In a closely watched case having enormous financial implications, the U.S. Court of Appeals for the Ninth Circuit recently vacated all equitable relief awarded to a famed toy maker, finding that the district court abused its discretion by imposing an overbroad constructive trust and copyright injunction against the makers of the Bratz dolls. MGA Entertainment Inc. et al. v. Mattel, Inc. et al., Case No. 09-55673 (9th Cir., Jul. 22, 2010) (Kozinski, J.).

MGA Entertainment (MGA) and Mattel are competitors in the toy doll industry and have been embroiled in a long-running battle over ownership of the “Bratz” line of dolls. The Bratz were conceived and created by Carter Bryant, a former Mattel employee, who pitched the Bratz to MGA while still working for Mattel. Bryant created the concept of the dolls, the “Bratz” name and other character names (one of which MGA used), preliminary sketches and a sculpt (plastic doll body), all while employed by Mattel. Bryant later left Mattel and worked with MGA to develop the Bratz, which became a billion-dollar brand. When Mattel learned of Carter’s involvement in the Bratz products, litigation ensued.

The district court bifurcated the trial into two phases, only the first of which has been tried. The first phase dealt solely with claims regarding ownership of the Bratz products. The jury ruled in favor of Mattel and awarded Mattel $10 million in damages. Based on the jury’s findings, the district court imposed a constructive trust over all trademarks affiliated with the Bratz products. The district court also issued an injunction on the basis of copyright infringement, which prohibited MGA from producing or marketing any Bratz doll, or future dolls “substantially similar” to Bryant’s sketches and sculpt. MGA appealed.

The Ninth Circuit reversed, finding that due to ambiguity in Bryant’s employment agreement, the district court erred by holding that Bryant’s ideas were clearly assigned to Mattel. In any event, the court also held that the constructive trust imposed by the district court was overbroad and an abuse of discretion, reasoning that it was inequitable to divest MGA of the entire Bratz trademark portfolio based on two names Bryant created while employed at Mattel. Rather, the Court found the portfolio’s billion-dollar value was overwhelmingly the result of MGA’s hard work.

As for Bryant’s employment agreement with Mattel, the court found it was ambiguous as to whether it entitled Mattel to claim ownership of the copyrights to Bryant’s sketches and sculpt, which were created during Bryant’s personal time. The court found that the district court erred by granting summary judgment on this issue in favor of Mattel.

In addition, the Ninth Circuit disagreed with the district court’s finding that the vast majority of Bratz dolls were “substantially similar” to Bryant’s sculpt and preliminary sketches. Rather, the Court explained that the sculpt was entitled to only a “thin” copyright, as there are a limited ways of expressing a female doll body. Further, the Ninth Circuit noted that the district court failed to filter out unprotectable elements of Bryant’s sketches when analyzing substantial similarity. The court stated that in order to prove copyright infringement, Mattel must show that the Bratz dollars are substantially similar to Bryant’s sculpt and sketches, beyond similarities in unprotectable ideas.

Accordingly, the Ninth Circuit vacated the constructive trust and the copyright injunction and concluded that because most of the district court’s errors appeared in the jury instructions, a significant portion of the jury verdict and damages award should be vacated as well. The case was remanded.