Right to Veto Clause Prevents Partnership’s Virtual Reality Lawsuit
A judge in the Northern District Court of California ruled that a virtual reality firm’s “right to veto” provision in its partnership agreement prevented the company from bringing suit against Oculus VR, LLC (“Oculus”), a company that created a popular line of 3-D virtual reality headsets. Total Recall Technologies (“TRT”), a general partnership also in the business of virtual reality headsets, sued Oculus and its founder, Palmer Luckey, claiming that Luckey and Oculus breached a contract to develop headsets for TRT. In his Order, Judge Alsup examined how a general partnership gets authority to bring suit and the subsequent result if that suit was brought without the requisite authority. Judge Alsup granted summary judgment subject to certain conditions in favor of Oculus, finding that TRT lacked the authority to bring suit due to the partnership agreement’s “right to veto” clause. This ruling highlights the critical nature of partnership agreements for technology-based startup companies (and, indeed, all partnerships), particularly in regard to “right to veto” clauses. While veto rights can enforce compromise and cooperation between partners, such a right may prove frustrating if the relationship between partners grows irreconcilably sour.
According to Judge Alsup’s order, TRT is a Hawaiian general partnership formed in 2010 between Thomas Seidl and Ron Igra. In August 2011, Seidl (on behalf of TRT) entered into an agreement with Luckey to make a head-mounted virtual reality prototype. The written agreement included confidentiality and exclusivity clauses. Yet, in April 2012, Luckey allegedly formed Oculus without informing TRT. Oculus raised more than $100 million in financing and was acquired by Facebook in March 2014. Luckey’s exodus sparked a disagreement between Igra and Seidl. Igra wanted to sue Luckey and Oculus for violating the confidentiality and exclusivity clauses in their contract, and for misappropriating TRT’s design features for the virtual reality headset. Seidl, on the other hand, did not want to bring suit, claiming that Luckey could be more useful as an ally to TRT.
Nevertheless, in May 2015, Igra commenced an action in the name of TRT against Luckey and Oculus. Defendants then moved for summary judgment, claiming that TRT did not have authority to bring the action because Seidl never agreed to file the complaint. In granting summary judgment, Judge Alsup found that Seidl had not. The court pointed to the final email communication between Igra and Seidl before the suit was initiated, in which Seidl explicitly objected to the suit: “Again. Do not take any legal action against [P]almer [Luckey].” As a result, the court found that the lawsuit was not filed with mutual authorization.
Without mutual authorization from the general partners, the court looked to Hawaii law to determine whether Igra lacked authority to sue in the name of TRT without unanimous partner consent. Under the Hawaii Uniform Partnership Act of 1999, the general partnership agreement controls the governance of the partnership. Therefore, in jurisdictions that defer to partnership agreements on corporate governance issues, it becomes crucial to craft the partnership agreement with caution because courts can be statutorily mandated to examine the agreement closely. Because TRT’s partnership agreement had a “right to veto” clause which stated that for “any decision regarding the company[,] Ron Igra and Thomas Seidl have to agree on any action . . . ,” Igra lacked authority to unilaterally sue in the name of TRT. The “right to veto” clause proved to be an essential factor in this case, preventing Igra from performing an action on behalf of TRT that did not receive unanimous approval.
In dismissing the suit, the court determined that under California law, parties and the court have a legitimate need to determine if a suit is authorized. In this case, the court found that allowing one partner to sue in the name of the partnership without the requisite authority from the partnership would create untenable results. For example, if Igra had the authority to unilaterally bring claims against Oculus, Seidl should then be deemed authorized to unilaterally settle and release all claims against Oculus — an end result that would prove counterproductive and a waste of court resources. Instead, the court held that TRT was required to act with one authoritative voice and could only bring suit if both partners agreed on the decision.
In the end, the court granted summary judgment, subject to certain conditions. For the suit to remain in effect, Igra and Seidl must file sworn declarations affirming that they authorize and agree to maintain the suit against Oculus and Luckey. For those forming technology startup companies, this ruling highlights the importance of looking ahead when drafting the initial partnership agreements. While optimism and cooperation may be high at the formation of a partnership, it is important to craft partnership agreements with the cognizance that disputes often arise between partners.