Recently, Uber found itself in yet another reputation-damaging scandal. But instead of the routine matter of major investors asking a long-time CEO to resign, this scandal was a bit more law centered—and a lot more interesting. This scandal resulted from Waymo’s claim against Uber that it had stolen and inappropriately used trade secrets for self-driving vehicles.[i]
The trouble all started with Uber’s $680 million acquisition of Otto, a self-driving technology company. Shortly after the transaction had been concluded, Uber found itself the target of a lawsuit. In order to understand how and why this complaint arose, it is important to take note of two facts: first, prior to founding Otto, Anthony Levandowski had previously worked for Alphabet, Inc.; and second, Waymo, the company that filed suit against Uber after news of the acquisition became public, was a subsidiary of Alphabet. Waymo claimed that Uber’s acquisition of Otto was motivated, primarily, by Uber’s desire to acquire driver-less car design secrets, which Levandowski was privy to from his time at Alphabet. Some of the more controversial allegations listed in the complaint were that several Waymo employees solicited their co-workers to join Otto and left with confidential files from Google, another Alphabet subsidiary.[ii] Dara Khosrowshahi, current Uber CEO, maintained that Uber never misappropriated any trade secrets belonging to Waymo or Alphabet.
Waymo’s lawsuit raised numerous legal questions that could have set the tone for future Silicon Valley litigation. First, how would Alphabet prove that the merger was designed as a conspiracy to steal trade secrets for self-driving vehicles? Second, what information did Alphabet have that made it so certain that filing suit was the best idea? Finally, assuming that Alphabet could successfully prove the merger’s conspiratorial intent, what kind of relief would it have been entitled to? Presumably, the court could issue an injunction preventing Uber from using any of Waymo’s technology. But what if Uber had independently developed self-driving cars on its own? Could Uber really prove that such a development was entirely independent of Levandowski’s past relationship with Alphabet? Where would the court draw the line?
Unfortunately for legal scholars, the case settled. According to the settlement terms, Uber will pay Waymo a 0.34 equity amounting to about $245 million (0.34 percent of Uber’s $72 billion valuation).[iii] Additionally, Uber agreed not to incorporate any of Waymo’s confidential technology into any of its products. Apparently, this was not the first settlement offer on the table. An earlier settlement would have required Uber to sacrifice a larger equity stake amounting to about $500 million, but included less restrictions on Uber’s use of Waymo technology.[iv]
We will likely see more disputes arising between giants in the technology sector in the future. We are living in a world where the technology markets are increasingly concentrated. From 2008 to 2017, the S&P 500 went from 15% to 23% tech.[v] Interestingly, although this market continues to grow exponentially, most of this growth seems to be driven by a small number of tech giants. Consider, for example, the fact that Facebook controls 77% of mobile social traffic. Similarly, Alphabet controls 81% of the search engine market. Further, one out of every two dollars spent on the Internet goes through Amazon. Together, Apple and Google provide 90% of the operating systems for the world’s smart phones. [vi]
Having such large market shares enables these companies to take advantage of economies of scale, thereby increasing the burden on new entrants.[vii] These companies also use their massive market share to leverage smaller companies into selling. In one such case, a shoe retailer, Zappos, refused Amazon’s acquisition offer.[viii] In response, Amazon set up a competing retailer, and leveraged its massive size to sell shoes at an extremely low price, essentially forcing Zappos to accept Amazon’s acquisition offer.
Turnover among the Fortune 500 companies is highest in the technology industry,[ix] and many employees who leave these companies go on to form tech start-ups, taking much of their former employer’s proprietary information with them. Then, these start-ups are often acquired by another tech giant. Large companies in Silicon Valley are cognizant of the potential that one of their large rivals may gain some sort of competitive edge. As new technologies develop and the Silicon Valley workforce goes from tech giant to tech giant, there will be more allegations of the sort we saw in the Waymo case.
[i] Greg Bensinger, Uber Settles Trade-Secrets Case, Wall. St. J. B1 (Feb. 10-11, 2018).
[ii] Jonathan Shieber, Uber settles law suit with Waymo, Tech Crunch (Feb. 9, 2017), https://techcrunch.com/2018/02/09/uber-settles-lawsuit-with-waymo/.
[iii] Anita Balakrishnan, et. al., Uber Settles Dispute with Alphabet’s Self-Driving Car Unit, CNBC (Feb. 9, 2018), https://www.cnbc.com/2018/02/09/uber-waymo-lawsuit-settlement.html.
[iv] Alexandria Sage, et. al., Waymo Accepts $245 Million and Uber’s “Regret” to Settle Self-Driving Car Dispute, Reuters (Feb. 9, 2018), https://www.reuters.com/article/us-alphabet-uber-trial/waymo-accepts-245-million-and-ubers-regret-to-settle-self-driving-car-dispute-idUSKBN1FT2BA.
[v] Nathan Reiff, Tech Concentration in the S&P 500 is Highest Since 1999, Investopedia (June 20, 2017). https://www.investopedia.com/news/tech-concentration-sp-500-highest-1999-fb-aapl/.
[vi] Challenging the Titans of Technology, The New Center (2017), http://newcenter.org/ideas-to-re-center-america/challenging-big-tech/.
[ix] Lydia Dishman, Where Google, Apple, and Amazon Employees Want to Work Next, Fast Company (November 18, 2015), https://www.fastcompany.com/3053695/where-former-google-apple-and-amazon-employees-want-to-work.