MGA Entertainment Inc.’s $172.5 million victory over rival toymaker Mattel Inc. (MAT:US) for theft of trade secrets was thrown out by a federal appeals court that said the company’s counterclaims shouldn’t have been allowed to go to the jury.
At the same time, the three-judge panel of the U.S. Court of Appeals in San Francisco upheld the trial judge’s decision to award closely held MGA $137.2 million for having to defend against Mattel’s claims that MGA’s Bratz dolls infringed Mattel’s copyrights.
“At one point, a copyright defendant had to show that the plaintiff’s claim was frivolous or made in bad faith in order to be entitled to fees; but no longer,” the panel said in a ruling today. “Even assuming Mattel’s claim was objectively reasonable, the district court didn’t abuse its discretion in awarding MGA fees.”
It was the second time the three judges reversed the outcome of a trial in the eight-year battle between Mattel, the maker of Barbie, and MGA, which Mattel accused of stealing the idea for its Bratz dolls. In 2010, the panel reversed a trial judge’s ruling that had given Mattel almost complete ownership of MGA’s Bratz brand.
Mattel in the second trial in Santa Ana, California, lost on its copyright infringement claim, a result that it didn’t contest on appeal. The toymaker appealed U.S. District Judge David Carter’s decision to allow MGA to bring counterclaims in the case that Mattel said were unrelated to the underlying lawsuit.
The trial jury awarded MGA $88.5 million in damages on its claims that Mattel employees used fake business cards to get access to MGA’s booths at toy fairs and obtain MGA’s trade secrets. The judge later reduced the verdict to $85 million and then doubled it by adding $85 million in punitive damages.
Carter had also awarded MGA $2.5 million in lawyer fees and costs for its trade secret-theft claims, which was vacated by the appeal court’s ruling together with the $170 million in compensatory and punitive damages.
The appellate panel agreed with Mattel that MGA’s counterclaims weren’t “compulsory” in that they weren’t based on the same underlying facts as Mattel’s trade-secret theft claims against MGA. As such, the judge had erred by allowing MGA’s claims to be part of the case, the panel said.
“That both Mattel and MGA claimed they stole each other’s trade secrets isn’t enough to render MGA’s counterclaim compulsory,” the panel said. “What matters is not the legal theory but the facts.”
MGA, based in Van Nuys, California, said in a statement that the appeals court’s decision allows the company to bring the trade secret-theft claims in a new lawsuit.
“We are confident that when the second jury hears about Mattel’s sneaking into our showrooms and egregious theft of scores of our secrets over the years, they will be even more appalled than the first jury and award MGA even greater damages,” MGA Chief Executive Officer Isaac Larian said in the statement.
Alan Hilowitz, a spokesman for El Segundo, California-based Mattel, said in an e-mailed statement that the company was confident a new lawsuit by MGA would be barred by the statute of limitations.
“We look forward to the speedy and final resolution of this dispute, and will continue to focus our efforts on successfully competing in the marketplace,” Hilowitz said.
The case is Mattel Inc. v. MGA Entertainment Inc., 11-56357, U.S. Court of Appeals for the Ninth Circuit (San Francisco).
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