Facebook Facing ‘Frivolous’ Lawsuit?

The popular social networking site Facebook, valued in the billions of dollars, is facing legal action brought by a plaintiff who claims to be entitled to the lion’s share of the business. The claim alleges that Paul Ceglia paid Facebook co-founder Mark Zuckerberg to develop the site in exchange for $1,000. The contractual agreement which forms the basis of the action incorporates terms that would entitle Ceglia to an 84% stake in the company, and in addition he is seeking a cut of company profits from the last 7 years. Facebook were slapped with an injunction preventing disposal of their assets, and responded by taking the case to federal court, requesting that the injunction be dissolved and the case dismissed. Currently Facebook has an estimated value of $6 billion,  and if successful Ceglia could stand to receive not only equity worth in the region of $5 billion, but a share in the revenues brought in by the business since its inception.

Facebook described the case as ‘frivolous’ and made clear that they plan to fight on a variety of grounds, including that since the contract was signed over 6 years ago in 2003, it is void according to the Statute of limitations in New York. The question is also raised as to why Ceglia waited so long to file his suit? FaceBook currently has hundreds of millions of users. It seems that it was only when the site proved to be truly successful that the plaintiff decided to file his case.

It has also been suggested that Ceglia’s claim does not add up based on the site’s history. Facebook’s domain name was not registered until January 2004, and according to the official history of the site Zuckerburg did not come up with the idea of creating the site until after 2003.

In light of Facebook’s success it is not surprising that they have been the subject of various claims, often by people asserting that they have had some input into the site’s development, and therefore deserve financial recognition. The case illustrates one of the most important considerations when taking a business online, the nature of the contractual relationship between the parties involved.

 If you are having a website or part of a website commissioned, be sure to agree upon and set out clearly in writing, how rights to the different elements are apportioned, and what each party is entitled to. Make sure this is done early, and done well, and you can avoid facing the type of lawsuit that will cost a business like Facebook a huge waste of time and resources to fight, even if there is no merit to the claim.