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What a Thickening Legal Battle Means for Activision


Its blockbuster franchise is on the line.

Details regarding the lawsuit against Activision (ATVI) by former executives Jason West and Vince Zampella surfaced Friday courtesy of video-game blog Joystiq, which posted the court document online for all the world to see.

If you're not up to speed, West and Zampella are charging that Activision unjustly fired them from the company just weeks before they were set to receive significant royalties for their work on the company's blockbuster Call of Duty: Modern Warfare 2 game.

But a look at the complaint indicates that this mess isn't just about a one-time payment -- it's about control of the video-game industry's most valuable franchise.

As far as legal complaints go, this one is pretty darn good. It's only 16 pages, it's informative, and it's snarky.

First and foremost, we learn that Activision either has a really big horseshoe collection or one of the best M&A teams in history. It purchased the Infinity Ward studio, creator of the Call of Duty franchise, for just $5 million in 2002. Fast-forward to 2010 and that franchise has generated more than $3 billion in sales. If you recall, Activision purchased Guitar Hero publisher RedOctane for just $150 million.

So for well under $200 million, Activision purchased two generation-defining franchises that delivered more than $5 billion in sales. That's simply astounding.

But more importantly, Activision may be suffering from sour grapes from a memorandum of understanding that served to extend West's and Zampella's employment contracts in early 2008.

To secure the release of Modern Warfare 2 for 2009, Activision just may have given away a little too much at the negotiating table.

According to the complaint, the memorandum of understanding (which will be filed with the court) gave West and Zampella creative control over all Call of Duty games set in the post-Vietnam era. Not necessarily a bad idea -- these guys are proven winners. However, the memorandum also states that "no such game can be commercially released without the written consent of West and Zampella," and that the pair could "choose to develop new intellectual property after they completed Modern Warfare 2."

In other words, West and Zampella's firing may have been spurred by them saying no to a previously inevitable Modern Warfare 3 -- a catastrophic event when you consider that this is the biggest franchise in the video-game world right now.

No Modern Warfare 3 in 2012? The stock goes right into the toilet.

I can also imagine a scenario where West and Zampella simply asked for a huge amount of money to make the game -- I'm thinking a number going well into nine figures. Maybe they wanted a bigger piece of the pie after selling Infinity Ward too cheaply in 2002 -- a time when nobody was throwing money at young, capital-hungry tech companies.

Activision's justification for firing West and Zampella -- breach of contract and insubordination -- doesn't inspire confidence on their side, either. I'm not a lawyer, but it sounds kind of like getting arrested for disorderly conduct when no discernible law has been broken.
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