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.”

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