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Condoning Fraud

Even if there hadn’t been a movie making this whole story famous, those of us concerned with the law and mediation might still follow the saga of the lawsuit between Mark Zuckerberg and the Winklevosses with interest. Yesterday the twins were dealt a setback in their efforts to overturn a settlement they claim was fraudulently induced. Here is the Ninth Circuit opinion’s description of that settlement agreement:

After a day of negotiations, ConnectU, Facebook and the Winklevosses signed a handwritten, one-and-a-third page “Term Sheet & Settlement Agreement” (the Settlement Agreement). The Winklevosses agreed to give up ConnectU in exchange for cash and a piece of Facebook. The parties stipulated that the Settlement Agreement was “confidential,” “binding” and “may be submitted into evidence to enforce [it].” The Settlement Agreement also purported to end all disputes between the parties.
People might be surprised to learn that this sort of thing happens in mediation. Even in a dispute worth tens of millions of dollars, the parties sometimes conclude a day of mediation with nothing but a hastily-prepared handwritten term sheet, leaving a number of items open for future clarification, and contemplating a further long form agreement. They do that because they do not want to leave the table without some documentation of the deal, otherwise the deal might fall apart. But they don’t have time to think about all the details required to finish a complete agreement. In this case, where the parties scrawled out a document that was labeled both a term sheet and a settlement agreement, and that said it was both confidential as well as admissible in evidence, the agreement seems to express contradictory purposes. What happens when the parties sign such a flawed document, and never sign the final agreement they were contemplating? Two questions were decided by the panel in the Winklevoss v. Facebook case. (1) Was the handwritten agreement definite enough to be enforceable? and (2) Does the parties’ agreement to maintain mediation confidentiality bar a claim to set the agreement aside based on alleged fraudulent inducement? The panel answered “yes” to both questions.

Mediation participants, and mediators, sometimes worry whether the agreements they commit to paper after a long day of negotiation will contain enough of the necessary verbiage to make them enforceable. (See my previous post on that topic.) This case illustrates a variant of that concern. Here the parties signed a document that was sufficiently vague that at least one of the parties thought (perhaps only in hindsight) that it should not be enforceable if the parties never completed a more detailed agreement. This problem is not confined to mediation. Here in Hollywood, players are used to making handshake deals, or sending quick letters confirming their participation in large projects. These short form deals omit many important points, and do not always make clear what happens if the parties fail to sign a fully-detailed, heavily-lawyered document. Both in that context, therefore, as well as the mediation context, it is a good practice to specify what happens in that event. It is not difficult to include a sentence that says that if the parties fail to complete a long form agreement, the term sheet either is, or is not, intended to be binding. (It might be enough to just label it as either a binding agreement, or as a non-binding term sheet.) There is really no excuse for not covering that point in even the briefest of documents. Parties should understand that if there is language expressing the intent that the document is intended as a binding settlement, then it probably will be held binding even if the parties fail to complete a longer agreement, and even if the term sheet has holes and ambiguities in it.

Another point mediation participants should understand, as is also illustrated by this case, is that mediation confidentiality can preclude evidence of all kinds of alleged wrongdoing that may have occurred in the context of a mediation session. The Cassel case, discussed in a previous post, shows that even claims against a party’s own attorneys may be barred by mediation confidentiality. (In that state court case, it was a strict state statute that barred evidence of alleged attorney misconduct, while interestingly in this federal case, it was the parties’ mediation agreement that precluded evidence of the alleged fraud.) This case, which I don’t think raises quite the same troublesome questions as Cassel, holds that because of mediation confidentiality, parties may not use evidence of anything said in the course of a mediation to overturn the agreement itself. That result is not as troublesome, because it is based on a rule, similar to the parol evidence rule, that may apply in other contexts as well. And also because parties should understand that they always have the option not to close, and that if they do sign a binding agreement at the mediation, then the agreement is all they have. That means that if somebody lied to the Winklevosses to induce them to accept shares in Facebook in settlement of their claims, whether their own attorneys or their adversaries, it is tough luck for them, but they should have been aware of that.

The court is not too sympathetic to the Winklevoss twins, given their ability to obtain expert counsel and perform their own due diligence, and given the court’s evident feeling that the value of the settlement may have turned out to be better than they should have expected even if allegedly crucial information had not been withheld. In other cases, however, enforcing mediation confidentiality may prevent less sophisticated parties from obtaining redress for fraud or other trickery in the course of mediation. Parties therefore may have to approach mediation as they would a game of poker. They may need to understand that the law of the jungle applies in mediation, even more so than in court, or in transactions out of court. That means you should be cautious about taking anything the other side says at face value. You may have no recourse if someone lies to you. People can bluff, and they can hide material facts. (Parties can lie and cheat in court also, but there is a record of it, and a right to appeal.) If we apply the principle of mediation confidentiality strictly, parties have little protection against fraud or abuse. That means that if you walk out of mediation without a deal, then no harm, no foul. And if you walk out of mediation with a deal, the deal is all you have. Your complaints about the process will not get you far in court. That is why, as I’ve argued previously, mediators should take some time and trouble to make sure the parties understand and are satisfied with whatever result they obtain in mediation.


Joe Markowitz

Joseph C. Markowitz has over 30 years of experience as a business trial lawyer.  He has represented clients ranging from individuals and small businesses to Fortune 500 corporations.  He started practicing with a boutique litigation firm in New York City, then was a partner in a large international firm both… MORE >

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