European court sides with Mega Brands, blocks Lego intellectual property claim

By Ross Marowits, The Canadian Press

MONTREAL - Struggling toy maker Mega Brands Inc. (TSX: MB.TO) has won an anticipated trademark victory in Europe against Danish rival Lego, just as it is attempting to restore the company's financial lustre through the introduction of new products.

The European Court of First Instance rejected Lego's efforts to preserve a trademark on its construction toy Wednesday.

Lego had appealed a 2006 EU administrative ruling that its bricks can't be legally protected by trademark law.

The court agreed with Montreal-based Mega Brands that the plastic building blocks, with two rows of interlocking studs, are a functional, technical shape that cannot become the property of any one company.

Mega Brands said it was thrilled by the decision supporting its largest brand, Mega Bloks, which also use rows of raised knobs to hold the bricks together.

"It's not only a victory for us, but it's a victory for all the consumers around the world that have made the Mega Bloks brand the No. 1 pre-school building block," spokesman Harold Chizick said in an interview.

The case dates back to 1999 when Lego won an EU trademark that was overturned five years later on appeal by Mega Brands.

Chizick said the company has prevailed in about 15 cases that have been launched by Lego around the world, including one in Canada.

The plastic blocks were the first toy manufactured by Mega Brands in 1984.

They were the company's foundation and remain its best selling product. It won't provide sales data on the product but industry observers estimate some $250 million worth of the plastic blocks are sold annually, with about one-third being bought in Europe.

Lego is the overall world leader in construction blocks for all ages, selling C$1.6 billion worth of the blocks each year, with half the sales located in Europe.

A spokeswoman said the company was disappointed by the ruling.

"I cannot imagine that we are not going to appeal," Charlotte Simonsen, head of corporate communications, said from Denmark.

The appeal to the EU Court of Justice would be the final arbitrator on the legal battle.

Lego modelled its bricks on blocks invented and patented in 1939 by Harry Fisher Page, founder of Britain's Kiddicraft. Lego patented its design in 1958.

After those patents expired in 1988, Lego shifted its legal approach toward trademark and copyright laws in an effort to protect its products. It claims the design is a unique system and not simply an alternative to keeping the blocks together without the use of glue.

National Bank Financial analyst Benoit Caron said the ruling was expected and that a ruling against Mega Brands would have been dramatically bad for the company.

"Nobody can use the word Lego, but the shape of the block itself is not a trademark," he said in an interview.

Mega Brands will release its third-quarter results Thursday.

Analysts polled by Thomson Financial expect it will report earnings per share of 29 cents on $186 million of sales, compared to a loss of 31 cents on $184 million of revenue last year.

Caron hopes for an end to the bad news the company has endured through three recalls over the past 18 months or so.

"I don't expect miracles. They are turning the situation around but now the economy is not helping."

Products introduced this summer, including MagNext, Struxx, Smart Builders Piano and Legends King Arthur have received several awards. But it's too soon to say if they have yet received traction, he said.

The financial crisis may also make it increasingly difficult to sell the stationery and activities business to reduce debt.

"Selling it in these market conditions at a discount to the price they paid two years ago probably is not the best of the outcomes."