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Activision Defeats Derivative Suit Over Culture, for Now (1)

May 24, 2022, 8:17 PMUpdated: May 25, 2022, 1:05 AM

Activision Blizzard Inc. is free of a derivative suit alleging company leadership failed to shut down a culture of racial and sexual harassment, but a federal judge in California said shareholders could try again on some claims.

Shareholders say the video game publisher’s directors and officers didn’t take appropriate action to stop discrimination at Activision Blizzard despite red flags.

But the shareholders didn’t make a demand on the company’s board before suing and they failed to sufficiently explain why doing so would have been futile, the US District Court for the Central District of California said.

The shareholders sued in 2021 after Bloomberg Law broke the news that California’s Department of Fair Employment and Housing was investigating allegations of workplace sexual harassment at Activision Blizzard.

The US Equal Employment Opportunity Commission also began an inquiry into the company’s culture.

The complaint didn’t “allege any lack of independence” on the part of the directors, so the court will only evaluate whether the shareholders “adequately pleaded that a majority of directors face a substantial likelihood of liability on any claim or received a material personal benefit from the alleged misconduct,” Judge Percy Anderson’s order said.

The shareholders argued that oversight failures, allegedly misleading statements in Activision Blizzard’s Securities and Exchange Commission filings and other documents, and material personal benefits establish demand futility.

But “several of the purported ‘red flags’ also include descriptions of actions taken to combat noncompliance” with policies against harassment and discrimination, Anderson said. “Though in hindsight Activision’s response to red flags could have been more drastic or immediate, the Director Defendants’ actions to remedy compliance issues defeats any plausibility of bad faith.”

The complaint also failed to “allege with particularity that the Director Defendants are responsible for the challenged statements,” so those can’t be a basis for liability, either. And the shareholders didn’t establish that any of the directors “received a material personal benefit arising out of the challenged conduct,” according to the order entered on the docket Monday.

“We are pleased the Court thoroughly rejected each of plaintiffs’ six causes of actions alleging that Activision’s Board of Directors did not fulfill their duties to shareholders,” the company said in a statement.

The shareholders have until June 1 to file an amended complaint strengthening their claims of breach of fiduciary duty, waste of corporate assets, unjust enrichment, and improper proxy solicitation. They can’t amend their contribution claim because it isn’t ripe.

Anderson threw out a related securities class action over the probes April 18. The investors in that case filed an amended complaint last week.

Wilmer Cutler Pickering Hale & Dorr LLP represents Activision Blizzard. Johnson Fistel LLP represents the shareholders.

The case is Kahnert v. Kotick, C.D. Cal., No. 2:21-cv-08968, order docketed 5/23/22.

(Updates with Activision comment in 10th paragraph.)

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editor responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com