Rising site valuation plus litigant-friendly US legal system proving a real headache for founder, writes JOHN COLLINS
IT SEEMS everyone wants a piece of Facebook these days. The social network, which is now used by one million Irish people a day and has more than 500 million registered users worldwide, is now facing at least two court cases challenging its ownership, having already settled with one of the site’s co-founders.
The case of the Winklevoss twins, the former Olympic rowers, and their business partner Divya Narendra, has been well documented and even featured in The Social Network, the Hollywood dramatisation of Facebook’s rise. The trio claim Facebook founder Mark Zuckerberg stole the idea for the site after he did some work on their service, Harvard Connect, later renamed ConnectU.
The Winklevoss twins and Narenda settled their case for $65 million in 2008 – some $45 million in stock and $20 million in cash. Despite the fact the settlement is now said to be worth $200 million (thanks to the $50 billion and rising valuation of Facebook), the twins returned to court earlier this month looking for more.
“At some point, litigation must come to an end,” Alex Kozinski, the chief judge for the 9th US Circuit Court of Appeals wrote in his judgement. “That point has now been reached.”
Despite this, a lawyer for the Winklevosses this week said they plan to appeal the decision.
Facebook has previously settled with Eduardo Saverin, a Brazilian who was in Harvard with Zuckerberg. He was the site’s first salesman and provided finance to allow the site buy servers to support its early rapid growth. That settlement was private but it is estimated that Saverin holds 5 per cent of the company’s stock – valued at a cool $2.5 billion.
More worrying, both for Zuckerberg’s personal fortune and Facebook itself, is the re-emergence of a suit from Paul Ceglia, a resident of upstate New York who claims he is entitled to 84 per cent of Facebook based on a contract he signed with Zuckerberg for work on his website Streetfax.
While the case was originally filed last July, it was largely dismissed on the basis of the long delay in filing it and Ceglia’s colourful legal record. He pleaded guilty to possession of magic mushrooms in 1997, which is a felony offence under US law. In 2009 he was sued by New York attorney general Andrew Cuomo who alleged that a wood pellet fuel company he was operating with his wife was in fact a massive fraud. The case settled last year after the Ceglias paid $125,000 in compensation to customers.
In preparation for his defence of that case, Ceglia says he discovered an old PC which contained e-mails between himself and Zuckerberg from 2003. He says the e-mails entitled him to 50 per cent of the “the Face Book” in exchange for an investment of $1,000. Under the terms of the contract, detailed in his complaint, Ceglia says he was entitled to an additional 1 per cent of the business for every day after January 1st, 2004, that it wasn’t finished. Ceglia has updated his complaint with the new evidence and now has the backing of blue-chip law firm DLA Piper.
“We are quite sure we did not sign a contract that says that they have any right to ownership over Facebook,” Zuckerberg said in an interview with ABC News when Ceglia’s claims first emerged.
In a statement released to The Irish Times, Facebook spokesman Andrew Noyes didn't pull any punches: "We are pleased that the court agreed with us that this case belongs in the federal court. This is a fraudulent lawsuit brought by a scam artist, and we look forward to defending it in federal court."
Alistair Payne, a partner with Dublin law firm Matheson Ormsby Prentice, says the US legal system encourages the sort of challenges Facebook is facing.
“It allows lawyers to work on a contingency fee basis so you don’t have to stump up the costs in advance,” said Payne. “And generally in the US courts, costs don’t follow the event; the winner usually can’t claim legal costs from the losing parties.”
Payne suggests the Ceglia case seems to have more substance as there is some kind of contract with Zuckerberg, which is “more than university pals in residences discussing potential projects”, as in the Winklevoss case.
He said start-ups should be sure to protect their ideas with patents and copyright, while relationships with employees and third parties providing services should be clearly set out in contracts.
Zuckerberg certainly seems to have learned some hard lessons from his court battles.
“I started the site when I was 19. I didn’t know much about business back then,” Zuckerberg told Diane Sawyer of ABC News. When pressed he admitted he would have done a lot differently.
“I hope that instead of making the mistakes that I made, I would have made different mistakes. I think this has been an extremely educational experience”.
The 26-year-old whose senior employees still refer to him as “Zuck” looks like he hasn’t seen the last of a US courtroom.
