Software Developer's Suit Against ConnectU May Go Forward

A Massachusetts state court judge has ruled that a Boston software developer's case against defunct social media site ConnectU Inc. and its founders and key shareholders, including the Winklevoss twins, can move forward.

Software developer Wayne Chang and his former company, the i2hub Organization Inc., sued ConnectU, its principals and its law firm in December 2009, for actions that allegedly deprived him of a cut of Facebook's $65 million settlement with ConnectU's founders.

The order in Chang v. Winklevoss was dated April 28 and filed in Suffolk County Superior Court in Massachusetts on May 3. In the order, Justice Peter Lauriat of the court's business session ruled that some claims may proceed against ConnectU, its co-founders Cameron and Tyler Winklevoss, and its directors and shareholders, Howard Winklevoss and Divya Narendra.

Lauriat dismissed claims against ConnectU's law firm, Washington, DC-based Finnegan, Henderson, Farabow, Garrett & Dunner, and also against Scott Mosko, a Palo Alto, CA, partner at the firm.

Ownership Remains an Issue

Lauriat rejected the defendants' argument that the court lacks jurisdiction because the settlement with Facebook hasn't been distributed, and therefore Chang hasn't suffered an injury.

“The flaw in this argument is that defendants appear to conflate loss of the settlement proceed[s] with loss of rights,” Lauriat said. “Chang alleges that he has received nothing in return for the substantial benefits he provided to ConnectU, including the value of his work, as well as i2hub's users and goodwill.”

Lauriat also noted that, although Chang's claims to the settlement are “too speculative to confer standing, his claims with respect to an ownership in ConnectU are not.”

“They constitute an injury separate and distinct from his possible share of the settlement proceeds,” Lauriat wrote. “The court concludes that Chang has pled sufficient facts to confer standing with respect to his claims against the Winklevoss defendants.”

The surviving claims against the Winklevoss defendants include breach of contract, breach of the covenant of good faith and fair dealing, breach of partnership and breach of fiduciary duty. Lauriat also ruled that dismissal of accounting and constructive trust claims “would be premature,” because there's been no determination yet about whether the defendants breached their fiduciary duties.

Lauriat dismissed unjust enrichment and quantum meruit claims because “Chang has asserted both tort and breach of contract claims, which if the Winklevoss defendants are held liable, will adequately compensate him for any losses.” He dismissed Chang's conversion claim because it's based on the contention that the Winklevoss defendants converted his share of the settlement money.

“It fails for the reason, if no other, that he has set forth no facts from which the court can infer that he has a right to immediate possession of the money,” Lauriat wrote.

The claims dismissed against Finnegan Henderson and Mosko were professional negligence, civil conspiracy, aiding and abetting and interference with advantageous business relationships. According to court papers, Chang alleged that the firm and Mosko did not enable him to participate in the settlement proceedings, which deprived him of the proceeds and breached their duties to him.

Lauriat wrote that although lost settlement opportunities may be enough to support a claim of legal malpractice, “on the facts of this case, any injury as a result of missed settlement opportunities is far too speculative, and any causal connection to the defendants' conduct far too attenuated, to confer standing.”

Lauriat concluded that “as to Chang's claim that he could have asserted claims against the Winklevoss defendants at the time of the settlement, nothing in the complaint supports an interference that the delay caused him an injury.”

Case Commentary

Alan Rose Jr., a partner at Boston-based Rose, Chinitz & Rose who represented Chang, says the lawyers at his firm “view the ruling as a significant victory for our clients.”

“The case will now move forward with the value of the claims completely intact,” Rose says. “That's what we care most about and what we're prepared to go forward on.”

Sean O'Shea, a partner at New York-based O'Shea Partners who represents all three Winklevosses and Narendra, says that the only thing the order does is say that Chang deserves discovery on his claims.

Although it's not surprising that a judge would rule that a party like Chang who only has an oral contract is entitled to some discovery, O'Shea says his clients are “confident his claims remain baseless.”

“In no way does the decision vindicate Chang's claims, which are self-contradictory,” O'Shea says. “We expect that we'll prevail in this case.”

Looney & Grossman of Boston served as local counsel for the Winklevoss defendants and Narendra on the case.

Tom Mason of Washington, DC-based Zuckerman Spaeder, who represented Finnegan Henderson and Mosko, says that Lauriat looked at this matter very carefully and issued a thoughtful decision. “The result is entirely consistent with the applicable law, and we're very pleased on behalf of our clients.”

Boston's Conn Kavanaugh Rosenthal Peisch & Ford also represented Finnegan Henderson and Mosko.

Share of Settlement

Chang's complaint claims his memorandum of understanding with ConnectU entitles him to a 15% share of ConnectU for integrating i2hub's peer-to-peer file-sharing software and ConnectU's website. Chang also claims he and the Winklevosses formed the Winklevoss Chang Group partnership to jointly operate ConnectU, i2hub and other Internet projects. He claims to have a 50% interest in the partnership, which entitles him to half of the proceeds of ConnectU's sale. As for the settlement, Chang claims the partnership agreement means he should get half, or, alternatively, a 15% cut based on the memorandum of understanding.

ConnectU and its founders originally sued Facebook founder Mark Zuckerberg in the District of Massachusetts in 2004 claiming that Zuckerberg stole the idea for Facebook when they were all students at Harvard University. Facebook struck back in 2005 with a California state court lawsuit against ConnectU, the Winklevosses, Chang and others, which was later removed to the Northern District of California. In 2008, the parties agreed to a settlement whereby the Winklevosses agreed to give up ConnectU in exchange for cash and shares of Facebook.

Facebook Case to Supreme Court

The Winklevosses' subsequent bid to undo the Facebook settlement culminated in a ruling by a panel of the U.S. Court of Appeals for the Ninth Circuit in April rejecting that effort. (See, “En Banc Rehearing Demanded on Facebook-ConnectU Settlement,” in the May 2011 issue of Internet Law & Strategy, www.ljnonline.com/issues/ljn_internetlaw/9_5/news/155225-1.html.) On May 16, the Ninth Circuit declined to assign the case for consideration by an 11-judge panel.

The following day, the San Francisco-based firm Howard Rice, which represents the Winklevosses and Narendra in the Facebook case, issued a press release stating that the case will be appealed to the U.S. Supreme Court. In the release, lead appellate attorney, Jerome B. Falk, Jr., says that there is a dispute between the federal courts that warrants a ruling by the High Court:

The Ninth Circuit's opinion creates a conflict between Ninth Circuit precedent and the decisions of other federal courts on two issues.
The first is the [c]ourt's holding that a party who is defrauded into entering into a settlement agreement cannot challenge the contract on the ground of fraud. Federal and state courts have long held that a settlement founded on fraud must be set aside. The [c]ourt's decision conflicts with that body of precedent.
The second issue is the [c]ourt's holding that a routine agreement to hold statements made in a mediation confidential bars proof that Facebook committed securities fraud in the mediation. Numerous federal precedents, and the text of the 1934 Securities Exchange Act, hold that an agreement to directly or indirectly waive rights under federal antifraud provisions of the securities laws is void. The Panel's decision conflicts with that body of precedent.

Falk concludes: “The [Ninth Circuit's] decision shut the courthouse door to a solid claim that Facebook obtained this settlement by committing securities fraud. Our Petition to the Supreme Court will ask the [H]igh [C]ourt to decide whether that door should be reopened.”

Legal commentators, however, don't see much hope in the Court granting the petition. According to Tom Goldstein, of SCOTUSBlog (www.scotusblog.com), the chances of the Supreme Court hearing the appeal are “zero” because the dispute is primarily about facts rather than broad legal issues.

“I would be astounded if the Supreme Court grants cert,” says Chicago-Kent College Professor, and member of this newsletter's Board of Editors, Henry H. Perritt, Jr. “The Court of Appeals decision is well-reasoned, based on mainstream principles of law.”

The Winklevosses have also come under fire for wanting to reopen a considerable settlement. Perritt, however, thinks it's simply a matter of trying to get a better deal: “As to motivation, I think the Court of Appeals got it right: The Winklevosses made a deal and they now regret it, because they think they could get more if they made a deal now. The deal they made wasn't a bad one, but they would like more.”

A Massachusetts state court judge has ruled that a Boston software developer's case against defunct social media site ConnectU Inc. and its founders and key shareholders, including the Winklevoss twins, can move forward.

Software developer Wayne Chang and his former company, the i2hub Organization Inc., sued ConnectU, its principals and its law firm in December 2009, for actions that allegedly deprived him of a cut of Facebook's $65 million settlement with ConnectU's founders.

The order in Chang v. Winklevoss was dated April 28 and filed in Suffolk County Superior Court in Massachusetts on May 3. In the order, Justice Peter Lauriat of the court's business session ruled that some claims may proceed against ConnectU, its co-founders Cameron and Tyler Winklevoss, and its directors and shareholders, Howard Winklevoss and Divya Narendra.

Lauriat dismissed claims against ConnectU's law firm, Washington, DC-based Finnegan, Henderson, Farabow, Garrett & Dunner, and also against Scott Mosko, a Palo Alto, CA, partner at the firm.

Ownership Remains an Issue

Lauriat rejected the defendants' argument that the court lacks jurisdiction because the settlement with Facebook hasn't been distributed, and therefore Chang hasn't suffered an injury.

“The flaw in this argument is that defendants appear to conflate loss of the settlement proceed[s] with loss of rights,” Lauriat said. “Chang alleges that he has received nothing in return for the substantial benefits he provided to ConnectU, including the value of his work, as well as i2hub's users and goodwill.”

Lauriat also noted that, although Chang's claims to the settlement are “too speculative to confer standing, his claims with respect to an ownership in ConnectU are not.”

“They constitute an injury separate and distinct from his possible share of the settlement proceeds,” Lauriat wrote. “The court concludes that Chang has pled sufficient facts to confer standing with respect to his claims against the Winklevoss defendants.”

The surviving claims against the Winklevoss defendants include breach of contract, breach of the covenant of good faith and fair dealing, breach of partnership and breach of fiduciary duty. Lauriat also ruled that dismissal of accounting and constructive trust claims “would be premature,” because there's been no determination yet about whether the defendants breached their fiduciary duties.

Lauriat dismissed unjust enrichment and quantum meruit claims because “Chang has asserted both tort and breach of contract claims, which if the Winklevoss defendants are held liable, will adequately compensate him for any losses.” He dismissed Chang's conversion claim because it's based on the contention that the Winklevoss defendants converted his share of the settlement money.

“It fails for the reason, if no other, that he has set forth no facts from which the court can infer that he has a right to immediate possession of the money,” Lauriat wrote.

The claims dismissed against Finnegan Henderson and Mosko were professional negligence, civil conspiracy, aiding and abetting and interference with advantageous business relationships. According to court papers, Chang alleged that the firm and Mosko did not enable him to participate in the settlement proceedings, which deprived him of the proceeds and breached their duties to him.

Lauriat wrote that although lost settlement opportunities may be enough to support a claim of legal malpractice, “on the facts of this case, any injury as a result of missed settlement opportunities is far too speculative, and any causal connection to the defendants' conduct far too attenuated, to confer standing.”

Lauriat concluded that “as to Chang's claim that he could have asserted claims against the Winklevoss defendants at the time of the settlement, nothing in the complaint supports an interference that the delay caused him an injury.”

Case Commentary

Alan Rose Jr., a partner at Boston-based Rose, Chinitz & Rose who represented Chang, says the lawyers at his firm “view the ruling as a significant victory for our clients.”

“The case will now move forward with the value of the claims completely intact,” Rose says. “That's what we care most about and what we're prepared to go forward on.”

Sean O'Shea, a partner at New York-based O'Shea Partners who represents all three Winklevosses and Narendra, says that the only thing the order does is say that Chang deserves discovery on his claims.

Although it's not surprising that a judge would rule that a party like Chang who only has an oral contract is entitled to some discovery, O'Shea says his clients are “confident his claims remain baseless.”

“In no way does the decision vindicate Chang's claims, which are self-contradictory,” O'Shea says. “We expect that we'll prevail in this case.”

Looney & Grossman of Boston served as local counsel for the Winklevoss defendants and Narendra on the case.

Tom Mason of Washington, DC-based Zuckerman Spaeder, who represented Finnegan Henderson and Mosko, says that Lauriat looked at this matter very carefully and issued a thoughtful decision. “The result is entirely consistent with the applicable law, and we're very pleased on behalf of our clients.”

Boston's Conn Kavanaugh Rosenthal Peisch & Ford also represented Finnegan Henderson and Mosko.

Share of Settlement

Chang's complaint claims his memorandum of understanding with ConnectU entitles him to a 15% share of ConnectU for integrating i2hub's peer-to-peer file-sharing software and ConnectU's website. Chang also claims he and the Winklevosses formed the Winklevoss Chang Group partnership to jointly operate ConnectU, i2hub and other Internet projects. He claims to have a 50% interest in the partnership, which entitles him to half of the proceeds of ConnectU's sale. As for the settlement, Chang claims the partnership agreement means he should get half, or, alternatively, a 15% cut based on the memorandum of understanding.

ConnectU and its founders originally sued Facebook founder Mark Zuckerberg in the District of Massachusetts in 2004 claiming that Zuckerberg stole the idea for Facebook when they were all students at Harvard University. Facebook struck back in 2005 with a California state court lawsuit against ConnectU, the Winklevosses, Chang and others, which was later removed to the Northern District of California. In 2008, the parties agreed to a settlement whereby the Winklevosses agreed to give up ConnectU in exchange for cash and shares of Facebook.

Facebook Case to Supreme Court

The Winklevosses' subsequent bid to undo the Facebook settlement culminated in a ruling by a panel of the U.S. Court of Appeals for the Ninth Circuit in April rejecting that effort. (See, “En Banc Rehearing Demanded on Facebook-ConnectU Settlement,” in the May 2011 issue of Internet Law & Strategy, www.ljnonline.com/issues/ljn_internetlaw/9_5/news/155225-1.html.) On May 16, the Ninth Circuit declined to assign the case for consideration by an 11-judge panel.

The following day, the San Francisco-based firm Howard Rice, which represents the Winklevosses and Narendra in the Facebook case, issued a press release stating that the case will be appealed to the U.S. Supreme Court. In the release, lead appellate attorney, Jerome B. Falk, Jr., says that there is a dispute between the federal courts that warrants a ruling by the High Court:

The Ninth Circuit's opinion creates a conflict between Ninth Circuit precedent and the decisions of other federal courts on two issues.
The first is the [c]ourt's holding that a party who is defrauded into entering into a settlement agreement cannot challenge the contract on the ground of fraud. Federal and state courts have long held that a settlement founded on fraud must be set aside. The [c]ourt's decision conflicts with that body of precedent.
The second issue is the [c]ourt's holding that a routine agreement to hold statements made in a mediation confidential bars proof that Facebook committed securities fraud in the mediation. Numerous federal precedents, and the text of the 1934 Securities Exchange Act, hold that an agreement to directly or indirectly waive rights under federal antifraud provisions of the securities laws is void. The Panel's decision conflicts with that body of precedent.

Falk concludes: “The [Ninth Circuit's] decision shut the courthouse door to a solid claim that Facebook obtained this settlement by committing securities fraud. Our Petition to the Supreme Court will ask the [H]igh [C]ourt to decide whether that door should be reopened.”

Legal commentators, however, don't see much hope in the Court granting the petition. According to Tom Goldstein, of SCOTUSBlog (www.scotusblog.com), the chances of the Supreme Court hearing the appeal are “zero” because the dispute is primarily about facts rather than broad legal issues.

“I would be astounded if the Supreme Court grants cert,” says Chicago-Kent College Professor, and member of this newsletter's Board of Editors, Henry H. Perritt, Jr. “The Court of Appeals decision is well-reasoned, based on mainstream principles of law.”

The Winklevosses have also come under fire for wanting to reopen a considerable settlement. Perritt, however, thinks it's simply a matter of trying to get a better deal: “As to motivation, I think the Court of Appeals got it right: The Winklevosses made a deal and they now regret it, because they think they could get more if they made a deal now. The deal they made wasn't a bad one, but they would like more.”