A federal appeals court said Mattel Inc was wrongly granted ownership of the popular Bratz dolls, a decision that could lead to a new trial over control of the estimated $1 billion franchise.

The 9th U.S. Circuit Court of Appeals in San Francisco said on Thursday that former U.S. District Judge Stephen Larson erred in ordering MGA Entertainment Inc to transfer the Bratz portfolio, including the Bratz and Jade names, to Mattel, which makes the iconic Barbie doll.

Writing for a unanimous three-judge panel, Chief Judge Alex Kozinski also threw out Larson's injunction prohibiting MGA from selling the pouty-lipped, multi-ethnic Bratz dolls, or dolls substantially similar to Mattel's own copyrighted works. Bratz dolls were introduced in 2001.

It is not equitable to transfer this billion dollar brand -- the value of which is overwhelmingly the result of MGA's legitimate efforts -- because it may have started with two misappropriated names, Kozinski wrote.

The district court's imposition of a constructive trust forcing MGA to hand over its sweat equity was an abuse of discretion, he wrote.

Unlike the relatively demure Barbie, the urban, multi-ethnic and trendy Bratz dolls have attitude, Kozinski went on. America thrives on competition; Barbie, the all-American girl, will too.

Mattel, MGA and lawyers for both companies were not immediately available for comment.

In August 2008, a federal jury in Riverside, California ordered MGA and Chief Executive Isaac Larian to pay Mattel $100 million in damages, concluding that Barbie designer Carter Bryant was under contract to Mattel when he sold MGA some drawings upon which the Bratz dolls were based.

Mattel had sought roughly $2 billion in damages.

Larson subsequently ordered MGA to transfer the Bratz doll franchise to Mattel, and to stop selling the dolls by the end of 2009. The 9th Circuit had in December suspended that order while it considered the six-year-old case.

Kozinski said it's likely that a significant portion -- if not all -- of the jury verdict and damage award should be vacated, and the entire case will probably need to be retried because the jury instructions contained several of the errors that the appeals court identified.

The district court didn't properly analyze whether Mattel owns Bryant's ideas under his contract, Kozinski wrote in a footnote, so it's premature to try to determine whether MGA's acquisition of them was wrongful.

Mattel is based in El Segundo, California, while MGA has offices in Van Nuys, California.

In afternoon trading, Mattel shares were up 2.1 percent to $21.10 on Nasdaq amid broad gains for stocks.

The case is MGA Entertainment Inc et al Mattel Inc, U.S. Ninth Circuit Court of Appeals, Nos. 09-55673 and 09-55812.

(Reporting by Jonathan Stempel and Dhanya Skariachan in New York; Editing by Tim Dobbyn)