- $88.5 Million Lawsuit Over an Employee Contract???
- March 7, 2014 | Author: Timothy B. McCormack
- Law Firm: McCormack Intellectual Property Law PS - Seattle Office
$88.5 Million Lawsuit Over an Employee Contract???
Bratz Dolls and What it Means to You
Large corporations have larger budgets and sometimes seemingly, “unlimited funds” they can use to turn over every stone in a lawsuit through extensive discovery and other proceedings. In short, they can litigate even the tiniest of issues.
But this is a story of “David v. Goliath” that ended favorably for a small California business in the case Mattel, Inc. VS MGA Entertainment.
Seven years of litigation and millions in legal fees has helped this case to answer many important questions, including the following.
How important are Intellectual Property rights, specifically copyright and trade secret issues, to your business?
How important are employee contracts and what changes should you make to your employee contracts?
What does this case signify for individuals and their right to employment mobility?
Does this case show that our legal system can actually work for the small guy?
The Goliath in this story is Mattel, the largest toy company in the world. David is MGA Entertainment, a small privately held toy business located in Van Nuys, California. So how did trade secrets and employee contracts become the deciding factor in a $100 Million lawsuit?
Let’s start from the beginning. Carter Bryant was an employee of Mattel. He designed fashion and hair styles for high end, collectible Barbies. During the term of his employment Bryant created some preliminary sketches and a crude dummy doll for his idea of the Bratz line of dolls. He met with some MGA executives to pitch the idea of Bratz dolls and there was positive reception for the doll at MGA. Bryant was then offered a job with MGA and he gave his two week notice to Mattel.
In 2001, MGA released Bryant’s Bratz fashion line of dolls to compete with Mattel’s Barbie line. The Bratz dolls were portrayed as teenagers distinguished by large heads and skinny bodies, almond-shaped eyes, and lush, glossy lips. The Bratz line reached great success, including numerous generations of doll lines, doll accessories, Bratz inspired video games, a television show and even a movie.
In April 2005, MGA sued Mattel, claiming that Mattel’s “My Scene” line of Barbie dolls infringed upon MGA’s Bratz line of dolls. The “My Scene” line had dolls portrayed with large heads and skinny bodies. Specifically, MGA sued for: False Designation of Origin, Affiliation, Association or Sponsorship; Unfair Competition; Dilution; and Unjust Enrichment.
In an offensive posture, Mattel countered and sued MGA alleging copyright infringement, specifically that Mattel owned all the rights to Bryant’s ideas of the Bratz line, including his sketches and crude doll, because Bryant was working for Mattel when he developed the idea and he signed an employment contract that released all rights to Mattel.
Mattel won the first battle in District court. The judge found that Bryant’s ideas regarding the Bratz line belonged to Mattel because of the assignment clause in his employment contract. The jury found that Bryant came up with the Bratz idea while he was still at Mattel and awarded Mattel $100 million in damages, 5 percent of the $2 billion Mattel had claimed it was damaged. MGA lost on all its claims regarding Mattel’s “My Scene” line of dolls. This was a huge turn of events against MGA who actually started the lawsuit. MGA appealed the decision.
The appeals court overturned the district court judge’s finding that Mattel owned the ideas and the work of their former employee who first thought of the dolls. This would be a question for a jury. The appellate court also said the judge was wrong to conclude that most of MGA’s Bratz dolls were substantially similar to Bryant’s sketches. That would also be a question for the jury. The case was remanded back to district court. MGA then motioned for and was granted a new trial.
During the protracted legal fight, two main points of disagreement arose: (i) interpretation of the assignment clause in the employee contract, and (ii) whether there was copyright (against MGA if a jury found Mattel owned the copyrights under the employee contract) or trade secret infringement (as MGA originally claimed).
In the end, the jurors found that Mattel had misappropriated trade secrets from MGA and awarded MGA $88.5 million, $3.4 million for each of the 26 instances in which they found misappropriation of trade secrets. The jury did not conclude that the “idea” of the Bratz line was owned by Mattel based on the language of the contract (an important finding). Similarly, the jury did not find that the original sketches Bryant did while at Mattel were the substantially similar to the Bratz dolls he eventually created at MGA. The jury did find that MGA was liable to Mattel for intentional interference with contractual relations and awarded Mattel a mere $10,000.
Assignment Rights and the Employee Contract
Carter Bryant worked as an employee for Mattel prior to taking a job with MGA Entertainment. Bryant came up with the idea of Bratz during his employment with Mattel. Mattel argued that Bryant’s employment contract assigned all of Bryant’s ideas to Mattel and that Mattel was the rightful owner of the copyrighted work associated with the Bratz idea.
Whether Mattel’s argument is valid depends on the interpretation of Bryant’s 1999 employment agreement. The employment agreement provided, “I agree to communicate to the Company as promptly and fully as practicable all inventions (as defined below) conceived or reduced to practice by me (alone or jointly by others) at any time during my employment by the Company. I hereby assign to the Company - all my right, title and interest in such inventions, and all my right, title and interest in any patents, copyrights, patent applications or copyright applications based thereon.”
Initially it would seem like Mattel had a slam dunk win in the dispute. But on closer inspection of the wording, the contract only specifies that the term ‘inventions’ includes discoveries, improvements, processes, developments, designs, knowhow, and data computer programs, not ideas. Mattel argued that the agreement assigned Bryant’s ideas to Mattel, even though the word ideas was not included in the contract.
Mattel argued that the list of examples of what constitutes an invention is only illustrative not exclusive. They argued the definition includes less tangible inventions such as “know-how” and “discoveries” and Bryant may have conveyed rights that were not embodied in a tangible form.
MGA Entertainment argued the definition of invention lists designs, processes, and computer programs which are concrete and tangible items. They argued that these tangible items are unlike ideas, which reflect bursts of inspiration that exist only in the mind. MGA Entertainment also introduced evidence of other contracts Mattel drafted for other employees that included the words “ideas” as well as “inventions” when talking about assignment. They argued that this tended to show that the term “inventions” alone doesn’t include ideas because other contracts included both words - inventions and ideas.
MGA also argued that even if they were wrong, the employment agreement didn’t assign the items because Bryant created them outside the scope of his employment at Mattel, i.e. on his own time during off work hours. Bryant’s 1999 employment agreement assigns to Mattel inventions created “at any time during my employment by the Company.” MGA argued that “at any time during my employment” covers only works created within the scope of Bryant’s employment, not those created on his own time and outside of his duties at Mattel.
Mattel countered by arguing that the Bryant’s employment agreement assigned to Mattel “any doll or doll fashions [Bryant] designed during the period of his employment with Mattel” and that it was irrelevant whether Bryant worked on Bratz on his own time or during his working hours at Mattel.
Again, this looks like a slam-dunk for Mattel. But a closer read of the employment contract shows that the terms are ambiguous. It could be that “any time during my employment” referred to the entire calendar period Bryant worked for Mattel, including nights and weekends. But it also could be read narrowly to encompass only those inventions created during work hours but includes lunch and coffee breaks.
The jury decided in favor of MGA Entertainment! The jury did hold, however, that MGA wrongfully interfered in Mattel’s contractual relations, but this is unrelated to the issue of intellectual property ownership and the $88.5 million judgment.
What does this mean for emerging and established businesses? Business owners should revisit employee contracts to specify in greater detail what things created during an employee’s employment are assigned to the company. One should ask whether or not the contract specifically states assignment of “ideas?” Also, does it specifically state whether assignment of inventions includes those developed outside of work hours? Clearly understanding your written contract could save you from a $100 Million law suit!
The Issue of Copyright and Trade Secret
The second point of contention in the law suit was copyright infringement and trade secret misappropriation. Mattel argued that if it prevailed on the employment contract issue and owned the copyrights to Bryant’s ideas included in his sketches, then MGA’s Bratz dolls infringed upon those copyrights. MGA argued that Mattel misappropriated trade secrets related to the Bratz line.
A. Copyright Issues
You may be asking yourself, what exactly was copyrightable? The idea itself of a bratty-doll is not copyrightable. Only a specific expression of the bratty-doll idea is copyrightable. The court stated, “Degas can’t prohibit other artists from painting ballerinas, and Charlaine Harris can’t stop Stephenie Meyer from publishing Twilight just because Sookie came first. Similarly, MGA was free to look at Bryant’s sketches and say, “Good idea! We want to create bratty dolls too.”
To distinguish between permissible adoption of ideas and illegal copying, the courts have developed a two-part “extrinsic/intrinsic” test. Basically the court examines the similarities between the copyrighted and challenged works and then determines whether the similar elements are protectable or unprotectable. When the unprotectable elements are “filtered” out, what’s left is an author’s particular expression of an idea.
A work will infringe if it’s “substantially similar” to the copyrighted work. To help explain this, the court provided, “If there’s only a narrow range of expression (for example, there are only so many ways to paint a red bouncy ball on blank canvas), then copyright protection is “thin” and a work must be “virtually identical” to infringe.”
So now that we know we need a specific expression, what specific expression according to Mattel was infringed? Mattel claimed their copyrights in Bryant’s sketches were infringed. They claimed they had exclusive rights to making derivative works (creating substantially similar looking dolls based on the sketches) and that MGA infringed upon those rights by creating and selling the Bratz line of dolls.
The question then is, would an ordinary and reasonable observer consider the copyrighted sketches and the Bratz doll substantially similar (or virtually identical)? If the answer is yes, then the challenged work is infringing.
B. Trade Secret Issues
First, what is a trade secret? Broadly speaking, any confidential business information which provides a business a competitive edge may be considered a trade secret. Trade secrets encompass manufacturing, marketing, and sales secrets. The unauthorized use of such information by persons other than the holder is regarded as an unfair practice and a violation of the trade secret.
i. Mattel’s Claims
Mattel argued that previous employees, that had left Mattel to work for MGA, stole trade secrets from Mattel. MGA had hired former employees from the U.S., Canada, and Mexico. Those employees copied files from their work computers prior to leaving Mattel. They then uploaded certain files to their new work computers at MGA. The ultimate question is, were trade secrets misappropriated?
First, an employer’s failure to mark documents as confidential or trade secret precludes in many cases trade secret protection for those materials under California’s Uniform Trade Secrets Act. California requires that a party seeking to protect trade secrets must describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade. For example, a vague claim that a former employee misappropriated “business models and implementations” is insufficient to describe a trade secret with particularity.
After reviewing the facts, the jury concluded that none of Mattel’s trade secrets were misappropriated.
ii. MGA’s Claims
MGA argued that during trade shows employees of Mattel misrepresented themselves to MGA as toy shop owners to obtain information from MGA about new product releases, marketing strategies, and pricing.
The question for the court was, did information MGA disclose to toy shop owners derive “independent economic value” from not being generally known to the general public? And the next question was, did MGA take reasonable efforts to maintain the secrecy of the information shared at its toy fair showrooms from the general public?
After review of the facts, the jury held in favor of MGA for both issues. They decided that information about forthcoming products can have value prior to the release of such products because the manufacturer can profit from the primacy of its product. They also found that MGA had produced evidence that it took special precautions to prevent the disclosure of product information to the general public, for example, by ensuring that girl’s brands were planogramed in a separate planogram room where no other Toy Vendor’s were allowed admittance.
The jurors awarded MGA $3.4 million for each of the 26 instances in which they found that Mattel had misappropriated a trade secret.
Something as common as an employment contract can have huge ramifications. One should read each word of his employment contract before jumping to conclusions about his rights as an employer or employee. For employees, the company just might own any and all of their intellectual property. For employers, it is important to consider whether they want their employees moonlighting on projects after work hours.
Courts prefer competition in the market place. Most commentators suggest that Mattel should have settled out of court. The case was not worth the 7 years and hundreds of millions of dollars in legal fees. The case also highlights that at least in the Ninth Circuit, The Court prefers employee rights and employee mobility. This goes back to preferring competition in the market. Favoring employee mobility provides for a healthy market place and strong competition. This goes against the recent trend to favor intellectual property rights, which has great ramifications on U.S markets being invaded by foreign companies with pirate ships and plundered knock-offs.
Trade secret misappropriation is a serious matter, $88.5 million to be exact! One should not be caught thinking that the intellectual property of another is free to be exploited. If a business has protectable trade secrets, the owner should ask himself if the trade secrets derive independent economic value from not being generally known to the public, i.e. are the trade secrets valuable? Also, they should ask themselves if their business is taking reasonable efforts to maintain the secrecy of the information by doing such things as placing confidential labels on things, having employees sign confidentiality agreements, and granting access to sensitive information on a need to know basis.
A business should not use deceptive tactics to try and gain an edge on the competitors. Having employees falsify their identity to gain insider knowledge of another business’s trade secrets is wrong. Also, interfering with another company’s employee can get a person into hot water. Bottom line - if one plays by ethical business rules then his or her business will have less legal issues to worry about. If you have a question, consult a knowledgeable attorney, like Copyright Cow.
Finally, this case showed that even if the U.S. legal system is inherently convoluted at times, the system still works for the small guy and big battles against big corporations can still be won. The last bastion of sanity appears to be with the Jury - at least that is where the final buck stops.
Copyright Cow should give special thanks to Eric Harrison - a second year law student from the University of Washington.
Article by Timothy B. McCormack, attorney at law, a well established and successful Seattle-based intellectual property, technology and business lawyer.
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