Genius Vs. Activision/7 Studios: The Complaint Analyzed

Gamasutra has received a full copy of the lawsuit filed by Genius Products and Numark against 7 Studios and Activision over DJ title Scratch, and runs down the allegation and timeline in detail here. In analyzing the full 30-page complaint, for those not interested in reading through all of the legal jargon, here are some notable highlights from both the complaint overview and the claimed chronology. The Legal Complaint Although much of the initial allegations are outlined well in Genius Products' and Numark's initial statement about the lawsuit, it's worth noting that the duo are claiming that Activision is particularly interested in Scratch due to how far on in development DJ Hero is. As quoted: "Activision... is concurrently developing its own competing DJ-band video game to be marketed as part of its Guitar Hero game franchise under the name DJ Hero. Scratch DJ, however, is believed to ahead of Activision in terms of the development of, and scheduled release date for, the Game." The suit then claims that Activision negotiated to acquire Scratch, but "negotiations ceased after Activision learned from Genius that its game developer, 7 Studios, was behind in the contractual development schedule for the Game and that Genius and 7 Studios were close to signing a revised development schedule." "When Activision attempted to renegotiate its offer price, suggesting a substantial reduction in price, Genius terminated negotiations and entered into a joint venture with Numark to finish the development of the game." At this point, Genius claims, Activision "embarked on a sinister strategy of intentional interference and unfair competition", purchasing "the financially-troubled 7 Studios in order to delay and prevent the completion of the Game - in effect holding its competitor's game hostage." Scratch DJ: The Timeline The suit then lays out the timeline of the game's development and the controversy, revealing several notable claims along the way. Firstly, the development agreement was signed between Genius and 7 Studios on February 26th, 2008, and the terms of the deal were such that all IP was signed over to Genius. According to Genius' suit, by October 2008, 7 Studios had fallen behind in its development schedule. At that time, 7 Studios CEO Lewis Peterson informed Genius that the developer "had lost a significant client and was having trouble making payroll." (It's believed by Gamasutra that this client was failing movie-game publisher Brash Entertainment.) From there, 7 Studios assigned extra staff to the game, but "was still ultimately behind schedule." Nonetheless, Genius made a milestone payment early in December 2008 "in order to allow 7 Studios to make its year-end payroll and provide bonus payments to its staff. Although not required to do so, Genius complied with this request." From there, on January 26th 2009, Peterson informed Genius that 7 Studios "was out of cash" and that it would be unable to make its payroll and "get basic services ([such as] health insurance) back online." On February 6, 2009, Genius wired an early milestone payment of $303,000 to 7 Studios, despite the fact "it had not yet performed the work associated with that Milestone", according to Genius. Following focus tests in January 2009, 7 Studios and Genius looked to expand the scope of the game and provide a revised milestone schedule. But on February 2, 2009, Peterson told Genius that 7 Studios was "considering an unpaid furlough of its employees because it was behind on its payroll." Moreover, on February 11th Peterson said to Genius that "things will be bad over here" unless Genius made an extra unscheduled payment, so on February 2009, Genius advanced an additional $250,000 to 7 Studios "solely to protect the millions of dollars already invested in the game and again so that 7 Studios could make its payroll obligations." Activision - The White Knight Arrives? Genius then claims that, starting in January 2009, the company "received inquiries from a number of notable video game publishers seeking to purchase the game." On January 27, 2009, 7 Studios' Peterson introduced Genius to a friend -- who turned out to be RedOctane SVP Laird Malamed -- asking about the game. Although Genius was "wary of entering into negotiations with Activision", due to the competing product set, they did so nonetheless, and signed a mutual NDA on February 3rd, 2009. Crucially, on February 26th, 2009, Peterson emailed Genius about a conversation he had with Activision, mentioning that Activision was interested in who else might want to buy the game, and saying "if they [Activision] find out [that competitor] is not in the running, the interest level/value drops significantly." Even more notable, Peterson claimed that Activision was thinking about buying 7 Studios and that the firm "do[es]n't want [the game] to ship this year." He said Activision's purchase of 7 Studios would accomplish this because Activision "would then control the developer and would have a lot more control over how development went and when the game finished." He noted that Activision "would be in a much better negotiating position with Genius" after buying 7 Studios, and ended by saying that Activision "ha[s] ways to get what they would want that would leave Genius in a very difficult position, possibly with nothing." From there, Genius demonstrated the game to Activision, and on March 12th, Activision proposed a purchase price that was roughly equal to Genius' costs and did not "include the value of the intellectual property of the game" which it was previously assured it would do. Genius, Activision Talks Break Down From there, Genius rejected Activision's offer on March 13th, with Activision business/legal SVP Greg Deutsch saying on a phone call that "Scratch as an IP has no value", because "no one knows what Scratch is." Deutsch then claimed that Genius should be worried about the game infringing patents held by Konami and Activision (and previously discussed on Gamasutra), and that Genius would run into "a legal buzz saw" unless it shipped the game with Activision. He also said the game would not "see the light of day" unless distributed by Activision. At this point, offers were discussed for four days, but then Activision said it was "reverting to its opening offer for the game", due to the fact that it "had entered into a binding letter of intent to purchase 7 Studios" -- a deal that has now gone through. Genius believes that Activision acquired 7 Studios so the firm can "produce and/or enhance its own 'disc jockey-style' video game" and/or "impede the remaining work required by 7 Studios on the game in order to keep the game from being completed and going to market as scheduled", ahead of DJ Hero. Post-Acquisition, Things Get Hostile Following the acquisition, 7 Studios and Genius continued to work on a revised Scratch contract, but apparently, on April 3rd, when they met to sign it, 7 Studios "surprised Genius by presenting new, commercially unreasonable, bad faith and punitive terms and refused to execute the new amendment, instead demanding more than twice the additional development fees that Peterson had quoted in January 2009 and insisting on other additional and onerous terms." Some of the terms included monthly payment, separate of milestones, with rights reverting to 7 Studios if any were late, as well as "a carve out from 7 Studios' indemnification requirements for potential payment infringement." Following this, Genius decided to terminate the developer agreement and take over development "rather than continue to negotiate with a developer controlled by its competitors." This happened on April 3rd, but it's claimed that 7 Studios rejected the termination and would not hand over work, including in progress builds of the game. It also has not returned the "nine custom-manufactured turntable and beat-button game controllers" belonging to Numark. On April 4th, 7 Studios specifically instructed the security guards at their office "to prevent Michael Rubinelli and Fred Galpern of Genius from accessing 7 Studios' office." The legal document ends in Genius and Numark asking for an injunction from 7 Studios making a competitive game "for one year after release of the game", and disclosing Scratch DJ's trade secrets. It also asks for damages and attorneys' fees, and a jury trial.