Train Wreck

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On that day in 1999 when he realized that Lionel was bearing down on him with a vastly -- and to his eyes, suspiciously -- improved product, Mike Wolf wasted no time responding. Sales at MTH were headed to a high of some $60 million in 2000, close to Lionel's industry-leading position. Wolf had closed the gap by offering innovative products and lower prices, but most important, he made better trains. If Lionel was now matching his quality, he faced trouble. He knew only too well the power of the nearly century-old brand -- especially among men going gray and bald, men for whom the name Lionel was a ticket back to childhood.

Wolf showed the suspect Lionel engine to his top managers, all childhood friends, many of whom also had worked in Jerry Williams's basement. They backed his decision to board a plane for South Korea and try to jump-start an investigation at his design and manufacturing subcontractor, a company called Samhongsa. Like a lot of companies, MTH had reached a certain size and realized that irresistible advantages lay in moving manufacturing overseas. It had some downsides, but in 15 years Wolf had never had reason to worry that the company's proprietary design drawings and tooling were half a world away, under someone else's control. Now he realized how vulnerable he'd become.

When he hit the ground in South Korea, however, he did benefit from prompt and diligent attention from both his Asian business partner and South Korean authorities. Investigations pinpointed a former designer of MTH trains at Samhongsa who had moved on to become chief engineer at a rival company called Korea Brass. The former designer confessed to receiving stolen MTH designs on computer disks from accomplices at Samhongsa. It was a thoroughly modern theft: Before computer design, a single die-cast train engine might have required more than 200 desktop-covering drawings, and copies would have been as easy to sneak out the door as a rolled-up throw rug. Nowadays that amount of digitized information can fit on a USB flash drive, the sort of thing people carry on key chains.

"The irony of trade-secret theft is that your entire company can be stolen over the weekend, and you come in on Monday and everything's still there."

"The irony of trade-secret theft," says R. Mark Halligan, a lawyer with Welsh & Katz in Chicago and a professor in trade-secret law at the John Marshall School of Law, "is that your entire company can be stolen over the weekend, and you come in on Monday morning and everything's still there. Somebody simply downloads your entire hard drive."

Samhongsa's former designer was convicted of trade-secret theft, as was the head of Korea Brass, who was found by a South Korean appellate court to have paid for the stolen designs and used them in the manufacture of trains it sold to Lionel. (A total of four people were convicted. The harshest sentence was a jail term of several months.) The link to Lionel was a U.S.-based Korea Brass sales agent named Yoo Chan Yang, who happened to be in South Korea the day of a February 2000 raid of Korea Brass' office and whose computer Korean agents seized. Yang's hard drive contained e-mail correspondence with a high-level Lionel employee that pointed to Lionel as a knowing recipient of the stolen designs and some of MTH's production schedules as well.

By any reckoning, those were smoking guns. When Wolf tried to interest the U.S. Department of Justice in prosecuting the case under the Economic Espionage Act of 1996, however, he got an ear, but no action. "The act can be a powerful tool, but it's judicial discretion," says Halligan. "I have taken half a dozen trade-secret cases to the FBI. Not one has been to the courtroom." Prosecutions are rare in part because of 9/11-altered priorities and resources and in part because there are bigger corporate fish to fry. Halligan's monitoring of trade-secret cases indicates a bit more than 50 instances of charges being brought in the nine years since the act's inception, generally in cases that tend to be slam dunks. And prosecuting Lionel would not be easy. Not only had the evidence trail begun on the other side of the globe, but it would involve putting an icon on trial -- not quite on the order of prosecuting Santa Claus, as in Miracle on 34th Street, but surely not a case coveted by prosecutors with political ambitions.

Nonetheless, Wolf wanted Lionel brought to justice. In truth, he wanted more. He wanted Lionel brought to its knees. He was fighting for the survival of his company and also for a measure of revenge. He had for a time maintained a partnership with Lionel, had even thought he might one day run the company, and now the competition between MTH and Lionel was bitter in a way that perhaps only relations between former partners can be. In the spring of 2000, Wolf brought a civil action against Lionel, seeking $29 million in damages for misappropriation of trade secrets. The suit also named Korea Brass and Yoo Chan Yang as defendants.

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