<i>En Banc</i> Rehearing Demanded on Facebook-ConnectU Settlement

[Editor's Note: When the Ninth Circuit denied Cameron and Tyler Winklevoss and Divya Narendra's request to have their settlement with Facebook overturned last month, it made headlines, most likely due to the depiction of the legal battle in the Academy Award-nominated film, The Social Network. But despite being told by the court to be happy with the "quite favorable" settlement amount, the attorney leading the fight isn't ready to give up, and in an interview with our ALM affiliate, The Recorder, reveals why.]

Jerome Falk Jr. knew it would be tough to get a court to undo his famous clients' settlement with Facebook. But the Howard Rice Nemerovski Canady Falk & Rabkin appellate specialist still boasted confidence ' albeit measured ' about his arguments in the case.

“I think it's always an uphill battle for a party trying to get out of a settlement,” Falk said in an interview as his team was gearing up for oral arguments in Facebook v. ConnectU. “That said, I've won these cases before.”

Of course, that was before he faced tough questions at oral arguments. And it was before a panel of the Ninth U.S. Circuit Court of Appeals flatly rejecting his clients' claims last month.

But Falk isn't ready to call it a day.

On April 21, the Howard Rice team filed a petition for rehearing en banc on behalf of ConnectU founders Cameron and Tyler Winklevoss and Divya Narendra, who claimed Facebook's Mark Zuckerberg stole their idea for the site then procured a settlement in the case by fraud. (See the petition at http://bit.ly/fmCV5M.)

Never mind that the unanimous panel sent strong signals it thought the court fight should end.

“The panel's opinion is so profoundly at odds with federal and state precedent, with dreadful ramifications, that rehearing en banc is required,” the petition says.

Falk's petition argues that the panel incorrectly applied a routine mediation confidentiality provision to bar evidence of fraud. Other courts have long held that settlement agreements procured by fraud may be rescinded, the petition says.

The panel's opinion, applying federal common law, “abruptly rejected that rule (seemingly without acknowledging its existence),” the petition argues. The opinion conflicts with numerous federal court decisions that construe a part of the Securities Exchange Act to prohibit agreements that “even indirectly impair enforcement of the securities laws,” Falk wrote.

ConnectU founders claim Facebook, during mediation, led them to believe the company stock they would acquire was worth about $35.90 per share, and that they only learned later that Facebook had obtained an expert valuation of $8.88 per share.

In rejecting the fraud claims, the panel noted that the ConnectU founders entered mediation with a bevy of lawyers and a financial adviser at their sides. They made a deal that “appears quite favorable in light of recent market activity,” Chief Judge Alex Kozinski wrote, pointing out that investors recently have valued Facebook at $50 billion ' more than three times the value at the time the deal was struck.

“For whatever reason, they now want to back out,” Kozinski wrote. “Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached.”

Falk countered that the court was wrong to consider the value of the deal.

“This appeal is not about whether our clients would be better off keeping the settlement proceeds (which admittedly are substantial) rather than proceeding with their lawsuit against Facebook.” Falk said in a prepared statement. “That is up to them to decide; it is not a question for the courts.”

“The opinion's implication,” the petition says, “that appellants should take the now-more-valuable stock and stop complaining about Facebook's blatant violation of [the Securities and Exchange Act] inappropriately minimizes federal securities laws that command honest dealing and full disclosure in the sale or exchange of securities.”

[Editor's Note: When the Ninth Circuit denied Cameron and Tyler Winklevoss and Divya Narendra's request to have their settlement with Facebook overturned last month, it made headlines, most likely due to the depiction of the legal battle in the Academy Award-nominated film, The Social Network. But despite being told by the court to be happy with the "quite favorable" settlement amount, the attorney leading the fight isn't ready to give up, and in an interview with our ALM affiliate, The Recorder, reveals why.]

Jerome Falk Jr. knew it would be tough to get a court to undo his famous clients' settlement with Facebook. But the Howard Rice Nemerovski Canady Falk & Rabkin appellate specialist still boasted confidence ' albeit measured ' about his arguments in the case.

“I think it's always an uphill battle for a party trying to get out of a settlement,” Falk said in an interview as his team was gearing up for oral arguments in Facebook v. ConnectU. “That said, I've won these cases before.”

Of course, that was before he faced tough questions at oral arguments. And it was before a panel of the Ninth U.S. Circuit Court of Appeals flatly rejecting his clients' claims last month.

But Falk isn't ready to call it a day.

On April 21, the Howard Rice team filed a petition for rehearing en banc on behalf of ConnectU founders Cameron and Tyler Winklevoss and Divya Narendra, who claimed Facebook's Mark Zuckerberg stole their idea for the site then procured a settlement in the case by fraud. (See the petition at http://bit.ly/fmCV5M.)

Never mind that the unanimous panel sent strong signals it thought the court fight should end.

“The panel's opinion is so profoundly at odds with federal and state precedent, with dreadful ramifications, that rehearing en banc is required,” the petition says.

Falk's petition argues that the panel incorrectly applied a routine mediation confidentiality provision to bar evidence of fraud. Other courts have long held that settlement agreements procured by fraud may be rescinded, the petition says.

The panel's opinion, applying federal common law, “abruptly rejected that rule (seemingly without acknowledging its existence),” the petition argues. The opinion conflicts with numerous federal court decisions that construe a part of the Securities Exchange Act to prohibit agreements that “even indirectly impair enforcement of the securities laws,” Falk wrote.

ConnectU founders claim Facebook, during mediation, led them to believe the company stock they would acquire was worth about $35.90 per share, and that they only learned later that Facebook had obtained an expert valuation of $8.88 per share.

In rejecting the fraud claims, the panel noted that the ConnectU founders entered mediation with a bevy of lawyers and a financial adviser at their sides. They made a deal that “appears quite favorable in light of recent market activity,” Chief Judge Alex Kozinski wrote, pointing out that investors recently have valued Facebook at $50 billion ' more than three times the value at the time the deal was struck.

“For whatever reason, they now want to back out,” Kozinski wrote. “Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached.”

Falk countered that the court was wrong to consider the value of the deal.

“This appeal is not about whether our clients would be better off keeping the settlement proceeds (which admittedly are substantial) rather than proceeding with their lawsuit against Facebook.” Falk said in a prepared statement. “That is up to them to decide; it is not a question for the courts.”

“The opinion's implication,” the petition says, “that appellants should take the now-more-valuable stock and stop complaining about Facebook's blatant violation of [the Securities and Exchange Act] inappropriately minimizes federal securities laws that command honest dealing and full disclosure in the sale or exchange of securities.”