On December 3, 2008, a federal judge in California ordered MGA Entertainment (MGA) to cease production and sale of its core product line, the popular “Bratz” dolls, and declared MGA’s ownership rights in Bratz doll design to be null and void in response to a jury finding that MGA wrongfully procured the design from a doll designer employed by Mattel (a competitor of MGA). On January 7, 2009, the judge stayed the injunction, until further order of the court, through December 31, 2009. These orders follow an earlier court order, which MGA and Mattel have appealed, requiring MGA to pay Mattel damages of $100 million.
Mattel employed Carter Bryant as a product designer through October 2000 under an employment contract that prohibited Bryant from (a) engaging in any business other than for Mattel; (b) assisting any business competitor of Mattel in any manner; and (c) engaging in any business deals creating a conflict of interest. Roughly two weeks prior to Bryant’s departure from Mattel, Bryant entered into a consulting contract with MGA, which provided that (i) Bryant would perform product design services for MGA’s line of "Bratz" dolls; (ii) any designs furnished by Bryant to MGA under the agreement would be considered “works made for hire” owned by MGA; (iii) all intellectual property rights to pre-existing work in product designs provided by Bryant to MGA under the agreement would be assigned to MGA; and (iv) Bryant would receive royalties and other consideration for sales of products Bryant helped create. MGA began selling the Bratz dolls nine months later. When Mattel learned of the consulting agreement between Bryant and MGA, it sued Bryant for, among other things, breach of contract, breach of fiduciary duty and breach of the duty of loyalty. MGA intervened in the suit, claiming ownership of the Bratz doll design, and the legal actions were consolidated into the single case of Bryant v. Mattel, Inc.
Bryant testified at trial that he developed the design for the Bratz doll during breaks from his employment with Mattel, but Mattel persuaded the jury that the design was developed while Bryant was employed by Mattel. The jury found that (i) MGA wrongfully induced Bryant to design a doll for MGA while Bryant was still employed by Mattel; (ii) the design for the Bratz doll was created while Bryant was an employee of Mattel and, as a result, the doll design was a “work made for hire” owned by Mattel; and (iii) MGA infringed Mattel’s copyright in the doll design by manufacturing and selling the Bratz doll. The jury awarded Mattel $90 million for MGA persuading Bryant to breach his contractual obligations to Mattel and $10 million for infringement of Mattel’s copyright. On December 3, 2008, the court permanently enjoined MGA from manufacturing or selling any doll, product, advertising, packaging or other item based on the Bratz doll design or using the Bratz name, character, or design, and it ordered MGA to recall its Bratz dolls from all channels of trade, including from retail shelves and from online retailers. Both Mattel and MGA have appealed the damages award, and on January 7, 2009, the court stayed the injunction, until further order of the court, through December 31, 2009.
Lessons for Companies
The Bratz dispute presents two critical lessons for companies, regardless of the ultimate outcome of the damages award or the injunction. The first lesson is that companies should not seek to access a competitor’s ideas, designs, and specifications by purchasing creative expertise from the competitor’s employees. For MGA, accessing Mattel’s doll designs by engaging Bryant as a consultant has proved to be a costly strategy. Companies can avoid similar mistakes by performing adequate due diligence when considering any prospective employee or contractor, particularly when seeking to hire or obtain services from an individual to provide creative expertise that is expected to yield commercially valuable intellectual property in the form of new products or services. A company’s due diligence should, at least, include the following: (i) asking for detailed information regarding prior employment history and consulting engagements, and ascertaining what duties and obligations the individual owes to current and previous employers and/or consulting clients; (ii) requesting copies of all existing employment and consulting contracts; and (iii) seeking to verify that the individual will not bring to bear, for the company’s benefit, a previous employer’s or consulting client’s information or other intellectual property.
The second critical lesson for employers is that all skilled workers, whether employees or contractors, may potentially bring knowledge, specifications, and designs that constitute intellectual property of their previous employers or consulting clients. Companies that hire skilled workers, particularly a skilled worker currently or previously employed or engaged as a consultant by a competitor, or a skilled worker being hired to create valuable intellectual property for the company, need to make certain that the company’s employment and consulting contracts applicable to such skilled workers prohibit the skilled workers from incorporating the intellectual property of another employer or client into any work product for the company.
Companies should, as a matter of policy, respect third-party intellectual property rights and, to safeguard their own confidential information, specifications, designs, and other intellectual property, should make intellectual property training available to their own employees and contractors. Additionally, companies should prohibit employees and contractors from both (i) disclosing or using any work they developed for previous employers or clients, for instance by incorporating such pre-existing work into new work products for the company; and (ii) providing services or works to the company that may be based on ideas or information learned from previous employers or clients.
Lessons for Individuals
Skilled workers should recognize that they owe their employer a duty of loyalty and a fiduciary duty and that these legal duties prohibit, among other things, conflicts of interest and working for the benefit of competitors. Skilled workers who have entered into written employment or consulting contracts should be mindful of the contractual obligations they have undertaken to their employers and consulting clients. Skilled workers should also develop a sufficient understanding of intellectual property concepts to enable them to recognize the existence of intellectual property rights, how those rights are created and, most importantly, who owns them. This basic intellectual property knowledge will help skilled workers, when changing employers or entering into consulting arrangements, to recognize valuable knowledge assets (e.g., formulas, software tools, product designs, proprietary documents, or trade secrets) owned by the current employer or consulting client, which may not be taken, used, or relied upon for the benefit of others. Also, all employees must understand the basic premise that any copyrightable work product the employee creates while performing activities within the scope of employment are “works made for hire” and owned by the employer.
Companies and employees that understand the employee’s duty of loyalty and fiduciary duty, pay attention to employment contracts, and grasp fundamental concepts of intellectual property can avoid the type of costly dispute in which MGA and Bryant have been embroiled in connection with the design and sale of Bratz dolls.