Man claims to own 84% stake in Facebook - judge grants TRO in his favor

http://online.wsj.com/article/SB10001424052748703283004575363330101240888.html?mod=WSJ_hps_MIDDLETopStories

by grellas • 16 years ago

138 41 16 years ago

online.wsj.com

troygoode• 16 years ago

The date of the contract appears to conflict with previous accounts of the creation of Facebook. Mr. Zuckerberg built a predecessor to Facebook called Facemash in October and November 2003, but Mr. Zuckerberg didn't register the domain thefacebook.com until January 2004.

In 2009, New York's Attorney General Andrew M. Cuomo accused Mr. Ceglia of defrauding customers of his wood-pellet fuel company, according to a news release from the Attorney General's office. The state claimed that he took more than $200,000 from consumers and then failed to deliver any products or refunds. That case is still active.

Sounds like this is a bogus case. I can't imagine the pit in Zuckerburg's stomach right now it were true though...

rokhayakebe2• 16 years ago

If this was true, someone would agree to a settlement or someone would disappear.

baddox• 16 years ago

Surely Zuckerburg would have at least thought about that old contract if it were real. Perhaps he's been paying him to keep quiet but the guy's finally pissed and going public?

fleitz3• 16 years ago

Zuckerberg has nothing to worry about, everyone knows the he got the code from ConnectU.

On a more serious note, this screams Doctrine of Laches (sleeping on your rights). It's going to be rather difficult to have missed the emergence of Facebook and with an 83% share why he had not been involved in any of the VC rounds, or any decisions in a company worth $15 billion.

rbanffy3• 16 years ago

But this guy says it's his design... It could be that Zuckerberg took the code from ConnectU and the design from this other guy to make Facebook.

code_duck• 16 years ago

How about this guy? He says he was ripped of by Zuckerberg in a similar fashion. He had a site colloquially known as, guess what, 'the Face Book', and....

http://www.huffingtonpost.com/aaron-greenspan/the-end-of-the...

From Wikipedia, "Though the two entrepreneurs decided to work on their respective projects independently, they frequently discussed technological aspects of houseSYSTEM related to the Face Book, as well as Zuckerberg's latest project, about which he was secretive.[162] On January 11, 2004, shortly after using the Universal Face Book on houseSYSTEM, Zuckerberg registered the domain name "thefacebook.com" independently."

fleitz3• 16 years ago

Yes, but this is a question of ownership of a corporation. I doubt he has any claim to whatever Facebook's legal entity is. He may have claims for copyright violations if the contract included ownership of the code, etc. Which the contract appears not to include. He may have other claims but I doubt he has a straightforward ownership claim over the legal entity.

My reason for thinking this is the amount of VC that went into Facebook and the common sorts of IP issues that VC's regularly deal with it's extremely likely a new corporation was created and Zuck's assets transferred to that company.

Zuck may have transferred assets illegally to that corporation (copyrights, domains, etc) which would create a legit claim, but it's unlikely that he can prove a straightforward 83% ownership. Even if he can prove that it's going to be very hard to overcome the subsequent VC rounds that would have reduced everyone's equity stake.

anigbrowl3• 16 years ago

Yeah, but his actual claim is that he hired Zuckerberg to develop it. He paid $1,000 up front on the understanding that once it was done on time, they'd have a 50/50 ownership interest, or more in proportion to how long overdue the project went.

According to this guy, it got done, but late, and as a result he owns 84% and Zuckerberg 16%, and Z. then went on and transformed the business several times into today's Facebook Inc., as if he owned it 100%. But he never asserted his claim until now, so unless he's been in a coma or something, his failure to act was an implicit waiver of rights. It's more like a trademark than a copyright situation; undefended trademark infringements are construed as abandonment after a while.

rokhayakebe2• 16 years ago

Ouch.

wicknicks• 16 years ago

Maybe Ceglia will claim that he was abducted by aliens in 2003 and just got back now.

Alex3917• 16 years ago

Considering that Zuck gave something like 15% of Facebook to Eduardo Saverin in exchange for his a few thousand dollars of his bar mitzvah money, this contract isn't entirely impossible. (Albeit it's very unlikely to be legitimate.)

grellas• 16 years ago

An excellent point on laches. Let me take this occasion to contrast this with the ConnectU case and, by the way, to offer up a mea culpa for even having posted this thing on HN (well, I guess it does qualify as an item of interest to hackers but the merits of it are something else again, as I will explain here).

First, one can take a look at the real thing, that is, a truly scary case against Mr. Zuckerburg that might have a huge impact on Facebook and its shareholders - and that is the action by the ConnectU founders by which highly prestigious lawyers are mounting a first-class challenge to the settlement agreement that was entered into a few years back in an attempt to settle lawsuits going back to 2004. Here is a link to a recent piece on that dispute, together with a detailed comment by me describing it and its implications: http://news.ycombinator.com/item?id=1362379. I personally don't think that the ConnectU action is likely to prove to have merit but, and this is key, it poses such huge risks to Facebook as a company that the pressures to settle it will be very large.

The Ceglia action, in contrast, poses no serious risk to Facebook or to Mr. Zuckerburg. Here are some reasons why:

1. The contract was breached, if at all, at least six or seven years ago. The complaint says so right on its face, and this undoubtedly means that all claims are barred at this point by the applicable statutes of limitations. There are cases where a statute of limitations is "tolled" (i.e., doesn't yet begin to run) but these need to be specifically alleged in order to apply and they are not. Thus, on their face, all these claims would appear to be time-barred.

2. Laches also could apply insofar as the claims might be said to be so-called "equitable" claims as opposed to mere claims for damages. Here the complaint purports to ask for so-called "declaratory relief," which is an equitable claim. An equitable claims basically invokes the extraordinary power of the court to issue decrees and judgments beyond simply ordering that a money award be paid. In this case, the claimant would in essence be asking the court to force Facebook to issue mountains of additional stock to him to satisfy his claim that he is entitled to 84% of the ownership of the company. The doctrine of laches can serve to bar the grant of any such equitable relief. Laches is a technical doctrine that in effect enables a court to use its discretion to deny relief to a party who has acted inequitably. With laches, this is tied to delay in asserting one's rights but, in contrast to a statute of limitations, it is not tied to the lapse of any specific time period. With laches, a court will deny equitable relief to any party who knows the facts relating to his injury and to his claims (and who is not prevented or hindered from filing suit), and yet waits an unreasonable time before filing suit such that other parties are prejudiced by delay, Here, of course, one has all sorts of events to point to by which Facebook and its shareholders have issued and transferred stock in the company while this claimant has slept on his alleged right to assert his ownership claim. This would obviously make it grossly unjust for a court to do any action to prejudice the ownership rights of such persons in order to uphold claims that could have been asserted long ago. In the ConnectU case, despicable as the plaintiffs' conduct might have been in some respects, no one can ever accuse them of sleeping on their rights - all concerned have been acutely aware that, should they prevail with their claims, the Facebook IP might be at risk and so there is no equitable bar to their claims (should such claims ever prove to be valid). In contrast, Mr. Ceglia does not even attempt to explain his delay or why he failed to act with diligence.

3. The real tip-off here, though, lies in the nature of the TRO application brought in the state court. A TRO is an extraordinary remedy enforceable by contempt, meaning that a party can actually be jailed for violating it. It is a very serious remedy that a court does not enter lightly. Moreover, at absolute minimum, when a TRO is sought, the party applying for it is required under court rules to tell the adverse party that an application for such relief will be made and give such adverse party at least 24 hours notice to enable such party to appear to contest it. Here, no notice whatever was given to Facebook or to Mr. Zuckerburg of the application. Anyone who is a lawyer will immediately recognize just how outrageous this is - this virtually never happens and, when it does, court rules require a very detailed explanation of why the giving of notice should not be required (e.g., that a party might run off with assets). Here, nothing whatever was set forth to justify the failure to give notice, meaning that this application was wildly out of bounds.

4. A TRO also is a specific temporary remedy aimed at preventing irreparable harm from happening to a party pending a hearing on such party's application for a preliminary injunction. A preliminary injunction hearing, usually held within a few weeks after a case is filed, is a form of interim relief designed to prevent a party from taking certain actions until the merits of the case can be decided at trial. Since trial usually takes a year or more to happen, the tandem remedies of TRO/preliminary injunction are designed in theory to allow a court to enter interim injunctive orders covering the entire pretrial period of a case. Since the full merits of a case can't be determined at these early stages, the standards for granting such interim injunctive relief turn on whether a party can make a detailed showing that it is likely to win the case on the merits and that it will be irreparable harmed in the meantime should it have to wait until trial to obtain the relevant injunctive relief. Thus, any TRO/preliminary injunction application will consist of detailed affidavits setting forth the facts showing why the party will likely prevail on the merits and also the facts showing why it will be irreparably harmed if the requested relief is not granted. In this case, the showing made by the applicant had none of this. In essence, the applicant merely said that he had been allegedly wronged and that the other parties should be enjoined from transferring any stock or assets of Facebook until he could prove his claims at trial.

5. This, however, is where the bonehead stuff comes in. A TRO is designed solely to cover the limited time period between the filing of the complaint initiating the case and the time of the hearing on the preliminary injunction - this is typically a 15-day period or so. Thus, TROs are almost universally denied because, to get a TRO, a party must show that it will be irreparably harmed unless it gets the court to block all further wrongful acts by the other parties over the next 15 days. This, of course, is an absurdity here: it means that this claimant is saying that, having waited seven years, he will be harmed in a way that is extraordinary unless the court intervenes to block Facebook stock sales, etc. for a two-week period pending a hearing on the preliminary injunction. Of course, if such irreparable harm would happen in the next two weeks, why the hell did he wait seven years to act in the first place. The other bonehead items: (a) asking for a permanent injunction at the time of the hearing on the preliminary injunction application (an absurdity, since a permanent injunction can only be issued after a full trial on the merits); (b) asking that the court order a full accounting in connection with the preliminary injunction hearing (a comparable absurdity, since this too is a remedy that is only possible after a full trial).

6. Given all the above, it makes no sense that a judge would have granted this TRO without a proper showing of any kind, where the remedies sought at the preliminary injunction hearing were wholly unauthorized by law, and where obvious statutes of limitations and laches problems loomed over the claims (strongly suggesting that there was no likelihood that this claimant could ever prevail on the merits of the claims at trial). Thus, the only logical conclusion is that the judge was in some small town and was not focused in any way on the relevant legal standards (this sort of thing is way below minimum standards and is the kind of thing that even a first-year law student would easily be able to evaluate). It appears that this is what happened here.

7. Once Facebook got notice of the claim, it immediately removed the lawsuit to federal court and brought a motion to dissolve the TRO. Chances of getting this TRO dissolved: 100%. The case is flaky and the entry of the TRO was flaky. There is zero chance that it will be sustained or (in my view) that this case will cause Facebook or Mr. Zuckerburg any significant legal trouble either now or later. This is a lightweight case that is ultimately going nowhere.

fleitz3• 16 years ago

Excellent response, I was wondering that a little myself as to why a TRO was issued for something from 5 or more years ago. The jurisdiction issue also popped immediately to mind as Zuckerberg was presumably at Harvard at the time and Facebook is a Delaware company which to me would immediately put it under the interstate commerce clause and thus Federal jurisdiction.

I have to admit hearing the things I've heard about Zuck this guy seems like the perfect business partner for him.

On another tangent, isn't pretty much everything ICC now after the SCOTUS declared growing pot for yourself in your closet interstate commerce?

omnigoat• 16 years ago

This may have no additional value to any aforementioned discussion or analysis, but:

Hooray for grellas! He always makes me consider going back to uni and studying law.

Scott_MacGregor• 16 years ago

Would laches necessarily apply here? If the contract did not specify that he needed to take part in the voting or other corporate formalities, it seems like a credible argument could be made that he is not trying to enforce anything until right now. Simply taking a hands off approach to his investments. Also, if he was not notified of Shareholder Meetings, does this raise other legal issues for Facebook's Board? Could this become a can of worms for the Board?

As an illustration, if he bought, or was gifted a Ferrari and didn't drive it for several years, but allowed someone else to drive it, then one day went to unlock the door to begin driving the car, but found the current driver had changed the locks would laches apply in this instance. To me this seems similar.

mortenjorck• 16 years ago

We know stranger things have happened on a smaller scale: http://sivers.org/mistake

But given the case currently pending against Mr. Ceglia himself, I'm pretty skeptical about the whole thing.

rbanffy3• 16 years ago

Careful.

Ceglia can be a crook and have a valid contract.

giardini• 16 years ago

Couldn't the same be said about Zuckerberg?

tomjen3• 16 years ago

No.

You wait this long, you don't have a valid contract.

Aaronontheweb• 16 years ago

Is it just me or did Zuckerburg build Facebook on a foundation of ill-advised contracts or what?

aresant• 16 years ago

No doubt reflective of nearly any 19 year old web developer's confused web of NDAs / Non-Competes / etc when doing contract work . . .

micrypt• 16 years ago

It sounds like "The Social Network" might be getting a sequel. :)

waterlesscloud• 16 years ago

The fact that a related movie is coming out no doubt plays a role in the timing.

anigbrowl3• 16 years ago

I uploaded the complaint (only) on Scribd, which includes the contract as an exhibit. It's hard to read (as a poor quality photocopy) but seems superficially credible - that is, there are signatures supposed to be Zuckerberg's on the contract and a receipt for cashed check, which could be checked for authenticity.

As to whether the contract is enforceable or even valid, I have no opinion. I'm having considerable difficulty just reading it and don't know enough about contract law to evaluate it. Even if it is, I imagine Facebook would respond that the suit is equitably estopped by laches (unreasonable delay in enforcement of a claim).

Edit: they do - 2nd link, 2nd last paragraph.

http://www.scribd.com/doc/34239119/Ceglia-v-Zuckerberg-compl... http://www.scribd.com/doc/34240120/Ceglia-v-Facebook-Motion-...

jeromec• 16 years ago

Perhaps grellas might shed some light on the laches issue, but aside from that I think this is legit. First, I notice the response from Facebook was that this is "frivolous" not bogus, which implies to me that Mark did sign that document. Second, from scrutinizing the hardly legible document it appears the claims are accurate, including the 1% ownership transfer to "Purchaser" for every day of delay in project completion after January 1, 2004. Last, the contract timeline does make sense to me. It sounds like a very young college kid in 2003 with his mind on many things, including a hobby project to connect students met a more experienced business man who wanted some street software developed. The business man recognized the value in the hobby project already begun by Mark which he loosely referenced as "The Face Book". The business man then covered himself to be well-positioned legally if this hobby took off. He paid Mark 1K for it (and another 1K for the street software), explaining Mark would still own 50% of "The Face Book" in case it did become more valuable... All hypothetical, but not hard to imagine.

protomyth2• 16 years ago

"but getting a 50% stake in the product. The contract stipulated that Mr. Ceglia would get an additional 1% interest in the business for every day after Jan. 1, 2004, until it was completed."

Wouldn't you structure it so he would lose 1% for every day late after Jan 1,2004?

anigbrowl3• 16 years ago

No. The deal here is that ownership interest is gained in lieu of prompt performance.

bena• 16 years ago

The article isn't written too clearly on this matter.

Ceglia bought a 50% share for $1000 and capital to pay for domain and hosting expenses with the stipulation that he would get an additional percent each day after January 1st 2004 that it was late (and presumably it was 34 days late).

Zuckerberg was the developer, Ceglia was the wallet.

protomyth2• 16 years ago

no kidding on the clearness of the article, I thought Zuckerberg was the wallet and thought what a demented contract.

Vivtek• 16 years ago

See, this is just the kind of twist you wouldn't be able to sell in fiction. It's just as implausible as WWII!

startuprules• 16 years ago

Whenever I see Mark Zuckerberg in public in front of all his peers, he is always so frightened and insecure. Perhaps in the back of his mind, he's always thinking about the fact that he just has to last a bit longer so he can get away with not one, but two cases of theft (ConnectU and nowthis). Or perhaps today is the day where the world sees him for who he really is: a small time crook who got real lucky, and gets to sit in the private dining room in the back of the italian restaurant with the mafia bosses.

ryanwaggoner• 16 years ago

Or maybe he's just shy and you're just jealous? Nah, it's probably the mafia boss thing.

DilipJ• 16 years ago

Yes, I think I read a story somewhere that during one of the VC rounds he was so nervous about the terms that he ended up curled up on the floor of the bathroom??

Anyway, I think he seems like an all around decent guy, and I admire anyone who has the guts to turn down a billion from Yahoo (especially at his age, and on his first business!) That shows vision and confidence, so I think he's the perfect CEO for Fb (which will likely one day have a market cap greater than Yahoo).

melvin• 16 years ago

He's clearly way out of his league, but then, has managed to pull it off... so maybe not.

I see him as extremely sleazy - just the type of person who I hate to see become successful.

Facebook is the prime example of a company that needs a real CEO, with actual business experience and ethics. Not one of those MBA types who is actually a complete idiot, though. I guess it would be very hard to find the right person.

johnl• 16 years ago

This is why you want to deal with a ycombinator from the getgo. Poking around and signing contracts to get some momentum going could end up biting you in the leg down the road.

robryan• 16 years ago

Even if it was a valid contract I can't see how you would be able to let everyone think they own certain amounts of a company for years without any input then make a claim later. Doesn't make logical sense but then the legal system is counter-intuitive at times.

nphase• 16 years ago

I wonder if this will make an appearance in the new Facebook movie. puke

gwern2• 16 years ago

No; the script is already set in stone (it's floating around the Internets if you want to read it - it's actually not as terrible as it could be), and October is not very far away; I'd guess filming is already done.

paulnelligan• 16 years ago

One thing I'm asking myself is 'why the hell did he wait so long???'

for a minute there I was envisioning the fall of facebook and what it would mean for everyone - you mean we get to reinvent social networking???!!, without zuckerberg???!!!

Man claims to own 84% stake in Facebook - judge grants TRO in his favor

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