VR tips for investors and inventors – what we can learn from the US$500 million Oculus lawsuit

ZeniMax Media is better off to the tune of half a billion dollars thanks to a Texan jury verdict on their IP suit against Facebook-owned company Oculus VR.

On Wednesday 1 February 2017, a US jury in Dallas, Texas awarded video game publisher ZeniMax media US$500 million after finding that Oculus infringed on its technology while developing its virtual reality headset. ZeniMax claimed that Oculus co-founder Palmer Luckey violated the terms of a non-disclosure agreement.

Tech junkies, innovators and investors can learn three real-life lessons from the virtual reality federal court outcome

• Tip number one: non disclosure agreements can be great, but at a certain point you have to move on
• Tip number two: be upfront with innovation
• Tip number three: due diligence can only take you so far (and only if you do it)

Over the last 5 years, ZeniMax (who owns id Software, notable in the gaming industry for Doom and Quake, and Bethesda, notable for Skyrim – The Elder Scrolls) has tussled with Oculus VR Inc and its founders, over to what extent, if at all, Oculus Rift, game changing VR consumer technology, was built on ZeniMax IP.

Facebook snapped up Oculus in May 2014, and ZeniMax promptly brought a number of actions against everyone, looking for US$4 billion.

That didn’t happen. Oculus has to pay (although it has appealed the decision) ‘only’ US$200 million for breach of a non disclosure agreement, US$50 million for copyright infringement and US$50 million for misuse (in Australian language) of ZeniMax’s DOOM, ID, RAGE and SKYRIM marks. While Oculus’ founders have to pay a further US$200 million, Facebook itself doesn’t have to pay at all.

There are some useful lessons for both innovators, and potential investors, from this situation.

Tip number one: non disclosure agreements can be great, but at a certain point you have to move on

Palmer Luckey, so the story goes, worked on an initial virtual reality headset in his garage (building his first prototype, so Wikipedia says, at 17), and sought, or was offered help with the software by id Software founder and industry legend John Carmack, and funded early prototypes through a Kickstarter.

Because id Software was owned by ZeniMax, and Carmack was ZeniMax’s employee, a non disclosure agreement was entered into between Luckey and ZeniMax. The non disclosure agreement, as is normal, claims for the disclosing party ownership of IP in any confidential information it discloses, and requires that the receiving party only use the confidential information for the ‘proper purpose’. A ‘proper purpose’ was to be a purpose agreed by the parties in writing.

As work progressed, Luckey incorporated his company, Oculus VR, Inc. ZeniMax sought to negotiate a partnership with Oculus, or equity ownership in Oculus, over a period of close to two years, but ultimately the parties never signed any commercialisation agreement.

The jury found that the non disclosure agreement had been breached by Oculus, although the id Software confidential information had not been misappropriated. As it was a jury trial, and there is not a written judgement, the basis for this decision is not clearly apparent. It may have been that despite more id Software people becoming involved in the Oculus Rift project, and supplying Doom and Skyrim copyright material for use with the various prototypes, the jury felt that

1. the proper purpose of the non disclosure agreement was to allow ZeniMax to explore a potential future commercial arrangement with Oculus – rather than to develop and commercially exploit the Oculus Rift;
2. however insufficient evidence had been lead that the Oculus Rift product actually used any confidential information belonging to ZeniMax.

• Tip for innovators: make sure you are working with people who are free to work with you, on terms that clearly permit them to do that, and which allow you to own, or at least commercially exploit, any resulting product.
• Tip for investors: if you are disclosing proprietary information under a non disclosure agreement, and you feel that the receiving party is going beyond what is agreed, take active steps to limit further disclosure beyond what is required of you by the non disclosure agreement. If you’re in a tricky negotiation situation because your employees have co-operated a bit too much, you may be better off taking a deal that’s not quite as perfect as could be, than risking the loss of your people and information.

Tip number two: be upfront with innovation

From press releases at the time Carmack left employment with ZeniMax to take up the CTO position at Oculus, he (and others) were unhappy with the lack of support for VR projects inhouse at id Software, and from the ZeniMax complaint, there were certainly a number of ZeniMax employees with relevant software experience who were helping Oculus with the Oculus Rift project. Under at least Carmack’s employment contract, copyright works he created within the scope of employment were owned by his employer.

The ZeniMax complaint recites that a voluminous amount of code and work emails were copied and taken by Carmack on his last day at id Software. However, the jury decided that there was insufficient evidence any ZeniMax trade secrets had been used in the Oculus Rift software, and while they found that copyright infringement had occurred, it is unclear on the face of the jury verdict whether this was in relation to the Oculus Rift software itself, or in relation to use of the Doom, Skyrim etc Oculus Rift demonstration games.

• Tip for innovators: if you want to do a side project, and have IP that you create as part of that side project as yours (or a third party’s), you should be upfront with your employer about what you want to do, and the terms on which you want to do it. At law, your employer is likely to have a claim of ownership over copyright, know how and the right to file a patent in relation to inventions and material that you create in the course of employment, so if your side project is in any way connected to the area in which you are employed, you need to be very careful. Written agreements between you and your employer about your side project would be a good place to start.
• Tip for investors: although a basic starting point is being clear in employment contracts with employees about what IP the company will own, when you’re working with innovative and somewhat maverick individuals, while you don’t want to stifle innovation – I mean, look, cool VR headsets – you need to make sure that you stay on top of what your employees are doing, and make sure that you stay on the same page about who owns what IP.

Tip number three: due diligence can only take you so far (and only if you do it)

It takes time to establish a chain of title / entitlement to own and deal with copyright material.

In Australia, we do not have a copyright register, and need to rely on a target to provide responses to questions about creation and development of copyright material.

In the USA, the public can search a register of copyright material (assuming of course that the material has been registered).  Searching on Oculus VR Inc brings up an entry, filed in 2012, in relation to an Oculus Rift Software Developer Kit. Searching on id Software brings up a number of entries filed between May 2014 and 2016 in relation to ZeniMax VR Implementation Code. At the time of the deal announcement in March 2014, ZeniMax’s registrations had not issued, and ZeniMax had not yet brought its claim against Oculus VR – that is, there was no external evidence of the dispute between Oculus VR and ZeniMax that Facebook’s lawyers could examine.

There may also still have been uncertainty about the legal question of whether the Oculus Rift inappropriately incorporated id Software / ZeniMax IP- and Facebook would then have been on notice of any issues. In Australia, this can be a factor in determining whether aggravated damages should be awarded in relation to a claim of  infringement (or authorisation of infringement).

• Tip for innovators: while it may feel counter intuitive to disclose to a suitor a problem that hasn’t crystallised, in this situation, Facebook isn’t the one left with the bill – it’s the innovator. A failure to disclose can leave you in breach of warranties and representations that you’ve made to the investor, and expose you to claims not just from the existing dispute, but also to claims from a cashed up and unhappy investor.
• Tip for investors: it is not uncommon for investors in Facebook’s position to either in addition to due diligence or as an alternative to due diligence seek some form of protection in relation to actions or potential actions being brought against a target – for instance, a hold back amount, insurance, or other form of indemnity protection.
• Final tip for innovators on the wrong end of the commercial stick: If you are an innovator who has had IP misappropriated by a partner, don’t just consider patent infringement, but also consider whether you can establish that copyright, or trade marks has been infringed – or even a humble non disclosure agreement breached. You might not get all that you’re after – but this jury verdict flags that it’s worth a try.