CrunchPad Federal Lawsuit Filed; Some Additional Thoughts
techcrunch.com
techcrunch.com
1. This obviously was an ill-documented relationship, though what is outlined in the complaint clearly suggests that it was either a joint venture of some type or at least something intended potentially to be a joint venture. When such a relationship is properly documented, all the associated issues - who is contributing what, who is getting what out of the arrangement, who owns the IP, etc. - are defined in the written documentation, typically a comprehensive written agreement signed by authorized representatives of both parties.
2. That said, opportunistic teaming happens all the time in the startup world and the absence of a carefully defined agreement is not necessarily fatal to a party's claim that a joint venture existed. A joint venture is a variation of partnership law (legally, it is a form of partnership by which the parties agree to do business jointly, and to share profits in some fashion, for a specific purpose, as opposed to a more general partnership by which they agree to do business together, and split profits, in connection with all their business activities). Technically, a joint venture (indeed, any partnership) can be based on a purely verbal arrangement or one that is verbal and supported by various written exchanges documenting some of the material terms of the arrangement, whether physically signed or not. To be a legally enforceable arrangement, the important thing is for the parties to have some clearly understood agreement, verbal or otherwise, specifying that they would be working together, and making their respective contributions, for a specific purpose whose ultimate goal was to split profits in some reasonably defined way as a result of their joint efforts.
3. While the formal requirements for a joint venture are not necessarily rigorous, and can be met even in a comparatively loose arrangement, one nonetheless must have some form of deal terms that can be said to be a reasonable meeting of the minds on some form of coherent business terms. The idea that "we agreed to work together," without more, does not make for an enforceable joint venture (or any form of contract). Moreover, even if there was a pretty good understanding that parties were to work together for a business purpose, if there is no understanding about who was to get what in exchange for what contribution, then it is almost certain that no form of enforceable agreement would be found.
4. Quite apart from whether a technical contract might be found to exist, the question of credibility also is crucial. That is, even if one party's story, if believed, would support the elements of a proper joint venture, there is the further question of whether that story is believable. On the facts alleged here, for example, why would TC, if it really did contribute major components of the software, hardware, funding, etc., do so without insisting that the parties have some form of written agreement documenting the terms of their venture? To me, this is the major flaw in a complaint of this type. It ultimately makes no sense for a reasonably sophisticated party to have, in effect, proceeded through multiple steps of a pretty complex transaction without proper documentation when, by its own admission, it knew quite a ways back that there were good grounds not to trust the party it was dealing with.
5. That said, the tactical goal of this complaint is to try to demonstrate that some form of enforceable joint venture existed (even if it is pretty shaky on its terms and in terms of believability) because that is the predicate for claiming breach of fiduciary duty on the part of the other "partner." If people really are doing business as partners, they do have fiduciary duties toward one another and can't engage in duplicitous tactics in their dealings with one another. Here, a secret plan on the part of one partner to appropriate the product of the parties' joint efforts would qualify as an illegal form of duplicity. If this can be proved, then the party misappropriating an opportunity or the IP belonging to the venture would have to account for its profits to the other party and would otherwise be legally exposed to substantial damage claims, even punitive damage claims.
6. If IP had been stolen here, though, the first action one would expect is for a party to be at the courtroom seeking to get a TRO and preliminary injunctive relief by which it asks the court to bar the other party from selling or distributing the product pending the trial in the lawsuit. That hasn’t happened here. Perhaps this is because, to get such relief, the moving party would need to demonstrate convincingly that it likely to prevail on the merits of its claims, and this something TC may not be able to do here.
7. On this score, the most telling thing that appears in the facts is the claim that TC had a deal because the CEO of the party it was negotiating with allegedly "agreed" to the terms of a merger in an email exchange. This sort of claim lies in the desperate category. Any merger of this type is highly complex, requires both board and shareholder approval, and is reasonably expected by all but the most unsophisticated parties to include, at a minimum, a detailed term sheet specifying what those terms are. For TC to claim that it had a "deal" on this score, based on statements made in a negotiation by the other party’s CEO, is exceedingly weak.
8. Thus, the legal aspects of this case would seem to come down to this: one party claims it had a deal and got betrayed while the other claims that there was no deal but "mere negotiations" which ultimately failed to lead to a binding agreement or arrangement between the parties. From a reading of the complaint, it would seem to be a difficult hurdle for TC to show that the terms of an enforceable deal are in place here. At the same time, there appears to be evidence of duplicity in the conduct of the other party and TC may have some claims to a form of remedy on account of having been misled by shark-like conduct on the other side. My intuitive sense, however: shark-like conduct likely occurred on both sides here and, if this is so, then TC will ultimately be left to stew in its own juices when this is all said and done.
(grellas: quality post!)
Generally speaking, if a third-party contractor did work on the project, that party could potentially have IP rights to its work, but not if it did so as a work-for-hire and assigned rights to whoever retained it. If there were no work-for-hire or IP assignments, then any contractor that might have done software development or hardware design could potentially assert infringement claims if its IP is used without benefit of a license agreement to the party using it.
Without further details, though, it is impossible to assess this.
In a civil suit Arrington and Techcrunch would probably lose the trial. But as far as the dispute goes I think they win if they can just get to trial. Fusion Garage has very few resources and no one is going to invest further money while they're embroiled in a legal battle. So if Arrington can just get an injunction against them selling the product he has effectively cut off every source of money they have.
With limited finances and no source of money coming in they'll eventually lose because they can't pay their legal bills or their employees. So in the end Arrington wins simply by filing a suit that is valid enough to take to trial.
By the way, I am not saying that TC's case may not have winnable elements - only that its core case may be relatively weak.
This makes sense, but it scares me a little. Entrepreneurial types frequently do what Fusion Garage and Arrington did, though usually on a lesser scale. A product person and a tech person might get together for a week to try something out, and they might even talk about formalizing a relationship. Often, this is done to just test a relationship or test an idea. I'd hate to think that one would have grounds to sue the other for "false promise" because of something like this.
What's the difference between two parties exploring an idea together and actually having an implicit, binding, unwritten contract?
There's no obvious line to draw, but certainly there's a real difference between talk and a whole lot of work, and outright fraudulent behavior, which (from TC's account) is what happened in this case.
To have a binding contract, even a verbal one, you need to have a meeting of the minds on terms of a deal that typically include mutual consideration - if what you are discussing is preliminary and does not include commitments upon which people can reasonably rely, it usually is safe to conclude that there is no basis for a binding contract.
The "false promise" type of situation is a specialized one that normally does not arise in most startup situations. In general, it is a variation of fraud. Fraud generally consists of false representations made to a party upon which that party reasonably relies to his detriment - in other words, getting "tricked," misled, etc. in a way that hurts you. A typical misrepresentation must be one of a fact that is falsely represented by a party (e.g., "my company has achieved x sales and you should invest in it when sales are nowhere near what is represented). The "false promise" variation of fraud is one in which the misrepresentation consists of a false fact but the fact itself is intangible - in this case, a false representation of one's state of mind. Thus, if one makes a promise without any intention of ever performing it, this is in the nature of a false statement of fact by which one can "trick" another person and thus constitutes a basis for fraud (e.g., if you do x, y, and z for my company, I will grant you a 20% interest in my company where the person making the promise never had any intention of performing on that promise). This "false promise" type of fraud is not the type of promise upon which a contract is formed but rather one upon which an action for fraud is predicated. In the contract context, it is most often used to try to get out of a contract ("I know my contract says I must do x, but the only reason I entered into it was in reliance on a promise made by the other party that he never intended to perform - because of the promissory fraud, I can rescind my contract").
With respect to promises or exchanges upon which parties try to claim that a partnership has resulted, you need the essential element that any such venture has to be based on the idea of splitting or sharing profits arising from your joint activity in some fashion (almost always in some percentage fashion). Thus, this represents only a narrow category of situations where one might inadvertently find himself faced with a claim by another party that negotiations they engaged in allegedly resulted in a legal partnership between them.
As appears in the TC case, the "false promise" and "binding partnership" type of claims tend to arise when parties have had complex dealings between them, allowing one or more of the parties to assert colorable claims of having been misled to one's detriment or of claiming that the parties agreed to undertake a venture by which they would split profits.
In 99.99% of cases, you can safely undertake typical negotiations with another party without fear that you will inadvertently enter into a contract. This is one aspect of law in which, surprisingly, common sense is actually your best guide. Contracts ultimately tend to turn on reasonable expectations of the parties and, if what you are doing does not feel like a binding commitment, it usually is not.
grellas +++
Interesting Arrington said neither has rights to the product. Just pointing out from an independent AP source instead of TC.
I'm working in a startup with a Neurologist who has an appointment at Harvard and an MBA - no doubt he's a smart guy. Nevertheless that didn't really matter a few years ago when our startup was taken to the cleaners by cons.. With the best of intentions we planned a strategic partnership with a medical device company only to find out that several months later we were deliberately being led on and lied to by the CEO of said company while they worked on stealing and implementing our ideas and cutting us out of the deal..
We thought about a lawsuit but we just didn't have the funds to go through with it.. In the end it worked out for us because we had already had some successful partnerships with other device companies which kept us afloat. Also, the company who stole our ideas failed miserably..
Is it really too much to ask that everyone pointing/shaking their finger at TC and Arrington to give them the benefit of the doubt..? It's pretty obvious if you believe what he's saying about Fusion Garage and Chandra that these guys are accomplished liars.. It's a tough lesson to learn and I for one applaud Arrington for being open and transparent in this whole ordeal.. I'm sure this has been embarrassing enough for him and the TC team..
And, unless most of the article is correct, he is also slandering them pretty bad.
Looks increasingly like MA found some company who could develop a product and that could be bullied out of the deal when it's ready to be taken away.
Jack Thompson used to be a lawyer, too. Having the training guarantees neither intellect nor sanity.
There's no reason to attach everything you've got to an initial complaint, and a lot of good reason to wait until you see how the other side responds. If they want to settle, for example, the less you've had to disclose in public, the easier it might be.
So while they very well may not have had a contract, this confirms no such thing.
(Disclosure: I know Mike)
This is a misconception - a contract does not need to be written to be enforceable. A contract consists of an "offer" and "acceptance"
http://en.wikipedia.org/wiki/Contract#Offer_and_acceptance
Techcrunch looks like it made an offer to work with someone to build a device, and Fusion looks like it accepted in some capacity by announcing they were working with them, tentatively branding it the Crunchpad, etc.
After that, the question is - did Techcrunch provide "consideration" to Fusion? That is, did they work to fulfill the agreement the two companies had?
Here, it looks pretty clear that TC did provide some consideration. Courts will look at what was agreed, and whether the parties provided that. Techcrunch might be exaggerating their role in the project, but they did clearly bring some consideration to the table - they put time, effort, money into the project because they believed they had a deal. Fusion accepted this consideration.
Importantly, consideration doesn't look at abstract value. It looks at whether you delivered on the contract. This is important, here's Wik on the subject:
"Consideration must be "sufficient" (i.e., recognizable by the law), but need not be "adequate" (i.e., the consideration need not be a fair and reasonable exchange for the benefit of the promise). For instance, agreeing to buy a car for a penny may constitute a binding contract."
The car for a penny example is extreme, and it might not be a binding contract, but it might too - there's been some famous cases of pranksters getting sued. But the key is, even if what TC provided wasn't important, if Fusion agreed to partner/pay royalties/give them a percent/something in exchange for what TC brought to the table, then they had a deal and TC delivered on their end of it.
Also from Wik -
"Contrary to common wisdom, an exchange of promises can still be binding and legally as valid as a written contract."
A clear, well written contract goes a long way. In absence of one, though, if you can still show there was an offer, acceptance, and consideration, then you've got a contract. I'm still going through the lawsuit reading, I'll come back when I see what TC is asking for because that's an interesting detail.
Edit: On page 10 of the lawsuit. TC is saying they paid vendors and paid Fusion's debts. That'd be pretty clear consideration if true. Still reading.
Edit2: Alright, page 21 has what TC is asking for. They're asking for all profits from sale of the product to be put into a trust and that Fusion is permanently forbidden from selling or distributing the Joojoo product, and must destroy it. Earlier in the suit they mentioned TC and Fusion are now permanently competitors, which implied TC is going to build their own pad. It'll be interesting to see if they have their own set of IP and specs to do that, or if it's just bluffing for leverage.
Some contracts, though, fall under what's called the "statute of frauds" - that means they must be written to become contracts.
http://www.expertlaw.com/library/business/statute_of_frauds....
> A "statute of frauds" requires that certain contracts be in writing, and that they be signed by all parties to be bound by the contract.
Contracts under statute of frauds include land sales and transfers, guaranteeing another person's debts, and contracts that can't be completed in a year.
It can be hard to prove an oral contract, but if you can prove it has all the elements of a contract, it's a contract, legal, and enforceable at least under the standard United States common law.
From what I read it seems that neither party treated the relationship as if they are bound by a contract. On the contrary it seemed like they proceeded under the assumption that they will negotiate some type of a deal in the future, but currently did not want to bind themselves.
None of this is legal advice, etc.
FG had $500k in debt by end of June. To whom? We don't know. Chandra would have liked to sell FG to CP [crunchpad] and then pay off that debt in a subsequent round of capital-raising. Arrington and fellow investors did not want to buy a company with half a million in outstanding debt.
Another option was for TC to buy FG at a valuation of $3m and pay off the debt at the same time by converting it to equity, which was also undesirable since it would have diluted shareholding by 16%. We may infer that with 35% of CP shares going to FG and a further 16% converted from debt to equity, the upshot would have been that Arrington's investors would have only had a 49% stake, with the other 51% being held by FG's investors and creditors, obviously giving them control of the company.
So TC's offer was for FG to pay off its debt completely, in rturn for which its investors would get 35% of CP shares. Chandra indicated this was acceptable, but was unhappy about it as it would have meant giving up all of his personal equity in FG and $75,000 in cash (in order to satisfy FG creditors) and his only holding would be an option to acquire 11% of CP in a future round.
Chandra asked for a better deal but indicated that this option was acceptable to him if it was the only way. It is unclear from the emails (which are confusingly presented in reverse chronological order) what position, if any Arrington & co. took in response to this offer. Since TC did not go ahead and buy FG, we may infer that the matter was placed on hiatus. I guess but do not assume that this was pending on FG's satisfaction of its creditors and getting back to a clean balance sheet.
By November, the awesomely-named Bruce Lee and his 2 co-investors considered FG to be worth $10m in its own right and valued TC's contribution at 10% of that for the Crunchpad name and Arrington's marketing effort, with Lee noting that Chandra had commended an offer of 25% of the shares in CP as payment for FG. It's unclear whether Arrington lowered the equity offer in exchange for taking on the debt, or whether the ~28% discount to the earlier offer represented Chandra's personal equity in FG; I suspect the former, suggesting that that CP planned to put down $2.5m in cash and absorb any outstanding debt in exchange for 75% of the equity, which would be fairly consistent with the negotiations in June.
Whew. So the upshot here is that Dr Lee is basically saying that he disbelieves Arrington/Crunchpad has brought $5m worth of product development and marketing clout to the table, but instead values their contribution at $1m (out of $10m cash that he and fellow investors are willing to put on the table). Additionally, he seems to feel like he is being hustled, considering the lack of a formal offer letter for the merger.
Seems to me that Dr Lee has decided to see the color of Arrington's money by raising the cash stakes considerably; suddenly Fusion Garage [in the sense of its largest shareholder] is offering to gobble up Crunchpad and pay Arrington off with a job rather than the other way round. Arrington's blogged thoughts refer to FG's poor financial position, but gloss over the fact that its investors have $10m on hand (which appears to be about 4x what Arrington had lined up).
The plaintiffs seem to argue that Fusion Garage is only alive because of the good will invested by Arrington/Crunchpad and would have died otherwise; I presume the defendant's argument will be that this was never the case, that FG had entered into the project in a spirit of partnership rather than supplication, and that any monies advanced by Crunchpad to FG's creditors were a matter of mutual convenience. The case seems to turn on the degree of innovation provided to the project by Arrington/CP: and looking at some of their claims, they seem pretty thin (eg suggesting web pages are bettered rendered against white background, or the use of large icons to select favorite sites, both of which the defendant will claim to be obvious prior art).
Prediction: it won't go to trial, Fusion Garage will settle with Arrington for $1.5-2.5m and both sides will declare victory. Arrington will keep the name and claim moral high ground and return something to his investors, FG will end up free of encumbrances and with a commitment of future silence from TechCrunch about the company and its products.
as in "i wanted to grow organically; he wanted a big marketing push: it ended in a total crunchpad". or "someone didn't tighten the nuts; front driverside wheel came off on a mountain road: complete crunchpad". or "flock of birds triggered a false alarm; first strike; automated response: crunchpad".
it happened with cuil, i'm sensing the same promise here....
The saga has the appearance of deliberate, or perhaps just subconscious submarining for the sake of having something sensational to blog about.
(Perhaps this is a good topic for an essay: how blogging twists the mind to make everything you do seem like a blog entry.)
I was getting tired of FAIL! anyway.
"So you apparently found out that your business partner was pretty shady last summer but you chose to not reveal that obviously newsworthy information to readers, why exactly?
Just wondering why readers should be considering techcruch a newsworthy source if such an obvious conflict of interests results in you coming down on the side that benefits you the most?"
Doesn't sound like he did, actually.
This is not the same. If the journalist wrote about his book in his own column would be the same. Arrington didnt go to gigaom to talk about crunchpad, He is using his own platform to talk about his own project, for the last year or so. Most of the time good things about it.
If he tried to pretend it was not his own project, then that would be wrong.
Point being, Arrington is not a journalist in any stretch of imagination.
Arrington states that he has known for a long while (as steerpike pointed out) that Fusion Garage has been in such shambles, and claims he isn't "just a blog" and has made significant (and/or the majority of) contributions to the CrunchPad. If both of these are true, why the hell didn't he pull out on Fusion Garage early on and go with someone else?
You supposedly have the idea, the investors, the retail channels lined up, etc... so why is Fusion even an issue? I call shenanigans here...
I expect him to be able to prove that FG has and continues to engage in shady deals.
Actually, I hope not. I would love to see him fight off a slander lawsuit.
Second, I can see this happening. Arrington has an idea for a tablet. He comes up with the basic idea and rough specs. Fusion Garage goes and implements it. In Arrington's view, the device is partly his because he had the original idea. In Fusion Garage's view, the device is all theirs because they did all of the work to create it. Both think the device is "theirs" because they underestimate the contribution of the other.
Arrginton really needs to establish what exactly they did, and demonstrate that it made it into the final device. I'm not sure what his actual contributions are from the claim; coming up with the specs isn't a big deal to me. (Note I'm talking morally and ethically, not legally - as always, I am not a lawyer.)
FG have said they have devices built or building haven't they? I wonder which is true - my guess is a small inventory, hence the pre-sale.
Chandra and Fusion Garage have shown a long term pattern of deceit in their business dealings.
Dear god.... why oh why did he deal with them? (or continue to deal with them)
If the lined up investors, guys who make a living in picking horses to back, were worried why didn't Arrington listen to their concerns
And after a brief scan through I dont see any/many mention of contracts or agreements between TC and FG. As we said before that is a basic mistake - and it looks like it is one that was actually made :(
Personally I am coming down slowly on TC's side: Fusion Garage are screwing about.
However the one thing I am certain about now is that I would definitely never go into business with or invest in Arrington. He's destroyed any reputation he had as an investor / businessman for me.
Shambles.
The pre-sale is to get enough cash in hand to pay the manufacturing outfit enough to do a production run in order to fulfill the pre-sale orders. If you send money to FG for a pre-sale, you are gambling that they will use your money to actually make a device and deliver it to you.
That is Arrington's warning in point 5, and it is a valid warning. Even if they don't use the pre-sale money to hire lawyers, there is no guarantee they will get enough money to do a production run, there is no guarantee they won't take your money and disappear.
Pre-sales is based on trust (buyer) and reputation (seller), not goods already manufactured.
The emails talk about shareholder investment; if that is the case they can pre-sale while they are building the first batch on investor money. This way they get a share of the Xmas market rather than launching in the January sales (always a bad move).
With all that said nothing about DG has shouted "marketing sense" :)
We sell units like that.
If he means pictures then I've got some rockin' time machine blueprints for sale. Hit me up...
I may be mistaken of course, but it looks like they do not have any formal document that says anything about their ownership of the project. Sure - they helped out the project, or even produced the blueprints, but do they have a proper contract saying what do they get in exchange? Afaik there's no law stopping me from creating a device based on someone else's not patented blueprints (otherwise people writing RFCs would own a lot of software they didn't write).
Litigation won't bring him happiness, wealth, a good reputation, or even closure. In fact, all this lashing out will do the opposite.
If he just shuts up about them, they'll very likely disappear like all the other >year-late, >100% over-budget buggy gadgets without major marketing, funding, or innovation.
He also has a lot of pride invested here.
So yes, Arrington is out to destroy them, and he wants to send a message saying more or less, "Don't fuck with me."
And he's smart enough to know that there's no such thing as bad publicity.
The sad truth is while techcrunch does "other things", its main operation is being a weblog, as posted in its about section:
"TechCrunch was founded on June 11, 2005, as a weblog dedicated to obsessively profiling and reviewing new Internet products and companies. In addition to covering new companies, we profile existing companies that are making an impact (commercial and/or cultural) on the new web space.
TechCrunch has now grown into a network of technology focused sites offering a wide range of content and new media."
In its literal sense Techcrunch is anything but tech blog, more precisely is covers a subset of technology, which is mainly the business aspect of "online technology". A tech blog in it's truest sense would be Arstechnica or Engadget or even gizmodo. TC's tech writing depth goes as far as reporting "twitter being down for 30secs". Their writers couldn't tell their ass from their mouth if you were to ask them a simple question as to point out the underlying technical similarities between safari and chrome.
As much as I love hacker news, I am often troubled by some of our fascination towards techcrunch as a source for tech news. TC is often posted 4-5 times a day here on the front page.
Utter rubbish example #1:
http://www.techcrunch.com/2009/12/11/google-code-freeze/
example #2:
http://www.techcrunch.com/2009/12/10/playboy-iphone/
example #3:
http://www.techcrunch.com/2009/12/10/facebook-is-totally-dow...
Those are in last 24 hours...
Must. click. link.
These are entirely my interpretations and personal thoughts. Happy to be corrected.
- From emails its clear that Chandra is desperate, to be either acquired by Tech-crunch or raise some money. Poor guy is under loan, has to pay vendors, salaries. There is no contract because then techcrunch would have to invest and hence share the risks and put in some real money. If its their joint venture why haven't they done that ?
- Michael is aware of chandra's talking to other investors. He jointly owns the product, but wouldn't let his lined-up investors come and help chandra out. Doesn't he know that when investors come they do have some say in how company should run ?
- The blueprint shit. Come-on. I have a time-machine blue print. Anyone building it ?
- Michael says FG is in trouble, has no money even to defend lawsuit. Now if this was a joint venture started by Michael, how did it come to this ?
- Many are now suggesting Techcrunch to take their blue print and Crunchpad name and get the hardware done by someone else. Isn't this what FG did ? Too their hardware and got a new name ?
To me its clear that Chandra thought of Michael as an potential investor and discussed details hoping to get acquired. He also talked to several other investors, who agreed to invest under some conditions they deemed fair. Chandra, desperate enough, went ahead. Doesn't this happen all the time ? What's the fuss. Its only unfair that FG is being projected in such a wrong light.
Point 7: The entire blueprint of the device was created by me.
I don't exactly understand what he means by this. He created the blue print but someone else owns the IP? And what exactly is a blue print, in this case? Just saying what the device needs to do/look? Isn't that too easy to do?
Few people would start out with a blank slate when most large potential manufacturing partners can offer decent starting points that are well suited for their manufacturing process (using components they have large volume discounts on; designs that fit their tooling perfectly etc.)
But presumably that is only a small part of the IP for the device, and TC are arguing they own the rights to some or all of the remaining IP.
In my business we've conducted several off-shoring experiments, and they have largely failed to realize a significant return. The lesson I learned from observing and assisting in those experiments is that the secret sauce in business is reputation. Finding people who are honest, reliable, and intelligent can be very difficult. When you find people like that, "grapple them to thy soul with hoops of steel." If, like Michael Arrington, you wander into an industry with nothing but your hubris to guide you, you'll most likely be taken for a ride.
I guess even if they did that, it'd be the nail in the coffin for ever getting the device sold in the US though.
Reminds me of 'The Dentist' from Cryptonimicon.
Why didn't TC & these guys set up a legal person in which to jointly conduct their business?
Or was TC just effectively the marketer for this company?