Sierra’s & VUG’s Answer, Affirmative Defenses & 

Counterclaims (CV02-01683)

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

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The Honorable Thomas S. Zilly

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

VALVE LLC, a Washington limited liability 

company,

 Plaintiff,

 vs.

SIERRA ENTERTAINMENT, INC. (AKA 

SIERRA ON LINE, INC.), a Delaware 

corporation; VIVENDI UNIVERSAL GAMES, 

INC., a Delaware corporation; and VIVENDI 

UNIVERSAL, S.A., a French foreign 

corporation,

 Defendants.

No. CV02-1683Z

ANSWER, AFFIRMATIVE 

DEFENSES AND 

COUNTERCLAIMS OF 

SIERRA ENTERTAINMENT, 

INC., AND VIVENDI 

UNIVERSAL GAMES, INC. 

JURY DEMAND

SIERRA ENTERTAINMENT, INC. (AKA 

SIERRA ON LINE, INC.), a Delaware 

corporation; and VIVENDI UNIVERSAL 

GAMES, INC., a Delaware corporation,

 Counter-Claimants,

 vs.

VALVE LLC, a Washington limited liability 

company; GABE NEWELL, an individual; and 

SCOTT LYNCH, an individual,

 Counterclaim Defendants.

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

206.623.1745; fax 206.623.7789

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Defendants Sierra Entertainment, Inc. (“Sierra”) and Vivendi Universal Games, Inc. 

(“VUG”), by and through their counsel of record, hereby answer the First Amended 

Complaint of Valve, LLC (“Valve”) and assert the following affirmative defenses and 

counterclaims, as set forth herein below.

ANSWER

JURISDICTION AND VENUE

1. Sierra and VUG admit that this is an action for copyright infringement and 

breach of contract, denies that they have infringed any copyrights or breached any contract, 

and deny every other allegation in Paragraph 1.

2. Sierra and VUG admit that this Court has subject matter jurisdiction with 

respect to activities within the ambit of United States copyright law, admits that this Court 

has personal jurisdiction over Sierra and VUG, deny that this Court has personal jurisdiction 

over Vivendi Universal, S.A. (“Vivendi”), deny that the Court has subject matter jurisdiction 

with respect to overseas activities or actions outside the ambit of the United States copyright 

law, and deny the remaining allegations in Paragraph 2.

3. Sierra and VUG admit the allegations in Paragraph 3.

THE PARTIES

4. Sierra and VUG deny that Valve is the sole developer of the Valve Games, 

admit the allegations as to awards received by Valve for the Half-Life game, and lack 

knowledge or information sufficient to respond to the remaining allegations in Paragraph 4 

and, on that basis, deny each and every other allegation in Paragraph 4.

5. Sierra and VUG admit the allegations in Paragraph 5. 

6. Sierra and VUG admit that VUG is a Delaware Corporation, admit that VUG 

is a distant subsidiary of Vivendi, admit that VUG’s principal place of business in the 

United States is in Los Angeles, California, and deny the remaining allegations in Paragraph 

6. 

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

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7. Sierra and VUG admit that Vivendi is a French corporation, admit that 

Vivendi is a distant parent corporation of VUG and Sierra, and deny the remaining 

allegations in Paragraph 7.

8. Sierra and VUG admit that Sierra and Valve executed a Software Publishing 

Agreement in March, 2001 (the “2001 Agreement”), as well as subsequent amendments 

thereto, state that the terms of the 2001 Agreement are as set forth in the documents 

comprising the 2001 Agreement, with amendments, and deny the remaining allegations in 

Paragraph 8.

STATEMENT OF FACTS

9. Sierra and VUG admit that Sierra and Valve executed the 2001 Agreement in 

March 2001, admit that VUG is a party to the 2001 Agreement, deny that Vivendi entered 

into the 2001 Agreement, and state that the remaining allegations in Paragraph 9 state legal 

conclusions to which no response is required.

10. Sierra and VUG admit that the Valve Games at issue contain software code 

commonly referred to as the “Valve Engine,” and state that the remaining allegations in 

Paragraph 10 state legal conclusions to which no response is required.

11. Sierra and VUG admit that Sierra and/or their distributors or agents have 

distributed one or more of these Valve Games to cyber-cafés in the United States and in 

other countries, admit that cyber-cafés are multi-player retail outlets that make computers 

available for use to consumers for payment, and deny the remaining allegations in Paragraph 

11.

12. Denied.

13. Denied.

14. Sierra and VUG admit that Sierra and VUG and/or their agents entered into 

agreements for the distribution of games developed in part by Valve to cyber-cafés, state 

that the characterization of the obligations imposed by the 2001 Agreement is a legal 

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

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conclusion to which no response is required, and deny the remaining allegations in 

Paragraph 14.

15. Sierra and VUG state that the characterization of the obligations imposed by 

the 2001 Agreement is a legal conclusion to which no response is required, and deny the 

remaining allegations in Paragraph 15.

16. Sierra and VUG state that the characterization of the obligations imposed by 

the 2001 Agreement is a legal conclusion to which no response is required, and deny the 

remaining allegations in Paragraph 16.

17. Sierra and VUG state that the characterization of the obligations imposed by 

the 2001 Agreement is a legal conclusion to which no response is required, and deny the 

remaining allegations in Paragraph 17. 

18. Sierra and VUG admit that shortly prior to the commencement of this action, 

Valve claimed that Sierra and VUG did not have the right to distribute Valve Games to 

cyber-cafés, and deny the remaining allegations in Paragraph 18.

19. Sierra and VUG admit that Sierra, VUG and/or their agents exercised their 

rights under the 2001 Agreement to enter into licensing or distribution agreements which 

permitted distribution of one or more of the Valve Games to cyber-cafés, including an 

agreement with Asian Media Development Group, and deny the remaining allegations in 

Paragraph 19.

20. Sierra and VUG lack knowledge or information sufficient to respond to the 

allegations in Paragraph 20.

21. Denied.

22. Denied.

COUNT I: COPYRIGHT INFRINGEMENT

23. Sierra and VUG incorporate herein their responses to Paragraphs 1-22 

above.

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

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24. Sierra and VUG lack knowledge or information sufficient to respond to the 

allegations in Paragraph 24 and on that basis deny them. 

25. Sierra and VUG lack knowledge or information sufficient to form a belief as 

to the allegations contained in Paragraph 25 and on that basis deny them.

26. Sierra and VUG admit that Sierra, VUG and/or their agents or distributors 

distributed one or more of the Valve Games to cyber-cafés and deny the remaining 

allegations in Paragraph 26.

27. Denied.

COUNT II: BREACH OF CONTRACT

28. Sierra and VUG incorporate herein their responses to Paragraphs 1-27 above.

29. Denied. 

30. Denied.

31. Denied.

32. Denied.

33. Denied.

34. Denied.

35. Denied.

36. Denied.

37. Denied.

38. Denied.

39. Denied.

40. Denied.

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

206.623.1745; fax 206.623.7789

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AFFIRMATIVE DEFENSES

As separate and affirmative defenses to Valve’s First Amended Complaint, and 

without conceding that the burden of proof as to any of these matters lies with Sierra or 

VUG, Sierra and VUG allege as follows:

FIRST AFFIRMATIVE DEFENSE

41. Each and every separate cause of action alleged in Valve’s First Amended 

Complaint fails to state facts sufficient to constitute a cause of action against Sierra or VUG 

and fails to state a claim upon which relief may be granted.

SECOND AFFIRMATIVE DEFENSE

42. This Court lacks subject matter jurisdiction to adjudicate all or some of the 

claims set forth in Valve’s First Amended Complaint.

THIRD AFFIRMATIVE DEFENSE

43. Some or all of Valve’s claims are barred by the doctrine of express or implied 

waiver.

FOURTH AFFIRMATIVE DEFENSE

44. Valve, by its conduct, is estopped from asserting its claims against Sierra and 

VUG .

FIFTH AFFIRMATIVE DEFENSE

45. Some or all of the relief sought by Valve is barred pursuant to 17 U.S.C. 

§412.

SIXTH AFFIRMATIVE DEFENSE

46. Valve’s injuries, if any, were caused in whole or part by the acts of others 

over which Sierra and VUG had no control and are not responsible. 

SEVENTH AFFIRMATIVE DEFENSE

47. Valve is barred from obtaining equitable relief by the doctrine of unclean 

hands. 

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

206.623.1745; fax 206.623.7789

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EIGHTH AFFIRMATIVE DEFENSE

48. Valve has failed to take reasonable steps to mitigate its damages.

NINTH AFFIRMATIVE DEFENSE

49. Sierra and VUG were authorized by Valve to engage in the allegedly 

infringing conduct.

TENTH AFFIRMATIVE DEFENSE

50. Some or all of Valve’s claims are barred by the doctrine of laches. 

ELEVENTH AFFIRMATIVE DEFENSE

51. Valve’s breach of contract count is barred by the doctrine of frustration of 

purpose. 

TWELFTH AFFIRMATIVE DEFENSE

52. Valve’s breach of contract count is barred by mistake of fact.

THIRTEENTH AFFIRMATIVE DEFENSE

53. The First Amended Complaint is barred in whole or in part because Valve 

obtained the 2001 Agreement as a result of fraud.

FOURTEENTH AFFIRMATIVE DEFENSE

54. Valve’s breach of contract count is barred by failure of consideration.

FIFTEENTH AFFIRMATIVE DEFENSE

55. To the extent any contract existed between Sierra, VUG and Valve, Valve 

failed to perform under such contract, as required by the terms of the contract, and that 

performance on the part of Valve was a condition precedent to the performance of Sierra’s 

or VUG’s obligation. Sierra and VUG are therefore excused from performance thereunder.

SIXTEENTH AFFIRMATIVE DEFENSE

56. Valve’s claims are barred by Valve’s business compulsion. 

SEVENTEENTH AFFIRMATIVE DEFENSE

57. If Valve has sustained any damages or incurred any expenses, such damages 

or expenses, if any, were the result of intervening or superseding events, factors, occurrences 

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

206.623.1745; fax 206.623.7789

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or conditions, which were in no way caused by Sierra or VUG and for which Sierra and 

VUG are not liable. 

EIGHTEENTH AFFIRMATIVE DEFENSE

58. Valve may not recover on the claims pleaded in the First Amended 

Complaint because the damages sought are too speculative and remote. 

NINETEENTH AFFIRMATIVE DEFENSE

59. Valve may not recover on the claims pleaded in the First Amended 

Complaint because the damages sought are barred in whole or in part by the parties’ 

agreements. 

COUNTERCLAIMS

By and for its Counterclaims against Counterclaim Defendants Valve, LLC 

(“Valve”) and Gabe Newell and Scott Lynch, Counter-Claimants Sierra and VUG allege as 

follows:

I.

JURISDICTION AND VENUE.

60. This Court has personal jurisdiction over Plaintiff and Counterclaim 

Defendant Valve, as Valve is a Washington limited liability company having its principal 

place of business in this district, and by virtue of Valve’s activities conducting business in 

this district, and by virtue of its consent to personal jurisdiction in the 2001 Agreement.

61. This Court has personal jurisdiction over Gabe Newell, a resident of King 

County, Washington, as the tortious acts of this Counterclaim Defendant occurred 

substantially in Washington and had a direct and intended effect on Sierra and VUG in 

Washington.

62. This Court has personal jurisdiction over Scott Lynch, a resident of King 

County, Washington, as the tortious acts of this Counterclaim Defendant occurred 

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

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substantially in Washington and had a direct and intended effect on Sierra and VUG in 

Washington.

63. This Court has subject matter jurisdiction over these counterclaims pursuant 

to 28 U.S.C. §§1331 and 1367(a), and pursuant to 28 U.S.C. §1338(a), with respect to 

Valve’s, Sierra’s and VUG’s activities within the ambit of United States copyright law.

64. Venue is proper in this Court pursuant to 28 U.S.C. §1391.

II.

THE PARTIES.

65. Plaintiff and Counterclaim Defendant Valve is a Washington Limited 

Liability Corporation with its principal place of business in Bellevue, Washington. Valve is 

a developer of computer software games. 

66. On information and belief, Counterclaim Defendant Gabe Newell is an 

individual residing in Seattle, Washington. He is and at all relevant times was the Founder 

and Managing Director of Valve, and at all times had the authority to act and was acting on 

behalf of Valve with respect to the matters set forth herein. Counterclaim Defendant Newell 

is joined in this action pursuant to Federal Rules of Civil Procedure 13(h) and 20.

67. On information and belief, Counterclaim Defendant Scott Lynch is an 

individual residing in King County, Washington. He is and at all relevant times was the 

Chief Operating Officer of Valve, and at all times had the authority to act and was acting on 

behalf of Valve with respect to the matters set forth herein. Counterclaim Defendant Lynch 

is joined in this action pursuant to Federal Rules of Civil Procedure 13(h) and 20.

68. Sierra, previously known as Sierra On-Line, is a Delaware Corporation with 

its principal place of business in Bellevue, Washington. At the time of the events described 

herein, Sierra was a publisher of video games. Now a studio of VUG, Sierra was one of the 

earliest developers and largest worldwide publishers of interactive entertainment software. 

Sierra has released critically acclaimed and award winning titles that represent a wide 

variety of computer entertainment on game consoles and PC platforms.

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

206.623.1745; fax 206.623.7789

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69. VUG is a Delaware Corporation with its principal place of business in Los 

Angeles, California. VUG is a global leader in multi-platform interactive entertainment. A 

leading publisher of PC, console and online-based interactive content, VUG has a portfolio 

of development studios including Black Label Games, Blizzard Entertainment, Coktel, 

Knowledge Adventure, NDA Productions, Sierra and Universal Interactive. Through its 

Partner Publishing Group, VUG also co-publishes and/or distributes interactive products for 

a number of strategic partners, including Bits Software, Crave Entertainment, Fox

Interactive, Interplay, Majesco, Mythic Entertainment and Simon & Schuster, among others.

III.

STATEMENT OF FACTS.

A. The Original Agreements.

70. On April 27, 1997 Valve and Sierra entered into a Software Publishing 

Agreement (the “4/27/97 Agreement”) for the development of computer software games, 

including a game that was eventually called Half-Life. A copy of the 4/27/97 Agreement is 

attached hereto as Exhibit A. Although VUG did not execute the 4/27/97 Agreement, VUG 

participated in the negotiations over that Agreement and, as Sierra’s “affiliate,” shares in the 

same rights and obligations as Sierra under the terms of the 4/27/97 Agreement.

71. Under the 4/27/97 Agreement, Sierra and VUG owned all rights, including 

intellectual property rights (except for certain limited, defined Valve Underlying 

Technology) to Half-Life. 4/27/97 Agreement at § 2.4. The 4/27/97 Agreement did not 

limit distribution by Sierra or VUG of Half-Life to any particular channel, type of end user, 

or medium. 

72. The 4/27/97 Agreement also vested in Sierra and VUG the right to sell all 

sequels of Half-Life and provided that, if Sierra or VUG determined that they wanted a 

sequel product, Sierra, VUG and Valve would negotiate in good faith to reach an agreement 

for Valve’s development of such a sequel. If Valve, Sierra and VUG were unable to reach 

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HI L L I S CL A R K MA R T I N &

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Seattle WA 98101-2925

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agreement after 30 days of good faith negotiations, Sierra and VUG were entitled to find 

another party to develop the sequel. 

73. On September 3, 1997, Valve and Sierra entered into a second Software 

Publishing Agreement (the “9/3/97 Agreement;” collectively with the 4/23/97 Agreement, 

the “1997 Agreements”). A copy of the 9/3/97 Agreement is attached hereto as Exhibit B. 

Once again, although VUG did not execute the 9/3/97 Agreement, VUG participated in the 

negotiations over that Agreement and, as Sierra’s “affiliate,” shares in the same rights and 

obligations as Sierra under the terms of the 9/3/97 Agreement. The 9/3/97 Agreement 

required Valve to develop three additional games to be published by Sierra and VUG, 

including Half-Life 2. As with the first agreement, the 9/3/97 Agreement granted Sierra and 

VUG ownership of all rights, including intellectual property rights (except for certain 

limited, defined Valve Underlying Technology), to these games. 9/3/97 Agreement §2.6. 

Similarly, the 9/3/97 Agreement did not limit distribution by Sierra or VUG of these games 

to any particular channel, type of end user, or medium. 

74. On July 24, 1998, Valve and Sierra executed an amendment to the 4/27/97 

Agreement (the “1998 Amendment”). VUG did not execute this contract but, as an 

“affiliate” of Sierra under the 4/27/97 Agreement, shares in the same rights and obligations 

under the 1998 Amendment as Sierra. Among other changes, the 1998 Amendment changes 

the name of the game to be developed to Half-Life, doubles the royalty fees for Licensing 

Revenue from 25% to 50%, decreases the royalty fees for Net Revenues from 27% to 25%, 

and extends the development schedule for Half-Life by nine months. A copy of the 1998 

Amendment is attached hereto as Exhibit C. 

B. Valve's Breaches Of The Existing Agreements And Counterclaim 

Defendants’ Extortionate Threats To Negotiate New Terms. 75. Counterclaim Defendant Newell formed Valve in 1996 after working for 13 

years in various positions at Microsoft. At the time of the execution of the 4/27/97 

Agreement, neither Valve nor Newell had ever published a computer game. 

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76. Despite Counterclaim Defendants’ inexperience, Sierra and VUG undertook 

in the 4/27/97 Agreement to manufacture, promote, and distribute a computer game later 

denominated Half-Life. Sierra and VUG agreed to pay Valve $800,000 in advance royalty 

payments for the development of this game and, ultimately pursuant to the 1998 

Amendment, 25% of net revenue and 50% of licensing revenue in royalty payments for 

Half-Life. 

77. Slightly more than two months later, Sierra and Valve entered into the 9/3/97 

Agreement. This agreement required Valve to develop three additional games, including 

Half-Life 2 and two other games (then denominated as Prospero and Prospero 2), and to 

deliver the games to Sierra for publication according to agreed-upon delivery schedules. 

Sierra and VUG undertook to manufacture, promote, and distribute these games before 

Valve had completed a single game. Sierra and VUG agreed to pay $4.5 million in advance 

royalty payments, as well as 25% royalties on net and licensing revenues for all three games. 

By undertaking these obligations under the 1997 Agreements to an unproven developer with 

unproven products, Sierra and VUG incurred substantial risk. And, Sierra paid Valve in 

excess of one million dollars in royalty advances to fund development.

78. Although the 4/27/97 Agreement required Valve to complete Half-Life by 

December 1997, Valve did not do so. On July 24, 1998, Valve and Sierra executed the 1998 

Amendment which, among other things, permitted Valve to extend its delivery deadlines for 

Half-Life by nine months. 

79. Following its initial release as a personal computer game in November 1998, 

Half-Life was an enormous success. Half-Life won numerous awards and quickly became 

one of the best-selling computer software games to date. Among other reasons for its 

success, Half-Life was the first game of its kind to allow multiple gamers to play together 

over the Internet. This “multi-player functionality” contributed to the formation of a 

worldwide community of devoted Half-Life fans who eagerly await the long-promised Half- Life 2 sequel, even today. 

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80. By 1999, in an attempt to leverage their sudden success, Valve and 

Counterclaim Defendant Newell began to demand that Sierra and VUG relinquish their 

rights under the 1997 Agreements. 

81. In or about September 2000, just as Valve was nearing completion of two 

games under development for Sierra and VUG called Counterstrike and Gunman 

Chronicles, Counterclaim Defendants threatened to indefinitely delay the release of 

Counterstrike, Gunman Chronicles and Half-Life 2 by diverting resources from these games 

to the development of games for other publishers. 

82. For example, Newell told Mark Hood in September 2000 that Valve would 

not sign an interim agreement for the shipping of that year’s products until Sierra made 

concessions under the 1997 Agreements. Similarly, on October 25, 2000, Newell told 

David Williamson that Counterstrike would not ship without a new software publishing 

agreement. Newell made similar statements at about this time to Hubert Joly, Jim Veevaert 

and David Grenewetzki, as well.

83. On November 1, 2000, Valve employee Erik Johnson wrote to Sierra’s Jim 

Veevaert that Counterstrike had been completed and would be delivered to Sierra that 

evening, copying Newell on the email. Newell immediately responded, saying that he was 

stopping delivery of the game until disputes over the proposed new agreement were 

resolved. Although Counterclaim Defendants later agreed to piecemeal, interim agreements 

for the shipment of Counterstrike and Gunman through November, they would not agree to 

permit the shipment of these products through the holiday season until Sierra and VUG 

finally agreed to an increase in royalty rates for Valve.

84. In making these threats, Valve breached various obligations under the 1997 

Agreements. For example, by threatening to discontinue work on Counterstrike, Gunman 

Chronicles and Half-Life 2, Valve breached its obligation under Section 2.1 of the 9/3/97 

Agreement to deliver three games to Sierra according to agreed-upon delivery schedules. 

By threatening to shop games to other publishers, Valve also breached its obligation under 

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Section 2.2 to give Sierra and VUG the option of making new concepts a product under the 

agreement. In addition, Valve violated its obligation under Section 2.3 to refrain from 

commencing development of any concept or product for its own account or for a third party 

until Valve had the first three products encompassed by the 9/3/97 Agreement under 

development. 

85. By this time, Sierra had waited more than two years and expended 

considerable resources on the development and marketing of Half-Life, Counterstrike, 

Gunman and Half-Life 2. Concerned that Counterclaim Defendants could effectively vitiate 

the benefits of the 1997 Agreements by carrying through on their threats to divert resources 

to the development of games for other publishers, Sierra found itself with little choice but to 

acquiesce in Counterclaim Defendants’ demands to renegotiate the parties’ business 

relationship. 

C. Valve's Fraudulent Misrepresentations, Fraudulent Concealment And 

False Promises To Win New Terms.

86. During the parties’ negotiations for a new agreement, Counterclaim 

Defendant Newell told Mr. Joly that Valve sought three concessions: (a) the transfer of 

intellectual property rights to all games, as this issue was emotionally important to Newell; 

(b) higher royalty rates for Valve; and (c) transfer of the ancillary right to distribute the 

games in non-retail channels, such as direct download over the Internet. Newell represented 

that Valve was principally interested in obtaining the intellectual property rights to its 

games. 

1. Valve’s Concealment And Misrepresentations Regarding Its Intended 

Online Distribution Technology And Strategy (Later Called Steam).

87. During the parties’ negotiations over the new agreement, Counterclaim 

Defendants repeatedly and falsely assured Sierra and VUG that retail sales would remain

“the key to [their] strategy.” In September 2000, for example, Newell told Hubert Joly, then 

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VUG’s CEO, that “online is a way to nurture the retail business” and that he “could not 

understand how one can make money online today.” 

88. Sierra and VUG would later learn that these statements were flatly false. One 

of the innovations of the Valve games was that they contain a matchmaking function 

developed on the basis of software licensed from a third party that allows purchasers to play 

the games with others over the Internet. In order to do so, however, players were required 

to host a common version of the game on their computers. Due to this requirement, at times 

sizeable patches or updates were required to be downloaded off the Internet, and this process

at times could be cumbersome and slow. At the time of the negotiations, however, Valve 

was developing and since has completed a technology that it calls “Steam” which Valve 

states solves this problem. 

89. In addition, Valve has announced that Steam will enable consumers to 

purchase games directly over the Internet without downloading an extremely large file 

comprising the entire software product prior to play. Steam will allow consumers who 

would normally purchase games from Sierra and VUG at retail to purchase those products 

online directly from Valve. The new technology will enable consumers to download games 

a portion at a time as needed without waiting for the whole game to download. If Steam 

works as stated by Valve, it will have a material adverse impact on Sierra’s and VUG’s 

“Retail Channel” publishing rights under the 2001 Agreement. 

90. Given the technological complexity of Steam, the announcement by Valve of 

the completion of Steam during early 2002, and an announcement by Speakeasy that Valve 

had approached Speakeasy about Steam a year prior to its release in March 2002, it is 

apparent that Valve was working on the Steam distribution technology long prior to the time 

the March 2001 Agreement was signed. Yet, during the negotiations for the Agreement, 

Valve never disclosed its efforts to develop Steam or its intention to broadly exploit 

worldwide direct download distribution rights with respect to Half-Life 2 or other games. 

To the contrary, Counterclaim Defendant Newell affirmatively represented to Mr. Joly in 

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September 2000 that retail marketing remained “the key to [their] strategy” and that “online 

is a way to nurture the retail business.” Incredibly, Counterclaim Defendant Newell also 

stated that he “could not understand how one can make money online today,” plainly with 

the intention to falsely imply that Valve had no present or future strategy to engage in 

widespread online distribution of the games. This misleading half-truth was Newell’s 

deliberate concealment of the extent to which Valve intended through the parties’ 

negotiations to appropriate the substantial value of the distribution rights to Valve, rather 

than to Sierra and VUG .

91. Similarly, in mid-January 2001, Counterclaim Defendant Lynch stated to 

Suki Hayre of Sierra that the population of online gamers was just 3 million and that “only a 

fraction of them will be downloading Half-Life 2.” This statement confirmed Sierra’s and 

VUG’s understanding, acquired from Valve during the negotiations, that Valve did not 

intend to exploit online download rights in any material manner.

92. Any substantial threat to the value of Sierra’s and VUG’s exclusive retail 

publication rights was material to the 2001 Agreement. Had Sierra or VUG known about 

Valve’s development of the new Steam distribution technology, they would have realized 

that their retail distribution rights were in serious jeopardy. Because of Valve’s 

misrepresentations and concealment, however, Sierra and VUG actually and justifiably 

relied on Valve in believing that by changing the scope of its distribution rights to permit 

online distribution by Valve, there would be no significant impact to its retail distribution 

rights. Sierra and VUG therefore agreed to relinquish valuable rights that they owned under 

the 1997 and 1998 Agreements to Valve pursuant to the 2001 Agreement, including 

intellectual property ownership as well as certain rights to the online distribution of Half- Life 2 and other Valve games.

93. Valve continued to conceal its development of the Steam online distribution 

technology even after the execution of the 2001 Agreement, in order to win additional 

concessions from Sierra and VUG. For example, under the 2001 Agreement, Sierra and 

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VUG had the right to acquire an unspecified “Game 3” in addition to Team Fortress 2 and 

Half-Life 2. In or about April 2001, Sierra and VUG began discussions with Valve 

regarding two sequels to Counterstrike, one known as Counterstrike 2, and the other as 

Counterstrike: Condition Zero (“CSCZ”). Sierra and VUG attempted to acquire the right to 

publish CSCZ by separate agreement. When Valve demanded unreasonable terms and 

threatened to take the game to another publisher, Sierra and VUG exercised their option 

under the 2001 Agreement to accept CSCZ as Game 3 under the 2001 Agreement. Under 

the terms of the 2001 Agreement, Game 3 was to be subject to revenue protection for 

Valve’s non-retail distribution of the game. Sierra and VUG waived these protections under 

false assurances by Counterclaim Defendants Lynch and Newell to Sierra in-house counsel 

Eric Roeder that Valve had no plans to release a non-retail version of CSCZ, and that waiver 

of the revenue protection provisions therefore would not affect materially affect the 

agreement. Valve did not disclose its development of Steam or the significant effect that 

that technology could have on Sierra’s and VUG’s retail revenue when making these 

assurances.

94. In January 2002, after numerous further delays in the release of Half-Life 2, 

Sierra and VUG asked Valve directly whether it intended to exploit direct download 

opportunities. In response to these questions, Douglas Lombardi, Valve’s Director of 

Marketing, falsely stated to Lee Rossini, a Director of Marketing for VUG, that Valve 

“[didn’t] have anything going” in this regard. That this statement was false, and a further 

deliberate attempt to conceal Valve’s intentions, is amply demonstrated by the fact that just 

two months later, Valve announced the release of Steam as well as at least one already- completed business deal with another company to distribute content using the Steam 

distribution network.

95. Thus, it was not until March 2002, nearly a year after the 2001 Agreement 

was signed, that Valve finally came clean regarding its plans. Newell announced the new 

Steam technology in a Game Developers’ Conference in San Jose. During that conference, 

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Newell acknowledged that with Steam, Valve “can market and have direct communication 

with customers, sales and distribution, and have customer service and support. . . . You 

only download what you need and when you need it. It’s faster and cheaper than CDs and 

lastly, no more patches.” He also stated that “for those eagerly awaiting Counter-Strike: 

Condition Zero, that game will be available simultaneously via Steam and retail outlets.” 

Newell also gave interviews to online game news sites such as Shacknews specifically 

identifying the release of Steam as a threat to retail publishers.

2. Valve Falsely Represents That Half-Life 2 And CSCZ Are Near 

Completion.

96. Counterclaim Defendants made several other false representations during the 

course of their successful efforts to fraudulently induce Sierra and VUG to enter into the 

2001 Agreement. In particular, Counterclaim Defendants falsely represented that Half-Life 

2 and CSCZ were in the final stages of development and soon would be ready for release. 

97. In a meeting with Mr. Joly in mid-February 2001, for example, Newell 

represented that Half-Life 2 could be released that year “depending on a number of 

choices.” Consistent with Valve’s representations regarding the status of Half Life 2, during 

the negotiations, Valve, Sierra and VUG exchanged projected royalties for the Half-Life 2 

game over the 2001 through 2003 period. Counterclaim Defendants adopted this time 

period for their own royalty projections for Half-Life 2 and never corrected the time period 

assumption supplied by Sierra and VUG that the game would be on the market and earning 

royalties in 2001. Because Half Life 2 has yet to be delivered, and given all of the work that 

Valve performed on Steam in the interim, in retrospect, it has become clear that 

Counterclaim Defendants either deliberately misrepresented, or made statements without 

any reasonable basis for believing them to be true, regarding the status of the development 

and anticipated delivery date of Half-Life 2.

98. Similarly, as a further inducement to entering into the new agreement, in 

March 2001, Counterclaim Defendant Lynch represented to Mr. Joly that CSCZ could be 

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included as a product under the 2001 Agreement. Mr. Lynch also represented that given its 

current status of development, CSCZ would be ready for release on October 31, 2001. That 

game was later included as part of the 2001 Agreement as Game 3 pursuant to Addendum 3, 

signed on December 28, 2001. While Sierra and VUG certainly knew that the game had not 

yet been delivered by that date, it also relied on Valve’s statements in believing that the 

game would shortly be ready for publication. Like Half-Life 2, however, CSCZ proved to 

be far from delivery. As discussed in further detail below, Valve did not deliver until 

October 2003 a seriously flawed build of this game to Sierra as a candidate for Final 

Milestone under the Agreement. Again, given Valve’s diversion of resources to Steam and 

its now apparent desire to include Steam within the retail version of CSCZ, which it knew it 

was undertaking at the time, Mr. Lynch either deliberately misrepresented or had no 

reasonable basis for making statements regarding the development status and likely delivery 

dates of CSCZ.

99. In the end, given Newell’s extortionate demands and constant threats to 

breach the existing Agreements, as well as his and his negotiating team’s false promises, 

false statements, and fraudulent concealment, Sierra and VUG buckled and entered into the 

2001 Agreement. A copy of the 2001 Agreement is attached hereto as Exhibit D. 

D. The 2001 Agreement.

100. Although Sierra and VUG relinquished certain intellectual property rights in 

Valve games under the 2001 Agreement, they retained global rights to manufacture, 

reproduce, use, distribute, rent, lease and license certain computer games. The 2001 

Agreement, which by its terms is governed by Washington law, broadly grants Sierra and 

VUG:

a worldwide, perpetual license to manufacture or cause to be manufactured, 

reproduce or cause to be reproduced, use, distribute (directly or indirectly), or 

have distributed, market, advertise, publicly display and perform in 

connection with such marketing and advertising, rent, lease and license 

. . . [various games] and Foreign Translations thereof (developed by or for 

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Valve) in object code form on an exclusive basis (even as to Valve and its 

Affiliates . . . ) as Retail Packaged Product. (2001 Agreement §3.1.4)

101. With respect to the “Half-Life” game, the Agreement provides that

Sierra shall retain the exclusive (even as to Valve, except for bundles as 

described in Section 3.1.2) worldwide, license to reproduce, use, distribute 

(directly or indirectly), and license Retail Packaged Product versions of Half- Life in object code form . . . . (2001 Agreement §3.1.1)

102. Under the Agreement, Sierra and VUG have the right to reproduce, use, 

distribute, or license Valve-developed games “as Retail Packaged Products.” The 

Agreement defines a Retail Packaged Product as:

a version of a Product, Add-On Product, Foreign Translation or Platform 

Extension that: (a) is distributed on only tangible media (e.g. on a CD-ROM); 

(b) includes as part of the purchase price, the right to receive Sierra product 

support for a limited period of time (however, Valve and Sierra may mutually 

agree to include applications thereon which are not so supported); (c) is 

distributed in packaging of the type typical of game software in the Retail 

Channel; and (d) is distributed in the Retail Channel. (2001 Agreement §1)

103. The incorporated definition of Retail Channel also is very broad:

“brick and mortar” retail outlets; Internet retailers that carry any of 

electronics, software, games, toys and/or gifts, Internet auction sites; and all 

other channels now or during the term hereof commonly referred to in the 

retail trade as ‘retail outlets’ and distributors and resellers to such “retail 

outlets.” (Id.)

The term “retail outlets” is not defined in the 2001 Agreement. 

104. Valve explicitly agreed in the 2001 Agreement to “use diligent efforts to 

continuously develop [Half-Life 2, Team Fortress 2 and a third game, later determined to be 

CSCZ] to completion.” 2001 Agreement §§2.1-2.3 & Addendum 3. These same provisions 

also require Valve to inform Sierra and VUG of its development schedules for these games 

upon Sierra’s and VUG’s request. Id.

105. The 2001 Agreement imposes good faith obligations on both parties, 

including the duty not to engage in conduct that would harm the other entity’s good will 

and/or reputation. In addition, the 2001 Agreement prohibits Valve from:

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conduct[ing] any business or arrangement directly or indirectly through any 

Affiliate (by way of license, sublicense, transfer pricing, distribution or 

otherwise) that results in such party avoiding, bypassing or otherwise altering 

the intent or terms or conditions of this [2001 Agreement]. (2001 Agreement 

§9.11)

106. Under the 2001 Agreement, Valve bore the responsibility for performing 

quality assurance and other error testing on the games governed by the agreement. 2001 

Agreement §2.6. 107. The 2001 Agreement also requires Valve to translate games into various 

foreign languages and to provide Sierra and VUG with sufficient source code to enable 

Sierra and VUG to “localize” the games. 2001 Agreement §2.7.

E. Valve's Ongoing Breaches Of Virtually Every Provision Of The 2001 

Agreement.

1. Counterclaim Defendants Delayed The Development And Release of 

Half-Life 2 And CSCZ In Order To Ensure Distribution Over Steam.

108. Due to the success of Half-Life and the international following that that game 

has inspired, Sierra’s and VUG’s right to distribute the Half-Life 2 sequel represents the 

crown jewel of both the 9/3/97 Agreement and, later, the 2001 Agreement. As discussed 

above, during the parties’ negotiations over the 2001 Agreement, Counterclaim Defendants 

represented that Half-Life 2 was near completion.

109. Pursuant to the terms of the 2001 Agreement and Addendum 3, Valve had the 

obligation to use diligent efforts to continuously develop Half-Life 2, Team Fortress 2 and 

CSCZ to completion. Although Valve initially indicated that Half-Life 2 would be ready for 

release in May 2001, it has continually delayed the release date over the course of the 2001 

Agreement. In two occasions prior to July 2003, Valve showed Sierra and VUG a limited, 

scripted demonstration of Half-Life 2. Valve represented each time that the game would be 

ready for release later that year. Nevertheless, nearly three years after the signing of the 

2001 Agreement, Valve has yet to complete Half-Life 2. In fact, until just a couple of 

months ago, Valve had failed to provide builds of any of the games encompassed by the 

2001 Agreement. 

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110. Similarly, consistent with industry practice, the 2001 Agreement requires 

Valve to provide a current development schedule for games covered by the agreement upon 

Sierra’s and VUG’s request. Development schedules, in the custom and usage of the 

computer game and software development industry, require the identification of a specific 

set of milestones, progress to date on each milestone, and expected dates of completion for 

each of those milestones. Valve has consistently refused to provide development schedules 

to Sierra or VUG upon request, including schedules for Half-Life 2, thereby making it 

nearly impossible for Sierra and VUG properly and efficiently to plan for the marketing and 

promotion of these games.

111. Since Newell’s announcement of Steam in March 2002, it has become 

apparent that Valve delayed the development of CSCZ and Half-Life 2, and diverted 

resources to Steam throughout the period of development of those two games, so as to 

ensure the sale and distribution of CSCZ and Half-Life 2 through Steam. Newell secretly 

decided that Valve would use Sierra and VUG as the agent to get the Steam code into the 

hands of consumers, thus using Sierra and VUG , without their knowledge or permission, as 

an agent of their own destruction to allow Valve to compete with their own distribution 

channels. Indeed, Newell has even announced that he intends to strike Steam deals (and 

may already have done so) as a distribution mechanism for other game publishers. Thus, 

Valve seeks to use Sierra’s and VUG’s retail distribution capabilities to force them to put 

Steam code into the hands of consumers that may also then be used by Sierra’s and VUG’s 

retail publisher competitors. 112. In order to do this, Valve linked the development of Steam with the 

development of CSCZ. Specifically, Valve has embedded the Steam technology in CSCZ 

so that Steam will be distributed and installed on Sierra’s retail consumers’ computers with 

CSCZ. Once installed with CSCZ, Steam will allow Valve to bypass Sierra’s and VUG’s 

retail distribution network entirely, thereby diverting much of the financial benefit of the 

2001 Agreement away from Sierra and VUG. By delaying completion of Half-Life 2 until 

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after the release of the Steam-carrying CSCZ, Valve hopes to siphon much of the retail 

revenues from the highly-anticipated release of Half-Life 2.

2. Valve Breaches The 2001 Agreement And Addendum 3.

113. On March 9, 2001, shortly before the parties signed the 2001 Agreement, 

Counterclaim Defendant Lynch represented to Mr. Joly that Valve was developing CSCZ 

and that the game would be ready for release on October 31, 2001. Counterclaim Defendant 

Lynch suggested to Mr. Joly that the game could be designated as the unspecified “Game 3” 

that Valve was obligated to develop and deliver under the 2001 Agreement. 

114. After the 2001 Agreement was executed, however, Counterclaim Defendants 

attempted to get Sierra and VUG to waive certain revenue protection rights for CSCZ that 

would otherwise apply under the terms of the 2001 Agreement, by threatening to give the 

game to other publishers. As discussed above, Sierra and VUG instead took the position 

that they would treat CSCZ as Game 3 under the Agreement, in accordance with the terms 

thereof. Valve nevertheless refused to deliver the game under those terms. Once again, 

Sierra and VUG had little choice but to acquiesce.

115. CSCZ finally became Game 3 of the 2001 Agreement through the execution 

of Addendum 3 on December 28, 2001. Section 4 of Addendum 3 waives the revenue 

protection provisions of the 2001 Agreement for CSCZ. Notwithstanding this waiver, 

Addendum 3 and the 2001 Agreement imposed several obligations upon Valve, including 

the obligation to use diligent efforts to continuously develop CSCZ to completion.

116. Although Valve originally promised that CSCZ would be completed by 

October 31, 2001, a release candidate was not delivered until two years later. Sierra and 

VUG repeatedly requested detailed development schedules—in accordance with the 2001 

Agreement and industry practice—but were continuously rebuffed. In addition, Valve 

delegated to other companies, such as Ritual and Turtle Rock, its obligation to develop the 

CSCZ.

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117. On April 14, 2003, Sierra and VUG gave Valve formal written notice 

pursuant to Section 3.13 of the 2001 Agreement that Valve had breached its obligations to 

use diligent efforts to develop CSCZ to completion and to honor Sierra’s and VUG’s 

requests for current development schedules. Valve did not cure this deficiency within 30 

days of this notice (and, in fact, has failed to cure the deficiency to date). Accordingly, 

Sierra and VUG are, among other things, entitled to a fourth game with Add-On Products 

and other rights under the 2001 Agreement, pursuant to the provisions of Section 3.13. 

118. On October 29, 2003, Valve finally delivered a build of CSCZ to Sierra. 

However, Sierra’s initial testing revealed that after delaying delivery of CSCZ for two years, 

Valve had provided a product riddled with bugs. Sierra’s limited initial testing of this build 

revealed 81 “bugs,” at least 15 of which were “must fixes,” i.e. serious enough to prevent 

shipping of the product. Consequently, over the course of the following months, Sierra and 

VUG were forced to expend hundreds of hours performing the quality assurance testing that 

Valve was required to do under the terms of the 2001 Agreement. Rather than remedy the 

problems that this testing revealed, Valve has taken the position that as of November 13, 

CSCZ is “done” and that it is not required to fix the dozens of bugs that remain in the North 

American version of the product.

119. Valve has also refused to allow Sierra or VUG to test the multi-player 

functionality of CSCZ over the Internet, in a real-world environment, as consumers would 

play it. Sierra and VUG are aware of numerous problems in the past with the Steam

network that cause them to question whether this functionality will work as expected by 

consumers. For example, the release of the new Steam technology has burdened Sierra’s 

resources and harmed its reputation. Among other problems, because Valve has refused to 

provide telephone support for Steam, Sierra’s and VUG’s customer service lines have been 

inundated with phone calls and emails from consumers with various Steam-related issues. 

On November 26, 2003, for example, the VUG customer support group received dozens of 

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telephone calls and dozens of emails in a single day when Valve’s Steam authentication 

servers went down. 

120. Similarly, on September 20, 2001, Valve posted a new “patch” to Half-Life 

over Steam without properly testing it. By posting patches over Steam, consumers’ Half 

Life games are automatically updated as soon as they log on to an on-line server to play the 

game over the Internet. As a result, and due in part to Valve’s refusal to provide sufficient 

bandwidth as required by the 2001 Agreement, a high percentage of customers’ computers 

crash. On September 21, Sierra’s customer service department received approximately 150 

email complaints within 2 hours of Valve’s posting of the patch to the site. 

121. Sierra is also informed and believes that in mid-January 2003, a gaming 

tournament was canceled, in part due to Steam technical problems. 

122. Given these problems, Sierra and VUG have repeatedly requested that they 

be allowed to test the multi-player functionality of CSCZ over the Internet in a real world 

environment. Valve has flatly refused this request.

123. Valve has also failed to cooperate with the development of adequate 

localizations of CSCZ for release of the game in Germany, France, Italy, Spain, Korea and 

China. Rather than responding promptly to the numerous bugs and other problems that 

Sierra and VUG discovered in these localizations, Valve insisted that Sierra and VUG 

release the U.S. version of the game prior to other localized versions—despite the negative 

effect that a staged release would have on international sales (due to piracy) and the parties’ 

agreement, reached months prior to the October delivery, that the game would be shipped 

simultaneously worldwide. 

124. Also with respect to CSCZ, Valve has failed to ensure that CSCZ conforms 

with the agreed-upon October 26, 2001 Game Design Document that was incorporated as 

Exhibit B to Addenda 3 of the 2001 Agreement. Specifically, contrary to the terms of the 

Game Design Document, CSCZ does not allow for 75 total scenarios, provides only limited 

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cooperative play, does not include 25 new maps playable in both single and multi-player 

modes, and does not include at least 8 new weapons and items.

125. With respect to Half-Life 2, in about September 2003, Valve entered into an 

agreement with a company called ATI permitting ATI to distribute coupons for Half-Life 2 

games to consumers who purchase ATI graphics cards. This agreement violates numerous 

provisions of the 2001 Agreement, including Valve’s obligation to refrain from selling Half- Life 2 prior to its release by Sierra and VUG.

126. In addition to these breaches, Valve has failed to continuously develop Team 

Fortress 2 as required by the 2001 Agreement and has refused, despite numerous demands, 

to provide development schedules for that product. In fact, Valve has yet to demonstrate to 

Sierra or VUG any portion of a Team Fortress 2 game or to provide any development 

schedules. Sierra and VUG therefore believe that Valve has done little, if any, work on this 

game.

127. Valve has also refused to cooperate with Sierra and VUG regarding Valve’s 

marketing and promotional plans.

F. Valve’s Security Breaches.

128. In October 2003, it was widely reported in the press that a hacker had stolen 

the source code for the yet-to-be-released Half-Life 2, CSCZ, CounterStrike 2, and Team

Fortress 2. As a result of the theft of the source code, pirated copies of Half-Life 2 and 

CSCZ are now being sold throughout the world. Valve has postponed the release of Half- Life 2 yet again, purportedly due to the theft. 

129. Valve also refuses to provide Sierra and VUG with assurances regarding the 

security of Half-Life 2 and Valve’s other products. Upon information and belief, a security 

consulting firm called PivX reported that it had discovered the security vulnerabilities in the 

Half-Life game code and contacted Valve on April 14, 2003, regarding these lapses. Valve 

informed PivX that it was working to develop a patch. However, after a delay of 100 days 

without the production of a patch, PivX released a free fix for the problem. In a public 

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release, PivX has claimed that the Half-Life bugs affect both clients and servers, so 

everyone that plays or serves Half-Life is vulnerable.

130. Given these problems, Sierra and VUG have repeatedly requested that Valve 

provide reasonable assurances that Half-Life 2 is not a security threat to consumers. Valve 

has failed and refused to provide such assurances. 

G. Valve’s Infringement Of Sierra’s and VUG’s Retained Rights In Half-Life.

131. Sierra and VUG obtained all intellectual property rights to the Valve games 

encompassed by the 1997 Agreements. Sierra and VUG relinquished many of these rights 

in the 2001 Agreement in the face of Valve’s extortionate threats premised upon express 

repudiations of the parties’ existing agreements, and in reliance on Valve’s fraudulent 

misrepresentations.

132. Sierra and VUG nevertheless retained certain intellectual property rights in 

Half-Life under the 2001 Agreement. Specifically, Section 3.1.1 of the 2001 Agreement 

provides that notwithstanding the transfer of ownership of intellectual property embodied in 

Half-Life to Valve, “Sierra shall retain the exclusive (even as to Valve, except for bundles as 

described in Section 3.1.2) worldwide, license to reproduce, use, distribute (directly or 

indirectly), and license Retail Packaged Product versions of Half-Life in object code 

form . . . .” 

133. Beginning at a date unknown to Sierra or VUG but sometime within the past 

two years, Valve began to reproduce, use, distribute and/or license Half-Life to consumers 

through Steam. This conduct exceeds the scope of Valve’s license (which, according to the 

foregoing language, gives Sierra and VUG the exclusive worldwide license to reproduce and 

distribute the game in object code form) and violates Section 3.11 of the 2001 Agreement.

H. Valve's Continuing Extortionate And Fraudulent Conduct After The 2001 

Agreement.

134. Even after signing the 2001 Agreement, Valve continues to use threats to 

extract concessions from Sierra and VUG. For example, in or about May of 2001, during 

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the parties’ negotiations over Addenda to the 2001 Agreement and in accordance with 

Counterclaim Defendant Lynch’s suggestion on March 9, Sierra and VUG proposed to 

designate CSCZ as the as yet unspecified “Game 3” under the 2001 Agreement. 

Counterclaim Defendant Newell responded by demanding that Sierra and VUG make 

multimillion dollar advance payments for the game and agree to waive the revenue 

protection provisions that would otherwise apply to CSCZ under the 2001 Agreement. 

Despite the fact that Valve was obligated to provide CSCZ to Sierra and VUG, Valve 

threatened to seek another publisher for CSCZ if Sierra and VUG did not accede to these 

demands. 

135. Similarly, on February 5, 2003, in a meeting between Sierra, VUG and 

Valve, Counterclaim Defendant Newell demanded that unless Sierra and VUG paid millions 

of dollars in cash advances not contemplated by the 2001 Agreement, Valve would divert 

resources away from Half-Life 2 to the development of Counterstrike 2 for another 

publisher, thus repudiating Valve’s obligations to continuously develop Half Life 2.

136. Finally, on about October 9, 2003, after the theft of the source code for the 

yet-to-be-released Half-Life 2, CSCZ, CounterStrike 2, and Team Fortress 2 had been 

widely reported in the press, Counterclaim Defendant Newell stated to the press that CSCZ 

was completed, or “gold,” and would be “available via Steam and at retail on November 

18th.” Counterclaim Defendant Newell made this statement knowing that Valve had not yet 

delivered a release-candidate version (“Final Milestone”) of CSCZ to Sierra or VUG, that 

Section 4 of the 2001 Agreement permits Sierra and VUG a six-month period of exclusive 

rights after the delivery of a Final Milestone within which to appropriately time the 

commercial release of products to the market, that Sierra and VUG had planned a worldwide 

simultaneous release of CSCZ that was impossible within this time frame even if a Final 

Milestone had been delivered, and that Section 3.11 of the 2001 Agreement prohibits Valve 

from releasing any product until Sierra and VUG have released it into the retail channel. 

When questioned by Sierra and VUG about these statements, Counterclaim Defendant 

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Lombardi wrote to Adam Fossa acknowledging that these statements were knowingly false 

and explaining that Counterclaim Defendant Newell “was simply trying to get the attention 

off the leak and onto [CS]CZ.” By publicly announcing that CSCZ was “gold” and ready 

for release when in fact it was not, Counterclaim Defendants were once again attempting to 

coerce Sierra and VUG into relinquishing its rights under the parties’ agreements—namely, 

to determine the timing of the release of this product.

I. Valve Knew Of And Condoned The Sale, Licensing And Distribution Of 

The Valve Games By Sierra and VUG To Cyber-Cafés.

137. Although cyber-cafés vary greatly, a common feature is that all rent computer 

time and software access on an hourly or pay-per-play basis. Most, if not all, cyber-cafés 

with which Sierra, VUG and their affiliates distribute Valve Games sell some sort of 

product, including computer software or games and/or food and drink. Additionally, given 

modern security measures, many cyber-cafés rent games to customers by having them 

“check out” a CD containing the game, which the customer then loads onto the computer. 

138. Since the execution of the 4/27/97 Agreement, Sierra and VUG have actively 

licensed Valve Games, including Half-Life and Counterstrike, to cyber-cafés. Cyber-cafés 

are the principal source of revenue for Valve Games in the Asian-Pacific and Eastern 

European regions, and a lesser source of revenue in the United States and Western Europe.

139. Consistent with its activities under the prior agreements and the language of 

the 2001 Agreement, Sierra and VUG have continued to distribute and license multiple 

Valve games (including, inter alia, Half-Life, Half-Life Opposing Force, Half-Life Blue 

Shift and Counterstrike) to cyber-cafés in multiple countries (including, inter alia, France, 

Germany, Italy, the United Kingdom, Malaysia, the Philippines, and Australia). 

140. Valve has always known of these cyber-café distributions—and has always 

accepted royalty payments for them. After the parties amended the 4/27/97 Agreement in 

July of 1998 to provide that a category of revenues called Licensing Revenues would arise 

only from third-party licensing deals in which VUG was not the publisher and had not 

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funded marketing and distribution costs, Sierra and VUG submitted royalty reports to Valve 

under which revenues from cyber-café distributions were delineated as Net Revenues rather 

than Licensing Revenues. Upon receipt of those reports, Valve objected—not to the cyber- café distribution, but rather based on its belief that cyber-café licensing revenue was 

Licensing Revenue and not Net Revenue. After the 2001 Agreement, Sierra and VUG 

continued to submit such reports, and Valve continued to accept royalty payments for cyber- café distribution. It was not until after Valve released Steam and began to see cyber-cafés as 

an excellent proving ground for Steam that Valve began to complain about Sierra’s and 

VUG’s exploitation of its cyber-café rights under the 2001 Agreement.

FIRST CAUSE OF ACTION

(Fraudulent Misrepresentation Against All Counterclaim Defendants)

141. Paragraphs 1 through 140 are hereby incorporated by reference.

142. In 2000, Valve threatened to halt development of Half-Life 2 unless Sierra 

and VUG relinquished some of their rights under the 1997 Agreement. During the parties’ 

negotiations concerning the 2001 Agreement, Counterclaim Defendants repeatedly and 

falsely assured Sierra and VUG that retail sales would remain “the key to their strategy” and 

that Valve did not plan to engage in anything other than de minimis distribution of games 

online. 

143. For example, in September 2000, Counterclaim Defendant Newell told Mr. 

Joly that “online is a way to nurture the retail business.” In mid-January 2001, Counterclaim 

Defendant Lynch represented to Sierra and VUG that the population of on-line gamers was 

just 3 million and that “only a fraction of them will be downloading Half-Life 2.” In late 

April 2001, when the parties were negotiating Addendum 2 to the 2001 Agreement, 

Counterclaim Defendants Lynch and Newell falsely told Sierra in-house counsel Eric 

Roeder that Valve had no plans to release a non-retail version of CSCZ. Similarly, in July 

2001, Counterclaim Defendant Lynch told William Dugan that electronic distribution of 

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CSCZ “should not have a material effect on retail sales.” In January 2002, after numerous 

delays in the release of Half-Life 2, Sierra and VUG asked Valve directly whether it 

intended to exploit direct download opportunities. In response to these questions, Douglas 

Lombardi falsely represented to Sierra and VUG that Valve “[didn’t] have anything going.” All of these representations were false.

144. Similarly, during the parties’ negotiations over the 2001 Agreement, 

Counterclaim Defendants also falsely represented that Half-Life 2 and CSCZ were near 

completion. In a meeting with Mr. Joly in mid-February 2001, for example, Counterclaim 

Defendant Newell represented that Half-Life 2 could be released that year, “depending on a 

number of choices.” In addition, Valve exchanged spreadsheets with Sierra and VUG 

projecting royalties for the sale of the Half-Life 2 game during the 2001 through 2003 

period. On March 9, 2001, Counterclaim Defendant Lynch represented to Mr. Joly that 

Valve was developing CSCZ, that the game could be added to the new agreement, and that it 

would be ready for release on October 31, 2001. Neither Half-Life 2 nor CSCZ were near 

completion at the time these statements were made. In fact, nearly three years after the 

execution of the 2001 Agreement, Valve has yet to deliver a build of Half-Life 2. 

145. Sierra and VUG did not know that Counterclaim Defendants’ 

misrepresentations were false.

146. The status of the development of Half-Life 2 and CSCZ and Valve’s 

development of Steam were material facts to the 2001 Agreement. Had Sierra or VUG 

known of the true status of the development of these games or that Valve was developing a 

technology that would steal revenue from sales in the Retail Channel, Sierra and VUG 

would not have agreed to relinquish its rights under the 1997 Agreements.

147. Counterclaim Defendants either knew that Half-Life 2 and CSCZ were not 

near completion at the time of the 2001 Agreement or knew that they had an insufficient 

basis for their representations regarding the status of development of Half-Life 2. Similarly, 

Counterclaim Defendants either knew that Valve was developing Steam during the 

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negotiations for the 2001 Agreement and in January 2002, or knew that they had insufficient 

knowledge to support their statements that Valve did not plan to engage in anything other 

than de minimis distribution of games online. In making all of these representations, 

Counterclaim Defendants intended to induce Sierra’s and VUG’s reliance to enter into the 

2001 Agreement and the Addenda thereto. 

148. Sierra and VUG did, in fact, rely on the Counterclaim Defendants’ 

misrepresentations in entering into the 2001 Agreement and its Addenda. Sierra’s and 

VUG’s reliance on Valve’s affirmative misrepresentations of fact was justifiable. 

149. As a consequence of Counterclaim Defendants’ misrepresentations, Sierra 

and VUG have suffered and will suffer significant injury.

SECOND CAUSE OF ACTION

(Promissory Fraud Against All Counterclaim Defendants)

150. Paragraphs 1 through 149 are hereby incorporated by reference.

151. In negotiating and entering into the 2001 Agreement, Counterclaim 

Defendants represented that they would use diligent efforts to continuously develop Half- Life 2 and other games governed by that contract to completion. 

152. Counterclaim Defendants made these representations without any intention of 

doing so. For example, although Half-Life 2 was originally scheduled for release in 2001, 

Valve has yet to complete this game. Instead, Counterclaim Defendants secretly and 

intentionally delayed the development of Half-Life 2 until Steam could be completed. In 

addition, although Counterclaim Defendants represented that CSCZ would be complete by 

October 31, 2001, they did not provide any builds of this game as candidates for a Final 

Milestone under the Agreement until nearly two years later. 

153. Sierra and VUG did not know that Counterclaim Defendants made these 

promises without any intention of continuously developing CSCZ and Half-Life 2 for 

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prompt completion and release, and instead to divert resources to Steam and to intentionally 

delay the release of these games until Steam could be completed. 154. Valve’s promise to use diligent efforts to continuously develop Half-Life 2 

and CSCZ to completion was material to the 2001 Agreement and its Addenda. Had Sierra 

or VUG known that Valve did not intend to use diligent efforts to develop Half-Life 2 and 

CSCZ to completion, Sierra and VUG would not have agreed to relinquish their rights under 

the 1997 Agreements or to enter into the Addenda to the 2001 Agreement.

155. Counterclaim Defendants did not intend to use diligent efforts to 

continuously develop Half-Life 2 and CSCZ to completion and had no reasonable basis for 

their representations in this regard. Instead, they intended to delay development of these 

games at least until the completion of Steam. In making these false promises, Counterclaim 

Defendants intended to induce Sierra’s and VUG’s reliance. 

156. Sierra and VUG did, in fact, rely on the Counterclaim Defendants’ 

misrepresentations in entering into the 2001 Agreement and its Addenda. Sierra’s and 

VUG’s reliance on Valve’s promises was justifiable. 

157. As a consequence of Counterclaim Defendants’ misrepresentations, Sierra 

and VUG have suffered and continue to suffer significant injury. 

THIRD CAUSE OF ACTION

(Concealment Against All Counterclaim Defendants)

158. Paragraphs 1 through 157 are hereby incorporated by reference.

159. In 2000, Valve threatened to halt development of Half-Life 2 unless Sierra 

and VUG relinquished some of their rights under the 1997 Agreement. During the parties’ 

discussions over this issue, Newell told VUG’s CEO that Valve required three concessions 

in order to continue development of Half-Life 2: (a) the transfer of intellectual property 

rights to all games, as this issue was emotionally important to Counterclaim Defendant 

Newell; (b) higher royalty rates for Valve; and (c) transfer of the “ancillary right” to 

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distribute the games in non-retail channels, such as direct download over the Internet. 

Newell represented that Valve was principally interested in obtaining the intellectual 

property rights to its games.

160. During the parties’ negotiations over these issues, Sierra and VUG also 

received assurances from the Counterclaim Defendants that Half-Life 2 was near 

completion. In a meeting with Mr. Joly in mid-February 2001, for example, Counterclaim 

Defendant Newell represented that Half-Life 2 could be released that year “depending on a 

number of choices.” Consistent with these representations, Valve, Sierra and VUG 

exchanged projected royalties for the Half-Life 2 game for the 2001 through 2003 period.

161. During this time, Counterclaim Defendants concealed the fact that Valve was 

already in the process of developing Steam, a new technology that could significantly affect 

the retail rights retained by Sierra and VUG. Steam would allow consumers who would 

normally purchase Half-Life 2 and other games from Sierra and VUG in tangible media 

form to purchase those products directly from Valve online.

162. In January 2002, after the 2001 Agreement was signed and after numerous 

delays in the release of Half-Life 2, Sierra and VUG asked Valve directly whether it 

intended to exploit direct download opportunities. In response to these questions, 

Counterclaim Defendant Lombardi not only failed to reveal Valve’s development of Steam, but affirmatively and falsely represented to Lee Rossini, a Director of Marketing for VUG, 

that it “[didn’t] have anything going.” 

163. Valve’s development and/or plans to develop Steam during the negotiations 

for the 2001 Agreement was a material fact that was peculiarly within Valve’s knowledge 

and not discoverable by Sierra and VUG with the exercise of ordinary diligence. Sierra and 

VUG did not, in fact, discover that Valve had developed Steam until March 2002, when 

Valve announced the new technology at the San Jose Game Developers’ Conference. 

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164. Had Sierra and VUG known about Valve’s intended development of Steam

during the negotiations, they would not have entered into the 2001 Agreement or its 

Addenda. 

165. The status of Valve’s development of CSCZ and Half-Life 2 also was a 

material fact that was peculiarly within Valve’s knowledge and not discoverable by Sierra or 

VUG with the exercise of ordinary diligence. Had Sierra or VUG known that the games 

would not be released for another two years, they would not have entered into the 2001 

Agreement or its Addenda.

166. As a consequence of Counterclaim Defendants’ concealment, Sierra and 

VUG have suffered and continues to suffer significant injury.

FOURTH CAUSE OF ACTION

(Business Compulsion Against Valve)

167. Paragraphs 1 through 166 are hereby incorporated by reference.

168. Beginning in late 1999 and continuing through the parties’ negotiations for 

the 2001 Agreement, Valve repeatedly threatened to halt or indefinitely delay development 

of Half-Life 2 and other games unless Sierra and VUG agreed to relinquish many of their 

rights under the 1997 Agreements. 

169. As the developer of Half-Life, Counterstrike, and other Half-Life sequels, 

add-ons and modifications, Valve had gained unique knowledge and experience that made it 

uniquely qualified to develop Half-Life 2. In making its threats, Valve improperly wielded 

its power as the developer of a unique product.

170. By late 2000, Sierra and VUG had expended considerable resources to fund 

and market the Valve games and believed that any further delay in the development of Half- Life 2 and other games would vitiate the benefits of the 1997 Agreements. By making its 

threats, Valve therefore created immediate pressure to enter into the 2001 Agreement.

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171. Under the 2001 Agreement, among other concessions, Sierra and VUG 

relinquished certain intellectual property rights to Valve games, agreed to pay higher 

royalties for these games, and agreed to limit its exclusive, undivided distribution rights 

under the 1997 Agreements to retail distribution rights under the 2001 Agreement. Had 

Valve not threatened nonperformance of the 1997 Agreements, Sierra and VUG would not 

have entered into the 2001 Agreement or its Addenda on those terms. Therefore, as a result 

of Valve’s business compulsion, Sierra and VUG were forced to incur a serious business 

loss and was required to make payments to which Valve was not legally entitled.

172. By entering into the 1997 Agreements, Valve had impliedly or expressly 

agreed to use diligent and good faith efforts to timely develop Half-Life 2 and other games. 

By 2000, Sierra and VUG had expended significant resources in marketing Half-Life and 

other Valve games in reliance on Valve’s undertakings. Sierra and VUG had also refrained 

from finding a new developer for the Half-Life 2 sequel, as it would otherwise have been 

entitled to do under the 4/23/97 Agreement, with the understanding the Valve had obligated 

itself to complete these games in a timely and satisfactory manner. Valve’s own conduct, 

therefore, contributed to Sierra’s and VUG’s vulnerability to Valve’s business compulsion.

173. Consequently, Sierra and VUG are entitled to void the 2001 Agreement, 

leaving the parties in their respective positions under the 1997 Agreements and 1998 

Amendment, and to recover restitution of involuntary payments made under Valve’s 

business compulsion. 

FIFTH CAUSE OF ACTION

(Breach of Contract Against Valve)

174. Paragraphs 1 through 173 are hereby incorporated by reference.

175. Valve, Sierra and VUG entered into the 2001 Agreement on March 29, 2001, 

Addendum 1 to the 2001 Agreement on March 30, 2001, and Addendum 3 to the 2001 

Agreement on December 28, 2001. 

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176. Pursuant to the terms of the 2001 Agreement and Addenda 1 and 3, Valve 

was obligated to “use diligent efforts to continuously develop [Half-Life 2, Team Fortress 2, 

and CSCZ] to completion.” 2001 Agreement §§2.1-2.3. Valve has breached this obligation 

by repeatedly delaying the development of these games and failing to achieve final 

milestones for these games within a commercially reasonable period of time. 

177. In accordance with industry practice, the 2001 Agreement imposes upon 

Valve the obligation to provide current development schedules upon request. 2001 

Agreement §§2.1-2.3. Valve’s refusal to provide development schedules for Half-Life 2, 

Team Fortress 2, and CSCZ violates these provisions of the 2001 Agreement.

178. Section 2.3 of the 2001 Agreement sets out the mechanism by which the 

parties are to determine which game is to constitute Game 3. Although Valve had the right 

to negotiate with third parties for the development of proposed games if Sierra and VUG 

refused the proposal, it had no right to do so once the proposal was accepted. By repeatedly 

threatening to develop CSCZ for other publishers, threatening to stop shipment of CSCZ, 

and coercing Sierra and VUG into dropping the revenue protection provisions of the 2001 

Agreement after Sierra and VUG had accepted the proposal to include it as Game 3 under 

the 2001 Agreement, Valve breached its obligations under Section 2.3.

179. Section 2.3, Exhibits A and B and Addenda 3 require Valve to develop CSCZ 

as a game of AAA quality. Valve has breached this obligation by providing builds of 

CSCZ that do not meet this requirement. 

180. Sections 2.3, 4.1.1 and Addendum 3 require Valve to deliver a Final 

Milestone of CSCZ to Sierra and VUG . Final Milestone is defined in the 2001 Agreement 

as the “completion and delivery to Sierra of a release-candidate version of a Product.” In 

addition, Section 2.6 of the 2001 Agreement requires Valve to perform quality assurance 

and other error testing on the games that it delivers to Sierra and VUG. Valve has breached 

these provisions of the agreement by failing to conduct adequate quality assurance and error 

testing to the builds of CSCZ that it delivered to Sierra and VUG, refusing to correct dozens 

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of bugs identified by Sierra and VUG, and declaring publicly that the inferior builds of 

CSCZ that it had delivered to Sierra and VUG were Final Milestones triggering Sierra’s and 

VUG’s manufacturing, promotion, and distribution obligations.

181. Section 2.5 of the 2001 Agreement requires Valve to protect against the 

unauthorized dissemination and use of Sierra’s and VUG’s tools. Valve breached this 

agreement when it failed to take adequate precautions to prevent hackers from stealing the 

source code for Half-Life 2 and CSCZ. 

182. Section 2.6 of the 2001 Agreement requires Valve to perform quality 

assurance and other error testing on the games that it delivers to Sierra and VUG. Valve 

breached this provision by failing to conduct adequate quality assurance testing on Half-Life 

for PlayStation 2 and on CSCZ for PCs and by delivering inferior product to Sierra. 

183. Section 2.7 of the 2001 Agreement and Addenda 3 imposes upon Valve the 

obligation to provide English, French, German, Spanish and Italian translations and 

localizations of CSCZ. Valve breached these obligations by providing localized builds with 

numerous bugs preventing shipment and by refusing to allow Sierra and VUG to conduct 

any testing on the multi-player functionality of localizations.

184. Section 2.9 requires Valve, within one year of the commercial release of a 

game, to correct all errors in any game within a commercially reasonable time. Valve 

breached this obligation by failing to provide reasonable assurances that it will patch the 

numerous bugs in CSCZ and its translations after it is released.

185. Section 2.13 of the 2001 Agreement provides that “Valve shall be solely 

responsible for any and all bandwidth and hosting services involved in Valve’s distribution 

of patches . . . .” Valve breached this obligation by failing to provide adequate bandwidth 

for patch distribution, resulting in an increased customer service burden for Sierra and VUG.

186. Section 2.14.1 of the 2001 Agreement prohibits Valve from releasing sequels, 

including Half-Life 2 and CSCZ, prior to 18 months after Valve’s delivery and Sierra’s and 

VUG’s acceptance of the Final Milestone for that product. Valve expressly repudiated (and 

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therefore breached) this obligation by threatening to give CSCZ to another publisher for 

release prior to the deadlines set forth in this provision.

187. Section 3.1 of the 2001 Agreement retains for Sierra and VUG the exclusive 

worldwide license to reproduce, use, and distribute (directly or indirectly) Half-Life in 

object code form. Valve breached this agreement by selling Half-Life via Steam. Valve 

also breached this provision by asserting to this Court and to others that Sierra and VUG do 

not have the right to distribute Half-Life to cyber-cafés.

188. Section 3.11 of the 2001 Agreement prohibits Valve from selling games, 

directly or indirectly, prior to the time that such game is released by Sierra and VUG. Valve 

breached this agreement by permitting ATI to distribute coupons for Half-Life 2 prior to 

Sierra’s and VUG’s release of this game. 

189. Section 3.17, as amended by Addenda 1, requires Valve to consult with 

Sierra and VUG regarding its contemplated marketing of products, non-retail products, 

platform extensions and associated foreign translations. Valve breached this obligation by 

failing and refusing to consult with Sierra and VUG regarding marketing, and failing and 

refusing to provide marketing plans. 

190. Section 4.5 of the 2001 Agreement makes Valve responsible for technical 

support for any non-retail software product and traditional OEM product that Valve 

distributes itself or through a third party. Valve breached this obligation by failing to 

provide reasonable assurances of a patch for CSCZ and failing to provide adequate technical 

support for Steam. 

191. Pursuant to Section 7.1(e) of the 2001 Agreement , Valve warranted and 

represented that it would not grant any rights in any product to any third party that are 

inconsistent with the rights granted or transferred to Sierra and VUG under the 2001 

Agreement. Valve breached these warranties and representations by granting ATI the right 

to provide coupons for Half-Life 2 games to consumers who purchase ATI graphics cards in 

violation of Sierra’s and VUG’s rights under the 2001 Agreement.

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192. The 2001 Agreement also imposes upon Valve good faith obligations, 

including the duty not to engage in conduct that would harm the other entity’s good will 

and/or reputation. 2001 Agreement §9.2. In addition, the 2001 Agreement prohibits Valve 

from conducting any business directly or indirectly that results in such party avoiding, 

bypassing or otherwise altering the intent or terms or conditions of the 2001 Agreement. 

2001 Agreement §9.11. By delaying the development of CSCZ and Half-Life 2 to coincide 

with the release of Steam and by concealing its development of Steam, Valve breached its 

good faith obligations and conducted business resulting in such a manner as to avoid, 

bypass, and otherwise alter the intent or terms and conditions of the 2001 Agreement.

193. Valve also breached Sections 9.2, 9.11 and 9.12 by refusing to provide 

adequate assurances regarding the security of Half-Life 2, refusing to allow Sierra and VUG 

to test the multi-player functionality of CSCZ in a real world environment, refusing to 

provide adequate customer support for its Steam technology, and failing to take adequate 

measures to prevent source code for Half-Life 2 and CSCZ from being released to the 

public.

194. Valve has further breached Section 9.2 by publicly announcing on or about 

October 9, 2003, following the theft of the Half-Life 2 and CSCZ source code, that CSCZ 

would be released at retail and via Steam on November 18, 2003. Valve knew at the time 

that it made these statements that it had not yet delivered a Final Milestone of CSCZ to 

Sierra or VUG, that Section 4 of the 2001 Agreement permits Sierra and VUG a six-month 

period of exclusive rights within which to appropriately time the commercial release of 

products to the market, that Sierra and VUG had planned a worldwide simultaneous release 

of CSCZ, and that Section 3.11 of the 2001 Agreement prohibits Valve from releasing any 

product until Sierra and VUG have released it into the retail channel. By making knowingly 

making false statements to the public regarding the release date for CSCZ, Valve brought 

Sierra’s and VUG’s reputation into disrepute in violation of Section 9.2. 

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195. Section 2 of Addendum 1 to the 2001 Agreement obligate Valve to “consult 

with Sierra regarding its contemplated marketing of Products, Non-Retail Products, Platform 

Extensions and associated Foreign Translations.” Valve has repeatedly violated this 

provision, including by entering into the bundling deal with ATI concerning Half-Life 2 

without consulting Sierra or VUG and by making or permitting repeated public statements 

concerning that deal and the product release dates associated with that deal. 

196. Valve has also violated Section 2 of Addendum 1 by making numerous 

public statements about the expected retail release date of CSCZ and Half-Life 2 following 

release of the news of the theft of the source code for these games without consulting Sierra 

or VUG. 

197. Sierra and VUG have fully performed, or are excused from performing, all of 

their obligations under the 2001 Agreement and its Addenda.

198. As a result of Valve’s breaches of the 2001 Agreement and its Addenda, 

Sierra and VUG have suffered significant damages in an amount to be proven at trial.

SIXTH CAUSE OF ACTION

(Breach of the Covenant of Good Faith and Fair Dealing Against Valve)

199. Paragraphs 1 through 198 are hereby incorporated by reference.

200. As in every contract, the 1997 Agreements and the 2001 Agreement carried 

an implied duty of good faith and fair dealing that obligated Valve to cooperate with Sierra 

and VUG so that they could obtain the full benefit of performance.

201. Among other actions, during the course of the parties’ relationship, Valve has 

exerted duress to exact unwarranted concessions under the 2001 Agreement and its 

Addenda, concealed its development of Steam, delayed the development of Half-Life 2 to 

coincide with its release of Steam, imbedded Steam on a game that Sierra and VUG are 

contractually obligated to distribute through their marketing and distribution chain, delayed 

the development of CSCZ and Team Fortress 2, refused to provide adequate development 

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schedules, and provided flawed and inferior product. Each of these actions violates Valve’s 

duty of good faith and fair dealing because each represents an evasion of the spirit of the 

1997 Agreements as well as the 2001 Agreement, a lack of diligence and slacking off, 

willful rendering of imperfect performance, an abuse of power to specify terms, and/or 

interference with or failure to cooperate in Sierra’s and VUG’s performance. 

202. In particular, Valve’s insertion of Steam into CSCZ violates the duty of good 

faith and fair dealing because it significantly dilutes the basis for Sierra’s and VUG’s 

compensation under the 2001 Agreement and directly affects Sierra’s and VUG’s ability to 

distribute other products. 

203. As a result of Valve’s actions, Sierra and VUG have suffered and continue to 

suffer significant and irreparable injury.

SEVENTH CAUSE OF ACTION

(Failure of Consideration Against Valve)

204. Paragraphs 1 through 203 are hereby incorporated by reference.

205. As set out in detail above, Valve has breached nearly every operative 

provision of the 2001 Agreement, including the key provisions to continuously develop the 

games. As also set out above, Valve has frustrated the purpose of the 2001 Agreement 

through its activities with Steam. Accordingly, Valve has deprived Sierra and VUG of 

substantially all of the consideration it sought to receive under the 2001 Agreement.

206. The loss of consideration caused by Valve’s breaches is not slight in 

comparison with the consideration for the whole contract; in fact, it is significant. 207. Sierra’s and VUG’s damages are not easily ascertainable.

208. Rescission would not be inequitable to Valve, since Valve purposely delayed 

the development of CSCZ and Half-Life 2. Valve also concealed its development of Steam

during the parties’ negotiations over the 2001 Agreement and its Addenda. By making these 

misrepresentations and/or omissions, Valve concealed the failure of consideration. 

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Moreover, under the 1997 Agreements, the parties are required to negotiate an agreement to 

develop and distribute Half-Life 2 in good faith. EIGHTH CAUSE OF ACTION

(Frustration of Purpose Against Valve)

209. Paragraphs 1 through 208 are hereby incorporated by reference.

210. Sierra’s and VUG’s primary purpose in executing the 2001 Agreement and 

Addenda was to ensure the timely and satisfactory development of CSCZ and Half-Life 2 so 

that Sierra and VUG could capitalize on the popularity of the original Half-Life game and 

meet the existing demand for sequels. The 2001 Agreement and Addenda were made upon 

the basic assumption (and the affirmative assurances of the Counterclaim Defendants) that 

this demand would be met through distribution of the game in the retail channel.

211. The development of CSCZ and Half-Life 2 were significantly delayed to 

coincide with the release of Steam, a new technology that will divert distribution away from 

the retail channel and substantially impair the value of the rights for which Sierra and VUG 

received under the 2001 Agreement. Due to the delay in the development of CSCZ and 

Half-Life 2, and the concurrent development and release of Steam, the primary purpose of 

the 2001 Agreement has been frustrated. 

212. Sierra and VUG are not responsible for the delay in the development of 

CSCZ and Half-Life 2 nor the development of Steam. NINTH CAUSE OF ACTION

(Mutual Mistake Against Valve)

213. Paragraphs 1 through 212 are hereby incorporated by reference.

214. The 2001 Agreement is voidable due to mutual mistake because Sierra, VUG 

and Valve were independently mistaken at the time of contracting regarding basic 

assumptions of the contract and because Sierra and VUG did not bear the risk of this 

mistake.

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215. First, Sierra and VUG were mistaken as to the development status of Half- Life 2 and the other games referenced in the 2001 Agreement and its Addenda due to the 

Counterclaim Defendants’ representations that the games were near completion. To the 

extent that Valve did not intentionally misrepresent the status of the development of these 

games at the time of contracting, Valve was also mistaken as to the development status of 

these games. The parties’ assumptions regarding the development status of the games was a 

basic assumption of the 2001 Agreement that materially affected the basis of the parties’ 

contract. Had Sierra and VUG known that Half-Life 2 and CSCZ were not near completion, 

or that release of those games would be deliberately delayed by Valve for a substantial 

period of time, Sierra and VUG would not have entered into the 2001 Agreement or its 

Addenda.

216. Second, Sierra, VUG and Valve were mistaken as to the scope of the 

intellectual property rights conferred under the 2001 Agreement. Sierra and VUG believed 

that they were retaining the right to distribute games developed by Valve to cyber-cafés; in 

its First Amended Complaint, Valve claims that it believed that it was acquiring that right. 

The parties’ assumptions regarding the scope of rights conferred was a basic assumption of 

the 2001 Agreement that materially affected the basis of the parties’ contract. Had Sierra or 

VUG known that they would be giving up the right to distribute and/or license to cyber- cafés, they would not have entered into the 2001 Agreement.

217. Sierra and VUG did not bear the risk of these mistakes. The 2001 Agreement 

does not allocate the risk of these mistakes to Sierra or VUG. In addition, Sierra and VUG 

were unaware of any limitations on their knowledge. In fact, with respect to the 

development status, Valve affirmatively represented that the games, including Half-Life 2, 

were near completion and undertook the obligation under the 2001 Agreement to use 

diligent efforts to continuously develop these games to completion. Valve also concealed its 

development of Steam, despite its duty to negotiate in good faith.

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218. As a result of the mutual mistakes of Sierra, VUG and Valve, Sierra and 

VUG have been and continue to be injured and have failed to receive the material 

consideration to which they were entitled to expect and receive under the 2001 Agreement.

TENTH CAUSE OF ACTION

(Unilateral Mistake Against Valve)

219. Paragraphs 1 through 218 are hereby incorporated by reference.

220. The 2001 Agreement is voidable due to unilateral mistake because Sierra and 

VUG were mistaken at the time of contracting as to basic assumptions that have a material 

and adverse effect on the exchange of performances. 

221. First, Sierra and VUG were mistaken as to the development status of Half- Life 2 and the other games referenced in the 2001 Agreement due to Valve’s representation 

at the time of contracting that the games were near completion. Sierra’s and VUG’s 

assumption regarding the development status of these games vitally affected the basis of the 

2001 Agreement, as delay in the development of a game can greatly affect the ability to 

exploit market demand, particularly where, as here, two of the games were sequels.

222. Second, Sierra and VUG were mistaken as to the scope of the intellectual 

property rights conferred under the 2001 Agreement. Sierra and VUG believed that they 

were retaining the right to distribute games developed by Valve to cyber-cafés. Sierra’s and 

VUG’s assumption regarding the scope of rights conferred was basic to the 2001 Agreement 

and their mistake materially affected the basis of the parties’ contract.

223. Sierra and VUG did not bear the risk of these mistakes. The 2001 Agreement 

does not allocate the risk of these mistakes to Sierra or VUG. In addition, Sierra and VUG 

were unaware of any limitations on their knowledge. In fact, with respect to the 

development status, Valve affirmatively represented that the games, including Half-Life 2, 

were near completion and undertook the obligation under the 2001 Agreement to use 

diligent efforts to continuously develop these games to completion. Valve also concealed its 

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development of Steam, despite its duty to negotiate in good faith. Valve therefore was 

aware of Sierra and VUG’s mistakes, and capitalized upon those mistakes in inducing Sierra 

and VUG to enter into the 2001 Agreement.

224. The effect of each of these mistakes is to render enforcement of the contract 

procedurally and substantively unconscionable. First, Valve’s threats to halt or indefinitely 

delay the development of Half-Life 2 if Sierra and VUG did not sign the 2001 Agreement 

left Sierra and VUG without any meaningful choice with respect to this Agreement. Sierra 

and VUG agreed to relinquish rights under the 2001 Agreement with the understanding that 

this would hasten the development of Half-Life 2, a game that was represented to be nearly 

complete. Had Sierra and VUG known that Half-Life 2 was not near completion (and, in 

fact, would still not be completed nearly three years later), they would never have 

relinquished their rights under the 1997 Agreements. 

225. Similarly, cyber-cafés are and have always been the principal source of 

revenue for Valve games in the Asian-Pacific and Eastern European regions, as well as a 

source of revenue in the United States and Western Europe. By eliminating the right to 

distribute Valve games to cyber-cafés, Sierra and VUG would be left with virtually no 

source of revenue in the Asian-Pacific and Eastern European regions and would suffer a 

significant reduction in revenues in the United States and Western Europe. Had Sierra or 

VUG known that Valve intended to acquire the right to distribute Valve games to cyber- cafés, they would not have entered into the 2001 Agreement.

226. Moreover, Valve caused or had reason to know of Sierra’s and VUG’s

mistakes. Valve knew or should have known that its devotion of resources to the 

development of Steam would cause the development of Half-Life 2 and CSCZ to be 

delayed. Valve also knew or had reason to know that Sierra and VUG had historically 

distributed Valve games to cyber-cafés and that this distribution would be a significant 

source of revenue, without which Sierra and VUG would not have signed the 2001 

Agreement.

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227. As a result of its unilateral mistakes, Sierra and VUG have been and continue 

to be injured and have failed to receive the material consideration to which they were 

entitled to expect and receive under the 2001 Agreement.

ELEVENTH CAUSE OF ACTION

(Tortious Interference with Business Expectancy Against Valve)

228. Paragraphs 1 through 227 are hereby incorporated by reference.

229. Pursuant to the terms of the parties’ various agreements, Sierra and VUG 

expect to manufacture, reproduce, use, distribute, rent, lease, license and sell Valve games. 

Sierra’s and VUG’s business expectancy is reasonable, given their extensive success in the 

industry and their experience with publishing other Valve games.

230. As a party to the 2001 Agreement, Valve is and at all relevant times was 

aware of Sierra’s and VUG’s business expectancy.

231. By inserting the new Steam technology into CSCZ, Valve has intentionally 

interfered with Sierra’s and VUG’s business expectancy, since Steam will enable Valve to 

piggyback on Sierra’s and VUG’s marketing efforts and retail distribution chain and to 

bypass Sierra and VUG by offering games directly to Sierra’s and VUG’s own customers. 

Valve acted with the purpose of interfering with Sierra’s and VUG’s business expectancy or 

with the knowledge that such interference would result.

232. Valve had a duty of non-interference in that it: (a) interfered with Sierra’s 

and VUG’s business expectancy for the improper purpose of vitiating the benefits to Sierra 

and VUG of the 2001 Agreement; and (b) used the improper means of coercing Sierra and 

VUG into entering into the 2001 Agreement and its Addenda, concealing its development of 

Steam, and secretly imbedding Steam on CSCZ in order to usurp the benefits of Sierra’s and 

VUG’s efforts in marketing and distribution.

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P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

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233. As a result of Valve’s tortious interference with Sierra’s and VUG’s business 

expectancy, Sierra and VUG have suffered and will continue to suffer significant and 

irreparable injury for which there is no adequate remedy at law.

TWELFTH CAUSE OF ACTION

(Unfair Business Practices Under RCW Chapter 19.86 Against Valve)

234. Paragraphs 1 through 233 are hereby incorporated by reference.

235. Both prior to and after the execution of the 2001 Agreement, Valve falsely 

represented to Sierra, VUG, and the public that Half-Life 2 and CSCZ were near completion 

and would soon be released. 

236. Valve’s practice of falsely representing the status of the development of its 

games constitutes unfair or deceptive acts or practices in the conduct of trade or commerce.

237. Valve’s unfair or deceptive acts or practices impact the public interest and 

have the potential for repetition. 

238. Sierra and VUG have been injured by Valve’s unfair or deceptive acts or 

practices and those unfair or deceptive acts or practices are the proximate cause of Sierra’s 

and VUG’s injuries. The amount of Sierra’s and VUG’s damages will be proven at trial. Sierra’s and VUG’s damages associated with each unfair and deceptive act should be trebled 

pursuant to RCW 19.86.090.

THIRTEENTH CAUSE OF ACTION

(Declaration of Lack of Contract Formation Against Valve)

239. Paragraphs 1 through 238 are hereby incorporated by reference.

240. There exists an actual case or controversy as to whether there was a meeting 

of the minds as to the scope of the rights transferred under the 2001 Agreement.

241. Cyber-cafés are the principal source of revenue for Valve games in the 

Asian-Pacific and Eastern European regions, as well as a source of revenue in the United 

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States and Western Europe. As such, Cyber-café rights were an essential term of the 2001 

Agreement.

242. In entering into the 2001 Agreement, Sierra and VUG intended to retain the 

right to market Valve games to cyber-cafés, whereas Valve claims that it intended to acquire 

that right. The 2001 Agreement therefore does not reflect a common understanding of the 

essential terms of the contract. 

243. Wherefore, Sierra and VUG are entitled to the Court’s declaratory judgment 

that the 2001 Agreement is void for lack of contract formation.

FOURTEENTH CAUSE OF ACTION

(Declaration of Cyber-Café Rights Against Valve)

244. Paragraphs 1 through 243 are hereby incorporated by reference.

245. There exists an actual case or controversy as to Sierra’s and VUG’s right to 

manufacture, distribute, rent, lease or license the Valve games, including Half-Life 2, Team 

Fortress 2 and CSCZ, to cyber-cafés within the United States as Retail Packaged Product.

246. If the Court determines that it has subject matter jurisdiction over the playing 

of Valve Games in cyber-cafés outside the United States, then an actual case or controversy 

exists as to whether Sierra and VUG have the right to manufacture, distribute, rent, lease and 

license the Valve games to cyber-cafés outside the United States, as Retail Packaged 

Product.

247. All of the activities undertaken by Sierra and VUG with respect to the 

licensing, sale and distribution of Valve games to cyber-cafés, both inside and outside the 

United States, are within the scope of the license rights granted to Sierra and VUG under 

the 2001 Agreement.

248. All of the activities undertaken by Sierra and VUG with respect to the 

licensing, sale and distribution of Valve Games to cyber-cafés, both inside and outside the 

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United States, are within the scope of other express and implied license rights granted to 

Sierra and VUG by Valve.

249. Both before and after the execution of the 2001 Agreement, Valve had actual 

and constructive knowledge that Sierra and VUG were licensing the Valve Games to cyber- cafés both inside and outside the United States. This licensing activity was undertaken by 

Sierra and VUG with the express or implied approval of Valve agents who had actual or 

apparent authority to do so. In reliance on Valve’s approval, Sierra and VUG entered into 

contractual licenses with cyber-cafés both before and after execution of the 2001 

Agreement.

250. By its conduct, Valve has waived any right to object to the Counter- Claimants’ activities concerning cyber-cafés. 

251. In the alternative, Valve is estopped by its conduct from claiming that the 

license rights that it granted to Sierra and VUG do not permit the Counter-Claimants’ 

activities concerning cyber-cafés.

252. Wherefore, Sierra and VUG are entitled to the Court’s declaratory judgment 

that they have, and in the past had, the right to license the Valve Games to cyber-cafés.

FIFTEENTH CAUSE OF ACTION

(Declaration of Reversion of Intellectual Property Against Valve)

253. Paragraphs 1 through 252 are hereby incorporated by reference.

254. There exists an actual case or controversy as to whether Valve’s intellectual 

property interest in Half-Life, Team Fortress and the platform extensions and add-ons to 

these games, including the Half-Life and Team Fortress trademarks, have reverted to Sierra 

and VUG as a result of Valve’s failure to continuously develop Half-Life 2 and Team 

Fortress 2 in accordance with Sections 2.1 and 2.2 of the 2001 Agreement and Valve’s 

failure thereafter to cure this deficiency within 30 days of Sierra’s and VUG’s written 

notice.

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255. Sections 3.12.1 and 3.12.2 provide that if Sierra or VUG provide written 

notice to Valve that Valve has not continuously developed Half-Life 2 and Team Fortress 2 

in accordance with Sections 2.1 and 2.2 and Valve does not cure this deficiency within 30 

days, then Valve shall be deemed to immediately and without the necessity of further action 

on the part of either party grant Sierra and VUG an exclusive, transferable, worldwide, 

royalty-free license as to the intellectual property in Half-Life and Team Fortress and their 

platform extensions and add-ons, including the Half-Life and Team Fortress trademarks.

256. On April 14, 2003, Sierra and VUG provided written notice to Valve that 

Valve has not continuously developed Half-Life 2 and Team Fortress 2 in accordance with 

Sections 2.1 and 2.2. Valve did not cure this deficiency within 30 days of this notice.

257. Wherefore, Sierra and VUG are entitled to the Court’s declaratory judgment 

that Valve’s intellectual property interest in Half-Life, Team Fortress and their platform 

extensions and add-ons, including the Half-Life and Team Fortress trademarks, have 

reverted to Sierra and VUG pursuant to Section 3.12.1 and 3.12.2 of the 2001 Agreement.

SIXTEENTH CAUSE OF ACTION

(Declaration of Right To Develop Fourth Game)

258. Paragraphs 1 through 257 are hereby incorporated by reference.

259. There exists an actual case or controversy as to whether Sierra and VUG have 

the right to use Valve’s Half-Life 2 engine to develop a fourth game, along with applicable 

add-on products and other rights, as a result of Valve’s failure to continuously develop 

CSCZ in accordance with Section 2.3 of the 2001 Agreement and its failure thereafter to 

cure this deficiency within 30 days of Sierra’s and VUG’s written notice.

260. Section 3.13 provides that if Sierra or VUG provide written notice to Valve 

that Valve has not continuously developed CSCZ in accordance with Section 2.3 and Valve 

does not cure this deficiency within 30 days, then Valve shall be deemed to grant Sierra and 

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Seattle WA 98101-2925

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VUG the right to develop a fourth game, along with add-on products and other rights, as set 

forth in Exhibit F to the 2001 Agreement.

261. On April 14, 2003, Sierra and VUG provided written notice to Valve that 

Valve has not continuously developed CSCZ in accordance with Sections 2.3. Valve did not 

cure this deficiency within 30 days of this notice.

262. Wherefore, Sierra and VUG are entitled to the Court’s declaratory judgment 

that Sierra and VUG have the right to develop a fourth game pursuant to the terms of 

Section 3.13 and Exhibit F of the 2001 Agreement.

PRAYER FOR RELIEF

Wherefore, Defendants and Counter-Claimants Sierra and VUG pray for the 

following relief:

A. That Valve take nothing by its First Amended Complaint;

B. For dismissal of Valve’s First Amended Complaint in its entirety with 

prejudice;

C. For rescission of the 2001 Agreement, returning the parties to their relative 

position under the 1997 and 1998 Agreements;

D. For a declaration and judgment that the 2001 Agreement is void for lack of 

contract formation, lack of consideration, or frustration of purpose, and that the 1997 and 

1998 Agreements govern the relationship of the parties;

E. For a declaration and judgment that Sierra and VUG have and may exploit in 

the future, and have had, at all times relevant to the claims herein, the right to distribute 

and/or license Valve games, including Half-Life 2, Team Fortress 2, and CSCZ, to cyber- cafés;

F. For a declaration that Valve’s intellectual property interest in Half-Life, 

Team Fortress and their platform extensions and add-ons, including the Half-Life and Team 

Fortress trademarks, have reverted to or are otherwise owned by Sierra and VUG pursuant to 

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Seattle WA 98101-2925

206.623.1745; fax 206.623.7789

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Section 3.12.1 and 3.12.2 of the 2001 Agreement, and requiring Valve to transfer all right, 

title and interest therein to Sierra and VUG;

G. If the 2001 Agreement is not rescinded, for a declaration that Sierra and VUG 

have the right to a fourth engine license pursuant to the terms of Exhibit F of the 2001 

Agreement;

H. For a preliminary and permanent injunction enjoining Counterclaim 

Defendants, their officers, employees, agents, subsidiaries, representatives and all persons 

active in concert and participation with any of them from (a) including any Steam object 

code in any Final Milestone delivered to Sierra for publication as Retail Packaged Product 

other than such code that is necessary to meet Valve’s obligations to provide CD key 

authentication, multi-player matchmaking, and online patch/update functionality as specified 

in the 2001 Agreement; (b) using any Steam object code in any Final Milestone delivered to 

Sierra for publication as Retail Packaged Product other than such code that is strictly 

necessary to meet Valve’s obligations to provide CD key authentication, multi-player 

matchmaking and online patch/update functionality as specified in the 2001 Agreement, and 

particularly, enjoining Valve from using such code to distribute games to any consumers 

who obtained the Steam code through purchase of such Retail Packaged Product; and (c) (if 

the 2001 Agreement is not rescinded) reproducing, using, distributing (directly or 

indirectly), and licensing Half-Life in object code form, including via Steam distribution; or 

(d) (if the 2001 Agreement is rescinded) reproducing, using, distributing (directly or 

indirectly), and licensing any of the Valve games which Sierra was entitled to publish in any 

form, including via Steam distribution.

I. For damages in an amount to be proven at trial;

J. For attorneys’ fees pursuant to RCW 19.86.090, or as otherwise provided by 

law;

K. For attorneys’ fees incurred herein as provided by the 2001 Agreement;

L. For treble damages pursuant to RCW 19.86.090;

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HI L L I S CL A R K MA R T I N &

P E T E R S O N , P . S . 500 Galland Building, 1221 Second Ave

Seattle WA 98101-2925

206.623.1745; fax 206.623.7789

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M. For restitution in an amount to be proven at trial, including without limitation 

the return of all royalty sums paid by Sierra and/or VUG to Valve in excess of those owed 

under the 1997 and 1998 Agreements;

N. For punitive damages in an amount to be proven at trial;

O. For costs as provided by the 2001 Agreement or as otherwise provided by 

law;

P. For such other and further relief as the Court may deem just and proper.

JURY DEMAND

Sierra and VUG demand trial to the jury as to all issues so triable.

DATED this __26th__ day of January, 2004. HILLIS CLARK MARTIN & PETERSON, P.S.

By____s/_Michael R. Scott____________

Michael R. Scott, WSBA #12822

500 Galland Building

1221 Second Avenue

Seattle WA 98101-2925

Telephone: (206) 623-1745

Facsimile: (206) 623-7789

e-mail: mrs@hcmp.com

HOWARD RICE NEMEROVSKI CANADY FALK & 

RABKIN, A PROFESSIONAL CORPORATION 

Annette L. Hurst (admitted pro hac vice)

Simon J. Frankel (admitted pro hac vice)

Three Embarcadero Center, Seventh Floor

San Francisco, CA 94111-4024

Telephone: (415) 434.1600

Facsimile: (415) 217.5910

e-mail: sking@howardrice.com

Attorneys for Defendants Sierra Entertainment, 

Inc, Vivendi Universal Games, Inc., and 

Vivendi Universal, S.A.

#264938 18133-002 5_f#01!.doc 1/26/2004

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