The SEC Jumps Into the Mix of Claimants and Investigators Challenging Activision Blizzard’s “Frat Boy” Environment

UPDATE (October 29, 2021): Activision Blizzard has ended its mandatory arbitration, has debuted a new zero-tolerance sexual harassment policy, will invest $250 million over the next five years to capture more diverse talent, and will invest an additional $250 million over the next ten years to improve opportunities related to technology and gaming in under-represented communities. Bobby Kotick, the company’s CEO, also announced that he will take a pay cut until the company’s board determines that he has achieved the “transformational gender-related goals and other commitments.”

UPDATE (September 28, 2021): Activision Blizzard has resolved its claims with the Equal Employment Opportunity Commission. The company has agreed to update its policies and create an $18 million fund to “compensate and make amends” with female employees victimized by the company’s toxic work environment.

Activision Blizzard, the gaming giant that created Call of Duty and Candy Crush, is facing a veritable blizzard of legal challenges from individual claimants and state and federal agencies.  Activision, it is alleged, fostered a toxic “frat boy” work environment with pay bias and sexual harassment and assaults.  Activision confirmed on September 21, 2021 that, among its other woes, the SEC is investigating its “disclosures regarding employment matters and related issues.”

On July 20, 2021, the California Department of Fair Employment and Housing (DFEH) filed a sweeping civil rights lawsuit against Activision after a two-year investigation.  The suit alleges that Activision’s workforce is only 20% female and that females earn less, on average, than males.  The suit also claims that female employees have been subjected to “constant sexual harassment” that includes groping, inappropriate comments, and sexual advances.  It alleges that company executives have refused to take action to address the sexual harassment and abuse, retaliated against women who spoke out about the abuse, and participated in harassing behavior.

The lawsuit describes a tradition in the office called “cube crawls,” in which male employees drink “copious amounts of alcohol” and “crawl” their way through various cubicles, sometimes groping their female colleagues.  “Male employees . . . engage in banter about their sexual encounters, talk openly about female bodies and joke about rape,” the DFEH alleges.  In what DFEH described a tragic illustration of the treatment women have endured, a female employee committed suicide during a business trip during which a male supervisor who brought lubricant and sex toys with him.  The company alleges that the department’s complaint “includes distorted, and in many cases false, descriptions” of its past.

On July 26, 800 employees wrote a public letter to executives, calling their response to the lawsuit “odious and insulting.”  The next day, thousands of employees signed an open letter, blasting the company’s response to the DFEH suit as “abhorrent and insulting” and then staged a walk-out on July 28.  Activision Blizzard CEO Bobby Kotick told employees in a July 27 letter that the company’s initial response was “tone deaf” and that it had tapped D.C.-headquartered law firm WilmerHale to conduct a probe into its workplace culture.  Former Activision President J. Allen Brack stepped down just a few weeks after the DFEH filed its suit.  Then, on September 20, Chief Legal Officer Claire Hart announced on LinkedIn that she had left the company effective September 17, stating that she had “decided on move on to my next adventure.”

Other federal regulators have jumped into the mix.  The Communications Workers of America filed a charge on September 10, 2021, with the National Labor Relations Board (NLRB).  The charge alleges that the company violated federal labor laws by using coercive tactics to prevent employees from organizing, and by prohibiting employees from discussing wages, working conditions and ongoing investigations.  And, on September 22, the company confirmed in a press release that it was “actively engaged in continued discussions” with the Equal Employment Opportunity Commission (EEOC). 

And, taking a page out of the playbook of McDonald’s shareholders, on August 3, 2021, shareholder Gary Cheng filed a proposed class action lawsuit in federal court in California.  The suit alleges that Activision and its executives failed to disclose to shareholders that DFEH was conducting an investigation.  Cheng alleges that Activision’s unaudited quarterly statements contained statements that were “essentially false” in light of the allegations of the DFEH lawsuit.  Activision’s shares are down 17% since the shareholder suit was filed.

Activision also confirmed on September 20, 2021, that the SEC is pursuing an investigation of the company.  The SEC issued a subpoena to the company and several current and former executives and employees, including former CEO Kotick, seeking documents relating to the company’s disclosures on employment matters and related issues.  The SEC is seeking, among other categories, minutes from Activision board meetings since 2019, personnel files of six former employees, and separation agreements with former employees.  It has also requested Kotick’s communications with other senior executives regarding complaints of sexual harassment and discrimination by employees and contractors.

The SEC investigation ratchets up the regulatory and legal pressure on Activision.  The SEC is seeking information to determine whether Activision and its executives failed to disclose material information concerning allegations of workplace harassment and discrimination to investors.  SEC rules may require the disclosure of internal investigations and sexual harassment claims.  Item 303 of Regulation S-K, for instance, requires a publicly-traded company to “[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”  The bounds of these disclosure obligations will likely be clarified through this and other SEC enforcement actions challenging the failure to disclose sexual harassment investigations and claims.