Since 1959, Barbie has been the queen of the fashion-doll market. She even has close to two million friends on Facebook. However, in 2001, Bratz fashion-dolls entered the market, and their funky, trendy attitudes led them to quick success. Within five years Barbie had a formidable competitor in Bratz dolls (“The Girls with a Passion for Fashion!”) which had captured about 40 percent of the market. Barbie manufacturer Mattel responded by suing MGA Entertainment (creator of Bratz), and the two California-based companies have been locked in battle ever since. The reason? An employment agreement that was ambiguous about intellectual property (IP) rights.
Background
In 2000, while he was still employed by Mattel as a designer in the “Barbie Collectibles” department, Carter Bryant pitched his idea for Bratz dolls to MGA, providing some preliminary sketches and a crude mock-up of a doll. MGA offered him a consulting agreement and, on the day on which he signed the agreement with MGA, Mr. Bryant informed Mattel that he was going to resign. He gave two weeks’ notice and set to work immediately to create a prototype Bratz doll for MGA. The drawings used to pitch the Bratz idea were the basis for the first generation of Bratz dolls, named Cloe, Yasmin, Sasha and Jade.
With the commercial success of Bratz, Mattel uncovered Mr. Bryant's involvement. This led to the first lawsuit in 2004, asserting Mr. Bryant's violation of his employment agreement. Numerous other claims and counterclaims were filed, and all issues concerning ownership of Bratz were consolidated in the United States Federal District Court for the Central District of California.
2004 District Court decision
Mr. Bryant settled with Mattel before trial, but the two companies continued their legal battle. The first phase of the case, decided in July 2008, dealt with claims relating to the ownership of the Bratz concept, and resulted in a victory for Mattel1. The jury found that Mr. Bryant's ideas for the names “Bratz” and “Jade” as well as the preliminary sketches and prototype were all generated within the scope of his employment agreement with Mattel, making Mattel the rightful owner of the dolls2. The jury issued a general verdict (i.e., without specific findings) that MGA wrongfully acquired the ideas and was liable for infringing Mattel's copyright. It awarded Mattel US$100 million.
Given the general verdict, the judge found that it was unclear exactly which Bratz dolls were infringing. Therefore, to determine equitable relief3, he made his own finding that most of the dolls infringed.
The District Court imposed a constructive trust – an equitable remedy directing transfer of property to the rightful owner – over all Bratz trademarks, effectively handing over the entire business to Mattel. The court also issued an injunction prohibiting MGA from marketing or producing not just the four original dolls but all other Bratz dolls.
2010 Ninth Circuit decision
MGA appealed to the United States Court of Appeals for the Ninth Circuit, which on July 22, 2010, reversed the District Court decision, vacating the constructive trust and injunction.
Ideas for “Bratz” and “Jade”
In reaching its decision to vacate the constructive trust, the Ninth Circuit discussed:
- whether Mr. Bryant’s employment agreement assigned his ideas for “Bratz” and “Jade” to Mattel; and
- if so, and Mattel was the rightful owner, whether the constructive trust transferring MGA’s entire trademark portfolio was too broad.4
Mr. Bryant’s employment agreement with Mattel stated:
“I agree to communicate to the Company as promptly and fully as practicable all inventions conceived or reduced to practice by me (alone or jointly by others) at any time during my employment by the Company. I hereby assign to the Company . . . all my right, title and interest in such inventions, and all my right, title and interest in any patents, copyrights, patent applications or copyright applications based thereon.”
Bratz dolls, marketed as "The Girls with a Passion for Fashion!"
(Photo: MGA Entertainment)
The agreement specified that “the term ‘inventions’ includes, but is not limited to, all discoveries, improvements, processes, developments, designs, know-how, data, computer programs and formulae, whether patentable or unpatentable.”
The language of the contract could have been interpreted to cover ideas, as evidence was presented that it was common knowledge in the industry that the term invention included ideas. On the other hand, in contrast with agreements signed by other Mattel employees, which expressly assigned ideas, Mr. Bryant’s agreement did not. Given this ambiguity, the district court erred in holding that the agreement clearly covered ideas.
Notwithstanding the issue of which company owned the ideas for “Bratz” and “Jade,” the Ninth Circuit vacated the constructive trust because there had been significant value added to the line of dolls by MGA’s later efforts and creativity. The opinion by Chief Judge Alex Kozinski explained that “[i]t is not equitable to transfer this billion dollar brand – the value of which is overwhelmingly the result of MGA's legitimate efforts – because it may have started with two misappropriated names.”
Bratz drawings and prototype
Addressing the copyright injunction, the court considered:5
- whether Mr. Bryant’s employment agreement effectively assigned the Bratz drawings and prototype; and
- if Mattel did own the copyright in those works, whether the later-developed Bratz dolls infringed those rights.
The discussion on the first point focused on whether the items were created under the employment agreement which assigned copyrightable works created “at any time during [Mr. Bryant’s] employment by [Mattel].” The Ninth Circuit found that the District Court erred in holding that the employment agreement assigned to Mattel, works made by Mr. Bryant both during working hours and in his own time during evenings and weekends. Evidence at the trial supported both interpretations; there was testimony by employees who thought they owned the rights to projects developed in their own time, while others testified that they thought everything they did belonged to Mattel. Because the language of the agreement was ambiguous, the Ninth Circuit determined that the issue should have been submitted to the jury and that this error required vacating the copyright injunction.
On the second point, the key question was whether MGA went beyond copying the idea in making the dolls and copied the particular expression of the Bratz dolls.
The Ninth Circuit uses a two-part “extrinsic/intrinsic” test to distinguish between permissible appropriation of an idea and impermissible copying of the expression.6 For the “extrinsic” stage, the court first determined which of the similar elements in the copyrighted works and the challenged works were protectable and which were not. When the unprotectable elements (e.g., ideas and unoriginal elements) were taken away, only the specific and original expressions of an idea, which are protectable under copyright law, remained. Next, the court considered whether the idea could be expressed in many ways (for example, a mystery novel) or few (for example, a computer icon showing where to discard files). Protection of the first type is deemed “broad” and of the second type “thin”. If copyright protection is broad, the challenged work will infringe if it is “substantially similar” to the copyrighted work. If copyright protection is thin, the challenged work will infringe only if it is “virtually identical” to the copyrighted work.
In discussing the scope of copyright protection afforded to the prototype, the Ninth Circuit noted that, although the fashion-doll market includes many small plastic figures representing young females, the Bratz dolls also have exaggerated features, including an oversized head and large feet. It disagreed with the District Court’s conclusion that there are many ways to depict an exaggerated human figure, explaining that the features can be exaggerated only so much before they stop representing an ideal type and the doll becomes odd looking. Because of the narrow range of possible expressions, the scope of copyright protection for the prototype was deemed thin and, thus, the District Court had erred by applying the wrong standard of infringement.
As for the Bratz drawings, the Ninth Circuit agreed with the District Court that the doll sketches should be afforded broad copyright protection, because there are many ways to express the idea of young, hip female fashion-dolls with exaggerated features – using options for face paint, hair color and style, clothing and accessories. However, when applying the “substantially similar” test to the sketches, the Ninth Circuit found that the District Court failed to first filter out all the unprotectable elements (trendy clothing, unique attitudes) in making its determination of infringement. Although some of the first-generation Bratz dolls could be considered “substantially similar” to the sketches, this was not true of the subsequent generations since the clothing and hairstyles were markedly different.
2010 District Court decision
Following the appeal on October 22, 2010, the District Court granted MGA's motion for a new trial on all claims and issues. In addition, the parties’ claims against each other for trade secret misappropriation, previously severed from copyright and trademark infringement claims, were consolidated for trial. The new trial started on January 11, 2011, and the jury rendered its verdict on April 21, 2011.7
Applying the “extrinsic/intrinsic” test, the District Court had determined that no subsequent generation dolls (except for two) were “substantially similar” to the protectable elements of the sketches. The ultimate decision regarding the interpretation of the employment agreement, first-generation dolls, the remaining two subsequent generation dolls, and the sketches and prototype, were all given to the jury, which found in favor of MGA.
On the misappropriation claims, Mattel failed to convince the jury that it had a trade secret in any of the Bratz materials and that its trade secrets in other documents had been misappropriated.8 MGA, however, prevailed in its claim, based on evidence that Mattel had operated a “market intelligence group” that attended international toy fairs posing as retailers or reporters to gain access to competitors' non-public showrooms and to confidential information concerning future products. The jury found that Mattel’s behavior was willful and malicious and awarded US$3.4 million for each of 26 instances of misappropriation, totaling US$88.5 million in damages.
However, the jury found that MGA and its CEO had intentionally interfered with Mattel's contractual relations with Mr. Bryant, and it awarded Mattel US$10,000.
What’s next?
Barbie apparently intends to fight on, as Mattel has filed a motion for judgment as a matter of law, arguing that MGA failed to prove misappropriation of trade secrets.9 Meanwhile, the battle also continues on issues of damages and fees. MGA is requesting US$177 million in punitive damages under the California Trade Secrets Act. In addition, MGA is seeking US$129.7 million in attorneys' fees and US$32.4 million in costs. MGA’s attorney fee request is grounded in part on § 505 of the U.S. Copyright Act. Mattel has opposed the motion by arguing that the Copyright Act’s fee-shifting provision is meant to apply only to frivolous claims. With the case likely headed again to appeal, the only clear winner so far seems to be Mr. Bryant, who was paid over US$30 million in royalties before his settlement (for an undisclosed amount) with Mattel, before the 2004 trial.
Lesson learned
The dispute holds an important lesson about the significance of well-drafted employment agreements. If Mr. Bryant’s employment contract had been more precise, the case might not have ballooned to such proportions or included claims for trade secret misappropriation. The two obvious problems with the agreement were failures to include 1) an express assignment of ideas; and 2) clear language defining the scope of “at any time during my employment.” Practically speaking, Mattel could have ensured all the employee agreements assigning rights were identical and created and communicated clear guidelines for employees, to reduce confusion as to where Mattel's ownership rights stopped and where the employees' began. As illustrated by this case, for businesses that thrive on their IP assets, carefully drafted employment agreements can make the difference between millions gained or lost.
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1 Mattel, Inc. v. MGA Entm't, Inc., 2010 U.S. App. LEXIS 24150 (9th Cir. Cal. Oct. 21, 2010)
2 For simplicity, only the most relevant parties and issues will be discussed.
3 Equitable relief involves the granting of nonmonetary judicial remedies where available legal remedies, such as monetary damages, cannot sufficiently repair the injury.
4 2010 U.S. App. LEXIS 24150 at *7-13
5 Id. at *13-32
6 Sid & Marty Krofft Television Prods., Inc. v. McDonald's Corp., 562 F.2d 1157, 1164 (9th Cir. 1977)
7 Mattel, Inc. v. MGA Entm't, Inc. & Consol. Consol. Actions, 2010 U.S. Dist. LEXIS 136922, (C.D. Cal. Dec. 27, 2010)
8 For simplicity, only the most relevant trade secret claims will be discussed.
9 Mattel’s Notice of Motion and Motion for Judgment as a Matter of Law Re MGA’s Claim for Misappropriation of Trade Secrets Pursuant to Federal Rule of Civil Procedure 50(B); and Alternative Motion for Remittitur and/or New Trial, Case No. CV 04-9049-DOC, May 5, 2011.
