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Mattel v. MGA Entertainment, USCA Ninth Circuit, January 24, 2013
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Ninth Circuit vacates jury verdict and related damages, fees and costs award in connection with MGA’s misappropriation of trade-secrets counterclaim, finding that that counterclaim was not compulsory and not permissible, and affirms attorneys’ fees and costs awarded to MGA under the Copyright Act.
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.”
Morris v. Young, USDC C.D. California, January 28, 2013
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District court grants in part and denies in part plaintiff photographer’s motion for summary judgment in copyright infringement action against defendant artist who used plaintiff’s photograph of two members of the punk-rock band the Sex Pistols in three works, finding a possibility of fair use in only one of the three works.
Plaintiff Dennis Morris, a photographer and artist, brought suit infringement against defendant Russell Young, an artist, asserting copyright infringement for Young’s use in three of his works of one of Morris’ many photographs of Sid Vicious and Johnny Rotten of the punk rock band The Sex Pistols. The court granted plaintiff’s motion for summary judgment as to two of defendant’s works, finding that they were not a fair use of plaintiff’s photograph, and denied summary judgment as to the third.
Morris published two books, Never Mind the B*ll*cks: A Photographic Record of the Sex Pistols Tour and Destroy: Sex Pistols 1977, that included the photograph in question and distributed the photograph through a website. Morris obtained U.S. copyright registration for the two books in 2011, more than five years after publication. Young created a series of works in the mid-2000s using images of the Sex Pistols he found on the Internet, including Morris’ photograph. Young used Morris’ photograph in three works, Sex Pistols in Red, Sex Pistols and White Riot + Sex Pistols. Each of the works modified the original photograph to some extent. For Sex Pistols in Red, Young cropped the photograph slightly to frame the subjects and tinted it a deep red color. For Sex Pistols, Young reproduced the photograph using black enamel on an acrylic background to add “grittiness” and also altered the colors and shades, deepening the contrast between the black and white portions of the image. For White Riot + Sex Pistols, Young placed two images of the Subject Photograph side by side and “graffitied” a Union Pacific logo, the words “White Riot” and red stars over the original image.
At the outset, the court found no material dispute that plaintiff owned a valid copyright in the photograph. While Morris had obtained copyright registration more than five years after first publishing the photograph in his books and was therefore not entitled to the presumption of validity, the registration did provide evidence of registration.
Young argued that Morris had not established ownership of the photograph because the photograph appeared on various websites without copyright notices. The court rejected this argument, finding that this fact alone did not undermine Morris’ authorship and ownership of the copyrights. The court likewise found it undisputed that Young had copied original elements of the photograph, based on Young’s own admission that he found the photograph on the Internet and copied it in his own works.
Turning to Young’s fair use defense, the court considered the four fair use factors: (1) the purpose and character of the use, (2) the nature of the copyrighted work, (3) the amount and substantiality of the portion used in relation to the copyrighted work, and (4) the effect of the use upon the potential market for or value of the copyrighted work. The court concluded that two of Young’s works, Sex Pistols and Sex Pistols in Red, did not constitute fair use but that the third, White Riot + Sex Pistols, might.
Noting that Young’s purpose in creating all three works was clearly for commercial purposes and that Young had received a profit from the sale of his works, which weighed against a finding of fair use, the court concluded that these two works were “little more than reproductions of the Subject Photograph with minor alterations,” such as tinting, slight cropping and changing the medium to create these pieces. The works added only marginal artistic innovation to the photograph to change the aesthetic expression of the work. The court also concluded that Young’s works lacked any unique, significant expression, meaning or message and were therefore not transformative.
Given that the artistic nature of Morris’ photograph and the fact that Young used substantially the entire image in his works weighed against a finding of fair use, the court focused on the fourth factor –the effect of Young’s unauthorized use of the photograph on the potential market for or value of Morris’ work. Young argued that his own works “appeal to different customers of differing artistic tastes.” The court disagreed, finding that Young’s use of the photograph could threaten the market for that photograph because “[a]t a minimum, both the Subject Photograph and the two works…could appeal to overlapping audiences of Sex Pistols fans and those who appreciate punk-rock culture” and Young’s work lacked any transformative quality that made it even more likely that the works could appeal to similar audiences and markets. The court concluded that “Young’s use of the Subject Photograph, if widespread, could threaten the market for the Subject Photograph by eroding its uniqueness.” Not finding any material facts that would support a “fair use” defense with regard to Sex Pistols and Sex Pistols in Red, the court granted Morris’ motion for summary judgment as to those two works.
In contrast, the court found that Young’s use of the photograph in the third work, White Riot + Sex Pistols, might be transformative. In particular, the court noted the incorporation of three distinct elements in the work: the Union Pacific logo, the words “White Riot” and red stars in graffiti, and the side-by-side positioning of two reproductions of the photograph. The incorporation of images beyond the band itself and the way the images are arranged could convey a new message, meaning or purpose beyond that of Morris’ original photograph, and the possibility of a new expression was apparent from the face of the work itself, according to the court, creating a triable issue as to whether the work is transformative. Noting that the transformative nature of a work bears upon the weight and meaning of the other fair use factors, and finding a triable issue as to whether the third work was transformative, the court denied Morris’ motion for summary judgment.
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