Why ZeniMax v. Oculus Matters

While at E3 this year, I dove into an impressive undersea world using the new Oculus Rift headset. Simultaneously, I thought about the gallons of hot water that Palmer Luckey, the company’s founder, must be swimming in now that ZeniMax Media has filed a lawsuit against him, alleging, among other claims, copyright infringement and misappropriation of trade secrets. [1] It also occurred to me that anyone working in a creative or technical field could easily find themselves in a similar situation.

The relationship between ZeniMax and Luckey is complex. ZeniMax claims that while Luckey was developing his innovative virtual reality headset, former Id Software cofounder John Carmack provided proprietary technology and know-how that enabled Luckey to perfect his invention and overcome a host of technical hurdles. [2] Because Carmack was a ZeniMax employee at the time, ZeniMax now lays claim to his technological contributions, demanding money damages and more.

Oculus counters that Carmack and ZeniMax contributed nothing to the Rift technology, and that the basis of the suit is merely an attempt to cash in on the $2 billion, March 2014 Oculus sale to Facebook. [3] [4] Oculus challenges that there isn’t a shred of ZeniMax hardware or code in the Rift headset. [5] Both companies are demanding a jury trail, and because the stakes are high, this one might go all the way.

Regardless of which version of the tale you believe, one thing is virtually clear: two years before the dispute arose, Palmer Luckey signed a non-disclosure agreement with ZeniMax, and therein lies a critical lesson for anyone contemplating an NDA.

Non-disclosure Agreements are Binding, Enforceable Contracts

Non-disclosure agreements are more than business formalities. NDA’s aren’t handshakes or respectful hellos exchanged between individuals prior to a meeting simply because protocol demands it. They are contracts. When executed between individuals—even when they are not ideally drafted—they form binding agreements as weighty and powerful as any twenty-five-page publishing or licensing agreement. [6] And the breach of a non-disclosure agreement is a breach of contract, and a damaged party may be entitled to a host of legal remedies.

In ZeniMax v. Oculus, the parties agree that Palmer Luckey signed a document, which ZeniMax claims is a binding non-disclosure agreement. [7] Oculus asserts that it even if it is an NDA, it is invalid because a specific term in it was not defined properly. [8] 

Regardless, a legal question has been set in motion, and my guess is that Luckey signed that initial NDA—as most people do—without giving much thought to its long-term consequences. 

Unfortunately, an NDA may lie dormant for years, but can erupt with volcanic force the moment a dispute arises, as it did inSilicon Knights v. Crystal Dynamics

Saved by an NDA

In 1997, Canadian video game developer Silicon Knights and Crystal Dynamics were embroiled in a legal dispute over the video game Blood Omen: Legacy of Kain, which was developed by Silicon Knights. SK was upset because Crystal Dynamics (the game’s publisher) had assigned the game’s intellectual property rights—including the rights to sequels and other derivative works—to Activision. [9] 

Silicon Knights claimed that Crystal Dynamics promised that they would remain the game’s publisher; that the Activision deal would transfer only the game’s distribution rights; and that the new deal would not affect Silicon Knights’ right of first refusal to develop derivative games. 

None of this, by the way, had anything to do with a non-disclosure agreement.

But in their complaint, Silicon Knights also alleged that several of its employees were induced by Crystal Dynamics to breach their non-disclosure agreements, and either join Crystal or form new, competing companies. [10] According to SK, Crystal Dynamics had interfered with employee and employee non-disclosure agreements. [11] 

The court reviewed each of SK’s fourteen claims, and nearly all were dismissed, but the question as to whether Crystal Dynamics interfered with SK employee contracts and non-disclosure agreements was upheld. [12] Thereafter, SK and Crystal Dynamics settled their dispute out of court, and one could argue that the non-disclosure agreements provided substantive leverage in that settlement. [13] 

But an NDA doesn’t always give a party the protection they need, as former Foosball champion Steve Simon discovered.

Warning: An NDA Doesn’t Protect Everything

Regardless of whether you have an NDA in place, you may not be safeguarding the information you want protected. 

In 1995, Steve Simon came up with an idea for adding a coupon dispenser to arcade video games.  Similar machines were already in use, but rather than dispensing hundreds of paper tickets, Simon’s machine printed a single coupon, on which a player’s cumulative points were printed, along with advertisements and more. 

The idea wasn’t new, however. Similar coupon machines were already in use in the real-money wagering world. Nevertheless, to promote his machine to the video game industry, Simon disclosed it to several individuals, including Richard Oltmann, whom he met at a trade show. Oltmann signed Simon’s NDA, but after reviewing Simon’s device, Oltmann told Simon that he wasn’t interested. 

Of note, is that Simon never showed Oltmann any of the device source codes or schematics, nor did Simon tell Oltmann how the device was built or discuss its component parts. [14]

But the plot thickens. 

It turns out that Oltmann had an existing relationship with a company called Laser-Tron, which Simon had already unsuccessfully pitched his coupon machine. Oltmann knew the president of Laser-Tron, and records reveal that Oltmann contacted Laser-Tron the day after his meeting with Simon. Less than a year later, Laser-Tron introduced a coupon dispensing option for an arcade game called Solar Spin. Understandably, Simon was convinced that Laser-Tron had replicated his idea based on information provided to Oltmann. 

Oltmann disagreed and filed a pre-emptive suit requesting declaratory judgment that he did not steal Simon’s trade secret. Simon filed a counter suit, alleging misappropriation of his trade secret, unfair competition, breach of contract, and fraud.

Surprisingly, the court dropped all of Simon’s claims. As to misappropriation of a trade secret, the court held that its value lies in the fact that it is not generally known to others who could benefit from using it, saying that a product or service that is within the realm of general skills in the industry cannot be a trade secret. [15] In other words, Simon’s idea wasn’t unique. It was based on information already known within the video game industry. [16] As to breach of the non-disclosure agreement, the court held that because there wasn’t a trade secret, there wasn’t a breach of contract either. [17]

Protecting Simon’s Idea as a Trade Secret

Simon couldn’t protect his idea as a trade secret because it was already known in the industry. Trade secrets—which in the United States are controlled by state rather than federal law—generally require that the information is not known, possesses commercial value, and reasonable steps are taken to protect it. [18] In other words

Steve Simon discovered that his idea wasn’t protected, despite diligence in obtaining a signed agreement with Oltmann, not because he didn’t take reasonable precautions (as required in bullets two and three above) but because the information itself wasn’t a trade secret. [20] It failed because of bullet number one. 

Protecting Simon’s Idea with a Copyright?

Under copyright law, Simon could have protected the underlying source code for his device but not the idea of a coupon-dispensing machine. Why? Because copyright law doesn’t protect ideas. [21] This is why Paramount doesn’t sue Lucas (or visa versa) for the similarities between Star Wars and Star Trek: outer space; cool looking spaceships, quests to unknown galaxies far, far away; aliens; etc.

Protecting Simon’s Idea with a Patent?

What about protecting Simon’s idea with a patent?

Although patents do protect processes and inventions, and Simon’s device qualifies as such, he still wouldn’t have been able to protect his idea with a patent because, unfortunately, you can’t patent something already in use. [22]

As a result, Simon lost despite his diligence in making sure that he had an NDA in place.

Back to Palmer

Palmer Luckey signed a non-disclosure agreement, too, and ZeniMax claims that John Carmack provided confidential information that was covered by it, including trade secrets contained in, among other things, the ZeniMax’s VR Testbed software. [23]

Section 2(a)(vi) of Luckey’s NDA obligated him to not use ZeniMax’s proprietary information to create competitive products or to “obtain any competitive advantage.” [24] Luckey further agreed that ZeniMax was not granting a license for him to use ZeniMax’s technology without their consent, including any tech that Carmack had created during his time at ZeniMax.

It seems like a slam-dunk that Oculus is in trouble, but for two reasons it’s not.

First, if Oculus is telling the truth, that there isn’t a line of ZeniMax code in Rift, then ZeniMax’s copyright infringement claims are weak and difficult to prove.  To be clear, showing copyright infringement doesn’t require a showing of actual code use, but it helps.

Second, proving trade secret misappropriation, even if it is true, isn’t easy either. Texas trade secret law has recently changed, [25] and regardless of whether ZeniMax v. Oculus is litigated under the old law or new, ZeniMax will need to prove each of the elements of the infringement. [26]

But it all comes down to Luckey’s non-disclosure agreement, because it provides a critical link in ZeniMax’s strategy. And this may be why Oculus is questioning its validity from the get-go. [27] Throw out the NDA and ZeniMax’s case could fall apart. 

The Luckey Dilemma

The relevant question the reader should ask is whether they would have signed ZeniMax’s NDA had they been in Palmer Luckey’s position. 

The truth is that most would. 

Two years ago, when Palmer Luckey was without resources or visibility, John Carmack, an industry icon, showed interest in the Rift technology. Regardless of how Oculus tries to downplay it, Carmack’s early endorsement was key to Rift’s initial acclaim and thereafter to the success of his Kickstarter campaign. But Luckey wouldn’t have gotten Carmack’s help, endorsement, or technological advice without the NDA. And as my mom used to say, you can’t have your cake and eat it, too.  

Regardless of how ZeniMax v. Oculus turns out, the lesson learned is that next time someone asks you to sign a non-disclosure agreement; you should consider the consequences.

Stay tuned. Next up: a discussion of the more ominous NDA provisions and what they mean.

[1] ZeniMax filed suit against Palmer Luckey, as an individual, and his company, Oculus VR, Inc., on 5/21/14. Oculus VR’s response was filed on 6/25/14.

[2] The Oculus VR, Inc. and Palmer Luckey response to ZeniMax’s complaint Oculus VR, Inc. and Palmer Luckey response to ZeniMax’s complaint ZeniMax v. Oculus VR, Inc. and Palmer Luckey complaint, filed in the United States District Court for the Northern District of Texas, asserts that its trade secrets include confidential programming code, methods, plans, designs, concepts, improvements, modifications, research data and results, and know-how related to virtual reality headsets; interfaces between virtual reality headsets and interactive entertainment content and/or software; sensors and optical components calibration; latency reduction; low-latency head-tracking, including positional and absolute tracking; head and neck modeling; predictive tracking; chromatic aberration reduction; distortion, motion blur, and jitter/judder reduction; pre-warping of displayed images; combining and selecting devices, displays, cables, optics, and related hardware solutions best-suited for improving the user’s virtual reality experience; minimizing or removing the “screen door” effect on the display; minimizing simulator sickness and/or motion sickness for users; and creating a commercially- viable virtual reality headset. ZeniMax Trade Secrets include valid, enforceable trade secrets in the confidential, proprietary components of ZeniMax’s “DOOM 3: BFG Edition” computer program code.

[3] Forbes. http://www.forbes.com/sites/briansolomon/2014/03/25/facebook-buys-oculus-virtual-reality-gaming-startup-for-2-billion/

[4] The Oculus VR, Inc. and Palmer Luckey response to ZeniMax’s complaint (above) asserts in paragraph 2 that “ZeniMax’s Complaint falsely claims ownership in Oculus VR technology in a transparent attempt to take advantage of the Oculus VR sale to Facebook. By deliberately misstating some facts and omitting others, ZeniMax makes the incredible assertion that it, a videogame software publishing company for personal computers and consoles like the Sony PlayStation, invented and developed a virtual reality hardware and software system.”

[5] Oculus VR, Inc. and Palmer Luckey response to ZeniMax’s complaint, at page 5.

[6] Cybertek Computer Products, Inc. v. Whitfield, 1977 Cal. App. LEXIS 2140.

[7] ZeniMax requests in their complaint Actual Damages; Restitution; Disgorgement; Unjust Enrichment; Equitable Relief; Punitive and Exemplary Damages; Statutory Damages; Enhanced Damages; Prejudgment and Post-Judgment Interest; Court Costs; Attorney Fees, and more. 

[8] Oculus claims that the non-disclosure agreement is invalid because ZeniMax failed to define an essential term “Proper Purpose” in that non-disclosure agreement (Oculus VR, Inc. and Palmer Luckey response to ZeniMax’s complaint, page 512).

[9] Silicon Knights v. Crystal Dynamics, 983 F. Supp. 1303.

[10] Id. at 1311. Further, SK’s complaint alleged tortious interference with Silicon Knights' contracts with its former employees, and that SK had valid non-disclosure agreements and non-compete agreements in place with each with respect to work performed on behalf of Silicon Knights on Kain.

[11] The actual claim was intentional interference with contractual relations.

[12] Ibid.

[13] On July 3, 1997, Silicon Knights filed a complaint against Crystal Dynamics requesting rescission or reformation of the contract and damages for breach of contract. Additionally, the complaint asserted Statutory Unfair Competition, pursuant to Cal. Bus & Prof. C. § 17200 & 17500 et seq.; Common Law Unfair Competition; Intentional Interference with Contractual Relations with Silicon Knights' former employees; Intentional Interference with Contractual Relations with Activision; Intentional Interference with Prospective Economic Advantage with Activision; International Interference with Prospective Economic Advantage (generally); Negligent Interference with Economic Advantage (generally); Defamation and Commercial Disparagement; Fraud; and Negligent Misrepresentation. The claim as to intentional interference with contract was upheld, whereas the claims for interference with the Activision contract, interference with economic relations, negligent interference with prospective business advantage, and defamation and commercial disparagement, fraud and negligent misrepresentation, and unfair competition were all dismissed.

[14] Simon v. Oltmann, 2001 U.S. Dist. LEXIS 13924 at page 5.

[15] Id. at page 12, citing Pope v. Alberto-Culver Co., 296 Ill. App. 3d 512, 515, 694 N.E.2d 615, 617, 230 Ill. Dec. 646 (1st Dist. 1998).

[16] Id. at page 17.

[17] Ibid.

[18] Note that depending on the state of country, trades secret law will differ. California, for example, may include criminal penalties (Cal. Penal Code §§ 499c, 502).

[19]  See http://abcnews.go.com/Business/coca-colas-secret-formula-revealed/story?id=12914877&page=2

[20] http://www.wipo.int/sme/en/ip_business/trade_secrets/protection.htm.

[21] Copyright does not protect facts, ideas, systems, or methods of operation, although it may protect the way these things are expressed.  “In no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.” 17 U.S. Code § 102 (b).

[22] Under U.S. Patent law, a prior work cannot be patented. GLOBESPANVIRATA, INC. v. TEXAS INSTRUMENTS, INC., 2005 Jury Instr. LEXIS 855

[23] See the ZeniMax complaint. http://cdn0.vox-cdn.com/assets/4490157/1-main.pdf

[24] See Palmer Luckey’s non-disclosure agreement with ZeniMax. http://cdn0.vox-cdn.com/assets/4490157/1-main.pdf

[25] The Texas Uniform Trade Secrets Act (TUTSA) became effective on September 1, 2013. The following explains the changes provided by the this recent law: https://www.texasbar.com/AM/Template.cfm?Section=Texas_Bar_Journal&Template=/CM/ContentDisplay.cfm&ContentID=23857

[[26] See https://www.texasbar.com/AM/Template.cfm?Section=Texas_Bar_Journal&Template=/CM/ContentDisplay.cfm&ContentID=23857 for an explanation of the older Texas common law and the recently passed Texas Uniform Trade Secrets Act (TUTSA).

[27] See Oculus’ reply to the ZeniMax complaint: http://www.scribd.com/doc/231298129/Oculus-Response-to-Zenimax.

[28] Image Licensing: Shutterstock.com