Activision Investors to Urge Revival of #MeToo Stock Drop Suit

Activision Blizzard Inc. investors are set to ask a US appeals court on Thursday to reinstate their allegations that the video game maker propped up its stock price by concealing state and federal sexual harassment investigations.

The argument’s outcome could clarify what a company is required to divulge when the government initiates a high-stakes investigation. Public filings by Activision, now a Microsoft Corp. unit, saying that it faced only “routine” investigations were false, the investors say.

Activision, fighting to lock down the lower court’s dismissal of the proposed class action, in a July brief told the US Court of Appeals for the Ninth Circuit that the suing investors’ securities fraud complaint relied on “speculation, bare conclusions, and hindsight.”

The Activision probes at issue led to a nearly $55 million settlement with the California Civil Rights Department announced Dec. 15, 2023, and an $18 million settlement with the US Equal Employment Opportunity Commission in March 2022.

In February 2023, Activision agreed to a separate $35 million settlement with the US Securities and Exchange Commission over allegations that it failed to establish controls to properly handle workplace misconduct complaints and disclose them, and that it violated a whistleblower-protection rule. The company didn’t admit liability in any of the three cases.

The state’s lawsuit had alleged the entertainment company had a “frat boy culture” and subjected women to unequal pay, constant sexual harassment, and retaliation.

‘Case Study’

“When the Civil Rights Department began its investigations, that was seen as a moment for companies to be aware of risks” related to environmental, social, and governance issues, said Angeli Patel, executive director of the Berkeley Center for Law and Business at the University of California Berkeley School of Law. ESG concerns “were starting to gain traction,” she said.

Corporate ESG policies and investment managers’ ESG-focused strategies have drawn a great deal of politically charged controversy ahead of election season, with Republican officials and candidates making their “anti-woke” stances known.

But Activision’s recent settlement with the California regulators is “a warning or case study” on why ESG remains worth looking at, Patel said.

“The Ninth Circuit tends to see these issues as important,” she said. “A ruling against the investors would signal that future cases would need to provide clearer evidence connecting the facts.”

The case may be hindered by evidence issues that come up in underlying workplace-conduct cases. “The reason why so many cases get dismissed for not having a clear pleading is because workplace culture related lawsuits often use circumstantial evidence,” Patel said.

“Sexism or toxicity is already such a difficult concept to measure and so plaintiffs struggle in showing exactly how a workplace culture contributes to their specific incident,” she said. “Often more concrete evidence is needed such as emails showing that the company was aware of a toxic culture problem.”

Nevertheless, the appeals court’s approach may not affect corporate approaches to ESG risks directly, she said. Regardless of the outcome, companies will want to be prepared through risk mitigation and risk prevention, she said.

Undisclosed Investigations

The Activision shareholders argued the investigations, which began in the fall of 2018, were anything but routine. Each used mechanisms “reserved for investigations into serious systemic misconduct,” the investors said in their opening brief.

Activision recognized the risk they posed by changing its human resources procedures, starting an internal investigation to “thwart” the federal and state ones, and firing “key employees whose misconduct it had previously been willing to tolerate,” the investors said.

But the gamesmaker “reassured investors for more than two years in Activision’s 10-Ks and 10-Qs that any undisclosed investigations were ‘routine,’ in the ‘ordinary course of business,’ ‘not significant,’ and were not expected ‘to have a material adverse effect,’” the plaintiffs said, referring to those SEC filings.

After the state Civil Rights Department, then called the Department of Fair Employment and Housing, filed its lawsuit, employee terminations allegedly caused a delay in two video game releases. Those delays in turn prompted the company’s stock price to drop more than $25, according to the brief.

“To be clear, Activision disputes all of the underlying allegations of wrongdoing,” the Santa Monica, Calif.-based company and several individual defendants, including former CEO Robert Kotick, said in their answering brief.

Activision and its investors have teed up questions about the factual detail in the complaint, which must meet heightened pleading rules for fraud and, under the Private Securities Litigation Reform Act, for securities fraud.

The lower court failed to consider some of the material in the complaint, didn’t construe the allegations in the investors’ favor, and didn’t analyze them “together and in context,” lead plaintiff Jeff Ross and other shareholders said.

Activision countered that the investors “rely impermissibly on hindsight, focusing on what eventually happened in the second half of 2021 after DFEH and EEOC asserted they had cause to pursue claims.” Other allegations were conclusory, speculative, or anecdotal, it said. Their pleading about Kotick’s, and the company’s, level of intent is also speculative, the company said.

Hearing the case will be Ninth Circuit judges Johnnie B. Rawlinson and Holly A. Thomas, joined by Sixth Circuit Judge Danny J. Boggs, sitting by designation.

The case is Cheng v. Activision Blizzard, Inc., 9th Cir., No. 23-55158, oral argument set 1/11/24.