Judges Not Likely to Undo Facebook-ConnectU Settlement

SAN FRANCISCO — The Winklevoss twins went to the Ninth Circuit U.S. Court of Appeals today hoping to undo a settlement that makes them far richer than it did when they struck the deal with Facebook in 2008.

So perhaps it wouldn't be too big a blow if the appeals panel were to reject their claims — as it appeared inclined to do — and uphold an agreement that gives the twins and their business partner in ConnectU $20 million in cash and 1.25 million shares of private Facebook stock once valued at $45 million. The Winklevosses, Cameron and Tyler, took front-row seats at the latest showdown in their years-long legal battle, which has played out on both coasts and even made its way into a feature film. The heart of their suit — that Facebook founder Mark Zuckerberg stole their idea after hiring him to work on their social networking site — is what they want the chance to pursue anew.

"They want something kind of basic — good old American justice," their attorney, Howard Rice Nemerovski Canady Falk & Rabkin partner Jerome Falk Jr. , said in an interview after the hourlong arguments.

He acknowledged that if the panel sides with Facebook, his clients still "have something." The stock, by his calculation, is now worth nearly $150 million.

"To give that up in return for the lawsuit is showing a lot of faith in the lawsuit," Falk said.

The $150 million valuation is based on a recent deal Facebook reached with Goldman Sachs and a Russian investor that makes the privately held company worth an estimated $50 billion, as opposed to the $15 billion it was valued at in 2008 when the parties were in mediation.

The Winklevosses and fellow ConnectU founder, Divya Narendra, claim Facebook committed securities fraud by not disclosing an internal valuation of the shares, and argue the term sheet didn't amount to a binding contract. But a trial judge disagreed.

Today's panel was likewise skeptical, with the judges indicating they were concerned about letting Falk's clients use information gleaned from the mediation session.

Early in Falk's arguments, Judge Barry Silverman peppered him with questions about how two different stock valuations came to light. Based on the numbers in the term sheet, the twins understood the shares to be valued at $35.90 per share but — and mediation secrecy makes all of this murky — the ConnectU founders somehow learned of an internal $8.88 per-share estimate. Silverman wanted to know why lawyers didn't address the issue during mediation. Then Chief Judge Alex Kozinski piled on, noting that statements in mediation are confidential and inadmissible during later legal proceedings.

Senior Judge J. Clifford Wallace also questioned how sophisticated clients — with a father who is business expert — and their many lawyers could have been duped, as they claim.

"Isn't it a little difficult to say ... that they were taken advantage of?" Wallace asked.

Falk agreed that his clients "were not behind the barn door when brains were passed out."

But, he said, "The same is true with Facebook."

For Facebook, Orrick, Herrington & Sutcliffe partner E. Joshua Rosenkranz argued that no one was misled. Facebook can't be expected to "know what was on their minds and spoonfeed" them information.

If the twins think they were owed that, Rosenkranz said, then "they are not victims of fraud — they are outright imbeciles."

Later, during Falk's rebuttal, he and Kozinski went back and forth over whether the handwritten termsheet constituted a binding contract, with Kozinski saying it looks like it included the number of shares, the amount of cash — "everything you would want in a contract."

The case is Facebook v. ConnectU , 08-16745.

(Published by The Recorder - January 12, 2011)