Importance of Good Legal Advice

I just read an interesting court ruling from California in a case between TechCrunch and Fusion Garage. The case in question is about the JooJooPad (previously known as the CrunchPad). In short, Fusion Garage and TechCrunch worked together on a tablet computer and ultimately before the commercial launch, Fusion Garage decided they didn’t want to or couldn’t partner with Arrington and TechCrunch, so they launched without him. The facts and innuendo of the case are all over the internet – feel free to go look them up yourself.

I’m going to write about two things here: first of all, my non-lawyer insight into the ruling and second, how you avoid getting yourself into this situation as a startup.

The District Court’s ruling can be found here.

In summary, Arrington initially was seeking injunctive relief from the court in the form of freezing all proceeds from JooJoo sales. This was dismissed. This was an injunctive roll of the dice that has no bearing on the overall facts of the case so why not try. The basic idea is that Fusion Garage was in bad financial shape prior to the launch of the JooJoo Pad, if any profits were to come out of it (which at a later point a court may rule Arrington is entitled to a share) then they may be squandered or lost and Arrington would be unable to recover any proceeds he may be entitled to. It was nothing more than a lottery ticket, as the judge writes, “Even assuming TechCrunch prevails on the merits, however, that would not give it a claim to 100% of the revenues Fusion garage derives from selling the product.”

The more telling parts of this ruling come from the judge’s comments around Fusion Garage’s defence. Everything I’ve read online says Arrington copped the smackdown, but truth be told, Fusion Garage’s defence is torn to shreds by the judge. Essentially, “the heart of Fusion Garage’s opposition” (according to the judge) is that it never entered into a partnership or joint venture with TechCrunch and therefore it had no fiduciary obligations to TechCrunch in relation to marketing the product. Fusion Garage also contends that they solely own the product and developed through their own endeavour. They have to add the last comment as part of their defence even if they know it isn’t true otherwise they’d be acknowledging that TechCrunch has a position.

The first thing the judge does is demonstrate case law (precedent) where parties have in fact been in partnership or joint venture together by the way they’ve acted rather than what they’ve agreed contractually. This is the very first thing he elaborates on in the Discussion section of the ruling which is an indicator to how he is viewing the facts so far. Before even getting to the detailed defence of Fusion Garage, the judge is already putting forward a hurdle that they have to overcome

The judge then proceeds to point out the six elements of the defence by Fusion Garage. He then proceeds to go through each of the six points and using existing case law show how these points don’t hold up. He also dismisses the argument of Fusion Garage creating the product of their own endeavour throughout the various points by concluding that the parties worked together closely and collaboratively.

The judge summarises his discussion on the injunctive relief by writing, “Accordingly, TechCrunch has made a credible showing that it may be able to establish the existence of a joint venture under which Fusion Garage owed it certain fiduciary duties.” Now considering that the judge hasn’t heard all of the facts, has left the door open in a few places (ie Fraud and Competitive Damage) for TechCrunch to amend its filing and has basically cast a heavy shadow of doubt on the defence, its hard to see how Arrington “lost”. His injunctive request was too broad, but that was certainly the intent and it was refused.

Now how does this impact you and your startup company. I think the first thing you need to realise is that it isn’t always what you SIGN, but also how you BEHAVE that is important. In this issue, the crux of the defence is that Fusion Garage didn’t have a firm agreement with Arrington and that ultimately their relationship wasn’t workable. The truth is, as the judge pointed out, both parties behaved as though they were working together and that alone constituted a joint venture. So be careful about this kind of thing – don’t commit to working with other companies until you have a firm documented agreement in place.

I’ve also seen this apply with relation to customer agreements. I’m familiar with a case where a customer agreed to a scope of work, a price and terms of reference but then did not sign the contract. In the course of doing business the supplier simply didn’t realise the contract had never been signed and sent back. The supplier did the work, billed the customer, the customer paid their bills, commented on the work (positively and negatively), the supplier fixed things the customer were unhappy with and even gave them contractual service credits when they were entitled. Then one day the supplier got an email from the senior person at the customer (who by this time are three months in arrears on payments) that because they haven’t signed the contract, they were not obligated to pay any outstanding amounts. The supplier responded to that with the view that they’d carried out the relationship in good faith, expected to be paid in full and asked if the customer wished to invoke the notice period for the service. No response. After a few months of effort and both sets of lawyers getting involved, the customer paid in full all outstanding amounts, including the months during the dispute because they didn’t terminate the agreement properly.

In that case, the supplier were pretty lucky for a number of reasons. However one thing they did was try and tighten up on signed paperwork. This is a must! While it is exciting to win the business, you have to implement the discipline in your organisation from Day One that unless the legals/contractuals are in place, you’ve not yet won the business and you shouldn’t undertake any work.

Take the time, at the beginning of starting your business to get a good legal advisor. Someone who can give your broad business/contractual advice and when necessary get you in tough with specialists for things like IP law. For most startups, legals are one of the most neglected areas of the business until they get caught out. Make sure you get your legal ducks in a row early on because otherwise, it can become a massive distraction.

Tagged as: contracts, Fusion Garage, legals, Mike Arrington, Startups, TechCrunch