Could Mattel End Up With Bratz?


In winning its copyright case against MGA, Mattel could grab hundreds of millions in back royalties—and maybe even ownership of the superhot Bratz dolls

It was the Battle of the Dolls, and Barbie has won. A U.S. District Court jury in Riverside, Calif., found toymaker MGA Entertainment guilty of contract interference and copyright infringement when it hired doll designer Carter Bryant away from Mattel (MAT) in 2000. The verdict could bring the world's largest toymaker hundreds of millions of dollars in back royalties or outright ownership of the wildly successful Bratz line of dolls launched by MGA in 2001.

The July 17 decision represents a rare shot of good news for Mattel, which has suffered a major loss of market share for its flagship Barbie brand since the Bratz launch. Mattel has also been involved in a spate of toy recalls over the past year. "This is a victory for all the hard-working people at Mattel who come together to create many of the most beloved toys for children," said Chairman and Chief Executive Officer Robert Eckert in a statement. "It is also a victory for all those who believe in fair play."

Not so fast, says Isaac Larian, the Iranian-born entrepreneur who is the majority owner of MGA (BusinessWeek.com, 6/10/08), which is also based in suburban Los Angeles. Larian says he'll have an opportunity to reveal new evidence the jury was barred from seeing in the first phase of the trial. In the second phase, which is to begin on July 23 and last about three weeks, the same jurors will be asked to determine damages. Larian has also vowed to appeal. "It's not over yet," Larian told BusinessWeek. "We own the name Bratz. There's no way they are ever going to get it."

On July 18, Mattel, based in El Segundo, Calif., reported that its earnings fell by nearly half, to $11.8 million, or 3 cents per share, in the second quarter. Barbie sales worldwide fell 6%. Still, the results beat analysts' already pessimistic expectations. Linda Bolton Weiser, an analyst with Caris Research, estimates that Bratz generates $1.1 billion a year in sales and could add as much as $115 million a year in earnings to Mattel if the company was awarded all rights to Bratz sales and profits. Buoyed in part by the Bratz verdict, Mattel shares surged 12%, to $20 per share.

The Bratz Conception

The case focused on Bryant, 39, who worked at Mattel but claimed he conceived the idea (BusinessWeek.com, 6/13/08) for the pouty-lipped Bratz dolls during an eight-month hiatus from the company in 1998. At the trial, Bryant testified that he used Mattel doll parts and fellow employees' time, and he sketched many Bratz drawings after returning to Mattel in 1999. As is customary in the industry, Bryant signed an agreement giving Mattel rights to anything he designed while employed by the company.

Bryant earned more than $30 million in royalties from MGA. He settled a copyright infringement suit brought against him by Mattel just before the MGA case began in May.

Larian admits the work Bryant did on the dolls while at Mattel did not make him a sympathetic witness for MGA. "There's no question he did not have good judgment," Larian says. "But we didn't know about that. Why punish MGA?"

Larian says that in the second phase of the trial and for the appeal he'll point out that Mattel uses much the same legal review for hiring new toy designers as MGA did. He claims Mattel was well aware of the Bratz dolls and was even offered a chance to distribute them in 2001. He says further evidence will show Mattel's strategy has been to "litigate MGA to death." Larian has his own countersuit claiming Mattel copied Bratz designs for its own doll lines. That case could go to trial in the fall.

Scott Landsbaum, a Los Angeles attorney with several toy industry clients, says he always tells them to work with inventors who work independently and not for rival toy companies. "All these creative people dream of having their own lines," he says. "If you've got an employee from another company approaching you with an idea, you ought to think long and hard about buying it."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.

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