The Facebook, Inc., et al v. ConnectU, Inc., et al

Filing 177

Filed (ECF) Intervenors Divya Narendra, Cameron Winklevoss and Tyler Winklevoss in 08-16745, Appellants Divya Narendra, Cameron Winklevoss and Tyler Winklevoss in 08-16873, 09-15021 petition for rehearing en banc (from 04/11/2011 opinion). Date of service: 04/18/2011. [7719916] [08-16745, 08-16873, 09-15021] (JBF)

CA Nos. 08-16745, 08-16873, 09-15021 (consolidated)
DC No. C 07-01389 JWW

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
THE FACEBOOK, INC. ET AL.,

Plaintiffs/Appellees/Cross Appellants,
v.
CONNECTU, INC.,

Defendant/Appellee,
and
CAMERON WINKLEVOSS, TYLER WINKLEVOSS and
DIVYA NARENDRA,

Defendants/Appellants/Cross-Appellees.
Appeal From Judgment Of The United States District Court
For The Northern District Of California
(Hon. James Ware, Presiding)
PETITION FOR REHEARING EN BANC
Panel Decision by Judges Kozinski, Wallace and Silverman
April 11, 2011

JEROME B. FALK, JR.
SEAN M. SELEGUE
SHAUDY DANAYE-ELMI
NOAH S. ROSENTHAL
HOWARD RICE NEMEROVSKI CANADY
FALK & RABKIN
A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, California 94111
Telephone: [phone]

Attorneys For Appellants and CrossAppellees Cameron Winklevoss, Tyler
Winklevoss and Divya Narendra

TABLE OF CONTENTS
Page

ISSUES PRESENTED

2

STATEMENT OF FACTS

3

ARGUMENT

7

I.

THE PANEL’S HOLDING THAT A GENERAL
RELEASE IN A SETTLEMENT AGREEMENT
BARS A CLAIM THAT A SETTLEMENT AGREEMENT WAS ITSELF OBTAINED BY FRAUD CONFLICTS WITH FEDERAL AND STATE
PRECEDENT.
A.

7

A General Release In A Settlement Agreement
Does Not Bar A Claim That The Agreement
Was Procured By Fraud.

7

If The Release Were Found To Bar A Claim
That The Settlement Agreement Was Procured
By Securities Fraud, The Release Would Violate
Section 29(a) Of The Exchange Act.

12

II. THE PANEL’S HOLDING THAT SECTION 29(a)
DOES NOT PREVENT A STANDARD MEDIATION
CONFIDENTIALITY PROVISION FROM BARRING EVIDENCE THAT A SETTLEMENT
AGREEMENT WAS THE PRODUCT OF FRAUD
CONFLICTS WITH FEDERAL PRECEDENT.

14

B.

CONCLUSION

18

-i-

TABLE OF AUTHORITIES
Page(s)
Cases

AES Corp. v. Dow Chem. Co., 325 F.3d 174 (3d Cir. 2003)

17

Affiliated Ute Citizens v. United States, 406 U.S. 128
(1972)

2

Associated Ins. Serv., Inc. v. Garcia, 307 S.W.3d 58 (Ky.
2010)

9

Boyd v. Boyd, 67 S.W.3d 398 (Tex. App. 2002)
Brown v. County of Genesee, 872 F.2d 169 (6th Cir. 1989)
Burgess v. Premier Corp., 727 F.2d 826 (9th Cir. 1984)

10
8
3, 12, 13

Can-Am Petroleum Co. v. Beck, 331 F.2d 371 (10th Cir.
1964)

17

Cohen v. Tenney Corp., 318 F. Supp. 280 (S.D.N.Y. 1970)
Dice v. Akron, C. & Y. R. R., 342 U.S. 359 (1952)
Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005)

17
8
18

Dresner v. Utility.Com, Inc., 371 F. Supp. 2d 476
(S.D.N.Y. 2005)

12, 13

Estate of Jones v. Comm’r, 795 F.2d 566 (6th Cir. 1986)

8

Esteves v. Esteves, 680 A.2d 398 (D.C. 1996)

9

FDIC v. White, No. 3-96-CV-0560-BD, 1999 WL 1201793
(N.D. Tex. Dec. 14, 1999)

11

First Nat’l Bank of Cincinnati v. Pepper, 454 F.2d 626 (2d
Cir. 1972)

10

Fox v. Kane-Miller Corp., 398 F. Supp. 609 (D. Md. 1975),
aff’d, 542 F.2d 915 (4th Cir. 1976)

-ii-

16

TABLE OF AUTHORITIES
Page(s)

Galasso v. Galasso, 320 N.E.2d 618 (N.Y. 1974)

10

Haller v. Wallis, 573 P.2d 1302 (Wash. 1978)

10

Howard v. Howard, 163 A.2d 861 (Vt. 1960)

10

In re Estate of Lobaina, 705 N.W.2d 34 (Mich. Ct. App.
2005)

9

James v. Chicago Transit Auth., 356 N.E.2d 834 (Ill. Ct.
App. 1976)

9

Jones v. Roth, 31 So. 3d 115 (Ala. Civ. App. 2009)

9

Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991)

8

Krantz v. Univ. of Kansas, 21 P.3d 561 (Kan. 2001)

9

Mallory v. Eyrich, 922 F.2d 1273 (6th Cir. 1991)

8

Manderville v. PCG&S Group, Inc., 146 Cal. App. 4th
1486 (2007)

9

McMahan & Co. v. Wherehouse Entm’t, Inc., 65 F.3d 1044
(2d Cir. 1995)

17

Millet v. Millet, 888 So. 2d 291 (La. Ct. App. 2004)

9

Morgan v. Vandevers Dry Goods Co., 370 P.2d 830 (Okla.
1962)

10

Nationwide Mut. Ins. Co. v. Martin, 171 S.E.2d 239 (Va.
1969)

10

Nicklin v. Henderson, 352 F.3d 1077 (6th Cir. 2003)

8

Nolan ex rel. Nolan v. Lee Ho, 577 A.2d 143 (N.J. 1990)

9

Pearlstein v. Scudder & German, 429 F.2d 1136 (2d Cir.
1970)

16

-iii-

TABLE OF AUTHORITIES
Page(s)

Pennsbury Village Assocs., LLC v. McIntyre, 11 A.3d 906
(Pa. 2011)

10

Petro-Ventures, Inc. v. Takessian, 967 F.2d 1337 (9th
Cir. 1992)

7, 12, 13, 14

Phone Partners Ltd. P’ship v. C.F. Commc’ns Corp., 542
N.W.2d 159 (Wis. Ct. App. 1995)

10

Rogen v. Ilikon, 361 F.2d 260 (1st Cir. 1966)

17, 18

Ron Greenspan Volkswagen, Inc. v. Ford Motor Land Dev.
Corp., 32 Cal. App. 4th 985 (1995)

9

Rugemer v. Rhea, 957 P.2d 184 (Or. Ct. App. 1998)

10

Shinberg v. Garfinkle, 278 N.E.2d 738 (Mass. 1972)

9

Smith v. Monongahela Power Co., 429 S.E.2d 643 (W.Va.
1993)

10

Special Transp. Servs., Inc. v. Balto, 325 F. Supp. 1185
(D. Minn. 1971)

17

TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)

2

United States v. Reyes, 577 F.3d 1069 (9th Cir. 2009)

2

Vai v. Bank of America, 56 Cal. 2d 329 (1961)
Wheat v. Hall, 535 F.2d 874 (5th Cir. 1976)

11
2

Statutes

15 U.S.C.
§77aaaa
§78cc(a) (Securities Exchange Act of 1934 §29(a))
§80a-46
§80b-15
-iv-

1
1, 2, 3, 12,
13, 15, 16, 17
1
1

TABLE OF AUTHORITIES
Page(s)

UNIFORM MEDIATION ACT (2003)
Prefatory Note, §1
§6(b)(2)

10
10

CAL. CIV. CODE §1668

18
Other Authorities

James R. Coben & Peter N. Thompson, Disputing Irony: A
Systematic Look At Litigation About Mediation, 11
HARV. NEGOT. L. REV. 43 (Spring 2006)
1 B. WITKIN, SUMMARY OF CALIFORNIA LAW, Contracts
§304 (10th ed. 2005)

-v-

10, 11
9

American courts have long held that a settlement agreement procured by fraud may be rescinded. The Panel’s opinion in this case,
applying federal common law, abruptly rejected that rule (seemingly
without acknowledging its existence). It held that standard broad
releases found in settlement agreements render the agreements
invulnerable against claims that they were procured by fraud. That
holding has broad implications. For example, a settlement obtained
by falsely representing that the defendant has no liability insurance
policy would be enforceable despite proof of deliberate fraud.
The opinion also conflicts with numerous federal court decisions
regarding the “anti-waiver” provision of the Securities Exchange Act
of 1934, 15 U.S.C. §78cc(a). Section 29(a) of that Act, which mirrors
like provisions in several other securities statutes (see 15 U.S.C.
§§77aaaa (Trust Indenture Act), 80a-46 (Investment Company Act of
1940), 80b-15 (Investment Advisors Act of 1940)), prohibits any
agreement “to waive compliance with any provision of this chapter or
of any rule or regulation thereunder.” The Panel held that applying
a mediation confidentiality agreement to bar evidence of securities
fraud occurring in the mediation did not run afoul of Section 29(a)
because the agreement did not expressly waive rights under the
Exchange Act but merely “frustrate[d]” such claims.

Again, the

Panel’s decision conflicts with other federal decisions that construe
-1-

Section 29(a) and its counterpart antiwaiver provisions to prohibit
agreements that even indirectly impair enforcement of the securities
laws (a conflict not acknowledged in the Panel’s opinion). Because
these holdings raise fundamental conflicts with federal (and state)
law on important legal issues, rehearing en banc is required.1
ISSUES PRESENTED

1.

Did the Panel err in holding that, under federal common

law governing the validity of a settlement of federal claims, the settlement’s release of all claims bars a defense to enforcement on the
ground that the settlement agreement itself was procured by fraud?

1

On rehearing en banc, the Court should not reiterate the Panel’s
dicta (Appendix A (attached) at 4906-07)—which is not supported by
the record (see Appellants’ Motion to Strike (Dkt. 163) at 1-2)—about
the supposed legal and commercial sophistication of Appellants and
their counsel. A plaintiff’s sophistication is no defense to a claim
that the defendant failed to disclose material facts in connection with
the sale or exchange of securities. See Wheat v. Hall, 535 F.2d 874,
876 (5th Cir. 1976) (“Even sophisticated investors are entitled to the
protections of” the securities laws); see also TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 448 (1976); United States v. Reyes, 577
F.3d 1069, 1075 (9th Cir. 2009). Nor would sophistication support a
defense of non-reliance in a nondisclosure case, where reliance is
presumed so long as the undisclosed facts are material. Affiliated
Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972).
Likewise, the gratuitous statement (also unsupported by the
record) that Appellants were “bested by a competitor” (Appendix A at
4911) is an inappropriate way to describe the misappropriation and
use of Appellants’ business idea by someone they trusted.
-2-

2.

If so, does the Panel’s holding conflict with Burgess v.

Premier Corp., 727 F.2d 826 (9th Cir. 1984), which held that waivers
of unknown securities law claims are invalidated by Section 29(a) of
the Exchange Act?
3.

Does use of a mediation confidentiality agreement to pre-

clude evidence of securities fraud that induced the settlement violate
Section 29(a) of the Exchange Act?
STATEMENT OF FACTS

In the underlying litigation, Appellants alleged that, during their
junior year at Harvard, they conceived the idea of creating a website
that would connect people through networks of friends and common
interests.

See 2-ER-150 ¶12.

In November 2003, Appellee

Zuckerberg—then a fellow Harvard student—entered into a partnership with Appellants and agreed to complete the computer
programming necessary to finish the website. Id. ¶14.
Zuckerberg repeatedly assured Plaintiffs that he would complete
the programming in time to launch the website before the end of the
2004 school year. 2-ER-150-51 ¶¶15-16. But just days after reconfirming his intention in writing, Zuckerberg registered the domain
name “TheFaceBook.com” and launched his own website, thereby
misappropriating Appellants’ ideas and intellectual property. 2-ER-

-3-

151-52 ¶¶19-20. Zuckerberg and Facebook thereafter exploited the
advantage they appropriated for great personal gain, which led to
litigation in federal courts in Massachusetts and California. See 2ER-153-59 ¶¶21-76, 2-ER-111-19.
In February 2008, the parties attended a mediation to discuss
resolution of both cases. 5-ER-800 ¶1. Prior to the mediation, they
signed a form contract agreeing that everything said in the mediation would be privileged and would not be offered as evidence in any
legal proceeding. 4-ER-665. At the conclusion of the mediation, they
signed a handwritten 1-1/3 page Term Sheet (the “Term Sheet”). 5ER-800 ¶5; 4-ER-482-83; 5-ER-845:13-19. The Term Sheet called for
Facebook’s acquisition of ConnectU, the release of claims against
Facebook, payment by Facebook of $20 million, and the issuance of
1,253,326 shares of Facebook stock to the Founders. That figure was
calculated by Facebook on the basis of approximately $35.90 per
share, the parties having agreed that the total value of the stock
component of the settlement would be $45 million. 5-ER-800-01 ¶¶27.
That valuation derived from a then-recent public announcement
by Facebook that Microsoft had invested in Facebook based upon a
$15 billion valuation of the company. 5-ER-729-31. That resulted in
a per-share value of approximately $35.90. 5-ER-801 ¶7. However,
-4-

unknown to Appellants at the time they signed the Term Sheet,
Facebook’s Board of Directors had recently obtained, and thereafter
approved, an expert valuation of Facebook’s stock at $8.88 per share.
5-ER-801 ¶8, 702 ¶9. Facebook obtained that valuation for purposes
of valuing and issuing stock options for tax purposes. The valuation
was highly credible because issuance of stock options below the
share’s fair value triggers adverse tax consequences. Facebook did
not disclose the $8.88 per share valuation to Appellants at the
mediation. See 5-ER-801 ¶8. Had Appellants known of the $8.88
valuation, they would have challenged the $35.90 value on which
Facebook’s settlement offer was based.
After Appellants learned of this undisclosed fact, they sought to
rescind the settlement. The District Court ordered the settlement
enforced. 1-ER-48-60. The Panel affirmed. Appendix A (attached).
A brief comment on a statement at the conclusion of the Panel’s
opinion is required. The opinion states:
With the help of a team of lawyers and a financial advisor,
[Appellants] made a deal that appears quite favorable in light
of recent market activity. See Geoffrey A. Fowler & Liz
Rappaport, Facebook Deal Raises $1 Billion, Wall St. J.,
Jan. 22, 2011, at B4 (reporting that investors valued Facebook
at $50 billion—3.33 times the value the Winklevosses claim
they thought Facebook’s shares were worth at the mediation.
For whatever reason, they now want to back out. (Appendix A
at 4911-12)

-5-

There is no mystery about Appellants’ reason for their now over
three-year-long objection to the enforcement of the settlement: it was
procured by securities fraud—the failure to disclose a contemporaneous stock valuation (and issuance of stock options) at one-quarter the
price being offered to them. Rescinding a securities transaction on
the ground of fraud is hardly “backing out.”
As for the opinion’s characterization of the settlement as “quite
favorable” based on a comparison between a recent valuation
reported in the Wall Street Journal and the valuation Appellants
relied on at the mediation, those valuations are separated by nearly
three years. During that period, the value of Facebook shares has
increased immensely.

That does not cure a securities fraud that

affected the number of shares Appellants were defrauded into
accepting in settlement of their claims several years ago.
The opinion’s implication that Appellants should take the nowmore-valuable stock and stop complaining about Facebook’s blatant
violation of Rule 10b-5 inappropriately minimizes federal securities
laws that command honest dealing and full disclosure in the sale or
exchange of securities.

Whether Appellants would be better off

financially keeping the proceeds of the settlement rather than
rescinding and proceeding with their lawsuit against Facebook is a
personal judgment for them—not an appellate court—to make. And
-6-

there certainly was no basis for the opinion to disparage their
choice—reflecting a willingness to forgo retention of a very valuable
block of stock in Facebook—to trust in the legal system’s capacity to
fairly adjudicate their claims against Facebook.
ARGUMENT
I.
THE PANEL’S HOLDING THAT A GENERAL RELEASE
IN A SETTLEMENT AGREEMENT BARS A CLAIM
THAT A SETTLEMENT AGREEMENT WAS ITSELF
OBTAINED BY FRAUD CONFLICTS WITH FEDERAL
AND STATE PRECEDENT.
A.

A General Release In A Settlement Agreement Does Not Bar
A Claim That The Agreement Was Procured By Fraud.

The validity of a settlement agreement is ordinarily a question of
state law. However, the validity of a release or waiver of a federal
claim is a question of federal common law. Petro-Ventures, Inc. v.

Takessian, 967 F.2d 1337, 1340 (9th Cir. 1992). In this case, the
Panel declared a new federal common law rule: a settlement agreement that contains a release of claims (as all settlements do) bars a
defense to enforcement on the ground that the settlement agreement
was procured by fraud. Appendix A at 4908-09. This ruling sharply
conflicts with well-established precedent in federal courts around the
country and in state courts (including California, where this
controversy arose) as well.

-7-

Many federal cases hold that a settlement agreement does not bar
a claim that the settlement was procured by fraud. “[T]he correct
federal rule is that . . . a release of rights under the [Federal Employers’ Liability] Act is void when the employee is induced to sign it by
the deliberately false and material statements of the railroad’s
authorized representatives made to deceive the employee as to the
contents of the release.” Dice v. Akron, C. & Y. R. R., 342 U.S. 359,
362 (1952). “[T]he existence of fraud or mutual mistake can justify
reopening an otherwise valid settlement agreement” concerning
claims under 42 U.S.C. §1983 and the Rehabilitation Act. Brown v.

County of Genesee, 872 F.2d 169, 174 (6th Cir. 1989); see also
Nicklin v. Henderson, 352 F.3d 1077, 1081 (6th Cir. 2003) (following
Brown in the context of the settlement of a federal employment discrimination claim); Mallory v. Eyrich, 922 F.2d 1273, 1280 (6th Cir.
1991) (noting the Brown rule in the context of settlement of constitutional claims and claims under Section 1983 and the Voting Rights
Act); Estate of Jones v. Comm’r, 795 F.2d 566, 573 (6th Cir. 1986)
(settlement

with

IRS

voided

because

of

taxpayer’s

misrepresentations).
Federal common law is ordinarily based on the common law prevailing among the states. Kamen v. Kemper Fin. Servs., 500 U.S. 90,
98 (1991) (“federal courts should ‘incorporat[e] [state law] as the
-8-

federal rule of decision,’ unless ‘application of [the particular] state
law [in question] would frustrate specific objectives of the federal
programs’”) (citation omitted)). The vast majority of state courts also
hold that a settlement agreement can be challenged on the ground of
fraud despite a general release within it. For example, in California,
a contract provision purporting to release claims of fraud in connection with the contract is invalid because “fraud renders the whole
agreement voidable, including the waiver provision.” 1 B. WITKIN,
SUMMARY

OF

CALIFORNIA LAW, Contracts §304 (10th ed. 2005)

(emphasis omitted); see also, e.g., Ron Greenspan Volkswagen, Inc. v.

Ford Motor Land Dev. Corp., 32 Cal. App. 4th 985, 996 (1995);
Manderville v. PCG&S Group, Inc., 146 Cal. App. 4th 1486, 14991502 (2007).
The rule in state courts around the country is the same. See, e.g.,

Jones v. Roth, 31 So. 3d 115, 117 (Ala. Civ. App. 2009); Esteves v.
Esteves, 680 A.2d 398, 401 & n.1 (D.C. 1996); James v. Chicago
Transit Auth., 356 N.E.2d 834, 836 (Ill. Ct. App. 1976); Krantz v.
Univ. of Kansas, 21 P.3d 561, 567 (Kan. 2001); Associated Ins. Serv.
v. Garcia, 307 S.W.3d 58, 69 (Ky. 2010); Millet v. Millet, 888 So. 2d
291, 293-94 (La. Ct. App. 2004); Shinberg v. Garfinkle, 278 N.E.2d
738, 742 (Mass. 1972); In re Estate of Lobaina, 705 N.W.2d 34, 36
(Mich. Ct. App. 2005); Nolan ex rel. Nolan v. Lee Ho, 577 A.2d 143,
-9-

146 (N.J. 1990); Galasso v. Galasso, 320 N.E.2d 618, 618 (N.Y. 1974);

Morgan v. Vandevers Dry Goods Co., 370 P.2d 830, 834 (Okla. 1962);
Rugemer v. Rhea, 957 P.2d 184, 187 (Or. Ct. App. 1998); Pennsbury
Village Assocs. v. McIntyre, 11 A.3d 906, 914-15 (Pa. 2011); Boyd v.
Boyd, 67 S.W.3d 398, 404-05 (Tex. App. 2002); Howard v. Howard,
163 A.2d 861, 865 (Vt. 1960); Nationwide Mut. Ins. Co. v. Martin,
171 S.E.2d 239, 242 (Va. 1969); Haller v. Wallis, 573 P.2d 1302, 1306
(Wash. 1978); Smith v. Monongahela Power Co., 429 S.E.2d 643, 652
(W.Va. 1993); Phone Partners Ltd. P’ship v. C.F. Commc’ns Corp.,
542 N.W.2d 159, 161 (Wis. Ct. App. 1995); see also First Nat’l Bank

of Cincinnati v. Pepper, 454 F.2d 626, 632 (2d Cir. 1972) (applying
New York law).
Indeed, so well established is the rule that settlements procured
by fraud will not be enforced that the Uniform Mediation Act contains an explicit exception to mediation privilege for evidence of
fraud. Id. §6(b)(2) (2003) (“no [mediation] privilege” in “a proceeding
to prove a claim to rescind . . . a contract arising out of the mediation”). The Act’s drafters concluded that, as “with other privileges,
the mediation privilege must have limits, and nearly all existing
state mediation statutes provide them.” Id. Prefatory Note, §1.2 An
2

See, e.g., James R. Coben & Peter N. Thompson, Disputing
Irony: A Systematic Look At Litigation About Mediation, 11 HARV.
(continued . . . )
-10-

exception to mediation privilege for evidence of fraud would be
pointless if settlements were invulnerable to claims of fraud.
The Panel asserted that the distinction between the release of
claims that “arose out of facts that occurred prior to the settlement”
and the release of a claim that the settlement itself was procured by
fraud “is a distinction without a difference.” Appendix A at 4909. To
the contrary, that distinction is dispositive in federal courts as well
as in numerous state courts.

As the California Supreme Court

explained in a leading case:
[W]hen the agreement itself is procured by fraud, none of its
provisions have any legal or binding effect. . . . The fraud
which was the inducing cause of the execution of the contract
renders the whole instrument vulnerable—the clause in question as well as all other provisions. . . . The clause which it is
claimed estops plaintiff to complain of the fraud cannot be
made to survive the rest of the transaction as a shield and
protection to defendants, when false representations were the
efficient and inducing cause of the contract. (Vai v. Bank of
America, 56 Cal. 2d 329, 344 (1961) (citation and internal quotation marks omitted))

( . . . continued)
NEGOT. L. REV. 43, 69-72 (Spring 2006) (in most states, “relevant
mediation communications appear to be used regularly in court to
establish or refute contractual defenses such as fraud, mistake, or
duress”); see also FDIC v. White, No. 3-96-CV-0560-BD, 1999 WL
1201793, at *2 (N.D. Tex. Dec. 14, 1999) (“unlikely” that Congress
intended to create a federal mediation privilege that “would
effectively bar a party from raising well-established common law
defenses such as fraud, duress, coercion, and mutual mistake . . .
under the guise of preserving the integrity of the mediation process”).
-11-

Rehearing en banc should be granted to resolve the conflict between
the new rule announced by the Panel and the authorities holding
that settlements that were procured by fraud will not be enforced.
B.

If The Release Were Found To Bar A Claim That The
Settlement Agreement Was Procured By Securities Fraud,
The Release Would Violate Section 29(a) Of The Exchange
Act.

Section 29(a) of the Exchange Act states that any “condition,
stipulation, or provision binding any person to waive compliance
with any provision of this chapter or of any rule or regulation thereunder . . . shall be void.” 15 U.S.C. §78cc(a). The law of this Circuit
is that under Section 29(a), waivers of unknown securities fraud
claims are invalid. Petro-Ventures, 967 F.2d at 1340-41; Burgess v.

Premier Corp., 727 F.2d 826, 831 (9th Cir. 1984).
That principle was correctly followed in Dresner v. Utility.Com,

Inc., 371 F. Supp. 2d 476 (S.D.N.Y. 2005). There, the defendant
argued that broadly worded releases of unknown claims contained in
a merger agreement barred a securities fraud action based on the
merger agreement. The court held that Section 29(a) “invalidates
releases that attempt to insulate beneficiaries from compliance with
the Exchange Act.” Id. at 490. The court explained:
Section 29(a) does not prohibit parties from executing valid
releases in connection with securities fraud claims that have
already matured . . . . The releases at issue here . . . purported
prospectively to waive plaintiffs’ rights to pursue causes of
-12-

action of which they were not yet aware. Section 29(a) forbids
enforcement of that type of contract to bar Exchange Act
claims. (Id. (citations omitted))

Petro-Ventures carved a narrow exception to this rule for settlements
of litigation in which pre-existing securities law claims, known or
unknown, are waived.

As the Panel acknowledged, however, the

releases in Petro-Ventures “arose out of facts that occurred prior to
the settlement.” Appendix A at 4909 (emphasis added). The Court
in Petro-Ventures held that settlement of a dispute about a transaction could release another claim arising from that same transaction.
Appellants’ Reply Motion for Judicial Notice (Dkt. 160), Ex. 1, at 1-5.
Here, the claim is that the securities transaction that was part of
the settlement agreement itself was procured by fraud. As noted, the
Panel said that “[t]his is a distinction without a difference.”
Appendix A at 4909. Not so. As we’ve shown, it is a distinction
regularly drawn by federal and state courts. See pp.11-12, supra. It
is one thing to settle securities fraud claims by agreeing to release
known and unknown securities fraud claims concerning prior transactions in return for an agreed settlement amount.

It is quite

another to release claims that the settlement agreement was itself
procured by fraud. Nothing in Petro-Ventures addresses the latter
circumstance. Accordingly, Burgess and Dresner establish the governing principle, which is that Section 29(a) bars the release of an
-13-

unknown securities law claim of fraud in the inducement of the very
agreement containing the release.
The Panel’s opinion sets a dangerous precedent. Take a gardenvariety example: a federal claim is settled based upon the defendant’s false representation that the defendant has no insurance. As
we have shown, upon proof that this was a lie, federal and state
courts would unhesitatingly uphold a claim of rescission The Panel
holds that it would have to be enforced.
Rehearing en banc is therefore required to resolve the conflict
between the Panel’s opinion and these authorities, and to correct the
Panel’s misapplication of the narrow exception approved in Petro-

Ventures for releases of pre-existing claims of securities fraud as
part of a negotiated settlement of litigation.
II.
THE PANEL’S HOLDING THAT SECTION 29(a) DOES
NOT PREVENT A STANDARD MEDIATION
CONFIDENTIALITY PROVISION FROM BARRING
EVIDENCE THAT A SETTLEMENT AGREEMENT WAS
THE PRODUCT OF FRAUD CONFLICTS WITH
FEDERAL PRECEDENT.

The Panel also held that a mediation confidentiality agreement
barred Appellants’ fraudulent inducement defense to enforcement of
the settlement.

The agreement stated that anything said at the

mediation was privileged and “inadmissible for any purpose

-14-

including in any legal proceeding” and that “[n]o aspect of the
mediation shall be relied upon or introduced as evidence in any arbitral, judicial, or other proceeding.” Appendix A at 4910 (emphasis
omitted).
If the mediation agreement had provided that “if a settlement
results from this mediation, any claim that such settlement was procured by fraud, including securities fraud in violation of Rule 10b-5,
is hereby waived,” that provision would unquestionably run afoul of
Section 29(a) as to securities fraud claims. The Panel held, however,
that the confidentiality provision did not violate Section 29(a)
because it is not a direct waiver of the securities law but “merely precludes both parties from introducing evidence of a certain kind”
(Appendix A at 4910)—i.e., “any evidence of what Facebook said, or

did not say, during the mediation” (id. (emphasis added))—thereby
“frustrat[ing] the securities claims the Winklevosses chose to bring.”

Id. at 4910-11.
The distinction is unacceptably formalistic. The result of the contract provision is that the “Winklevosses can’t show that Facebook
misled them about the value of its shares or that disclosure of the tax
valuation would have significantly altered the mix of information
available to them . . . .” Id. at 4910. The mediation confidentiality
provision, as interpreted by the Panel, has exactly the same effect as
-15-

an express waiver of securities law claims that would be void under
Section 29(a).

As construed by the Panel,3 the mediation

confidentiality provision confers a license to commit securities fraud
with impunity by prospectively waiving any fraud defense to a settlement agreement reached at the mediation.
The Panel’s application of the mediation confidentiality provision
to the Winklevoss’ claim of fraud in the inducement would mean
that, by agreeing to participate in the mediation, they gave up the
protections and remedies afforded by the Exchange Act for securities
fraud occurring subsequent to signing the mediation confidentiality

agreement. This kind of advance waiver of the Act’s protection is
exactly what Section 29(a)’s anti-waiver rule prohibits.

See

Pearlstein v. Scudder & German, 429 F.2d 1136, 1143 (2d Cir. 1970)
(advance waiver would “contravene public policy”); see also Fox v.

Kane-Miller Corp., 398 F. Supp. 609, 624 (D. Md. 1975) (waiver of
securities claims viewed with “very strong disfavor”), aff’d, 542 F.2d
915 (4th Cir. 1976). As one court explained:

3

The Panel silently rejected Appellants’ sensible suggestion that
the mediation confidentiality provision be read to exclude application
to claims of fraud or invalidity, just as the Uniform Mediation Act
proposes. See pp.10-11, supra. That interpretation would be
consistent with the reasonable expectation of parties who sign a
mediator’s standard form agreement.
-16-

Judicial hostility toward waivers generally requires that the
right of private suit for alleged violations be scrupulously preserved against unintentional or involuntary relinquishment.
Otherwise, recognition of settlements would indeed undermine, rather than abet, the cause of effective enforcement of
the interest which the community as a whole, as well as the
aggrieved individual, has in regulation of securities markets.
(Cohen v. Tenney Corp., 318 F. Supp. 280, 284 (S.D.N.Y.
1970))
The Panel’s holding that Section 29(a) was inapplicable because the
statute only “applie[s] to express waivers of non-compliance”
(Appendix A at 4910) conflicts with numerous authorities holding
that Section 29(a) applies to direct or indirect waivers. See Can-Am

Petroleum Co. v. Beck, 331 F.2d 371, 373 (10th Cir. 1964) (“the
remedial aspects of [the Securities Act] cannot be waived either

directly or indirectly”) (emphasis added); see also AES Corp. v. Dow
Chem. Co., 325 F.3d 174, 180 (3d Cir. 2003) (refusing to enforce contract provision that disclaimed reliance on representations in prospectus); McMahan & Co. v. Wherehouse Entm’t, Inc., 65 F.3d 1044,
1051 (2d Cir. 1995) (rejecting argument that clause imposing conditions on recovery merely established “a procedure that must be followed before an action may be brought”); Rogen v. Ilikon, 361 F.2d
260, 265, 268 (1st Cir. 1966) (representation that plaintiff was
familiar with company’s business and was “not relying on any . . .
obligations to make full disclosure” invalid under Section 29(a));

Special Transp. Servs. v. Balto, 325 F. Supp. 1185, 1187 (D. Minn.
-17-

1971) (anti-waiver provision applies to a contract that “waive[s]
statutory liabilities . . . by indirection”).

As the First Circuit

observed in Rogen:
[W]e see no fundamental difference between saying, for example, “I waive any rights I might have because of your representations or obligations to make full disclosure” and “I am not
relying on your representations or obligations to make full disclosure.” Were we to hold that the existence of this provision
constituted the basis . . . for finding non-reliance as a matter
of law, we would have gone far toward eviscerating Section
29(a). (361 F.2d at 268)
These cases prohibiting terms that directly or indirectly have the
effect of waiving fraud are consistent with the rule in states such as
California (where the Confidentiality Agreement was entered into).

See CAL. CIV. CODE §1668 (contracts that exempt a person from fraud
“directly or indirectly” violate public policy) (emphasis added);

Discover Bank v. Superior Court, 36 Cal. 4th 148, 163 (2005) (invalidating class action waiver clause where the “waiver becomes in

practice the exemption of the party ‘from responsibility for [its] own
fraud, or willful injury to the person or property of another’”) (quoting Section 1668) (emphasis added). The Panel’s opinion profoundly
conflicts with settled precedent on this point as well.
CONCLUSION

Regardless of whether or not one thinks that the settlement gave
Appellants “enough,” the fact remains that the settlement was based
-18-

on the issuance of securities resulting from a settlement in which
Facebook perpetrated a garden-variety securities fraud. The Panel’s
opinion immunizes this fraud by enforcing a general release found in
the fraudulently induced agreement and by applying a routine
mediation confidentiality provision to bar evidence of the fraud. The
Panel’s Opinion is so profoundly at odds with federal and state
precedent, with dreadful ramifications, that rehearing en banc is
required.
DATED: April 18, 2011.
Respectfully,
JEROME B. FALK, JR.
SEAN M. SELEGUE
SHAUDY DANAYE-ELMI
NOAH S. ROSENTHAL
HOWARD RICE NEMEROVSKI CANADY
FALK & RABKIN
A Professional Corporation
By

/s/ Jerome B. Falk, Jr.
JEROME B. FALK, JR.

Attorneys For Appellants and CrossAppellees Cameron Winklevoss, Tyler
Winklevoss and Divya Narendra

W03 041811-180060001/L12/1645702/F

-19-

CERTIFICATE OF COMPLIANCE PURSUANT TO
FED. R. APP. P. 32 AND CIRCUIT RULES 35-4 AND 40-1
FOR CASE NUMBERS 08-16745, 08-16873, 09-15021
(CONSOLIDATED)

Pursuant to Federal Rule of Appellate Procedure 32 and Ninth
Circuit Rule 35-4 and 40-1, I certify that the attached Petition for
Rehearing En Banc is proportionally spaced, in a typeface of
14 points or more and contains 4,170 words, exclusive of those materials not required to be counted under Federal Rule of Appellate
Procedure 32(a)(7)(B)(iii).
DATED: April 18, 2011.

/s/ Jerome B. Falk, Jr.
JEROME B. FALK, JR.

PROOF OF SERVICE

I hereby certify that I electronically filed the foregoing PETITION
FOR REHEARING EN BANC with the Clerk of the Court of the
United States Court of Appeals for the Ninth Circuit by using the
appellate CM/ECF system on April 18, 2011.
Participants in the case are registered CM/ECF users and that
service will be accomplished by the appellate CM/ECF system.
I further certify that some of the participants in the case are not
registered CM/ECF users.

On April 18, 2011, I have mailed the

foregoing document described as PETITION FOR REHEARING EN

BANC by placing the document for deposit in the United States
Postal Service through the regular mail collection process at the law
offices of Howard Rice Nemerovski Canady Falk & Rabkin, located at
Three Embarcadero Center, Seventh Floor, San Francisco, California
or have dispatched it to a third party commercial carrier for delivery
within 3 days to the following non-CM/ECF participant:
Mark A. Byrne
Byrne & Nixon LLP
800 W. Sixth Street, Suite 430
Los Angeles, CA 90017

Jonathan M. Shaw
Bois, Schiller & Flexner, LLP
5301 Wisconsin Avenue NW
Washington, D.C. 20015

Steven C. Holtzman
Bois, Schiller & Flexner, LLP
1999 Harrison Street, Suite 900
Oakland, CA 94612

/s/ Jerome B. Falk, Jr.
JEROME B. FALK, JR.