TechCrunch sues Fusion Garage over the Joojoo -- we break it down

By Nilay Patel

posted December 11th 2009 1:28PM

Okay, well here we go. Michael Arrington says he filed a lawsuit yesterday against Fusion Garage over the CrunchPad / Joojoo situation, and he's helpfully provided a copy of the complaint, which alleges false advertising, breach of fiduciary duty, misappropriation of business ideas, fraud, and unlawful business practices. You'll notice that list doesn't include any breach of contract or intellectual property claims -- a fair departure from what Michael said he'd be suing over, but not entirely surprising since it doesn't seem like there was any contract here at all. Let's take a quick skim through the rest of the complaint, shall we?

The story of the CrunchPad as told by Arrington and his lawyers is just as confusing as you'd expect. Fusion Garage apparently came to TechCrunch during the development of Prototype B and provided the software running on the device. After several more months of development, TechCrunch and Fusion Garage were negotiating terms of a merger that would have seen Arrington's CrunchPad, Inc., acquire Fusion Garage in return for 35 percent of the new company's stock. As far as we can tell, this is the contract that never happened: looking at the emails attached as exhibits, it's clear that both parties knew they didn't have a deal and were scrambling -- Arrington even told Fusion Garage CEO Chanda Rathakrishnan that his "position is to turn the project off completely." TechCrunch puts great emphasis on Chandra's email reply to that saying he'd agree to a deal, but there's no evidence that a deal was ever closed or made final.
TechCrunch also says that Fusion Garage lied to them from the outset, and that the company wasn't even developing a browser-based OS until another project called "Velvet Penguin" died. Of course, this doesn't explain how Fusion Garage was able to put its software on the CrunchPad prototypes at the outset, but that's the claim.
The CrunchPad was to be built by Pegatron, but the Taiwanese ODM apparently terminated its relationship with Fusion Garage over unpaid debts. TechCrunch says it didn't know about any of this.
Fusion Garage registered thejoojoo.com on November 10, a week before Arrington declared the CrunchPad dead, and several days before Chandra emailed Arrington to say launch was scheduled for November 20. Sketchy!

So those are the basic facts from the TechCrunch side -- now let's look at the actual claims of the lawsuit. They're pretty wild, as these things go.

False advertising: Basically, TechCrunch says Fusion Garage is lying to people about the origins of the Joojoo, and those lies are damaging to TechCrunch. It's pretty interesting that this is the first listed claim, as lawyers traditionally lead with what they consider to be their strongest argument. To win here, Arrington will have to show that Fusion Garage is advertising a product in commerce and somehow misleading consumers in a way that's likely to influence a purchasing decision. Considering neither Fusion Garage nor TechCrunch have actually sold anything yet and we think the Joojoo's $499 pricetag will probably do more to influence customers than any ads ever will, we don't know how exactly this one is going to play out, but it's certainly intriguing.
Breach of fiduciary duty: This is the "we were in this together and you stabbed us in the back" claim. Although there wasn't ever a contract, Arrington says that TechCrunch and Fusion Garage's business dealings were enough to legally form a general partnership complete with a duty of loyalty to each other, which Fusion Garage violated when it concealed facts, made misrepresentations, and walked away with joint property. This one's going to turn on the court's interpretation of the timeline and how much each party contributed to the project: we think it's fair to say these two were partners at some point, but given all the talk about mergers and shutting the project down, the court could see things differently.
Misappropriation of business ideas: This one's pretty out there; you might think of it as the stand-in for a copyright or patent claim. Basically Arrington says that the idea for the CrunchPad was his, and that Fusion Garage stole it lock, stock, and barrel. Arrington goes pretty far in claiming that this was all his idea -- he takes credit for "the use of a white instead of a black background to better display web pages," "the use of large icons on the home screen," and "the idea and know how for empowering the device to play video output to a resolution of 1080p," among others. We're not overly familiar with the case law on this subject, so we honestly don't know how strong of an argument this is, but -- white backgrounds and large icons? Sure.
Fraud: Another count of "you lied to us." TechCrunch says it relied on what Fusion Garage was saying, and then got screwed.
Unlawful business practices and false advertising under California law: We're not familiar with the California law cited here, but fundamentally these are just the state-level versions of the claims above.

That's not a small lawsuit, and Arrington's lawyers certainly have their work cut out for them -- we don't think any of these claims can be won quickly, easily, or cheaply. That means Fusion Garage is also going to be on the hook for some big bills as well -- Chandra better hope the Joojoo has some, uh, juju.

(Interestingly, we don't see any record of the case with the Northern District of California yet, but we're assuming it just got held up while Winston and Strawn put some finishing touches on the complaint. We'll let you know when the case is actually filed.)