By Edvard Pettersson and Heather Burke
May 13 (Bloomberg) -- Mattel Inc., the world's biggest toymaker, may add as much as $500 million a year to its revenue by winning a copyright suit against MGA Entertainment Inc. over the Barbie doll's hip urban rival, Bratz.
The maker of Matchbox cars, T.M.X. Elmo and Barbie is arguing before a California court this month that the pouty- lipped Bratz doll was conceived while designer Carter Bryant was a Mattel employee. If the jury agrees, the toy company will potentially pocket damages estimated at $360 million and, based on Mattel calculations, as much as $500 million in annual direct MGA sales and licensing fees.
``Mattel either gets the status quo or something better,'' said Sean McGowan, an analyst at Needham & Co. in New York. A win and damage award would send shares of the El Segundo, California- based company up ``a few dollars at least,'' he said. The analyst rates Mattel a ``strong buy'' and doesn't own the shares.
Barbie, originally all-blonde and all-suburban, has had a place on toy shop shelves since 1959. Since the advent of Bratz in 2001, sales have slipped. Mattel reported April 21 that U.S. Barbie sales fell in the first quarter by 12 percent.
By contrast, the Bratz doll, with big eyes, prominent lips, hip-hop clothing and ``a passion for fashion,'' has grown in seven years into a $2 billion franchise, according to MGA Chief Executive Officer Isaac Larian. Needham's McGowan estimates that MGA has made about $360 million in after-tax profit since the beginning and probably earns licensing fees ``in the vicinity of 15 percent'' on non-MGA sales of Bratz products.
Key Competitor
``Bratz is a key competitor of Barbie, which is Mattel's biggest brand,'' said Ira Carnahan, an equity analyst for consumer product companies at T. Rowe Price Group Inc. in Baltimore. ``So if Mattel prevailed, that would be positive for the company.'' T. Rowe Price manages $450 billion, including 14.4 million, or 4 percent, of Mattel shares.
Bratz scored its biggest victories with girls ages 5 to 9, leaving Barbie to play with the preschool crowd, said Gerrick Johnson of BMO Capital Markets in New York. ``Bratz totally took the higher-age market from Barbie,'' he said. Johnson recommends selling the shares and doesn't own them.
Sales figures aren't available because MGA is closely held. Besides dolls, Bratz products include clothes, games and furniture. CEO Larian, 54, wouldn't confirm the MGA revenue figure used by Mattel in court papers.
The trial in a Riverside, California, court starts May 27. In the first phase, a jury will decide if MGA infringed Mattel's copyright.
Three Cases
The litigation originally involved three consolidated cases. Bryant, the designer, filed against Mattel, asking the court for a declaration that he hadn't acted improperly over Bratz.
The third suit was filed by MGA, claiming Mattel copied the Bratz's lips and almond-shaped eyes for its ``My Scene'' dolls. MGA will seek $1 billion in damages, Larian said. That claim will die if MGA loses the first round and has no valid copyright, said attorney Michael Elkin of Winston & Strawn in New York.
The first phase of the trial will focus on evidence Mattel claims will show that Bryant got the idea for Bratz and made sketches while still employed by the plaintiff. Among the company's 169 possible witnesses is a woman Mattel says made a Bratz prototype for Bryant during his employment there.
An agreement Bryant signed gives Mattel the right to the drawings if he made them while working there, U.S. District Judge Stephen Larson ruled on April 25. Bryant worked twice for Mattel: from 1995 to April 1998 and from January 1999 to October 2000, according to court papers. He then moved to MGA.
Between Stints
Bryant and MGA maintain he worked on Bratz between stints at Mattel, inspired by children he saw while living in Missouri with his parents.
If it proves infringement, the company probably will ask for MGA's past profits from Bratz, said Terence P. Ross, a lawyer with Gibson, Dunn & Crutcher in Washington who isn't involved in the case.
An order barring MGA from making the doll would be up to the judge and wouldn't be automatic, copyright lawyers say. A 2006 U.S. Supreme Court ruling says judges must decide whether such a harsh punishment would serve the public interest, or if money damages are enough.
``MGA can argue that the public interest isn't served by halting Bratz production and that a licensing fee would be a better remedy,'' Ross said.
Mattel doesn't report Barbie sales in dollars separately. McGowan estimated $1.25 billion last year, 21 percent of Mattel's $5.97 billion revenue. U.S. Barbie sales fell 15 percent to $390 million last year, the analyst said.
Mattel Shares
Mattel fell 34 percent in the past year before today. It rose 51 cents, or 2.6 percent, to $19.85 today in New York Stock Exchange composite trading.
The company dropped 8.2 percent, the most in 5 1/2 years, on April 21 when it posted a first-quarter loss of $46.6 million, or 13 cents a share, partly because of increased legal costs. Nine analysts had predicted a 1 cent per-share profit.
The case is Bryant v. Mattel, 04-9049, U.S. District Court, Central District of California (Riverside.)
To contact the reporters on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net; Heather Burke in New York at hburke2@bloomberg.net.
Last Updated: May 13, 2008 16:28 EDT
