It is pretty well established that using the characters etc. of one work to make a new work constitutes copyright infringement (it would be a derivative work).

It is pretty well established that using the characters etc. of one work to make a new work constitutes copyright infringement (it would be a derivative work). (Quick Google search turns up: http://www.publaw.com/fiction.html http://www.publaw.com/fiction.html) The new work certainly has copyrightable elements of its own, but that does not change the basic fact that the new work infringes the old. The bigger issue in my mind is the license. It is generally the case that if someone gives you a license to property, and you spend money in reliance on that license in a reasonable and expected manner, then the license becomes irrevocable. If Vivendi granted Phoenix a license, and Phoenix spent money developing the game, I can't see how the new property owner Activision can just retract the license.