By Robert Milligan and Joshua Salinas

After more than eight years of litigation and two jury trials over the Bratz doll line, rival toy makers Mattel, Inc. and MGA Entertainment, Inc. may be headed for a rubber match – a third jury trial. Yesterday, a Ninth Circuit panel consisting of Chief Judge Alex Kozinski, Judge Kim Wardlaw, and Judge Stephen Trott, overturned an award of $172 million in damages (including attorneys’ fees) to MGA for alleged trade secret misappropriation, holding that MGA’s respective counterclaim-in-reply was not compulsory and should not have reached the jury. Mattel, Inc. v. MGA Entertainment, Inc., Case No. 11-56357 (9th Cir. Jan. 24, 2013).

In 2006, Mattel sought leave to amend its complaint by adding a claim against MGA for alleged misappropriation of trade secrets. Then, in 2010, after the Ninth Circuit had decided the first appeal, MGA filed a counterclaim against Mattel for misappropriating its trade secrets.

To be compulsory, the counterclaim must “arise[] out of the transaction or occurrence that is the subject matter of the opposing party’s claim.” FRCP 13(a)(1)(A).

Mattel moved to dismiss MGA’s claim, arguing that the statute of limitations had run because the events at issue happened more than three years earlier. Mattel argued that MGA’s trade secrets claim did not arise out of the transaction or occurrence that was the subject of Mattel’s trade secrets claim. Mattel argued that that each parties’ claims involved different trade secrets that were allegedly stolen at different places and times; by different actors; and through different means.

The district court denied Mattel’s motion and instead found that that MGA’s counterclaim-in-reply for trade secret theft was compulsory because it was “logically related” to Mattel’s trade secret theft claim. Specifically, the district court ruled that it was “more than reasonable to conclude at least some of the trade secret information allegedly misappropriated by [MGA] incorporated trade secret information” that Mattel had allegedly stolen from MGA.

MGA’s trade claim proceeded to trial. The jury found for MGA, and awarded more than $80 million in damages. The district court then awarded MGA an equal amount in exemplary damages under the California Uniform Trade Secrets Act, which authorizes exemplary damages if the misappropriation was “willful and malicious.” Cal. Civ. Code § 3426.3(c). The court also awarded trade secret attorneys’ fees and costs. In addition, because the jury found for MGA on Mattel’s copyright claim, the district court awarded attorneys’ fees and costs to MGA under the Copyright Act. Mattel appealed the trade secret award and the award of fees and costs on the Copyright claim. (See our prior posts on Mattel’s opening appellate brief and the Judges’ questions during oral argument).

On appeal, the Ninth Circuit panel affirmed the award of fees and costs on the copyright claim but reversed on the trade secret award.

Relying on In re Pegasus Gold, 394 F.3d 1189 (9th Cir. 2005), the panel held that MGA’s counterclaim-in-reply was not “logically related” to Mattel’s counterclaim because it “did not rest on the same ‘aggregate core of facts.’” The panel explained that opposing claims of trade secret theft are not enough to render a counterclaim compulsory: “[w]hat matters is not the legal theory but the facts.”

Specifically, the Court reasoned that MGA’s claim did not rest on the same “aggregate core of facts” as Mattel’s claim:

“While Mattel asserted many claims that covered numerous interactions between Mattel and MGA, Mattel’s specific allegations regarding trade secrets were that several of their employees … defected to MGA and disclosed Mattel’s trade secrets. By contrast, MGA’s trade-secret claim rested on allegations that Mattel’s employees stole MGA trade secrets by engaging in chicanery (such as masquerading as buyers) at toy fairs. That both Mattel and MGA claimed they stole each other’s trade secrets isn’t enough to render MGA’s counterclaim compulsory.”

The Court further reasoned that the claim would not have been compulsory if “the same information may have shuttled back and forth between Mattel and MGA… [because this] isn’t a sufficient nexus to support a compulsory counterclaim.”

Thus, the Court vacated the jury’s verdict in favor of MGA because the claim was not compulsory and, thus should not have reached the jury. The Court instructed the district court to dismiss MGA’s trade secret claim without prejudice.

This is the second time the same three-judge panel overturned a significant jury award in the case. In 2010, the same panel reversed a jury verdict that awarded Mattel nearly $100 million in damages and the ownership rights to the Bratz doll brand.

The Court upheld the approximately $137 million in attorneys’ fees for MGA’s defense against Mattel’s copyright claims. The Court reasoned that the district court did not abuse its discretion in awarding fees and costs under the Copyright Act and that bad faith and frivolousness was not the applicable standard.

It does not appear that this case is over yet and published reports indicate that MGA intends to file a new lawsuit for the trade secret misappropriation claim. Regardless what happens, Chief Judge Kozinski had one final piece of advice for the parties, “play nice.”

Apart from the size of the awards in this case, this case is also significant from a procedural standpoint because it reaffirms the importance of facts when determining whether a claim is compulsory or permissive. Indeed, the panel reiterated that the logical relationship test is based on the “aggregate core of facts” and not general inferences about similar legal theories.

We will keep you posted on any significant further developments.