A deteriorating situation became unfixable in April 1993 at the York train show. The catalyst: Kughn spotted a new MTH brochure announcing the planned production of an O-scale plastic diesel engine called the Dash-8. Pulling Wolf aside, he asked angrily if MTH indeed planned to go into direct competition with Lionel with that engine. Indeed it did.
Lionel responded decisively. It terminated MTH's distributor status -- Wolf says he was then the second-largest mover of Lionel trains and parts in the nation, selling $3 million to $4 million of Lionel products annually -- cutting off delivery right then and there. "I had $750,000 worth of pre-orders and had taken deposits from customers," says Wolf. Lionel's response? It would fill the orders. "With my mailing list? No way," says Wolf.
Why had Wolf decided to compete with Lionel? "The Dash-8 came about because they weren't giving me any more orders [for reproductions]," he says. Plus, he says, he'd first offered to build this more expensive, more difficult-to-manufacture diesel engine for Lionel. Those things may be true, but Wolf was not entirely forthcoming with Lionel on another matter: He had become a hidden 50% partner in a start-up called Weaver Brass that built and sold brass O-scale steam engines. Wolf was competing against Lionel at the same time he worked for it.
After the blowup, Wolf returned his customers' deposit money and filed an antitrust suit against Lionel, accusing it of trying to run him out of business. The suit dragged on, blocking Kughn's attempts to sell his controlling interest in Lionel. Says Jim Bunte, a former Lionel vice president: "I don't think Mike intended to split off and do his own thing. He faced what I faced when I went to work at Lionel -- a very entrenched bureaucracy. Mike's a very entrepreneurial guy. He's been fueled over the last 10 to 15 years out of a sense of vengeance. He feels he was wronged by Kughn.
"Mike is not sparkling lily white in all this," Bunte continues. "But he has a lot of fans. A lot of people love the fact that he pushed the product in a scalelike direction, dragging Lionel away from its kind of toylike past. They like the innovation that Mike brought. And a lot of these guys are underdog worshippers. They like the underdog kicking the big guy in the nuts."
More than two years later, in 1995, the companies finally settled out of court, and Lionel was purchased by investor Martin S. Davis, who received a 75% stake, and rock star Neil Young, who got 20%. Davis, the former head of Gulf+Western, has since passed away, and the company is now managed for his heirs by Wellspring Capital Management, a New York City-based private-equity firm. The settlement did nothing to curb the animosity. And Lionel was clearly vulnerable. An internal memo noted: "Prior to Wellspring's purchase of Lionel, the company had not invested substantially in new tooling, and had no ability to do so. The company had no internal electronics ability, inadequate vendors for major components, and an understaffed engineering department. As a result, Lionel was saddled with an aging and unreliable product line at a time when competitors were improving their offerings."
Wolf, emulating his hero, Joshua Lionel Cowen, rattled the industry with a barrage of aggressive comparative ads -- and a provocative demonstration at the next York train show. MTH arrived with a display featuring an uphill stretch of track used for a demo that repeated again and again throughout the weekend. An MTH engine pulled a Lionel engine backward up the hill, while the Lionel's wheels spun pitifully. Near the top of the hill the MTH engine hit a sensor that cut the power. The coupled engines slid back downhill, and the Lionel engine smashed into a bumper, symbolically adding insult to injury.
In a federal courtroom in Detroit in May 2004, a jury of six women and two men got a glimpse of just how personal things had grown when MTH's counsel quoted an e-mail from Korea Brass agent Yoo Chan Yang to former Lionel director of engineering Bob Grubba that referred to MTH as "the dirty rat." Another e-mail from Yang to Grubba said: "By the time MTH realizes what is happening, the game should be over...We know exactly what the other camp is doing."
Wolf took the witness stand a week into the proceedings. By then, he'd been away from his business for 10 days, holed up with his lawyers from early morning till late at night. The physical toll was clearly visible in the bags under his eyes. He knew, however, that he was fortunate to be making his case to this jury. Most small businesses wouldn't have made it this far in a civil theft-of-trade-secrets case against a much more established competitor with deeper pockets. At the time of the trial, Wolf estimated his legal expenses, ratcheted nastily upward by its foreign components, were approaching $4 million, with more than $1 million already out of pocket. He was able to continue only because his law firm felt confident enough of the outcome to work on contingency.
The jurors heard of Wolf's rise in the world of model railroading and saw a slide of his family's modest Cape Cod-style house, including the window of the upstairs bedroom where Mike's Train House was born. They heard him testify about the impact not just of the theft of his designs but also of the theft of his production schedule, which his lawyers had shown had ended up in the hands of Lionel's president and other top employees. "It's easy to beat your competition when you know what they're making and how many they're making," says Wolf. "It's like shooting fish in a barrel."
To press his case, Wolf felt compelled to reveal much of his privately held company's production strategy and financial information. He testified that MTH made $9.6 million in profit in 1997. The number dropped to $7.8 million in 1998, $6.2 million in 1999, and less than $1 million in 2000 -- as Lionel, he testified, competed with him model by model, using his own drawings to flood the market, intent on putting him out of business. Wolf told the jury his company lost some $815,000 in 2001 -- one of many revelations he found painful. "This is the way the system works," Wolf said back at his hotel after his second day of testimony. "It's like a woman who gets raped and then has to explain her sex life in court." And then the transcript is easily ordered, nowadays on CD, by the rest of one's competition.
