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Matsushita Electric Industrial Co. v. Epstein

    Brief Fact Summary
    A state court settlement was found not to have preclusive effect because it released exclusively federal claims.

    Synopsis of Rule of Law.
    A federal court may not withhold full faith and credit from a state-court judgment approving a class action settlement just because the settlement releases claims within the exclusive jurisdiction of the federal courts.

    Facts
    Matsushita Electric Industrial Co. (Defendant) made a tender offer that led to Defendant’s acquisition of MCA, Inc., a Delaware corporation.  A class action was filed in the Delaware Court of Chancery against MCA and later, Matsushita (Defendant), for breach of fiduciary duty in failing to maximize shareholder value.  At the same time, another complaint was filed in federal court, claiming violations of Securities Exchange Commission Rules.  The district court dismissed the federal action and the case was appealed to the Court of Appeals for the Ninth Circuit.  The parties to the Delaware suit negotiated a settlement before a decision was handed down in that case.  The Chancery Court certified a class for purpose of settlement and approved a notice of the proposed settlement.  Epstein (Plaintiff) was a member of both the state and federal plaintiff classes but failed to opt out of the settlement class or to appear at the hearing to contest the settlement or the representation of the class.  On appeal in the Ninth Circuit, Matsushita (Defendant) raised the Delaware judgment as a bar to further prosecution under the Full Faith and Credit Act.  The court of appeals found that 28 U.S.C. § 1738 did not apply, and formed a test under which the preclusive force of a state court settlement judgment was limited to those claims that could have been extinguished by the issue preclusive effect of an adjudication of the state claims.  The Supreme Court granted certiorari.

    Issue
    May a federal court withhold full faith and credit from a state-court judgment approving a class action settlement just because the settlement releases claims within the exclusive jurisdiction of the federal courts?

    Held
    (Thomas, J.)  No.  A federal court may not withhold full faith and credit from a state-court judgment approving a class action settlement just because the settlement releases claims within the exclusive jurisdiction of the federal courts.  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.  The Full Faith and Credit Act, 28 U.S.C. § 1738, is applicable to cases wherein the state court judgment at issue incorporated a class action settlement releasing claims only within the jurisdiction of the federal courts.  Since Delaware has generally treated the impact of settlement judgments on further state court litigation as a question of claim preclusion, Delaware would probably afford preclusive effect to the settlement in this case as well.  Congress did not intend to create an exception to 28 U.S.C. § 1738 for suits claiming violations of the Exchange Act.  Reversed and remanded.

    Discussion
    The Circuit Court had decided that the Delaware court had acted outside the bounds of its own jurisdiction in approving the settlement.  The Circuit Court decided that full faith and credit would not be required since the state court did not have subject matter jurisdiction.  In this case, however, the U.S. Supreme Court decided that the Delaware court clearly possessed subject matter jurisdiction over both the underlying suit and the defendants.


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