[Ann Woolner] Appealing a case against Facebook

In the film, “The Social Network,” one of the Winklevoss twins digs in his heels when his furious brother urges a lawsuit against a fellow Harvard student for stealing their idea and turning it into Facebook.

(Which twin was which, I don’t know. Who could tell the difference between Cameron and Tyler, played by the same actor?)

But one of them, along with their partner, really, really wanted to sue Mark Zuckerberg. The other one repeatedly refused, saying that Harvard men simply don’t do that sort of thing. Filing tacky lawsuits and publicly airing grievances just isn’t the way well-bred gentlemen settle disputes, he told the others.

That was then, if the movie’s to be believed on the point. Now, in real life, it seems that both twins can’t get enough courtroom time. With three lawsuits going with Facebook Inc., they agreed in 2008 to end them all with a mediated settlement for $65 million in cash and stock.

That should have been that. It wasn’t.

Soon after settling, the twins and partner Divya Narendra claimed Facebook misled them about its value. They say this even though the Palo Alto, California-based company never told them its value (now put at $50 billion).

This didn’t stop them from going back to court to try to undo the settlement. They’re trying to start all over in negotiations and drive up their ownership stake in Facebook.

Oh, yes. They have shed all gentlemanly reticence over dragging former allies into court. They also sued the lawyers who negotiated the $65 million deal, alleging malpractice and are balking at paying their $13 million fee.

They lost that case and have so far lost their claims against Facebook. A federal judge in San Jose, California, ruled in 2008 that the agreement was valid and enforceable.

That should have been that. But they appealed.

This week one of their current lawyers, Jerome Falk, asked three judges of the 9th U.S. Circuit Court of Appeals in San Francisco to reverse the other judge and let them tear up the settlement because his clients had been duped.

But if they were, they did it to themselves. While negotiating the settlement, neither they nor their lawyers asked Facebook what the company or its shares were worth.

“It could have been asked. It should have been asked, and it wasn’t asked,” Falk conceded to the judges.

Instead, the twins’ lawyers used a five-month-old press release announcing Microsoft’s investment in Facebook to compute the company’s worth, said to be $15 billion. That translated into a share price of $34.90.

So when figuring out how many shares would amount to $45 million, the sum agreed to as part of the settlement, they wound up with 1.25 million shares, nothing to sneeze at.

But if they had used the share price of $8.88 that the Winklevosses now say was the correct one, they would have gotten about 5 million shares. After signing the settlement they learned that Facebook’s directors had set shares at $8.88 for stock-option purposes.

Did the company have a duty to save the Winklevosses and Narendra from themselves if their lawyers didn’t find that number earlier?

“It’s called due diligence because you’re supposed to be diligent,” Facebook lawyer E. Joshua Rosenkranz, told the judges.

Was Zuckerberg supposed to say, hold on, your valuation is way off? Should he have voluntarily handed over 5 million shares instead of the 1.25 million the agreement gave them?

Of course not, a federal judge in San Jose ruled in 2008. The panel of appellate court judges this week seemed to agree.

We aren’t talking about innocent young guys represented by wet-behind-the-ears counsel from a no-name firm, Judge Clifford Wallace of the 9th circuit pointed out. The twins and their partner hired attorneys from the San Francisco office of Quinn Emanuel Urquhart & Sullivan, one of the top business litigation firms in the country.

Ah, but their expertise was litigation, not business, Falk told the judges. It’s one thing to know how to hammer out a deal and quite another to go to court to fight over it.

Still, the twins were fully represented by top-notch counsel, had a Wharton Business School professor and business consultant as a father, and plenty of smarts themselves, Wallace said.

Besides, the agreement was struck in mediation, which is by design less formal and more streamlined than litigation. The whole idea is to end lawsuits and quit fighting, even if you don’t have all the information you’d get by staying in court.

There’s value in simply calling off the war.

At the time, the twins and Narenda didn’t much care about the “momentary value” of the shares, which couldn’t be reliably calculated, anyway, said Facebook’s lawyer, Rosenkranz.

“They were interested in owning a specified portion of the world’s hottest startup company, precisely .3000 percent,” he said. That’s exactly what they got, and it’s making them richer every day. The settlement is worth $168.5 million today. If they get what they want and quadrupled their ownership, they’d get something like $600 million.

They won’t.

How Facebook got started and the struggle over its ownership made for a smart, compelling and well-acted film. But as for a lawsuit, the Winklevosses and Narendra should have resisted the temptation to go for a sequel, and a tacky one at that.

By Ann Woolner

Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own. ― Ed.

(Bloomberg)