Epstein v. MCA, Inc. (Epstein II)

Matsushita Acquisition Corporation (Matsushita) (defendant) bought out MCA, Inc. (defendant). Lawrence Epstein and other former shareholders of MCA (plaintiffs) filed a California federal class action alleging federal securities-law violations during the buyout. While the federal action was pending, a Delaware state court approved a class-action settlement involving the same class. However, federal law prevented the federal securities-law claims at issue from being heard in state court, and the Delaware class counsel had initially offered to release the class’s federal claims for nothing—plus $1 million in attorney’s fees. The Delaware state court rejected that settlement. The Delaware class counsel and Matsushita eventually convinced the Delaware state court to approve a settlement releasing the class’s federal claims for two cents per share. Matsushita then sought to dismiss the California federal action, arguing that the Delaware settlement had released the class’s federal claims. The case reached the United States Supreme Court, which determined that the federal courts must give full faith and credit to a state court’s judgment of federal issues. The Supreme Court remanded the case to the Ninth Circuit to consider the full-faith-and-credit issue. On remand, Epstein argued that even though state-court judgments could release federal claims, this particular state-court judgment was not binding on the federal class members because they had been denied due process by the Delaware class counsel’s woefully inadequate representation of their federal claims in the state action. Matsushita argued that the class members should have raised any objections in the Delaware action and could not collaterally attack the judgment’s validity in a different proceeding.