Facebook Loses $500 Million in Virtual Reality Lawsuit After Battle Between Experts

Over the past decade, Facebook has become not just the most popular social media platform in the world, but a cultural phenomenon. As part of its growing universal influence, Facebook expanded its business model by acquiring Oculus VR Inc., a startup company that produces virtual reality headsets for $2 billion in 2014. Two months after the acquisition, Facebook was sued by video game publisher, ZeniMax Media, which alleged that ZeniMax’s former employee and Oculus chief technology officer stole its company’s trade secrets. The trade secrets, ZeniMax argues, were integral in the development of the Oculus Rift headset. After a three-week jury trial in Texas federal court, Facebook, Oculus, and other defendants were ordered to pay a combined $500 million to ZeniMax for copyright infringement and breach of a non-disclosure agreement. The main issue of the case was whether Oculus created its virtual reality headset by stealing computer codes developed by ZeniMax. Because the crux of the matter involved very specific computer technology, the expert witnesses on both sides were indispensable to the jury in reaching a verdict.

The History and Outcome of the Lawsuit

ZeniMax alleges that one of its former employees, John Carmack, shared ZeniMax virtual reality technology with Palmer Luckey, a founder of Oculus. Carmack, program developer and creator of the “Doom” videogame, later joined Oculus as its chief technology officer. Carmack was essential in the development of the Oculus Rift, a headset that enables the user to experience a virtual reality environment through the set’s goggles. Carmack, along with Luckey, showcased a prototype at a video game industry trade show in 2012, where Luckey was repeatedly lauded as the genius inventor of the headset. In March 2014, Facebook announced the acquisition of Oculus, which as Mark Zuckerberg explained, was “a long-term bet on the future of computing.”

Two months later, ZeniMax filed a lawsuit against Facebook, as the owner of Oculus, for the use of trade secrets, copyright infringement, and breach of Carmack’s non-disclosure agreement. In a statement to the media, ZeniMax stated that “the proprietary technology and know-how Mr. Carmack developed when he was a ZeniMax employee, and used by Oculus, are owned by ZeniMax.” At the heart of the case is ZeniMax’s claim that Oculus would never have advanced if Carmack had not collaborated with its founder. ZeniMax alleges that Oculus is built on a foundation of stolen code and stolen ideas. ZeniMax claims Facebook acted with gross negligence by failing to conduct adequate due diligence before buying Oculus and by allegedly destroying evidence after getting notice of the ZeniMax claim, and that punitive damages of $4 billion are merited.

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On the defense side, Oculus and Facebook argued that all of its code and technology were built from scratch by Oculus employees, and they denied using any of the code that Carmack wrote at ZeniMax. Throughout the trial, the defendants emphasized the groundbreaking work done by their own employees, as well as the billions of dollars facebook invested into the company. As Zuckerberg testified at trial: “We are highly confident that Oculus products are built on Oculus technology. The idea that Oculus products are based on someone else’s technology is just wrong.” The defendants had also raised a number of affirmative defenses, including an argument that any copyright infringement was so small that it fell under a fair use exception, and that ZeniMax waited too long to bring claims against the Oculus executives as individuals.

At the conclusion of trial, the jury did not find Oculus liable for stealing trade secrets. However, Oculus (and by extension, Facebook, as the parent company) was found liable for violating non-disclosure agreements and committing both copyright infringement and false designation (essentially lying about the origin of a product). ZeniMax was awarded $500 million in damages, which included $200 million for breaching the non-disclosure agreement.

A Battle of the Experts

Explaining the complexity of coding, computer programming, and copyright law to a lay jury was a central issue in the case, and as a result experts on both sides played key roles. At trial, dueling expert witnesses testified about the software, and whether Carmack’s code was incorporated into the Oculus Rift. ZeniMax experts said they were “absolutely certain” Oculus copied ZeniMax code both literally and substantively, and said they found “fingerprints” of ZeniMax’s work in Oculus code. Carmack publicly criticized the testimony, stating that “as a man of science,” he was offended by the expert’s claim that Carmack had duplicated their codes.

Meanwhile, Facebook’s computer science experts testified that Oculus’ source code did not incorporate code written by Carmack. Further, the experts testified that Carmack’s codes for several components of virtual reality were not copyrighted and were not trade secrets. The innovations ZeniMax claims were trade secrets were either public knowledge, like published academic papers, or information he shared by publishing his code online.

In addition to computer science and programming experts, damages experts played a critical role in establishing the value of ZeniMax’s trade secrets, nondisclosure agreements, and copyrights. ZeniMax’s damages expert had estimated the value of the trade secrets and the violation of a nondisclosure agreement at between $1.3 billion and $2 billion, and said if the jury finds copyright infringement, ZeniMax should be awarded damages worth 20 percent of Oculus’ value at the time of its acquisition — $400 million — plus a reasonable royalty from Oculus equivalent to 20 percent for the next 10 years. Without the damages expert, it would have been difficult for a jury to compute damages, as copyright law concerning this type of technology is still relatively new.

Although a verdict had been reached, the experts’ work is not over. While Oculus plans to appeal, ZeniMax seeks an injunction against the Rift headset. As more information unfolds and technology progresses, it is safe to assume that this is not the last time that issues surrounding virtual reality will be litigated in the courts.