The EA-Activision legal feud takes unexpected twists

The lawsuit over the breakup of Infinity Ward and Activision Blizzard has been a proxy war between two industry giants.

But this week, the legal case took some new turns. For a while, it looked like Activision would prevail, but now the outcome isn’t so clear. It started in 2010 when the founders of Infinity Ward, the Activision-owned game studio that turned Call of Duty into a billion-dollar franchise, were fired for breach of contract and insubordination. Co-founders Vince Zampella and Jason West said Activision owed them royalties, and Activision accused them of planning to defect to a new studio funded by its arch enemy, Electronic Arts. The founders fired off a lawsuit saying Activision conspired to get rid of them.

The legal action spiraled in a bigger battle for control of the first-person shooter market, which has turned into a multibillion-dollar business. Activision sued EA for interrupting its business by stealing away Zampella and West, who set up Respawn Entertainment and hired dozens of former Infinity Ward employees. Activsion recently claimed more than $1 billion in damages.

Activision said that it had to pull another studio, Sledgehammer Games, off of its own Call of Duty game to help the decimated Infinity Ward studio finish Call of Duty: Modern Warfare 3. That game generated more than a billion dollars in revenue forActivision, but the company said it could have made more profits and also completed another game in the Call of Duty family. EA could have been stuck holding the bag for a very large legal bill.

But EA and Activision settled the lawsuit this week. In a joint statement, the companies said: “Activision and EA have agreed to put this matter behind them.” They declined to disclose the details of the settlement, but Wedbush Securities analyst Michael Pachter said that no money changed hands. EA said it would not have to file an 8K financial disclosure related to the settlement, and EA never set aside a fund to insure against legal losses related to the case.

On top of that, Activision voluntarily agreed to pay $42 million in royalties that it owed to Infinity Ward employees — not including West and Zampella. But the trial will go forward in West and Zampella v. Activision case.

Los Angeles County Superior Court Judge Elihu Berle denied Activision’s motion to postpone the case for an additional thirty days. The trial will begin as scheduled on May 29.

Even more stunning were court disclosures about Project Icebreaker. Activision executives’ email records showed that they had allegedly conspired to find dirt on West and Zampella because the Activision management was fed up with their arrogance and wanted a pretext to fire them. This project preceded the time when the founders began communicating with EA and Hollywood agent Seamus Blackley, who helped get the Infinity Ward co-founders and EA together.

In other words, Activision was trying to get rid of the duo that it said were critical to the success of its Call of Duty business. In the legal filings, former chief legal officer George Rose at Activision asked Thomas Fenady, former director of information technology at Activision, to “dig up dirt on Jason and Vince” because “we just want to get rid of them.” Rose allegedly told Fenady that Activision Blizzard chief executive Bobby Kotick had given the orders. Rose also told Fenady not to get caught and said that “Bobby will take care of you” if things didn’t turn out well. Rose denied this in his deposition. Fenady reportedly tried to get access to West and Zampella’s hard drives and email records.

Activision said that it accepted the court judgment and looks forward to the trial. But this week has had a few big setbacks for its proxy war with EA, which is its biggest rival in the video game business.