Jury Awards $500 Million Verdict Against Company Owned by Facebook
A jury in Texas returned a $500 million verdict in favor of ZeniMax Media in its lawsuit against Oculus VR. Facebook paid $2.3 billion to acquire Oculus in 2014. Additional compensation and milestone payments may raise the total cost of the acquisition to $3 billion.
What did Facebook get for its money? According to the jury, it acquired technology that infringed a copyright held by another company. The jury also found Oculus and its principles liable for related claims concerning the Rift virtual reality system.
Rift combines a headset with hand-held controllers that, at least in theory, allow users to simulate lifelike experiences. Advertised as “next-generation” virtual reality, the Rift system is supposed to make users feel that they are part of the action while playing a videogame, watching an immersion movie, or interacting with people from around the world who are sharing a virtual reality experience.
ZeniMax is a video game publisher. It claimed that one of its game designers, John Carmack, developed technology while working for ZeniMax that was used in the Rift system. Oculus hired Carmack away from ZeniMax in 2013, making him the company’s chief technology officer.
Oculus co-founder Palmer Luckey met Carmack in an online forum. When they began chatting about virtual reality, Luckey signed an agreement with ZeniMax in which he promised not to disclose information he received from Carmack. One issue in the trial was whether Luckey breached that agreement by using (and thus disclosing) information provided by Carmack.
Luckey’s trial testimony was his first public appearance since he admitted his secret funding of a political group that circulated political memes attacking Hillary Clinton. Luckey later “apologized for actions that may negatively impact perceptions of Oculus and its partners.”
Also testifying at the trial was Facebook’s Mark Zuckerberg, who denied that Oculus misappropriated technology that it did not own. Zuckerberg said that the trial was his first experience testifying in a courtroom. In 2008, he settled a lawsuit (made famous by the movie The Social Network) that claimed he stole the idea of Facebook from the Winklevoss twins.
Zuckerberg testified that moving fast is the key to staying ahead of the competition in the rapidly advancing technology field. ZeniMax argued that Facebook acquired Oculus to leap ahead in its virtual reality development by using technology that Oculus did not own. Whether Facebook knew about the copyright infringement when it acquired Oculus was not a question the jury was asked to decide.
A lawyer for ZeniMax called Facebook’s acquisition of Oculus “one of the biggest technology heists ever.” ZeniMax wanted $2 billion in compensatory damages and another $4 billion in punitive damages, but the jury rejected its claim that Oculus misappropriated ZeniMax’s trade secrets.
Oculus attempted to spin the $500 million verdict as a victory by claiming that the “heart of this case was about whether Oculus stole ZeniMax's trade secrets, and the jury found decisively in our favor.” Whether or not the remaining issues were at the heart of the case, the jury found that Oculus or its principles were at fault. Specifically, the jury awarded:
- $200 million for Luckey’s breach of the nondisclosure agreement
- $50 million for copyright infringement
- $250 million for false designation
False designation is a form of unfair competition that involves false or misleading claims about a product’s origin. The jury awarded $50 million each against Luckey and Oculus, and $150 million against former Oculus CEO Brendan Iribe, on the false designation claims.
Impact on Facebook
Oculus said it would appeal the verdict. ZeniMax, on the other hand, said it might seek an injunction to prevent Oculus from selling its Rift system as long as the copyright infringement continued. If the court were to grant an injunction, Oculus would be challenged to create a different, non-infringing computer code for Rift or to abandon the system. Given what’s at stake for both companies, it wouldn’t be surprising to see a settlement negotiated in the near future.
Facebook gambled a lot of money when it purchased Oculus, but Facebook has money to spare. Even without Oculus’ litigation woes, however, industry reports suggest that the Rift headset has not been a hit with consumers or vendors. Best Buy stopped demonstrating the Rift, and while explanations differ, a corporate insider revealed that software bugs rendered the demonstration headsets unusable.
The verdict had no immediate impact on the value of Facebook’s stock, which benefited from a favorable fourth-quarter earnings report.