Activision accused of trying to "kill off" indie studio

Call of Duty: Finest Hour developer files $10 million suit accusing publisher of fraud, breach of contract, and stealing employees and sequel ideas.

Last November, Activision released Call of Duty: Finest Hour, a console version of its wildly popular World War II shooter, Call of Duty. Despite receiving only middling reviews, the game was a solid success, becoming one of the publisher's leading games for the all-important holiday season. It is estimated to have sold more than 1 million copies for the Xbox, GameCube, and PlayStation 2 combined and was among the top 10 best-selling console games in the US until February 2005.

Given Finest Hour's success, it came as little surprise when in February CEO Ron Doornik announced a sequel was in the works. However, some eyebrows were raised a month later when Finest Hour's developer, independent studio Spark Unlimited, announced it had entered into a contract with Atari to develop a series of next-generation console games instead.

On the same day as the Spark announcement, Activision revealed that three of its internal studios would be working on console Call of Duty games. Original Call of Duty developer Infinity Ward would bring Call of Duty 2 to the Xbox 360, while Gray Matter and Spider-Man 2-maker Treyarch would codevelop Call of Duty: Big Red One for current-generation platforms.

In the wake of Spark and Activision parting ways, various theories began to circulate about the split. However, it wasn't until late last week that the full extent--and ugliness--of the rift was revealed. That's when Spark's attorneys filed a lawsuit against Activision seeking more than $10 million in damages and compensation, as well as an injunction preventing the release of Call of Duty: Big Red One.

A copy of the lawsuit obtained by GameSpot lays bare the acrimonious nature of the two companies' parting. Specifically, it accuses Activision of breach of contract, fraud and misrepresentation, and breach of an implied contract. According to Spark, these charges stem from Activision's deviating from a development agreement the two companies signed in September 2002. The deal followed several months of negotiations in the wake of E3 2002, when the then-nascent Spark, comprising veterans of Electronic Arts' Medal of Honor series, claims it pitched an idea that became the subject of a bidding war by numerous publishers, including Ubisoft, LucasArts, and Atari parent Infogrames.

According to Spark, the agreement it signed with Activision called for it to make three games, the first of which was Call of Duty: Finest Hour. However, in its complaint, Spark alleges that over the next two years "Activision induced Spark into reducing and delaying certain of its rights under the contract by falsely promising that it would continue to partner with Spark to develop the second and third titles in the Finest Hour line, when in fact Activision had already decided to bring the development of the sequel in-house at Activision so it could realize an even higher level of profit on the sequels than it had on the original game."

Specifically, Spark says that "in May 2004, Activision informed Spark that it would not continue funding the game [Finest Hour] unless Spark agreed to amend the development agreement and take a substantially reduced royalty rate."

The complaint contends that despite assurances to the contrary--by Activision executives such as president Kathy Vrabeck--during negotiation of the reduced-royalty amendment, the company never had any intention of having Spark make the second or third Call of Duty games. The studio contends that this amounted to "fraudulently inducing Spark to enter into Amendment No. 2 (which substantially reduced Spark's royalties on the first product)."

The complaint says "Activision repaid Spark by usurping Spark's rights and taking for itself only all benefits of the contract...then followed up this usurpation by seeking to kill off Spark altogether. [Emphasis added.] Activision refused to pay Spark the royalties owed on Finest Hour or the bridge financing due under the contract, stole Spark's idea, and then hired away Spark's own employees to develop that sequel, hoping that if Spark was sufficiently crippled, Spark would be unable to protect its rights."

Spark also claims that although a multiplayer component was not in Call of Duty: Finest Hour's original specification, the studio worked overtime at its own expense to create one with no bridge funding from Activision. "In the October through November time frame, a limited amount of Spark employees were working around the clock to implement a multiplayer [mode] into [the] game. The multiplayer was not in the game's original specifications, and the game was otherwise substantially complete. During the period, Activision had demanded that the remaining Spark employees vacate Spark's premises so that Activision could work closely with the key employees to implement the multiplayer. Although Spark had specifically negotiated a bridge funding provision that was meant to cover employee salaries and overhead during this gap period between products, Activision refused to provide this funding."

It is also Spark's contention that rather than supply the $750,000 in expenses the developer claims it incurred while implementing Finest Hour's multiplayer, it actually charged Spark $1,882,920.97 for the implementation, which it deducted from the first Finest Hour royalty payment Activision sent it in March 2005.

Spark also claims that "Activision charged Spark millions of dollars in developer assistance costs that were not approved by Spark and that were never contained on any amendment" to the developer agreement, including $300,000 in licensing costs "related to the Activision Game Engine."

The complaint also says that in November and October 2004, Spark submitted "formal sequel proposals" to Activision. Included in these proposals were "specific creative ideas" for a Finest Hour sequel centering on "'Operation Husky (Landing and Taking Sicily),' and included the '[l]anding on the beach with the Big Red One - [a] classic contested beach landing.'" Spark contends that after its ideas were "summarily rejected," Activision studios Gray Matter and Treyarch began work on Call of Duty: Big Red One, which features Operation Husky.

Overall, Spark's complaint contends that "Activision then breached the development agreement by failing to negotiate in good faith over a second and third product, and refused to provide any meaningful bridge funding." Spark's complaint claims that Activision said it had not decided on whether to make a sequel to Finest Hour when it told Spark it had rejected its sequel ideas and was "releasing" the studio from the development agreement. "Indeed, Activision simply waited until Call of Duty: Finest Hour was virtually complete and then abandoned its relationship with Spark," reads the complaint.

Last but not least, Spark says that after it was told it was being released from the development agreement, Activision began to actively recruit members of its development staff to work on Call of Duty: Big Red One, eventually hiring an unspecified number of individuals.

Activision officials contacted by GameSpot refused to comment on the Spark lawsuit, which is the policy of most corporations when asked about pending court cases. However, given the rancor of Spark's complaint, it's likely that this is but the first shot in a bitter legal battle.

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