Korean Situation Update

Lionel had scored a victory when a District Court in Michigan denied MTH's request that Lionel not be allowed to distribute several steam locomotives made for them by Korea Brass. The ruling also denied MTH compensation from Lionel on sales made from the N&W Class A. Contrary to some belief in the hobby, this was not the end of the litigation between Lionel and MTH in the United States or Korea Brass and Samhongsa in Korea.

Below are the two press releases made by Lionel and MTH after the ruling.

From Lionel:

CHESTERFIELD, MI -- June 19, 2000 -- Lionel, L.L.C. announced today that it has successfully defended against a request for injunctive relief filed by M.T.H. Electric Trains in the Eastern District Court of Michigan. The Court turned down the M.T.H. request in a ruling it announced in Court on June 14, 2000.

M.T.H. filed a lawsuit against Lionel in the Eastern District of Michigan this year, claiming, among other things, that Lionel knew, or should have known, that a subcontractor doing independent design work for Korea Brass, a Korean supplier for Lionel, allegedly used M.T.H. drawings to aid in the design of Lionel locomotives. It claimed theft of its trade secrets. Its claims were highly publicized, and the subject of a number of M.T.H. press releases. 

In the lawsuit, M.T.H. sought to have the court issue an injunction preventing Lionel from importing and selling any products made by Lionel supplier Korea Brass. The court ruling turning down M.T.H.'s request was made following a lengthy hearing, during which Mike Wolf, the CEO of M.T.H., testified. 

Richard N. Maddox, Lionel president & COO, would not elaborate on the details of the favorable decision of the court, but did say, "We were confident that the Federal Court would rule on the facts and turn down the M.T.H. request. We truly believe that this type of action by M.T.H. is harmful to our industry. Market success should be achieved through competition, not through the press or the courts."

Lionel remains an American icon that designs, manufactures and markets train sets for children and limited-edition trains and accessories for hobbyists and collectors. Lionel trains are among the most valued toy trains in the market today, being collected or operated by over 100,000 toy train hobbyists. The success of Lionel is the result of a 100-year tradition of painstaking attention to quality. Lionel sells its products through a nationwide distributor and dealer network, the largest in existence today.

Today, the Lionel legend continues to move towards the 21st century, providing kids and "kids at heart" with the finest quality toy trains. Thanks to a history of innovation and quality, Lionel -- the world-renowned manufacturer and marketer of electric toy trains -- is as timeless as the trains it produces.

From M.T.H. Electric Trains:

[June 20, 2000] M.T.H. Electric Trains® announced today that the company's lawsuit against Lionel, L.L.C. for unfair competition continues in the Eastern District of Michigan. M.T.H. claims in the suit that, among other things, Lionel® knew or had reason to know that its Korean manufacturer used M.T.H.'s proprietary designs to assist in the design of Lionel locomotives. A direct employee of Lionel's manufacturer and others were found guilty of the theft of M.T.H. designs. 

M.T.H. believes that the evidence reflects the justice of M.T.H.'s legal position. M.T.H. remains confident that a jury's decision will affirm this view. 

M.T.H. has always believed that competition is good for the company and for model railroading as a whole. However, the use of stolen M.T.H. plans to aid in the design of Lionel's locomotives undercuts all sense of fair competition in the marketplace. M.T.H. continues to pursue legal means of redress and seeks to prevent others from profiting from M.T.H.'s extensive research and development process.

About one week after this news broke, the Korean courts granted a similar request by Samhongsa for the seizure of some Shays built for Lionel by Korean Brass. The following two statements were released to dealers by Lionel and MTH separately.

From Lionel:

June 29, 2000

Recently, the Federal Court of the United States refused to grant a request by M.T.H. Electric Trains for preliminary injunctive relief, which would have prevented Lionel from importing product from it's supplier, Korea Brass.

Among the claims rejected by the judge at the preliminary injunction hearing were M.T.H.'s allegations that Lionel knew, or should have had reason to know, that an independent subcontractor of Korea Brass was using Samhongsa drawings and other alleged "trade secret" information to aid in the design of Lionel locomotives. (Samhongsa is Lionel's former Korean supplier and currently serves as the Korean supplier to M.T.H.) Also, M.T.H. did not establish to the court's satisfaction at the preliminary injunction hearing that the drawings and other information allegedly obtained by Korea Brass and/or its independent contractor constituted "trade secrets." 

Until now, our supplier Korea Brass has successfully defended itself against actions by Samhongsa in Korea. However, a Korean court recently issued a preliminary attachment order, requested by Samhongsa, seizing (we believe wrongfully) a large portion of a shipment of Lionel Shays, a product well known to have been tooled and designed by Samhongsa for Lionel over ten years ago.

Korea Brass plans to present to the Korean Court documents showing proof of Lionel's ownership of the tools and designs for the Shay, as well as the transcript of the decision of the U.S. District Court here denying M.T.H.'s request for a preliminary injunction. However, because we have been told that the Shays are being held as security for a potential judgment by Samhongsa against Korea Brass (and not because they were supposedly manufactured with the benefit of stolen trade secrets), we do not have any reason to believe that this information concerning Lionel's ownership will cause the Court to reverse its order of attachment. In short, we believe it is unlikely that we will see shipment of these fine models in the near future. Based on our recent experience, little due process can be expected and a lengthy struggle is likely.

Lionel has made the decision to distribute the limited number of these locomotives in our possession and to seek out another Korean manufacturer to produce a new run of Shays, hopefully before year-end.

We are extremely sorry for the inconvenience this causes you and your valued customers. Thank you for your kind patience and understanding.

Respectfully yours,

Richard N. Maddox
President & COO

From M.T.H. Electric Trains:

July 5, 2000

We have recently received many calls from retailers like you, expressing concern about the Korean court order to seize several products made by Lionel supplier Korea Brass in connection with the court case there. The concerns arise from a letter Lionel sent out last week. A letter which, sadly, gave a very incomplete and misleading picture of the situation.

When there is a lack of factual information, rumor and innuendo will spread. Prior to Lionel’s letter, MTH had our lawyers contact Lionel’s lawyers with a proposal to jointly publish the complete transcripts of the injunction hearings and exhibits, so that consumers and retailers can read them and come to their own conclusions. Lionel would only agree to publishing the final few hours of the four-day hearing. Omitting the earlier testimony and the exhibits presented by both parties prevents a fair understanding of the case. For example, Lionel provided through discovery three diskettes containing some AutoCAD design drawings for the N&W Class A with creation dates ranging back as far as 1994. Korea Brass was not in the die-cast engine business at that time, but it was exactly the time MTH was creating its Y6b tender, which was also used for the MTH Class A. Lionel made the astonishing claim that they never reviewed the material on the diskettes, because they did not have the latest version of AutoCAD. MTH believes full disclosure is the only way to clear the air, and believes Lionel should reconsider making joint publication of the transcripts and exhibits, so the documents can speak for themselves. Clearly the public is not well served by dueling sound bites and spin doctoring.

On May 23 (well before the injunction ruling on the stateside MTH/Lionel lawsuit), the Korean court issued a seizure order for several products made by Korea Brass for Lionel, including the Shay, Pennsylvania T-1, Scale Hudson, and Baby Hudson. The seizure order was based on credible evidence provided by Samhongsa to the Korean court that Korea Brass used stolen trade secrets in their production. The seizure was not due solely to “security for a potential (monetary) judgement”, as Lionel would like to imply.

The 16 die cast tool sets used in the 1991-92 Lionel Shay production was shipped to Lionel at the conclusion of the Lionel-MTH/Samhongsa relationship. While the new Shays may have used the same tooling for those parts, additional know-how and part drawings are needed to complete a working Shay. Mr. Ahn, Korea Brass’ chief designer, has admitted to stealing and using MTH designs in the new Lionel Shay production.

Rather than respond to Lionel’s recent letter with mere claims that their designers stole things, we have decided to release the attached transcripts from the Korean court case and let them tell their own story. These are translations of the interrogation of four individuals regarding their theft of trade secrets from MTH supplier Samhongsa and use of stolen designs at Lionel supplier Korea Brass. This is some of the evidence the Korean court used when it accepted guilty pleas from all four individuals, sentencing them for illegal theft and use of trade secrets. Please note it is commonly accepted by the rules of evidence that people who admit to committing crimes are generally telling the truth.

When you read the interrogations, you will see Korea Brass’ chief designer admit to stealing MTH designs for all of the products included in the seizure. And you will read how they used these designs to produce the Lionel products that are currently at issue. In fact, Lionel has admitted in the lawsuit that they did not forward any part drawings from the 1990 Lionel Scale Hudson production run to Korea Brass for use in producing the 2000 Scale Hudson production.

Although Lionel President Richard Maddox has stated that he does not wish to try this case in the media, Lionel has repeatedly issued press releases or letters, promoting a very one-sided view of the case. While MTH is committed to not initiating further press releases and letters regarding the case, we will not sit back and allow Lionel to spread misleading innuendo without responding.

M.T.H. Electric Trains

MTH has provided us with the full transcripts of the four interrogations. In their original form, they were almost 50 total pages in length. We edited out questions that pertained to each individuals religion, military experience, family make-up, and other personal background in order to somewhat shorten the documents. We also edited out the introductory court jargon for each interrogation session. All questions and answers dealing with the case itself are listed verbatim from the translation. They are still a very long read and we make them available as a service to those who would like to gather as much information as they can regarding this on-going case.

Korean Interrogation Transcript #1

Korean Interrogation Transcript #2

Korean Interrogation Transcript #3

Korean Interrogation Transcript #4