In re: Cendant Corporation Litigation Janice G. Davidson v. Davidson, No. 99-0587 C.D. Cal. April 8, 1999 appears in the appendix at App.…

Volume 2 of 2
Filed May 9, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-2185
IN RE: CENDANT CORPORATION LITIGATION
JANICE G. DAVIDSON; ROBERT M. DA VIDSON, in his
capacity as trustee of Robert M. Davidson Charitable
Remainder Unitrust, and as co-trustee of Elizabeth A.
Davidson Irrevocable Trust, Emilie A. Davidson Irrevocable
Trust, John R. Davidson Irrevocable Trust, Emilie A.
Davidson Charitable Remainder Unitrust and John R.
Davidson Charitable Remainder Unitrust,
Appellants
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Action No. 98-cv-01664)
District Judge: Honorable William H. W alls
Argued: November 16, 2000
Before: SLOVITER, AMBRO, and GARTH, Circuit Judges
(Filed: May 9, 2001)

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GARTH, Circuit Judge, dissenting.
I respectfully dissent from the majority's decision. In
particular, and apart from any other doctrine of law, I
cannot understand how the majority can permit a New
Jersey District Court to enjoin arbitration and thereby
overrule an order by a companion district court in
California compelling arbitration,1 when that arbitration
order was entered months before notice of class
certification was even distributed and when that order
embraced each and every one of the Davidsons' claims.
This issue of arbitration vis-a-vis class certification is of
overriding importance, and its proper r esolution cannot be
overemphasized. Indeed, just recently this Court has
announced the formation of a Task For ce on selection of
class counsel and has enumerated a number of issues for
the Task Force to consider.2 I suggest that this question of
arbitration-class certification is one which in my opinion
should assume prominence in the Task For ce's labors.
I.
I suggest that the sequence in which the majority
discusses issues in its opinion is inappropriate and in effect
"puts the cart before the horse." I should not be surprised
that the discussion of the arbitration injunction issue--
unquestionably the most significant and important in this
case and an issue of first impression--was relegated to the
very last discussion in an otherwise mundane appeal.
Obviously, if one "goes into" the arbitration injunction
discussion with a holding that the appellants--the
Davidsons--were and are class members, all else falls into
the majority's theory. As one goes in, that's how one comes
out. That is the tactic employed by the majority her e.
_________________________________________________________________
1. The California Central District Court's order, Cendant Corp. v.
Davidson, No. 99-0587 (C.D. Cal. April 8, 1999) appears in the appendix
at App. 704-09.
2. See, e.g., Cendant Corp. PRIDES Litig., 243 F.3d 721 (3d Cir. 2001),
discussing our overall supervisory role and our responsibilities in the
selection of class counsel and in attorneys' fee awards as well as in
safeguarding fair settlements of class actions.
42

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However, if, with an understanding of the r ecord and a
correct understanding of the case authority and res
judicata, we recognize, as I do, that the opinion and order
of the California Central District Court which required
Cendant to arbitrate with the Davidsons pr eceded any class
certification and also preceded by approximately seven
months any distribution of a class notice which pr escribed
an opt-out period, then a completely differ ent and a correct
result obtains.
Accordingly, the proper course of action for the majority
would have been to deal with the arbitration injunction
first. If the majority then concluded, as I feel it should have,
that the arbitration order both preceded and preempted the
class action as to the Davidsons, then the issue of whether
the Davidsons fit within the class definition is completely
irrelevant because they could not have been class
members. As I will discuss later, that is the only and the
correct result of this appeal. In light of my conviction that
the arbitration issue necessarily had to be decided before
the issue of the Davidsons' inclusion in the class, I will
discuss the issues in that order.
II.
The majority characterizes its holding with r espect to the
New Jersey District Court's injunction of the Davidsons'
arbitration as follows: "we hold that the District Court did
err in enjoining, in its entirety, Appellants' arbitration.
While Appellants are subject to the class settlement, and
therefore are enjoined fr om pursuing any claims that fall
within that settlement, they are not enjoined from pursuing,
in arbitration, any claims that fall outside the settlement's
scope." (Maj. Op. at 1 (emphasis added).)
In discussing the arbitration injunction, the majority
correctly cites language from the Supr eme Court
emphasizing the preferred status of arbitration under the
Federal Arbitration Act ("FAA"). (Maj. Op. at 32.) However,
because "Appellants . . . cite no case law holding that the
FAA trumps, and thereby forgives,[the Davidsons'] failure
to opt out," the majority holds that "the District Court did
not violate the policies of the FAA when it enjoined
43

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Appellants from proceeding with their arbitration after they
did not opt out of the class." (Maj. Op. at 36.) Accordingly,
the majority concludes that "the District Court could enjoin
. . . claims in arbitration that were r esolved by the Class
Action Settlement." (Maj. Op. at 36.) The majority could not
be more wrong.
Indeed, I strongly disagree with the majority's decision for
several reasons. I would hold that the New Jersey District
Court did abuse its discretion, indeed it gr ossly abused its
discretion, in enjoining the arbitration and not giving effect
to the California Central District Court's or der compelling
arbitration, and I would hold that the entir e arbitration
must be allowed to go forward.
A.
First, the majority wholly ignored the timing of the
initiation of the arbitration and of the class action. Because
of the importance of the various events, I note in the
margin the timeline of these events and the dates on which
they occurred.3 Further, I recite the chronology of the most
significant events that occurred:
_________________________________________________________________
3. Timeline:
December 14, 1998 Lead Plaintiffs file an Amended Consolidated Class
Action Complaint ("ACCAC") and move for class
certification.
December 17, 1998 The Davidsons initiate arbitration against Cendant
pursuant to their Settlement Agreement.
January 21, 1999 Cendant files suit in the District Court for the
Central District of California to enjoin the
arbitration (claiming that the Davidsons' claims
are barred by the Settlement Agreement).
January 27, 1999 The New Jersey District Court grants the motion
for class certification.
February 17, 1999 Cendant moves for a pr eliminary injunction of the
arbitration; the Davidsons move for summary
judgment on the injunction action.
April 8, 1999 The California Central District Court dismisses
Cendant's injunction action and finds that the
Davidsons' claims must be arbitrated.
April 1999 Cendant appeals the California Central District
Court's decision, and Cendant and the Davidsons
44

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1) the Amended Consolidated Class Action Complaint and
motion for class certification were filed on December 14,
1998;
2) the Davidsons filed a Notice of Claims for arbitration
against Cendant on December 17, 1998;
3) the class was certified on January 27, 1999;
4) on April 8, 1999, the California Central District Court
issued an opinion and order declining to enjoin the
Davidsons' arbitration and finding that the Davidsons'
claims must be arbitrated;
5) in October 1999, class notice was first disseminated
and the opt-out period began (almost a year after the
Notice of Claims for arbitration was filed);
6) the opt-out period for the class action expir ed on
December 27, 1999.
The majority ignores the most salient fact--that the
Davidsons initiated arbitration before the class was certified
--indeed, before any notice of certification was ever
formulated or distributed. Despite this and despite the fact
_________________________________________________________________
agree to stay arbitration pending the Ninth
Circuit's resolution of the appeal.
August 6, 1999 The New Jersey District Court or ders
dissemination of class notice.
October 1999 Class notice is disseminated.
December 17, 1999 A proposed settlement of the class action is
reached.
December 27, 1999 The opt-out period for the class action expires.
March 29, 2000 The New Jersey District Court grants preliminary
approval of the settlement of the class action.
April 2000 The Davidsons file a motion in the New Jersey
District Court for clarification of the class to
exclude them or for extension of the opt-out
period.
June 20, 2000 The New Jersey District Court enjoins the
Davidsons' arbitration and finds that they ar e
class members.
August 15, 2000 The final settlement of the class action is approved
by the New Jersey District Court and class
members release all claims against Cendant.
45

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that no case authority--I repeat, no case authority--exists
which holds that an arbitration initiated prior to class
certification, thereafter ordered by a federal district court,
and on appeal to its Court of Appeals4 may be enjoined, the
majority here nevertheless and perplexingly holds that the
New Jersey District Court properly enjoined the Davidsons'
arbitration of issues covered by the class action.
B.
The majority states that the District Court had authority
to enjoin the Davidsons' arbitration under the All W rits Act,
28 U.S.C. § 1651.5 The majority goes on, however, to make
several points that contravene its own eventual holding: 1)
that the Supreme Court, and the FAA,"require[ ] that
arbitrable claims be arbitrated" in most cir cumstances; 2)
that federal district courts may only enjoin state court
proceedings and arbitrations under the All W rits Act in rare
instances;6 and 3) that the Anti-Injunction Act, 28 U.S.C.
§ 2283, also limits the situations in which injunctions of
other proceedings by federal district courts ar e permissible.
(Maj. Op. at 31-39.) By making these points, the majority
has, in effect, done much of my work for me.
_________________________________________________________________
4. The California Central District Court's order of April 8, 1999 is
presently pending before the Ninth Cir cuit.
5. Incidentally, the New Jersey District Court did not explicitly invoke the
All Writs Act in enjoining the Davidsons' arbitration. I will assume,
however, that the All Writs Act is where the District Court found its
authority to issue the injunction, in light of the lack of such authority
under Rule 23 of the Federal Rules of Civil Pr ocedure itself. As the
Second Circuit observed in In re Baldwin-United Corp. Litig.:
We do not find independent authority for the issuance of the
injunction in the Fed.R.Civ.P. 23(d) pr ovision empowering the
district judge to issue orders appropriate"for the protection of the
members of the class or otherwise for the fair conduct of the action";
that rule is a rule of procedure and cr eates no substantive rights or
remedies enforceable in federal court.
770 F.2d 328, 335 (2d Cir. 1985).
6. We should not lose sight of the fact that, here, a federal district court
in New Jersey enjoined a California arbitration after a California federal
district court had previously denied Cendant's application to reject the
Davidsons' arbitration claims.
46

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Picking up after the majority's eloquent recitation of these
points, one would expect that the majority would logically
hold that the District Court's order enjoining the Davidsons'
arbitration was without legal foundation and authority and
must, therefore, be reversed. Inexplicably, the majority,
without basis in reason and without support in the cases
and statutes on which it relies, has err oneously held
otherwise, leading to this dissent.
1.
The All Writs Act states: "The Supr eme Court and all
courts established by Act of Congress may issue all writs
necessary or appropriate in aid of their r espective
jurisdictions and agreeable to the usages and principles of
law." 28 U.S.C. § 1651(a). To explain why the majority erred
in relying on the All Writs Act to support its affirming the
District Court's injunction, I will flesh out in more detail
the scope of the Act and the meaning of the phrase
"necessary7 . . . in aid of . . . jurisdiction[ ]."
In Turner Broadcasting System, Inc. v. Federal
Communications Commission, the Supreme Court stated:
The All Writs Act, 28 U.S.C. § 1651(a), is the only
source of this Court's authority to issue an injunction.
We have consistently stated, and our own Rules so
require, that such power is to be used sparingly.
"[J]udicial power to stay an act of Congr ess, like
judicial power to hold that act unconstitutional, is an
awesome responsibility calling for the utmost
circumspection in its exercise. . . .
_________________________________________________________________
7. Though the All Writs Act contains the phrase "necessary or appropriate
in aid of . . . jurisdiction[ ]," 28 U.S.C. § 1651(a) (emphasis added), the
scope of authority to issue injunctions under the Act is necessarily
limited by the Anti-Injunction Act, which pr ovides that "[a] court of the
United States may not grant an injunction to stay pr oceedings in a State
court except as expressly authorized by Act of Congress, or where
necessary in aid of its jurisdiction, or to pr otect or effectuate its
judgments." 28 U.S.C. § 2283. Therefor e, the appropriate inquiry under
the All Writs Act in conjunction with the Anti-Injunction Act is whether
the injunction is "necessary in aid of . . . jurisdiction." (Emphasis
added).
47

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An injunction is appropriate only if (1) it is"necessary
or appropriate in aid of [our] jurisdictio[n]," 28 U.S.C.
§ 1651(a), and (2) the legal rights at issue are
"indisputably clear."
507 U.S. 1301, 1303 (1993) (internal citations omitted).
In sanctioning the New Jersey District Court's injunction
as authorized under the All Writs Act, the majority
erroneously relies on several cases.8 First, the majority
misapplies In re Baldwin-United Corp. Litig., 770 F.2d 328
(2d Cir. 1985). In Baldwin-United, the district court had
issued an injunction against state court actions under the
All Writs Act, stating that "the injunction was necessary `in
aid of preserving [the court's] jurisdiction.' " 770 F.2d at
333 (quoting 28 U.S.C. § 1651). The district court had
found that "the existence of competitive litigation . . . would
jeopardize its ability to rule on the settlements, would
substantially increase the cost of litigation, would create a
risk of conflicting results, and would pr event the plaintiffs
from benefiting from any settlement alr eady negotiated or
from reaching a new and improved settlement in the federal
court." 770 F.2d at 333.
The Second Circuit affirmed the district court's grant of
a preliminary injunction in Baldwin-United , observing that
an injunction is proper under the All W rits Act when
"necessary to prevent a state court fr om so interfering with
a federal court's consideration or disposition of a case as to
seriously impair the federal court's flexibility and authority
to decide that case." 770 F.2d at 335 (quoting Atlantic Coast
_________________________________________________________________
8. The majority also perplexingly contradicts itself in its discussions of
the FAA and the Anti-Injunction Act. It corr ectly observes that "the
Supreme Court requires that arbitrable claims be arbitrated, even where
the result would be the possible inefficient maintenance of separate
proceedings in different forums," and it points out that "the FAA requires
piecemeal resolution when necessary to give ef fect to an arbitration
agreement." (Maj. Op. at 32 (internal citations and quotation marks
omitted).) However, only two pages later , the majority contradicts this
mandate, averring in its discussion of the Anti-Injunction Act that "a
class action calls for distinct rules in connection with the need to have
as many common issues as possible disposed of in a single proceeding."
(Maj. Op. at 34.) This statement is simply incorr ect in the context of this
case, in light of FAA and Anti-Injunction Act jurisprudence.
48

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Line R.R. Co. v. Brotherhood of Locomotive Engineers, 398
U.S. 281, 295 (1970) (dicta)). The Second Cir cuit held that
this standard was met in Baldwin-United because "[t]he
existence of multiple and harassing actions by the states
could only serve to frustrate the district court's efforts to
craft a settlement in the multidistrict litigation before it
[because t]he success of any federal settlement was
dependent on the parties' ability to agree to the release of
any and all related civil claims the plaintif fs had against the
settling defendants based on the same facts," which release
would be uncertain "[i]f states or others could derivatively
assert the same claims on behalf of the same class or
members of it." 770 F.2d at 337.
The holding in Baldwin-United that an injunction was
proper under the All Writs Act is wholly inapplicable to this
case for several reasons. First, it concer ned derivative
lawsuits in state courts by the states themselves, not
arbitration by an individual under the FAA. Second, the
lawsuits were commenced after the class settlement was
reached, contrasted with the Davidsons' arbitration, which
was initiated before the CalPERS class was even certified.
Finally, whereas the district court in Baldwin-United
properly held that the injunction was necessary to preserve
its jurisdiction under the All Writs Act because of the
dangers to the class settlement from these derivative
lawsuits, an injunction of the Davidsons' arbitration is not
necessary to the settlement of the claims of the other
CalPERS class members because the settlement of the class
action here is not at all contingent on the Davidsons'
participation in the class action. Moreover , the Davidsons
have already received a final judgment in their favor from a
competent court--the California Central District Court--
holding their claims to be arbitrable. (I discuss this issue of
res judicata hereafter.)
The majority also cites In re PaineW ebber Partnership
Litig., 1996 WL 374162 (S.D.N.Y. July 1, 1996), a case that
the District Court relied upon in enjoining the arbitration.
The majority observes that, in PaineWebber, "the court
denied fifteen plaintiffs' attempts to arbitrate claims covered
by a class action where they all failed to opt out of the class
before the deadline," a situation which the majority
apparently likens to the instant case. (Maj. Op. at 32.)
49

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In PaineWebber, after the opt-out period had expired and
a tentative settlement had been reached, fifteen class
members who had failed to opt out initiated separate state
court litigation and arbitration, both covering similar claims
to those in the class action. Relying on Baldwin-United, the
district court enjoined the state litigation and the
arbitration under the All Writs Act, observing that such an
injunction was appropriate "where a federal court is on the
verge of settling a complex matter, and state court
proceedings may undermine its ability to achieve that
objective." 1996 WL 374162, at 3 (quoting Standard
Microsystems Corp. v. Texas Instruments, Inc., 916 F.2d 58,
60 (2d Cir. 1990). The district court further noted that "this
consolidated class action is analogous to a r es over which
the Court requires full control, ther eby justifying a stay
pursuant to the All Writs and Anti-Injunction Acts, at least
to the extent that parties to this litigation seek to bring a
new action in a different forum." 1996 WL 374162, at 3.
In fact and in law, PaineWebber is wholly inapposite to
this case, and I fail to understand why the majority has
relied upon it. In PaineWebber, the plaintiffs did not seek
arbitration until after the class had been certified, after
notice of the class action had been sent out, after the opt-
out period had expired, and after a tentative settlement of
the class action had been reached. The observations by the
district court in PaineWebber that"the Court has the ability
to enjoin further litigation by class members involving the
subject matter of this class action," 1996 WL 374162, at 4
(S.D.N.Y. July 1, 1996) (emphasis added), and that an
injunction was proper "to the extent that parties to this
litigation seek to bring a new action in a different forum,"
1996 WL 374162, at 3 (emphasis added), have no r elevance
or application here, where the Davidsons' arbitration did
not constitute "further litigation" or "a new action" but
rather was commenced before class certification and was
confirmed as the appropriate course of action by a federal
district court in California long befor e class notice was
disseminated. Accordingly, the reasoning employed by the
district court in PaineWebber to issue an injunction under
the All Writs Act cannot be used to justify the injunction
here.
50

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Another case cited by the majority, In r e Joint Eastern
and Southern Districts Asbestos Litig., 134 F.R.D. 32
(E.D.N.Y. 1990), concerned consolidation of asbestos-
related proceedings against the defendant. Class counsel
and the defendant reached a proposed settlement, after
which "the court directed that all inter ested parties appear
. . . and show cause why the proposed class should not be
certified and asbestos-related proceedings in other forums
stayed." 134 F.R.D. at 35. After these hearings, a class
action complaint and motion for certification wasfiled,
which motion was granted by the court in conjunction with
a stay of "any pending asbestos-related pr oceedings
brought on behalf of class members." 134 F .R.D. at 35.
In asserting that the injunction in Asbestos was
"necessary and appropriate in aid of " the district court's
jurisdiction of the class action under the All W rits Act, the
district court pointed out that:
To permit pending actions against [the defendant] to
proceed in their present form would substantially
impair or impede the interests of other asbestos
claimants and would significantly deplete the assets
available to resolve all pending and futur e cases. These
pending cases, if allowed to continue independently,
will seriously hinder the ability of the court to evaluate
the adequacy and fairness of the proposed settlement
of the class action by constantly depleting [the
defendant]'s assets.
134 F.R.D. at 36. In addition, the district court in Asbestos
described asbestos litigation as having reached"crisis
proportions." Specifically, the district court observed:
Over 100,000 pending asbestos personal injury and
wrongful death cases have backlogged the courts--
preventing many injured persons fr om obtaining much
needed compensation in a timely and efficient manner.
Even more troubling is the current r ealization that
each day, as more judgments are paid, the possibility
that similarly situated claimants will not r eceive the
full value of their claims becomes increasingly likely. A
fundamental tenet of our legal system--equal
treatment--no longer exists for asbestos victims.
51

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134 F.R.D. at 33.
To suggest that the necessity of enjoining the Davidsons'
arbitration is even remotely comparable to the national
"crisis" of asbestos litigation is preposterous. The District
Court in this case was not faced with hundreds of
thousands of individual actions threatening to impair the
settlement of the class action before it. Indeed, the District
Court was faced with only a single arbitration pr oceeding
that had been decided and was on appeal in another
Circuit, that had been commenced before class certification
pursuant to arbitration agreements between Cendant and
the Davidsons, and that made claims available to no other
Cendant shareholders. In other words, wher eas the
injunction in Asbestos served to stay countless actions by
class members, which actions could of course seriously
impact the possibility and quality of settlement of the class
action, the District Court here enjoined one arbitration
arising out of circumstances peculiar to the Davidsons and
which could not have any imaginable impact on the
administration and disposition of other class members'
claims.
The case before us simply does not meet the
requirements for issuance of an injunction under the All
Writs Act, and none, I repeat, none, of the cases that the
majority cites furnishes even a modicum of authority for
the conclusion that the majority desires to r each. Unlike
Baldwin-United, PaineWebber, and Asbestos, the injunction
issued by the New Jersey District Court was not"necessary
in aid of its jurisdiction." The Davidsons initiated their
arbitration against Cendant under an agreement between
the Davidsons and Cendant not applicable to other class
members and, as will be discussed infra, the claims in their
arbitration overlapped only slightly with the claims in the
class action. In addition, there is no thr eat that allowing
this arbitration, initiated before class certification and long
before expiration of the opt-out period, to pr oceed would
expose Cendant to future claims by other putative class
members, because such claims would necessarily be
commenced much later in the course of the class action
and would therefore be more analogous to the cases relied
upon by the majority and discussed above.
52

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The arbitration would neither "interfer[e] with [the New
Jersey District Court's] consideration or disposition" of the
class action, nor would it "seriously impair the[New Jersey
District Court's] flexibility to decide" the class action, nor
would it "undermine [the New Jersey District Court's]
ability to achieve" class settlement. Baldwin-United, 770
F.2d 328, 335 (2d Cir. 1985); PaineWebber, 1996 WL
374162, at 3 (S.D.N.Y. July 1, 1996). Accor dingly, I
fervently disagree with the majority's holding that the New
Jersey District Court had authority to enjoin the arbitration
under the All Writs Act.9
2.
Because the Davidsons initiated arbitration so early,
indeed before the class had even been certified, those cases
cited by the majority which permit injunctions of
arbitrations initiated by class members at the time when
the class action is nearing settlement are just not
applicable to this appeal, and the majority has err ed
grievously in attempting to support its holding based on
such authority. In light of the fact that the Davidsons
commenced arbitration pursuant to unique agr eements
_________________________________________________________________
9. The majority cites still another case, In re Prudential Partnership Litig.,
158 F.R.D. 301, 304 (S.D.N.Y. 1994), which it claims bolsters its
unsupportable conclusion that one district court can enjoin an
arbitration that another district court has ruled must go forward. In re
Prudential does not invoke the All Writs Act but should be discussed
briefly because it too is completely distinguishable from the instant case.
The court in In re Prudential Partnership Litig. stated: "Class members
who wish to opt out in order to . . . seek arbitration in a forum in
existence at the time of the original opt-out deadline have no excuse for
their neglect to opt out; they are simply seeking to escape consequences
known to them at the time they chose to remain in the class." 158
F.R.D. 301, 304 (S.D.N.Y. 1994); (See Maj. Op. at 36). By contrast, in
this case, the Davidsons did not "wish to opt out in order to . . . seek
arbitration." They had already sought arbitration almost a year before the
opt-out period even began and over a year before the expiration of the opt-
out period and, most importantly, had received a final judgment in their
favor. This is not a case in which the Davidsons received notice of the
class settlement and then suddenly decided to arbitrate their claims
instead of participating in the settlement. Rather , they sought to compel
arbitration before the class was even certified.
53

-- 13 of 35 --

between themselves and Cendant, the majority's holding
that the injunction was "necessary . . . in aid of " the
District Court's jurisdiction under the All W rits Act is
equally untenable. Indeed, the one case wher e the facts are
analogous to this appeal, in that the arbitration
commenced before the class was certified and notices were
distributed, is the Eighth Circuit case of In re Piper Funds,
Inc., Inst. Gov't Income Portfolio Litig., 71 F .3d 298 (8th Cir.
1995), a case relying on the FAA rather than the All Writs
Act to reverse a district court's injunction of an arbitration
initiated before class certification.
In Piper Funds, the Eighth Circuit held that the district
court had improperly enjoined an arbitration commenced,
as here, before class certification and before the notice of
class action had been disseminated and the opt-out period
had begun. Piper Funds differs slightly from this case in
that the plaintiff in Piper Funds, Park Nicollet, had
specifically expressed its desire to opt out of the class
before the opt-out period had even begun. The Eighth
Circuit pointed out that "the FAA does not authorize a
district court to enjoin arbitration" and observed that "there
are very few reported cases in which a federal court has
enjoined arbitration." 71 F.3d at 302. It listed three reasons
why the district court's reasons for the injunction were not
sufficient, all of which are equally applicable in this case: 1)
"Park Nicollet has a contractual right to immediate
submission of its securities law claims to arbitration," 71
F.3d at 303; 2) "Park Nicollet's contractual and statutory
right to arbitrate may not be sacrificed on the altar of
efficient class action management," 71 F .3d at 303; and 3)
the Court did not accept "the class action parties'
conclusory assertion that immediate arbitration by Park
Nicollet (and perhaps others) will frustrate their class action
settlement." 71 F.3d at 303.
Though relying on the FAA to hold that the district
court's injunction of the arbitration had been in error, the
Eighth Circuit did address the All W rits Act, stating:
The district court based its injunction on the All W rits
Act, 28 U.S.C. § 1651, which has been invoked by
federal class action courts to enjoin persons not within
the court's jurisdiction from frustrating a court order
54

-- 14 of 35 --

or court-supervised settlement. We agr ee with the
district court that it has the power, under Fed.R.Civ.P.
23 augmented by the All Writs Act, to contr ol conduct
by absent class members that affects management or
disposition of the class action. However, exercise of this
power must be "agreeable to the usages and principles
of law," § 1651(a), which in this case include the FAA
as well as Rule 23.
71 F.3d at 300 n.2 (internal citations omitted).
To put the Eighth Circuit's holding mor e firmly in the
context of the All Writs Act, the FAA's clear preference for
arbitration over other forms of litigation dictates that an
injunction can never be appropriate in a case such as this
one because "the legal rights at issue [can never be]
`indisputably clear' " where issuance of an injunction would
violate the principles of the FAA, and, ther efore, the second
prong of the test of the propriety of an injunction, set forth
by the Supreme Court in Turner Br oadcasting System, Inc.
v. Federal Communications Commission, can never be met.
It is true that the Court in Piper Funds noted in dictum
that the district court may properly have denied the party's
request to opt out if, for example, "its r equest to opt out
was too late." 71 F.3d at 304. The majority seizes upon that
language as reason enough to justify its holding in this
case, disregarding the Eighth Circuit's indisputable
reasoning that it is inappropriate under the FAA for a
district court to enjoin a previously initiated arbitration
simply because the party did not follow the standar d opt-
out procedure. (See Maj. Op. at 35-36.) However, the
majority's willful blindness to the similarities between this
case and Piper Funds is just another example of the
majority's unwillingness to accept the fact that the
arbitration sought by the Davidsons preempted any class
membership and could not be enjoined.
In fact, in both this case and Piper Funds, the plaintiffs
did not follow the standard opt-out procedure. In Piper
Funds, the plaintiff attempted to opt out before the opt-out
period had begun, and, here, the Davidsons initiated
arbitration well before the opt-out period began but did not
explicitly opt out of the class. The Davidsons did not opt
55

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out at that time, undoubtedly because neither the
Davidsons nor Cendant believed that the Davidsons were
class members. Moreover, when the Davidsons filed their
motion in the District Court seeking clarification of the
class definition, the Lead Plaintiffs filed a brief stating that
"Lead Plaintiffs agree that the Davidsons are excluded from
the class." (App. 918.) The Davidsons obviously could not
have been found to be members of the class if the District
Court had honored the California District Court's order
compelling arbitration.10
Moreover, the majority errs in r elying on In re VMS Sec.
Litig., 21 F.3d 139 (7th Cir. 1994), to support its point that
a late opt-out terminates a party's right to arbitrate.
Though, as the majority notes, the plaintiffs in VMS "had
obtained an award in the arbitration filed before resolution
of the class action," (Maj. Op. at 35), the pr ogression of
events in that case differed markedly fr om this case. In
VMS, class actions were filed and consolidated into one
class action, and a proposed settlement was approved,
subject to notice to class members, hearing, andfinal
approval. Then, the Hubbards initiated arbitration.
Subsequently, class notice was disseminated and the opt-
out period expired without the Hubbards opting out. The
district court then enjoined the Hubbards' arbitration, but
the arbitrators heard the Hubbards' claims anyway and
granted them an award.
The Seventh Circuit held that "[t]he arbitrators `exceeded
their power' when they decided to act on the Hubbar ds'
claims [because t]he Hubbards' claims against Prudential
arising from their investment in the VMS Mortgage
Investment Fund were subject to the class action
settlement, and had already been resolved." VMS, 21 F.3d
at 145. Indeed, the claims in VMS had been r esolved in the
class settlement before the Hubbar ds even initiated
arbitration.
_________________________________________________________________
10. Additionally, in Section IV, infra , I discuss the New Jersey District
Court's failure to comply with this court's dir ections in noting that, after
the California arbitration had been enjoined, the Davidsons were too late
to opt out of the class. The District Court failed to apply the Supreme
Court's Pioneer analysis and our instructions in its opinion.
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By contrast, the Davidsons' arbitration commenced
before the class was even certified. Additionally, the
Davidsons initiated arbitration pursuant to br oad and
binding arbitration agreements (see Part II.C.2, infra),11the
predominance of which had already been confirmed by a
federal district court in California, wher eas the Hubbards'
arbitration was not pursuant to such an agreement.12
Accordingly, the Seventh Circuit's opinion in VMS
understandably contained no reference to the guiding
principles of the FAA. Because of these significant
differences between VMS and this case, the Seventh
Circuit's decision that the Hubbards wer e bound to the
class settlement after they failed to opt out has no
relevance to the instant case. Indeed, I have no quarrel with
the VMS decision and might very well have joined in the
VMS holding if that case were befor e me.
By asserting that the Davidsons' right to arbitrate is not
extinguished by their failure to opt out of the class, I am
not "gloss[ing] over" the Eighth Cir cuit's statement in Piper
Funds regarding late opt outs as the majority suggests.
(Maj. Op. at 36.) I am simply affording more importance to
the Eighth Circuit's actual holdings r egarding the
predominance of the FAA than to itsfleeting statement in
dictum regarding late opt-outs. The majority, by contrast,
has attempted to support and justify its holding her e by
resorting to odd and assorted dicta from the cases which it
has cited and I have distinguished, all of which, other than
Piper Funds, are irrelevant to the issue presented here of
arbitration preceding class action. (See Maj. at 35-36
(quoting In re VMS Sec. Litig., 21 F .3d 139 (7th Cir. 1994);
In re PaineWebber P'ship Litig., 1996 WL 374162 (S.D.N.Y.
July 1, 1996); In re Prudential P'ship Litig., 158 F.R.D. 301
(S.D.N.Y. 1994).)
I believe, as I have earlier stated, that the only case
relevant to the issue before us is Piper Funds, which, while
_________________________________________________________________
11. Singularly, the majority opinion makes no mention of the terms and
breadth of the arbitration agreements entered into by the Davidsons and
Cendant in its discussion and analysis.
12. In addition, as will be discussed in Part III infra, the class settlement
here did not "resolve" the Davidsons' claims.
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not binding on us in the Third Circuit, nonetheless, with
unimpeachable reasoning, supports a holding that, under
the FAA, and despite the All Writs Act, the New Jersey
District Court could not have and should not have enjoined
the Davidsons' arbitration.
C.
1.
The Davidsons argue that the New Jersey District Court
should have given res judicata effect to the decision by the
California Central District Court. In addr essing this
argument by the Davidsons, the New Jersey District Court
stated:
Plaintiffs' assertion that the Court is r es judicata-
barred from hearing this action is meritless. The
Central District of California was not pr esented with
the issue before this Court--whether the Davidsons are
within the CalPERS settling class. While the Court
directed arbitration of claims arising fr om the 1996
acquisition and 1997 Settlement Agreement, that
direction was made under different factual (and
procedural) circumstances. As Cendant says, it did not
argue that the Davidsons were class members--at
most, they were potential members. Obviously, that
issue was not before the Central District of California
impliedly or actually.
194 F.R.D. 158, 166 (D.N.J. 2000). I believe that the New
Jersey District Court incorrectly applied the doctrine of res
judicata and that the Davidsons are corr ect that the
California Central District Court's decision precluded the
New Jersey District Court from enjoining the Davidsons'
arbitration.
Initially, I should explain that there ar e two forms of
preclusion under the doctrine of res judicata: claim
preclusion and issue preclusion (also r eferred to as
collateral estoppel). As the Third Circuit stated in In re
Graham:
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Claim preclusion applies to claims that `wer e or could
have been raised' in a prior action involving the`parties
or their privies' when the prior action had been
resolved by `a final judgment on the merits.' Claim
preclusion thus bars relitigation of any claim that
could have been raised in the prior action even if it was
not so raised.
In re Graham, 973 F.2d 1089, 1093 (3d Cir.1992) (internal
citations omitted). Issue preclusion, on the other hand,
"bars relitigation only of an issue identical to that
adjudicated in the prior action." Witkowski v. Welch, 173
F.3d 192, 198 n.8 (3d Cir. 1999); see also In re Braen, 900
F.2d 621, 628-29 n. 5 (3d Cir.1990).
Here, we are considering Cendant's motion for an
injunction of the arbitration, a motion made in both
California and in New Jersey. The Califor nia Central
District Court dismissed Cendant's action seeking an
injunction, and that decision is currently on appeal before
the Ninth Circuit Court of Appeals.13 The decision of the
California Central District Court constitutes a "final
judgment on the merits" and that the doctrine of claim
preclusion applies to that decision.
The Supreme Court has described the doctrine of claim
preclusion as follows: "A final judgment on the merits of an
action precludes the parties or their privies from relitigating
issues that were or could have been raised in that action."
Federated Department Stores, Inc. v. Moitie, 452 U.S. 394,
398 (1981). Therefore, it must be deter mined whether
Cendant's motion for an injunction of the Davidsons'
arbitration in the New Jersey District Court was"or could
have been raised" in the California Central District Court.
Cendant's complaint before the California Central District
Court asking the court to enjoin the arbitration was based
solely on the several agreements between Cendant and the
Davidsons and did not mention the issue of the Davidsons'
_________________________________________________________________
13. Under federal law, a judgment on appeal is still a final judgment for
res judicata purposes. See Huron Holding Corp. v. Lincoln Mine Operating
Co., 312 U.S. 183, 188-89 (1941); Transaero, Inc. v. La Fuerza Aerea
Boliviana, 99 F.3d 538, 540 (2d Cir . 1996).
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putative class membership at all. In addition, as the New
Jersey District Court pointed out, the issue of the
Davidsons' class membership could not have been before
the California Central District Court because, at the time of
the California Central District Court's decision, the opt-out
period had not even begun and, therefor e, the Davidsons
had not yet irrevocably failed to opt out of the class action.
The New Jersey District Court found this distinguishing
feature to be dispositive of the res judicata question, as
does the majority here, which describes the fact that the
Davidsons' putative class membership was not addr essed
in the California injunction action as a "fatal flaw." (Maj.
Op. at 30-31 n.22.) Indeed, the New Jersey District Court
reasoned that, because the Davidsons' class membership
"was not before the Central District of California impliedly
or actually," 194 F.R.D. at 166, the California court's
decision that the Davidsons' could not be enjoined did not
preclude the New Jersey District Court fr om enjoining the
arbitration after the expiration of the opt-out period.
However, it is the New Jersey District Court's and the
majority's analyses, not mine, that are fatallyflawed. What
the New Jersey District Court and the majority fail to
realize is that the Davidsons' class membership is irrelevant
to the issue of whether to enjoin the arbitration. Because of
the timing of the arbitration and the class action and
because of the lack of authority to enjoin the Davidsons'
arbitration under the All Writs Act, all discussed in detail in
the preceding sections, the New Jersey District Court could
not base its authority to issue an injunction on the
(arguable) fact of the Davidsons' class membership.
Therefore, contrary to the majority's position, it is far from
"spurious to suggest that res judicata pr ecludes the District
Court from deciding whether Appellants' claims could be
decided in the class action." (Maj. Op. at 30-31 n.22.) The
issue before the New Jersey District Court, whether to
enjoin the Davidsons' arbitration at Cendant's r equest, was
precisely the same issue that was befor e the California
Central District Court and that the California court decided
more than a year before the New Jersey District Court dealt
with the issue. Thus, it is completely irrelevant that
"Cendant's complaint [in the California Central District
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-- 20 of 35 --

Court] . . . did not interpose the existence of the class
action as a ground for seeking injunctive r elief from the
arbitration." (Maj. Op. at 9.)
Because the injunction issues before the California and
New Jersey courts were the same, the New Jersey District
Court was required to afford the decision of the California
court res judicata effect. The Califor nia Central District
Court held that, with regard to the Davidsons' claims
regarding rescission of the Settlement Agreement, "[t]he
Supreme Court has held that an arbitrator must resolve a
claim to rescind a contract based upon fraud in the
inducement when the contract contains a broad arbitration
provision." (App. 705 (citing Prima Paint Corp. v. Flood &
Conklin Mfg. Co., 388 U.S. 395, 404-05 (1967).) The court
also held that the remaining claims, regar ding the merger
of CUC and DAI, should also be submitted to arbitration
because "whether or not the claims were r eleased depends
on whether the settlement agreement can be r escinded, and
depends also on the scope of the release in the agreement.
Both of these issues must be determined by an arbitrator,
pursuant to the clear intent of the parties to submit such
disputes to binding arbitration." (App. 706.) This clear
holding by the California Central District Court left no room
for the New Jersey District Court to enjoin the Davidsons'
arbitration, and the New Jersey District Court err ed in
doing so. The majority has similarly erred in upholding the
New Jersey court's injunction.
2.
It is worth mentioning briefly that a review of the
arbitration clauses in the February 19, 1996 Mer ger
Agreement and the May 27, 1997 Settlement Agr eement
between the Davidsons and Cendant makes clear that the
California Central District Court's decision to dismiss
Cendant's injunction action and to allow the arbitration to
go forward was the correct decision. The arbitration clause
in the Merger Agreement states: "Any controversy, dispute
or claim arising out of or relating to this Agr eement or the
breach hereof which cannot be settled by mutual agreement
. . . shall be finally settled by arbitration . . ." (App. 524.)
The clause goes on to state that "[t]he decision of the
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arbitrator on the points in dispute will be final,
unappealable and binding and judgment on the awar d may
be entered in any court having jurisdiction thereof." (App.
524.) Additionally, the clause states:
The parties agree that this clause has been included to
rapidly and inexpensively resolve any disputes between
them with respect to this Agreement, and that this
clause shall be grounds for dismissal of any court action
commenced by either party with respect to this
Agreement, other than post-arbitration actions seeking
to enforce an arbitration award.
(App. 524-25 (emphasis added).
The Settlement Agreement contains similar language. The
agreement to arbitrate states:
Notwithstanding anything to the contrary contained in
this Agreement or the Surviving Agreements and
Rights, any controversy, dispute or claims arising out
of or relating to this Agreement or any of the Surviving
Agreements and Rights or the breach her eof or thereof
which cannot be settled by mutual agreement shall be
finally settled by binding arbitration in accor dance with
the Federal Arbitration Act . . .
(App. 668.) The arbitration clause in the Settlement
Agreement also states that "[t]he decision of the arbitrator
on the points in dispute will be final, unappealable and
binding, and judgment on the award may be enter ed in any
court having jurisdiction thereof." (App. 669.) Finally, as in
the Merger Agreement, the arbitration clause in the
Settlement Agreement states:
The parties agree that this Section has been included
to rapidly and inexpensively resolve any disputes
between them with respect to this Agreement or any of
the Surviving Agreements and Rights, and that this
Section shall be grounds for dismissal of any court
action commenced by any party with respect to this
Agreement or any of the Surviving Agr eements and
Rights, other than post-arbitration actions seeking to
enforce an arbitrator award.
(App. 669-70 (emphasis added).)
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In their Notice of Claims for arbitration, the Davidsons
raised claims in connection with both the Mer ger
Agreement and the Settlement Agreement. They explicitly
invoked both arbitration clauses in support of arbitrating
these claims, stating that "[t]his dispute pr operly is before
this arbitration tribunal by virtue of an arbitration
provision set forth in the Settlement Agr eement between the
Davidsons and CUC," and "[t]his dispute also is properly
before this arbitration tribunal by virtue of an arbitration
provision set forth in . . . the `Mer ger Agreement.' " (App.
535-36.) The Davidsons also cited similarly wor ded
arbitration provisions in their Employment Agr eements with
CUC and in their Noncompetition Agreements with CUC in
support of arbitrating their claims. (App. 537-38.)
These broad arbitration clauses clearly pr eclude a court
from mandating that the Davidsons participate in a class
action concerning the claims for which they sought
arbitration, and the clauses support the Califor nia Central
District Court's decision.
3.
One final point in connection with the preclusive effect of
the California Central District Court's decision: in light of
the California court's clear holding that the arbitration
could not be enjoined, the majority misapplies our decision
in Great Western Mortgage Corp. v. Peacock, 110 F.3d 222
(3d Cir. 1997). This court held in Peacock: "Once a dispute
is determined to be validly arbitrable, all other issues are to
be decided at arbitration. . . . It would be anomalous for a
court to decide that a claim should be referr ed to an
arbitrator rather than a court, and then, by deciding issues
unrelated to the question of forum, for eclose the arbitrator
from deciding them." 110 F.3d at 230-31.9
The majority perplexingly fails to realize that the dispute
between the Davidsons and Cendant has already been
"determined to be validly arbitrable" by the California
Central District Court. Accordingly, it is"anomalous" and
indeed erroneous for the majority here to issue this opinion
which clearly "foreclose[s] the arbitrator from deciding" the
very issues raised in the arbitration, which a competent
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court with jurisdiction over both parties has held to be
arbitrable.
D.
Because of the timing of the Davidsons' commencement
of the arbitration and the initiation of the class action,
because of the fact that the requirements of the All Writs
Act were not met in this case for issuance of an injunction,
because of this case's dissimilarity to Baldwin-United,
PaineWebber, and Asbestos and its similarity to Piper
Funds, and because of the appropriate application of the
doctrine of res judicata to this case, ther e can be no doubt
that the New Jersey District Court grossly abused its
discretion in enjoining the Davidsons' arbitration.
Accordingly, I am satisfied that, at this point, the issue of
whether the Davidsons can be deemed to fall within the
class definition is irrelevant. The Davidsons sought
arbitration pursuant to the arbitration clauses in the
Merger Agreement and the Settlement Agr eement, and the
California Central District Court confir med that arbitration
was proper. As noted earlier, that order is presently on
appeal to the Court of Appeals for the Ninth Cir cuit and
should have been given res judicata effect by the New
Jersey District Court. The only way the issue of the
Davidsons' class membership could become relevant is if
the Ninth Circuit reversed the Califor nia Central District
Court's decision and held that the Davidsons' claims were
not properly before the arbitrator . Because of that remote
possibility, I will nonetheless discuss below the issue of the
Davidsons' class membership.
III.
The majority holds that the District Court did not err in
finding that the Davidsons were within the class definition.
It bases its holding in part on its interpretation of the term
"publicly traded" in the class definition, which the majority
reads to include the Cendant shares acquir ed by the
Davidsons in the Merger Agreement. The majority concedes
that there were restrictions placed on the Davidsons' sales
of the stock they acquired in the Merger Agreement, but
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observes that "[t]he restriction on sale of the CUC stock
held by Appellants emanated solely from the quantity of
shares they received as a result of the merger, not in any
way from the type of security they received." (Maj. Op. at
16.)
Further, the majority notes that the r estrictions on the
Davidsons' sale of their shares "could be avoided entirely
. . . if Appellants were to sell shares of CUC stock under
any subsequent registration statement." (Maj. Op. at 17.)
Accordingly, the majority reaches the conclusion--a
conclusion for which no relevant authority is cited--that
the Davidsons' shares were "publicly traded," asserting that
"[h]aving traded publicly tens of millions of shares of CUC
common stock so soon after the DAI merger , and then to
claim that they are not `publicly traded' securities within
the class definition, is a non sequitur." (Maj. Op. at 17.)
I cannot agree with the majority's holding on this issue,
because the Davidsons' shares were not"publicly traded,"
and I would hold that the District Court and the majority
of this court have erred in holding otherwise.
Pursuant to the Agreement and Plan of Mer ger of DAI
and CUC, shares of DAI were to be converted as follows:
"each share of common stock, par value $0.00025 per
share, of [DAI] issued and outstanding immediately prior to
the Effective Time . . . shall, by virtue of the Merger . . . be
converted into and shall become 0.85 of one fully paid and
nonassessable share of common stock, $.01 par value per
share, of [CUC]." (App. 475.) The Agr eement was entered
into on February 19, 1996. Also on that date, the
Davidsons signed letters upon which the merger was
conditioned. The letters stated, inter alia:
I hereby represent, warrant and covenant to [CUC]
that:
(a) I will not transfer, sell or otherwise dispose of any
of the [CUC] shares except (i) pursuant to an effective
registration statement under the Securities Act, or (ii)
as permitted by, and in accordance with, Rule 145, if
applicable, or another applicable exemption under the
Securities Act; and
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(b) I will not (i) transfer, sell, or otherwise dispose of
any [DAI] Shares prior to the Effective Time (as defined
in the Merger Agreement) or (ii) sell or otherwise reduce
my risk (within the meaning of the Securities and
Exchange Commission's Financial Reporting Release
No. 1, "Codification of Financial Reporting Policies,"
Section 201.01 [47 F.R. 21028] (May 17, 1982) with
respect to any [CUC] shares until after such time (the
"Delivery Time") as consolidated financial statements
which reflect at least 30 days of post-mer ger combined
operations of [CUC] and [DAI] have been published by
[CUC], except as permitted by Staf f Accounting Bulletin
No. 76 issued by the Securities and Exchange
Commission.
(App. 1129, 1131.)
In light of these limitations on the Davidsons' shar es, the
District Court clearly erred in finding that they were
"publicly traded," and the majority compounded that error
by subscribing to the District Court's ruling. The
Davidsons' shares were certainly "common stock," but not
all common stock is necessarily "publicly traded." The
Merger Agreement placed restrictions on the Davidsons'
trading of their CUC shares, differ entiating them from freely
and publicly traded CUC common stock. Further , there is
no basis for the majority's speculative assertion that the
restrictions were entered into because of the quantity, and
not the quality, of the shares. Regardless of the reason,
there were restrictions on the Davidsons' shares of CUC
common stock, and, therefore, those shar es were not
"publicly traded."
Nor am I convinced by the majority's argument that the
Davidsons could have avoided the restrictions on their
shares by selling under subsequent registration statements.
The fact that the Davidsons were able to over come the
restriction on their shares (in other wor ds, that the
restriction did not amount to an absolute pr ohibition on
trading) does not suddenly transform the r estricted shares
which are not publicly traded into "publicly traded
securities." Whether the restriction made the Davidsons'
shares wholly untradeable or tradeable only after some
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maneuvering, the fact remains that the shar es simply were
not "publicly traded securities."
I agree with the majority that the Davidsons meet the
class definition in other respects, because they "purchased
or otherwise acquired" their shares within the relevant time
period, they were "injured ther eby," and they are not
"officers and directors of Cendant." However, the dispositive
point, and the point on which I diverge fr om the majority,
is the majority's position that the Davidsons' shar es are
"publicly traded securities." "Publicly traded securities" is
the cornerstone of "class membership" as the class was
certified. Because the Davidsons' shares wer e not "publicly
traded," they do not meet the class definition. Accordingly,
the District Court erred in finding the Davidsons to be class
members, even according "particular defer ence" to the
District Court on this finding.14
_________________________________________________________________
14. The majority uses the "particular defer ence" standard of review in
referring to the District Court's interpr etations of the District Court's
own orders. I do not think that it is appr opriate to accord the District
Court "particular deference" on this issue because I do not believe that
the District Court's finding as to the Davidsons' membership in the class
amounted to an "interpretation of its own or der." The majority asserts
that, "[h]ere, the District Court, in determining whether Appellants were
class members, interpreted its own orders, the order certifying the class
and the order approving the class notice, both of which contained the
class definition." (Maj. Op. at 14-15.) In so holding, the majority accords
a "particular deference" to the District Court's interpretations.
While it is true that those orders gave content to the class definition,
the District Court did not draft the definition itself. I believe that
"particular deference" can be accor ded when the District Court claims to
have a better insight on the meaning of an or der as the author of that
order. This is not such a case.
Indeed, I believe that the orders in this case approving class
certification and approving class notice ar e analogous to consent decrees
approved by courts, in that they are "hybrid[s] of . . . contract[s] and . . .
court order[s]." Holland v. New Jersey Dept. of Corrections, Nos. 00-1801,
2356, 2357, at 20. As this court has just recently held in Holland, the
appropriate standard of review for such decrees is plenary or de novo
review, and not the "particular defer ence" review held by the majority.
Holland, at 21-24. Hence, the majority exer cised an incorrect standard
of review over the District Court's orders certifying the class and
approving class notice.
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My interpretation of "publicly traded" as not including the
Davidsons' shares is bolstered by the definition of "publicly
traded" in the Internal Revenue Code Regulations.
Regulation § 1.170A-13 defines "publicly traded securities"
as follows:
In general. Except as provided in paragraph (c)(7)(xi)(C)
of this section, the term `publicly traded securities'
means securities . . . for which (as of the date of
contribution) market quotations are readily available
on an established securities market.
I.R.C. Reg. § 1.170A-13(c)(7)(xi)(A). The exceptions section
states:
Exception. Securities described in paragraph (c)(7)(xi)
(A) or (B) of this section shall not be consider ed
publicly traded securities if-- (1) The securities are
subject to any restrictions that materially af fect the
value of the securities to the donor or pr event the
securities from being freely traded . . . .
I.R.C. Reg. § 1.170A-13(c)(7)(xi)(C)(1) (emphasis added).
The Davidsons' shares precisely fall into this exception,
in that restrictions were placed on the shares that
prevented them from being freely traded. Therefore,
according to the definition of "publicly traded" in the
Internal Revenue Code Regulations, the Davidsons' shares
were not "publicly traded."
Moreover, the majority once again tur ns a blind eye to
the Amended and Consolidated Class Action Complaint
("ACCAC"), which by its terms supports the Davidsons'
position that the class action was not intended to cover
their claims. The ACCAC describes the class members"as
purchasers on the [NYSE] and acquir ers pursuant to the
Registration Statement and the Joint Proxy
Statement/Prospectus [of the merger of CUC and HFS]."
(App. 156.) In addition, the ACCAC states:
Lead Plaintiffs' claims are typical of the members of the
Class. Plaintiffs and all other members of the Class
acquired their CUC common stock pursuant to the
Registration Statement and Joint Proxy
Statement/Prospectus, and purchased their CUC and
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Cendant publicly traded securities on the open market
and sustained damages as a result of defendants'
wrongful conduct complained of herein.
(App. 156.) These statements make clear that the lead
plaintiffs intended the class to consist only of purchasers of
the Cendant shares on the market and pur chasers
pursuant to the HFS/CUC merger. The Davidsons fall into
neither of these categories.
In addition, the fact that the claims in the ACCAC for the
most part differ from the Davidsons' claims against
Cendant lends still further support to excluding the
Davidsons from the class. Of the fourteen counts in the
ACCAC, only five cover the time period during which the
Davidsons acquired their shares. In addition, as the
Davidsons point out, the ACCAC alleges claims for violation
of Section 11 of the Securities Act, 15 U.S.C. § 77k, only in
connection with the HFS/CUC merger. The Davidsons
would (and did) pursue such claims on their own behalf in
arbitration, but the ACCAC does not make those claims for
the Davidsons.15 The ACCAC only intended to cover merger-
related claims in connection with the HFS/CUC merger and
further reinforces the point that the CalPERS class did not
include the Davidsons.16
I therefore disagree with the majority's holding regarding
the Davidsons' class membership, because I am convinced
that the District Court clearly erred in finding that the
Davidsons are within the class.
_________________________________________________________________
15. In their Notice of Claims for arbitration, the Davidsons made claims
under §§ 11, 12(a)(2), and 17 of the Securities Act, 15 U.S.C. § 77a, et
seq., § 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), as
well as under various sections of the Califor nia Corporations Law and
common law. The ACCAC also alleges violations of sections 11 and 12 of
the Securities Act and § 10(b) of the Securities and Exchange Act, but its
section 11 and section 12 claims are not the same claims that the
Davidsons have asserted in arbitration, and only the§ 10(b) claims in
the ACCAC arguably cover claims of the Davidsons.
16. See note 4, supra.
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IV.
I have still another disagreement with the majority
opinion and its holdings. The majority holds that the
District Court did not abuse its discretion in its analysis of
whether to grant the Davidsons' request for an extension of
the time to opt out. In considering the Davidsons's request
for an extension of the opt-out deadline under Rule 6(b) of
the Federal Rules of Civil Procedure, the District Court
described the factors to be considered in connection with
the excusable neglect standard in detail, citing the Supreme
Court's decision in Pioneer Investment Services Co. v.
Brunswick Assoc. Ltd. Partnership, 507 U.S. 380, 395
(1993), and the Third Circuit's earlier opinion concerning
this standard, Dominic v. Hess Oil V .I. Corp., 841 F.2d 513,
517 (3d Cir. 1988). See In re Cendant Corp. Sec. Litig., 194
F.R.D. 158, 165 (D.N.J. 2000).
However, the District Court in this case, as in other cases
when it gave only lip service to the Pioneer factors, did not
comply with the Supreme Court's or our instructions. See
In re Cendant Corp. PRIDES Litig., 235 F .3d 176 (3d Cir.
2000); In re Cendant Corp. PRIDES Litig. , 234 F.3d 166 (3d
Cir. 2000).17 The District Court here stated only that the
Davidsons' "alleged failure to receive notice . . . does not
warrant an extension of the exclusion deadline." 194 F.R.D.
at 165. It gave as its reasons: class notice was adequately
published; the case got independent press coverage; "the
Davidsons' assertion that their failure to opt out is
excusable because Cendant acted as though they wer e not
_________________________________________________________________
17. The majority cites another Cendant appeal in which we affirmed the
District Court's decision that certain plaintif fs' late filing of proofs of
claim was "excusable neglect." (Maj. Op. at 28 (citing In re Cendant Corp.
PRIDES Litig., 233 F.3d 188 (3d Cir . 2000)).) Because that appeal
concerned a situation in which the District Court had found excusable
neglect, it does not particularly illuminate our analysis of the District
Court's failure to conduct a complete excusable neglect analysis here.
Moreover, as I note in the text above, at least two other Cendant cases
have been remanded because the same District Court judge who
presided over the instant case failed to explain his analysis in those
cases as well. See In re Cendant Corp. PRIDES Litig., 235 F.3d 176 (3d
Cir. 2000); In re Cendant Corp. PRIDES Litig., 234 F.3d 166 (3d Cir.
2000).
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class members is not convincing"; and Cendant's"defensive
maneuvers" in reaction to the Davidsons' arbitration before
the expiration of the opt-out period "are irrelevant." 194
F.R.D. at 165.
The District Court said nothing about "the danger of
prejudice" to Cendant if an extension wer e granted, "the
length of the delay and its potential impact" on the case, or
"whether the defendant acted in good faith," Pioneer, 507
U.S. at 395, nor did the District Court consider"(1) whether
the inadvertence reflected professional incompetence such
as ignorance of the rules of procedure, (2) whether an
asserted inadvertence reflects an easily manufactured
excuse incapable of verification by the court, and, (3) a
complete lack of diligence." Dominic, 841 F.2d at 517.
It does not suffice for the majority to attempt tofill in the
gaping gaps left by the District Court in its aborted Pioneer
analysis. Nor is the majority's attempt to cur e the
deficiencies of the District Court's analysis consistent with
our jurisprudence which requires the District Court to
explain its excusable neglect reasoning.
When we direct a district court to take a particular
action, it is not only customary but I suggest it is our
mandate that the issue or case be retur ned to the district
court for compliance with our instructions. See, e.g., In re
Orthopedic Bone Screw Prods. Litig. , 2001 WL 377052, at 5
(3d Cir. Apr. 16, 2001). It is the district court's discretion
and findings, not our discretion and findings, that are
called for in relating the facts found to the principles that
we have established. Appellate fact finding and"shortcuts"
taken by an appellate court as the majority has taken here
are rarely if ever prudential and sage and, unfortunately,
such fact finding and shortcuts may lead to
misunderstandings in the case sub judice, to say nothing of
eroding our established jurisprudence. See Pullman-
Standard v. Swint, 456 U.S. 273, 291 (1982) (appellate fact
finding); Chalfant v. Wilmington Institute, 574 F.2d 739 (3d
Cir. 1978) (same). We have consistently followed the
practice of having the district court in the first instance
determine whether the factors we have established18 meet
_________________________________________________________________
18. Our cases are legion in which we have set forth factors which are to
be met and analyzed by evidence in the recor d. See, e.g., Holland v. New
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evidentiary requirements. Why now in this case has it
become so necessary to turn our backs on established
procedures, practices, and our announced jurisprudence by
usurping the District Court's role?
As we observed in another Cendant appeal:"In the wake
of Pioneer, we have imposed a duty of explanation on
District Courts when they conduct `excusable neglect'
analysis." In re Cendant Corp. PRIDES Litig., 234 F.3d 166,
171 (3d Cir. 2000). Indeed, in that case, r egarding
appellant's motion pursuant to Federal Rule of Civil
Procedure 60(b) to excuse its late filing of its proof of claim,
we vacated the District Court's finding that ther e was no
excusable neglect "because the District Court did not make
clear its reasoning and application of the`excusable neglect'
factors," and, therefore, "we do not have a sufficient basis
to review the District Court's ruling for abuse of discretion."
234 F.3d at 168.
In yet another Cendant case, also concer ning a party's
Rule 60(b) motion to allow its late filing of a pr oof of claim,
we reversed the District Court's finding that there had not
been excusable neglect, pointing out that "the District
Court failed to apply properly the standar ds for determining
`excusable neglect' outlined in Pioneer." In re Cendant Corp.
PRIDES Litig., 235 F.3d 176, 180 (3d Cir . 2000). We held
"that the District Court's misapplication of the Pioneer
factors in denying Santander's Rule 60(b) motion[was]
beyond the sound exercise of its discretion." In re Cendant
Corp. PRIDES Litig., 235 F.3d at 184.
Indeed, in a recent opinion, the author of the majority
opinion has himself acknowledged our requir ements for
_________________________________________________________________
Jersey Dept. of Corrections, Nos. 00-1801, 2356, 2357, at 34-43 (findings
of fact in connection with enforcement of compliance with consent
decrees); Cendant Corp. PRIDES Litig., 243 F.3d 721 (3d Cir. 2001)
(awards of attorneys' fees in class actions); Oddi v. Ford Motor Co., 234
F.3d 136 (3d Cir. 2000) (deciding whether to conduct Daubert hearings);
In re TMI Litig., 193 F.3d 613 (3d Cir. 1999) (admission of expert
testimony); United States v. Iannone, 184 F .3d 214 (3d Cir.
1999)(sentencing decisions in criminal cases); Poulis v. State Farm Fire &
Casualty Co., 747 F.2d 863 (3d Cir . 1984) (the dismissal of a complaint).
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district courts denying parties' "excusable neglect" motions.
In In re Orthopedic Bone Screw Pr ods. Liab. Litig., Judge
Ambro observed that "[g]enerally we r equire further
explanation of an order terminating a litigant's claim." In re
Orthopedic Bone Screw Prods. Liab. Litig., 2001 WL 377052,
at 5 (3d Cir. Apr. 16, 2001). He then asserted that " `[w]e
have imposed a duty of explanation on District Courts
when they conduct `excusable neglect' analysis.' " In re
Orthopedic Bone Screw Prods. Liab. Litig., 2001 WL 377052,
at 5 (quoting In re Cendant PRIDES Litig. , 233 F.3d 188,
196 (3d Cir. 2000)). In light of the majority's apparent
understanding of what is required of district courts under
Pioneer, as evidenced by the recent opinion in Orthopedic
Bone Screw Prods., it is thor oughly perplexing to me that
the majority fails to hold the District Court to that standard
and instead takes on the District Court's job itself.
The precedent is clear: the District Court must satisfy its
duty of explanation. When it does not, the case must be
remanded for the District Court to do so. This conclusion is
by no means a "leap of logic" as the majority suggests (Maj.
Op. at 26-27 n.18); it is the proper and the only application
of the rule of law in this Circuit.
In re Cendant PRIDES Corp. Litig., 235 F.3d 176 (3d Cir.
2000), relied upon by the majority as support for its own
consideration of the Pioneer factors, is entirely
distinguishable. In that case, our court reviewed the
District Court's denial of a Rule 60(b) "excusable neglect"
motion for an abuse of discretion. We concluded "that the
District Court's decision [denying the motion for`excusable
neglect'] was not consistent with the sound exer cise of its
discretion." 235 F.3d at 181. Because we held that the
District Court abused its discretion, we wer e obliged to
reach the merits of excusable neglect and answer the
"second question . . . : whether `excusable neglect' excused
Santander's duty. . . This involves a review of the matter de
novo, applying the law to the facts." 235 F .3d at 181.
It was only in that procedural posture--reviewing under
a de novo standard--that we applied the Pioneer factors in
Cendant PRIDES, 235 F.3d 176. Ther efore, by relying on
that case, the majority is relying on a case in which we
exercised de novo review in or der to support its actions in
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this case where we must exercise abuse of discretion review.
Such misplaced reliance does not constitute"merely
following precisely what we did in" Cendant PRIDES, 235
F.3d 176, as the majority suggests. (Maj. Op. at 26-27
n.18.) That is, in effect, like saying that it is appropriate to
reconsider facts already found by a jury because a prior
appellate court had reviewed de novo a grant of summary
judgment on a factually similar case. There is simply no
language strong enough to describe how seriously the
majority has erred. Its error not only af fects the decision in
this case, but it also confounds our jurisprudence involving
our own standards of review.
Indeed, no matter how the majority tries to spin and
justify its holding here and Judge Ambr o's recent holding in
Orthopedic Bone Screw Prods., in derogation of its own
admonition that "[w]e [should] r efrain from substituting our
judgment for that of the District Court," see In re
Orthopedic Bone Screw Prods. Litig. , 2001 WL 377052, at 5,
it is the majority that has found: that the Davidsons do not
qualify for the excusable neglect exception because their
actions caused prejudice to Cendant; that their actions do
not comport with the good faith requirement; that their
claims would subject Cendant to additional liabilities; that
permitting the Davidsons to opt out would deprive Cendant
of the finality it bargained for; and that the Davidsons
sought a strategic advantage in not filing a for mal opt-out
request. (Maj. Op. at 26-29.) These wer e findings that the
District Court did not make but was obliged to make under
Pioneer and was then obliged to include in its analysis. Nor
can I understand why the majority has so blithely undercut
our directions to the District Court which have now been
emphasized not just once but at least twice in the Cendant
cases. See In re Cendant Corp. PRIDES Litig., 235 F.3d 176
(3d Cir. 2000); In re Cendant Corp. PRIDES Litig., 234 F.3d
166 (3d Cir. 2000); see also In r e Orthopedic Bone Screw
Prods. Litig., 2001 WL 377052 (3d Cir . Apr. 16, 2001).
We have said, and this majority is bound by our holdings,
that the District Court must satisfy its "duty of explanation
. . . when . . . conduct[ing] `excusable neglect' analysis"
under Pioneer. In re Cendant Corp. PRIDES Litig., 234 F.3d
at 171; In re Orthopedic Bone Scr ew Prods. Litig., 2001 WL
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377052, at 5. The District Court's mere citation of Pioneer
and recitation of its factors do not satisfy this "duty of
explanation." Nor, I suggest, does the majority's untoward
attempt to furnish its own findings and its own
explanations satisfy the excusable neglect standar d that the
District Court failed to furnish itself. Now, it may well be
that, had the District Court considered the Pioneer factors
explicitly, it still could have reached its same conclusion.
But that cannot excuse the District Court's flagrant failure
to comply with this Court's mandate, nor can it excuse the
majority for attempting to brush this issue under the carpet
by substituting its discretion for that of the District Court.
V.
In conclusion, I am more than satisfied that the New
Jersey District Court egregiously erred in enjoining the
Davidsons' arbitration. After a review of the statutes and
case law, there can be no question that the Davidsons'
claims were properly in arbitration and the California
Central District Court's decision to that ef fect precluded the
New Jersey District Court from enjoining the arbitration.
Additionally, I am satisfied that the Davidsons did not fit
within the class definition because their Cendant shares
were not "publicly traded securities." Infinding that they
were, the New Jersey District Court clearly err ed.
Finally, I believe that the New Jersey District Court, in
failing to comply with the Supreme Court's and our own
unequivocal directions, again clearly err ed in denying the
Davidsons' request to extend the opt-out deadline without
explaining the application of the Pioneer factors as it was
required to do.
I therefore respectfully dissent, and I would reverse and
vacate the District Court's order which enjoined an
arbitration ordered by the Califor nia Central District Court.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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