In the past week, there’s been wild speculation on the technology news and blog sites about the claims made in a bombshell lawsuit filed against Facebook.
According to published reports, a New York man filed a lawsuit claiming that he owns a majority ownership interest in the $25 Billion company by virtue of a contract that he signed in 2003 with Facebook founder and CEO Mark Zuckerberg. An email from Facebook has asserted that “the claims are absurd and we strongly suspect that the contract is forged.”
The Facebook lawsuit raises five critical points that every company and entrepreneur should consider when formalizing its business relationship with a written contract.
FORMALITY COUNTS
In the Facebook case, the company has asserted that the contract is a forgery. There’s no doubt this issue will be addressed at the initial phase of the litigation. If the contract is in fact a forgery, the case will be summarily dismissed. If the contract is legitimate, the litigation will proceed on the merits to determine the rights and obligations of the parties to the contract.
Do you formalize each important business relationship with a written contract? If so, do you have a filing system for maintaining these important documents in a safe and secure place?
The appropriate degree of formality for a specific contract is dependent on the gravity of the business relationship. A relatively minor contract (i.e., a gentlemen’s wager on a sporting event with $1 is at stake) can be written on the back of a napkin or an envelope and signed by the parties. By contrast, a integrated written contract is needed when there’s a company-to-company relationship involving substantial performance obligations, the use of complex intellectual property rights, and substantial money is at stake.
If the parties to a deal ever had any reason to believe that the subject matter of their deal would someday be worth $25 Billion, then they probably would have insisted on a much more formalized written contract.
CLARITY IS CRUCIAL
The second lesson of the Facebook case is the compelling need for parties to a deal to strive for clarity in stating the rights and obligations of the contract. The rights and obligations of the parties constitute the bulk of the contractual terms.
In the context of the Facebook case, the parties should have addressed relevant rights and obligations including:
· The ownership rights related to the intellectual property, name of the venture/entity, interest in ancillary ventures/entities, and stock/shares of the venture/entity.
· Performance obligations such as who is obligated to do what, the payment of compensation, vesting of ownership rights, breach of contract, and termination of the contract.
· How to handle a dispute including alternate dispute resolution (mediation and arbitration), choice of law, choice of forum, attorney’s fees, and costs.
EXECUTION IS IMPORTANT
What are the appropriate formalities for execution of the contract? This question turns on who has authority to bind each party to the contract. If an individual will be signing the contract, then the individual has the authority to bind themselves to the contract (assuming that he/she has the requisite legal capacity).
If a party to the contract is a legal entity (i.e., a corporation, limited liability company, partnership, etc.), then the appropriate individual with authority to bind the legal entity should be executing the contract on behalf of the corporation. In short, you would want the President of a Fortune 500 company to execute an important contract, not a janitor who works at a remote branch of the corporation.
In order to make it easier to authenticate the contract in court at a later date, you should also consider whether to have multiple persons execute the contract (i.e., President and Secretary, whether there’s a need for witnesses to the execute of the contract, and whether the execution should be notarized.
ENFORCEMENT SHOULDN’T BE AN AFTERTHOUGHT
During the deal-making process, you should always contemplate what action should be taken in the event that the contract is breached. Depending upon the business relationship at issue, the parties should consider inclusion of:
· A non-compete provision that defines whether and how the parties can compete against each other in the event the relationship is terminated.
· A confidentiality provision that protects either or both parties against the unauthorized disclosure of business secrets.
· A liquidated damages provision that requires the party who violates the contract to pay a pre-established sum of money (liquidated damages).
· A provision that provides for injunctive relief so that the non-breaching party can effectively seek a court order that compels the breaching party to immediately stop violating the contract.
GET PREVENTATIVE LEGAL ADVICE
Based on the news reports of the Facebook case, it doesn’t appear that the parties to the alleged deal sought legal advice prior to striking their deal. I think its obvious that if the parties had obtained sound legal advice when the deal was allegedly negotiated, they could have avoided several glaring problems in this case:
· The degree of formality of the contract would have been commensurate with the scope of the deal.
· Whether the contract was legitimate or a forgery would likely not be at issue.
· There would be much more clarity about the rights and obligations of the parties.
· The appropriate means for enforcing the contract would be apparent.
Ultimately, the Facebook case will be resolved. Unfortunately, many of the issues raised at the initial phase of litigation could have been avoided altogether and without the necessity of time-consuming, expensive litigation. Don’t make the same mistakes in your business.
ABOUT THE AUTHOR
Fred Reilly became an attorney in 1986 and is a Member of the California Bar Association, District of Columbia Bar Association, and Florida Bar Association. Mr. Reilly is also a Solicitor and Member of The Law Society of the United Kingdom.
He is admitted to practice before the United States Supreme Court and United States Court of International Trade.
Mr. Reilly graduated from The London School of Economics and Political Science (Master’s degree in International Business Law), The Cumberland School of Law at Samford University (J.D.) and The Krannert School of Management at Purdue University (B.S. Management).
He practices international business and eCommerce law. Mr. Reilly frequently travels to Florida, California, London, and Moscow.
IMPORTANT NOTICE
This purpose of this blog is to inform and not to advise. The statements are general and individual facts in any given situation may alter their application or involve other laws not referred to here. You should always seek advice from a competent professional if any questions arise.