Matsushita Elec. Industrial Co. v. Epstein

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.

In 1990, petitioner Matsushita Electric Industrial Co. made a tender offer for the common stock of MCA, Inc., a 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 state-law 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 Exchange Commission (SEC) Rules 10b-3 and 14d-10. 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. . . . 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 to the Delaware suit negotiated a settlement. 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.” . . . 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 validly 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.” . . .

The judgment also stated that the notice met all the requirements of due process. The Delaware Supreme Court affirmed. . . .

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. . . . 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.” . . . The lower courts have taken varying approaches to determining the preclusive effect of a state court judgment, entered in a class or derivative action, that provides for the release of exclusively federal claims. We granted certiorari to clarify this important area of federal law. . . .

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.” . . . 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.” . . . Because the Court of Appeals failed to follow the dictates of the Act, we reverse.

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 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.

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, 105 S.Ct. 1327, 84 L.Ed.2d 274 (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.” . . . In so holding, we relied primarily on Kremer v. Chemical Constr. Corp., supra, which held, without deciding whether Title VII claims 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.” . . . 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.” . . .

In Marrese, we discussed Nash County Board of Education v. Biltmore Co., 640 F.2d 484 (C.A.4), cert. denied, 454 U.S. 878, 102 S.Ct. 359, 70 L.Ed.2d 188 (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. 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. . . . 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.

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. . . . 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.” . . .

[. . .]

. . . [T]here is no “universal right to litigate a federal claim in a federal district court.” . . . 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.” . . . 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. . . . 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, 102 S.Ct., at 1888, 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.

[. . .]

. . . [T]he 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 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.

The judgment of the Court of Appeals is reversed and 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 Exchange Act 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.

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, 102 S.Ct. 1883, 72 L.Ed.2d 262 (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. . . .

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. . . . 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. . . .

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 settlement, 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. . . .

[. . .]

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. . . . 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. . . .

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. . . . “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.” . . .

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. . . . “[T]he Due Process Clause of course requires that the named plaintiff at all times adequately represent the interests of the absent class members.” . . . 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. . . .

Although emphasizing the constitutional significance of the adequate representation requirement, this Court has recognized the first line responsibility of the states themselves for assuring that the constitutional essentials are met. . . . Final judgments, however, remain vulnerable to collateral attack for failure to satisfy the adequate representation requirement. . . . A court conducting an action cannot predetermine the res judicata effect of the judgment; that effect can be tested only in a subsequent action. . . .

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. . . . Delaware requires, as a prerequisite to class certification, that the named plaintiffs “fairly and adequately protect the interests of the class.” . . . 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. . . . 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. . . .

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. . . . Notice, the Delaware Supreme Court reasoned, cannot substitute for the thorough examination and informed negotiation an adequate representative would pursue. . . . The court also recognized that opt-out rights “are infrequently utilized and usually economically impracticable.” . . .

[. . .]

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. . . . 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. 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, the Epstein plaintiffs contend that the Vice Chancellor improperly shifted the burden of proof; he rejected the Delaware objectors' charges of “collusion” for want of evidence while acknowledging that “suspicions [of collusion] abound.” . . .

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. 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. . . .