Mattel v. MGA Entertainment

Where a counterclaim is based on chicanery by the opposing party’s employees, who were not involved with the facts of the original claim, the counterclaim is not compulsory.

At the new trial, on remand, a jury found in favor of MGA Entertainment (“MGA”) on MGA’s counterclaim that Mattel misappropriated MGA’s trade secrets. The district court awarded attorneys’ fees and costs to MGA under the Copyright Act. Mattel had argued that MGA’s counterclaim was barred by the statute of limitations, but the district court reasoned that “MGA’s counterclaim-in-reply was compulsory and therefore permissible.” The Ninth Circuit noted that to be compulsory, a counterclaim must “arise[] out of the transaction or occurrence that is the subject matter of the opposing party’s claim.” The Ninth Circuit found that the pleadings in the initial claim and counterclaim each arose out of independent transactions and therefore did not trigger a compulsory counterclaim. The Ninth Circuit vacated the judgment on MGA’s counterclaim. The Court also noted that an award of attorneys’ fees under the Copyright Act, must “further the purposes of the Act,” and is “reposed to the sound discretion of the district courts.” In response to Mattel’s argument that fees should not have been awarded because its claim was “objectively reasonable,” the Ninth Circuit affirmed the award of fees and noted that it is no longer good law that a defendant must show bad faith or frivolousness on the part of the plaintiff to be entitled to fees. REVERSED in part, AFFIRMED in part, and REMANDED.