No. 08-16745, No. 08-16873, No. 09-15021
Alex Kozinski, Chief Judge
April 11, 2011

We all love Facebook and the movie Social Network. After a mediated settlement of lawsuits disputing the ownership of Facebook, the Winklevoss twins sought to judicially overturn the deal. Their theory was that the fantastic increase in the current value of Facebook after the mediation, necessitated a lower valuation of the stock given them in the settlement, increasing the number of higher valued shares they would own.

In a succinct affirmation of the law of contracts, negotiation, settlement, confidentiality and mediation, Chief Judge Kozinski ruled in favor of all those principles we learned as first year law students (and honed during the intervening years between then and now). In the dispute, the Winklevosses sought to obtain from Facebook and Zuckerberg a better or different deal than that resulting from the mediation.

The settlement agreement called for the parties to subsequently enter 130 pages of additional documents, including a stock purchase agreement, a stockholders’ agreement and a confidential mutual release “as broad as possible.” Finding that the missing agreements are important terms that affect the value of the bargain: a contract that omits terms of the latter type is enforceable under California law, so long as the terms it does include are sufficiently definite for a court to determine, whether a breach has occurred, order specific performance or award damages.

Chief Judge Kosinski wryly observed:
The parties agreed that 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.

In the executed settlement agreement, the parties delegated to Facebook the duty to document the parts of the transaction governed by securities law. The court concluded the parties intended to be bound. Having agreed to be bound, the appellants did not meet the steep uphill requirements to set aside an agreement on SEC Rule 10b-5 grounds.

The court affirmed the district court’s exclusion “of what was said and not said during the mediation” based not on the Local Rule, but on the parties’ contractual language for the mediation:
All statements made during the course of the mediation or in mediator follow-up thereafter at any time prior to complete settlement of this matter are privileged settlement discussions … and are nondiscoverable and inadmissible for any purpose including in any legal proceeding… . No aspect of the mediation shall be relied upon or introduced as evidence in any arbitral, judicial, or other proceeding.

It’s called ADR – alternate dispute resolution – for a reason. As mediators, we are looking for the parties’ resolution. The court properly concluded, to the chagrin of the Winklevosses:
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.

by Robert F. Saint-Aubin

Robert F. Saint-Aubin, Co-Chair of the California Bar Litigation Section ADR Committee, serves as a mediator and arbitrator in Southern California and Nevada, including as a Settlement Judge for the Nevada Supreme Court. A graduate of MIT’s Sloan School and University of Pennsylvania Law School, Saint-Aubin has more than forty years of eclectic experience as a corporate, commercial, regulatory and environmental attorney.