In today’s fast paced commercial environment, non-disclosure agreements (“NDA’s"), are something which many businesses sign without giving the matter a second thought. There is perhaps a misconception amongst some that they are relatively harmless legal documents, either a mere formality or not needed altogether.
The recent case in a North Texas District Court, however, between on one side: Facebook, Oculus, its co-founders Palmer Luckey and John Carmack and its former CEO Brendan Iribe, and on the other side ZeniMax Media and its subsidiary Id Software, proves that breaching the terms of an NDA can be very costly indeed.
The specifics of the case focused on Oculus, a USD two billion dollar acquisition that Facebook made in 2014.
Oculus is a pioneering Virtual Reality ("VR”) company responsible for the Oculus Rift VR headset (advertisement above). Such headsets are seeing an increase in popularity with the likes of the Oculus Rift, HTC Vive and Sony’s PSVR all seeking to gain traction in the mainstream market.
ZeniMax is less of a household name by contrast than Facebook, with it probably best known through its subsidiaries as being the creators of the Doom, Quake, Fallout and Elder Scrolls series of games.
VR requires considerable hardware and specialised software to run seamlessly and the law suit, first filed in 2014, alleges that Oculus would not have been able to build the Oculus Rift without breaching the intellectual property rights of ZeniMax.
The dispute between the parties stems back to a time when John Carmack (now the Chief Technology Office at Oculus), worked at Id Software, and Luckey was in the initial phases of creating the Rift headset. Luckey had provided an early protoype of the Rift to ZeniMax which they had created numerous improvements to, such as, for instance, adding integrated motion sensors. ZeniMax showed this improved Rift headest to Luckey but under an NDA (which the jury found by extension was found to have also later applied to Oculus). When Carmack left ZeniMax to co-found Oculus with Luckey, ZeniMax alleged Carmack had taken data with him. Whilst Luckey was one of the co-founders of Oculus, ZeniMax felt that he lacked the ability to create the code necessary for the Rift headset, having only rudimentary coding skills, and hence copied code from Carmack.
ZeniMax alleged Oculus breached ZeniMax’s intellectual property in the following ways:
misappropriation of trade secrets (under common law);
breach of contract (NDA);
tortious interference with contract (NDA);
conversion (the wrongful exercise of control over ZeniMax property); and
trademark infringement and false designation of ZeniMax trademarks
ZeniMax was seeking USD four billion in damages.
In the end, ZeniMax actually failed to make out the largest element of the case, specifically that Oculus misappropriated its trade secrets. The jury found against them on this front due to a lack of sufficient evidence. Likewise, Facebook was not guilty of tortious inteference with respect to the NDA and neither Facebook nor Oculus were guilty of unfair competition. Whilst the jury found Carmack had engaged in conversion of ZeniMax’s documents, no damages were awarded.
Damages were, however, awarded against the various defendants for trademark infringement (USD 50 million against Oculus), copyright infringement (USD 50 million against Oculus) and false designation (USD 50 million against Luckey and USD 150 million against Iribe). Oculus plan to appeal the false designation charge.
Notably, with respect to the copyright infringement awards, Oculus was found guilty despite not having used any code that was identical to that of ZeniMax.
Rather it was found, on the basis of expert evidence, to be substantially similar, something which Carmack later passionately disagreed with in comments after the verdict.
However, the greatest damages were incurred by Oculus with respect to the NDA that Luckey had signed. The jury found that Luckey violated the terms of the NDA he had with ZeniMax and damages of USD two hundred million were awarded against Oculus. The case is a good example of the potential liability an NDA can expose a business to. NDAs are contractual documents and like all such documents contain obligations that should only be entered into without a proper understanding of their ramifications. If you have an NDA or other contractual document that needs review, be sure to get in touch with Creative Artists Law and find out how we can help in negotiating the conditions.