Magic Leap files lawsuit against former employee for 'breach of contract' and 'unfair competition'

It may be an uphill battle for the VR company, but the suit against Nreal is important to show potential investors that Magic Leap is willing to fight for its intellectual property.

At CES 2019, Chinese VR startup Nreal made waves with the announcement of its new lightweight augmented reality headset. Many critics praised its slight format and graphical capabilities. Some also drew a comparison to the Magic Leap One headset, an ironic observation considering a recently-launched lawsuit. According to Bloomberg, Nreal founder Chi Xu has been accused of stealing Magic Leap technology and using it to build his own headset to compete with the Magic Leap One.

According to the lawsuit filing, Xu, who worked as an engineer at Magic Leap from 2015 to 2016, allegedly used company time to attend meetings he was not assigned to in an effort to gain access to sensitive information. After leaving Magic Leap, Xu moved to China where he supposedly leveraged that information, along with stolen tech details, to found Nreal in 2017.

“The complaint asserts claims for breach of contract, interference with contract (against Nreal), constructive fraud, and unfair competition,” Ethan Jacobs, commercial litigator at Holland Law LLP told GameDaily. “But the complaint doesn’t assert claims for trade secret misappropriation, copyright infringement, or patent infringement. Magic Leap therefore might not have to prove that any aspects of the headsets are the same—only that Xu used Magic Leap’s confidential information to benefit Nreal.”

According to Jacobs, laws in California--which is where Magic Leap is based--do not prevent former employees from founding or joining competing businesses, but it can prevent them from using its trade secrets. However, that does not include any technological expertise gained while on the job.

“That distinction can be murky, and I think it could be difficult for Magic Leap to prevail if they can’t show what Mr. Xu did really was improper use of Magic Leap’s confidential information,” Jacobs said.

Going forward, it’s likely that this distinction will be the crux of the case, Jacobs explained. “The references in the complaint to permissible conduct by Mr. Xu—leaving Magic Leap with an intent to compete with it and not being a ‘respectful admirer’ of Magic Leap—contribute to the appearance that Magic Leap is upset about a former employee competing and not about actionable misconduct.”

Without solid proof that Xu outright stole secrets, and used those secrets to start a competing company, Magic Leap may be facing an uphill legal battle. Intangible factors, such as experience gained while at Magic Leap, are likely to muddy court opinions. Also of note is the fact that Xu moved to China following his time at Magic Leap.

“Even though the suit is in the U.S. Courts, if Magic Leap wins a judgment and there are no assets in the U.S. to recover from, they'd be looking to enforce the judgment in China,” Brandon Huffman, attorney at Odin Law and Media told GameDaily. “Similarly, if the end goal is to stop distribution of the Nreal headset, they'd need to look at how to enforce that kind of an injunction globally, which will be a challenge.”

Still, Huffman believes the lawsuit is a good move on the part of Magic Leap thanks to a combination of alleged case facts, and the current trade climate between the U.S. and China. “Even if they don't ultimately win in court, their investors will probably still support the decision to litigate,” Huffman explained. “They raised over a quarter of a billion dollars earlier this year, and if they want to continue to raise funds and be perceived as a company worth pouring that kind of money into, they need to defend and protect their inventions.”

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Sam has been freelancing since 2016, and has bylines at IGN, PCGamesN, PCGamer, and Unwinnable. When not writing about games, he is most likely taking care of his two dogs or pretending to know a lot about artisan coffee. Get in touch with Sam by emailing him at sdesatoff@gmail.com, or follow him on Twitter.

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