A U.S. appeals court late Wednesday stayed an order to transfer ownership of the Bratz fashion doll line to Mattel Inc. from rival MGA Entertainment Inc. until it rules on the case, and ordered the fighting sides into mediation.

Attorneys for Mattel and MGA appeared before a three-judge panel of the Ninth U.S. Circuit Court of Appeals in Pasadena on Wednesday for oral arguments in the long-running dispute. During the arguments, the judges expressed uncertainty about some of the rulings made by now-former U.S. District Court Judge Stephen Larson, who presided over the case. Chief Judge Alex Kozinski called Larson’s decision to give Mattel the rights to Bratz “drastic,” and questioned why Larson had not awarded Mattel a royalty or ownership stake in Bratz.

The order was filed after the close of business, and it states that Mattel and MGA are “ordered to attempt to settle the dispute…in this court's mediation program.” Under the appellate court’s order, retailers may continue to sell Bratz products, a major victory for MGA. The toymaker had been trying to convince the appellate judges to overturn several rulings made by Larson, including the assignment of the Bratz ownership to Mattel, an injunction barring MGA from making Bratz further, and an order for MGA to remove all Bratz products from store shelves by Jan. 21. The appellate court will issue a more detailed order later, which could result in the reversal of Larson’s previous rulings.

Earlier, Larson had ordered MGA, the Van Nuys toymaker, to stop selling the Bratz line at the end of the 2009 holiday season, and then hand over portions of the Bratz intellectual property that will help Mattel, the El Segundo Barbie maker, prepare its own Bratz line for the Spring 2010 sales season.

“The court’s stay is good news for all Bratz fans and for anyone who cares about fair competition,” said MGA Chief Executive Isaac Larian in a statement. “It keeps Bratz on the shelves, allows MGA Entertainment to continue meeting consumer demand for new Bratz products, and prevents Mattel from taking control of the billion-dollar international Bratz brand built by MGA Entertainment while the court makes its final decision.”

In a statement, Mattel pointed out that the court hasn’t issued a decision in the appeal.

“It has issued an order staying the equitable relief, and also ordering expedited participation in the Circuit’s mediation program,” Mattel said in the statement. “Since the appeal process is still pending, we cannot comment further.”

A federal jury decided last year that a former Mattel doll designer created the Bratz name and characters for MGA while still working for Mattel. As a result, control of the Bratz line was awarded to Mattel in addition to a $100 million damages award against MGA.

Under the appellate court’s order, retailers may continue to sell Bratz products.

The last-minute decision came after oral arguments in which the pane expressed skepticism of rulings made by now-former U.S. District Judge Stephen G. Larson. The judge had granted Mattel sweeping rights to the popular Bratz doll line as part of a fiercely litigated intellectual property battle.

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