February 08, 2012

Mediation Lessons from the Facebook-Winklevoss Dispute

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Excerpted from my article published in Daily Journal, April 19, 2011

What lessons can we learn from the recent Ninth Circuit decision in Facebook v.ConnectU? In that case, the Winklevoss twins sought to invalidate the settlement agreement that put an end to the highly publicized dispute between Mark Zuckerberg and the Winklevoss brothers as depicted in the film, The Social Network.

There are two lessons to be learned from this decision.

Lesson Number 1: What happens in mediation stays in mediation.

The 9th Circuit confirmed the longstanding policy that mediation confidentiality prevails - even in the face of an allegation that fraud was committed during the mediation.

The twins claimed that Facebook led them to believe during the mediation discussions that Facebook’s share value was $35.90, even though Facebook’s internal tax valuation had determined its share value to be $8.88. They sought to introduce evidence of what was said or not said during the mediation in support of their securities fraud claims; however the 9th Circuit held the statements inadmissible based on the confidentiality agreement signed by the parties. Without evidence of the negotiations made during mediation, the Winklevosses would be unable to prove a securities fraud claim.

Since mediation discussions are inadmissible, parties need to be sure that all essential information is included in the document that is admissible – namely a settlement agreement that explicitly states that the agreement itself is binding, admissible and enforceable. This leads to the next lesson:

Lesson Number Two: Draft a clearly-written settlement agreement in mediation.

In Facebook, the parties spent a long, grueling day in mediation negotiating a settlement and at the end drafted a “handwritten, one-and-a-third page Term Sheet & Settlement Agreement.” That’s not a lot of detail for a settlement that likely has a value in the hundreds of millions of dollars.

The Winklevosses argued that the settlement agreement lacked material terms, including terms of a stock purchase agreement, a stockholders agreement and a confidential mutual release agreement, and that the absence of these “material” terms in the settlement agreement render it unenforceable.

The 9th Circuit disagreed, concluding that it was permissible for the parties to delegate to Facebook the task of drafting these additional agreements. Should problems arise in the drafting of such documents, the 9th Circuit gave the district court permission to “fill in missing terms by reference to the rest of the contract, extrinsic evidence and industry practice.”

Mediation Tips
·Bring to the mediation a draft settlement agreement containing many of the typical clauses, so you can spend time crafting the unique clauses with care.

·Think about potential settlement options prior to the mediation to allow sufficient time to evaluate drafting, valuation or tax issues.

In the Facebook case, there seems to have been a different understanding of the share value of Facebook stock. However, in light of mediation confidentiality, courts will not delve into the mediation discussions to resolve potential misunderstandings of the settlement.Therefore, stock valuation issues must be resolved in the settlement agreement itself, for example, by requiring the party with knowledge to supply the necessary information or to make a warranty of the stock value, or by including language providing for the transfer of sufficient shares to equal a specified amount and delegating the determination of share value to a mutually agreed-upon third party.

Since no statements made during mediation will be admissible except the settlement agreement itself, failing to write a clear agreement with the essential terms is a lose-lose situation for all parties. The court could decide that the agreement lacks material terms, and deem it unenforceable. Or the court could decide that the agreement is enforceable and, as in the Facebook case, simply “fill in” missing terms. Either way, the parties lose the ability to determine voluntarily the outcome of their dispute.

Eleanor Barr is a mediator with ADR Services Inc. and has been resolving complex employment, business and environmental matters for over a decade.

To learn more about her practice, visit www.eleanorbarr.com.

Filed Under: Mediation

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