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UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF WASHINGTON

AT SEATTLE

 

VALVE, )

 )

Plaintiff, )

 )

-vs- )CASE NO. C02-1683Z

 )

SIERRA ENTERTAINMENT, )

 )

Defendant, )

___________________________________________________________

Verbatim of Proceedings

before

THE HONORABLE THOMAS S. ZILLY

 

__________________________________________________________

Seattle, Washington

Date: Friday, June 4, 2004

Reported By: Susan A. Zielie, CCR, RPR
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A P P E A R A N C E S

For the Plaintiff: KARL QUACKENBUSH, ESQ.

 JASON P. HOLTMAN, ESQ.

 KRISTIN J. BORAAS, ESQ.

 Preston, Gates, Ellis

925 Fourth Avenue

Suite 2900

Seattle, WA 98104-1158

For the Defendant: ANNETTE L. HURST, ESQ.

LINDA Q. FOY, ESQ.

Howard, Rice, Nemerovski, 

Canady, Falk & Rabkin

 Three Embarcadero Center

 San Francisco, CA 94111-4024

MICHAEL R. SCOTT, ESQ.

Hillis, Clark, Martin 

& Peterson

 500 Galland Building

1221 Second Avenue

 Seattle, WA 98101-2925
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SEATTLE, WASHINGTON; FRIDAY, JUNE 4, 2004

10:00 A.M.

--oo0oo--

THE CLERK: Case No. C02-1683Z, Valve vs. Sierra 

Entertainment. Counsel, please stand and make your 

appearances.

MR. QUACKENBUSH: Karl Quackenbush representing 

Valve Corporation, Mr. and Mrs. Newell and Mr. and Mrs.

Lynch. With me at counsel table are my colleagues, Jason 

Holtman and Kristin Boris.

MS. HURST: Good morning, Your Honor. Annette 

Hurst of Howard Rice representing Sierra, Vivendi Universal 

Games and Vivendi Sales. With me are Mr. Scott from the 

Hillis Law Firm and Linda Foy from Howard Rice, and also Mr.

Roeder who is the general counsel for Vivendi Universal.

THE COURT: It appears both sides are 

well-represented this morning. 

The motion comes on before the Court for 

Plaintiff's counterclaim for failure to state a claim, Docket 

No. 110. I have set this time for oral argument, and I'm 

going to permit oral argument, but I'd like to give you some 

direction and tell you generally where my uncertainty is with 

respect to these issues. 

First, my law clerk gave you a chart which attempts 
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to, on the left-hand column, list every claim that we think 

the counter-claimant is making with respect to 

misrepresentations. In the middle column, we've attempted to 

quote that portion of the contract if the contract deals with 

the subject. And, on the right side, we've given at least a 

tentative, "this is opinion or this is fact." Obviously, if 

it's fact and all the other elements of fraud can be proved, 

it goes forward. If it's opinion, it can't be the basis for 

a fraud claim. 

Now, I'm not asking you to accept my tentative 

conclusions on what's a fact and what's an opinion; but, 

because I'm going to want you to address specifically the 

specific representations, I thought it would be helpful if we 

all had the same list, and hopefully we've got all of the 

alleged misrepresentations of fact that counsel wants to talk 

about. 

The second and frankly more challenging issue is to 

try and make some sense, I guess that's the only way I could 

describe it, between the line of cases that are best shown by 

the Gole vs. Jain case, Judge Lasnick's case found at 259 

F.Sup.2d 1128. That case relies heavily on another case of 

One-O-One Enterprises, Inc. vs. Caruso, but basically saying 

that contracts would not be worth the paper they're written 

on if we can't rely on these integration clauses. 

So we've got that line of cases, which I think has 
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a lot going for them. Then we have what appears to be 

Washington cases, which seem to be in conflict. A good 

example is the Coson vs. Roehl case, 63 WA.2d 384, which 

deals with the proposition that if you have fraud in the 

inducement of a contract, that fraud would vitiate the entire 

contract notwithstanding a provision in the contract that 

there are no understandings or agreements not contained in 

the writing. Those two and Coson have many other cases that 

stand for the same general proposition. They seem to be 

somewhat in conflict. Hopefully, the lawyers will be able to 

assist me in understanding how we can reconcile those two 

lines of cases, if it can. 

My tentative view would be that if the terms -- let 

me put it this way. The parol evidence, in light of the 

integration clause, should probably not be admitted to 

contradict or vary a term in the contract. Because, if it 

could, I think the Judge Lasnick line of cases is a more 

appropriate resolution. On the other hand, if the contract 

is silent on a term or condition, then it's not all together 

clear to me that -- well, I think that parol evidence can 

come in if the defendant counter-claimant believes that or 

alleges that representation, if it was a fact. And, of 

course, we've got all the other ingredients of fraud, which 

really aren't relevant here, this is a motion to dismiss, not 

a motion for summary judgment, but if it's not in the 
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contract and if the defendant alleges but for this 

representation they wouldn't have entered into it, in other 

words, fraud and inducement, then that seems to me the Coson 

line of cases is more relevant. And, of course, underlying 

all of this is the question of whether or not any of these 

things can be decided as a matter of law, or ultimately 

whether something was a representation that induced the 

defendant to do something is for a jury at a later date. 

Well, I don't know if that helps or confuses you, 

but we've spent a great deal of time, I've spent a great deal 

of time reading all of these cases, studying the agreements, 

and it's less than clear, and I hope you'll be able to clear 

it up. With that, we have the moving party, we might as well 

hear from Mr. Quackenbush or one of the plaintiff's lawyers 

first. And let's see if we can limit our argument to 20 

minutes per side. I do want to spend some time on the 

Motions to Compel, the Motion to Compel as well.

MR. QUACKENBUSH: Thank you, Your Honor. 

The 2001 agreement that we're really talking about 

here is a comprehensive road map to the relationship between 

these two parties with regards to the development, payment 

for, timing of, distribution of Valve's games. All of the 

subject matters that are alleged not to be the subject of 

fraudulent misrepresentations are in the contract. All of 

those subject matters are dealt with in the contract. And, 
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I'd like to, if I might, I tried to simplify things and do my 

own chart, which has what I think are the relevant contract 

provisions. And then I also set out a list of the alleged 

misrepresentations -- of course, you've already done that, 

thank you -- and then the amended counterclaim. With the 

Court's permission, I'd like to hand this up to illustrate my 

argument.

THE COURT: All right.

MR. QUACKENBUSH: So, just briefly, I think you 

have to look at all the four agreements that are attached to 

the defense counterclaim and are fair game on a Motion to 

Dismiss. And I just want to highlight sort of the chief

subject matters that govern here. 

The products covered, we started with one product, 

which was Half-Life. And then we had a new agreement for 

three other products. Then we had a modification of the 

original agreement. And then we had the 2001 agreement that 

we're talking about now, which covers many, many products, 

future products, options on future products, rights of first 

refusal on the first products. Included among the products 

covered by this agreement is the product that's referred to 

as Game 3, which was delivered last year and shipped earlier 

this year under the name Counterstrike Condition Zero. And 

the other product, another product it dealt with is Half-Life 

2, which is the sequel to the famous Half-Life game, which is 
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going to be completed this summer. 

So what you can see here is that the agreement 

signed in March 2001, that Vivendi has enjoyed the benefits 

in the agreement. I think they're going quite nicely, thank 

you, since 2001, over three years. Now comes back and tries 

to collaterally attack the agreement with allegations that 

things were said to me before I signed. As I was about to 

sign this paper, I was thinking about these things that were 

said to me that are inconsistent with the agreement, that I 

raise over three years later, having enjoyed the benefits of 

the agreement during those three years. If this agreement 

can be collaterally attacked by after-the-fact recollections 

about something somebody told me in a sophisticated 

negotiation between this game outfit in Bellevue and one of 

the largest media conglomerates on the planet, then you can't 

integrate any contract. You can't rely on any contract. 

The ownership of intellectual property is --

THE COURT: Let me ask you whether you agree or 

disagree with my tentative view that, if it's a fact that's 

represented which is -- and assuming all of the other 

ingredients of fraud, that it was material, et cetera, et 

cetera, if the subject is not covered by the agreement, don't 

I have to deny your Motion to Dismiss?

MR. QUACKENBUSH: Well, if the agreement is silent 

about it. So, for example, let's say the allegation was, 
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Valve, you're going to move your headquarters to Los Angeles 

because we want all your developers in our shop, you promised 

us that you would do that. Theoretically, if that was 

material, and that was a lie, and that was said with intent, 

and all the other things --

THE COURT: And, it was a fact, which it may or may 

not be.

MR. QUACKENBUSH: Right. -- I suppose you could 

stay a cause of action for fraud. 

Here, all the subject matters or the statements are 

negotiated and got resolved in this agreement. So look at 

the ownership of intellectual property. We start out with 

Sierra, sort of a classic -- it's the second row -- sort of 

the classic publisher -- artist, publisher or author record 

company, musician arrangement where --

THE COURT: Let's go to specifics. On my chart on 

15, the middle one is, in mid-January 2001, Mr. Lynch had 

allegedly told the defendants that the population of on-line 

gamers was just 3 million.

MR. QUACKENBUSH: All right.

THE COURT: Now, is that a fact? 

MR. QUACKENBUSH: I suppose it is.

THE COURT: All right. Is it covered in the 

agreement? 

MR. QUACKENBUSH: Well, the subject of on-line 
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distribution is definitely covered.

THE COURT: Well, is the population of on-line 

gamers covered? 

MR. QUACKENBUSH: Not to my knowledge. I'm not 

sure that this specific allegation is what's being alleged as 

an inducement to enter into the agreement. I think it's the 

next part of that sentence. But I agree, if I say there's -- 

I know for a fact there's 3 million people on-line, sure, 

that sounds like a fact.

THE COURT: Let's go to the next page, the top one. 

The ones that are highlighted on the left-hand are what I 

think are facts. It's alleged that your clients falsely 

represented that Half-Life 2 and CSCZ were near completion. 

Is that a fact? 

MR. QUACKENBUSH: I'm sorry, this is page 60? 

THE COURT: You've got a different page.

MR. QUACKENBUSH: I'm with you. 

That strikes me as, given the fact that these were 

games out into the -- that were under development, strikes me 

as a statement of opinion by a developer.

THE COURT: But isn't it a fact? If we say it's 

near completion, it might be vague as to how soon it's going 

to be -- what if they said it was going to be completed next 

week?

MR. QUACKENBUSH: There was an allegation that it 
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was going to be done by October 31. Then you have to look at 

the contract and say is that specifically dealt with. And 

you look at paragraph -- you look at the delivery schedule, 

paragraph 2.2, and you see there's no deadlines for delivery 

of these games. As opposed to the prior agreements where 

each milestone for delivery of the game including the final 

one had a date-certain and a payment associated with it. In 

this contract, it's up to Valve when to deliver. And there's 

no payments. They don't have any skin in the game under this 

contract because they're not making any interim payments to 

get the game done. Valve controls the -- has artistic 

control over a game. And it's a little bit unusual of a 

contract in this context to say, I'll tell you when the game 

is done because I'm not going to be satisfied with it until 

it's perfect and I'll tell you when it's done; I don't want 

you breathing down my neck. So, in light of that, I don't 

think you can sustain a fraud allegation by saying, They told 

me specifically when it would be done. Because, in fact, if 

you look in the context, Valve is specifically saying, We 

won't tell you that it's going to be done on a specific date; 

if you ask us what our schedule is like, we have an 

obligation to tell you, but that's it. And then Vivendi --

THE COURT: Let me go to another specific. I think 

I now do have your same page paginations. Go to page 17, the 

top one, where Mr. Newell is alleged to have, and Mr. Lynch, 
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falsely told the Sierra in-house counsel, Mr. Roeder, that 

Valve had no plans to release a nonretail version of the 

CSCZ. Let's assume that that was -- is that a fact? They 

had no plans to release that nonretail version of that?

MR. QUACKENBUSH: Well, just to be clear, this CSCZ 

refers to the product that was released earlier this year. 

So we're talking about a product that's way out in the 

future.

THE COURT: But that's not the point. The point is 

that, prior to entering into apparently addendum 2, 

defendants contend that they were told that your client had 

no plans. Now let's assume that in your shop was a memo 

saying, The moment they sign this addendum 2, we're going to 

release a nonretail version. Let's assume that's material. 

Is there anything in the contract that deals with that 

subject? 

MR. QUACKENBUSH: Yes, there is.

THE COURT: And we've quoted 3.11. But, I don't 

know, would that representation conflict with a term in the 

contract? 

MR. QUACKENBUSH: Well, the contract gives Valve 

all the ownership of all the intellectual property rights and 

all the distribution rights, including on-line, say for this 

retail package product in the retail channel; okay? Clearly, 

on-line distribution was contemplated, and it's alleged in 
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the counterclaim that Vivendi was concerned about it. So 

what they did is they insisted on and got an insurance policy 

against on-line distribution impacting the retail channel. 

And that's section 5.3, which is at the bottom right corner 

of my chart. And what that says is that, Valve, if you go --

THE COURT: Just a moment. Where is it on your 

chart?

MR. QUACKENBUSH: Bottom right corner.

THE COURT: Of the face sheet?

MR. QUACKENBUSH: Yeah.

THE COURT: Go ahead. And it's 5.3? 

MR. QUACKENBUSH: That's right.

THE COURT: Is it section 5.3 of the agreement of 

March 29, or the addendum?

MR. QUACKENBUSH: It's the agreement, Exhibit D to 

the counterclaim, the March 2001. It's the one that starts 

out Revenue Protection. In a nutshell, what that says is 

that Vivendi will do a projection of how much they're going 

to sell into the retail channel, they'll do an advance six 

months' projection in advance. If their actual sales don't 

meet that, then they come back to Valve and say, You need to 

pay us for the difference between what we thought we'd sell 

and what we didn't sell. And this is a good insurance 

policy, they don't have to prove that it was Valve's fault, 

they have to prove it wasn't Vivendi's fault. They just send 
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a bill for the difference. It may be that the product wasn't 

popular, it may be that the projection was wrong. But that's 

the insurance policy that they get. So, for the fellow to 

sign this agreement to say, Well, I really thought there was 

only going to be only diminimus distribution or I really 

thought they weren't going to distribute on-line strikes me 

with inconsistent --

THE COURT: What if they had said, We will not 

distribute on-line, is that contrary to this?

MR. QUACKENBUSH: Absolutely contrary to this. In 

fact, they insured against it. They insured that, if it 

impacted them and cost them money, they'd get a rebate. So 

it's hard for me to see how you can weave a fraud allegation 

into that by saying, We thought it was just going to be a 

minor deal, or we didn't think it was going to happen very 

soon, or we really didn't think you were going to do it. 

Because the contract provides for it. 

And, specifically with regard to the delivery, 

going back to the delivery schedule, how can you attack this 

contract with a fraud allegation, You promised me you'd be 

ready by the fall, or you promised me you'd be ready by a 

certain date, when you know that you're taking the delivery 

schedule completely out of the agreement? 

And there's another insurance policy on delivery in 

this agreement. The agreement says, Valve, you should just 
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continuously use diligent efforts to continuously develop 

these products, period. That's what you should do. No date, 

no timetable. When it's ready, it's ready. But the 

insurance policy is, if you don't diligently pursue 

development, our remedy under this contract, which we 

contemplated and which we bargained for, is we're going to 

take the intellectual property back.

THE COURT: I want to move away from the specifics 

to a general. If I were to conclude that there were one or 

more representations of fact which the Court was unclear of 

as a matter of law as to whether or not I could dismiss, in 

other words, whether it's induced the contract or not, is 

that a jury question? And, if any material issue of fact 

resulted in ultimately the trier of fact or the court on 

summary judgment concluding that it had been made, et cetera, 

what does it mean to vitiate the contract? I mean, would 

we -- would this agreement fly out the window?

MR. QUACKENBUSH: Apparently so.

THE COURT: That doesn't make much sense; does it?

MR. QUACKENBUSH: It doesn't make much sense for a 

variety of reasons. One, we've been doing business under 

it, earning very nice profits for Vivendi, for three or four 

years. Number two, there's some 16, 18, how many number of 

counterclaims of those saying you've breached the contract 

and we want damages and we want some recovery, and we want 
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this insurance policy that we spoke about, we want the 

intellectual property back because you breached the 

agreement. I guess you have to get rid of all those. I 

mean, you either have to have the contract, or you don't. 

Either you want the contract or you don't. 

But it strikes me, going back to your original 

question, it's not a jury issue, because here you have the 

parties agreeing -- and this isn't a contract teaching, this 

isn't a house siding -- you have the parties agreeing this 

contract supersedes and cancels any prior understanding.

THE COURT: Is it your position that there could 

not be a prior oral representation that was made that, my 

hypothetical, one, it was material, it was made, and it 

induced them to enter into the contract? You're saying that 

it doesn't matter. You're saying it doesn't matter, there 

could not be -- there's no statement of fact, no material 

representation that induced them to enter into the contract, 

that they could now claim fraud and inducement? 

MR. QUACKENBUSH: If it's dealt with in the 

agreement. Let me give you an example, a very simple 

example. Contract calls for royalty rate of 37 percent. 

They're various permutations, but it's basically 37 percent. 

What if Valve were standing here, what if we were standing 

here, we know it said 37 percent, we know there's no prior 

understandings, you promised us as we were writing this thing 
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you're going to pay us 40; right? I don't think you can 

bring that claim. I think you'd lose that claim.

THE COURT: I think that's the Judge Lasnik's case. 

That's what -- I think that's where I see the distinction of 

these cases, is, if it's in the contract, I don't think you 

can bring the claim. The question, it's not entirely clear 

in some of these alleged facts, what I think are facts, are 

or are not in the contract.

MR. QUACKENBUSH: They really break down into

there's really two categories. There's these alleged 

representations about on-line distribution, are you going to 

do it, when are you going to do it, how much are you going to 

do it. On-line distribution is definitely dealt with in the 

contract. And, as I said, there's an insurance policy in 

case Valve is successful. And then there's the allegations 

about delivery dates, due dates. Well, there just aren't any 

due dates in the contract. And what is in the contract is 

Valve having control over when this product is delivered. As 

opposed to the other three --

THE COURT: Does Valve having control over when the 

product is delivered set forth somewhere?

MR. QUACKENBUSH: The language is in each provision 

about each game; but look at section 2.2. the section is 

Development and Delivery, section 2. And then the language 

is the same for basically for each game, but 2.2 is the 
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simplest one, Delivery and Development and delivery of 

Half-Life 2. And the obligation Valve has to it is to 

develop, make and deliver and continuously develop. 

Again, just for context, contrast that with the 

prior three agreements, each one with an exhibit with 

specific delivery dates, the milestones you have to meet, 

final product has to be done by a particular date. How can 

you come back later and say, Well, what you told me was that 

there'd be a specific delivery date, when you specifically 

took it out and rearranged your relationship?

THE COURT: Let me ask you this. Can I even look 

at the prior agreements to decide? You want to hide behind 

this -- perhaps hide behind is a little strong -- but you 

want to take advantage of the benefit of this integration 

clause. Can you even look at those prior agreements?

MR. QUACKENBUSH: Yes. Because one of the elements

of fraud is that it needs to be proved in order to maintain a 

claim was there a right to rely, was the reliance reasonable, 

the alleged reliance, how can you say I relied on a specific 

allegation? Again, these are part of the counterclaim, these 

were attached on the counterclaim, so you can consider them 

on the Rule 12. Now, how can you say you promised me a 

specific -- it's really no different than my hypothetical, I 

know the agreement says 37 percent but you promised me you'd 

pay 40.
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THE COURT: Let's go back to paragraph 2.2 again. 

It talks about Valve will inform Sierra of its then current 

development schedule and review and discuss and use diligent 

efforts to develop to completion. Let's assume, as part of 

the negotiations, your clients told the defendants that it 

will be done in 30 days. I'm not sure that's a fact, but 

let's assume it's a fact. And they wouldn't enter it unless 

it was going to be done in 30 days.

MR. QUACKENBUSH: Assume it's absolutely essential.

THE COURT: Yes. Is that precluded by this 

delivery clause?

MR. QUACKENBUSH: Yes, it is, because the delivery 

and development is specifically dealt with. The integration 

clause says no other agreements, no other -- any other 

understandings you may have are canceled whether you have 

some subjective -- maybe you thought I said this, may you 

subjectively believed it, those are canceled, and you 

provided some safety net for yourself if you didn't get the 

game in what you thought was a timely way.

THE COURT: I want to go back to that safety net in 

just a moment, because I'm not entirely sure I fully 

understand it.

MR. QUACKENBUSH: Sure.

THE COURT: But let's assume that -- this is a 

complicated agreement -- but let's assume that the only 
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product was Half-Life 2, and the agreement was to, under 

Development and Delivery, was, just as provided in 2.2, that 

Valve will inform of its then current development schedule 

upon request and review and discuss the schedule and use 

diligent efforts to develop to completion. Let's assume, 

prior to signing the agreement, they said, Well, how are you 

doing on HL, on the Half-Life 2, and you produced a schedule 

and said, Here's where we are, we'll be done next week, it's 

a certainty. Now, why wouldn't that be -- and the only 

reason they entered into it was that you were going to be 

done next week. Isn't that fraud inducement?

MR. QUACKENBUSH: I don't think so. It may be a 

lie.

THE COURT: It would be without the integration 

clause. The real question is whether you can rely on the 

integration clause; isn't it?

MR. QUACKENBUSH: It's whether you could rely on 

the integration clause, whether there's a right to rely when 

the contract says something different. And there are lots 

of --

THE COURT: What does it say when it will be ready? 

It doesn't say something different. It says that you'll 

inform them if they request it.

MR. QUACKENBUSH: Yeah.

THE COURT: Does a representation that says -- my 
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hypothetical really is that, the day before they signed it, 

they said, Well, how are you doing, and you made this 

positive statement, It will be done next week.

MR. QUACKENBUSH: Then you can't explain why you 

have 2.2. it makes no sense. You're going to inform us 

about your schedule in the future. If the representation is, 

You promised us it's going to be done next week, why don't 

you have that promise in the agreement? There are a whole 

scad of representations that Valve makes in this agreement 

and in section 7.1, representations and warranties by Valve.

THE COURT: Just a moment.

MR. QUACKENBUSH: Which is on page 25 of the 

agreement. So, if that representation was material, in other 

words, if there was -- you're not signing the agreement 

without it, and you have a right to rely on -- there must be 

10 or 11 representations that Valve makes here in section 

3.1. why isn't it on the list? 

THE COURT: Now explain to me this insurance or 

guarantee or whatever that backed up this Half-Life 2.

MR. QUACKENBUSH: Sure. If you look at -- it's on 

page 17 of the agreement, 3.12, Revision of Intellectual 

Property.

THE COURT: What portion of that is important?

MR. QUACKENBUSH: It starts out, and I'm kind of 

paraphrasing here, but, in other words, there's notice from 
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Sierra that you're not continuously developing these games in 

accordance with section 2.2, which is the one that says you 

will continuously develop them, and I give you notice, and if 

you don't cure it, then I get all the intellectual property 

back, I get the crown jewels back of this agreement. 

Now, interestingly, that's one of the things that 

Vivendi is suing Valve for, is failure to continuously 

develop. It strikes me as odd that you're going to sue on 

this promise to continuously develop while saying, I'm going 

to rescind the agreement and void it because you promised a 

date-certain. I don't see how you can have that both ways.

THE COURT: Well, lawyers frequently plead in the 

alternative.

MR. QUACKENBUSH: They do. But at some point you 

have to sort to fish or cut bait, it seems to me. The point 

here is, as you've observed, this is a complicated agreement. 

I've tried to set out the important pieces here. All of the 

subject matters are covered. All the subject matters are 

covered. And, if you can come back later and say, I know the 

subject matter is covered but you told me something 

different, and I know I said there wasn't any different 

understanding but you told me something different, what 

agreement is going to be worth -- how can you sustain a 

contract against an after-the-fact, three years later? After 

you've been doing business under the contract for three 
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years, and you decide you don't like it because Valve sues 

you to enforce its right, you answer back with 19 fraud 

allegations or 20 fraud allegations that there never was a 

contract in the first place?

THE COURT: I think I understand. Thank you.

MS. HURST: Good morning, Your Honor. 

THE COURT: Good morning again.

MS. HURST: I think there are two, at least two 

potential ways of reconciling the two lines of cases that the 

Court has identified, the Coson case and the Goel vs. Jain

case. The first way to reconcile them is that the discussion 

in Goel vs. Jain is clearly dicta, the discussion of the 

integration clause. There was a separate release agreement 

entered into in Goel vs. Jain after the fully integrated 

agreement was signed. And the majority of the discussion in 

Goel in dismissing the fraud claim, and I believe that was on 

summary judgment, Your Honor, not on a 12(b)(6) motion, 

relates to that separate and independent release, full 

release agreement.

THE COURT: Just a moment. It does appear to be a 

summary judgment, you're right. Go ahead.

MS. HURST: So there was a separate and independent 

release agreement that was signed by the plaintiff in this 

case after the main agreement. And the Court almost 

exclusively relies, and then at the end of its discussions, 
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it sort of says -- and it actually literally says, Not to the 

mention the integration clause, and then it cites this 

out-of-Washington authority, the One-O-One Enterprises case. 

So one way to reconcile Coson and Goel, Your Honor, 

is that the discussion of the integration clause in Goel is 

dicta. And Coson is the last pronouncement of the Washington 

Supreme Court on this issue, and it makes the very broad 

statement reiterating the statement made by the court in 

seven prior cases that fraud in the inducement vitiates an 

exculpatory clause like the one that Mr. Quackenbush is 

relying on here this morning. So that's one way to reconcile 

these two lines of authority.

THE COURT: Let me ask you this. Dealing with 

Coson and all of the other cases, can you have a 

representation of fact that's material before you enter into 

a contract that varies a term in the contract, and yet you 

can make the claim in the face of an integration clause? 

MS. HURST: Under Coson, yes, Your Honor. I 

believe so. 

THE COURT: Coson is a factually fairly easy case 

in the sense that they agreed on a $3,500 price, and then, 

unbeknownst to one side, the other side writes in -- I think 

both the $3,500 is typed in or printed in, and then 

handwritten in is the financing charges. It seems to me 

that's an easy case.
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MS. HURST: Although, Your Honor, in that case, the 

number of monthly payments and the monthly payment amount was 

included in the typewritten or inked portion. So, had the 

plaintiff simply multiplied, as the court pointed out and as 

the defendant tried to defend on that ground in the Coson 

case, had they simply multiplied, this was an inconsistency 

on the face of the agreement.

THE COURT: Let's just go to -- let's go to 2.2 of 

this agreement.

MS. HURST: Yes, Your Honor. 

THE COURT: I'm troubled. What you're saying is 

that, even in the presence of an integration clause, for a 

release that comes after the fact, that release is 

everything, covers everything, that you can have a 

representation that someone can come and say, Well, they're 

really telling me that, I know that the contract says that 

it's going to be a one-year contract but they promised me 

they were going to be a five-year contract, I never would 

have entered into it unless it was going to be a five-year 

contract because of the start-up costs. Given the 

integration clause, do you think Washington law would permit 

them to come in and say, We were induced into this because it 

was a five-year promise?

MS. HURST: What we're talking about is the right 

to rely, whether there is a justifiable reliance.
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THE COURT: Answer my question.

MS. HURST: Yes.

THE COURT: In my hypothetical.

MS. HURST: Yes.

THE COURT: So, in other words, fraud in the 

inducement, parol evidence can be brought to bear to try and 

challenge any contract regardless of the integration clause?

MS. HURST: Well, Your Honor, presuming that you 

need the other elements of the fraud claim, certainly.

THE COURT: What good is the integration clause? 

MS. HURST: The integration clause is good for 

breach of contract claims and interpretation of the contract 

in the context of breach of contract claims.

THE COURT: I don't understand why it would be good 

for breach of contract. You don't have a breach of contract 

until after the contract is signed. It can't relate to a 

breach of contract.

MS. HURST: Well, it does in the sense of what 

evidence, what parol evidence can be considered in 

interpreting the contract to determine whether there was a 

breach or not. So, for example, the integration clause would 

still bar a statement of purely subjective understanding on 

one parties' part as to what the contract meant at the time 

it was entered into, an unexpressed intension. The parol 

evidence rule and the integration clause would still bar that 
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kind of evidence. It may well bar other kinds of evidence 

depending on the circumstances. 

But I would point out, Your Honor, that under the 

Berg case, the parol evidence rule in Washington state isn't 

perhaps one of the more robust parol evidence rules among the 

states. In fact, a great deal of evidence is ordinarily 

admissible even to interpret a contract; and that, if the 

question is found ambiguous, then that is a question of fact 

under Washington law.

THE COURT: Walk down the path with me. If I found 

that there was some representation out there that 

fraudulently induced and prior fact concluded that, what 

would be the effect? The contract would be voided?

MS. HURST: Yes. In this case, that's what the 

contract says. The contract is voidable at the election of 

either party.

THE COURT: When do you make that election?

MS. HURST: We pled both theories, and we would 

have been entitled, if the Court decided it wanted a jury to 

advise it on the equitable remedies, it could do so. And 

then we could wait and see.

THE COURT: Do you agree with Mr. Quackenbush that 

the subject matters that you allege were these 

representations, the subject matters were covered in the 

contract?
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MS. HURST: No.

THE COURT: Let's go to my chart. Page 14. And 

perhaps we can just walk down these alleged statements. The 

first one on the fact is that the sales would remain the key 

of the strategy. Isn't that a future statement? Is that an 

existing fact?

MS. HURST: Your Honor, it's there's an implication 

of a distinction of fact there which is what is Valve's 

existing plan for the distribution of its games. What 

they're saying is retail sales are going to remain key to 

their strategy. What they're saying is we currently have no 

plan to destroy your distribution rights, which was the big 

lie in this case.

THE COURT: All right. I'm just not with you on 

that one. So let's go to the next one. 

This one is that Valve did not plan to engage in 

anything other than diminimus distribution. Doesn't 

paragraph 3.11 deal with that subject? 

MS. HURST: Your Honor, generally, paragraph 3.11 

deals with the subject of the timing of release of an on-line 

game. It does not deal with the degree to which Valve would 

exploit or limitations on the degree to which it would 

exploit any on-line distribution rights. And there's nothing 

in the contract that does deal with that. There's nothing in 

the contract which expressly deals with any discussion of how 
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much will Valve engage in this activity.

THE COURT: Was the agreement not clear that Valve 

had a right to distribute games on-line? Did they have that 

right under the agreement?

MS. HURST: The agreement includes an on-line 

distribution right for Valve.

THE COURT: So what you're saying is it doesn't -- 

you knew they had the right to distribute on-line, but you 

feel that the representation that they didn't plan to engage 

in anything is contrary to that? 

MS. HURST: It's not contrary to the existing 

provision in the agreement. It doesn't contradict, it 

doesn't vary it. It's independent of it. It's a statement 

about the present plan of Valve regarding the degree to which 

it will exploit that right.

THE COURT: Do you think that the last thing on 

page 14 is anything other than opinion? 

MS. HURST: No, Your Honor. I would agree that 

that's opinion. And I think under the -- I believe it's the 

Holwhits -- Horowitz case in Washington, when the statements 

of fact are so intermingled with matters of opinion and 

promises regarding future matters, they all come in as the 

sort of I guess res gestae of the fraud, Your Honor. That's 

the Horowitz case.

THE COURT: All right. Let's talk about the one on 
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page 15. In January, Mr. Lynch alleged, as I said, that the 

population of on-line gamers was just 3 million.

MS. HURST: Certainly. That's a fact.

THE COURT: It's also a fact that you probably 

could -- I mean, is that something that's public knowledge? 

I mean, would they have any -- are they saying that on-line 

gamers that use their products, or is that -- I don't quite 

understand how that could be the basis of a counterclaim for 

fraudulent inducement.

MS. HURST: Your Honor, I don't think that 

statement alone would be. It's part of the body of 

statements that were made here, and it goes to the issue of 

their plan to exploit on-line rights. And this was a way for 

them to reassure Vivendi that they had no such plan. It was 

a statement of reassurance that there was no plan. It goes 

to the fact, relates to and is intermingled with the fact of 

there being no plan. 

The implication reasonably to be inferred from the 

statement, and this is a 12(b)(6) motion, and we're entitled 

to that inference, the implication reasonably to be inferred 

from the statement is we're not going to be, either be able 

to or we don't plan to exploit this in any material way. And 

so these statements all go to that issue of what their plan 

was and reassurances about the fact that they didn't have a 

plan. 
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THE COURT: Let's go to the allegation of Half-Life 

2 and CSCZ were near completion. Is that covered in the 

agreement or the addendum? 

MS. HURST: It's not, Your Honor. Certainly, it's 

a statement of fact about the current status of development 

of the game. It absolutely is. It's a statement of 

nonexisting fact. It does not contradict or vary section 2.2 

in any way. In fact, as Mr. Quackenbush went to lengths to 

point out, there is no deadline in this agreement. So it 

doesn't contradict or vary. Why would we include 2.2, that 

they have to continuously develop, if it was true that it was 

almost done? Because, if it was almost done, and we signed 

the agreement, and then they stopped developing, then that 

would be silly. Of course we'd want them to keep developing, 

and we want to impose on them an obligation to do so. It 

wasn't done yet at the time of the agreement was fine, but 

they told us it was almost done, and that was a then existing 

fact. And, not only was it a then existing fact, but it was 

one of which they had unique and peculiar knowledge. They 

were the only ones in a position to know that. 

THE COURT: All right. Let's go to the page 16, on 

March 18, Plaintiffs represented Valve was developing CSCZ. 

So is that subject matter dealt with in the development and 

delivery section of the agreement? 

MS. HURST: It's not, Your Honor. There's no 
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representation or operative provision in the agreement 

discussing what the current status of game development was at 

the time of the agreement.

THE COURT: Are you alleging that that was false, 

that they were not developing CSCZ at the time?

MS. HURST: Your Honor, we're alleging that their 

representation about the status of how far it had been 

developed at the time was false.

THE COURT: So then this agreement was -- you're 

not alleging that they weren't developing it at some stage? 

Is that what I heard you say? 

MS. HURST: Your Honor, I don't think that we have 

alleged this fragment of the sentence that's been extracted 

from the counterclaim as a separate fraudulent statement.

THE COURT: I think you alleged in all of the facts 

that, on March 8th, they were developing a game can be added 

and it would be ready and released by October 31st. But what 

you're telling me is that it is true they were developing it, 

and I think the rest of it is all opinion?

MS. HURST: Actually, I don't know whether we know 

whether they were developing or not, Your Honor. I certainly 

wouldn't say that it was true. We believed that they weren't 

developing, and we've alleged facts that would give rise if 

an inference that they stopped developing to get their 

on-line distribution scheme done first and then release the 
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game.

THE COURT: Did I misunderstand? I thought you 

told me just a couple minutes ago that you believed they were 

developing.

MS. HURST: No. I'm sorry if I misspoke, Your 

Honor. I think what I said was that we don't rely on that 

fragment of the sentence as a separate misrepresentation.

THE COURT: All right. Let's go to the top of page 

17. You allege that Mr. Lynch, Mr. Newell falsely told 

Sierra's in-house counsel that Valve had no plans to release 

a nonretail version of CSCZ. Is that subject matter -- I 

think that's a fact.

MS. HURST: This is a fact, Your Honor.

THE COURT: Is it covered in the paragraph 3.11 of 

the agreement? 

MS. HURST: It's not, Your Honor. Again, that does 

not address Valve's then current plans with respect to any 

exploitation of the on-line rights or the degree to which 

they might do so. 

With respect to this provision, Your Honor, when 

Mr. Quackenbush was up here, he argued vociferously that what 

he calls the insurance policy in section 5.3 was part of the 

subject matter that was relevant to this particular 

representation of existing fact. Your Honor, the point about 

this part of the fraud claim is that they induced a deletion 
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of that provision in this addendum in connection with this 

particular representation. In other words, if the Court 

looks at addendum 3 --

THE COURT: Is it 2 or 3? 

MS. HURST: I believe it's 3, Your Honor. 

Paragraph 4 of addendum 3, which is page 142 of the materials 

that Mr. Quackenbush handed up.

THE COURT: I've got it in my own version here. 

But it says, paragraph 4, Valve and Sierra agree that 

provisions of section 5.3 will have no application entry.

MS. HURST: That's right, Your Honor. So they tell 

us they're not going to release a nonretail version, and as a 

result we agree to delete the insurance provision.

THE COURT: Let's just focus on that, because I'm 

still trying to understand how that all played out. Does 

that mean -- let's assume it was false, and you relied upon 

it, and they induced you to enter into this addendum 3, 

what's the legal -- what's the legal effect of that? I mean, 

does the whole contract go out? Does that little agreement, 

paragraph 4 of addendum 3, does that go out? What's the 

legal effect of that? 

MS. HURST: Well, certainly, Your Honor, if it's 

material to the addendum -- and obviously we allege that it 

is -- the entire addendum would be gone. Then the -- if we 

elected remedy of recision. 
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Now, the Court will perhaps recall, from the first 

time we were here, the reason that the Vivendi Universal 

Games is interested in the remedy of rescission is that it 

believes that it had a better situation under the prior 

agreement. That it owned all the intellectual property, that 

it had an output deal with Valve which would have entitled it 

to all of the same games, and at a lower interest rate. So 

it makes absolutely no sense that they would be seeking 

rescission here; but, in the event that they're unable to 

prove this, fraud, in order to obtain the rescission, there 

are also some contract claims which provide some similar or 

alternative remedies. And so these are -- this is an 

absolutely consistent position to take if what you consider 

that the goal to achieve here is to regain the intellectual 

property and to avoid this monstrous on-line distribution 

scheme that they've come up with, which vitiates the entire 

purpose of this agreement. But, certainly, Your Honor, it 

would be premature in terms of trying to determine questions 

of materiality of these and other factual questions at this 

point on a 12(b)(6) motion.

THE COURT: You make, if you'd turn to page 18, you 

do make the contention, I believe that in January of 2002, 

after numerous delays, that it was falsely represented to 

Sierra and VUG that Valve didn't have anything going. I'm 

not entirely sure what that means. But is that fact or is 
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that statement? 

MS. HURST: It's a fact, Your Honor. It's a 

statement of existing fact, Your Honor. And it was only two 

months later that they announced the release of Steam.

THE COURT: And was that before or after addendum 

4?

MS. HURST: I believe it was before addendum 4.

But this is also relevant to the concealment claim which the 

Court has already sustained that it was a pattern of 

continuing concealment of their intentions. And I think 

that's relevant here to -- as part of a deceit theory, 

because they were asked a direct question, and they lied 

about it. And it shows a continuing pattern of deceit with 

respect to this issue of the on-line distribution.

THE COURT: Help me understand. Let's assume that 

one or more of these statements survives this Motion to 

Dismiss, but I believe that some of the statements are not 

factual statements, they're opinions, they're future 

promises, they're something going out into the future. Now 

we're at trial. Would you be permitted under the parol 

evidence rule or under this, as a result of this integration 

clause, from getting into evidence these opinions and matters 

which are not factual? In other words, to put the whole 

package in context? 

MS. HURST: I believe so, Your Honor, under both -- 
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certainly, under the fraud line of cases, Coson and that line 

of cases. The Weller case in particular says that, when you 

have opinions by someone who has peculiar knowledge -- which 

is what a lot of this is -- that that's even an exception to 

the representation of existing fact requirements. So it 

would be that those would be not only admissible to show body 

of fraud but they would be actionable in and of themselves.

THE COURT: The result, the bottom line is, under 

your view, that the parol evidence rule and the integration 

clause would have no effect? 

MS. HURST: Not in the context of the fraud claim, 

Your Honor. The court would be, under those circumstances, 

required to give instructions to the jury about what evidence 

it should consider for which claims. And the jury would be 

instructed that, with respect to the fraud claims, it can 

consider a certain a body of evidence; and, with respect to 

the contract claims, it should disregard certain things, if 

it comes to that. If there are -- because, certainly, with 

respect to the contract claims under the Berg case, the 

Washington Supreme Court case in Berg, a whole lot of stuff 

is admissible to go to the question of ambiguity and 

interpretation, and therefore to breach of contract to the 

extent that the provisions that are at issue in the breach, 

various brief claims of both parties are ambiguous. If it 

turns out that the court finds on Summary Judgment that 
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certain of the provisions that are subject of the breach 

claim aren't ambiguous, then that evidence won't go to those 

provisions, and the jury would be instructed to disregard 

that evidence with respect to those provisions. But, 

certainly, the parol evidence rule -- so it has both a 

substantive effect as the Court has been exploring here this 

morning, and then an evidentiary effect, which is elucidated 

through jury instructions at that time.

THE COURT: I can just hardly wait to craft those 

jury instructions.

MS. HURST: We'll be doing the work, Your Honor. 

The least in the first instance.

THE COURT: You may be doing the first drafts.

MS. HURST: Yes, in the first instance.

THE COURT: I think I understand your position. 

Anything further? I've been asking you -- anything else you 

want to add to the argument? 

MS. HURST: Your Honor, I would just add this. 

There's another way to sort of look at these potentially 

inconsistent line of cases and the issues that the Court's 

been exploring this morning, which is there's a difference 

between contradicting or varying a substantive term of the 

agreement and contradicting an exculpatory clause such as the 

merger or integration clause. And the tendency of the courts 

has been to really draw the line in allowing fraud cases 
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where the only thing that somebody can point to as being 

contradicted is the merger or the integration clause. What 

the courts have said under those circumstances is that what 

you consider the right to rely, when somebody commits a 

deliberate fraud, that will not vitiate even the negligence 

of the other party in signing the agreement. And these cases 

are rife with negligence on the other party in signing the 

agreement. In other words, we're not going to let an 

integration clause defeat a fraud claim. And, when you see 

there being more of a direct contradiction between a 

substantive term, then you see more struggling with the 

courts, although even in the Coson case you had a 

multiplication there and it was revealed right on the face of 

agreement that it was inconsistent with the oral 

representations, and then a substantive term, not just the 

merger clause or the integration clause.

THE COURT: The best I can tell you, you can get 

anything you want out of these cases one way or another. I 

mean, it's just a very -- there's lot of tension between the 

subjects we've been talking about this morning.

MS. HURST: Your Honor, the Coson case does note 

that Washington believes it was following the restatement, 

which supports this idea that fraud is not vitiated by an 

integration clause. That there's a section, I believe 

section 573 of the restatement cited in there reflecting 
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that, at least at the time the majority rule, which certainly 

hasn't been since overruled in Coson.

THE COURT: Thank you.

MS. HURST: I'll submit, Your Honor.

MR. QUACKENBUSH: Your Honor, might I have one 

minute? Two? 

THE COURT: Two.

MR. QUACKENBUSH: Just, I want to make sure that I 

made myself clear about these insurance policies that got 

negotiated into this agreement. It's just clear on the face 

of the agreement that on-line distribution is insured against 

here. And, it's like saying, before the contract, You told 

me you wouldn't take my car out and drive it around, and you 

promised me that. But, I don't believe you, so I get 

insurance. It's the same thing. The allegation is, I had a 

subjective belief that I knew you had on-line distribution 

rights, I knew you were going to do it, but I just thought it 

wouldn't be a big deal or wouldn't happen very soon. And, if 

it did, it would be bad for my business. It would hurt my 

retail channel, retail package product business. So that's 

why we say, in 5.3, to compensate Sierra for potential loss 

of sales of retail packaged product, and there's a 

parenthetical with a lot of the products listed, due to 

Valve's exploitation of add-on products, products, flat-form 

extensions, et cetera, et cetera. In short, if you exploit 
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your products in a way -- and I'm sure that it would be 

agreed that that exploitation would include on-line -- if you 

go ahead and exploit, that hurts me, then there's a formula 

here for paying me back, an insurance policy. Now, it's very 

hard for me to see how you could possibly say that the 

contract doesn't deal with on-line distribution. It 

specifically does, and it had insurance against it. 

The second point is, why would you have section 2.2 

if you had a subjective belief and you were relying on it? 

Section 2.2 that says, I'm going to check with you, and you 

have an obligation to tell me where you are on this product. 

So, the day after the contract was signed, you could call 

Valve up and say, Okay, I need to talk to you about your 

schedule, just give me a heads-up where you are. And, if you 

didn't like the answer, if you said, You're not working hard 

enough on this, you're not far enough along, you've got an 

insurance policy of the revision clause. But there's no 

deadline. The deadline pieces were explicitly taken out of 

the relationship with these parties. And what the fraud 

claim is, we've got to put them back in, we're adding that 

term to this agreement. That's what this is. And that's 

completely inconsistent with having a contract. To me, it's 

inconsistent with having a contract that means anything. 

I was interested to hear their counsel say that the 

problem here with all these -- the reason we have all these 
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claims is Vivendi thought it had a better deal under the old 

contract. Of course it had a better deal under the old 

contract, and of course it wants it back. But it has a deal, 

a deal's a deal. This is a really sophisticated party, knows 

a lot about games, knows a lot about distribution. We ought 

to make this deal stick. Thank you.

THE COURT: What does the Court do with this 

restatement of contract, section 5.3-A and B, enter into a 

written agreement that contains a clause that states no oral 

representations have been made, fraudulent representations, 

if the agreement in fact induced the contract?

MR. QUACKENBUSH: I think the key is a fraudulent 

misrepresentations in the contract. In other words, I say, 

If you sign this agreement, I'll buy you a car. As soon as 

you sign, I'm going to give you the keys to this car. That's 

different, that's a different -- entirely different set of 

facts than, I know you're going to distribute on-line, I know 

it may hurt me, I know you have control over it, but you told 

me that it would only be a minor deal and I'll insure against 

it. It strikes me, what the restatement is saying is my 

hypothetical. In other words, there's something outside the 

contemplation or outside the explicit language of the 

contract.

THE COURT: Do you really think that the Court on a 

Motion to Dismiss, giving every inference in favor of the 
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nonmoving party, can conclude that these alleged 

misrepresentations pre-contract are not -- you're not only 

asking me to determine what's in the contract and what's not 

in the contract, and it's not entirely clear to me having 

heard all of the arguments what's in the contract and what's 

not in the contract.

MR. QUACKENBUSH: Well, the decision, I think, is a 

question of law to determine what's in the contact and what's 

not. And I'm happy to go through this and point out exactly 

what we're talking about. I've tried to point to the 

provisions that we're talking about. So, yes, I do think 

it's an as a matter of law. I think right to rely is an as a 

matter of law. When you say, on one hand, I know there's no 

representations, I know you're going to pay me a dollar but 

you promised me that you would pay me two, that to me is a 

Rule 12 motion in this situation.

THE COURT: All right. I'm going to take the 

matter under advisement. I was hoping you all would make it 

crystal clear to me, but I can see that it's not entirely 

crystal clear, and I want to think about it some more. 

Because, as I indicated, there seems to be good things for 

each side from all of these cases, and I need to study it 

further. 

I want to proceed with this Motion to Compel, 

but -- why don't we take about a two minute stretch, and then 
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I'm going to suggest the court reporter stay here but not 

transcribe our discussions on the subject until we get to the 

point where -- I don't know that you need or I need to let 

you argue on the record. So let's take a stretch, though. 

(Proceedings held off the Record.)

(12:05 p.m., Proceedings Concluded.)
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C E R T I F I C A T E

STATE OF WASHINGTON )

 ) ss.

COUNTY OF SNOHOMISH )

I, Susan A. Zielie, RPR, CSR, the undersigned 

officer of the Court, hereby certify that the foregoing 

verbatim transcript was transcribed under my direction;

That I am neither attrorney for nor a relative or 

employee of any of the parites to the action; further, that I 

am not a relative or employee of attorney or counsel employed 

by the parties hereto, nor financially interested in its 

outcome.

/S/ Susan A. Zielie, RPR, CRR

SUSAN A. ZIELIE, RPR, CCR

Official Court Reporter

US District Court

Seattle, Washington