Monday brought two interesting developments in the never-ending saga of people trying to pry shares of Facebook from Mark Zuckerberg. First, the lawsuit that spawned the uber-successful film The Social Network — and a damn fine blog post about the same— seemingly came to an end. (I assume Zuck clicked “Like” next to the story.) And second, the lawsuit that will inevitably spawn The Social Network IIsuddenly got a lot more interesting. (And maybe now Facebook will take those long-standing calls for a “Dislike” button more seriously.)
“At Some Point, Litigation Must Come to an End. That Point Has Now Been Reached.”
First, something the wunderkinds at Facebook can party about. The Ninth Circuit Court of Appeals rejected the attempts of Tyler and Cameron Winklevoss (not-so-affectionately referred to as the “Winklevii” in the movie) to set aside a settlement agreement which purported to resolve their claims against Facebook. Apparently, the Winklevii will have to live with $165 million (based on current estimates). And although Judge Alex Kozinski’s opinion rejecting their appeal isn’t nearly as sexy and exciting as Aaron Sorkin’s depictions of the heated depositions during the case — all in favor of just having Sorkin write real life for the rest of us, say aye — there are some legal concepts worthy of note, as well as a few choice samples of judicial snark. [Ed. Note: Aye.]
For those who haven’t seen The Social Network and/or who think that social media is for “them durned kids” and refuse to follow any news about it, Olympic crew rowers/walking Harvard stereotypes Tyler and Cameron Winklevoss sued Facebook and its founder, Mark Zuckerberg, claiming that Zuckerberg stole the idea for the social networking site from them. The Winklevosses (as Judge Kozinski correctly, if humorlessly, calls them) claimed they had hired Zuckerberg to write code for a website they were developing, which was eventually called ConnectU. Facebook has gone on to become a $50 billion business and turned founders Dustin Moskovitz and Zuckerberg into the first and second youngest billionaires in the world, respectively, while ConnectU has disappeared (but at least The Social Network still made “Winklevoss” a household name). So, like any red-blooded Americans, the Winklevosses sued to get their share. (Says Kozinski: “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.” Ouch.)
After extensive litigation, the parties participated in a private mediation to discuss settlement. At the outset of that mediation, the parties signed a confidentiality agreement, promising that they would not disclose anything that happened in the mediation, nor would they try to use anything that was said in the mediation in court. During that mediation, the Winklevosses decided to accept a settlement of $20 million in cash and shares of Facebook stock which were valued at another $45 million (those shares are now worth about $145 million). However, when Facebook presented them with the required settlement documentation for signature, the Winklevosses refused to sign and demanded more money. Facebook, having none of this nonsense, went to court and got an order forcing the Winklevosses to comply with the terms of the settlement. The Winklevosses appealed that decision. (Kozinski on the value of the Winklevosses’ settlement, in light of recent valuations of Facebook: “They made a deal that appears quite favorable in light of recent market activity.” He seems to like the “Winklevii” about as much as Zuckerberg does.)
The Winklevosses first claimed that the settlement agreement — which was handwritten on 1 1/3 sheets of paper — lacked material terms and therefore was unenforceable. In a world in which contracts written on cocktail napkins are legally enforceable, Judge Kozinski disposed of this argument without any apparent hesitation, noting that the settlement agreement said that the Winklevosses would get cash and shares in Facebook and each side would “get on with their lives.” To the extent any terms were left unresolved, the agreement specifically provided that Facebook would draft the formal documentation, so the Winklevosses couldn’t complain about terms inserted by Facebook.
The Winklevosses, who (unsurprisingly) have mild trust issues involving Zuckerberg, next argued that Facebook had lied to them about the value of the Facebook stock at the time, leading them to believe the deal was richer than it was. (Wow, they really don’t like this Zuckerberg guy, do they). There were two big problems with this argument. First, the parties agreed that (as is typical for litigation settlements), they would release each other from any claims, known or unknown, and as Judge Kozinski said, “stop fighting.” This release was broad enough to cover any alleged concealment regarding the value of Facebook’s stock. Second, the Winklevosses had agreed at the outset of the mediation not to reveal anything that happened during the course of the mediation and not to use any statements made during mediation in court proceedings — and then, of course, proceeded to rely on those statements in challenging the settlement that resulted. Because the alleged misrepresentations at the heart of the brothers’ fraud claim occurred during the mediation, Judge Kozinski concluded that they were inadmissible. (Says Kozinski: as “sophisticated parties who were locked in a contentious struggle over ownership rights in one of the world’s fastest-growing companies” who showed up to mediation with “half-a-dozen lawyers” and an accomplished expert in corporate valuation who just so happened to be their father, the Winklevosses “face a steep uphill battle trying to undo their settlement. Did the dratted Winklevii secretly steal Kozinski’s billion-dollar business idea or something?)
Although the Winklevosses have pledged to keep fighting, the battle they now face is much like trying to row their way up Niagara Falls. Courts are loathe to unwind settlement agreements and reopen billion dollar litigation. Especially when the guys who want to keep fighting have $20 million in the bank, another $145 million in stock, and come from a super wealthy family. (Last word from the Koz: “At Some Point, Litigation Must Come to an End. That Point Has Now Been Reached.”)
“But I Never Said That Other Litigation Couldn’t Immediately Commence in Its Place!”
While Facebook is undoubtedly thrilled with this result, Zuckerberg and his company are now facing a potentially greater challenge.
The same day Judge Kozinski filed his opinion, a man named Paul Ceglia filed an amended complaint in federal court in Buffalo, NY claiming that he and Zuckerberg entered into an agreement in 2003 in which Zuckerberg promised Ceglia a 50% stake in Facebook (then known as The FaceBook). While Ceglia’s lawsuit was derided by Facebook as a “scam” and largely dismissed by observers when it was filed in mid-2010, he’s come back in a big way, hiring DLA Piper — a big-time, reputable law firm that immediately gives Ceglia new credibility — and filing the new complaint with a series of purported e-mails between Ceglia and Zuckerberg that sure make it look like Zuckerberg promised Ceglia a full 50% ownership in what ultimately became Facebook.
From the looks of it, Ceglia’s amended complaint not only states a valid claim (if the allegations are true), but it should provide ample fodder for a new script allowing Jesse Eisenberg to revisit his career-defining role as a socially awkward nit who is remarkably similar in persona to Jesse Eisenberg, but with really authentic t-shirts. Among other things, Ceglia’s complaint claims Zuckerberg sent Ceglia an email in November 2003 demanding more money so that Zuckerberg can move more quickly on The FaceBook and make the site live before certain nefarious Harvard upperclassmen (read: the Winklevii) could complete a competing site. Then, Ceglia claims Zuckerberg sent an email asking that Ceglia waive certain penalties and just agree to a 50/50 ownership — to which Ceglia agreed.
Of course, none of that is nearly as interesting as the message in which Ceglia told a suddenly reticent Zuckerberg (I bet the Winklevosses remember what that’s like…), “Grow up, take a f- ethics class, choke yourself with that silver spoon of yours.” Sorkin couldn’t have written that better himself.