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CONNECTU LLC v. Zuckerberg

District Court, D. Massachusetts
482 F. Supp. 2d 3, 2007 WL 1098163, 2007 U.S. Dist. LEXIS 27547 (2007)
ELI5:

Rule of Law:

Federal diversity jurisdiction is determined by the state of facts at the time a complaint is filed, and this cannot be altered by a subsequent event, such as the execution of a corporate operating agreement with a retroactive effective date.


Facts:

  • Cameron and Tyler Winklevoss and Divya Narendra began developing a business plan for a new website in December 2002 while attending Harvard University.
  • The Certificate of Formation for ConnectU LLC was filed in Delaware on April 6, 2004.
  • At the time of its formation and for over a year thereafter, ConnectU LLC had no written operating agreement and no members were formally named in its formation documents.
  • Mark Zuckerberg, a citizen of New York, moved to California for the summer of 2004 to work on his website, TheFacebook.
  • On September 2, 2004, ConnectU LLC filed a lawsuit against Zuckerberg and others.
  • In August 2005, nearly a year after the lawsuit was filed, the founders of ConnectU executed an Operating Agreement.
  • This 2005 Operating Agreement stated that Divya Narendra, a citizen of New York, was a founding member of ConnectU LLC effective as of the LLC's formation on April 6, 2004.

Procedural Posture:

  • ConnectU LLC sued Mark Zuckerberg and other Facebook defendants in the U.S. District Court for the District of Massachusetts, alleging subject matter jurisdiction based on diversity of citizenship.
  • ConnectU later filed an amended complaint to add a federal copyright claim, creating federal question jurisdiction.
  • The Facebook Defendants filed a motion to dismiss the original complaint pursuant to Rule 12(b)(1), arguing that the court lacked subject matter jurisdiction at the time of the initial filing because complete diversity of citizenship did not exist.
  • The District Court referred the motion to dismiss to a Magistrate Judge for a report and recommendation.

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Issue:

Does a retroactively effective provision in a limited liability company (LLC) operating agreement, executed after a lawsuit is filed, determine the LLC's membership for the purpose of establishing federal diversity jurisdiction at the time of filing?


Opinions:

Majority - Collings, Magistrate Judge

No. A retroactively effective provision in an LLC operating agreement, executed after a lawsuit is filed, does not determine the LLC's membership for the purpose of establishing federal diversity jurisdiction at the time of filing. Federal jurisdiction is assessed based on the facts as they existed at the time of filing, a principle known as the 'time-of-filing rule.' While Delaware law permits an LLC's operating agreement to have a retroactive effect, this state law cannot be used to create or destroy federal jurisdiction that did not exist when the complaint was filed. The court must analyze a 'snapshot' of the facts on the filing date, September 2, 2004. On that date, no operating agreement existed, and no members had been formally admitted to ConnectU LLC under the provisions of the Delaware Limited Liability Company Act. Because an LLC's citizenship is determined by the citizenship of all its members, an LLC with no members is effectively 'stateless' for diversity purposes and cannot establish diversity of citizenship under 28 U.S.C. § 1332.



Analysis:

This decision reinforces the strictness of the 'time-of-filing' rule for subject matter jurisdiction, establishing that federal jurisdictional principles can supersede the legal effects of state corporate law. The court's holding prevents parties from manipulating jurisdiction after the fact through retroactive agreements. The case serves as a critical lesson on the importance of corporate formalities, demonstrating that an unincorporated entity like an LLC may be deemed 'stateless'—and thus barred from federal court on diversity grounds—if its membership is not clearly established at the moment a lawsuit commences. This creates a potential pitfall for new business ventures that may delay formalizing their internal agreements.

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