VRARA's Co-Chair of the Licensing Committee Take on the $4B ZeniMax v. Oculus Case

Update: Verdict was reached, see here

Original article posted on RoadtoVR

Guest Article by Brian Sommer, IME Law

Brian is an interactive media and entertainment attorney at IME Law, where he focuses his practice on the intersection of traditional entertainment and immersive media. He also serves as Co-Chair of the VRARA Licensing Committee. You can follow Brian on Twitter @arvrlaw, and @IME_Law

This week the eyes of the virtual reality industry are on a federal court in Dallas, Texas where ZeniMax (and child company id Software) and Facebook (and child company Oculus) have been engaged in legal battle over a dispute which could cost Facebook $4 billion. ZeniMax alleges that a former employee used VR code that it owned after being hired by Oculus, and further that Facebook should have known that the code was ZeniMax property. With jury deliberations now starting, a verdict could come as soon as today. Here’s what you need to know about the case.

For 13 days, attorneys in the Dallas federal court have been selling the jury very different stories. “One of the biggest technology heists ever” is how ZeniMax attorney Tony Sammi described to jurors Facebook’s acquisition of Oculus in opening statements. In Thursday’s closing arguments, Oculus attorney Beth Wilkinson told jurors ZeniMax and Id Software are “jealous, they’re angry and they’re embarrassed” over the success of Oculus and the acquisition by Facebook.

At first blush, this lawsuit appears to be a complicated mess involving two plaintiffs, five defendants, nine causes of action, over 900 court filings (many sealed from the public) and a demand for more than $4 billion in damages. Without having access to many of the critical motions filed in the case (due in part to the Court’s order sealing such filings), it is not possible to assess in exacting detail certain critical arguments made by each side. But, from arguments, publicly-available filings and reports that have been made available to the public, it appears that the essence of the lawsuit can be distilled down to this: this is a dispute about who owns the intellectual property (“IP”) that was vital in creating the Oculus Rift.

Will the jury agree with ZeniMax that its proprietary computer code was a foundational component of Oculus’ success, or will the jury side with the defense’s argument that Oculus code was developed independently and based upon publicly known code and different solutions?

Starting today, jurors begin sorting through hundreds of facts and applying them to the issues contained in the jury instructions, weighing the credibility of witness testimony and evidence presented. Here are three key issues that could drive jury deliberations:

1. Did Palmer Luckey and Oculus Misappropriate IP That Zenimax Disclosed Through a Nondisclosure Agreement?

Defendant John Carmack is heralded as one of the most recognized and accomplished video game programmers and virtual reality engineers in the industry today. He co-founded Id Software (plaintiff), which was later acquired by ZeniMax (plaintiff). In April 2012, while employed as Id Software’s Technical Director, Carmack discovered through an Internet forum that Palmer Luckey (defendant)—who would go on to become the founder of Oculus—had developed a prototype virtual reality headset called the “Rift.” Carmack contacted Luckey, and Luckey sent Carmack a very early Rift prototype. Carmack is alleged to have immediately started to evaluate, analyze and modify the Rift prototype using research, software code and tools owned by id Software.

Carmack and Luckey’s friendship quickly turned business-like by May 2012 when Luckey in his personal capacity signed a nondisclosure agreement (“NDA”) with Id Software’s parent company ZeniMax, according to information from the case.

Companies use NDAs to ensure ideas or trade secrets disclosed to another party remain confidential. NDAs usually prohibit the recipient of confidential information from using or disclosing any information that they receive under the NDA, except for agreed purposes. Since an NDA is a contract, all of the legal principles surrounding contract law (e.g., elements needed to form a contract, defenses, etc.) are used to analyze an alleged breach of an NDA.

In June 2012, Luckey formed Oculus on the heels of successful demonstrations by Carmack (employed at the time by ZeniMax) and Luckey at the E3 Convention. ZeniMax alleges that through early 2013, and while bound by the NDA, Carmack and other Id Software employees collaborated with Oculus and Luckey to debug and refine the Rift.

ZeniMax alleges Luckey breached the NDA by taking ZeniMax-owned proprietary information and then using it without permission and disclosing it to Facebook. Oculus and Luckey contend the NDA is unenforceable for a number of reasons, including because the NDA was signed by Luckey in his personal capacity before Oculus was founded, a key material term was never defined, and for other legally nuanced reasons. In response, plaintiffs assert that Oculus is bound by the NDA because Oculus is a mere continuation of Luckey’s prior work. The jury’s outcome may hinge on the many factual findings related to the NDA.

2. Did Carmack Misappropriate Zenimax IP and Use It at Oculus?

Prior to Carmack meeting Luckey, he and his team of Id Software employees were researching and developing technological innovations associated with virtual reality. After receiving the Rift prototype, Carmack and other Id Software employees modified the Rift to work with Id Software’s popular computer game DOOM 3: BFG Edition (2012). ZeniMax has alleged that Carmack had a continuous, collaborative relationship with Luckey and Oculus.

By the summer of 2012, the meteoric rise of Oculus culminated with a Kickstarter campaign that raised $2.44 million based on a funding goal of just $250,000. Meanwhile, the only written contractual relationship between ZeniMax and Luckey was the NDA. Spurred by the successful Kickstarter fundraiser, ZeniMax and Oculus engaged in contract negotiations through early 2013, but they never could reach a deal.

Meanwhile, ZeniMax and Oculus continued to collaborate with one another despite no written agreement being in place with respect to their financial relationship. ZeniMax and Oculus exchanged offers and counteroffers in an attempt to reach an agreement as to financial assurances and equity (among other things), but they moved further apart rather than closer together. The relationship between ZeniMax and Oculus began to sour by early 2013. Carmack’s employment contract with Id Software ended in June 2013. Two months later, he joined Oculus as its Chief Technology Officer.

During the trial, Carmack admitted that on his last day at Id Software, he copied thousands of work emails (which included ZeniMax-owned computer code) to a portable drive, but he contends he did not use ZeniMax’s proprietary code in his work at Oculus. To support the theory that Carmack copied and used Id Software code for the Rift once at Oculus, ZeniMax called computer science professor David Dobkin to testify. Dobkin compared and analyzed large sections of ZeniMax and Oculus code and concluded there was evidence of copying, including aberration correction, time warping and drift correction. To also show Carmack’s influence on Oculus, ZeniMax referenced various emails between Oculus and Carmack to establish that Carmack’s IP contributions were essential and embraced by Oculus as instrumental to its success.

The defense told a different story. Oculus sought to debunk the credibility and findings of Dobkin, undercutting his expertise and seeking a distinction between literal and non-literal copying, among other things. Oculus’ strategy also focused on downplaying Carmack’s actual IP input once at Oculus, contending Carmack acted mainly in an advisory role at Oculus, and producing emails where Carmack himself said computer code developed by Oculus engineers was superior to his efforts while at Id Software.

A pivotal point in the case could be how the jury interprets the circumstances that led to Carmack’s defection to Oculus—was there motive or reason for Carmack to misappropriate Id Software IP? Jurors were introduced to a January 2013 email from Carmack to ZeniMax leadership, urging the company to lead the VR wave, but leadership was dismissive of VR and told Carmack to focus on DOOM 4 (2016). Since Carmack’s employment would not expire until June 2013, jurors could conclude evidence supports Carmack sought to make up for lost time riding the VR wave by integrating allegedly misappropriated Id Software code once employed by Oculus.

3. How Does Facebook Fit into the Equation If the Main IP Issues Started with Oculus, Luckey and Carmack?

In March 2014, Facebook announced it would acquire Oculus for about $2 billion in cash and stock. But the IP allegedly owned by ZeniMax and unlawfully used in the Rift occurred well before Facebook’s acquisition—how is Facebook potentially liable?

Five of the nine causes of action name Facebook. They are: common law misappropriation of trade secrets, copyright infringement, tortious interference with contract, unfair competition and unjust enrichment. While ZeniMax’s allegations are extensive and nuanced, it essentially is alleging that when Facebook bought Oculus it knew or should have known (had it performed reasonable due diligence) that the Rift uses ZeniMax IP.

Facebook CEO Mark Zuckerberg was called to testify at the trial, and his testimony was illuminating about the details of the acquisition. ZeniMax’s cross-examination of Zuckerberg was aimed at establishing that Facebook rushed to purchase Oculus, and in doing so, inadequately conducted due diligence that would have revealed that ZeniMax IP was made part of the Rift.

Zuckerberg also testified that he had never even heard of ZeniMax before the lawsuit. But evidence presented included a note Zuckerberg wrote to John Carmack while he was CTO at Oculus, saying it had been surreal to meet him and how he grew up playing games Carmack designed.

The defense contends ZeniMax sued Facebook seeking a “chance for a quick payout”—the lawsuit was filed within two months of Facebook’s announcement of acquiring Oculus. If the financial negotiations were breaking down between Oculus and ZeniMax in early 2013, but ZeniMax decided to sue for IP infringement after the Facebook acquisition announcement a year later, the jury could be persuaded that ZeniMax was ultimately going after the deep pockets of Facebook.

ZeniMax attorney Sammi posed to Zuckerberg: “So your plan for a $2-point-something-billion deal was to begin legal diligence on Friday, and sign the deal on Monday, over a weekend, right?” “Yeah,” Zuckerberg replied.

Ironically, jurors also have had this weekend to consider the complex facts at issue in this case and could deliver a verdict as early as today.