Facebook and The Social Network Speak on Mediation

“Social Network” has come to life with lessons on how to prepare for mediation.

The storyline for this blockbuster movie, in case you missed it is that on “a fall night in 2003, Harvard undergrad and computer programming genius Mark Zuckerberg sits down at his computer and heatedly begins working on a new idea. In a fury of blogging and programming, what begins in his dorm room soon becomes a global social network and a revolution in communication. A mere six years and 500 million friends later, Mark Zuckerberg is the youngest billionaire in history… but for this entrepreneur, success leads to both personal and legal complications.” http://www.imdb.com/title/tt1285016/.

Those legal complications resulted in a recent Ninth Circuit decision that is of value even beyond the curiosity factor. The Facebook, Inc.; Mark ü Zuckerberg v. ConnectU, Inc., Slip Op. No. 09-15021 (9th Cir. April 11, 2011). The law suit was initiated by the twin brothers Winkelvoss, who claimed that Zuckerberg stole the idea for Facebook from them. Zuckerberg countersued and the district court in California ordered the parties to mediate. Facebook, the competing website ConnectU, and the Winklevoss twins were all party to the mediation. Before the mediation began, the participants entered into a confidentiality agreement that provided that all statements made during mediation were privileged, non-discoverable and inadmissible “in any arbitral, judicial, or other proceeding.” A full day of negotiations resulted in a signed, handwritten, one-and-a-third page “Term Sheet & Settlement Agreement.” In return for cash and a Facebook shares, the Winklevosses gave up ConnectU. The parties stipulated that the Settlement Agreement was “confidential,” “binding” and “may be submitted into evidence to enforce [it].” Slip Op. at 4902.

But, before the ink was dry, the parties were at arms. Facebook sought to enforce the settlement term sheet. The Winklevosses claimed material terms were omitted from the term sheet and that they had been defrauded (in violation of Section 10(b)-5) in the mediation, in particular focusing on a difference in their understanding of the value of the shares of Facebook that they had agreed to accept. The Court found the terms sufficiently definite, including the delegation of the drafting of the deal papers to Facebook. It further held that the dispute over the valuation of the shares was not particularly persuasive given the extensive prior discovery in the litigation and the presence of six lawyers and Winkelvoss pere who was a former accounting professor at the Wharton school. The release language agreed to in the term sheet was to be the broadest possible and to terminate all claims between the parties. The Court read this to include any claims, including unknown claims, arising out of the mediation itself: “An agreement meant to end a dispute between sophisticated parties cannot reasonably be interpreted as leaving open the door to litigation about the settlement negotiation process.” Id. at 4908.

Moreover, properly excluded proffered testimony about representations made during the mediation in light of the confidentiality agreement between the parties. Finally,the Court noted that the current valuation of Facebook appears to be three times what the Winklevosses were claiming they were entitled to, demonstrating that their advisors had made a perfectly good deal for them and all good fights must come to an end. Id. at 4912. The current value of the settlement appears to be $160 million, and was a mere $65 million at the time of the settlement. http://latimesblogs.latimes.com/technology/2011/04/winklevoss-twins-file-a-petition-for-another-hearing-in-their-fight-with-facebook.html. The twins have already petitioned for rehearing en banc. Id.

Most of us wish we could have the Winklevoss problem. But we may look beyond the story to the questions it raises. How could parties, and more importantly the advocates, come to such a significant mediation without having actually drafted key language? Without having key terms at hand? Why was a handwritten document required? The answer may be that despite the fact that that over 98% of cases settle, lawyers still prepare for settlement discussions and mediation far less carefully and assiduously than they do for trial. We have a system of checklists and protocols for trial preparation and no comparable system of preparation for settlement and mediation. Dealmakers do usually have a list of key terms but often resort to references to the “usual language” which does not really exist in most cases and leads to confusion or recrimination. Do yourselves and your clients a favor and suggest to the mediator that release language and key non-monetary terms be exchanged even in advance of the mediation, or certainly that the parties bring draft clauses to discuss at the mediation itself. If you have “standard” release language and a preferred confidentiality clause, bring them along. In fact, create a checklist of items and provisions that will have to be covered and your preferred terms for each of them. These terms may be agreeable to your opposing counsel and may even form the basis for small agreements that can lead to better resolutions. In any case, don’t let key assumptions go unstated and undocumented. Let the movies speak to you