Metropolitan News-Enterprise


Tuesday, April 12, 2011


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Ninth Circuit Says Facebook Settlement With Twins Enforceable

Kozinski Says Time to End Litigation Depicted in ‘The Social Network’ Has Arrived


From Staff and Wire Service Reports


The Ninth U.S. Circuit Court of Appeals yesterday rejected an effort by two former Harvard University schoolmates of Facebook founder Mark Zuckerberg to rescind a 2008 settlement agreement, now worth an estimated $160 million, over ownership rights in what the panel noted was one of the world’s fastest-growing companies.

In his decision for the appellate court, following six years of litigation dramatized in the Oscar-nominated film “The Social Network,” Chief Judge Alex Kozinski explained the mutual release of claims executed by twins Cameron and Tyler Winklevoss foreclosed their challenge to the settlement negotiation process.

“At some point, litigation must come to an end,” Kozinksi said. “That point has now been reached.”

The brothers, who are Olympic rowers, sued Facebook and Zuckerberg in Massachusetts state court. Facebook countersued them and their competing social networking site, ConnectU, in California, alleging that the Winklevosses and ConnectU hacked into Facebook to purloin user data, and tried to steal users by spamming them.

Confidentiality Agreement

The district court judge ordered the parties to mediation, and all of the participants signed a Confidentiality Agreement stipulating that all statements made during mediation were privileged, non-discoverable and inadmissible “in any arbitral, judicial, or other proceeding.”

After a day of negotiations, ConnectU, Facebook and the Winklevosses signed a handwritten, one-and-a-third page agreement pursuant to which the brothers agreed to give up ConnectU in exchange for a $20 million cash payment and partial ownership of Facebook.

A third Harvard classmate, Divya Narendra, was part of the settlement with the twins but did not join them in the lawsuit seeking to undo the agreement.

The parties all stipulated that the agreement was “confidential,” “binding” and “may be submitted into evidence to enforce [it].” They each agreed to grant each other “mutual releases as broad as possible,” and the Winklevosses represented and warranted that “[t]hey have no further right to assert against Facebook” and “no further claims against Facebook & its related parties.”

Eventually the settlement fell apart during negotiations over the form of the final deal documents. Facebook then filed a motion seeking to enforce the agreement, and also asked the district judge to order ConnectU and the Winklevosses to sign more than 130 pages of documents to “finalize” the settlement.

U.S. District Judge James Ware, of the Northern District of California, found the agreement was enforceable and ordered the Winklevosses to transfer all ConnectU shares to Facebook, but he declined to find the additional documents provided by Facebook were part of the deal.

The Winklevosses appealed, contending they were misled into believing the company was worth $35.90 a share at the time of the settlement negotiations because of an investment by Microsoft Corp., when an internal valuation prepared to comply with tax laws put the value of its common stock at $8.88 per share. Had they known about this valuation during the mediation, they claimed, they would not have signed the agreement.

Kozinski reasoned that the terms of the settlement agreement were “sufficiently definite for a court to determine whether a breach has occurred, order specific performance or award damages.” He noted that “[t]his is not a very demanding test, and the Settlement Agreement easily passes it” since it provided “Facebook would swallow up ConnectU, the Winklevosses would get cash and a small piece of Facebook, and both sides would stop fighting and get on with their lives.”

The jurist said the agreement’s language “leaves no doubt that the Winklevosses and Facebook meant to bind themselves and each other, even though everyone understood that some material aspects of the deal would be papered later.”

‘Sophisticated Parties’

He went on to emphasize that the Winklevosses “are sophisticated parties” who had “access to a good deal of information about their opponents” through discovery and had the assistance of “half-a-dozen lawyers” plus their father, a former accounting professor at Wharton School of Business and an expert in valuation.

In light of their circumstances, Kozinski said, they “face[d] a steep uphill battle” to establish a violation of 17 C.F.R. § 240.10b-5, assuming a party negotiating an exchange of shares to settle a lawsuit even could violate Rule 10b-5 by misstating or hiding information that would materially change the other side’s evaluation of the settlement.

Since the parties negotiated “releases as broad as possible,” Kozinski suggested the Winklevosses should have “understood that the broadest possible release includes both known and unknown securities claims.”

Even if the brothers’ claims had not been waived, the Winklevosses’ securities fraud claims also failed because they could not show that Facebook misled them about the value of its shares or that disclosure of the tax valuation would have significantly altered the mix of information available to them during settlement negotiations because of the limitations imposed by the confidentiality agreement, Kozinski said.

Facebook’s deputy general counsel yesterday issued a statement saying: “We appreciate the Ninth Circuit’s careful consideration of this case and are pleased the court has ruled in Facebook’s favor.”

Lawyers for the Winklevoss twins said they are reviewing the decision and have not decided on their next step.

The case is The Facebook, Inc. v. Pacific Northwest Software, Inc., 08-16745.


Copyright 2011, Metropolitan News Company