| Lionel -vs- K-Line
by Erol Gurcan, Esquire RM-6598 Last year, a federal court jury in Detroit, Michigan awarded MTH $40.7 in a trade secrets case brought against Lionel LLC. Now Lionel, as a plaintiff, has sued fellow competitor K-Line, in an unrelated case involving the theft of its technology. On July 27, 2005, Lionel LLC filed a complaint (the legal document that starts a civil lawsuit for money damages and/or for equitable relief such as an injunction to prevent further use of misappropriated technology) in the U.S. Bankruptcy Court for the Southern District of New York (the same court where its bankruptcy petition has been pending since November 15, 2004). Seeking unspecified money damages and a permanent injunction, Lionel has sued K-Line Electric trains, its parent company MDK, Inc., K-Line's sole owner Maury Klein, and former Lionel director of engineering, now K-Line employee Robert Grubba, as defendants. The basis of the complaint involves alleged misappropriation of Lionel's closely held trade secrets for its Odyssey system (cruise control for trains to maintain consistent speed around curves and grades), its "trainsounds" sound system, and CW-80 transformer (the transformer used in all its starter sets), and for copyright infringement concerning copyrighted Lionel computer circuit board codes for its Odyssey speed control system. It also separately alleges the unauthorized use of its TrainMaster Command Control (TMCC) system, claiming K-Line modified that technology and used it to their advantage, violating the licensing agreement between Lionel and K-Line. Specifically, Lionel claims that Grubba, its former director of engineering, with the knowledge and consent of his current employer K-Line, knowingly schemed, conspired contracted and acted as a liaison with then Lionel senior electrical engineer Marty Pierson, to provide K-Line with Lionel's technology, consisting of trade secrets and copyrighted computer circuits. Allegedly, at the beginning of his employment with Lionel, Pierson signed an agreement not to disclose Lionel's secrets, and Grubba, who was employed by K-Line at the time of the misappropriation, also signed a nondisclosure agreement because he was still a consultant to Lionel. A separate claim for damages for a breach of that contract has been made by Lionel against Grubba. Interestingly, Pierson is not a named defendant even though the complaint alleges he was part of the chain of misappropriation, and Lionel terminated his employment in May 2005. Prior to his firing, Lionel claims that the information found on his computer, confirms their allegations. When Lionel confronted Pierson about the information found on his computer on July 6, 2005, he provided a signed statement admitting his involvement in the thefts with K-Line and Grubba. In exchange, Lionel agreed not to sue him, most likely because they will need his testimony at trial to establish the more important part of the case against K-Line (the potential deep pocket) and Grubba. At the present time, the above statements are only Lionel's allegations and have not been proven. If the case is not settled prior to trial, it will be for the jury to determine if the claims have any validity or not.
Ultimately, Lionel has claimed that K-Line's theft of its trade secrets and copyrighted circuit boards have allowed K-Line to market similar or superior trains at lower prices, without having to pay to develop the technology. This, Lionel alleges, has caused it to be damaged to the extent of lower sales, and subject to the perception of price gouging in the toy train community. The complaint also seeks a recall of all K-Line products using the stolen technology that were shipped or about to be shipped to distributors, but not yet sold to consumers. How this is realistic when the case could take years to get to trial (the MTH-Lionel lawsuit took four years) and the products sold in the meanwhile is questionable at best.
With regard to its closed loop Odyssey system, Lionel has alleged that once K-line took its technology, it improved upon it to the extent it allowed a wider range of speed settings, up from Lionel's 32 speed steps, up to as many as 256 under the K-line system, and they marketed it under the name "CruiseControl." Concerning the trainsounds sound system, K-Line allegedly developed a similar system and marketed it as "K-Sounds." Furthermore, K-Line also allegedly took the technology for Lionel's CW-80 transformer and used it to develop a more powerful 120 watt unit that it used in its starter sets and for sale as a separate item.
At the present time, only the complaint has been filed with the court. It will still be need to be served on each of the defendants. Once served, each has 20 or 30 days to answer it, depending on the method of service (personal service or otherwise). It is expected the defendants will deny the allegations of wrongdoing. The case will go on from there, and is expected to take several years to conclude, if not settled in the interim.
Lastly, as a side note Lionel's complaint reads like a press release, boasting it "is the nation's number 1 model train manufacturer", "the acknowledged industry leader with a sterling reputation for cutting edge engineering, high quality products and excellent customer service", and "its success is due in large measure to its superior technology." Even Joshua Lionel Cowan himself couldn't have said it any better. More........ ***The opinions/summary expressed in this article are strictly those of the author and are not necessarily those of the Officers and Directors of LOTS, nor of the LOTS organization as a whole.
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