We've all seen the movie. Mark Zuckerberg versus the Winklevoss twins. Uber-nerd versus uber-jocks. Outsider versus the privileged and connected. In the balance rests the right to violate the privacy of virtually everybody in the "civilized" world.
The movie shows some of the discovery proceedings in the lawsuit filed by the Winklevosses in Massachusetts alleging that Zuckerberg stole the Facebook idea. Zuckerberg filed a countersuit in California (typical Facebook ploy, see here) against the twins and ConnectU, alleging that ConnectU had hacked into Facebook and stolen information and attempted to steal Facebook users by spamming them. The California dismissed the action against the Winkelvosses, finding that there was no personal jurisdiction over them. The Court then ordered the parties to mediate to attempt to find a settlement to all their issues.
Then things start to get stranger. With billions of dollars at stake, the parties mediate for one day, reach a settlement and document it with a one and a third pages of hand written notes with the title: "Term Sheet and Settlement Agreement". This Agreement envisions the transfer of ConnectU to Facebook in exchange for cash and an interest in Facebook. Facebook lawyers then present 130 pages of documents to flesh out the Agreement (merely 100 times the volume of the Agreement). The deal then comes off the tracks for a number of reasons including the Winklevosses asserting that the value of the Facebook stock is less that they were lead to believe. Facebook files a motion to enforce the Agreement. The twins alleged that the Agreement is not enforceable because it lacks material terms and was procured by fraud. The Court finds the Agreement enforceable and the Winklevosses appeal.
Then Ninth Circuit, in a decision released yesterday, upheld the enforcement of the Settlement Agreement. The Winklevosses had alleged that the Agreement violated Rule 10b-5 of the Securities Act and as such was void. The Ninth Circuit rejected this argument and found: "The Winklevosses are sophisticated parties who were locked in a contentious struggle over ownership rights in one of the world's fastest-growing companies. They engaged in discovery, which gave them access to a good deal of information about their opponents. They brought half-a-dozen lawyers to the mediation. Howard Winklevoss—father of Cameron and Tyler, former accounting professor at Wharton School of Business and an expert in valuation—also participated."
The Court also held: "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. And the courts might have obliged, had the Winklevosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity. See Geoffrey A. Fowler & Liz Rappaport, Facebook Deal Raises $1 Billion, Wall St. J., Jan. 22, 2011, at B4 (reporting that investors valued Facebook at $50 billion —3.33 times the value the Winklevosses claim they thought Facebook's shares were worth at the mediation). 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." (Emphasis added)
So, the poor Winklevoss twins are stuck with a deal that is only worth millions and not billions. In the lessons learned department, we are struck by the fact that you probably couldn't turn around in the mediation room without tripping on a lawyer or a financial advisor and yet, they ended up with slightly over a page long, hand written document. That either means you don't need lawyers at all or you really need them to do their job.
Maybe we'll find the answer in the next sequel, "Social Network III, The Legal Grievance Phase".