Don’t be fooled by the topic I put this in: This has potential implications for any area of manufacturing.
Lionel, the most famous U.S. maker of toy trains and model railroads, has been found guilty of industrial espionage and ordered to pay $40 million to competitor MTH Electric Trains.
What happened? Well, both Lionel and MTH outsource their production. As it turned out, some work that was done for MTH ended up in Lionel designs as well.I really don’t think anyone has a good grasp of what happened, but the story I heard is that a contractor who worked for MTH’s subcontractor designing locomotives moonlighted for Lionel’s subcontractor, and that he reused some work that he did on an MTH design on a Lionel design. MTH claims Lionel knew about this. Lionel claims it did not.
Regardless of who you believe, somebody was wronged. R&D work for one company ended up benefiting its competitor, and now that mistake is costing lots of money.
As a consumer, I’m disappointed because I’ve been led to believe that Lionel and MTH do their own designs and outsource production to Korea and China. Evidently they outsource some of their lucrative R&D as well.
Apologists for both companies have said that Korean companies tend to be related by blood or marriage and that workers routinely move from company to company, taking trade secrets with them and using them. That’s the corporate culture. U.S. corporate culture, of course, is exactly the opposite. We demand that you somehow forget all of your proprietary trade secrets when you change employers. Or at least don’t use them in your new job.
The products involved in this case aren’t the $20 locomotives you see at Hobby Lobby or Toys ‘R Us either. We’re talking premium products that sell for five figures here. I’ve seen them in person–they’re definitely impressive looking. But they’re playthings for people who make six figures per year, minimum. I like O gauge Lionel stuff an awful lot. But I don’t expect to ever own one. They cost more than I’m willing to pay for a computer.
I suspect that with those kinds of profit margins, they could have afforded to build them in Michigan or New Jersey, where Lionel understands how its workers work and its workers understand how its employer works. That’s the scenario if you assume Lionel is innocent. If you assume Lionel is guilty, well, that scenario makes industrial espionage much more unlikely. It’s always best not to allow yourself to be tempted to do something wrong–it’s easier to avoid temptation than it is to resist it.
And if they’d had to raise the price of a $1,400 locomotive by another $100, I doubt too many people would have screamed. Especially if the words “Proudly made in USA” were prominently featured on the package.
There’s some question whether there’s even room in a $100 million hobby for both Lionel and MTH. When your industry is worth $100 million as a whole, and you have to share that pie with four or five competitors, you can’t really afford a $40 million jury award, can you?
Saving a few bucks in labor and R&D may have just cost Lionel its life.
David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.
