Appeals Court Report

[nblum]

From Bob Bartizek:
"Bob

Posted June 07, 2006 04:04 PM
***************************************
Mike’s Train House v. Lionel LLC
Eastern District of Michigan at Detroit J. O’Meara

In this diversity misappropriation of trade secrets action tried to a jury, defendant appeals the judgment for plaintiff and the denial of its post-judgment motions. (20 Minutes for Plaintiff, 20 Minutes for Defendant)
***************************************

This was the announcement on the court docket that greeted me outside Courtroom 403 in Cincinnati this morning. I took the day off to attend the oral arguments phase of this appeal. Mike Wolf was in attendance, along with 4 or 5 attorneys (they left after the proceeding to caucus in a room outside the courtroom, so I couldn’t get an exact count). Jerry Calabrese was also in attendance with what looked like 10 attorneys.

I am not a lawyer, and the procedure today was for the benefit of the appeals judges, not to help the audience understand what was going on. I took lots of notes, but I’m sure I have some of the terminology wrong and incorrect spelling of some names. This is likely to be the only report you’ll see, so the readers will have to live with it. Perhaps Erol will read this post and correct some of my terminology mistakes.

The appeals panel consisted of 3 judges: Mr. Cole, Ms. Daughtrey and Mr. Graham. Prior to the MTH v. Lionel case, we were treated to a sentencing appeal in a child pornography case from Tennessee and a DUI/threatening a federal officer case from Kentucky. When the MTH v. Lionel case was called, there were 28 people in the courtroom (other than court staff), and as far as I could tell there were only 3 model railroad spectators (including yours truly).

Lionel went first, represented by Mr. Hacker and Mr. Dellenger. Mr. Hacker requested and was granted 5 minutes of rebuttal time to follow the MTH arguments. Mr. Hacker argued that the case was very complex, with many issues concerning exactly what happened, when and by whom. However, the evidence presented by MTH at trial was very narrow. He argued that the decision to hold defendants liable, jointly and separately (one of those legal terms) for $25 million in current and future profits was incorrect. He argued that the court should have allocated those damages among the three defendants (Lionel, Korea Brass and who?). In order to allocate, he argued that all of the information on all of the trains involved along with exactly what happened when would need to come in.

Mr. Hacker stated that the entire model train industry is based on copying. Manufacturers copy real trains for the model trains and they copy from each other all the time. The key is to separate trade secrets from general knowledge or from specific knowledge that is common within the industry.

Judge Daughtrey pointed out that the court ahs testimony on record from Koreans that they did copy computer files. Mr. Hacker said that the key is whether trade secrets were copied, or simply design files. He went on to state that MTH’s own witness said that 80% of a model train can be determined by looking at the competitor’s product.

Mr. Hacker then quickly summarized his position prior to yielding the balance of his time to Mr. Dellenger. He said that Lionel had issues with:
The fact that MTH claimed that manufacturing tolerances were trade secrets,
That the court failed to allocate damages among the defendants,
That the damages improperly consisted of both lost profits to MTH
and unwarranted profits to Lionel for a period of 7 years,
That the damage award made no attempt to account for future market
conditions during those 7 years.
He listed a couple of other points, but too quickly for me to capture them.

Mr. Dellenger began by saying that a professor Lee from Korea was the most important “witness” at the trial, since he had examined 95% of the trains at issue (he is a professor of Mechanical Engineering). His findings were presented at trial by a Dr. Stein (from the University of Michigan College of Engineering), but professor Lee was not present at the trial. Dr. Stein relied on Lee’s report to arrive at a total of 16 trains that were copied.

Lionel objected to the testimony about Lee’s report as hearsay and also to their perception that Dr. Stein was attempting to qualify professor Lee as an expert. He cited a prior case from the 1890’s that he claimed was directly on point.

Judge Daughtrey said that while there was testimony from Dr. Stein about the Lee report, the trial judge did not let the report itself into evidence.

Mr Dellenger was out of time and closed by saying that there was no proof of American trade secrets misappropriation.

MTH was represented by Mr. Swift. He opened by stating that the evidence showed that Korea Brass and Lionel not only stole MTH trade secrets, but they were trying to put MTH out of business (e-mail evidence was said to show this). He said that Dr. Stein used professor Lee’s report under Rule 703, allowing an expert to refer to another expert’s report to help form his opinion.

Mr. Swift referred to a model of the C&O Allegheny (that was displayed on the MTH attorney’s table, and no, I didn’t get to walk out of court with it), saying that a model like that has 300-400 parts that must all fit together properly. There are 200-300 engineering drawings, each with close tolerances.

Judge Daughtrey acknowledged that she might be the only one in the room that didn’t have Lionel trains as a child. She then asked why MTH did not bring professor Lee to court.

Mr. Swift answered that professor Lee had refused to testify for either party. He went on to allege that 3500 drawings were destroyed by Korea Brass and Lionel so they could not be used in the case. As a result, Dr. Stein was only able to compare 162 pairs of Lionel and MTH drawings, while Dr. Lee had 3200 pairs available.

Judge Cole pointed out that Lionel had stated in their brief to the court that Dr. Lee was not a model train expert. Mr. Swift stated that professor Lee teaches design drawing, and he compared design drawings. He reiterated that Lionel destroyed massive amounts of documents, including design drawings and production schedules which would have shown that Lionel had no time to develop designs on their own.

Judge Graham referred to documents in front of him and reported that Rule 703 says that information used by an expert must be “the type of information commonly used by experts in the field and generally relied upon to form opinions.” He questioned whether a report from a Korean professor is something that “is commonly used by experts in the field generally.”

Judge Daughtrey said that if Dr. Lee’s report is excluded, then all that is left is a finding that 55% of the 162 drawing pairs examined by Dr. Stein were copied.

Mr. Swift agreed that Judge Daughtrey was correct, but e-mails show that Lionel had MTH production schedules and planned to bring out trains to preempt MTH. He said that the jury was allowed to consider that Lionel and Korea Brass destroyed massive amounts of documents during their deliberations.

Regarding joint and separate damages, Mr. Swift said that 46 states have courts that have heard trade secret cases, and to date non of them have ever applied allocated damages in these cases. “I think this court would be on dangerous ground to apply comparative fault in this case, when it has never been done before.”

Mr. Swift’s time expired, and Judge Daughtrey stated that a question might be who did the stealing, who knew, who profited and how much?

Mr. Dellenger gave a brief rebuttal in which he said, regarding document destruction, that the Michigan judge said that he had not heard evidence that Lionel intentionally destroyed documents, nor information on how many documents were involved. He said that the MTH attorneys had CD’s that they acknowledged they had received from Dr. Lee, so they had them (it sounded to me like he was referring to the 3200 drawings, but he did not come out and say that). His parting words were, “This is not a copyright case, it is a trade secrets case.”

That’s it. That’s what I heard. Let the spin-doctoring begin! Roll Eyes

Bob Bartizek"

[Poppa_Zit]

Thanks, Bob. Great reporting. And thanks, Neil (not Besougloff or Young or Down).

[More to restore]

I am a complete laymen in this, but it does not sound like a strong case for MTH, some wacky Korean statement (and this bloke does not even want to testify), e-mails (are e-mails legal proof in the US?, not here), accusations that documents and drawings have been destroyed (how to prove that somebody has destroyed something?, do they have the ash as prove?).
Strange....

[Poppa_Zit]

QUOTE: Originally posted by More to restore

I am a complete laymen in this, but it does not sound like a strong case for MTH, some wacky Korean statement (and this bloke does not even want to testify), e-mails (are e-mails legal proof in the US?, not here), accusations that documents and drawings have been destroyed (how to prove that somebody has destroyed something?, do they have the ash as prove?).
Strange....

What you ask is exactly what makes it so interesting.

[dwiemer]

Can't wait for these companies to return their focus on making trains. I am thankful for the report, but when I look at many of the items that MTH has put out, they look just like Lionel trains of yesterday. Hard to see which is the "Bad Guy" in all this.
Dennis

[trigtrax]

am a complete laymen in this, but it does not sound like a strong case for MTH,

The case itself was very strong for MTH, $40 Million strong in fact. The purpose of the Appeals court is to find legal flaws that would have led to an opposite decision. Lionel is admitting to stealing but bickering over degrees. Claiming they only stole a little bit?

All that nonsense aside the appeals court will rule on the legal issues. But this report show the true nature of Lionel, far from an Icon IMO

[Anonymous]

Has anyone bought the products that being argued over in this case?

Are these Steam Locomotive Models good, great, or excellent?

I have not bought any Scale Steam Locomotives from Lionel or MTH.

People who operate only Diesel-Electric Locomotive models would like to hear from the actual purchasers of these specific Steam Locomotive Models.

Andrew Falconer

[dougdagrump]

I'll bet that the knives are flying fast and furious on a couple of un-named boards. [(-D]

[Poppa_Zit]

QUOTE: Originally posted by trigtrax

am a complete laymen in this, but it does not sound like a strong case for MTH,

The case itself was very strong for MTH, $40 Million strong in fact. The purpose of the Appeals court is to find legal flaws that would have led to an opposite decision. Lionel is admitting to stealing but bickering over degrees. Claiming they only stole a little bit?

All that nonsense aside the appeals court will rule on the legal issues. But this report show the true nature of Lionel, far from an Icon IMO

Cases like this one tend to have a polarizing effect, and so I think we need to exercise some caution here and not let our personal opinions of MTH or Lionel or their products or philosophies or hearsay enter into how each of us interprets the merits of this case. The outcome won't be decided on this forum, so let's sit back and observe and allow the judicial process take whatever course it will. At this point, predictions are a dice roll, at best.

Like many of us, I have followed this case. I have no bias (I'm a proud S-gauger), and from what I read would hardly describe MTH's case as "strong." And I see nowhere where Lionel "admitted to stealing." And if you we can assume Bob's report to be reasonably accurate and you read all of it, you'll see that. Don't fall into the trap of believing one side's counsel and dismissing the other based on personal bias.

[Anonymous]

My guess: MTH will prevail. Just how much they will prevail is still anyone's guess, but it may be something short of the original award of $40 million. Strictly a guess on my part. I buy products from both firms in pretty much equal amounts, so I don't have a dog in this fight. But it's kind of fun to make a guess just to make reading this stuff somewhat worthwhile over the long haul.

[Anonymous]

QUOTE: Originally posted by Allan Miller

My guess: MTH will prevail.

Your guess is right on![tup][#ditto]

[msacco]

Both companies are pretty pathetic to me right now. yucccccccccccck.

Postwar Rules !.

Mike S.

[tsgtbob]

QUOTE: Originally posted by msacco

Both companies are pretty pathetic to me right now. yucccccccccccck.

Postwar Rules !.

Mike S.

X2
I normally try not to do that, but, at this point, who cares anymore?
One thing that escapes ALL of the toy train mfgrs is the one thing that the Auto makers finally discovered.
The secondary market (used cars or trains) can overwhelm to new market.
Thanks Bob, for posting this, even though not too many of us really understand it.

[MartyE]

QUOTE: My guess: MTH will prevail. Just how much they will prevail is still anyone's guess, but it may be something short of the original award of $40 million.

I think your probably right Allan. I always thought that Lionel owed MTH something but personally I think the judgement was a bit off. I hope it wraps up quickly regrdless and we can all move on!

[trigtrax]

Cases like this one tend to have a polarizing effect, and so I think we need to exercise some caution here and not let our personal opinions of MTH or Lionel or their products or philosophies or hearsay enter into how each of us interprets the merits of this case.

I don't see it that way, in this appeal Lionel doesn't claim innocence. They just argue the significance of what they stole. The level of their guilt and how the damges for what they did should be redistributed. Okay so you squeeze it in to tight legal definitions but like the song says:
"You don't need to be a weatherman to know which way the wind blows"

Why worry about polarizing effects? This company admitted to stealing and using other peoples stuff. What else do you need to say?

[nblum]

I agree with those like Poppa Zit who have pointed out that this case obviously brings out a lot of psychopathology and misunderstanding amongst the participants in the hobby.

One of the reasons for this is that one of the manufacturers has frequently played upon its customers' sense of superiority and righteousness, despite using the legal system themselves to intimidate and seek unfair advantage over their competitors. The origins of the hostility at the consumer end comes from both passionate support for their manufacturer of choice, and a relentless attempt over the years to demonize the competition, if you get my drift. Bad values amongst the leadership of the hobby lead to bad values amongst the loyal fans. Plus the fact that some members of the hobby are legitimately nuts.

[Anonymous]

"One of the reasons for this is that one of the manufacturers has frequently played upon its customers' sense of superiority and righteousness, despite using the legal system themselves to intimidate and seek unfair advantage over their competitors."
----------------------
You're absolutely right about that, Neil! Downright unfair of Lionel to have destroyed K-Line with such tactics! [:)]

[nblum]

"You're absolutely right about that, Neil! Downright unfair of Lionel to have destroyed K-Line with such tactics!"

Actually, Allan, I was thinking in more general terms. :) Megalomania hasn't been restricted to only one company over the last 20 years.

[palallin]

QUOTE: Originally posted by trigtrax



I don't see it that way, in this appeal Lionel doesn't claim innocence. They just argue the significance of what they stole. The level of their guilt and how the damges for what they did should be redistributed. Okay so you squeeze it in to tight legal definitions but like the song says:
"You don't need to be a weatherman to know which way the wind blows"

Appeals court is not the venue to argue innocence. Appeals court determines the legal soundness of the case. When a conviction or an award is overturned or modified on appeal, the action is a result of legal flaws in the case, not a new determination of guilt or innocence.

[Warburton]

This whole thing has been ridiculous from the start. MTH has remade so much of Lionel's late pre-war and early postwar stuff (like accesories) without repercussion. They obviously had the legal right to do so, but it's only a step away from what Lionel was convicted of doing. And what about Williams? They blatantly copy Lionel's postwar stuff -- even use its postwar catalog artwork. Legal, I guess, but ethical? I wi***hey all would concentrate on making good products at a fair price and settle this thing before it goes on any longer. Of course, I know they won't!!

[Poppa_Zit]

QUOTE: Originally posted by trigtrax

I don't see it that way, in this appeal Lionel doesn't claim innocence. They just argue the significance of what they stole. The level of their guilt and how the damges for what they did should be redistributed. Okay so you squeeze it in to tight legal definitions but like the song says:
"You don't need to be a weatherman to know which way the wind blows"

Why worry about polarizing effects? This company admitted to stealing and using other peoples stuff. What else do you need to say?

Here's what I need to say, and thank you for asking: In another thread, I commented that I can't wait for Congress to finally get off the fence and officially decree that Publishing Law applies broadly to the Internet, just as it does to newspapers, books, magazines, other printed materials as welll as TV and radio stations. How you choose to phrase your personal opinions is a perfect example of language that could be actionable, should that law finally be extended to the Internet.

Publishing Law should apply to the 'net because forums like this allow anonymity, which encourages some people to post things that, under a legitmate byline in a legitimate print publication, would spark a firestorm of lawsuits. Businesses and individuals deserve the same protection from false claims, defamation, libel and slander on Internet forums as they do other media.

The media provide a controlled forum for news, thoughts and ideas, and are held responsible for whatever is included in their publications or broadcasts, whether they generate the copy themselves in-house or not. When writing on controversial topics like this, one safety net (it also shows a basic courtesy) is to preface words like "stole" with "allegedly" because it has not been proven, only alleged, in this case by MTH.

While Publishing Law does not at this time apply to the Internet as an entity, individual cases of severe impact are being prosecuted. The shield of anonymity is not guaranteed by the U.S. Constitution, and true identities of guilty authors making vicious statements are being released via court orders. And any forum that advertises itself as being "moderated" then would likely be penalized more harshly should anonymous posts containing libelous, defamatory or slanderous statements be allowed to stand by those doing the moderating.

Making a post using terms like "admitted to stealing" and "stole" [your words] to describe Lionel's alleged actions is simply irresponsible. Those are your own interpretation of a set of circumstances that have yet to be proven, let alone admitted. This case is in appeal, which means a panel of judges is investigating to see whether proper legal protocol was followed by the court that heard the initial case. It is not an opportunity for Lionel to profess its innocence.

If Lionel had done what you describe ("admitted to stealing"), it would have pled guilty and not appealed. Lionel has not admitted to stealing anything, but thanks to your own personal biases and wishful thinking, you choose to see it that way. One thing Lionel is trying to do in appeal is to have the case reheard on the basis that the original decision was based on an unclear premise -- what constitutes proprietary technology in the toy train industry, and what is considered "fair use" based on what history has deemed acceptable in the industry.

It is also no secret toy train moguls like Mike Wolf and Jerry Calabrese read forums like this on a regular basis. Is it unlikely that they'd unlea***heir attorneys over these type of posts? Probably, but in today's extremely litigious society, who knows? They wouldn't do it for monetary reasons as much as to set an example.

[Anonymous]

Has anyone bought the products that being argued over in this case?

Yep, I have a Lionel Westside Lumber Shay. TMCC equipped with all the trainsounds etc. A really cool engine to pull my log cars, and it can creep along slow as you please- until it tries to go through a FasTrack 060 turnout where it stalls- unless it is cranked up to about 30 MPH! Then it still stutters through the switch! The TMCC electronics board was unplugged inside the cab and rattling around when I took it out of the box and I had to take the engine apart to fix it before it would run. If Lionel stole the plans for this engine as accused, then they never tried it out in a prototype model before they tooled up, manufactured, and sold it, or, they would have known that it won't go through a turnout without stalling unless there is momentum to carry it through. Being new to O scale and an ex-*** in love with geared engines caused me to buy this engine almost on impulse. I should have done my homework first. After I started reading the engine's owner's manual I discovered that it would not run on anything less than 052 radius track( A call to Lionel tech assistance did confirm that it would not run on the 036 FasTrack layout that I just built but that it would run on 048). This engine retails for more than a Grand! If you ask me, Lionel should counter-sue MTH for allowing poorly performing engine drawings to be snitched. As usual, it seems like the people who are paying the price are the end users who plunk down a lot of dollars for a crappy product.
I chose to go with Lionel due to reputation and childhood knowledge. Did not know about the lawsuit at the time of purchase or I would have passed this one by. Lionel is batting 1000 though. Both of the engines I recently purchased (Shay and Berksire) did NOT work out of the box. I had to fix them to use them the first time! I'm glad the only kid in my house is me because it would have been a bad scene if it was Christmas and there were little ones opening these trains up and finding them "Broke in the box"

My 2 cents,

blabree11

[nblum]

This civilized discussion of the issues, and knowledgeable commentary could become a pattern in our hobby if it gets out of hand :). One can only hope......Thanks again Poppa Zit.

[Anonymous]

The last information that I knew about the employees who apparently stole the drawings is that they have moved on to other jobs in the model railroading industry.

Will any of the individuals who stole the drawings be mentioned by name again?

Andrew Falconer

[trigtrax]

Making a post using terms like "admitted to stealing" and "stole" [your words] to describe Lionel's alleged actions is simply irresponsible. Those are your own interpretation of a set of circumstances that have yet to be proven,

Not quite, These were essentially the finding of facts by the Michigan Jury which described Lionel's actions as "willful and malicious". Now through this appeal we find out that Lionel destroyed thousands of drawings and of the few remaining drawings 55% were shown to be copies. Further, Richard Maddox told me personally he was shown what his interviewers alleged to be MTH's production schedule at the time he took the position at Lionel. He claimed that it was a fake, but Mike Wolf told me personally that it was genuine. Between that and the discovery of e-mails between Lionel and Korea I have no doubt that Lionel was fully involved in the conspiracy to use MTH designs and time the release of similar products for maximum econmic effect on MTH sales.

So you get a bunch of high-priced lawyers and nit pick over what you stole as being this and not that. But don't claim I'm irresponsible for calling a spade a spade.

[Poppa_Zit]

QUOTE: Originally posted by trigtrax

Making a post using terms like "admitted to stealing" and "stole" [your words] to describe Lionel's alleged actions is simply irresponsible. Those are your own interpretation of a set of circumstances that have yet to be proven,

Not quite, These were essentially the finding of facts by the Michigan Jury which described Lionel's actions as "willful and malicious". Now through this appeal we find out that Lionel destroyed thousands of drawings and of the few remaining drawings 55% were shown to be copies. Further, Richard Maddox told me personally he was shown what his interviewers alleged to be MTH's production schedule at the time he took the position at Lionel. He claimed that it was a fake, but Mike Wolf told me personally that it was genuine. Between that and the discovery of e-mails between Lionel and Korea I have no doubt that Lionel was fully involved in the conspiracy to use MTH designs and time the release of similar products for maximum econmic effect on MTH sales.

So you get a bunch of high-priced lawyers and nit pick over what you stole as being this and not that. But don't claim I'm irresponsible for calling a spade a spade.

You seem to be quite well informed about this legal action. But your comments raise some important questions.

This is a civil case, which requires much less evidence than a criminal case. (If the evidence was so rock-solid, why didn't MTH press criminal charges?) And sometimes we tend to forget that a ruling in favor of the plaintiff does not mean all of the charges made against the defendant are true, either. In a civil case, the jury just needs to find "some" wrongdoing.

I still haven't seen any documentation where Lionel "admitted to stealing." Having a jury surmise Lionel's actions were "willful and malicious" does not constitute any admission by Lionel. It is the opinion of 12 people. Remember, juries found OJ and Michael Jackson not guilty.

What you were told by Richard Maddox and Mike Wolf sounds very interesting, and you use it to bolster your argument. But are those quotes part of the court record, which in fairness is all that should be considered admissible in this discussion? Otherwise, it is just hearsay.

Obviously, you have read and heard enough to support your opinion. You say: "I have no doubt that Lionel was fully involved in the conspiracy to use MTH designs and time the release of similar products for maximum econmic effect on MTH sales."

Well, I do have doubts because I haven't seen enough to convince me. Perhaps skewing your own sense of fairness are the personal relationships you admit to having with some of the principals in this case.

You say Lionel destroyed thousands of documents and of those remaining, 55 percent were copies. What seems to be at issue in the appeal is whether those copies were indeed proprietary technology. And you cannot assume anything about the destroyed documents, because they do not exist and are not admissible. The act of destroying documents is in itself not illegal.

I'm just trying to be responsible because that's how I've been trained. So I cannot yet form an opinion because between the court documents and news reports I've read, I'm not sure what's true, and how much of what anyone did was genuinely illegal. And that seems to be the engine driving Lionel's appeal. They'll have their day in court.

I'd also like to know how MTH computed its claim for damages in this case, because no one is certain whether any of the technology involved would actually drive sales or hurt sales. The rule of thumb in these cases is "Ask for the moon, and cross your fingers you get something." How can anyone assign a dollar value to any of this? Which means I'd like to know how the jury computed the award. $41 million from Lionel and Korea Brass sounds pretty arbitrary to me. Where did they get that number?

There are still a lot of gray areas and questions to be asked. Apparently, I'm not as easily convinced as the jury was so I'll be content wait to see what shakes out in the appeal.

[trigtrax]

I can see the jury verdict in this case has upset you. The fact is MTH sought 25 Million in damages and the Jury tacked on an additional 15 million. The Judge also kicked in an injunction to prevent Lionel from selling the copied units. That was probably an emotional response to the overwhelming evidence and Lionel's attitude towards the whole thing.
Richard Maddox personally told me he warned the powers that be at Lionel that they didn't need to take this road, but they ignored him. They were losing to MTH in the market big time and his recommendations were they move to China and compete legally. He was confident that cutting costs and the Lionel name would have brought them back. Instead he felt their actions put a stigma on an otherwise lifetime of respect he had working in this industry.
So again legal nit pick all you want. There was a trial and a Judge and Jury spoke based on the facts... It doesn't matter to me if they fiddle with the awarded damages. I know for sure what Lionel did and why.

[nblum]

The only thing I'm sure of is that *** Maddox will not be sharing his opinions on such things in the future, because only the devil knows how they'll be distorted or misconstrued :).

[FJ and G]

sounds to me like the lawyers are laughing all the way to the bank

[Poppa_Zit]

QUOTE: Originally posted by nblum

The only thing I'm sure of is that *** Maddox will not be sharing his opinions on such things in the future, because only the devil knows how they'll be distorted or misconstrued :).

There's nothing to be upset about with this story. And I don't care how this turns out, either, because I'm not a shareholder in Lionel and have absolutely no stake in it. None.

Heck, I'm an S scaler and, quite frankly, have no use for the products of either company. This is just an interesting business story about two companies that make hobby products. And I just want to see a modicum of fairness in the stuff I read here.

No one knows how this will shake out. So I'll still wait, patiently, because as the saying goes, until Lionel exhausts all appeals, the jury is still out on this one. Do I think the jury award is too high? You betcha, it's ridiculous, and another exhibit in the case for tort reform.

The way trigtrax throws *** Maddox's name around sure makes it sound like they're chummy. I wonder if Mr. Maddox takes his calls.