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Who Owns the Data Your Business Uses? Not Knowing Could Hurt the Sale of Your Company. Data usage comes with limitations.

By Glynna Christian Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

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In late 2016, San Francisco-based software engineer Anthony Levandowski got a new job when car-sharing service Uber acquired Otto, the autonomous trucking company that he had started less than a year earlier for a reported $680 million. Eventually, his technology found its way into Uber's self-driving car project and Levandowski himself was named Uber's vice president of engineering.

Related: 6 Things Big Companies Look for When Buying Your Startup

But there was a problem.

Soon after the acquisition, Levandowski's former employer, Waymo, an Alphabet subsidiary, sued him, accusing the star engineer of stealing thousands of documents related to the company's self-driving technology, including blueprints, testing documents and design files. The lawsuit alleges that this intellectual property went into his work at Otto, and was later incorporated by Uber.

As the case dragged on, Levandowski refused to cooperate with investigators and Uber eventually fired him, all because of questions surrounding the data he used to build his business. The case is not yet set for trial.

This is an extreme example, but it is reflective of what can happen when a company is accused of misappropriating the data it used to underpin its business. And the situation is going to get a lot worse before it gets better -- using data obtained from various sources, such as consumers using apps or other services, tools that scrape web sites, engineers downloading information from Wikipedia as well as data provided by suppliers, customers and other parties has become commonplace in a wide range of industries.

Related: Time to Sell Your Business? You'll Need Metrics.

This extends beyond data monetization and includes, among other things, running data through advanced machine learning algorithms (such as neural networks, deep learning and natural language processing) to train their own algorithms, determine trends, identify risks and create intelligent applications.

Beyond Silicon Valley

This is not just a trend in the technology industry. As traditional industries have begun transforming their products and customer engagement models around IoT, well-managed databases from both legacy and new sources, combined with artificial intelligence, are playing a critical role.

But, there is a downside to this practice that is being overlooked. There is a lot of data out there being leveraged, and not enough oversight going into who owns it, who pays for it and who can use it.

Related: 5 Things to Keep in Mind When Using Data for Artificial Intelligence

For the most part, data is not free for the taking. Although everyone today wants to use data, the fact is they probably don't have the rights to actually use it. This is because a lot of the information available these days is coming from third parties, either without their permission or under contract terms that limit what can be done with that data.

So, we have companies pulling content off the web indiscriminately. They're scraping websites, they're downloading data from Wikipedia, they're using information their customers provide (whether the customer knows it or not) when using their services, and they're not really paying any attention to whether or not they actually have the right to grab the data or use it.

Once it comes time to raise money, find a buyer or close a deal, this can become a major problem if a smart investor or purchaser understands the risks and asks the right questions.

Wide-reaching risks

Buyers, sellers and even firms still don't yet understand the limitations on the data that sellers are using. They may think representations and warranties around intellectual property and data privacy will reveal these issues, but a significant amount of data being used is not an intellectual property right, nor is personal data, which is covered by data privacy legislation.

Related: 3 Fundamental Ways Machine Learning Will Change Business in 2018

The Supreme Court's 2014 decision in Alice v. CLS Bank was generally viewed in the tech community as weakening the protections afforded to software inventions, leading to a decline in patent filings and IP cases in Silicon Valley. As litigation surrounding artificial intelligence increases, so should the attention to whether companies even own the rights to the underlying data.

The time to prepare for this is now.

For companies and investors, data brings with it great power but also great risks. It may seem trivial, but when it comes time to review a deal or back a new company, data rights and governance are important considerations. For those that don't, the results could be costly.

Related Video: What to Do When You're Ready to Sell Your Business

Glynna Christian

Partner; Co-Head Global Technology Transactions at Orrick, Herrington & Sutcliffe LLP

Glynna Christian advises both emerging and established companies, serving as an advisor across virtually all operational and strategic areas of business. She has more than 20 years' experience advising clients on emerging and transformative technology, communications, media and data transactions.

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