Wednesday, April 20, 2011

Ninth Circuit Addresses Mediation Agreements

The United States Court of Appeals for the Ninth Circuit issued an opinion a few days ago that supports the enforcement of agreements reached through mediation and upholds confidentiality provisions in private agreements to mediate.

The case involves a claim against Facebook and its founder, Mark Zuckerberg.  A competing social media site called ConnectU and its owners sued Facebook, claiming Facebook stole their site.  Facebook countersued.  After protracted litigation, including extensive discovery, the parties were ordered to mediate the case.  The district court did not appoint a mediator.  Instead, the parties chose a private mediator and entered into an agreement to mediate.  That agreement included a confidentiality agreement, which is common to most mediations, that required all negotiations and statements made during the mediation process to remain confidential, non-discoverable, and inadmissible in any court proceeding.

The mediation was successful, and the parties signed a handwritten term sheet.   Included in the term sheet were provisions that Facebook would prepare the final settlement documents and that all claims each party had against the other were released.

The agreement fell apart during negotiations over the final settlement documents.  Facebook sought to enforce the mediation agreement, and the district court agreed.  The case was appealed to the Ninth Circuit.

In upholding the settlement agreement signed at the mediation, the Ninth Circuit noted that both sides were sophisticated businesses with legal teams and various experts.  The Court went on to state:

Parties involved in litigation know that they are locked in combat with an adversary and thus have every reason to be skeptical of each other’s claims and representations. They can use discovery to ferret out a great deal of information before even commencing settlement negotiations.  They can further protect themselves by requiring that the adverse party supply the needed information, or provide specific representations and warranties as a condition of signing the settlement agreement.  Such parties stand on a very different footing from those who enter into an investment relationship in the open market, where it’s reasonable to presume candor and fair dealing, and access to inside information is often limited.  There are also very important policies that favor giving effect to agreements that put an end to the expensive and disruptive process of litigation. (Emphasis added)

The Court went on to state, “An agreement meant to end a dispute between sophisticated parties cannot reasonably be interpreted as leaving open the door to litigation about the settlement negotiation process.”  The Court enforced the mediation confidentiality agreement and denied the fraud and securities claims the owners of ConnectU tried to make based upon statements made during the mediation.

This opinion gives an important boost to the mediation process.  It confirms that mediation is confidential (here by a confidentiality agreement as opposed to court rule) and that the agreements reached in mediation are enforceable.  As the Court concluded, “At some point, litigation must come to an end.”

The case is Facebook v. ConnectU, Inc., case number 08-16745.  A copy of the opinion can be found at

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