In the latest chapter of the dispute between Mattel and MGA related to the BRATZ toys, the popular line of doe-eyed, fashion-forward dolls popular among pre-teens, the U.S. Court of Appeals for the Ninth Circuit recently affirmed in part and reversed in part the district court’s judgment in the 2010 jury trial, which was instituted after remand from the 9th Circuit in the parties’ original 2004 action. Mattel, Inc. v. MGA Entertainment, Inc., Case No. 11-56357 (9th Cir., Jan. 24, 2013) (Kozinski, J.).    

In the new trial (ordered by a prior remand) [IP Update, Vol. 13, No. 8], the jury found that MGA did not infringe Mattel’s copyrights by producing the BRATZ dolls.  The jury also found in favor of MGA with respect to its counterclaim against Mattel for misappropriation of trade secrets.  Mattel appealed. 

On appeal, Mattel did not challenge the holding pertaining to copyright infringement, but instead focused on the district court’s ruling that MGA’s trade secret counterclaim was timely because it was compulsory, as well as the district court’s grant of attorneys’ fees and costs to MGA under the Copyright Act. 

In this appeal, the 9th Circuit vacated the jury’s verdict in favor of MGA’s claim against Mattel for misappropriation of trade secrets and the related damages award of $172.5 million.  However, the Court upheld the district court’s award of $137.2 million in attorneys’ fees to MGA under the Copyright Act, as it concluded MGA was the prevailing party with respect to Mattel’s copyright infringement claims.

Using the “logical relationship test” for compulsory counterclaims, the 9th Circuit determined that MGA’s claim for misappropriation of trade secrets did not rest on the same “aggregate core of facts” as Mattel’s 2006 counterclaim which alleged that MGA had stolen its trade secrets. Specifically, the court noted that Mattel’s original trade secret claims centered on Mattel employees who had defected to MGA and allegedly disclosed Mattel’s trade secrets.  On the other hand, MGA’s claims alleged that Mattel employees stole trade secrets from MGA at toy fairs by masquerading as third-party buyers.

The 9th Circuit acknowledged the similarities of the underlying legal theories, but the court emphasized that the essential focus was not the legal theory but the predicate facts at issue by early party. The court concluded that there was not a sufficient nexus or logical relationship between the relevant facts that each party relied on to support its respective legal theory to support the characterization of the counterclaims as a compulsory counterclaim.  Therefore, under the applicable statute of limitations, MGA’s 2010 counterclaim for misappropriation of trade secrets was vacated.  As the court explained, the counterclaim should never have reached the jury in the new trial. The court also vacated the damages, fees and costs awarded to MGA in relation to the vacated trade secret claim.

Mattel also appealed the award of attorneys’ fees and costs awarded to MGA under the Copyright Act, arguing that its claims of copyright infringement were objectively reasonable, and thus did not warrant such fees to be paid to MGA.  On this issue, the 9th Circuit explained that the requirements of frivolousness and bad faith are no longer necessary for a defending party to be awarded such costs and fees. The court also noted that the district court properly exercised its discretion in awarding and calculating the fees and costs, and that the district court’s review of MGA’s attorneys’ invoices in camera was a sufficient safeguard against unreasonable bills. Sensing, however, that the ongoing dispute may still not be over, the court advised the parties to “take a lesson from their target demographic: Play nice.”

Update

On Wednesday, February 13, 2013, Mattel filed an ex parte application for an injunction to prevent MGA and its subsidiaries from collecting the $137.2 million attorneys’ fees award, claiming that Mattel would face multiple competing litigation by MGA and other claimants to the award without an injunction, including MGA’s former attorneys and at least five insurers.