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FEBRUARY 2017

INTELLECTUAL PROPERTY >> ALERT $500 MILLION VERDICT HIGHLIGHTS LITIGATION RISKS FOR EMERGING TECH COMPANIES The decision by a federal jury in Dallas, Texas, to award $500 million to the plaintiffs in a case involving (VR) technology – despite the jury’s conclusion that the defendants had not misappropriated any of the plaintiffs’ trade secrets – illustrates the degree to which companies must move with caution when they begin or expand businesses relying on VR or other emerging technologies.

COMPLAINT The plaintiffs in the case, Zenimax THE BOTTOM LINE Media Inc. and LLC, sued Companies developing – or seeking to acquire – new technology must take every Oculus VR LLC, owned by , precaution to limit their risks before litigation is on the horizon. The full extent and Inc., which had acquired Oculus in scope of those risks is often not clear without careful analysis. Working with counsel October 2014 for approximately $3 billion. The plaintiffs also sued Oculus’ every step of the way can help to uncover potential liabilities and limit exposure. founder (), chief technology officer (John Carmack, trademarks, including the names of The jury also agreed with the plaintiffs who previously worked for Zenimax), popular video games “” and that Carmack converted their property, and former chief executive officer “SKYRIM.” Oculus and Iribe infringed ZeniMax’s (Brendan Iribe) individually. trademarks, and held Oculus, Luckey, The plaintiffs sought $2 billion in The allegations included claims that and Iribe liable for “false designation” damages, a royalty, and billions more the defendants had misappropriated of the origin of their trademarks. in punitive damages. VR-related trade secrets, infringed key Although the jury did not award code copyrights, and damages on the trademark violated a binding non-disclosure JURY VERDICT infringement and conversion claims, agreement (NDA). The jury rejected a number of the the jury found that Oculus should pay plaintiffs’ claims, including their claim $50 million, Luckey should pay $50 The plaintiffs also asserted that (1) for misappropriation of trade secrets million, and Iribe should pay $150 Facebook had tortiously interfered with – which was the main emphasis of million for false designation of origin. the NDA and that Oculus and their case. Defendants have indicated their intent Facebook had engaged in unfair to appeal the verdict. Meanwhile, Nevertheless, the jury decided that competition with respect to their Zenimax has indicated its intent to Oculus (but not any of the other contracts, trademarks, copyrights, seek an injunction to prevent Oculus defendants) had directly infringed the and/or trade secrets; (2) Carmack had from further use of its computer code. “converted” their property by copying plaintiffs’ computer code copyrights files to a USB storage device and and that Oculus had breached the taking them with him; and (3) Oculus, NDA. The jury awarded damages of Luckey, and Iribe had infringed their $50 million and $200 million for those respective claims.

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INTELLECTUAL PROPERTY >> ALERT

IMPORTANT LESSONS Second, the risk of litigation in the VR For companies involved in VR or in space is real. There is a great deal of FOR MORE INFORMATION other emerging technologies, the money involved and entrepreneurs, Richard S. Eisert Oculus action has a number of inventors, and business people will Partner/Co-Chair, Intellectual Property seek to protect their inventions and 212.468.4863 important lessons. [email protected] investments by going to court, if they The $500 million total jury award fell deem that necessary. In an emerging Marc J. Rachman short of the billions of dollars the Partner, Litigation market with a potentially significant 212.468.4890 plaintiffs sought to recover, but it is, of first-mover advantage, litigation is one [email protected] course, still a significant amount of tool for getting, and staying, out in Josh J. Gordon damages. It is also important to keep front of the competition. Thus, as Associate, Intellectual Property in mind that a damages award, in developers and other businesses seek 212.468.4834 these circumstances, is only part of to capitalize on the growing VR [email protected] the cost of litigation. Preparing and market, they need to carefully analyze or the D&G attorney with whom you going to trial, the amount of executive the positions and motivations of their have regular contact. time involved in a lawsuit of this nature competitors to assess their risk profile. (Facebook’s chief executive officer, Finally, this case illustrates the care , testified in person in Davis & Gilbert LLP court for several hours in the Oculus that must be taken when hiring a 212.468.4800 case), and the accompanying publicity former employee of a competitor who 1740 Broadway, New York, NY 10019 www.dglaw.com all weigh heavily on the defendants. is bound by an NDA. The jury found © 2017 Davis & Gilbert LLP There is also the risk that an injunction that Oculus must pay $200 million for could force a company to stop the use its failure to comply with the NDA and/or sale of its emerging technology initially signed between Zenimax and or to revise its technology to be Luckey, the obligations of which non-infringing. Oculus took on, according to the jury award, by manifesting its acceptance In a situation such as this, where a of the NDA when Luckey began number of hardware manufacturers are working for Oculus. When hiring from a all striving to create similar technology competitor, be wary of more than just at once and have employees that have intellectual property risks; your moved between the companies, there company may face exposure from is increased risk that one party will, related contractual rights and other either accidentally or purposefully, potential wrongdoing. Perhaps infringe on another’s intellectual paradoxically, the very reason a former property or other rights. Therefore, it is employee of a competitor is valuable imperative that companies do proper – that is, his or her proprietary diligence on the intellectual property knowledge – is the same reason the that they want to create or acquire, legal risk is elevated. and any related contractual restrictions, including NDAs and restrictive covenants.