US OPINION: Spies in toy land

When you think of toys, what do you see?
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Do you see a girl hugging her doll, or a Christmas tree, or Santa Claus with his elves, or a family sitting around a table playing a game? Or do you see slave factories in China, cutthroat competition for retail shelf space, and spies stealing trade secrets?

Both pictures are apt. There is a happy side and there is a dark side to this industry. And the dark side just came into sharp focus at one of the more interesting recent court cases.

First, some background. Beginning with their launch in June 2001, Bratz dolls stormed into a market dominated by Barbie. By 2003, Barbie’s market share had dropped to 60 per cent from 75 per cent in 2000, totally because of inroads made by Bratz. The ascent of the range continued unabated and by end of 2005 it was in a number of markets on a par with or even ahead of Barbie. Unable to stop MGA by more traditional means, Mattel remembered the hallowed American marketing mantra “when you cannot beat them, sue them” and initiated a court case accusing MGA and Mattel’s former employee Carter Bryant of copyright infringement. The essence of their case was that "Carter Bryant concealed his Bratz work from Mattel and wrongfully sold Bratz to MGA while he was a Mattel employee."

Whilst this court case wound its way through the legal system, MGA decided to take a leaf out of Mattel’s book and to return the compliment by hauling its competitor into court on August 7, 2010, alleging industrial espionage. They claimed that Mattel's market intelligence group had faked credentials at toy fairs to be able to enter competitors show rooms, including that of MGA, and to secretly photograph new products and gather information on pricing and marketing strategies normally only shared with retailers and distributors, not with competitors. In the process, Mattel gained an illicit but potent competitive advantage at the expense of MGA.

The end effect of all litigation this was that Mattel took a hammering.

Firstly, they lost their own case. The jury rejected the Mattel claim that MGA had violated Mattel’s copyrights. In a separate ruling, Judge David O. Carter on August 4, 2011, denied Mattel’s request for a new trial. In addition, they lost the case which MGA had started against them. The judge awarded MGA punitive damages, fees and costs for its trade-secret theft claims against Mattel to the tune of $309 million.

The court proceedings tell a sorry tale about how Mattel goes about its business. This is what the Court document dated August 4. 2011, had to say: “The jury found Mattel’s conduct reprehensible and the evidence confirmed that Mattel encouraged its employees to consistently violate the California Uniform Trade Secrets Act.” In the same court verdict, it says that “An internal Mattel document instructed Mattel employees to create false identifications before attending toy fairs, using a ‘home phone number or a fake number but not your Mattel number’. This internal Mattel document is referenced as TX 36028.

I decided to have a closer look at this TX 36028 smoking gun. It is quite unbelievable. Amongst other ways to gain access to competitive information, it suggests the following steps in infiltrating toy fairs:

Nuremberg Toy Fair:
 “It is best to go in as a U.S. Retailer since you will not be asked as many questions.”

New York Toy Fair:
“Proof of your business _ At least 3 recent industry manufacturers invoices for goods purchased wholesale and meant for resale….. This is probably the easiest proof of business. You can contact someone in the Accounts Payable – retailer invoicing department to have the proctor an invoice with your company name on it. Each invoice should be for at least $500 and dated within the last year.”

Electronic Entertainment Expo:
“Since the main objective of this show is for exhibitors to hype their products, it’s best that you go to E3 as Media (e.g. writer for Parenting Magazine etc] rather than as a buyer. See Business Card Section.”

The manual also has a section on faking business cards. Here is what it says under “What to include”:

“Name: You should always use your own name since you usually need to present your business cards with picture ID [drivers license].”

“Address. Use your home address in case the manufacturers want to send you materials. If you live in an apartment, call it Suite or just put the number sign in front of it rather than Apt.”

“Phone number: you can either put down your home phone or make up a fake number. Just don’t put down your Mattel number.”

Mattel top managers including Bob Eckert all knew that these practices went on. The court document states that “Mattel’s Chief Executive Officer, General Counsel, two in-house counsel, three former high ranking executives, and a current employee all admitted under oath that employees misrepresented themselves to access competitors show rooms and gather information about unreleased products. Every one of these individuals acknowledged that the conduct was sanctioned by senior members of Mattel’s hierarchy and that it was improper.”

There is another aspect to this case which has so far not been examined – the fact that the commercial theft of trade secrets is a criminal act. The Economic Espionage Act of 1996 makes the commercial theft of trade secrets, carried out for purely economic or commercial advantage a crime which carries a top penalty of a fine of not more than $5 million for corporations and not more than 10 years imprisonment. This law applies not only to thefts that occur within the United States, but also to thefts outside the U.S. if the thief is a U.S. citizen or corporation, or if any act in furtherance of the offense occurred in the U.S. In other words, theft at the Nuremberg Toy Fair would equally be prosecutable under it. I asked Isaac Larian whether he intended to begin to press for criminal prosecution and his reply was that “We are looking at our options in the EU and Germany”.

In the context of this article, I spoke to a number of people in the industry to get their take on it. The first were three buyers at large retailers and involved in the fashion doll category. All three asked me not to quote their names.

The first: “This is unbelievable. That Mattel could do this sort of ……comes as a real shock to me. What were they thinking?”

The second: “This has changed my view of Mattel and of the Mattel execs that come to call on me. I can no longer trust them.”

The third: “Sure, we know that this goes on. If we catch anybody trying this on us, we will blacklist him. But you would have to be pretty incompetent to be caught like Mattel was. But you wonder what else they are doing which we don’t know yet."

I also asked Isaac Larian about his take on all this. He said that: “I have received calls and emails from so many people congratulating me that it is emotionally overwhelming. Nobody likes a bully and Mattel is a bully. I believe we were vindicated and opened the eyes of the industry around the world to Mattel’s illegal and anticompetitive behavior. We are back to do what we do best: Make great toys and make children happy."

He also sent on August 8 a letter to Bryan Stockton, COO of Mattel and Chairman of the Board of the Toy Industry Association, requesting him to resign from this body. In this letter he said that Bryan Stockton’s reaction to this letter is not known. If it was, it would probably not be printable anyway.

Finally, I spoke to Robert Klauber, one of the owners of Creative Toys, innovators of toys in the construction toy category, who had the following take on the whole thing: “At Creative Toys, we are not naïve about the forces at play in the marketplace, and being a small company with innovative products, we are meticulous about protecting our intellectual property. We file extensive patent applications on our new toy ideas, use non-disclosure agreements regularly, and exercise considerable care with regard to whom we reveal our yet-to-be-marketed inventions. It is hard to be too cautious about these things. The stakes are very high.”

Mattel now state that they will file an appeal against the latest verdicts. And so the saga continues.


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