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?
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.
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.
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.
(grellas: quality post!)
Interesting Arrington said neither has rights to the product. Just pointing out from an independent AP source instead of TC.
grellas +++
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.