Free Response in Opposition to Motion - District Court of Arizona - Arizona

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PETER E. HEUSER, admitted pro hac vice ELIZABETH A. TEDESCO, admitted pro hac vice Kolisch Hartwell, P.C. 200 Pacific Building, 520 SW Yamhill Street Portland, OR 97204 Telephone: (503) 224-6655 Facsimile: (503) 295-6679 [email protected] [email protected] DANIEL R. MALINSKI (#005911) Burch & Cracchiolo, P.A. 702 East Osborn, Suite 200 Phoenix, Arizona 85014 Telephone: (602) 274-7611 Facsimile: (602) 234-0341 [email protected] Attorneys for Plaintiffs Richard G. Krauth and R.M. Wade & Co.

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA ) ) No.04-544 PHX PGR ) ) Plaintiffs, ) ) v. RESPONSE IN OPPOSITION TO ) DEFENDANTS' MOTION FOR ) Phelps Dodge Corporation, a New York SUMMARY JUDGMENT ENFORCING ) corporation; Phelps Dodge Bagdad Inc., a SETTLEMENT AGREEMENT ) Delaware corporation; Phelps Dodge Chino ) Inc., a Delaware corporation; Phelps Dodge Morenci Inc., a Delaware corporation; Phelps ) ORAL ARGUMENT REQUESTED Dodge Sierrita Inc., a Delaware corporation; ) ) Phelps Dodge Tyrone Inc., a Delaware corporation; and Phelps Dodge Miami Inc., a ) ) Delaware corporation, ) ) Defendants. Richard G. Krauth, an individual; and R.M. Wade & Co., an Oregon corporation,

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TABLE OF CONTENTS

INTRODUCTION AND SUMMARY OF ARGUMENT __________________________ 1 FACTUAL BACKGROUND ______________________________________________ 2

A. The Parties Agree To Some Basic Terms Of Settlement, But Their Written Settlement Proposals Vary Significantly As To Scope And Subject Matter _________________________ 2 B. As The Parties Begin Negotiating To Accommodate An Additional Patent, Plaintiffs Twice Communicate That If The PTO Issues A Favorable Office Action Before The Agreement Is Executed, The Settlement Is Off ___________________________________________________ 3 C. For Another Five Months, The Parties Continue Negotiating Contract Language And An Exhibit Relating To The `548 Patent _______________________________________________ 5 D. Before The Final Draft Of The Settlement Agreement Is Executed, The PTO Issues An Office Action Upholding The Claims Of The Patents-In-Suit_________________________________ 7

LEGAL ARGUMENT ___________________________________________________ 7

A. Because The Parties Dispute The Existence Of A Settlement Agreement, This Issue Should Be Decided Against Phelps Dodge Or Decided At Trial __________________________________ 8 B. The Facts, Many Of Which Are Disputed, Plainly Establish That No Settlement Contract Was Formed _______________________________________________________________________ 9
1. Because the January 2005 exchange of voicemails was oral, left out several material terms, and did not result in a common understanding, the parties did not form a contract at that time __________9 2. Because there was no agreed "modification" but an ongoing negotiation as to plaintiffs' additional patent, no contract was formed in April 2005 ____________________________________________11 3. Because Wade communicated its intent to be bound only after the settlement agreement was executed while the parties were still negotiating material terms, the most recent version of the settlement agreement is not a contract__________________________________________________12

C. Because There Is No Signed Writing Under The Arizona Statute of Frauds, There can Be No Enforceable Agreement _________________________________________________________ 14

IV.

CONCLUSION________________________________________________________ 16

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TABLE OF AUTHORITIES

Bishop v. Norell, 88 Ariz. 148, 151, 353 P.2d 1022 (1960) ......................................................... 16 Callie v. Near, 829 F.2d 888 (9th Cir. 1987).................................................................................. 8 Canyon Contracting Co. v. Tohono O'Odham Housing Authority, 172 Ariz. 389, 391, 837 P.2d 750 (App. 1992).......................................................................................................................... 9 Canyon, 172 Ariz. at 393, 837 P.2d at 754 ..................................................................................... 9 Celotex Corp. v Catrett, 477 U.S. 317 (1986) ................................................................................ 7 8 Hackin v. Rupp, 9 Ariz. App. 354, 356, 452 P.2d 519 (1969)........................................................ 9 Hill-Shafer Partnership v. Chilson Family Trust, 165 Ariz. 469, 473, 799 P.2d 810 (1990) .. 9, 10 Lamle v. Mattel, Inc., 394 F.3d 1355 (Fed. Cir. 2005) ................................................................. 16 Lyons Enterprises, Inc. v. Custer, 168 Ariz. 439, 440-41, 814 P.2d 780 (App. 1991)................... 9 Ozyagcilar v. Davis, 701 F.2d 306 (4th Cir. 1983) ........................................................................ 8 Rogus v. Lords, 166 Ariz. 600, 603, 804 P.2d 133 (App. 1991) .............................................. 9, 10 Scripps Clinic & Research Foundation v. Genentech, Inc., 927 F.2d 1565 (Fed. Cir. 1991) ........ 8 Tabler v. Industrial Commission of Arizona, 202 Ariz. 518, 521-22, 47 P.3d 1156 (App. 2002) 14 Wilson v. Wilson, 46 F.3d 660 (7th Cir. 1995) ............................................................................... 8 Statutes 35 U.S.C. § 154............................................................................................................................. 15 Arizona Revised Statute Section 44-101 ................................................................................ 14, 16 Mission v. Mt. Sinai Congregation, 276 P. 930, 932 (Wyo. 1929) .............................................. 15 Schick Service, Inc. v. Jones, 173 F.2d 969, 975-77 (9th Cir. 1949)............................................ 16 Solaia Tech. LLC v. ArvinMeritor, Inc. et al., 2006 U.S. Dist. LEXIS 11347 (N.D. Ill. March 16, 2006) ......................................................................................................................................... 15 Sun Studs, Inc. v. Applied Theory Associates, Inc., 772 F.2d 1557, 1563 (Fed. Cir. 1985) ......... 16 Rules Arizona Rule of Civil Procedure 80(d)........................................................................... 1, 9, 10, 17 Fed. R. Civ. P. 56(c) ....................................................................................................................... 7

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I.

INTRODUCTION AND SUMMARY OF ARGUMENT Rather than proceeding to litigate this dispute on its merits, facing patent claims newly

validated by the Patent and Trademark Office ("PTO"), Phelps Dodge Corporation and the other Phelps Dodge defendants (collectively, "Phelps Dodge") hope to piece together an enforceable settlement contract from emails, voicemail transcripts, and an unsigned draft of an agreement. Recent discovery reveals that Phelps Dodge points not only to the unexecuted draft of a settlement agreement discussed in its Motion for Summary Judgment as enforceable, but hopes to fall back on two oral "settlement agreements" purportedly formed in January and April 2005. Phelps Dodge's purported agreements rest on the shaky foundation of almost wholly disputed facts--facts that, nonetheless, do not favor a finding that any binding settlement agreement was formed. For instance, although Phelps Dodge contends that there was an oral agreement that merely needed to be memorialized in writing, the settlement negotiations continued for nine months, involving debate and conflicting contract language as to almost every material term. Furthermore, during this discussion of material terms, plaintiffs communicated their intent to be bound only after the settlement agreement was executed because, otherwise, a favorable reexamination ruling by the PTO would entirely change the direction of the negotiations. Plaintiffs have contemporaneous emails showing that these statements were made in April and May 2005, with the final settlement draft not created until October of that year. Phelps Dodge, relying entirely on the unaided recollection of its counsel, insists that plaintiffs' statements requiring an executed agreement came in "late summer" of 2005. Moreover, as set forth in detail in plaintiffs' concurrently filed Motion for Summary Judgment That No Settlement Agreement is Enforceable, Arizona Rule of Civil Procedure 80(d) prevents the formation of any agreement, if disputed, unless both the terms of the agreement and the parties' assent to those terms are in writing. The Arizona statute of frauds also prevents the formation of a settlement contract here, where any such agreement would include a covenant by plaintiffs not to sue Phelps Dodge for infringement of the patents-in-suit, a promise that would last at least four years. Accordingly, plaintiffs respectfully request that the Court deny Phelps Dodge's Motion for Summary Judgment Enforcing Settlement Agreement.

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II.

FACTUAL BACKGROUND On August 16, 2004, the Court stayed this action pending the result of a reexamination of

the patents-in-suit, and plaintiffs filed the Request for Reexamination on September 30, 2004. [Statement of Facts ("SOF") ¶ 1]. With the status of the claims of the patents-in-suit uncertain, the parties began to discuss settling the lawsuit. Contrary to the brief and bullet-pointed

summary of facts set forth in Phelps Dodge's Motion for Summary Judgment, settlement negotiations lasted almost nine months and included dozens of revisions as to material terms of settlement. A. The Parties Agree To Some Basic Terms Of Settlement, But Their Written Settlement Proposals Vary Significantly As To Scope And Subject Matter

On January 11, 2005, counsel for plaintiffs, Peter E. Heuser ("Heuser"), left a voicemail message for counsel for Phelps Dodge, C. Mark Kittredge ("Kittredge"). [SOF at ¶ 2]. Heuser's message stated, among other things, "my client says that they will settle this case for a *** dollar, prompt cash payment," with "the terms to be confidential," for what "would in effect be a paid-up license for Phelps Dodge Company."1 [Id.] The next day, Kittredge called Heuser, stated that Phelps Dodge would agree to settle on those terms, and did not supply any additional terms of settlement. [Id.] On January 18, 2005, the parties agreed that Heuser would prepare a "simple" draft agreement that would provide a paid-up license in return for a dismissal with prejudice. [SOF ¶ 3]. They agreed that Kittredge would draft the release provisions. [Id.] The parties did not discuss a license as to any other patents or for any other parties at that time. [Id.] On January 19, 2005, Heuser emailed a draft agreement to Kittredge, encompassing the terms the parties had discussed and leaving the release provisions to be drafted by Phelps Dodge. [SOF ¶ 4]. The license applied only to the Phelps Dodge companies named in the complaint and the agreement made clear that "Wade and Krauth do not warrant that the Processes may be practiced or the Products may be manufactured, used or sold without liability with respect to other patents." [Id.] Heuser's email stated, "As I indicated to you, neither of my clients has seen

Although the transcript of Heuser's voicemail message also includes the statement that "that's regardless of what happens in the PTO," Heuser was referring to what might happen at the PTO after the agreement was executed. Heuser did not, in January 2005, anticipate that the reexamination result would be received before the parties' had an executed settlement agreement. [See SOF ¶ 2 (and the Heuser declaration reference therein)].

1

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this document, so this should not be considered an offer that is in condition to be accepted." [Id. (emphasis added)]. Several weeks later, on February 7, 2005, Kittredge emailed Heuser a draft of the agreement containing Phelps Dodge's revisions. [SOF ¶ 5]. Without discussing the revisions in advance, Phelps Dodge made sweeping changes to almost every page and provision of the draft agreement. [Id.] The most significant revisions were the following: The seven Phelps Dodge defendants added their "Affiliates" to the license from plaintiffs, including any entities managed by Phelps Dodge and any entities in which Phelps Dodge owns an interest of 15% or more; Phelps Dodge expanded the definition of "Patents" licensed to include not only the patents-in-suit but "any related United States or foreign patents;" Phelps Dodge expanded the license to include not only the patents-in-suit but "any other patents, patent applications and inventions conceived or owned by either Krauth or Wade prior to the date of this Agreement that relate to the field of using drip irrigation for heap or dump leach mining;" Phelps Dodge added a covenant that plaintiffs would not sue for infringement of any patents conceived or owned by plaintiffs, in addition to the license already provided for; Phelps Dodge added a warranty that plaintiffs were not "aware of any patents" other than the patents-in-suit that Phelps Dodge was infringing; and Phelps Dodge added that plaintiffs would release and "forever discharge" any "third-party manufacturers, distributors, importers, resellers, suppliers, system integrators, licensees, and users" of any Phelps Dodge product from any claim relating to the infringement of the patents-in-suit. [Id.] Because the parties held widely varying views of the scope of the license Phelps Dodge agreed to purchase for $ ***, as to the parties licensed, the very patents licensed, and the scope of plaintiffs' warranty of noninfringement, the settlement negotiations continued. B. As The Parties Begin Negotiating To Accommodate An Additional Patent, Plaintiffs Twice Communicate That If The PTO Issues A Favorable Office Action Before The Agreement Is Executed, The Settlement Is Off

As evidenced by correspondence between Heuser and plaintiffs prior to the January 11, 2005 proposal to settle the action for $ ***, there was in fact another, potentially "related," patent owned by Wade that plaintiffs did not wish to license to Phelps Dodge and never intended to license to competing drip tube and emitter manufacturers: U.S. Patent No. 6,817,548 ("the

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`548 patent"). [SOF ¶ 6]. During a telephone conference on February 14, 2005, Heuser brought this patent to Kittredge's attention and the two discussed how the settlement agreement might account for the `548 patent. [Id.] Heuser told Kittredge that plaintiffs were not willing to grant Phelps Dodge a license under the patent, and that plaintiffs were reluctant to agree to warrant that Phelps Dodge was not currently infringing the patent. [Id.] On March 24, 2005, plaintiffs sent Phelps Dodge a proposed settlement agreement that had been revised to account for the `548 patent. [SOF ¶ 7]. The draft agreement expressly disclaimed any license to Phelps Dodge under the `548 patent. [Id.] It provided a covenant not to sue Phelps Dodge for any past infringement of the `548 patent, but provided no future assurances. [Id.] The agreement only stated that "Wade is not aware of any infringement of the `548 patent by the Phelps Dodge Companies." [Id.] Heuser called Kittredge on April 5, 2005 to see if Phelps Dodge had given him any input on the latest draft of the agreement. [SOF ¶ 8]. Kittredge stated that he thought the agreement should identify the emitters Phelps Dodge was currently using in an exhibit to the agreement, expressly warrant that the emitters in that exhibit did not infringe the `548 patent, and allow for continued use of those emitters free from any claim of infringement. [Id.] Next, Kittredge asked Heuser if plaintiffs had heard anything from the PTO. [Id.] Heuser and Kittredge agreed that if the PTO rejected the claims of the patents-in-suit, it would not change the settlement they were working on. [Id.] Heuser stated, however, that if the PTO did not reject all of the claims of the patents-in-suit, the settlement negotiations would change directions entirely. [Id.] Heuser then called Edward Newbegin, president of R.M. Wade & Co. ("Newbegin") to report this conversation with Kittredge. [SOF ¶ 9]. Newbegin told Heuser that Wade would really like to start selling product to Phelps Dodge and asked Heuser to be a little more positive with Kittredge about the progress of the negotiations. [Id.] As a result of this conversation, Heuser sent an email to Kittredge asking for digital photographs of the emitters that would be included in the exhibit they had discussed, and stating the following: Incidentally, now that we have been able to put the case to bed, subject to an exchange of additional information, would it be appropriate for Wade to contact Phelps with the thought of doing business in the future? The final execution of the agreement has been delayed but we don't see that as a reason for delaying further business deals between Wade and Phelps Dodge. [Id.]
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After sending this email, Heuser sent an email to plaintiffs confirming the telephone conversation with Kittredge from earlier that morning. [Id.] The email included the following paragraph: [Kittredge] asked if we heard anything from the PTO and I said we had not. We agreed that we were both certain that what we would get would be a first office action rejection of all the claims. We also agreed that such a result would not change the settlement we were working on. Such an office action does not of course mean we lose; it is simply the next step in the process. We then would have an opportunity to respond. If, on the other hand, the PTO does not reject all of the claims, then that could totally change things to our benefit. [Id.] Several times during the next few weeks, Heuser emailed Kittredge asking whether Kittredge was obtaining the information relating to the emitter exhibit. [SOF ¶ 10]. On May 10, 2005, Heuser emailed Kittredge asking only, "Anything more?" [Id.] Kittredge called Heuser soon after the email was sent. [Id.] After speaking with Kittredge, Heuser recounted the conversation in an email to Newbegin as follows: [Kittredge] called right back and said that he was still trying to get the information from his client. I told him the longer we waited the more likely it became that there would be a ruling by the PTO. We both expected a rejection of all of claims but I said that if it was anything other than that, this could entirely change the direction of the negotiation. He said he felt we had a deal and I said I did not know that that was so clear. In any event, we agreed that a mess could be avoided if he got back to us soon. [Id. (emphasis added)]. Kittredge remembers a single conversation "at no time prior to late summer 2005" in which "Heuser told Kittredge that if the Patent Office issued a favorable Office Action before the written settlement agreement was signed, then he thought his clients' position would be that all bets would be off." [SOF ¶ 11]. Kittredge has no notes, emails or other memoranda to help him place the date. [Id.] C. For Another Five Months, The Parties Continue Negotiating Contract Language And An Exhibit Relating To The `548 Patent

On June 17, 2005, Kittredge finally emailed Heuser revisions to the draft settlement agreement he received on March 24, 2005. [SOF ¶ 12]. The draft included provisions

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warranting that the emitters identified in "Exhibit C" did not infringe the `548 patent and covenanting that plaintiffs would not assert any claim against any of the Phelps Dodge companies or their "Affiliates" for infringement of the `548 patent based on the use of those emitters. [Id.] Significantly, however, although the parties had not discussed any such

provision, the draft also included Paragraph 2b, a "world-wide, non-exclusive, perpetual, irrevocable, fully paid-up, royalty-free license to the `548 Patent effective from the date of issuance of the `548 Patent, to use, make, have made and import the products identified in Exhibit C." [Id.] The draft further included, for the first time, a signature line for Krauth's

wife, whom Kittredge indicate he believed to "own[] an interest in the patents" which were obtained in and were sought to be licensed from two community property states, California and Arizona. [Id.] On June 22, 2005, Heuser responded in an email that the plaintiffs could not agree to the addition of Paragraph 2b because a license under the `548 patent could be seriously prejudicial to plaintiffs and would not be necessary to the intellectual property rights Phelps Dodge would receive under the proposed agreement. [SOF ¶ 13]. On June 24, 2005, Heuser further asserted that plaintiffs could not warrant that Phelps Dodge did not infringe any patent of which they were aware, but would provide a warranty only as to those patents "owned in whole or in part by Wade and/or Krauth" other than the patents-in-suit and the `548 patent. [Id.] In the next several months, the parties worked to obtain emitter information for Exhibit C, and plaintiffs reviewed those emitters to ensure they could warrant that such products did not infringe the `548 patent. [SOF ¶ 14]. The parties continued to negotiate the contract language releasing Phelps Dodge from liability for infringing the `548 patent. [Id.] On August 12, 2005, Heuser received a voicemail message from Kittredge stating that he was not comfortable with plaintiffs' "whittling away" at each term relating to rights under the `548 patent previously discussed by the parties, including the license term. [Id.] In early September, plaintiffs momentarily thought the parties had reached agreement on contract language and signed a draft of the agreement. [SOF ¶ 15]. Before Heuser received the signed copies, he received a voicemail from Kittredge stating, in pertinent part, the following: I wanted to chat with you briefly, and make sure we don't get ahead of ourselves, because it looks like you're already gathering signatures. There is going to be a review process that I need to go through here with my client to make sure we are

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comfortable with this, because Exhibit C looks a lot different than what we had before. [Id.]. Because the document plaintiffs had signed was an incomplete, mooted version of the settlement agreement, it was never transmitted to Phelps Dodge, and Phelps Dodge was never told the draft had been signed. [Id.] A few weeks later, on October 9, 2005, Kittredge sent by email what would be a final draft of the proposed settlement agreement although Exhibit C would change. [SOF ¶ 16]. Recognizing the importance of executing the document before the PTO ruled, Kittredge's email stated, "Now that we are finally here, I would really like to see what we can do to get the agreement executed this week." [Id.] D. Before The Final Draft Of The Settlement Agreement Is Executed, The PTO Issues An Office Action Upholding The Claims Of The Patents-In-Suit

On October 19, 2005, Kittredge reported that Phelps Dodge had signed the final draft of the agreement. [SOF ¶ 17]. Plaintiffs had not yet signed it. [Id.] On October 20, 2005, Heuser called Kittredge to inform him that plaintiffs had just received an Office Action from the PTO confirming the validity of both patents-in-suit. [SOF ¶ 18]. Heuser reminded Kittredge that plaintiffs had always maintained that the agreement needed to be executed before Wade received a favorable ruling from the PTO or the parties would be back to negotiating. [Id.] Kittredge acknowledged that Heuser had said this, but stated that, as previously asserted, Phelps Dodge believed that a binding agreement had already been formed. [Id.] As the conversation

concluded, Heuser and Kittredge agreed that they wanted to--as Phelps Dodge's discovery responses state--"resolve the issue of the disputed settlement" before proceeding with other aspects of the case. [Id.] LEGAL ARGUMENT Summary judgment is appropriate only if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v Catrett, 477 U.S. 317, 325 (1986). The moving party has the initial burden of

establishing that it is entitled to summary disposition. Id. Once a "sufficiently supported motion" has been submitted, the burden shifts to the non-movant to show that a genuine issue of material fact remains. Scripps Clinic & Research Foundation v. Genentech, Inc., 927 F.2d 1565,
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1571 (Fed. Cir. 1991). Here, because overwhelming issues of fact as to the formation of a settlement contract remain, Phelps Dodge cannot obtain summary disposition. A. Because The Parties Dispute The Existence Of A Settlement Agreement, This Issue Should Be Decided Against Phelps Dodge Or Decided At Trial

Phelps Dodge points to the Seventh Circuit decision Wilson v. Wilson, 46 F.3d 660, 664 (7th Cir. 1995), as citing Ninth Circuit and other precedent for the proposition that "a district court possesses the inherent or equitable power summarily to enforce an agreement to settle a case pending before it." [MSJ at 4]. But the language of Wilson continues as follows: Having settled that, we note that these same courts have repeatedly cautioned that a district court may only enforce completed settlement agreements. These decisions uniformly hold that where the material facts concerning the existence or terms of an agreement are in dispute, the matter must be remanded to the district court in order to conduct an evidentiary hearing. Wilson, 46 F.3d at 664 (emphasis in original) (internal citations omitted). In fact, controlling Ninth Circuit law cited by Wilson, deciding an Arizona dispute, is directly on point. In Callie v. Near, 829 F.2d 888, 890 (9th Cir. 1987), the parties orally agreed to settle the dispute for a set amount, with a certain payment schedule as later set forth in a letter by plaintiffs' counsel, but defendants ultimately did not agree to an accompanying stipulation dismissing the action and the related form of judgment. Id. at 889-90. Defendants argued that no settlement was reached because "the settlement agreement was contingent upon the execution of a stipulation and judgment." Id. at 890. The Ninth Circuit held that "[w]here material facts concerning the existence or terms of an agreement to settle are in dispute, the parties must be allowed an evidentiary hearing." Id. (emphasis in original). It further held, "whether the parties intended only to be bound upon execution of a written, signed agreement is a factual issue." Id. at 890-91 (emphasis in original) citing Ozyagcilar v. Davis, 701 F.2d 306, 308 (4th Cir. 1983). Here, it is undisputed that the parties contest whether a settlement agreement was actually formed. Accordingly, just as in Callie, summary judgment is inappropriate. The policy of Callie has in fact been codified by the State of Arizona, and, for the sake of judicial economy, Arizona law takes the principle one step further. Arizona Rule of Civil Procedure 80(d) provides, "No agreement between parties or attorneys in any matter is binding if disputed, unless it is in writing, or made orally in open court, and entered in the minutes." Ariz.

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R. Civ. P. 80(d). This rule, which unambiguously applies to settlement agreements, was created to relieve courts of the necessity of determining highly factual disputes as to the existence and terms of such agreements, "which it has been said are often more perplexing than the case itself." Hackin v. Rupp, 9 Ariz. App. 354, 356, 452 P.2d 519, 521 (1969), citing 83 C.J.S. Stipulations § 4; Canyon Contracting Co. v. Tohono O'Odham Housing Authority, 172 Ariz. 389, 391, 837 P.2d 750, 752 (App. 1992). As set forth in greater detail in Wade's concurrently filed Motion for Summary Judgment that No Purported Settlement Agreement is Enforceable, to avoid difficult issues of proof in the context of enforcing settlement agreements, "the manifestation of assent, as well as the terms of the agreement, must be in writing." Canyon, 172 Ariz. at 393, 837 P.2d at 754. Therefore, Rule 80(d) should apply to nullify any purported settlement agreement. See Lyons Enterprises, Inc. v. Custer, 168 Ariz. 439, 440-41, 814 P.2d 780, 781-82 (App. 1991). B. The Facts, Many Of Which Are Disputed, Plainly Establish That No Settlement Contract Was Formed

The parties agree that Arizona law controls the issue of settlement contract formation. In Arizona, "[f]or an enforceable contract to exist, there must be an offer, an acceptance, consideration, and sufficient specification of terms so that the obligations involved can be ascertained." Rogus v. Lords, 166 Ariz. 600, 603, 804 P.2d 133, 136 (App. 1991). The requirement of certainty is "relevant to the ultimate element of contract formation, i.e., whether the parties manifested assent or intent to be bound." Id. Furthermore, it is "well-established" that to form a binding contract the parties must mutually consent to all material terms. HillShafer Partnership v. Chilson Family Trust, 165 Ariz. 469, 473, 799 P.2d 810, 814 (1990). As recent discovery reveals, Phelps Dodge argues that three different "contracts" dispose of this action. These will be addressed in chronological order. 1. Because the January 2005 exchange of voicemails was oral, left out several material terms, and did not result in a common understanding, the parties did not form a contract at that time

Phelps Dodge contends that "Plaintiffs manifested assent to settle this Action through the voice mail message left by Heuser on the evening of January 11, 2005" and "Defendants manifested assent to be bound during the January 12, 2005 telephone conversation" between Heuser and Kittredge in which "Kittredge told Heuser that the offer made by plaintiffs in that voicemail message was accepted by Phelps Dodge." [SOF ¶ 19]. Phelps Dodge's theory that the

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parties formed an oral agreement to settle this action in January 2005 is belied by the fact that it took the parties another nine months of negotiation to "memorialize" the purported agreement, and is flawed on several other levels as well. At the outset, as mentioned above, Rule 80(d) plainly provides that courts should not enforce disputed oral agreements. See Ariz. R. Civ. P. 80(d). Considering that only seven days after the purported oral agreement was formed, Heuser sent a draft of a written agreement to Kittredge stating, "this should not be considered an offer that is in condition to be accepted," Phelps Dodge can hardly claim there was a meeting of the minds as to whether the exchange of voicemails was intended to be an offer and acceptance forming a binding contract. [Id. at ¶ 4]. Because the existence of an oral agreement was undoubtedly disputed, it will be barred by Arizona Rule of Civil Procedure 80(d). Secondly, to be enforced, the parties must mutually consent to all material terms and the terms of the contract must be sufficiently specific. See Rogus v. Lords, 166 Ariz. 600, 603, 804 P.2d 133, 136 (App. 1991); Hill-Shafer Partnership v. Chilson Family Trust, 165 Ariz. 469, 473, 799 P.2d 810, 814 (1990). There must be "[a] distinct intent common to both parties... without doubt or difference, and until all understand alike there can be no assent." Hill-Shafer, 165 Ariz. at 473, 799 P.2d at 814. Here, the parties neither discussed all terms material to a patent license agreement nor came to a mutual understanding of the terms they did discuss. As detailed above, as of January 12, 2005, the parties had not discussed or determined to what extent affiliated companies would receive a license, whether Phelps Dodge would admit validity or infringement, the scope of any release provisions, to what extent manufacturers and suppliers to Phelps Dodge would be released, and whether the agreement would contain a covenant not to sue in addition to a license. [SOF ¶¶ 2-5]. Furthermore, even to the extent they did agree to a "*** prompt cash payment" for a "paid-up license" with "the terms to be confidential," as set forth in Heuser's January 11, 2005 voicemail, the parties' respective written settlement proposals reveal widely varying understandings of these terms. [Id. at ¶¶ 4, 5]. Plaintiffs' proposed agreement would have provided a non-exclusive, paid-up license to the named defendants under the patents-in-suit only. [Id. at ¶ 2]. As detailed above, Phelps Dodge's proposed "memorialized" version of the agreement included a license for any company in which it owned an interest of at least 15%, as to "any related United States or foreign patents," a covenant not to sue under any patent or invention conceived or owned by either plaintiff, and a

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warranty that Phelps Dodge does not infringe any patent of which plaintiffs were aware. [Id. at ¶ 5]. Finally, the January discussions did not include any reference to the `548 patent or any mention of Krauth's wife, whom Phelps Dodge would come to believe owned an interest in the patents-in-suit. Because these were key portions of the final draft of the proposed agreement, the facts--particularly the few undisputed ones--do not support Phelps Dodge's position that the parties' formed an oral settlement contract in January 2005. 2. Because there was no agreed "modification" but an ongoing negotiation as to plaintiffs' additional patent, no contract was formed in April 2005

In response to the interrogatory regarding contract formation, Phelps Dodge further states, "[S]ometime between February 14, 2005 and April 5, 2005, the parties mutually agreed to modify their January 12, 2005 agreement to take into consideration the Plaintiff's newly issued `548 patent in a telephone conversation between Kittredge and Heuser. The telephone

conference likely occurred on April 5, 2005." [SOF ¶ 20]. According to Phelps Dodge, the "modification" included the parties' agreement "that (i) defendants would identify the subject emitters; (ii) plaintiffs would review that information with respect to the new patents; and (iii) all emitters that do not infringe the new patent would be expressly identified in and covered by the agreement." [Id.] Because this "agreement" was oral, incomplete and general at very most, it cannot constitute contract formation. The purported "modification" makes no mention of the nature of the intellectual property right Phelps Dodge would receive, a subject of significant negotiation from mid-March to late August 2005. Heuser's March 24, 2005 draft agreement provided only a covenant not to sue as to past infringement of the `548 patent with a warranty that Phelps Dodge did not presently infringe. [SOF ¶ 7]. Phelps Dodge's June 17, 2005 revised draft, however, contained a license to Phelps Dodge under the `548 patent, a term that was never discussed, was strongly protested, and was certainly not part of any purported April 2005 "modification." [Id. at ¶ 12]. In fact, as evidenced by Kittredge's voicemail of August 12, 2005, the parties were still debating this highly material aspect of the proposed agreement four months later. [Id. at ¶ 14]. Even as to the general agreement on April 5, 2005 that the parties would "identify" the noninfringing emitters in an exhibit to the agreement, the manner in which to identify the emitters was the very last contract term to be determined and took the parties' several months to

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decide. [Id. at ¶16]. Given that the identification of these products is the essence of the intellectual property right proposed to be granted to Phelps Dodge under the `548 patent, it can hardly be called an immaterial aspect of the agreement. The evidence points to run-of-the-mill settlement negotiations between plaintiffs and Phelps Dodge, exchanging drafts and contemplating a final agreement to be binding when executed by both parties. Phelps Dodge's effort to compress the negotiations relating to the `548 patent into a unitary April 5, 2005 contract modification simply because Heuser stated, to encourage the progress of negotiation, that the case had been "put to bed," is an implausible and insupportable reach. In any event, the intent of the parties during these rounds of revisions is undoubtedly a relevant, unresolved question of fact. 3. Because Wade communicated its intent to be bound only after the settlement agreement was executed while the parties were still negotiating material terms, the most recent version of the settlement agreement is not a contract

In its Motion, Phelps Dodge asserts that the final draft of the settlement agreement should be binding on plaintiffs because the statements by Heuser that his clients were "ready to sign" and that, with a certain revision, he would "have [his] clients...sign the agreement" indicate plaintiffs' assent to the terms contained in that agreement. [Defendants' Motion for Summary Judgement Enforcing Settlement Agreement ("Defendants' Motion") at 3-4]. Setting aside a semantic debate as to whether being "ready to sign" is equivalent to intending to be bound to the terms of a draft agreement--although that would be an important jury question--plaintiffs made clear from an early stage in the negotiations that, awaiting a reexamination determination by the PTO, they intended to be bound only once the agreement was executed. Phelps Dodge does not dispute that "Heuser told Kittredge that if the Patent Office issued a favorable Office Action before the written agreement was signed, then he thought his clients' position would be that all bets would be off." [SOF ¶ 11]. Phelps Dodge contends only that Heuser made a single such representation in "late summer 2005," after a binding agreement was formed. [Id.] As to the timing of the representations, there is the clearest factual dispute. Heuser recalls twice telling Kittredge, on April 5, 2005 and May 10, 2005, that if the PTO did anything other than reject every claim of the patents-in-suit before the agreement was executed, it would entirely change the direction of the negotiations. [Id. at ¶¶ 8, 10]. To support Heuser's

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recollection, plaintiffs have produced contemporaneous emails from Heuser to plaintiffs recounting his conversations with Kittredge in detail. [Id.] Although Kittredge has no notes, memoranda, or email to support his recollection, he--not surprisingly--asserts that the negotiations were further along when Heuser mentioned the contingency, "at no time prior to late summer." [Id. at ¶ 11]. As detailed in Sections III.B.1 and III.B.2 above, given that material terms of the agreement were discussed into September and that any prior agreement was both oral and incomplete, there can be no doubt that there was no "deal" in April or May 2005. Indeed, it was not until October 9, 2005 that Kittredge announced that the parties were "finally here." [Id. at ¶ 16]. Accordingly, whether Heuser's statements were made in April and May 2005 or the "late summer" of 2005, plaintiffs' intent not to be bound to the terms of the proposed settlement agreement until and unless it was executed before the PTO ruled in plaintiffs' favor was communicated before the formation of a contract. Furthermore, the parties' conduct is consistent with an understanding that plaintiffs did not intend to be bound until after the agreement was executed. As Kittredge stated in the September 6, 2005 voicemail to Heuser, he wanted to "make sure we don't get ahead of ourselves, because it looks like you're already gathering signatures" when there would be further review of the proposed agreement by Phelps Dodge. [SOF ¶ 15]. Also, on October 9, 2005, Kittredge stated in an email, "I would really like to see what we can do to get the agreement executed this week," and, "Please let me know if you think that will be possible." [Id. at ¶ 16]. He further stated, "As soon as you tell me that you [sic] client is ready to sign, I will move to make sure my client does as well." [Id.] Finally, in an email to Heuser on October 19, 2005, Kittredge stated that Phelps Dodge had signed the agreement and asked, "How is it going on your end? Do you think we will be in a position to exchange signatures by tomorrow?" [Id. at ¶ 17]. Kittredge's focus, and increasing urgency, surrounding the exchange of signatures on the final draft of the agreement indicate Phelps Dodge's awareness that the agreement would not be consummated--at least as far as plaintiffs were concerned--until it was executed. Phelps Dodge asserts that this case is "remarkably like" Tabler v. Industrial Commission of Arizona, 202 Ariz. 518, 521-22, 47 P.3d 1156, 1159-60 (App. 2002), in that the parties agreed to settle a dispute for a certain sum and "intended that the agreement would formalized by a signed written agreement." [Defendants' Motion at 5]. That case, however, involved a worker's

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compensation claim before the Industrial Commission of Arizona (ICA). The court expressly noted that Arizona Rule of Civil Procedure 80(d) did not apply to a case before the ICA, and stated that it would otherwise require that the agreement be "executed in writing." Id. at 521, 47 P.3d at 1159. Furthermore, the court held that, "in cases in which the parties to an oral

agreement contemplate the later execution of a written document, the fact-finder must resolve whether the parties intended the written document to be a mere memorialization of an already binding oral agreement, or whether they intended to be bound only upon execution of a formal, written instrument." Id. It continued, "The determination of intent is a factual issue." Id. Here, as set forth in plaintiffs' concurrently filed Motion for summary Judgment, Rule 80(d) should operate to null any purported settlement agreement between the parties because it is disputed and not "executed in writing." Even if the Court elects not to apply Rule 80(d) or the statute of frauds, issues of intent preclude the case from being decided on summary judgment. C. Because There Is No Signed Writing Under The Arizona Statute of Frauds, There Can Be No Enforceable Agreement

As set forth in greater detail in plaintiffs' concurrently filed Motion for Summary Judgment that No Purported Agreement is Enforceable, there is also no enforceable contract for settlement because such a settlement would come within the Arizona statute of frauds, and there is plainly no signed agreement to satisfy the statute. Arizona Revised Statute Section 44-101 provides, "No action shall be brought in any court in the following cases unless the promise or agreement upon which the action is brought, or some memorandum thereof, is in writing and signed by the party to be charged, or by some person by him thereunto lawfully authorized." A.R.S. § 44-101 (emphasis added). The purported settlement agreement is within this rule as "an agreement which is not to be performed within one year from the making thereof." See A.R.S. § 44-101(5). First, under the purported agreement, Plaintiffs would forbear from suing Phelps Dodge for infringement of the patents-in-suit or the `548 patent, as to the emitters listed in Exhibit C, during their remaining terms. [SOF ¶ 16 (referring to Heuser Declaration attaching final draft of the proposed agreement)]. Second, Phelps Dodge would receive a "perpetual" license to these patents. [Id.] The patents-in-suit will expire April 9, 2008 and July 9, 2008, 2011, while the

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`548 patent will expire September 5, 2021. See 35 U.S.C. § 154. These permissions and obligations, by their terms, last longer than one year. Courts have confirmed that a covenant not to sue for infringement of a patent whose remaining term is longer than a year comes within the statute of frauds. See Solaia Tech. LLC v. ArvinMeritor, Inc. et al., 2006 U.S. Dist. LEXIS 11347 (N.D. Ill. March 16, 2006), citing 9 Williston on Contracts § 41:1 (4th ed. 2005) ("[A]n oral contract to forbear bringing suit on a certain claim for more than a year has been held unenforceable"). See also Mission v. Mt. Sinai Congregation, 276 P. 930, 932 (Wyo. 1929) ("Some courts have attempted to distinguish between an agreement to do a thing and an agreement not to do a thing for a certain definite time more than a year. But the better and more logical reasoning is, we think, to the effect that any such claimed distinction is unsubstantial."). In Solaia, patent infringement plaintiffs attempted to enforce a settlement agreement based on unsigned drafts of a settlement agreement and the representations in "cover letters" and emails by the parties' counsel. Solaia, 2006 U.S. Dist. LEXIS 11347 at *49-50. The court found that the purported agreement was unenforceable for the "independent reason" that it contained a covenant not to sue for the term of the patent-in-suit which was covered by the Illinois statute of frauds as an "agreement that is not to be performed within the space of one year from the making thereof." Id. at *42-50. Phelps Dodge cites the Restatement (Second) of Contracts for the proposition that a covenant to forbear or refrain from exercising a right is not within the one-year provision of the statute of frauds. [Defendants' Motion at 7 citing Restatement (Second) of Contracts § 130 cmt. b ill. 9]. The Restatement illustrates the point with reference to employment contracts and covenants not to compete: "A sells his grocery business to B [with] A orally agreeing not to engage in the grocery business in the same town for five years. The contract is not within the one-year provision of the Statute, since A's death within one year will give B the equivalent of full performance." Restatement (Second) of Contracts § 130 cmt. b ill. 9. In such situations, however, the right that the party refrains from exercising is tied to their individual performance of a profession. By contrast, the right to sue for patent infringement can be exercised by anyone with an ownership interest in the patent. If Krauth were to die within one year, his wife or another named successor named in his will would have the right to sue Phelps Dodge for infringement of the patents-in-suit and the `548 patent. If he died without a will, the right to sue on these patents would pass as personal property through intestate succession.

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Courts have also held that contracts pertaining to acquiring patent rights come within the statute of frauds where the remaining life of the patent is more than one year, even though the licensee could theoretically go out of business or quit manufacturing a license product, or the licensed patent could be invalidated within one year. See Sun Studs, Inc. v. Applied Theory Associates, Inc., 772 F.2d 1557, 1563 (Fed. Cir. 1985); Schick Service, Inc. v. Jones, 173 F.2d 969, 975-77 (9th Cir. 1949). Accordingly, an agreement containing a covenant not to sue and a license as to three patents, each with a remaining term of more than one year, is within the statute of frauds and must be "in writing and signed by the party to be charged" pursuant to Arizona Revised Statute Section 44-101. Phelps Dodge can provide no evidence that plaintiffs signed the final draft of the agreement. Despite the authorities cited in Phelps Dodge's Motion that an email signature is no less a signature than a hand-written one, there is no law for the proposition that an attorney's emailed statement that his clients are "ready to sign" is equivalent to receiving the written signatures of the parties to the agreement. See Lamle v. Mattel, Inc., 394 F.3d 1355, 1362 (Fed. Cir. 2005) (stating that an email by employee of party may satisfy the California statute of frauds "assuming that there was a binding oral agreement") (emphasis added); Bishop v. Norell, 88 Ariz. 148, 151, 353 P.2d 1022, 1025 (1960) (holding that "any of the known modes of impressing a name on paper" is sufficient signature by "person to be charged" provided it is "done with the intention of signing"). Phelps Dodge likewise cannot argue that an earlier signed draft of the purported agreement can be enforced against plaintiffs because Kittredge's own voicemail concedes that there was no mutual assent as to the early September 2005 draft. Therefore, because no purported settlement agreement will satisfy the statute of frauds, Phelps Dodge's Motion for Summary Judgment should be denied.

CONCLUSION Even if the Court chooses not to apply Arizona Rule of Civil Procedure 80(d) or the

Arizona statute of frauds, this case nevertheless includes highly contested issues of fact surrounding the question of contract formation. Accordingly, plaintiffs respectfully request that Phelps Dodge's Motion for Summary Judgment Enforcing Settlement Agreement be denied.

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1 Dated: March 31, 2006. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DANIEL R. MALINSKI Burch & Cracchiolo, P.A. 702 East Osborn, Suite 200 Phoenix, Arizona 85014 Telephone: (602) 274-7611 By s/ Elizabeth A. Tedesco PETER E. HEUSER ELIZABETH A. TEDESCO Kolisch Hartwell, P.C. 520 SW Yamhill Street, Suite 200 Portland, Oregon 97204 Phone: 503-224-6655 Facsimile: 503-295-6679

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