March 8, 2011
Watching “The Social Network” lose out to “The King’s Speech” for Best Picture, I couldn’t help but wonder how Cameron and Tyler Winklevoss, would-be twin inventors of Facebook, reacted to the news. Were the Olympic rowers disappointed that the movie that made them famous didn’t walk away with the big prize? Or, was the announcement some cause for relief, a signal that their nearly decade long pursuit of justice against Facebook wonderkin, Mark Zuckerberg, might be moving out of the public eye and eventually wind down. Either way, my guess is that emotions remain high in the boathouse as the Twins await yet another court ruling in the epic battle over Facebook, one that has the potential to reignite the fight.
For those who have yet to see the movie, the Winklevoss twins (the “Twins”), together with their Harvard classmate, Divya Narendra, allege that they had the idea for Facebook, and that Mark Zuckerberg stole their idea. Zuckerberg and Facebook deny the claims, and for their part, allege that the Twins and Narendra infiltrated their system, took thousands of e-mail addresses, and then spammed them. After years of vigorous fighting worthy of all the Hollywood attention, the parties entered into a mediation driven settlement in which Facebook agreed to purchase ConnectU, the Twins’ failing competitor site, with shares of Facebook stock — a deal worth in excess of $160 million because of Facebook’s soaring value.
In a remarkable demonstration of — well — “True Grit”, the Twins have now asked the Ninth Circuit to undo the settlement. They claim that, despite a bevy of lawyers at their side during the mediation, they were duped about the actual value of Facebook stock they were to receive as part of the settlement. If the Court agrees, the Twins will be $160 poorer, the scorched earth litigation will resume in earnest, and if not already underway, a team of Southern California screenwriters will begin blocking out drafts of “The Social Network II.”
Overturning a settlement is no easy business. Most who try argue, as the Twins have, that either the settlement was too indefinite to have resulted in a meeting of the minds or that the agreement was the product of fraud. With regard to the agreement itself, there is typically a “presumption of enforceability” followed by a review of whether the terms are “sufficiently certain.” As to fraud, Ninth Circuit courts require a showing of a duty plus a level of misconduct that “substantially impeded” the movant’s ability to act. No easy feat.
One issue specific to the Facebook litigation is the Twins’ novel claim that the settlement should be unwound because Facebook committed securities fraud during the mediation. The argument is that Facebook was guilty of insider trading in the mediation process because it failed to volunteer all the information it had regarding the valuation of the company. Ultimately, the Twins relied upon their own research, namely a Microsoft press release, in coming up with a $36 per share value. They claim that Facebook withheld information that would have disclosed a value closer to $9 per share. The Twins claim that had they know that information, they would never have settled for so few shares.
The securities claim will hinge on whether the Twins properly pled a securities claim and on whether Facebook had a duty to volunteer any information bearing on the value of the stock. One wonders, for example, why such a duty would arise in the course of mediating such contentious litigation. Oh, and there is the matter of the release signed by the Twins absolving Facebook for “any future fraud claim.”
For those interested in researching cases regarding settlement agreements, I ran a WestSearch on WestlawNext in the Ninth Circuit across all content sets for the following: enforce settlement agreement. The result yielded the most relevant Ninth Circuit opinions on the topic including:
Callie v. Near , 829 F.2d 888 and William Keeton Enterprises, Inc. v. A All American Strip-O-Rama, Inc., 74 F.3d 178.
A click on secondary sources revealed several articles directly on point including:
“Reviewing Agreements Reached During Mediation,” a chapter in Cole’s Mediation Law treatise. (MEDIATION § 4:13); and
“Disputing Irony: A Systematic Look at Litigation About Mediation,” a detailed Harvard Negotiation Law Review Article. (11 Harv. Negot. L. Rev. 43)
A more directed boolean terms and connectors search might look something like:
((settlement mediation /4 agreement) /20 enforc!) and fraud! (sufficiently /4 certain definite) and (fail! +3 disclose) (withhold withheld +3 information)
For those interested in the outcome of the Ninth circuit decision in Facebook, set up a Docket Track in the DOCK-CTA9 for docket number 09-15021. When the decision is filed, you will be e-mailed an alert.
Other briefing of interest in this case:
Brief of Appellant/Cross-Appellee Facebook – 2010 WL 5625003
Brief of Appellee ConnectU (the Twins) – 2010 WL 5625005
Appellant’s Reply Brief – 2010 WL 562004