Mattel, Inc. v. MGA Entertainment, Inc.

After jury verdict in favor of MGA for improper misappropriation of trade secrets, district court awards MGA exemplary damages equal to corrected jury award of $85 million, and costs and attorneys’ fees of $2.52 million.

After the second trial in litigation between Mattel, Inc., the maker of Barbie dolls, and MGA Entertainment, Inc., maker of Bratz dolls, the jury returned a verdict in favor of MGA on its counterclaim for misappropriation of trade secrets. MGA's claim arose out of the activities of Mattel's so-called "Market Intelligence" Group, a collection of employees dispatched to international toy fairs and directed to gather information from Mattel's competitors' private showrooms through the use of false pretenses. The jury found that Mattel had misappropriated 26 categories of trade secrets and that the company's conduct was willful and malicious, and awarded $3.4 million for each category of trade secret. After remittitur of the award to $85 million to correct for computation errors made by the jury, the court awarded MGA an additional $85 million in exemplary damages under the California Uniform Trade Secrets Act (CUTSA). The court rejected MGA’s request for damages in an amount equal to twice the compensatory damages, describing Mattel’s nefarious tactics as “silly, not evil” and not worthy of the most severe economic sanctions.

In cases of willful and malicious misappropriation, CUTSA allows for the award of exemplary damages not to exceed twice the award of compensatory damages. To determine the proper measure of exemplary damages under the statute, California courts consider common law factors traditionally used to determine both whether and to what extent exemplary damages are warranted: (1) the nature of the misconduct; (2) the amount of compensatory damages; and (3) the defendant's financial condition.

Noting that the largest exemplary awards are reserved for the most reprehensible acts, in breach of basic commercial ethics and fraud, and that exemplary damages equal to twice the compensatory award may be awarded in cases involving conduct causing purely economic loss, the court concluded that that large an award was not warranted in Mattel’s case. Mattel's "market intelligence" tactics were “intentional, pervasive, long-standing and egregious,” and fell “far short” of basic ethical standards. Its senior management encouraged employees to use false pretenses to gain access competitors' private displays at international toy fairs and improperly acquire competitive information, disseminated the information throughout the company, praised the employees that committed the wrongdoing, and used the trade secrets information to preempt MGA's unreleased products, reaping $85 million in unjust enrichment. Nonetheless, the court reasoned that the need for deterrence was not at its strongest, since other members of the toy industry had been alerted to Mattel's misconduct and were already likely be wary of Mattel. Mattel’s “use of cheap fake business cards, silly nicknames, and amateurish tactics in a futile effort to stave off legitimate competition” also did not evoke a “strong desire to punish.” The court concluded: “That one of California's largest companies abandoned innovation and resourcefulness for bumbling fraud evokes disappointment instead.”

Acknowledging that, under California law, the jury’s large award of $88.5 million, remitted to $85 million, would support an exemplary damages award double that amount, and that Mattel’s substantial net worth suggested that a high award of exemplary damages would be necessary to deter future misconduct, the court concluded Mattel's conduct did not represent the most reprehensible form of trade secret misappropriation imaginable. Even recognizing its maliciousness, the conduct should not be punished by the largest exemplary damage award available.

The court also held that MGA was entitled to recover the reasonable attorneys' fees and costs it incurred to prosecute Mattel's willful and malicious misappropriation of trade secrets. Rejecting Mattel’s argument that MGA was not entitled to fees and costs incurred prior to filing its claim, the court found that MGA could recover its fees spent on pre-filing activities that were reasonably expended on the litigation. While most of the time spent on its affirmative claims between 2004 and 2010 did not advance its successful claim for trade secret misappropriation, relating instead to Mattel’s alleged manipulation of retailers, licensees, and other industry groups that did business with MGA, the court found that some of the factual investigation performed by MGA's attorneys between 2007 and 2010 helped lay the foundation for its claim that Mattel used misappropriated information to create products that mimicked unreleased MGA products. The court concluded that MGA reasonably spent $2.52 million prosecuting its trade secrets claim – $2,172,000 in fees and $350,000 in costs for the litigation of its claim.