## Facts

- Facebook and Mark Zuckerberg were involved in multiple suits with ConnectU and its principals concerning the creation of a social-networking site and alleged misconduct between the parties.
- A court-ordered mediation was convened to achieve a global resolution of the related disputes.
- Before mediation, the parties signed a confidentiality agreement making mediation statements privileged, non-discoverable, and inadmissible in later proceedings.
- At mediation, the parties executed a short, handwritten term sheet memorializing the essential settlement terms, including:
  - Facebook’s acquisition of all ConnectU shares;
  - Consideration to ConnectU’s principals consisting of cash and a specified portion of Facebook common stock; and
  - Mutual, broad releases intended to end the disputes and related claims.
- After mediation, the parties disagreed over “final” documentation, and Facebook moved in federal district court to enforce the term sheet as a binding settlement.
- The district court enforced the settlement and ordered performance, including transfer of ConnectU’s shares to Facebook.
- ConnectU’s principals sought to unwind the settlement, alleging that Facebook misrepresented or failed to disclose information bearing on the value of the stock component and asserting securities-fraud theories under Rule 10b-5.
- The district court held the settlement enforceable, concluded the releases barred the securities-fraud attempt to rescind, and excluded mediation communications under the confidentiality agreement.

## Issues

1. Whether the handwritten term-sheet settlement reached in mediation was sufficiently definite and intended as a binding agreement under California contract law.
2. Whether a broad settlement release could bar later-asserted Rule 10b-5 claims seeking rescission, consistent with Exchange Act § 29(a)’s prohibition on waivers of compliance.
3. Whether the parties’ mediation confidentiality agreement rendered alleged negotiation statements and omissions inadmissible, leaving insufficient evidence to support a securities-fraud challenge to the settlement.

## Decision

- The Ninth Circuit affirmed enforcement of the settlement.
- The court held the term sheet was an enforceable contract because it reflected agreement on essential terms and an intent to be bound, even though additional documents were contemplated.
- The court held the settlement’s broad releases barred the post-settlement Rule 10b-5 rescission theory; § 29(a) did not invalidate releases given in a negotiated settlement resolving existing litigation among sophisticated, represented parties.
- The court enforced the mediation confidentiality agreement, which excluded the mediation communications on which the alleged fraud theory depended.

## Legal Principles

- Under California law, a settlement agreement is enforceable if it is sufficiently definite for a court to determine obligations and provide a remedy; ancillary open terms do not defeat formation when essential terms are settled and intent to be bound is shown.
- Exchange Act § 29(a) targets prospective contractual waivers of compliance, not releases exchanged in settlement of existing disputes; negotiated settlement releases may bar later securities-law claims aimed at undoing the settlement.
- Enforceable mediation confidentiality agreements can preclude use of mediation communications in later proceedings; when a fraud theory depends on barred communications, the evidentiary exclusion may defeat the claim.

## Conclusion

The Ninth Circuit enforced a mediated term-sheet settlement as a binding contract, upheld broad releases as barring a later Rule 10b-5 effort to rescind the deal notwithstanding Exchange Act § 29(a), and enforced mediation confidentiality to exclude negotiation evidence necessary to prove the alleged fraud.


Facebook, Inc. v. Pac. Nw. Software, Inc., 640 F.3d 1034 (9th Cir. 2011)