Dolls in the Docket
Just before he got up to testify in federal court on June 5, Isaac Larian cocked his shoulders back like a boxer about to enter a ring. Then he smiled and winked at Angela, his wife of 24 years. The Iranian-born entrepreneur always seems up for a fight. These days, he's got a big one on his hands.
Larian, 54, launched one of the most successful new toy lines in decades, the Bratz line of sassy dolls. But now ownership of those Bratz is in question. Industry giant Mattel (MAT) claims Larian stole the Bratz when he acquired them from designer Carter Bryant, a Mattel employee at the time. If Mattel wins its civil lawsuit in Riverside, Calif., some Wall Street analysts estimate Larian and his privately held company, MGA Entertainment, may owe the world's largest toymaker hundreds of millions of dollars in back royalties and punitive damages. And in the ultimate knockout punch: Mattel could even end up owning Bratz.
The trial in U.S. District Court, Central District of California, which started May 27, provides a fascinating window into the $22 billion toy industry. It may seem like fun and games from the outside, but behind the scenes there's cutthroat competition and bare-knuckle tactics to score the next hot toy. Mattel, alleging theft of company secrets, persuaded government agents in Mexico and Canada to seize such things as hard drives and calendars from former employees who had jumped to MGA. It hired a private investigator to tail one former Mattel employee who went to work for MGA. Mattel has tried to get this reporter to testify in its case against Larian, but judges ruled three times in BusinessWeek's favor. The two sides have even argued in court over who got to stay at Riverside's Mission Inn, the fanciest hotel in town.
Building an Empire
Losing the trial to Mattel would be devastating for MGA. The Bratz line has been a gold mine. As recently as 1997, MGA was in bankruptcy. According to Mattel filings in the current suit, Larian reported $466,000 as income on his tax return in 1999. By 2002, a year after Bratz was released, Larian was earning $34 million. Larian now sits atop an empire that Mattel claims in court papers is worth $1.9 billion. Larian's attorney disputes all of those numbers. In recent years Larian has used his company's surging profits to buy the office park in suburban Los Angeles that serves as MGA's headquarters. In 2006, he bought the popular Little Tikes brand of preschool toys from Newell Rubbermaid (NWL) for an undisclosed price.
Larian owns 82% of MGA, and members of his family own the rest. "I came to this wonderful country with nothing more than a dream," Larian said in a statement to the press on June 1. "I will not let Mattel destroy that dream."
Larian was born in the Iranian city of Kashan, the rug trading capital of the world. Larian's father ran a three-person textile company. As a boy, Larian was something of a brat, recalls one of his sisters, who was attending the trial but declined to give her name. "He was always annoying," she told BusinessWeek in a brief interview. "He was always throwing tomatoes at the rest of us." In 1971, Larian came to the U.S. with $750 in his pocket. He washed dishes in a diner to help pay for classes at California State University, Los Angeles, where he earned an engineering degree in 1978. He co-founded MGA with his brother Farhad, originally as an importer of consumer electronics.
Bratz dolls were an immediate hit when they hit store shelves in 2001, appealing to a new generation of girls who had grown tired of Mattel's comparatively staid Barbie doll. Bratz feature big flirtatious eyes and skimpy clothes, prompting some parents to jokingly call them "Slutz." Still the brand resonated with girls, producing what Mattel claims in court filings is revenue of $500 million a year. MGA does not release sales figures.
Gerrick Johnson, a toy industry analyst at BMO Capital Markets Equity Research (BMO), estimates Barbie's U.S. sales fell almost 50% since Bratz was introduced. Total Barbie sales, including international, are $1.2 billion, according to Johnson.
Larian testified he first met Bryant, the doll designer, in September, 2000, when Bryant pitched him the idea for Bratz in his office. Larian said he was unsure about the dolls at first but his daughter, Jasmin, 12 years old at the time, told him the dolls looked "cool." Bryant signed a contract with Larian shortly thereafter and left Mattel for good in mid-October. Bratz launched the following summer.
Mattel alleges MGA had a campaign beginning in the late 1990s to steal Mattel employees. When one MGA staffer suggested waiting until Mattel had layoffs, Larian responded in an e-mail: "Why are we waiting for a layoff? They don't lay off their stars." Mattel also claims Larian tried to cover up the origin of the Bratz dolls. Sample e-mail from Larian: "There must be no mention about Mattel or any of their properties: Carter, any MGA arts, et cetera."
On the witness stand Larian denied having a regular strategy to recruit Mattel employees. MGA's lead attorney, Thomas Nolan, said in his opening statement that the "there must be no mention" e-mail was a response to a Mattel demand to stop mentioning Barbie products on a Bratz fan Web site.
Dolls' Creation Story in Dispute
Larian, meanwhile, is trying to paint a picture of Mattel as a desperate Goliath out to crush a rival. MGA points to a presentation by Mattel management calling Barbie a "brand in crisis." In a statement to the press in response to Larian's testimony on June 5, Mattel said: "This trial is about who came up with Bratz and when. It is about a doll designer who pretended to be dedicated to Mattel's collaborative team effort, but in reality was working with a competitor."
Bryant first worked for Mattel from 1995 until April, 1998. Then he left the company and went back home to Missouri. There, he has said in court filings, he was inspired to create Bratz after returning from his job at an Old Navy store and seeing kids in big, baggy jeans and backpacks outside a local high school. Bryant has said he did the initial Bratz drawings around August, 1998, four months before returning to work at Mattel. Bryant, his parents, a family friend, and his companion are all expected to testify they saw the original Bratz drawings around that time.
Mattel, however, contends Bryant actually came up with the idea for Bratz after returning in January, 1999. It claims he used company notebooks, doll parts, fax machines, and other Mattel employees to create a prototype. According to court filings, Bryant signed, as many Mattel employees must, an agreement giving the company rights to anything he invented while working for Mattel.
In his opening statement, Mattel attorney John Quinn displayed a map showing that the high school Bryant spoke of was not on the way home to his parents' house where he was living. Instead, Mattel maintains Bryant got inspiration for Bratz from two other doll projects under way at Mattel in 1999: Toon Teens, which never made it to market, and Diva Starz, which Mattel still sells.
Both sides are employing ink experts and handwriting analysts, who will testify as to when they believe Bryant created his first Bratz drawings.
Mattel says Bryant earned some $35 million in royalties from MGA for Bratz sales. Just prior to the opening of the trial, Bryant settled Mattel's case against him. The terms were not disclosed.
A "Slam Dunk" for Mattel?
Facing off against Mattel lawyers, armed with more than 100 thick black binders full of courtroom evidence, Larian was a combative witness. He repeatedly asked for time to read documents in their entirety before commenting on them. Larian, who named two of the Bratz dolls after his children, said on the witness stand that he considers Bryant "one of the inventors of Bratz." He said that although MGA, like Mattel, has had employees sign contracts giving the company rights to their ideas, he didn't think that applied to work they did on their own time. "I don't own the people," he said. "They just work for me."
Sean McGowan, a longtime toy industry analyst now at Needham & Co., says at first glance Mattel's case seems to be a "slam dunk." That's because Bryant was a Mattel employee when he was pitching Bratz to Larian. But McGowan says there is a range of possible financial outcomes even if Larian loses. Larian's attorney Nolan has said that in the worst-case scenario MGA may owe Mattel royalties of perhaps $20 million on just the few initial Bratz drawings.
Scott Landsbaum, a toy industry attorney with his own firm in Los Angeles, agrees the case is a relatively simple one. "When did he create the first drawings?" Landsbaum says. "It really does come down to that very simple factual issue, and who the jury is going to believe."
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