Technology Law Alerts

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.

Background

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.

The Takeaway

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 skane@fkks.com, S. Gregory Boyd at (212) 826 5581 or gboyd@fkks.com, or any other member of the Frankfurt Kurnit Interactive Entertainment Group.