The inadequate search for "adequacy" in class actions: A critique of Epstein v. MCA, Inc.

New York University Law Review

Volumn 73, Issue 3, 1998, Pages 765-792

  Kahan, Marcel ^a,b,c,d   Silberman, Linda ^a,e  

^a NEW YORK UNIVERSITY   (United States)

^b BRANDEIS UNIVERSITY   (United States)

^c MASSACHUSETTS INSTITUTE OF TECHNOLOGY   (United States)

^d HARVARD UNIVERSITY   (United States)

^e UNIVERSITY OF MICHIGAN   (United States)

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[No Author keywords available]

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EID: 0032387293     PISSN: 00287881     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (112)

1. 126 F.3d 1235 (9th Cir. 1997) [hereinafter Mastushita II].
2. 472 U.S. 797 (1985).
3. Shutts itself discussed the opt out requirement in a situation where there was no basis for personal jurisdiction over absent class members and construed a failure to opt out of a class suit as consent to personal jurisdiction. See id. at 813-14; see also Patrick Woolley, Rethinking the Adequacy of Adequate Representation, 75 Tex. L. Rev. 571, 580 n.38 (1997). Several courts and some commentators have suggested that Shutts should be read more broadly to require a due process right to opt out of a class suit when monetary claims are involved, without regard to the jurisdictional issue. Compare Brown v. Ticor Title Ins. Co., 982 F.2d 386, 392 (9th Cir. 1992) (citing Shutts in holding that minimal due process requires that absent plaintiffs be given opportunity to opt out of class action if monetary claims would be precluded, without discussion of personal jurisdiction), with In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 292 (2d Cir. 1992) (reading Shutts as mandating right to opt out of class only when court lacks jurisdiction over plaintiff); see also Adams v. Robertson, 117 S. Ct. 1028, 1072 (1997) (dismissing writ of certiorari as improvidently granted and noting jurisdictional context of Shutts); Linda S. Mullenix, Class Actions, Personal Jurisdiction, and Plaintiffs' Due Process: Implications for Mass Tort Litigation, 28 U.C. Davis L. Rev. 871, 880-83 (1995) (discussing briefs filed in Supreme Court in Ticor Title, which focus on question of whether there existed independent due process right to opt out of class actions that would preclude monetary damages); Steven T.O. Cottreau, Note, The Due Process Right to Opt Out of Class Actions, 73 N.Y.U. L. Rev. 480, 510-21 (1998) (arguing that due process requires opt out rights in some cases where adjudicatory jurisdiction over class members exists and setting forth framework to determine when such rights are required).
4. Shutts itself discussed the opt out requirement in a situation where there was no basis for personal jurisdiction over absent class members and construed a failure to opt out of a class suit as consent to personal jurisdiction. See id. at 813-14; see also Patrick Woolley, Rethinking the Adequacy of Adequate Representation, 75 Tex. L. Rev. 571, 580 n.38 (1997). Several courts and some commentators have suggested that Shutts should be read more broadly to require a due process right to opt out of a class suit when monetary claims are involved, without regard to the jurisdictional issue. Compare Brown v. Ticor Title Ins. Co., 982 F.2d 386, 392 (9th Cir. 1992) (citing Shutts in holding that minimal due process requires that absent plaintiffs be given opportunity to opt out of class action if monetary claims would be precluded, without discussion of personal jurisdiction), with In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 292 (2d Cir. 1992) (reading Shutts as mandating right to opt out of class only when court lacks jurisdiction over plaintiff); see also Adams v. Robertson, 117 S. Ct. 1028, 1072 (1997) (dismissing writ of certiorari as improvidently granted and noting jurisdictional context of Shutts); Linda S. Mullenix, Class Actions, Personal Jurisdiction, and Plaintiffs' Due Process: Implications for Mass Tort Litigation, 28 U.C. Davis L. Rev. 871, 880-83 (1995) (discussing briefs filed in Supreme Court in Ticor Title, which focus on question of whether there existed independent due process right to opt out of class actions that would preclude monetary damages); Steven T.O. Cottreau, Note, The Due Process Right to Opt Out of Class Actions, 73 N.Y.U. L. Rev. 480, 510-21 (1998) (arguing that due process requires opt out rights in some cases where adjudicatory jurisdiction over class members exists and setting forth framework to determine when such rights are required).
5. Shutts itself discussed the opt out requirement in a situation where there was no basis for personal jurisdiction over absent class members and construed a failure to opt out of a class suit as consent to personal jurisdiction. See id. at 813-14; see also Patrick Woolley, Rethinking the Adequacy of Adequate Representation, 75 Tex. L. Rev. 571, 580 n.38 (1997). Several courts and some commentators have suggested that Shutts should be read more broadly to require a due process right to opt out of a class suit when monetary claims are involved, without regard to the jurisdictional issue. Compare Brown v. Ticor Title Ins. Co., 982 F.2d 386, 392 (9th Cir. 1992) (citing Shutts in holding that minimal due process requires that absent plaintiffs be given opportunity to opt out of class action if monetary claims would be precluded, without discussion of personal jurisdiction), with In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 292 (2d Cir. 1992) (reading Shutts as mandating right to opt out of class only when court lacks jurisdiction over plaintiff); see also Adams v. Robertson, 117 S. Ct. 1028, 1072 (1997) (dismissing writ of certiorari as improvidently granted and noting jurisdictional context of Shutts); Linda S. Mullenix, Class Actions, Personal Jurisdiction, and Plaintiffs' Due Process: Implications for Mass Tort Litigation, 28 U.C. Davis L. Rev. 871, 880-83 (1995) (discussing briefs filed in Supreme Court in Ticor Title, which focus on question of whether there existed independent due process right to opt out of class actions that would preclude monetary damages); Steven T.O. Cottreau, Note, The Due Process Right to Opt Out of Class Actions, 73 N.Y.U. L. Rev. 480, 510-21 (1998) (arguing that due process requires opt out rights in some cases where adjudicatory jurisdiction over class members exists and setting forth framework to determine when such rights are required).
6. For a more detailed description of the proceedings leading up to Matsushita II, see Marcel Kahan & Linda Silberman, Matsushita and Beyond: The Role of State Courts in Class Actions Involving Exclusive Federal Claims, 1996 Sup. Ct. Rev. 219, 221-28. For other commentary on the litigation, see G. Chin Chao, Securities Class Actions and Due Process, 1996 Colum. Bus. L. Rev. 547.
7. See 17 C.F.R. § 240.14d-10 (1997).
8. See Securities Exchange Act of 1934 § 27, 15 U.S.C. § 78aa (1994).
9. In re MCA, Inc. Shareholders Litig., 598 A.2d 687, 694 (Del. Ch. 1991).
10. Id. at 696.
11. Id. at 695-96. The proposed settlement provided for a modification of a "poison pill" regarding an MCA subsidiary to be spun off to MCA shareholders as well as for a "generous" $1 million fee to the Delaware class counsel. See id. at 695.
12. See Epstein v. MCA, Inc., 50 F.3d 644, 648 (9th Cir. 1995) (summarizing district court judgments).
13. In re MCA, Inc. Shareholders Litig., Civ. A. No. 1174, 1993 WL 43024, at *4 (Del. Ch. Feb. 16, 1993), reprinted in 18 Del. J. Corp. L. 1053, 1061 (1993).
14. Id., reprinted in 18 Del. J. Corp. L. at 1062.
15. The settlement provided for a $2 million fund which, after attorneys' fees, resulted in a recovery of 2 to 3 cents per share of MCA stock. As we have noted elsewhere, the proper measure of damages for violating Rule 14d-10 is unclear, but such damages could plausibly exceed $700 million. See Kahan & Silberman, supra note 4, at 223 n.18.
16. See In re MCA, Inc. Shareholders Litig., 633 A.2d 370 (Del. 1993).
17. See Epstein, 50 F.3d at 648.
18. See id. at 668-69.
19. See id. at 661-66.
20. See Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367 (1996) [hereinafter Matsushita I]. 19 See 28 U.S.C. § 1738 (1994).
21. See Matsushita I, 516 U.S. at 373.
22. See id. at 377-78. Justices Ginsburg and Stevens dissented from a portion of the opinion, arguing that the content of Delaware preclusion law was for the Ninth Circuit to decide on remand, not the Supreme Court. See id. at 394 (Ginsburg, J., concurring in part and dissenting in part).
23. See id. at 398-99 (Ginsburg, J., concurring in part and dissenting in part). Justice Thomas's majority opinion did not address the due process contention, observing in a footnote that "[w]e need not address the due process claim, however, because it is outside the scope of the question presented in this Court." Id. at 379 n.5.
24. See Matsushita II, 126 F.3d 1235, 1240-41 (9th Cir. 1997).
25. Id. The court also noted that the notice to class members failed to state that the purpose of the hearing was to determine the adequacy of representation. See id. at 1240. The significance of this omission is presumably that it helps explain the failure of class members to object on the grounds of "inadequate representation." In his dissent, Judge O'Scannlain argued that the objectors did litigate the "adequacy of representation." Id. at 1257-58 (O'Scannlain, J., dissenting). In a footnote, the court offered, without deciding, a second basis under Delaware law for rejecting preclusion, namely a failure to "'articulate on the record its findings regarding the satisfaction of the Rule 23 criteria and supporting reasoning' before it approves a class action settlement." Id. at 1241 (quoting Prezant v. De Angelis, 636 A.2d 915, 925 (Del. 1994)). In Prezant, the Delaware Supreme Court held that such findings, including a finding that the due process right to adequate representation had been satisfied, could protect a class settlement from possible collateral attack. See Prezant, 636 A.2d at 925-26. In our earlier article, we discussed the possibility that Delaware law might itself allow a collateral attack for failure to meet the Prezant standard. See Kahan & Silberman, supra note 4, at 275-76.
26. See Matsushita II, 126 F.2d at 1241.
27. In dissent, Judge O'Scannlain argued that the Epstein plaintiffs were barred by issue preclusion from relitigating the adequacy of representation because that argument had been raised and rejected by other objectors in the Delaware fairness hearing. As we explain later, see infra notes 98-99 and accompanying text, we do not believe that plaintiffs are barred because of the litigation activity of objectors whom they did not control. Of course, if there was tacit participation by the Epstein plaintiffs in raising these objections, as was suggested by Judge O'Scannlain, see Matsushita II, 126 F.3d at 1257 (O'Scannlain, J., dissenting), they may be precluded through the doctrine of "virtual representation." See infra note 99.
28. 472 U.S. 797 (1985).
29. Id. at 810.
30. See id. at 812.
31. Id. at 809 (emphasis added).
32. Id. (quoting James W. Moore & John E. Kennedy, 3B Moore's Federal Practice ¶ 23.45 (2d ed. 1984)).
33. Matsushita II, 126 F.3d 1235, 1243 (9th Cir. 1995).
34. Id. at 1245.
35. Id.
36. Presumably, even the Ninth Circuit believes this is the obligation of the class members with respect to any objections to the fairness of the settlement.
37. 456 U.S. 461 (1982).
38. Id. at 481.
39. 474 F.2d 67 (5th Cir. 1973).
40. See Matsushita II, 126 F.3d at 1243 (discussing Gonzalez).
41. See Gonzalez, 474 F.2d at 71-72.
42. Matsushita II, 126 F.3d at 1245.
43. Id. at 1246. In addition to a reference to the "salutary principle" of Hansberry v. Lee, 311 U.S. 32 (1940), that a class member cannot be bound if there was no adequate representation, the Court of Appeals also cited the Supreme Court's recent decision in Richards v. Jefferson City, 517 U.S. 793 (1996), and Ninth Circuit precedent. See Matsushita II, 126 F.3d at 1246. As we have pointed out elsewhere, see Kahan & Silberman, supra note 4, at 266-67 & n.154, in Hansberry the court in the initial suit did not formally designate the action as a class suit and made no finding of adequate representation; in Richards, the taxpayer plaintiffs did not sue on behalf of a class and the judgment did not purport to bind taxpayers who were nonparties. Therefore, the prior Supreme Court cases do not provide guidance in situations where the court entertaining the class suit has made a determination of adequacy of representation. Prior Ninth Circuit cases have permitted collateral attacks on federal class action settlements, although not necessarily with success. See, e.g., Brown v. Ticor Title Ins. Co., 982 F.2d 386, 390-91 (9th Cir. 1992): [T]o avoid the binding effect of a prior class action based on class counsel's error, a party must show not only that the prior representative "'failed to prosecute or defend the action with due diligence and reasonable prudence,'" but also that "'the opposing party was on notice of facts making that failure apparent.'" (quoting Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1278 (9th Cir. 1992) (quoting Restatement (Second) of Judgments § 42(1)(2) (1982))). Two other Ninth Circuit cases in which "adequacy" challenges were also unsuccessful - Torrisi v. Tucson Elec. Power Co., 8 F.3d 1370 (9th Cir. 1993), and Marshall v. Holiday Magic, Inc., 550 F.2d 1173 (9th Cir. 1977) - were distinguished by the Ninth Circuit as involving class members who participated in the initial proceedings. Neither case, however, involved a collateral attack; in each case, the issue was presented on a direct appeal from the settlement judgment, and the challenges were rejected on the merits. Several courts in other circuits have refused to permit collateral attacks based on inadequacy of representation where the absent class member had not previously raised the objection but other objectors had. See, e.g., Grimes v. Vitalink Communications Corp., 17 F.3d 1553, 1562 (3d Cir. 1994). The Ninth Circuit expressly stated that it disagreed with Grimes and "respectfully decline[d] to follow it." Matsushita II, 126 F.3d at 1242. For a more extensive discussion of collateral attack on class actions and class action settlements, see Kahan & Silberman, supra note 4, at 262-74.
44. See Matsushita II, 126 F.3d at 1248-49.
45. See id. at 1249-50.
46. See id. at 1250.
47. See id. at 1251-53.
48. See id. at 1253-54.
49. Kahan & Silberman, supra note 4, at 232.
50. See generally John C. Coffee, Jr., Class Wars: The Dilemma of the Mass Tort Class Action, 95 Colum. L. Rev. 1343, 1370-72 (1995).
51. Plaintiffs may forum shop for favorable choice of law rules that will result in applicable law favorable to plaintiff, favorable jury pools likely to result in high jury awards, a hometown bias for the "local" party, or regional and cultural preferences by judges or jury.
52. Matsushita II, 126 F.3d at 1250.
53. See Kahan & Silberman, supra note 4, at 235-38.
54. See Matsushita II, 126 F.3d at 1249. The Court of Appeals also noted two further reasons why it believed that the problem of plaintiff shopping in the Delaware litigation was compounded. First, the court suggested that Delaware counsel would have been unable to conduct discovery with respect to the federal claims even if it had tried to do so. See id. at 1249. We doubt that this is a significant factor. To the extent that the state and federal claims are transactionally linked, most discovery regimes are broad enough to provide access to information relevant to either claim. See Kahan & Silberman, supra note 4, at 246 n.104. Second, since the state and federal claims shared no common issues of material facts, Delaware class counsel "lacked the ability to make a credible threat that they could put Matsushita at risk by going to trial on the state claims and proving facts material to the federal claims that would be binding upon Matsushita through issue preclusion." Matsushita II, 126 F.3d at 1249. By the same token, however, Matsushita would not be able to prove, in a trial on the state claims, facts material to the federal claims that would be binding upon the federal class through issue preclusion. To the extent that "issue preclusion" applies either to both sides or to neither, the lack of the potential for issue preclusion does not reduce one's bargaining power.
55. Matsushita II, 126 F.3d at 1256.
56. See John C. Coffee, Jr., Class Actions: Interjurisdictional Warfare, N.Y. L.J., Sept. 25, 1997, at 5 (noting that Alabama, Louisiana, and Texas courts attract large numbers of class actions and routinely certify last minute settlement classes).
57. See Geoffrey P. Miller, Overlapping Class Actions, 71 N.Y.U. L. Rev. 514, 523-25 (1996); see also White v. National Football League, 41 F.3d 402, 409 (8th Cir. 1994) (approving settlement in class action suit and enjoining related actions in other fora).
58. 134 F.3d 133 (3d Cir. 1998) [hereinafter GM]. In the GM litigation, a class action settlement in the Pennsylvania federal court was reversed on appeal and remanded to the district court to determine whether a class could be certified pursuant to the standards enunciated by the Third Circuit. However, rather than continue the proceedings in Pennsylvania, the class plaintiffs pursued parallel litigation that had been brought in Louisiana and reached a settlement there. The Third Circuit refused to enjoin the Louisiana proceedings on numerous grounds: (1) lack of jurisdiction over absentee plaintiffs, see id. at 140-41; (2) the full faith and credit statute and the Rooker-Feldman doctrine, see id. at 141-43; and (3) the anti-injunction act, see id. at 143-46.
59. It appears that the class plaintiffs and the class counsel in the Louisiana state court action were the same class plaintiffs and counsel in the multidistrict litigation federal action, where the district court's approval of a settlement on behalf of the class was disapproved, not only because the district court did not make the necessary findings under Rule 23 to certify the class, but also because the settlement was not fair, reasonable, and adequate.
60. See GM, 134 F.3d at 137-38. Interestingly, Judge Becker, writing for the majority, referred to both Matsushita I and II in his opinion, noting that the "final word has yet to be written in (or about) Matsushita." Id. at 142. Judge Becker also suggested that the Supreme Court might have something to say about the Louisiana settlement in "due process" terms and the way in which it "facilitated an end run around the Eastern District of Pennsylvania proceedings." Id. For another refusal by a federal court to enjoin parallel class action litigation in state court, see J.R. Clearwater, Inc. v. Ashland Chemical Co., 93 F.3d 176, 177 (5th Cir. 1996).
61. See Kahan & Silberman, supra note 4, at 256. Under present practice, it is probably not possible to require their intervention, but legislation might be able to achieve such a result.
62. In Kahan & Silberman, supra note 4, at 256-58, we have suggested such measures as part of a framework designed to deal with the specific problems created by state court class action settlements that release exclusive federal claims.
63. One such bill has already been proposed in Congress. See The Class Action Fairness Act of 1997, S. 254, 105th Cong., 1st Sess. (1997), discussed infra at note 88.
64. Suggestions along these lines have been made by Professor John Coffee. See Class Action Lawsuits: Examining Victim Compensation and Attorneys' Fees: Hearings Before the Senate Comm. on the Judiciary Subcomm. on Administrative Oversight and the Courts, 105th Cong. (Oct. 30, 1997) (statement of Professor John C. Coffee, Jr. of Columbia University Law School), available in 1997 WL 683686 [hereinafter Coffee Testimony] (outlining "bill of rights" for class members, which includes having selection and conduct of class counsel subject to more democratic means of control by class members).
65. Although we cannot point to specific examples of successive collateral attacks and therefore the specter of successive collateral attacks may seem far-fetched, the new regime offered by Matsushita II clearly opens such possibilities.
66. As we argue below, we do not believe that objection in a prior action should be grounds for preclusion. See infra notes 97-100 and accompanying text.
67. This is because a later challenge to the settlement is now possible, however weak its merits. Defendants who have settled may need to "buy off" later "objectors" to the settlement, who are now armed with "collateral attack." Cf. Woolley, supra note 3, at 618-19 (discussing leverage of objectors in class actions generally). Indeed, dissatisfied class members may be encouraged not to appear in the forum where the settlement proceedings are ongoing, but rather to wait and raise their objections in a collateral proceeding where their bargaining power may be greater. Alternatively, defendants may just decide to forego settlement altogether.
68. The right to bring a collateral attack in Matsushita II is without regard to whether there is a basis for personal jurisdiction over the absent class members. Shutts held that even in the absence of traditional minimum contacts, a court can exercise personal jurisdiction over absent members of a plaintiff class who are "presumed to consent" to jurisdiction if they do not exercise their right to opt out of the class. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 813 (1985). Absent plaintiffs were bound, the Court held, as long as the absent class members were given an opportunity to remove themselves from the class through an opt out, had notice and an opportunity to participate in the litigation, and were adequately represented at all times by the named plaintiff. See id. at 811-12. Shutts might be read to hold that opt out rights and actual "adequate representation" confer personal jurisdiction over class members who lack traditional minimum contacts on the court and that, in the absence of actual adequate representation, a judgment by the court can be collaterally attacked for lack of personal jurisdiction (a well-established basis for collateral attack in the absence of appearance). We do not understand the Ninth Circuit to have read Shutts this way, nor do we think Shutts should be so interpreted. However, even under such a reading of Shutts, the Delaware courts would probably have had personal jurisdiction due to traditional minimum contacts over claims related to the ownership of stock of a Delaware corporation. See Hynson v. Drummond Coal Co. 601 A.2d 570, 571-72 (Del. Ch. 1991) (Allen, C).
69. See Matsushita II, 126 F.3d 1235, 1243-44 (9th Cir. 1997).
70. There is no reason to think that collateral attack is the appropriate remedy in a multijurisdictional system. A subsequent appeal to a higher court alleviates some of the problems of "on-the-spot" monitoring that might be required by the "settlement" hearing, though not all courts provide standing to appeal to absent class members who do not object or intervene. See Timothy A. Duffy, Comment, The Appealability of Class Action Settlements by Unnamed Parties, 60 U. Chi. L. Rev. 933, 934 (1993) (observing that courts have developed three positions on issue of whether unnamed class member may appeal settlement, of which only most permissive position grants standing to class members who did not intervene or object to settlement in court below); Christopher R. Thyer, Note, Un-Appealing Class Action Settlements: Why No One Has Standing to Challenge Settlements after Haberman v. Lisle, 49 Ark. L. Rev. 375, 392 (1996) (observing that Fifth, Eighth, and Eleventh Circuits had denied standing to appeal for dissatisfied unnamed class members, while Third, Seventh, and Ninth Circuits had granted such standing). We believe that absent class members, whether or not they object or intervene, should have a right to appeal both the adequacy of representation and the fairness of the settlement, including attorneys' fees, and that the right of appeal is highly preferable to collateral attack. See Kahan & Silberman, supra note 4, at 269 n.168. Of course, restrictive time limits on the right of appeal pose a problem if there is a real time lag on the information available to absent class members. However, most judicial systems also provide for relief from a judgment on grounds similar to those in Fed. R. Civ. P. 60(b), such as mistake, newly discovered evidence, and fraud. Under this procedure, relief is sought in the forum that rendered the judgment and prevents forum shopping for favorable collateral attacks.
71. This observation in no way underestimates the information deficiencies that exist for absent class members. Class members are often not in a position at this stage of the process to evaluate whether or not the settlement represents a superior alternative to litigation, or whether they are being adequately represented. The point here, however, is that there is no "monitoring" burden as there might be in adversarial class litigation.
72. Allegations of fraud and collusion based on later-acquired information would generally be grounds for relief from the judgment. See Restatement (Second) of Judgments § 70 (1982). Whether the challenge to a judgment on grounds of fraud or the like can be made in a subsequent action in another jurisdiction or must be raised in a motion before the rendering court or through an independent action in the original jurisdiction is not entirely clear. See id. at § 82 cmts. (a), (b).
73. Shutts, 472 U.S. at 810.
74. See Gonzales v. Cassidy, 474 F.2d 67, 76-77 (5th Cir. 1973) (permitting collateral attack on class action judgment for inadequate representation where class representative secured better monetary deal for himself than for rest of class and noting behavior of class representative after certification gave rise to challenge on adequacy grounds).
75. It might be suggested that this is the situation in Matsushita itself. That may well be, but the Ninth Circuit in Matsushita II did not purport to adopt this as the standard. In addition, we note that application of a "material misrepresentations" standard would normally entail a factual hearing to determine just what the behavior of counsel was and the nature of the alleged misrepresentations before the settlement court, thus requiring a remand to the district court.
76. See Matsushita II, 126 F.3d 1235, 1256 (9th Cir. 1997).
77. Id.
78. Id. at 1242.
79. The court refused to reach the issue of whether the failure by the court in F-1 to supervise adequately the settlement proceedings is a basis for collateral attack. See id. at 1255.
80. Matsushita submitted to the personal jurisdiction of the Delaware Chancery Court after the first settlement agreement was negotiated, and defendants took no action to have the Delaware action dismissed after the Chancery Court, in rejecting the first settlement agreement, noted that the state claims were "at best, extremely weak." In re MCA, Inc. Shareholders Litig., 598 A.2d 687, 694 (Del. Ch. 1991). These actions, of course, are also consistent with plaintiff shopping rather than forum shopping.
81. In approving the second settlement, the Delaware Vice Chancellor failed to follow up on "suspicions" of collusion that he recognized to exist. See In re MCA, Inc. Shareholders Litig., No. 11,740, 1993 WL 43024, at *5 (Del. Ch. Feb. 16, 1993), reprinted in 18 Del. J. Corp. L. 1053, 1063 (1993). Moreover, in an earlier case (later reversed by the Delaware Supreme Court), the Vice Chancellor approved a class action settlement, finding it "fair and reasonable" under "heightened scrutiny" despite deficiencies in the settlement process but failing to make a finding that the plaintiff was an adequate representative of the class. See De Angelis v. Salton/Maxim Housewares, Inc., 641 A.2d 834, 836, 839, 840 (Del. Ch. 1993), rev'd sub nom., Prezant v. De Angelis, 636 A.2d 915 (Del. 1994). On the other hand, the Vice Chancellor rejected the first MCA settlement as unfair, substantially reduced the attorneys' fees awarded to Delaware class counsel, and took special note of the fact that the Ninth Circuit had denied the federal plaintiffs' motion for expedited appeal. See In re MCA, 1993 WL 43024, at *2, *5, *6, reprinted in 18 Del. J. Corp. L. at 1058, 1062, 1064.
82. Note that our argument here is not that the level of oversight exercised by the Chancery Court was too low, but rather that the parties could have reasonably (and, it turns out, accurately) predicted that the Ninth Circuit would exercise more oversight than the Delaware courts. Compare, in this regard, the discussion of adequacy of representation and fairness in the Delaware Chancery and Delaware Supreme Court with the discussion of these issues by the Ninth Circuit in Matsushita II.
83. Even though Matsushita II in principle permits collateral attacks both on class action settlements and on the outcome of class action trials, see Matsushita II, 126 F.3d at 1241, the potential for collateral attack will tend to impede settlements. Obviously, the issue of collateral attack becomes moot if plaintiffs prevail in a trial. And even if defendant prevails in a trial, the chances of succeeding in a collateral attack are likely to be lower than the chances of succeeding in an attack on a settlement. In the former case, defendants often will have litigated the issue of "adequate representation," and class counsel will have nothing to gain by failing to press plaintiffs' case forcefully (as success at trial is the only way to get attorneys' fees); in the latter case, defendants typically support class counsel's appointment, and class counsel can gain by agreeing to a settlement favorable to defendants that entails generous attorneys' fees.
84. U.S. Const. art. IV, § 1.
85. 28 U.S.C. § 1738 (1994).
86. The Supreme Court recently reaffirmed this principle in Baker v. General Motors Corp., 118 S. Ct. 657, 664 (1998), and rejected any possibility that local public policy could justify nonrecognition of another state's judgment. However, in the context of deciding whether a Michigan injunction, which incorporated a stipulation by one party that he would not testify against the other in any litigation without consent, could prevent testimony in litigation elsewhere involving third parties, the Court held that the injunction could not determine evidentiary issues in a Missouri forum brought by parties who were not subject to the earlier decree. See id. at 667.
87. In Kahan & Silberman, supra note 4, we discuss when state courts should approve class actions settlements that involve exclusive federal claims. We believe that the Delaware courts showed sufficient sensitivity (if barely so) to the federal interest when it approved the settlement. See id. at 278-79.
88. See, e.g., Kamilewicz v. Bank of Boston Corp., 100 F.3d 1348, 1349 (7th Cir. 1996) (Easterbrook, J., dissenting from denial of rehearing en banc) (commenting on state court settlement that gave "more than $8 million to the class attorneys in legal fees and credited most accounts with paltry sums"); Adams v. Robertson, 676 So. 2d 1265 (Ala. 1995) (affirming appeal of class action settlement regarding cancer insurance policies despite objections by class members for failure to provide opt out right), cert. granted, 117 S. Ct. 37 (1996), cert. dismissed as improvidently granted, 117 S. Ct. 1028 (1997); White v. General Motors Corp., No. 42,865 (La. Dist. Ct., Iberville Parish, Dec. 19, 1996) (approving voucher settlement on terms slightly revised from those disapproved by Court of Appeals in GM, 55 F.3d 768 (3d Cir. 1995)). See also the comments of Senator Kohl introducing Senate Bill 254 and commenting on the Alabama state court settlement against BancBoston Mortgage Corp. in which a class member received a refund of $4.38 but was charged $80.00 to pay the attorneys' fee, 143 Cong. Rec. S897 (daily ed. Jan. 30, 1997); Coffee Testimony, supra note 63, at *11 (criticizing, among others, settlement in Broin v. Philip Morris, Inc., Case No. 91-49738 (11th Judicial Dist., Dade County, Fla.), where $300 million settlement resulting from action by flight attendants for employment-related exposure to tobacco smoke was to be paid to proposed foundation to study tobacco related illnesses).
89. Various legislative proposals have been introduced in Congress. See, for example, the Class Action Fairness Act of 1997, S. 254, 105th Cong. (1997), which would require that state attorneys general be notified about potential class action settlements that would affect residents of their states and would allow them to intervene in cases where they think the settlements are unfair. If a class member resides in a state where the state attorney general has not been provided notice, a class member may choose not to be bound by any settlement. Other bills may be forthcoming as congressional hearings continue to examine potential class action abuse. See, e.g., Hearings on Class Action Lawsuits: Examining Victim Compensation and Attorneys' Fees, Before the Subcomm. on Administrative Oversight and the Courts of the Senate Comm. on the Judiciary, 105th Cong. (1997). With respect to securities litigation in particular, several bills have been introduced to ensure the effectiveness of the Private Securities Litigation Reform Act of 1995 by halting migration of class actions to state courts and avoiding inconsistent standards in state court litigation. See, e.g., Securities Litigation Improvement Act of 1997, H.R. 1653, 105th Cong. (1997), which would require individual cases and class actions involving securities to be brought in federal court, and Securities Litigation Uniform Standards Act of 1997, H.R. 1689, 105th Cong. (1997) and S. 1260, 105th Cong. (1997), which would prohibit state court "class actions" alleging certain types of securities claims. Another goal for some proponents of these bills was to eliminate the strategic use of easy state court settlements to release exclusive federal claims in the wake of Matsushita I. An exception in the legislation that would continue to permit class actions based on state law in certain circumstances might undermine that goal. For the status of this legislation, see Karen Donovan, Full Stop for Fraud Suits in States?, Nat'l L.J., Mar. 23, 1998, at A1.
90. With respect to fraud, see supra note 71. The process point is consistent with Justice Ginsburg's observation in Matsushita I, that Kremer v. Chemical Construction Corp., 456 U.S. 461 (1982), sets forth the scope of full faith and credit in that a "'[s]tate may not grant preclusive effects 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.'" Matsushita I, 516 U.S. 367, 395 (1996) (Ginsburg, J., concurring in part and dissenting in part) (quoting Kremer, 456 U.S. at 482).
91. See Kahan & Silberman, supra note 4, at 251-54. For a summary of the proposals, see 18 Charles Alan Wright et al., Federal Practice and Procedure § 4470 n.36.20 (1997 Supp.).
92. In the context of a proposed state settlement that releases federal claims, we offer guidance on how that analysis should proceed. See Kahan & Silberman, supra note 4, at 258-62. Professor Coffee has made a similar, albeit more generalized, proposal for situations where a settlement purports to release claims that are not asserted; courts should, he argues, conduct a prospective valuation of the competing claims and a court should not release claims that might be considered "more valuable." See Coffee, supra note 55.
93. See Kahan & Silberman, supra note 4, at 248, 254.
94. We recognize that there may be some uncertainty as to when this standard is met. But "due process" has always been a flexible standard and understood as requiring an interpretation in context. We venture that courts, rule makers, and legislatures, aware of the process deficiencies in class action settlements and serious about protecting the interests of absent class members, will be able to construct fair processes for ensuring adequacy and thus assure finality to their settlements. Our proposal, we believe, offers the necessary incentive to do so.
95. See John C. Coffee, Jr., 'Epstein II': Adequacy v. Finality, N.Y. L.J., Jan. 29, 1998, at 5. Such a concern may explain why in Matsushita II, the Ninth Circuit majority rejects the Kremer "procedures only" approach and relegates it as applicable only to "collateral challenges of judgments in traditional litigation, where individual parties are bound by virtue of their presence before the court." Matsushita II, 126 F.3d 1235, 1245 (9th Cir. 1997).
96. See Proposed Amendments to the Federal Rules of Civil Procedure, 167 F.R.D. 559 (1996); see also Linda S. Mullenix, The Constitutionality of the Proposed Rule 23 Class Action Amendments, 39 Ariz. L. Rev. 615 (1997).
97. See Kahan & Silberman, supra note 4, at 278.
98. As we pointed out in our earlier article, we view participation in the state proceedings as a prerequisite for collateral attack - at least as long as such an appearance is not clearly futile. See id. at 279. We recognize that this is not the existing rule. See, e.g., Grimes v. Vitalink Communication Corp., 17 F.3d 1553, 1558-61 (3d Cir. 1994) (barring absent class members who did not raise objections to adequacy of representation, as well as objectors who did, from later collaterally attacking finding of adequate representation even where settlement class contained no opt out right); Nottingham Partners v. Trans-Lux Corp., 925 F.2d 29, 33 (1st Cir. 1991) (stating that plaintiff, having raised objection to adequacy and lost, could not maintain collateral attack).
99. See Matsushita II, 126 F.3d 1235, 1259 (9th Cir. 1997) (O'Scannlain, J., dissenting).
100. Of course, to the extent a "non-objector" controls or "substantially participates" in the control of the presentation on behalf of a party, he will be bound through doctrines of virtual representation. See Restatement (Second) of Judgments § 39 (1982). For a history of "virtual representation" and a theory for its expansion, see Robert G. Bone, Rethinking the "Day in Court" Ideal and Nonparty Preclusion, 67 N.Y.U. L. Rev. 193 (1992).
101. See supra note 93.
102. For some of the various suggestions made recently, see Judith Resnik, Litigating and Settling Class Actions: The Prerequisites of Entry and Exit, 30 U.C. Davis L. Rev. 835, 863-72 app. (1997) (including proposal for settlement classes); William W. Schwarzer, Settlement of Mass Tort Class Actions: Order Out of Chaos, 80 Cornell L. Rev. 837, 843 (1995) (suggesting, as addition to Fed. R. Civ. P. 23(e), several criteria by which judges should assess proposed class action settlements).
103. 117 S. Ct. 2231 (1997).
104. The adequacy of representation issue in Amchem arose from the potential conflict of interests between asbestos claimants, some of whom suffered present injuries and some of whom were only exposed. See id. at 2250-51.
105. For a discussion of an economic model assessing the incentives at work in class action settlements, see Samuel Issacharoff, Class Action Conflicts, 30 U.C. Davis L. Rev. 805 (1997). While Professor Issacharoff is critical of the Supreme Court's opinion in Amchem for failing to articulate the appropriate standard for assessing settlement classes under Rule 23, he has no disagreement with the Court's factual conclusion - and that of the Third Circuit below - that the named plaintiffs were not adequate representatives for the sprawling class of asbestos claimants, some of whom suffered present injuries and some of whom were only exposed. See id. at 818-20. Of course, disagreement about what "adequate representation" is in any given case will persist. See, e.g., Ahearn v. Flanagan, 134 F.3d 668 (5th Cir. 1998). In Ahearn, a panel majority reaffirmed its approval of a class action settlement of asbestos related claims. The Supreme Court had vacated an earlier ruling, Ahearn v. Flanagan, 90 F.3d 963 (5th Cir. 1996), vacated, 117 S. Ct. 2503 (1997), and remanded for reconsideration in light of Amchem. On remand, the panel majority, in a short per curiam opinion, wrote that they could "find nothing in the Amchem opinion" to change their earlier ruling. Ahearn, 134 F.3d at 669. The majority observed that any "conflict between members of the future claimant class" was over "larger and earlier shares of available money and that the non opt out limited fund class was designed precisely to control such conflict." Id. at 670. Judge Smith wrote a sharp dissent, stressing several structural conflicts, including the same conflict between present and future claimants identified in Amchem. See id. at 675-79 (Smith, J., dissenting). Such uncertainty about when the standard of "adequate representation" has been met underscores the need to limit the availability of collateral attack.
106. Matsushita I, 516 U.S. 367, 384 (1996).
107. The Ninth Circuit reviewed the course of conduct by Delaware counsel for the class and concluded that counsel did not make even a reasonable effort to investigate and assess the fair settlement value of the federal claims. See Matsushita II, 126 F.3d 1235, 1251-55 (9th Cir. 1997).
108. See Kahan & Silberman, supra note 4, at 235-38.
109. Cf. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 386 (1985): Only if state law indicates that a particular claim or issue would be barred, is it necessary to determine if an exception to § 1738 should apply. Although for purposes of this case, we need not decide if such an exception exists for federal antitrust claims, we observe that the more general question is whether the concerns underlying a particular grant of exclusive jurisdiction justify a finding of an implied partial repeal of § 1738. Resolution of this question will depend on the particular federal statute as well as the nature of the claim or issue involved in the subsequent federal action.
110. In arguing that Section 27 was fully applicable to settlements, the Epstein plaintiffs argued that global settlement authority in the state court, if upheld, was "bound to generate unseemly judge - or, more accurately, lawyer - shopping by defendants seeking the cheapest settler." Brief for Respondents, Matsushita I, 516 U.S. 367 (1996) (No. 94-1809), available in 1995 WL 551027, at *32.
111. In commenting on the Matsushita I decision in the Wright, Miller & Cooper treatise, Professor Ed Cooper observed that the "issues of exclusive federal jurisdiction and adequate representation may be intertwined." He notes that the adequate representation issue has not yet been resolved but that reactions to the decision in Matsushita I "may be affected by the strong sense of uneasiness that the Delaware settlement invokes" and that "this uneasiness also plays a legitimate role in addressing the abstract balance between full faith and credit, exclusive federal jurisdiction, and class-action settlements." As he points out, "the case for preclusion cannot be stronger than faith in the approval process," on which he casts some doubt. Charles Alan Wright et al., supra note 90, § 4470 at 526; see also John C. Coffee, Jr., After 'Matsushita,' Litigants Should Focus on the Due Process Limits on a State Court's Authority to Settle Claims Over Which It Lacks Jurisdiction, Nat'l L.J., Apr. 15, 1996, at B5 (discussing how Matsushita I leads to radically revised incentive structures for defendants and some plaintiffs' attorneys and creates "reverse auction" under which defendants will settle with lowest bidder among them).
112. See, e.g., Romstadt v. Apple Computer, Inc., 948 F. Supp. 701, 704-09 (N.D. Ohio 1996) (announcing that federal district court would refuse to give full faith and credit to any final Texas settlement due to procedural unfairness in that forum, which included certification of class and preliminary approval of class where no notice was given to federal plaintiffs and no information about pending federal action was given to state judge).