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Why Fuhu, Maker of The Kids' Tablet Nabi, Is Suing Toys "R" Us

Fuhu Inc., the Los Angeles startup behind the $199 Nabi childrens' tablet with Google Nexus guts, is suing former partner Toys "R" Us, which plans to launch its own competing Tabeo tablet next month.

(Also read my follow-up blog detailing the background of Fuhu and its pivot from widgets maker to tablet vendor.)

Here's more proof that the demand - and the stakes - are rising in the Android tablet market. Fuhu Inc., the Los Angeles-area startup behind the hot $199 Nabi childrens' tablet, filed a lawsuit in Southern California court today against former partner Toys "R" Us, which just announced its own kids' tablet.

The El Segundo-based company is accusing the toy retailing giant of wooing Fuhu to sign an agreement to sell the Nabi exclusively through its 1,600 stores and Web site last Christmas, using promises of millions of dollars in marketing and merchadising incentives as inducement.

Despite apparent high demand - Fuhu's complaint alleges that Toys "R" Us internally reported 1,000 Nabi pre-order every 3 hours until it stopped accepting them, and that "demand would support sales of 20,000 NABI units per day on the TRU (Toys "R" Us) website" - Toys "R" Us broke its promises around promoting the Nabi and then ordered "commercially unreasonable" amounts.

As a result, Toys "R" Us only sold slightly more than 20,000 of the first version of the Nabi tablet last Christmas, said Fuhu CEO, Jim Mitchell, in a phone interview today after the complaint was filed.

"They thought we could do six figures. The question is why they didn't order more," Mitchell said.

The answer, according to Fuhu, was that Toys "R" Us planned all along to launch its own competing tablet, and was getting close to Fuhu in order to study its market research, design and business plans (despite their being shared with Toys "R" Us under NDAs).

That product, the $150 Tabeo, was announced two weeks ago.

"It was simply too much of a wrongdoing for us to ignore," Mitchell said.

(Full disclosure: I was in touch with Fuhu about a forthcoming review of its Nabi tablet when they reached out to me to brief me on their lawsuit. I sent an e-mail to Toys "R" Us spokespeople and they replied that they hadn't seen the lawsuit yet and could not yet comment. I hope to include their comments if and when they arrive.)

The Tabeo includes many of the Nabi's features, including parental controls, kid-engineered user interface, pre-loaded games and educational apps. To be fair, many kids and educational tablets do offer these features in some form.

Moreover, the Tabeo's specs - single-core ARM chip, 800x480 screen - are more typical of other underpowered kid tablets such as Oregon Scientific's MEEP and Techno Source's Kurio, and are vastly inferior to the Nabi, which sports a quad-core Nvidia Tegra 3 chipset (the same as the Google Nexus tablet).

(Read my interview with the makers of the Kuno, the hottest Android tablet in the education space .)

However, Mitchell and other Fuhu employees say they were incensed by what they see as evidence of blatant infringement of Fuhu's trade secrets. For instance, the Tabeo's rubber case, with its corner protrusions, does appear to mimic the 'butterfly' shape of the Nabi's case (Nabi means "butterfly" in Korean). See below, and check out  my image gallery  of all the leading Android kids' tablets to compare with others.

nabi tabeo collage small

Nabi (left) and Tabeo

And though Fuhu and Toys "R" Us terminated their exclusive agreement in January after the disappointing Christmas 2011 season, Toys "R" Us is using the Nabi keyword on its web site to redirect customers to other tablets it does sell, including the MEEP, Kurio and the Tabeo.

Mitchell says that despite Fuhu's small size - it has about 100 employees in California and Asia - it has the heft to take on Toys "R" Us in the courtrooms. Its investors include Asian tech powerhouses Acer Inc., Kingston Digital, Foxconn Digital Inc. and others. It has raised almost $33 million in VC and debt financing.

Fuhu is advertising heavily today on kids' television channels such as Nickelodeon and Disney, and has a loyal fan base on Facebook and elsewhere. And it isn't betting on exclusive relationships this Christmas. It is selling through the retail stores and online sites of WalMart, Target, Best Buy, GameStop and Amazon.com.

"We're doing very well right now, and have well exceeded what we sold last year," Mitchell said. He declined to state a target for this Christmas: "Our hope is that we sell quite a bit more than last year."

Mitchell said he decided to go ahead with a lawsuit in part because of what his two young daughters said after they found out about the Tabeo launch.

"They said, 'Dad, they're copying you. Isn't that wrong?' And I said, 'Yes, I do think they are copying me,'" he said. "We just felt we had to take a stand on this."