Viacom Ordered to Give Up Claims to Harmonix Deal Funds

Viacom Inc., owner of MTV, Nickelodeon and Comedy Central, was ordered by a judge to turn over a $12 million fund to former investors in Harmonix Music Systems Inc., maker of the video game “Rock Band,” as part of a buyout.

Viacom executives should allow the funds, set aside during the media company’s $175 million acquisition of Harmonix, to be given to a representative for ex-Harmonix shareholders, Delaware Chancery Court Judge Leo Strine concluded yesterday. Viacom bought Harmonix in 2006 to acquire rights to the Rock Band game, which features a guitar simulator and came on the market a year after the acquisition.

Viacom sought access to the $12 million to indemnify the media conglomerate for the costs of defending patent-infringement lawsuits over the game, in which players assume the identity of rock stars and perform for crowds. The purchase agreement set aside the funds in case problems with the deal cropped up, Strine said.

Harmonix officials never agreed to indemnify Viacom “against losses arising out of infringements of intellectual property rights that took place at the time of Rock Band’s publication in 2007,” Strine said in his 21-page decision.

Jeremy Zweig, a spokesman for New York-based Viacom, said there were several disputes over the six-year-old acquisition still outstanding.

Deal Disputes

“There are a series of disputed issues between the parties and this is just one element of the disagreement,” Zweig said in an e-mailed statement yesterday.

Viacom Inc.’s MTV unit bought Harmonix, a Cambridge, Massachusetts-based developer of music-themed video games such as “Guitar Hero,” in 2006 to expand its interactive and digital music businesses.

In games such as Guitar Hero and Rock Band, players assume the identity of a musician and play along with recorded music using a guitar simulator. Players progress through the game by appearing in larger venues.

In December 2010, Viacom sold the Harmonix unit, which had been losing money, to New York-based investment company Columbus Nova LLC in a deal the Hollywood Reporter newspaper said was valued at $150 million.

As part of the 2006 buyout agreement, Viacom and Harmonix executives agreed to set aside $12 million to indemnify Viacom for “losses arising out of breach of representations and warranties made by Harmonix,” Strine noted in his ruling.

The money was to be held in escrow for 18 months and if Viacom didn’t lodge legitimate indemnification claims, it would be dispersed to Harmonix’s former stockholders, the judge said.

Legal Fees

Viacom officials requested indemnification for losses tied to defending patent claims over Rock Band, which was still in development when Harmonix was acquired, Strine said. Company officials said they paid out $28 million in legal fees defending against intellectual-property claims over the game, the judge said.

Viacom hired lawyers to defend the company against claims by companies such as Activision Blizzard Inc., the largest video-game publisher, Konami Digital Entertainment Co. and Gibson Guitar Corp. over the game.

Gibson, the closely held maker of B.B. King’s “Lucille” and Jimmy Page’s “Les Paul” guitars, sued Viacom and Harmonix in 2008. Nashville-based Gibson claimed the video game infringed a patent covering a way of using a musical instrument to take part in a simulated concert.

Representatives of Harmonix’s former stockholders refused to honor the indemnification request, saying it wasn’t based on losses covered by the acquisition agreement.

When Viacom officials refused to agree to allow the $12 million to be paid to ex-Harmonix investors, lawyers for the shareholders sued in Delaware.

Payout Approved

Strine concluded that Viacom’s indemnification claims weren’t viable and ordered the media company to allow the money to be paid to former Harmonix shareholders.

“There is no reason why the sellers would have indemnified Viacom for infringements of intellectual property rights arising out of Harmonix’s actions at the time the sellers no longer controlled Harmonix,” the judge said.

The case is Winshall v. Viacom International Inc., CA 6074-CS, Delaware Chancery Court (Wilmington).

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