U.S. appeals court weighs Mattel Bratz case

Bratz dolls and a Barbie Doll (C) are seen at the Dream Toys 2004 exhibition in London in this October 6, 2004 file photo.

PASADENA, California (Reuters) - A U.S. appeals court on Wednesday suspended a lower court order that transferred ownership of the Bratz doll franchise to Mattel Inc until it rules in the case, and ordered Mattel and rival toymaker MGA Entertainment into mediation.

The order was granted hours after the parties appeared at the Ninth U.S. Circuit Court of Appeals in Pasadena, California for oral arguments in the case.

The district court had ordered MGA to stop selling Bratz dolls and thousands of Bratz products at the end of the year and to recall and destroy all remaining items, and transfer hand molds and designs to Mattel by the end of January.

"The equitable relief granted by the district court is stayed pending further order of this court. The parties are ordered to attempt to settle the dispute through expedited participation in this court's mediation program," the order said.

MGA Chief Executive Isaac Larian, who attended the hearing with his family, said the ruling by the three-judge panel "restored my faith in the U.S. justice system."

"This is a big weight off my shoulders," Larian told Reuters through tears in a telephone interview. His attorneys said his company faced an "imminent demise."

A Mattel spokeswoman said "court hasn't issued a decision in the appeal" and that the company had no comment.

The appellate judges on Wednesday questioned whether a California trial judge went overboard by awarding MGA's Bratz doll franchise to Mattel after MGA lost a copyright infringement trial to its rival in 2008.

The judges also took aim at Mattel's employment contract at the center of the dispute over the big-headed, pouty-lipped ethnic doll line during an oral argument.

The judges did not indicate when or how they would decide the closely watched case but they would have to rule faster than usual to stop the transfer of Bratz to Mattel.

MGA had asked the appeals court to halt the "draconian remedy" and to overturn the case on grounds of mistakes by trial judge Stephen Larson.

"Mattel's agenda has been to kill Bratz," MGA attorney Josh Rosenkranz told the court, adding that MGA was "hobbling right now" and faced "imminent demise" if Larson is not reversed.

Mattel's attorney, Daniel Collins, said Larson correctly awarded the franchise, along with the Bratz name, after a jury found that former Barbie designer Carter Bryant sold MGA the idea for Bratz while he was still under contract to Mattel.

But Chief Judge Alex Kozinski and Judges Kim Wardlaw and Stephen Trott wanted to know why Larson had not awarded Mattel a royalty or an ownership stake in Bratz, based on the jury's $10 million damages award for copyright infringement.

'DRASTIC AND UNPRECEDENTED'

"(The jury) didn't give Mattel everything. They gave them a small fraction of what they asked for," Kozinski said, adding that Larson's remedy was "quite drastic and somewhat unprecedented."

Collins said the judge had been concerned that "hostility between the parties" would make a royalty scheme "unworkable."

"Why is it unworkable?" Trott queried. "You order a royalty and they pay it."

"Do they not cash checks from someone they don't like?" Kozinski said. "I don't find that idea persuasive."

Wardlaw commented that Larson seemed to take opposition to his rulings from MGA "quite seriously" and wondered whether "that didn't color his judgment" in fashioning the "draconian remedy."

The judges also seemed concerned that Larson's ruling did not require Mattel to continue manufacturing Bratz, which has cut deeply into market share for Barbie since its 2001 launch.

"What about all those little girls out there who use the dolls and like the dolls?" Kozinski said. "If we were to affirm this ... would there be anything to prevent Mattel from killing it in six months?"

Mattel has pledged to have its first Bratz dolls out in April but profitability and other factors probably would determine whether it is continued, Collins told the panel.

The judges also focused on whether a Mattel "inventions agreement" signed by Bryant gave the toy giant ownership of "ideas" he came up with "at any time" during his employment.

"There is nothing in here that says, 'any idea,'" Trott said. "So if he just walked over to MGA and said, 'I've got an idea that would be covered?"

"'At any time' could mean when I am at work .... Does this mean when I go to the bathroom? When I am asleep?" Kozinski asked. "I don't think I buy much of that," Mr. Collins."

Kozinski said, however, that Bryant "did exactly what Mattel was trying to prevent him from doing" when he used Mattel materials and workers to create a Bratz prototype.

The case is MGA Entertainment v. Mattel, Case No. 09-55673 and 09-55812, Ninth U.S. Circuit Court of Appeals.

(Reporting by Gina Keating; Editing by Richard Chang)