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9th Cir. Rolls Back Trade Secret Damages In Bratz Litigation; Mattel Still Owes Fees, Costs

Monday, January 28, 2013

A counterclaim of trade secret misappropriation, asserted against the maker of Barbie dolls by the maker of Bratz dolls, was not compulsory and therefore never should have been submitted to the jury in the lengthy dispute between the two toy manufacturers, the U.S. Court of Appeals for the Ninth Circuit ruled Jan. 24 (Mattel Inc. v. MGA Entertainment Inc., 9th Cir., No. 11-56357, 1/24/13). The appeals court accordingly vacated the $172 million judgment against Mattel Inc. for its alleged theft of trade secrets.

The court, however, upheld an award of more than $137 million in attorneys' fees and costs for Mattel's violations of the Copyright Act.

Chief Judge Alex Kozinski noted that the decision likely will not bring an end to the litigation, but he implored the two parties to “take a lesson from their target demographic: Play nice.” 

Mattel Sued First, Won Big, Then Lost on Remand

In 2004, Barbie-maker Mattel Inc. filed suit against MGA Entertainment Inc., the maker of a line of Bratz dolls that competes with Barbie. Mattel sued Bratz designer and former Mattel employee Carter Bryant for copyright infringement, breach of contract, unjust enrichment, and conversion, alleging that Bryant had given to MGA the designs he had made for Mattel that led to the wildly successful Bratz line of dolls, “The Girls With a Passion for Fashion!”

Mattel argued that Bryant conceived of the ideas for the design for Bratz dolls when working at Mattel and thus he had no rights to his designs based on the terms of his employment contract. Judge Stephen G. Larson of the U.S. District Court for the Central District of California found that Bryant's agreement assigned his ideas and preliminary mock-ups to Mattel, and he instructed a jury accordingly.

The jury awarded Mattel $100 million in damages from MGA (211 PTD, 10/31/08). Larson issued a permanent injunction in December 2008 and further imposed a constructive trust over related Bratz trademarks for transfer to Mattel. The order was originally stayed until February 2009 (235 PTD, 12/8/08), and then further extended to the end of 2009 to give MGA more time to sell Bratz dolls before they are removed from the market (08 PTD, 1/14/09).

Meanwhile, MGA appealed, and the Ninth Circuit remanded after it found multiple errors in the district court's judgments and jury instructions that led to a copyright infringement verdict in favor of and trademark transfer to Mattel. Mattel Inc. v. MGA Entertainment Inc., 616 F3d 904, 96 U.S.P.Q.2d 1012 (9th Cir. 2010)(141 PTD, 7/26/10). In that decision, the Ninth Circuit said that the case may have to be retried.

The district court indeed retried the case, but prior to doing so it permitted MGA to file its own trade secret misappropriation claim against Mattel.

Mattel was much less successful in the second trial where the jury found in MGA's favor both in regards to Mattel's copyright infringement claim, and also with respect to MGA's trade secret claim. Mattel Inc. v. MGA Entertainment Inc., 2011 BL 202559 (C.D. Cal. 2011).

In total, MGA was awarded $172 million on its trade secret misappropriation claim.

Furthermore, because MGA prevailed on Mattel's copyright claims, the district court determined that the company was entitled to attorneys' fees and costs pursuant to Section 505 of the Copyright Act, 17 U.S.C. §505. It thus awarded MGA over $101 million in attorneys' fees, and more than $36 million in costs. Mattel appealed. 

Trade Secret Claim Wasn't Compulsory

Mattel argued that MGA's trade secret misappropriation claim was not compulsory, and therefore that it was an error for the district court to submit the issue to the jury. The appeals court agreed.

A counterclaim-in-reply, such as the one that MGA filed only after the Ninth Circuit's remand in 2010, is only permitted if it is compulsory, the court noted. “To be compulsory, a counterclaim must 'arise[] out of the transaction or occurrence that is the subject matter of the opposing party's claim,' ” the court said, quoting Fed. R. Civ. P. 13 (a)(1)(A).

Quoting In re Pegasus Gold Corp., 394 F.3d 1189, (9th Cir. 2005), the court said that a counterclaim will be compulsory only if “A logical relationship exists when the counterclaim arises from the same aggregate set of operative facts as the initial claim, in that the same operative facts serve as the basis of both claims or the aggregate core of facts upon which the claim rests activates additional legal rights otherwise dormant in the defendant.”

In this case, Mattel's trade secret misappropriation claim was based on allegations that its former employees had absconded with its trade secrets.

“By contrast, MGA's trade-secret claim rested on allegations that Mattel's employees stole MGA trade secrets by engaging in chicanery (such as masquerading as buyers) at toy fairs,” the court said. “That both Mattel and MGA claimed they stole each other's trade secrets isn't enough to render MGA's counterclaim compulsory.”

The district court had determined that it was “more than reasonable to conclude at least some of the trade secret information allegedly misappropriated” by Mattel's former employees included some of the trade secret information that Mattel had allegedly stolen from MGA. But this determination was contrary to the record, the appeals court said. Accordingly, the court said that the counterclaim was not compulsory, and thus it was an error for the trial court to send the matter to the jury. The court thus vacated the $172 million award and remanded with instructions for the district court to dismiss MGA's trade secret claim without prejudice. 

No Abuse of Discretion in Award of Attorneys' Fees

Mattel also appealed the district court's award of attorneys' fees and costs. Mattel argued that its copyright infringement claim was not objectively unreasonable, and therefore it said the district court erred by invoking the attorneys' fees provision of Section 505 of the Copyright Act.

Mattel's argument, the Ninth Circuit said, “seeks to resurrect the long-rejected requirements of frivolousness and bad faith.”

It is true that in the past attorneys' fees would only be issued to copyright defendants that could demonstrate that the plaintiff's initial claim was frivolous, but that requirement is not longer necessary, the court said.

As the law lies now, “The most important factor in determining whether to award fees under the Copyright Act, is whether an award will further the purposes of the Act,” the court said. The court noted that the Copyright Act seeks to incentivize creativity “for the public good,” and it also noted that Section 505 determinations are left to the discretion of the district court.

In this case, “The district court did not abuse its discretion in awarding MGA fees for fighting against Mattel's claim 'that was stunning in scope and unreasonable in the relief it requested,' ” the court said, quoting the lower court's decision. It therefore upheld the $137 million award for attorneys' fees and costs.

Judges Stephen S. Trott and Kim McLane Wardlaw joined the opinion.

Mattel was represented by Kathleen M. Sullivan of Quinn Emanuel Urquhart & Sullivan, New York. MGA Entertainment was represented by Clifford M. Sloan of Skadden, Arps, Slate, Meagher & Flom, Washington, D.C.

By Tamlin H. Bason

Text is available at /uploadedFiles/Content/News/Legal_and_Business/Bloomberg_Law/Legal_Reports/57Jan2412(1).pdf.


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