Reply To: Star Citizen – Musings
CRYTEK v CIG/RSI LAWSUIT UPDATE
Parts of this article first appeared in my breaking news Twitter thread.
On Dec 12th 2017, CryTek sued CIG and RSI. Shortly following their Jan 5th 2018 response to the lawsuit, CIG/RSI filed a motion to dismiss with the court on Jan 6th 2018. Since that time, very little has happened as we waited to hear the judge’s ruling on the motion to dismiss. I have been tracking all of this over in this dedicated forum.
Now the judge has finally ruled on the motion to dismiss, denying 4 out of 6 items. It’s not looking good for CIG at all. I predicted this outcome months ago. You can read the filing here.
The long and short of this is that CIG/RSI are facing a very serious issue that could have long-term ramifications. That they could even hope to settle this for less than $20M, is a pipe-dream; unless of course CryTek are desperate and willing to take whatever they can, plus attorney fees. Even with the punitive damages temporarily off the table – assuming they don’t re-file as per the judge’s suggestion (bottom of last page in the filing) – the breach in Section 2.4 alone is already a major slam dunk. Combining that with copyright infringement as it pertains to SQ42 being a separate game, the damages go through the roof. For context and comparison (and that was back in 2012), Epic Games won massive damages (later doubled!) against Silicon Knights, and bankrupted the company in the end. And they took advantage of the injunctive relief, forcing SK – via court order – to remove and destroy all their products from market. That’s how bad this is. That we’re in 2018, where new precedent for damages have been set and won, well you can guess the rest.
I can’t WAIT to read what all those Star Citizen YT lawyers (who shockingly have law degrees) have to say now. Anything that doesn’t amount to the usual “Derek Smart Was Right”, should be disregarded out of hand.
Make no mistake, seeing as CIG/RSI are basically INSOLVENT, this is the final death knell. Especially if Crytek files an injunction to prevent them from continuing to operate Star Citizen. The damages alone are going to be catastrophic. If you’re an investor, you just got rekted. Notice that the judge also allowed the lawsuit to proceed against BOTH entities. And since they own/support the others, they are ALL on the hook. There is NO ESCAPE.
Now the fun begins. We’ll see if Crytek starts discovery or goes for the injunction first.
For an idea of just how destructive this MtD ruling is to CIG/RSI, read up on the Epic Games v Silicon Knights, Bethesda v Oculus, and similar cases. I don’t see how they can even settle this, when they don’t even have the money to do so. They’re on the hook for MILLIONS. Anyway, let me opine on the 6 elements in the CIG filing for the MTD.
1) RSI WAS NOT A PARTY TO THE GLA (DENIED)
This one was puzzling; especially considering that RSI is the parent company of most of the companies setup around this project. Hilariously, the judge saw right through their “We don’t even know why they’re suing us” nonsense. Not only did she deny that defense, she also ruled that RSI was in fact party to the GLA; thus putting both CIG and RSI on the hook. This is a major deal.
See all these companies? This ruling DESTROYS the shell game in one fell swoop. Only Twin Bros (Ortwin’s own personal co) has minimal protection. Until discovery shows that it received funds for the project. Which it DID. And given Ortwin’s expose in this lawsuit, he’s now at huge risk.
2) BREACH OF CONTRACT AS PER EXCLUSIVITY (GRANTED – IN PART)
To be honest, I was surprised by this one. After reading the judge’s ruling, and given the ambiguity of the GLA, I see now where she was going with this. Basically CryTek was claiming that CIG agreed to use CryEngine exclusively for the development of Star Citizen; and as part of that, was required to display their logo in the game etc. The judge disagreed with this, and from her notes, she did give Crytek the opportunity to amend their complaint to better address what they were going for. If they are successful, and the judge grants it later, then discovery will no doubt fill in the missing pieces.
A key part of the “exclusivity” section that some people (apparently even Internet lawyers) are missing/ignoring is the judge’s notes at the bottom of p11. She pointed this out for a reason. Now take a look at what section 2.4 of the GLA says. And therein lies the rub.
The GLA has not expired, and is still contractually valid (the term) until otherwise terminated (+ 2 yrs). CIG were NOT allowed to switch to a competing engine.
Section 2.4 of the GLA makes the 2.1.2 claim immaterial in its entirety, and thus a BIGGER problem for CIG because they DID switch. This is why the judge made those notes because she wanted to point out that even the denial of 2.1.2 on its merits, has no relevance to the big picture because there is already a much larger breach (2.4) with NEITHER side is denying.
Now, CryTek doesn’t even have to prove that CIG actually switched to Lumberyard – because they did so; and it’s all in the public domain.
I can’t even stop laughing.
The judge is basically telling CIG “Look, here’s your REAL problem“. That’s the thing with lawsuits, lawyers will throw anything that even looks good, while waiting to see what sticks. BOTH of what the judge granted, are relegated to Red Herrings. Who remembers this thread where I covered this exclusive issue back in Jan?
When I profiled this judge back in Feb, I predicted that her ruling was going to be a thing of beauty. She didn’t disappoint. I have since been following her slap Trump around these past months.
3) BREACH OF CONTRACT AS PER SQUADRON 42 (DENIED)
Remember when I wrote that the GLA only covered a SINGLE game and not two (SC + SQ42) and that the GLA was clear on this? The judge agreed on p13. In fact, she used my EXACT (see my web forum for links) reasoning in her brief. I remember all those internet YT lawyers (who actually have law degrees!) arguing that SQ42 was part of the project and so CIG had every reason to split it, sell separately etc as part of the pre-existing GLA.
Nope, I haven’t stopped laughing. Even the judge’s note on this is 100% support of the argument that I made back then. And she made this note for a reason: that being, the SQ42 split isn’t ambiguous – it’s a FACT.
Again in that note 7 she’s saying to CIG, “Hey guys! GUYS!! This here is your REAL problem – and YOU put it in the public domain. It’s not even in dispute“. The long and short of these 2 critical parts are that 2.1.2 allowed them to use any other engine; not just CryEngine, and 2.4 prevented them from doing so for the term + yrs. Since the GLA is in full effect, they are in material breach of 2.4, while 2.1.2 is immaterial. LOL! Back in January, those same “lawyers” were claiming that 2.4 was a non-compete clause. This is what I said back then. And it’s EXACTLY the judge’s ruling.
In case there was any doubt about the GLA term, here it is.
The GLA is still 100% in effect, whether or not they switched engines. Thus 2.4 still stands. THAT’S why the judge made that note. Just because they switched to Lumberyard doesn’t automatically terminate the GLA. And they were already developing, promoting, and selling SQ42 long before they announced the switch in 2016. I wrote a blog about it in Dec 2016.
Basically, not only are they locked to CryEngine – whether or not they use it – they can’t terminate the GLA without doing ALL of those things in Section 8.3. And it’s a mutual termination, not a one-side thing.
Yes, CIG/RSI are so screwed, I haven’t even started contemplating on that yet.
4) COPYRIGHT INFRINGEMENT AS PER SQUADRON 42 (DENIED)
Having ruled on point #3, this one was easy because, as per 2.4, the judge already saw a copyright infringement by their using CryEngine to make not one, but two games. And this stems from the breach of contract of the GLA.
The judge’s ruling on p17 regarding the copyright infringement in SQ42, is the single largest liability that CIG is never – ever – going to be able to defend against. And the judge’s wording already hinted at that.
For context, these are some of the SAME things that caused serious damages & issues in cases such as Epic Games v Silicon Knights, Bethesda v Oculus etc. Copyright and trademark infringement damages are the single most destructive things in ANY corporate lawsuit. That CIG failed to get the SQ42 issue dismissed is a major problem. Even if they had succeeded in getting ALL the other items dismissed, this is THE one that throws them off a cliff. It’s like being up on charges for murder & burglary; but only the latter gets dismissed.
5) DISMISSAL OF MONETARY DAMAGES CLAIMS (DENIED – IN PART)
As I wrote back in Jan, CIG’s Section 6.1.4 reference in their filing never made ONE lick of sense. And the judge felt that way too. In fact, she used a LOT of words to complete DESTROY it. Even the note is snarky enough to make me chuckle.
To recap, CIG were basically saying that even if they were in breach, that there were no damages. LOL!!
Yes. Really. Not making this up.
On p17-18, not only did the judge deny the CIG motion to exclude all damages, but she also issued CIG a crippling blow in that she pointed out that Crytek in fact CAN seek injunctive relief if they chose to do so. What will that do? Prevent CIG from selling the games.
It may seem an easy thing to gloss over, but consider that when a judge rules that you have to pull a product off the shelves, that’s what you have to do: pull a product off the shelves. CryTek can file this – at any time. And then we’re back to even more fireworks.
At this point, I believe that CryTek are more focused on discovery because there are enough causes of action which survived the MtD that are going to make discovery an absolute nightmare for CIG and expose ALL their secrets. More importantly: WHERE DID ALL THE BACKER MONEY GO!?
The importance of the injunctive relief in any damages which are pertinent are substantial enough for the judge to spend a whopping 2.5 pages explaining her ruling.
She left NO room for ambiguity.
She’s basically saying to CIG “Pucker up because we already KNOW SQ42 exists“. I believe that she went to those great lengths because she wanted to make clear to CIG that the most material breach (e.g. 2.4, SQ42 etc) were subject to specific damages by law – just as CryTek had claimed. So CIG can’t hand-wave it away by writing a $100 instead of $1M check.
6) REQUEST TO STRIKE – AS PER ORTWIN FREYERMUTH (DENIED)
The last part of her ruling, is my personal favorite because it involves Ortwin and she was 100% in line with what I wrote months ago about his liability.
I, PRICK
This was my thread about Ortwin and his duplicity. I wrote this back in Jan this year. I also cataloged it in my forum thread on the lawsuit. On p21, the judge didn’t mince words, and I am actually tickled that her reasoning was in line with mine. She even highlighted it. LOL!! I love this judge. Definitely a Goon. 🙂
Here’s what this means.
It puts Ortwin squarely in the case, and makes him a material PART of it. Not just the corporate entity. CryTek are no doubt going to go for it.
As an attorney, accused of acting in BAD FAITH for FINANCIAL GAIN this is disbarment territory right there. Now you see why CIG wanted to have those parts of the Crytek complaint stricken. The judge wasn’t having any of it because she recognizes the critical problem that the duplicity poses and she couldn’t have agreed to this without causing procedural issues down the road.
If I were CryTek, and because I’m a complete bastard when it comes to lawsuits, I would immediately file a separate action and stick that prick right in the middle of it. Then file a bar complaint.
CONCLUSION
So, of the 6 causes of action which CIG wanted dismissed, the judge only granted 2; both of which didn’t have any major impact to the Crytek case merits.
Section 2.1.2 (granted) : we already know it’s a Red Herring because they’re already royally screwed with the PROVEN & UNDENIABLE breach of 2.4 of the GLA anyway.
And the judge helpfully pointed this out to them in her notes. The judge granted them the punitive damages dismissal, and which was a long shot anyway. They’re still on the hook for monetary damages, statutory damages AND injunctive relief.
Interpretation: They’re f-cked.
Now we see why, back in April CIG had filed for a protective order to stifle all Crytek attempts at discovery. And it was in that filing and responsive pleading, that we discovered CIG had initiated settlement talks – which CryTek dismissed and decided to wait for the MtD ruling. If CryTek had gone for the quick settlement, they could NEVER have known that the most material breach (2.4) would stick, nor that EVERY SINGLE important cause of action would in fact survive the MtD. This was a HUGE bet by Crytek, and it paid off in spades.
CryTek also could NEVER have known that the 2nd most destructive force in their lawsuit, the SQ42 copyright infringement, would ever survive that motion. While it was clear, parts of the GLA left enough room for ambiguity; though most of us software devs already UNDERSTOOD it. When you license an engine to make ONE product, the minute you use it for TWO products, you have violated the license. It doesn’t matter if the engine was free or not. Only the EXISTING license agreement prevails. I have said this over and over again. I mention this because some people were saying CryEngine is free, so there was no breach if CIG used it for SQ42 as well. Aside from the fact that people were deluded into saying the license covered BOTH games. It did not.
The execs running CIG are bunch of lowlife scumbags who have SCAMMED gamers out of money. So this is not surprising to me at all. Thing is, had they not gotten GREEDY and PUBLICLY split SQ42 into a separate product, they wouldn’t be on the hook for a DAMAGING infringement suit. The damages would would have been awarded in all the other causes of action claim, would have been dimes to donuts when compared against a copyright infringement claim. They have basically DESTROYED the company with this because they simply cannot afford for this to go to trial.
Now, this MtD ruling has not only given Crytek a massive upper hand in any settlement talk, if I were in Crytek’s shoes, I would just go in, take every f-cking thing, kick them all out, finish the game and extract their losses and damages. That’s what it will come to.
Contrary to popular belief, CIG isn’t sitting on a pile of cash. As I highlighted in my discussion of the finances for their largest studio, they are operating on a month-to-month basis with money from backers (and some investor cap). The largest studio (F42 UK/GER) is burning through about 73% of their yearly funding. And that entity is in debt, has little to NO cash, and ZERO sources of income other than from the parent company. And their assets are already 100% pledged to Coutts bank. We know little about the US entities in LA and TX, but what we do know is that they too are heavily leveraged. And THAT is why Crytek is going to start looking into the finances as that’s how damages are derived down the road.
The other problem for CIG is that they probably don’t have liability insurance to cover this sort of thing. And even so, that the GLA is a pre-existing contract, considering how half-assed they do everything, even if they got one later, the claims are probably not covered.
So that’s the end of that. Now we wait for Crytek’s next move, which I suspect will be the filing for discovery which they tried to do back in March.
With this MtD now out of the way, things are going to start moving really fast now. If they didn’t think they were funding a lawsuit before, I think backers still giving them money should now come to the realization that, aside from them never – ever – getting their money back, nor the games promised, they are now going to be funding a LOSING lawsuit. If we take the funding chart at face value, and say they are raising about $30M a year, let me assure you, that’s a drop in the bucket compared to the sort of damages they are going to be faced with very soon.
And they don’t have the money to settle, unless they sell the co. While I don’t believe that Crytek is intending on destroying the company or project, what CIG and Ortwin did to them, is enough bad blood for Crytek to BURN IT ALL to the ground, then write-off their legal expenses against company income. That’s what I would do. And if there were to be any settlement, knowing that any award is going to create financial liability that exceeds the company net worth, Crytek will basically own ALL OF IT, after CIG/RSI are forced into bankruptcy.
For posterity sake, I am calling it now. We’re going to wake up one day and find that Crytek owns EVERY asset of CIG/RSI entities. If you thought this was far-fetched 8 months ago, this MtD ruling should help you rethink that position. Biggest problem which most are going to miss, is the judge AGREED that both CIG and RSI were on the hook.
So that’s the end of my coverage.
Now we wait to see Crytek’s next move. I’m sure it’s going to be hilariously good.
UPDATED 08/17/2018: CIG FILES OPPOSITION TO LATEST CRYTEK FILING. MY COVERAGE
UPDATE 08/16/2018: CRYTEK FILES A SECOND AMENDED COMPLAINT. MY COVERAGE.
FOUNDRY 42 (UK/GER) FINANCIALS
They recently filed the financials for period ending Dec 2017. Quite a few interesting tit-bits in this filing, but not important enough for me to write an in-depth analysis as I’ve done in the past.
Several keys points:
1) This filing presents sufficient evidence that the number of employees in both F42-UK and F42-GER, increased within June – Dec 2017 from 284 to 318.
Given the number of current vacancies following key departures in 2018, we’ll know more next filing.
2) Erin Roberts, brother of Chris Roberts is still one of the highest paid studio directors in the UK. In 2017 he made over £200K. Note they also bought the studio from themselves in previous filing period to the tune of £440K. I wrote about that before.
3) Employees alone cost the F42 group over £14M in 2017 alone. In case you were wondering why they need to keep raising money, this is why. And that’s just UK/GER
4) This filing provides strongest evidence that the Coutts loan which caused such a furor when I broke the news last Summer, really was a payday loan. Of the £3.69M remaining, they have to re-pay £1.53M by Dec 2018. Basically, they didn’t get a loan for the full award.
5) As of Dec 2017, they were £3.9M in debt to various parties – including the Coutts loan. Notice the £1.065M from June 2017 period ending? Yup, that’s part of the money they previously paid themselves by taking money OUT of the project, while putting the project in debt.
6) F42 owes other group company entities over £1.25M. The interesting part of this is that in order to hide the inter-group transactions so backers won’t know what they did, they exercised the non-disclosure rule. Backers will never know.
7) It’s hilarious to me that a professionally prepared accounting and audit, got the name of the parent company WRONG. Here again, we see “Robert” vs “Roberts”. It’s an on-going joke now, since this has been a running theme on their website, various materials created by them etc
8) The long and short of it is that taking that they “gained” £622K in 2017, combine that with their debt load and accounts payable, that group was basically insolvent YE 2017.
F-cking hell! I’m laughing so hard I can’t even breathe. In the words of the commander himself..
9) Remember that these shenanigans are going on over in the UK & GER, and musings from the US side say the LA & TX studios aren’t faring any better.
With refunds past 14-days now at an end, we have to wait and see for how long whales keep throwing money into an open furnace. The project, now in year 8 (!), and over $190M in funding raised from backers buying ships in a game that’s totally not P2W (wink-wink), it’s still not even 20% complete for either of the two games promised
YUP, YEAR 8. CHRIS SAID SO IN 2014 @ 1:15:55
SO DID THE EX-TECHNICAL DIRECTOR IN DEC 2015 @ 26:20
Even more hilarious when you consider that was less than 5 months after my first blog in July 2015. During that month, backers who were just entering sunk cost fallacy engaged in “spite pledging” because they thought money would prove me wrong cuz the game was totally coming. LOL
FURTHER READING
Previously: YEAH, NO MORE REFUNDS. EVER