Facebook and The Winklevoss Twins: Ninth Circuit Upholds Contractual Mediation Confidentiality

Over the last several years, California courts have clarified and strengthened mediation confidentiality. In Cassel v. Superior Court (2011) 51 Cal.4th 113, Radford v. Shehorn (2010) 187 Cal.App.4th 852, and Simmons v. Ghaderi (2008) 44 Cal.4th 570, California courts have construed mediation confidentiality very broadly, refusing to allow statements made in the course of mediation into evidence.

But mediation confidentiality in California courts is based on the California Evidence Code. Do the same rules apply in federal court?

The Ninth Circuit addressed this issue in The Facebook, Inc. v. Pacific Northwest Software, Inc., --- F.3d ----, 2011 WL 1346951 (9th Cir. 4/11/11). The case concerns allegations that Mark Zuckerberg stole the idea for facebook.com from Cameron and Tyler Winklevoss, as depicted in the film, The Social Network.

The district court ordered the parties to mediation. Before mediation, they signed a confidentiality agreement, stipulating that all statements made during mediation were privileged, non-discoverable and inadmissible "in any arbitral, judicial, or other proceeding." At mediation, the parties signed a "Term Sheet & Settlement Agreement."

The Winklevosses agreed to give up ConnectU in exchange for cash and a piece of Facebook. The parties stipulated that the Settlement Agreement was “confidential,” “binding” and “may be submitted into evidence to enforce [it].” The Settlement Agreement also purported to end all disputes between the parties.

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.

Slip op. at 1.

The Court held that the settlement agreement was enforceable. First, it contained all necessary material terms, even though it contemplated additional documents to complete the deal.

California allows parties to delegate choices over terms, so long as the delegation is constrained by the rest of the contract and subject to the implied covenant of good faith and fair dealing. Delegation isn't necessary for a contract like the Settlement Agreement to be enforceable, as the court may fill in missing terms by reference to the rest of the contract, extrinsic evidence and industry practice. But the clause quoted above leaves no doubt that the Winklevosses and Facebook meant to bind themselves and each other, even though everyone understood that some material aspects of the deal would be papered later.

Slip op. at 2.

The Court then reached the confidentiality issue.

After signing the Settlement Agreement, Facebook notified the Winklevosses that an internal valuation prepared to comply with Section 409A of the tax code put the value of its common stock at $8.88 per share. The Winklevosses argue that Facebook misled them into believing its shares were worth four times as much. Had they known about the $8.88 valuation during the mediation, they claim, they would never have signed the Settlement Agreement. The Winklevosses charge Facebook with violating Rule 10b–5, and they seek rescission of the Settlement Agreement under Section 29(b) of the Securities Exchange Act of 1934 (the Exchange Act).

Slip op. at 3. The Court held that contractual mediation confidentiality -- not any common law privilege, Federal Rule of Evidence, or Local Rule -- prohibited introduction of evidence of anything said during the mediation.

The district court excluded this evidence under its Alternative Dispute Resolution (ADR) Local Rule 6–11, which it read to create a “privilege” for “evidence regarding the details of the parties' negotiations in their mediation.” But privileges are created by federal common law. See Fed.R.Evid. 501. It's doubtful that a district court can augment the list of privileges by local rule. In any event, the parties used a private mediator rather than a court-appointed one. Their mediation was thus “not subject to the ... ADR Local Rules,” including Local Rule 6–11.

Slip op. at 5.

Nevertheless, the district court was right to exclude the proffered evidence. 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 non-discoverable 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.

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. 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.

Slip op. at 5.

The moral of the story for us -- mediators and parties going to mediation -- is to be sure that everyone signs a mediation confidentiality agreement before the mediation starts. And if you reach a settlement agreement at mediation, make sure you get the signatures on the dotted line before anyone leaves.

The opinion is available here.

Cassel v. Superior Court: Cal. Supremes Uphold Mediation Confidentiality

In Cassel v. Superior Court (Wasserman, Comden, Casselman & Pearson, L.L.P.) (1/13/11) 51 Cal.4th 113, the California Supreme Court continued a trend of enforcing strictly California's policy in favor of mediation confidentiality, holding that communications between attorney and client during the course of mediation cannot come into evidence in the client's subsequent malpractice action against the attorney and that all discussions conducted in preparation for a mediation as well as all mediation-related communications that take place during the mediation itself are protected from disclosure, even if these do not occur in the presence of the mediator or other disputants. The Court summarized the case as follows:

Petitioner Michael Cassel agreed in mediation to the settlement of business litigation to which he was a party. He then sued his attorneys for malpractice, breach of fiduciary duty, fraud, and breach of contract. His complaint alleged that by bad advice, deception, and coercion, the attorneys, who had a conflict of interest, induced him to settle for a lower amount than he had told them he would accept, and for less than the case was worth.   

Prior to trial, defendant attorneys moved, under the statutes governing mediation confidentiality, to exclude all evidence of private attorney-client discussions immediately preceding, and during, the mediation concerning mediation settlement strategies and defendants' efforts to persuade petitioner to reach a settlement in the mediation. The trial court [L.A. Superior, Judge McLaughlin] granted the motion, but the Court of Appeal vacated the trial court's order. 

Slip op. at 1. 
The Court began its analysis by stating the purposes of mediation confidentiality: 

As noted above, the purpose of these provisions is to encourage the mediation of disputes by eliminating a concern that things said or written in connection with such a proceeding will later be used against a participant. “Toward that end, ‘the statutory scheme ... unqualifiedly bars disclosure of communications made during mediation absent an express statutory exception.’ “ Judicial construction, and judicially crafted exceptions, are permitted only where due process is implicated, or where literal construction would produce absurd results, thus clearly violating the Legislature's presumed intent. Otherwise, the mediation confidentiality statutes must be applied in strict accordance with their plain terms. Where competing policy concerns are present, it is for the Legislature to resolve them. 

Slip op. at 6 (citations omitted). The Court then reviewed a number of recent decisions upholding mediation confidentiality: Foxgate Homeowners' Assn. v. Bramalea California, Inc. (2001) 26 Cal.4th 1 (barring evidence that party refused to mediate in good faith); Rojas v. Superior Court (2004) 33 Cal.4th 407 (mediation confidentiality applies broadly to all "writings" "prepared for the purpose of, in the course of, or pursuant to, a mediation"); Fair v. Bakhtiari (2006) 40 Cal.4th 189 (written settlement agreement reached in mediation can be disclosed only if it includes, on its face, "a statement that it is ‘enforceable’ or ‘binding,’ or a declaration in other terms with the same meaning"); Simmons v. Ghaderi (2008) 44 Cal.4th 570 (judicial doctrines of equitable estoppel and implied waiver are not valid exceptions to the strict technical requirements set forth in the mediation confidentiality statutes for the disclosure and admissibility of oral settlement agreements reached in mediation). 

Here, as in Foxgate, Rojas, Fair, and Simmons, the plain language of the mediation confidentiality statutes controls our result. Section 1119, subdivision (a) clearly provides that “[n]o evidence of anything said or any admission made for the purpose of, in the course of, or pursuant to, a mediation ... is admissible or subject to discovery....” As we noted in Simmons, section 1119, adopted in 1997, “is more expansive than its predecessor, former section 1152.5. Section 1119, subdivision (a), extends to oral communications made for the purpose of or pursuant to a mediation, not just to oral communications made in the course of the mediation. [Citation.]”   

The obvious purpose of the expanded language is to ensure that the statutory protection extends beyond discussions carried out directly between the opposing parties to the dispute, or with the mediator, during the mediation proceedings themselves. All oral or written communications are covered, if they are made “for the purpose of” or “pursuant to” a mediation. (§ 1119, subds. (a), (b) .) It follows that, absent an express statutory exception, all discussions conducted in preparation for a mediation, as well as all mediation-related communications that take place during the mediation itself, are protected from disclosure. Plainly, such communications include those between a mediation disputant and his or her own counsel, even if these do not occur in the presence of the mediator or other disputants. 

Slip op. at 8-9. 
Further, the Court held that while a represented party may waive the privilege for communications between that party and counsel, "the mediation confidentiality statutes do not create a “privilege” in favor of any particular person." Slip op. at 12. Rather, "all mediation participants involved in a mediation-related communication must agree to its disclosure." Ibid. As a result, the attorney defendants in this case could object to introduction of communications with their client that took place both preceding and during the mediation. 

The opinion is available here. 

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Cal. Supreme Court Schedules Oral Argument for Mediation Confidentiality Dispute

The California Supreme Court will hear oral argument on Cassel v. Superior Court (Wasserman Comden Casselman & Pearson) on November 2, 2010, at 9:00 a.m., in San Francisco.

See our original post on Cassel here.

Court of Appeal Requires Personal Consent for Enforceable Settlement Agreement

Critzer v. Enos (8/30/10) --- Cal.App.4th ---, emphasizes the need for the consent of all parties -- either in writing or orally before the court -- in order to obtain an enforceable settlement agreement.

In a multi-party action, the parties recited the terms of a settlement agreement in open court, and three of the five parties gave their consent on the record. The parties could not agree on the language of a formal settlement agreement, and one brought a motion to enforce settlement under California Code of Civil Procedure section 664.6, which provides:

If parties to pending litigation stipulate, in a writing signed by the parties outside the presence of the court or orally before the court, for settlement of the case, or part thereof, the court, upon motion, may enter judgment pursuant to the terms of the settlement. If requested by the parties, the court may retain jurisdiction over the parties to enforce the settlement until performance in full of the terms of the settlement.

The trial court granted the motion. The Court of Appeal, noting that the law requires the personal assent of the parties themselves, and not just their counsel, reversed:

We conclude further that because there was neither an oral settlement all parties personally agreed upon, nor a written settlement agreement signed by all of the parties, the court lacked authority under the summary procedure of section 664.6 to enforce any settlement.

Slip op. at 2.

The full text of the opinion is here.

Court of Appeal Rules Mediator's Testimony Inadmissible in Settlement Agreement Dispute

Radford v. Shehorn (August 19, 2010) --- Cal.App.4th ----, is one of those cases that's not just well reasoned, it's well written and fun to read. It asks whether a mediator can submit a declaration in support of a motion to enforce a settlement agreement. It begins:

Mediators facilitate settlement of legal disputes. They use a variety of techniques to achieve that goal which include listening, enlightening, suggesting, empathizing and, sometimes, cajoling. But once the mediation is concluded, the mediator may not offer clarification concerning the mediation or a disputed settlement unless the parties agree otherwise. Like an actor whose concluding scene occurs in Act 2, the mediator may not reenter the stage to play a part in Act 3.

The parties here signed a settlement agreement during a mediation. One party brought a motion to enforce the agreement pursuant to Code of Civil Procedure section 664.6. The first page of the agreement contains a waiver of mediation confidentiality. A question arose whether the first page was part of the agreement. The trial court found it was and granted the motion to enforce the settlement.

We conclude the trial court erred in admitting the mediator's declaration into evidence, but that the error was harmless. We affirm.

Slip op. at 1.

The Court reasoned that mediation confidentiality prohibits a mediator from testifying - in person or in a declaration - to anything having to do with a settlement agreement drafted at a mediation, including the number of pages the agreement contains. The trial court erred in admitting the mediator's declaration, but the Court held that the error was harmless because the motion was supported by counsel's declaration that the parties executed the settlement agreement. Although mediation confidentiality prohibits attorneys from testifying as to things said at mediation, it does not prevent them from testifying as to conduct, such as the parties signing the settlement agreement. That said, the Court affirmed the order enforcing the agreement.

The opinion is available here.