Erol's Legal Update on MTH's Patent Infringement Claim Against Lionel By Erol Gurcan June 7, 2006-As some of you may recall from my legal articles published in April, the appeal in the Lionel MTH trade secrets case is scheduled to be heard in the Sixth Circuit Court of Appeals today. Some are hoping that once there is a decision by the appeals court, which is expected late this year, that this will end the six years of litigation between the two train companies, and once again allow them to focus on making quality O gauge trains. However, unfortunately, there remains another legal issue between the two, which will most likely be around long after the trade secrets case is decided. Specifically, this involves a patent infringement claim against Lionel, alleging it infringed an MTH patent involving its "use of a microprocessor controlled system for the synchronization of puffing smoke and sound effects with the speed of the model train." By way of background, this matter was most recently brought to light by D. Railer of the Hi-Rail Times portion of the Coil Couplers web site. On March 11, 2006, D. Railer reported that based on (unnamed) inside sources at Lionel, MTH had recently filed a patent infringement suit against Lionel involving synchronized puffing smoke. Thereafter, I wrote that MTH owner Mike Wolf, who was on business in China at the time, emailed Charlie of Nassau Hobbies and me, stating MTH had not recently sued Lionel for patent infringement, calling the statement a "lie". One day after my information was posted, on March 13, 2006, the Coil Couplers web site posted what it called a "correction", now stating MTH had recently filed a patent infringement claim against Lionel. I criticized the Coil Couplers correction, stating a claim and a lawsuit are not the same in the legal world, and additionally noted the claim was not recent, having been filed in August 2005 based on documents posted on the Coil Couplers web site. Some on the OGR forum disagreed with my explanation of the situation, stating I was splitting hairs. Regardless, it is undisputed that in August 2005, MTH filed a 17 million dollar patent infringement claim against Lionel in the United States Bankruptcy Court for the Southern District of New York, the court where its bankruptcy proceeding has been pending since November 15, 2004. The infringement claim also alleges inequitable conduct on Lionel's part in its dealings with the US patent and Trademark Office, rendering Lionel's patent for the "Smart Smoke Unit" invalid. So, the question becomes, why am I raising this matter again now when there has been no news about it since the Coil Couplers story almost three months ago? The reason is, on May 31, 2006, Lionel's new bankruptcy attorneys filed a motion (an application for a court order) with the bankruptcy court, requesting it be allowed to obtain discovery with respect to MTH's 17 million dollar patent infringement claim. (Most of the following information was obtained from Lionel's motion) Specifically, the discovery sought involves infringement related documents from both MTH and Train America Studios, and depositions of persons from both companies. (A deposition occurs when a witness, who has first been sworn in, is asked questions by an opposing party's attorney, and the questions and answers are recorded by a stenographer. A written record in the form of a booklet is then prepared by the stenographer). The depositions of MTH persons would at least involve owner Mike Wolf and David Kriebiehl, its Vice President of Research and Development, as both are allegedly listed as inventors according to Lionel's motion. Lionel's Lawyers want the depositions to cover five topics, 1) Lionel's alleged infringement of MTH's patents, 2) validity and enforceability of the patents, 3) MTH's alleged 17 million dollars in damages (which Lionel's attorneys claim was not adequately set forth in the August 2005 claim), 4) MTH's allegations that the Lionel smart smoke unit patent is invalid, and 5) MTH's infringement of certain Lionel patents and MTH's related revenues. With regard to any MTH infringement of Lionel patents (number 5 above), the motion does not specifically state what, if any, Lionel patents, MTH has violated. However when the Coil Couplers story was reported in March, Mike Wolf emailed me and stated Lionel claims that DCS (MTH's digital remote control system) violates Trainmaster Command Control ( TMCC) patents, and wants it taken off the market. Mike Wolf also emailed me on June 5 concerning Lionel's motion, stating "Lionel is now seeking all information concerning DCS and all of our technology." Because of this new development, Mr. Wolf stated he may have no other choice but to sue Lionel for patent infringement in federal district court, so the federal rules of discovery will apply, instead of what he called a broader "fishing expedition" standard concerning "MTH's most guarded secrets." Surprisingly, Lionel's motion, characterized its ability to conduct depositions in bankruptcy under the same broad standard. Lastly, Mr. Wolf stated he thought it would be best if both parties wait until the Sixth Circuit Court of Appeals rules in the trade secrets case before more money is spent on more lawyers and litigation concerning the patent infringement claim. The basis of Lionel's motion is to have more information so it can properly decide to defend or resolve the MTH patent infringement claim, and/or determine if it has any potential infringement claim against MTH, which may reduce or offset any MTH claim. It also seeks to find out how MTH arrived at 17 million in damages, when the claim calculates the infringement at 5.8 million dollars. The motion is scheduled to be heard in the bankruptcy court on June 15. It is expected MTH's lawyers will oppose Lionel's motion I believe the court will grant part of Lionel's motion as to the discovery of documents, but will deny those requests which are overbroad and/or irrelevant to the claim. I also expect it will also grant most of the requested depositions of MTH and Train America Studio persons. The general rule in legal proceedings is to allow broad and liberal discovery. However, such a wide standard sometimes invites the possibility of abuse by attorneys. I will continue to update all as necessary. | 
