Mattel Inc , after waging a seven-year legal war against a tiny California company, suffered a surprise defeat on Thursday after a U.S. jury decided that MGA Entertainment Inc is the rightful owner of the once-billion dollar line of pouty-lipped Bratz dolls.

The astonishing loss for the world's largest toy maker is the latest development in a case that began in 2004, when MGA's line of dolls was all the rage among young girls. Mattel accused Van Nuys, California-based MGA of stealing its designs by hiring away a key employee.

Mattel CEO Robert Eckert sat stone-faced, staring straight ahead as the verdict was read on Thursday in a Santa Ana, California, federal courtroom. He said afterward that he was disappointed.

We remain committed to protecting the intellectual property that is at the heart of business success, Eckert said in an email.

Mattel will soon file a motion for a new trial, said Susan Estrich, a lawyer for the company.

MGA Chief Executive Isaac Larian, meanwhile, said the case has been a prolonged battle for his family. Larian, who left Iran alone at the age of 17, named two of the Bratz dolls after his children.

It very well shows that in America, even huge corporations are not above the law, Larian told Reuters afterward.

A federal jury in 2008 ordered MGA and Larian to pay Mattel $100 million, but a federal appeals court threw out that verdict last year.

MGA then accused Mattel of gaining entry to toy fairs with false credentials to steal trade secrets and concealed evidence of these activities.

Jack Lerner, a professor at USC Gould School of Law who has followed the case, said this new evidence allowed MGA to present a large canvas to the jury on retrial, whereas the first trial was more circumscribed.

The jury found Mattel misappropriated trade secrets from MGA and awarded MGA $88.5 million in damages. The jury found that Mattel acted willfully, and after the verdict MGA attorneys said they would seek to triple the damages award.

The jury also decided MGA had interfered with Mattel's contract with designer Carter Bryant, but awarded only $10,000 in damages to Mattel.

BMO Capital Markets analyst Gerrick Johnson said the failure to settle will go down as a tremendously bad decision by Mattel management.

It means they wasted $400 million or so of shareholder money to get zero return, Johnson said.

At the height of its popularity, in 2005 and 2006, the urban-chic Bratz dolls -- sporting short skirts and flirty, midriff-baring tops -- ate into Mattel's market share and were viewed as a threat to Mattel's key Barbie franchise.

The craze died down, however. MGA has accused Mattel of costing the company hundreds of millions in litigation.

U.S. District Judge David Carter said the trade secrets damages could be lowered to $88.4 million due to a calculation mistake by the jury.

Mattel's shares fell as much as 2.8 percent to a low of $26.17 after the verdict was announced, before bouncing back slightly to close one percent lower at $26.67. The stock had been roughly flat throughout the morning session.

The next court hearing has been set for May 24.

This is not the final word in this case, Estrich said.

The case in U.S. District Court, Central District of California is Mattel Inc. v. MGA Entertainment Inc., 04-9049.

(Reporting by Nichola Groom and Dhanya Skariachan; Writing by Dan Levine; Editing by Maureen Bavdek, Gerald E. McCormick, Matthew Lewis and Bernard Orr)

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