Bloomberg News

Activision Seeks Delay of $1 Billion ‘Modern Warfare’ Trial

May 15, 2012

Activision Blizzard Inc. (ATVI:US) is seeking to delay a trial against the creators of its blockbuster game “Call of Duty: Modern Warfare 2” to bring in a new lead lawyer as the possible damages it faces have ballooned to $1 billion.

Beth Wilkinson, the lawyer Activision hired May 10, asked California Superior Court Judge Elihu Berle at a hearing today in Los Angeles to postpone the May 29 trial date for 30 days so she can get up to speed. Berle didn’t rule on the request at the hearing, saying he needed further information on how long the parties expected the trial to last.

Activision, the biggest U.S. publisher of video games, said in a May 9 regulatory filing that the damages claim of Jason West and Vince Zampella, the developers of “Modern Warfare 2,” whom the company fired in 2010, has increased to more than $1 billion, from the $36 million the two sought in unpaid royalties when they first sued two years ago.

“A 30-day continuance would be extremely prejudicial to us,” Robert Schwartz, a lawyer for West and Zampella, said at the hearing.

Wilkinson said Activision is working on ways to make the trial shorter, including paying $42 million owed to 40 other former Activision employees, who left after West and Zampella were fired and who filed a separate lawsuit for unpaid bonuses, to take part of their claims out of the case.

‘Less Disruptive’

“A shorter trial will be less disruptive,” Wilkinson said in response to Schwartz’s objections to a later trial date.

Zampella and West claim Activision strung them along with false promises of royalties and creative control so that they would complete the game that helped Activision leapfrog Electronic Arts Inc. (EA:US) as the biggest video game publisher. Activision countersued, naming Electronic Arts as a defendant and accusing the company of trying to pry the developers away while they were still under contract.

“Modern Warfare 2,” a shooter game, was released in November 2009, and broke all sales records in the entertainment industry, selling 4.7 million copies in the U.S. and U.K. and generating $310 million in sales in its first 24 hours.

Harry Potter

In five days, sales hit $550 million, beating the box- office record of $394 million for “Harry Potter and the Half- Blood Prince,” Activision said at the time. By June 2010, more than 20 million copies of the game had been sold worldwide.

Activision, based in Santa Monica, California, surpassed Electronic Arts, based in Redwood City, California, as the biggest U.S. video-game publisher by revenue in 2009. West and Zampella said in a court filing last year that “Modern Warfare 2” earned Activision more than $1.5 billion.

Activision contends Electronic Arts conspired with West and Zampella as early as July of 2009 to disrupt its “Call of Duty” franchise, according to Activision’s December 2010 amended cross-complaint. It seeks $400 million in damages for costs to rebuild its Infinity Ward unit, which Jason and West founded. In the months after the two were fired, about 40 other Infinity Ward employees quit.

Electronic Arts wanted to disrupt the rival studio ran by West and Zampella because its own “Medal of Honor” shooter games were failing and it wasn’t able to compete with Activision’s “Call of Duty” games, Activision said.

‘Secret Meeting’

In August 2009, when West and Zampella still had two years left on their contracts with Activision, Electronic Arts flew them on a private plane to San Francisco for a “secret meeting” at the home of Electronic Arts Chief Executive Officer John Riccitiello, Activision said.

“The negotiations between Electronic Arts and West and Zampella were structured with the design and expectation that West and Zampella would ‘spin out’ from Activision and would take significant numbers of key Infinity Ward employees with them to set up their own independent company so that Electronic Arts would make another run at competing with Activision,” according to Activision’s counterclaims.

After Activision fired them for breach of contract and insubordination, West and Zampella started a new studio, Respawn Entertainment, which has a distribution agreement with Electronic Arts. Respawn hasn’t released any games yet, and West and Zampella declined to comment on what game they are working on and when it is expected to be released.

Receive Congratulations

The two developers said in an April 19 interview at Respawn’s offices in Van Nuys, California, that they met with Electronic Arts executives after they had finished work on “Modern Warfare 2” as part of a customary “victory lap” of meetings to receive congratulations and celebrate the completion of their latest game.

West and Zampella had started Infinity Ward originally in Tulsa, Oklahoma, and Activision bought a 30 percent stake in the studio in 2002. The first “Call of Duty” release, a World War II action game, came out in 2003, after which Activision bought the remaining 70 percent, making the studio a wholly owned unit.

Among the issues that soured relations between the developers and Activision executives were disputes over “Call of Duty” offshoots and expansion packs developed by other Activision units that were put on the market with similar- sounding names before Infinity Ward was to come out with their next “Call of Duty” game, the developers said.

“We hear about it at the last minute, and the team gets all upset,” West said during the interview. “We’re making this game, we have a huge team of people spending years of their life putting everything they have into this, so our goal is to make sure it’s the best it can be.”

Call of Duty

The “Call of Duty” titles Activision released that weren’t developed by Infinity Ward didn’t live up to the quality of the studio’s games and hurt the image of the franchise they had built up, West and Zampella said.

In 2008, Activision agreed to give them “unprecedented creative authority” over the “Call of Duty” and “Modern Warfare” brands, as well as performance bonuses tied to the success of “Modern Warfare 2,” West and Zampella said in their April 2011 fraud claims against Activision. The agreement stipulated that no “Modern Warfare” game could be shipped without West and Zampella’s written consent.

The developers allege Activision never intended to keep its end of the bargain and induced them to sign the agreement so they would complete “Modern Warfare 2.” They say they were never paid the millions of dollars in bonuses they were promised if the game reached the level of success it achieved.

‘Dig Up Dirt’

At a May 2 hearing, Activision lost a bid to keep the jury from hearing testimony from a former information-technology employee, who said Activision’s inhouse lawyer asked him to “dig up dirt” on West and Zampella.

Elliot Brown, a lawyer for Activision, said at the hearing that the issue was only a “sideshow” and that the former employee, Thomas Fenady, was only asked to see if Activision could access the computers of West and Zampella, not to investigate them.

Fenady acted on instructions of then-general counsel George Rose and his testimony falls under attorney confidentiality rules and shouldn’t be disclosed at trial, Brown said.

“It’s part of attorney work to ask an IT guy to see, ‘Can we hack computers of the employees?’” Berle said at the hearing. “That is part of the legal work of Mr. Rose?”

Activision was trying to find out “what was going on inside Infinity Ward” because relations were strained between the company’s executives and West and Zampella, and Infinity Ward had put a firewall between its computer network and Activision’s, Brown told the judge.

Firewall

Fenady reported that it would be difficult to get around the firewall and nothing further was done, Brown said at the hearing.

Victor Jih, a lawyer for West and Zampella, said at the hearing that the evidence shows that Activision, almost nine months before the two were fired, was secretly looking for excuses to “dump” them and that their meeting with the Electronic Arts executives, which happened after the attempt to access their computers, had been a pretext to fire them.

“It directly refutes all of the testimony from every Activision executive that has testified that they reluctantly fired Jason and Vince, that they never even thought about firing Jason and Vince until oh, at the very, very last minute,” Jih said. “This is not a sideshow, your honor. It’s the crux of the case.”

Richard Kendall, a lawyer for Electronic Arts, said at the hearing that the Fenady testimony “is critical evidence.”

It shows that “Activision had the gears in motion already to fire these guys well before EA surfaced in any way as communicating with West and Zampella or any of their representatives,” Kendall said.

The case is West v. Activision, SC107041, California Superior Court (Los Angeles County).

To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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Companies Mentioned

  • ATVI
    (Activision Blizzard Inc)
    • $21.69 USD
    • -0.13
    • -0.6%
  • EA
    (Electronic Arts Inc)
    • $36.61 USD
    • -0.10
    • -0.27%
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