The ongoing war between Mattel, Inc. (“Mattel”) and MGA Entertainment, Inc. (“MGA”) over the very successful Bratz dolls was going extremely well for Mattel, the maker of the decades-famous Barbie and Ken dolls. In fact, Mattel had won virtually every battle along the way, ruling after ruling, injunction after injunction, including the penultimate battle of Phase I of a jury trial, which was held in the fall of 2008. On July 22, 2010, the Ninth Circuit Court of Appeals, however, stopped Mattel in its tracks by reversing the jury’s verdict and numerous district court rulings.1
The Ninth Circuit’s recitation of the facts underlying the case makes it appear that the facts are not all that complicated. The Ninth Circuit court provides, essentially, that in 2000, Mattel employed an individual named Carter Bryant (“Bryant”) in its Barbie Collectibles department. Bryant designed fashion and hairstyles for some of the high-end Barbie dolls. While at Mattel, Bryant had an idea for a line of dolls that would be much edgier than Barbie, with a “bad girl” image, which he called “Bratz.”
He pitched the idea for this line to MGA, one of Mattel’s competitors, while he was still with Mattel. Subsequently, he was asked to meet with the CEO of MGA. He brought some preliminary sketches of four dolls, named Zoe, Lupe, Hallidae, and Jade.2 He also brought with him a crude dummy that was constructed out of a doll head from a Mattel bin, Barbie’s body, and Ken’s boots.
Bryant signed a consulting agreement with MGA on the same day that he gave Mattel two weeks’ notice. During his last two weeks at Mattel, Bryant worked with MGA to develop the Bratz concept and to help create a preliminary Bratz “sculpt,” which is a “mannequin-like plastic doll body without skin coloring, face paint, hair, or clothing.”3 Those ideas ultimately became the bases for a line of MGA dolls called “Bratz” that became phenomenally successful, generating revenue of approximately $1 billion in “interest-adjusted” profit.4
However, the parties, in their briefs, make it clear that the facts are much more complicated: both that Bryant’s use of Mattel’s facilities, including other employees, and that MGA’s complicity in the alleged misappropriation from Mattel may have been much more extensive than the Ninth Circuit describes. The facts according to Mattel are as follows:
Mattel hired Bryant in 19955 as a designer in the Barbie group. He left Mattel for a short time in early 1998 and moved to Missouri, but then returned to Mattel in late 1998. When he returned, his job was to design clothing and accessories for Mattel’s exclusive Barbie Collectibles department.6
While employed by Mattel, Bryant came up with an idea for a line of dolls that would be much edgier than Barbie, with a “bad girl” image, which he called “Bratz.”7 In 2000, Bryant pitched an idea to one of Mattel’s competitors, MGA. He was then called in to meet with the CEO of the company. He brought some preliminary sketches of four dolls, named Zoe, Lupe, Hallidae, and Jade.8
As noted earlier, Bryant signed a consulting agreement with MGA on the same day that he gave Mattel two weeks’ notice. However, according to Mattel, the relationship long predated the agreement. The agreement was “dated as of September 18, 2000,” and it required Bryant to work on Bratz for MGA on a “top priority basis.” One of MGA’s former executives testified that Bryant was working with MGA by early summer 2000.9 In fact, according to Mattel, while Bryant was working with MGA, he used Mattel employees and resources to develop Bratz, placed dozens of calls to MGA from Mattel’s premises, and sent faxes to MGA using Mattel’s facilities. MGA made numerous payments to Bryant and other Mattel employees while Bryant was still employed by Mattel. Bryant used these Mattel employees to assist him with the project, never revealing that the project was for a competitor.10
However, Mattel claims that it was revealed at trial that information withheld from other Mattel employees was not the only concealment orchestrated by Bryant and MGA. Mattel claims that Isaac Larian repeatedly identified himself as the creator of Bratz and forbade any discussion of Bryant’s involvement with Bratz outside of MGA. One year after Bryant left Mattel, Larian sent an e-mail to MGA employees mandating that “[t]here must be no mention about Mattel or any of their properties, Carter, any MGA Bratz arts, etc.”11
According to Mattel, Larian also directed an MGA executive to white out a Mattel fax header on Bryant’s faxed, signed MGA agreement in order to hide the fact that Bryant faxed the agreement to MGA from Mattel. Moreover, Bryant installed and used a program called “Evidence Eliminator” on his own computers just a few days before they were to be accessed and imaged pursuant to the district court’s order.12
While Bryant was working for both companies, he worked with MGA to develop the Bratz concept, which included, as noted above, helping to create a preliminary Bratz sculpt, which became the basis for the Bratz dolls that generated approximately $1 billion in interest-adjusted profit. MGA’s version of the facts is essentially as follows:
In late August 2000, Bryant met with MGA and showed its representatives some sketches and descriptions of “four edgy, hip, multiethnic dolls called ‘Bratz.’” They were described as a “group of friends who are very . . . cool, maybe kind of popular,” wearing “clothing that was trendy but not necessarily fancy,” and had attitudes that were “very, well, non-Barbie.”13 He then mocked up a “primitive Bratz ‘dummy doll’” with help from some of his coworkers at Mattel by putting a plastic head that he retrieved from the trash at Mattel on a Barbie body and adding Ken army boots.14
Once it was interested in Bryant’s design, MGA’s president asked Bryant if he had come up with the idea and materials on his own and on his own time, to which Bryant responded in the affirmative, claiming that he created the drawings in 1998, during the period in which he was not employed by Mattel. Bryant made a contractual warranty that he was not violating any contractual obligation by conveying the drawings to MGA, and he agreed to indemnify the company with respect to claims of ownership of the Bratz concept or the drawings.15
MGA also insisted that Bryant quit his job with Mattel as soon as he signed an agreement with MGA, to which Bryant agreed. However, instead of quitting immediately, Bryant gave Mattel two weeks’ notice on the day that he signed his agreement with MGA.16
MGA further claims that Bryant told MGA: “Here’s my idea. Just take it and run with it,” which is exactly what MGA did, even before the agreement with Bryant was signed. MGA converted Bryant’s sketches into a sculpt and hired a freelance sculptor, who created the first prototype. MGA continued to develop the product over the next several months, creating more sculpts and instituting dozens of successive changes. With each sculpt, “the dolls morphed farther and farther away from the images” in the original drawings, and extensive changes were made to the doll’s age (19 or 20 to 11 to 13), body structure (appropriate to the change in age), head shape (more “humanistic” and less “cartoonish”), facial features (more natural, modest, and appropriate for younger girls), facial structure (chin and temples were added, with emphasized brows and jaws and defined and raised cheekbones), ears (smaller and closer to the heads), nose (more substantial than the original dot, and, later, more rounded and less triangular), eyes (no eye detail over time), lips (smaller, but more definition with corners of the mouths rounded), face color, and hair.
What both sides agree upon is that the Bratz dolls became phenomenally successful. With success, of course, comes litigation, and this particular dispute has been fought as hard and as mercilessly as any. Mattel claimed that Bryant violated his employment agreement by disclosing his idea to MGA, instead of taking the concept to Mattel and assigning Mattel the rights thereto. Mattel further claimed that it owns the copyrights to Bryant’s preliminary sketches and sculpt, and that the Bratz dolls infringed that copyright. Lastly, Mattel maintains that, because MGA wrongfully acquired the ideas for the names “Bratz” and “Jade,” the Bratz trademarks should be transferred from MGA to Mattel. At the trial of Phase I of the case, which involved the ownership of the Bratz line, the jury found that Bryant was employed by Mattel when he created the “Bratz” and “Jade” names and preliminary sketches and sculpt. The jury also found that MGA had interfered with Bryant’s Mattel employment agreement and had aided and abetted its breach. The jury issued a general verdict finding MGA liable for copyright infringement with respect to Bryant’s preliminary Bratz works. However, although Mattel sought more than $1 billion in copyright damages, the jury awarded only $10 million.
The district court thereafter made equitable rulings based on the jury’s verdict. With respect to the state law violations, the court imposed a constructive trust over all of MGA’s Bratz-related trademarks. The imposition of a constructive trust included the terms “Bratz” and “Jade,” which had the effect of transferring the entire “Bratz trademark portfolio” to Mattel, including dolls, video games, and Bratz: The Movie. In fact, the court issued an Unfair Competition Law (“UCL”) injunction pursuant to Business & Professions Code § 17200 and a declaratory judgment with respect to MGA’s right to the Bratz trademarks.
With respect to the copyright verdict, the court issued an injunction prohibiting MGA from producing and/or marketing virtually every Bratz female fashion doll, including the original four dolls and subsequent generations, and other doll characters, as well as any future dolls that are substantially similar to the copyrighted works.
CONSTRUCTIVE TRUST
The Ninth Circuit first discussed the propriety of the constructive trust that was so harshly imposed by Judge Larson of the lower court. The district court held that Bryant’s employment agreement with Mattel had assigned all of his ideas to Mattel, and specifically instructed the jury as such. The jury’s sole responsibility, therefore, was to determine which ideas Bryant had conceived while he was employed by Mattel.
The court of appeals noted that a constructive trust would only be appropriate if the employment agreement assigned Bryant’s ideas for “Bratz” and “Jade” in the first place. Although the agreement purported to assign “inventions” (and other things) that were conceived by Bryant while employed by Mattel, it did not specifically mention ideas. The Ninth Circuit concluded that the agreement could be construed to cover ideas, but it also could be construed not to cover ideas. The agreement was therefore ambiguous in that regard. Thus, the court of appeals held that the district court erred in finding no ambiguity in the language of the agreement, and essentially finding that the agreement covered ideas as a matter of law.17
Once the ambiguity was found, the district court was required to resolve the issue by allowing the jury to examine extrinsic evidence of the interpretation of the agreement, but it did not do so. At various stages in Phase I of the litigation, conflicting evidence was adduced concerning the issue, but the evidence was never presented to the jury for its required determination of credibility. That issue, like so many others, is now to be determined by the jury on remand.18
The Ninth Circuit went on to discuss the law of constructive trusts, which generally allows the beneficiary of the trust to profit from any enhancement in value of the trust property. The court used as an example a $100,000 house that is wrongfully acquired and subsequently appreciates to $200,000. The rightful owner is entitled to the enhanced value of the property. “It is simple equity that a wrongdoer should disgorge his fraudulent enrichment.”19
However, the Ninth Circuit noted that, when the value of the property increases significantly because of the defendant’s own efforts, a constructive trust that passes on that profit is improper. The court likens that situation to one in which an artist acquires paints by fraud and then uses them to paint a valuable portrait; the rightful owner of the paints clearly would not be entitled to the proceeds of the sale of the painting.20
According to the Ninth Circuit, even if MGA misappropriated certain ideas, “it added tremendous value by turning the ideas into products and, eventually, a popular and highly profitable brand.”21 Even though Bryant’s ideas may have been significant, the Ninth Circuit found that MGA’s hard work and creativity dwarfs the value of those original ideas.22 The court speculated that the jury reached a similar conclusion when it awarded Mattel only 1 percent of MGA’s more than $1 billion in “interest-adjusted profit.”23
According to the Ninth Circuit, it is not fair to transfer ownership of “this billion dollar brand” just because it started with “two misappropriated names,” when the value of the brand is “overwhelmingly the result of MGA’s legitimate efforts.”24
The lower court’s imposition of the constructive trust forced “MGA to hand over its sweat equity,” which the Ninth Circuit held to be an abuse of discretion.25
COPYRIGHT INFRINGEMENT
The Ninth Circuit went on to discuss the copyright infringement verdict. In order for there to be an infringement of Mattel’s copyright, Mattel had to have owned a copyright in the first place. There was no question that the employment agreement covered inventions such as Bryant’s Bratz drawings and sculpt. However, MGA argued that the agreement did not assign the copyright in those works because they were created outside the scope of Bryant’s employment with Mattel and on his own time.26
The district court held, again as a matter of law, that the agreement pertained to anything created by the employee during the time period covered by the agreement, irrespective of the employee’s duties, and irrespective of when, during that time period, he or she created the work. As such, there was no question in the district court’s mind that Mattel owned the copyright to the earlier works, and thus the lower court instructed the jury that any and all dolls that were “substantially similar” to the sketches and sculpt were infringements.27
During the jury’s deliberations, the jury asked the judge if it could find infringement as to the first generation of Bratz dolls and no others, to which the court responded in the affirmative. The jury then returned a general verdict finding MGA liable for copyright infringement but awarded Mattel only $10 million in copyright damages. Nevertheless, the district court thought it was unclear which dolls or how many dolls the jury found infringing, so it made its own determination that the vast majority of Bratz dolls were infringing. As a result, Judge Larson enjoined MGA from producing those dolls or any other substantially similar ones.28
The Ninth Circuit held that the phrase in Bryant’s employment agreement “at any time during my employment” is ambiguous. The phrase could refer to every second of every minute during the time period, or only in the scope of employment during work hours, or something in between.29
The Ninth Circuit also held that, because the agreement was ambiguous, and there was, again, extrinsic evidence to support each position that should have been presented to the jury, the district court erred by granting summary judgment to Mattel on the issue. On remand, the jury is tasked with deciding whether Bryant’s agreement assigned works that were created outside of the scope of his employment with Mattel to Mattel, and, if so, whether the creation of his sketches and sculpt fell outside of the scope of his employment (which it certainly appears to have done, given Bryant’s employment as a clothing and hairstyle designer for Mattel dolls).30
Although the district court’s error was, according to the Ninth Circuit, sufficient for it to vacate the copyright injunction, which it ultimately did, the court determined that if, on remand, the jury ultimately determines that Mattel owns a copyright that MGA infringed, it would have to discuss the scope of the injunction in any case. The Ninth Circuit therefore went on to discuss the copyright claim in general and the scope of the injunction.31
The court noted that, even if Mattel owns Bryant’s preliminary drawings and sculpt, the copyright would only cover the particular expression of the “bratty-doll idea,” and not the idea itself. In what may be the key to the entire case, the court of appeals made it quite clear that “MGA was free to look at Bryant’s sketches and say, ‘Good idea! We want to create bratty dolls too.’”32
The Ninth Circuit then discussed the extrinsic and intrinsic tests for infringement, examining first whether the similar elements are protectable or unprotectable, and then, by the jury, whether an ordinary, reasonable observer would consider the copyrighted work and the challenged work to be substantially similar.33
The district court had determined, through the extrinsic test, that the common items were protectable, and that, therefore, substantial similarity was the appropriate test for infringement. In determining equitable relief, the lower court decided that the two Bratz sculpts and the vast majority of the Bratz female fashion dolls were substantially similar to Mattel’s works. The court then imposed an injunction prohibiting any further infringement of such works.34
DOLL SCULPT
With respect to the doll sculpt, the Ninth Circuit determined that the district court erroneously applied the substantial similarity standard. Although, as Mattel argued, there are countless ways that one can depict an exaggerated human figure, the court of appeals found that “[t]he expression of an attractive young, female fashion doll with exaggerated proportions is . . . highly constrained.” Because of this narrow range of expression, the copyright protection to be afforded to the sculpt is “only thin copyright protection against virtually identical copying.”35
BRATZ SKETCHES
With respect to the Bratz sketches, the district court had enjoined MGA from marketing or producing almost every Bratz female fashion doll, including second-generation dolls, because it held that they were substantially similar to the preliminary sketches.36 Although MGA argued that the district court erred by applying the substantial similarity standard, the court of appeals disagreed with MGA and held that the lower court did not err in “affording the doll sketches broad copyright protection against substantially similar works.”37
However, the Ninth Circuit did hold that the district court erred when it failed to exclude the unprotectable elements of Bryant’s sketches in its substantial similarity analysis. Although the district court had ruled that the doll’s “particularized, synergistic compilation and expression of the human form and anatomy that expresses a unique style and conveys a distinct look or attitude” is protectable, the Ninth Circuit made it clear that “fashion dolls with a bratty look or attitude, or dolls sporting trendy clothing” are all unprotectable ideas over which Mattel clearly does not own a “monopoly.”38
The court of appeals therefore held that, although the substantial similarity standard was appropriate, the similarity must be between protectable elements. There must be a similarity in expression, and not of ideas. According to the Ninth Circuit, the key question is whether the works are substantially similar “beyond the fact that they depict the same idea.” There can be no finding of substantial similarity just because the dolls and the sketches depict “young, stylish girls with big heads and an attitude.”39
The Ninth Circuit then noted that it might have been reasonable for the district court to rule that some of the Bratz dolls, but not the vast majority, were substantially similar to the sketches, unless the court was relying on similarities in idea.40
Because of this error by the district court and its error in ruling that the employment agreement assigned Bryant’s ideas as a matter of law, the Ninth Circuit held that the district court abused its discretion in transferring the entire Bratz trademark portfolio to Mattel. The court therefore vacated the constructive trust, the UCL injunction, and the declaratory judgment concerning the trademarks. The Ninth Circuit welcomed the district court’s imposition of a narrower constructive trust, but only if the jury ultimately determines that Mattel owns Bryant’s ideas.41
The Ninth Circuit established a fairly onerous test for Mattel on remand. For Mattel to obtain any injunction, it will have to prove either that Bryant’s employment agreement assigns works made outside of the scope of employment or that Bryant’s sketches and sculpt were not made outside of the scope of his employment. Then, it will have to prove either that the Bratz sculpts are virtually identical to the preliminary sculpt or that the Bratz dolls are substantially similar to Bryant’s sketches, without regard to similarities in unprotectable ideas.42
It appears, particularly in light of the court’s brief recitation of the basic facts, without addressing the most damaging facts of MGA’s apparent complicity in Bryant’s defection, that the Ninth Circuit is less persuaded by Bryant’s and MGA’s initial actions and much more persuaded by Mattel’s apparent inaction while MGA made Bratz into a phenomenal success, only later to attempt to capitalize on that success. In any event, based on the Ninth Circuit’s comments, guidelines, and instructions, it is going to be extremely difficult for Mattel to recapture even a semblance of the injunction that the district court issued. At least with respect to the constructive trust/trademark portion of the case, only the U.S. Supreme Court will be able to save MGA now.
Endnotes
1. Mattel, Inc. v. MGA Entm’t, Inc., et al., Nos. 09-55673, 09-55812, 2009 U.S. App. LEXIS 29187 (9th Cir. July 22, 2010).
2. Ultimately, MGA abandoned all of those names except for “Jade,” naming the other three original dolls “Chloe,” “Yasmin,” and “Sasha.”
3. Mattel, 2009 U.S. App. LEXIS 29187, at 3.
4. Id. at 13.
5. Mattel, Inc.’s Combined Answering Brief on Appeal and Opening Brief on Cross-Appeal (“Mattel AB”) at 7, Mattel, Inc. v. MGA Entm’t, Inc., et al., Nos. 09-55673, 09-55812 (9th Cir. July 22, 2010).
6. Id.
7. Although MGA and Bryant claim that Bryant created his first drawings of his Bratz concept during the eight months in 1998 in which he was not employed by Mattel, there was considerable evidence to the contrary presented at trial. Some of that evidence included that (1) forensic examina- tion of his drawings were on pages that were torn from a notebook of other drawings that he created in 1999; (2) although Bryant insisted that Bratz was inspired by a 1998 Steve Madden advertisement, his designs had more in common with a 1999 Steve Madden ad; and (3) Bryant gave the Bratz sculptor the 1999 advertisement when she prepared the sculpts in 2000. Id. at 12–13.
8. See note 2, supra.
9. Mattel AB, supra note 5, at 9.
10. Id. at 9–10. Although Mattel asserts this in its Answering Brief, it is difficult to imagine how these employees could not know that the project was for “a competitor” if they were receiving checks from MGA.
11. Id. at 11.
12. Id. at 12.
13. Opening Brief for Appellants MGA Entertainment, Inc., MGA Entertainment HK, Ltd., and Isaac Larian (“MGA OB”), at 7–8, Mattel, Inc. v. MGA Entm’t, Inc., et al., Nos. 09-55673, 09-55812 (9th Cir. July 22, 2010).
14. Id. at 8.
15. Id. at 8–9.
16. Id. at 9.
17. Mattel, Inc. v. MGA Entm’t, Inc., et al., Nos. 09-55673, 09-55812, 2009 U.S. App. LEXIS 29187, at 7–8 (9th Cir. July 22, 2010).
18. Id. at 9–10.
19. Id. at 11 (citing Janigan v. Taylor, 344 F.2d 781, 786 (1st Cir. 1965)).
20. Id. at 12 (citing Janigan, 344 F.2d at 787).
21. Id.
22. Id.
23. Id. at 13.
24. Id.
25. Id. at 13.
26. Id. at 14.
27. Id. at 15.
28. Id.
29. Id. at 17–18.
30. Id. at 18–19.
31. Id. at 19.
32. Id. at 19–20.
33. Id. at 21–22.
34. Id. at 23.
35. Id. at 25–26.
36. Id. at 26–27.
37. Id. at 28.
38. Id. at 29–30.
39. Id. at 30–31.
40. Id. at 31–32.
41. Id. at 32.
42. Id. at 33–34.