In-Fusio Sues Microsoft Over Mobile Halo Development Rights

Text of Complaint (December 18, 2006)
Memorandum in Support of TRO (December 19, 2006)

French Mobile Game Developer, In-Fusio has filed suit in the District Court of Seattle for breach of contract and breach of good faith and fair dealing. It seeks an injunction prohibiting Microsoft from terminating a development and distribution agreement.

In September of 2005 Microsoft entered into an exclusive Development and Distribution Agreement with In-Fusio to develop versions of the popular Halo video game for certain mobile platforms. Under the deal In-Fusio was to make scheduled minimum royalty payments totaling $2M between Jan 1, 2006 and Jan 1, 2008.

After making its first $500,000 payment, and submitting several design concepts that were not acceptable to Microsoft, the parties were at an impasse. According to In-Fusio’s Memo, Microsoft both: (i) couldn’t decide, internally, what it wanted the mobile version of Halo to be; and (ii) wanted In-Fusio to develop more of a “dumbed down” version of the Halo game for mobile platforms than what In-Fusio thought it had bargained for.

Nonetheless, according to In-Fusio’s claim, Microsoft insisted on receiving the next scheduled royalty payment of $500,000 in October of 2006 after Microsoft allegedly agreed to “postpone” such payment obligations while the parties resolved their design differences.

After providing written warnings in October, on November 27, 2006 Microsoft served In-Fusio with notice of its intention to terminate on In-Fusio’s failure to make the scheduled payment. In-Fusio refused to pay on the grounds that Microsoft was in breach for failing to reasonably accept its design concepts or provide written reasons for rejecting them, as the contract required.

Dale’s Comment: It is a common industry practice for a developer and publisher to split income and royalties from video game sales and for one or the other party to commit to royalty pre-payments to the other before game development is even complete.

Such contracts routinely stipulate that a party has the right to terminate on the material breach of another party. Failing to pay $500K on time is, by anyone’s account, a material problem.

In paragraph 16 of the Complaint In-Fusio alleges that under the agreement a party can only terminate if it is not itself in pre-existing breach. As mentioned above, In-Fusion alleges that Microsoft was previously in breach for failing to reasonably approve its designs or give written reasons for rejecting them and, as such, has no right to terminate.

Unfortunately, citing confidentiality provisions, In-Fusio did not provide a copy of the agreement or the highly unusual clause in question. I would like to see the clause because it is not typical for a termination clause to be so constrained. Rather, I suspect In-Fusio may be relying on standard contract language such as

“the non-breaching party may terminate this Agreement on 30 days written notice if the other party …”

to bolster this argument. The intent of such language, however, is usually to distinguish between the parties, not to set a condition precedent, as In-Fusio is possibly alleging, that a party must not be in breach (ie: the “non-breaching party”) in order to exercise its termination rights when the other party is in breach.

In paragraph 24 of the claim, In-Fusio alleges Microsoft waived its right to timely payment of the second $500,000 by “postponing” the payment. The claim does not say how Microsoft so postponed the payment. My guess is that any such agreement to postpone payment was not made in writing or In-Fusio would have claimed that important fact. Contracts typically include clauses that stipulate that such waivers must be in writing to be enforceable.

Without having seen the underlying documents or knowing any more than the press accounts and the statements made in In-Fusio’s complaint, In-Fusio will likely face an uphill battle convincing a Seattle court to ignore any “waiver must be in writing” clause that is almost certainly to be contained in the written agreement’s boilerplate langauge.