An Irrevocable Act

From the Blog of Phyllis G. Pollack.

One good thing about mediation is that the parties are free to change their minds on any issue as many times as they want during a mediation. . . until they sign a settlement agreement. Once an agreement is signed, the settlement is extremely difficult, if not impossible, to unwind.

Earlier this month, the Winklevoss Twins (of Facebook fame) found this out the hard way. In The Facebook, et al. v. Narendra, Case No. 08-16745, the Ninth Circuit Court of Appeals refused to let them back out of a settlement they made with Facebook and Mark Zuckerberg. (Facebook vs Narendra)

As has been widely publicized, the Winklevoss Twins and Divya Narendara (“Twins”) claim that Mark Zuckerberg stole the idea for Facebook and so sued both Facebook and Zuckerberg in Massachusetts. Zuckerberg and Facebook counter-sued in California adding ConnectU as a defendant and alleging that these defendants stole data and tried to steal users.

The federal District Court in California eventually dismissed the Twins due to a lack of jurisdiction but then ordered the parties to mediate their dispute.

Prior to the mediation, the parties signed a Confidentiality Agreement stipulating that

“. . . all statements made during mediation were privileged, non-discoverable and inadmissible “in any arbitral, judicial or other proceeding.” ” (Slip Opinion at p. 4902).

After a day of negotiations, the parties signed a handwritten, one and a third page “Term Sheet and Settlement Agreement” (“Term Sheet”). Therein, the Twins agreed to give up ConnectU in exchange for $20 million in cash and $45 million in shares in Facebook (now estimated to be worth about $200 million.) (See, Los Angeles Times April 21, 2011 article.)

However, the negotiations fell through during discussions on the final deal documents. Facebook filed a motion to enforce the settlement. ConnectU opposed the motion arguing that the Term Sheet was not enforceable as it lacked material terms and was procured by fraud. The trial court found the Term Sheet to be enforceable and ordered completion of its terms.

The Ninth Circuit agreed, affirming the trial court’s order. As part of the settlement, Facebook was to acquire all of ConnectU’s shares in exchange for cash and a percentage of Facebook’s common stock. To accomplish this, the attorneys drafted more than 130 pages of documents typically required to finalize an acquisition.

On appeal, the Twins argued that if the terms set out in these voluminous acquisition documents were “required” and “typical”, then they should have been included in the Term Sheet; because they were not, it is unenforceable.

The Ninth Circuit rejected this argument finding that the Term Sheet complied with the requirements of California contract law.

Next, the Twins argued that Facebook misled them as to the value of its stock. An internal valuation prepared to comply with the federal tax code put the value at $8.88 per share. In contrast, the Twins claimed they were led to believe that the value was four times as much and so were defrauded.

The Court rejected this argument noting:

“The Winklevosses are sophisticated parties. . . . They engaged in discovery, which gave them access to a good deal of information about their opponents. They brought half-dozen lawyers to the mediation. Howard Winklevoss – father of Cameron and Tyler, former accounting professor at Wharton School of Business and an expert in valuation – also participated. A party seeking to rescind a settlement agreement by claiming [fraud] under the circumstances faces a steep uphill battle (citations omitted). Id. at p. 4906.

Finally, the Ninth Circuit addressed the issue of mediation confidentiality, but only superficially. It agreed that the trial court was correct to reject the proffer of certain evidence by the Twins about what was said and not said during the mediation, in light of the Confidentiality Agreement signed by the parties. The Ninth Circuit though did not delve into a discussion of mediation confidentiality, its purpose and importance. It simply concluded:

“. . .The Winklevosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winklevosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity. See Geoffrey A. Fowler & Liz Rappaport, Facebook Deal Raises $1 Billion, Wall St. J., Jan. 22, 2011, at B4 (reporting that investors valued Facebook at $50 billion – 3.33 times the value the Winklevosses claim they thought Facebook’s shares were worth at the mediation). For whatever reason, they now want to back out. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached.”

In sum, signing on the dotted line means that the matter is truly over!

. . .Just something to think about!

                       

Phyllis Pollack

Phyllis Pollack with PGP Mediation uses a facilitative, interest-based approach. Her preferred mediation style is facilitative in the belief that the best and most durable resolutions are those achieved by the parties themselves. The parties generally know the business issues and priorities, personalities and obstacles to a successful resolution as… MORE >