In this protracted litigation between Mattel, Inc., the maker of Barbie dolls, and MGA Entertainment, Inc., the maker of Bratz dolls, Mattel asserted claims for copyright infringement and misappropriation of trade secrets, and MGA asserted its own counterclaim misappropriation of trade secrets. After remand from the Ninth Circuit and prior to the second trial in this litigation, Mattel moved to dismiss MGA’s counterclaim for misappropriation of trade secrets as barred by the statute of limitations. The court denied Mattel’s motion, finding that Mattel’s trade secret misappropriation counterclaim and MGA’s trade secret misappropriation counterclaim-in-reply were “logically related,” and therefore MGA’s counterclaim was compulsory and permissible. After the second trial, the jury found for MGA and awarded more than $80 million in damages. The district court added an equal amount of exemplary damages under the California Uniform Trade Secrets Act, and attorneys’ fees and costs related to MGA’s trade secret claim (read our summary of the district court’s decision here), and costs and fees to MGA as the prevailing party under Section 505 of the Copyright Act (read our summary of the district court’s decision awarding the Section 505 attorneys’ fees here). On Mattel’s appeal, the Ninth Circuit reversed the district court’s determination that MGA’s counterclaim was compulsory and vacated the award on MGA’s trade secret claim as well as the attorneys’ fees and costs related to the trade secrets claim. The court of appeals affirmed the district court’s award of MGA’s attorneys’ fees and costs related to Mattel’s unsuccessful copyright claim as the prevailing party under the Copyright Act.
In order to be compulsory and therefore permitted, counterclaims must arise out of the transaction or occurrence that is the subject matter of the opposing party’s claim. Under the “logical relationship test” for compulsory counterclaims, “a logical relationship exists when the counterclaim arises from the same aggregate set of operative facts as the initial claim – where the same operative facts serve as the basis of both claims” or “the aggregate core of facts upon which the claim rests activates additional legal rights otherwise dormant in the defendant.” The Ninth Circuit found that MGA’s claim for misappropriation of trade secrets did not rest on the same “aggregate core of facts” as Mattel’s claim. “While Mattel asserted many claims that covered numerous interactions between Mattel and MGA, Mattel’s specific allegations regarding trade secrets were that several of their employees…defected to MGA and disclosed Mattel’s trade secrets. By contrast, MGA’s trade secrets claim rested on allegations that Mattel’s employees stole MGA trade secrets by engaging in chicanery (such as masquerading as buyers) at toy fairs.” According to the Ninth Circuit, the fact that both Mattel and MGA claimed the other stole its trade secrets wasn’t enough to render MGA’s counterclaim compulsory. The court observed that, in the final analysis, what matters is not the legal theory but the facts, and even the most liberal interpretation of “transaction” cannot make a counterclaim that arises out of an entirely different or independent transaction or occurrence compulsory. The Ninth Circuit also rejected the district court’s conclusion that it was “more reasonable to conclude at least some of the trade secret information allegedly misappropriated by [MGA] incorporated trade secret information” that Mattel had stolen from MGA. It held that this conclusion was not borne out by the pleadings and observed that, even if it were, the fact that “the same information may have shuttled back and forth between Mattel and MGA isn’t a sufficient nexus to support a compulsory counterclaim.” Concluding that MGA’s counterclaim should not have reached the jury, the Ninth Circuit vacated the jury’s award as well as the district court’s award of exemplary damages and attorneys’ costs and fees, and it remanded the case to the district court with instructions to dismiss the counterclaim with prejudice.
The Ninth Circuit affirmed the district court’s award of attorneys’ fees and costs to MGA as the prevailing party under the Copyright Act. Noting that the most important factor in evaluating an award of fees under the Copyright Act is whether an award will further the purposes of the Act, the court agreed with the district court’s conclusion that MGA had furthered the public interest in “a robust market for trendy fashion dolls populated by multiple toy companies” and that its contribution to copyright law “in a case of this magnitude and notoriety” was important, because MGA’s “failure to vigorously defend against Mattel’s claims” could have resulted in “a new era of copyright litigation aimed not at promoting expression but at stifling the ‘competition’ upon which America thrives.” The court rejected Mattel’s argument that MGA was not entitled to attorneys’ fees and costs because Mattel’s copyright claim was objectively reasonable, noting that Mattel’s argument relied on “long-rejected requirements of frivolousness and bad faith.”