Settlement Talks Break Down Between U.S. Justice Department, Activision Blizzard Over Esports Antitrust Probe

Settlement discussions between the U.S. Department of Justice and “Overwatch” and “Call of Duty” publisher Activision Blizzard regarding an antitrust probe over a previously instituted “competitive balance tax” in those two games’ esports leagues have broken down, sources familiar with the investigation told The Jacob Wolf Report.

The Department of Justice first opened its investigation after a series of September 2018 tweets made by former London Spitfire general manager Susie Kim about a soft salary cap, which discouraged teams from excess spending in the first few seasons of the Overwatch League and Call of Duty League.

Dot Esports first reported the investigation in July 2021; Activision Blizzard confirmed its cooperation with the Department of Justice in a statement in that report.

Throughout 2022, attorneys at Chicago-based Winston & Strawn LLP, which is jointly representing Activision Blizzard and many of the Overwatch and Call of Duty League teams, have participated in settlement discussions with the Department of Justice, according to sources.

But in the past few weeks, those discussions ceased after Activision Blizzard refused to make certain concessions, including anti-salary cap rule changes that would last beyond the company’s impending acquisition by Microsoft—which is expected to close in summer 2023—and other public statements regarding the rule.

After the investigation began, Activision Blizzard nixed the competitive balance tax rule in October 2021, according to a report from the Sports Business Journal and confirmed by The Jacob Wolf Report.

The competitive balance tax rule cost teams one dollar for each dollar spent over a limit that increased year over year. That limit was set at $1.6 million in 2020, according to Dot Esports.

Essentially, for each dollar spent on a roster’s salaries above that limit, that team would be required to pay double the amount—once to the player and once to a pool collected by the league. The luxury tax dollars would then be distributed to teams that spent below the salary cap.

The Jacob Wolf Report is a reader-supported venture. Free and paid versions are available. The best way to support us here is by taking out a paid subscription.

The Department of Justice has focused on whether or not that salary cap negatively impacted player compensation. Throughout the course of its investigation, it has interviewed a number of players; their agents and attorneys; former broadcast talent; former Activision Blizzard, Overwatch League and Call of Duty League employees; and others familiar with the leagues’ policies.

The Department’s Civil Conduct Task Force is leading the investigation, and since settlement discussions ceased, it has resumed gathering information and assessing whether it has a viable legal case, sources said. The nature of the investigation is not criminal, sources told Dot Esports in July 2021.

While luxury taxes are common in traditional sports leagues such as the NFL and NBA, those leagues feature unionized player bases and collective bargaining agreements that exist between the players associations and the leagues themselves. While some players associations do exist in esports, none of them are official unions or have collective bargaining agreements. In the case of “Overwatch” and “Call of Duty,” no players union exists for either.

The esports antitrust probe is just one of many league battles that Activision Blizzard is currently navigating.

In July 2021, the California Department of Fair Employment and Housing, now known as the Civil Rights Department (CRD), sued the Santa Monica and Irvine-based developer, alleging rampant sexual harassment and gender discrimination toward female employees. Despite Activision Blizzard asking several courts to dismiss that lawsuit, a California appeals court greenlit it to move forward on Oct. 24. It is expected to move to trial in early 2024, according to Axios’ Stephen Totilo.

Thank you for reading The Jacob Wolf Report. This post is public so feel free to share it.

Activision Blizzard is also the target of a U.S. Securities and Exchange Commission investigation into how much the company and its chief executive, Bobby Kotick, knew about the allegations levied in the CRD’s lawsuit prior to its filing, and whether or not it withheld information from its board and its shareholders. A November Wall Street Journal report said that the company withheld information regarding a two-year-long Equal Employment Opportunity Commission investigation and even the SEC’s probe to its shareholders, prior to those becoming public via filings by the EEOC and another report from the Journal.

Microsoft and Activision Blizzard are also still the subjects of regulatory review for their merger, which the two companies agreed to in January. Despite them not meeting much regulatory pushback in the U.S., the two companies recently received scrutiny from U.K. and Belgian regulators on the transaction.

The Call of Duty League’s season ended in August, while the Overwatch League is playing its grand finals this weekend in Anaheim, Calif. Its season will end on Friday.