News site TechCrunch filed suit against former partner Fusion Garage last week, claiming that the Singaporean start-up used fraud and deceit in a bid to take control of the CrunchPad, a tablet computer developed by the two companies.
The lawsuit, filed in the U.S. District Court for the Northern District of California, escalates a two-week war of words between the two companies. The lawsuit seeks unspecified monetary damages and an injunction that would prevent Fusion Garage from distributing or commercializing the device.
The relationship between TechCrunch and Fusion Garage broke down last month, when TechCrunch founder Michael Arrington announced that Fusion Garage had taken control of CrunchPad and planned to release the product on its own.
The CrunchPad was conceived by Arrington as a low-cost tablet computer for surfing the Web. The company developed the first two prototypes of the device before joining forces with Fusion Garage after a September 2008 meeting between Arrington and Fusion Garage CEO Chandrasekher Rathakrishnan, according to the lawsuit, a copy of which was made available online.
TechCrunch filed the lawsuit as Fusion Garage began taking preorders for the CrunchPad, which it renamed the JooJoo, on Friday.
TechCrunch's lawsuit alleged that Rathakrishnan and Fusion Garage used deceit and fraud to launch the JooJoo, pretending that all was well between the two companies even as Fusion Garage registered a domain name to sell the JooJoo as its own product. Prior to the sudden split between the two companies last month, the relationship had appeared normal, it said.
At one point, TechCrunch appeared close to acquiring Fusion Garage.
Under terms of a deal that Rathakrishnan accepted in a June 27 e-mail, TechCrunch would have paid to acquire a 35 percent stake in Fusion Garage. However, the deal required that Rathakrishnan pay off creditors to eliminate the company's debt before the acquisition could go through. To make that happen, Rathakrishnan would be required to hand over his personal stake of 20 percent to creditors and investors, leaving him with stock options for 11 percent of the company's shares.
Rathakrishnan said he was willing to do the deal under these conditions, but that never happened. Nevertheless, the two companies continued to work together, planning to show off the finished CrunchPad at a TechCrunch event in San Francisco on Nov. 20, the lawsuit said.
Continued financial pressure on Fusion Garage appears to have contributed to the split between the companies.
Three days before the CrunchPad launch was scheduled to happen, Rathakrishnan informed Arrington that one of Fusion Garage's investors believed TechCrunch had no formal commitment to the device and only provided marketing support of minor value, suggesting the CrunchPad was entirely the work of Fusion Garage. The investor offered to give Arrington and his team options in Fusion Garage worth 10 percent of the company's shares in return for transferring rights for the CrunchPad name to Fusion Garage.
"The percentage would be non-negotiable," the investor wrote in the Nov. 17 e-mail, which Rathakrishnan forwarded to Arrington.
At that time, the investor urged Rathakrishnan to move ahead with plans to launch the CrunchPad as soon as possible, with or without TechCrunch's involvement.