Thursday, July 22, 2010

Court of Appeals Reverses Lower Court’s Constructive Trust on BRATZ trademarks

Various news reports (Reuters, Bloomberg, USA Today, LA Times) reported on the decision by the Ninth Circuit Court of Appeal reversing a district court’s decision to enjoin MGA Entertainment, Inc. (“MGA”) from selling its popular BRATZ line of dolls. See MGA Entertainment Inc et al Mattel Inc, Nos. 09-55673 and 09-55812 (9th Cir. July 22, 2010). The district court’s injunctive relief was entered after a jury found that Mattel, Inc. (“Mattel”) was the rightful owner of the BRATZ dolls because the doll idea and name was created by a former Mattel employee and awarded Mattel millions of dollars in damages (this latest decision states that $10 million was awarded although most published reports at the time of the original jury decision was $100 million – anyone explain the discrepancy?).

As part of the district court's injunctive relief, the court imposed a constructive trust over MGA’s entire Bratz trademark portfolio, which essentially transferred MGA’s entire BRATZ trademark portfolio to Mattel. Under the rationale that “[t]he beneficiary of the constructive trust is entitled to enhancement in value of the trust property,” the lower court concluded that, because the two marks BRATZ and JADE had been transferred improperly, Mattel was entitled to the enhancement of the value of such property and ordered a constructive trust over MGA’s entire Bratz trademark portfolio.

The Court of Appeals, however, reversed this decision on the ground that the court’s overly broad constructive trust allowed Mattel to acquire “the fruit of MGA’s hard work, and not just the appreciation in value of the ideas Mattel claims it owns.” The court noted that the general rule of making the beneficiary of the constructive trust entitled to the enhancement in value of the trust property “has the greatest force where the appreciation of the property is due to external factors rather than the efforts of the wrongful acquisitor.” But when the value of the trust property increases based on the efforts of the defendant, “a constructive trust that passes on the profit of the defendant’s labor to the plaintiff usually goes too far.”

The court stated the following:

Even assuming that MGA took some ideas wrongfully, it added tremendous value by turning the ideas into products and, eventually, a popular and highly profitable brand. The value added by MGA’s hard work and creativity dwarfs the value of the original ideas Bryant brought with him, even recognizing the significance of those ideas.

In this case, while the original Mattel employee’s idea of a line of dolls, which included the names BRATZ and JADE, may have been improperly taken by MGA, MGA went on to create multiple generations of Bratz dolls (from Cloe, Yasmin, Sasha and Jade to Ciara, Dana, Diona, Felicia, and Fianna to variations on the original four dolls such as Bratz Flower Girlz Cloe and Bratz on Ice Doll Yasmin) as well as Bratz doll accessories, video games, and a move – efforts which “significantly raised the profile of the Bratz brand and increased the value of the Bratz trademarks.”

The Court, in vacating the lower court’s constructive trust, found the court’s actions of transferring an entire $1 billion brand over to Mattel – value that was created mostly from MGA’s own efforts and not reflective of the value of the two particular names, BRATZ and JADE, that were found to have been taken improperly by MGA – was an abuse of discretion:

It is not equitable to transfer this billion dollar brand— the value of which is overwhelmingly the result of MGA’s legitimate efforts—because it may have started with two misappropriated names. The district court’s imposition of a constructive trust forcing MGA to hand over its sweat equity was an abuse of discretion and must be vacated.

For copyright fans, the decision also includes an interesting discussion regarding the fine line between copyrightable expression and unprotectable ideas (“Mattel can’t claim a monopoly over fashion dolls with a bratty look or attitude, or dolls sporting trendy clothing—these are all unprotectable ideas.”).

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