Ninth Circuit Holds That Even Brats Deserve Equitable Treatment

This case involves rights to the Bratz line of dolls introduced by MGA Entertainment, a competitor of Mattel, in 2001. This line, marketed as “The Girls with a Passion for Fashion,” has what Chief Judge Alex Kozinski characterized as an “attitude,” and struck a chord with consumers. It has since been expanded to include a line of boy dolls, a video game, and even a movie.

The man behind the idea for Bratz was Carter Bryant, who worked for Mattel in the Barbie's Collectable Department developing Barbie accessories. Instead of providing his idea to Mattel, Bryant took the idea to MGA and even submitted “dummy” dolls made from parts of Barbie's body, Ken's boots, and other parts from a Mattel bin. Bryant subsequently signed an employment agreement with MGA, but continued to work for Mattel for two weeks after giving notice. During this two-week period, Bryant created a preliminary model (called a sculpt) for the Bratz dolls.

Bryant had executed an employment agreement that assigned to Mattel inventions created “at any time during [his] employment” and which, in accordance with California law, did not apply to any invention “developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information” unless such work resulted from any work performed by the employee for the employer. The agreement also assigned to Mattel all copyrights relating to these inventions.

When Mattel discovered that the inventor behind Barbie's new biggest competition had been working at Mattel when he developed the Bratz line, it claimed that all of the names, ideas, and sketches created while Bryant was still employed at Mattel were its property, and that MGA was infringing Mattel's rights.

The district court held, relying on the “at any time during my employment” language, that as a matter of law all of Bryant's ideas created while in Mattel's employ went to Mattel. According to the district court, the language of the agreement made clear that Bryant had agreed to assign to Mattel any idea regardless of whether he created it during the course of his work or on his own time. Based on these instructions, the jury found that the trademarks for the Bratz line and the name of one of the original dolls, Jade, were ideas owned by Mattel. The jury also found that MGA had committed several state law violations connected to the breach of Bryant's contract. As a result, the district court created a constructive trust for all of the Bratz trademarks (not just Bratz and Jade).

The District Court's Decision

The district court also held that the agreement assigned the copyright to works even if they were not made during working hours; the jury therefore found that because Bryant made the preliminary Bratz drawings and doll sculpt while he was employed by Mattel, the agreement assigned them to Mattel. The district court therefore issued an injunction prohibiting MGA from producing or marketing virtually every Bratz female fashion doll, or future dolls substantially similar to the original line.

In essence, the district court found that MGA had benefited by developing a line of dolls based on an idea for a trademark and copyrighted materials that belonged to Mattel and that therefore the proper remedy was to give Mattel control over this asset wrongfully created by MGA. This result seems, at least at first glance, to be extremely equitable and not particularly surprising. For instance, no one would question that if someone fraudulently acquired a house worth $100,000 in 2000 that later doubles in value due to a strong market, the rightful owner is entitled to the benefit of that increase. Certainly most trademark and copyright owners would instinctively agree that the increased value of the product line created from the misappropriated assets should belong to the plaintiff and not the defendant.

The Ninth Circuit's Opinion

The Ninth Circuit had a very different reaction.

In a strongly worded decision taking the lower court to task, the Ninth Circuit, in an opinion authored by Chief Judge Kozinski, held that the district court had erred or abused its discretion at nearly every turn. First, the Ninth Circuit found that Bryant's contract was not clear on whether Mattel owned an employee's ideas. Chief Judge Kozinski emphasized that while the agreement might be construed to cover “ideas,” because the agreement never even used the word, it was ambiguous. He noted that the district court failed to consider evidence that other employment agreements used by Mattel did in fact expressly cover “ideas.”

The district court also held as a matter of law that any inventions, copyrights and ideas created by Bryant during the time he was employed by Mattel belonged to Mattel. However, the Ninth Circuit pointed out that the term “at any time during my employment” could mean only those ideas created during work hours. Accordingly, the instructions to the jury on these issues were simply wrong. On remand, the district court will need to consider the extrinsic evidence presented by the parties as to the meaning of “inventions” as well as “at any time during my employment.”

Thus, after this case it is clear that boilerplate language in many existing agreements could be improved to clarify exactly what the employee is assigning to his employer. It would behoove any company to review carefully the precise language it uses in such agreements to determine if its employees assign not only their inventions but also their ideas, whether or not those ideas (and inventions) were created in the course of employment. A company should also evaluate whether its current form of agreement does effectively have its employees assign the copyright to any work related to the company's business, regardless of whether the work was created within or outside the scope of employment or regular work hours. While certainly many companies will desire language that provides for such broad assignments, competitive concerns about attracting the best employees may require a more balanced agreement, especially with respect to ideas created by an employee outside the scope of his employment and created on his or her own time. Indeed, the California statute referenced above would negate any such agreement.

The significance of this decision, however, goes far beyond drafting concerns, and provides a new and somewhat startling perspective on damages that is far more sympathetic to defendants than one would expect. Chief Judge Kozinski went to great pains to emphasize that even if the district court ultimately concluded on remand that its interpretation of the language was correct ' that Bryant should have assigned the ideas of the Bratz line to Mattel and that Mattel did own the drawings and first mock up of the Bratz dolls ' that Mattel should in no way receive the type of broad relief granted after the first trial.

First, Judge Kozinski held that by placing all of the Bratz trademarks (including many that were undeniably created long after Bryant was employed by Mattel) in a constructive trust, the district court had awarded Mattel property that was the result of MGA's legitimate hard work. Most brand owners and their counsel will no doubt be troubled by the characterization of MGA's investment in this line to be “legitimate.” Yet this case seems to suggest that even if the genesis for a new product line was stolen from a competitor, it is improper to award the plaintiff the fruit of the infringer's careful tending of the forbidden tree. Chief Judge Kozinski did not see this case as akin to a fraudulently purchased home that doubles in value due to a market-wide increase in real estate values; in his view, it is analogous to a case where the value of the home increases because of expenditures made by the fraudulent buyer to add a second floor.

Chief Judge Kozinski was also obviously troubled by the district court's order which essentially enjoined MGA from competing in the line of “bratty dolls.” While not necessary to the holding, the decision involves a rather detailed application of the “extrinsic/intrinsic” test for copyright infringement.

Under this test, the court first examines whether the works had similar elements and then whether those elements were protectable. As part of the first step, a court must determine whether the work deserves broad protection, meaning that there are many possible expressions of the relevant idea and that the infringing work must be substantially similar, or whether the work falls under a thin copyright, meaning that the possible expressions of the idea are limited and the infringing work must be virtually identical. While stating that the district court had not erred in granting the original Bratz drawings broad protection, Chief Judge Kozinski pointed out that the second “intrinsic” part of this analysis must exclude expression belonging in the public domain, and that the district court judge had failed to do this with the “unprotectable” bratty look. Because substantial similarity cannot be based on unprotectable elements, Chief Judge Kozinski noted that he did not believe the majority of Bratz dolls could be considered substantially similar to Bryant's original drawings.

While this discussion is not binding on the district court, it is clear that the Ninth Circuit is unlikely to affirm any ruling that effectively bars MGA from competing in the market for bratty dolls. Was the Ninth Circuit too sympathetic to a defendant that knew and apparently had no misgivings about dealing with an employee of a competitor who likely had contractual restrictions? Would we not be better served by a result that makes clear that a business that begins an enterprise under such questionable circumstances does so at its own peril and will forfeit its right to any economic benefit from that business? To Chief Judge Kozinski, equity justifies awarding a plaintiff its “pound of flesh” but not the defendant's “blood.” Slip Op. at 13. No doubt, many trademark and copyright owners would counter that allowing the defendant to enjoy the benefits of its wrongful conduct is tantamount to allowing it to enjoy the fruit of the forbidden tree. The question that proponents of the latter view must now ask is how to best frame the discussion to illustrate how the perspective enunciated in Mattel is misguided, before it gains more traction in the courts.

Stephen W. Feingold is a partner in the Trademark and Copyright Team in the New York office of Kilpatrick Stockton LLP and a member of this newsletter's Board of Editors. Katharine M. Sullivan is an associate on the team resident in the Atlanta office.

Many companies require their employees to sign agreements that any inventions they create “during the course of their employment” will belong to the employer. Such agreements are a reaction to patent law, under which (unless someone is hired expressly for the purpose of inventing something) title to a patent vests in the inventor even if he creates the patent in the course of his employment. Many such agreements do not address ownership of copyrighted works because under the work made for hire doctrine, the copyright in any work created by a bona fide employee automatically vests in the company. Additionally, because it is axiomatic that one cannot copyright ideas but only the particular expression of an idea, there is sometimes a misconception that one cannot “own,” and therefore cannot assign, an idea. Finally, the common wisdom has also been that an assignment of trademarks developed by an employee is unnecessary because trademark rights only vest when a mark is used in commerce, or if one has a bona fide intent to use a mark in commerce and files a trademark application.

Mattel Inc. v. MGA Entertainment, Inc., a recent case decided by the Ninth Circuit, however, illustrates why companies should revisit such agreements in order to ensure that the ideas developed by their employees may not be exploited by those employees to the detriment of their employer. It also brings into sharp focus the question of how the principles of equity should apply in trademark and copyright cases where the use of the trademarks for a new product line may constitute trademark infringement, and the creation of the first products may constitute copyright infringement, but the product line evolves to include many other trademarks and copyrighted works.

The Rights to Bratz

This case involves rights to the Bratz line of dolls introduced by MGA Entertainment, a competitor of Mattel, in 2001. This line, marketed as “The Girls with a Passion for Fashion,” has what Chief Judge Alex Kozinski characterized as an “attitude,” and struck a chord with consumers. It has since been expanded to include a line of boy dolls, a video game, and even a movie.

The man behind the idea for Bratz was Carter Bryant, who worked for Mattel in the Barbie's Collectable Department developing Barbie accessories. Instead of providing his idea to Mattel, Bryant took the idea to MGA and even submitted “dummy” dolls made from parts of Barbie's body, Ken's boots, and other parts from a Mattel bin. Bryant subsequently signed an employment agreement with MGA, but continued to work for Mattel for two weeks after giving notice. During this two-week period, Bryant created a preliminary model (called a sculpt) for the Bratz dolls.

Bryant had executed an employment agreement that assigned to Mattel inventions created “at any time during [his] employment” and which, in accordance with California law, did not apply to any invention “developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information” unless such work resulted from any work performed by the employee for the employer. The agreement also assigned to Mattel all copyrights relating to these inventions.

When Mattel discovered that the inventor behind Barbie's new biggest competition had been working at Mattel when he developed the Bratz line, it claimed that all of the names, ideas, and sketches created while Bryant was still employed at Mattel were its property, and that MGA was infringing Mattel's rights.

The district court held, relying on the “at any time during my employment” language, that as a matter of law all of Bryant's ideas created while in Mattel's employ went to Mattel. According to the district court, the language of the agreement made clear that Bryant had agreed to assign to Mattel any idea regardless of whether he created it during the course of his work or on his own time. Based on these instructions, the jury found that the trademarks for the Bratz line and the name of one of the original dolls, Jade, were ideas owned by Mattel. The jury also found that MGA had committed several state law violations connected to the breach of Bryant's contract. As a result, the district court created a constructive trust for all of the Bratz trademarks (not just Bratz and Jade).

The District Court's Decision

The district court also held that the agreement assigned the copyright to works even if they were not made during working hours; the jury therefore found that because Bryant made the preliminary Bratz drawings and doll sculpt while he was employed by Mattel, the agreement assigned them to Mattel. The district court therefore issued an injunction prohibiting MGA from producing or marketing virtually every Bratz female fashion doll, or future dolls substantially similar to the original line.

In essence, the district court found that MGA had benefited by developing a line of dolls based on an idea for a trademark and copyrighted materials that belonged to Mattel and that therefore the proper remedy was to give Mattel control over this asset wrongfully created by MGA. This result seems, at least at first glance, to be extremely equitable and not particularly surprising. For instance, no one would question that if someone fraudulently acquired a house worth $100,000 in 2000 that later doubles in value due to a strong market, the rightful owner is entitled to the benefit of that increase. Certainly most trademark and copyright owners would instinctively agree that the increased value of the product line created from the misappropriated assets should belong to the plaintiff and not the defendant.

The Ninth Circuit's Opinion

The Ninth Circuit had a very different reaction.

In a strongly worded decision taking the lower court to task, the Ninth Circuit, in an opinion authored by Chief Judge Kozinski, held that the district court had erred or abused its discretion at nearly every turn. First, the Ninth Circuit found that Bryant's contract was not clear on whether Mattel owned an employee's ideas. Chief Judge Kozinski emphasized that while the agreement might be construed to cover “ideas,” because the agreement never even used the word, it was ambiguous. He noted that the district court failed to consider evidence that other employment agreements used by Mattel did in fact expressly cover “ideas.”

The district court also held as a matter of law that any inventions, copyrights and ideas created by Bryant during the time he was employed by Mattel belonged to Mattel. However, the Ninth Circuit pointed out that the term “at any time during my employment” could mean only those ideas created during work hours. Accordingly, the instructions to the jury on these issues were simply wrong. On remand, the district court will need to consider the extrinsic evidence presented by the parties as to the meaning of “inventions” as well as “at any time during my employment.”

Thus, after this case it is clear that boilerplate language in many existing agreements could be improved to clarify exactly what the employee is assigning to his employer. It would behoove any company to review carefully the precise language it uses in such agreements to determine if its employees assign not only their inventions but also their ideas, whether or not those ideas (and inventions) were created in the course of employment. A company should also evaluate whether its current form of agreement does effectively have its employees assign the copyright to any work related to the company's business, regardless of whether the work was created within or outside the scope of employment or regular work hours. While certainly many companies will desire language that provides for such broad assignments, competitive concerns about attracting the best employees may require a more balanced agreement, especially with respect to ideas created by an employee outside the scope of his employment and created on his or her own time. Indeed, the California statute referenced above would negate any such agreement.

The significance of this decision, however, goes far beyond drafting concerns, and provides a new and somewhat startling perspective on damages that is far more sympathetic to defendants than one would expect. Chief Judge Kozinski went to great pains to emphasize that even if the district court ultimately concluded on remand that its interpretation of the language was correct ' that Bryant should have assigned the ideas of the Bratz line to Mattel and that Mattel did own the drawings and first mock up of the Bratz dolls ' that Mattel should in no way receive the type of broad relief granted after the first trial.

First, Judge Kozinski held that by placing all of the Bratz trademarks (including many that were undeniably created long after Bryant was employed by Mattel) in a constructive trust, the district court had awarded Mattel property that was the result of MGA's legitimate hard work. Most brand owners and their counsel will no doubt be troubled by the characterization of MGA's investment in this line to be “legitimate.” Yet this case seems to suggest that even if the genesis for a new product line was stolen from a competitor, it is improper to award the plaintiff the fruit of the infringer's careful tending of the forbidden tree. Chief Judge Kozinski did not see this case as akin to a fraudulently purchased home that doubles in value due to a market-wide increase in real estate values; in his view, it is analogous to a case where the value of the home increases because of expenditures made by the fraudulent buyer to add a second floor.

Chief Judge Kozinski was also obviously troubled by the district court's order which essentially enjoined MGA from competing in the line of “bratty dolls.” While not necessary to the holding, the decision involves a rather detailed application of the “extrinsic/intrinsic” test for copyright infringement.

Under this test, the court first examines whether the works had similar elements and then whether those elements were protectable. As part of the first step, a court must determine whether the work deserves broad protection, meaning that there are many possible expressions of the relevant idea and that the infringing work must be substantially similar, or whether the work falls under a thin copyright, meaning that the possible expressions of the idea are limited and the infringing work must be virtually identical. While stating that the district court had not erred in granting the original Bratz drawings broad protection, Chief Judge Kozinski pointed out that the second “intrinsic” part of this analysis must exclude expression belonging in the public domain, and that the district court judge had failed to do this with the “unprotectable” bratty look. Because substantial similarity cannot be based on unprotectable elements, Chief Judge Kozinski noted that he did not believe the majority of Bratz dolls could be considered substantially similar to Bryant's original drawings.

While this discussion is not binding on the district court, it is clear that the Ninth Circuit is unlikely to affirm any ruling that effectively bars MGA from competing in the market for bratty dolls. Was the Ninth Circuit too sympathetic to a defendant that knew and apparently had no misgivings about dealing with an employee of a competitor who likely had contractual restrictions? Would we not be better served by a result that makes clear that a business that begins an enterprise under such questionable circumstances does so at its own peril and will forfeit its right to any economic benefit from that business? To Chief Judge Kozinski, equity justifies awarding a plaintiff its “pound of flesh” but not the defendant's “blood.” Slip Op. at 13. No doubt, many trademark and copyright owners would counter that allowing the defendant to enjoy the benefits of its wrongful conduct is tantamount to allowing it to enjoy the fruit of the forbidden tree. The question that proponents of the latter view must now ask is how to best frame the discussion to illustrate how the perspective enunciated in Mattel is misguided, before it gains more traction in the courts.

Stephen W. Feingold is a partner in the Trademark and Copyright Team in the New York office of Kilpatrick Stockton LLP and a member of this newsletter's Board of Editors. Katharine M. Sullivan is an associate on the team resident in the Atlanta office.