Judge Delays Facebook Ruling

The Facebook face-off is on hold. Again.

A federal judge in Boston today gave three Harvard graduates accusing Facebook founder Mark Zuckerberg of ripping them off two weeks to provide more information before he decides whether to throw out their long-running lawsuit.

U.S. District Judge Douglas Woodlock told Divya Narendra and brothers Cameron and Tyler Winklevoss to return to court by August 8 with more details to support their claim. They assert that Zuckerberg stole Facebook's source code and business plan from them when he briefly worked for their rival social network Harvard Connection, now known as ConnectU.

At the hearing, Woodlock cast a skeptical eye on the trio's legal arguments, repeatedly challenging their lawyers to provide details of the contract Zuckerberg is alleged to have violated.

"Dorm room chit chat does not make a contract," the judge said at one point.

Zuckerberg contends that because he never signed a formal contract with ConnectU or received any money for his services, the lawsuit is without merit.

Facebook, which had hoped the judge would dismiss the lawsuit altogether, issued a statement saying it was "pleased with the outcome of the hearing."

"We continue to disagree with the allegations that Mark Zuckerberg stole any ideas or code to build Facebook," the company said. "We intend to honor the judge's request not to comment further in the media and will continue to vigorously defend this case in court."

During a press conference in Boston after the hearing, ConnectU's lead lawyer John Hornick said he would be "happy" to settle the case to his clients "advantage," but said there are no active settlement talks at present.

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 site. 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 an awkward 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 vowed to pursue the case without regard to legal fees.

"This was our idea, and he stole it," he said.

Facebook has sought to portray the case as a schoolyard squabble between college classmates. But with valuation talk for the company crossing the $1 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 initial public offering of stock or an outright sale, according to Eric Goldman, director of the High Tech Law Institute at Santa Clara University.

Because the lawsuit is central to Facebook's ownership, the case will most likely have to be resolved before Zuckerberg, Thiel and the site's other backers can 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 federal court in California, 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."

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.

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."

by Sam Gustin