Facebook’s mediated settlement with ConnectU and the Winklevoss twins might finally be over in light of the Ninth Circuit Court of Appeals’ opinion issued April 11, 2011. Well, . . . it may be over. There may be an appeal. But, what can we learn from the opinion?
Cameron Winklevoss, Tyler Winklevoss (twins and Olympic crew-rowers) and Divya Narendra (“the Winklevosses”) sued Facebook claiming Mark Zuckerberg stole the idea for Facebook from them. Facebook struck back with a suit claiming Winklevosses, for the benefit of their competing social networking site, ConnectU, hacked into their site and tried to steal users. (Yes, this is the story turned into a movie, “The Social Network.”) The California court ordered the parties to mediate.
In mediation, the parties signed an “agreement to mediate” with a provision that all statements made during mediation were privileged, non-discoverable and inadmissible “in any arbitral, judicial, or other proceeding.” That provision eventually preserved the mediation process as privileged and inadmissible in court. That’s important. Mediators, attorneys and clients rely on the confidentiality and privilege of mediation to allow people to talk openly and to get deals done.
But what happened in mediation? And who tried to get out of the deal? According to the New York Times and the Wall Street Journal, the 2008 settlement is worth between $150 million and $200 million today. As the Ninth Circuit stated, “For whatever reason, they now want to back out.” One blog’s headline states, “They’re Handsome, They’re Rich, and They Didn’t Invent Facebook.”
In the mediation the parties settled the case using a handwritten document. According to the court, the Winklevosses agreed to “give up ConnectU for some cash and a piece of Facebook,” according to the Ninth Circuit. The deal fell apart as the parties tried to put the multiple final documents together. (This is why I always urge attorneys to bring final pre-drafted agreements if possible to mediation, and we work on the provisions until finalized. If we need time, we may have follow-up mediation sessions to hammer out the documents necessary to effectuate the agreement. In one case, I had the attorneys exchange draft agreements in advance. I have no idea what they did in this case.)
The Winklevosses first argued that the 130 pages of post mediation documents Facebook tried to get the Winklevosses to sign rendered the original agreement indefinite and unenforceable. The court said the initial contract provisions were sufficiently definite and rejected that claim.
The Winklevosses then claimed Facebook violated Rule 10b-5, and sought rescission of the Settlement Agreement under Section 29(b) of the Securities Exchange Act of 1934. They said Facebook misled them into believing their shares were worth 4 times as much as they turned out to be. The court was not persuaded. Both sides were equally sophisticated, had half a dozen lawyers, an opportunity to figure this out, accountants, experts, and the ability to make the agreement contingent on the accuracy of this price per share.
Interestingly, to make this claim about the price per share, the Winklevosses tried to introduce evidence of conversations during mediation. The court made a distinction between hiring a private mediator and a court-appointed mediator in determining whether the conversations were protected. Because the mediator was not stipulated to by the parties and approved by the judge under California rules, the court declined to exclude the conversations under California’s local court rules. The agreement to mediate, however, did provide that the conversations were excluded thereby allowing the court to rule that the evidence inadmissible. I guess that means one of two things for anyone mediating in California: 1) Get a stipulation and court approval before you privately mediate so you have the protection of the court rules; or 2) Use an agreement to mediate that covers your bases.
Good lessons from this opinion. But is it really over? Chief Judge Kozinski, writing for the court sounds like he thinks the case is or should be over. Midway through the opinion, he states, “There are also very important policies that favor giving effect to agreements that put an end to the expensive and disruptive process of litigation.” And, he closed the opinion stating,“At some point, litigation must come to an end. That point has now been reached.”
According to the Wall Street Journal, Winklevosses attorneys say the case raises significant federal issues, and they will file a Petition for Rehearing En Banc – to have the entire Ninth Circuit Court review the decision. Stay tuned.