California Public Employees' Retirement System v. Felzen

PETITIONER: California Public Employees' Retirement System
LOCATION: North Carolina General Assembly

DOCKET NO.: 97-1732
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 525 US 315 (1999)
ARGUED: Jan 11, 1999
DECIDED: Jan 20, 1999

David C. Frederick - For the United States, as amicus curiae
John G. Kester - Argued the cause for the respondents
Michael K. Kellogg - Argued the cause for the petitioners

Facts of the case

Shareholders sought to appeal from a federal District Court settlement of a stockholder derivative suit. The suit arose out of claims that managers conspired with rival sellers thereby exposing the corporation to criminal and treble-damages liability. The Court of Appeals held that shareholders who had not intervened and were not parties to the derivate action could not appeal an unsatisfactory settlement. The court dismissed the appeal for want of jurisdiction.


Must shareholders formally intervene in a derivative lawsuit before they can appeal its settlement?

Media for California Public Employees' Retirement System v. Felzen

Audio Transcription for Oral Argument - January 11, 1999 in California Public Employees' Retirement System v. Felzen

William H. Rehnquist:

I think we'll start argument in the third case, No. 97-1732, California Public Employees' Retirement System v. Felzen.

Mr. Kellogg.

Michael K. Kellogg:

Mr. Chief Justice, and may it please the Court:

The question at issue in this case is whether shareholders may appeal without formal intervention when a district court approves a derivative suit settlement over their objections.

We suggest that three characteristics combine in this case to give the objecting shareholders such a right.

The first is that they receive notice pursuant to rule 23.1 in the form of an order to show cause why the settlement should not be approved.

Second, they appeared and litigated their objections.

And third, they are bound by the judgment of the district court; that is, they are subject to claim preclusion.

When all three of those characteristics are found, this Court's cases indicate that intervention is not required in order to preserve a right to appeal.

Antonin Scalia:

They litigated their... what does litigating their objections consist of?

Just presenting their objections to the court.


Michael K. Kellogg:

That's true.

They did so both in writing--

Antonin Scalia:

I mean, they weren't subject to discovery or... or to any of the other procedures that a party is subject to.


Michael K. Kellogg:

--Not in this case, although a district court judge could fashion a settlement hearing in which he would allow some sort of discovery of the objecting parties' experts or... or some limited... I would think that... that the court would have discretion to do that in appropriate circumstances.

Antonin Scalia:

But it doesn't follow automatically from the fact that you submit that the other side is entitled to treat you like a party.

Michael K. Kellogg:

That's correct.

But what this Court's cases teach, starting with Johnson v. Manhattan Railway, is that in appropriate circumstances where you do appear and object and you have a right to do so and you are bound by the judgment, that you are entitled to appeal.

That was the holding of this Court shortly before the Federal rules were passed.

It was the holding in Cohen v. Young shortly after the Federal rules were passed, and it has been the uniform holding of the courts of appeals until the Seventh Circuit's decision in this case.

Now, the basic impulse behind that is the well-established principle that only parties may be bound by a judgment.

Now, obviously there's an exception to that rule for class... class plaintiffs and derivative suit shareholders.

But the only reason there is an exception is because non-named shareholders and absent class members are in a sense quasi parties.

They are treated as such under the Federal rules.

That is why they get notice.

That is why they have a right to appear and object, and that is why in our view they also enjoy the right to appeal.

William H. Rehnquist:

What does a quasi party mean?

Michael K. Kellogg:

Well, quasi party means they are not a formal party in the sense of names on the caption or allowed to intervene pursuant to rule 24.