Lego can no longer prevent its competitors from selling in Italy

On 29 February 2008 the Italian Supreme Court ruled that Lego can no longer prevent its competitors from selling, in Italy, toy construction bricks that are compatible with the world-famous Lego bricks. The Supreme Court handed down its decision ten years after it had granted the same Lego bricks protection, under unfair competition law, in a similar case.

The legal U-turn executed by the Italian Supreme Court is the most recent example of a growing tendency to put an end to Lego’s monopoly in the market for toy construction systems, a monopoly which in several countries continued to exist even after the expiry of the patent and design rights in Lego’s bricks. In the past few years, similar decisions in favour of Lego’s competitors have been handed down by the courts of – for example -the Netherlands (decision of the Appeal Court of Den Bosch, 12 June 2007), Canada (ruling of the Supreme Court of Canada, 17 November 2005), and Germany (ruling of the Bundesgerichtshof, 2 December 2004).

The Italian Supreme Court gave its recent decision in a case between Lego System A/S and the Canadian company Mega Bloks Inc. Mega Bloks had requested the District Court of Milan to declare that it did not infringe on any of Lego’s rights by producing and selling, in Italy, construction bricks that are compatible with the Lego system. As was to be expected, Lego immediately filed counter claims, requesting an injunction order. Lego could not base its claims on any exclusive intellectual property rights. Its bricks were not eligible for copyright protection under Italian law and its patent and design rights had already expired years before. Lego argued, however, that the production and sale of the Lego look-a-like bricks by Mega Bloks created confusion on the market and constituted acts of unfair competition. Mega Bloks, on the other hand, argued that it had only copied the functional dimensions of the Lego brick, and that it could not possibly compete with Lego if it were not allowed to sell bricks that were compatible with Lego bricks.

The District Court of Milan upheld the claims of Mega Bloks and dismissed Lego’s claims. It ruled that the Mega Bloks’ conduct did not constitute acts of unfair competition, because Mega Bloks did not create confusion on the market. The size and spacing of the stud-tube mechanism used by the Mega Bloks bricks is similar to that of Lego bricks, but this is only a functional elements, and is not capable of causing consumer confusion.

Lego appealed the decision before the Court of Appeal of Milan. The Court of Appeal agreed with the District Court that there was no risk of confusion, and that in absence thereof the acts of Mega Bloks could not be characterized as unlawful slavish imitation of products within the meaning of article 2598 section 1, Italian Civil Code. Nevertheless, the Court of Appeal held that by meticulously imitating the stud-tube adhesion system of the Lego bricks, Mega Bloks had violated the norms of professional correctness between competitors within the meaning of article 2598 section 3, Italian Civil Code. According to the Court of Appeal, Mega Bloks could and should have developed its own system of interlocking bricks without imitating the exact dimensions and connective elements of the Lego bricks. The Court of Appeal repealed the decision of the court of first instance and granted Lego the injunction order sought on the basis of unfair competition principles.

Mega Bloks contested the decision of the Court of Appeal before the Italian Supreme Court. The Supreme Court found that the conclusions of the Court of Appeal were inconsistent and were not in accordance with the relevant law. It stressed that if imitation of products could not be deemed unlawful under article 2598 section 1 of the Italian Civil Code (slavish imitation), neither could it be deemed unlawful under section 3 (violation of professional correctness) unless there were specific additional circumstances causing a violation of the norms of professional correctness. According to the Supreme Court, the Court of Appeal did not base its decision on such additional circumstances.

The Supreme Court noted that it is an essential characteristic of the market for toy construction systems that consumers desire bricks that are compatible with systems they have bought in the past. If new competitors on the market were not allowed to produce and sell bricks compatible with the existing Lego system, the Lego monopoly, which could no longer be justified by patent rights, would be infinitely prolonged. The Supreme Court also added that the essential characteristic of the interconnectivity of the bricks justifies an exact reproduction of the spacing between the studs and tubes of Lego bricks. For these reasons, Mega Bloks should be allowed to produce and sell a constructing system compatible with the Lego system, as long as it does not create confusion on the market. The court of first instance and Appeal Court had already concluded that there was no risk of confusion and Lego did not contest this assessment before the Supreme Court. Based on the foregoing, the Supreme Court upheld Mega Bloks’ claims and thus effectively ended Lego’s decade-lasting monopoly in Italy.

The recent ruling of the Supreme Court will be welcomed by critics of its earlier decision, of 9 March 1998, in a similar case between Tyco and Lego. In this case, the District Court and Court of Appeal of Milan had ruled that the Lego-compatible bricks produced by Tyco were not an unlawful slavish imitation of Lego bricks, because the essential requirement of consumer confusion, within the meaning of article 2598 section 1, was not fulfilled. Tyco’s bricks were marketed in packaging and under a brand that differed significantly from those used by Lego products. Lego contested the decision of the Appeal Court in Supreme Court proceedings. It argued, inter alia, that the Court of Appeal had not applied the correct criteria in assessing the risk of confusion. The Supreme Court found in favour of Lego, ruling that the courts had failed to take into account the risk of consumer confusion after the sale of the product, once the packaging had been removed and children were playing with the bricks. This element of the Supreme Court decision was in itself controversial. Until then, it had been established case law that post-sale confusion should not be taken into account in the context of unfair competition law.

In its 1998 ruling the Supreme Court furthermore acknowledged that Tyco could legitimately copy the function of playing bricks connectable by studs and tubes, but stressed that it was obliged to introduce so-called “innocuous” variations in order to differentiate its bricks from Lego bricks. In particular, the Supreme Court held that it was not necessary for Tyco to utilize the same size and spacing for its studs and tubes as that used by Lego Bricks. After all, it could produce its own system of interlocking bricks. This reasoning was strongly criticized because the Supreme Court did not take into account that it would be impossible for parties such as Tyco to compete with Lego if it were not allowed to make its product compatible with Lego bricks. Thus the monopoly of Lego seemed to have been unreasonably and infinitely extended.

In its recent decision, the Supreme Court did take this argument, posed by Lego’s competitors, into consideration. It seems that even the brick-built monopoly of Lego cannot last forever.