Free Reply in Support of Motion - District Court of Arizona - Arizona

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Sid Leach (#019519) Andrew F. Halaby (#017251) Monica A. Limón-Wynn (#019174) SNELL & WILMER L.L.P. One Arizona Center 400 E. Van Buren Phoenix, AZ 85004-2202 Telephone: (602) 382-6372 Attorneys for Plaintiff Hypercom Corporation [email protected] [email protected] [email protected] IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA Hypercom Corporation, Plaintiff, vs. Omron Corporation, Defendant. No. CV 04-0400 PHX PGR HYPERCOM'S REPLY IN SUPPORT OF MOTION TO STRIKE INADMISSIBLE EVIDENCE AND TO PRECLUDE TESTIMONY OF JAMES DUNLOP

The Testimony of James Dunlop Is Not Probative Omron's opposition to Plaintiff Hypercom's motion to strike argues that the testimony of James Dunlop should not be excluded under Rule 403 of the Federal Rules of Evidence because it is allegedly "highly probative." Omron's Opposition, at 5. However, the evidence is not probative of any issue properly in this case, inter alia, because Dunlop did not make his observations of a POS terminal until June 9, 2006. This is a case involving claims of aiding and abetting the commission of malicious prosecution and abuse of process, and a conspiracy to commit those torts. The malicious prosecution and abuse of process are based upon the following proceedings filed without probable cause: (1) Michigan in September 2003; (2) Texas in February 2004; (3)

California in August 2004; and (4) the ITC investigation filed in August 2004. Omron's designated witness has already admitted in his deposition taken in March 2005 that Omron did not have probable cause for accusing Hypercom of patent infringement at any time prior to March 2005. For example, Mr. Nakano admitted in his deposition:

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Q

As of October 14, 2003, when you signed the agreement of Exhibit 6A [giving Verve additional patents to use against Hypercom], you knew at that time that Verve had sued Hypercom in Michigan on the '895 patent; correct? Yes, I did, I believe so. As of October 14, 2003, when you signed the agreement of Exhibit 6A, did you have any information from Verve or that Omron had obtained itself that supported any basis for accusing Hypercom of infringement of the '895 patent that was in the Michigan lawsuit? It does not include anything that suggests such a basis. We didn't do even an evaluation of patent '895.

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Nakano Depo., at 101-02. But has anyone at Omron looked into the merits of the patent infringement claims that Verve is asserting against Hypercom and the other companies Verve has sued to reach a conclusion whether you can confirm the infringement that's alleged against those companies? About this matter, I was in charge as a representative of Omron in America and I -- the Japanese side was, basically, not involved. I asked to get the documents that were concerned but when you ask me whether we analyzed the merit of the Verve's case in this matter, to this day I do not know what Hypercom product it is involved so there is no way I can analyze anything. So the short answer is you have not made any effort to analyze the merits of the patent infringement claims asserted by Verve? Regarding Hypercom, no, I did not make any analysis ... .

Nakano Depo., at 157-58 (emphasis added). Because Dunlop did not make his observations of a POS terminal until June 9, 2006, Dunlop's testimony does not involve any information that was known to Omron or was relied upon by Omron to support a determination that there was probable cause for bringing the patent infringement actions against Hypercom, or for continuing the actions. In fact, the Michigan Action, the California Action, the ITC Action, and the patent infringement claims asserted against Hypercom in the Texas Action, had all been dismissed by the time that Dunlop made his observations. The issue of lack of probable cause must be analyzed based on the information that was known to Omron at the time the malicious lawsuits were filed. Mr. Dunlop's testimony is irrelevant to this case because his testimony involves information that was
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not known to Omron (or Verve) at the time the malicious lawsuits were filed. Hydranautics v. FilmTec Corp., 204 F.3d 880, 886 (9th Cir. 2000)("[T]he lack of probable cause question must be answered based upon the facts actually known to FilmTec at the time it prosecuted its patent application and infringement case, and not on the facts it actually presented."); Smith v. St. Paul Fire & Marine Ins. Co., 905 F. Supp. 909, 917 (D. Kan. 1995)("In cases of malicious prosecution, the inquiry as to want of probable cause is limited to the facts and circumstances as they appeared to the defendant at the time the prosecution was commenced."), aff'd without opinion, 99 F.3d 1150 (10th Cir. 1996); Donohoe v. Burd, 722 F. Supp. 1507, 1517 (S.D. Ohio 1989) ("In determining lack of probable cause, the defendant's conduct should be analyzed in view of his situation and the facts and circumstances which he knew or was reasonably chargeable with knowing at the time he made the original complaint."), aff'd without opinion, 923 F.2d 854 (6th Cir. 1991). All information obtained by Omron and all events that took place subsequent to the filing of the malicious lawsuits are irrelevant to the question of probable cause. Hite v. Triton Energy Ltd., No. 99-56975, 2002 U.S. App. LEXIS 7518, 35 Fed. Appx. 434, 437 (9th Cir. April 23, 2002)("[A]ll events subsequent to the filing of the allegedly malicious lawsuit ... are irrelevant to the question of probable cause.")(unpublished); Gill v. Kostroff, 82 F. Supp.2d 1354, 1364 (M.D. Fla. 2000) ("A determination of whether probable cause exists is based on the facts known by the defendant in the malicious prosecution action at the time the underlying action was initiated, not some later point in time."); Owens v. Carpenay, 939 F. Supp. 558, 565 (E.D. Mich. 1996) ("[T]his Court cannot indulge in hindsight, but instead must focus on Defendants' roles in the criminal prosecution of Plaintiff in light of what they knew at the time."); Martin Centers v. Dollar Markets, 99 Cal. App.2d 534, 543, 222 P.2d 136 (Cal. App. 2nd Dist. 1950)("The knowledge of facts which may justify the alleged malicious prosecution is that which is possessed at the time of its occurrence; not that which is subsequently acquired."). Verve and Omron were required to investigate the basis for the patent infringement
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claims against Hypercom before the lawsuits were filed, not after. View Engineering, Inc. v. Robotic Vision Systems, Inc., 208 F.3d 981, 986 (Fed. Cir. 2000) ("In bringing a claim of infringement, the patent holder, if challenged, must be prepared to demonstrate to both the court and the alleged infringer exactly why it believed before filing the claim that it had a reasonable chance of proving infringement.")(emphasis added). Omron cannot escape liability for aiding and abetting Verve's filing of lawsuits against Hypercom without probable cause by attempting to investigate Verve's baseless claims after the malicious claims had already been dismissed. Filing first and investigating later is not acceptable. Burnette v. Godshall, 828 F. Supp. 1439, 1448 (N.D. Cal. 1993) ("Plaintiff's attorney chose to `file first and investigate later,' which is unacceptable."), aff'd, 72 F.3d 766 (9th Cir. 1995); Ultra-Temp Corp. v. Advanced Vacuum Systems, Inc., 194 F.R.D. 378, 382 (D. Mass. 2000) ("[I]t should be obvious that the requirement of a pre-filing investigation would be utterly meaningless if a party could file a complaint without having done the requisite investigation, do some discovery, and then file an amended complaint and thereby insulate itself from any possibility of being sanctioned for the failure to conduct a pre-filing investigation before filing the original claim."); Garr v. United States Healthcare, Inc., 22 F.3d 1274, 1279 (3d Cir. 1994) (if a reasonable inquiry has not been conducted, attorney will not be shielded from sanctions by ''the stroke of luck that the document happened to be justified''); Vista Manufacturing, Inc. v. Trac-4 Inc., 131 F.R.D. 134, 138 (N.D. Ind. 1990) ("A shot in the dark is a sanctionable event, even if it somehow hits the mark."); Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990) (if a lucky shot could save the signer from sanctions, the purpose of Rule 11 "to deter baseless filings" would be frustrated). Omron cannot rely on information, such as Dunlop's investigation, that was obtained after the malicious lawsuits had already been filed, and after the malicious lawsuits had already been dismissed. When initiating the original cause of action, the defendant in a malicious prosecution action could only rely on information that was obtained by the time the action was initiated, as opposed to information later gained
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through discovery, in-depth inquiry, and communications. Gill v. Kostroff, 82 F. Supp.2d 1354, 1364 (M.D. Fla. 2000) (emphasis added). The issue in this case is not whether any Hypercom POS terminals actually infringed any of the Omron patents. Here, even after Hypercom demonstrated to Omron's representative that the Hypercom products accused of infringement did not infringe the asserted patents, Omron made no effort to investigate the claims and continued to aid and abet Verve after being put on notice that the lawsuits were malicious. Nakano Depo. at 159. Omron cannot rely on Dunlop's testimony based on events that occurred on June 9, 2006, after the malicious lawsuits had been filed, and after all of the malicious claims had already been dismissed. The "Probative Value," If Any, Of Dunlop's Testimony Is Substantially Outweighed By The Danger Of Confusion Of The Issues And Misleading The Jury Dunlop's "Patent Analysis Report" purports to show a Hypercom ICE600 POS terminal. However, the components of the system that the ICE6000 terminal was connected to are not disclosed. The Hypercom ICE6000 POS terminal cannot operate standing alone. The Hypercom ICE6000 terminal does not have any processing capability, and must be connected to an electronic cash register manufactured by someone else (Hypercom does not make electronic cash registers). The Hypercom ICE6000 POS terminal merely provides a card reader and PIN pad for an electronic cash register, and whatever processing is done on the information that is read when the card is swiped must be done by equipment made by someone other than Hypercom. The Hypercom ICE6000 is not capable of processing the information read from the card to determine whether the card read was a debit card or a credit card. Exhibit A attached hereto is a copy of a hand-drawn diagram that was marked as Exhibit 8 during the deposition of Omron's expert Brad Gulko. This diagram shows how an ICE6000 POS terminal is only part of a system that includes an electronic cash register ("ECR") made by someone else. The Dunlop report fails to disclose or consider the electronic cash register that was used at the PetCo retail store in question. Both IBM and
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NCR are licensed under the Omron patents at issue. Nakano Depo., at 79-80. If the cash register at the PetCo store was an NCR cash register or an IBM cash register, then the Dunlop report would be highly misleading because a licensed system does not infringe. Exhibit A attached hereto shows how an ICE6000 POS terminal is connected to an electronic cash register ("ECR") made by someone else, which is connected to a POS application server made by someone else. Both the electronic cash register and the POS application server run software provided by someone else. The elements of the Omron `077 patent that must be present in order for infringement to be found are implemented in software. Omron's expert Brad Gulko admitted this: Q Well, just from a technical standpoint, I'm just asking you as a technical guy, the debit processor that processes debit cards [in claim 1 of the `077 patent] is going to be implemented in software, isn't it? It's not inconceivable that such a thing could be created without software. But I would expect in this case to see software, yes. Sure. And you'd expect to see the credit processor for effecting credit card processing implemented in the software; correct? That's what I would expect. And you would expect the card discriminator for automatically discriminating whether a card is a credit card or a debit card to be implemented in software; correct? Yes. I would expect to see that in software. And you'd expect the processing activator for activating the processors in response to the automatically discriminated data to be implemented in software as well; correct? I would expect software to be a component of that, yes.

A Q A. Q.

A. Q.

A.

Exhibit B, Gulko Depo., at 42-43. Mr. Gulko was specifically questioned about the diagram of Exhibit A during his deposition as follows: Q A. Q. A. Okay. Now, you're going to have some software that's going to be running on the POS terminal, correct? Yes. And you're going to have some software that's running on the electronic cash register, correct? Typically, yes.
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Q. A.

And you're going to have some software that's running on the POS application server; correct? Yes. Now, in trying to determine whether the ­ whether the Hypercom POS terminal fell within the scope of the patent claims, wouldn't it be relevant whether or not the software [that] is providing the functionality that falls within the scope of the patent claims is on the Hypercom terminal or on the electronic cash register or on the POS application server or somewhere else, just from a technical standpoint? It might be. But you would concede, just as a technical person, that the software providing the functionality specified in the claims could be on the POS application server, correct? Could be, yes. And it could be on the electronic cash register as well, correct? It could be.

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Exhibit B, Gulko Depo., at 109-110. Dunlop's report fails to disclose what electronic cash register or POS application server was in use at the PetCo store, or what software was running on them. The Omron `077 patent at issue cannot be infringed by the Hypercom POS terminal, because if the system observed by Dunlop actually could distinguish between credit cards and debit cards based solely on the information read from the card when it was swiped, the software that allegedly provided the functionality required for patent infringement was not supplied by Hypercom, and ran on equipment that was not provided by Hypercom. Hypercom cannot infringe a patent based on equipment or software that comes from somewhere else, and Hypercom is not responsible for the functionality that Mr. Dunlop claims he observed. Dunlop's "Patent Analysis Report" was not disclosed until June 15, 2006, which was the day that discovery closed in this case. Hypercom did not have an opportunity to depose him and cross-examine him on his "Patent Analysis Report." Allowing Omron to use this testimony at trial would be unduly prejudicial, and would only serve to confuse the issues and mislead the jury.

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Dunlop's "Patent Analysis Report" Is Governed By Rule 702 Omron's opposition argues that Dunlop's "Patent Analysis Report" is not based on scientific, technical, or other specialized knowledge within the scope of Rule 702. Omron's Opposition, at 2. This is nonsense. Dunlop's expert report states, at page 3, that he was requested "to determine if the Hypercom ICE6000 would be able to identify a Debit or Credit card without having the user identify the card type after swiping, as Claim 1 in USPN 5,012,077 depicts." He necessarily relies upon "scientific, technical, or other specialized knowledge" in reaching the opinion that it was Hypercom's terminal, and not the electronic cash register or POS application server provided by someone else, that was "able to identify a Debit or Credit card without having the user identify the card type after swiping." Without such a scientific or technical opinion that he recorded and observed the functionality of the Hypercom terminal, his testimony would be irrelevant. Dunlop's "Patent Analysis Report" also relies upon "scientific, technical, or other specialized knowledge" in creating the patent claim chart that appears on page 4 of his report. His comparison of the elements of the patent claim on page 4 of his report to the Hypercom ICE6000 terminal requires "scientific, technical, or other specialized knowledge." His statement that "The Hypercom ICE 6000 is a processor that is capable of identifying the difference between the credit cards and debit cards without external entry from a user" is an expert opinion that requires "scientific, technical, or other specialized knowledge." His statement that "Running through the two separate scenarios of using a debit and credit card demonstrates that there is a discrimination made between the debit and credit cards" is an expert opinion that requires "scientific, technical, or other specialized knowledge." The Supreme Court has held that "the trial judge must ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable." Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 589 (1993) ("Daubert I"). Dunlop's Patent Analysis Report is not reliable, because he made no effort to determine what equipment and what software was actually providing the observed functionality. His
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observations did not take place under controlled conditions designed to reveal the functionality of the Hypercom POS terminal, as opposed to undisclosed equipment and software provided by someone else on the system that Dunlop observed. His report is not reliable enough to be relied upon by Omron's other experts pursuant to Rule 703. Under Rule 703, "expert opinions based on otherwise inadmissible hearsay are to be admitted only if the facts or data relied upon are of a type reasonably relied upon by experts in the particular field in forming opinions." In re TMI Litigation, 193 F.3d 613, 664 (3rd Cir. 1999). In order for Omron to oppose Hypercom's motion based upon an argument that Omron's other experts will rely upon Dunlop's report, Omron must show that the facts or data is of the type relied upon by experts in the field, and that such reliance is reasonable. In re TMI Litigation, 193 F.3d 613, 697 (3rd Cir. 1999). If Dunlop's report is not sufficiently reliable to be relied upon by Omron's other experts, then Omron's argument cannot save it from exclusion. Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 595 (1993) ("Rule 703 provides that expert opinions based on otherwise inadmissible hearsay are to be admitted only if the facts or data are `of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject.'") (emphasis added); In re TMI Litigation, 193 F.3d 613, 697 (3rd Cir. 1999); In re Paoli Railroad Yard PCB Litigation, 35 F.3d 717, 748 (3d Cir. 1994), cert. denied, 513 U.S. 1190 (1995). The key inquiry is reasonable reliance, and that inquiry dictates that the trial judge must conduct an independent evaluation into reasonableness. Rule 703's reliability standard is similar to Rule 702's reliability requirement, i.e., "there must be good grounds on which to find the data reliable." In re TMI Litigation, 193 F.3d 613, 697 (3rd Cir. 1999). Dunlop's report has not been shown to be reliable. In fact, the expert opinions of Omron's other experts should be excluded because they rely upon data that is unreliable. In re TMI Litigation, 922 F. Supp. 997, 1024 (M.D. Pa. 1996), aff'd, 193 F.3d 613, 697 (3rd Cir. 1999) (data supporting expert's opinion was not reliable, and the district court did not abuse its discretion in excluding her testimony);
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see 2 Stephen A. Saltzburg, Michael M. Martin & Daniel J. Capra, Federal Rules of Evidence Manual 1397-99 (7th ed. 1998) (discussing Rule 703 and collecting cases in which courts have excluded expert testimony because the experts unreasonably relied on underlying data that was too speculative or not introduced into evidence). See also Head v. Lithonia Corp., 881 F.2d 941, 944 (10th Cir. 1989) ("Implicit in [Rule 703] is the court's [obligation] to make a preliminary determination pursuant to Rule 104(a) whether the particular underlying data is of a kind that is reasonably relied upon by experts in the particular field in reaching conclusions. ... Thus, the district court may not abdicate its independent responsibilities to decide if the bases meet minimum standards of reliability as a condition of admissibility."). Conclusion For the foregoing reasons, Omron should be precluded from using the "Patent Analysis Report" submitted as Exhibit 9 to Omron's Second Motion for Summary Judgment. Hypercom's motion should be granted. Omron should be precluded from introducing the testimony of Dunlop or his expert report at trial. RESPECTFULLY SUBMITED this 13th day of October, 2006. SNELL & WILMER L.L.P.

By s/Sid Leach Sid Leach Monica A. Limón-Wynn SNELL & WILMER L.L.P. One Arizona Center Phoenix, AZ 85004-2202 Attorneys for Plaintiff Hypercom Corporation

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CERTIFICATE OF SERVICE I hereby certify that on October 13, 2006, I electronically transmitted HYPERCOM'S REPLY IN SUPPORT OF MOTION TO STRIKE INADMISSIBLE EVIDENCE AND TO PRECLUDE TESTIMONY OF JAMES DUNLOP to the Clerk's Office using the ECF System for filing and transmittal of a Notice of Electronic Filing to the following ECF registrants:

David P. Irmscher John K. Henning, IV BAKER & DANIELS 300 N. Meridian Street, Suite 2700 Indianapolis, IN 46204 Phone: 317-237-1317 Fax: 317-237-1000 [email protected] [email protected] Paul Moore Ray K. Harris FENNEMORE CRAIG, P.C. 3003 N. Central Avenue, Suite 2600 Phoenix, AZ 85012-2913 Phone: 602-916-5414 Fax: 602-916-5614 [email protected] [email protected] Attorneys for Defendant Omron Corporation s/ Sid Leach

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