
Man claims to own 84% stake in Facebook - judge grants TRO in his favor - grellas
http://online.wsj.com/article/SB10001424052748703283004575363330101240888.html?mod=WSJ_hps_MIDDLETopStories
======
fleitz
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.

~~~
grellas
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.

~~~
fleitz
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?

------
anigbrowl
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/34239119/Ceglia-v-Zuckerberg-complaint)
[http://www.scribd.com/doc/34240120/Ceglia-v-Facebook-
Motion-...](http://www.scribd.com/doc/34240120/Ceglia-v-Facebook-Motion-for-
Dissolution)

~~~
jeromec
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.

------
troygoode
_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...

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

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

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

------
mortenjorck
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.

~~~
rbanffy
Careful.

Ceglia can be a crook _and_ have a valid contract.

~~~
giardini
Couldn't the same be said about Zuckerberg?

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

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

------
protomyth
"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?

~~~
bena
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.

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

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

------
robryan
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.

------
paulnelligan
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???!!!

------
johnl
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.

------
nphase
I wonder if this will make an appearance in the new Facebook movie. _puke_

~~~
gwern
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.

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

~~~
DilipJ
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).

