## Facts

- In 1990, Matsushita Acquisition Corporation (Matsushita) acquired MCA, Inc. through a tender offer and merger.
- The transaction triggered two parallel class actions based on the same alleged misconduct: (1) a Delaware Chancery Court action asserting state fiduciary-duty claims, and (2) a federal action in the Central District of California asserting federal securities claims (including Williams Act and related SEC tender-offer rules).
- The Delaware court approved a class settlement that released all claims arising from the transaction, including both state-law claims and federal securities claims, and entered final judgment.
- In the federal case, the district court declined to certify a class and entered summary judgment for defendants, concluding the Delaware judgment and release precluded the federal claims.
- Earlier Ninth Circuit rulings and Supreme Court review shaped the posture:
  - In Epstein I, the Ninth Circuit had refused to give preclusive effect to the Delaware judgment because it released federal claims.
  - The Supreme Court reversed in Matsushita Electric Industrial Co. v. Epstein, holding that 28 U.S.C. § 1738 can require full faith and credit for a state-court class judgment that releases exclusively federal claims, subject to due process limits.
  - On remand, a Ninth Circuit panel decision (Epstein II) permitted a federal collateral attack based on alleged due-process flaws, but that opinion was withdrawn after rehearing was granted.
- In this substituted rehearing decision (Epstein III), federal plaintiffs (absent class members in Delaware) argued they were not bound because Delaware class counsel allegedly provided inadequate representation, so the Delaware settlement lacked due process as to them.

## Issues

1. May absent class members collaterally attack a Delaware class-action settlement judgment in a later federal action on due-process grounds (especially inadequate representation) to avoid preclusion?
2. Under 28 U.S.C. § 1738 and Delaware preclusion law, must the federal court give full faith and credit to the Delaware judgment approving a settlement that released the federal securities claims at issue?

## Decision

- The Ninth Circuit affirmed the district court’s judgment for defendants.
- The court held that, under § 1738 and the Supreme Court’s Matsushita decision, the Delaware class settlement judgment could have preclusive effect over the federal claims even though those claims were exclusively federal.
- The court concluded the federal plaintiffs could not use the federal action to relitigate alleged defects in notice, adequacy of representation, or settlement fairness that were decided, or could have been contested, in the Delaware proceedings.
- Because Delaware provided procedures to object to the settlement and seek review, and the Chancery Court entered a final judgment approving the settlement and release, Delaware law would treat the judgment as binding; the federal court was required to do the same.

## Legal Principles

- Federal courts must give state-court judgments the same preclusive effect they would receive in the rendering state, as required by 28 U.S.C. § 1738.
- After Matsushita, a state-court class settlement may release claims that could be brought only in federal court, and that release can bar later federal litigation if the state judgment is otherwise entitled to recognition.
- Due process places limits on binding absent class members, including requirements tied to representation and class procedures, but where the state court adjudicated (or provided a fair chance to contest) notice, adequacy, and settlement approval, a later federal suit generally cannot be used as a second forum to contest those matters.
- In determining preclusion, the federal court applies the rendering state’s preclusion rules; if Delaware would treat the Chancery Court’s final settlement judgment as binding on absent class members, the federal court must treat it as binding as well.

## Conclusion

Epstein III held that the Delaware Chancery Court’s final class-action settlement judgment releasing all claims arising from Matsushita’s acquisition of MCA—including the federal securities claims later pled in federal court—was entitled to full faith and credit under § 1738 and Delaware preclusion law, and that absent class members could not avoid preclusion by mounting a broad collateral due-process attack in the subsequent federal action when Delaware procedures allowed those objections to be raised in the Delaware case.


Epstein v. MCA, Inc. (Epstein III), 179 F.3d 641 (1999)