Law School Case Brief
Facebook, Inc. v. Pac. Nw. Software, Inc. - 640 F.3d 1034 (9th Cir. 2011)
For purposes of rescission of a settlement agreement under 15 U.S.C.S. § 78cc(b), a distinction is made between buyers of securities in the context of an exclusively business relationship and those acting in the adversarial setting that is characteristic of litigation. When adversaries in a roughly equivalent bargaining position and with ready access to counsel sign an agreement to establish a general peace, a court enforces the clear terms of the agreement. Parties involved in litigation know that they are locked in combat with an adversary and thus have every reason to be skeptical of each other's claims and representations. Parties signing a release of claims have a "duty of inquiry." They can use discovery to ferret out a great deal of information before even commencing settlement negotiations. They can further protect themselves by requiring that the adverse party supply the needed information, or provide specific representations and warranties as a condition of signing the settlement agreement. Such parties stand on a very different footing from those who enter into an investment relationship in the open market, where it is reasonable to presume candor and fair dealing, and access to inside information is often limited.
Cameron Winklevoss, Tyler Winklevoss and Divya Narendra (the Winklevosses) claim that Mark Zuckerberg stole the idea for Facebook from them. They sued Facebook and Zuckerberg (Facebook) in Massachusetts. Facebook countersued them and their competing social networking site, ConnectU, in California, alleging that the Winklevosses and ConnectU hacked into Facebook to purloin user data, and tried to steal users by spamming them. The district court eventually dismissed the Winklevosses from that case for lack of personal jurisdiction. It then ordered the parties to mediate their dispute. The mediation session included ConnectU, Facebook and the Winklevosses so that the parties could reach a global settlement. Before mediation began, the participants signed a Confidentiality Agreement stipulating that all statements made during mediation were privileged, non-discoverable and inadmissible "in any arbitral, judicial, or other proceeding." After a day of negotiations, ConnectU, Facebook and the Winklevosses signed a handwritten, one-and-a-third page "Term Sheet & Settlement Agreement" (the Settlement Agreement). The Winklevosses agreed to give up ConnectU in exchange for cash and a piece of Facebook. The parties stipulated that the Settlement Agreement was "confidential," "binding" and "may be submitted into evidence to enforce it." The Settlement Agreement also purported to end all disputes between the parties. The settlement fell apart during negotiations over the form of the final deal documents, and Facebook filed a motion with the district court seeking to enforce it. ConnectU argued that the Settlement Agreement was unenforceable because it lacked material terms and had been procured by fraud. The district court found the Settlement Agreement enforceable and ordered the Winklevosses to transfer all ConnectU shares to Facebook. This had the effect of moving ConnectU from the Winklevosses' to Facebook's side of the case. The Winklevosses appealed.
Did the district court err in finding the Settlement Agreement between Facebook and the opposing parties enforceable?
The Court of Appeals for the Ninth Circuit found that Winklevosses, who had been dismissed for lack of personal jurisdiction, were implicitly granted intervention by the district court and had standing to appeal. The terms of the settlement agreement were sufficiently definite and left no doubt that the agreement was intended to be binding, even if some material aspects of the deal were to be filled in later. Winklevosses also argued that they were misled as to the value of the networking site's shares, in violation of 17 C.F.R. § 240.10b-5, and therefore were entitled to rescind the agreement under 15 U.S.C.S. § 78cc(b). However, Winklevosses were sophisticated parties who were engaged in litigation, not buyers of securities on the open market. A release contained in the agreement was valid under § 78cc(a) and applied to the securities claim; also, a confidentiality agreement precluded use of statements made during the mediation to support the securities claim.
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