Appeals Court Judges Seem Skeptical of Winklevii Claims

Published on January 11, 2011
by Liz Gannes

Tyler and Cameron Winklevoss have spent a lot of time in court, and the rulings rarely seem to go in their favor.

But the Olympic rowers and one-time social networking entrepreneurs–one twin’s suit was more pin-striped than the next–were back at it this morning in San Francisco for their biggest hearing yet, in front of the Ninth Circuit Court of Appeals.

Unfortunately for them, Facebook’s more polished presentation seemed to go over better with the judges than the Winklevoss’ claim they had been unprepared and uninformed when they finalized a previous settlement.

While I sought network connectivity in the back of the extra-large ornate courtroom, wishing for a Verizon iPhone hotspot, the twins sat stoically and silently in the front as Facebook’s attorney, Orrick partner Joshua Rosenkranz, urged them to let it go, saying they are “big boys,” and “big boys can make deals that bind them.”

The Winklevii, as Silicon Valley folks like to call them, are rehashing a settlement with Facebook from three years ago over the events of seven years ago.

They have now hired new lawyers and appealed a previous judgment, having accused their previous lawyers of malpractice and withheld their attorney fees (a case they also lost).

The twins want that 2008 settlement–which had Facebook buy their ConnectU social network for $20 million in cash and $45 million in Facebook shares, at that time considered .3 percent of the company–revoked, so they can resume their original lawsuit over Mark Zuckerberg flaking on their project while he started Facebook.

In December, they reportedly considered dropping the matter entirely and keeping what they have already pocketed, but decided they must keep fighting.

The settlement of 2008 was invalid, argued Winklevoss lawyer Jerome Falk of Howard Rice in court today, because terms were not finalized before it was signed, and in particular the portion of the settlement awarded in stock was at a valuation about four times higher than Facebook’s internal valuation at the time.

The Ninth Circuit Court of Appeals heard from both Falk and Rosenkranz at length, allowing them to exceed their expected time to thoroughly discuss the case. A ruling should be forthcoming about three months from now.

The discussion focused on precise details of California and federal securities law and case law about, for example, whether a mediation session that was confidential could be opened to evaluate whether fraud occurred.

Others involved in the case, such as Zuckerberg and the Winklevoss’ ConnectU o-founder Divya Narendra, were not in attendance.

From the cheap seats, it seemed that the judges were more critical of the Winklevoss argument. Chief Judge Alex Kozinski (pictured here) was quite skeptical of the ideas that Facebook needed to disclose its internal valuation and that the settlement agreement signed after mediation was somehow informal.

Judge J. Clifford Wallace commented that the Winklevosses are clearly quite capable and were well-represented during the mediation by their team of lawyers and their father, a former business school professor at Wharton.

“I agree my clients were not behind the barn door when the brains were passed out,” replied Falk.

Judge Barry Silverman harped on why the Winklevosses hadn’t directly asked Facebook what its current valuation was. “This question could have been asked, should have been asked and wasn’t asked,” he said.

In the hallway and outside the courthouse, the Winklevii themselves would only politely say that they look forward to the court’s ruling. Chased by reporters and photographers, they made a quick exit.

Meanwhile Facebook Global Communications, Marketing and Public Policy VP Elliot Schrage, who had brought his two young sons to see the hearing in person, commented that the issues at stake are much more exacting details than the personal story of Zuckerberg and the Winklevosses that’s now widely known (in large part due to its Hollywood portrayal in “The Social Network”).

Falk said he thought the court was “thorough and well-prepared,” and he was grateful the court allowed the full arguments to be made.

Besides not willing to compromise their honor, the Winklevii can trace much of their dispute to problems reaching formal agreements, especially with Zuckerberg and his cronies.

They never got Zuckerberg to sign a contract to work for them back at Harvard, and then years later when they got him to settle, they allowed Facebook to set terms that weren’t fully scoped out.

Obviously, they later came to regret it.

Falk said on the courthouse steps that his clients don’t actually want their settlement retroactively valued (combining the Winklevoss’ chosen price and Facebook’s current valuation, their shares would be worth something like $608 million today), but rather to “get their lawsuit back,” so they can keep pursuing it.

Which would mean: More Winklevii!

Please see the disclosure about Facebook in my ethics statement.

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