The Ninth Circuit Court of Appeals has enforced a mediation confidentiality agreement and refused to nullify a mediated settlement agreement. In Facebook v. ConnectU, Inc., No. 08-16873, (9th Cir., April 11, 2011), Cameron and Tyler Winklevoss sued Mark Zuckerberg in Massachusetts claiming he stole the idea for the social networking site Facebook from them. Zuckerberg countersued the Winklevosses and their social networking site, ConnectU, in California. The United States District Court for the Northern District of California ordered the parties to mediation. Prior to mediation, all parties signed a confidentiality agreement which stipulated “all statements made during mediation were privileged, non-discoverable and inadmissible,” in any other proceeding. During mediation negotiations, the Winklevosses agreed to give up all of ConnectU in exchange for cash and a percentage of ownership in Facebook. The settlement fell apart during negotiations over the form of the final deal documents, and Facebook filed a motion with the district court seeking to enforce it. ConnectU argued that the Settlement Agreement was unenforceable because it lacked material terms and had been procured by fraud. The district court found the Settlement Agreement enforceable and ordered the Winklevosses to transfer all ConnectU shares to Facebook. This had the effect of moving ConnectU from the Winklevosses’ to Facebook’s side of the case. The Winklevosses then appealed to the Ninth Circuit Court of Appeals. The Court of Appeals rejected each of the Winklevosses’ claims. The court also stated, The Confidentiality Agreement, which everyone signed before commencing the mediation, provides that: “All statements made during the course of the mediation or in mediator follow-up thereafter at any time prior to complete settlement of this matter are privileged settlement discussions . . . and are nondiscoverable and inadmissible for any purpose including in any legal proceeding. . . . No aspect of the mediation shall be relied upon or introduced as evidence in any arbitral, judicial, or other proceeding.” (emphasis added). This agreement precludes the Winklevosses from introducing in support of their securities claims any evidence of what Facebook said, or did not say, during the mediation. See Johnson v. Am. Online, Inc., 280 F. Supp. 2d 1018, 1027 (N.D. Cal. 2003) (enforcing a similar agreement). 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 during settlement negotiations. Without such evidence, their securities claims must fail. See In re Daou Sys., Inc., 411 F.3d 1006, 1014 (9th Cir. 2005); see also McCormick v. Fund Am. Cos., 26 F.3d 869, 876 (9th Cir. 1994). According to the Appellate Court, The Winklevosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winklevosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they 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. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached. The Ninth Circuit Court of Appeals affirmed the Northern District of California and refused to nullify the parties’ settlement agreement. Technorati Tags: Mediation

Kristen Blankley, Assistant Professor at the University of Nebraska College of Law recently authored and interesting and useful article entitled Keeping a Secret from Yourself? Confidentiality When the Same Neutral Serves Both as Mediator and as Arbitrator in the Same Case, Baylor Law Review, Forthcoming. In her article, Professor Blankley examines the process of med-arb from a confidentiality and privilege standpoint. Here is the abstract: As the alternative dispute resolution field has grown, parties have designed their own processes from established processes in an attempt to best serve their process needs. One such hybrid process is mediation-arbitration, called “med-arb” for short. Med-arb involves a single neutral who first serves as a mediator, and, if the parties reach impasse in mediation, the neutral then serves as an arbitrator to resolve the dispute. Although the literature has given some attention to the benefits and drawbacks of med-arb, this Article examines the process in light of broad mediation confidentiality and privilege statutes. Because these laws have no exceptions for med-arb, parties who seek to utilize this process must execute careful waivers to avoid the possibility that any resulting arbitration award later be vacated by the courts. The article may be downloaded here (without charge) from Social Science Research Network. We welcome your comments. Technorati Tags: arbitration, ADR, law, Mediation

The Northern District of Texas has held that a signatory to an arbitration agreement may enjoin another signatory from pursuing litigation against a non-signatory. In Salad Bowl Franchise Corp. v. Crane, No. 3:11-CV-0034-D (N.D. Tex., March 17, 2011), Salad Bowl, a Texas corporation with its principal offices in Dallas, entered into a franchise agreement which contained an arbitration clause with New Mexico residents Mason and Henry Crane (“the Cranes”). Soon after, the Cranes opened a Salad Bowl franchise in a rented location in Albuquerque, NM. In August, 2010, the Cranes’ landlord notified the parties that the Cranes were in default on their business lease due to non-payment. The Cranes failed to bring the lease current and Salad Bowl terminated the franchise agreement. Salad Bowl initiated arbitration proceedings in Dallas before the American Arbitration Association. At the conclusion of the arbitral proceedings, the parties agreed to a draft Settlement Agreement and Mutual Release. The terms stated Salad Bowl would purchase the Cranes’ restaurant and related assets and further release the Cranes. The Settlement Agreement also contained an arbitration clause. After arbitration, Salad Bowl sent representatives to Albuquerque to prepare the transition and to execute the final Settlement Agreement. The Cranes failed to sign or return a fully executed copy of the Settlement Agreement and instead filed a lawsuit in New Mexico which alleged a number of claims related to both the Franchise and Settlement Agreements against Salad Bowl and Salad Bowl’s co-owners individually. Salad Bowl then filed a petition to compel arbitration and a motion for a preliminary injunction against the Cranes’ New Mexico lawsuit in the Northern District of Texas. The Northern District stated, Salad Bowl cites several cases that hold that a non-signatory can compel a signatory to submit to arbitration with the non-signatory . . . and one case that concludes that signatories cannot compel a non-signatory to arbitrate . . . in support of its slightly different proposition that a signatory should be able to enjoin another signatory from pursuing litigation against a non-signatory. (emphasis in original) Next, the court noted the Fifth Circuit recently held in an unpublished decision that certain non-signatories could compel a signatory to arbitration over litigation when the complaint alleged “substantially interdependent and concerted misconduct” among the non-signatories and another signatory party. The Northern District of Texas held, [T]he same rationale that enabled a non-signatory to compel a signatory to arbitrate with the non-signatories in Griffin and Grigson permits a signatory to compel another signatory to submit to arbitration against a non-signatory, so long as it is on the subject matter covered under the Agreement and the non-signatory is being sued for his acts as agent for the signatory. Since the Cranes’ New Mexico lawsuit was clearly brought against the named individuals for actions they allegedly engaged in while acting in their capacity as co-owners and representatives of Salad Bowl without distinguishing between the alleged actions of each individual or Salad Bowl, Salad Bowl demonstrated a substantial likelihood that the New Mexico lawsuit claims relied upon the terms of the agreement. According to the court, equitable estoppel was appropriate. The Northern District of Texas issued an injunction against the Cranes’ New Mexico lawsuit. Technorati Tags: arbitration, ADR, law

Via the ADR Prof Blog, we learned the U.S. Securities and Exchange Commission (SEC) approved a revised Discovery Guide applicable to FINRA securities arbitration customer cases on Friday. The proposed rule change was filed with the SEC on July 12, 2010 and published for comment in the Federal Register on August 3, 2010. The Commission received 55 comment letters on the proposed rule change. On February 8, 2011, the Commission received from FINRA a Response to Comments and Partial Amendment No. 1 to the proposed rule change. According to the SEC, The Commission believes that the revisions to the Discovery Guide will help reduce the number and limit the scope of disputes involving document production and other matters, thereby improving the arbitration process for the benefit of the public investors, broker-dealer firms, and associated persons who use the process. The revisions to the Discovery Guide are the result of over six years of consultation by FINRA with its constituents. The Commission also expects that further improvement of the process should be possible through the Discovery Task Force’s consideration of discovery issues as they arise. The SEC seeks to solicit comments on Amendment No. 1, “and to approve the proposed rule change, as modified by Amendment No. 1, on an accelerated basis.” Written comments should refer to File Number SR-FINRA-2010-035 and may be submitted: At the SEC’s website: http://www.sec.gov/rules/sro.shtml; Via email to: rule-comments@sec.gov; or Via regular mail (in triplicate) to: Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Although not yet published, comments are due within 21 days from the date the new rule appears in the Federal Register. The SEC will post all comments on its website. Meanwhile, the full text of the rule change is currently available here. Technorati Tags: ADR, law, arbitration