UPDATE [8/17/11]: Most of my assumptions depended on the basic idea that Ceglia’s lawyer, who seemed to have a good reputation, had some credibility.  Ceglia later retained council from a major New York firm, which also seemed to indicate he had something.  But from recent news, it doesn’t look good.

In any case, one of my predictions was correct: the lawsuit didn’t go away quickly.  Unfortunately, the rest of my argument depended on an assumption of competent attorneys, who wouldn’t risk sanctions by bringing a suit on the basis of a known fraud and who would make some minimal inquiries before taking a case that was destined to draw a lot of attention.  But apparently high-powered law firms are more gullible than I would have believed.

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A lot of commentary out about the Paul Ceglia lawsuit against Facebook seems to assume the guy must be a fraud, particularly since he has been accused of fraud.  They (reporters, bloggers, etc.) assume since they haven’t seen the evidence that it must not exist.

Here’s why I think these are bad assumptions, and why this case will drag on for quite a while — and, in the end, Ceglia will probably walk away with at least a boatload of money, if not Facebook itself.

The objections seem to fall into a number of categories:

  1. Why did Ceglia wait so long?
  2. Where’s the original contract?
  3. Couldn’t the original contract have been modified to create a forgery?
  4. Where’s the proof of a transaction?
  5. Zuckerberg didn’t start Facebook until the next year, and he didn’t have the idea until at least six months later.
  6. Why would Zuckerberg accept just $1000 for such a major part in his idea?
  7. Okay — suppose it’s all legit.  Doesn’t the statute of limitations make all of this moot (as Facebook lawyers claim)?

I’ll address these point-by-point.  Again, we don’t have enough information to know what will happen, so I’m not claiming that Ceglia will definitely win, and if he does, I’m not predicting on what terms.  But I am arguing that we shouldn’t be so dismissive.

(1) Why did Ceglia wait so long?

Who cares why Ceglia waited so long?  He came out recently and said it was because he had forgotten about the contract and only found it recently because he was forced to go through old documents due to the pending litigation against him (and his wood pellet business).

Does this sound “reasonable”?  I don’t know.  I don’t care.  It doesn’t matter why it took him so long to come forward with the contract.  So stop wasting time worrying about it and what it might mean about the validity of the case.  It’s irrelevant.  (Admittedly, though, if he does win, it will make the story much more interesting to know what role happenstance played in things.)

[Addendum: Actually, on second thought, this could be important in deciding the validity of the action, since it would determine whether laches applies.  This is a principle in equity law that says a plaintiff can’t delay unnecessarily in filing an action once he/she has been wronged.  Even if the statute of limitations hasn’t run out yet (see below), laches could cause the case to be thrown out or could limit the award that might be due to the plaintiff, if it could be shown that he didn’t come forward soon after he had a case.  Ceglia’s current story would be difficult to prove, but if true, laches wouldn’t necessarily apply.]

(2) Where’s the original contract?

Come on, people.  This isn’t some random guy bringing his own case into court.  His attorney is Terrence Connors, apparently the senior named partner on a major Buffalo law firm.  For all those bloggers out there assuming that the original contract doesn’t exist, do you seriously think that an experienced senior named partner at a major law firm would represent a guy without first looking at the original contract?  Really?

Also, it appears the law firm has taken the case for no up-front fee.  They just want a piece of the settlement money, if it materializes.  That suggests not only that they think the contract is probably legit, but that it has the potential to stand up in court.

(3) Couldn’t the original contract have been modified to create a forgery?

See answer to (2).  Seriously.  Again, don’t you think that a major attorney would examine the document in question before running with such a case?  If there were anything vaguely suspicious about the document’s authenticity, they would know it would come out in the media attention that was bound to follow.

Here’s the important point, though — if the law firm had any hint that the contract might be forged, they couldn’t bring the lawsuit.  At best, they’d risk sanctions or disbarment for knowingly offering false documents as legal evidence; at worst, they could be a party to a lawsuit against them by Facebook for conspiracy to commit fraud.

Is it possible that the contract was forged or doctored, nevertheless?  Sure, it’s possible.  Anything’s possible.  People have noted that “The Facebook” is mentioned only on certain parts of the document; others have noted the presence of “The Pagebook” or whatever.  So what?  Admittedly, the contract would look stronger with Zuckerberg’s signature right next to the terms about “The Facebook,” but it doesn’t strike me that this is a critical limitation.  At the time of the contract, Facebook could not have been more than a vague idea; the real work was for Ceglia’s other business site.  Facebook was a secondary idea within this contract (if it’s legit).

Also, by the way, the contract seems to have a certain air of authenticity about it.  This isn’t some polished-up forgery; it’s a document with typos, weird conditions (like adding 1% ownership on for every day past January 1st — if this was really a forgery, why not just stop with 50% ownership?), weird wording mentioned for prospective ideas (“The Pagebook”), etc.  That doesn’t prove it’s real, but rather than casting doubt on the matter, I personally think it does make it look more real.  If you were going to forge such a document, wouldn’t you make it more clear-cut?

Also, there’s something further that seems to imply that Ceglia and his attorneys thought the contract would stand up to close scrutiny: they brought an actual lawsuit.  Apparently they first approached Facebook to seek terms to settle it out of court, but Facebook just laughed in their faces.  It’s reasonable perhaps to imagine someone trying a stunt like that with a forged contract.  But by filing a public lawsuit, they knew they were going to draw media attention.

Again, forget about Ceglia and his potential ethics.  Would an established attorney be willing to stake his reputation in the international media on a contract that his law firm had suspicions about?  I think it’s unlikely.  Not impossible, but unlikely.

(4) Where’s the proof of a transaction?

Well, there’s a canceled check (or perhaps a checkbook entry; the photos I’ve seen are unclear) that’s part of the court documents.  It clearly shows $1000 being paid from Ceglia to Zuckerberg.

“But wait,” say all those Perry Mason-type bloggers out there, “the contract mentions two transactions of $1000 — one for Ceglia’s website and one for ‘The Facebook.’  Where’s the other transaction?”

Umm… again, see (2) above.  This is not a random guy showing up in court one day with a random piece of paper and suing Facebook himself.  This is a guy represented by an attorney at a serious law firm.  For all you wannabe Matlocks out there, do you seriously think that Ceglia’s lawyer wouldn’t have considered this problem?

The reasonable answer is that Ceglia has two records of transactions, and he only submitted the relevant one to the court as evidence.  He’s not filing a lawsuit claiming that Zuckerberg didn’t do his work coding Ceglia’s random website — he’s filing a claim about Facebook.  Thus, he submitted a copy of the check dealing with that clause and that transaction.

In any case, this all should be easily answered by looking at Zuckerberg’s financial records of the time.  If he only cashed one check, Ceglia’s case is much less strong.  But again, my guess is that any competent lawyer would have already thought about this problem and made sure there were complete records from the time, including two checks.  Any competent attorney would realize that Zuckerberg’s bank records from the time could easily ruin their whole case, so they’d want to know that Ceglia had good documentation proving his story.

Again, I’m assuming the lawyer is minimally competent, because he’s the head of a law firm in a major city.  One would assume that these questions would be standard in vetting such a case before taking it.  I highly doubt Ceglia just showed up at the law firm one day with photocopies of a contract and one canceled check, and all the lawyers said, “Oh, okay… sure, that makes sense.”

(5) Zuckerberg didn’t start Facebook until the next year, and he didn’t have the idea until at least six months later.

How does anyone know what was in Zuckerberg’s head?  We know for a fact that he has lied in the past regarding his involvement with other Harvard students.  The new narrative seems to be that he stole their idea.  Maybe.  But isn’t it also just as possible that he had a similar idea himself, and he agreed to code for those other Harvard students to sabotage their competing idea?  I don’t know.

All we know for sure is that at some point Zuckerberg picked up the Facebook idea and ran with it.  We don’t really know for sure when the first inkling of an idea entered his head.  And we know that he has lied about the early history of Facebook in the past.

Again, this is not proof that Ceglia is correct.  It’s just saying that we really don’t know the whole truth about Facebook’s founding, and it’s at least possible that Zuckerberg was pondering such an idea months or even years before.

(6) Why would Zuckerberg accept just $1000 for such a major part in his Facebook project?

This objection seems to break down into two parts.  One comes from the sort of person who assumes that Zuckerberg thought he was sitting on an idea with great potential and value.  The fact is that he probably didn’t know that at the time.  Most big business ventures that are creative in any way require a bit of luck and timing as well as a good idea.  There’s no guarantee that any business venture will pay off, as Hollywood movie execs know very well, and their business is to try to be sure a movie will earn back its investment.

Now, let’s compare that to an 18-year-old kid.  Would he actually know whether his idea would take off?  Probably not.  Nobody could have really predicted it.

But the other part of this objection is stronger — why did Zuckerberg take so little money?  He didn’t need the money at the time, from all appearances.  (He had already coded some successful software that major companies were interested in buying.)  So why accept a measly $1000 for a major stake in such an idea?

Well, one possibility could be that Zuckerberg was just scamming the guy by taking his money (even a small, but significant sum) for a venture he didn’t think would pan out, or perhaps one which he had little interest in pursuing seriously at the time.  His behavior in running Facebook clearly shows he’s willing to take advantage of people’s trust in all sorts of ways.

Who knows?  Perhaps he had the idea, thought it might be a minor project he’d try out, and when he found this guy with a little money, he ran it by him.  The guy was interested and offered shell out some cash.  Zuckerberg was expecting to earn $1000 for his coding for the guy; now he could walk out with $2000.  If Zuckerberg wasn’t seriously thinking about the project at the time, this could be a major win for him with little risk.  He got $1000 for promising next to nothing.  He could put in some minimal effort to create a site within the next year, and he’d let it fail and walk away with $1000.

But in the meantime, he met some Harvard students that fall who had a similar idea, and he realized it had some potential, so he worked harder to develop it himself.

Maybe?  I don’t know.  This is all speculation.  The point is that it’s possible that there was some reason Zuckerberg would apparently give away significant interest in a venture for $1000, particularly if this idea wasn’t fully-formed and didn’t seem to have a lot of potential at the time.

(7) Okay — suppose it’s all legit.  Doesn’t the statute of limitations make all of this moot (as Facebook lawyers claim)?

I’m not a lawyer.  But everyone’s interpretation of this is really annoying to me.  Yes, New York has a 6-year statute of limitations for contract breaches.  Yes — be careful to read that right — contract breaches.  The clock in most such cases starts ticking at the moment of a breach, not the moment the contract was signed.  You need to wait for a violation before suing.

Imagine you had signed such a business agreement and you were involved as a half-owner for six years.  Then, after six years, your partner suddenly takes over and claims he owns the business.  Is that true?  Has the statute of limitations expired?  Of course not.  The contract doesn’t expire with the statute of limitations.  The limitation is on the amount of time a person can wait before filing a lawsuit after the claim arises, i.e., someone violates the contract.

So, the relevant date is not the contract date in 2003, but rather what was going on with Facebook six years before the lawsuit was filed in 2004.  Zuckerberg could hardly violate a contract signed in 2003 dealing with ownership of a business that didn’t actually exist until 2004.  He needed to do something that violated the terms of the contract with that business by mid-2004.  Had Zuckerberg violated the terms of the contract by June 2004?  How would he do such a thing?

Well, for example, he might sign another contract giving away a share greater than what he legally owned according to Ceglia’s contract (16%).  Clearly in the summer of 2004, Zuckerberg got some investors interested.  But the timeline is important — at what point did Zuckerberg start legally giving away more of the company than he apparently owned?

Also, there are legal remedies sometimes available in cases where a contract violation could not have been known to a party before a particular point.  Ceglia contracted for a website to be put up by early 2004.  It happened.  He had no other expectation from the terms of the contract, until Zuckerberg clearly started acting like he owned more of the company than 16%.

For example, if Zuckerberg started promising friends shares in Facebook in early 2004 exceeding 16%, it wouldn’t necessarily matter if these were private (particularly oral) agreements done informally.  Ceglia would have no way of knowing such agreements existed and therefore could not have reasonably been aware of a breach of contract.

But again, this is all speculation.

[Update: after doing some more research, I can see the legal argument to be made for the window for action expiring upon the date Zuckerberg performed the required actions of the contract, i.e., when he finished the website in February 2004.  That would mean Ceglia would have to file a complaint by February 2010.  I don’t know enough about contracts law to know whether this would be an absolute deadline.  It would seem to me that the contract not only stipulated what Zuckerberg had to do by 2004, but also stated a continuing interest in owning the company, which shouldn’t have an expiration date.  But I’m not a lawyer.  Ceglia clearly has lawyers, and they must think the contract still has a chance.  Also, we don’t know whether tolling applies in this case — which is the legal term for circumstances that would allow certain kinds of delays that might extend the statute of limitations.

Whatever the technical legal status of everything here, just remember that the case presented on its face was strong enough to get a judge to issue a temporary injunction for Facebook to stop transferring assets, which was lifted after both parties agreed to it after a couple days.  Nevertheless, any judge would know more about the law than I do, and I wouldn’t think most judges would take an action like restricting a multi-billion-dollar company from doing business without a reasonably strong case.]

Conclusion

The major point to take away from this is that Zuckerberg and Facebook have not outright ignored this guy.  They didn’t come out right away and say the guy was a fraud.  They still haven’t clearly said that the contract is a fraud.  Zuckerberg said:

If we said that we were unsure, I think that was likely taken out of context because I think we were quite sure that we did not sign a contract that says that they have any right to ownership over Facebook.

In other words, “I was quite sure that I did not sign a contract that I believe says they have any right to ownership over Facebook.”  This doesn’t deny that such a contract might exist that might appear to make such a claim.  It just says that Zuckerberg was “quite sure” that he didn’t sign a contract that he thought gave away Facebook.

And of course “we were quite sure” that this was true; otherwise, he could not have just gone on running the company for the past few years.  He had either forgotten about the contract or ignored it, if it’s valid.  In the meantime, he was quite sure that he hadn’t signed away the company.

The question isn’t what “we were quite sure” about, but rather what he’s now sure about.  And his quote doesn’t clarify that.

As for Facebook, first they were “unsure” about the contract, they they “strongly suspected” the contract to be forgery.  Then, they said:

Ceglia has refused to produce the original contract and the copy we’ve seen is a forgery, with inconsistent margin sizes, inconsistent font sizes, and other glaring discrepancies. We will continue to defend this baseless lawsuit vigorously.

This is doublespeak: “the copy we’ve seen is a forgery.”  They are being careful to word the statement correctly.  If they were certain the contract couldn’t be real, they could say that.  Here they are careful to restrict the word “forgery” to the copy they’ve seen, i.e., they spent time measuring the PDF or photocopy or whatever, and they’re sure that’s not the real contract.  Great — they know the copy isn’t the original.  Tell us something we didn’t know.

If Zuckerberg and his Facebook pals are all so “quite sure” about all of this, why not come out and say that the contract actually is a forgery, because Zuckerberg knows he didn’t sign this contract.

The answer most people seem to settle on is that Facebook is just being careful not to say anything wrong, since this is a legal proceeding.  Except they wouldn’t be saying anything wrong (even legally) if they were actually “quite sure” the contract was a forgery, since that would be a matter of fact.

The very fact that they are even being minimally careful about the way they are wording their press releases shows that they are at least a little worried that this guy isn’t just a crackpot that’s going to go away.

In sum, I don’t know for sure that the contract is legit, that all its terms are clearly stated enough for Ceglia to have a case, or whether there will be enough supporting evidence offered to make this stick.  But to all the folks out there who are acting like there are holes all over the place — well, most of them must have already been considered by a competent attorney.  And the rest — well, that’s speculation either way.

But unless Zuckerberg can produce some documents that seem to prove this guy is actually wrong — like a copy of the actual contract that has different wording and doesn’t mention “The Facebook,” or at least his bank statement showing that he received only one check for $1000 from Ceglia, and there is some correspondence clarifying that the check was only for Ceglia’s business — unless Zuckerberg can produce something like that, this lawsuit is probably not going away anytime soon.

If Zuckerberg had this sort of thing, though, it’d probably be out there already.

Things must not be looking good for him.