Activision sued over Scratch developer buyout

By Tor Thorsen, GameSpotPosted Apr 14, 2009 8:48 pm PT

Megapublisher accused of acquiring 7 Studios to halt work on DJ Hero rival; "substantial damages" sought along with return of software assets, Numark turntable controller.

Like most cash-flush corporations, Activision has been involved with a fair share of litigation. The past several years have seen the massive publisher cross legal swords with THQ, Harmonix, Viacom, guitar maker Gibson, Turning Point developer Spark Unlimited, a few former RedOctane employees, some of its shareholders, and several irate customers. Almost always, though, the company has either settled or come out on top.

The cel-shaded Scratch in action.

Now yet another company is taking the Guitar Hero and Call of Duty publisher to court. Tuesday evening, Scratch DJ Game LLC, publisher of the forthcoming Scratch: The Ultimate DJ, filed a legal action accusing Activision of various misdeeds. The LLC is a joint venture between DVD distributor Genius Products and audio-equipment manufacturer Numark Industries, who commissioned indie shop 7 Studios to develop Scratch to try to break into the rhythm-game market.

Currently, said rhythm market is largely controlled by Activision's rock-heavy Guitar Hero series, the third installment of which grossed more than $1 billion (a milestone that the rival Rock Band series just hit). Besides this month's release of Guitar Hero: Metallica and this summer's Guitar Hero: Smash Hits, the company plans on expanding into new types of music with DJ Hero and the rumored Band Hero. The former game is currently set for a multiplatform release in the fall...right about the time that Scratch: The Ultimate DJ was originally set to ship in September

However, today's suit may upend all of that. It alleges that "Activision has engaged in intentional interference with contract, breach of contract...and misappropriation of trade secrets obtained from Genius to purchase 7 Studios, which is under contract to develop the much-anticipated new hip-hop video game, Scratch: The Ultimate DJ." (Emphasis added.) The buyout, which had not been publically announced, is already complete.

According to the complaint itself, 7 Studios had fallen behind schedule in October 2008, with its CEO Lewis Peterson declaring that the shop had run "out of cash" on January 26, 2009. Genius says that, during the next two months, it gave the Los Angeles-based studio two payments totaling $553,000 while renegotiating milestones so 7 Studios could complete its work.

Genius asserts that in January it also began receiving offers from "a number of notable video game publishers" wishing to purchase Scratch outright. Peterson then allegedly told a Genius executive that he had a friend at a publisher asking if the game was still for sale. The complaint identifies the friend as Laird Malamed, senior vice president of Guitar Hero and DJ Hero label Red Octane.

The only glimpse so far of DJ Hero.

The suit states that on January 29, Malamed spoke with Genius officials and revealed that Activision was working on DJ Hero--a fact officially announced the day after. Though self-admittedly "wary" of the offer, Genius says that it signed a nondisclosure agreement with Activision on February 3, and thereafter provided confidential data about Scratch and 7 Studios' progress on the game.

Activision then proposed that it buy the Scratch IP and associated music licenses from Genius for a sum that would cover the latter's "multimillion dollar" development costs. On February 26, Peterson sent an e-mail saying that he had spoken about the possibility of selling Scratch to an unnamed competitor. He is then quoted as saying that "If they [Activision] find out that [that competitor] is not in the running, the interest level/value drops significantly."

Genius contends that in the same e-mail, Peterson said that Activision "do[es]n't want [the game] to ship this year" and was willing to buy 7 Studios to prevent it from happening. He then said that such a move would prevent a 2009 Scratch release since Activision "would then control the developer and would have a lot more control over how development went." He allegedly ended his e-mail with the ominous summary that Activision "has ways to get what they want that would leave Genius in a difficult position, possibly with nothing."

At 5 p.m. on February 26, Genius says that it demonstrated Scratch for Activision, which then asked the company for its development costs to date--information Genius says that it supplied on March 6. After some initial purchase negotiations, Genius rejected Activision's initial purchase offer. In a conference call the following day, Genius claims that Activision senior vice president of legal and business affairs Gregory Deutsch declared that "Scratch as an IP has no value…[because] no one knows what Scratch is."

Deutsch then allegedly said that unless Activision published Scratch, Genius would run into a "legal buzz saw" by patent holders of technology similar to the game's Numark-designed turntable controller. Beatmania publisher Konami, who sued Harmonix parent Viacom over rhythm-game patents, was apparently named specifically. The complaint then alleges that Deutsch ended the call by saying that if Genius went with another publisher, Scratch "would not see the light of day."

Genius claims that, during the next four days, it and Activision exchanged a series of offers and counteroffers. Then, on March 19, 2009, the complaint says that "Activision advised Genius that Activision was reverting to its opening offer for the game (a substantial reduction to a price that equaled Genius' costs to date and reflected no compensation for Genius' intellectual property). Activision explained that the reduction was due to the fact it had entered into a binding letter of intent to purchase 7 Studios." The buyout was finalized in the following days.

One of Numark's turntables.

Genius contends that, after the buyout of 7 Studios was finished, Activision hampered work on Scratch by "commandeering the individual game programmers who were devoted full time to the game." On or about April 2, Genius claims that it and the new Activision subsidiary came to a verbal agreement to finish Scratch. However, at a meeting the following day, Genius said that it was "surprised" when 7 Studios refused to sign a written agreement, "instead demanding more than twice the additional development fees that Peterson had quoted in January 2009" and monthly payments that would be delivered irrespective of milestones being reached. 7 Studios then demanded that if any such payments were missed, "all intellectual property rights to the game would revert to 7 Studios."

Genius claims that as a result, it terminated its agreement with 7 Studios on April 2 and announced that it would send employees to retrieve "all Scratch DJ-owned property relating to the game" on April 6. When that day came, reads the complaint, 7 Studios rejected the termination notice and refused to turn over all Scratch hardware and software assets--including a controller based on Numark's popular turntables. Genius again requested in an April 10 letter that it be given back its assets, including the alpha build of the game--a request that was never granted.

Genius' suit seeks the immediate handover of said assets and controller so it can "attempt to salvage its 'first to market' status." The suit also seeks "substantial damages" from Activision, whose parent company Activision Blizzard grossed $2.3 billion in this past October-December quarter.

As of press time, Activision reps had not responded to requests for comment on the suit.

118 Comments

  • fmprodguy

    Posted Apr 18, 2009 8:51 pm PT

    squidracerX:
    Scratch didn't lose anything, yet. Acti-Bliz will most likely hire a huge lawyer pool and try to crush them unless the Bad PR has them settle out of court. What was refused, is 7 refused to turn over the assets.

    Additionally, in court matters the exact nature of what emails who does and does not have exactly they will never share totaly with press. Simply put, court is a bit like Poker.... Can't show them your entire hand.

    Doesn't sound like Activision is acting very well on the surface does it.

  • squidracerX

    Posted Apr 17, 2009 12:19 pm PT

    Well scratch lost due to "lack of evidence", they say there were all these emails from Activision with threats, (and we ALL know how easy emails are to save), but if they don't have the emails on file, a judge won't believe them. Also they said this was delaying their game, but they already said their game WAS delayed. This doesnt mean that Activision is NOT GUILTY, it just means lack of evidence. i assume that's what happened here. But as to why they are not getting their own material back from 7 studios? That seems shady to me!?

  • NateDawg31

    Posted Apr 16, 2009 8:10 pm PT

    @okassar: I have nothing against Activision but breaking antitrust laws are not right no matter what you may think about the company doing it. And if they are making such great games then why would they even want to resort to such low levels, wouldn't they just make a better game and beat Genius that way? And as a supporter of Activision as a developer you should be one of the first people to be upset with them over this because you of all people should believe that this is beneath them.

    And Genius probably has a good chance in this case the Federal Trade Commission's website says about Section 7 of the Clayton Antitrust Act of 1914 that it "prohibits mergers and acquisitions where the effect 'may be substantially to lessen competition, or to tend to create a monopoly.'" The quote they used comes directly from the law itself. And the buyout of 7 Studio and the subsequent actions by the developer could be proven in court to of had the effect of reducing competition for Activision's DJ Hero which is due later this year.

    I do hope that Genius does end up winning this case. Not because I hate Activision or think that Scratch is going to be a great game. From the video I think Scratch is going to be a terrible game in fact. But I do hate the precedence that would be set if Activision were to win. I believe that the best way for there to be better games is to have as much competition as possible so developer's need to create better games in order to separate themselves from their competition.

  • nintendoboy16

    Posted Apr 16, 2009 7:47 pm PT

    @AlexandLandon
    I know, as I said before, I didn't know what I was thinking on the previous post. I think we should end the discussion at this point due to the latest news about this. This was a quick lawsuit, though, makes me wonder on how Konami vs Harmonix is going.

  • AlexandLandon

    Posted Apr 16, 2009 3:41 pm PT

    @nintendoboy16:: Konami doesn't own the patents for the wiimote and nunchuck. A lot of games on the wii use the wii-mote and nunchuck. I think Nintendo would want third party developers to use the Wii's controllers. How else would we play most of the Wii titles? The reason Konami is suing Harmonix is because Konami DOES own patents for their unique guitar and drum controllers that Harmonix stole and tried to patent as their own.

  • nintendoboy16

    Posted Apr 16, 2009 2:06 pm PT

    @AlexandLandon

    Well, both Wii Music and the Wii version of Rock Revolution have air instruments using Wii Remote and nunchuk, but I don't know why I said that before. Maybe because I was worried if Nintendo was going to get in the same trouble like what Harmonix got into (which was completely stupid and I don't know why I rooted for Harmonix for their fightback suing). Meh, maybe that Konami vs Harmonix suit had me worried that they'll do the same for Nintendo. They've got into enough lawsuits already, which is why I've been seeing a lot and thinking these lawsuits are stupid in my opinion.

  • okassar

    Posted Apr 16, 2009 1:45 pm PT

    I hope Activision wins actually,unlike EA,they're a big company that's actually consistently making good games--like half of my games are Activision.I don't care what they're being sued for....

  • soulless4now

    Posted Apr 16, 2009 1:02 pm PT

    Can't say I'm too surprised. I always wondered what would happen since the two games seem to be very alike and now I guess I have my answer...

  • yukine

    Posted Apr 16, 2009 12:17 pm PT

    Dirty pool, Activision. Hopefully Genius will win their lawsuit, as their complaints are seemingly valid.

  • otanikun

    Posted Apr 16, 2009 7:57 am PT

    Who saw that coming? Anybody? Anybody?
    When I first saw this news, all I could think about was pure sweet karma biting Activision in the butt and thought it was the funniest news piece I've seen all week.

    So to recap my funny moment I had that night it came about this way;

    Konami > Guitar Freaks/Beat Mania (Uses scratchboard based gameplay)
    Activision > Guitar Hero (*Basically a rip off franchise of the original Guitar Freaks which uses the same guitar gamepad)
    7 Studios > Scratch the Ultimate DJ
    Activision again > DJ Hero (rip of Beatmania, which is followed by a subsequent buyout for 7 Studios)

    It came about in that exact same way, and I got to thinking that the originality of these music games have already run dry and that I'm starting to see it's decline with this lawsuit, of that I hope that 7 Studios wins and Activision has to pay a heavy sum of cash out.
    Now I'm not saying I dislike Activision, but rather I still do in some respects, but with stuff like this they're loosing the respect of fans like me and this just kinda puts them in that position where they need to be careful where they tread and which companies they're going to buyout without due reason why, besides preventing the other company from releasing it's game.

  • AlexandLandon

    Posted Apr 16, 2009 7:39 am PT

    @Nintendoboy16:: Why would Konami do that? Wii music doesn't use a controller patented by Konami.

  • morgos15

    Posted Apr 16, 2009 7:07 am PT

    @conan6980: Did I say it was alright? No... I said "it's not right" but it IS what happens. What I was trying to stress was don't think it doesn't happen far more often than you hear about. This isn't exactly rare in the business - it's exaggerated when its a big corporation that people already have a hate for. Practically every high end corporation is guilty of this type of thing - don't kid yourself.

  • nurse_tsunami

    Posted Apr 15, 2009 11:12 pm PT

    Wow, that reads like a crime novel or something out of high school (he said, she said). Even if Genius got the alpha build of the game now, there is no way they'd beat DJ Hero to market since they'd have to find a new developer, get them up to speed, and get all the work done. Or they might just release a half-finished game to beat it. Either way, I agree that all this time both studios could have been making something more interesting to play than a pretend record player.

  • StJimmy15

    Posted Apr 15, 2009 10:03 pm PT

    or or or! we could just not release ANY DJ games and thus not defile any consoles...

  • JReefer1

    Posted Apr 15, 2009 9:40 pm PT

    WACK.

  • nintendoboy16

    Posted Apr 15, 2009 9:06 pm PT

    @AlexandLandon

    "No DJ game can possibly be as good as IIDX. Konami will sue them both."

    Good luck to Konami if they do so. Next they'll sue Nintendo over Wii Music.

  • xblane

    Posted Apr 15, 2009 8:25 pm PT

    That is messy... :s

  • frogiggy323

    Posted Apr 15, 2009 8:00 pm PT

    Activision is turning into the new EA, seriously.

  • MasterChief1694

    Posted Apr 15, 2009 7:59 pm PT

    To powerwalk- Crab people taste like crab, talk like people.

    anyway, this makes no sense.

  • PhilWil92

    Posted Apr 15, 2009 7:28 pm PT

    @CreatureRising
    Also the fact that our economy is in HORRIBLE condition doesn't justify doing corrupt business practices. What's wrong is wrong. No matter how our economy is.

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