Toy Companies Can Be Bratz Too
On a second appeal, Mattel and MGA still can’t “play nice.” Mattel, Inc., famous for producing the Barbie dolls, sued MGA Entertainment, Inc., who produces the Bratz dolls. Both filed claims for trade secret misappropriation. Mattel filed its misappropriation claim in 2006, but it was filed as a counterclaim. In 2010, MGA filed its claim as a counterclaim-in-reply to Mattel’s misappropriation counterclaim. Mattel moved to dismiss MGA’s claim, arguing that the statute of limitations had run since the events giving rise to the claim had occurred more than 3 years earlier. The district court denied Mattel’s motion, stating that Mattel’s claim was logically related to MGA’s claim, and therefore MGA’s claim was compulsory and permissible. At trial, MGA won, and was awarded over $80 million in damages. Mattel appealed, and the Appeals Court reversed, stating that MGA’s claim was factually distinct from Mattel’s. Mattel, Inc. v. MGA Entertainment, Inc., Case No. 11-56357 (9th Cir. January 24, 2013)(available here).
The 9th Circuit had previously remanded the case for a new jury trial, and the second jury rejected Mattel’s copyright claim over MGA’s Bratz dolls. The jury found that Mattel had misappropriated MGA’s trade secrets, and MGA was awarded attorneys’ fees and costs under the Copyright Act. Mattel did not challenge the copyright infringement claim, but it did challenge the misappropriation of MGA’s trade secrets, and the award of attorneys’ fees. The 9th Circuit held that MGA’s counterclaim for trade secret misappropriation under California law was not compulsory, and therefore should not have been allowed since it was not based on the same facts as Mattel’s trade secret misappropriation claim. The Court also vacated the jury’s verdict that Mattel had misappropriated MGA’s trade secrets, and vacated the relevant damages, fees, and costs. However, the Court affirmed the award of attorneys’ fees and costs to MGA under the Copyright Act.
A compulsory counterclaim is one that arises out of the same transaction or occurrence of the opposing party’s claim, Fed. R. Civ. P. 13(a)(1)(A), a logical relationship test, which “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 re Pegasus Gold Corp., 394 F.3d 1189, 1195-96 (9th Cir. 2005). The Court reiterated that “what matters is not the legal theory [of the claims] but the facts.” Mattel, Slip Op. p. 6 (emphasis in original).
Applying the logical relationship standard, the Court determined that MGA’s misappropriation claim did not rest on the same facts as Mattel’s claim. Instead, Mattel’s claim focused on the allegation that several of Mattel’s employees disclosed trade secrets to MGA, while MGA’s claim focused on allegations that Mattel’s employees stole MGA’s trade secrets by engaging in trickery at toy fairs, such as by pretending to be buyers.
The Court then examined whether the award of attorneys’ fees to MGA under the Copyright Act was proper. Case law dictates that the award of attorneys’ fees under the Copyright Act is completely under the discretion of the district courts. The district courts must determine whether the award of attorneys’ fees would further the purpose of the Act of inducing artistic creativity for the good of the general public. Mattel, Slip. Op. P. 7. The Court acknowledged the public interest with respect to the Bratz dolls. In addition, the Court agreed with the district court that MGA’s involvement in the case was important because MGA’s “failure to vigorously defend against Mattel’s claims could have ushered in a new era of copyright litigation aimed not at promoting expression but at stifling the ‘competition’ upon which America thrives.” Mattel, Slip. Op. 7 (quoting the district court).
The Court concluded that the district court’s award of attorneys’ fees to MGA was acceptable because of Mattel’s extremely broad and unreasonable claims for relief. MGA did not have to show that Mattel’s claim was frivolous or in bad faith. Mattel, Slip Op. p. 8. The Court affirmed the award of attorneys’ fees to MGA under the Copyright Act with the hope that “Mattel and MGA can take a lesson from their target demographic: play nice.” Mattel, Slip Op. p. 9.