At the center of Alphabet Inc.’s battle with Uber Technologies Inc. over alleged stolen technology is a due diligence report prepared ahead of Uber’s acquisition of a company called Otto. This report, which Alphabet claims may prove the ride-hailing giant knowingly acquired stolen intellectual property, was seen by a number of Uber’s in-house attorneys, according to a recently filed document in the case.
The situation at Uber underscores the role of in-house counsel in the due diligence process. Attorneys who have not worked with Uber said a due diligence report can be critical in a merger or acquisition and one of the key roles for in-house counsel throughout the process is to be mindful of protecting privilege.
What the Lawyers Saw
In a complaint filed on Feb. 23 in U.S. District Court for the Northern District of California in San Francisco, Alphabet subsidiary Waymo went after Uber, claiming that former Waymo manager Anthony Levandowski downloaded more than 14,000 confidential files and then formed his own self-driving car company called Otto, which Uber acquired last August. Since filing the complaint, Alphabet has moved to compel Uber to produce a due diligence report from that acquisition. In early June, U.S. Magistrate Judge Jacqueline Corley ordered Uber to turn over the report, and U.S. District Judge William Alsup, who is presiding over the case, later rejected Uber’s attempts to overturn the decision based on attorney-client privilege arguments.
Now, over four months and 700 filings in, a document filed on June 23 — and updated five days later — by Uber details who looked at the due diligence report created by forensics firm Stroz Friedberg. According to the filing, 10 individuals from Uber’s internal legal team, including chief legal officer Salle Yoo and associate general counsel Angela Padilla, received copies of the due diligence report without exhibits, some as early as last August.
In response to request for comment, Uber pointed Corporate Counsel to a June 28 filing and said the company “took precautions to ensure that no former Google employees, including Levandowski, brought Google IP with them to Uber—and it worked.” It was added: “After searching through terabytes of data, deposing numerous employees and spending 55 hours with free reign to inspect our facilities, Waymo has turned up exactly zero evidence that any of the 14,000 files came to Uber.”
Waymo did not immediately respond to request for comment, but in a separate document filed the same day, its lawyers wrote that while Waymo still has not seen the due diligence report, there’s reason to believe that an early version of the report “would reveal that Levandowski had downloaded materials, since the whole purpose of the due diligence process was for Uber to evaluate the liabilities that would come with the transaction[.]”
The Legal Department’s Role in Due Diligence
The critical goal behind a diligence report is to give a holistic look at a target company in a merger or acquisition and identify any potential issues, said Shannon Zollo, a member at Morse, Barnes-Brown & Pendleton and former general counsel at telecommunications company Celox Networks Inc. “The purpose of a diligence report is to understand as best as is possible before you close, the nature of the target and whether that target fits within your acquisition profile across the board,” he said, explaining that this could involve examining a target’s tax history, legal structure and human resource issues.
The resulting report may show some red flags, such as weakness in financial protections, pending litigation matters or questions related to ownership of intellectual property, Zollo said. He noted that “if any or all of those surface,” the buyer’s internal team will have to discuss the best way forward.
At all steps in the process, and particularly as legal departments discuss any red flags, in-house counsel should be deliberate in trying to maintain privilege, according to Zollo. “It seems to me that when you are in-house counsel, especially within the deal context, your primary responsibility is to your client and you need to protect your client’s interests,” he said. “So you have to be astute as to how you treat information and from whom you seek advice.”
“The reason that’s important,” Zollo added, “is if the company subsequently ended up in litigation as a result of the deal … the buyer wants to be in a situation where internal communications are protected under attorney-client privilege.”
Even if outside counsel play a key role in the due diligence process, it’s important to have at least one in-house lawyer take point, said Jon Klassen, a corporate partner at Kunzler Law Group who was previously executive vice president, general counsel and secretary at life sciences-focused real estate company BioMed Realty Trust Inc. “My experience, and I think best practice is, that you have at least one in-house lawyer managing the transaction and managing the law firm,” he said. “Because as the issues come up, you kind of want to be dealing with them and raising them as you go.”
These issues may range from those that can be resolved — such as by asking the target company to maintain some liability in certain situations — to the types of problems that may not have a solution, Klassen said. “For material issues, as an in-house [lawyer] … I would see what I could do to mitigate them and then escalate up the ladder to company executives,” he said. “As a lawyer, it’s: ‘Here’s the relevant facts, here’s my legal analysis … my conclusions, my recommendations.’”
But the in-house lawyer is not typically tasked with making that final decision, Klassen added. “Ultimately, who’s going to make the call is the CEO or the board,” he said. “And if they decide to do something illegal, you may just have to quit. But it rarely ever comes to that.”
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