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Tyler and Cameron Winklevoss hired some of the best tech lawyers money can buy to try to find holes in a settlement they reached with Facebook in 2008, that is now believed to be worth more than $140 million. So what did Team Winklevoss dig up? Not much, apparently. The three-judge panel hearing their appeal today showed little sympathy for the twins’ argument that the settlement they signed three years ago — surrounded by their lawyers, it should be added — was a swindle.
“The founders are pretty smart people themselves,” noted Judge John Wallace, referring to the Winklevosses and their partner Divya Narendra, who founded ConnectU, a failed competitor to Facebook. “They also had five lawyers from two firms sitting there with them. The twins also have a father, from the Wharton School [of Business at University of Pennsylvania], who’s very bright, and considered to be one of the top people in valuation [of businesses]… If you have all these people there to advise you, isn’t it a little difficult to say this was one of those things where they were taken advantage of?”
“I agree my clients were not behind the barn door when brains were passed out,” admitted Jerry Falk, the Howard Rice partner arguing the appeal for the Winklevosses. “But the same is true of Facebook. You had sophisticated people in the room on both sides.”
Falk argued that the proper disclosures hadn’t been made in the papers that the Winklevosses signed, thus violating both federal securities laws as well as California state laws. Specifically, Falk said that Winklevosses should have been told about an internal valuation of Facebook stock done because of Microsoft’s recent investment in the company, which put the value of the company’s stock at $8.88–far less than the $35.90 per share valuation that the Winklevosses had been relying on. (The $35.90 figure was based on Microsoft’s publicly announced purchase of Facebook stock, a deal that gave Facebook an overall value of $15 billion.
But Chief Judge Alex Kozinski characterized the internal valuation as merely “an opinion, and an opinion that’s given for a certain purpose.” These are parties that are negotiating, and one of the things they’re litigating about is the value of ownership of the company.”
The Winklevosses and their partner first sued in 2004, claiming that Facebook CEO and founder Mark Zuckerberg had broken his promises to them and stole their idea while they were all fellow students at Harvard. That lawsuit was settled in January 2008, but the Winklevosses have been trying to undo it ever since in the hopes of wringing more money out of Zuckerberg, who has gone from fantastically rich to cosmically rich in the past few years. They accused the lawyers who helped them sign the settlement–from Quinn Emanuel, another top Silicon Valley firm–of malpractice. (The Winklevosses arbitrated that accusation, and lost.)
The founding of Facebook and ensuing lawsuits were memorialized last year in the semi-factual and very popular movie, The Social Network. That movie portrays the Winklevosses as entitled, wealthy whiners. Anyone who has followed the twins’ exploits in the last three years would have to consider that a generous assessment.
The value of Facebook stock profoundly affects the value of Winklevosses’ settlement. In order to achieve litigation peace, Facebook agreed in 2008 to give the Winklevosses $20 million in cash and $45 million in Facebook stock, which represented a .003% share of the company, according to the Facebook attorney who argued this appeal, E. Joshua Rosenkranz of Orrick, Sutcliffe and Herrington.
Rosenkranz framed the issues like this: “This case is about whether sophisticated parties, surrounded by a platoon of world class lawyers, can cancel a deal that they said was binding and everyone believed was binding at the time. The district court correctly ruled that they can’t.”
The Winklevosses didn’t care about the “momentary value” of a company whose valuations were all over the map, Rosenkranz said. They were interested in owning a specified share of Facebook–.003% of undiluted stock, to be precise, a gift that would keep on giving as Facebook increased in value.
“The ConnectU founders struck a deal that has made them very very rich, and it’s making them richer by the day,” said Rosenkranz. “Part of the bargain was a declaration of the end of the war. They should be bound by the declaration of peace.”
Litigation is unpredictable, and there’s a chance that I’ll be returning to this subject to eat crow in a few months when this decision comes out. But I really, really doubt that is going to happen here: Facebook will–rightly, and at long last–carry the day here.
The Winklevosses exited the courthouse to a mini-paparazzi scene, where a group of about ten photographers followed them towards a parking lot about a block down Mission Street, away from the 9th Circuit. The twins refused to give interviews.”We’re going to leave it in the hands of the court,” said Cameron Winklevoss.