Activision sued over Scratch developer buyout

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.

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 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.

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.