Who Really Owns Facebook … And Why

Social networking giant www.facebook.com was in the news again recently when the Wall Street investment firm Goldman Sachs pumped $500 million into the enterprise.  With a membership of more than 500 million subscribers and an estimated value of about $50 billion, Facebook more closely

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 resembles a sovereign state than a website.  Because of its high monetary value and seemingly limitless growth potential, a number of people have attempted to lay claim to this cyber-goldmine.  One such prospector, Paul D. Ceglia, is staking his claim on a nearly eight-year-old contract he allegedly entered into with Mark Zuckerberg, the founder and CEO of Facebook, Inc.

Ceglia claims that in the spring of 2003, he contracted Zuckerberg (a student at Harvard University at the time) to develop a database and programming language called StreetFax.  According to the contract, Zuckerberg was to be paid $1,000 for his work on the StreetFax project.

Under current copyright law, whoever creates an original work of authorship, such as a computer program, is considered its author.  The author is also the owner of copyright unless there is either a written agreement assigning the copyright to another person or entity, or the work was created by an employee in the course of his employment.  In cases of works made for hire (either by agreement or by employer-employee relationship), the employer or commissioning party is considered to be the author.

Because Zuckerberg was an independent contractor, a relatively simple work-for-hire agreement between him and Ceglia could have been drafted to assign the rights to the StreetFax software to Ceglia.  However, the matter was complicated by another project that Zuckerberg was working on, a project in which Ceglia wanted to invest.  This project eventually developed into the multi-billion dollar venture known as Facebook.

Rather than draft a separate investment agreement for the Facebook project, an agreement entitled “‘Work for Hire’ Contract” was drawn up that comingled the two projects.  Ceglia agreed to pay Zuckerberg $1,000 for half interest in the StreetFax software and an additional $1,000 for half interest in the project “designed to offer the students of Harvard university [sic] access to a wesite [sic] similar to a live functioning yearbook with the working title of “The Face Book‘.”  Regarding “The Face Book,” Ceglia was to acquire an additional 1% interest for each day the project was delayed beyond the completion date of January 1, 2004.  Since Zuckerberg didn’t complete the project until February 4, 2004, Ceglia claims he now owns 84 percent of Facebook.

After Ceglia finally filed suit against Zuckerberg and Facebook, Inc. in state court in upstate New York on June 30, 2010, the judge issued a temporary restraining order preventing Zuckerberg and Facebook from selling or transferring any assets.  The case has since been removed to federal court, where Zuckerberg and Facebook filed a motion to dissolve the TRO.  A hearing on this motion was held July 20, and the TRO was allowed to expire three days later.

There are a number of problems with Ceglia’s case. First and foremost is whether his claim is barred by the statute of limitations, which in New York State is six years for contracts.  Assuming he somehow overcomes this legal obstacle, there is a question as to whether Zuckerberbg actually signed the contract, which was neither witnessed nor notarized.  During the hearing, Facebook’s attorney stated that “whether he signed this piece of paper, we’re unsure at the moment,” but also claimed that there were “serious questions” about the contract’s authenticity.

Another problem is the chronology of events. The contract was allegedly signed on April 28, 2003, but Zuckerberg didn’t register the domain name thefacebook.com until January 2004, and even the predecessor to The Face Book, Facemash, wasn’t created until late autumn of 2003.

It remains to be seen how this case will finally be decided, but one thing is certain.  Since no one knows in advance what the ultimate value of intellectual property like software will be, it’s vitally important to clearly establish from the beginning who owns the rights to such intangible assets.


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