Earlier this week, influential tech blogger and aspiring cool product entrepreneur Michael Arrington announced that the eagerly anticipated CrunchPad was stillborn.  Popular Mechanics prematurely heralded the planned low-cost tablet computer as one of the 10 Most Brilliant Products of 2009.  While we will have to wait for more information to know the real story behind the dispute behind Arrington’s company TechCrunch and its partner in the venture, Fusion Garage, there are some interesting issues raised by what Arrington has so far revealed. 

[Note: although Fusion Garage has removed much of the content from its website, for the time being, a cache of Fusion Garage’s blog/PR announcements can be found here].

Arrington claims that because TechCrunch and Fusion Garage jointly own the intellectual property behind the CrunchPad, “it’s legally impossible for [Fusion Garage] to simply build and sell the device without [TechCrunch’s] agreement.”  Now, we don’t know what agreements there were between these two companies, but joint ownership of intellectual property would not by itself keep any joint owner from using that property.  The US Patent Office, for example says the following about joint ownership (emphasis added):

Patents may be owned jointly by two or more persons as in the case of a patent
granted to joint inventors, or in the case of the assignment of a part interest
in a patent. Any joint owner of a patent, no matter how small the part interest,
may make, use, offer for sale and sell and import the invention for his or her
own profit provided they do not infringe another’s patent rights, without regard
to the other owners, and may sell the interest or any part of it, or grant
licenses to others, without regard to the other joint owner, unless the joint
owners have made a contract governing their relation to each other. It is
accordingly dangerous to assign a part interest without a definite agreement
between the parties as to the extent of their respective rights and their
obligations to each other if the above result is to be avoided.

Under US Copyright law, the rights are a little different: a joint “copyright owner has the right to
commercially exploit the copyright, provided that the other copyright owners get an equal share of the proceeds.”  Stanford University Libraries, Copyright Ownership: Who Owns What?, Copyright FAQs.

Therefore, unless there were some agreement between TechCrunch and Fusion Garage that requires both parties to agree on how their joint intellectual property is to be used or licensed, there is no restraint put on either party.  If Arrington sues Fusion Garage, as he has threatened, I will be interested to see the complaint – perhaps there was such an agreement.

Another issue raised is that by sending an email with the following message to Fusion Garage CEO Chandra Rathakrishnan, an unnamed investor may have provided some of the evidence needed to pierce the corporate veil to make the investor liable if a court ultimately finds Fusion Garage wronged Arrington or TechCrunch in this dispute:

“We still acknowledge that Arrington and TechCrunch
bring some value to your business endeavor…If he agrees to our terms,
we would have Arrington assume the role of visionary/evangelist/marketing head and Fusion Garage
would acquire the rights to use the Crunchpad brand and name.
Personally, I don’t think the name is all that important but you seem
to be somewhat attached to the name.”

If this dispute ends up in court, the email to Fusion Garage would probably have been disclosed in discovery anyway, but Rathakrishnan unnecessarily highlighted the investor’s direct involvement with the dispute by forwarding it to Arrington.  The limited liability provided by the corporate form is not absolute – investors who have sufficient ownership and control a corporation to such an extent that a court finds the corporation is a “mere instrumentality” of the investors may be liable for the corporation’s acts.  See, e.g., Institute of Veterinary Pathology, Inc. v. California Health Laboratories, Inc., 116 Cal.App.3d 111, 119 (1981); Standard Wire & Cable Co. v. AmeriTrust Corp., 697 F. Supp. 368, 374 (C.
D. Cal. 1988).

Both issues should serve to remind entrepreneurs (and investors) to be careful about ownership of IP and to be careful about corporate control and the dangers of discussing sensitive issues over email.

In any event, I personally hope that TechCrunch and Fusion Garage resolve the situation, release an innovative product, and make scads of money.