Who Will Get Spanked in Bratz Spat?

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At first blush, it looked like MGA Entertainment Inc. got off easy when a federal jury awarded Mattel Inc. up to $100 million in the battle over ownership of the line of edgy Bratz fashion dolls. That’s because the amount was a tiny slice of the $2 billion that Mattel was seeking.

But MGA has quietly been waging a second legal battle, this time with its insurance companies, over who is going to pay those damages as well as its court costs, which already runs more than $60 million.

That means MGA could be on the hook for more than $160 million, and that amount would increase if the case lingers on.

The Van Nuys toymaker claims that two insurance companies have refused to pay for the defense of the company in its suit with Mattel over the Bratz dolls. By failing to do so, MGA alleges the companies are breaching their contractual duties and acting in bad faith. It’s unclear whether the insurers are balking at paying some or all of the damages and legal bills.

According to court documents, MGA has amassed at least $63 million in defense fees and costs, which are likely to increase as the trial continues into new phases and makes its way up the appellate process.

“It’s important for companies to know that when they get sued in high-stakes litigation, the insurance companies step up to the plate,” said Eric Schindler, a Laguna Beach-based attorney who is representing MGA alongside lawyers from Claremont-based Shernoff Bidart Darras Echeverria LLP.

In April, MGA originally filed three separate lawsuits against Connecticut-based the Hartford Financial Services Group Inc., New Jersey-based Crum & Forster Specialty Insurance Co. and Massachusetts-based Lexington Insurance Co. The suits have been consolidated into one.

Representatives for Crum & Forster and Hartford Financial Services declined to comment on the pending litigation.

Lexington Insurance has agreed to pay costs for the Bratz case, but reserved the right to decide whether it will cover only certain portions of the damages.

Lexington Insurance has paid or advanced MGA over $1 million in costs and $10 million in legal fees.

The insurers said in court documents that they may not be required to pay MGA’s legal expenses mainly lawyers’ fees and court-awarded damages because they claim the policies don’t cover the types of allegations in the Mattel case.

However, Kirk Pasich, an attorney who represents companies and individuals in insurance coverage disputes, said insurers must pay to defend policyholders in litigation even if there is only a possibility that the policy covers allegations set forth in a lawsuit.

“As long as some small part of the claims are potentially covered, then the company has a duty to defend the entire lawsuit,” said Pasich, who read MGA’s suit against its insurance companies at the Business Journal’s request but who is not involved in the case. “And that is true even if most of the suit isn’t potentially covered.”

Attorneys for MGA, Crum & Forster and Hartford Financial Services are scheduled to meet in front of U.S. District Court Judge Stephen Larson in November, when the insurers will argue that they do not have a duty to pay MGA’s court costs.

Larson is supervising the federal court battle between El Segundo-based Mattel and MGA, which will continue with key rulings on the future of the Bratz line. Mattel sued MGA when the Bratz line began taking market share away from its iconic Barbie dolls.


Advertising infringement

In MGA’s suit against its insurance companies, the company states the insurers should cover court costs because Mattel alleged that advertisement of the Bratz dolls infringed on Mattel’s copyright.

MGA’s policies state the company should be covered for any advertising injuries.

The fight over insurance can become crucial if MGA loses the Bratz line its main product in further legal actions. The awards and insurance payments then would seem much bigger.

“Considering their status as a private company, it’s very difficult to know how the award will hurt MGA,” said Lynn Rosenblum, who has served as a consultant for Mattel and MGA. “Everybody says it won’t hurt, but you have to think that’s a lot of money.”

But it would be easy to see that the loss of the Bratz line would be a serious blow and call into question the company’s future. Rosenblum said the only significant product MGA would have left is the Little Tikes line, which is a licensed product and is far from being a big seller.

Another key dispute that arose last week dealt with the amount of the jury verdict. Jurors made one award of $30 million, which was broken down as $20 million against MGA and $10 million against MGA Chief Executive Isaac Larian.

But the award was given for three separate claims brought by Mattel.

Attorneys for Mattel argue that the MGA should pay a total of $90 million for the three different claims. MGA attorney Tom Nolan, a partner in the Los Angeles office of Skadden Arps Slate Meagher & Flom LLP, has argued that Mattel should only be awarded $30 million.

The jury also awarded Mattel $10 million for MGA’s copyright infringement, which is not in dispute.

The judge encouraged both sides to settle Mattel’s allegations that MGA stole trade secrets from the company, and MGA’s claim that Mattel’s “MyScene” dolls copy Bratz.

“He has asked us to meet to explore the potential for settlement,” said Mattel lawyer John Quinn, a name partner at Los Angeles-based Quinn Emanuel Urquhart Oliver & Hedges LLP.

Quinn said he plans to seek an injunction against MGA, preventing the company from manufacturing the Bratz dolls, or using the Bratz name.

Lawrence Hadley, an intellectual property lawyer in the Los Angeles office of Hennigan Bennett & Dorman LLP, said the judge will have to weigh several factors when deciding on the future of Bratz, including Mattel’s right to protect its intellectual property and MGA’s right to engage in commerce.

“The court could prohibit MGA from distributing the dolls in their current forms or require that MGA make changes to the dolls so that they are different enough from the property that Mattel is now found to own,” said Hadley, who is not involved in the case. “The threshold question is: What do the dolls look like now compared to what Mattel was found to own?”