Milberg Weiss

Stanford University Law School - Securities Class Action Clearinghouse

NOT CERTIFIED FOR PUBLICATION
[filed Aug. 14, 1997]

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

OAK TECHNOLOGY, et al.,
H016141
Petitioners,
(Santa Clara County
vs. Super.Ct.No. CV758510)

THE SUPERIOR COURT OF SANTA CLARA COUNTY,

Respondent;

HOCHMAN, et al.,

Real parties in interest.
________________________________________/

DIAMOND MULTIMEDIA SYSTEMS, INC., et al.,
H016186
Petitioners,
(Santa Clara County
vs. Super.Ct.No. CV758927)

THE SUPERIOR COURT OF SANTA CLARA COUNTY,

Respondent;

JOANNE PASS, etc.,

Real party in interest.
________________________________________/

IMP, INC., et al.,
H016281
Petitioners,
(Santa Clara County
vs. Super.Ct.No. CV760793)

THE SUPERIOR COURT OF SANTA CLARA COUNTY,

Respondent;

JEFF LEE, et al.,

Real parties in interest.
________________________________________/

Defendants in three civil actions for securities fraud seek

extraordinary relief from the superior court's order denying them

a stay of proceedings pending closely related litigation in the

federal district court. We ordered that (1) the above-captioned

matters be considered together for purposes of briefing,

argument, and decision; (2) an alternative writ of mandate be

issued in each case; and (3) all proceedings in each case be

stayed except discovery. Real parties in interest filed one

formal return applicable to each case,¹ petitioners filed replies

to the return, and we entertained oral argument. Since

petitioners' burden is to establish an abuse of discretion and

petitioners fail to carry this heavy burden, we deny each

petition.

OAK TECHNOLOGY, INC.

Petitioners Oak Technology, Inc. (hereafter, Oak), David D.

Tsang, Donald R. Bryson, Sidney S. Faulkner, Dr. Mou Hsin Yang,

Ben T. Taniguchi, Kenji Fujimoto, Able S. Lo, Ta-Lin Hsu, Richard

B. Black, Timothy Tomlinson, Wen-Chang Ko, and Richard L. King

are defendants in a consolidated class action² brought in

respondent court by real parties in interest. Oak manufactures

____________________

¹ The same law firm represents real parties in interest in
each case.

² The action, however, has not yet been certified to proceed
as a class action. Nor have the related federal class actions
been certified. Similarly, in the Diamond and Imp cases neither
the state nor the federal class actions have been certified as
class actions.

controller chips and other CD-ROM products for use with personal

computers. The individual petitioners are some of Oak's

directors and officers.

Real parties in interest are Jeffrey Hochman, Charles J.

Piven, Baruch Lifshitz, Thomas Randall, Mark S. Goldman, Jerry

Krim, Jack Saltz, Al Manning, Philip Fortuna, John R. Gallo, Mark

S. Fenton, Joe Rossini, Thomas J. Stack, and Kevin Stack. They

are Oak shareholders suing on behalf of all persons who purchased

Oak common stock between July 27, 1995, and May 22, 1996.

Real parties in interest essentially allege that petitioners

misrepresented Oak's worth and financial position so as to

inflate the price of Oak's stock and sell their holdings before

the true picture materialized and the stock price deflated.

Petitioners allegedly sold over four million shares at prices

ranging from $18.25 to $29.50 per share, reaping over $104

million before the stock deflated to $7 per share. The causes of

action rest upon corporations Code section 25400 (prohibiting

false and misleading statements by persons in California who

engage in the purchase or sale of securities), Civil Code

sections 1709 and 1710 (prohibiting fraud and deceit), and breach

of fiduciary duty and abuse of control theories.

After the state action was filed, a federal class action

alleging the same underlying facts was filed in the United States

District Court for the Northern District of California. By

contrast, it rests upon a violation of section 10(b) of the

Securities Exchange Act of 1934 and SEC rule 10b-5 (prohibiting

knowing or reckless false or misleading material statements re

sale of securities via interstate commerce). (15 U.S.C.A. § 78J

[hereafter, 10b-5].)³ No state law claims are alleged.⁴ DIAMOND MULTIMEDIA SYSTEMS, INC.

Petitioners Diamond MultiMedia Systems, Inc. (hereafter,

Diamond), William J. Schroeder, Gary B. Filler, and.Hyung Hwe Huh

are defendants in a consolidated class action brought by real

party in interest Joanne Pass on behalf of all persons who

purchased Diamond common stock between October 26, 1995, and June

20, 1996. Diamond manufactures and supplies graphics accelerator

and modem products for computers. Real party in interest

essentially alleges that petitioners made false and misleading

statements about Diamond so as to inflate the price of Diamond's

stock. Petitioners allegedly sold over four million shares at

prices ranging from $17 to over $30 per share, reaping over $115

million before the stock deflated to just over $9 per share. The

causes of action rest upon Corporations Code section 25400 and

Civil Code sections 1709 and 1710. The subsequently-filed

consolidated federal class action suit involves the same

____________________

³ Three similar federal class actions were also filed;
petitioners claim that the four were consolidated but cite no
record reference for this fact.

⁴ All petitioners stress in their arguments, however, that the
federal courts, at least potentially, maintain concurrent
jurisdiction over whatever state law claims real parties in
interst [sic] choose to bring. Petitioners contend that real parties
in interest purposely avoided pleading state law violations in
order to maintain duplicative litigation. They attribute this to
a strategic maneuver. Real parties in interest deny a malevolent
strategy.

underlying facts as the state action, but it asserts two federal

causes of action alleging violations of 10b-5 and section 20(a)

of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78t, subd.

(a) [liability of persons who control another], hereafter 20(a)).

No state law causes of action are alleged.

IMP, INC.

Petitioners Imp, Inc., Barry M. Carrington, David A. Laws,

Charles S. Isherwood, Robert J. Crossley, Bernard V.

Vonderschmitt, George Rassam, Zvi Grinfas, and Peter D. Olsonare

are defendants in a consolidated class action brought by real

parties in interest Jeff Lee, Morris Rubin, Patricia Richter,

Ronald Ricter, JTWROS,⁵ Ronald D. Goodman, Stuart M. Waxman,

Joseph R. Legan, Jeffrey Cohen, and Dominick Benvenuto on behalf

of all persons who purchased Imp common stock between April 24,

1996, and July 22, 1996. Imp supplies high-integration analog

and mixed signal CMOS integrated circuits to the communications,

computer, and industrial markets. Real parties in interest

essentially allege that petitioners made false and misleading

statements about Imp so as to inflate the price of Imp's stock

from $7 per share to over $23 per share. Petitioners allegedly

sold over one million shares at inflated prices, reaping over $23

million; some petitioners allegedly liquidated their entire

holdings. The causes of action rest upon Corporations Code

section 25400, Civil Code sections 1709 and 1710, and Business

____________________

⁵ The record sheds no light upon who or what is JTWROS,

and Professions Code section 17200 (prohibiting unfair business

practices and false or misleading advertising). Three

subsequently-filed federal class action suits involve the same

underlying facts as the state action. All allege federal

violations of 10b-5, 20(a), and section 20A of the Securities

Exchange Act of 1934 (15 U.S.C.A. § 78t-1 [liability of persons

to contemporaneous traders for insider trading]).⁶ No state law

causes of action are alleged.

THE MOTIONS BELOW

Petitioners made separate motions below and advanced similar

arguments.

Oak claimed that a stay was necessary to (1) prevent the

injury attendant to simultaneously defending identical state and

federal class actions, (2) advance the purposes of California

Rules of Court, rule 804 (coordination of related cases), and (3)

avoid the potential of inconsistent judicial rulings and

judgments. It also pointed out that federal law allowed the

state court causes of action to be litigated in federal court but

precluded the federal securities causes of action from being

litigated in state court. (See Schneider v. Vennard (1986) 183.

____________________

⁶ Imp claims in its reply to real parties in interest's return
that (1) a fourth federal class action was filed in the Northern
District of California, (2) three others were filed in the
District of Delaware, and (3) the three original suits together
with these were ultimately consolidated in the Northern District
of California. It cites, however, no record references for these
facts.

Cal.App.3d 1340, 1348-1349.) It finally asserted that our

decision in Schneider mandated a stay.

Diamond claimed that a stay was warranted because it would

(1) prevent a waste of resources and an unfair burden from having

to defend concurrent litigation involving substantially identical

parties and issues, (2) preclude the risk of inconsistent

judicial rulings, and (3) allow the parties' rights to be better

determined because the federal case would resolve broader issues.

Imp made arguments similar to Diamond. It also pointed out

that the federal case was pending in a California federal court,

a factor that should favor a stay. (See Caiafa Prof. Law Corp.

v. State Farm Fire & Cas. Co. (1993) 15 Cal.App.4th 800, 804.)

Petitioners generally argued that (1) they were entitled to

bring state law claims and federal law claims in separate fora,

and (2) the claims are different in the sense that the state

claims afford broader relief.

Respondent court denied the motions in the Oak and Diamond

cases without comment.⁷ But in the Imp case it articulated: "The

notion to stay the consolidated state actions is denied. This

action was filed after the related federal actions. California

law affords plaintiffs broader and more effective relief on their

state law-claims than on their federal claims, which involve

____________________

⁷ Oak complained at oral argument that there was no rationale
stated for the trial court's decision. The point is of no
moment. There is no requirement that a trial court articulate
reasons for discretionary rulings. And an appellate court
reviews the action of the lower court, not its reasons. (9
Witkin, Cal. Procedure (4th ed. 1997) Appeal, § 340, p. 382.)

different issues. Under the circumstances, this court can best

determine the rights of the parties. There are no 'unseemly

conflicts' if this case proceeds. And this action is not

harassing, vexatious or oppressive."

DISCUSSION

The underlying theme of these petitions is the view that

real parties in interest are circumventing the Private Securities

Litigation Reform Act of 1995. (15 U.S.C.A; § 78u-4 et seq.) As

put by Diamond: "Routine filing of duplicative securities class

actions in both federal and state courts is a new problem.

Securities fraud plaintiffs and their attorneys have seized upon

this two-track litigation strategy to evade recently enacted

changes to the federal securities laws. Congress recently

amended federal law to tighten up the pleading requirements for

securities fraud and to provide for a discovery stay while the

pleadings are tested under this new standard. These changes were

designed to stop the abusive practice of filing vague and

broadly-pleaded securities fraud allegations, while hoping to

uncover facts through discovery to support the allegations and

survive dispositive pretrial notions. To evade these new

requirements, securities plaintiffs now routinely split their

securities law causes of action, filing one lawsuit in federal

court asserting federal claims, while filing another lawsuit

based on the exact same factual allegations in California state

court asserting state law claims. This strategy allows

plaintiffs to manipulate the system by taking advantage of the

broader substantive reach of federal claims, while using the

state court to evade the discovery limits and high pleading,

standards imposed by federal law."

The theme is irrelevant to our analysis because the current

state of the law permits securities fraud plaintiffs to maintain

dual-track litigation strategy.

We are mindful that substantial public policy issues are

implicated in cases such as these, and piecemeal judicial

decisions which might conflict with each other could create

problems in the event of future litigation. Nonetheless, the

legislative forum is clearly the best arena to work out such

public policy questions. (Cf. Mirkin v. Wasserman (1993) 5

Cal.4th 1082, 1104-1105 [courts should be hesitant to impose new

laws when to do so would involve complex policy decisions,

especially when such decisions are more appropriately the subject

of legislative deliberation and resolution].)

Petitioners' substantive points are essentially rearguments

from the motions below. They argue that a stay will prevent the

waste of resources and unfair burden caused by duplicative

litigation, preclude the threat of unseemly judicial conflicts

caused by duplicative litigation, and affirm that the federal

forum is superior because it alone can resolve the state and

federal claims.

"It is black letter law that, when a federal action has been

filed covering the same subject matter as is involved in a

California action, the California court has the discretion but

not the obligation to stay the state court action." (Caiafa

Prof. Law Corp. v. State Farm Fire Cas. Co., supra, 15

Cal.App.4th at p. 804.)

"In exercising its discretion the court should consider the

importance of discouraging multiple litigation designed solely to

harass an adverse party, and of avoiding unseemly conflicts with

the courts of other jurisdictions. It should also consider

whether the rights of the parties can best be determined by the

court of the other jurisdiction because of the nature of the

subject matter, the availability of witnesses, or the stage to

which the proceedings in the other court have already advanced."

(Farmland Irrigation Co. v. Dopplmaier (1957) 48 Cal.2d 208,

215.)

Once the decision on a stay motion has been made, however,

Appellate review of it is circumscribed by the abuse of

discretion rule. "A decision will not be reversed merely because

reasonable people might disagree. 'An appellate tribunal is

neither authorized nor warranted in substituting its judgment for

the judgment of the trial judge.' [Citations.] In the absence

of a clear showing that its decision was arbitrary or irrational,

a trial court should be presumed to have acted to achieve

legitimate objectives and, accordingly, its discretionary

determinations ought not be set aside on review." (People v.

Preyer (1985) 164 Cal.App.3d 568, 573-574.) This rule requires

that the reviewing court engage in all intendments and

presumptions in support of the decision and consider the evidence

in a light most favorable to the prevailing party. (People v.

Condley (1977) 69 Cal.App.3d 999, 1015.) It also requires that

the party claiming abuse of discretion affirmatively establish

the point. (Smith v. Smith (1969) 1 Cal.App.3d 952, 958.)

As we have indicated, petitioners fail to make the

appropriate appellate argument that respondent court's decision

was irrational given the evidence favoring the decision. In any

event, the evidence supports respondent court's decision.

Real parties in interest's state law claims are partly

grounded on Corporations Code section 25400. It is true that the

section is like 10b-5 in some respects, but it is very different

in others. (Mirkin v. Wassermann, supra, 5 Cal.4th at p. 1104.)

For example, federal law requires that a plaintiff plead and

prove scienter, a degree of fault greater than negligence (id. at

p. 1107), while the California scheme encompasses liability for

negligence (Corp. Code, § 25400, subd. (d) [imposing liability

for statements which the defendant "knew or had reasonable ground

to believe was so false or misleading"]).⁸ Also, 10b-5 does not

impose liability upon aiders and abettors (Central Bank v. First

Interstate Bank (1994) ___ U.S. ___ [114 S.Ct. 1439, 1448]) while

the state scheme reaches "[a]ny person who willfully participates

____________________

⁸ We acknowledge that whether Corporations Code section 25400
imposes negligence liability for securities violations is by no
means clear. On the one hand, the section makes it unlawful for
a securities seller or buyer to make statements which he or she
knew or had reasonable ground to believe were false or
misleading; on the other hand, Corporations Code section 25500,
the section which creates the private right of action for
violations of section 25400, imposes liability only upon those
who "willfully" participate. For our purposes,, however, the
pivotal points are that the statutory ambiguity was a collateral
issue and respondent court was entitled to take a position on it
for purposes of exercising its discretion.

in any act or transaction in violation of Section 25400" (Corp.

Code, § 25500; see Hokama v. E.F. Hutton & Co.. Inc. (1983) 566

F.Supp. 636, 648 [Corp. Code, § 25500 is not limited to direct.

violators of § 25400]).

Real parties in interest's claims are also grounded upon

common law fraud codified in Civil Code sections 1709 and 1710.

"The substantive requirements of some of [these claims] are less

burdensome than those for a 10(b)-5 claim. For example, [real

parties in interest] must establish 'scienter' under a 10(b)-5

claim [citation], while a cause of action for negligent

misrepresentation requires only a showing of negligence.

[Citation.] Punitive damages are available on some of the state

[fraud] claims, while such damages are not recoverable under a

10(b)-5 claim." (Schneider v. Vennard, supra, 183 Cal.App.3d at

p. 1348.)

Real parties in interest detail numerous other differences

between the federal and California securities laws. They argue

that these differences also favor their position in the sense

that the state court affords broader relief and other benefits,

such as the availability of immediate discovery in contrast to

the federal stay that is at the heart of these petitions.

For their part, petitioners dispute real parties in

interest's opinions, claim that the federal forum is better

suited because it can resolve all issues,⁹ and argue that the

____________________

⁹ This, of course, follows only if real parties in interest
choose to ask the federal court to exercise its pendent
jurisdiction over their state law claims. They obviously choose
(Continued)

stage of the state proceedings have not outpaced the federal

cases. According to petitioners, 10b-5 and Corporations Code

section 25400 causes of actions have the same elements. (See

ante, fn. 6.) Since 10b-5 actions cannot be brought in state

court but section 25400 actions can be brought in federal court,

so the argument goes, the federal forum is better suited

considering that the state and federal proceedings are at similar

early stages.

But we need not jump into this fray. The bottom line is

simply that it is rational to believe that real parties in

interest's state actions afford them broader relief, resolution

of the federal actions will therefore not resolve all the issues,

so the state actions will proceed to decision in any event.

Stated another way, respondent court could have reasonably

concluded that real parties in interest's main thrusts are the

state actions and the 10b-5 actions are secondary, filed to cover

all bases given that federal courts have exclusive jurisdiction

of 10b-5 actions. We add that the Private Securities Litigation

Reform Act of 1995 effectively compels state class action

plaintiffs to file parallel 10b-5 actions in federal court. This

follows because of its "lead plaintiff" procedure whereby a

plaintiff or group of plaintiffs must be chosen from competing

class actions to control the federal litigation. Under this

procedure, if state class action plaintiffs do not file a 10b-5

____________________

not to do so and have the right to maintain suits in both fora.
(Schneider v. Vennard, supra, 183 Cal.App.3d at p. 1348.)

action and vie for lead plaintiff status they risk losing control

of the federal litigation which, in turn, could result in a loss

of control of the state action. (See 15 U.S.C.A. § 78u-4, subd.

(a)(3)(B).)¹⁰ Under these circumstances, (1) the multiple

litigation was not "designed solely to harass an adverse party,"

(2) there are no "unseemly conflicts" with the federal court, and

(3) the rights of the parties can best be determined in state

court. (Farmland Irrigation Co. v. Dopplmaier, supra, 48 Cal.2d

at p. 215.)

Schneider v. Vennard, supra, 183 Cal.App.3d 1340, does not

compel a different result.10 There is no point in ignoring the reality that the lead
counsel status in current class action litigation is accompanied
by huge financial implications relative to attorney fees and
costs. We make no judgment here on the justification for such
monetary considerations, but note only that there is a
significant financial aspect to such litigation.

¹¹ If it did, the rule that a decision on a stay notion is
within the superior court's discretion would be emasculated.
"Judicial discretion is that power of decision exercised to the
necessary end of awarding justice based upon reason and law but
for which there is no special governing statute or rule.
Discretion implies that in the absence of positive law or fixed
rule the judge is to decide a question by his [or her] view of
expediency or of the demand of equity and justice." (People v.
Preyer, supra, 164 Cal.App.3d at p. 573.) Thus, two cases could
have similar facts but inconsistent discretionary rulings so long
as each ruling is rational.

action is superior to other available methods. We then discussed

the factors supporting the trial court's decision, the principal

one being that a federal action based on the same set of facts

was pending between the same parties. We observed that the trial

court expressly conditioned its order upon the defendants'

withdrawal of their opposition to class certification in the

federal action; and that it noted the plaintiffs' concession that

they could bring each cause of action alleged in the state

lawsuit as a pendent claim in the federal action. We then opined

that the plaintiffs could obtain complete relief in either forum.

In this context, we stated: "[D]uplicative litigation of the same

issue does not serve the public interest. As already noted,

plaintiffs would receive a fair adjudication of their claims and

adequate relief in either jurisdiction. To allow them to pursue

both class actions would increase the burdens on two already

overburdened courts." (Schneider v. Vennard, supra, 183

Cal.App.3d at p. 1350.) We concluded that the trial court's

refusal to certify the case as a class action prevented

duplicative class actions, eliminated inconsistent results, and

avoided undue burdens on the parties and the judiciary. We

therefore found no abuse of discretion.

Petitioners seize upon our language about duplicative

litigation not serving the public interest, etc. and make the

leap that in all cases, or at least the ones at issue, state

actions must be stayed in favor of federal actions. We do not

disagree with the reasoning and language of Schneider. It was,

and still is, a persuasive opinion for that case and similar

cases. But the context of Schneider is significant for

application to this case.

In Schneider, we were giving deference to a trial court's

discretionary ruling, as we must. We were therefore resting upon

the considerations supporting the decision rather than making

pronouncements of black letter law. Here, we are doing the same:

supporting respondent court's orders is that real parties in

interest chose the state forum to pursue state causes of action

which offer more complete relief and will need to be litigated no

matter how the federal action resolves.

The bottom line in Schneider was that the trial court

concluded that the plaintiffs "would receive a fair adjudication

of their claims and adequate relief in either jurisdiction."

(Schneider v. Vennard, supra, 183 Cal.App.3d at p. 1350.) The

bottom line in this case is that respondent court reasonably

believed that real parties in interest would receive incomplete

relief in the federal forum.

We add that if litigating the state and federal actions

herein are unduly burdensome then the parties could always agree

to stay the federal actions. Moreover, questions of burdensome

and oppressive discovery and litigation tactics in the course of

these cases can be readily addressed by the trial court or

appointed special masters. Trial courts have long since become

acclimated to overseeing the management of complex litigation.

Economy of court resources is one important reason for this, but

so is the protection of litigants from oppressive litigation

tactics.

"[W]e must be constantly aware of the different functions

performed by the superior court and ourselves. Unless,

ultimately, each case of this nature is to be decided by the

Court of Appeal as if no trial court had ever acted . . . , we

must be careful to preserve the area of the superior court's

discretion and we must do this in fact, as well as in words."

(Bennett v. City of Los Angeles (1970) 12 Cal.App.3d 116, 120.)

DISPOSITION

Diamond's request for judicial notice is granted. Real

parties in interest's request for judicial notice is denied. The

stays of further proceedings are dissolved. The petitions for

peremptory writ of mandate are denied. Costs are awarded to real

parties in interest.

_____________________________
Premo, Acting P.J.

WE CONCUR:

_____________________________
Elia, J.

_____________________________
Wunderlich, J.

OAK TECHNOLOGY, INC. v. SUPERIOR COURT (HOCHMAN)
No. H016141
DIAMOND MULTIMEDIA SYSTEMS, INC. v. SUPERIOR COURT (PASS)
No. H016186
IMP, INC., v. SUPERIOR COURT (LEE)
No. H016281

Source: Scanned paper copy of court-stamped document