Lessons from ZeniMax v. Oculus

In ZeniMax Media Inc. v. Oculus VR Inc., ZeniMax alleged that Oculus, along with its co-founder Palmer Luckey and CTO John Carmack, unlawfully used ZeniMax's proprietary virtual reality technology to develop the Oculus Rift headset. The jury found Oculus liable for violating a Non-Disclosure Agreement (NDA) and awarded ZeniMax $200 million for the NDA breach, contributing to a total of $500 million in damages.

This case underscores the critical importance of NDAs in protecting intellectual property; they serve as enforceable legal instruments that can lead to substantial financial remedies when breached.

Below is an excerpt from an article by Kingdoms Law which goes in-depth into key areas of the NDA discussed in the case:

(1) “Ownership. All Proprietary Information, including but not limited to that which is contained in files, letters, memoranda, reports, records, data, sketches, drawings, notebooks, program listings, or other written, photographic, or other tangible or intangible, or other materials, or which shall come into the Receiving Party’s custody or possession, is and at all times shall be the exclusive property of the Disclosing Party, and shall be used by the Receiving Party only for the Proper Purpose.”

This is NOT a mutual NDA in which both parties are disclosing and receiving parties. Since this a unilateral NDA with one disclosing party and one receiving party, it was easier for ZeniMax Media to prove its case in court given that all the data belonged to ZeniMax Media’s trade secrets, and not to Luckey.

From a contractual perspective, the one disclosing party NDA gave the impression that ZeniMax Media was more knowledgeable and owned more advanced technology, while Luckey owned nothing and provided nothing in return, despite Luckey’s reputation.

(2) ““Proprietary Information” means all information and know-how, regardless of whether or not in writing, or a private, secret or confidential nature that relates to the business, technical or financial affairs of the Disclosing Party, its parent, subsidiaries, affiliates, licensors, customers, potential customers, suppliers or substantial suppliers provided or disclosed to the Receiving Party or which becomes known to the Receiving Party, whether or not marked or otherwise designated as “confidential”, “proprietary” or with other legend indicating its proprietary nature. Proprietary Information includes, by way of illustration and not limitation, all forms and types of financial, business, scientific, technical, or engineering information, including patterns, plans, compilations, inventions and developments, products, formulas, designs, prototypes, methods, techniques, processes, procedures, computer programs and software (whether as source code or object code), documentation, technologies, plans, research, marketing, and reports, other technical information relating to the Disclosing Party’s business, and any information not generally known to the public or within the industry or trade in which the Disclosing Party competes, whether tangible or intangible, and whether or not stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.”

Although the definition of proprietary information is clear, it has broadened the scope of the definition such that the receiving party has the burden of proof. For example, last part of the sentence stating that “any information not generally known to the public or within the industry or trade in which the Disclosing Party competes” covers everything conveyed to Luckey. In sum, this clause further strengthens ZeniMax Media’s claim that everything conveyed to Luckey is protected - almost with no exceptions.

(3) “Maintenance of Confidentiality. With respect to the Disclosing Party’s Proprietary Information, the Receiving Party undertakes and agrees that the Receiving Party shall secure and keep such Proprietary Information strictly confidential and: … (ii) Restrict disclosure to those of its directors, officers, employees or attorneys who clearly have a need-to-know such Proprietary Information, and then only to the extent of such need-to-know, and only in furtherance of the Proper Purpose; (iii) Use such Proprietary Information only for the Proper Purpose and not disclose such Proprietary Information other than as set forth above unless the Disclosing Party shall have expressly authorized such disclosure in advance in writing; and (iv) Not use any Proprietary Information to compete or obtain any competitive or other advantage with respect to the Disclosing Party.”

The key resides in the use limitation set forth in (iii) above. According to ZeniMax Media, Luckey breached “the Non-Disclosure Agreement by wrongfully using and misappropriating ZeniMax Media’s Contract-Protected Information beyond the scope of “Proper Purpose” authorized in the Non-Disclosure Agreement, including using ZeniMax’s Contract-Protected Information for testing, developing, demonstrating, promoting the Rift Headset, and selling Oculus to Facebook.”

In other words, ZeniMax Media claimed that Luckey could use such information as defined by the Proper Purpose, and not for any other purpose unless authorized in writing by ZeniMax Media. ZeniMax Media’s accusation of Luckey’s violations of the NDA’s use limitations appeared to be a successful strategy for convincing the jury. This was easier to prove for ZeniMax Media instead of arguing technical aspects, which would have confused the jury.

Works Cited:

Law Firm, Kingdoms. Kingdoms Law, 1 Dec. 2020, www.kingdomslaw.com/en/publication/why-ndas-are-important/. Accessed 20 Dec. 2020.