Total Recall Technologies v. Palmer Luckey

Background

Palmer Luckey agreed in April 2011 to use $798 supplied by Thomas Seidl to build and deliver two virtual-reality headset prototypes: one with a single screen and one with two screens. The parties’ emails contemplated that Seidl would have exclusive rights to a design unless he decided not to use it. In August 2011, Seidl sent Luckey a written document titled “Nondisclosure, exclusivity and payment agreement.” Luckey signed it without changes.

The written agreement required confidentiality, restricted Luckey from helping others design a head-mounted display, and provided for a 2.5% royalty on net profits from sales of the head-mounted display. It also stated that exclusivity would continue for ten years if Luckey received at least $10,000 in royalties per year, although the relevant provision contained grammatical errors and did not define “the Head Mounted Display.”

Luckey delivered the single-screen Mk1 prototype and later the multi-screen Mk2 prototype to Seidl. Seidl did not use either prototype to bring a product to market and paid Luckey only the $798 for parts. Luckey later developed and marketed the single-screen Rift through Oculus. Facebook acquired Oculus in 2014. Total Recall Technologies, identified as Seidl’s successor, alleged that Luckey was required to offer Seidl exclusive rights to the Rift and sought damages based on that theory.

Contract construction

The court’s primary task was to interpret the agreements, not to decide whether Luckey breached them. Under California law, contract interpretation is for the judge when the written instrument and relevant extrinsic evidence—evidence outside the document, such as the parties’ communications—do not create a material witness-credibility dispute. The court found two related agreements: the April 8 email exchange and the August 1 written agreement. It read them together because the written agreement was vague and otherwise difficult to understand.

The court held that the parties’ arrangement required Seidl to provide $798 for parts and Luckey to build and deliver two prototypes. Seidl received an option to obtain an exclusive license to either prototype, but the option ended as to a design if Seidl decided not to use it. Seidl had no option over every other design in Luckey’s portfolio or over unfinished designs that Luckey had not delivered for Seidl’s consideration.

The court distinguished between “the Head Mounted Display” and “a Head Mounted Display.” “The Head Mounted Display” meant the final prototype, if any, that Seidl accepted for production and marketing. “A Head Mounted Display” meant a prototype delivered to Seidl for evaluation. Luckey could not assist another person or entity with a delivered prototype while Seidl considered it, unless Seidl decided not to use it or reasonably led Luckey to believe that he had made that decision. If Seidl selected a prototype as the final design, the parties were expected to execute a further written exclusive-license agreement for that design.

The court also held that the minimum payment required to continue exclusivity was $10,000 in royalties from sales, not money supplied from Seidl or his associates. The first exclusivity period ran through June 30, 2012. If Luckey had not received $10,000 in royalties by then, exclusivity would end; if he had, it could continue for another year, subject to another $10,000 royalty payment.

The court rejected Total Recall Technologies’ broader interpretation, under which “Head Mounted Display” would cover any commercial headset developed by Luckey that met five general criteria. The court found that the emails contemplated specific prototypes for Seidl’s evaluation, not a broad category of virtual-reality technology. It also concluded that the broader interpretation would improperly restrain Luckey’s occupation under California Business and Professions Code section 16600. The court stated that even evidence that Luckey concealed his Rift work would not change the contract’s objective meaning, and that any remaining ambiguity would be resolved against Seidl because he drafted the disputed provisions.

Other rulings and case schedule

The court gave both sides an opportunity to revise their expert reports to conform to its contract interpretation. It denied all pending Daubert motions without prejudice to new motions directed at the revised reports. The court stated that new damages-related evidence challenges would likely be decided between the liability and damages phases of trial. It set a jury trial to begin October 4, 2021, and stated that no further motions for summary judgment would be entertained, although motions for judgment during trial could be considered.

The order did not determine whether the agreement was breached, whether Total Recall Technologies was entitled to damages, or whether the Rift fell within the agreement under the court’s construction. It also left open the possibility of asking the jury for special findings about alleged lies, concealment, or other credibility issues involving the extrinsic evidence.