Matsushita Elec. Industrial Co. v. Epstein
516 U.S. 367 (1996)
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Rule of Law:
Under the Full Faith and Credit Act, 28 U.S.C. § 1738, a federal court must give a state-court judgment approving a class-action settlement the same preclusive effect it would have in the rendering state's courts, even if the settlement releases claims within the exclusive jurisdiction of the federal courts.
Facts:
- In 1990, Matsushita Electric Industrial Co. made a tender offer for the common stock of MCA, Inc.
- In response, a class-action lawsuit was filed in Delaware state court against MCA and its directors, alleging breaches of fiduciary duty under state law.
- Separately, MCA shareholders, including Epstein, filed a lawsuit in California federal court, alleging Matsushita's tender offer violated federal securities rules under the Securities Exchange Act of 1934.
- The Securities Exchange Act of 1934 grants federal courts exclusive jurisdiction over claims brought under it.
- While the federal case was on appeal, the parties in the Delaware state action negotiated a settlement.
- The settlement agreement included a global release of all claims arising from the acquisition, specifically including the federal securities claims being litigated in California.
- Notice of the settlement was sent to all class members, informing them of their right to opt out.
- The respondents were members of the settlement class but did not opt out of the Delaware settlement agreement.
Procedural Posture:
- MCA shareholders filed a class-action suit in the Delaware Court of Chancery asserting state-law claims.
- Other MCA shareholders (respondents) sued Matsushita in the U.S. District Court for the Central District of California for violations of the federal Securities Exchange Act.
- The federal district court entered summary judgment for Matsushita and dismissed the case.
- The federal plaintiffs (respondents) appealed to the U.S. Court of Appeals for the Ninth Circuit.
- While the federal appeal was pending, the Delaware Court of Chancery approved a settlement of the state action, which included a release of the federal claims.
- The Delaware Supreme Court affirmed the settlement judgment.
- In the Ninth Circuit, Matsushita argued the Delaware judgment barred the federal action, but the Ninth Circuit disagreed, holding the state court lacked jurisdiction to release exclusively federal claims.
- The U.S. Supreme Court granted certiorari to review the Ninth Circuit's decision.
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Issue:
Does the Full Faith and Credit Act require a federal court to give preclusive effect to a state-court judgment approving a class-action settlement that releases claims within the exclusive jurisdiction of federal courts?
Opinions:
Majority - Justice Thomas
Yes, the Full Faith and Credit Act requires a federal court to give a state-court judgment the same effect it would have in the courts of the State in which it was rendered. The court applied a two-step analysis from Marrese v. American Academy of Orthopaedic Surgeons. First, under Delaware law, the settlement judgment would be given preclusive effect, as Delaware courts have approved global settlements that release claims, even those not presentable in the original action, if they arise from the identical factual predicate. Second, § 27 of the Securities Exchange Act, which grants exclusive jurisdiction to federal courts, does not create an implied exception to the Full Faith and Credit Act. Section 27 prohibits state courts from adjudicating Exchange Act claims, but not from approving a settlement where parties voluntarily release those claims. The Delaware court had proper jurisdiction over the state-law claims and merely approved the parties' agreement without ruling on the merits of the federal claims, thus not usurping federal authority.
Concurring-in-part-and-dissenting-in-part - Justice Stevens
Yes, § 27 of the Securities Exchange Act does not create an implied repeal of the Full Faith and Credit Act. However, the Court should not have decided the question of Delaware law itself. This issue should be addressed by the Court of Appeals in the first instance. Furthermore, the Ninth Circuit remains free on remand to consider whether the due process requirement of adequate class representation was met in the Delaware proceedings.
Concurring-in-part-and-dissenting-in-part - Justice Ginsburg
No, a state-court judgment is not entitled to full faith and credit unless it satisfies the requirements of the Fourteenth Amendment's Due Process Clause, a key component of which is adequate representation for absent class members. While agreeing with the remand, the Court should not have decided the content of Delaware preclusion law. The Ninth Circuit should determine that issue, and importantly, it remains free to examine whether the Delaware class representatives adequately represented the interests of the class members. An inadequate representative 'taints' the entire settlement process, and if representation was constitutionally deficient, the resulting judgment would not be binding on the absent class members in the federal action.
Analysis:
This decision significantly strengthens the finality of state-court class-action settlements by confirming their power to extinguish related federal claims, even those under exclusive federal jurisdiction. It establishes a high bar for finding that a federal statute impliedly repeals the Full Faith and Credit Act, reinforcing principles of comity and repose. The ruling encourages defendants to seek 'global settlements' in state courts to resolve parallel litigation efficiently. However, Justice Ginsburg's opinion highlights a critical limitation: such judgments remain vulnerable to collateral attack in federal court if the settlement did not meet constitutional due process standards, particularly the requirement of adequate representation for the class.
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