Marc and Vic Bertrand of Mega Brands Inc. at the company headquarters in MontrealJohn Morstad/The Globe and Mail
More than a decade after the battle began, Montreal-based toy company Mega Brands has finally emerged victorious in its legal fight with Danish rival Lego AS over the shape of its building blocks.
In a final and binding ruling, the European Court of Justice said Tuesday that Lego cannot use trademarks to protect the shape of its iconic building blocks, meaning Mega Brands has the right to sell similar bricks in Europe.
The two rows of studs on the top of the bricks perform a "technical function" and therefore can't be trademarked, the court said in its decision.
The dispute, which began in the late 1990s, has been moving through the European legal process at a glacial pace, but has now reached the end of all possible appeals. Lego conceded, saying Tuesday: "We have no option but to note the court's ruling."
While the win is a morale boost for the troubled Canadian toy maker, there are limited financial ramifications. Mega pointed out that an earlier European ruling in its favour has been in effect since 2004, pending the appeals to higher courts, so it has not been stopped from selling its blocks in Europe.
"We are definitely pleased that the high court in Europe has confirmed that the monopoly that Lego was trying to obtain is over," said Mega Brands chief financial officer Peter Ferrante. Still, he noted, the company has been operating under the lower court decisions, so "it's business as usual."
Business as usual means Mega Brands must continue clawing its way back from a near disastrous couple of years in which its survival was at risk. A year or so ago, the company was heavily in debt, reeling from a recall of a line of magnetic toys which had caused the death of one child and injuries to 27 others, and was still involved in a now-settled legal fight against some former partners.
"For a while there, they were left for dead," said analyst Gerrick Johnson of BMO Nesbitt Burns Inc. in New York. Now, "they are on a much better footing."
While the legal settlements help, the main reason for the company's healthier outlook is a financial restructuring that was completed in March.
The reorganization saw Mega Brands raise hundreds of millions of dollars in a series of equity issues and private placements, allowing it to pay down $290-million in debt and substantially curb its interest charges.
However, the arrangement also saw existing shareholders' equity diluted substantially, and the stock now trades in the 50-cent range, a far cry from four years ago, when it rose to more than $20.
Still, the recapitalization gave the company the confidence to move forward, Mr. Johnson said, and it gave retailers the confidence to continue doing business with it.
Mega Brands' second-quarter financial results, released in August, show that it has some upward momentum. Its numbers improved for the third quarter in a row, with sales jumping 12 per cent in the period ended June 30. It eked out a profit of $1.2-million (U.S.), compared to a loss of $13.3-million a year earlier.
Lutz Muller, head of toy industry consultancy Klosters Trading Corp., said those results suggest Mega Brands "has probably turned around the corner," although he noted that it is "early days" to definitively suggest it can sustain the improvement.
The company has some good product licences, Mr. Muller said, including construction toys base on the Halo Wars video game and block toys based on the Thomas the Tank Engine television series. There are more "coming down the pipe for next year," he added.
But its recent reliance on strong sales of toys based on the Iron Man II movie could "bite them in the second half" of this year, he said, because of high inventory levels of that product.
Another concern: The company's art materials business, which it acquired in the 2005 purchase of Rose Arts Industries Inc., is not doing well, Mr. Muller said. The company should sell that division or close it down, he suggested.
Still, New York-based analyst Chris Byrne - known as The Toy Guy - said Mega Brands' European court victory, combined with its efforts to develop strong product lines, mean the firm is on the right path. "It is back in the game in a very big way," he said.