| August 23, 2005 Update - K-Line Files for Bankruptcy Protection: Lionel vs. K-Line, part 2 by Erol Gurcan, Esquire RM-6598
On August 23, 2005, K-Line Electric Trains filed for chapter 11 (for reorganization) bankruptcy protection and named Lionel as a defendant in the proceeding. There are now two related court proceedings involving Lionel and K-Line. The first was Lionel's trade secrets lawsuit against K-Line. The following summarizes what has happened so far in the short one month period since all this began .
As many of you know by now, on July 27, 2005, Lionel filed a lawsuit against its competitor, K-Line Electric Trains, its parent company MDK Inc., its sole owner Maury Klein and former Lionel director of engineering, now K-Line employee Robert Grubba. Seeking unspecified monetary damages and a permanent injunction against K-Line to prevent the continued use of Lionel's technology in its products, the basis of Lionel's complaint (the document that starts a lawsuit) involves the alleged misappropriation of its trade secrets for its Odyssey system (cruise control for trains to maintain consistent speed around curves and uphill grades), its "trainsounds" sound system (an entry level sound system and less sophisticated than its "railsounds" sound system), 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. A trade secret is a technology, formula, process or device used in business that is not published or divulged, and gives the one with the secret an advantage over its competitors. A patent (for inventions or improvement to an existing invention) is an example of a trade secret. For a more detailed summary of Lionel's lawsuit allegations, please see my first article on this matter, presently under the "articles/reviews" section of the LOTS website.
On August 9, 2005, two weeks after Lionel sued, the parties appeared to quickly settle the case in court on terms that were favorable to Lionel. The agreement, conducted on the record in the federal bankruptcy court in New York where the matter was pending, was also approved by the judge. It, in part, required K-Line to reimburse Lionel $700,000 for its legal expenses, and included an agreement between the parties for the entry of a permanent injunction preventing K-Line from making or selling any products containing Lionel's technology after January 31, 2006. The parties also stipulated that Lionel would also receive a portion of the profits for the products already sold using its technology. Interestingly, the agreement also acknowledged that Mr. Klein and Mr. Grubba wrongfully acquired and used Lionel's technology in some of K-Line's products. However, things went downhill after that and the agreement unraveled.
On August 10, Lionel posted a press release on its website explaining its understanding of the settlement. K-Line also issued its own press release which differed from Lionel's. For example, K-Line's version stated that Lionel senior electrical engineer Martin Pierson was working for K-Line at the time of the alleged misappropriation, which would appear to contradict any wrongdoing. Lionel's version is that Pierson was an employee of theirs who had signed a non-disclosure agreement at the time he was hired. Lionel lawsuit papers stated it fired Pierson shortly before it sued K-Line, for allegedly conspiring with and giving K-Line Lionel's trade secrets mentioned above. However, Lionel agreed not to sue him, since he had previously agreed to sign a statement admitting he provided K-Line with the misappropriated technology, and they would need his testimony at the time of trial to establish a chain of theft.
Thereafter, the court directed that both parties draft a joint press release. After several days of attempting to do so, they were unable to.
On August 22, the court held a conference and denied K-Line's motion to enforce the settlement agreement. It instead issued a temporary restraining order in Lionel's favor, enjoining K-Line form "manufacturing, marketing, delivering or selling to customers", any of its products containing Lionel's technology, including but not limited to the "trainsounds" sound system, the Odyssey cruise control system and technology in its CW-80 transformer. Thus, at the present time, there is no longer a settlement.
In response and left with few legal options, one day later, on August 23, K-Line filed a chapter 11 ( for reorganization) bankruptcy petition in the U.S. Bankruptcy Court for the Eastern District of North Carolina (K-Line's home state). What is interesting is that Lionel is a named defendant (a person or entity that is sued in court) in K-Line's bankruptcy petition. It is unusual to name a defendant in such a proceeding. K-Line's requested relief in its bankruptcy petition is to stay the trade secrets action brought against it by Lionel until the conclusion of its bankruptcy matter. This in effect will buy K-line some time for now. The court will need to determine how long Lionel's trade secrets case will be stayed now that K-Line has filed for bankruptcy.
As a side note, K-Line's bankruptcy petition acknowledges that it is small player in the model train market, with approximately $7,000,000 to $8,000,000 in gross annual sales. In contrast, it notes that Lionel and Mike's Train House (MTH) collectively have an 80% market share.
***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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