Building a Legal Case, Block by Block

By IAN AUSTEN February 2, 2005

MONTREAL, Jan. 28 - In much of the world, Lego is synonymous with toy plastic building blocks. So it is not all that surprising that decades after its last significant patent for Lego expired, the Lego Group of Denmark zealously guards its trademarks and other intellectual property rights.

"There are many who have tried to capitalize on the good will we have built with consumers," said Poul Hartvig Nielsen, head of legal services at the company.

But what Lego casts as an effort to maintain a quality product is, its competitors say, an attempt to use intellectual property law unfairly to dominate the building block world.

"They are a company that enjoyed many years of monopoly in this market category and now they want to stifle anything competing against them in the construction toy aisle," said Brahm Segal, vice president and lawyer for Mega Bloks of Montreal.

The last major patents covering Lego's building blocks expired in 1978. Since the early 1990's, Mega Bloks has been involved in about a dozen lawsuits, most of them filed by Lego and still active. Best-Lock (Europe), which makes blocks compatible with Legos, is also involved in eight Lego-related lawsuits in Germany alone.

"We've definitely been spending more on lawyers than I would consider necessary to be in this business," said Best-Lock's chief executive, Torsten Geller, who runs the small company from Summerland, British Columbia. "Basically, Lego is trying to extend its patents to the end of all time. Lego's public image is totally different from the reality of the company."

Lego's management has been feeling the effects of increased competition ever since Mega Bloks decided in 1991 to go beyond its original product - jumbo bricks designed for infants - into Lego-size blocks. NPD Funworld, which tracks retail toy sales, would not give market figures but said that Mega Bloks is the No. 2 player, after Lego, in the construction toy market for the United States, the products' single largest market. Marc Bertrand, Mega Bloks' president and chief executive, said his company had a stronger market position in parts of Europe where construction toys were a much bigger business relative to the population.

As a result of the increasing competition and changing toy trends, Lego has faced several years of eroding sales and weakened financial performance. In 2004, the company lost 400 million Danish kroner ($70.1 million) on sales of 8.4 billion Danish kroner ($1.5 billion). On the other hand, Mega Bloks reported net earnings of $28.8 million on $219.6 million in sales in 2003.

Lego did not develop the idea of plastic blocks that lock together with small knobs. The blocks were invented and then patented in 1939 in England by Harry Fisher Page, who went on to found Kiddicraft, an early maker of plastic toys.

Mr. Nielsen, the Lego lawyer, acknowledges that Kiddicraft bricks "inspired" Ole Kirk Christiansen and Godtfred Kirk Christiansen, Lego's founder and his son, to make their first plastic blocks. (In 1981, Lego bought all rights to the Kiddicraft blocks.)

But in 1958, Lego patented a subtle change in the bricks that even its competitors agree brought enormous improvement. The company introduced tiny tubes inside the bricks to give the knobs on top of other blocks more places to grip.

"We have, over the years, seen ourselves as being copied, although others say they are imitating," Mr. Nielsen said. "Since the late 60's, we have been very cautious about our intellectual property rights and have tried to police them."

Mega Bloks grew out of a $2-million-a-year toy distribution business known as Ritvik Holdings that was owned by Rita and Victor Bertrand, the parents of Marc Bertrand.

In the early 1980's, the elder Mr. Bertrand wanted to move the company from importing and into manufacturing "a proprietary product that could be worldwide rather than Canadian in scope," as Marc Bertrand puts it.

About the same time, Tyco Industries, which was later acquired by Mattel, was in a legal battle in the United States with Lego over a line of interlocking bricks it had introduced. Tyco ultimately prevailed, but Mega Bloks waited until 1991 before directly confronting Lego.

Mr. Bertrand said that Mega Bloks applied some lessons from Tyco's bricks, which ultimately were not commercially successful. Any Lego competitor, he said, must be more than just a discount alternative.

Like Lego in recent years, Mega Bloks avoided emphasizing bulk packages and hired designers (it now has 120) to develop kits based on themes like dragons and robots.

Mega Bloks' move in 1994 into Europe, which now accounts for about half of its sales, was the start of the full-scale legal war with Lego.

Without any major patents, Lego shifted toward trademark and copyright laws to protect its market. In particular, Lego has tried in many countries to register the appearance of a standard Lego brick with eight studs on top as a trademark.

While Mr. Nielsen accepts the concept that patents are only supposed to give inventors limited protection from competition, he insisted that Mr. Christiansen designed his bricks with "eye appeal," which is still covered by copyright and design laws.

The complexity of the legal cases means that neither side can provide a clear score sheet. Lego, for example, won a victory in a Chinese court last year over the design of a pirate set produced by a small Chinese toymaker. But Mega Bloks has won significant court cases in France and Italy, as well as before the European Community's trademark office.

Last month, Best-Lock was successful before Germany's Supreme Court, which previously decided twice, first in 1964, that only Lego could make pieces that interlock with its blocks. Last month, however, that court ruled that Lego's protection had lapsed, although it has ordered a lower court to review some of Lego's trademark and copyright claims.

While Best-Lock's Mr. Geller, who is German, is obviously pleased by the German court decision, he does acknowledge that when it comes to the public's sympathies, if not its buying habits, Lego may always have the upper hand.