Activision’s Legal Problems Are Getting Uglier

Chris Morris|Special to

The fight that kicked off when Activision fired the two heads of the studio behind last year’s best selling video game is getting uglier—on multiple fronts.

Modern Warfare 2

Thirty-eight current and former employees of Infinity Ward, the wholly owned subsidiary that was responsible for “Modern Warfare 2,” are suing the publisher for alleged unpaid royalties on the game.

The Infinity Ward Employee Group, as the coalition calls itself, is seeking to recover between $75 million and $125 million in compensatory damages, as well as up to $500 million in punitive damages.

The employees allege Activision violated California labor codes and deliberately withheld royalty payments for the game "in an attempt to keep the employees hostage so that Activision could reap the benefit of the completion of Modern Warfare 3."

Activision, according to the suit, has paid out $28 million in bonuses so far, with another $54 million outstanding. (The extra amount in the compensatory claim comes from compensation the employees say they were promised related to other royalties, additional bonuses, profit sharing, lost value on restricted stock options and interest.)

This is the second suit filed against the company revolving around “Modern Warfare 2” payments. West and Zampella filed suit in early March seeking at least $36 million in earned royalties, as well as future royalty payments and, seemingly, creative control over the “Modern Warfare” franchise.

“It’s horrible PR, but I don’t think it’s going to leverage the stock,” says Michael Pachter, an analyst with Wedbush Securities. “I think after today you won’t see anybody file a lawsuit like this against Activision again. I think heads are going to roll in HR and they’re going to start kissing their employees butts.”

Activision shares were down more than 3 percent Wednesday.

Activision, in a statement, said the suit was “without merit” and noted it "retains the discretion to determine the amount and the schedule of bonus payments for MW2."

Regardless of the outcome, the legal battle is another blow to the relationship between the publisher and one of its most important development teams. Infinity Ward created the “Call of Duty” and “Modern Warfare” franchises, which have made Activision over $3 billion.

The abrupt firing of studio heads Jason West and Vince Zampella in early March drew a line in the sand between developers and the publisher, though. West and Zampella have since launched a new studio, dubbed Respawn Entertainment and aligned themselves with Activision’s chief rival Electronic Arts.

Since that mid-April announcement, over a dozen Infinity Ward employees have joined their old bosses at Respawn. All totaled, more than 25 people have left the studio, including most of the department leads from “Modern Warfare 2”.

This mass departure (with more employees expected to leave in the near future) could impact the quality and quantity of future titles from the studio. Titles from the studio are consistently the best rated in the “Call of Duty” franchise, which generally means better sales.

Ben Schachter, an analyst with Broadpoint AmTech, has warned since the beginning of the Infinity Ward drama that the key issue to watch is whether the studio “implodes” - with a sizable percentage of the team abandoning ship.

He not ready to declare that as having happened, he says, “but clearly that’s the fear from the investment community.”

“I think it’s a problem,” he adds. “There’s certainly a perception problem. There’s an issue with how shareholders are going to view this. There’s an issue with how other developers are going to view this. It’s a high profile issue…and I think it’s going to take some time to repair the damages.”

The news of the lawsuit comes as Activision Publishing CEO and president Mike Griffith has announced plans to resign his role. Analysts say the move does not seem to be related to Activision’s other troubles, despite the awkward timing. The company telegraphed his departure when CFO Thomas Tippl was promoted to COO a month ago.