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Mediation: Ninth Circuit Uses Agreement, Rather than Privilege, to Confirm Settlement in ‘Social Network’ Case (April 25).

The Ninth U.S. Circuit Court of Appeals ruled earlier this month in Facebook Inc. v. Pacific Northwest Software Inc., No. 08-16745, that a mediated settlement agreement was enforceable, and refused to allow a party to oppose enforcement with evidence of mediation discussions. 2011 WL 1346951 (Apr. 11)(Available here).
The real-life case frames the plot of the fictionalized film, “The Social Network,” which received three Academy Awards and four Golden Globe Awards.  It marks a rare federal circuit court mediation ruling.

In a unanimous decision written by Chief Judge Alex Kozinski, the Ninth Circuit rejected a trial court finding that local ADR rules could create a mediation privilege.  Instead, the opinion relied on the parties’ confidentiality agreement in affirming the district court’s exclusion of mediation communications.

Two brothers, Cameron and Tyler Winklevosses, who are the appellants, originally filed suit along with a business partner against the social networking website Facebook and its creator Mark Zuckerberg.  They claimed that Zuckerberg stole the Facebook idea from them.  

Facebook countersued the Winklevosses as well as the brothers’ social networking website, ConnectU.  A California district court ordered the parties to mediate.  They hired a private mediator.  Before mediation commenced, the parties signed a confidentiality agreement stipulating that any statement made during mediation was privileged, non-discoverable, and inadmissible in any future proceeding.

The parties came to a settlement agreement, which they signed and stipulated as confidential, binding, and capable of being used as evidence in order to enforce it.  This settlement, however, deteriorated during later negotiations.  California’s Northern District federal court granted Facebook’s enforcement request.  This had the effect of transferring ConnectU shares to Facebook, and thus moving ConnectU to Facebook’s side of the litigation.  

The Winklevosses appealed.  

In opposing the settlement agreement’s enforcement, the Winklevosses made two related securities fraud claims: that during negotiations, Facebook led them to believe that its shares were worth more than they were worth, and that Facebook failed to disclose the material information of the shares’ valuation.  In support, the Winklevosses attempted to use evidence of what was said during mediation, as well as what was not said.  The district court excluded this evidence under its ADR Local Rule 6-11 because it found that 6-11 created a mediation privilege.

Judge Kozinski disagreed with the district court’s reasoning, yet came to the same result.  He wrote that the court found that privileges are created by federal law, and, though he wasn’t categorical about the ruling, he struck it down, noting that it is “doubtful that a district court can augment the list of privileges by local rule.”  

Kozinski added further that regardless of whether local rules can generate this privilege, the parties’ use of a private mediator as opposed to a court-appointed neutral meant that their mediation not was no subject to the “ADR Local Rules.”

Nevertheless, the Ninth Circuit affirmed the exclusion of the mediation evidence on the grounds that the parties had signed a confidentiality agreement stipulating that any statement made during mediation was privileged, non-discoverable, and inadmissible in any future proceeding.  The Court emphasized the portion of the confidentiality agreement that states “[n]o aspect of the mediation shall be relied upon or introduced as evidence in any arbitral, judicial, or other proceeding.”  

Therefore, the Court found, the Winklevosses were prevented from introducing evidence of what Facebook said, or did not say, during mediation.  Without such evidence, the Winklevosses could not succeed in their securities fraud claims.  

In enforcing the settlement agreement, Kozinski concluded the opinion by noting that “[a]t some point, litigation must come to an end. That point has now been reached.”

--Madeleine Elkan, CPR Intern