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Facebook v/s ConnectU Mediation Case study

 

The twin brothers- Tyler and Cameron Winklevoss claimed that Mark Zuckerberg stole the idea for Facebook from them and had brought Facebook against the Winklevoss’s company- ConnectU. The twin brothers initiated a law suit against Mr. Zuckerberg inorder to negotiate a settlement, accusing it of unfair business practices.

The district court in California ordered the parties to mediate.

Before the mediation began, both the parties signed a confidentiality agreement that stated that all statements made during mediation will not be made public and were inadmissible in any arbitral, judicial, or other proceeding. After all the arguments and discussions, a settlement agreement was signed that between both the parties and Winklevosses gave up ConnectU in return for cash and Facebook shares. The Settlement Agreement purported to end all disputes between the parties.

Just after signing the agreement, Winklevosses affirmed that there was a difference in their understanding of the value of the shares of Facebook that they had agreed to accept and that they had been defrauded (in violation of Section 10(b)-5) in 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. Had they known about this valuation during the mediation, they claim, they would never have signed the Settlement Agreement.

Section 10(b)-5 is a regulation that deems it to be illegal for anybody to directly or indirectly use any measure to defraud, make false statements, omit relevant information or otherwise conduct operations of business that would deceive another person; in relation to conducting transactions involving stock and other securities. A party negotiating an exchange of shares to settle a lawsuit could violate Rule 10b-5 by misstating or hiding information that would materially change the other side’s evaluation of the settlement.

In support of these claims, the Winklevosses proffered evidence of what was said and not said during the mediation. However the statements were held inadmissible based on the confidentiality agreement signed by the parties that stated that “All statements made during the course of the mediation or in mediator follow-up thereafter at any time prior to complete settlement of the matter are privileged settlement discussions and are non-discoverable and inadmissible for any purpose including in any legal proceeding. Without such evidence, their securities claims must fail.

Further, the Winklevoss twins sought to invalidate the settlement agreement under Section 29(b) of the Securities Exchange Act of 1934 that voids any settlement agreement made in violation of Rule 10b-5. Winklevosses hired a team of lawyers and a financial advisor. 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 the value of settlement to be $160 million, that was mere $65 million at the time of the settlement.

However, a number of lessons can be learnt from this mediation case study. Whatever happens in mediation stays in mediation. Parties need to be sure that all essential information is included in the settlement agreement. The settlement agreement should be clearly-written. Since no statements made during mediation will be admissible and settlement agreement is the only admissible and enforceable document of mediation.

7 Simple Ways You Can Protect Your Idea From Theft

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