If Mark Zuckerberg Duped Investors, Are They On the Hook (and Other Answers to Your Questions)

Yesterday, Business Insider reported that Paul Ceglia, who emerged last July with claims he’s entitled to at least 50 percent of Facebook, is back with a new lawsuit, new evidence, and a new, serious, law firm: DLA Piper.

For his newest suit, Ceglia has produced more than a dozen emails dating back to 2003 in which Zuckerberg purportedly agrees to give Ceglia half of his “the face book” project in exchange for $2,000. According to the emails, Zuckerberg later tells him — as the site is taking off — that it isn’t doing well and that he’d like to shut it down and return Ceglia’s money.

Unsurprisingly, the suit raises more questions than it answers. One of them is why Zuckerberg –  who had already turned down lucrative offers to join Microsoft and AOL by the end of his senior year at Exeter — would agree to give away half of any Internet endeavor for peanuts, especially to Ceglia, an Internet entrepreneur who would surely soon discover that Facebook was alive and thriving.

Another is what happens to Facebook’s investors if the emails Ceglia has produced are proven to be authentic.

To talk about that issue, along with a number of other questions relating to the case, I called a litigator who often represents startups. Because his firm has ties to Facebook, including through its clients, he asked to speak anonymously.

If it turns out that Zuckerberg really did dupe his VCs about how much of Facebook he owns, will they be on the hook for any damages?

The VCS themselves are not defendants in the case. So technically they can’t be liable for the damages unless they had some kind of ancillary agreement with [Zuckerberg] that they’d be liable for judgments against him. But I can’t imagine any kind of agreement like that.  

So investors’ ownership interest couldn’t be impacted by a really adverse ruling?

It’s conceivable that if this case went horribly wrong for [Zuckerberg], that it would have ripple effects on Facebook investors, but it’d be hard to predict without knowing more about the ownership structures of the company and the deal documents relating to those ownership interests.

The discovery process will reveal whether the allegations have any merit at all, and until you get through that process, it’s going to be hard for anybody to say whether the allegations support any kind of claim for damages.

Do you think it’s possible that DLA Piper would take the case if the evidence weren’t rock solid?

Generally speaking, lawyers have to ensure that there’s a good faith basis for the claims that they file on behalf of their clients. That doesn’t mean that they have to think that they necessarily will prevail, but there has to be some kind of factual basis, in their view, to provide some support for the allegations.

This is certainly a provocative case, where the stakes could be high. [Facebook’s perceived valuation is right now somewhere between $50 billion and $75 billion.] But the complaint is always the document where the plaintiff tries to tell his story, and so, of course, it always sounds like that person has a case, and that the claims have merit. In truth, whether those parts of emails actually support any of the allegations remains untested and remains to be seen. There are certainly plenty of cases out there that get filed and that ultimately get disposed of by a motion to dismiss or otherwise because the claims don’t have much if any merit.

If Ceglia’s claims are proven not to have much merit, will that be a black eye for DLA Piper?

Not necessarily. Lawyers are supposed to represent their clients with “zealous advocacy.” I think there’s an acknowledgment that you win some and you lose some and you do have to take chances. If you only bring cases you’re certain you’ll win, you’re probably not representing your clients with as much advocacy as perhaps you should be. 

Would you have taken on this case?

I couldn’t say. There’s obviously no information about how the lawyers who are representing this guy are being compensated. If it’s potentially a case that could be very lucrative for the plaintiff, then it could potentially be very lucrative for the attorneys and that sometimes can serve as an incentive.

What will the discovery process entail here?

It will focus on really the two, traditional forms of discovery: an exchange of documents, including electronic documents like emails, related to the claims in the case, as well as the taking of testimony through depositions, and that would include depositions of not just [Zuckerberg and Ceglia] but also any other individuals who may have been a part of these events and are related to the allegations in the case.

Obviously, a dispute over the ownership of a hot company isn’t new. Would you guess that Facebook will settle this quickly, just to make it go away?

In many respects, this isn’t an uncommon type of dispute. And most civil litigation involving business disputes does settle. There’s no question about that. That doesn’t mean that every case settles, though, so at the very start of a case, it’s extremely hard to predict whether it will settle. Odds are it will, but there are plenty of cases that do go through trial, particularly when the stakes are very high.

Can you think of a case where a plaintiff has won?

I can’t think of one off the top of my head. But I also can’t think of a case where it’s one individual versus one individual, like this. And of course, this case is more colorful because one of the parties was a college student. It’s not common to see allegations that include questions about whether the defendant was spending the plaintiff’s money on beer and women or threats to call his parents.

If Facebook settles, what kind of message will it send?

It’s definitely the case that parties will settle civil claims, even when they feel like they should have no liability whatsoever. It may actually be less expensive than to spend a lot of money litigating claims, where there’s always a chance that they could lose.

Juries can be hard to predict, which is why people pay very generous settlements to make litigation go away, even if they believe in their heart of hearts that they don’t owe the other party a nickel. Insurance companies have to settle cases all the time where they feel their motorist [customer] did nothing wrong but they don’t want a supposedly injured plaintiff to go before the jury and get a multimillion verdict.