Oculus damages: Should Facebook have seen legal action coming?

Facebook should have done more thorough due diligence before buying Oculus, suggests John-Paul Rooney of Withers & Rogers

News that the Facebook-owned virtual reality business, Oculus, has been ordered to pay damages to the tune of $500m after being found guilty of infringing intellectual property (IP) rights and breaching a non-disclosure agreement may be the result of poor due diligence. So should Facebook have seen it coming?

Specialising in virtual reality headsets, Oculus represents a relatively small branch of Facebook's business but the potential risks of acquiring it would have been the same as for any transaction of this type. Is it possible that Facebook's executives missed a key detail when tying up the deal?

Any IP assets owned by Oculus at the time of its acquisition in 2014 should have been considered during the due diligence process. It is possible that Facebook's executives failed to spot that a renowned programmer by the name of John Carmack had recently moved to Oculus from a rival firm - id Software, which was owned by ZeniMax Media - before going on to develop code for its Rift VR headsets. Not only that, John Carmack had spent a short amount of time working simultaneously for both id Software and Oculus. This strategic appointment should have attracted attention during the due diligence process and the existence of any non-disclosure agreements, signed by executives at Oculus, should also have been discovered and flagged.

When preparing a business for sale, it is important for the seller to ensure that IP rights and schedules are well presented and up to date, to reduce the possibility of a failed sale, and to increase the price by reducing risk for any buyer. Detailed summaries of individual IP assets, including relevant trade mark registrations and patents, should be prepared. All registered IP rights should be in the name of the seller with a clear chain of title, and any renewal fees due should have been paid. Any commercially-sensitive licence and non-disclosure agreements should also be included as part of this pack of information.

In this case, it seems likely that the claim was made as a result of an oversight when preparing documents for the sale. While the appointment of a lead coder from a rival firm should have been sufficient to raise concern, it is not always easy to discover if any copyright or other IP breach has occurred. Close analysis of the code produced by both firms would be required in order to do this, or at least a detailed knowledge of how the seller's code was derived and developed.

Getting the detail right prior to completing a deal may seem a perfunctory matter to those involved but if mistakes are made it can give rise to potentially costly disputes. In the years following a deal, if the buyer goes on to make large sums of money it is not unusual for opportunistic rivals to claim some misuse of IP or a breach of agreement in a bid to secure a share of the profits.

There are many examples of businesses losing out because they failed to take proper account of IP assets during the deal-making process. Volkswagen was famously forced to cede Rolls Royce cars to its rival, BMW, after discovering that the deal to buy the well-known, luxury car-making business did not include the rights to the Rolls Royce name, which was licenced to BMW.

In these situations, the damage done to the business is not just financial - there can be significant damage to brand reputation too. In this case, Facebook can probably be forgiven for failing to spot some coding similarities in a piece of virtual reality software, but there can be little excuse for not examining non-disclosure agreements and other trade mark rights more closely. As Facebook considers whether to appeal the court ruling or not, it may well be ruing the day it didn't check out Oculus's IP assets more closely.

John-Paul Rooney is a partner and patent attorney at intellectual property firm, Withers & Rogers LLP. He specialises in advising firms in the consumer electronics and computing sectors.