A federal jury says the Bratz dolls were conceived at Mattel (MAT), a verdict that could mean millions of dollars in damages for MGA Entertainment, the maker of the Barbie doll rival.

On Thursday, the federal jury decided that designer Carter Bryant came up for the idea for the Bratz line while working for the El Segundo-based Mattel in 1999 and 2000.

But MGA argued that the idea for the multi-ethnic Bratz dolls came to Bryant in 1998, while he was living with his parents in Missouri. MGA said it made significant changes to the dolls to make them appeal to a broad audience. The company argued that the success of the Bratz dolls stems from its successful marketing - not from Bryant’s original drawings.

Bryant settled with Mattel a week before the trial started in May. Terms weren’t disclosed.

Mattel filed suit in U.S. District court in Riverside, east of Los Angeles, against rival MGA. The competitor began marketing the sassy line of urban Bratz dolls in 2001. Analysts estimate that Bratz dolls have generated about $500 million a year for MGA.

The verdict means Mattel can seek hundreds of millions of dollars from MGA for copyright infringement.

In what could be a very expensive decision, the jury concluded that MGA and Isaac Larian, the chief executive officer, were liable for converting Mattel’s property to their own use. The jury also said MGA and Larian intentionally interfered with Bryant’s contractual duties to Mattel.

The Bratz line has kicked sales of Barbie dolls down the stairs. U.S. sales of Barbie were down 15% in 2007 and 12% in the first quarter of 2008. International sales were up 6% in 2008 compared with a 12% increase last year.

The jury will return to court July 23 to hear evidence in the damages phase of the trial. Mattel will argue that the Bratz dolls are similar to the drawings that Mattel can now say it owns.

Mattel’s competitors include Hasbro (HAS), Jakks Pacific (JAKK), Marvel Entertainment (MVL) and Lego, a Danish company.