We don't know the details of the contract. There may well be a loop hole which says that you won't receive them under specific circumstances. Heck, who says there even IS a contract for royalties paid directly to employees? If IW itself got paid royalties, it may well be up to management to decide how to divide it. By decapitating IW, Activision may have well delayed this even further.

If they've got a strong case then I'd imagine that many law firms would be willing to represent them on a no win no fee basis. Their expenses would be paid by Activision if Activision lost. But then, as I've said before, I'm not up on CA law, which is usually pretty insane.
You're right about the precedent too. Even other employers would object to the decision as it would mean they'd be forced to change their payment model. Which really wouldn't work for some industries.

From what I've gathered, it's a fairly standard Activision model and part of Kotick's attempts to enforce an ethic of placing profits above all else. But I wouldn't mind seeing something concrete on that.

Oh, most definitely. It takes two to tango (but only one to play with yourself). But we don't know all the details. And if the contract didn't specify that IW's heads should get the royalties they wanted, here is what we have against them:
Allegedly looking to jump ship and go back to EA
Wanted more money than originally negotiated for making a freaky-successful game
Upon being fired, took a "woe is me" perspective ("unemployed and drinking" or whatever it said)
Suing the crap out of Activision and rallying the gaming media/public to their side
Openly admit that they largely tried to ignore Activision during development
The infamous speedy-credits for MW2
Seems like pretty primadonna-esque behavior to me :p. Is it justified? Maybe. But still not people I would necessarily want to deal with in a board meeting.

If they're owed royalties they're not being paid then that alone puts the majority of those points in perspective.

I refused to buy MW2 due to the $60 MSRP and Steamworks integration. This episode only strengthens my case for avoiding the game.

If this rumor is true and Activision actually are trying to avoid paying employees what they are contractually obligated to then they are in for a world of hurt when the matter goes to court. At the very least they'll be looking at treble damages, probably with attorneys fees and some punitive damages stacked on top.

Well they can probably afford that and more just from a few weeks of WoW subscriptions

I didn't buy it because I couldn't fathom a cutting edge team not having added a cover system for the player, yet adding it for the AI. Plus, I'm not a great fan of online shooters and the mush mouth they create.
However, IW is one of the few Activision arms that I still had respect for though--this is before they canned the heads obviously. Blizzard is another.
Sadly, my minor boycott of Activision (which included canning my WoW subscription after the Brutal Legend fiasco) hasn't done anything to hurt their sales.
I did play 2 hours of Rock Band 2 last night as sort of a middle finger to Activision--I wonder if they felt it.

Killzone 2 had a perfectly serviceable first person cover system

Yes, they are, in order to remove some of the barriers into the world. It was a view created in order to make it seem as if you were looking through the eyes of an actual character.
Just a second ago, to make sure I'm not stupid, I went over and used my couch as cover in an imaginary gun fight. Turns out that looking through my own eyes does in fact allow me to use cover and the notion that first person shooters shouldn't include it means you would prefer that first person shooters don't ever actually reach their upper potential or original intent--which is to create immersion.
Personally, when I see a crate and can't take cover and blind fire, I'm no longer immersed.

I use cover in FPSs all the time. It is called "Crouch behind the thing that bullets won't pass through" :p
As for the whole "I need to blind fire": Okay, then I would love to see a game where blindfire actually is blind. As in, you don't see what you are firing at, not just "your hitcone is slightly larger".

What i still dont understand is why they haven't fired that idiot community manager robert trhee two one bowling. He kept stalling people about MW2's lack of ded servers and features expected from pc games like freaking graphics settings beyond brightness and contrast.

hehe.

Perhaps ironically, I find crouching behind cover to be a hell of a lot more effective than the cover mechanics built into many games. Mostly they tend only to get me shot up more than I would have been if I was just crouching. The only exception was Mass Effect 2, in which the cover mechanics really did work for once.