HP-2020-000016 - [2025] EWHC 1451 (Ch)

If Worldeez would not, in the counterfactual case, have been profitable in the UK, then (as was common ground) there would not have been a realistic prospect of international sales. In any event, however, it was clear from the evidence that Cabo’s hopes of penetrating the international market were highly optimistic, given the competition from established brands such as Shopkins. While Cabo had some discussions with Spin Master regarding US distribution, in June 2018 Spin Master said that Worldeez would be a “tough sell”, not primarily because of MGA but “Just on trends etc Shopkins starting to lose steam”. The international toy company Jay@Play likewise told Mr Sivner in August 2017 that the market for world-themed collectibles in the US was “very crowded with Shopkins leading the way with their World Vacation w little dolls and collectibles … Also Gift Ems by Jakks is all about all of the countries and it is marked down at Walmart”. In a transcription of a call between Mr Michaelson and Mr Cohen and an international toy agent, Tom Hodgkins, who had been discussing Worldeez with various international toy distributors, Mr Hodgkins made similar comments:

“… up there you have a healthy MGA and a healthy Shopkins so, there’s not a lot of room at retail for us to wedge ourselves in. That’s the other big problem that we’ve got overall, is just the landscape right now, we’re coming at the end of what’s been a couple years’ worth of new girls’ collectible items being launched.”

A further problem was the question of how Cabo would distribute its products internationally. On that point, there was significant debate during the trial and in the post-hearing submissions as to whether international sales would have been made through the use of distributors, which would have borne the inventory risk, or through local sales representatives, for which Cabo would have had to bear the inventory risk, with a consequent increase in its requirements for working capital.

Cabo’s position was that a distribution model would have been feasible. The evidence at the trial did not support that position. Rather, the consistent picture which emerged was that an international distribution model would have been unfeasible for Cabo, because Cabo’s cost prices were too high for it to be able to offer a suitable wholesale price to distributors.

In the September 2017 internal document referenced at §178 above, Mr Michaelson and Mr Cohen said that “We were shocked that in last meeting Marc S said he spoke to ‘all’ distributors who have said the model doesn’t work”. The comments in the same document indicated that Mr Michaelson and Mr Cohen did not agree with that assessment, but the contemporaneous documents bear out Mr Sivner’s reported statement, with numerous examples of Cabo being told that its prices were simply too high. These included a comment from Jay@Play that “The prices do not work” for the US market, and a message from Mr Mottram reporting on discussions with various international distributors, saying that “there was a hard stop when we went over pricing … it will not work as is … pricing is an issue (as we spoke when I did the USA model also) in particular the globe … respectfully we need to re-look at costs and sell prices if we wish to generate sales”. Cabo was likewise told in March 2018 that the “costing simply [doesn’t] work for the Spanish market”.

When asked what pricing would work, Goliath Games, a big international distributor, said that the FOB price should be under $1. Mr Mottram similarly suggested that Cabo should be paying $0.50 for the globe and selling it for $1 to distributors. Mr Cohen suggested that this would be possible, but Mr Mottram replied “Johnny – have to ask respectfully – how can you sell Globe to distributors at 1.00$ if your cost is 97 cents?” Mr Cohen suggested in his oral evidence that higher prices to distributors could have been negotiated if Worldeez had been more successful in the UK, giving it more clout. That was, however, pure speculation: Mr Cohen accepted that he had no evidential basis for that claim, and he did not offer any reason why prices that he was told categorically did not work for distributors might have become viable in the counterfactual case.

Cabo could undoubtedly have reduced its costs slightly by placing orders for larger quantities. But a WhatsApp discussion on this point in August 2017 between the Cabo founders confirmed that even with volume discounts the factory costs would only come down by 5–8 cents, which would still have put the cost price at significantly above what Cabo had been told would be viable. Mr Michaelson then asked whether “the distributors are being unrealistic? Is it same story with rest of the world?” Mr Cohen replied, “All the dist are saying the same”. Mr Michaelson then responded “If they are all saying the same we could bite bullet and hope for good licensing deals”. That comment was revealing: it indicated that already, by that stage, Cabo was aware that it was unlikely to make any significant profits from international sales using a distributor approach.

Mr Harper addressed this point in his evidence, and considered that Cabo’s profit margins would have made it difficult for Cabo to secure international distribution deals even if it had met its UK sales projections. At the trial he referred in particular to the US market of which he had recent experience. On the basis of that experience, he thought that Cabo would have had difficulty in securing US distribution due to the generally lower toy prices in the US than in Europe, and the consequent more limited margins available for Worldeez. While he suggested that it might be easier to secure distribution agreements for Australia and European markets, he noted that securing European distribution was administratively heavy, and South America had limited sales potential. His evidence was, therefore, broadly consistent with the factual evidence at the trial.

Ms Munt, for her part, did not consider whether Cabo’s margins were sufficient for it to expand overseas. She did, however, consider that a sales representative international distribution model would generally have been more appropriate for small to mid-sized suppliers. The problem with that model in practice, however, was the increased cash flow requirement, which in Mr Harper’s view meant that sales representative arrangements would have been unfeasible for Worldeez.

At the outset of the trial the economic experts accepted Mr Harper’s position on the viability of sales representative arrangements, and therefore did not include calculations for a sales representative model in the initial version of the DTM. After the trial, however, Mr Colley provided estimates for Cabo’s potential international business under a sales representative model, which were incorporated into the final version of the DTM. His evidence on this point had, obviously, not been explored at the trial. In any event, that evidence indicated that international sales under the sales representative model would have required additional working capital of over £5m for the US alone (and more if other countries were included). There was no evidence suggesting that this would have been feasible for Cabo; quite the contrary, the contemporaneous comment from Mr Sivner at §563 above indicates that this would not have been remotely affordable.

Cabo’s answer to this was to suggest that cashflow requirements to sell into the US on a sales representative model could have been offset by revenues generated from international sales outside the US on a distributor model, as well as UK sales and licensing revenues. There was no evidence as to how that might have worked from a cashflow perspective (and it was not modelled even in the final version of the DTM). Moreover, that analysis obviously presupposed that it would have been feasible for Cabo to sell to non-US markets under distribution arrangements, which the factual evidence set out above indicated was unlikely. It also presupposed cashflow from UK sales, which was also unlikely given the analysis above.

I do not, therefore, consider it at all likely that Cabo would have been able to generate international sales in the counterfactual case.