Although the academy award winning film The Social Network was released almost 10 years ago, the lessons it teaches about intellectual property, confidential information, contracts and the protection of know-how are still valid for entrepreneurs and small businesses today.
The Social Network was adapted from Ben Mezrich’s book Accidental Billionaires. In 2003, Harvard students and twins Tyler and Cameron Winkelvoss, along with fellow Harvard student, Divya Narendra (collectively, the “Founders”), conceived a social networking website for Harvard college students. None of the Founders had the programming expertise to develop the website and enlisted Mark Zuckerberg, also a Harvard student, to write the source code and help with the website.
The Founders claimed that, not only did Zuckerberg fail to provide the coding and development services he promised, but he acted in secret and stole their idea, business plan and source code, using them to launch his own, competing social networking website. By the time the Founders discovered what Zuckerberg had done, Zuckerberg’s “the facebook.com” website (later abbreviated to “facebook.com) had built a considerable lead in user traffic that would turn out to be impossible for the Founders’ social networking website, Connectu, to overcome.
Connectu sued Zuckerberg and Facebook.com, along with five other individuals who developed Facebook.com with Zuckerberg. Among the many claims in the suit was misappropriation and unauthorized use of confidential source code and business plans, along with breach of an oral employment agreement. The suit was ultimately settled in 2008, with the defendants agreeing to pay the Founders $65 million.
Here are some of the legal lessons from this saga:
Lesson 1: Agreements for Ownership of Intellectual Property Must be in Writing.
You can’t copyright an idea. Copyrights protect the expression of an idea, but not the idea itself. This is a subtle but important point. So, while the social network concept itself couldn’t be copyrighted, the software code for the Founder’s concept of a social network site could. Writing the software code for Connectu was precisely what Zuckerberg was hired by the Founders to do.
It was undisputed that Zuckerberg had orally agreed with the Founders to write Connectu’s code. The problem for the Founders was that the contract wasn’t clear whether Zuckerberg was their employee or contractor. While the terms of an oral employment or contracting agreement are enforceable under certain circumstances, a critical term – who owns the source code – was not clearly addressed, or even addressed at all, by the parties.
Under U.S. Copyright law, employees automatically own their employee’s work product, including the copyright in that work product. But contractors own the work product they create for others, unless there’s an agreement that specifically states that this work product is a “work made for hire”. Although Zuckerberg’s disputed status as an employee or contractor may have contributed to the parties’ $65 million settlement in favor of the Founders, the absence of an agreement clearly benefitted Zuckerberg given Facebook’s eventual multi-billion-dollar market cap.
The lesson here is unmistakable: get agreements in writing, particularly if the subject matter is intellectual property.
Lesson 2: Protect the Intellectual Property in your Idea at the Outset.
Even without an enforceable employment or contractor agreement, the Founders could still have protected the valuable confidential information in their idea. Had they done so, Zuckerberg would likely have been prevented from starting a competing business or otherwise exploiting that idea. This could have been accomplished with two critical documents:
A Nondisclosure Agreement, or NDA, is a contract in which the party receiving confidential information (also called a Recipient) agrees to protect its confidentiality. As part of the confidential relationship created by an NDA, the Recipient promises not to disclose or use that confidential information except as permitted by the NDA. If the Recipient violates the NDA, the discloser of the confidential information has the right to sue the Recipient for the resulting damages, and/or seek an injunction to prevent any further disclosures or use of its confidential information, including the discloser’s ideas, in violation of the NDA.
Business entities typically enter into NDAs with their employees, contractors, and other third parties who work on projects for them. If, before Zuckerberg began providing services for the Founders (whatever his status – employee or contractor), the Founders had entered into an NDA with Zuckerberg clearly covering the source code Zuckerberg was creating and, most importantly, the social networking site concept itself, things would have been decidedly different. It’s likely that Zuckerberg would either have been dissuaded from appropriating this information or, if he had appropriated it, prevented from using and/or exploiting the code and the idea.
The most common purpose of a non-compete agreement is to restrain an employee or contractor from competing with their employer, both during and after employment.
Non-competes are more susceptible to legal challenge than NDAs. But as long as they contain reasonable restrictions as to where an employee or contractor may work, and how much time has to pass before they may compete, non-competes will generally be upheld. Moreover, non-competes are especially enforceable where they’re intended to prevent an employee or contractor from misappropriating the employer’s ideas, inventions, brand, customer lists or other trade secrets.
Had the Founders insisted that Zuckerberg sign a non-compete, he would have been prevented from starting Facebook, at least for some period of time. During this time, the Founders could have achieved a critical mass for their own social networking site that would have given it the intended head start over any competing site Zuckerberg developed, including Facebook.
Lesson 3: Have your own Attorney review all Agreements.
Once Facebook launched, Zuckerberg “froze out” his original business partner and CFO, Eduard Saverin (an alleged “best friend”). Saverin had actually put up the initial starting capital for Facebook.
As Facebook gained popularity, its attorneys recommended creating a new Delaware corporation to acquire the existing corporation Facebook was operating under and distribute shares in the new company to the owners. Unfortunately for Saverin, unlike Zuckerberg and the other owners of the old company, Saverin’s shares in the new company were diluted from 30% to just 1%. Saverin had erroneously assumed that Facebook’s attorneys were also his attorneys; had he consulted with his own counsel, he likely would have avoided this problem. Having a business degree or background didn’t protect Saverin. He needed to use the expertise of an attorney to explain the legal effect of what he was agreeing to, but didn’t.
The film, The Social Network, is an object lesson for entrepreneurs and small businesses about protecting themselves in the long-term, particularly in the rush and excitement of launching a new, and perhaps game-changing, business opportunity.
Consult an Attorney for Guidance
You need to be especially careful with the intellectual property you’ve worked hard to create. Becker Law LLC works with creatives, freelancers, startups, and small or medium businesses to protect their intellectual property rights, including trademarks, copyrights, and trade secrets. Contact us today to provide you with essential guidance for protecting the assets which are critical to your business.