Total Recall Technologies v. Palmer Luckey

Background

Palmer Luckey agreed to build two virtual-reality headset prototypes for Thomas Seidl, one using a single display and one using two displays. Seidl agreed to provide $798 for parts. In an April 8, 2011 email exchange, Seidl asked for exclusive rights to Luckey’s design unless Seidl decided not to use it. Luckey agreed that they were on the same page and referred to a later contract after Seidl’s patent application became pending.

On August 1, 2011, Seidl sent Luckey a document titled “Nondisclosure, exclusivity and payment agreement.” Luckey signed it without changes. The document required confidentiality, restricted Luckey from helping others design a head-mounted display, and provided for a 2.5% royalty on net profits from sales. It also stated that exclusivity would continue for up to 10 years if at least $10,000 in royalties were paid each year, although the relevant provision contained a sentence fragment and did not define “the Head Mounted Display.”

Luckey completed the single-display Mk1 prototype and later the two-display Mk2 prototype. Seidl received and disliked the Mk1, but accepted the Mk2. Seidl’s product never reached the market, and Luckey received no payment beyond the $798 for parts. Luckey later developed and marketed the single-display Rift through Oculus. Facebook acquired Oculus in 2014 for more than $2 billion. Total Recall Technologies, identified as Seidl’s successor, then pursued claims asserting that Luckey should have offered the Rift exclusively to it under the 2011 agreement.

Tentative contract interpretation

The court stated that the principal purpose of the order was to interpret the August 1 agreement. It treated the April email exchange and the August written agreement as two related agreements and used the earlier emails to interpret the later document because the written terms were otherwise vague. The court explained that interpreting a written contract is ordinarily a judicial function when the relevant evidence is written and there is no unresolved credibility dispute that would affect the result.

The court concluded that the parties’ original arrangement required Luckey to provide two prototypes, gave Seidl an option for an exclusive license to a design that Seidl selected, and contemplated future written documentation. Seidl was not required to accept either prototype. If Seidl selected a prototype as the final design, that design would be “the Head Mounted Display,” and the related drawings and parts information would remain confidential.

The court rejected Total Recall Technologies’ broader interpretation that “Head Mounted Display” covered any commercial headset developed by Luckey that met five general characteristics: low cost, light weight, low latency, three-dimensional viewing, and a wide field of view without visible screen edges. The court found that the parties had discussed numerous design features and tradeoffs, but had not adopted a list of those five criteria. It also concluded that the agreement was directed to the limited group of prototypes contemplated by the parties, rather than a broad range of future virtual-reality technology.

Under the court’s proposed interpretation, “a Head Mounted Display” referred to prototypes submitted to Seidl for evaluation, while “the Head Mounted Display” referred to the single final design, if any, selected for production and marketing. Luckey could not help another person or entity design a submitted prototype while Seidl was considering it. If Seidl selected that prototype as the final design, the restriction would continue as to that design, and Seidl would have an option for an exclusive license.

The court further held that the $10,000 minimum had to be paid from royalties generated by sales, not from unrelated cash payments. The court read the sentence fragment in paragraph 9 as making the $10,000 royalty payment a condition for continuing exclusivity after June 30, 2012. If the required royalties were not paid by then, exclusivity would end; if they were paid, exclusivity could continue for another year, and so on.

The court also stated that California’s rule against unreasonable restraints on a person’s profession independently prevented the agreement from restricting Luckey’s work beyond the specific prototypes made for Seidl’s consideration, and the final design while subject to Seidl’s license. In addition, any remaining uncertainty would be resolved against Seidl because he drafted the disputed provisions.

Alleged concealment and procedural rulings

Total Recall Technologies argued that Luckey had lied to or concealed information from Seidl about his work on the Rift and that a jury should decide whether this conduct showed Luckey believed he was violating the agreement. The court assumed, for purposes of the tentative order, that a jury could find Luckey misled Seidl. It nevertheless concluded that such a finding would not change the proposed contract interpretation because the broader restriction would be barred by California law and because ambiguity would be resolved against Seidl as the drafter.

The court emphasized that this was a tentative construction order and did not decide whether the agreement was violated. The parties could file critiques limited to 25 pages and could identify any genuine credibility issues requiring a jury. The court also allowed the parties to adjust their expert reports to conform to the proposed interpretation.

The court denied all pending motions challenging expert testimony under the evidence rule known as Daubert, without prejudice to filing new motions directed at the revised reports. It stated that new motions concerning damages would likely be decided between the liability and damages phases of trial, set a jury trial for October 4, 2021, and stated that no further motions for summary judgment would be allowed, although motions for judgment during trial could be made.