Insurers Seek Reversal in Bratz Dolls Litigation

     PASADENA (CN) - Two insurers facing a hefty bill for a long legal battle against Mattel over the billion-dollar Bratz dolls line asked the 9th Circuit for a reversal.
     MGA Entertainment had racked up the bills over the last nine years as it fought Mattel's claims that it owns the rights to Bratz.
     Mattel's claim hinged on allegations that former employee Carter Bryant still worked for Mattel when he showed MGA a concept that spawned the Bratz doll line -- the teenage doll with a large head, big lips and skinny body.
     MGA filed a counterclaim for trade-secret theft, alleging that Mattel had sent spies to toy fairs to gather information about MGA's dolls before they hit stores.
     After the 9th Circuit reversed a jury award favoring Mattel in 2010, a second jury later rejected Mattel's bid for ownership of the Bratz brand and awarded MGA $172 million in damages, and another $137.2 million to cover the cost of fighting Mattel's copyright infringement claims.
     Earlier this year, the 9th Circuit wiped out the $172 million judgment against Mattel on the trade secrets claim but preserved the attorneys' fees award.
     Meanwhile MGA and its principal Isaac Larian had sought indemnity from their insurance companies - the Hartford Insurance Group, Crum & Forster Specialty Insurance, and Lexington Insurance.
     Crum & Forster and Lexington then asked for a declaratory judgment that they did not have to pay defense costs to MGA under liability insurance policies.
     In early 2012, U.S. District Judge David Carter had found that exclusions of coverage in the policies did not rule out the insurers' duty to defend the toy maker.
     At a hearing before the 9th Circuit on Thursday, Lexington's lawyer Mark Sheridan with Patton Boggs said a Mattel counterclaim did not allege that MGA used Mattel's trade secrets "in" an advertisement. MGA was required to make that clear to benefit from advertising injury coverage, the lawyer argued.
     "There is no allegation anywhere in the underlying action that MGA used Mattel's advertising ideas or copyrights in its advertisements," Sheridan said.
     Crum & Forster's attorney Susan Field with Musick, Peeler & Garrett noted that Carter had made a "critical mistake" when he ruled based on allegations that former Mattel employees had taken Mattel's advertising plans and passed it on to MGA.
     "What Judge Carter relied upon were all of Mattel's arguments about theft and trade secrets," Field said. "And what Judge Carter said was 'Well, perhaps they weren't trade secrets.' But Mattel's allegation itself [in its counterclaim] expressly calls them trade secrets, and defines them as trade secrets."
     That is not enough to satisfy the "in advertising" provision of the insurance coverage, she added.
     MGA attorney Jeffrey Isaac Ehrlich of Encino disagreed. He said that Mattel, in the fourth-amended answer and counterclaim at the center of the dispute with the insurers, had claimed that MGA used stolen advertising documents to try and gain an advantage over Mattel.
     Chief Judge Alex Kozinski said that Ehrlich was ducking the issue raised by the insurers' lawyers.
     "They have an argument that says it's not 'in advertising,'" Kozinski said. "You're not answering their argument."
     When pressed by the panel, however, Ehrlich stuck to his guns, arguing that Mattel's counterclaims "do satisfy" the "in advertising" provision of the coverage.
     In a related hearing the same afternoon, Evanston insurance company argued that a ruling on MGA defense costs was inequitable because it was ordered to pay double Lexington's contribution, and $10 million more than Crum & Forster. Evanston is represented by Sean Hanifin with Troutman Sanders.
     Sheridan again argued for Lexington, while Jennifer Kokes of firm Musick Peeler argued for Crum & Forster.
     Judges Stephen Trott and Judge Kim Wardlaw joined Kozinski on the panel.