Delaware Court Tosses Uber Derivative Suit Over Stolen Trade Secrets

Former Uber CEO Travis Kalanick leaves the Northern District of California after testifying. Photo: Jason Doiy/The Recorder

The Delaware Chancery Court on Monday dismissed a shareholder derivative suit stemming from Uber's $680 million acquisition of a driverless-car technology company, whose founder was accused of stealing intellectual property and trade secrets from Google.

The ruling, from Vice Chancellor Sam Glasscock III, found that Travis Kalanick, an Uber director who formerly served as the ride-hailing company's CEO, faced a "substantial likelihood of liability" for failing to heed warnings that Otto founder Anthony Levandowski had downloaded thousands of proprietary files from Google's self-driving business Waymo before he left to form the San Francisco-based startup.

However, Glasscock said, there was no reason to believe that the rest of Uber's board had acted in bad faith by supposedly turning a blind eye to the misappropriation allegations, which ended up costing Uber $245 million in a settlement with Waymo last year.

"If the plaintiff’s allegations are true, the directors who approved the Otto acquisition approved a questionable transaction without fully informing themselves," Glasscock wrote in a 54-page memorandum opinion. "Their decision ultimately damaged Uber. Nonetheless, a failure to follow best practices is not necessarily a breach of fiduciary duty."

Uber investor Lenza H. McElrath III filed her complaint for damages in February 2017, about nine months after Uber acquired Otto in a stock deal. According to the complaint, Kalanick had been in regular contact with Levandowski about poaching other employees from Google, and the two often exchanged text messages and would meet occasionally to discuss the acquisition over a series nighttime walks.

At the time, Uber had hired an outside firm, Stroz Friedberg, to investigate the deal and whether any theft of Google's intellectual property had occurred. According to McElrath, Kalanick knew that Levandowski had absconded with top-secret information from the Mountain View, California tech giant, but later ignored "serious reservations" that Uber's general counsel had raised about the deal.

McElrath said that Kalanick had been briefed on the preliminary finding's of Stroz's probe, but did not share the results with Uber's other directors before the board approved the purchase in April 2016.

McElrath's Grant & Eisenhofer attorneys argued in court filings that Kalanick had a history of flouting local taxi regulations in its ride-share business and violating copyrights with Scour, a file-sharing company he started, which later went bankrupt to protect against a $250 billion lawsuit from Motion Picture Association of America, the Recording Industry Association of America and the National Music Publishers Association.

Kalanick's checkered past, they said, should have raised "red flags" for the board and triggered a duty to act when it came to an acquisition that might involve IP infringement.

Glasscock, however, said the complaint did "no more" than plead breaches of a duty of care against the directors, who were protected against such claims under Uber's charter. Despite Kalanick's potential exposure, the complaint did not implicate the remaining board members in a bad-faith attempt to purposely avoid their obligations to investors.

"Assuming the directors were aware of the culture of taxicab violations, I cannot infer from that knowledge that the directors were also aware or should have been aware of Kalanick’s alleged participation in Levandowski’s IP theft," Glasscock wrote.

"This is not a sufficient red flag, in my mind, to convert a plain vanilla duty of care allegation into a persuasive pleading of bad faith on the part of the directors."

Attorneys for the parties were not immediately available to comment Monday afternoon. A spokesman for Uber said the company is "pleased with the court’s decision to dismiss this meritless complaint."

Kalanick resigned as CEO in June 2017, amid a shareholder revolt following a series of missteps that had called his leadership into question. Among the headaches for Kalanick was Waymo's trade-secrets case, which sought $1 billion in damages in a California federal court. Uber last February agreed to settle the suit on the fifth day of trial for close to $245 million, but did not admit wrongdoing or issue and apology.

Kalanick, who remains on the company's board, was replaced by Dara Khosrowshahi in September 2017.

McElrath was represented by Michael J. Barry, Jeff A. Almeida and Rebecca A. Musarra of Grant & Eisenhofer in Wilmington.

Kalanick was represented by Joseph G. Petrosinelli and Kenneth J. Brown of Williams & Connolly in Washington, D.C.

The Uber directors were represented by Susan S. Muck, Kevin P. Muck and Marie C. Bafus of Fenwick & West in San Francisco and R. Judson Scaggs Jr., Susan W. Waesco and Sabrina M. Hendershot of Morris, Nichols, Arsht & Tunnell in Wilmington.

The case was captioned McElrath v. Kalanick.