, that should interpret Ohio
preclusion law and apply it.").4
B
Every State's law on the preclusiveness of judgments is
pervasively affected by the supreme law of the land. To be valid in
the rendition forum, and entitled to recognition nationally, a
state court's judgment must measure up to the requirements of the
Fourteenth Amendment's Due Process Clause.
Kremer, 456 U.
S., at 482-483. "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."
Id., at 482 (footnote omitted).
In
Phillips Petroleum Co. v.
Shutts, this Court
listed minimal procedural due process requirements a class-action
money judgment must meet if it is to bind absentees; those
requirements include notice, an opportunity to be heard, a right to
opt out, and adequate representation. 472 U. S., at 812. "[T]he Due
Process Clause of course requires that the named plaintiff at all
times adequately represent the interests of the absent class
members."
Ibid. (citing
Hansberry v.
Lee,
311 U. S. 32,
42-43, 45 (1940)). As the
Shutts Court's phrase "at all
times" indicates, the class representative's duty to represent
absent class members adequately is a continuing one. 472 U. S., at
812; see also
Gonzales v.
Cassidy, 474 F.2d
67,75 (CA5 1973) (representative's failure to pursue an appeal
rendered initially adequate class representation inadequate, so
that judgment did not bind the class).
Although emphasizing the constitutional significance of the
adequate representation requirement, this Court has recog-
4 In its endeavor to forecast Delaware preclusion law, the Court
appears to have blended the "identical factual predicate" test
applied by the Delaware Supreme Court in
Nottingham Partners
v.
Dana, 564 A. 2d 1089, 1106-1107 (1989), with the broader
"same transaction" test advanced by Matsushita. See
ante, at
376-378.
396
nized the first line responsibility of the States themselves for
assuring that the constitutional essentials are met. See
Hansberry, 311 U. S., at 42.5 Final judgments, however,
remain vulnerable to collateral attack for failure to satisfy the
adequate representation requirement. See
id., at 40, 42; see
also Restatement (Second) of Judgments §§42(d) and (e), Comments
e andf, pp. 406, 410-412 (1982) (noting,
inter alia,
that judgment is not binding on purportedly represented person
where, to the knowledge of the opposing party, the representative
seeks to advance his own interest at the expense of the represented
person); see also
id., §41, Comment
a, p. 394 (if §
42 circumstances exist, "the represented person may avoid being
bound
either by appearing in the action before rendition of
the judgment
or by attacking the judgment by subsequent
proceedings"). (Emphasis added.) A court conducting an action
cannot predetermine the res judicata effect of the judgment; that
effect can be tested only in a subsequent action. See 7B C. Wright,
A. Miller, & M. Kane, Federal Practice and Procedure § 1789, p.
245 (2d ed. 1986).
In Delaware, the constitutional due process requirement of
adequate representation is embodied in Delaware Court of Chancery's
Rule 23, a class-action rule modeled on its federal counterpart.
Prezant, 636 A. 2d, at 923, 920. Delaware requires, as a
prerequisite to class certification, that the named
5 Many States, including Delaware, have class-action rules
corresponding to Federal Rule of Civil Procedure 23, a rule ranking
adequacy of representation as a prerequisite to maintaining a class
action. See 3 H. Newberg & A. Conte, Newberg on Class Actions,
App. 13-1 (3d ed. 1992) (listing 39 States and the District of
Columbia with rules comparable to the amended Federal Rule of Civil
Procedure 23); Fed. Rule Civ. Proc. 23(a)(4) (representatives may
sue on behalf of the class only if "the representative parties will
fairly and adequately protect the interests of the class"); see
also
General Telephone Co. of Southwest v.
Falcon,
457 U. S. 147,
157-158, n. 13 (1982) (Federal Rule of Civil Procedure 23(a)(4)'s
adequate representation requirement "raises concerns about the
competency of class counsel and conflicts of interest," in addition
to the question whether the representative shares the interests of
the class members).
397
plaintiffs "fairly and adequately protect the interests of the
class." Del. Ch. Rule 23(a)(4). In
Prezant, the Delaware
Supreme Court considered whether adequate class representation was
"a
sine qua non for approval of a class action settlement,"
and concluded that it was. 636 A. 2d, at 920, 926. The state high
court overturned a judgment and remanded a settlement because the
Court of Chancery had failed to make an explicit finding of
adequate representation.
Id., at 926.
The Delaware Supreme Court underscored that due process demands
more than notice and an opportunity to opt out; adequate
representation, too, that court emphasized, is an essential
ingredient.
Id., at 924 (citing
Phillips Petroleum
Co. v.
Shutts, 472 U. S., at 812). Notice, the Delaware
Supreme Court reasoned, cannot substitute for the thorough
examination and informed negotiation an adequate representative
would pursue.
Prezant, 636 A. 2d, at 924. The court also
recognized that opt-out rights "are infrequently utilized and
usually economically impracticable."
Ibid.
The Vice Chancellor's evaluation of the merits of the settlement
could not bridge the gap, the Delaware Supreme Court said, because
an inadequate representative "taint[s]" the entire settlement
process.
Id., at 925.6 "[A]n adequate representative," the
Delaware Supreme Court explained, "vigorously prosecuting an action
without conflict and bargaining at arms-length, may present
different facts and a
6 In both
Prezant and the instant case, a temporary
settlement class device was used, telescoping the inquiry of
adequate representation into the examination of the fairness of the
settlement. According to the Delaware Supreme Court, however, this
near simultaneity does
not relieve the representative of her
duty to demonstrate, nor the court of its duty to determine, the
adequacy of representation.
Prezant, 636 A. 2d, at 923. In a
comprehensive opinion, the Third Circuit reached the same
conclusion after examining the temporary class settlement device in
the context of Federal Rule of Civil Procedure 23. See
In re
General Motors Corp. Pick-up Truck Fuel Tank Products Liability
Litigation, 55 F.3d
768, 794-800 (1995).
398
different settlement proposal to the court than would an
inadequate representative."
Ibid. Consequently, the Delaware
Supreme Court held,
"in every class action settlement, the
Court of Chancery is required to make an explicit determination on
the record of the propriety of the class action according to the
requisites of Rule 23(a) and (b)."
Ibid.
In the instant case, the Epstein plaintiffs challenge the
preclusive effect of the Delaware settlement, arguing that the Vice
Chancellor never in fact made the constitutionally required
determination of adequate representation. See
id., at 923.7
They contend that the state court left unresolved key questions:
notably, did the class representatives share substantial common
interests with the absent class members, and did counsel in
Delaware vigorously press the interests of the class in negotiating
the settlement.8 In particular, the Epstein plaintiffs question
whether the Delaware class representatives-who filed the state
lawsuit on September 26, 1990, two months before the November 26
tender offer announcement-actually tendered shares in December,
thereby enabling them to litigate a Rule 14d-10 claim in federal
court. They also suggest that the Delaware representatives
undervalued the federal claims-claims they could only settle, but
never litigate, in a Delaware court. Finally,
7 The Vice Chancellor did not have the benefit of the Delaware
Supreme Court's clear statement in
Prezant, decided one year
after this settlement was approved. In
Prezant, however, the
Delaware Supreme Court largely reiterated and applied what this
Court had stated almost a decade earlier in
Phillips Petroleum
Co. v.
Shutts, 472 U. S. 797, 808, 812
(1985). See also 2 R. Balotti & J. Finkelstein, Delaware Law of
Corporations and Business Organization § 13.22, p. 13-131, and n.
578 (2d ed. 1996 Supp.).
8 The order approving the class for settlement purposes, the
Epstein plaintiffs urge, contains no discussion of the adequacy of
the representatives, see App. 198, and the order and final judgment
approving the settlement contains only boilerplate language
referring to the adequacy of representation, see
id., at
204-205. The Delaware Supreme Court approved the Court of
Chancery's judgment in a one paragraph order. See
In re MCA,
Inc. Shareholders Litigation, 633 A. 2d 370 (1993) (judgt.
order).
399
the Epstein plaintiffs contend that the Vice Chancellor
improperly shifted the burden of proof; 9 he rejected the Delaware
objectors' charges of "collusion" for want of evidence while
acknowledging that "suspicions [of collusion] abound."
In re
MeA, Inc. Shareholders Litigation, 1993 WL 43024, at
*5.10
Mindful that this is a court of final review and not first view,
I do not address the merits of the Epstein plaintiffs' contentions,
or Matsushita's counterargument that the issue of adequate
representation was resolved by full and fair litigation in the
Delaware Court of Chancery.ll These arguments remain open for
airing on remand. I stress, however, the centrality of the
procedural due process protection of adequate representation in
class-action lawsuits, emphatically including those resolved by
settlement. See generally J. Coffee, Suspect Settlements in
Securities Litigation, N. Y. L. J., March 28, 1991, p. 5, col.
1.
9 Delaware law appears to place the burden of proof on the class
representatives. See 2 Balotti & Finkelstein,
supra, at
11, n. 7, § 13-17, p. 13-121 (class representative must prove
satisfaction of Del. Ch. Rule 23(a) requirements, including
adequacy of representation); see also 7A C. Wright, A. Miller,
& M. Kane, Federal Practice and Procedure § 1765, pp. 273-274,
and n. 29 (2d ed. 1986); 3B J. Moore, Moore's Federal Practice §
23.02-2 (2d ed. 1995).
10 In this regard, it is noteworthy that Matsushita did not move
to dismiss the Delaware action after the Vice Chancellor, in
rejecting the first proposed settlement, surveyed the state-law
claims and found them insubstantial. See
In re MeA,
Inc. Shareholders Litigation, 598 A. 2d 687, 694 (Del. Ch.
1991) (Vice Chancellor described "the asserted state law claims" as
"at best, extremely weak" and of "little or no value").
11 Counsel for Matsushita acknowledged that relief from a
judgment may be sought in Delaware pursuant to that State's
counterpart to Federal Rule of Civil Procedure 60(b). See Tr. of
Oral Arg. 51-52; Del. Ch. Rule 60; see also 2 Newberg & Conte,
supra, at 9, n. 5, §§ 11.27, 11.63 (Federal Rule of Civil
Procedure 60(b) provides an avenue to challenge the adequacy of
representation in a class settlement).
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