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Carl Kanowsky: When $65M isn’t enough to say ‘Sorry’

It's the Law

Posted: April 22, 2011 1:55 a.m.
Updated: April 22, 2011 1:55 a.m.

One of the top movies last year, “The Social Network,” dealt with the founding of the internet phenomenon, Facebook, or, as the 9th Circuit Court of Appeals likes to call it, “The Facebook.”

Just in case you didn’t see it, the movie covered how Mark Zuckerberg, wunderkind extraordinaire, put Facebook together. According to the movie, Zuckerberg had some tentative agreement with twin brothers Tyler and Cameron Winklevoss.

Just as in the movie, these are Harvard-trained Goliaths (each about 6’4”), who, in their spare time, are training to be on USA’s Olympic rowing team, also started their own version of Facebook — or perhaps, came up with the original idea.

Well, as you would expect whenever we’re talking about companies worth $50 billion, there were disagreements. The Winklevosses alleged Zuckerberg stole the whole Facebook concept from them, and Zuckerberg denied it. So they sued each other.

And as the Court of Appeals said, “The ensuing litigation … gave bread to many lawyers.”  Unfortunately, they didn’t retain anyone from the SCV Bar. 

The legal battle forms the central core of “The Social Network.” Eventually, Zuckerberg and the twins mediated the dispute, and came to a settlement.

Prior to beginning the mediation, the warring parties signed a confidentiality agreement, which provided that anything said during the proceeding could not be used for any purpose. The idea is to get everyone to open up and be serious about the negotiations.

After spending untold amounts on attorney fees and countless hours in depositions, the terms of the settlement at the mediation took up all of one and a half pages. The Winklevosses were to get $65 million — $20 million in cash, and $45 million in Facebook stock. The document also stated that the parties agreed that to give “each other mutual releases, as broad as possible.”

Some time afterward, the Harvard rowers developed settlers’ remorse. They said that, despite having six lawyers and an accounting and a valuation expert (who happened to be their dad) present at the mediation, they got hoodwinked by Zuckerberg and his crew.

The twins alleged that Zuckerberg had told them at the mediation that the Facebook stock was worth $35 a share, and then changed it to about $9 after the mediation. The twins said that Zuckerberg committed fraud, and that essential terms were missing from the short settlement agreement. They asked the court to set aside the agreement.

Judge Koszinski, chief judge of the 9th Circuit, had no sympathy. He first said that since the Winklevosses had signed the confidentiality agreement, whereby the parties stipulated that whatever was said during the mediation could not be used for any reason, then anything Zuckerberg said could not be used.

As for any missing terms, the settlement agreement gave Facebook’s attorneys the duty to prepare the so-called “long-form agreements” to detail the intricacies of how the Winklevosses were going to be paid. Facebook’s counsel went overboard — they transformed a one-and-one-half-page settlement agreement into 130 pages. (I guess there were a lot of intricacies.)

Both the trial court and the appellate court rejected Facebook’s documentation and ruled that the simple settlement agreement was sufficient in its detail to figure out how to close the deal.  As a result, the court ruled, “The parties (should) stop fighting and get on with their lives.” 

Essentially, the 9th Circuit was not very sympathetic to the Winklevosses. If they wanted more money, they should not have settled.

But they did, and they were going to live with it — the poor guys.

They were going to be paid a great deal of money and get stock that was actually more than three times the $35 the Winklevosses thought it was worth. News reports have said the settlement with the current value of Facebook’s stock is now actually closer to $165 million.

As the court said, “At some point, litigation must come to an end. That point has now been reached.” And only $165 million to show for it.

Oh well.

Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by email at Kanowsky’s column represents his own views, and not necessarily those of The Signal. Nothing contained herein shall be or is intended to be construed as providing legal advice.


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