ConnectU Appeals Facebook Settlement
A panel of judges on Tuesday began debating whether Facebook founder Mark Zuckerberg deceived former Harvard classmates in a $65 million settlement of a lawsuit alleging that the idea for the website was stolen.
Three men — twin brothers Tyler and Cameron Winklevoss, along with Divya Narendra — claimed they asked Zuckerberg to finish software code for their ConnectU social-networking website while they were all students at Harvard in 2003.
The men said Zuckerberg, a second-year student at the time, stole their code and their idea and launched Facebook in 2004 instead of holding up his end of the deal.
The ordeal was profiled in the recent Hollywood hit movie, “The Social Network.”
The two brothers accepted a settlement two years ago that netted them $20 million in cash and $45 million worth of stock valued at $36 per share.
Now, the brothers are gambling on that settlement — which was supposed to be confidential — in a federal court appeal that contends they were tricked a second time because Facebook internally valued the stock at $9.
Members of the three-judge panel bored holes in the Jerome Falk’s argument, the Winklevoss’s attorney who spoke during a hearing in the Ninth Circuit Court of Appeals in San Francisco.
Judge John Wallace noted that teams of lawyers and a top mediator had worked on the settlement.
“The (ConnectU) founders are pretty smart people themselves,” Wallace said. “The twins also have a father from Wharton School who is very bright,” he continued.
“If you have all these people to advise you, isn’t it difficult to say this is one of those things where you were taken advantage of?” he asked Falk during the hearing
The brothers based the value of Facebook stock on news that months earlier technology giant Microsoft had bought a small piece of the social network in a deal that valued the stock at just shy of $36 and the company at $15 billion, said Falk.
He argued that Facebook violated US securities law by not disclosing that it had valued the stock at closer to $9 for stock options issued to employees at that time.
“This case is about whether sophisticated parties surrounded by a platoon of world-class lawyers can cancel a deal that is binding,” countered Joshua Rosenkranz, Facebook’s attorney.
He said nobody was misled. “The ConnectU founders struck a deal that made them very rich and is making them richer by the day. No one made them sign it.”
Rosenkranz argued that Facebook was under no obligation under the law to disclose the stock option information during settlement negotiations and that the information was not intentionally withheld.
“It looks like it’s got a lot of just about everything you would want in a contract,” Ninth Circuit chief judge Alex Kozinski said while leafing through the settlement paperwork. “It definitely says we have a binding agreement.”
The panel is expected to decide in about three months whether it will overturn a decision by a federal district court denying the appeal.
“They certainly exhibited a healthy degree of skepticism,” Falk told AFP after the hearing. “They pressed me on things. I hope I answered to their satisfaction.”
According to analysts, the three men effectively gambled their $65 million settlement. If the court decides to unwind the agreement, Facebook will either have to offer more money or fight it out in court.
After the hearing, Cameron Winklevoss said they are looking forward to a decision. “I just think it’s in the hands of the court,” he told Reuters.
If the appeal is rejected, the Winklevoss brothers would lose the cash and stock, which is in escrow, but would be free to pursue their original lawsuit, according to Falk.
Facebook’s founder, Zuckerberg, was not in attendance at the hearing.
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