Lack of duty

Activision Blizzard was fined $35 million for neglecting employee complaints

The settlement marked the end of an extensive SEC investigation
Gamers try out World of Warcraft, one of Activision Blizzard's most popular games.
Gamers try out World of Warcraft, one of Activision Blizzard's most popular games.
Photo: Sascha Schuermann (Getty Images)
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Activision Blizzard agreed to pay a settlement worth $35 million after the Securities and Exchange Commission (SEC) accused the popular video game developer of failing to properly address complaints of workplace misconduct. Federal regulators also alleged that the company violated whistleblower laws by requiring employees to provide notice if they received a request for supplementary information from the SEC.

“Taking action to impede former employees from communicating directly with the Commission staff about a possible securities law violation is not only bad corporate governance, it is illegal,” Jason Burt, director of the SEC’s Denver Regional Office, said in a statement.

In paying the settlement, Activision is not admitting nor denying the SEC’s findings. Activision’s representatives expressed satisfaction at solving the matter “amicably” in a statement.

Last month, the company scored a victory in the ongoing legal disputes surrounding allegations of sexual harassment and gender discrimination. A judge dismissed a case brought by shareholders who claimed the company misled them about the severity of the misconduct claims and the surrounding probes. Last March, Activision Blizzard settled allegations of workplace misconduct for $18 million with the California Equal Employment Opportunity Commission. The settlement required the company to take steps to fix its workplace culture and handling of employee complaints.

The initial SEC investigation began after the California Department of Fair Employment and Housing launched an inquiry into allegations of sexual harassment and pay discrimination at Activision’s Santa Monica offices. The California state agency accused the company of promoting a “frat boy culture” and said company leadership neglected to take action on the complaints.

This prompted federal regulators to launch their own investigation into how the company handled the reports of misconduct, eventually leading to the settlement.

The Microsoft deal’s ongoing scrutiny

Microsoft proposed a $69 billion acquisition of Activision in December but was quickly blocked by the Federal Trade Commission (FTC), which argued that the deal would “enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business.”

The FTC case isn’t scheduled to start court proceedings until August, a month after Microsoft’s offer expires. Microsoft and Activision are hoping to strike a deal before the case goes to litigation, with Microsoft offering to discuss a settlement with federal regulators. So far, the FTC has shown no willingness to negotiate a deal before the trial begins.

In January, Microsoft recanted its claim from initial court filings that the structure of the FTC inherently “violates Article III of the U.S. Constitution and the separation of powers,” saying that the language was a mistake and the FTC was an essential part of protecting competition and consumers.

Additionally, last Wednesday (Feb. 1) European Union regulators issued Microsoft a formal warning over its proposed acquisition of Activision. The European antitrust commission took particular issue with the possibility of Microsoft blocking access to the mega-popular Call of Duty franchise on competing consoles.

“Such foreclosure strategies could reduce competition in the markets for the distribution of console and PC video games, leading to higher prices, lower quality, and less innovation for console game distributors, which may, in turn, be passed on to consumers,” the regulators said in a statement delivered to Microsoft.

Activision’s chief communications officer Lulu Cheng Meservey sought to appease concerns about competition in a Twitter thread inspired by the success of HBO’s The Last of Us, a tv show based on Sony’s video game, arguing that Sony has many weapons in its IP arsenal to remain a market leader. But her argument that the FTC is concerned about market players conceals the true goal of the regulators, which is consumer protection.

Quotable: The Last of Us shows Sony will be just fine, according to Activision CCO

“The TV show The Last of Us is already generating renewed interest in that game. Sony’s talent and IP across gaming, TV, movies, and music are formidable and truly impressive. It’s no wonder they also continue to dominate as the market leader for consoles. In gaming, Sony is ‘the first of us’ - and they will be just fine without the FTC’s protection.” —Activision CCO Lulu Cheng Meservey in a Twitter thread dated Jan. 30.

The stakes are high for Activision’s upcoming earnings report

The embattled company is set to report largely positive fourth-quarter earnings on Monday (Feb. 6), buoyed by the continued success of marquee franchises like World of Warcraft and Candy Crush. According to Zacks Investment Research, the consensus estimate for revenue is roughly $3.22 billion, a 30% increase from the same figure last year.

The company’s earnings beat estimates in two of the last four quarters, while missing estimates in the other two. ATVI was down 1.15% on the news of the settlement at 10:45 am in New York.

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