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An Analysis of ZeniMax’s and Oculus’s Legal Arguments over a Permanent Injunction of Rift Sales

Virtual Legality Blog

ZeniMax was recently awarded a $500 million judgment for Oculus’s breach of a non-disclosure agreement in addition to Oculus’s infringement of ZeniMax’s copyrights and trademarks. ZeniMax then moved for a permanent injunction, which would stop all sales of the Oculus Rift.

The arguments regarding the injunction have been filed mostly unsealed, allowing us to dig into the substance of either side’s arguments or positions. You can find a copy of ZeniMax’s Motion for Entry of Permanent Injunction here, and Oculus’s Response here.

I tried to make this post easy to understand, so I have skipped over more nuanced issues in the parties’ briefs. The law is complicated. My belief is that Oculus has the upper hand to prevent a permanent injunction.

General Observations:

It appears that ZeniMax was going for an emotional response while Facebook focuses on the law. ZeniMax’s brief is somewhat unfocused as a result, while Facebook’s brief tries to step away from the details of their alleged actions. If you don’t want to read the briefs, a comparison of the table of contents shows the diverging strategies.

ZeniMax uses 13 out of 25 pages for a preliminary statement and a factual background. They use this space to paint themselves as the outstanding actor in this dispute, one who followed the law and was harmed by Oculus.

This approach is unsurprising. An injunction is an equitable remedy, which provides Judge Kinkeade a significant amount of discretion. The more ZeniMax can paint themselves as the good actor, the better. Judges usually don’t pull the trigger on equitable relief unless there is a “bad” actor.

In response, Facebook tries to cut through all the smoke created by ZeniMax’s preliminary statement and heads straight for the law. By keeping it clean and simple, Facebook hopes to make ZeniMax’s arguments appear as rambling, rather than articulating a basis for an injunction. This dichotomy can be common, especially when it comes to arguments for equitable relief. While ZeniMax also structures its arguments around the relevant law, with such a long recitation in their brief I think that the benefit of that structure is lost.

The Playing Field:

ZeniMax needs to win these four factors to get an injunction:

  1. that it has suffered an irreparable injury;
  2. that remedies available at law, such as monetary damages, are inadequate to compensate for that injury;
  3. that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and
  4. that the public interest would not be disserved by a permanent injunction

eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006)

The Main Arguments by Both Parties:

1. Irreparable Injury

ZeniMax places a lot of emphasis on a Non-Disclosure Agreement (NDA) signed between Oculus, Carmack, and ZeniMax to argue that the damage to ZeniMax is irreparable. The NDA has a clause that states that any breach of the NDA is to be treated as an irreparable injury. While relying on that clause in the NDA, ZeniMax also argues in the alternative that a creation of a separate company based on its confidential information is also an irreparable injury (citing case law to support this position).

In response, Oculus argues that a provision in an NDA regarding “consent” to the irreparable injury factor is not enforceable, or is at least not dispositive of the issue. Oculus cites decent but not watertight case law to support this point. Further, Oculus argues that the jury found that there are zero ongoing damages in the future; therefore, future harm (which an injunction tries to prevent) does not exist and cannot be irreparable.

Within these arguments is a separate issue of whether the Copyright Act and/or the Lanham Act (the Trademark statute) provide a legal basis for an injunction.

ZeniMax argues that the Oculus Rift contains code which continues to infringe on ZeniMax’s copyrights, and that Oculus’s use of the DOOM trademark in its Kickstarter video constitutes continuing infringement of the DOOM trademark (the video is still up).

Oculus responds that the current code in the Rift is so far removed from the old code produced by ZeniMax that there is no ongoing infringement. Further, Oculus argues that the Kickstarter video is no longer in active use and that there is no evidence that the Kickstarter is likely to confuse consumers regarding the origin of the Rift (e.g., that a consumer would think that ZeniMax created the Rift).

2. Adequacy of Monetary Damages

ZeniMax argues that while it was awarded $500 million in damages by the jury, the award is still inadequate to make it whole. In particular, ZeniMax quotes Facebook’s COO that the Jury’s verdict is “not material to financials.” Therefore, the damages will not cause the defendant to cease infringing. ZeniMax also argues that because the damages are difficult to quantify, injunctive relief is appropriate.

Oculus responds that because ZeniMax is not a competitor in the VR market, monetary damages are adequate to make ZeniMax whole. Because ZeniMax is a content creator and not a hardware creator, any damage to them would not be competitive damage but merely monetary loss due to potential license fees.

3. The Balance of Hardships Between the Parties

ZeniMax argues that because it wants to enforce the NDA that still binds Oculus, there is no ongoing hardship to Oculus from a legal perspective. Further, because ZeniMax is asking for compliance with the Copyright Act and the Lanham Act, the balance weighs in ZeniMax’s favor as any hardship is based on forcing Oculus to operate in a legal manner.

Oculus argues that because ZeniMax has not established future harm, there is no ongoing hardship to ZeniMax. However, Oculus would not be able to compete in the marketplace if an injunction was granted. Therefore, the balance weighs in favor of Oculus.

4. The Public Interest

ZeniMax argues that the public interest weighs heavily in its favor, as ZeniMax has an NDA with Oculus that it wishes to enforce. The public has a recognized interest in the freedom to contract, and denying an injunction effectively nullifies a contract.

Oculus argues that an injunction would not serve the public interest, and that industry insiders are concerned about the impact an injunction would have. An injunction would only serve to increase the leverage ZeniMax has over Oculus for a license agreement, and would reduce “the public’s enjoyment of Oculus’s groundbreaking products.”

Side Arguments by Both Parties:

ZeniMax argues that even if the court does not want to impose a permanent injunction, it should impose an ongoing royalty for any continued infringement by Oculus. Oculus responds that there is no ongoing infringement, so a royalty is not necessary. Further, the trial found that a lump sum license was the likely outcome, so a royalty would be doubly unnecessary.

Oculus also has two separate arguments for the denial of an injunction. First, that ZeniMax should have moved for an injunction years ago when the NDA was breached. Second, the proposed injunction by ZeniMax is overbroad.

Interspersed between all of Oculus’s arguments are general disagreements with the outcome of the Jury’s decision, which is really meant to tee things up for an appeal.

Conclusion:

Hopefully this helps dispel some myths and general misinformation regarding the potential injunction. Also, this took quite a while to sift through, so I have not reviewed ZeniMax’s reply brief (if it exists) or the reporting around the oral arguments.

FWIW, my personal feeling is that ZeniMax is going to have a very tough time meeting the “adequacy of damages” factor. On balance, I think this pushes the outcome in Oculus’s favor. Keep in mind that judges can do anything, so my thoughts are merely speculative.

 
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