Part 2 Specific Lessons: What Entrepreneurs Can Learn From the Facebook Ownership Litigation

In my last post, I gave an overview of the current Facebook ownership litigation in which Paul Ceglia is claiming that he owns 84% of Facebook based on an old software development contract with Facebook’s founder Mark Zuckerberg.

A few years ago, Zuckerberg and Facebook also faced legal allegations that Zuckerberg stole the business idea and source code from some Harvard classmates to start Facebook.

Assuming for the sake of discussion that the allegations in both lawsuits are true:

What can entrepreneurs learn from Zuckerberg’s legal troubles?

Here are my top ten lessons.

1.  If you are wildly successful, people claiming ownership may come out of the woodwork.

If your business gets VC funding or becomes valuable, your company will become the target for any person or entity who has a potential case for ownership.

The skeletons will come out of the closet.

IP ownership disputes are very common.  Old employers, co-workers, partners or even classmates may claim that they are entitled to a piece of your new company based on former agreements, verbal or written, or intellectual property rights that they own or claim to have originally created.

2.  Don’t contaminate your company’s IP with any IP that you don’t have the right to use.

A cavalier attitude regarding ownership of software code can get you in trouble.  Just ask Zuckerberg. He’s probably lucky.  Taking someone else’s code can land you in jail.

To minimize the chance of any claims, it’s important to understand basic information about intellectual property law, especially trade secret law, so you know what you can and can’t use from what sources for your new venture.

When you incorporate intellectual property that you don’t own into your company, you contaminate your IP and make your entire company vulnerable to claims by others.

Some plaintiffs are very aggressive and may claim that they own everything that was built on the foundation of contaminated IP.  It’s sort of like fruit of the poisonous tree.  A plaintiff may try to get all of the fruit, especially VC money and related intellectual property rights.  (For another famous example, see my discussion of the famous Bratz doll case.)

Clean IP is very important to maintain the value of your company.  In the Facebook case, if the plaintiff can prove that it owned the intellectual property rights to the foundation of Facebook as well as the future alleged business interests, the plainitff’s damages expert will have a heyday.

3.  Software genealogy is important.

It’s super simple to copy and take software code.

Unfortunately, many software programmers freely use code written by others without understanding that copyright law and sometimes trade secret law protects software.

To keep IP ownership clean, it’s important to understand who wrote each section of code and what rights or licenses are related to it.  A company will want to make sure that it owns the code created by its employees and independent contractors and that it has an appropriate license for any open source code used.  Make sure your company really owns the code provided by the founder.

Ask your software programmers: Where did you get the code?  Did you write it? If not, who did?  If yes, when and where did you write it?  Does anyone else have a potential claim to the code?

Watch out for sections of code that is legally owned by others, especially former employers.  It’s very easy to do a software code comparison and it makes a stunning exhibit in litigation.

4.  Assume your business will be successful and treat equity like gold and not penny candy.

In the alleged contract between Zuckerberg and Ceglia, Zuckerberg allegedly gave up 50% ownership to the Face Book software and business interests.  The contract also had a bizarre penalty clause for delay in completion of the Face Book website of a 1% interest in the business per day.

This is crazy but not uncommon.  Some entrepreneurs don’t have an understanding of the potential value of a business interest.  Although equity in something worthless is worthless, even a small piece of equity in a valuable company may be very significant.

Don’t give away equity lightly as payment for services.  You may be paying a much higher price than you intended.

If someone is asking for equity they are assuming that you will be successful, you should assume so too.

5.  Read and understand any contract concerning ownership of intellectual property before you sign it.

I can’t stress this enough.  If you are giving away your IP rights, know and understand the boundaries of what you are giving up.  Make sure they are fair and reasonable for the circumstances. As an independent contractor, you have more negotiation power than you think.

Zuckerberg’s alleged signature on the Ceglia contract looks real.  My hunch is that Zuckerberg signed the alleged contract but didn’t read or understand it.  I’m also betting — considering the bizarre, hodpodge nature of the alleged contract — that the drafter didn’t understand the contract terms either.  It looks like part of it was copied from another unrelated source.  Indeed, the alleged contract is so convoluted the parties may be fighting about the meaning in court for a long time.

I’m sure Zuckerberg has read the contract by now but it is a little too late.

6.  Beware of contracts drafted by non-lawyers and don’t sign bizarre, crazy contracts.

Contracts like the alleged contract in the Facebook case make the hairs on the back of my neck stand up.

No one should ever sign a contract that looks like that.

7.  Know what you’ve signed and keep a copy of all contracts.

This is basic housekeeping.  Keep a copy of all contracts that you sign.  Know what you own and don’t own.

8.  Make sure you use proper assignment language in your contracts.

The alleged assignment language in the alleged Facebook contract is improper and bizarre.  Courts are very picky about the specific wording of IP assignments.  If the assignment provision in a contract is written incorrectly, it may not do what you think it does.

Moreover, don’t count on the “work made for hire” doctrine in the Copyright Act if you don’t understand it.  There are only a few statutory categories of work that apply to independent contractors.  Always have a fall back assignment provision if you really want to own copyrights for work you didn’t create.

9.  Understand that you will be subject to broad discovery if you are sued.

In litigation, everything within your possession, custody and control that is relevant must be given to the other side.  Archive tapes, random disc drives, thumb drives, old non-working computers and boxes in your attic and garage are all fair game.

Again, the skeletons will come out if you keep them.

10.  Even a crazy, amateur contract may be the basis for a lawsuit and enforceable.

This item is my favorite.  Just be aware that anything that looks like a contract may come back to haunt you if your startup is successful.

Other posts about IP ownership claims:

• Analyzing the Risk:  Will My Current Employer Claim Rights to My Startup’s IP?
• Preventing Your CA Employer From Owning Your Inventions
• Who Owns the IP Rights to Custom Software?