Opinion
C 15-02281 WHA
09-22-2021
TOTAL RECALL TECHNOLOGIES, Plaintiff, v. PALMER LUCKEY and FACEBOOK TECHNOLOGIES, LLC F/K/A OCULUS VR, LLC, Defendants.
PRELIMINARY JURY INSTRUCTION RE CONTRACT INTERPRETATION
WILLIAM ALSUP United States District Judge
In this case, you will hear considerable evidence about a two-page agreement entitled “Nondisclosure, exclusivity and payments agreement” dated August 11, 2011. This is Trial Exhibit _______. I will sometimes refer to it as ‘the August 1 agreement.” In a trial, the judge is required to tell the jury the meaning of a contract, so I will tell you how I, as the judge, have construed the agreement. This interpretation has been based on my review of all of the communications between Luckey and Seidl. This interpretation is not yet final because some testimony in the trial might possibly necessitate an adjustment by me. I believe that advising you of my interpretation, as it now stands, will help you in mentally organizing the trial evidence as it comes in. I have complete faith that any additions or subtractions in my final interpretation will be readily accepted and understood and followed by the jury. Before the case goes to you for decision, I will instruct you on my final interpretation of the contract.
Even before the August 1 agreement, there was an earlier agreement represented by an exchange of emails leading up to April 8, 2011, so I will start there.
Early on, around December 23, 2010, Luckey asked in an email exchange, “Are you looking for . . . ownership of the design?” Seidl responded, “We would have option to license the product off you on an exclusive rights basis, provided we met some sales targets Luckey replied, “Licensing all sounds good.”
Later, Luckey emailed that he would build two prototypes for Seidl to demo, one with a single panel and one with two panels. Luckey needed money for parts so he itemized a list for Seidl and it came to $798.
On April 8, before sending the money, Seidl asked for the following assurance:
Just so we are on the same page. With the initial payment to you I would like the exclusive rights to your design unless we decide not to use it. I need to cover myself if we pay for development and then end up paying for a competitor.To which Luckey replied that day:
Yes, we are on the same page here. Once your patent hits pending, I am sure we can put together a contract of some sort to finalize it all.
This sequence of events formed a contract as follows:
. Seidl would supply $798 so Luckey could buy parts, which $798 Seidl supplied soon thereafter.
. Luckey would use those parts to build and to deliver two prototypes to Seidl, one with a single panel and the other with two panels.
. Seidl would have an option to acquire an exclusive license to one or the other of Luckey's designs, as represented by the prototypes. This option would lapse as to a design if Seidl decided not to use it.
. Seidl might decide against both prototype designs and it was left open as to whether Luckey would or would not build yet more
(or whether Seidl would or would not entertain more than two submissions). It was entirely possible that they would never reach agreement on a final design and entirely possible that they would never proceed past two prototypes.
. Seidl would not pay Luckey for his time and effort other than to give him an unspecified share of the net profits from the future sales of any final design.
. They would enter into a nondisclosure agreement once a patent Seidl was trying to get on his 3D camera reached the patent pending stage.
At this point, Luckey was under no explicit deadline to finish the prototypes other than, as the law would infer, to do so within a reasonable time, taking into account the attendant circumstances, which included the fact that both sides knew Luckey was working on other VR projects, that Seidl was paying him no immediate compensation, and that Luckey had bills to pay. For his part, Seidl was under no explicit deadline once he received a prototype to make a decision whether or not to exercise his option to use the prototype other than, as the law would infer, to do so within a reasonable time, taking into account the attendant circumstances.
On August 1, 2011, Seidl sent Luckey a one-and-a-half-page document entitled “Nondisclosure, exclusivity and payment agreement.” Its introductory paragraph stated that the agreement's “purpose” was “preventing the unauthorized disclosure of Confidential Information.” Its first few paragraphs tracked conventional NDA language, all running in Seidl's favor. Seidl added paragraphs 9 and 10, as follows:
9. Exclusivity. The Receiving party [Luckey] shall keep all details including drawings and part suppliers of the Head Mounted Display confidential and shall not aid any other person or entity in the design of a Head Mounted Display other than the disclosing party [Seidl]. Unless within a twelve month period from 1st july 2011 the receiving party has not received a minimum payment in royalties of 10, 000 U.S. dollars by the disclosing party. The exclusivity shall remain in place for a period of 10 years providing a minimum of 10, 000 U.S. dollars is paid from the disclosing party to the receiving party per annum.
10. Payments. A royalty of 2.5% shall be paid of the net profit made by the disclosing party from sales of the head mounted display to the receiving party.
You will note that there is a sentence fragment in the middle of paragraph 9, the part beginning with “Unless within . . . ” You will note also that initial caps were used for “Head Mounted Display” in paragraph 9 but no definition was provided.
Luckey signed without objection or change.
Before turning to what the August 1 agreement did require, I will note that it did not address:
[] The document failed to expressly commit Luckey to build a prototype or anything at all or to provide a timetable. Luckey, however, had already undertaken to build two prototypes and had received money from Seidl to buy parts, although the document made no reference to this circumstance. Luckey was still under the law to complete his prototypes within a reasonable time, taking into account all of the attendant circumstances.
[] The document failed to require Seidl to try to sell the product. Even though it said Luckey would receive 2.5% of any net profit from sales, the document called out no express duty by Seidl to try to market or promote.
[] The document left Seidl free to deal simultaneously with another source for head-mounted displays.
[] The document failed to expressly address ownership of the design or the prototypes or their parts and never mentioned the words “license” or “option.”
I will now turn to paragraph 9 entitled “Exclusivity, ” the main provision in dispute which, to repeat, read:
9. Exclusivity. The Receiving party [Luckey] shall keep all details including drawings and part suppliers of the Head Mounted Display confidential and shall not aid any other person or entity in the design of a Head Mounted Display other than the disclosing party [Seidl]. Unless within a twelve month period from 1st july 2011 the receiving party has not received a minimum payment in royalties of 10, 000 U.S. dollars by the disclosing party. The exclusivity shall remain in place for a period of 10 years providing a minimum of 10, 000 U.S. dollars is paid from the disclosing party to the receiving party per annum.In paragraph 9, the first sentence required Luckey to keep confidential all details including drawings and part suppliers of “the Head Mounted Display.” This went a step further than the conventional NDA paragraphs 1 through 4, which protected information received from Seidl. This extra step in paragraph 9 protected information generated by Luckey himself.
Although the initial capitalizations in paragraph 9 usually would have indicated a defined term, “the Head Mounted Display” went undefined in the document. Nor did the document state any design specifications or in any way identify what “the Head Mounted Display” meant. Nor had any email ever defined that term.
Reasonable persons in the positions of the parties at the time would have understood the phrase “the Head Mounted Display” as used in the written agreement to mean the final prototype design, if any, accepted by Seidl for production and marketing. The article “the” indicated that, although more than one Luckey prototype might be considered, the term “the Head Mounted Display” would be the one selected for production and marketing. Seidl had an option for an exclusive license. He wasn't required to exercise it or to accept any of the prototypes. But if he did, that prototype would become “the Head Mounted Display.” The drawings and part suppliers for that final design would be kept confidential, meaning Luckey could not reveal the drawings and part suppliers to others. Although the contract failed to expressly say so, the parties would then presumably execute a further written license agreement covering the final design. This was indicated by Seidl's December email explaining that “We would have option to license the product off you on an exclusive rights basis, provided we met some sales targets” and Seidl's April 8 email that “I would like the exclusive rights to your design unless we decide not to use it.” And, as will be seen, it is consistent with the use of the term “the head mounted display” as used in the royalty provision of paragraph 10.
By contrast, “a Head Mounted Display” in the second half of the same sentence in paragraph 9 referred to any and all of the prototype designs delivered to Seidl and under his consideration. This term went undefined as well, but the run-up to August 1 made clear what was intended. To protect exclusivity pending decision on the final design, Luckey would not, under the provision, aid anyone else with respect to a prototype design delivered to Seidl until Seidl decided not to use it (or the exclusivity period otherwise expired). This exclusivity would give Seidl time to evaluate a prototype design. Seidl could even keep both prototype designs under exclusivity until he vetted them side by side. Or, he could decide right away not to use one and to wait on the other. If and when Seidl selected “a Head Mounted Display” as the final design, it would become “the Head Mounted Display.”
Turning now to paragraph 10, it called for a “royalty of 2.5% . . . of the net profit . . . from sales of the head mounted display . . . .” This time, initial capitalization was not used but “the” was used. Despite the inconsistency in capitalization, “the head mounted display” in paragraph 10 surely meant the same as “the Head Mounted Display” in paragraph 9. Both meant the final design, if any, that would go into production and marketing. In other words, if Seidl used a Luckey prototype for the final design, Seidl would pay a royalty to Luckey equal to 2.5% of any net profit from sales of that specific design.
The written agreement, as stated, failed to expressly require a “license.” The word “license” wasn't even used. Nor was “option.” But since paragraph 10 referenced a “royalty, ” we may infer from the term “royalty, ” taken together with the earlier emails, that an option for a license was intended. The April 8 email exchange had agreed that Seidl would acquire “exclusive rights to your design unless we decide not to use it.” And, remember that a December email had earlier referenced an “option” for a “license.” Thus, in my view, the mutual understanding was that Seidl had the option for an exclusive license on a prototype design. To protect that option for a prototype delivered to Seidl for consideration, Luckey was obliged to preserve that option, including declining to aid anyone else in the same design or licensing it to someone else. If Seidl decided not to use any prototype design, Luckey would get nothing for his trouble. Seidl had an option only on those designs delivered by Luckey for Seidl's consideration. Seidl did not have an option on any other designs in Luckey's portfolio or on any other designs Luckey was working on for his own account or for someone else.
The parties expected that Luckey would use the parts purchased with Seidl's $798 to make a good faith effort to build prototypes suitable for Seidl's stated purpose and that, as Luckey built each prototype, he would take such care as necessary to keep it eligible for an exclusive license. The event, however, that identified a particular design being offered for option was its delivery to Seidl. The whole point of a prototype was for Seidl to test drive it. As well, upon delivery, that specific design was subject to prohibition on aiding someone else with respect to that design. Until delivery, however, Luckey remained free to revise his works in progress and Seidl had no option rights on the various unfinished iterations left on the cutting-room floor.
To summarize, important is the difference between “the Head Mounted Display” versus “a Head Mounted Display.” When it came to “the Head Mounted Display, ” there would be, if any, but one, namely, the final design selected by Seidl for production and marketing. Royalties to Luckey, if any, would flow only from it. A later exclusive license would cover that specific design (once Seidl exercised his option for it). The drawings and part suppliers for that specific design would continue to be kept confidential. By contrast, “a Head Mounted Display” referred to any Luckey prototype design delivered to Seidl for evaluation. Luckey could not aid anyone else as to any such design until Seidl had decided not to use it (or had led Luckey to reasonably believe that he had so decided).
Paragraph 9 further set forth a minimum-royalty limitation on “exclusivity”:
Unless within a twelve month period from 1st july 2011 the receiving party has not received a minimum payment in royalties of 10, 000 U.S. dollars by the disclosing party. The exclusivity shall remain in place for a period of 10 years providing a minimum of 10, 000 U.S. dollars is paid from the disclosing party to the receiving party per annum.
Despite being a grammatically flawed sentence fragment, the “Unless” clause was clearly intended to relieve Luckey from any and all “exclusivity” in the event Seidl failed to market the final design sufficiently to reach $10,000 per annum in royalties from the 2.5% of net sales.
The sentence fragment beginning with “Unless” and ending with “by the disclosing party” modified the entire preceding sentence, so as to extend the confidentiality duty and the no-aid restraint until at least June 30, 2012. In other words, Seidl would have all the way to June 30, 2012, to pay Luckey at least $10,000 out of royalties during that first period (ending June 30, 2012). Meanwhile, Luckey would have to honor his exclusivity duty as to any prototype design unless Seidl had decided not to use it (or had led Luckey to reasonably believe he had decided not to use it). The $10,000 in royalties was a condition precedent to any continuing exclusivity obligation by Luckey after June 30, 2012. If $10,000 in royalties were not paid by June 30, 2012, exclusivity would then evaporate. If $10,000 in royalties were paid to Luckey by June 30, 2012, then exclusivity would extend another year. If another $10,000 in royalties were paid in the second year, then exclusivity would extend for a third year, and so on.
The money would have to come from royalties, not from petty cash or the deep pockets of Seidl's associates.
For now, this is enough to give you a framework to help you process the evidence as it comes in. Remember, this interpretation is possibly subject to additions or subtractions depending on the specifics of the evidence received here at trial. At the end of the evidence and before the case goes to you for decision, I will instruct you on the meaning of the contracts.
IT IS SO ORDERED.