TechCrunch sues Fusion Garage over the Joojoo -- we break it down
By Nilay Patel 
posted December 11th 2009 1:28PM
posted December 11th 2009 1:28PM
- 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!
- 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.
(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.)
http://www.youtube.com/watch?v=xSLlZh9yelk
All I've seen is Fusion Garage build an internet tablet while Arrington promise to put his clout behind promoting it and getting deals made with different vendors/distributors etc.
Fusion Garage is still coming out with an internet tablet based on open source software, and Arrington didn't come through on his end... that's probably part of the reason it costs more than his fantasy price. Look at what he SAID he was doing 'behind the scenes'...
"And what’s really sad about all this is the incredible support we were getting from companies and people around the world to launch this device. A major multi-billion dollar retail partner has been patiently working with us for months, giving advice on manufacturing partners and offering to sell the CrunchPad at a zero margin to help us succeed in the early days. They were also willing to pay for the devices on order instead of 30 days after delivery, a crucial cash flow benefit that would allow us to ramp up volume without putting ourselves our of business. They were even willing to fly the devices from China on their own planes to eliminate our shipping costs. Intel, which would supply the Atom CPUs to power the device, has assisted us repeatedly with engineering and partner advice, and gave us pricing that was ridiculously generous given our projected first year sales volumes. Other partners were eager to promote and sell the device for little or no benefit on their end other than “supporting the project.” We even had sponsors lined up to help us sell the device near our $300ish cost."
Arrington's own words at:
http://www.techcrunch.com/2009/11/30/crunchpad-end/
So from all the publicly available information, Arrington appears to have failed on his promises (negotiate deals to lower the manufacture/retail price), and Fusion Garage made good on theirs (to come up with the hardware and software). If Arrington and Co. DID come through, then we'd see written agreements from Intel, the major retailer and the others Arrington mentions, as they would have been involved for some time.
If I were a Fusion Garage investor, and this 'too-good-to-be-true' promise with no legal contract to show for it, I'd say "Screw you Arrington" and launch without him. It's obvious who was blowing smoke up who's wazoo.
I was initially sympathetic to Arrington, but if he didn't sign a paper contract with Fusion Garage and didn't actually contribute anything to the device but its name, well, he's gotten what he deserves.
I don't have a horse in this race, and I wouldn't be surprised if there were shenanigans from both sides, but a couple of the claims strike as weak, at best.
A ~12in touchscreen tablet, browser-driven, with large icons? Isn't that basically what everyone has wanted since 2004? I mean, I'm sure Apple, Nokia, Sony, and a dozen other companies already have patents on parts of this description. Hell, the touchscreen Sony Reader is almost there. Give me an HP tablet PC, and I'll put a white background on it, and set it to have large icons. Since Windows is (partly) browser-driven anyway, that works, right? What about the TouchBook computer from Always Innovating? This particular claim fails the obviousness test, for me.
As for registering "thejoojoo.com" 10 days before Arrington declared it was dead. If I see the writing on the wall for a business deal to fall apart, I might prepare to have a soft-landing. In fact, when a vendor of mine was preparing to quit working for several of his clients, I started lining up replacement prospects due to the obvious signs that came before the "official declaration". It's more than possible the FG did that if TC started changing their tune in private communications. I'm not sure I buy this one.
As for the rest of it, if TC contributed to the project (more than emails and unfulfilled promises), then FG shoould be held to account. So far, the ball is in Arrington's court to prove a crapload of stuff, and it all looks dubious.
I have following the Crunchpad for a few months. Mabee I'm wrong but it seemed like Arrington almost avoided questions about the Crunchpad. His comments and interviews were always vauge about the hardware or other aspects of it. He never really had any concrete specs about it. Also, I have never seen a picture of him with the prototype or even in the same room as the device. It was always Fusion Garage displaying it or showing it off!
I am interested in the JooJoo even at the price. It would be nice if it al least functioned as a PMP as well. Why pay 400-450 for a netbook with a tiny screen that doesn't really have the processing power to do much of anything but surf the web anyway without the touchscreen?
@Nilay, thanks for the thoughtful story which has prompted many insightful comments.
You did much better than some "others" at Engadget (cough: Darren Murph) who would have merely chalked this story up to nothing more than greedy "monkey" (his favorite name-calling of late) lawyers who have nothing better to do.
So Arrington is a lawyer by profession, worked for a great firm. Shows how being away from the job for too long distorts one's legal knowledge. Aside from asserting some claims that are without merit (the disparagement/false advertising ones where the only person damaging TechCrunch's reputation was ... TechCrunch), he has no claims that would net him a nickel in damages.
Why a law firm would agree to represent TechCrunch here is unclear. There is no breach of contract claim that has a snowball's chance of winning (and in fact will likely be dismissed via a motion) and everything else is a lot of hand waving minus evidence or anything resembling a path to receiving a $0 award -- in the extraordinary event he proves anything more that the two entities had a working relationship. When a contract-less working partnership breaks up because Party A has lot interest in Party B, there is nothing to sue over -- you move on.
There was no lost interest; Arrington had been waiting and kept receiving emails basically saying "not yet". And even though there doesn't seem to be any word of an actual contract, under California law, a partnership means that the partners own the property together and not individually. With the Fusion Garage team flying to TechCrunch and working with the team there, that should be proof enough of a partnership between them.
And about the part in the article about project "Velvet Penguin", from the lawsuit/original article, it says that Velvet Penguin was a different type of software (not a browser-based OS) and the project had died. So Fusion Garage had said they were already developing a browser-based OS, but what they had first showed off was just some basic html rendering; it wasn't a real browser OS on the prototype.
The biggest issue though, that isn't included in this lawsuit, is whether or not Fusion Garage has stolen Pegatron's IP. Pegatron has admitted they weren't working with Fusion Garage anymore, yet somehow the JooJoo is managing to come to a release shortly. I wouldn't think they'd have gone to a new manufacturing company and had them set up this new tablet that fast.
Mike claims this is not about the money and at this point I tend to agree with him. He seems intent on doing everything he can to use his power to stop thejoojoo from being successful. It's going to go on sale and a few thousand of them will be sold and it will generate well north of $1m in revenues for this new company. No way to stop that from happening at this point without an injunction. After reading the complaint here, it is clear that no responsible court would grant such an injunction and the claims in the suit are not going to be easy, or possible to prove. Mike has a well known reputation for blatantly showing a bias to any story, and only highlighting those facts that are beneficial to his cause. This whole thing is a pretty big mess for Arrington and other than recouping a lost investment, which is probably not all that significant, I'm not sure why he really cares at all. The more he pushes this issue, the more it becomes clear that he was bamboozled and even if he wins his case, the damage to his reputation and credibility is done. No moral victory here. He would be wise to hire a publicist and just move on...
This whole "JooJoo" tablet began to reek of disaster during the liveblog when questions started being thrown around. Now litigation is brewing before the device even begins to sell. I sense one messy, messy road downhill.
Frankly, I think FG played Arrington for a sucker. They saw a chance to suck IP and ideas from Arrington and co since Arrington was stupid enough to deal with in overseas company with no written agreements. (I am a retired lawyer and its happens more often that you would think that lawyers will get into a deal without the ink on the paper) Now they parlay "their side" into a lot of free PR and might get them some revenue out of curiousity purchases if nothing else. I was more than a little stunned that Josh T had a sitdown with Mr. Rathakrishnan. Would the Editor in Chief of Engadget have done a interview with Fusion Garage had there not been the Arrington connection? I think not. I suspect FG knew that and thus kept Arrington on the hook. Is this actionable? In the end probably not. In my past experience, judges have a well developed hostility toward cases that become hard lawsuits in large part because people who should know better, such as pupported hotshot IP laweyrs turned bloggers, get into bed with comparative strangers without protection. Sorta you get the legal clap you deserve what you get line of thinking.
Based on FG s actions I would not send them money either without a good way to protect it.
This is similar to the kind of problems you have in the music business. For example, someone might approach a producer / beat maker with an idea. They'll say "use this James Brown sample" etc.. And "start the record with no drums". The producer is the one with the know-how. They know how to build the song with the tools. In fact they were probably working on a similar idea to yours weeks ago. When the track is finished the producer might start thinking about what the "ideas man" contributed considering the producer is the one who's been slaving away for weeks actually making the song.
Alot of producers at that point think the song is theirs, lock stock and barrell since in reality there was nothing significant in the original ideas that really made your work easier. The "ideas man" actually thinks that it was their idea / inspiration that made this track materialise. IT's always hard to quantify the significance of "ideas" but it's easy to quantify "man-hours". This a "hollywood" style lawsuit. Ideas over muscle. Muscle usually wins btw.
Arrington is the ideas man here. But I think he has no real idea how hardware development works. He doesnt realise that tech companies work on similar things all the time (its called practising your craft), and what Arrington thinks is unique inspiration is just icing on an already thought out cake. Tablets are not unique and have been around of years, there is nothing completey unusual that Arrington has brought to the scene apart from marketing and "background colour of the screen" (LOL!),
At the end of the day FG's owners probably thought. Why are FG doing 99% of the actual work and giving away 50% of the product. They told FG that they're crazy to give away their man-hours like that and told them to stop being silly. FG's head had no choice but to diss arrington because the reality is, FG is not a charity, it's a business.
Remember kids.. hardware is a big boys game. Come correct or don't bother at all..
If Arrington thinks that he can sure people for an idea, think again. His idea is to get a tablet for $200, not $499.
Arrington claimed that he has all the funds line-up, then why is there a problem with Pegatron?
If somebody even think that Pegatron owns the IP, then ASUS should have launched the tablet since Pegatron terminated the deal with FG.