Quinn Emanuel Urquhart & Sullivan has claimed success in an arbitration against its former clients, the founders of a website called ConnectU Inc., whom the firm represented in their suit against their Harvard classmate, Mark Zuckerberg, who started Facebook, for allegedly stealing the idea for the social networking site from them.
ConnectU's founders had contended Quinn Emanuel committed malpractice by failing to obtain recent valuations of Facebook Inc.'s common stock before negotiating a settlement, resulting in a recovery that was smaller than they claim it should have been.
In papers filed in Manhattan Supreme Court, Los Angeles-based Quinn Emanuel said an arbitration panel on Aug. 25 ruled that the firm "earned its full contingency fee" from a 2008 settlement the firm obtained for its clients. While Quinn Emanuel did not disclose in court papers the amount of its award, it had been seeking $13 million.
The arbitration panel also found that Quinn Emanuel committed no malpractice, according to an Aug. 27 affidavit by Richard I. Werder Jr., a partner at the firm. The reported $65 million settlement was mostly made up of stock in Facebook, which is privately owned and whose shares are not publicly traded.
Quinn Emanuel is seeking to confirm the award, which would also bring with it 6 percent annual interest. The ConnectU founders signaled in court filings on Aug. 31 that they may seek to have the award vacated or modified. A hearing before Manhattan Supreme Court Justice Richard Lowe III is scheduled for Oct. 12.
The firm also has moved to keep the award itself confidential, a request backed by ConnectU founders on Friday. In a filing Aug. 27, Werder said Quinn Emanuel was seeking to seal the award, which was filed as an exhibit, because it included "a document which was generated in the parties' confidential arbitration and which contains statements regarding privileged attorney-client communications and a confidential settlement held between [ConnectU's founders] and Facebook, Inc."
In an order filed Sept. 3, Justice Lowe declined to sign off on sealing the records and instead directed the law firm to request a status conference on the subject.
Sean F. O'Shea, a lawyer for ConnectU founders at O'Shea Partners, declined to comment. Werder also declined to comment.
The arbitration panel's ruling is the latest in a more than two-year-long dispute between the firm and its former clients, ConnectU founders Divya Narendra and twins Cameron and Tyler Winklevoss. The Winklevoss' father, Howard Winklevoss, is also a party in the fee dispute with Quinn Emanuel.
While undergraduates at Harvard, Narendra and the Winklevoss twins recruited Zuckerberg to work on their social networking site, ConnectU. A few months later, Zuckerberg launched a rival site, Facebook.
The ConnectU founders, represented by Finnegan, Henderson, Farabow, Garrett & Dunner, sued Facebook in the U.S. District Court of Massachusetts in 2004, accusing Zuckerberg of misappropriating trade secrets and fraud. The litigation is featured in the new David Fincher film "The Social Network," which opens Oct. 1.
The ConnectU team hired Quinn Emanuel in 2007, with New York partners Peter Calamari, Werder and William Price, according to an engagement letter. Working with lawyers at Quinn and Finnegan Henderson, ConnectU reached a settlement with Facebook in February 2008.
While the settlement was confidential, Quinn Emanuel later inadvertently disclosed that the value was $65 million. In the arbitration, the firm sought a 20 percent contingency fee it valued at $13 million, also putting the settlement's total value at $65 million.
ConnectU, though, has contended the $65 million figure was overstated. The founders said they signed the settlement agreement believing Facebook's privately owned shares were worth $35.90 each, a figure they came to based on Microsoft Corp.'s October 2007 $240 million investment in the company. But as the settlement was being finalized, they discovered more recent tax documents filed with the California secretary of state in February 2008 that valued Facebook shares at $7.75 each.
ConnectU tried to challenge the settlement, but Facebook successfully argued before a Northern District of California judge that it should be enforced. An appeal is pending before the 9th U.S. Circuit Court of Appeals.
FEE DISPUTE
Quinn Emanuel, meanwhile, began in April 2008 an arbitration seeking its 20 percent fee. ConnectU filed a petition in July 2008 with the Manhattan Supreme Court to stay the arbitration. Justice Lowe in September 2008 ruled Quinn Emanuel was entitled to arbitrate the claim.
In arbitration, ConnectU's founders claimed Quinn Emanuel was not owed the full $13 million and that the firm was negligent in not seeking the more recent valuation of Facebook's shares before negotiating the settlement. ConnectU's founders at one point obtained an arbitration subpoena against third parties Facebook, Microsoft and investment bank Houlihan, Lokey, Howard & Zukin to gather information on Facebook's stock's value. But Justice Lowe in March blocked the subpoenas.
Hearings before the arbitration panel ran 11 days in three periods from October 2009 to this May, according to Werder's affidavit. The transcript runs 2,600 pages and both sides submitted more than 500 exhibits.
The case is ConnectU Inc. v. Quinn Emanuel Urquhart Oliver & Hedges LLP, 602082/08.
