When you have one critical intangible asset, you’ll do anything to protect it.
This simple logic appears to have been the driving force behind LEGO’s steadfast opposition to toymaker ZURU trying to prove in the New Zealand High Court that including compatibility statements on its building bricks did not infringe on LEGO’s trade mark.
After dominating the building brick niche for the better part of a century, LEGO’s patents and copyright have been expired for a while now. The well-known Danish toy company has only one valuable intangible asset remaining: its brand.
Without registered intellectual property rights protecting its control of the toy bricks, it was always only a matter of time before a rival decided it could capture some of LEGO’s market share. Enter: self-described “disrupters” ZURU.
Here’s a quick background of the latest toymaker squabble.
In 2017, ZURU saw an opportunity to compete with LEGO in the toy building bricks market. As a result, it released a toy range called “Max Build More.”
Initially, ZURU marketed this range as “LEGO brick compatible.” But when a major US retailer got nervous about stocking the toy bricks with such a phrase like that, ZURU amended it to read “compatible with major brands” instead. That seemed to tick the boxes.
However, ZURU wasn’t interested in creating a perception amongst consumers that its bricks were “compatible” with the inferior toys. ZURU wanted consumers to think its products were compatible with LEGO so that curious buyers were reassured the two versions were of similar quality.
But ZURU sat on its hands for a few years. Then in 2021, ZURU reintroduced the original “LEGO brick compatible” statement onto the toy bricks being sold in New Zealand. LEGO was not pleased. It pointedly asked the retailer to remove all ZURU products with the statement from its shelves.
ZURU then tried to resolve this dispute and sought LEGO’s consent to use one of these compatibility statements:
Predictably, LEGO wasn’t having any of this.
ZURU then took the case to the High Court where it sought a declaration that the above statements would neither infringe LEGO’s trade mark, breach the NZ Fair Trading Act nor amount to “Passing Off” – which would mean ZURU was wrongly suggesting a connection with LEGO’s goods, trading off LEGO’s goodwill.
Unfortunately for ZURU, earlier in July the court ruled against ZURU’s case.
In this decision, Justice Graham Lang said ZURU’s use of the offending statement was “an aggressive attempt by ZURU to obtain leverage for its products” and “not in accordance with honest practices in commercial matters.”
This isn’t the first time the rival toymakers have butted heads. In the US, ZURU is boldly attempting to have LEGO’s trade mark revoked on the grounds that the word “LEGO” has become a generic term – similar to Sellotape or Velcro.
Yet, because the patent for toy building bricks owned by LEGO expired more than a decade ago, its brand is the only defensible right LEGO still holds after almost a century of an effective monopoly.
The reputational value of this brand is significant, but LEGO’s ferocity in the courtroom is a great example of what happens when a company that depended on patent rights for so long suddenly finds itself without that protection.
Such a situation will eventually happen to every company that relies solely on patent or IP protections. One day – maybe not during the tenure of the current CEO, but one day – an important right will no longer insulate your company from competition.
So, it’s worth asking the question early: Does your company have what it takes to survive without patent protection in a world of powerful and agile market disrupters?
In the 1980s and 1990s, when China was gathering momentum as the factory of the world, LEGO had a few minnows nibbling at its feet with competitive toy brick ranges. But these rivals were easily shooed away since their alternatives were of such poor quality that consumers were unwilling to forgo LEGO for the imitations, despite the cheaper price.
Fast-forward a few decades and rival toymaker ZURU is no joke.
ZURU’s “Max Build More” bricks are difficult to tell apart from LEGO’s own bricks and are just as durable. Also, its offerings really, actually are “compatible” with LEGO, even though ZURU can’t legally advertise this.
The major problem for LEGO is that the public is beginning to realise this. Walk down any toy aisle and both parents and kids will be looking just as intently at LEGO toys as they do at ZURU’s. Many will be perfectly comfortable owning a mix of the two options. They see no real difference.
What must be worrying LEGO – hence its aggressive legal tactics – is that, at its core, children want building brick toys because they are fun. Whether those bricks are made by ZURU or LEGO is moot. If they work, if they are compatible in practice (not in legal theory), then that’s enough. Brand loyalty is not really an influential factor for six-year-olds messing around on the play mat.
Particularly in the retail market: price matters, and LEGO is presently the more expensive option. That’s a long-term problem for the Danish company. LEGO may have a great brand with a reputation for delivering high-quality toys, but the quality of ZURU’s brick isn’t far behind – and ZURU’s own brand gets stronger every year.
An old saying holds that when the tide goes out, you can see who is wearing swimming trunks and who isn’t. If this is a metaphor for competitive advantage, we are about to see if LEGO’s brand really is good enough to cover the necessary ‘bits’ as the escaping tide creates a more level playing field.
High Court Justice Lang captured this problem in the discussion of his decision:
“ZURU specialises in entering established markets and endeavouring to obtain market share at the expense of established participants. It does so by establishing points of difference between its products and those currently available,” Justice Lang said.
So, while LEGO continues to spend precious resources defending the brand of its only market offering, ZURU circles above many beaches searching for more prey caught with their trunks down.
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