by: David M. Pridham
Intellectual property battles can make or break a company — just ask Paragon Trade Brands, whose diaper business “hit the fan” (so to speak) and went bankrupt after infringing Procter & Gamble’s Pampers diaper patents. Or ask Amazon, which sued Barnes & Noble for infringing its patented “one-click” purchase system and drove the brick and mortar retailer from the online book business, eventually growing to dominate all of Internet retailing itself.
But now the corporate IP wars have reached a new level of ferocity. An alleged trade secret thief, the superstar autonomous vehicle designer Anthony Levandowski, may actually go to jail for his actions. And I mean serious jail time — 15 years in federal prison, or longer.
The case began in February, when Google’s autonomous vehicle subsidiary Waymo accused former star engineer Levandowski of illegally downloading 14,000 technical files — including top-secret details on lidar, the laser sensor that allows self-driving vehicles to “see” their surroundings — before leaving to start his own self-driving company, Otto. Uber then quickly (and conveniently) acquired Otto for 700 million, putting Levandowski in charge of its own autonomous vehicle program, which it deemed crucial to the firm’s future.
In a case that is apparently as sleazy as it looks, U.S. District Court Judge William Alsup referred the case to the U.S. Attorney’s office for possible criminal action in the theft of Waymo’s trade secrets. Such action is exceedingly rare in civil suits like trade secret misappropriation. But as Judge Alsup noted to Waymo attorney’s when making the referral, “You have one of the strongest records I’ve seen for a long time of anybody doing something that bad.”
It’s so bad, in fact, that on May 30 Uber was forced to fire Levandowski in order to distance itself from the actions of the autonomous vehicle designer it had paid so much to poach from arch-rival Google (i.e.,Waymo). This after Levandowski invoked his fifth amendment right against self-incrimination and repeatedly refused the judge’s orders to return all 14,000 files he had allegedly stolen from Waymo.
It doesn’t look good for either Levandowski or Uber. If the Department of Justice proceeds with a criminal investigation of Levandowski for economic espionage, he could spend many years in federal prison. According to intellectual property attorney Peter Toren, quoted in Wired magazine, the market value of any stolen intellectual property is a major factor in sentencing.
“If we’re talking about tens of millions of dollars in value,” Toren told Wired, “we’re talking about a very, very lengthy prison sentence.” And autonomous vehicle technology is extremely valuable, with salaries for top engineers like Levandowski starting at $10 million a year and hundreds of billions of dollars of future market value at stake. In 2014, Walter Liew was sentenced to 15 years in prison for stealing a mere $20 million worth of trade secrets from DuPont.
For Uber, meanwhile, the acquisition of Levandowski and his company has already proven to be a disaster, so firing him merely gives Uber a way to reduce its liability and claim that it was not willfully conspiring with the engineer to steal technology from Waymo. But the risk is that Levandowski could become a witness against Uber, and cut a better deal for himself by claiming that Uber all along knew what he was doing and merely “looked the other way.”
Whatever happens, the Waymo trade secret suit and associated liability is just another in a whole series of recent corporate pratfalls by the world’s most valuable startup. Uber is already the subject of a federal criminal probe over its use of “greyball” software technology to fool regulators in a number of cities. Last week, it also admitted publicly that it had stiffed its New York City drivers of tens of millions of dollars in serial underpayments. Then there’s the final report due on an independent investigation of pervasive sexual harassment within Uber’s management ranks. Don’t forget the departure of more than a dozen top executives this year alone — including the head of finance on May 31, and in February, the senior vice president of engineering, another poached Google executive. And finally we come to Uber’s chief executive, Travis Kalanick, who is still trying to live down a YouTube video showing him arrogantly berating one of his New York drivers when the man pointed out — correctly, we now know — that Uber has been consistently underpaying its drivers.
Oh yes, and the autonomous vehicle program that Uber says is absolutely “existential” to the very future of the company? It has now lost its single greatest architect. It’s safe to say morale cannot be good among the remaining employees of this beleaguered program.
Uber is hardly alone in suffering the wounds of intellectual property battle. With patents and other intellectual property now accounting for roughly 80% of the market value of all companies today, IP battles have become bet-the-company affairs both at home and abroad.
Consider, for example, Searchmetrics, a venture-backed Berlin-based search optimization company whose U.S. subsidiary just filed for Chapter 11 bankruptcy protection in hopes of escaping a three-year-long patent infringement suit from arch-rival BrightEdge. According to a report in TechCrunch, Searchmetrics had patented its technology in Europe, but had failed to file for similar patents in the U.S., which left an opening for archrival BrightEdge to file patent infringement suits against Searchmetrics’s now-vulnerable U.S. operations.
The Berlin-based leadership of Searchmetrics would have done well to read the Prussian general and theorist Carl von Clausewitz’s “Principles of War,” who noted the critical need when defending from enemy attack to “place our forces as much under cover as possible” — in Searchmetrics’s case, under the protection of strong U.S. patents.
Then there’s the Chinese bike-sharing startup YouOn, which last month was forced to cancel its planned $90 million initial public offering of shares on the Shanghai Stock Exchange after an independent inventor filed a patent infringement suit against it. He also warned the China Securities Regulatory Commission that allowing the IPO to go forward despite the threat of an injunction should he win his suit was contrary to shareholder interests.
YouOn’s problem, like that of Searchmetrics, was that it left its flanks unprotected. Although its main business consists of bikes rented at dock stations around the city, YouOn had recently branched out into station-less rentals of bikes that customers could find anywhere in the city with their smartphones. But it had failed to patent protect that portion of its business. Chinese inventor Gu Tailai, on the other hand, had a 2010 patent entitled, “System and method for operating bicycle leasing without a fixed taking and returning spot.”
Incidentally, pre-IPO patent litigation is becoming increasingly common nowadays, as are patent purchases by pre-IPO companies in order to defeat such challenges. According to Intellectual Asset Management magazine, in fact, six out of the 10 largest IPOs ever — Alibaba, Facebook, Snap, Google, Twitter, and LinkedIn — have all been preceded by these startups’ purchases of patents from the intellectual property behemoth IBM.
The point being, success or failure in business competition is now often “war by other means” — e.g., by patent or trade secret lawsuit.
Better get prepared for it.