Free Declaration in Support - District Court of California - California

Case 3:08-cv-02314-BZ

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MARK D. BYRNE, ESQ. SBN#109268 LAW OFFICES OF TRIANO & BYRNE 25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Telephone: (415) 371-8000 Facsimile: (415) 371-8001 [email protected] Attorney for Plaintiffs Ernest Lahti, Linda Lahti and Applied Reserve Analysis, LLC

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION ERNEST LAHTI, LINDA LAHTI AND APPLIED RESERVE ANALYSIS, LLC, a California corporation, Plaintiffs, v. DAN BLOOMQUIST, REBECCA BLOOMQUIST, HIGHLANDS ELECTRONICS LLC, an Arizona corporation, and DOES 1 through 50 inclusive, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No: CV-08-2314 BZ DECLARATION OF ERNEST LAHTI IN SUPPORT OF TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION

I, Ernest Lahti, declare: 1. I have spent the last sixteen years (16) developing my reserve analysis business in

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

DECLARATION OF ERNEST LAHTI IN SUPPORT OF APPLICATION FOR TEMPORARY RESTRAINING ORDER

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Northern California, with my wife Linda Lahti ("Linda"). I created the idea for Reserve Analyst software ("Software") and we have spent the last seven (7) years developing it with Rebecca Bloomquist ("Rebecca") and Dan Bloomquist ("Dan") (collectively, the "Bloomquists") so that the Software, and similarly our business, would produce the highest quality reserve reports possible. I have worked extremely hard to develop the Software and our reserve analysis business into valuable commodities. I am now in declining health as is my wife, Linda, and we have just discovered that we may lose everything we have worked so hard to develop. 2. I am seventy (70) years old, and my wife and I were looking forward to selling the business and retiring within the next year. However, we now stand to lose everything we have worked so hard to create, our business, the Software, our clients and the goodwill of our company, because the Bloomquists seek to terminate the licensing agreement for the Software, for which I created the idea and which helped them to program and develop. If the Bloomquists are allowed to terminate this agreement, our business will be ruined, we will no longer be able to perform reserve studies, we will lose our clients and we will no longer be able to sell our business. 3. The history and effect of the subject of this suit is described in fuller detail below. A. Background 4. As stated above, I am currently seventy years old; my date of birth is August 18, 1937. I have been a senior citizen since August 18, 2002, which is on or about the time I first began negotiations with the Bloomquists for a licensing agreement for the Software. Linda and I are co-owners of Applied Reserve Analysis, LLC, a California corporation which performs

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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reserve studies and prepares reserve reports for Homeowners' Associations, Time Shares and other entities requiring reserve reports. A sample of a reserve report is attached as Exhibit A. 5. Linda and I began performing reserve studies in 1992, preparing reserve reports for Homeowners' Associations and other entities requiring reserve reports. We originally worked with DOS-based software that was inefficient and inadequate for our needs. Based upon my experience in reserve analysis and with computer programming, I began to develop my idea for a more efficient and more inclusive software for reserve analysis. 6. My idea for the Software included: Windows-based software to perform reserve analysis and generate reports that included charts, spreadsheet and pictures, the format of the reserve reports generated, warnings to be used, and calculations to be performed, including but not limited to cost and useful life basis calculations. This idea was provided to Dan in 2001 for development, under the agreement that we would form a joint venture to develop and market the Software. I never received any compensation from the Bloomquists for my idea or my efforts to program and develop the Software. Now, seven years later, the Bloomquists are trying to reap all the benefits of my experience in reserve analysis and computer programming for themselves by terminating our bargained for five-year licensing agreement and keeping all rights to the Software for themselves. B. Relationship with the Bloomquists and Development of the Software 7. Linda and I met Rebecca in or about 1994, because my son worked for her at her small appliance store in Clearlake, CA, where Linda and I live. Rebecca called me one day because my son did not go to work and she was concerned for him. My son is addicted to drugs

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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and on that day he simply disappeared and we are not certain what happened to him or where he went. During this difficult time I developed a close relationship with Rebecca who became, or so I believed, like a daughter to me. Rebecca referred to me as "Dad" and signed all of her correspondence to me "Love, Rebecca." Rebecca led me to believe that she cared for Linda and I as family and for that reason I trusted her more than I would have otherwise. 8. Rebecca met Dan in or about 1995 and thereafter they moved together to Arizona. I maintained a close relationship with Rebecca even after she moved to Arizona, including attending her wedding in 2000. Sometime after Rebecca and Dan met, I mentioned to Rebecca that I had an idea for new software to perform reserve analysis. She told me that Dan was a software programmer and that I should work with him to develop the idea. She and Dan initially offered to program the Software for free. 9. Rebecca and Dan continued to push me to tell them my idea for the Software. I initially did not believe that they would follow through with the development, but after many years of persistence I told them the idea on July 17, 2001. Since all available software for reserve analysis functioned on DOS, my idea was for Windows-based software to perform reserve analysis and generate reports that included charts, spreadsheet and pictures. I also provided other valuable ideas, including but not limited to format of reserve reports generated, warnings, and calculations, including but not limited to cost and useful life basis calculations. 10. Dan began to program the Software in July, 2001 but soon became frustrated with the process and was ready to give up. I flew out to Arizona and stayed with the Bloomquists for two days, during which I worked full-time to get Dan on the right track developing the idea. I

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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continued to work with them for almost a year to prepare a working version of the Software. It was a full-time job. 11. During the year that I revealed my idea and worked with Dan to develop the Software, I took a trip with Rebecca to Finland to visit my family. Linda was not able to take the trip with me, because she had to work and manage the business. Because I believed that Rebecca and I had a father/daughter relationship, she joined me for this trip. 12. Rebecca and Dan continued to use Linda and I and our ARA employees to beta test the Software from 2002 to 2008. Because I saw Rebecca and Dan as family, I provided significant assistance to the Bloomquists to program, develop and beta test the Software to produce quality, detailed and all inclusive reports with proper calculations tailored to reserve analysis. Just in the last year alone I have spent fifteen to twenty weeks working full-time (40 hours a week) to beta test the Software for the Bloomquists. C. Negotiated Terms of the License Agreement 13. Initially when I disclosed my idea for the Software to Dan in July, 2001, we had agreed that we would enter into a joint venture with the Bloomquists to design and market the Software. Under this initial agreement, Dan would develop the Software, Rebecca would sell the Software and the Linda and I would train users of the Software. 14. Within a year after I disclosed the idea to Dan and after I helped him create, program and develop a working sample of the Software, it was clear that the Bloomquists saw us only as the Software users and that they had no interest in forming a joint venture with us. Therefore, in order to establish our rights in the Software, in or about August, 2002, I approached the

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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Bloomquists for a licensing agreement that would provide ARA with exclusive use of the Software in Northern California. 15. Rebecca and Dan clearly did not want us to have an exclusive license and instead were looking to capitalize on our clients and competitors by marketing the Software directly to them. Rebecca was very insistent that they should have access to ARA's Northern California clients and competitors as well as potential clients in the area. She especially pushed to market the Software to Homeowner Associations, and even suggested that such marketing would increase our business. See Exhibit B. 16. We were adamantly opposed to such marketing and negotiated an initial licensing agreement for 2004-2005 ("Initial Agreement") to provide for our exclusive use of the Software in Northern California. See Exhibit C which is a draft of the Initial Agreement. The Initial Agreement also included a clause that allowed the Bloomquists, but not us, to terminate the agreement for cause with 30 days notice. The Initial Agreement also included a clause whereby all rights in the Software were retained by the Bloomquists. The Bloomquists insisted that if we wanted to use the Software that we had to abide by the Initial Agreement. Therefore in order not to lose the use of the Software that was my idea originally and which we had worked so hard to develop, we consented to the agreement. 17. Because the Initial Agreement was only for a one-year period, between the years 2005 and 2006, we negotiated with the Bloomquists for a new licensing agreement ("Licensing Agreement"). We met stiff opposition from the Bloomquists who initially refused to even speak to us regarding a new licensing agreement. We then brought in Don Thomas to assist us with

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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our negotiations. We were afraid we were going to lose our rights to the Software that was my idea and which would mean that we would lose our clients and our business. 18. We bargained for a transferable five-year license for exclusive use of the Software in Northern California so that Linda and I could sell our business due to our advanced age and and especially because of Ernie's continually declining health. Eventually, with the help of Don Thomas, our business consultant, we agreed with the Bloomquists as to the following terms: (a) We would no longer be used to beta test the Software; (b) Our license would be for a five (5) year term and would automatically renew for an additional five (5) years unless sixty (60) days prior notice was provided; (c) We would have exclusive use of the Software in Northern California (d) Our exclusive license would be transferable to any purchaser of our business; and (e) Any errors that we encountered would be promptly remedied. 19. In order to receive the five (5) year term, we agreed to a periodic increase in the license price to account for inflation and assigned our development rights to the Bloomquists. 20. I did not have knowledge of the terms of Termination Provision, did not negotiate such terms and did not consent to such terms. Mr. Thomas cautioned us to seek the advice of an attorney before signing the agreement. However, we were unable to locate an attorney in Lake County given the time provided by the Bloomquists for the execution of a Licensing Agreement. The Bloomquists insisted that we sign a licensing agreement by February 28, 2006 and the final version of the Licensing Agreement was provided to us on February 28, 2006. See Exhibit D. As a result, we relied upon Mr. Thomas' review of the Licensing Agreement.

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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21. The title of the Licensing Agreement is "Reserve Analyst Professional Licensing Agreement 5 Year Automatic Renew" and each page of the Licensing Agreement is labeled at the bottom "5 Year Contract - Automatic Renewal." See Exhibit E. 22. Unknown to Linda and I, the Bloomquists included the following additional terms in the Licensing Agreement: (a) The Licensing Agreement can be terminated by either party without cause with a sixty (60) days prior written notice after the second year of the Licensing Agreement ("Termination Provision"); and (b) The statute of limitations is shortened. D. Prejudice from Termination of Licensing Agreement 23. On February 28, 2008, ARA paid the licensing fee under the Licensing Agreement for 2008-2009 license year. On March 12, 2008, the Bloomquists sent Linda, ARA and I a 60day notice of termination of the Licensing Agreement ("Termination Notice"), along with a new contract ("New Contract"). See Exhibit F. The Termination Notice was based upon the Termination Provision which was included without the knowledge or Linda or I or Don Thomas as it provided for termination without cause and we had negotiated for a clause providing for Termination for Cause. The New Contract (a) does not provide for our exclusive use of the Software in Northern California, (b) is only for a one-year term and (c) does not allow us to transfer the license. 24. Because of the Termination Notice we will lose our bargained for five-year Licensing Agreement, which includes our right to use Software, our exclusive area of use of the Software,

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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and our ability to sell our business. We will also lose our development rights in this Software because we assigned those rights to the Bloomquists in exchange for the five-year Licensing Agreement. (1) Destruction of Our Business 25. If we do not have a license for the Software we will not be able to perform our reserve analysis studies and our business will be destroyed. The reports we prepare cannot be done without the Software because all data entries would have to be reentered into a new software database, we have not been able to locate any comparable software and it would take six to eight months to develop such software. 26. We have already spent seven years working with the Bloomquists to create and develop my idea for the Software. In fact I have spent fifteen to twenty weeks working full-time (40 hours a week) in the last year alone to beta test the Software for the Bloomquists. 27. If we must switch to new Software, all data entries would have to be reentered by hand as the data base is not transferable. One of our largest clients, which is a time-share resort, has hundreds of thousands of data entries, a typical client has tens of thousands of data entries, and our smaller clients have thousands of data entries. None of our clients has less than 1000 data entries. 28. The reserve reports created for our largest client are currently 300 pages long and growing, and take one month full time with the Software to prepare. Other reports we prepare take three to twelve hours to update using the Software. See Exhibit A hereto for an example of a reserve report.

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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29. A software consultant, Wayne Jerves, has been attempting to find replacement software for us but he has been unable to locate any. Any software he has found is more than ten (10) years old and as such is far from being able to produce the quality reports our customers expect. It would take six to eight months to develop comparable software for use in our business. Most of our competitors have their own proprietary software, which is not available on the market for obvious reasons. (2) Loss of Potential Purchasers 30. In 2007 we received an offer of $500,000 to purchase our business. Thinking that we had a five-year contract and sufficient time to receive a higher bid, we turned down the offer. 31. Now we have new interest from a new prospective purchaser, Associa. We do not yet know the details of this possible purchase. 32. During our negotiations with the Bloomquists, we made it clear that we needed a transferable exclusive license for the Software for five years. The Bloomquists knew that we requested these terms because we wanted to sell our business with the Software license due to our advanced age and poor health. (2) Loss of Customers 33. Now that the Bloomquists threaten to terminate the Licensing Agreement we believe that they will immediately begin to market the Software to our clients and competitors. We negotiated and fought for our right to exclusive use since we first contemplated a licensing agreement for the Software. If we lose the right to exclusive use of the Software in Northern California we will lose our customers and our business will be irreparably harmed.

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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34. We stand to lose our customers because our contracts are renewed each year due to change in law each year and the need to redraft agreements to conform with new disclosures. Therefore, although our customers are repeat customers, we only have one-year contracts with them. We will lose our customers because (1) they will have access to our Software and can perform the analysis themselves, (2) our competitors will have access to our Software and be able to perform the quality of work that our clients desire, which took us seven (7) years to develop and (3) we will no longer have access to the Software, we will have to begin all over again to develop a comparable product and to re-enter hundreds of thousands of data entries. 35. In fact, on February 20, 2008, we received notice from one of our clients, Brookvale, a Homeowner Association in Santa Cruz, California, informing us that it will no longer require ARA's services because it will be purchasing the Software directly from the Bloomquists and performing their own analysis. See Exhibit G hereto. 36. Rebecca previously indicated her intention of marketing to HOAs and stated that she somehow believed that if they marketed to HOAs we would gain business, which is clearly untrue and manipulative. Obviously, the Bloomquists' marketing to HOAs in Northern California, and especially our clients, will be devastating for our business. I. Beta Testing and Failure to Remedy Errors. 37. We have performed beta testing of the Software since a working version was created in or about 2002. The Software errors which often caused unexpected delays and errors in our reports to clients who were unhappy with the problems. We even lost some clients due to the Software problems. We continue to experience many errors in the Software, despite the

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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Licensing Agreement provision to the contrary. In fact, the Bloomquists have refused to timely remedy many of the problems and errors that we encounter using the Software. 38. In locating these errors and troubleshooting the Software, we continue to perform beta testing for the Bloomquists, despite the Licensing Agreement provision to the contrary. The Bloomquists continued to use Linda and I and ARA to beta test the Software from 2006-2008. I have spent fifteen to twenty weeks in the last year working full-time (40 hours a week) to beta test the Software for the Bloomquists. I have received no compensation for my efforts. 39. Because the Bloomquists continually violated the Licensing Agreement, we made demand for compensation in February, 2008 for our time spent beta testing the Software. The Bloomquists refused to provide any such compensation to us and demanded that we pay the licensing fee for 2008-2009 plus an increase in the licensing fee for 2007-2008 according to the Consumer Price Index, as provided in the Licensing Agreement. We made such payment to retain our exclusive Software license on February 28, 2008. Not even two weeks later we received the Termination Notice on March 12, 2008. 40. We originally requested a Termination for Cause provision because the Bloomquists repeatedly used us for beta testing and because of the errors in the Software. However, because we invested so much time and effort into creating the Software and because we needed the Software to continue our business, we never thought to terminate the Licensing Agreement. Now we find that the Bloomquists included the Termination Provision that provides for termination without cause after two years and we stand to lose all of the years we spent laboring to develop a working product that produces the highest quality reserve reports.

Law Offices

TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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41. I declare under penalty of perjury under the laws of the State of California and the laws of the United States of America, that the foregoing is true and correct and was executed in San Francisco, California on May 14, 2008.

By: ___/s/ Ernest Lahti________ ERNEST LAHTI

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TRIANO & BYRNE
25 Jessie Street, 16th Floor San Francisco, CA 94105-2749 Tel. (415) 371-8000 Fax (415) 371-8001

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