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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Ninth Circuit Hears Oral Argument in Rival Toy Makers’ Trade Secrets Dispute

Posted in Trade Secrets

Two rival toy makers engrossed in an eight-year battle over the Bratz doll line have once again taken their fight to the Ninth Circuit. This week, a Ninth Circuit panel consisting of Chief Judge Alex Kozinski, Judge Kim Wardlaw, and Judge Stephen Trott, heard oral argument concerning an award of more than $310 million in damages and attorneys’ fees against Mattel, Inc. in its dispute with MGA Entertainment, Inc.

This is the second time the case has made its way to the Ninth Circuit and to the same three-judge panel. In 2010, the same panel reversed a jury verdict that awarded Mattel nearly $100 million in damages for copyright infringement and the ownership rights to the Bratz doll brand. Previously, Chief Judge Kozinksi, writing for a unanimous panel, reversed the decision below that Bratz creator and former Mattel employee Carter Bryant had assigned the intellectual property rights in the dolls to his former employer through his employment agreement’s invention assignment provision. The case was remanded for a retrial.

In a surprising turn of events, the second jury in the contentious case awarded more than $80 million in damages to MGA for Mattel’s alleged trade secret misappropriation (a claim that was not tried in the first jury trial), plus attorneys’ fees and treble damages for a total amount of more than $310 million.

Oral arguments began Monday in Pasadena, California. Mattel requested the court to vacate or reverse the award on grounds that MGA’s trade secret counterclaim was untimely and barred by the statute of limitations. Mattel also asked the court to reverse or vacate the trade secret damages award on grounds of insufficient evidence, and reverse or vacate the attorneys’ fees and costs award on grounds that Mattel’s pursuit of its copyright claim was objectively reasonable.

During yesterday’s oral arguments, the panel primarily focused on the timing issue. The statute of limitations for trade secret misappropriation under the California Uniform Trade Secrets Act (Cal. Civ. Code § 3426.7) is three years after the plaintiff discovers, or should have discovered, the misappropriation.

During its oral argument, Mattel explained that MGA filed its trade secret counterclaim against Mattel in August 2010, on grounds that Mattel allegedly stole trade secret information about the Bratz Doll lines during toy fairs. Mattel argued that the statute of limitations began running in 2004, when MGA had “reason to suspect” the alleged misappropriation after it hired two Mattel employees that were aware of Mattel’s alleged “toy fair conduct.” Specifically, Mattel pointed to MGA’s prior pleadings and discovery requests concerning the alleged toy fair conduct, which allegedly evinced MGA’s “reason to suspect.” Thus, Mattel argued that more than three years had passed and MGA’s trade secret counterclaim was untimely and barred.

In addition, Mattel argued that the district court erred when it found that MGA’s trade secret counterclaim compulsory and related back to Mattel’s own trade secret claim in 2006, because the two sets of claims involved different trade secrets that were allegedly stolen at different places and times; by different actors; and through different means.

MGA opened its argument by accentuating Mattel’s alleged deposition misconduct, which allegedly tolled MGA’s claim. MGA also argued that its counterclaim was compulsory because Mattel’s trade secrets claim concerned the same “category of documents.”

Chief Judge Kozinski pressed MGA hard on its “same category of documents” position. The Chief Judge emphasized that the compulsory issue is based on the claim, not documents. For example, he explained that the same document can simultaneously support different torts and contracts claims without giving rise to compulsory counterclaims. He stated that he “didn’t see how it’s compulsory or anywhere related.”

MGA also argued that there is a “logical relationship” between the parties’ trade secret claims. Judge Trott said he is having trouble with this argument based on the definition provided in In Re Pegasus Gold Corp., 394 F.3d 1189 (9th Cir. 2005), which is “the same aggregate set of operative facts as the initial claim.” Mirroring the Chief Judge’s concerns, Judge Trott said he does not see what constellation or common nucleus of facts makes them compulsory. He said the two claims are as different as “chalk and cheese.”

If the Ninth Circuit finds that the counterclaim was not compulsory, and MGA did not have reason to suspect it should have brought its counterclaim earlier, this could mean more litigation in this action in the upcoming year. In fact, Judge Wardlaw suggested that MGA refile its trade secret claim as a separate new lawsuit against Mattel.

While the ultimate outcome of this dispute is unclear, what is clear is that it does not appear to be reaching a resolution any time soon.

We will keep you apprised of any further developments.