The recent $309 million judgment against the world’s largest toy company, Mattel, Inc., is yet another cautionary tale of corporate espionage and provides lessons for both plaintiffs and defendants alike. A California judge entered a $309 million judgment after a California jury found Mattel willfully and maliciously misappropriated 26 categories of trade secret information of its rival MGA Entertainment. See Mattel, Inc. et al. v. MGA Entm’t, Inc. et al., No. 2:04CV09049-DOC-RNB (C.D. Cal. Aug. 4, 2011); MGA Entm’t, Inc. v. Mattel, Inc., No. 2:11CV01063-DOC-RNB (C.D. Cal. Feb. 3, 2011). The judgment included $85 million in compensatory damages, $2.5 million in attorneys' fees and costs relating to MGA’s trade secret claims and a whopping $137 million in attorneys' fees and costs relating to MGA’s successful defense against Mattel’s copyright claims. This $309 million judgment against the original plaintiff provides important lessons not only on trade secret protection but also on early case assessment.
In 2001, MGA introduced Bratz, a line of trendy, pouty-lipped dolls. Bratz instantly became a runaway hit among older girls (ages 9 to 11) and deeply cut into the sales of Mattel's Barbie dolls, which had led the fashion-doll market since 1959.
In 2004, Mattel sued its former employee who created Bratz and was currently employed by MGA, alleging that he conceived of the idea for Bratz while still employed with Mattel and therefore breached his obligations to Mattel when he launched Bratz with MGA. Mattel also sued MGA for copyright infringement, claiming entitlement to the idea of the Bratz concept. In 2008, the jury found MGA liable for copyright infringement and awarded Mattel approximately $100 million in damages and shortly thereafter, the court enjoined MGA from producing or marketing virtually every Bratz doll. In 2010, however, the Ninth Circuit reversed the judgment and injunction.
During discovery, MGA learned that Mattel had engaged in a scheme of corporate espionage aimed at damaging its serious competitor in the fashion doll market. Upon discovering these tactics, MGA alleged that Mattel employees had (a) infiltrated confidential competitor showrooms in order to get an illicit preview of new Bratz products before they hit the market, so that Mattel could imitate or copy them; (b) rearranged Barbie/Bratz displays at key retailers to disadvantage Bratz; (c) priced products below cost to block Bratz's access to the market; (d) intimidated and threatened licensees, retailers and suppliers with loss of Mattel business if they dealt with MGA; and (e) paid retailers around the world not to buy Bratz or MGA products.
The Verdict and Judgment Against Mattel
In April 2011, a federal jury sided with MGA, rejecting Mattel's claims and awarding MGA damages. MGA then moved for exemplary damages including attorneys' fees and costs.
On August 4, 2011, Judge David O. Carter ruled that "Mattel's conduct fell far short of basic ethical standards" in its dealings with MGA. "For years, the company's senior management encouraged employees to use false pretenses to access competitors' private displays at international toy fairs and improperly acquire competitive information, including price lists, advertising plans, and unreleased product attributes. Mattel disseminated the improperly acquired information through internal memoranda, and company wide-presentations; praised the employees that committed the wrongdoing; used MGA's trade secret information to preempt MGA's unreleased products, and reaped $85 million in unjust enrichment. These 'market intelligence' tactics were intentional, pervasive, long-standing and egregious."
Although the court described the conduct as “egregious,” it did "not represent the most reprehensible form of trade secret misappropriation imaginable." Likening Mattel's use of cheap fake business cards and silly nicknames to "amateurish tactics," the Court awarded MGA $85 million, which equaled the jury’s compensatory damages award to MGA.
As for attorneys' fees and costs, in addition to awarding MGA the $2.5 million in attorneys' fees and costs it incurred in litigating its counterclaims against Mattel, the court awarded MGA $137 million for the attorneys' fees and costs incurred in successfully defending against Mattel's copyright claims pursuant to 17 U.S.C. § 505. According to the court, "Mattel asserted a copyright claim that was stunning in scope and unreasonable in the relief it requested. The claim imperiled free expression, competition, and the only serious competitor Matted had faced in the fashion doll market in nearly 50 years."
The Mattel case involves a classic case of corporate espionage. The case thus presents several important lessons for plaintiffs and defendants alike.
First,take preventative measures or early action. Corporate espionage takes many forms (some “amateurish” and some extremely sophisticated). Thus, companies must take precautions to protect their trade secret, proprietary, and other confidential business information before it is too late. This includes being aware of third-parties with whom one is dealing so that there is a clear understanding of their motivation and intention before confidential and proprietary information is disclosed.
Second, provide employee training. Companies should educate employees on the appropriate bounds for seeking competitive intelligence and what conduct may cross the line. While sneaking into a trade show using a fake business card and false identity may amount to what the court described as "amateurish tactics," these tactics nevertheless may be illegal and carry a stiff punishment.
Third, engage in a thorough case assessment before filing suit. Doing so will enable an analysis of the potential claims that could be raised in response to the allegations presented in a complaint. In this instance, if Mattel had not aggressively pursued its trade secret and copyright claims against MGA and its former employee in the first instance, Mattel’s trade secret misuse may not have come to light. Nevertheless, owners of confidential and trade secret information must vigorously protect their information to avoid waiving the ability to protect that information in the future. Thus, it is important to maintain clean hands in dealings with competitors so there is no hesitation when it comes time to act to protect confidential and trade secret information.