Facebook: It's All About Quinn Fee Fight

Zusha Elinson

The Recorder

After winning its battle to enforce a settlement with onetime rival ConnectU, Facebook accused ConnectU of trying to get out of the agreement because of a fee fight with its lawyers at Quinn Emanuel Urquhart Oliver & Hedges.

Both parties agreed in February to settle lawsuits that accused 24-year-old Facebook CEO Mark Zuckerberg of stealing ideas and success from ConnectU, a site run by his former Harvard classmates. But ConnectU has since argued in court that the settlement was a fraud.

In an order issued late Wednesday, San Jose, Calif., federal Judge James Ware sided with Facebook and its lawyers at Orrick, Herrington & Sutcliffe, enforcing a settlement that will give ConnectU undisclosed amounts of stock and cash. Ware shot down ConnectU's arguments that Facebook had cheapened the stock portion by deliberately concealing the true value of the hugely successful social networking site.

Instead, the judge wrote that ConnectU had been represented by "reputable counsel" and could've done more due diligence or asked for more assurances during negotiations, but decided not to.

In a statement issued Thursday, Facebook claimed that the dispute over the settlement wasn't about fraud; it was about ConnectU and its lawyers at Quinn Emanuel.

"We were disappointed that we had to litigate the settlement, as we believed we were caught in the middle of a fee dispute between ConnectU's founders and its former counsel," the statement read.

ConnectU fired Quinn Emanuel in late April as disagreements between the parties over the February settlement came to a head, with Facebook filing a sealed motion to enforce the agreement. At the same time, Quinn Emanuel filed a lien against anything ConnectU got from Facebook, to cover its fees and costs.

Quinn Emanuel's John Quinn declined to comment on Facebook's statement, and ConnectU did not return e-mails seeking comment about the apparent falling out and Ware's ruling.

ConnectU had used Finnegan, Henderson, Farabow, Garrett & Dunner from the beginning of its four-year battle, which took place in courtrooms in Massachusetts and California. It also brought on well-known trial firm Quinn Emanuel, whose lawyers worked on the Massachusetts cases as well as the controversial settlement in February.

John Hornick, a Finnegan partner who worked on the case, referred all questions about the settlement to Quinn Emanuel. "Finnegan had nothing to do with that," Hornick said.

SETTLEMENT PROBLEMS

The settlement came after the parties were in mediation before Antonio Piazza on Feb. 22, and it came in the form of a handwritten 1 1/2-page document, according to court filings. That agreement -- minus the amounts -- was made public for the first time in Judge Ware's order.

It's signed by Zuckerberg and ConnectU founders Cameron and Tyler Winklevoss and Divya Narendra. It includes the standard terms: It releases the parties from the claims, sets an agreement to execute more formal documents, and lays out the amount to be paid.

But ConnectU tried to argue that material terms had been omitted and that it had been bamboozled by Facebook on the value of the private company's stock. According to ConnectU's lawyers, Facebook concealed the fact that its board had adopted a new valuation for the company's stock since it had announced it was worth $15 billion last fall after a $240 million investment by Microsoft. That new valuation left the stock portion of the settlement worth "only one-quarter of its apparent value based on Facebook's public press releases," the ConnectU's lawyers wrote in a court filing.

Ware ruled that ConnectU failed to prove that Facebook had made any misrepresentations during negotiations, because there was no evidence it had made any representations and warranties about the value of the stock. Ware also wrote that both parties knew that the shares being exchanged were in a different class than the ones Microsoft got. Ware wrote that the onus had been on ConnectU to find out more, if the company had thought it necessary, during negotiations.

"The individual signatories to the agreement are sophisticated business parties who were represented by reputable counsel at the mediation," Ware wrote. "Either party could have chosen to condition the financial exchange being negotiated on representations and warranties of the value of the stock involved or to conduct their own due diligence with respect to Facebook's valuation. Neither party chose these courses of conduct."

Facebook also said in its statement that ConnectU had more than its fair share of advisers in the settlement negotiations.

"ConnectU's founders were represented by six lawyers and a professor at Wharton Business School when they signed the settlement agreement," Facebook said. "The ConnectU founders understood the deal they made, and we are gratified that the court rejected their false allegations of fraud."

Quinn, who was not directly involved in his firm's work on the settlement negotiations, declined to discuss the deal at all, and would only confirm that his firm was involved in the settlement negotiations. The Quinn lawyers who had been directly involved in the litigation did not return phone calls over the past week.

A spokeswoman from Boies, Schiller & Flexner -- which is handling the dispute over the settlement for ConnectU and was hired after Quinn was fired -- said her firm had no comment.

Neel Chatterjee, who led the Orrick team representing Facebook, also declined to comment.

The two sides will be back in court on July 2 to show cause why the judgment to enforce the settlement should not be entered. On Monday, Ware barred the public from the courtroom while the parties argued Facebook's motion to enforce the settlement.