False designation damages require proximate cause, dooming $250 million jury award

ZeniMax Media Inc. v. Oculus VR LLC, No. 14-cv-01849 (N.D. Tex. Jun. 27, 2018)

After trial of this case, the jury returned a verdict, finding in relevant part that defendants were liable for false designation of origin, basically about the origins of Oculus’s technology with a lagniappe of use of ZeniMax’s trademarks in a Kickstarter promotion. The jury awarded actual damages of $250 million in total for the false designation of origin. The court granted judgment as a matter of law because the record lacked legally sufficient evidence of injury causation in that or any amount. [Pointing to another part of Dastar’s practical wisdom: it’s rare that false designation of origin of ideas makes a difference. The court was sensitized to the Dastar problem in that its analysis focuses on unauthorized use of ZeniMax’s marks, but the trial theory, and thus the jury’s award, seems to have focused on claiming credit for the technology. The mismatch between the allowable scope of §1125 and the theory is likely part of what accounts for the lack of evidence of damages.]

Under Lexmark, damages must be proximately caused by the act of the false designation: “[A] plaintiff suing under § 1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s [actions]. . . .”

Plaintiffs’ damages expert testified only as to damages resulting from stolen trade secrets, not to reputational injury, or any defendant gains from false designation. For reputational damages, ZeniMax cited the testimony of Todd Hollenshead, former President of plaintiff id Software, that he was “concerned” about “the use of preleased software in any public demonstration that id Software was not controlling.” Without specifically noting that the existence of a risk isn’t evidence that the risk to reputation materialized, the court concluded that this wasn’t evidence of damage to reputation based on false designation. ZeniMax also pointed to three other items that supposedly showed reputational injury: (1) false representations Oculus made in the press about“collaborat[ion]” when “there was no actual affiliation between ZeniMax and Oculus”; (2) Oculus leading Mark Zuckerberg to believe that Oculus, not ZeniMax, “was miles ahead of everyone else” as to virtual reality technology; and (3) Zuckerberg’s testimony that ZeniMax “came out of the woodwork” when the Facebook purchase was announced. These were “even further from being evidence of reputational injury” than Hollenshead’s testimony.

ZeniMax pointed to excerpts from the damages expert’s testimony where he calculated a reasonable royalty for ZeniMax’s technology. But none of this testimony referenced false designation, let alone how the damages calculation he computed for trade secret violations also related to false designation and any resulting injury to ZeniMax. Defendant Carmack also wrote an email saying that “Oculus wouldn’t exist as a funded company if it weren’t for [Plaintiffs’] involvement.” That didn’t provide evidence that defendants “were massively and unjustly enriched” in relation to the false designation.

ZeniMax argued that defendants were unjustly enriched by their act of false designation when Facebook bought Oculus for approximately $2 billion. [Unjust enrichment of this type isn’t damages—it’s a disgorgement theory.]  Standing alone, the purchase price was legally insufficient evidence to prove damages from false designation. Facebook didn’t buy Oculus until 2014, almost two years after Oculus used promotional items containing ZeniMax’s marks without authorization in a Kickstarter video and investor materials. There was no causal evidence linking the two.

Even if there had been evidence of damages, plaintiffs failed to show proximate cause between those damages and the unauthorized use of their marks. Plaintiffs argued that the jury is vested with “broad latitude to infer proximate cause.” However, there was no evidence that Facebook believed the parties were somehow associated and that this led to the purchase. [Materiality as a proximate cause requirement….] Also, “[t]he time and intervening facts between these events alone makes the approximately $2 billion purchase price too remote to have been the proximate result of Defendants’ acts of false designation.” During those two years, millions of dollars were invested into Oculus by multiple investors, and others invested substantial time and effort, taking the Oculus Rift from a prototype device into a functioning device with market potential. That was the product that attracted Facebook to acquire Oculus. “There was simply no evidence presented that the purchase price Facebook paid for Oculus proves any of the harms against which Section 1225 protects.”

The only other evidence arguably proving proximate cause of harm flowing from the false designation was the money Oculus raised from investors in direct connection with the use of the promotional materials containing ZeniMax’s marks. However, there was no evidence about how much money was actually generated from these specific efforts using ZeniMax’s marks without permission. Also, the display of ZeniMax’s marks and the endorsement by Carmack, who was employed by ZeniMax at that time, was “merely a minor portion of the entire video.” By contrast, the video spent a substantial amount of time discussing the invention and technological improvements of the Oculus Rift without making any reference to ZeniMax or displaying of any of ZeniMax’s marks. The video also contained references to and endorsements from other companies and people in the industry unconnected to ZeniMax, such as USC’s MxR Lab, Epic Games, Unity, and Valve. The unauthorized use of ZeniMax’s marks was “diluted” by these endorsements of others as well as the support of ZeniMax’s competitors.

Here’s the Dastar hook: “The invention and technology of the Oculus Rift was a major issue in dispute in this matter” but those issues “play no role in a proximate cause analysis as to the false designation claims because the Lanham Act is intended to protect from harm related to the improper use of a mark and not intended to protect inventor’s rights.” The invention issues “add nothing to further a finding of proximate cause of a harm related to the money raised by this Kickstarter video.”