Facebook's Day In Court

A federal judge in Boston is scheduled to decide today whether to throw out a lawsuit accusing Mark Zuckerberg, the 23-year-old founder of Facebook, of stealing the plans for his booming social network from three Harvard schoolmates: Cameron and Tyler Winklevoss, and Divya Narendra.

The 2004 Harvard graduates accuse Zuckerberg of stealing the source code, design, and business plan for Facebook when he worked as a programmer for their social-networking site, Harvard Connection, now known as ConnectU. The Winklevoss brothers have demanded that Facebook be shut down and that full control of the site be turned over to them.

The hearing comes at the worst possible time for Zuckerberg, currently the golden boy of Silicon Valley. As Facebook explodes in popularity, the lawsuit poses a major obstacle in the company's quest to go public or potentially sell itself to the highest bidder.

Google, Yahoo, and Microsoft are all said to have eyed the site. Last fall, Zuckerberg famously turned down a $1 billion buyout offer from then-Yahoo chieftain Terry Semel, who has since resigned, in part because of a perception that he failed to snap up Facebook.

In an exclusive interview with Portfolio.com last week, Tyler Winklevoss, who along with his twin-brother Cameron are world-class rowers, vowed to pursue the case without regard to legal fees.

"This was our idea, and he stole it," Winklevoss said. He described Zuckerberg's actions as "premeditated, well thought out, duplicitous and conniving."

Facebook has sought to portray the case as a schoolyard squabble between college classmates. But with valuation talk for the company broaching the $10 billion mark, Zuckerberg is not taking any chances. He's brought out big legal guns, led by Silicon Valley intellectual property ace Hopkins Guy, of powerhouse Bay Area firm Orrick, Herrington & Sutcliff.

Indeed, with Facebook growing exponentially, there is a potential fortune at stake. Since Facebook expanded its website beyond college students last September, it has nearly doubled in size, to 31 million users.

In recent days, Facebook has acquired web-software firm Parakey -- founded by the creators of Mozilla Firefox -- for an undisclosed amount, and installed Youtube veteran Gideon Yu as its new chief financial officer. Facebook expects to earn $30 million this year on revenue of $150 million.

This week, Facebook's most visible backer, venture capitalist and PayPal co-founder Peter Thiel told The Deal magazine (subscription required) that the company is not for sale.

But, he added, "If we got an offer from someone for $10 billion, we probably would listen to them." He said Facebook would not seek to go public until 2009.

If the lawsuit is not dismissed, Facebook may be seek a settlement deal with ConnectU, effectively clearing a path toward an IPO or sale, according to Eric Goldman, director of the High Tech Law Institute at Santa Clara University.

Because the lawsuit is so central to Facebook's existence, the case will most likely have to be resolved before Zuckerberg, Thiel and the site's other backers realize the payout they're aiming for.

"This lawsuit goes to the core of the assets that Facebook claims to own," Goldman told Portfolio.com earlier this month.

Since 2004, the two sides have waged an increasingly acrimonious court battle. On March 28, a Massachusetts judge threw out the original lawsuit on a technicality, prompting the brothers to immediately file a new lawsuit.

Striking back, Facebook filed a countersuit in California federal court, accusing ConnectU of unfair business practices.

Facebook's lawyers argue that what matters most in the case is the fact that Zuckerberg, not the Winklevoss brothers, had the vision to turn a nebulous concept into a booming business. "Only one of [the students] had an idea significant enough to build a great company," Facebook said in a court filing. "That one person was Mark Zuckerberg."

Still, several people familiar with the dispute say it is widely held belief among recent Harvard graduates that Zuckerberg double-crossed the brothers. After agreeing to help code their site, Zuckerberg "went M.I.A. for a few months and suddenly came out with Facebook," according to one recent Harvard grad.

Zuckerberg acknowledges working for the brothers and has admitted having access to the source code of their website "in late 2003," according to court filings.

The Winklevoss brothers say Zurckerberg was integral to the development of ConnectU - until he ripped them off to launch Facebook. The brothers say Zuckerberg not only stole "the basic idea" for Facebook, but also their business plan as well as the site's specific code, layout and database which were "proprietary and confidential."

On January 11, 2004, Zuckerberg registered thefacebook.com , three days after sending the Winklevoss brothers an email promising to deliver a "functioning website" for Harvard Connection -- something he never did. Instead, on February 4, 2004, Zuckerberg launched Facebook, a move the brothers say "usurped" their "valuable business opportunity."

For his part, Zuckerberg has said he was "intrigued" by ConnectU, but found that he was "subjected to demands on my time without truly being made a part of the development team." He contends that because he never signed a formal contract with ConnectU or received any money for his services, the lawsuit is without merit.

Lawyers and reps for both sides declined to comment on the case ahead of today's hearing.

by Sam Gustin