The Social Network, Part 2: Mark Zuckerberg Wins Again

Gareth S. Lacy

Yesterday the Ninth Circuit refused to rescind a $65 million settlement agreement between Facebook founder Mark Zuckerberg and Harvard graduates Cameron and Tyler Winklevoss. The Winklevosses argued they should be released from their 2008 agreement with Zuckerberg because Facebook allegedly misrepresented its market value during settlement negotiations. But the Ninth Circuit upheld the settlement because the Winklevosses, “with the help of a team of lawyers and a financial advisor,” had “settled . . . and signed a release of all claims against Facebook.”

The conflict began in 2004 when the Winklevosses sued Mark Zuckerberg for allegedly stealing their idea to build an exclusive social network at Harvard, events dramatized in the 2010 Academy Award-winning film, The Social Network. Facebook countersued. The parties reached a $65 million settlement agreement in February 2008. But the Winklevosses soon attacked the settlement on the grounds the Facebook allegedly overstated the company’s value during negotiations. They claimed Facebook violated SEC Rule 10-b, which prohibits fraud in connection with the purchase or sale of securities.

After the district court refused to modify the $65 million settlement, the Winkelvosses appealed to the Ninth Circuit. In a terse opinion written by Chief Justice Alex Kozinski, the court refused to rescind the settlement:

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. A party seeking to rescind a settlement agreement by claiming a Rule 10b–5 violation under these circumstances faces a steep uphill battle.

Had the Winklevosses prevailed, the settlement agreement value might have quadrupled to more than $466 million.

Law, Technology & Arts Blog has provided a copy of the Ninth Circuit’s decision here. Copies of the Winkelvoss’s appellate brief, the response from Facebook, the Winkelvoss’s reply and a transcript of the oral argument are also available.

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