Ruling could mean end to pouty-lipped Bratz

NEW YORK - Pouty-lipped Bratz will stay on store shelves until after the holidays, but their fate after that — and that of their parent, MGA Entertainment Inc. — was uncertain Thursday after a federal court ruling banning MGA from making the saucy Barbie alternative.

MGA is appealing the ruling which — if upheld — is a severe blow for the company and an equal boon for Barbie maker Mattel Inc., which has been duking it out with MGA over Bratz for four years.

“In the most dire scenario, MGA can’t sell Bratz at all and a humongous chunk of their business disappears,” said Needham & Co. analyst Sean McGowan. “But it’s likely they will work out a way for MGA to stay in business but Mattel to profit.”

Late Wednesday, a federal judged banned MGA from making and selling all 40 dolls in the Bratz line, which it began selling in 2001, including the four originals — Yasmine, Chloe, Sasha and Jade. U.S. District Judge Stephen Larson also ordered MGA to reimburse its vendors and distributors for the cost of the dolls and all shipping charges for sending them back.

The ruling, issued in a California federal court, followed a jury’s finding that Bratz designer Carter Bryant developed the concept for the dolls while working for Mattel. The same jury later awarded Mattel $10 million for copyright infringement and up to $90 million for breach of contract after a lengthy trial stemming from Mattel’s 2004 lawsuit ended in August.

The post-trial dispute that prompted Wednesday’s ruling centered on whether the jury found that only the first generation of Bratz dolls infringed on Mattel’s copyright or whether all the dolls in the line were in violation.

The jury verdict form asked panelists only to find whether there was infringement and assign a dollar reward, but did not ask them to specify which dolls violated the law.

Larson allowed MGA to wait until after the holidays to begin removing dolls from the shelves, and the company has asked for that stay to be extended until after the appeal is resolved. Post-trial motions are scheduled for Feb. 11.

Mattel said in a statement it is pleased with the ruling, but did not immediately return a request for comment about the appeal.

The ruling “underscores what Mattel has said all along — that MGA should not be allowed to profit from its wrongdoing,” Mattel said in a statement.

MGA did not immediately respond to a request for an interview but issued a statement Wednesday saying it believes the “jury verdict was clear in denying 99 percent of Mattel’s copyright infringement claim and that issuing such a broad injunction is inconsistent with the limited jury verdict and the law.”

Wachovia analyst Timothy Conder said that if upheld, the ruling is a “large win” for Mattel, which has seen sales of its Barbie doll weaken in recent years.

“It effectively removes Bratz from the competitive landscape,” Conder wrote in a note to investors. “This is obviously much more important and critical than any one-time monetary damages.”

Investors agreed, sending Mattel shares up 85 cents, or 6.4 percent, to $14.05 in afternoon trading.

Stifel Nicolaus analyst Drew Crum likewise called the ruling a “stunning victory” for Mattel, one that “transforms the competitive landscape of the $2 billion U.S fashion doll category and severely weakens competition.”

Still, the court battle continues to be expensive for both companies, and even if MGA’s appeal is granted, the company is likely to be diminished, McGowan said.

“They’ll go back to business as if nothing happened, except they spent a lot of money,” McGowan said. “Meanwhile, the market has softened for Bratz anyway, so they’re not going to go back to what it was. And that’s the best possible outcome.”

Another scenario is that MGA would pay a “pretty hefty royalty” to Mattel and keep selling Bratz. McGowan said it is unlikely Mattel would bury the Bratz brand altogether because it continues to have some cachet.

“The best outcome is a balancing of both sides, but Mattel clearly has the strong hand at this point,” he said.

BMO Capital Markets analyst Gerrick Johnson said the Bratz brand has “declined significantly,” estimating that sales have fallen from $750 million in 2005 to just under $300 million in 2008.

Domestic sales of Barbie were down 15 percent in 2007. For the year ended in October 2008, overall fashion-doll sales came to $1.65 billion, down 6 percent for the year ended in October 2006, according to market research firm NPD Group.

Johnson said that even if the ruling is upheld, MGA is likely to persevere with the other brands it owns, including its Little Tykes line of children’s toys.

“It’s not going to put them out of business, but they do lose their largest brand,” he said.

Aside from Mattel, another likely benefactor of the ruling could be Jakks Pacific Inc. which makes Hannah Montana and Camp Rock dolls, which have been gaining market share as Barbie and Bratz decline.

“At retail, Bratz occupies about 24 feet at Toys “R” Us, 11 feet at Target and 12 to 16 feet at Wal-Mart,” Johnson said. “Should this injunction hold, this time next year, that shelf space will be up for grabs in the fashion doll isle.”

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