Free Response - District Court of Arizona - Arizona

1 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

Peter D. Baird (001978) [email protected] Robert H. McKirgan (011636) [email protected] Richard A. Halloran (013858) [email protected] Kimberly A. Demarchi (020428) [email protected] Lewis and Roca LLP 40 North Central Avenue Phoenix, Arizona 85004-4429 Facsimile (602) 734-3746 Telephone (602) 262-5311 Attorneys for POST Integrations, Inc., et al. George C. Chen (019704) [email protected] Bryan Cave LLP Two North Central Avenue, Suite 2200 Phoenix, AZ 85004-4406 Tel: (602) 364-7367 Fax: (602) 364-7070 Attorneys for Lexcel, Inc., et al.

William McKinnon [email protected] 800 East Ocean Boulevard, Unit 501 Long Beach, California 90802-5449 Nicholas J. DiCarlo (016457) [email protected] DiCarlo Caserta & Phelps PLLC 6750 East Camelback Road, Suite 100-A Scottsdale, Arizona 85251 Attorneys for Plaintiff MTSI and Third Party Defendant Gene Clothier

UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA Merchant Transaction Systems, Inc., ) ) Plaintiff, ) vs. ) ) Nelcela, Inc., et al., ) Defendants. ) ) ) And Related Counterclaims, Cross-Claims, ) ) and Third-Party Claims. ) No. CIV 02-1954-PHX-MHM JOINT PARTIES' RESPONSE TO THE NELCELA PARTIES' POSTTRIAL MEMORANDUM ON STATUTE OF LIMITATIONS (Assigned to The Honorable Mary H. Murguia) (Oral Argument Requested)

Once again, Nelcela, Inc., Len Campagna, and Alec Dollarhide (collectively "Nelcela") raise the same statute of limitations arguments they have raised multiple times before to this Court. And as before, their arguments remain meritless. The copyright statute of limitations governs the remedies available under the Copyright Act for copyright infringement; it does not govern the issue of ownership. Even if some portion of Lexcel's claim for damages is found by the jury in Phase II of this lawsuit to be time barred, Lexcel will still own the software it wrote as found by the jury in Phase I. But even as to the remedies available, Lexcel's copyright claim is timely. The statute of limitations on Lexcel's claim of copyright infringement against Nelcela was tolled by Nelcela's repeated assurances that Nelcela had not copied and was not using the Lexcel software. Moreover, the facts show that Nelcela actively infringed Lexcel's copyrights within the three-year period before Lexcel intervened in this action.
Case 2:02-cv-01954-MHM Document 578 Filed 10/30/2007 Page 1 of 10

1 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

I.

THE COPYRIGHT STATUTE OF LIMITATIONS DOES NOT AFFECT OWNERSHIP OF A COPYRIGHT The copyright statute of limitations (17 U.S.C. § 507(b)) applies to the remedies

sought by the copyright holder, not to the copyright holder's substantive rights. Zuill v. Shanahan, 80 F.3d 1366, 1369 n.1 (9th Cir. 1996)) ("the statute of limitations contained in this bill, is to extend to the remedy of the person affected thereby, and not to his substantive rights" (emphasis added) (quoting S. Rep. 85-1014 p. 1963 (1957))). If the jury in Phase II concludes that the statute of limitations has run on Lexcel's infringement claim against Nelcela, then 17 U.S.C. § 507(b) will bar Lexcel from recovering damages. But nothing in § 507 or any other provision in the Copyright Act will divest Lexcel of ownership of the software it created and which the jury in Phase I has concluded Lexcel owns. Evidently, Nelcela believes that failure to file suit within three years of an infringement causes a copyright to evaporate and renders the work fair game for copying by others. That position cannot be reconciled with the Copyright Act, and indeed has been characterized by one court as "ridiculous." See Pickett v. Prince, 207 F.3d 402, 407 (7th Cir. 2000) (Posner, J.) (argument that, as a result of failure to timely sue, a work "fell into the public domain and became fair game for makers of derivative works, is ridiculous"). As the Ninth Circuit has held, 17 U.S.C. § 507(b) "does not provide for a waiver of infringing acts within the limitation period if earlier infringements were discovered and not sued upon." Roley v. New World Pictures, Ltd., 19 F.3d 479, 481 (9th Cir. 1994) (citation omitted). While § 507(b) might preclude recovery of damages for the earlier infringements, the owner nonetheless retains her rights to sue "for all acts that accrued within the three years preceding the filing of the suit." Id.1 The Ninth Circuit's express holding in this regard forecloses the argument that Nelcela now makes because, The Court has already applied this rule in its summary judgment ruling. See Order at 8 (Dckt. 383) ("even if Nelcela could show that some of the alleged infringing acts occurred outside the limitations period and could not be saved, because the infringing conduct is alleged to have occurred on a continuing basis, any and all acts occurring within the limitations period is still actionable").
Case 2:02-cv-01954-MHM Document 578
1

2

Filed 10/30/2007

Page 2 of 10
1873944.3

1 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

for the copyright owner to retain the ability to sue for acts of infringement within the statutory period, it necessarily retains its ownership of the software. Hence, no matter what the jury in Phase II decides regarding the timeliness of Lexcel's present claim for damages, Lexcel will still retain ownership of its software and will be entitled to enforce its rights against subsequent infringements by Nelcela or other infringers. Roley, 19 F.3d at 481. II. THE JURY IN PHASE II MUST RESOLVE NELCELA'S STATUTE OF LIMITATIONS DEFENSE Nelcela's statute of limitations defense to Lexcel's claim for damages is an issue for the jury, not the Court. The critical question when dealing with a statute of limitations defense is when did the claim accrue? That question is an issue of fact, and thus must be resolved by the jury during the trial in Phase II of this action. E.g., Polar Bear Prods. v. Timex Corp., 384 F.3d 700, 707 (9th Cir. 2004) (accrual date for copyright infringement claim "is an issue of fact"). Lexcel moved to intervene in this lawsuit on June 13, 2005 (Dckt. 169), so the three-year limitations period specified by 17 U.S.C. § 507(b) began on June 13, 2002 (unless tolled by Nelcela's conduct or the discovery rule). Nelcela's infringement of Lexcel's software began before June 2002 and continued long after that date. Substantial evidence will be offered at trial showing that the accrual date on Lexcel's claim should be tolled to allow Lexcel to recover damages for Nelcela's infringements prior to June 13, 2002. Substantial evidence will also be offered at trial showing that Nelcela's infringements continued well after June 13, 2002. A. The Accrual Date of Lexcel's Copyright Claim Was Tolled Because of Nelcela's Misrepresentations

The copyright statute of limitations is subject to the discovery rule. Polar Bear Prods., 384 F.3d at 706. Also, "[a] defendant will be estopped from asserting the defense of statute of limitations if by its conduct the defendant induces the plaintiff to forego

Case 2:02-cv-01954-MHM

Document 578

3

Filed 10/30/2007

Page 3 of 10
1873944.3

1 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

litigation." Roer v. Buckeye Irr. Co., 809 P.2d 970, 972 (Ariz. App. 1990) (quoted in Order at 8 (Dckt. 383)). Here, the evidence establishes that Nelcela induced Lexcel not to file suit, thereby tolling the statute of limitations. When Lexcel discovered in 1999 that Nelcela had infringed its software, Nelcela acted quickly to assure Lexcel it had no need to bring suit. Mr. Campagna personally assured Lexcel that Nelcela would never again use the Lexcel software, and Lexcel relied upon that promise to forego bringing suit. (Statement of Facts ("SOF") ¶¶ 1-4). As the Court has already concluded, "Based upon this alleged promise, it is reasonable that the Lexcel Parties relied on his promise until they subsequently discovered continued acts of infringement within the three year limitations period." Order at 8 (Dckt. 383). Nelcela's efforts to keep Lexcel from bringing suit did not stop there. In early 2003, Lexcel had new reason to believe that Nelcela was infringing Lexcel's software, and accordingly wrote to Nelcela asking if Nelcela would be interested in licensing the software. (SOF ¶ 5). Nelcela responded on January 30, 2003 in a letter from its counsel stating: "Nelcela remains firm that the software it has used and copyrighted is not that of Lexcel Solutions, Inc. . . . Nelcela has appropriately and legally copyrighted its own work." (SOF ¶ 6 (emphasis in original)). Lexcel relied upon that representation to further postpone bringing suit. (Id.).2 These facts raise a jury issue. The jury must determine whether the conduct of Nelcela induced Lexcel to defer bringing suit. If so, Nelcela will be estopped from asserting the defense of statute of limitations. Order at 8 (Dckt. 383).

Nelcela's reference on page 2 of its Brief to Mrs. Kubitz's trial testimony misstates the record. Mrs. Kubitz testified that Lexcel relied upon Nelcela's repeated assurances that Nelcela was not using Lexcel's software. (SOF ¶ 7). And, Nelcela's reference to MTSI's use of the Lexcel software is immaterial because Lexcel believed that MTSI was the successor to Credit Card Services, Ltd. and thus licensed to use the software. (SOF ¶ 8).
Case 2:02-cv-01954-MHM Document 578

2

4

Filed 10/30/2007

Page 4 of 10
1873944.3

1 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

B.

The Facts Show that Nelcela Continued to Infringe Lexcel's Copyrights Within the Limitations Period

Nelcela represents to this Court that "Nelcela has not distributed any credit card processing software since early 2001," and "Nelcela has not performed any business whatsoever since 2001." (Nelcela Brief at 2 (Dckt. 575)). The evidence refutes these representations. 1. The Evidence Shows that Nelcela Has Continually Used and Distributed Credit Card Processing Software Since 2001

As explained in the accompanying Rule 56(f) declaration, Nelcela has tried to stonewall our discovery efforts. Nevertheless, the evidence uncovered so far shows that Nelcela has both used and distributed credit card processing software to third parties continuing well into the three-year period preceding Lexcel's intervention in this lawsuit. a. EPX

The evidence establishes that beginning in 2001, Nelcela provided a company called Electronic Payment Exchange a/k/a/ "EPX" with the software at issue in the ownership trial: the "Nelcela Authorization System" and "Nelcela Merchant System" software (hereafter "the Nelcela software"). (SOF ¶ 9). As compensation for that software, Dollarhide was employed by EPX at an enormous salary and given a substantial amount of EPX stock. (Id.). In addition, EPX began paying rent to Campagna for use of the Nelcela facilities. (Id.). This scheme is documented in a letter and accompanying license agreement transmitted by Nelcela's counsel on March 26, 2003, wherein Nelcela acknowledges that Dollarhide "was employed by EPX . . . as a software programmer with the understanding that, while he remained employed, Leonard Campagna, President of Nelcela would permit EPX to utilize the proprietary software developed and owned by Nelcela, commonly known as . . . Nelcela Merchant System and Nelcela Authorization System." (Id.). Dollarhide was employed by EPX as its Chief Information Officer, where his job was to both modify the Nelcela software for use by EPX, and to oversee EPX's implementation and use of that software. (SOF ¶ 10).
Case 2:02-cv-01954-MHM Document 578

5

Filed 10/30/2007

Page 5 of 10
1873944.3

1 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

Through their actions in distributing the software to EPX, modifying (i.e., preparing derivative works of) the software for EPX, and overseeing EPX's use (i.e., copying) of the software, the Nelcela Parties infringed Lexcel's copyrights. 17 U.S.C. § 106(1) - (3); see, e.g., Perfect 10, Inc. v. Amazon.com, Inc., 487 F.3d 701, 725 (9th Cir. 2007) (describing contributory and vicarious liability for copyright infringement).3 Nelcela concealed these actions through its repeated assertions that Nelcela ceased all business operations in 2001.4 Consequently, Lexcel did not learn of these infringements until 2005 when they were revealed during discovery in Phase I of this lawsuit. (SOF ¶ 11). Therefore, under the discovery rule, Lexcel's claim for damages for these infringements is timely. Polar Bear Prods., 384 F.3d at 706. b. InterCept

In 2002, EPX was acquired by a company named InterCept Payment Solutions ("InterCept"). (SOF ¶ 12). As part of that acquisition, Dollarhide became employed by InterCept as a computer programmer. (Id.). Dollarhide's job for InterCept was to both modify the so-called Nelcela software for use by InterCept, and to oversee InterCept's use of that software. (SOF ¶ 13). In exchange for Dollarhide's employment by InterCept, Nelcela distributed the Nelcela Merchant System software to InterCept in December 2002 ­ a date well within the limitations period of Lexcel's copyright claim. (SOF ¶ 12). In March 2003, Nelcela wrote to InterCept to clarify that InterCept's "continued use of Nelcela's software" was contingent upon continued payments to Dollarhide. (SOF ¶ 14). Through their actions in distributing the software to InterCept, modifying the software for InterCept (i.e., preparing derivative works), and overseeing InterCept's use When software is used, it is "loaded" (i.e., copied) from a storage medium such as a hard drive into the computer's memory for processing. Where, as here, the use is not authorized by the copyright owner, the act of loading the software from the storage medium into the computer's memory constitutes copyright infringement. MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511, 519 (9th Cir. 1993). 4 See, e.g., Statement of counsel: "Nelcela has been out of business since this litigation with Post began in 2001." (Trans. at 11, lns. 23-24 (June 27, 2005) (Dckt. 191)); Decl. of L.Campagna ¶ 7 (Nelcela "closed its doors for business" in July 2001) (Dckt. 329, Ex. 29). As explained below in Section II(B)(2), discovery has shown that these statements are not correct.
Case 2:02-cv-01954-MHM Document 578
3

6

Filed 10/30/2007

Page 6 of 10
1873944.3

1 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

of the software (i.e., copying), the Nelcela Parties continued to infringe Lexcel's copyrights. These actions occurred within three years of Lexcel's intervention in this lawsuit, so Lexcel's claim for such infringements is timely. The relationship between Nelcela and InterCept turned sour in May 2003, when Dollarhide and Campagna, on behalf of themselves and Nelcela, demanded millions of dollars from InterCept for continued use of the Nelcela software. (SOF ¶ 15). The acrimony between Nelcela and InterCept culminated in lawsuits filed in Arizona and Georgia in 2003 by Nelcela and InterCept. (SOF ¶ 16). Nelcela admitted in its pleadings in those lawsuits that from 2002 through at least May 2003, Nelcela provided the Nelcela Merchant System software to InterCept, and that in August 2003, Nelcela's Merchant software was still being used (i.e., copied) by InterCept. (SOF ¶ 17). And Dollarhide testified in a sworn declaration dated January 20, 2004 that "the Nelcela software was being used by EPX and is now being used by Intercept." (SOF ¶ 19). These facts further establish that Nelcela was continuing to copy, modify, and distribute the software within three years of Lexcel's intervention in the present action. Again, Lexcel's claim for such infringements is timely. c. Phoenix Payment Systems

The InterCept/Nelcela litigation concluded with the divestiture of the EPX assets to a company called Phoenix Payment Systems which operates under the name EPX. (SOF ¶ 20). Dollarhide became Phoenix Payment Systems' Chief Information Officer, and evidently remains in that capacity to this very day. (Id.). The facts indicate that Phoenix Payment Systems continues to both (a) use/copy software derived from the Lexcel software to process credit card transactions, and (b) modify (i.e., prepare derivative works of) that software. Dollarhide was instructed not to answer questions during his deposition about Nelcela's distribution of software to Phoenix Payment Systems (SOF ¶ 21), but as explained in the accompanying Rule 56(f) declaration, we expect discovery in Phase II to show that Nelcela distributed the software

Case 2:02-cv-01954-MHM

Document 578

7

Filed 10/30/2007

Page 7 of 10
1873944.3

1 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

to Phoenix Payment Systems and possibly other third parties within three years of Lexcel's intervention in this case. 2. The Evidence Shows That Nelcela Has Performed Business Since 2001

Although Nelcela has repeatedly represented to the Court that "Nelcela has not performed any business whatsoever since 2001" (e.g., Opening Brief at 2, ln. 10), the facts prove otherwise. The facts show that Nelcela engaged in at least the following business activities since 2001 that infringe Lexcel's copyrights: · Nelcela caused the Nelcela software to be used/copied by EPX in 2002 (SOF ¶¶ 9-10); · Nelcela distributed the Nelcela software to InterCept in 2002, and orally licensed the software to InterCept in December 2002 (SOF ¶ 12); · Nelcela caused the Nelcela software to be used/copied by InterCept from 2002 through 2004 (SOF ¶¶ 12-19); · Nelcela oversaw and orchestrated InterCept's use/copying and modification of the Nelcela software in 2002 and 2003 (SOF ¶ 13); · Nelcela received compensation from InterCept for use of the Nelcela software in 2002 and 2003 (SOF ¶ 12, 14); · Nelcela was actively licensing the Nelcela software at least as recently as March 2003 (SOF ¶ 14); · Nelcela demanded a payment in May 2003 from InterCept of millions of dollars for continued use of the Nelcela software (SOF ¶ 15); and · Nelcela filed a lawsuit in June 2003 in which it sought a declaratory judgment "[t]hat the copyrighted Nelcela Merchant System is the property of Nelcela, Inc." (SOF ¶ 18). These actions fall within the statute of limitations on Lexcel's copyright infringement claim.

Case 2:02-cv-01954-MHM

Document 578

8

Filed 10/30/2007

Page 8 of 10
1873944.3

1 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

III.

NELCELA'S STATUTE OF LIMITATIONS DEFENSE DOES NOT AFFECT POST'S AND MTSI'S CLAIMS AGAINST NELCELA, OR THE JOINT PARTIES' DEFENSES TO NELCELA'S CLAIMS Nelcela's lack of ownership of the "Nelcela Authorization System" and "Nelcela

Merchant System" software is a critical issue regarding POST's claim for fraud against Nelcela, and Nelcela's claims of copyright infringement against POST, MTSI, and Lexcel. The ownership question is so central to these claims that this action was bifurcated into an ownership phase and a damages phase before Lexcel's intervention. (E.g., Dckt. 78). Nelcela has no statute of limitations defense to POST's or MTSI's claims. Consequently, the jury's verdict in Phase I that Nelcela does not own the "Nelcela Authorization System" or "Nelcela Merchant System" software is a determinative ruling on that issue as to the claims between Nelcela, POST, and MTSI, regardless of how the Phase II jury rules on Nelcela's statute of limitations defense to Lexcel's claim for copyright damages. Likewise, the statute of limitations does not affect the Joint Parties' defenses to Nelcela's claims for copyright infringement, and does not impact the Joint Parties' pending motion for partial summary judgment on Nelcela's claims of copyright infringement, conversion, and aiding and abetting tortious conduct (Dckt. 513). IV. CONCLUSION Based on the evidence presented by Lexcel and the relevant law, the Court should rule yet again that Nelcela's statute of limitations defense does not apply to Lexcel's ownership of the software as determined by the jury in Phase I. The Court should further rule that Nelcela's statute of limitations defense is limited to Lexcel's claim for copyright damages, which is an issue for resolution by the jury in Phase II. // //

Case 2:02-cv-01954-MHM

Document 578

9

Filed 10/30/2007

Page 9 of 10
1873944.3

1 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

DATED: October 30, 2007. BRYAN CAVE LLP By s/ George C. Chen_______________ George C. Chen Attorneys for Lexcel, Inc., Lexcel Solutions, Inc., Carl Kubitz, and Flora Kubitz DICARLO CASERTA & PHELPS PLLC Nicholas J. DiCarlo and LAW OFFICES OF WILLIAM McKINNON By s/ William McKinnon____________ William McKinnon Attorneys for Merchant Transaction Systems, Inc., Gene Clothier, and Tone Clothier CERTIFICATE OF SERVICE I hereby certify that on October 30, 2007, I electronically transmitted the attached document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: Merrick B. Firestone [email protected] Veronica L. Manolio [email protected] RONAN & FIRESTONE, PLC 9300 East Raintree Drive, Suite 120 Scottsdale, Arizona 85260 Ray K. Harris [email protected] FENNEMORE CRAIG, P.C. 3003 North Central Avenue, Suite 2600 Phoenix, Arizona 85012-2913 LEWIS AND ROCA LLP By s/ Kimberly A. Demarchi________ Peter D. Baird Robert H. McKirgan Richard A. Halloran Kimberly A. Demarchi Attorneys for POST Integrations, Inc., Ebocom, Inc., Mary L. Gerdts, and Douglas McKinney

s/ Debi Garrett

Case 2:02-cv-01954-MHM

Document 578

10

Filed 10/30/2007

Page 10 of 10
1873944.3