The Ninth Circuit US Court of Appeals ruled that a jury should not have been allowed to consider MGA Entertainment's claims that it was the victim of trade secret theft during a trial convened to consider Mattel's lawsuit alleging MGA stole the idea for Bratz from Mattel.
A US federal appeals court has tossed out 172 million US dollars (£109 million) in damages Mattel had been ordered to pay the maker of Bratz dolls, the latest twist in a bitter nine-year legal dispute over commercial rights to the ethnically diverse, pouting toys.
The convoluted case dates back to 2004 when El Segundo-based Mattel first filed a lawsuit claiming Bratz designer Carter Bryant was working for Mattel when he did the initial drawings and early work on the provocative, hip hop-inspired dolls with large eyes, heads, lips and feet, and tiny noses.
The Bratz doll, introduced in 2001, was a blockbuster hit with "tweens", and gave Barbie a run for her money after decades of fashion doll dominance.
A jury awarded Mattel 100 million US dollars in 2008 and found that Mr Bryant had developed the Bratz concept while with Mattel, but the Ninth Circuit overturned that verdict and a new trial was ordered.
Before the start of the second trial in Santa Ana, California, US District Judge David Carter allowed MGA to submit a counterclaim to the jury that accused Mattel of engaging in corporate espionage at toy fairs and conspiring to keep Bratz products off retail shelves.
In April 2011, a jury rejected Mattel's claims and sided with MGA. Mattel was ordered to pay MGA a total of 309 million US dollars in damages and legal fees.
A unanimous three-judge panel ruled that the trial judge was wrong to allow the jury to consider MGA's counterclaims because they were unrelated to Mattel's initial lawsuit. MGA said it would continue to pursue its trade-theft claims by filing a new lawsuit.
Chief Judge Alex Kozinski, writing for the same panel that overturned the initial verdict in 2008, said that MGA could keep 137 million US dollars in legal costs spent fighting the Mattel lawsuit.
"While this may not be the last word on the subject," Mr Kozinski concluded, "perhaps Mattel and MGA can take a lesson from their target demographic: Play nice".