An award of fair and reasonable attorney fees in a securities class action precludes a subsequent malpractice case under the “relitigation” exception to the Anti-Injunction Act, the U.S. Court of Appeals for the Second Circuit held yesterday.

Addressing an issue of first impression, the circuit said that Wyly v. Weiss, 10-4785-cv, a state malpractice action, may be enjoined by a federal judge where the parties had a “full and fair opportunity to litigate counsel’s representation.”

The case involved the representation of class counsel Milberg Weiss; Schiffrin Barroway Topaz & Kessler; and Stull, Stull & Brody and allegations the lawyers cut a better deal for themselves in settling litigation against Computer Associates International.

The class actions against Computer Associates (CA) alleged that officers and directors of the Long Island company artificially inflated the price of company stock, artificially inflated its reported revenues and concealed the deterioration of its business between Jan. 20 and July 22, 1998.

A settlement covering two sets of class actions was reached in August 2003 in which class members were given CA common stock valued at $130 million to $150 million and class counsel given stock valued at between $30 million and $40 million.

Eastern District Judge Thomas Platt (See Profile) held a fairness hearing and determined in December 2003 that both the settlement and the award of attorney fees were fair and reasonable.

But in 2004, Computer Associates revealed that it was restating more than $2.2 billion in revenue; general counsel Steven Woghin pleaded guilty to conspiracy to commit securities fraud and obstruction of justice; and the company entered into a deferred prosecution agreement admitting to a multibillion dollar accounting fraud and cover-up.

Texas billionaire Sam Wyly and other members of the settlement class moved to vacate the settlement order under Federal Rule of Civil Procedure 60(b), arguing that the attorneys had settled prematurely to grab a quick payout and the shareholders could have gotten more. After three years of discovery, Platt rejected the motion, finding the parties failed to produce any new evidence of fraud upon the court.

Wyly filed a complaint in New York Supreme Court saying class counsel had placed its own financial interests ahead of the class. Wyly’s lawyer, William Brewer of Bickel & Brewer, called it “one of the most egregious cases of malpractice I’ve seen in 23 years.”

But on the motion of class counsel, Platt enjoined the state action under the All Writs Act, 28 U.S.C. §1651.

Wyly appealed to the Second Circuit, where Judges Amalya Kearse (See Profile), Jose Cabranes (See Profile) and Robert Sack (See Profile) heard oral arguments on Jan. 26, 2012.

Cabranes wrote the panel’s opinion, issued yesterday, saying the sole matter before the court is whether Platt’s injunction was appropriate under the Anti-Injunction Act and the All Writs Act.

The All Writs Act authorizes federal courts to “issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law,” but it is limited by the Anti-Injunction Act, which bars federal judges from enjoining state proceedings unless that action is “expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.”

“The Supreme Court has never held that a district court may enjoin an in personam action under the ‘in aid of jurisdiction’ exception,” Cabranes wrote. “We have recognized, however, that an in personam injunction may be appropriate under certain limited circumstances.”

Those “limited circumstances” were not present here, so the “aid in jurisdiction” exception could not apply, he said.

But the same was not true for the “relitigation” exception, which allows a district court to block state proceedings “to protect or effectuate its judgments,” 28 U.S.C. §2283. The Supreme Court in Chick Kam Choo v. Exxon, 486 U.S. 140, said applying that exception was akin to “resorting to heavy artillery.”

Cabranes said the problem was governed by the federal law of issue preclusion, and the question was not whether Platt decided the malpractice issue, but whether he decided an “element” of a malpractice claim—”namely, counsel’s deficient performance.”

“Even a cursory review of the allegations in the amended complaint belies the Wyly Appellants’ contention that the state court action does not seek to relitigate the District Court’s determination that class counsel’s representation was reasonable,” he said.

The allegations that the lawyers failed to exercise reasonable skill and knowledge commonly possessed by a member of the legal profession, Cabranes said, “constitute a collateral attack on the District Court’s findings that the Settlement was ‘fair, reasonable and adequate,’ that class counsel was entitled to an award of attorneys fees, and that those fees were ‘fair and reasonable,’” he said.

And it was clear to the court, he said, that Wyly was seeking to relitigate “the same issue that the District Court already resolved.”

The Wyly appellants’ contention that many of the facts and events that gave rise to the state malpractice action were not yet known at the time the settlement was approved failed to impress the circuit.

“This argument might have more force were it not for the fact that the Wyly Appellants litigated their fraud allegations for three years in connection with their Rule 60(b) motion—and lost,” Cabranes said.

Gregory P. Joseph represented the law firms.

In a statement, Brewer, Wyly’s lawyer, said, “We are disappointed in the decision, and believe that our client should have had an opportunity to pursue damages against Milberg for its role in orchestrating a settlement that, in our clients’ view, clearly failed to represent the best interest of the shareholders.”

He added, “Unfortunately, the rule established by the court further erodes the already limited ability of class members to control the conduct of class counsel.”