Video game sector enters lawsuit age.

Hollywood is studded with lawsuits in which writers or producers claim that a big movie studio they had worked for wound up stealing their ideas. Now, these familiar squabbles have found their way into the video game business.

Spark Unlimited Inc., developer of the popular World War II game "Call of Duty: Finest Hour," has sued Activision Inc., claiming that the Santa Monica-based game publisher broke its three-game contract after the first release. Activision then allegedly stole Spark's idea for the sequel, developing "Call of Duty: The Big Red One" in-house.

The $10 million lawsuit is not getting much attention on Wall Street, but it's becoming a big deal in the video game business. An industry that used to be known for its freewheeling creativity and cult-like business practices is becoming more like other realms of show business.

With consolidation and development costs hitting $10 million to $20 million per game, only a handful of big publishers dominate the field. Independent developers, meanwhile, find themselves in a bind. A successful game can lead to a lucrative sequel, but increasingly publishers want to purchase the developers themselves rather than continue paying royalties.

Or worse, the publishers could jettison the developer and make the sequel themselves.

It's not like the old days.

"As a developer, you sort of took your lumps," said Jason Della Rocca, executive director of the International Game Developers Association. "Developers weren't savvy on business or legal issues, but that's changing. We're seeing in the case of Spark that they're just not going to take it anymore."

Still, lawsuits are "a very risky proposition in a small industry," said Lewis Peterson, president and chief executive of 7 Studios, the independent developer behind the "Fantastic Four" game published by Activision. "One of the keys of being an independent is the ability to work out those problems and not burn those bridges."

Besides money, Sherman Oaks-based Spark is seeking an injunction to prevent Activision's release of the sequel, scheduled to ship in November. Activision is reviewing the lawsuit, filed in Los Angeles Superior Court. There was no further comment from the company.

Going in-house

Publishers have been known to hire away key talent or simply stop doing business with recalcitrant independents.

"When you want to make a sequel to a movie, it's very, very difficult to do without the cast that was in the first one," said James Korris, creative director of the Institute for Creative Technologies at the USC. But with video games, "You can play a lot faster and looser with the artists and producers."

In-house sequels are cheaper to make and publishers get to keep more of the revenues. "It's definitely part of (Activision's) strategy to acquire proven developers. It lowers their overall cost," said Michael Pachter, an analyst with Wedbush Morgan Securities.

Mike Arkin, chief executive of game developer Zono Inc., admits that companies like his, which has 16 employees, are subject to the whims of publishers. "Running a small studio is absolutely the worst thing that you can do," he said. "The only escape from that kind of torture is to be bought by a publisher."

Arkin said he hopes one of his projects will turn into something bigger and lead to an acquisition. But others don't feel the same way.

"We've made it very publicly known that we are not interested in being acquired," said Ted Price, founder and chief executive of Insomniac Games, developers of the "Ratchet & Clank" and the "Spyro the Dragon" series for Sony Corp.'s PlayStation 2.

"I hope the industry doesn't consolidate to the point where you can count all the indie developers on one hand," he said. "And I'm afraid we're headed in that direction."

Publishers typically provide the independent studios with a funding stream against future royalties. Payments are based on meeting certain milestones. As games become more expensive and complex, development teams swell to 50 or 90 people, requiring more money upfront from the publishers. That increases their risk and also stretches developers' cash flows to keep their businesses going in between those milestones.

"You used to be able to bring together three to five or 10 people in a garage, and you could make a game," said Craig Allen, cofounder and chief executive of Spark. Now, he said, "If you have a team size of 40 and you go without work for a month, you're out of business."

Part of Spark's lawsuit is over "bridge financing," the payments that bridge the gap between milestone payments or sequel projects. Spark alleges that Activision refused to pay royalties owed on "Finest Hour," as well as the bridge financing.

Spurned in sequel

Spark Unlimited was founded in 2002 with 28 people, mostly former Electronic Arts Inc. employees in L.A. The group, led by Allen, developed the successful "Medal of Honor" franchise. Spark then set out to win a long-term contract with a publisher for the next war-game franchise, and according to the lawsuit, settled on Activision because it offered a three-game deal. The studio swelled to 90 employees while developing "Call of Duty: Finest Hour."

Upon its release in 2004, "Call of Duty: Finest Hour" became a successful, critically acclaimed video game. That's when things started to go wrong, according to Spark's lawsuit.

"Activision repaid Spark by usurping Spark's rights and taking for itself only all benefits of the contract," reads the claim. It alleges that "Activision refused to pay Spark the royalties owed on 'Finest Hour' or the bridge financing due under the contract, stole Spark's idea for the Sequel and then hired away Spark's own employees to develop that Sequel."

Spark claims there were several publishers interested in entering agreements in 2002, when the company first launched, but that it chose to work with Activision because its agreement would allow Spark "to retain key employees and continue its business operations" in between products.

Though the contract did not obligate Activision to develop, produce and publish the sequels, it stipulated that if Activision decided to make a sequel, Spark "shall have first right of negotiation," the suit said. Instead, the sequel is being developed by two of Activision's in-house studios, Grey Matter and Treyarch, which have experience making the "Medal of Honor" World War II games and the "Call of Duty" PC game.

Such contracts are laced with stipulations of "negotiating in good faith," but the caveats governing who has the rights to make the sequel show how much the power has shifted to the hands of publishers.