SAN FRANCISCO (CN) - A panel of the Ninth Circuit indicated on Thursday it will revive virtual-reality company Total Recall's lawsuit accusing Facebook-owned Oculus VR of stealing its design for a virtual-reality display.
In making the indication, two of the three judges on the panel suggested U.S. District Judge William Alsup wrongly tossed the suit by mischaracterizing a settlement agreement between Total Recall's partners as an underhanded bid to keep the suit alive.
"Judge Alsup is one of our finest district judges; no one doubts that. He's a capable, bright, hardworking judge," said Senior Circuit Judge J. Clifford Wallace in the hearing in San Francisco. "But he was a little less than precise when he identified what he thought this settlement agreement was: 'smoke and mirrors.'"
Hawaii-based Total Recall Technologies sued Oculus VR LLC and its founder Palmer Luckey in San Francisco federal court in 2015, claiming Luckey took a prototype of the head-mounted display he built for Total Recall based on its patented technology, passed it off as his own, and formed Oculus to commercialize it.
Oculus countered its display was an "entirely separate product," and accused Total Recall of trying to "get rich" by suing Luckey for misappropriation after Facebook acquired Oculus for $2 billion in 2014.
Alsup ruled for Oculus on summary judgment in 2016, finding the suit wasn't authorized because Thomas Seidl, one of Total Recall's two partners, hadn't agreed to sue. Under their partnership agreement, Seidl and Ron Igra had the right to veto certain Total Recall actions, like the Oculus suit.
Igra, intent on suing Oculus, sued Seidl in Hawaii state court to compel him to authorize a suit in Total Recall's name. With the Hawaii action still pending, Igra sued Oculus in San Francisco, over Seidl's objection.
Instead of dismissing the Oculus suit outright, Alsup stayed it to give Seidl time to authorize it on behalf of Total Recall. Seidl declined, and he and Igra settled the Hawaii action soon after. Under the settlement, Seidl withdrew from the partnership in exchange for Total Recall's intellectual property and thirty percent of any recovery from Oculus. Importantly, he also agreed to relinquish control over the Oculus suit. As Total Recall's sole remaining partner, Igra then authorized the suit against Oculus.
Alsup found the settlement didn't cure the authorization problem, calling it "a clever smoke-and-mirrors work-around to protect Seidl from ratifying anything while creating an appearance that Igra now controls the partnership."
"But it does nothing to carry us back to the moment in time of the filing of the original complaint to fix the defect that plagued this action from the start. Only Seidl’s ratification could have done that," Alsup concluded in a June 2017 order finally dismissing the case.
Seeking reversal on Thursday, Total Recall lawyer Brian Cannon with Quinn Emanuel Urquhart & Sullivan argued Alsup had wrongly treated the Oculus suit as having being brought by two individuals when it was brought by an entity. Moreover, he said, Seidl couldn't authorize the suit after withdrawing from the partnership under the settlement agreement.
"The only party that can ratify is the partnership," Cannon told the court.
Oculus attorney Lauren Goldman with Mayer Brown countered that Total Recall's partnership agreement stated both Seidl and Igra had to agree to any action the partnership took. According to a brief Igra filed, Seidl told Igra not to sue Oculus, Goldman said.
"Seidl consistently refused to bless the suit from the beginning. He was the only person who could do that," she said, adding the settlement agreement "didn't ratify anything."
Circuit Judge Marsha Berzon pointed out the settlement had been mediated by a Hawaii state court judge, who she said presumably believed that once Igra became the sole partner, he could authorize the suit.
"I understand that's not what Judge Alsup originally proposed, but what is wrong with it in terms of a way of ratifying the lawsuit, if the lawsuit is ratifiable?" Berzon asked.
Goldman replied Alsup had found that the settlement was "collusive and problematic."
"The district court knew all along something funny was going on here," she said.
On rebuttal, Total Recall's Cannon disputed Alsup had made such a finding, arguing the judge only ruled the conditions he set for the case to proceed weren't met.
"He did not rule the settlement was a fraud; he did not say that Judge Loo had overseen a fraudulent settlement," Cannon said. "The judge simply ruled, 'I asked for two declarations from these two partners, they didn't give it to me, case dismissed.'"
U.S. District Judge Terrence Berg of the Eastern District of Michigan joined Berzon and Wallace on the panel. They did not indicate when they will rule.
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