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The Rift Between Companies: Oculus v. Zenimax

ZeniMax Media and Oculus are embroiled in a dispute over the intellectual property rights incorporated in the Rift product.

ZeniMax Media and Oculus are embroiled in a dispute over the intellectual property rights incorporated in the Rift product.

Have you heard of the Oculus Rift (that loveable virtual reality company swept off its feet by Facebook)? How about legendary game designer John Carmack? If you haven’t by now, you absolutely should have! In any case, here’s your major takeaway: Beware the Employer! The situation playing out between Oculus and ZeniMax Media is an interesting one, and it is a useful lesson in what not to do. While we wait for this to unfold (either in the courtroom or behind closed doors), let’s see where things went wrong and learn from Oculus’s potential mistakes.

Our Legal Setup

On May 1, 2014, ZeniMax Media (the parent company of Carmack’s former employer, id Software), sent letters to Oculus and Facebook claiming rights in at least part of the IP in the headset. In other words, ZeniMax believes it owns rights in IP created by Carmack during the course of his prior work for ZeniMax’s subsidiary, and that some of that IP is embedded in the Oculus Rift headset.  On May 21, ZeniMax initiated a lawsuit against Oculus in the Northern District of Texas. The focal point of Oculus’s problems stems from two documents: John Carmack’s employment agreement (and other ZeniMax/id personnel as well) and a Nondisclosure agreement entered into between Oculus cofounder, Luckey, and Zenimax Media.

Employment Agreements: Be Cautious about who helps you

Entrepreneurs, if you seek someone’s help, be sure to have them take a look at their employment agreement! Almost always, an employment agreement will include provisions that immediately make the company the owner of rights in inventions created by the employee in the scope of his employment. Sometimes, there may be an out if the work is unrelated or outside the scope of the Employer’s work or agreement. However, that may be difficult to prove.

Prior to this whole mess, Luckey, a hardware developer had begun the development process on the “Rift” virtual reality (VR) headset. In 2012, John Carmack began corresponding with Luckey and asked for a prototype of the Rift headset to tinker with. This is where their trouble begins. In the complaint, ZeniMax constantly states that it was developing VR technology with Carmack heavily involved in that research. As a game company, ZeniMax researched VR technology specifically for game development. There exists some question as to whether or not they sought to bring a viable consumer hardware project to market.

Carmack’s specific employment agreement reads:

Employee agrees that all Inventions that (i) are developed using equipment supplies, facilities or trade secrets of id Software or the Company… or (iii) relate to the Company’s business or current or anticipated research and development will be the sole and exclusive property of the Company (ZeniMax) or its designee from the moment of their creation and fixation in tangible media…

In other words, even if Carmack did not use his employer’s resources in working on the Rift, his employment contract would still purport to transfer rights to the employer if the Rift relates to the employers “current or anticipated research and development.”  Additionally, Carmack and other ZeniMax employees are said to have used company resources and research to make both hardware and software (including the software development kit or SDK) improvements to the device.

According to ZeniMax, “Carmack made breakthrough modifications to the Rift prototype based upon years of prior research at ZeniMax.” When Carmack and his crew made improvements, the resulting intellectual property had been assigned to ZeniMax via the employment agreements. The complaint constantly tees up that ZeniMax (Carmack with id Software in particular) had been working on VR hardware and software research. However, record exists where Carmack states that this was his pet project.  [Is there something missing in the prior sentence?]

In any case, if the court sides with ZeniMax, these improvements become their property, including the SDK. Carmack had quickly taken to Twitter to protest saying that nothing he has ever worked on was patented. But that might not be the only issue. The code he wrote, which is automatically protected by copyright, became property of ZeniMax (under ZeniMax’s interpretation of the law and facts). Accordingly, it might be the case that ZeniMax owns certain parts of the code used in the Rift.  If ZeniMax was the owner of Carmack’s rights in code he developed, then Occulus would have had to reverse engineer its code, without incorporating any of the copyrighted content from the ZeniMax-owned code.  It might also be the case that Luckey and ZeniMax became co-owners in the software.

Nondisclosure Agreement: Now that it’s not yours, it’s not yours.

Under ZeniMax’s argument, the technology became confidential information and trade secrets of ZeniMax. This is what gives ZeniMax some ammunition (or rather a actionable claim). Their research and proprietary information that was confidential and not readily attainable had been used in the Oculus Rift. Oculus was using it to profit to the tune of a cool $2 billion from Facebook. This could constitute misappropriation, meaning ZeniMax’s proprietary information was stolen. Helping to solidify their claim, ZeniMax points to the NDA entered into between the Company and Luckey.

It was under this agreement that Carmack showed Luckey the improvements made to the Rift. This contract is what governed the relationship between Carmack’s team, ZeniMax, and Luckey. The definition of confidential information includes the work done by the employees of ZeniMax. If these facts are correct, Luckey would likely not be able to use the information without the permission of ZeniMax (for purposes other than those outlined in the NDA). If ZeniMax’s secrets are disclosed, they potentially lose any trade secret protection. Multiple times in ZeniMax’s complaint, the Oculus team is painted as having no software background and no particular VR experience. If these facts are true, this would help ZeniMax demonstrate that they did not reverse engineer the tech (an acceptable method of discovering trade secrets). Multiple email chains affirmed the notion that they needed Carmack. Only days after demonstrating the Rift improvements, Oculus LLC was formed in the state of California.

Negotiations

ZeniMax’s complaint does not paint a favorable picture of how Oculus handled its negotiations with ZeniMax. The only facts are those from the complaint, and we’ll have to wait for more to come to light to know the truth. It is understandable that an entrepreneur will desire to protect and profit from an idea they believe to be there own. But even if there is not a clear owner of intellectual property rights in an idea, an entrepreneur maybe able to secure clear title to important intellectual property by negotiating a business arrangement with others involved.  ZeniMax’s allegations outline what not to do in negotiating over intellectual property rights.  ZeniMax alleges the negotiations broke down in large part due to the Oculus team. According to the complaint, originally, Oculus was to grant ZeniMax some share of equity in the LLC. According to the complaint, Oculus demanded a worldwide exclusive license over the IP disclosed by ZeniMax pursuant to the NDA. Furthermore Oculus demanded marketing support from ZeniMax and 10,000 free copies of Doom 3 BFG edition (a game capable of showing off the Rift) for the Kickstarter campaign. In return, ZeniMax would receive 2% equity interest subject to a 3 year vesting schedule. Vesting would be dependent on Carmack’s ongoing involvement in the project. Oculus also proposed tht ZeniMax could pay an additional 1.2 million for another 3%. However, that term was eventually dropped.

In 2013, negotiations in total broke down. ZeniMax would eventually prohibit Carmack from working with Oculus. As a result, Carmack left the company to become the Oculus CTO. They then began poaching former members of Carmack’s team despite noncompetition provisions in his employment agreement specifically prohibiting this.  Again, this is all based on ZeniMax’s unproven allegations.  However, this provides an example of how aggressive negotiating posture and subsequent aggressive hiring decisions can inflame a situation and lead to litigation.

Conclusion

Clear title to fundamental intellectual property is typically critical to a startup’s success.  While Oculus was able to achieve a favorable exit, their outcome is likely the exception to the rule.  ZeniMax’s complaint in its recently filed litigation provides numerous examples of mistakes startups can avoid making in working with individuals employed by others or subject to NDAs.

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