Facebook lawsuit could be reason Yahoo! won't bid

Facebook is facing a nasty lawsuit alleging the the source code for the company's service was stolen by its founder while he was at Harvard. The legal action has been brought by classmates that have a small rival service called ConnectU. They claim that their code for that project was taken by Mark Zuckerberg to start the Facebook service, according to the FT.

In the most extreme case, a court could find that the code was stolen. In the event of such a ruling, ConnectU could ask that Facebook be shut down or that they take ownership of the code and the company.

The suit comes at a particularly critical time for Facebook. Industry estimates have put the value of the service at as high as $8 billion. Most internet measurement services show the social network site growing more quickly than its larger rival, MySpace.

Facebook must also consider whether its wants to seek a large buyer. Yahoo! (NASDAQ: YHOO) has already been in negotiations with the company, but its offer was too low. Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) are seen as potential buyers.

Facebook's other two alternatives are to have an IPO or remain private.

But, none of these solutions work if the company does not own its own intellectual property.

Douglas A. McIntyre is a partner at 24/7 Wall St.