Lionel Settles K-Line Lawsuit: Chinese Train Maker Sanda Kan May
Purchase K-Line As Part Of The Bankruptcy Deal:
Lionel's Appeal In The MTH Case Is Likely To Be Argued Next Spring By Erol Gurcan, RM-6598
December 12, 2005-On October 27, 2005, Lionel announced on its website that it settled its trade secrets case with competitor K-Line Electric Trains. Its press release stated K-Line agreed to the entry of a permanent injunction that prohibits them from manufacturing or selling products that contained its technology. For those of you who are unfamiliar with the items in question, the disputed technology involved Lionel's CW-80 transformer (the one offered with all its starter sets), its "trainsounds" sound system (offered on some of its less expensive and/or entry level train sets) and its Odyssey speed control system (if you want to read about past aspects of the case in more detail, click on the "articles/reviews" section of the LOTS homepage, scroll down to Lionel v K-Line and click). K-Line also agreed to renounce any claim to the above technology, and to pay Lionel $2 million dollars. I waited several weeks to write this article since the first "settlement" fell apart two weeks after it was announced due to a difference in what was agreed to.
Although Lionel and K-Line have settled the trade secrets case, K-Line is still in bankruptcy. The following is the present status of its bankruptcy case. K-Line's deadline to file its reorganization plan with the bankruptcy court expired on November 22, 2005. They still have not done it. However, they presently have a motion (an application for a court order) pending to extend the deadline for 60 days. Any parties who want to oppose the motion have until December 22 to file their papers with the court. If there is no opposition to the motion, an order will be entered granting K-Line's extension of time. Also, prior to making the motion to extend their time to file the reorganization plan, K-Line's attorney also filed a motion with the court in mid-November to have Chinese toy train manufacturer Sanda Kan purchase substantially all of K-Line's assets. Sanda Kan presently manufactures K-Line's trains, and was owed almost $4 million dollars by K-Line at the time they filed for bankruptcy protection. Even before K-Line filed for Chapter 11 bankruptcy protection on August 23, 2005, Sanda Kan required them to make advance payments before they would ship any new product. Sanda Kan also has been manufacturing Lionel's trains since production moved overseas several years ago. K-Line and Sanda Kan representatives had been negotiating an agreement for weeks before the motion was made.
K-Line's attorney has represented in its motion, that, the sale, if approved by the judge, would have Sanda Kan purchase its assets so they can "…seek to stabilize and ultimately turn around and enhance the debtor's business, and hopefully enter into a sale or other transaction in the near future with another party." The motion also states that Sanda Kan has never been in the retail U.S. train market, and it not interested in doing it for the long term. It should be emphasized that Sanda Kan is not engaging in a hostile takeover of K-Line, as rumors to this effect have surfaced among toy train enthusiasts and on computer websites, including the OGR on-line forum. Rather it is a potential consensual sale between both parties. The sale must be approved by the court as part of the bankruptcy reorganization plan (which is why K-Line's attorney asked for the recent 60 day extension). It has not occurred yet, but could in the next few weeks.
Sanda Kan's reason for wanting to purchase K-Line is so that it can control how the company is run in the immediate future so they can be paid the millions owed to them at the present time. K-Line's reasons include that it would almost certainly go out of business without the deal, since Sanda Kan is its principal supplier of trains. Prior to the
K-Line entering into the current deal with Sanda Kan, they approached four other unnamed entities, and none proceeded diligently in negotiations.
If the sale occurs and K-Line continues to make trains, collectors and operators would certainly benefit since more competition ensures lower prices and better product. However, it would not beneficial to Lionel since its principal supplier would be competing directly against them. Additionally, the deal would not make Sanda Kan responsible for payment of any monetary amount to Lionel under the recent K-Line Lionel trade secrets settlement agreement.
Concerning Lionel's appeal in the MTH trade secrets lawsuit, all appeal papers were filed with the Sixth Circuit Court of Appeals in Cincinnati at the end of August. However at the present time, the court still has not set an oral argument date. On that day, each sides attorney will appear before the court and argue why the jury's $40.8 million dollar
verdict should be affirmed or reversed. When I recently spoke to the court clerk, she told me the oral argument date of the appeal would likely occur sometime in the spring. Once that occurs, it will still be many months before the court issues a decision. That likely will not occur until late 2006.
I will continue to provide updates to the LOTS website as circumstances
warrant. ***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.
| 
