• Daniel DiCicco

Zenimax and Oculus Settle Out

Virtual Reality made a big splash when Facebook bought out Oculus for $3B in 2014. Facebook's huge bet on the future of this technology stunned the market and spawned a gold-rush mentality in companies seeking to get a piece of the action. It also spawned a gargantuan lawsuit from ZeniMax claiming that the Oculus technology actually belonged to them. They were right. Today, Facebook and ZeniMax settled for an undisclosed amount thought to be between $250m-$500m. This article examines and explains the controversy and legal issues giving rise to this outcome.


Palmer Luckey - the 'inventor' of VR


John Carmack, 3D Pioneer

Ever hear of a game called Doom? How about Quake, or Wolfenstein 3D? In the world of video games these titles represent some of the medium's greatest early successes that are as defining to the medium of video games as Citizen Kane is to the medium of film. And just like movie-making needed visionary directors and writers to drive the art forward, so too did video games. The man behind these early hits is a man named John Carmack.


Carmack's contribution to Doom and Quake and other early video game titles was his pioneering work in the realm of real-time 3D rendering. Consider the movie Jurassic Park, released in 1993. To create this film, 3D artists painstakingly created each and every frame of the movie in their art software and then sent that frame to a huge super computer to "render" the frame with realistic lighting and shadowing and so on. After rendering out thousands and thousands of frames over months and months of time, the film's director could then stitch the frames together to create a realistic-looking dinosaur sequence. John Carmack pioneered doing this work instantly, so that people playing his games could experience a 3D world rendered right on their own computer.


In the early 90s, computers lacked the power to create photo-realistic graphics in real time whereas today you might be hard-pressed to distinguished a modern video game from a film.


Red Dead Redemption 2 - PS4

John Carmack Solves Virtual Reality

John Carmack's interest in real-time 3D graphics led him into the world of Virtual Reality. Virtual Reality involves rendering a 3D world using stereoscopic techniques. Consider how your own eyes work to create a 3D image in your brain. Your left eye sees the world ever slightly so differently than your right eye. Your brain can piece together the puzzle to give you your sense of depth perception.


Virtual Reality mimics this process by rendering a 3D scene twice - once for each eye - and then displaying that scene in a special headset. The essential problem with this process is that every effort to date ended up making people ill. People would put on a headset, view the 3D world and be suitably impressed, and within 10 or 15 minutes would become nauseated.


Carmack essentially solved this problem. He realized that the image needed to be rendered more quickly; he also recognized that peripheral vision was extremely important. He helped design special lenses for the VR headsets that would work best to reduce the VR sickness problem. Unfortunately for Facebook, Carmack was an employee of ZeniMax while Carmack did all of this work.


Palmer Luckey - Garage Inventor

Palmer Luckey is widely credited as the father of modern VR because he founded Oculus. Luckey certainly was a pioneer in the industry - he believed hard in the future of VR and invented the first modern VR headset prototype. But he also lacked the essential 3D programming skill to solve the toughest problems, and he lacked real game software to test his headset with. His solution was to call John Carmack.


As I said, Carmack solved the problem. Together with Luckey, they created the first commercially viable VR headset. Carmack quit his Job at ZeniMax to go work as the CTO for Oculus.


Intellectual Property Ownership Agreement

ZeniMax, Carmack's employer, probably didn't much mind that Carmack had left to go work on VR at first. ZeniMax is on the record as not believing in the technology at the time. You can imagine how their tune changed when they saw Carmack's work at Oculus result in a $3B dollar buy out. They didn't wait a month before filing suit asking for $2B in damages plus $4B in punitive damages.


At issue in the suit was that ZeniMax, as Carmack's employer, owned any technology that Carmack created while employed at ZeniMax via the terms of their employment contract. Furthermore, ZeniMax alleged a copyright interest in the code written by Carmack and alleged that Oculus stole their trade secrets. ZeniMax argued that Palmer Luckey did not have the technical skills to create the Oculus Rift - that it was Carmack who invented it. The case went to trial.


ZeniMax prevailed at trial with a $500m dollar verdict. The court reduced that verdict to $250m sua sponte and the case went on appeal. This week, the case settled.


Lessons for Your Business

This story should provide a few take-away lessons. First, do your due diligence. What could Facebook have done before acquiring Oculus for $3B dollars to examine any potential liability? Reports on this acquisition describe it as a rushed process - that Facebook seemed to buy Oculus in a hurry. The lesson to you is that before you buy a business, make sure you understand what makes it tick. Understand where the value is and make sure that the value is securely owned by the business.


Lesson Two: your contracts matter. The Employment Contract with Carmack was a small thing at the time it was written. A small clause in a contract that could easily have been omitted or negotiated around ended up forming the basis for a $6B dollar lawsuit. If you're working in a field where an employee could come up with the Next Big Thing, it's important to secure your ownership of that thing. As a business, you want to encourage your employees to engage in creative thinking and problem solving. When you're footing the bill for that creativity, you want to make sure that you get to reap the rewards.


Lesson Three: success makes you a target. One of the most striking details about this story is that ZeniMax never cared about VR before Facebook bought it. This was, in fact, Facebook's trial defense. That ZeniMax was angry and embarrassed at throwing Carmack and his desire to work on VR away. In essence, Facebook was right, but that's no legal defense. As your business becomes more successful, you can expect that parties will come out of the woodwork to try and take a piece of your pie. When that happens, you need proper representation. We'd be happy to help.

Daniel DiCicco