[UPDATE: the Ninth Circuit eviscerated the verdict, as well as the trial court’s imposition of a constructive trust and an injunction.]

As mentioned yesterday, a jury awarded Mattel $100 million* for the Bratz infringement, one-twentieth of the $2 billion requested in their closing argument, just over three times the $30 million suggested by MGA (and which may be reduced to $40 million, discussed below).

* see end of post, damages are apparently only $20 million due to duplication on verdict sheet

What happened? Mattel misjudged the jury’s outrage and overshot.

Here’s the jury’s breakdown:

The jury awarded damages of $20 million against MGA and $10 million against [MGA CEO] Larian in each of three causes of action, intentional interference with contractual relations, aiding and abetting breach of fiduciary duty, and aiding and abetting breach of the duty of loyalty.

They also found that MGA owed Mattel $6 million for copyright infringement, while Larian owed $3 million in distributions he’d received from Bratz-related sales, and MGA Hong Kong owed $1 million.

Here is what each side claimed:

Quinn said MGA owed Mattel for the entire Bratz empire, amounting to at least $1 billion in Bratz profits and interest. Quinn argued that Larian, too, personally gained nearly $800 million in stock value and distributions flowing from the success of the dolls.

…

MGA attorneys countered that the jury should award Mattel as little as $30 million because the company had built the doll line’s value with smart additions, branding and packaging.

(emphasis added) And here’s a critical fact:

The four original dolls made just $4 million in profit their first year and comprised only 2.5% of MGA’s entire Bratz revenue, said Raoul Kennedy, one of MGA’s attorneys.

In the past seven years, MGA has built the popular brand to include more than 40 characters and expanded it with spin-offs such as Bratz Babyz, Bratz Petz, Bratz Boyz and items like helmets, backpacks and bedsheets.

(emphasis added) Recall that excellent Learned Hand quote unearthed by the Eleventh Circuit (and discussed in my post on the Watchmen lawsuit:

It must be obvious to every one familiar with equitable principles that it is inequitable for the owner of a copyright, with full notice of an intended infringement, to stand inactive while the proposed infringer spends large sums of money in its exploitation, and to intervene only when his speculation has proved a success. Delay under such circumstances allows the owner to speculate without risk with the other’s money; he cannot possibly lose, and he may win.

I don’t believe the Bratz trial addressed laches and the suit was somewhat timely filed from what I can tell, perhaps two years after the infringement was discovered. I doubt any of the jurors were familiar with Learned Hand, but the core idea is well-accepted in America: expanding upon others’ ideas is a legitimate enterprize.

The jury essentially found that MGA was entitled to 95% of the Bratz empire’s profits, despite accepting that:

• the original idea was wrongfully lifted from Mattel;
• MGA willfully interfered with Mattel’s business;
• MGA aided and abetting in breaches of fiduciary duties;
• MGA aided and abetting in breaches of the duty of loyalty duties.

Despite that, the jury accepted MGA’s proposed $30 million and then, perhaps as a deliberations compromise or perhaps in confusion, awarded it thrice. That alone presents a big problem for Mattel, as it’s possible the judge will strike two of the three $30 million awards as duplicative, resulting in a $40 million final verdict.

After, say, a 40% gross contingency fee (which is probably on the high end, given the massive damages both Mattel and Quinn thought they could get, but which is common in commercial and business litigation) and costs, that would leave Mattel with about $20-24 million, or less than 5% of their annual profit. Yikes.

For MGA’s greedy, unjustified, wrongful conduct, the jury awarded $0 in punitive damages and a fraction of the plaintiff’s proposed compensatory damages. What the heck happened?

I’m not in a position to question the tactical decisions of Mattel’s counsel, so I won’t. With the benefit of hindsight, though, I believe Mattel dramatically overshot. It’s indisputable that MGA did virtually all of the work and invested virtually all of the funds that made Bratz the success it is today. They didn’t start the fire, but they gathered all the wood, they sheltered it from the rain, and they used it to kindle others. Yet, Mattel claimed it was entitled to everything, that for MGA’s risk it should be granted all the reward.

There were three elements missing, at least two of which are essential for a large verdict:

1. fairness,
2. the absence of a windfall, and
3. outrage.

First, jurors try very hard to be fair. What Mattel proposed was not fair. Sure, Mattel may be entitled to it under the law, and it was unfair that their design was stolen. But it’s just as unfair to all the people at MGA who didn’t know they were working with stolen goods, and, indeed, it’s unfair to the infringing parties themselves, since it denies their own contribution to the final work.

Second, jurors don’t like to give money for nothing. Mattel proposed a windfall. Why should they get all the profits? Mattel did almost nothing to earn those profits, it just had some design sketchs stolen. Big whoop — for that you get an entire empire that someone else built?

Third, If the jury had been outraged by MGA’s conduct, "fairness" would have already been decided in the plaintiff’s favor, and the windfall would have mattered less. But they weren’t outraged; they thought it was an unjustified way to do business, but obviously not enough to warrant punishment.

And here’s where I think Mattel made its biggest mistake: Mattel only asked for a number, while MGA gave them the tools to reach their own decision in a way that was favorable to MGA. How do I know the jury used MGA’s tools? Look at the numbers they used, right out of MGA’s closing: $30 million, around 2.5% of $1 billion in Bratz profit.

It can’t be said enough: in closing arguments, arm your jurors with the arguments they need to prevail over the others in liability and the tools they need to reach your proposed award.

Either way, MGA is breathing a deep sign of relief today. And Mattel is digging deeply through the transcript to find something warranting a retrial.

UPDATE: MGA has been pushing heavily in the press that it’s apparently undisputed the damages were overlapping, so the final sum really is just $20 million. Which means the jury took Mattel’s damages instructions almost verbatim. I have cleaned up slightly (typo) and moved the old discussion of that issue below the fold, to keep around for posterity, and pasted the MGA press release.Continue Reading Barbie v. Bratz: What Went Wrong for Mattel and Right for MGA