Palmer Luckey sent the Oculus Rift prototype to John Carmack in April 2012, and Carmack made improvements to it as I detailed last week.
Disclaimer: Like I said at the start of this series, I am not a lawyer. This is a complicated case and I am not an expert on the law, VR, or corporate contracts. I’m working with incomplete records of complex events where there was often more than two sides to every story. I’ve done what I could to be accurate, but series is intended as opinion commentary, not authoritative historical record.
In May, Zenimax had Luckey sign an NDA. This was probably the fatal mistake in the entire process. While I object to the entire premise of the Zenimax arguments regarding code, most of this case seems to turn on the NDA, and Oculus was probably doomed the moment Luckey put his signature on the thing.
Non Disclosure Disagreement
When speaking of the NDA, Zenimax stated:
[…] Mr. Luckey acknowledged in writing Zenimax’s legal ownership of this intellectual property. It was further agreed that Mr. Luckey would not disclose this technology to third persons without approval.
An NDA is typically used in a situation where A wants to share information with B, but they need to make sure B doesn’t tell anyone else. In this case Zenimax wanted to assert their ownership of all the stuff Carmack was inventing. I haven’t read the NDA in full, but some relevant parts are quoted in the complaint against Oculus. The NDA applied to all information related to the technology, written or otherwise, whether it was marked confidential or not. Which means that basically every single time Carmack and Luckey talked about VR, Luckey was bound to keep the contents of the conversation private. He was allowed to tell people within his own company, but only on a need-to-know basis and only in pursuit of developing this product.
I can’t get the full text of the NDA (and I’d probably struggle to fully understand it anyway) but I’m betting the poison pill was this one:
(iv) Not use any Proprietary Information to compete or obtain any competitive or other advantage with respect to the Disclosing Party.
Basically, “We own all the stuff that Carmack says. You’re allowed to know it, but if you ever use it to compete with us you’ll be in violation of this agreement.”
I don’t know if this is a particularly strongly worded contract by the standards of this sort of thing. (The NDAs I’ve dealt with were with smaller companies and covered short-term projects rather than ongoing R&D.) But it really does seem like it firmly traps Luckey. It shackles his company to Zenimax by saying that everything that Carmack says or does to improve the Rift is owned by Zenimax and Luckey is never allowed to use it to compete with Zenimax.
If another company came along and wanted to license the Rift, Luckey wouldn’t be able to do that without somehow removing all of the improvements that Carmack had made – even if they were offhand suggestions made over a beer!
It’s clear from this and their later actions that Zenimax was working very hard to gain control over Oculus from the beginning. That makes sense. Engineers love to collaborate, but companies do not. Particularly when one of them is a multi-billion dollar global and the other is a garage operation in Long Beach.
I say Luckey was trapped because if Microsoft had come along and offered Oculus a pile of money to put the Rift on the Xbox, I don’t see how he could have done it. How could he not use Carmack’s advances? Even if Luckey were to split from John Carmack and hire Engineer Bob, and even if Engineer Bob were to come up with the exact same ideas, Zenimax would still be able to drag him into court and say he was using Carmack’s ideas to compete with them.
To avoid a lawsuit, Luckey would need explicit permission from Zenimax, and they could simply withhold that permission unless Luckey gave them what they really wanted, which was equity in Oculus. Note that there wasn’t a reciprocal NDA. Luckey didn’t try to lock down his contributions to the device and restrict what Zenimax could do with it. Carmack and Luckey were collaborating on this device, both were indispensable to its creation, and neither one was interested in playing tag with the Zenimax legal team.
My decidedly non-expert opinion is that Palmer was unwise to sign this NDA in the first place. Maybe he saw it like a trivial formality required to work with Carmack and didn’t really think about how it might come back to bite him laterHe was only 20, after all!. It’s possible he viewed it was a simple promise to keep company secrets and wasn’t thinking about the eventual business ramifications down the road. Then again, I probably would have signed it too. I get to work with John Carmack and invent the future? Hand me a pen.
Even if the agreement doesn’t seem hard to follow, you’re still taking on some non-zero risk. Even if you comply fully, if you’re dealing with a stronger party (like, maybe you’re just one person and they’re a multibillion dollar corporation) remember that they will now have a lever to use against you. If you piss them off later they can drag you into court over some nitpicky detail and force you to waste your time and money defending yourself.
I’m not saying you should never sign an agreement. (Nobody would ever get anything done if that was the case.) I’m just saying that you should take a contract seriously, even if everyone is smiling and insisting it’s all “just a formality”. Stuff like this can come back to haunt you years later. Read it, think about it, and ask questions.
In June, Carmack demonstrated the Rift at E3. He had a special build of Doom 3 that was designed to support the Rift, and people were able to try the headset on. This was probably the first public demo of modern VR as we know it. The VR of generations past had failed, but this one seemed to be gaining traction instead of vanishing in a puff of disappointment and VR sickness. The buzz began to build, and people began wondering if VR might happen for real this time around.
I’m going to be quoting from a court document dated August 2015. This was after Zenimax had filed their lawsuit, which made six different complaints against OculusActually Facebook, but if you’ve read this far then you’ve probably got a grip on that already.. Oculus filed for a dismissal of the whole thing over various nitpicky details, as you do in these things. The judge rejected this dismissal (which is why the case went to trial) and I’m going to be quoting from the court order where the judge denied the dismissal. It’s got a lot of the relevant info in one relatively small document, which is ideal for my purposes. You can read the full text here, if that’s how you want to spend your time.
Luckey’s objective was to develop and promote the Rift as a commercially-viable VR headset. To that end, ZeniMax sent Luckey proprietary information on an ongoing basis. Throughout June 2012, Luckey continually emailed ZeniMax seeking and receiving access to ZeniMax’s “proprietary information, trade secrets, and know-how.” For example, ZeniMax sent Luckey software that permitted him to install customized firmware “onto the sensors that ZeniMax selected for the Rift.” Additionally, Luckey received “binary code for the tracking sensors that Carmack had added to the Rift.” Moreover, ZeniMax sent Luckey hardware to use in the Rift, including “cables,” “customized sensors,” as well as improvements to the Rift’s “optics calibration and sensor mounting.”
I love how this wording makes it sound like ZeniMax Media Inc., the corporation with $2.5 billion in assets, was personally emailing Palmer Luckey and sending him spare cables. I mean, from a legal sense this is true. John Carmack did all of these things and he did them in his capacity as an employee of Zenimax. But both sides have made it pretty clear Carmack was doing pretty much as he pleased. It’s not like the officers of the company got together for a board meeting to work out if they should send Luckey the new motion sensors this week, or wait until they had enough items to qualify for Amazon free shipping.
This is how legal documents are worded, of course. It just sounds funny when you’re not used to it.
It’s also really obvious how they’ve worded this so it sounds like Carmack is the only one doing any work. They only mention information and equipment flowing from Carmack to Luckey, and nothing going the other way – as if the inventor of the original device had nothing to contribute. I suppose it makes sense they would present it this way. They’re basing their arguments on the premise that Carmack invented all of the crucial stuff.
However, this constant communication does kind of undercut the Zenimax claim a little. There was evidently a lot of communication back and forth between these two, which wouldn’t be warranted if Carmack ran off and invented everything all by himself once he obtained the prototype. This looks more like two people working together to solve a problem.
Right after E3, Luckey began working on a Kickstarter campaign for the Rift. He asked Carmack to help him make the pitch video. (Although apparently Carmack didn’t actually make any additional footage for the video. All of his appearances in the pitch are recycled from his E3 demo.)
According to court documents, at this point ZeniMax proposed that the parties enter a formal agreement. It doesn’t say who they mean by “parties”, and it doesn’t say what sort of agreement. I’m extrapolating here, but I’m willing to bet this agreement wasn’t a proposal that they should all split a pizza. It was probably an effort on the part of Zenimax to get a stake in the nascent Oculus. It was clear at this point that despite the failure of VR in the past, this time it might really be happening and Zenimax probably thought it was perfectly reasonable that they – as the employer of one of the two key engineers on the project – should be running the show.
But aside from paying Carmack a salary, what did Zenimax have to offer them? Speaking as an engineer myself, the last thing I’d want is to place my potentially blockbuster invention in the hands of a corporation two billion dollars above my weight class. If you do that, the whole thing could wind up entangled in patents and exclusive agreements. If you’re an engineer you probably want to make a product the world will love, not one to make your employer rich. You’re not going to take a buyout offer unless you absolutely need the money to proceed.
Zenimax had no technology or expertise to offer these two. The only thing they had was Carmack’s employment contract. They didn’t really own him or his ideas. They could fire him, but he’s been independently wealthy since the early 90s and his reputation means he can find a job almost anywhere. They had no leverage over him whatsoever.
If you’ll allow me to to project my own personality and tendencies onto the two engineers: They were probably simply pursuing their immediate goals: “Let’s invent the cool thing we’ve always dreamed of.” From their point of view, they signed the stupid NDA to placate the legal department and from here on they just wanted to be left alone to build the future.
Back to the judge’s order:
As part of its fundraising campaign, Luckey requested that Carmack promote the Rift in a keynote speech he was scheduled to give at QuakeCon and to put together a promotional “cameo or blurb” on a video he planned use as part of his Kickstarter pitch. In response, ZeniMax proposed that the parties entered a formal agreement. Luckey “ignored” this suggestion, but continued to ask ZeniMax for proprietary information â€" which for unknown reasons ZeniMax continued to provide.
“Which for unknown reasons ZeniMax continued to provide,” is a really funny phrase. We kept doing it and we don’t know why! It makes it sound like the company has some sort of multiple-personality disorder. (Which, to be fair, is true of every company with more than one employee.) In any case, it’s not “unknown reasons”. It’s for the reason of, “John Carmack was working with another engineer to invent something groundbreaking and neither of them felt inclined to get the Zenimax legal department involved every time the device needed a stupid HDMI jack or USB extension cord.”
Also, the phrasing here suggests that Zenimax was trying to be reasonable and enter into a formal agreement and Luckey was ignoring them for no good reason. But in their public statements it’s clear that they were asking for an ownership stake. What possible reason would Luckey have for handing over his company? All they were offering him was help that Carmack was already giving him for free. Well, they might have also be offering money. I mean, I hope they were. Still, it’s entirely possible that Luckey was “ignoring” an insulting lowball offer. Zenimax said in a public statement:
“It was only through the concerted efforts of Mr. Carmack, using technology developed over many years at, and owned by, ZeniMax, that [Oculus founder] Mr. Luckey was able to transform his garage-based pipe dream into a working reality.”
I’m hoping this is just the typical public posturing you get in cases like this and not an honest expression of how Zenimax viewed the Rift. If this is really how they saw the situation, then there was little wonder the two sides were never able to reach an agreement. Zenimax apparently thought all the important breakthroughs came from their guy and Luckey’s contributions had little value. If this is the case, then a lot of the problems here are due to the fact that Zenimax showed up with not enough zeroes on their buyout offer.
Or maybe Luckey just wasn’t selling. It’s impossible to know from these court documents.
While the NDA was the fatal move that gave Zenimax leverage over Oculus, this point in the process is probably the fatal moment when conflict became inevitable. Zenimax was employing a world-famous engineer who was apparently helping to invent a device that could change the industryOr perhaps even launch a new industry! In 2012 it was impossible to predict how big this was going to be! and they somehow weren’t getting a cut. Under normal circumstances an employer might just threaten to fire you, but you don’t want to fire John Carmack without a really good reason.
In hindsight, Carmack probably should have left Zenimax at this point. But that would mean leaving the company he foundedId Software, now a subsidiary of Zenimax. 20 years earlier. And Zenimax would probably rather have him sitting in their office doing nothing at all rather than letting him work for a rival. So while it was in their short-term advantage for Carmack to stick around, it was only adding to this ongoing tension between these three parties over who should ultimately own the Rift. The longer he hung around, the easier it would be for Zenimax to come up with ways to lay claim to it.
Nobody could make a deal, so the engineers just “ignored” the offers from Zenimax and went back to the workshop.
The Oculus Kickstarter launched on August 1, 2012. That was one day before QuakeCon, which ran from August 2 to August 5. Luckey’s funding goal was $250,000, but by the end of the campaign it managed to raise almost ten times that.
More from the judge’s order:
In late August and early September 2012, ZeniMax made “multiple requests” to Oculus to discuss “compensation for ZeniMax’s role in developing and promoting the Rift.” On September 21, 2012, Oculus forwarded ZeniMax a proposal “designed to kick off a formal discussion” of the parties’ future relationship. No agreement was reached and Zeni-Max finally ceased to provide proprietary information or technological assistance to Oculus.
This is a very interesting gem of information. To me it sounds like Carmack had been freely collaborating with Oculus. It’s pretty hard to claim someone is “stealing” your proprietary secrets if your employees are simply giving them away from free. If I post on Stack Overflow asking “How can I speed up VR rendering to reduce judder?” and Carmack replies with a couple of obscure techniques to cut down on latency, Zenimax can’t sue me later for “stealing” their secrets. They might be able to take some kind of action against Carmack (they could at least fire him) but that doesn’t really help their cause. They wanted in on this VR action, and firing Carmack would simply cut them off from it completely. Heck, if Carmack was trapped in an employment contractHe was under an employment contract at the time, although as far as I know the details aren’t public. then he’d probably love to get fired.
At this point, they apparently were finally able to persuade him to stop collaborating with Luckey. The problem is that Carmack’s employment contract wasn’t up until June 23. Maybe Carmack continued to work on VR in the intervening time, but he was no longer sharing with Oculus.
Almost exactly a year later in August of 2013, John Carmack joined Oculus as chief technology officer. But he was also still working at Zenimax. This is roughly like when your significant other tells you that while they think their relationship with you is still the most important thing in their life, they’ve also begun dating other people. Sure enough, a few months later in November of 2013 Carmack left Zenimax to work at Oculus full-time, promising that they could still be good friends if Zenimax wanted.
Returning to the judge’s order:
On March 25, 2014, Facebook announced a planned acquisition of Oculus for $2 billion in cash and stock. At the time of the acquisition, Facebook knew, or had reason to know that Oculus’s representation â€" that it had titled, owned, or was authorized to use the intellectual property necessary to carry on its business â€" was false. On July 21, 2014, Facebook closed its acquisition of Oculus, despite Facebook’s knowledge of Plaintiffs’ claims against Oculus and Luckey. Facebook’s purpose in acquiring Oculus was for the financial benefit of its core business of online social networking and advertising.
Zenimax makes the claim that buying Oculus was to benefit Facebook’s “core” business, which is pretty hilarious. It’s always been something of a joke that Facebook had no clear indication of how owning VR would benefit its web-based business model. Even three years later, it’s still not clear. This doesn’t really undercut the Zenimax case, but it is an amusing claim. It’s like someone saying, “New Coke is crucial to the ongoing success of the Coca-Cola company.”
So that’s the relevant history. Next time I’ll get into my analysis.
 He was only 20, after all!
 Actually Facebook, but if you’ve read this far then you’ve probably got a grip on that already.
 Or perhaps even launch a new industry! In 2012 it was impossible to predict how big this was going to be!
 Id Software, now a subsidiary of Zenimax.
 He was under an employment contract at the time, although as far as I know the details aren’t public.
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