| SIGNIFICANT UPDATE ON LEGAL MATTERS IN THE TOY TRAIN WORLD By RM-6598Erol Gurcan ESQ.
SUMMARY:
· The Sanda Kan K-Line asset purchase agreement has been approved by the bankruptcy court and the agreement will be signed by the parties this week
· Lionel should be able to shortly enter into its licensing agreement with Sanda Kan
· Lionel' s appeal in the MTH trade secrets case is scheduled for oral argument on June 7.
DISCUSSION:
April 17, 2006: After many months of negotiation between lawyers for both Sanda Kan and K-Line, the Bankruptcy Court handling the matter approved the sale on Thursday, April 13, 2006. The court's order approving the sale was entered (signed by the judge) or scheduled to be entered on Friday, April 14, 2006. Based on information provided to me by two separate sources directly involved in the negotiations, the asset purchase agreement is scheduled to be signed by both parties on Monday, April 17, 2006. The deal is scheduled to close within a couple of days thereafter. At that time, Sanda Kan will pay the money needed to obtain the assets of K-Line and the deal will be officially concluded. The information obtained is public information and does not violate any attorney client privilege.
Now that the Sanda Kan K-Line deal is almost done, once it is complete, this also means the Lionel LLC can enter into the marketing and licensing agreement that it tentatively already agreed to with Sanda Kan, once it owns K-Lines (former) assets (inventory, tooling etc.). The Lionel Sanda Kan deal was previously announced on February 16, 2006 by Lionel CEO Jerry Calabrese, but had not been finalized since the Sanda Kan K-Line deal had not been completed until now. The other important requirement that Lionel needed to complete in order to enter into the deal with Sanda Kan, namely bankruptcy court approval, (since it currently is in bankruptcy), took place on February 28, 2006, when the bankruptcy judge in New York signed an order approving the sale. The only mere formality left is for Sanda Kan and Lionel to sign the licensing agreement they previously tentatively entered into, once Sanda Kan has complete ownership of the assets. I expect that Lionel will make an announcement at the TCA York meet they will be attending
later this week and/or on its web site.
In other model train related legal news, oral argument of Lionel's appeal in the MTH trade secrets case pending in the Sixth Circuit Court of Appeals in Cincinnati, Ohio is scheduled for June 7, 2006. This information was obtained directly from the court's clerk on April 10 and confirmed on the Federal Judiciary's PACER website on April 11. On June 7, both MTH's and Lionel's lawyers will appear before the court. MTH's lawyers will argue the Detroit jury's June 2004 $40.7 million dollar verdict against Lionel and Korea Brass was reasonable and correct, and the decision should be affirmed on appeal. Lionel's lawyers will seek to convince the court the jury's verdict was wrong and/or against the weight of the evidence, or the trial judge's evidentiary rulings or legal instructions to the jury on the applicable law were incorrect. Ultimately their goal is to have the jury's verdict reversed and a new trial ordered, or the verdict reduced. It is expected the court will issue a decision in late 2006 or early 2007. This decision will also likely be the final one. If the losing party were to appeal, the only higher tribunal would be the United States Supreme Court. It is very unlikely they will agree to hear the case, since thousands of appeals are made to it each year, but the court only decides about 100 cases in that time frame.
Once I learned of the oral argument date of Lionel's appeal, I contacted them and MTH to get their opinions on the matter. On Thursday, April 13, I called Lionel and asked to speak to CEO Jerry Calabrese. I was told he was not in. When I stated why I was calling, I was told I should speak to Vice President of Marketing, Mark Erickson. I called Lionel's recently opened New York City office and left a message for Mr. Erickson. I called again on Friday, April 14 and left a voicemail message. If Mr. Erickson calls, I will gladly set forth his comments in a follow-up post, including any on the almost completed Sanda Kan K-Line deal which directly affects Lionel.
I also contacted MTH president and owner Mike Wolf on April 14. The following was his written statement about the upcoming oral argument date concerning the appeal:
It has been 6 years this month that this case started. MTH is looking forward to the day that this matter will be behind us. We are hopeful that the appeals court will come to the same conclusion as the jury already has decided. If one steps back and looks at the facts in the K-Line case, combined with the facts in our case, you can't help but notice some similarities as to where the thefts originated, which only further vindicates the actions MTH took to protect our trade secrets.
Although Mr. Wolf's statement above did not specifically name someone, I believe he is referring to Bob Grubba concerning the "similarities as to where the thefts originated" in both trade secrets lawsuits. Mr. Grubba was Lionel's director of engineering when MTH's trade secrets were allegedly stolen and also later working for K-Line when Lionel brought a lawsuit against them in July 2005. In the lawsuit brought by MTH, the allegations were that Mr. Grubba conspired with an employee of codefendant Korea Brass to steal MTH's trade secrets involving design plans for articulated locomotives(locos with two sets of drivers). In the later case brought against K-line in July 2005, Lionel's allegations in its court papers were that Mr. Grubba, its former director of engineering, with the knowledge and consent of his then 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. The trade secrets in dispute involved its trainsounds sound system, CW-80 transformer and Odyssey speed control system (a cruise control system for trains to maintain speed on curves and inclines). I want to emphasize the statements above were obtained from the court papers in both cases and are only allegations. The Lionel K-Line case settled in October 2005, three months after it began, in part because K-Line had filed for bankruptcy in August 2005. The MTH case is still pending due to the appeal to be argued on June 7.
By way of background, in 2000 MTH sued Lionel for trade secrets infringement. As stated, in June 2004, a jury sided with MTH, and awarded them $40.7 million dollars. In early November 2004, Judge John Corbett O'Meara, who tried the case, denied Lionel's post trial motion to set aside the verdict. Rather, he affirmed the jury's verdict and also issued an injunction against Lionel, prohibiting them from using the alleged stolen design plans in the future. On November 15, 2004, Lionel filed for chapter 11 bankruptcy protection (reorganization) and thereafter, filed an appeal of the jury's decision. Shortly after filing for bankruptcy protection, Lionel CEO Jerry Calabrese stated the only reason they filed for bankruptcy was due to the verdict in the case, and not for other reasons. The last of the legal briefs (written summaries of each parties legal arguments) were filed with the court in late August 2005. The next step in the legal process is oral argument before the appeals court on June 7. The last step in the current appeal will be the court's decision either affirming the jury's decision, reversing it and ordering a new trial, or reducing the verdict amount.
Lastly, as some of you also know, The Union Pacific Railroad has separately sued both Lionel and MTH for trademark infringement. The case against Lionel is currently stayed under section 362a of the bankruptcy code as they are in bankruptcy and will not resume until it is concluded. The case against MTH was filed late last year or very early this year. |
