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In a battle over the patent rights for “scrunchies” — the cloth-covered elastic ponytail holders that became a fashion rage among young girls in the past decade — Mattel Inc. and Toys ‘R’ Us Inc. have agreed to pay untold millions to the exclusive licensee, The New L&N Sales & Marketing Inc. The confidential settlement, struck late last week, came in the midst of a bifurcated trial before Senior U.S. District Judge Clarence C. Newcomer in the Eastern District of Pennsylvaniain which the jury had already declared the patent to be valid. In the second phase of the trial, the jury would have decided whether the patent had been infringed and, if so, how much to award in damages. But just before the closing arguments were to be delivered, the lawyers announced that a settlement had been reached. Although neither side would discuss the terms of the settlement Wednesday, there are strong indicators in the court records that it was at least seven figures and possibly as high as eight figures. In design patent cases, damages are based on the profits earned by the infringing manufacturers and sellers. Testimony at trial showed that Mattel grossed $18.8 million on scrunchy sales and that Toys ‘R’ Us grossed $6.5 million. Witnesses also said that the allegedly infringing product — a child’s kit for making scrunchies at home — cost just $5 to make and retailed for about $20. An expert on the plaintiff’s side testified that the combined profits for the two defendants totaled more than $11 million. A defense expert opined that the true profits figure was much less, about $6 million, and that the plaintiff’s expert had failed to account for numerous costs. The trial was a contest between two formidable teams, each consisting of a top-flight litigator with renowned patent counsel at second chair. New L&N, which is based in Huntingdon Valley, Pa., was represented by James L. Griffith of Klett Rooney Lieber & Schorling and patent counsel Arthur H. Seidel of Seidel Gonda LaVorgna & Monaco. Mattel and Toys ‘R’ Us were represented by William T. Hangley of Hangley Aronchick Segal & Pudlin and patent counsel Ronald L. Panitch of Akin Gump Strauss Hauer & Feld. Court papers show that New L&N had quite a few hurdles to clear before it could wield significant leverage at the settlement table. The first hurdle was a legal battle with the patent holder herself, Rommy Revson, who had sold New L&N an exclusive license to manufacture and sell scrunchies during the life of her patent. Despite awarding the exclusive license to New L&N, Revson sold a second license to Mattel to manufacture kits. New L&N cried foul and invoked an arbitration clause in the license. An arbitrator later sided with New L&N and found that Revson had no power to give a second license to Mattel. Armed with the arbitrator’s ruling, New L&N required Revson to join as a co-plaintiff in suing Mattel and Toys ‘R’ Us. The next major hurdle came when Mattel argued that the patent should be declared invalid since there was evidence that a California company was producing a virtually identical product called “Stretchies” several years before Revson even applied for her patent. In an opinion handed down just before the trial, Newcomer found that the defendants “have made a strong case for invalidity based on obviousness” because the “Stretchies look uncannily similar” to both the scrunchies produced by New L&N and the drawings submitted with Revson’s patent. If the jury had found that the product was already on the market, Revson’s patent would have been declared invalid due to “prior art.” But the jury sided with New L&N and found that the defense witness never proved that the other product existed before Revson’s. Mattel and Toys ‘R’ Us also argued that they could not be found liable for infringing on the patent since it had not manufactured scrunchies, but merely the raw materials used for making them. The true infringers, if any, they argued, were the ultimate buyers of the kits — a class made up mostly of little girls. But New L&N argued that both defendants were liable under three theories of patent infringement — direct infringement; contributing toward infringement; and inducement to infringe. The “kit” was designed for no other purpose than to make infringing scrunchies, the plaintiff’s team argued. And the instructions inside the box showed buyers how to turn the materials into a scrunchy in just a few steps. A marketing video showed young girls making the scrunchies in 15 seconds, the plaintiff’s lawyers said. Also serving on the plaintiff’s team were Klett Rooney attorneys Gerald E. Burns III, John P. Halfpenny and Patricia E. Campbell, as well as Seidel Gonda attorney Michael F. Snyder. The defense team also included attorneys Michael Lieberman and Allison M. Meade of the Hangley firm and John Jamieson Jr. of Akin Gump.

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