Ninth Circuit No Friend to Winklevoss Twins: Facebook Settlement Stands

Putting what appears to be an end to a highly publicized legal battle dramatized in the movie The Social Network, the U.S Court of Appeals for the Ninth Circuit has upheld a $65 million settlement agreement made between brothers Cameron and Tyler Winklevoss, their former classmate Divya Narendra, and social-networking website Facebook and its CEO Mark Zuckerberg.  Facebook Inc. v. Divya Narendra et al., Case No. 08-16745 (9th Cir., Apr. 11, 2011) (Kozinski, J.).

In 2004, Cameron Winklevoss, Tyler Winklevoss and Divya Narendra sued Facebook and its CEO Mark Zuckerberg, alleging that Zuckerberg stole from them the idea for Facebook while classmates at Harvard.  Facebook and Zuckerberg countersued the plaintiffs and their competing social networking website Connect U, alleging that the plaintiffs hacked into Facebook and spammed Facebook users. The parties were ordered to mediation in 2008.  After one day of negotiations, the parties signed a handwritten settlement agreement in which the plaintiffs agreed to give up their social networking website ConnectU in exchange for a $20 million payment and $45 million worth of stock in Facebook.

When final settlement negotiations fell apart, Facebook filed a motion asking the district court to enforce the signed settlement agreement and order the Winklevosses to sign more than 130 pages of documents that would finalize the settlement.  The Winklevosses argued that the settlement was unenforceable because it lacked material terms and had been procured by fraud.  Namely, the Winklevosses argued that Facebook had committed securities fraud by providing an incorrect valuation of the company such that the Winklevosses should have received more shares in the settlement.  The district court found the settlement agreement enforceable and ordered the Winklevosses to transfer all ConnectU shares to Facebook.  The Winklevosses appealed.

The Ninth Circuit rejected the Winklevosses argument that the settlement agreement lacked material terms, determined the terms were sufficiently definite for a court to determine whether a breach has occurred and to order specific performance or award damages.  Further, the settlement agreement contained a mutually agreed upon procedure for filling in missing “material” terms, demonstrating that the parties intended to be bound even though some material terms might be resolved later.

In rejecting the Winklevoss brothers’ argument that Facebook procured the settlement by fraud, the court pointed out that the Winklevosses were sophisticated litigants who had obtained extensive information about Facebook through discovery during the long-standing litigation over ownership rights in one of the world’s “fastest-growing companies.”   The court also noted that at mediation the Winklevosses had a “team of lawyers and a financial advisor.”   Namely, the Winklevosses’ father, aformer accounting professor at the Wharton School of Business and an expert in valuation, participated in the mediation.  “A party seeking to rescind a settlement agreement by claiming a Rule 10b-5 violation under these circumstances,” the court warned, “faces a steep uphill battle.”  In any event, the Court determined that the Winklevosses’ securities fraud claims failed on the merits, as the only evidence proffered towards the claims concerning what Facebook allegedly said and did not say during the mediation, which was properly excluded by the district court due to a confidentiality agreement entered into by the parties.  In conclusion, the court stated: “At some point, litigation must come to an end. That point has now been reached.”