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While at E3 this year, I dove into an impressive undersea world using the new Oculus Rift headset. Simultaneously, I thought about the gallons of hot water that Palmer Luckey, the company’s founder, must be swimming in now that ZeniMax Media has filed a lawsuit against him, alleging, among other claims, copyright infringement and misappropriation of trade secrets. [1] It also occurred to me that anyone working in a creative or technical field could easily find themselves in a similar situation.

The relationship between ZeniMax and Luckey is complex. ZeniMax claims that while Luckey was developing his innovative virtual reality headset, former Id Software cofounder John Carmack provided proprietary technology and know-how that enabled Luckey to perfect his invention and overcome a host of technical hurdles. [2] Because Carmack was a ZeniMax employee at the time, ZeniMax now lays claim to his technological contributions, demanding money damages and more.

Oculus counters that Carmack and ZeniMax contributed nothing to the Rift technology, and that the basis of the suit is merely an attempt to cash in on the $2 billion, March 2014 Oculus sale to Facebook. [3] [4] Oculus challenges that there isn’t a shred of ZeniMax hardware or code in the Rift headset. [5] Both companies are demanding a jury trail, and because the stakes are high, this one might go all the way.

Regardless of which version of the tale you believe, one thing is virtually clear: two years before the dispute arose, Palmer Luckey signed a non-disclosure agreement with ZeniMax, and therein lies a critical lesson for anyone contemplating an NDA.

Non-disclosure Agreements are Binding, Enforceable Contracts



Non-disclosure agreements are more than business formalities. NDA’s aren’t handshakes or respectful hellos exchanged between individuals prior to a meeting simply because protocol demands it. They are contracts. When executed between individuals—even when they are not ideally drafted—they form binding agreements as weighty and powerful as any twenty-five-page publishing or licensing agreement. [6] And the breach of a non-disclosure agreement is a breach of contract, and a damaged party may be entitled to a host of legal remedies.



In ZeniMax v. Oculus, the parties agree that Palmer Luckey signed a document, which ZeniMax claims is a binding non-disclosure agreement. [7] Oculus asserts that it even if it is an NDA, it is invalid because a specific term in it was not defined properly. [8]



Regardless, a legal question has been set in motion, and my guess is that Luckey signed that initial NDA—as most people do—without giving much thought to its long-term consequences.



Unfortunately, an NDA may lie dormant for years, but can erupt with volcanic force the moment a dispute arises, as it did inSilicon Knights v. Crystal Dynamics

Saved by an NDA



In 1997, Canadian video game developer Silicon Knights and Crystal Dynamics were embroiled in a legal dispute over the video game Blood Omen: Legacy of Kain, which was developed by Silicon Knights. SK was upset because Crystal Dynamics (the game’s publisher) had assigned the game’s intellectual property rights—including the rights to sequels and other derivative works—to Activision. [9]



Silicon Knights claimed that Crystal Dynamics promised that they would remain the game’s publisher; that the Activision deal would transfer only the game’s distribution rights; and that the new deal would not affect Silicon Knights’ right of first refusal to develop derivative games.



None of this, by the way, had anything to do with a non-disclosure agreement.



But in their complaint, Silicon Knights also alleged that several of its employees were induced by Crystal Dynamics to breach their non-disclosure agreements, and either join Crystal or form new, competing companies. [10] According to SK, Crystal Dynamics had interfered with employee and employee non-disclosure agreements. [11]



The court reviewed each of SK’s fourteen claims, and nearly all were dismissed, but the question as to whether Crystal Dynamics interfered with SK employee contracts and non-disclosure agreements was upheld. [12] Thereafter, SK and Crystal Dynamics settled their dispute out of court, and one could argue that the non-disclosure agreements provided substantive leverage in that settlement. [13]



But an NDA doesn’t always give a party the protection they need, as former Foosball champion Steve Simon discovered.

Warning: An NDA Doesn’t Protect Everything



Regardless of whether you have an NDA in place, you may not be safeguarding the information you want protected.



In 1995, Steve Simon came up with an idea for adding a coupon dispenser to arcade video games. Similar machines were already in use, but rather than dispensing hundreds of paper tickets, Simon’s machine printed a single coupon, on which a player’s cumulative points were printed, along with advertisements and more.



The idea wasn’t new, however. Similar coupon machines were already in use in the real-money wagering world. Nevertheless, to promote his machine to the video game industry, Simon disclosed it to several individuals, including Richard Oltmann, whom he met at a trade show. Oltmann signed Simon’s NDA, but after reviewing Simon’s device, Oltmann told Simon that he wasn’t interested.



Of note, is that Simon never showed Oltmann any of the device source codes or schematics, nor did Simon tell Oltmann how the device was built or discuss its component parts. [14]



But the plot thickens.



It turns out that Oltmann had an existing relationship with a company called Laser-Tron, which Simon had already unsuccessfully pitched his coupon machine. Oltmann knew the president of Laser-Tron, and records reveal that Oltmann contacted Laser-Tron the day after his meeting with Simon. Less than a year later, Laser-Tron introduced a coupon dispensing option for an arcade game called Solar Spin. Understandably, Simon was convinced that Laser-Tron had replicated his idea based on information provided to Oltmann.



Oltmann disagreed and filed a pre-emptive suit requesting declaratory judgment that he did not steal Simon’s trade secret. Simon filed a counter suit, alleging misappropriation of his trade secret, unfair competition, breach of contract, and fraud.



Surprisingly, the court dropped all of Simon’s claims. As to misappropriation of a trade secret, the court held that its value lies in the fact that it is not generally known to others who could benefit from using it, saying that a product or service that is within the realm of general skills in the industry cannot be a trade secret. [15] In other words, Simon’s idea wasn’t unique. It was based on information already known within the video game industry. [16] As to breach of the non-disclosure agreement, the court held that because there wasn’t a trade secret, there wasn’t a breach of contract either. [17]

Protecting Simon’s Idea as a Trade Secret

Simon couldn’t protect his idea as a trade secret because it was already known in the industry. Trade secrets—which in the United States are controlled by state rather than federal law—generally require that the information is not known, possesses commercial value, and reasonable steps are taken to protect it. [18] In other words The information you want to protect as a trade secret can’t be already known, especially in the business sector that you are working. As an example, a telephone listing of potential customers gleaned from an Internet search wouldn’t be protected because the information is readily available. On the other hand, the customer database and sales history of a large video game distribution company (think Valve Corporation’s Steam) is undoubtedly a proprietary trade secret.

The information you want protected must also have commercial value because it is a secret. The Coca Cola formula, locked away in a vault in Atlanta, or Mr. Fields chocolate chip cookie recipe come to mind. They are valuable because no one knows them. (Yes, my doubting friends, Mrs. Fields recipe is still a trade secret despite the dozens of counterfeit combinations floating in the Internet ether. [19])

Finally, you must take reasonable trade secret to keep your valuable information secret. An NDA is one such way. Another is to keep the information secure and away from unauthorized access.

Steve Simon discovered that his idea wasn’t protected, despite diligence in obtaining a signed agreement with Oltmann, not because he didn’t take reasonable precautions (as required in bullets two and three above) but because the information itself wasn’t a trade secret. [20] It failed because of bullet number one.



Protecting Simon’s Idea with a Copyright?



Under copyright law, Simon could have protected the underlying source code for his device but not the idea of a coupon-dispensing machine. Why? Because copyright law doesn’t protect ideas. [21] This is why Paramount doesn’t sue Lucas (or visa versa) for the similarities between Star Wars and Star Trek: outer space; cool looking spaceships, quests to unknown galaxies far, far away; aliens; etc.



Protecting Simon’s Idea with a Patent?



What about protecting Simon’s idea with a patent?



Although patents do protect processes and inventions, and Simon’s device qualifies as such, he still wouldn’t have been able to protect his idea with a patent because, unfortunately, you can’t patent something already in use. [22]



As a result, Simon lost despite his diligence in making sure that he had an NDA in place.



Back to Palmer



Palmer Luckey signed a non-disclosure agreement, too, and ZeniMax claims that John Carmack provided confidential information that was covered by it, including trade secrets contained in, among other things, the ZeniMax’s VR Testbed software. [23]



Section 2(a)(vi) of Luckey’s NDA obligated him to not use ZeniMax’s proprietary information to create competitive products or to “obtain any competitive advantage.” [24] Luckey further agreed that ZeniMax was not granting a license for him to use ZeniMax’s technology without their consent, including any tech that Carmack had created during his time at ZeniMax.



It seems like a slam-dunk that Oculus is in trouble, but for two reasons it’s not.



First, if Oculus is telling the truth, that there isn’t a line of ZeniMax code in Rift, then ZeniMax’s copyright infringement claims are weak and difficult to prove. To be clear, showing copyright infringement doesn’t require a showing of actual code use, but it helps.



Second, proving trade secret misappropriation, even if it is true, isn’t easy either. Texas trade secret law has recently changed, [25] and regardless of whether ZeniMax v. Oculus is litigated under the old law or new, ZeniMax will need to prove each of the elements of the infringement. [26]



But it all comes down to Luckey’s non-disclosure agreement, because it provides a critical link in ZeniMax’s strategy. And this may be why Oculus is questioning its validity from the get-go. [27] Throw out the NDA and ZeniMax’s case could fall apart.



The Luckey Dilemma



The relevant question the reader should ask is whether they would have signed ZeniMax’s NDA had they been in Palmer Luckey’s position.



The truth is that most would.



Two years ago, when Palmer Luckey was without resources or visibility, John Carmack, an industry icon, showed interest in the Rift technology. Regardless of how Oculus tries to downplay it, Carmack’s early endorsement was key to Rift’s initial acclaim and thereafter to the success of his Kickstarter campaign. But Luckey wouldn’t have gotten Carmack’s help, endorsement, or technological advice without the NDA. And as my mom used to say, you can’t have your cake and eat it, too.



Regardless of how ZeniMax v. Oculus turns out, the lesson learned is that next time someone asks you to sign a non-disclosure agreement; you should consider the consequences.



Stay tuned. Next up: a discussion of the more ominous NDA provisions and what they mean.

[1] ZeniMax filed suit against Palmer Luckey, as an individual, and his company, Oculus VR, Inc., on 5/21/14. Oculus VR’s response was filed on 6/25/14.