Texas Business Dispute Blog

Friday, February 10, 2017

Virtual Reality Goes To Court: Lessons Learned From The $500 Million Jury Verdict Against Facebook’s Oculus Division

By: Ladd Hirsch

The ink is barely dry on the half billion dollar verdict that a Dallas federal court jury returned last week for ZeniMax Media against Oculus, a virtual reality company that Facebook acquired in May 2014. Even before the federal court issues a final judgment and Oculus files an inevitable appeal, however, the case provides valuable lessons for business owners and investors.

The case against Oculus centers on the ownership of the technology behind the virtual reality headset known as Oculus Rift.  Facebook bought Oculus, a virtual reality startup, for $2 billion in 2014, and claims to have invested additional billions in developing the Oculus Rift headset. Another tech company, ZeniMax Media, claims that it is the owner of the ground-breaking technology that operates the Rift VR headset, because one of its former developers, John Carmack, developed this software while working at id Software, a subsidiary of ZeniMax.

Before getting into the meat of the decision, it is helpful to more fully identify the critical parties involved and also review the key jury findings. 

The Players

The parties involved in the lawsuit are:

  • Oculus, a leader in the virtual reality space, whose future is now clouded by the jury’s verdict in favor of ZeniMax. The company was co-founded by defendants Luckey and Iribe, and it is known for its VR headset the Oculus Rift.
  • ZeniMax, owner of id Software, where defendant Carmack worked before departing for Oculus.ZeniMax had a Non-Disclosure Agreement (NDA) with both Luckey and Oculus.
  • Palmer Luckey (Luckey), a named defendant who co-founded Oculus and led the charge in developing the Oculus Rift headset.
  • John Carmack (Carmack), also a named defendant, and a legendary video game creator, who worked at idSoftware before leaving to join Oculus.
  • Brendan Iribe (Iribe), the final individual defendant, who is the CEO of Oculus.
  • Mark Zuckerberg, who was NOT a defendant, but whose company, Facebook, acquired Oculus in May 2014, and who testified at trial.

Review of Jury Findings

The jury concluded that none of the defendants, Facebook, Oculus, Carmack, Luckey, or Iribe, misappropriated (stole) any trade secrets when Carmack left ZeniMax and joined Oculus. 

The jury also found that Facebook had not tortiously interfered with the NDA that ZeniMax had with Oculus and Luckey and, similarly, that Facebook and Oculus did not engage in any unfair competition toward ZeniMax.  Thus, ZeniMax was not able to convince the jury that Facebook had engaged in any improper conduct and Facebook was not held liable for any damages.

Oculus and the individual defendants, however, did not escape the jury’s ire.  The jury found that Oculus infringed on ZeniMax’s copyrights and awarded a total of $50 million in damages against Oculus for this violation.  The jury did reject claims by ZeniMax that Facebook, Luckey and Carmack had infringed ZeniMax’s copyrights. 

The jury also found that Luckey and Oculus had violated the terms of the NDA with ZeniMax, but concluded that Luckey’s conduct was excused by the doctrine of laches (because ZeniMax delayed too long in asserting this claim).  The jury awarded $200 million in damages against Oculus based on its violation of the NDA with ZeniMax.

In addition to the jury’s finding against Oculus for copyright infringement, the jury also found that Oculus had violated certain trademarks belonging to ZeniMax and that John Carmack had wrongfully converted ZeniMax property by taking a USB drive containing electronic files, and then wiping clean his computer hard drive.  Based these trademark violations, the jury awarded an additional $250 million in damages divided among Oculus, Luckey and one more Oculus executive, Brendan Iribe.

To recap, the jury awarded damages in the following amounts: 

  • $200 million awarded against Oculus for violating the NDA.
  • $50 million awarded against Oculus for copyright infringement.
  • $50 million awarded against Oculus for falsely designating its product origin.
  • $50 million awarded against Luckey for falsely designating his product origin.
  • $150 million awarded against Iribe for falsely designating his product origin.

Lessons Learned

There are three major takeaways that owners and investors in companies of all sizes and types, not just large companies or tech companies, can learn from this case.

1. The Importance of NDA’s – Ignore Them at Your Peril

NDAs have become commonplace in the business world.  They are regularly requested whenever businesspeople consider buying companies or business assets or when an investor is kicking the tires on an investment in a private business.  As a result, signing an NDA can seem routine and inconsequential.  The $200 million the jury awarded in its verdict against Oculus for violating the NDA with ZeniMax, however, proves otherwise and should serve as a major wake-up call.

                Before signing any NDA, the following key items need to be considered by the person being asked to sign this agreement:

  1. Scope – What is Covered

    The NDA applies to specific material and information that will be disclosed to the prospective buyer or investor.  This scope of the NDA therefore needs to be clearly defined so that the party bound by the agreement is not accepting a broad duty not to use or disclose material that should be outside the scope of the agreement.

  2. Term - Length of Agreement

    The NDA should not subject the signer to perpetual liability.  While the specific length of time the NDA will remain in force is a subject for negotiation, the signer should be wary of agreeing to be bound for longer than two years, as longer periods of time expose the signer to greater liability.

  3. Liability – Cap on Damages

    Does the signer intend to accept unlimited liability for damages by signing the NDA?  If not, the signer can negotiate to include a reasonable cap on damages or, alternatively, an agreed, reasonable royalty rate for proof of a violation of the agreement and actual harm.  The agreement can also exclude recovery of any punitive damages. 

  4. Choice of Forum – Arbitration

The signer may insist that any claim be subject to arbitration, which has the benefit of keeping the claim private and also allows for a dispute over fairly technical issues to be resolved by a more sophisticated panel.  Even if the claim is to be litigated in a court rather than via an arbitration panel, the signer of the NDA may want to insist on that the agreement include a jury trial waiver preferring a bench trial to a jury trial.

2. Document & Data Destruction are Huge No-Nos

It appears one of the decisive factors in the verdict against Oculus and Carmack may have been the jury’s conclusion that Carmack downloaded a significant number of electronic files on a USB device, and then wiped his hard drive clean to hide his improper actions. Although Carmack vigorously denied both during and after trial that he had destroyed any evidence, the jury did not accept his denial.

Destroying evidence in a civil case is referred to as spoliation, and if the court determines that a party engaged in spoliation, the court can impose a broad range of sanctions.  These sanctions can range from lesser monetary sanctions all the way to the most severe, “death penalty” sanctions that result in a judgment or dismissal of the case depending on the scope of the wrongful conduct by the party who destroyed the evidence.

3. Avoid/Prevent Misappropriation Claims

The jury found that no misappropriation of trade secrets took place, but concluded that the Oculus Rift technology violated ZeniMax’s copyright.  Although no misappropriation was found, this high profile trial highlights two important, related lessons related to the handling of confidential information. 

First, employees need to follow a “clean hands” policy when they resign.  They should take nothing with them other than strictly personal items.  More specifically, employees should never take any type of documents from their employer in hard copy or electronic form even when it seems innocuous.  In a later lawsuit, the removal of information by the employee, no matter how innocent, is likely to be portrayed as a blatant theft of the company’s “crown jewels.”  It is safer and simpler to just leave it all behind.

Second, the new employer needs to take proactive steps to ensure that new employees do not bring anything from their former employer with them to their new company.  Employers should notify each new employee in writing of this policy that no information can be brought or used from former employers.  This policy should also be documented in the employee handbook confirming that employees must not use, transfer or upload any information from their former employer in performing their duties for the company. 

What’s Next?

ZeniMax has threatened to seek an injunction from the trial court to halt the sales of Oculus Rift devices while the case proceeds on appeal.  That request seems like a long shot, however, given that the owner of Oculus, Facebook, was not found guilty of any wrongdoing, and the large jury award to ZeniMax arguably provides it with full relief.

In the absence of an injunction, the jury’s verdict against Oculus will be the subject of post-verdict motions by the parties, and the federal court may well issue a final judgment that reduces the total amount of the damages that the jury awarded to ZeniMax.  The judgment will then be appealed to the Fifth Circuit, which will be looking closely at a number of issues, including the ZeniMax’s copyright and trademark infringement claims. 

Before the legal dust settles with final rulings years from now on appeal in the Oculus case, savvy business owners and investors are advised to negotiate their NDAs carefully, to avoid taking or accepting any information from former employers, and if any claims do arise, to scrupulously avoid deleting or destroying any information relevant to the dispute.


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