GameStop refused to pay $30 million bill from consulting firm, lawsuit says

GameStop refused to pay  million bill from consulting firm, lawsuit says
Enlarge / GameStop branch in Munich, Germany on November 23, 2021.

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GameStop has refused to pay $30 million in fees to Boston Consulting Group (BCG), the consulting firm alleged in a lawsuit filed Tuesday.

BCG said that GameStop has “unpaid fees of approximately $30,000,000” but added that the exact amount “is undetermined at this time” because GameStop executives have refused to attend mandatory meetings or “furnish the data necessary to determine certain profit improvements.” The lawsuit was filed in US District Court for the District of Delaware, and it seeks financial damages for breach of contract and breach of the covenant of good faith and fair dealing.

The complaint says that GameStop and BCG signed a contract in August 2019 in an attempt to turn around the game retailer’s business. “Once a highly profitable company, GameStop’s profits and financial prospects had fallen precipitously by the mid-2010s and by 2019 GameStop was on life support,” the lawsuit said. “Hemorrhaging customers and unable to grow its business, GameStop reported net operating losses of almost $800 million in 2018, including a $970.7 million ‘goodwill impairment charge’ to account for the loss of value from its brand.”

Fees based on projected profit improvement

BCG’s complaint briefly referenced the short squeeze that contributed to a meteoric rise in GameStop’s stock. “Already one of the most heavily shorted stocks relative to its float in early 2019, GME (GameStop’s stock ticker) became the most heavily shorted stock in the United States by the first quarter of 2020,” BCG pointed out.

But the lawsuit isn’t about GameStop’s stock price or even actual profit improvements. BCG said that its contract with GameStop “provided that BCG would be compensated on the greater of a fixed fee or a variable fee based upon projected profit improvement.”

“Projected” is a key word in the complaint because, it said, “BCG’s variable fees were based upon projections, not actual profit improvements.” The complaint continued:

The concept of basing BCG’s variable fees on projected improvements rather than actual results was negotiated and agreed upon by the parties specifically to ensure that BCG and GameStop’s incentives were aligned. This structure was intended to: incentivize BCG to significantly improve profits; prevent BCG from taking credit for and/or being penalized for exogenous factors outside the parties’ control; and to protect BCG from additional factors, such as GameStop’s execution risk, i.e., GameStop failing to take the actions necessary to implement the plan and achieve the predicted results.

GameStop defense: “Stockholders’ best interests”

BCG said that it “spent tens of thousands of hours working on this project and it overachieved, identifying and creating plans to capture substantially more profit improvement opportunities than what had been estimated in the SOW [Statement of Work] and what was contemplated in the SOW’s original scope.”

GameStop told the Financial Times, “We do not believe it is in our stockholders’ best interests to pay the tens of millions of dollars sought by BCG, especially given their seemingly meager impact on the company’s bottom line. We will fight this suit and are proud that GameStop no longer utilizes the likes of BCG for any services.”

GameStop also said the lawsuit reflects BCG’s “prioritization of excessive fees over clients’ interests,” according to a Bloomberg article. “It is confounding that the high-priced consultants at BCG claim to have delivered hundreds of millions in value for GameStop during a period when share price, sales, and debt were at perilous levels,” GameStop added.

We asked GameStop for more detail supporting its argument that it doesn’t have to pay the fees and will update this article if we get a response.