From Facebook, Inc. v. Pac. Nw. Software, Inc., 2011 U.S. App. LEXIS 7430 (9th Cir. Apr. 11, 2011):

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 this 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).

Rule 10b-5 prohibits fraud, whether by commission or omission, "in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5. We assume, without deciding, that a party negotiating an exchange of shares to settle a lawsuit could violate Rule 10b-5 by misstating or hiding information that would materially change the other side's evaluation of the settlement. Cf. Green v. Ancora-Citronelle Corp., 577 F.2d 1380, 1382-83 (9th Cir. 1978); Foster v. Fin. Tech., Inc., 517 F.2d 1068, 1071-72 (9th Cir. 1975).

Section 29(b) renders voidable "[e]very contract made in violation of any provision of [the securities laws] or of any rule or regulation thereunder, and every contract . . . the performance of which involves [such a] violation." 15 U.S.C. § 78cc(b); see Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 387-88, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970). If Facebook violated Rule 10b-5, the Winklevosses would be entitled to rescission of the Settlement Agreement. See Mills, 396 U.S. at 387-88; Royal Air Props., Inc. v. Smith, 312 F.2d 210, 213 (9th Cir. 1962).

The Winklevosses are sophisticated parties who were locked in a contentious struggle over ownership rights in one of the world's fastest-growing companies. They engaged in discovery, which gave them access to a good deal of information about their opponents. They brought half-a-dozen lawyers to the mediation. Howard Winklevoss — father of Cameron and Tyler, former accounting professor at Wharton School of Business and an expert in valuation — also participated. A party seeking to rescind a settlement agreement by claiming a Rule 10b-5 violation under these circumstances faces a steep uphill battle. See Petro-Ventures, Inc. v. Takessian, 967 F.2d 1337, 1341-42 (9th Cir. 1992); see also Harsco Corp. v. Segui, 91 F.3d 337, 343-44 (2d Cir. 1996); Locafrance U.S. Corp. v. Intermodal Sys. Leasing, Inc., 558 F.2d 1113, 1115 (2d Cir. 1977); cf. Mergens v. Dreyfoos, 166 F.3d 1114, 1117-18 (11th Cir. 1999) (applying Florida law).

In Petro-Ventures, we distinguished between buyers of securities in the context of "an exclusively business relationship," 967 F.2d at 1341, and those "acting in the adversarial setting that is characteristic of litigation," id. at 1342. When adversaries "in a roughly equivalent bargaining position and with ready access to counsel" sign an agreement to "establish[ ] a general peace," we enforce the clear terms of the agreement. Id. (citing Locafrance, 558 F.2d at 1115). 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. See Mergens, 166 F.3d at 1118; cf. Goodman v. Epstein, 582 F.2d 388, 403-04 (7th Cir. 1978) (holding that parties signing a release of claims have a "duty of inquiry"); Moseman v. Van Leer, 263 F.3d 129, 133-34 & n.3 (4th Cir. 2001) (same). 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. See Harsco, 91 F.3d at 344. 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. See, e.g., Franklin v. Kaypro Corp., 884 F.2d 1222, 1229 (9th Cir. 1989) ("[I]t hardly seems necessary to point out that there is an overriding public interest in settling and quieting litigation."). We analyze the Winklevosses' securities claims in light of these inhospitable principles.

Release of claims. The Settlement Agreement grants "all parties" "mutual releases as broad as possible"; the Winklevosses "represent and warrant" that "[t]hey have no further right to assert against Facebook" and "no further claims against Facebook & its related parties." The Winklevosses maintain that they didn't discover the facts giving rise to their Rule 10b-5 claims until after they signed these releases. They argue that the releases don't foreclose their challenge to the Settlement Agreement because Section 29(a) of the Exchange Act precludes a mutual release of unknown securities fraud claims arising out of negotiations to settle a pending lawsuit. See 15 U.S.C. § 78cc(a) (voiding "[a]ny condition, stipulation, or provision binding any person to waive compliance with" the securities laws).

Petro-Ventures dealt with just such a settlement agreement. 967 F.2d at 1338-39. We held that parties possessing roughly equivalent bargaining strength could release all claims arising out of the transaction that gave rise to the litigation, even though they hadn't yet discovered some of the securities claims when they signed the settlement. Id. at 1342. Such a release is valid if it "is unambiguous in conveying the intent of the parties to release all unknown claims." Id. The Settlement Agreement the parties negotiated granted "releases as broad as possible." As sophisticated litigants, the Winklevosses or their counsel should have been familiar with Petro-Ventures and understood that the broadest possible release includes both known and unknown securities claims. 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. See Petro-Ventures, 967 F.2d at 1342 (discussing the parties' "intent to end their various disputes . . . once and for all" (ellipses in original)). A release in such an agreement would be useless to end litigation if it couldn't include claims arising from the settlement negotiations. Cf. Sander v. Weyerhaeuser, 966 F.2d 501, 503 (9th Cir. 1992).

The Winklevosses point out that Facebook's alleged securities law violations took place in connection with the settlement itself, whereas the unknown securities claim in Petro-Ventures arose out of facts that occurred prior to the settlement. This is a distinction without a difference: Both here and in Petro-Ventures the parties gave up securities law claims they didn't know they had. If the release is effective in the one case, there's no principled reason it shouldn't be effective in the other. The district court correctly concluded that the Settlement Agreement meant to release claims arising out of the settlement negotiations, and that the release was valid under section 29(a).

Securities fraud claims. In any event, the Winklevosses' securities fraud claims fail on the merits. The Winklevosses make two related claims: that Facebook led them to believe during the settlement negotiations that its shares were worth $35.90, even though Facebook knew that its shares were, in fact, worth only $8.88; and that Facebook failed to disclose material information, namely the $8.88 tax valuation, during the negotiations.

In support of these claims, the Winklevosses proffered evidence of what was said and not 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. Cf. In re Grand Jury Subpoena Dated Dec. 17, 1996, 148 F.3d 487, 491-93 (5th Cir. 1998) (examining whether a federal statute created an evidentiary privilege). In any event, the parties used a private mediator rather than a court-appointed one. See N.D. Cal. ADR L.R. 3-4(b) ("A private ADR procedure may be substituted for a Court program if the parties so stipulate and the assigned Judge approves."). Their mediation was thus "not subject to the . . . ADR Local Rules," including Local Rule 6-11. Id.

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. (emphasis added).

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. See Johnson v. Am. Online, Inc., 280 F. Supp. 2d 1018, 1027 (N.D. Cal. 2003) (enforcing a similar agreement). 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. See In re Daou Sys., Inc., 411 F.3d 1006, 1014 (9th Cir. 2005); see also McCormick v. Fund Am. Cos., 26 F.3d 869, 876 (9th Cir. 1994).

The Winklevosses argue that if the Confidentiality Agreement is construed to defeat their Rule 10b-5 claims, it is void under section 29(a) of the Exchange Act as an invalid waiver. But section 29(a) "applie[s] only to express waivers of noncompliance," Levy v. Southbrook Int'l Invs., Ltd., 263 F.3d 10, 14, 18 (2d Cir. 2001), with the "substantive obligations imposed by the Exchange Act," Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 228, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987). The Confidentiality Agreement merely precludes both parties from introducing evidence of a certain kind. Although this frustrates the securities claims the Winklevosses chose to bring, the Confidentiality Agreement doesn't purport to limit or waive their right to sue, Facebook's obligation not to violate Rule 10b-5 or Facebook's liability under any provision of the securities laws. See McMahon, 482 U.S. at 230.

Even if we were to construe the Confidentiality Agreement as a waiver of the Winklevosses' 10b-5 claims, it wouldn't violate section 29(a). Petro-Ventures expressly considered a section 29(a) argument in the context of a global settlement agreement between sophisticated parties engaged in litigation. 967 F.2d at 1341-43. The court distinguished an earlier case, Burgess v. Premier Corp., 727 F.2d 826 (9th Cir. 1984), which had applied section 29(a) to preclude the waiver of unknown claims by plaintiffs who were "not acting in the adversarial setting that is characteristic of litigation." Petro-Ventures, 967 F.2d at 1342. Petro-Ventures held that "a totally different situation occurs where a plaintiff has affirmatively acted to release another party from any possible liability in connection with a transaction in securities." ... In such situations, the parties are "not so concerned with protecting their rights as investors as they [are] with establishing a general peace." Id. We are bound by Petro-Ventures to conclude that the Confidentiality Agreement did not violate section 29(a). Cf. Locafrance, 558 F.2d at 1115.