LEHMAN BROTHERS v. SCHEIN
Argument of James J. Hagan
Chief Justice Warren E. Burger: We’ll hear arguments next in 73-439, Lehman Brothers 440 and 495 the related consolidated cases.
Mr. Hagan, you may proceed whenever you’re ready.
Mr. James J. Hagan: Mr. Chief Justice and may it please the Court.
These three cases are here on the grant of a writ of certiorari to the Court of Appeals for the Second Circuit.
The issue has been limited to the question of whether the Court of Appeals erred in failing to certify the question of Florida law to the Supreme Court of Florida pursuant to its certification statute.
I will speak for the petitioners in the three cases which have been consolidated for argument and I would ask to reserve three minutes for rebuttal, Your Honor.
It is the position of petitioners here Your Honors that it was error for the Second Circuit to refuse to certify the issue of Florida Law to the Supreme Court of Florida.
The decision below exemplifies a new doctrine on the Florida law or in fact the law of any state.
Although purporting to find support under the case of Diamond against Oreamuno in the Court of Appeals of the State of New York, the decision below here is in fact a radical extension of the Diamond case.
The question of Florida law here is significant under the public policy of Florida.
It involves a Florida corporation and it involves the regulation of that Corporation’s relationship to its fiduciaries and its shareholders and to those who buy and sell its stock.
The decision below adopted a remedy here which could interfere with recovery by shareholders of that Corporation when they sue on an insider trading case.
Therefore, we can believe that in light of the significant question of Florida law and public policy that was involved, the Court of Appeals should have certified the question as it was requested to do by Judge Kaufman in his dissenting opinion.
Now, Your Honors, I would briefly discuss the underlined facts in this case and the opinions below.
This case arose out of an alleged misuse of inside information and subsequent insider trading.
Lum’s Incorporated is a Florida Corporation which was engaged in the fast food franchising business.
During 1969, in the attempt of diversification, it acquired a gambling casino in Las Vegas known as Caesar’s Palace.
And to acquaint the financial community with its new acquisition, it held what it described as a seminar in Caesar’s Palace in November of 1969.
Apparently, during that seminar, it released an earning’s forecast of a dollar to a dollar ten cents per share.
Subsequently, in January of 1970, it was alleged and when I make these claims of allegations, I am basically stating the allegations of the Securities and Exchange Commission which filed a complaint for injunctive relief in December 1970, all of the subsequent civil cases are basically copies, if you will, of the SEC complaint.
It was alleged that one Melvin Chasen, who was the Chief Operating Officer of Lum’s, learned of a decline, substantial decline in the earnings for Lum’s second quarter that he advised a Mr. Benjamin Simon, who was a registered representative employed by Lehman Brothers in its Chicago office of this decline.
And that Mr. Simon in turn passed on this information to representatives of Investors Diversified Services in Minneapolis.
All of these events were alleged to have occurred on January 8 and on January 9, two of the IDS funds sold 83,000 shares of Lum’s stock.
Trading was suspended on the 9th.
Lum’s issued a press release later in the afternoon announcing the decline in its earnings.
When trading resumed the following Monday, the stock was off $3.00 to $4.00 per share.
The sales on the previous Friday, had occurred at $17.00.
Now the SEC investigated and in the following December, as I said, they filed an injunction action and that was followed by a rash of civil suits and those suits basically fell into two categories.
One category consisted of derivative actions seeking recovery by Lum's of the trading profits.
The second category was a class action.
Several suits constitute, class actions on behalf of sellers or purchasers of the stock on the day of the trade-off.
So at the commencement of the litigation there were three prompts to the regulatory structure: the SEC injunction action, the derivative suits, and the class actions.
Now, the defendants below moved to dismiss before Judge Tyler, the derivative actions.
The derivative actions were premised on the rule of Diamond against Oreamuno, which is a New York case and that case briefly stated that officers and directors of a corporation who trade on inside information are required to remit their profits to the corporation even though the corporation has not been damaged in any legal sense.
The court espoused this doctrine in the context of a situation which was really a gross instance of misuse of corporate information The two top officers of the company, MAI had learned of an earnings declined and had sold their own stock at triggering an enormous decline in the price of the shares.
As the case reached the Court of Appeals in New York, there were no other actions pending.
The SEC had not commenced the preceding, Section 16 (b) did not apply because the stock had been held more than six months and there were no class actions or any actions pending by any of the defrauded purchasers of that stock.
And so, the argument before the Court of Appeals and strongly urged in the brief by the respondent was that if no remedy is fashioned here, these parties escaped with the illegal profits.
That was the context of the Diamond case.
It is the law in New York to the best of our research, it has never been cited or discussed in any decision in any other state court.
It’s five years old now.
It came down in 1969.
So the derivative suits here were premised on the Diamond case, but it was the defendants’ position that it was the Law of Florida that applied to the responsibility of insiders to the corporation.
Justice Potter Stewart: The defendants here --
Mr. James J. Hagan: The defendants Your Honor were Lum's, the Corporation; Mr. Chasen, Lehman Brothers and its employee Benjamin Simon; Investors Diversified Services and two of its funds and two employees of IDS who are alleged to have receive the tip and recommended the sale of the stock.
Justice Potter Stewart: In the Diamond case -- In the Diamond case, the defendants were corporate officers or directors?
Mr. James J. Hagan: Yes, Your Honor, yes.
They were actually corporate officers and directors including directors who had not actually made the trades, but had acquiesced in the situation after they learned of the matter and the lower court had dismissed the case against those directors and the appellate division had affirmed and the Court of Appeals affirmed on that point holding only the wrongdoing officers and directors [Voice Overlap]
Justice Potter Stewart: Who actually done the selling, that actually sold their own shares?
Mr. James J. Hagan: That’s correct Your Honor, that it actually sold the shares.
Justice Potter Stewart: Now, in this case, where there any defendants a corporate officers or directors?
Mr. James J. Hagan: Just Mr. Chasen.
Mr. Chasen was an officer and also a director of Lum's.
Justice Potter Stewart: I see.
Mr. James J. Hagan: Lehman Brothers had no relationship to Lum's.
It was not its investment advisor.
It had not done any investment banking for it.
It was really without dispute that there was no relationship there.
IDS -- some of the IDS funds held the stock in its portfolio.
Other than that, there was no relationship there either.
So the only conceivable nexus between our case and Diamond was Mr. Chasen.
Now Judge Tyler as I said, the defendants moved to dismiss on the ground that Florida law applied under the Law of Florida.
You first must show damage to your corporation before derivative suit will lie that even under Diamond, assuming arguendo Diamond applied, there were no profits here on the part of any defendant other than arguably the IDS funds and other than Mr. Chasen who had no profits, there were no fiduciaries involved.
Justice Harry A. Blackmun: Mr. Hagan, I take it that it is accepted that Florida law does apply here?
Mr. James J. Hagan: Your Honor, in the lower court before Judge Tyler, the defendants argue that Florida law applied but the respondents disputed this point.
They argued strenuously before Judge Tyler that New York law applied and they urged that the Diamond rule be imposed and that the rule will be expanded.
And the expansion of course has to proceed on two grounds.
It had to go beyond the officer or director holding of Diamond because that was the holding of Diamond.
Officers and directors and the rationale was encouragement of private attorneys general to regulate the corporation, it was phrased in that manner.
They also have to go beyond Diamond to pick up parties who hadn't profited because again in Diamond, only the directors who actually profited had been held liable.
So there were two extensions of Diamond then in an affect that they were urging a rule which really had very little relationship back to the Diamond case although that was the springboard for the argument.
Justice William H. Rehnquist: Did your clients make any request to Judge Tyler that he certify the Florida law question to the Florida courts?
Mr. James J. Hagan: No, we did not Your Honor.[Voice Overlap]
Justice William J. Brennan: Well I think they could, would you refer it, they found the statute --
Mr. James J. Hagan: First of all -- that’s correct Mr. Justice Brennan.
The Florida statute unlike other statutes in many States only permits an appellate court to certify the question.
Subsequent statutes in many of our States that had been adopted in the last number of years have adopted the recommendation of the uniform commissioners, the Uniform Act and permit District Courts to certify.
But in any event, the question was never raised before Judge Tyler.
Justice William H. Rehnquist: When did you first request that this question be certified?
Mr. James J. Hagan: The first request was on the petition for rehearing before Second Circuit Your Honor, and --
Justice Harry A. Blackmun: It was after the decision came down, including Judge Kaufman’s dissent?
Mr. James J. Hagan: That’s correct.
Judge Kaufman’s dissent was the first time, the certification question is raised to the best of my knowledge by any litigant or judge.
Justice Harry A. Blackmun: Was there a reason for not moving for certification before the decision?
Mr. James J. Hagan: Well, Your Honor, I think as far as the present petitioners were concerned, it was their position that the Law of Florida was not unclear or uncertain.
Florida law, at least, let me clarify that.
It was not unclear to the extent that Florida’s law required that you show actual damages to your corporation before derivative suit would lie.
The Diamond case in New York, flatly contradicted that.
It held no damages -- no damage requirement was necessary.
Secondly, to the extent that Florida had never discussed the Diamond rule, it could have been argued I suppose that it was therefore uncertain.
So to that extent, you could either say that Florida law was settled against the respondents or uncertain because they had never discussed Diamond and one could only speculate what they would do if Diamond was argued to them.
But again, even if you argued Diamond on the facts of this case, this is not a Diamond situation.
Justice William J. Brennan: Mr. Hagan, have you answered to Mr. Justice Blackmun?
Is there any dispute among the parties now that Florida law is --
Mr. James J. Hagan: Yes, I was getting to that, I am sorry Mr. Justice Brennan.
In the lower court, the respondents argued New York Law.
Judge Tyler found Florida law.
On appeal, the respondents here, appellants before the Second Circuit conceded Florida law applied and so when Mr. Justice Waterman wrote his majority opinion, he pointed out both parties concede and we so find that Florida Law applied.
Although there was a dispute in the District Court as to the proper choice of law, there was no dispute before the Second Circuit on this point.
Justice William J. Brennan: And none here of course?
Mr. James J. Hagan: There appears to be none here, no.
Chief Justice Warren E. Burger: In what cases -- go ahead Mr. Justice Blackmun.
Justice Harry A. Blackmun: No, I am just going to ask whether Judge Kaufman’s dissent was on the certification issue was really a sua sponte, was this his own idea?
Mr. James J. Hagan: Yes, Your Honor.
Justice Harry A. Blackmun: It was not discussed at oral argument?
Mr. James J. Hagan: Not discussed at oral argument and not discussed in the briefs.
Justice William H. Rehnquist: And I would presume, if you would have prevailed in the Second Circuit without ever certifying to the Supreme Court of Florida, you would not be interested in certifying?
Mr. James J. Hagan: Your Honor, it was not our position before the Second Circuit.
First of all, the predicate for certification is a finding that the law of the state is unsettled or uncertain and it was never our position and it is not our position today actually that the law of Florida was so uncertain or unsettled.
It became that way for the first time on the opinion out of the Second Circuit.
Prior to that opinion, the law of Florida has enunciated in four intermediate appellate court opinions was that damages were required in a situation like this.
Justice William H. Rehnquist: Well, the Second Circuit can’t change the law of Florida, can it?
Mr. James J. Hagan: Well, Your Honor, what the Second Circuit did here, I submit was imposing new rule on the law of Florida.
The Second Circuit here adopted as Florida’s rule, a doctrine which no one can find in the law of Florida.
At least none of the parties that have been able to find it in the law of Florida.
Certainly, my friend from the respondents has been unable to point out any Florida priorities and support and the majority in the Second Circuit agreed that there were no Florida precedents on point.
It disregarded, may I say Mr. Justice Rehnquist, it disregarded the four decisions of the Florida intermediate appellate courts on the damage point exemplified by Palma against Zerbey which was 1966.
It disregarded those in a footnote as not persuasive because there had not been any extensive discussion of the question and there have been a rather conclusionary statement citing earlier opinions and the only analysis of it is in that footnote where the court said it found these cases not persuasive and that was the end of the Florida law as far as the majority opinion below was concerned.
Now of course, our position had been that to that extent the law is settled and here, you cannot state a claim unless you can prove damages.
Now, in any event, Judge Tyler’s [Voice Overlap] I am sorry Mr. Chief Justice.
Chief Justice Warren E. Burger: Before you go on, some of these cases that are cited here on certification were sua sponte by the appellate court, were they not?
Mr. James J. Hagan: To which case?
I am sorry, Your Honor.
Chief Justice Warren E. Burger: Well, some of them, I don’t recall which one.
Mr. James J. Hagan: Oh!
Yes, Your Honor.
This has happened here.
This Court, this Court has sua sponte certified questions on many occasions.
Justice William J. Brennan: I do not know about many but we did in Aldrich, didn’t we?
Mr. James J. Hagan: You did in Aldrich and you did in the Clay and you did in Dresner against City of Tallahassee.
Those were --
Justice William J. Brennan: I remember all that was sua sponte.
It was Clay, I don’t --
Mr. James J. Hagan: I believe Clay also Your Honor was sua sponte.
I don’t believe that anyone had requested certification there.
In fact, I believe that’s the first reported decision that I am aware of where the question arose.
And this Court has as many times of course expressed its views on certification, the appropriateness of it.
Even those on the Court that have express reservations about the whole abstention doctrine and the problems it raises have often times endorse certification.
In any event -- I am sorry, are there any other questions on that point?
Judge Tyler found that Florida law applied.
He found that damages were required.
He found that although -- he decided the question under Diamond out of an abundance of caution and said, even if Diamond, the law of Florida did not apply because none of the party is fit within the Diamond Rule.
The ones that were -- the one that was an officer hadn’t profited.
The ones that profited were not officers or directors.
Now, when the case went up to the Second Circuit, the majority in effect, they did reverse Judge Tyler.
They found that there was no Florida law on point.
They believe they had the right to look to the law of other states, specifically New York and the Diamond rule and they then extended the Diamond Rule in several respects.
They extended the concept of the fiduciary beyond the officer and director category to pick up as they put it anyone who receives inside information, becomes ipso facto a fiduciary.
Although they did not use the term I suppose, the concept will be something akin to a constructive fiduciary once you receive the information.
They then postulated a common enterprise theory and cited certain antitrust cases to support the proposition and then said that as in a conspiracy situation or a joint tort, all of the defendants were liable for the profits of anyone.
They spent sometime discussing the problems with law of insider trading and the necessity to tighten the doctrine.
Judge Kaufman’s dissent agreed of course and there’s no issue here on the condemnation of insider trading.
He held however that the majority had invented a totally new concept of law, even under the law of New York, but certainly, it had no basis in Florida law.
He urged that the majority certify the question to the Supreme Court of Florida.
There was no discussion in the majority opinion.
It had no response, it did not respond to Judge Kaufman’s comment.
Petitions for rehearing were filed.
It was urged on the court that the matter would be certified, but it was not denied and we are now here on certiorari.
And we urge Your Honor that it was error for the court to refuse to certify in this area.
This decision has imposed in effect a new regulatory framework upon trading in the stock of Florida corporations.
Justice William J. Brennan: May I ask Mr. Hagan?
Mr. James J. Hagan: Yes, Your Honor.
Justice William J. Brennan: If it were not this Florida procedure, would this be a case for federal abstention?
Mr. James J. Hagan: We believe it would be Your Honor.
Of course we don’t --
Justice William J. Brennan: No constitutional question (Inaudible)
Mr. James J. Hagan: Well, Your Honor, we feel that under this Court’s decision in Thibodaux and Kaiser Steel, this would be the type of question.
There is no neat characterization of when a question like this can really be said to support abstention, but we believe that even, if you did not have a certification statute, a strong argument could be made here for abstention because of the policy questions involved.
After all, this is a Florida Corporation.
The State of Florida has expressed its own public policy by adopting a certification statute, the first state to do so in 1945.
But it would like to have a say in what the law of Florida is and for a court -- a federal court to discuss the duties and liabilities flowing from certain factual situations involving a Florida corporation it seems to me raise --
Justice William J. Brennan: Well, that’s an argument whether or not this would have been a case for abstention.
Mr. James J. Hagan: That is, you’re right.
Justice William J. Brennan: As long as Florida has this statute, the federal courts have to avail one?
Mr. James J. Hagan: That is our position Your Honor.
Justice William H. Rehnquist: Mr. Hagan, do you think it makes any difference that Thibodaux arose in a District Court in Louisiana and depended on Louisiana law and Kaiser arose in a District Court in New Mexico and depended on New Mexico law, where this arose in the Southern District of New York and depended on Florida Law?
Mr. James J. Hagan: I think that makes our case much stronger, Your Honor because --
Justice William H. Rehnquist: Why?
Mr. James J. Hagan: Well, because in those situations, presumably, the federal court sitting in those districts would be knowledgeable in the law of the jurisdiction.
The District Court sitting in Louisiana can be presumed to be more knowledgeable of Louisiana Law than say at New York Federal Court and it is rather ironic here Your Honor to think that if this case had arisen in the Fifth Circuit within which Florida lies, this question would undoubtedly, if one can read the Fifth Circuit precedents correct, it would have been certified to the Supreme Court of Florida.
The Fifth Circuit has used this procedure on many occasions.
Justice William H. Rehnquist: What does the District Court in the Southern District of New York tell these litigants to do when it abstains -- just dismiss their action and tell the plaintiff to go get service and [Voice Overlap]
Mr. James J. Hagan: Your Honor, here, if a state has a certification statute and today, 12 States do and there has been quite a trend here in the last number of years, depending upon whether the statute of the state permits District Court certification or appellate court certification, the parties frame a certified question to the court of that state.
The briefing -- there is a briefing period of 60 days at least under the Florida statute.
The question is presented, the parties brief it, oral argument is optional and then the certifying court responds back and answers the law of Florida in this situation as does itself.
That is reported back to the federal court.
This raises none of the problems that have plagued the courts and over the number of years since the abstention doctrine was first enunciated.
First of all, the delay problem is minimized.
You don’t hear of a situation where you have to proceed in the lower court and up to the appellate procedures in the state.
You go directly to the Supreme Court of that state for a final and definitive ruling on the law.
But I would say, Mr. Justice Rehnquist that here, if the Fifth Circuit had had this, I am sure it would have been certified.
As the fact that the Second Circuit had it and did not certify it when presumably it is not that knowledgeable on Florida Law is even stronger case for certification.
If I might, I would like to briefly discuss the trend here which I think is important Your Honors because there has been since 1960s, since this Court first used the certification doctrine, there has been a development here which I know this Court is aware of and if in fairness, the Court disagrees with this trend, presumably, this would be the case to discuss it because since 1960 in the Clay case.
When there was only one state with the certification statue, this court followed up with certification, suggestions and Aldrich and Dresner in 1963.
In 1964 in his concurrence in the England case, Mr. Justice Douglas although expressing strong reservations about the abstention doctrine, strongly endorsed certification as a possible solution to these problems.
Justice Potter Stewart: Is it in now what, 11 States?
Mr. James J. Hagan: Now, we have 12, Your Honor.
We had 10 in our main brief and we actually picked up two more in our reply brief.
Minnesota and Oklahoma adopted at the 73 Sessions and we have cited those in our reply brief.
Justice Potter Stewart: Are they all rather similar statute?
Mr. James J. Hagan: Basically yes.
Because in 1965, you had fours states adopt Hawaii, Maine, New Hampshire and Washington.
There was some difference among them, but in 1967, a Uniform Act was adopted by the Commissioners of State Laws.
This was basically the Florida statute with some minor variations.
Justice William J. Brennan: Except that it expands to the District Court?
Mr. James J. Hagan: It goes to the District Court also, from its District Court certification.
It was approved by the ABA in 1967, by the ALI (American Law Institute) in 1969 and since that time, you had a number of other states so that you now have 12 States that have adopted this doctrine.
And so we submit, this was a proper case for certification.
It should have been certified and the failure to do so when requested by Judge Kaufman was error sufficient to justify reversal and remand.
I will now stop.
Justice William J. Brennan: Mr. Hagan, may I just ask.
Mr. James J. Hagan: Yes, Your Honor.
Justice William J. Brennan: Is there anything, any of these statutes which permit whether our federal questions are in the case, a reservation of the federal questions as we held at England, the litigant and an abstention case finding?
Mr. James J. Hagan: Yes.
They really don’t -- they don’t really extend to that problem that we have in England, the danger of deciding the federal question and the res judicata problem that arises.
They are limited to the question of state law and where the question of state law maybe determinative of the issue, not just --
Justice William J. Brennan: And the Uniform Act so limits?
Mr. James J. Hagan: Yes, yes.
That’s right, Your Honor.
Chief Justice Warren E. Burger: Mr. Ruby.
Argument of Donald N. Ruby
Mr. Donald N. Ruby: Mr. Chief Justice and may it please the Court.
As the petitioner has acknowledged this morning the only question before this Court is whether the Court of Appeals for the Second Circuit committed reversible error in this action which is based upon diversity jurisdiction in deciding the question of Florida common law, rather than certifying it to the Florida Supreme Court, pursuant to Florida’s optional certification procedure.
This Court denied the petitioners’ request that it review the merits of this decision or whether the court below violated the principles of Erie against Tompkins in reaching its decision.
Petitioners, I suggest, no doubt recognizing the weakness of their position on the question which is before this Court had nevertheless argued the merits of this decision at great length in their brief and also this morning.
Since the merits itself of the decision are not before the Court, I shall not address myself to them this morning, but I would say only in passing that an examination of the decision below, I think, clearly reveals that the Court of Appeals for the Second Circuit was quite mindful of its obligations under Erie to decide this case under Florida law and that the Court’s decision is well supported by authorities, including Florida case law and I might add they cited a decision of the Florida Supreme Court in support of their decision.
Petitioner referred to four cases in his oral argument which he alleges the Court of Appeals disregarded or overlooked.
I might say only in commenting upon that that only one of these cases was even cited by the petitioners to the Court of Appeals, three of them have been referred to in their brief to this Court, but were not even included in their brief to the Court of Appeals.
Justice William J. Brennan: But may I ask Mr. Ruby.
The way the rule, the Florida rule reads, there has to be an initial determination of (a) whether Florida law would be determinative and (b) that there are no clear controlling precedences in the decisions of the Supreme Court of Florida.
Now, I take it from that initial determination has to be made by the certifying court, does it?
Mr. Donald N. Ruby: Yes, Mr. Justice Brennan.
As a matter of fact --
Justice William J. Brennan: You are not suggesting that in fact, the majority below who did even make that inquiry, did they?
Mr. Donald N. Ruby: I would not say that the Court of Appeals believed that the question was settled.
I am not suggesting that but I am --
Justice William J. Brennan: Well, my question was rather, whether they addressed the majority of the Court of Appeals even addressed themselves on the two questions, whether part of law would be determinative, I guess, they did say that, but about the other, that there are no clear controlling precedence in the decisions of the Supreme Court of Florida. Did they address themselves to that?
Mr. Donald N. Ruby: Well, I think there is a threshold question if I may answer your question in this fashion.
I think the basic question is, is this an appropriate case for certification?
Now in that, Judge Kaufman in his dissent did make a passing reference to the possibility of certification.
I would assume that the Court in their deliberations probably considered the whole question and they may have come to the conclusion and I believe that it is well supported, this was not an appropriate case for certification.
Justice William J. Brennan: Yes.
Mr. Donald N. Ruby: And I might also say, since I think you’ve really brought this point up.
Petitioner refers to the fact that the Florida legislature has enacted this certification statute and suggested to this Court that that is a reason for having a federal court in effect to abstain through certification in a diversity case.
First of all, the Florida statute of course is optional in the sense that it leaves it up to the federal court to decide what to do.
But I think the more important answer is, that the Florida Legislature cannot by enacting the statute, take away the rights which are given to litigants under the diversity of jurisdiction statute to go into a federal court and to have their claims adjudicated there.
And whether they have that right, and whether the court erred in this case, I think, must be determined under federal law which I will come to.
Justice Thurgood Marshall: Mr. Ruby, before you get to that.
Once Judge Kaufman raised a certified question point, is it significant that the other two members of panel did not say anything?
Mr. Donald N. Ruby: Well, Your Honor, I cannot of course search into the minds of the other two judges, but I would assume from the fact that they didn’t --
Justice Thurgood Marshall: Well, you can’t find from their minds that they didn’t care to comment to apply that up.
Mr. Donald N. Ruby: Yes, that is true Your Honor.
Justice Thurgood Marshall: So they did not make ruling on this though, did they?
Mr. Donald N. Ruby: I would say that in effect, they made a ruling by deciding the case.
Justice Thurgood Marshall: Well, but they did not say that we find that this is not the proper case to be certified, they never said that.
Mr. Donald N. Ruby: They did not say it in those words Mr. Justice Marshall, but I would say the clear inference from the fact that they did go ahead and decided the case on the merits that they determined that this was not an appropriate case for certification.
Justice Thurgood Marshall: Well, they didn’t give any reasons.
Mr. Donald N. Ruby: They did not express any reasons, that is correct.
The basic rule turning to the federal law, governing the obligation of federal courts to decide question of state law in actions based upon diversity jurisdiction was of course set forth by this Court in the Meredith case, which is generally regarded as a landmark decision, covering the obligation of federal courts to decide questions of state law in diversity cases.
This Court said and I will quote briefly, “It has from the first been deemed to be the duty of the federal courts, if their jurisdiction is properly invoked, to decide questions of state law whenever necessary to the rendition of judgment.”
This Court then went on to say that in the absence of exceptional circumstances, a failure to decide such questions of state law, and again I quote, “Merely because the answers to the questions of state law are difficult or have not yet been given by the highest court of the State would thwart the purposes of the jurisdictional act.”
Now, the principles that have been set forth by Meredith have been reaffirmed by this Court on several occasions.
In Propper against Clark, this Court indicated that to allow the difficulty of an issue of a state law to deter a federal court from deciding the issue of state law in a diversity case would be and again I quote “to enervate diversity jurisdiction”.
Again in McNeese against the Board of Education, this Court noted that in a diversity of citizenship case and I quote “we hold that difficulties and perplexities of state law are no reason for referral of the problem to the state court.”
Justice Thurgood Marshall: What reason do you think could be imagined to that?
Mr. Donald N. Ruby: I am sorry, Your Honor.
Justice Thurgood Marshall: What reason can you imagine would be necessary to have the question certified?
Mr. Donald N. Ruby: Well, Your Honor I --
Justice Thurgood Marshall: That you argue if you don’t certify any?
Mr. Donald N. Ruby: No, Your Honor.
Justice Thurgood Marshall: You are not arguing that, are you?
Mr. Donald N. Ruby: No, Your Honor.
It is our position that certification is a form of abstention.
In effect by certifying the question, the federal court abdicates its responsibility to decide the question of state law in a diversity case and it submits the issue to the state court.
Justice Thurgood Marshall: So you don’t do it only in diversity case?
Mr. Donald N. Ruby: You do it Your Honor in a case we submit which would be a proper case for abstention, since it is in effect a form of abstention.
Now, it may be preferable to outright dismissal as a form of abstention, but I think the question remains whether it is proper for the federal court at all to abstain from deciding the case in a diversity case and to submit the issue into a state court.
Chief Justice Warren E. Burger: But it’s affirmed only of a qualified abstention, isn’t it?
Then you certify to retain jurisdiction?
Mr. Donald N. Ruby: It retains jurisdiction Your Honor, but I think it nevertheless, is abstention in the sense that if the duty of the federal courts under the jurisdictional act is to decide all questions necessary to the adjudication of a judgment in a diversity case --
Chief Justice Warren E. Burger: I have difficulty seeing why there’s any incompatibility with the idea of asking the highest court of the State to declare what the law is so that the federal court can be aided in the exercise of its diversity jurisdiction?
Mr. Donald N. Ruby: I think there is no incompatibility Your Honor if it’s a proper case for a federal court to say to the litigants, we will not decide your issue.
I think, if we have to choose between for example, outright dismissal and certification, there is no question that the certification statute may serve a useful purpose and of course, many commentators have indicated that in such circumstances, it does serve a useful purpose.
But I would respectfully submit to this court that the issue in this case is not in effect the general proposition where the certification may serve a useful function.
Justice William J. Brennan: Well Mr. Ruby, I gather, had there been a decision of the Supreme Court of Florida, a white horse case with your own since Florida case -- this whole case depends on Florida law.
Were that through the Second Circuit and the District Court would necessarily have had to apply that Florida case would it --
Mr. Donald N. Ruby: There’s no question about that --
Justice William J. Brennan: Really, what’s involved here then is there is no such case, I gather?
Mr. Donald N. Ruby: There is no case directly Your Honor.
Justice William J. Brennan: Right or at least it is debatable whether there is anything that even points to the Florida and here is a way that you can get because there isn’t presently one, a decision of the Florida Supreme Court on what the Florida law is and that certainly is more definitive than anything either this Court or the Second Circuit or the District Court can provide?
Mr. Donald N. Ruby: I think that’s true, Your Honor, but I think you do so -- and what you would give up I think is really what has to be considered [Voice Overlap]
Justice William J. Brennan: Well, I don’t know what you’re giving up?
Mr. Donald N. Ruby: What I think, what you give up, I think first of all and perhaps it’s more than just giving up something.
I think it does represent a disregard of what the duty is on the federal courts under the Diversity of Citizenship Act.
I believe that imposed upon the federal courts by Congress --
Justice William J. Brennan: May I suggest Mr. Ruby rather than -- rather then they're not doing their job, but doing it more effectively, if they’d take advantage of this opportunity.
Mr. Donald N. Ruby: Well, first of all, of course they are not deciding the case themselves.
Now, I won’t delay to this point but I have --[Voice Overlap]
Justice William J. Brennan: But they have to decide it as it would be decided under Florida law.
Mr. Donald N. Ruby: That’s correct.
Justice William J. Brennan: And that being so -- and not presently being any decisions of the Florida Supreme Court which provide the answer and here you have an opportunity to get the decision applicable to your case?
Mr. Donald N. Ruby: That’s true Your Honor and I think this Court has considered this kind of situation in other cases if I might for example, perhaps in responding to you refer to what this Court said in the Propper against Clark case.
In that case, I think this Court clearly indicated that a federal court should not submit questions of state Law to a state court where the federal courts have been granted jurisdiction of the controversy in the absence of special circumstances and if I quote briefly from it, the submission of special issues and in effect, we are talking here about a special issue, is a useful device in judicial administration in sub-circumstances as existed and then it refers to Magnolia, Spector, Fieldcrest, and Pullman, those were all classic abstention cases.
Justice Thurgood Marshall: Mr. Ruby, what happens if the Supreme Court of Florida this morning renders an opinion in another case on all four but this one?
Mr. Donald N. Ruby: Your Honor, I suppose an application could be made to the Court of Appeals in that unlikely event and I recognize that there are instances which occur where federal court may decide a case and then subsequently, a state court may decide it differently.
That is a problem that is involved not only in the diversity area, it's involved in every case where you have conflicts of all law rule, where one state has to decide what another state would do.
Mr. Justice Marshall, I might add if this case has been brought for example in the state courts of New York which it might have.
The New York State Courts would have had the obligation under their conflicts of law rule to decide what Florida law was and then to apply it.
Now, of course there is always the danger that their decision could be wrong.
Justice Thurgood Marshall: I am just talking about this case, you decide it on Florida law and this opinion comes down and a week later the Florida Court has identical case on all four and say in its opinion says, the Second Circuit was just completely wrong in this interpretation of Florida Law.
Does that do anything for good judicial precedent?
Mr. Donald N. Ruby: Well, certainly not Your Honor, certainly not.
That is a problem --
Justice Thurgood Marshall: And isn’t that what this is for, is to make sure that it doesn’t happen.
Well it could not happen, could it?
If the question had been certified, it could not happen.
Mr. Donald N. Ruby: It could not happen if the question was certified, but Your Honor if the question was certified, not only would you have what I would refer to is ineffective denial of the rights under diversity jurisdiction, but you have what this Court I think has talked about time and time again the desire not to compel litigants to go down as I -- if I may borrow the phrase for Mr. Justice Douglas, “a long and expensive road to obtain an adjudication in the case that they have brought.”
Now, the delay --
Justice William J. Brennan: I have forgotten where we have invoked this Florida procedure in Clay and then Aldrich and Dresner.
We did not have any federal questions or did we in those cases to [Voice Overlap]
Mr. Donald N. Ruby: Yes Mr. Justice Brennan, Clay was a classic abstention case.
The Fifth Circuit --
Justice William J. Brennan: So we have a federal constitutional question that we have to decide if we have them?
Mr. Donald N. Ruby: Precisely, precisely, and in Clay Your Honor.
Justice William J. Brennan: (Voice Overlap) in the other two, Aldrich and Dresner?
Mr. Donald N. Ruby: Neither Aldrich nor Dresner were even diversity cases.
That in both of those case you had a problem in one case about due process under the federal constitution which could be avoided and in the other case, you had an interpretation of the full faith in credit cause.
Justice William J. Brennan: That was the divorce case, was it not?
Mr. Donald N. Ruby: Yes, that is correct.
So both of those cases really don’t support the proposition in this case because they involve the classic type of abstention.
If I might just continue my answer to Mr. Justice Marshall, I believe that one of the real problems in any kind of abstention including certification is the delay and the extra burdens, the added expense.
Now certification may lessen those burdens, but it certainly doesn’t eliminate them.
It’s been reported that certification to the State of Florida increases the length of a case maybe by at least a year.
It in affect produces two full dress appeals where one had taken place before and I might say that this particular case is really a inappropriate case to permit this kind of certification since the delay involved here is even more pronounced because of the fact that the petitioners here did not even request certification.
Justice William H. Rehnquist: Does the Supreme Court of Florida hear oral argument or --
Mr. Donald N. Ruby: Yes, they do Mr. Justice Rehnquist.
They have a full dress appeal.
Justice William H. Rehnquist: So the parties will then go down to Tallahassee and argue the case?
Mr. Donald N. Ruby: That’s correct, that’s correct.
In this case, the petitioners' in effect allowed the parties and the Court to go through the whole appeal before the Court of Appeals for the Second Circuit.
They allow the Court to deliberate to reach its decision and then finally, ceasing upon really, what Mr. Justice -- Justice Kaufman had added in his opinion because his main part of his opinion is, he dissented on the merits.
However, he added at the end that perhaps certification should have been used.
Ceasing upon that, the petitioners then made a motion for rehearing and I think it is interesting to note that even in their petition for rehearing, they did not come out in a forth right way and say, this case should be certified.
They asked for a rehearing en banc on the merits in effect, asking the Court of Appeals for the Second Circuit again to decide the case on the merits and then in the final paragraph of the 12-page petition for rehearing, in effect what they said is, that if you are not going to decide in our favor, then please send the case down to the State of Florida.
I might say perhaps in support of some of the points I said before that commentators have said in many instances and I refer to Professor Wright as an example of this, that certification and I quote is, “an undesirable innovation” if it will lead to an abrogation of the merit of doctrine and similar expressions are found in other commentaries.
The threshold question I would submit to this Court is whether this was basically a case for abstention of any kind and I think if you look at the nature of the case and the instances in which this court has granted abstention, I think it’s clear, it’s not.
There is no constitutional question that can be avoided in this case.
There is no constitutional question involved.
There is no state regulatory scheme involved and try as they may, the petitioners attempt to create some kind of regulatory scheme and yet the issue in this case, essentially involves the breach of a fiduciary duty or an alleged breach of a fiduciary duty.
I suppose if certification were appropriate or abstention were appropriate.
In this case, one might say, then in virtually any case where one alleges a breach of a fiduciary duty if there is an unsettled issue of law, that that’s a proper case for certification.
Justice Thurgood Marshall: But you still agree that Florida law controls?
Mr. Donald N. Ruby: There is no question about that Mr. Justice Marshall.
Under the Erie case, I think the Court of Appeals clearly recognized that and it did its duty, I would submit under Erie as required by Congress under the diversity of jurisdiction act to decide the case unless there was special circumstances which this Court has said warranted abstention.
Now, no one in this case was asking a federal court to in effect enjoin state officials from carrying out their act.
There was no peculiar local issue involved here such as eminent domain that was involved with Thibodaux.
There was no issue here as there was in the Kaiser case involving the control of vital natural resources.
Justice William H. Rehnquist: The inquiry under Erie is actually for the court in sitting in the Southern District of New York is what conflicts of law would the New York Court of Appeals apply in this case, isn’t it?
Then you look to that New York law and if that New York law in turn refers you to Florida law, then the District Court goes to Florida law.
Mr. Donald N. Ruby: That’s correct Mr. Justice Rehnquist.
The main issue in this case is not even the propriety of the petitioners’ conduct.
Even the petitioners have conceded here that the act that was committed that is trading with inside information has been subject to universal condemnation so that we are not even talking as we are in most abstention cases with whether certain conduct within a state is proper or not.
What we are talking about in this case is whether or not Lum’s should have a remedy to recover the profits which were made by these defendants as a result of their alleged trading with the use of confidential corporate information.
We would submit only to the Court on this point that it cannot be seriously urged that it is the public policy of Florida that a person should be permitted to engage in trading with confidential corporate information in the stock of Florida Corporations and that the decision in this case will interfere with that public policy.
Therefore, we would submit that this case does not present the classic conflicts or special circumstances which would have warranted abstention.
I would say recognizing really that this is not a proper abstention case, the main thrust of the petitioners’ argument is that any case which involves an unsettled issue of law, of state law is a case which is a proper case for certification and they go even further.
They say if the court does not certify even if it was never even requested to do so that it has a committed error.
I think this Court has made it clear that, and if I may borrow a phrase from Mr. Justice Brennan, there is a very narrow corridor through which a federal court may escape from its obligation to decide state law questions when federal jurisdiction is properly invoked.
We would respectfully submit that to accept the petitioners’ contention that where there is an unsettled issue of state law and I might say parenthetically in a majority of cases, it might be reasonably contended that the state law issue is not settled, that this would be to open the door wide and really to turn this narrow corridor which the Court has very carefully limited into what I think might be described as really a wide canyon and I think these are the clear implications of the petitioners’ argument.
There is no support that the petitioners can gain as I have indicated from either the Clay case or Dresner or Aldrich, since in those cases, you were dealing with classic abstention cases and in fact, Aldrich and Dresner were not even diversity cases.
In Clay, I think it’s also appropriate to note and I have referred to this, the remarks by Mr. Justice Douglas where he gave protest to the practice of making litigants travel a long and expensive road in order to obtain justice.
And I think in this case, I might add the case is already been pending three years, certification will now require the parties to perhaps spend another year on an appellate level by going down to Florida.
If certification is appropriate here, it may well be appropriate after trial, assuming that the plaintiff prevail on the allegations of the complaint.
The proof in this case may be different than the allegations of the complaint and the issue may arise, have the plaintiffs’ prove the case under Florida law and again, the argument could be made that that is an issue that should be certified and the case may go on for many more years with the consequent burdens to the parties as a result of that.
I think this should be justified only --
Justice Thurgood Marshall: Have you ever run across an SEC case that took less than three years?
Mr. Donald N. Ruby: I suppose Your Honor only where there’s consent judgments, [Attempt to Laughter] but generally not.
But I think nevertheless the object here is certainly not to increase the time or expense to the litigants.
Justice Lewis F. Powell: Mr. Hagan, are these respondents also thought as to the class action suit?
Mr. Donald N. Ruby: I am sorry.
I'm Mr. Ruby.
Justice Lewis F. Powell: I beg your pardon, Mr. Ruby, are the respondents in this case parties to the class action suit?
Mr. Donald N. Ruby: They are, Your Honor, and they were also of course parties to the action brought by the SEC.
I might say, in that, there was a consent judgment by the mutual fund defendants, they consented to judgment against them.
Lehman Brothers went to trial and the District Court found that they were not liable on the limited ground that they were not responsible for their agent who is the one, who in effect passed on the information.
Justice Lewis F. Powell: Is that in the SEC injunction suit?
Mr. Donald N. Ruby: It was Your Honor.
Justice Lewis F. Powell: What is the current status of the class action suit?
Mr. Donald N. Ruby: I believe, they are still pending, Your Honor.
I do not know this precise data.
I know that they are still pending and being litigated.
As I have indicated the floor, I would like to just turn for a moment to the equities of this case.
I think this is a particularly inappropriate case I would submit to the Court to find that the court below erred in not certifying where the petition is never even requested certification before the adverse decision on the merits.
This Court has said I think time and time again that such a procedure is to be criticized and certainly should not be sanctioned where one goes into court, submits his rights to a court, gets an adverse decision and then wants to go to another court to litigate the same issues.
In the Hostetter case, in holding that it was not error in not abstaining.
This Court referred to the fact that neither party had requested it.
In the England case in somewhat different circumstances, this Court indicated that where a party like the petitioners freely litigates his claims in one court even though he may not be required to do so, he should not be allowed to ignore the adverse decision and then start all over to another court.
That’s precisely what the petitioners are seeking to do here and as Mr. Justice Rehnquist aptly noted, we would not be here today seeking certification if the petitioners had prevailed in the Court of Appeals.
This Court in England said that such a procedure, the kind that the petitioners are seeking to follow now would countenance and unnecessary increase in the length and cost of litigation and there are many other cases along those lines.
Those cases involving disqualification of a judge or court indicate that a litigant cannot experiment with the court to see what happens.
So this is precisely what the petitioners have done here.
They were quite willing to let the Court of Appeals decide the case, but then when it was decided against them, after they so to speak tested the water, found it not to their liking, then they urged that the Court should not have decided the case to begin with.
Mr. Hagan this morning, in his reply brief, I think made a remarkable statement.
In response to Mr. Rehnquist's question, he said that there was no occasion for certification until after the decision below since the Law of Florida was not debatable or uncertain.
I might say in passing if the law wasn’t uncertain then you wouldn’t even have a proper case for certification.
But the implication of what the petitioners are saying is, that you do not even determine whether certification is appropriate by considering the nature of the case or the issues before decision.
What you do is that, after the decision, you look at the decision and if you think that it is wrong, then you argue that certification should have taken place.
I would suggest respectfully to the Court that this procedure has nothing to commend it and then certainly should not be sanctioned by this Court in this case.
One further point on the procedure, the petition has attempted in their reply brief to overcome the obvious inequity of the procedure they followed by making reference to the decision in the Kaiser case where after an adverse decision, the petitioner made a motion, asking the Court of Appeals to abstain pending a determination in a pending declaratory judgment action in the state.
The Tenth Circuit denied that motion with Judge Brown who was sitting by designation from the Fifth Circuit dissenting.
The Kaiser case, however, this Court then of course went on to reverse and ordered abstention, the Kaiser case however, certainly is a different kind of case and doesn’t sanction the kind of procedure that the petitioners have followed here.
Kaiser was a classic abstention case.
You were dealing there with the law of eminent domain.
You are dealing there with the control of a vital natural resource, water within the State of New Mexico.
Even the Attorney General of New Mexico had to come in and asked and the abstention take place.
Where you have this classic abstention case then the fact that the litigant did not ask for certification perhaps is not determinative because there you were dealing with great public stakes and if I will close just by referring with Judge Brown said in his dissent in the Tenth Circuit.
He said, if we were not dealing with serious matters of great public moment and importance to New Mexico, I would be quite willing to say to Kaiser that it must live with the consequences of a federal court diversity jurisdiction.
And finally, he went on to say, similarly, the fact that the motion is now made after the adverse decision of this Court, while a powerful circumstance in many situations does not prevent the exercise of abstention now in view of this great public stakes and I would only urge this Court that here where we are not dealing with those great public stakes of considerations that are present in abstention that the failure to request certification before an adverse decision should either constitute a waiver or bar to argue that the court erred in not doing so or at the very least should represent in Judge Brown’s word a powerful circumstance in determining whether the Court of Appeals, assuming it had any discretion to certify, abused that discretion.
We submit that it did not and we respectfully urge that the decision of the Court of Appeals should be affirmed.
Justice Harry A. Blackmun: Mr. Ruby, have the petitioners here, suggested to the Second Circuit at the oral argument of the case that it'd be certified, what is your guess as to the reaction of the panel?
Mr. Donald N. Ruby: Mr. Justice Blackmun, I can’t say what they would do.
I would say what I think they should do.
I would think because this case does not involve those considerations which justify a federal court abstaining from deciding the question itself.
I would say it should not have certified in this case because in my judgment this Court has indicated that a federal court is under a duty which is placed upon it by Congress in the jurisdictional act to decide questions of state law except in those very narrow circumstances and I would respectfully submit that an examination of the nature of this case would reveal that those circumstances are not present.
And therefore, I would believe that the Court of Appeals would come to that conclusion and I would assume Your Honor that since Judge Kaufman at least alluded to it that there was some discussion among the judges and this may well have been a consideration which influenced the court to decide the case as well as I have indicated the failure of the petitioners to request it.
Justice Harry A. Blackmun: Do you feel that the failure of the majority even to mention it in their written opinion is not necessarily indicative of the fact that they felt that the case had gone too far for certification?
Mr. Donald N. Ruby: I certainly do not, Your Honor.
I think the fact that Judge Kaufman at least did mention it would suggest that the court did give consideration to it and decided on various grounds that it should decide the case and not certify.
If there are no other questions, thank you very much.
Chief Justice Warren E. Burger: Mr. Hagan, you have about five minutes left.
Rebuttal of James J. Hagan
Mr. James J. Hagan: Your Honors, I believe that Mr. Ruby has overstated the position of the petitioners here and overstated the argument.
We do not argue here for abstention.
His entire argument in rebuttal and response is based on an abstention argument on the behalf of the petitioners.
Of course, this does not take away the right of any party that went to federal court.
The argument in favor of certification is that, it preserves that right.
That federal fact finding is available, federal rules of discovery are available.
The only issue that is certified is the issue of state law and it is found by the Federal Court in the same manner many other things are found in the litigation.
In this case, the question of Florida law almost becomes in effect a fact to be found by utilizing the certification statute.
They argue merit and they are setting up a straw man here.
We do not claim abstention.
There is no need for it.
That is in effect the beauty of the new certification statutes.
These arguments that have plagued the courts and the commentators for 20 or 30 years, may in the future start to alleviate because abstention in this area may not be necessary anymore.
Mr. Justice Marshall as well, pointed out that their basic position is that certification is not justified in any case because obviously, you always have delay.
The delay involved maybe several months, it maybe six months or more, but I would say that the answer to this delay argument which is always brought up by the party opposing either abstention or certification was well answered by this Court back in 1942 in Fieldcrest Dairies, where Mr. Justice Douglas said, considerations of delay inconvenience and cost to the parties which have been urged upon us, do not call for a different result.
They were there granting abstention.
What we are here concerned with the much larger issue as to the appropriate relationship between federal and state authorities, functioning as a harmonious whole and that issue is exactly before the Court today.
The problems that have been raised by abstention over the years have now started to result in the statutory certification process and I submit that the Court should now encourage it.
And finally, this point that who gets certification, whether you grant certification should almost be a form of gamesmanship as to who asks first or who does not ask for it is simply inappropriate.
When we were before the Second Circuit, we were parties to a litigation where our view was that Florida law did not support the claim and the District Court had so found and respondents here were unable to cite a single Florida case supporting their position.
It was not our position before the Second Circuit that Florida law was so uncertain as to require certification.
It became that way when the majority here developed a doctrine it did.
Only then that the question of certification, come to the forefront.
Prior to that time, our position was not that the Law of Florida was unsettled or uncertain.
Now, with all of the problems Mr. Ruby points out about classical abstention, certainly the court that has had the most experience with certification in a federal context has not found it to be a burden and has found it in fact to be a great benefit.
As recently as 1969, the Fifth Circuit in Martinez against Rodriguez said the following.
“We would be remiss if we did not once again, seize the opportunity to extol the virtues of the Florida certification procedure.”
For example, while this Court following the footsteps of the Stolrich (ph) below, might have reached the same conclusion as that of the Florida court with respect to the issue in this case, our decision would have had no assurance of predictable correctness.
No matter how many federal judges, trial, appellate, three-judge panel, or the full panoply of the court en banc, any decision would have been an eerie guess.
Now, the guesswork has been eliminated and we are quickly presented with a definitive explication of Florida law.
That’s the view of the Fifth Circuit, not just these petitioners and we submit that this Court should reverse the decision below and direct the Second Circuit also to certify this question of Florida law to the Supreme Court of Florida.
Chief Justice Warren E. Burger: Thank you gentleman.
The case is submitted.