Court Opinion

ID: 2995645
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:21:31.072312+00
Date Added: 2024-06-11T09:10:04.288125
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

Nos. 01-4049 & 01-4050

Abbott Laboratories, Zeneca, Inc.,
and Merck & Co., Inc.,

Plaintiffs-Appellants,

v.

CVS Pharmacy, Inc., CVS Corp.,
and CVS Revco D.S., Inc.,

Defendants-Appellees.

Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 01 C 2772 and 01 C 2784--Charles P. Kocoras, Judge.

Argued April 19, 2002--Decided May 15, 2002

  Before Bauer, Posner, and Easterbrook,
Circuit Judges.

  Easterbrook, Circuit Judge. This is
another installment in the Brand Name
Prescription Drugs saga. Many purchasers
of prescription drugs accused the
manufacturers and wholesalers of
violating the antitrust laws. Some of the
claims have been tried; others have been
the subject of summary judgment. See In
re Brand Name Prescription Drugs
Antitrust Litigation, No. 00-2464 (7th
Cir. May 6, 2002); In re Brand Name
Prescription Drugs Antitrust Litigation,
186 F.3d 781 (7th Cir. 1999). In 1996 two
of the defendants (Zeneca and Merck)
settled with the class, and in 1998 a
third defendant (Abbott Laboratories)
settled on similar terms. Because the
class had been certified under Fed. R.
Civ. P. 23(b)(3), any member was free to
opt out and litigate separately. Today’s
case concerns claims by Revco Drug
Stores, Hook-SupeRx, and Brooks Drug,
three retail chains that opted out.
(Revco has acquired both Hook- SupeRx and
Brooks Drug, so for simplicity we speak
only of Revco.)

  Revco’s suit is pending in the United
States District Court for the Middle
District of Pennsylvania. Nonetheless,
Abbott Laboratories and the other two
manufacturers (collectively "Abbott")
asked the United States District Court
for the Northern District of Illinois,
which approved the 1996 and 1998
settlements, to issue a declaratory
judgment to the effect that the
settlements block Revco’s action. The
ground of relief? That in 1997 CVS Corp.,
the parent of CVS Pharmacy, Inc., which
had not opted out, acquired Revco as a
subsidiary. Each settlement includes a
release of all claims by every class
member, including its affiliates. Because
Revco has become CVS Corp.’s subsidiary,
and thus CVS Pharmacy’s affiliate, Abbott
contends that Revco’s claims are blocked
by the release.

  The district judge ruled against Abbott,
explaining that the reference to
affiliates must be reconciled with
another provision in the settlement
allowing opt outs to pursue their claims.
Neither of these has linguistic priority;
but as a functional matter the clause
preserving opt outs’ rights must prevail
when an opt-out plaintiff also is an
affiliate of a settling plaintiff, the
judge thought. 2001 U.S. Dist. Lexis 17620
(N.D. Ill. Oct. 24, 2001). Read together,
these clauses prevent class members from
using affiliates to smuggle the class
member’s own claims back into court, the
judge found. Bottom line: Revco’s claims
are distinct from those of CVS Pharmacy
and thus are outside the release.

  Asking one federal court to resolve an
issue that is before another is
problematic. Only one federal court at a
time should handle a case, see Colorado
River Water Conservation District v.
United States, 424 U.S. 800, 817 (1976),
and a release, as an affirmative defense,
see Fed. R. Civ. P. 8(c), is ordinary
business for the court before which the
main action is pending. See Lucille v.
Chicago, 31 F.3d 546, 549 (7th Cir.
1994). "Declaratory judgment should not
be granted . . . to interfere with an
action already instituted." Sears,
Roebuck & Co. v. American Mutual
Liability Insurance Co., 372 F.2d 435,
438 (7th Cir. 1967). Cf. Pettibone Corp.
v. Easley, 935 F.2d 120, 122, 123-24 (7th
Cir. 1991). We appreciate the good sense
of having Judge Kocoras, who has handled
the Brand Name Drugs litigation for many
years and who approved the settlements,
determine whether a particular suit
violates the terms of those settlements.
See Lynch, Inc. v. SamataMason Inc., 279
F.3d 487 (7th Cir. 2002). There was a
simple way for him to do this. All of the
suits, including Revco’s, had been
transferred to Judge Kocoras by the Panel
on Multidistrict Litigation for pretrial
management under 28 U.S.C. sec.1407.
Judge Kocoras could have ruled on this
affirmative defense before asking the
Panel to send Revco’s suit back to its
original district. Revco wanted him to do
this, but he denied its motion without
giving a reason, so Revco’s suit returned
to Pennsylvania with the effect of the
releases unresolved. Only after the
remand did the judge turn to Abbott’s
independent suit asking him to declare
that the release blocks Revco’s suit.
This sequence has caused more than a
procedural imbroglio, with the subject
potentially before two district courts
simultaneously. It has created a problem
with federal subject-matter jurisdiction.

  Revco’s suit against Abbott arises under
the federal antitrust laws; there is no
need for any additional grant of
jurisdiction to adjudicate the defense of
release in Revco v. Abbott./1 But
Abbott’s independent suit against Revco
does not arise under the antitrust laws--
and, because both Revco and one
manufacturer are incorporated in
Delaware, it cannot rest on the diversity
jurisdiction either./2 Although the
class action that ended in settlement was
within federal-question jurisdiction, the
settlement is just a contract, so a suit
on the settlement needs an independent
basis of federal jurisdiction, see
Kokkonen v. Guardian Life Insurance Co.,
511 U.S. 375 (1994), which here is
lacking because parties on both sides
have the same corporate citizenship.
Kokkonen implies, and Jessup v. Luther,
277 F.3d 926 (7th Cir. 2002), holds, that
interpretation of a settlement contract
is governed by state law even if the
settled claim arose under federal law;
otherwise a suit directly on the
settlement agreement also would arise
under federal law, and the holding of
Kokkonen would be overthrown.

  Kokkonen observes that a district judge
may retain jurisdiction to enforce a
settlement. 511 U.S. at 381. Then the
supplemental jurisdiction supports later
adjudication. Both settlement agreements
provide for such a retention of
jurisdiction, and by incorporating these
agreements into his orders the district
judge set the stage for later litigation
to enforce their terms. Oddly, however,
Abbott did not file motions in the Brand
Name Prescription Drugs class action, the
suit whose jurisdiction had been retained
by the settlement. Instead Abbott filed
an independent action, which has been
docketed separately. (Actually there are
two independent actions, one by Abbott
and the other by Zeneca and Merck, but
recall that we are simplifying the
exposition.) By choosing to proceed
separately, Abbott may have surrendered
the benefit of the supplemental
jurisdiction. See Peacock v. Thomas, 516
U.S. 349 (1996). Yet there would be
little point in vacating the judgment,
only to have Abbott file a new motion in
the Brand Name Prescription Drugs class
action, in the same district court before
the same judge. We shall treat the
independent suit as equivalent to that
motion.

  Still, Abbott is not out of the
jurisdictional woods. The district
court’s reservation of jurisdiction to
enforce the settlement entitled it to
adjudicate a dispute between Abbott and
CVS Pharmacy, which was in the class at
the time of the settlement. But it does
not create jurisdiction of claims against
Revco (now formally "CVS Revco D.S.,
Inc."), which had opted out, or CVS
Corp., a holding company that has never
been in the pharmacy business and lacks
any claim under the antitrust laws. As
Peacock holds, a suit involving Party A
does not permit a district court to enter
a judgment against Party B, even when A
and B are affiliated. In Peacock, A was a
corporation and B its dominant
shareholder. Here, A is a corporation
that indirectly (through C) owns all of
the shares in B. The principle is the
same. Unless it is possible to collapse
the legal identities of the parties--and
Abbott does not contend that the
requirements for "piercing the corporate
veil" and treating all of the CVS
entities as a single person have
beensatisfied--each litigant is entitled
to separate handling. See Phillip I.
Blumberg, The Law of Corporate Groups
sec.8.03 (1987). Compare Sears, Roebuck &
Co. v. CIR, 972 F.2d 858 (7th Cir. 1992),
with NLRB v. International Measurement
and Control Co., 978 F.2d 334 (7th Cir.
1992). That a judgment binds one
corporation does not allow a court to ad
judicate claims against its shareholders,
subsidiaries, or other juridically
distinct entities. See Holmes v. SIPC,
503 U.S. 258 (1992); Teamsters Health and
Welfare Trust Fund v. Philip Morris Inc.,
196 F.3d 818 (7th Cir. 1999); Mid-State
Fertilizer Co. v. Exchange National Bank,
877 F.2d 1333 (7th Cir. 1989); Carter v.
Berger, 777 F.2d 1173 (7th Cir. 1985).
Each corporation’s interests are
distinct, and its legal attributes do not
leak to investors or subsidiaries. This
norm applies fully to fraternal
corporations in holding-company groups,
as Blumberg’s treatise shows. The settle
ment and release binds CVS Pharmacy but
not CVS Corp. or Revco, so the
reservation of jurisdiction is limited to
disputes involving CVS Pharmacy.

  Abbott observes that the supplemental
jurisdiction sometimes allows the
resolution of disputes that are closely
related to the original litigation.
Controversies about attorneys’ fees for
work in the underlying suit are prime
examples. See, e.g., Dale M. v. Board of
Education, 282 F.3d 984 (7th Cir. 2002);
Baer v. First Options of Chicago, Inc.,
72 F.3d 1294, 1301 (7th Cir. 1995). Ever
since 28 U.S.C. sec.1367(a) overturned
Finley v. United States, 490 U.S. 545
(1989), the supplemental jurisdiction has
been capacious enough to include claims
by or against third parties. See
Stromberg Metal Works, Inc. v. Press
Mechanical, Inc., 77 F.3d 928 (7th Cir.
1996). All this is true enough, but Revco
is not CVS Pharmacy’s lawyer, or any
other kind of agent. Revco and CVS
Pharmacy are distinct corporations--parts
of the same corporate group, to be sure,
but as we have already explained this
affiliation is not enough to justify a
rule that ability to sue one of the
corporations authorizes suit against the
others. See Richard A. Posner, The Rights
of Creditors of Affiliated Corporations,
43 U. Chi. L. Rev. 499 (1976). Peacock
holds that the supplemental jurisdiction
does not allow vertical veil-piercing
(between a corporation and its investors
or managers); no more does the
supplemental jurisdiction warrant lateral
veil-piercing (between fraternal
corporations). Abbott does not have even
a claim against CVS Corp. just because it
is CVS Pharmacy’s parent, so it would be
inappropriate to bring CVS Corp. in under
the supplemental jurisdiction. What is
more, the point of allowing opt outs is
to separate the claims of class members
from those of others. See, e.g.,
Matsushita Electric Industrial Co. v.
Epstein, 516 U.S. 367, 385 (1996);
Premier Electrical Construction Co. v.
National Electrical Contractors Ass’n,
Inc., 814 F.2d 358, 362-63 (7th Cir.
1987). If parties that have opted out
could be dragged back in under the
supplemental jurisdiction, a core
function of Rule 23(b) would be
nullified. So whatever scope may be left,
after Peacock, for the adjudication of
claims by or against third parties other
than attorneys, that power cannot be
asserted against an entity that has opted
out of a class action. Revco must be
dismissed as a defendant in Abbott’s
independent actions.
  CVS Pharmacy is not a party to Revco’s
antitrust suit, now pending in
Pennsylvania. This leads CVS Pharmacy to
contend that, although the district judge
has reserved jurisdiction with respect to
its disputes with Abbott, no case or
controversy exists between CVS Pharmacy
and Abbott. On this view Abbott’s only
option is to plead the release as a
defense to Revco’s antitrust suit. Yet
although CVS Pharmacy cannot reach out
its finger and deliver a Zeus-like bolt
that will end Revco’s suit, it may be
able to influence Revco to dismiss the
suit. Whether CVS Pharmacy must exercise
such influence as it possesses is a
justiciable controversy. President Nixon
could not summarily revoke the subpoena
that Special Prosecutor Cox had procured,
and could not fire Cox either; but he
could direct the Attorney General, who
had the power to replace the special
prosecutor, to exercise that authority,
and, when Attorney General Richardson
resigned rather than comply, the
President could and did replace him with
someone who would follow orders. Just so
with a parent corporation. Only the
subsidiary’s board of directors or ceo can
dismiss Revco’s suit against Abbott, but
the parent may (if necessary) replace the
subsidiary’s directors and managers. So
we shall ask whether Abbott is entitled
to an order compelling CVS to use the
instruments at its disposal to ensure
that Revco dismisses the pending
litigation. This is not the precise
relief for which Abbott has asked, but it
likely would come to the same thing and
must be considered--for a prevailing
party obtains the relief to which it is
entitled, whether it asked for that
relief or not. Fed. R. Civ. P. 54(c).

  Both settlement agreements provide that

all manner of claims . . . any class
plaintiff or plaintiffs or any member or
members of the Class who have not timely
excluded themselves from the Class Action
(including any of their past, present or
future officers, directors, stockholders,
agents, employees, legal representatives,
trustees, parents, associates,
affiliates, subsidiaries, partners,
heirs, executors, administrators,
purchasers, predecessors, successors, and
assigns) . . . ever had, now has or
hereafter can, shall or may have,
relating [to the conduct alleged in the
Class complaint are released.]

The agreements also provide, as Rule 23
requires, that any entity opting out is
not bound by the judgment. Revco opted
out and therefore is not bound by the
judgment. Nonetheless, Abbott insists, it
is today (and was in 1998, at the time of
the second settlement) an "affiliate" of
CVS Pharmacy (CVS Pharmacy and Revco, two
subsidiaries of CVS Corp., are fraternal
members of a corporate group), and all
claims of "affiliates" are wiped out
under what Abbott calls the plain
language of the release clause.

  Read together with the opt-out clause,
however, this language is not at all
plain--and it makes no sense to read the
two clauses in isolation, for each is
part of the other’s linguistic and
economic context. See Beanstalk Group,
Inc. v. AM General Corp., 283 F.3d 856
(7th Cir. 2002). What happens when a firm
is covered by both clauses--one because
it has opted out and the other because it
is an affiliate of a firm that did not
opt out? The settlement does not say in
so many words, but it makes the most
economic sense to say that the rights of
the opt-out party are preserved.
Otherwise firms such as Revco would be
worth more if they remained independent
(or were acquired by a firm in a
different industry) than if they were
acquired by a settling pharmacy. Yet what
sense would it make to say that the value
of Revco’s claim against Abbott--a value
that Revco’s investors would enjoy as
long as it remained independent or were
acquired by a bystander--simply vanished
on acquisition by CVS or any other
settling party? It would make no sense
that we can see. Cf. Palazzolo v. Rhode
Island, 533 U.S. 606 (2001) (a takings
claim survives transfer of the property
to a new owner). Certainly this
disappearing-value trick was not
something for which the parties
negotiated, or for which any part of the
settlement price compensated either
Revco’s or CVS’s investors.

  Even viewed in isolation, the release
clause is ambiguous. The parenthetical
beginning "including" might be read, as
Abbott prefers, to obliterate the claims
of all corporate affiliates. But it also
could be read to say only that it makes
no difference who prosecutes a class
member’s claim. On the latter reading,
CVS Pharmacy’s claim is released even if
transferred to and prosecuted by an
affiliate or officer--this prevents
evasion of the settlement--but no claim
held by a separate juridical entity is
released. The district judge chose the
latter reading, under which all of the
language in parentheses modifies "member
. . . of the Class" but does not
establish a free-standing limitation.
That’s a sensible approach.

  Otherwise what is one to make of the
fact that the parenthetical expression
contains words such as "stockholders" and
"heirs"? Let us assume that Revco
remained independent but that its
portfolio included one share of Walgreen
stock. That would make Revco a Walgreen
"stockholder" and extinguish its claim,
according to Abbott’s reading of the
language, because Walgreen did not opt
out of the class. Or consider the
possibility that Smith, who owned a
pharmacy that remained in the class, had
made his son-in-law Green, whose pharmacy
opted out, the beneficiary of his will.
On Abbott’s reading, Green’s claim is ob
literated by the release, because Green
is Smith’s heir. Or consider Perkins, who
was an employee of CVS (running errands
in its mail room) until 1970, when he
quit and founded his own chain of
pharmacies. Because Perkins is in the set
of CVS’s "past, present or future . . .
employees", on Abbott’s reading Perkins
lost his right to recover damages for
antitrust violations when in 1996 CVS
decided not to opt out of a class action.
That would be not only nonsensical but
also blatantly unconstitutional (the
court would have deprived Perkins of
property without due process). So the
release language just can’t mean what
Abbott says it means. That leaves the
district court’s approach, which is
sensible both linguistically and
functionally. The settling class members’
claims are released, no matter who tries
to prosecute them, but no other claims
are affected.

  CVS Pharmacy did not own Revco’s claim
in 1996 or 1998 (and for that matter does
not own it today); Revco’s claim
therefore is not affected by the
settlement and release. Thus CVS Pharmacy
is not under any obligation to induce
Revco to drop its suit, or to give back
the money if Revco prevails. The district
judge reached the same conclusion, and
its judgment is affirmed with respect to
CVS Pharmacy. With respect to CVS Corp.
and CVS Revco D.S., Inc., the judgment is
vacated, and the matter is remanded with
instructions to dismiss those
corporations for lack of subject-matter
jurisdiction. Appellees recover their
costs.

FOOTNOTES

/1 Surprisingly, Abbott contends in a post-argument
memorandum that the Middle District of Pennsylva-
nia lacks jurisdiction to entertain the defense
of release. Because defenses do not require an
independent jurisdictional footing, this position
is hard to understand. Abbott points to a clause
in the settlement stating that the Northern
District of Illinois has "exclusive jurisdiction"
to enforce its terms. Yet neither the parties by
contract, nor a district judge by approving such
a contract, may expand or contract any court’s
jurisdiction. The powers of the Middle District
of Pennsylvania depend on the Constitution and
the United States Code, not on the consent of any
litigant. Contracts may affect venue, and maybe
this is the right way to understand the "exclu-
sive jurisdiction" clause, but as a non-party to
the settlement Revco is not bound by any alloca-
tion of venue to Illinois. Any effort to move
venue without Revco’s consent would violate the
holding of Lexecon Inc. v. Milberg Weiss Bershad
Hynes & Lerach, 523 U.S. 26 (1998), that the
transferee court under sec.1407 must return each
case to its originating district for disposition
after the pretrial phase has been completed.

/2 To be precise, Zeneca, CVS Corp., and Revco are
incorporated in Delaware. Merck is incorporated
in New Jersey. Abbott is incorporated and has its
principal place of business in Illinois, while
CVS Pharmacy is incorporated and has its princi-
pal place of business in Rhode Island. Thus a
suit by Abbott against the three CVS entities
could proceed under the diversity jurisdiction.
But, until after the oral argument, Abbott had
not tried to distinguish itself from Zeneca and
Merck in this fashion--and if we were to consider
separately Abbott’s action against Revco we would
quickly be led to the question whether a ground
that should be an affirmative defense in Revco v.
Abbott may be litigated as an independent action.
Given the resolution reached below about the
proper resolution of a suit against CVS Pharmacy
alone, it is unnecessary to pursue this to con-
clusion.