Austin-based mobile advertising company Phunware, Inc., sued Uber in 2017 accusing it of breach of contract claiming $3 million in unpaid invoices, but there was much more to the story. In response to Phunware’s suit, Uber counterclaimed against Phunware, accusing it, its co-founder and CEO Alan Knitowski and several other employees of wire fraud, racketeering, transporting fraudulently obtained funds across state lines and common law fraud, seeking up to $17 million in compensation as well as additional amounts for punitive damages.
Uber indirectly hired Phunware, along with other third-party ad networks, to help Uber increase installations among consumers of its mobile app, the cornerstone of its business model. However, as the legal battle continued, evidence of widespread and continuing fraud came to light. Uber had grown suspicious of Phunware’s ad activity back in 2016, when an Uber employee raised serious concerns about Phunware’s activities on the ad campaign.
As Reed Smith confirmed in discovery, most of the Uber app installations that Phunware claimed to have delivered were generated by a fraudulent process known as “click flooding,” which reports a higher number of clicks than those occurring. Much of the ad traffic Phunware brought for Uber also came through auto-redirects, which automatically took visitors to an app store, whether the user clicked on the ad or not.
In fact, two former Phunware employees had conducted an internal investigation discovering that Phunware had falsely billed Uber for ad clicks they did not deliver. But Phunware continued its fraudulent practices. As evidenced in discovery, a widescale culture of fraud continued for many months. For example, in an email sent on Oct. 31, 2016, a Phunware employees wrote: “Guys it’s… time to spin some more BS to Uber to keep the lights on.”
To compound matters further, it was discovered that Phunware had placed Uber’s ads on pornographic websites, in direct violation of its contract and advertising standards. Even worse, Phunware attempted to cover this up as well by falsifying reports, which made it appear as if the ads were placed on legitimate, non-pornographic sites instead.
Ultimately, in a form of victory rarely seen in the courts, the Reed Smith team won a motion for terminating sanctions against Phunware. The Reed Smith motion was granted owing to Phunware’s spoilation of evidence, which was uncovered in discovery. Among the evidence destroyed by Phunware were the files of an employee whistleblower, whose investigation of fraud formed the basis for the lawsuit. Another key piece of evidence destroyed were logs showing precisely where Phunware had placed Uber’s mobile ads.
Not only are terminating sanctions rarely awarded, but the court dismissed Phunware’s case against Uber and issued a default judgment against Phunware on Uber’s case, paving the way for settlement.
“This case is a good example of how an aggressive discovery and motions strategy can turn the tides against fraudulent practices and claims,” said Intellectual Property, Technology and Data partner John Bovich, who served as lead counsel for Uber in the suit. “It also shows the dangers of ignoring and attempting to conceal your own internal investigations.”
To achieve this victory, Bovich joined with fellow IP, Tech & Data partners Seth Herring and Addie Hilgard and associates Chris Pulido and Donald Cespedes, and Global Commercial Disputes Group associates Justin McGuirk and Nicole Medeiros.
The case is Phunware Inc., vs. Uber Technologies Inc. and Uber Technologies Inc. vs. Phunware Inc., case number CGC-17-561546, in the Superior Court of the State of California, County of San Francisco.
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