The social networking saga appears to have finally come to an end in a decision by the United States Court of Appeals for the Ninth Circuit affirming the decision to enforce the Settlement Agreement between Facebook and the Winklevosses. The Facebook, Inc. v. Pacific Northwest Software, Inc., 2011WL 1843509 (C.A.9 (Cal.)). The tone of the decision was one of vexation towards the Winklevosses for the protracted litigation, despite the agreement to release all claims against Facebook. If you have watched the movie, "The Social Network," you know the genesis of the battle between Mark Zuckerberg and the Winklevosses. Cameron Winklevoss, Tyler Winklevoss and Divya Narendra (the Winklevosses) claimed that Mark Zuckerberg poached the idea for Facebook from them. The Winklevosses sued Facebook and Zuckerberg in Massachusetts and Facebook countersued them and their competing social network site, ConnectU, in California. The District Court in California ultimately ordered the ConnectU, Facebook and the Winklevosses to mediate their dispute.
The parties were able to reach a Settlement Agreement, in which the Winklevosses agreed to give upConnectU in exchange for cash and a part of Facebook. The agreement also stipulated that it would end all disputes between the parties. The settlement unraveled as the parties attempted to finalize Facebook's purchase of ConnectU. Facebook filed a motion with the court seeking to enforce the agreement. ConnectU argued that the agreement was unenforceable because it lacked material terms and had been procured by fraud. The instant action is an appeal from the District Court's decision holding that the agreement was enforceable and ordering the Winklevosses to transfer all ConnectU shares to Facebook.
On appeal, the Winklevosses argued that the specific terms of the acquisition were material to the agreement and that the absence of those terms renders it unenforceable. The agreement included a clause that stated, "Facebook will determine the form and documentation of the acquisition of ConnectU shares..." The court held that the parties clearly meant to bind themselves, "even though everyone understood that some material aspects of the deal would be prepared later." The court also admonished the parties and said that the deal was drawn up so that "both sides would stop fighting and get on with their lives."
The Winklevosses also argued, without success, that Facebook misled them into believing that its shares were worth four times as much as the internal valuation ultimately revealed. The Winklevosses claimed that had they been aware of this valuation at the time of mediation, they never would have agreed to the deal. They sought rescission of the agreement based upon various sections of the Securities Exchange Act of 1934. The court rejected the Winklevosses argument because they are a sophisticated party with access to discovery through the adversarial process. The court held that it will enforce an agreement between adversaries in roughly equivalent bargaining positions, who have the opportunity to "use discovery to ferret out a great deal of information before even commencing settlement negotiations."
Lastly, the court rejected the Winklevosses' argument that the release of claims did not foreclose their challenge to the agreement because the Exchange Act precludes release of unkown securities fraud claims arising out of negotiations to settle a pending lawsuit. The court cites to a Ninth Circuit case that held that "parties possessing roughly equivalent bargaining strength could release all claims arising out of the transaction that gave rise to the litigation, even though they hadn't yet discovered some of the securities claims when they signed the settlement." Petro-Ventures, Inc. v. Takessian, 967 F.2d 1337, 1342 (9th Cir.1992).
In its closing, the court made known its frustration with this litigation. The court wrote, "[t]he 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 . . . [a]t some point, litigation must come to an end. That point has now been reached."