A giant thumbs-up button marks the entrace to the Facebook campus, located at 1601 Willow Road in Menlo Park, CA.

U.S. District Judge Ed Kinkeade was not pleased.

The Dallas judge presided over one of the highest-profile trials of 2017—a suit against Facebook Inc. by game maker ZeniMax Media Inc. alleging the theft of the Oculus Rift virtual reality technology. But in a newly unsealed sanctions ruling, Kinkeade wrote that he was on the verge of throwing the whole thing out and ordering a new trial.

“This is most certainly a close call,” he wrote on June 27 in an order unsealed this week. “The court readily admits it has struggled with whether to grant a new trial is an appropriate sanction.”

In the end, he opted to preserve the judgment—but he also ruled that ZeniMax can forget about the $40 million in legal fees it asked for.

The three-week jury trial in the Northern District of Texas was an epic showdown, with Wilkinson Walsh + Eskovitz name partner Beth Wilkinson taking the lead for Facebook, and P. Anthony Sammi from Skadden, Arps, Slate, Meagher & Flom for ZeniMax. Even Facebook CEO Mark Zuckerberg had to take the stand.

After three days of deliberation, the jurors last year awarded ZeniMax $500 million. Kinkeade subsequently granted Facebook's motion for judgment notwithstanding the verdict and cut the award in half, tossing $250 million for trademark false designation.

Still, ZeniMax prevailed on copyright infringement claims—a statute which entitles the winner to ask for legal fees.

Kinkeade slammed that door shut. The reason: ZeniMax's failure to produce documents in discovery.

Facebook asked ZeniMax for standard-sounding documents about the gamevmaker's financial status and business valuation—relevant to show, for example, if ZeniMax had the ability to invest in or develop the virtual reality technology.

ZeniMax said it produced everything that was requested “to the extent possible,” though the magistrate judge remained skeptical.

But then ZeniMax CEO Robert Altman took the stand at trial. On cross-examination, Wilkinson asked what ZeniMax was worth, and he replied between $4 billion and $8 billion.

And how might he know that? Are there…documents?

“There are documents, yes” he answered.

(D'oh!)

“Outside the presence of the jury,” Kinkeade wrote, “the defendants argued that the plaintiffs' previous production was obviously insufficient and did not comply with the court's first order because the plaintiffs never produced the documents that Mr. Altman testified did exist.”

The judge ordered ZeniMax to produce the documents by 9 a.m. the next day.

“The court also specifically and repeatedly warned the plaintiffs that the consequences of not making a full production in compliance with this second order would be 'grave,'” Kinkeade wrote.

(I think we all know where this is going. It's like a slow-motion car crash.)

Kinkeade made a special point of emphasizing that not only did ZeniMax outside counsel hear his warning, but so did Altman—who is also a licensed attorney.

The next day, ZeniMax coughed up 60 pages of heavily redacted material and told the judge they had “fully complied with the discovery requests and the court's orders,” Kinkeade wrote.

At this point, the trial was nearly over—all that remained were closing arguments and jury instructions. Kinkeade tried to mitigate the damage, which at the point seemed modest, by limiting the scope of ZeniMax's closing regarding the value of the company.

A month after the trial was over, Facebook asked yet again for ZeniMax valuation documents, arguing the information was needed for post-trial and appellate purposes.

Lo and behold, ZeniMax came up with about 1,300 pages of new material. “Clearly, the plaintiffs themselves had these documents in their possession, yet failed to produce them in response to the previous two orders,” Kinkeade wrote, noting that they “offer no explanation as to why they did not put this time and effort into complying with the court's first and second orders.”

Not only that, Facebook argues ZeniMax still hasn't turned everything over. Some of the newly produced documents are incomplete or reference other material that hasn't been produced. And they only dug up seven emails regarding ZeniMax valuation.

Kinkeade has clearly had enough—though his ire was directed at ZeniMax, not its lawyers from Skadden plus co-counsel from Haynes and Boone.

“The court finds that this amounts to willfulness and/or bad faith along with a clear record of delay or contumacious conduct that is attributable to the plaintiffs, not the plaintiffs' attorneys,” he wrote, adding, “What is unmistakably clear to the court is that the plaintiffs, not their attorneys, engaged in continued and repeated efforts to resist production of responsive documents.”

But what to do about it?

He chose not to find ZeniMax in contempt, ruling that at this point, it would be moot.

And while tempted, he opted against a new trial because Facebook didn't show it was actually prevented from fully and fairly litigating the case. “The effect of the failure to produce the documents is not quite severe enough to overcome the policy of preserving final judgments,” Kinkeade found.

Instead, he wrote, “The court concludes that striking the plaintiffs' pleadings as to their recovery of attorneys' fees is an appropriate sanction in this case.”

The amount requested? $40 million.

Kinkeade added, “The court will not allow the plaintiffs to use their attorneys to flagrantly disrespect and disobey this court, and then ask the court to award them attorneys' fees incurred in this matter.”

 

Shout Out: Simpson Thacher Puts Securities Suit to Bed

A team from Simpson Thacher & Bartlett led by litigation department co-chair Jonathan Youngwood sealed a win for hotel chain La Quinta before the U.S. Court of Appeals for the Second Circuit.

La Quinta went public on April 14, 2014, but its stock soon tanked and it was hit with a securities class action. The suit also named Blackstone Group, which was La Quinta's majority shareholder before it went public, and certain La Quinta officers and directors.

A key factor: La Quinta's fall in stock came against the backdrop of declining oil prices—25 percent of the chain's hotels are in Texas, near oil and gas fields. After oil prices crashed, La Quinta's rates and occupancy in these hotels took a hit too.

Last year, U.S. District Judge Alison Nathan dismissed the suit with prejudice, ruling that the hotel chain “explicitly disclosed to investors that a decline in oil prices could negatively impact La Quinta.”

The Second Circuit was likewise convinced, affirming Nathan's decision in a summary order.

At Judge Gerald Lynch put it during oral argument, “Any idiot knows that oil is a big deal in Texas. So what is it that they didn't say?”

 

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