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February 9th, 2017
ZeniMax v. Oculus: Lessons from a $500 Million VR Case Verdict
The Oculus Rift has been one of the most anticipated technology developments in modern video game history. Now — as a result of avoidable mistakes— it is also a teaching case for lawyers advising clients in the interactive entertainment space. Here's a rundown of the case and the traps the developers fell into.
According to the complaint, ZeniMax initially approached Oculus founder, Palmer Luckey, while Luckey was still a college student tinkering away on a "primitive virtual reality headset that he called the 'Rift'." Luckey provided his prototype to John Carmack of ZeniMax. Thereafter, Carmack modified the headset, including adding what ZeniMax alleged was the critical component — the virtual reality-specific software. ZeniMax disclosed its proprietary hardware and software enhancements to Luckey. ZeniMax asked Luckey to sign a non-disclosure agreement. According to the complaint, Luckey recognized the value that ZeniMax incorporated into the modified Rift headset because Luckey formed his original company, Oculus LLC, approximately two months later.
ZeniMax continued to fine-tune the device and demonstrated it at various industry events. Although there was no formal written development agreement in place between ZeniMax and Oculus, ZeniMax, including John Carmack, continued to share information about its virtual reality technology with Oculus and its employees.
Eventually, against ZeniMax's instruction and without their involvement, Luckey began demonstrating and exploiting the device (including ZeniMax's proprietary software) to attempt to raise funding for Oculus. Facebook ultimately acquired Oculus for $2 billion.
Complaint and Trial
In February 2014, ZeniMax filed a $2 billion complaint against Oculus, alleging theft of trade secrets, unfair competition, breach of the non-disclosure agreement, false designation, and copyright and trademark infringement. Particularly, ZeniMax claimed that the software code and virtual reality innovations created by John Carmack (former ZeniMax employee and current CTO of Oculus) paved the path for Oculus to exist as a funded company.
The jury found Oculus liable for $300 million in damages for copyright and trademark infringement, as well as breach of the non-disclosure agreement with ZeniMax. The jury also found against Oculus executives as follows:
- Former Oculus CEO Brendan Iribe was found individually liable to ZeniMax for trademark infringement and false designation of origin in the amount of $150 million;
- Oculus founder Palmer Luckey was found individually liable to ZeniMax for false designation of origin in the amount of $50 million; and
- Although Oculus chief technology officer and former ZeniMax employee John Carmack was not found liable for any monetary damages to ZeniMax, he was found liable for conversion, meaning Carmack utilized ZeniMax's IP against ZeniMax's legal rights held in such IP.
It was not a complete win for ZeniMax as the jury did clear Oculus of other claims, including alleged trade secret theft and unfair competition.
While ZeniMax's contributions to the Oculus have been recognized and vindicated by the jury award, the litigation may have been avoided if ZeniMax had entered into a more formal working relationship with Luckey and Oculus before it began submitting ideas, code and other materials to the Rift project. While a non-disclosure agreement may be sufficient for early stage discussions (and did provide ZeniMax with some protection here), it is not the same as a formal development, license, or other agreement which specifically identifies the rights and responsibilities of the parties, including such things as intellectual property ownership and relevant revenue share. With such an agreement in place it is unlikely that Oculus would have been able to shop the Rift to potential investors without ZeniMax involvement. This oversight arguably led to a huge and costly litigation that has placed a potential dark cloud over the future of the Oculus Rift. Upshot: if you or your company are working with partners to develop new technologies, be certain to formalize your understanding of the material terms, rights and expectations of all parties involved at the outset.
If you have questions about legal liability for augmented reality projects, or about any other interactive entertainment matters, contact Sean F. Kane at (212) 705 4845 or email@example.com, S. Gregory Boyd at (212) 826 5581 or firstname.lastname@example.org, or any other member of the Frankfurt Kurnit Interactive Entertainment Group.
Other Technology Law Alerts
Risky Business Just Got Riskier - DOJ Changes Stance on Internet Gambling
Last week the U.S. Department of Justice (DOJ) made waves in the online gambling industry with an Opinion interpreting the Wire Act (18 U.S.C. § 1084). In the Opinion, DOJ's Office of Legal Counsel concluded that most sections of the Wire Act are not limited to sports-related wagers and instead prohibit the use of interstate wires for any bets or wagers. Read more.
January 23 2019
Video Games With Advanced Communications Services Must Now Be Accessible to Players With Disabilities
An important legal waiver recently expired and as a result, video game developers and publishers must now ensure that new and substantially upgraded games comply with the accessibility requirements of the 21st Century Communications and Video Accessibility Act (“CVAA”). Read more.
January 7 2019
Shields On: 9th Circuit Strengthens Legal Defense for Video Game Developers
There's good news for game developers who incorporate real-world elements in their games. On October 20, 2017, the Court of Appeals for the Ninth Circuit affirmed a trial court decision which found that Gran Turismo, a Sony video game, was an expressive work entitled to First Amendment protection Read more.
November 2 2017