The art of amicable negotiation.

“A good settlement is better than a bad lawsuit.” The saying is well-known. But how can one identify a situation where a good settlement can be negotiated?

Elements of explanation through a noteworthy case study: the Activision – Infinity Ward lawsuit (2010-2012), sometimes referred to as the case of the century for the gaming industry in the United States.

The Activision – Infinity Ward Case

In brief, this case revolved around the bad faith non-performance of an agreement concluded in March 2008 between Infinity Ward and its parent company, Activision.

According to this agreement, the employees and senior executives of Infinity Ward committed to delivering a sequel to their hit game, Call of Duty: Modern Warfare, to Activision by November 2009.

In return, Activision granted (i) several million dollars in financial bonuses to Infinity Ward, (ii) creative control over the Call of Duty: Modern Warfare franchise, and (iii) committed to funding the next original game proposed by the development studio.

The validity of this agreement was contingent on the presence of Infinity Ward’s two main executives, Vince Zampella and Jason West, within the teams.

However, these executives were terminated by Activision in March 2010, just weeks after the release of Call of Duty: Modern Warfare 2.

West, Zampella, and other Infinity Ward employees subsequently filed several lawsuits in 2010 with the California Superior Court, contesting wrongful terminations and denouncing the non-performance/bad faith performance of the agreement.

In May 2012, Activision settled for an undisclosed amount.

Here is a review of the many reasons behind this settlement.

 

  • 1. Too Much to Lose

In the event of a judicial victory, West, Zampella, and their associates would have gained creative control over the Modern Warfare franchise, with each installment generating billions of dollars in revenue for its publisher (Activision).

Activision had only signed this agreement with Infinity Ward because the company desperately needed to announce a sequel to the greatest success in its catalog (Call of Duty: Modern Warfare) to gain leverage in its merger negotiations with Vivendi.

It was, therefore, an extraordinary agreement that Activision was willing to bury by any means, including a settlement worth several hundred million dollars.

Such a scenario can appear in many contexts:

  • When the financial stakes of legal action are high compared to the defendant’s financial capacity;
  • When the action involves the defendant’s strategic activities or operations, making it easier to settle shareholder litigation when the plaintiff has blocking potential (e.g., blocking an acquisition);
  • When the action puts the company at odds with regulatory requirements (e.g., antitrust lawsuits for big tech companies).

 

  • 2. The Media Impact of the Lawsuit

In this case, the lawsuit was damaging to Activision’s image on two levels.

Firstly, Activision had a reputation as a hyper-capitalist publisher, contrasting with Infinity Ward’s reputation as creators/employees.

Shortly after the founding of the development studio Infinity Ward in 2002, Activision acquired a 30% stake with a clause to buy the remaining shares upon the release of the studio’s first game.

Thus, as soon as Infinity Ward released the first Call of Duty in October 2003, Activision took control of the studio (and the franchise, hence the creative control clause included by Infinity Ward in the 2008 agreement).

The excessive media coverage of a “craftsman versus businessman” lawsuit risked leading to boycotts of future installments of the Call of Duty franchise, which was so profitable for Activision.

Secondly, such media coverage would have highlighted the departure of nearly all Infinity Ward executives following the terminations of West and Zampella. The studio’s prestige at the time was such that it had become a selling point to the public.

A company’s vulnerability to public opinion is naturally stronger if it operates in B2C, but other factors also come into play (e.g., a company concerned with its CSR image would be inclined to avoid a lawsuit for environmental damage).

 

  • 3. Shareholder Situation

In 2010-2011, Activision was owned by the Vivendi group (since the 2008 merger-acquisition, which was the reason for the disputed agreement). This ownership had two implications for the litigation with Infinity Ward:

  • Since Vivendi was listed, the outcome of the lawsuit would have directly impacted its market capitalization;
  • In early 2010, the Vivendi group had just been convicted by the US courts in the Messier case (stock manipulation between 2000 and 2002) and had provisioned 550 million euros for awarded damages. Under these conditions, it could not afford another lawsuit of a similar magnitude.

 

  • 4. Settlement Culture

Regardless of the case, some companies have a policy of systematically seeking settlement.

This was indeed the case with Activision concerning the Call of Duty franchise.

Furthermore, the publisher did not hesitate to engage in contentious operations to secure its franchise (poaching employees from a competitor, abrupt contract terminations with subcontractors, summary dismissals, etc.), even if it meant settling in potential legal actions.

 

  • A 5. Losing Position on the Merits

Finally, it goes without saying that a losing position on the merits significantly increases the propensity to settle.

In this particular case, Activision had deployed an entire operation (with its own code name: Ice Breaker) to justify the terminations of West and Zampella and to break the disputed agreement.

Therefore, it was particularly difficult for them to imagine an entirely positive judicial outcome.

In a nutshell:

Identifying a favorable situation for negotiation involves understanding the existing power dynamics between the parties and deciphering the extrajudicial vulnerabilities of the opposing party.

Such analysis, which we consider essential, allows for the definition of a litigation strategy. It also influences the assessment of damages, which should be approached differently depending on whether a judicial or a transactional outcome is sought.

At Outmatch, we systematically conduct this analysis as part of our assessments.

For further information, please contact: arnaud.cluzel@outmatch.fr

 

 

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