Electronic Arts Fights Rival, Athletes, Insurers and Game Creator in Wave of Litigation
Is the video game company disclosing sufficiently liability from various lawsuits?
In its most recent quarterly report to the SEC, Electronic Arts indicated that its investors shouldn't worry about the company's ongoing legal battles. The giant video game publisher wrote:
"We are subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Condensed Consolidated Financial Statements."
Meanwhile, the company is currently engaged in lawsuits on three escalating fronts where damages could rise into the billions of dollars, and maybe threaten some of the company's most lucrative franchises. Next year could be an important one for the company in various California courtrooms.
One of the battles is with Activision Publishing as a result of fallout from the departure of two developers, Jason West and Vincent Zampella, credited with launching two of the most successful video games in history – Call of Duty and Modern Warfare.
West and Zampella were top executives at the Infinity Ward studio, which was acquired in 2003 by Activision. In early 2010, the two sued Activision for allegedly terminating their employment weeks before they were to be paid substantial royalty payments as part of their existing contracts for Modern Warfare 2.
Activision struck back with a $400 million counterclaim against EA, who was blamed for the ordeal. Allegedly, top executives at its rival had called the two and in a purported "hijack," urged them to leave, even though they were under contract.
On Wednesday, the Los Angeles Superior Court judge overseeing the case declined to dismiss the counterclaims, rejecting EA's argument that West and Zampella were free to explore future employment opportunities. A trial is expected next year.
On a second front, EA is still contending with many former collegiate athletes who claim their likenesses were exploited in sports-themed video games. Some of the claims have been dismissed. Others have been consolidated into a mega-action in California. These lawsuits are said to threaten some $4 billion in licensing deals and potential damages have been estimated as much as $1 billion.
Interestingly, EA is now involved in a dispute over whether various insurers have an obligation to indemnify the company on this front.
In October, the National Union Fire Insurance Company of Pittsburgh brought a lawsuit in California federal court in the interest of withdrawing itself from having to defend both EA and its partner, the Collegiate Licensing Company.
The insurer reported that EA and/or CLC had tendered a total of 18 lawsuits, seeking a defense and indemnity, but makes the argument that policies covering "personal injury and advertising injury," including copyright/patent/trademark infringement, don't encompass allegations brought by those athletes and/or indemnification isn't warranted when injury is "caused by or at the direction of the Insured with the knowledge that the act would violate the rights of another."
Since the lawsuit was filed, several other insurance companies including Allied World, Great Divide, and American Casualty have also sought to intervene to duck coverage obligations. According to the latter in papers submitted in court last week, payments for defense costs have already been suspended.
Finally, EA is also defending a big lawsuit by Robin Antonick, who created the first version of the mega-successful Madden NFL Football video game.
In September, a federal judge refused to dismiss Antonick's lawsuit that alleges he's entitled to tens of millions of dollars in owed royalties and potentially billions in profits. Antonick says that EA tried to duck its obligations to pay him by claiming that new iterations of the video game weren't derived from his code, which he says isn't true.
Recently, the two sides have been fighting about which documents should be produced in the discovery stage and which should be privileged. Antonick has told the court that EA has tried to "thwart Plaintiff's discovery at every turn," and is now seeking source code for every edition in the Madden series that EA has published annually for the past 23 years and financial data for all of those games.
EA counters that allowing Antonick personal access goes too far and believes that the plaintiff hasn't supported the contention that he's entitled to financial information beyond 1992.
EA has publicly expressed its confidence in all of these lawsuits, saying they are without merit.
But is the video game company sufficiently disclosing liability from pending litigation that could possibly have a "material adverse effect" on its financials? Legal experts say that it's mostly up to the company to decide this, and when we put the question to the company, a spokesperson gave us no comment.