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Big Stakes, Harsh Words in 'Modern Warfare 2' Lawsuit

When two top Activison executives responsible for "Modern Warfare 2"—which, with more than $1 billion in revenue, became the biggest entertainment launch of any kind in history—were abruptly fired by the company last Monday, everyone knew a lawsuit would follow.

As expected, the lawsuit came late Wednesday, and it could have both short- and long-term implications for the video game publisher and its competitors.

Modern Warfare 2
Modern Warfare 2

Jason West and Vince Zampella, studio heads of Infinity Ward, the group behind 2009's smash hit “Modern Warfare 2,” are suing Activision for wrongful termination and breach of contract. The pair is seeking at least $36 million in earned royalties, future royalty payments and, perhaps, creative control over the “Modern Warfare” franchise.

In the filing, West and Zampella claim a 2008 memorandum of understanding signed by Activision “gives [them] creative authority over the development of any games under the ‘Modern Warfare’ brand (or any ‘Call of Duty’ game set in the post-Vietnam era, the near future or the distant future)…the MOU explicitly provides that no such game can be commercially released without the written consent of West and Zampella.”

Activision calls the suit “meritless.”

“Activision legitimately expected them to honor their obligations to Activision, just like any other executives who hold positions of trust in the company,” the company said in a statement. “While the company showed enormous patience, it firmly believes that its decision was justified based on their course of conduct and actions. Activision remains committed to the Call of Duty franchise, which it owns, and will continue to produce exciting and innovative games for its millions of fans.”

Nevertheless, if West and Zampella can prove their case, it puts one of Activision’s most valuable franchises at risk.

“Call of Duty” games have grossed over $3 billion in sales to date. “Modern Warfare 2” was 2009’s top selling game and racked up $1 billion in sales in just over two months. Activision, lawyers familiar with the video game industry say, will likely argue the pair violated their contract, making the creative authority clause null and void.

Even if Activision retains control of the game, there’s a real risk that the development team at Infinity Ward could jump ship and join West and Zampella in a new venture. Games from the Infinity team have been major critical and commercial successes, so more departures would be noteworthy.

“If it is just a few key guys leaving, that would be a negative, but not insurmountable,” says Ben Schachter, an analyst with Broadpoint AmTech. “However, if the studio implodes and many employees leave, it would be a meaningful loss for Activision.”

Near-term, there are concerns that discord at the company could impact pending development of downloadable content for “Modern Warfare 2”. Schachter estimates the add-on packs could account for nearly $84 million in net revenue and $0.03-$0.04 in earnings per share in 2010 alone.

The harsh rhetoric in the suit filed by West and Zampella could also hurt Activision with future hiring. CEO Bobby Kottick has previously made several controversial statements that have caused consternation in the development community, something the pair may be seeking to capitalize on in their filing.

Describing the company’s policies as “Orwellian,” and calling Kottick someone “who prefers to pay his lawyers instead of his employees,” West and Zampella also accuse the company of terminating them “weeks” before they were to receive royalty payments. If these claims prove valid, the company could face difficulties in attracting top creative talent, impacting the quality of future Activision games.

Other publishers, such as Electronic Arts or Ubisoft , could benefit from developer trepidation about working with Activision. Electronic Arts, considered by some to be the black hat of the publishing world, has recently worked hard to improve relations and its reputation.

Unlikely to benefit from the fallout is Take Two Interactive .The company is in an ongoing legal battle with developer 3D Realms over the fate of the long-in-development “Duke Nukem Forever.”

Despite the suit's high profile — or perhaps because of it — few expect it to actually make it to court.

“I think that both sides will probably reach some kind of accord or settlement,” says Dan Offner, a partner with Loeb & Loeb, and a specialist in the video game industry.

“Do I think [West and Zampella] will get some money out of this? Yes, I do," Offner says. "It’s just a question of when...You’re dealing with bigger games on bigger budgets. That’s what I see driving this more into a high stakes contest.”