Court records indicate that the settlement was reached on Monday, a few weeks before trial was set to begin on the band's claims of fraud, violation of publicity rights and breach of contract.
Terms of the settlement were not disclosed. Neither side has commented on the matter.
No Doubt sued Activision Publishing Inc. over a feature in the game that lets players perform songs of other artists using the likenesses of No Doubt front woman Gwen Stefani and other band members.
Activision denied all wrongdoing and argued the idea of "unlocking" unadvertised features of a video game has been around for a long time in the industry.
"Band Hero" debuted in November 2009 and was a spinoff of Activision's popular "Guitar Hero" game series. No Doubt filed the lawsuit after the release of "Band Hero," claiming it turned the group into a "virtual karaoke circus act."
The case cited instances in which players could use Stefani's avatar to perform suggestive lyrics from the Rolling Stones' hit "Honky Tonk Women," or have a virtual version of bassist Tony Kanal sing his band's hit "Just a Girl" in Stefani's voice.
The Associated Press contributed to this report.