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IN THE UNITED STATES DISTRICT COURT IN AND FOR THE DISTRICT OF DELAWARE - - MCKESSON AUTOMATION, INC., Plaintiff, v SWISSLOG ITALIA S.P.A. and TRANSLOGIC CORPORATION Defendants. : : : : C.A. No. 06-028 (SLR/LPS) : : : : : : : - - Wilmington, Delaware Tuesday, May 20, 2008 at 11 a.m. PRETRIAL CONFERENCE - - BEFORE: APPEARANCES: LEONARD P. STARK, MAGISTRATE - - -

BLANK ROME LLP BY: CHRISTINE S. AZAR, ESQ. and SUTHERLAND ASBILL & BRENNAN LLP BY: BLAIR M. JACOBS, ESQ., CHRISTINA A. ONDRICK, ESQ. (Washington, D.C.) Counsel for Plaintiff Ellie Corbett Hannum, Registered Merit Reporter www.corbettreporting.com

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Page 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 www.corbettreporting.com APPEARANCES: (Continued) MORRIS, NICHOLS, ARSHT & TUNNELL LLP BY: JULIA HEANEY, ESQ. and DICKSTEIN SHAPIRO LLP BY: ALFRED R. FABRICANT, ESQ. BY: LAWRENCE C. DRUCKER, ESQ. BY: BRYAN DeMATTEO, ESQ. (New York City, New York) Counsel for the Plaintiffs

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Honor. THE COURT: Good morning. Your Honor, I am Fred Honor. THE COURT: Welcome to you all. This is - oOo P R O C E E D I N G S (REPORTER'S NOTE: The following Pretrial

Conference was held in open court, beginning at 11:00 a.m.) THE COURT: MR. JACOBS: Good morning. Good morning, Your Honor. Good morning, Your

MR. FABRICANT:

the time, as you all know, that we have set for oral argument on, I believe, it's four separate motions. If I

am right, Swisslog is the movement on three and McKesson on the other. But I think it will be easiest for me if I

just give you each time to address whatever issues it is that you want to address. And since the primary motion is the motion to dismiss for lack of standing, I want to hear first from Swisslog. Okay. Good morning, Your

MR. FABRICANT:

MR. FABRICANT:

Fabricant from the law firm of Dickstein Shapiro,

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representing the defendants in the case. Our instructor,

Brian DeMatteo, also with the law firm of Dickstein Shapiro, and Julie Heaney is our local counsel. Your Honor, the motion to dismiss for lack of standing started as a motion for lack of standing on its own. And it started out that way because during

the course of reviewing the documents produced by the plaintiff in the spring and summer of 2007, we discovered a file, which was a due diligence file, of the McKesson attorneys that had been used in connection with their acquisition of the AHI Company, which was the original owner of the patents in suit. And what we found when we reviewed that file was that there had in fact been an assignment, an actual outright assignment, with an assignment document to two separate parties. And, Your Honor, if I may,

because there are some documents I would like to go through today, all of them are exhibits to the papers before the Court, but just for reference sake, to show the Court several of these as we go through. THE COURT: That's fine. And this is the

MR. FABRICANT:

assignment document, which is in DeMatteo Moving Declaration Exhibit B. This is the document which was

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executed by Sean McDonald, the president and founder of AHI, so there is no question he was a person of authority. And this document conveys to two parties, 100

percent of the interest in the then pending patent application and all subsequent rights that might develop as a result of that patent application, including patents that would issue continuations and the like. THE COURT: This copy, though, it's only Is that typical for

signed by Mr. McDonald, I believe.

an assignment agreement that only the assignor is signing, and have you seen a copy that would be signed by both sides? MR. FABRICANT: I don't think it's

typical that an assignee signs an assignment document, Your Honor. THE COURT: And is that a relevant

consideration, since I understood your position to be, at least in part, look at the face of this assignment agreement on its own and separate and independent from the notes and the term sheets and the stock purchase agreement, since this recites consideration and it seems clear and unambiguous, but it is in fact only signed by one side to the transaction. So I'm not sure that I

could consider it in the abstract and not with all the

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other documents. MR. FABRICANT: I understand. I do

believe that it is common practice for the assignor to sign an assignment document and for the assignee not to be present as a signatory on an assignment document. That is common in the practice of patent assignments. This document states consideration on its face, having been received and in addition to other stated consideration. It clearly conveys 100 percent -- not

unlike if I transferred my automobile to Mr. Drucker, and I signed the title to Mr. Drucker and I conveyed 100 percent of my interest. Mr. Drucker doesn't sign the It's not even a

form that I convey my interest to him. place for it on the title assignment. THE COURT:

Let me ask you this:

Would

AHI as the assignor have an enforceable right to the one dollar consideration, absent any signature from the assignee? MR. FABRICANT: Well, the consideration

is stated as having been received, I believe, so I guess they wouldn't. And I realize this is typical lawyer

boilerplate consideration having been received of one dollar, but that's why it's stated as consideration received.

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point on it. THE COURT: So just to put the fine

Is it your view that this assignment

agreement is legally enforceable in and of itself as a separate stand-alone document. MR. FABRICANT: Yes, it is. Now, I

don't ask the Court obviously to ignore the other documents which have been presented to the Court, but I do believe that we start with the premises that this is a legally enforceable assignment document, and that if other things had not happened here -- some of which are still in dispute, Your Honor. It is not undisputed

whether this loan arrangement that these gentlemen made at the same time as the assignment, whether those loans were ever repaid. That's an open question. So putting aside those questions, we believe that this is an assignment that stands by itself. It conveyed 100 percent of the rights to this patent application and technology. When we discovered this, Your Honor, we immediately asked the McKesson counsel for any evidence of an assignment back or any proof that, in fact, McKesson is in fact the title holder of the patent. started in about July of 2007, promises to provide us with the information; and ultimately, by October of 2007, This

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despite our repeated e-mail requests and letters and comments at depositions, nothing was forthcoming. So we

made a motion to dismiss the case for lack of standing, which is a matter of subject matter jurisdiction. A

party to a patent lawsuit does not have ownership rights or sufficient ownership rights, there is a lack of subject matter jurisdiction. So we believe, as a matter

of right, that motion was made and timeliness is not even a factor with respect to that aspect of the motion. Ultimately the counsel for McKesson asked Magistrate Judge Thyne for permission to take the depositions of the two parties represented by these assigness, Mr. Demmler, who was the manager of the Pittsburgh seed fund, and Dr. Heilman, who was a separate individual assignee. They split it up at 71.4 percent to And at the

the fund and 28.6 percent to Dr. Heilman.

time McKesson's counsel urged Magistrate Judge Thyne that it was essential, that they had to take these depositions in order to respond. passed. The time for such depositions had

We argued that point before Magistrate Judge

Thyne, and she allowed them to take those two depositions. What I think is crucial to this motion is that at the depositions they didn't have any of the

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questions which this court, I'm sure, would like to have heard the answer to, like: interest in the patent? Do you have an ownership

Do you continue to have an They didn't ask those

ownership interest in the patent? questions, Your Honor.

They didn't ask those questions,

Your Honor, because in the gap of time between the time he made the motion and the time of those depositions, a gap of several months, the counsel for McKesson prepared draft affidavits for both of those witnesses, Dr. Heilman and Mr. Demmler. And in those draft affidavits, which are part of the record, and I would like to emphasize some points for the Court, they asked these individuals to disavow, in effect, any ownership rights, any continuing claims they might have. They asked these witnesses to And the reason why

confirm that the loans were repaid.

they did this, Your Honor, was because in this district when one reviews the cases which ultimately were submitted to the Court, it can be readily seen that Judge Robinson herself, in 2006, in the Matthews case and other decisions of both the District of Delaware and other courts, that the crucial factor that often comes into play in these standing motions is whether or not this other nonparty disavows any rights, says I will never

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is false. pursue these rights, and in the 2006 case here in the District of Delaware, that's exactly what was the basis for Judge Robinson's decision. We then find these draft

affidavits, which we discovered when we spoke to these witnesses and found out that McKesson's counsel had been in contact and had provided them with draft affidavits. Magistrate Judge Thyne ordered that they produce, and we exchange with each other any communications we have had with these individuals. THE COURT: And a suggestion, you

proposed draft affidavits as well and the inventors refused to sign yours too; is that correct? MR. FABRICANT: Their characterization

We did propose to Mr. Demmler only, not

Dr. Heilman, to Mr. Demmler, an affidavit, a proposed affidavit which said only the following -- and I will be happy to submit a copy of it to Your Honor. part of the papers. It is not

All it said was, which is what this

witness told us on the telephone, "I don't remember whether I assigned that. loan was repaid." I don't remember whether the It did not

That's what it said.

propose any business relationship. anything more than that.

It did not do

However, the affidavits, as I mentioned

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from McKesson's counsel, first Mr. Demmler's proposed after, Exhibit L to Mr. DeMatteo's apply declaration. Here is his draft after; it purports to be on firsthand knowledge of the facts. On the second page, in paragraph 13 -and this is important, Your Honor -- they used words about how this individual should characterize this transaction. And they say to secure the repayment of the

funds loaned to Automated pursuant to the promissory notes, both the bridge loan and the November loan. collateral or security for repayment provided by Automated was an assignment of the technology rights associated with the patent application of January 24, 1990." I focused on that for a moment because that's not the language of the assignment. The The

assignment and the original promissory note, which is actually executed by Mr. Demmler, is an assignment of the patent application itself, not an assignment of the technology rights. Now I will make this point. When I

finish with these affidavits I would like to show Your Honor very important evidence that was produced after this motion was pending. A box was supposedly found of

documents never previously were produced which had

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reasons why. this point. additional information. promissory notes -THE COURT: Let me just caution you at And in that box were draft

I understand you use the word supposedly and

you have made certain suggestions that seem to be suggestions of bad faith on the part of your friend on the other side, and unless you really have strong support for that, I rather you stick to the evidence and don't go to "supposedlies." MR. FABRICANT: Your Honor, I only meant

to say documents were produced after the motion was made which were never previously produced. THE COURT: That's fair. Not getting into the

MR. FABRICANT:

I don't know the reasons why. In that box of documents were draft

promissory notes for this transaction.

And the draft

promissory notes did not refer to an assignment of a patent. They referred to an assignment of technology -They referred to security

not even an assignment.

interests in technology rights. And the language being proposed here, when I show Your Honor those draft notes, is really the language of the draft notes, which were rejected, and not

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the language of the notes which were actually executed by the parties. That evidence will go if the Court looks at

the substance, the merits of the case at all, and McKesson has made a point of the intent of the parties. The intent of the parties clearly here, as the witnesses testified at the deposition, was to grant an assignment. They felt secure with an assignment of the outright patent as opposed to -THE COURT: Why after, really after June

of '90, why is there no evidence of anyone ever acting as if there was an assignment? That is, in November of '90,

you know, they execute the other note and pledge -- I don't know if it's pledge, but they reference assigning those rights again. But on your view of the case, AHI didn't have any rights to assign for the November note. And

then you go forward to 1994, in the Partek transaction, and '96, all the representations made to McKesson. 17 years or whatever pass and the inventors never actively have any interest. So explain to me, if I am And

agree with you up until the moment of June 29th of 1990, why is it not the case that everything that happened after that is totally contradictory to your view of the case?

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MR. FABRICANT: Well, point by point,

first of all, the subsequent McKesson transaction, the subsequent security transaction in 1994, I believe it was, the subsequent representations to McKesson at the time of the transaction, as those witnesses testified at the deposition, when they were handed a 100-page transaction document from McKesson, which in the first sentence said, you know, you agree that everything stated within this document is accurate and correct, and supposedly had schedules attached. First of all the We don't know

copies produced didn't have the schedule. if they ever saw the schedule.

They testified they don't Even if they had see

know if they ever saw the schedule.

the schedule, it didn't refer to the patent application that they had an assignment in; it referred to a patent number that had ultimately issued. So it's pretty clear they would not have known, even if they had read the document that this covered this particular aspect. With respect to all of

the other things, I will put it this way as a result of this lawsuit and as a result of McKesson looking for the assignment back, they stirred up this issue of whether or not there in fact was a proper chain of title and transfer of title. We can't undo that. The result of

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this, the result of this is -- even if these individuals from the time of the assignment in 1990 until the fall of 2007 were not awakened to the fact that they have legal title to this, to these patents in suit. As a result of

what has happened here they were contacted by McKesson's counsel. backed up. this. They were asked whether they had the assignment They were given a lot of information about Their counsel actually

They retained counsel.

contacted our law firm and wanted to know whether there was a business transaction that could be resolved here. I don't know. Perhaps they made the same kind of I don't know.

advances toward McKesson.

But what's happened here is if there is a party that has legal title, a claim to legal title based upon the transactions, even if they didn't follow it up, over the last however many years, it creates a situation where we now have two parties, two separate groups, a fund with many limited partners, and an individual who is a very sophisticated individual, who may have claims to patents in suit, which they deem as being very valuable. That wasn't as a result of our

doing or our making, that's as a result of -THE COURT: Go back to 1990. Yes, Your Honor.

MR. FABRICANT:

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THE COURT: Because I guess I want to

hear what do you say about the November 1990 transaction between AHI and the inventors? $50,000 loan. MR. FABRICANT: I don't believe that's I think there was another

at all inconsistent with the prior two assignment documents, the prior two notes entered into in June of that year. And the reason I don't believe it was

inconsistent, because that was an additional promissory note which used the same language as the prior notes. If, for example, they wanted to make sure that they still had the assignment, which they already had in their hand, could the words have been different, yes; but if, let's suppose the prior notes had been repaid, but that later note had not been repaid, they wanted to make sure they still had a valid assignment of the patent. It's That two

possible that only one of three would be paid. of three would be paid.

And I believe it was just, using

the same language to make sure it was understood, there was an outright assignment. June. The assignment was dated This

Now they were borrowing another $50,000.

would have been protected them in the event of default of some but not all of the notes. I don't believe it's inconsistent that

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nullity. the mere fact they took another $50,000 from these parties undid the nature of the assignment which had been granted several months earlier. THE COURT: So the idea that McKesson

raises, which is I need to reject your view of the case because otherwise the November '90 transaction is one in which AHI is purporting to sign something that it had no right to sign. You say that's not the way to read that

November '90 document? MR. FABRICANT: I think it's clear they

had already received the assignment and therefore the words in the 23406 promissory note which said it shall be secured by an assignment. taken place. The assignment had already

There was nothing else they had to do. THE COURT: Well, it's a nullity what

AHI had represented with respect to the assignment. MR. FABRICANT: I don't believe it's a

I believe it was additional words which gave

them security in the situation where the first two loans were repaid and they still -THE COURT: How can they give that

security on your view of the case, AHI didn't have any interest whatsoever in the patent, in the things that they assigned on June 29th of 1990.

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MR. FABRICANT: I agree that AHI did not It had That is our

have a patent to assign in November of 1990. already been assigned. position. THE COURT: I agree with that.

So how can AHI say, well, if

those first two notes are paid off, you can still use the assignment as security in November '90? I mean, AHI had

no ability to control what happened to the assignment, to the patent -MR. FABRICANT: There might be an There are a number of

assignment back prior to the date.

things that might have happened and I agree that once you assign something it's not the best use of language to not make that a stated point in the third note. But I don't

think it undermines the fact that there was an outright assignment, that they had not been repaid as of the date of November. There is no question about that. So that

whatever assignment was made, without any dispute, had clearly not been extinguished or undone. They clearly

had made that assignment, there had been no repayment. THE COURT: I guess the common sense

question, going back to it, is you want to take me through and have me focus on the drafts and everything leading up to the moment on June 29th, 1990, when they

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executed the assignment agreement as well as those notes, to make it clear, in your view, that the intent of the parties was an absolute assignment and not just a security interest. And yet everything, at least

beginning with November 1990, is inconsistent with the parties having such an intent. And so why doesn't that

mean that your argument about what the intent was is actually not persuasive? MR. FABRICANT: Well, it starts with the

premise, Your Honor, that this court should even be inquiring into the specific intent of the parties, parties not before this court. It starts with the

premise that for this court to look at what was meant by the fact that the two notes which didn't assign the patent and only granted the security interest were rejected days before. that intent. It asks this court to construe

Then it asks this court to look at what

were the reasons for the November language in the note. And then it asks this court to look at whether the loan was repaid, because if the loan wasn't fully repaid, and I mean all three notes repaid, then even the security interests theory wouldn't fly. Then it asks this court

to evaluate the ramifications of the recent Federal Circuit decision, from January 2008, which we cited to

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Your Honor, which that court addresses automatic assignments in that case in the context of an employment agreement but no less applicable in the situation of an automatic assignment back as the McKesson people argued, in which case the Federal Circuit in 2008 stated that you would not gain legal title as a result of a promise to assign in the future an automatic assignment back. The court also went further and said that when it comes to patent assignments, you don't look to state contract law, you look to federal law, which looks to the language of the contract. So when Your Honor starts taking into consideration all of the factors that McKesson has urged in its opposition, what was the intent of the party, form over substance, were the loans repaid, what's the applicant of a self-extinguishing assignment under Pennsylvania state law, in light of the Federal Circuit decision, and keep in mind the No. 1 thing to point out today, which is once all of this became known and the additional documents produced and the draft affidavits were reviewed and the depositions taken, we could see that the seed fund and Dr. Heilman became necessary and indispensable parties in order for the court to resolve this dispute. How can the court resolve this dispute

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without the parties present. And that's why in reply to all of the factors raised by McKesson -- and all we asked in the initial motion under 12(b)(1) was that they establish they have standing. They raised in opposition all of

this, look at the intent, look at the form, all of these issues, which go to the heart of this court having to make a decision without necessary and indispensable parties present. So it became a motion to dismiss as

well as 12(b)(1) for lack of standing for, under 12(b)(7), for lack of necessary and indispensable parties. THE COURT: Could I simply say, though,

without reaching the ownership issue fully stopped, that had they met their burden of proof or production at this procedural moment in the case and, you know, the final determination, if necessary, as to ownership will be at a later point in this case. MR. FABRICANT: Well, that I think gets

to the issue of, if Your Honor were to conclude that, as to whether these parties are necessary and indispensable parties. How are we going to decide at a later date or

at any date prior to trial, or even at trial, the ownership issues without the parties present that have

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the facts, that have the evidence, that have the potential claim, without them present, whatever result this court adjudicates ultimately would then run face on into the risks of Rule 19. Not only with respect to

Swisslog's interests, because obviously we have counterclaims for invalidity of the patent; we have counterclaims for non- infringement of the patent; we have a proposed counterclaims, which we will address with Your Honor, on enforceability of the patent. If there were be an adjudication, it would not be a final adjudication with respect to the patent. We would have to do it, perhaps, all over again.

When it comes to the rights of these individuals in this fund, their rights would be affected. We've cited to

Your Honor decisions that, even though the results of this litigation are not res judicata or in collateral estoppel against those entities or those parties, as a practical matter, as the Gonzales case has said in other courts, their rights have been affected. It will be a

Markman decision that they will not have been participated in. There may be a practical impact if they

have rights to pursue though rights in the future. So we run smack into the fact that they are a necessary party; they are not, we don't believe,

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cases. MR. FABRICANT: THE COURT: A lot of cases. joinder as feasible, although I don't know plaintiff has tried to join them; that they don't reside in the state of Delaware and they have not done any business here, to our knowledge, so they may not be able to get personal jurisdiction over them, in which this case I think clearly they would be an indispensable party. THE COURT: Well, with the Federal

Circuit decisions in the Applied Companies, which is a case involving a government contract and looking at whether that was an assignment there or a security interest. It's cited by McKesson, but I didn't see where

you had a response to it. MR. FABRICANT: that case, Your Honor. THE COURT: Sure. There are a lot of I am trying to recall

It's 144 F.3d 1470 (Fed.

Cir. 1998), a decision of the Federal Circuit in the Applied Companies vs. United States. MR. FABRICANT: offhand, Your Honor. THE COURT: Maybe we will have you back I don't recall it

up on rebuttal, if you have anything to say about that.

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through those. MR. FABRICANT: Right. But I went Honor. But basically, when we went through the cases, case by case, I did not find any case that, where the nonparty, who was the subject of this Rule 19 issue, was a prospective assignee of a patent who might have ultimate ownership rights to the patent and where a court refused to join that -- or where a court allowed a case to go forward without the presence as a necessary indispensable party of a patent owner by assignment. Case by case, as I went through the decisions cited by McKesson, there was the Kahn vs. General Motors case, which was a case where -THE COURT: You don't need to run MR. FABRICANT: What I would like to

point out, with respect to the law, is that when Your Honor looks at -- and I thought we had addressed all of the cases cited in their brief. THE COURT: You didn't address that one. You may be right, Your

MR. FABRICANT:

through them and I will address the case, if I can, which Your Honor has raised. But I didn't find a case where

there was an outright assignment where there wasn't some

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other issue of either reacquiring the rights or disavowing the rights or disclaiming the rights or some other factor not applicable to the present case but an outright assignment to a nonparty not subject to joinder in the case. I didn't see that in the case law. THE COURT: What about Section 261

relating to the recording of assignments? MR. FABRICANT: THE COURT: Yes, Your Honor.

Explain to me your position

on that and why that doesn't win the day for McKesson. MR. FABRICANT: Our position is that

very simple, which is Section 261 has one big requirement, and that is that you don't have actual notice of the prior assignment. THE COURT: And what is the proof here

that they had notice of the assignment, specifically the two-page document that you put up earlier? MR. FABRICANT: Yes, Your Honor. This

was produced by McKesson out of McKesson's due diligence files involving their acquisition of AHI in 1956. THE COURT: So those two pages you put

up the assignment of invention that were produced from that folder by McKesson? MR. FABRICANT: Yes. Along with the

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executed promissory notes, along with some of the other documents relevant to this transaction. folder marked "McKesson Due Diligence." It was in a So we know that,

as a matter of fact, I don't see any way to dispute the fact by McKesson, that they had actual notice of the transaction. And so we believe once you have actual notice, the provisions of 261 do not apply. THE COURT: And go back to an issue you

alluded to of these recent Federal Circuit decisions, I think a couple of them from this year. Help me out on

what is at stake, in your view, as to whether I apply federal or Pennsylvania law? reach, and if so, why? MR. FABRICANT: Well, the DDB Tech case, Is that an issue I need to

from January of 2008, was the case that previously I was referring to about the Federal Circuit. I think the

ramifications of that case is that this entire theory on the merits that McKesson has raised in opposition, that even if there was no assignment back, the assignment back was in effect self-extinguishing because of the security interest under Pennsylvania state law. I think what the

Federal Circuit said in the DDB Tech case was, if you look to federal contract interpretation law, which

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doesn't necessarily take into account the Uniform Commercial Code, and there the court described, looking at the language of the contract, and then they went through that process in that decision where they ultimately remanded to the district court for jurisdictional discovery, which the district judge had not allowed in dismissing the case. So there was no

ultimate resolution, as far as I know as of today, but there was a motion to dismiss based on lack of standing; that was a case dealing with an purported automatic assignment. The court not only said, we look to the

explicit expressed language of the contract, not to state law in patent cases, but also that made an express statement that the promise to assign in the future or the automatic-assignment scenario would not allow legal title to pass. Even if, even if there was a promise or even if

there was to be an automatic assignment, that legal title would not pass. And that was the import, I think, of

that decision to this case. So I would argue, and I think we have stated this in our briefs, that the Pennsylvania provision of the Uniform Commercial Code, as to whether or not this was a security interest rather than an assignment, if it was a security interest, whether it

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Your Honor. THE COURT: Okay. Why don't -- two would be self-extinguishing not be applicable. THE COURT: And what about the Akazawa

case, which I think is an even more recent Federal Circuit case, in March of this year, which seemed to talk about state law governing patent ownership over federal? I'm not entirely clear, but I'm looking for help on that. MR. FABRICANT: on rebuttal, Your Honor. THE COURT: Okay. I am just unprepared, If I could handle that

MR. FABRICANT:

things I want to make sure you cover before you sit down. One is are there some new documents that I haven't seen that you wanted to allude to, some recently discovered evidence or something, and also whatever it is you want to tell me about the other motions that we haven't discussed yet. MR. FABRICANT: Oh, sure. I don't

believe there are any new documents that are not attached as exhibits to either McKesson's briefs or declarations or ours, no additional documents. THE COURT: Okay. I do, as I said, I would

MR. FABRICANT:

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ask the court to look at -- I won't go through them all, but ask the court to look at, if we got into the issue of deciding the merits of this ownership question at all here without these parties present, the draft notes that were rejected, which have very different language which clearly create a security interest and not an assignment of a patent. And the ramification of that on the

evaluation of the intent of the parties. Also, I would point to the fact, and I think this is crucial to Your Honor's decision if you get past the indispensable party issue and actually looked at the merits of the arguments that McKesson has raised, the documents that were produced after the motion was made that were located by McKesson and produced to us, the witnesses were unable to identify or remember or recollect any of the handwriting on these exhibits. were asked that. They were unable to do that. They

There is

no evidence before the court as to who placed the handwriting destinations on these documents, so we don't know. One of the issues Your Honor would have to decide, we believe, if it was to be an evidentiary determination of this issue of ownership, is were the loans ever even repaid in full, because without that even

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M0474909. for PSF? MR. FABRICANT: of them, I believe. them. The notes apply to both a security interest theory doesn't cut it. So just for a

moment, Your Honor, I would show -- and this causes us some concern -- here is the promissory note that was produced after the motion was filed as to the $42,000 loan, and you can see that there has been placed on the document the word "void." And down at the bottom left it

says paid 12/27/90, down here. THE COURT: Is that for Heilman or

This is, I believe, it's both of This is Steven

Oh, no, this is Steven Heilman.

Heilman, Your Honor. THE COURT: Okay. Just for the record,

will you read the Bates number into the record, please. MR. FABRICANT: Yes. This is Bates No.

And I believe it was DeMatteo Reply

Declaration Exhibit M. And then there was another document provided at the same time, after the motion was filed, which was DeMatteo Reply Declaration Exhibit M, but at a different page, M0474912 to 13, and this is the $107,000 note. And this was says "Cancelled, paid in full." It

looks like the same handwriting, but no one has

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motions? MR. FABRICANT: THE COURT: Yes, Your Honor. identified whose handwriting this is or who made these notations. And, again, we have what we believe is a

disputed issue as to whether there ever was a full repayment of these loans. And I believe on the lack of standing issue and the indispensable party issue that's all I have for the court at this time. THE COURT: Okay. And on the other

Was there anything you

wanted to say with respect to them? MR. FABRICANT: Yes. Your Honor, I'm

going to address, with the Court's permission, the motion to amend the answers, the answer and counterclaims, and Mr. Drucker will address the other motions. THE COURT: That's fine. Your Honor, on the

MR. FABRICANT:

answer, the amendment, the proposed amendment to the answer and counterclaims, the scheduling order had provided a date for motions to amend cut-off of December 20, 2006. As a matter of fact, no documents were

produced before that date, no depositions were taken before that date. The documents were produced from

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McKesson to Swisslog in sort of rolling fashion that began sometime in the spring of 2007, after their deadline had already passed. The document production

continued until -- in fact, one of the largest productions, if not the largest of 250,000 pages, occurred in the fall of 2007, long after this deadline had passed. And therefore as a result of the timing of

the document productions, depositions in this case, by Swisslog of the McKesson witnesses, the 30(b)(6) depositions didn't start until late May of 2007, long after this deadline had passed. of '07. And the crucial depositions actually, in large part, were taken during the summer of 2007, culminating in the deposition of Sean McDonald, the founder, inventor, a person with duty of candor, the person who founded the company, on August 30, 2007. approximately seven days after the deposition of Sean McDonald, we wrote McKesson's counsel and advised them that we would like to make a motion to amend our answer and counterclaims, asking their permission to do so, consent to do so, and they refused to grant that. So we have, obviously, three major factors on a motion to amend, such as this one, undue So We went into the summer

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delay, whether the amendment would be futile, and the prejudice to the parties as a result of any amendment. THE COURT: Before we get to those, let

me just ask you, if I were to grant your motion to dismiss for lack of standing, would your motion then to amend, basically just the counterclaims at that point, would that still be an issue in front of me or would that be mooted? MR. FABRICANT: I think the

counterclaims, Your Honor, would still be an issue. Although if Your Honor dismissed without prejudice, as Your Honor might be inclined to do, and not knowing who the true owner of the rights might ultimately be found to be, we might not pursue those counterclaims because we might pursue them against the wrong party. So, as a practical matter, I believe if the case were dismissed without prejudice, probably all of the case would go away until such time as the proper parties stepped forward. THE COURT: On the assumption I am not

doing that, tell me what I need to know about this motion. MR. FABRICANT: Yes. Undue delay, Your

Honor, not only is the window of time relatively short,

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particularly in light of the fact the document production just started in the spring of '07 and depositions throughout, until the end of August of '07, but what the evidence collected during that period related directly to the amendments which we now seek to make at this time. With respect to inequitable conduct for failure to disclose material information to the patent office, in our original answer and counterclaim we reserved the right to add additional affirmative offenses with respect to patent defenses. We did not, at that

time, and I don't think it would have been appropriate to allege inequitable conduct, because inequitable conduct requires a pleading of the nature of a fraud pleading under Rule 9, and therefore we did not have the ability at that time to plead with particularity. We did receive some documents, in the spring and summer of 2007, which suggested that there had been some demonstrations or tests or public displays, but we didn't know who was at them, who attended them, who knew about them, what actually happened at those demonstrations. We took the deposition in the summer of

two people in 2007, the two people who were knowledgeable about what actually happened, Mr. Keyes, who was a cofounder; we took his deposition in the summer of '07,

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and Sean McDonald, whose deposition occurred on August 30. I know we pointed out in our papers, Your Honor,

that we've attempted to take Sean McDonald's deposition since early spring. process. We wanted him to be early in the

I think our first request for him was in March.

And for a number of reasons the deposition was postponed and postponed again by the plaintiffs until ultimately we had to subpoena his attendance at a deposition at the end of August. So it was not through any lack of our desire

or intent to take Mr. McDonald's deposition at an earlier date, but it didn't happen. At that deposition on August 30, just seven days before we raised this issue with McKesson and just a month or so before we made the motion to amend, we discovered all of the particular details and facts as we set forth in our proposed amendment on inequitable conduct, which we believe supports without question an inequitable conduct claim, certainly beyond any question of futility of the event. We discovered that he had

personally performed and put on presentations of a device which we believe teaches each and every element of the claims of the patent more than a year prior to the filing date, which would constitute an on sale bar, which we had already alleged invalidity.

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But what we also discovered because of his duty of candor as an inventor and his knowledge of what had transpired, that comparing what he testified to with the file history, that there had been no disclosure of material facts and events of material prior art. Remember the difference, Your Honor, between inequitable conduct and invalidity is for invalidity based on an on sale bar, you need to be able to establish what was on sale meets each and every element of each and every claim. But for an inequitable conduct claim, you only need to be able to demonstrate that a person with a duty of candor withheld material information to patentability. It can be something far less than on sale Of course, you

bar if it was material to patentability.

have to also establish this was done purposefully, with an intent to deceive the examiner. And that's why

parties don't allege at the early stages of cases, wisely, inequitable conduct until they gather the facts and the evidence. Once we gathered that and concluded that process on August 30, 2007, we immediately notified the other side of our intent to go forward and we made our motion to amend in October.

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With respect to the antitrust claims, Your Honor, the original answer and counterclaims raised a claim for antitrust violations under the Sherman Act, Section 2, as a result of sham litigation, because at that time all we were able to discern from the complaint and from the lawsuit was that we believed that there was objectively baseless grounds for bringing the action in light of the claim language, the way in which we believe the claim language reads or does not read on the invention, and we didn't believe there was an objective basis for bringing the lawsuit. So we alleged that kind

of sham litigation under Sherman 2, but we did not have the ability to allege any other type of antitrust violations at that time. fact depositions. As our papers explain, beginning with the deposition in late May of Mr. Zwolinski, continuing through the summer of '07, and again culminating with Mr. McDonald on August 30th, we discovered that there had been a course of conduct of predatory pricing, of sole-source agreements to protect large segments of the marketplace, of false statements being made about the plaintiff's product, of false and misleading statements being made about, not only the defendant's product but We had no documents; we had no

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the defendant's company and its financial wherewithal, and all of those facts, I believe, are set forth in great detail in our proposed amendment. And so therefore, based on the facts and evidence collected from May of 2007, which is the earliest possible date we could have discovered any of this, through the summer of 2007, we put together all of the factual allegations which, we believe, without question, supports the Sherman 2 claim based not on sham litigation but on monopolization or attempt to monopolize and the Sherman 1 and Clayton 3 claim, as well as the Delaware state claim which tracks the federal antitrust laws. So we don't believe the amendments are by any means futile; we don't believe they are subject to a motion to dismiss. If the Court allowed the amendment

to be made, for the reasons I described, and I think the pleadings speak for themselves because they are very detailed in the proposed amendment. This is not

something we could have discovered at an earlier date. And in light of the law with respect to allowing the amendment of pleadings, the liberal track on that, as well as the fact that there is really no prejudice to the parties, which is the third prong, and I will explain

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why. Prejudice to the parties -- obviously, there would be a significant prejudice to defendants if they are not allowed to urge inequitable conduct and the antitrust claims in light of the evidence which has been collected, but really nothing has been added to the lawsuit which will delay the case, delay the trial, cause any real need for anyone to have discovery in this case. These issues were all on the table in the original pleadings, although in a slightly different manner. sale bar, as part of invalidity, was already alleged. the only thing that changed was Mr. McDonald and Mr. Keyes' knowledge and familiarity with what happened as persons of duty of candor, which we needed to meet the final prong of intent to deceive. With respect to the antitrust claims, we needed to gather the evidence and take the depositions of these individuals. antitrust claim. Nothing has changed. We had an On So

They knew we had an antitrust claim.

We were already into that whole body of law and the only thing now is that there is some additional factual allegations which underlie the antitrust claim. Your Honor, we did nothing during this process to hold back the case. And, in fact, we had our

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-- we presumed, for purposes of discovery and expert reports, that Your Honor would ultimately or this court would ultimately allow us to amend and, therefore, we conducted the discovery which we felt was necessary anticipating that possibility. We had our expert even

include that in his expert report. THE COURT: I have got all of that.

Just very briefly, if you want to add the affirmative defense of lack of standing, if the motion to dismiss for lack of standing is denied, what impact would it have on the case if we allow you to add that as an affirmative defense going forward in the case? MR. FABRICANT: Your Honor, we did ask Because

for that relief, I believe, as a matter of law.

it involves subject matter jurisdictions, we are entitled as a matter of law to challenge standing if it affects subject matter jurisdiction. So I would submit that we

are entitled to that, notwithstanding the need to amend. I believe it would remain an issue in the case, unless this court is prepared to grant, in effect, what would be summary judgment on the standing issue at this point on this record, in which case there would be adjudication. If the court is not prepared to do that, then we would ask that this amendment be permitted so that we could

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here. 2006. pursue that through trial. THE COURT: All right. Let me hear from

Mr. Drucker briefly on the remaining motion. MR. FABRICANT: MR. DRUCKER: THE COURT: Yes, sir. Good morning, Your Honor. Good morning. The issue on the motion

MR. FABRICANT:

to dismiss the willfulness claim really arises out of the change of law after Seagate. Just to recap the sequence of events McKesson filed its original complaint in January They amended in July 2006 -- that was a The allegation of willfulness

substitution of parties. remained the same.

It was just a bare-bones allegation

that defendants sold the accused products with full knowledge of McKesson's patent rights. THE COURT: Prior to Seagate, would that

have been enough to establish willfulness? MR. FABRICANT: Well, it would have been

enough to allege willfulness in the complaint, but the issue is really slightly different. We think it still

won't have been enough because it doesn't satisfy the duty of good faith. That existed before Seagate. That's

a simple matter of law, Ledmen in Rule 8.

They have an

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decided Seagate. obligation to show that, at least that they have some basis for saying that we have that knowledge. proceeded. Discovery

In February 2007, we decided to elect to rely

on the advice of counsel defense, that was a date that had been set by the Court in the scheduling order. Beginning the following week, we produced the remaining documents supporting those opinions. And, I think, by May of 2007, everything had

been produced relating to the opinions of counsel. In August 2007, the Federal Circuit And shortly after we contacted

McKesson's counsel and we said, what's the basis for the allegation of willfulness? raised. It seems the bar has been You have to

Now it's an objective standard.

have acts of objective recklessness in light of knowledge of the patents. Where is the proof? And we were getting toward the end of discovery at that point also. We still had no basis from

McKesson as to what the claim of willfulness was based on. Finally, after exchanging correspondence for the following months on that question, we moved to dismiss. And the question is really coming down

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to, did they have equitable faith basis? What was it?

The response to the motion, McKesson said, well, we can't answer until we have taken the depositions of the Italian attorneys who rendered opinions in this case. And just to recap what happened

with respect to those opinions, in 2002, when Swisslog was designing its system, they contacted an Italian law firm, Provissionato & Company. They received an opinion

that would help guide them, help guide them around possible infringement. The opinion consisted of a survey

of what the relevant patents were in the field and gave them, just highlighted the major issues that they needed to focus on to avoid infringement when they were finishing up the design of their product. In November 2002, they asked for a final opinion and the Italian attorneys provided that. They

gave them a final opinion confirming their earlier one that the patents weren't infringed if they followed certain steps, and that was before they even entered the U.S. market. In 2003, Swisslog entered the U.S. market and started to make sales here. In 2002, it's covered in the briefing so I will raise it with Your Honor, the parties actually had

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that. negotiations, there had been several meetings. There was

discussion about whether Swisslog would act as a sales agent, and whether McKesson would enter into an agreement to market the Matoped (sic) product. As part of that, there were meetings between executives of the two companies. given access to technical information. McKesson was The senior

engineers at McKesson, Mr. Wangoo (sic) and Mr. Spano, the software developer, were told about the Swisslog product. patents. And apparently no mention was ever made of And the reason this is relevant to this motion

is because in response to our motion, it seems that the only information McKesson is able to come forward with to show that they had a good-faith basis at the outset of the suit is based on the disclosures that were made well after the suit was filed. THE COURT: But I have to, in a motion

to dismiss, take their allegations as true. MR. DRUCKER: That's fine, you can do

It changes nothing with respect to what they knew

at the time they filed suit, and that's expressly what Seagate requires. THE COURT: Well, if Seagate goes to

proof, it doesn't go to pleadings, and you have

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acknowledged that, I believe, in your filings. MR. DRUCKER: matter of what's pled. THE COURT: So the problem I am having Correct. This is not a

is what the procedural basis for me to look behind the pleadings to figure out what they knew and then make a decision, I guess, as to whether it was reasonable based on what they knew at the time of the suit. How is any of

that relevant to a motion to dismiss analysis? MR. DRUCKER: Well, we believe it comes

down to the good-faith basis of filing the suit in the first place. to -THE COURT: just an exception motion? MR. DRUCKER: Well, it's actually a Then you are just bringing It comes down to Rule 11, it comes down

motion to dismiss, because -- well, Seagate says when a compliant is filed the patentee must have a good-faith basis for alleging willful infringement. It says so a

willfulness claim asserted in the original complaint -THE COURT: Seagate doesn't say if the

defendant thinks the plaintiff doesn't have that, file a motion to dismiss. MR. DRUCKER: No, it doesn't say that

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expressly. In fact, we are not aware of any cases either Seagate is a relatively new decision, I don't believe the issue has been

way on this point. as the Court knows.

addressed before, not in any reported decision, but it seems at some point McKesson has to show the basis. And

what they have done -- and this ties into the motion to amend. They have come forward now with a proposed second

amended complaint, and the entire basis for the allegations of willfulness are information that they've obtained in the course of discovery from us relating to those opinions of counsel. If we had never chosen, if

defendants had never chosen to rely on the advice of counsel defense, McKesson right now would have absolutely no basis for their allegation of willful infringement. THE COURT: MR. DRUCKER: us, to our prejudice. THE COURT: Okay. I understand. I have Okay. So it's being used against

heard enough on those two motions and we will give Mr. Fabricant a chance for brief rebuttal but not until after we give McKesson a chance to tell me whatever they want to tell me on all four motions. MR. JACOBS: Good morning, Your Honor.

Blair Jacobs on behalf of McKesson; Christina Ondrick is

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with me; Christine Azar from Blank Rome here in Wilmington; and Jill Dessalines, from McKesson, is also present. Your Honor, what I would like to do is I would like to direct some comments to some questions that the Court asked Mr. Fabricant during his presentation, then I have some additional points that I want to bring up and demonstrate that weren't raised during that discussion. And then I would like to conclude by

demonstrating and showing how the loans were fully repaid and the evidence that's in the record that demonstrates that. THE COURT: It's also likely I will have

some other questions for you, but go ahead. MR. JACOBS: questions as well. THE COURT: MR. JACOBS: That was implied. Let me start out by, if I And I would And respond to all of your

could, by dealing with the state of the law. ask the Court to take it in this progression.

In 1996, the Federal Circuit, in a case called Minco, Inc. vs. Combustion Engineering, stated that "construction of assignment agreements are a matter of state law." It's a quote from the case, that

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statement has stood. date. THE COURT: MR. JACOBS: Federal Circuit? Federal Circuit case. It has not been overturned to this

In February, we have the DDB Technologies case. Now, that was a question of whether

the creation of an automatic assignment or an obligation to assign in the future. So the court was looking at a

specific assignment; was it assignment in the future or was it an automatic assignment vesting as of right now? And so that is something that is entwined with patent law, because it relates at some level to interpretation of patent rights. And Judge Newman sat on that case, if

you look at the opinion; she also filed a dissent disagreeing with certain aspects of that case. Then Akazawa, a month later, comes forth and it says that state law, not federal law, governs patent ownership. And as part of that, and we believe

the part that is really important to the resolution of this case, the Federal Circuit says a change in ownership can occur by operation of state law. So if there was an

assignment, and if the assignment could be extinguished because it was in effect a security interest, that would be something that would be governed by Hill (sic).

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That's why we have focused so much on intent. Actually,

UCC, Provision 9 of the UCC, which is adopted in Pennsylvania, there is a U.S. provision that's very, very similar with regard to security interests. We haven't

found a lot of case law where it's been interpreted via federal law. Pennsylvania has a lot more guidance with

regard to why intent is important with regard to that issue. THE COURT: So, in your view, though, do

I need to resolve whether it's federal or state law OR do I analyze the issues the same way either way? MR. JACOBS: I think either way you

analyze the issues based on the intent of the parties, what the parties intended. Did they intend absolute

assignment, divestiture of all of their rights -- that's the simple test for was an assignment required -- or did they intend something that was to serve as short-term security? Now, one thing that's interesting, Your Honor, is that we have had three papers that have been filed by the defendants since this motion was originally filed, and we filed our opposition. And with our Sean

opposition we filed a declaration of Sean McDonald. McDonald was the founder of AHI. He sat in on the

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transactions. He has recollection of what actually And he states in

occurred and why it occurred.

paragraphs 22 and 23 of that declaration, Your Honor, that he understood that the notes and the assignment, which he signed on behalf of AHI, were to simply provide collateral in the case the loans were not paid off. also states in paragraph 23 that, of course, start-up company, his intent was to obtain funding. His intent It was He

was to use the patent application as collateral. not to provide -- this goes to was it intent.

An intent He

to assign has to be a complete divestiture of rights.

says my intent was not to do that, it would have made no sense to provide permanent assignment of rights to the property. And if you think about the context of how this That's all they had at

arose, it's a start-up company. this point in time. THE COURT:

That maybe what makes sense,

but when he signed, the one thing he signed was the assignment of invention document which on its face makes no reference to notes, no reference to collateral, no reference to security interests. It is, on its face, it So how

seems to me, a clear and unambiguous assignment. does that fit into your argument? MR. JACOBS: Sure, Your Honor.

This is

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the language in the promissory