Small mistakes led to a $500 million verdict against Oculus

Mistakes in doing everyday business led to a $500 million verdict against Facebook’s Oculus division in a legal battle with ZeniMax.

ZeniMax sued Oculus, Facebook, and well-known virtual reality leaders John Carmack and Palmer Luckey for misappropriating trade secrets after Carmack left ZeniMax’s id Software and went to work at Oculus. The case has snowballed into a nightmare for Facebook, and it presents scary possible outcomes for VR developers.

[aditude-amp id="flyingcarpet" targeting='{"env":"staging","page_type":"article","post_id":2165692,"post_type":"analysis","post_chan":"none","tags":null,"ai":false,"category":"none","all_categories":"arvr,business,games,","session":"D"}']

Carmack and Palmer said they didn’t take any ZeniMax technology, and the jury agreed that they were not guilty of the most serious allegations of theft of trade secrets. But the jury awarded ZeniMax $500 million because it found that Luckey violated a nondisclosure agreement he had with ZeniMax. It appears to be a small transgression, but an expensive one.

Virtual reality technology has gone on to become a vital platform. VR is expected to become a $25 billion market by 2021, according to tech adviser Digi-Capital. The jury award is more than the estimated revenues for the first two years of sales combined ($425 million) for the Oculus Rift headset, according to market researcher SuperData Research. Facebook can afford to pay, but it raises a cloud over the platform that the company doesn’t need.

The verdict is a partial rebuff and partial victory for ZeniMax in part because Facebook counter-alleged that ZeniMax was being greedy, trying to grab back some ownership of VR after it had slipped out of its hands. An appeal is expected in this cautionary tale. In the meantime, it seems quite tragic that Carmack, the winner of the lifetime achievement award from the peer-based Game Developers Choice Awards in 2010, was caught up in such a legal nightmare.

To recount some history, Luckey started Oculus to revive virtual reality, which stalled after its debut in the 1990s. He showed his creation to Carmack, who was at id Software, in 2013. Carmack began to work on some software related to VR, and he ultimately left id to join Oculus in August 2013.

Then Facebook acquired Oculus for almost $3 billion in the spring of 2014, igniting a new boom in enthusiasm for VR. In May 2014, ZeniMax sued.

In reaction to the verdict, Facebook’s spokesperson replied, “The heart of this case was about whether Oculus stole ZeniMax’s trade secrets, and the jury found decisively in our favor. We’re obviously disappointed by a few other aspects of today’s verdict, but we are undeterred. Oculus products are built with Oculus technology. Our commitment to the long-term success of VR remains the same, and the entire team will continue the work they’ve done since day one – developing VR technology that will transform the way people interact and communicate. We look forward to filing our appeal and eventually putting this litigation behind us.”

ZeniMax said it might seek on injunction against the further sale of Oculus Rift headsets. It noted that the verdict found Luckey was guilty of a violation of copyrights as well as an NDA. ZeniMax called Carmack’s use of Rage source code — a game that he helped create — a “theft.” Brendan Iribe, CEO of Oculus, and Carmack were also found to have violated ZeniMax copyrights. But the verdict said that none of those accused was guilty of misappropriated trade secrets.

In a post today on Facebook, Carmack said, “The Zenimax vs Oculus trial is over. I disagreed with their characterization, misdirection, and selective omissions. I never tried to hide or wipe any evidence, and all of my data is accounted for, contrary to some stories being spread.”

[aditude-amp id="medium1" targeting='{"env":"staging","page_type":"article","post_id":2165692,"post_type":"analysis","post_chan":"none","tags":null,"ai":false,"category":"none","all_categories":"arvr,business,games,","session":"D"}']

Facebook said about the possible injunction: “We’re going to keep shipping Rift and building the next generation of great VR hardware and software. Our commitment to developers is stronger than ever and we’re going to keep investing millions in content development to bring the very best of VR gaming and experiences to people everywhere.”

“This is a really important step toward VR legitimacy: a legal case of this size substantiates the potential of VR technology,” said Stephanie Llamas, an analyst at SuperData Research, in an email. “The general public is seeing two pioneers in tech, Facebook and ZeniMax, fighting over this little company no one had heard of until 2015. In the end, while $500 million is not a small sum of money, this was a big win for Facebook given that they can continue their work with Oculus and do not need to bring ZeniMax in on future revenues. And since it was disclosed that Facebook paid closer to $3 billion for the company, it is clear they believe this investment will earn them several times that, making $500 million even less consequential.”

One of Carmack’s small, but legally indefensible, transgressions was to take a USB storage device with more than 10,000 files belong to id Software files. ZeniMax alleged those files contained ZeniMax-owned VR technology. I say that is a small transgression because Carmack is clearly a brilliant programmer and technologist, and I doubt he needed the files. But I wouldn’t presume too much in this situation, and the jury did not find Carmack guilty of the most serious charges in this instance.

Asked to comment on the decision, ZeniMax chairman and CEO Robert Altman said in a statement: “Technology is the foundation of our business and we consider the theft of our intellectual property to be a serious matter. We appreciate the jury’s finding against the defendants, and the award of half a billion dollars in damages for those serious violations.”

[aditude-amp id="medium2" targeting='{"env":"staging","page_type":"article","post_id":2165692,"post_type":"analysis","post_chan":"none","tags":null,"ai":false,"category":"none","all_categories":"arvr,business,games,","session":"D"}']

ZeniMax alleged that Carmack made a breakthrough in VR technology in March 2012, when he was still at id Software and before he met Luckey. Carmack shared the VR technology with Luckey, but he did so under a NDA that Luckey signed. ZeniMax alleged that Luckey didn’t know how to code the software in question, while Oculus’s lawyers argued unsuccessfully that Luckey made key breakthroughs in VR months before he ever met Carmack, including creating multiple versions of the Rift before the first encounter.

The circumstances around the NDA would be useful to know. Did Luckey visit Carmack at id Software one day and sign a generic NDA at the visitor’s desk? If so, why didn’t Carmack just meet him at a coffee shop instead? They could have circumvented the NDA quite easily. So why didn’t they?

Don McGowan, adjunct professor of entertainment law at the University of Washington School of Law and an expert in legal issues in AR/VR, found the NDA violation to be baffling. Why did Luckey violate an NDA, but not Carmack? It’s as if Carmack took the secrets, told them to Luckey under NDA, and then Luckey used them at Oculus. That’s a roundabout way of establishing that a violation occurred.

Also, the verdict appears to set a disturbing precedent. If an employee talks about an idea at a company, then moves on to another company, and then works on that idea, does it necessarily follow that the employee is at the risk of being sued by the former company? This kind of knowledge transfer happens all the time. Is it a crime? That hardly seems fair to call it that, particularly as is the case with ZeniMax, that the former company appeared to have no intention of working on the idea at all.

[aditude-amp id="medium3" targeting='{"env":"staging","page_type":"article","post_id":2165692,"post_type":"analysis","post_chan":"none","tags":null,"ai":false,"category":"none","all_categories":"arvr,business,games,","session":"D"}']

ZeniMax offered evidence that Carmack destroyed data on his computer after he got notice of the litigation, and after he researched on Google how to wipe a hard drive. ZeniMax also alleged that other Oculus computers were also wiped clean. Clearly, these aren’t actions that are going to win favors with a jury, and they seem like the actions that were, again, clearly avoidable or unnecessary in the successful creation of the Oculus Rift.

These seem like amateur mistakes. Yet ZeniMax has a reputation of being legally minded. If Carmack was aware of this reputation, why didn’t he try harder to ensure a smooth, lawsuit-free transition between jobs? It seems legally naive, and that might be a good way to describe someone who is a brilliant technologist.

ZeniMax further alleged that Oculus programmers cut-and-pasted ZeniMax code into the Oculus software development kit (SDK). Meanwhile, Facebook’s Mark Zuckerberg acknowledged that the company did very little due diligence in its acquisition, approving the deal in a matter of days. If Facebook’s attorneys had more time to vet the deal, would they have discovered any of these legal problems?

Of course, if there is a big mistake here, it was that Facebook allowed the trial to proceed instead of settling the case for a smaller amount of money.

[aditude-amp id="medium4" targeting='{"env":"staging","page_type":"article","post_id":2165692,"post_type":"analysis","post_chan":"none","tags":null,"ai":false,"category":"none","all_categories":"arvr,business,games,","session":"D"}']

The consequences also go beyond the monetary award. VR itself is likely to survive, as the litigation has no impact on competitors like Google Daydream View or HTC Vive. ZeniMax’s threat to stop sales of the Rift could put a cloud over the system, said Llamas.

“This likely won’t affect Oculus or Samsung in the near future, though, since ZeniMax has to wait until after Facebook’s appeal,” Llamas wrote. “If ZeniMax wins, Facebook’s devices will probably be halted next year or beyond. In the meantime, developers may look for other devices on which to develop so as not to get caught up in any of Facebook’s consequences. Either way, it’s bad for Oculus.”

And bad for Luckey.

“Palmer Luckey, on the other hand, continues to be a PR liability for the company since he is essentially the reason for the payout. After being the wunderkind of Oculus, his ties last year to a pro-Trump website and this lawsuit are giving Facebook all the more reason to keep him out of the spotlight for good,” Llamas said. “The narrative of Oculus being a $3 billion company that grew out of this kid’s basement is falling apart. There was a novelty to that story that gave the company the same authenticity that made people fall in love Apple, Microsoft, and even Facebook.”

[aditude-amp id="medium5" targeting='{"env":"staging","page_type":"article","post_id":2165692,"post_type":"analysis","post_chan":"none","tags":null,"ai":false,"category":"none","all_categories":"arvr,business,games,","session":"D"}']

Here’s the actual verdict below.

ZeniMax vs Oculus/Facebook verdict from Dean Takahashi