Ruling Aids Settlement of Class-Action Suits

In a case involving former MCA Inc. shareholders, the Supreme Court gave a major victory Tuesday to businesses trying to resolve class-action lawsuits, ruling that federal judges must honor settlements reached in state courts.

Legal experts said that the 7-2 decision will make it easier to settle lawsuits and will forestall companies’ having to fight multiple actions in federal and state courts.

But critics said the decision could make a “Delaware settlement” a term of abuse akin to “Nevada divorce.” Companies facing a slew of lawsuits alleging fraud or a defective product might be able to arrange a quick settlement in a pro-business Delaware court. Then, because of the Supreme Court ruling, they could use that settlement to block all other suits in federal courts.

“You can have an auction where defendants exploit the situation to find the sleaziest lawyer who is prepared to accept a cheap settlement,” said Columbia University professor John Coffee Jr., a securities law expert.

The high court decision is a setback for 7,000 angry MCA investors who believed they were cheated in 1990 when the Los Angeles-based entertainment company was sold to Matsushita Electric Industrial Co., a Japanese conglomerate.

The investors alleged that the sale gave a sweetheart deal to MCA’s two top executives. MCA Chairman Lew Wasserman was given a tax-free stock swap of shares worth $351 million, they said, while Chief Operating Officer Sidney J. Sheinberg was given a $21-million bonus with the sale of his shares.

A federal securities regulation known as the “all-holder, best-price rule” requires that bidders treat all investors equally. The group of disgruntled MCA investors cited this rule in their securities suit filed in federal court in Los Angeles.

But on Tuesday, the Supreme Court essentially threw out the suit on grounds that a lawyer representing all MCA investors in a separate suit had agreed to a meager settlement in Delaware. That deal gave the investors roughly 2 cents per share, but allowed the Delaware lawyers to obtain a $691,000 fee.

Justice Clarence Thomas, citing the 200-year-old rule requiring “full faith and credit” for all court rulings, said federal courts in California must accept the terms of the state court settlement in Delaware.

“A judgment entered in a class action, like any other judgment entered in a state judicial proceeding, is presumptively entitled to full faith and credit,” he wrote in the case (Matsushita Electric vs. Epstein, 94-1809).

The ruling is a striking example of both the high court’s desire to cut down on litigation and its tendency to defer to state judges.

Lawyers said the decision could have wide impact, not just in securities cases but in lawsuits involving asbestos, breast implants, copyrights, patents and trademarks.

“People who are negotiating settlements in class-action cases will know they won’t have to face other deals,” said University of Texas professor Linda S. Mullenix. This is an advantage for both sides, she said.

However, dissidents who believe that a suit was settled too cheaply may lose out, she added. In recent years, many critics have noted that settlements often look to be great deals for lawyers but bad deals for their clients.

It is not clear, however, whether Tuesday’s decision marks the end of the line for the MCA-Matsushita litigation.

Last year, the U.S. 9th Circuit Court of Appeals in California ruled against Matsushita and said the company owed damages to investors. The Supreme Court overruled that decision Tuesday.

However, Thomas noted in passing that a federal court could still consider whether the settlement violated “due process of law” because the Delaware lawyers did not fairly represent all of the MCA investors.

In dissent, Justices Ruth Bader Ginsburg and John Paul Stevens said the 9th Circuit still should be able to award damages based on the “due process” violation.

Not surprisingly, the two lawyers who battled in the Supreme Court disagreed on who won.

The lawyer for Matsushita said the ruling in the company’s favor ends the matter.

“I don’t see how this [majority opinion] can be read as saying anything other than that due process was met in Delaware,” said Barry R. Ostrager of the Simpson, Thatcher & Bartlett law firm.

But a New York lawyer for MCA investors said he is confident that his clients will still win damages in a federal court in California.

“In the end, I don’t think this will have a major impact on us,” attorney Roger W. Kirby said.