Upper Deck battles lawsuits and licensing issues.
For those of you who haven't heard, this week Upper Deck has both settled a multi-million dollar lawsuit with Konami, owner of the Yu-Gi-Oh brand, and been slapped with a $2.4 million lawsuit by Major League Baseball. Let's take a brief look at the details on each.
Konami: In a nutshell, Upper Deck had a licensing agreement in March 2002 with Konami to produce Yu-Gi-Oh cards. This partnership was immediately successful, seeing over $17 million dollars in sales in the second quarter alone and overtaking all Upper Deck's sports properties in becoming its best selling product.
Fast forward to 2008 where we find Konami taking legal action against a company named Vintage Sports Cards, who repackage packs and loose cards into blister packs for re-sale in stores such as Wall-Mart and Toys R Us (to name but a few). Konami alleged that the folks at Vintage were selling counterfeit copies of higher value Yu-Gi-Oh cards in these packages. 4pecifically, while Konami recognized that the packages contained in the blister packs were legit, the loose cards (often displayed at the front to grab the kids attention) were fraudulent knock-offs. Vintage were stunned, replying that they obtained ALL their cards, packs and loose, from Upper Deck, so they had to be real, right?
Wrong. Upper Deck was added as a defendant in the lawsuit and Konami took over the operation of the Yu-Gi-Oh card game. At this point of course, Upper Deck made the right call and...counter sued for $75 million? Yes, UD argued that these allegations HAD to be false! Why would the leader in trying to prevent counterfeiting, part of the appeal to UD over other companies when they first began developing cards with holograms on them, ever engage in the act themselves?
Makes sense until information from the lawsuit started coming out, including:
1) Revelations of a meeting in which Upper Deck’s chairman, Richard McWilliam, and at a minimum one other employee compared authentic Yu-Gi-Oh cards against the counterfeits.
2) A witness stating that following the meeting both authentic and counterfeit cards were shredded by Mr. McWilliam in his office.
3) Emails obtained in which an employee solicited information from other UD workers about how to "secretly" obtain Yu-Gi-Oh card security holograms.
4) Five Upper Deck executives pleading the Fifth Amendment (the right to not self-incriminate) on the stand.
Faced with these and other details, Upper Deck finally fesses up to having contracted out a company in China to print over 600,000 counterfeit cards for distribution to third party customers such as Vintage Sports Cards. On Tuesday and out of court settlement was reached which will see UD paying out millions in damages to Konami. How many millions? Hard to say exactly, but given that Konami were seeking between $50 to $150 million dollars plus punitive damage one can assume that its at least in the tens of millions. It was determined that Upper Deck would pay the settlement in two installments, the first having been due yesterday, February 5th, 2010.
This settlement has elicited reactions from many financial experts that the company could be on very shaky ground, possibly even headed for bankruptcy in the near future.
As if this financial hit and blow to the company’s reputation were not enough...
MLB: After 20 years of holding a license to produce MLB/MLBPA endorsed cards, Upper Deck found itself cut out. In a similar fashion to the deal Upper Deck and the NHL/NHLPA struck in 2005, Major League Baseball entered into a multi year exclusive deal with Topps in August 2009, making it the sole company able to produce cards featuring MLB properties on them. Having just recently lost their basketball license to Italian card company Pannini, UD were understandably concerned over losing another of the Big 4 sports in their product line. To prevent themselves from losing baseball completely they sign a 1-year deal with the MLBPA, which would allow them to produce player cards, but without any team/MLB logos or names on them as these are property of MLB.
So the first two products of 2010 are released AND..... some of the cards show MLB team logos/names. Major League Baseball's response this week was to slap Upper Deck with a $2.4 million dollar lawsuit and get a court order barring the company or its distributors from selling the product!
Summary: So Upper Deck finds itself in quite a bit of trouble right now folks. They're paying off what one has to think is a minimum $15-$20 million dollar court settlement with Konami, are being sued for another $2.4 million by MLB, have a few million dollars worth of merchandise that they have been barred from selling, and have had their reputation muddied even further than it was before.
There have always been questions about Upper Deck's business practices as far back as the company's inception. Were batches of Griffey Jr rookie cards being offered for purchase to dealers in 1989 as an underhanded way to drum up more cash? How backhanded was the undercutting of DeWayne Buice, MLB pitcher who became a founding member of the company by getting them an audience with the MLBPA that set the wheels in motion for the company getting their license? Was the 12% stake in the company truly only worth the $2.8 million they gave him initially or closer to the $17 million the courts ordered them to pay when he sued them (an amount that took the company 9 years to pay off)? How shady is their practice of vague wording on their game-used cards (On the front of this is a piece of memorabilia that has been certified to us as having been USED in an NHL game)? Based on these statements we don't know HOW its been used, or WHAT it was (note that it does not say jersey!). Never mind the use of jerseys from photo shoots (where over 10 different jerseys might be used in a session), old timers games for retired players (event-used), or even allegations as to whether they are merely using pieces of a jersey bought off a store rack that's never been in the vicinity of the player.
Point being is that these latest legal issues speak to shady dealings by a company that has been challenged on such behaviors before. Whether this spells the end of Upper Deck in the sports memorabilia world remains to be seen. It certainly adds another couple of stains to their reputation, however, and reveals certain arrogance about the approach they take with customers, business partners and licensees. The fallout from this will be interesting to say the least, and should their "worst case scenario" arise then we're all in for a major shift in the collectibles environment...
