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By Bill King

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No Cooling Off Period for Settlement Agreements

Just over a week ago, a federal appeals court told the Winklevoss twins to lie in the money-stuffed bed they made.  For those of you who have forgotten, the Winklevoss twins are the two spoiled Harvard rowers who claimed Mark Zuckerberg –of FaceBook fame– stole their social networking site idea.  The 2010 movie The Social Network portrayed this dispute and let us see Justin Timberlake sans Peyton Manning in something that lasted longer than 15 seconds.

Anyway, back in 2004, the twins sued Zuckerberg because he allegedly agreed to help them with their project and then designed and launched his own.  As is common with lawsuits, the parties agreed to mediate.  As is less common with lawsuits, the parties actually settled.  The twins agreed to give their company rights to ConnectU (their “FaceBook”) in exchange for $20 million and approximately a million FaceBook shares for a total value of approximately $65 million.

At some point, the twins decided that the settlement wasn’t good enough for them and accused Zuckerberg of misrepresenting the share values and that they are actually entitled to 4 million shares.

The problem?  Settlement agreements –which typically contain full releases of all claims– are not easy to undo…especially when the complaining party is sophisticated and has a team of lawyers at the time of settlement.  The U.S. 9th Circuit of appeals held that sentiment.  The first stop was the federal district court which ruled in 2008 that the settlement agreement holds up.

Obviously not what Team W was hoping to hear, they appealed the lower court ruling.  The appellate judges felt the appeal was a joke and made sure the duo knew it in their April 11, 2011 decision.

Chief Judge Alex Kozinksi authored the opinion which stated, “[t]he Winklevosses…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 [the twins father,  former accounting professor at Wharton School of Business, and valuation expert] also participated.”  The ruling further stated, “[a] party seeking to rescind a settlement agreement under these circumstances faces a steep uphill battle.”

In other words, they needed to show that Zuckerberg committed clear fraud.

“With the help of a team of lawyers and a financial advisory, they made a deal that appears quite favorable in light of recent market activity.”  It wasn’t lost on Kozinksi that the share values have continued to grow astronomically since the settlement.

“At some point, litigation must come to an end.  That point has now been reached.”

Personally, I haven’t been involved in too many appeals.  But, I don’t believe I’ve ever seen an opinion so directly suggest to a party, in writing, to stop the insanity and waste.   The court included commentary that the twins were simply bested in the marketplace and sunk the final dagger by reminding them that they released all of their claims when they signed the agreement.  In California, settlement and release agreements almost always include a “Civil Code section 1542 waiver.”  Civil Code 1542 provides:

A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.

But, when this is waived by the parties, any attempt to cry, “hey wait! I didn’t know x, y and z when I signed!” goes out the door.  Only in instances of clear concealment or misrepresentation would a party hope to undo what has been done.  Since they had access to all of FaceBook’s financials, and experts to review them, any fraud argument would likely fail.

"Thanks, Dad!" "I hope there aren't any sharks around." "Uh, Cameron, those are our lawyers."

In other words, the Winklevoss Twins’ boat was sunk.

This is an important lesson that should not be lost on any business, whether the claim is over $5,000 or $50 million.

As for the W Twins’ 2008 6th Place finish at the Beijing Olympics, no word yet on if they plan to appeal those results…

Bill

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