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

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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. and Lexcel Solutions, Inc.

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 OPPOSING THE NELCELA PARTIES' MOTION FOR JUDGMENT AS A MATTER OF LAW, FOR JUDGMENT NOTWITHSTANDING THE VERDICT, OR FOR NEW TRIAL (Assigned to the Honorable Mary H. Murguia)

Having failed to prove their case at trial, the Nelcela Parties now seek to evade

21 the jury's unanimous verdict on the basis of two issues that are set for resolution in Phase 22 II of this action. Nelcela's motion should be denied. The Court did not err in application 23 of the law, or in setting Nelcela's statute of limitations and "analytic dissection" defenses 24 for resolution in Phase II. 25 I. 26 Setting Aside the Jury's Verdict Is an Extraordinary Remedy. The jury's verdict may be set aside only if "a party has been fully heard on an

27 issue and there is no evidentiary basis for a reasonable jury to find for the party on that 28 issue." Fed. R. Civ. P. 50. Setting aside a jury's verdict is an extraordinary remedy,
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appropriate only where "evidence permits only one reasonable conclusion, and that conclusion is contrary to the jury's verdict." Josephs v. Pacific Bell, 443 F.3d 1050, 1062 (9th Cir. 2006). Here, the parties presented the jury with substantial evidence that Lexcel, rather than Nelcela, is the owner of the software at issue in this lawsuit. Such evidence included the testimony of Carl Kubitz that Lexcel created the software, along with numerous exhibits supporting Mr. Kubitz's testimony including: Lexcel's contemporaneous development file reflecting Lexcel's creation of the software (Exhibit 535), the written contract between Lexcel and Credit Card Services, Ltd. ("CCS") pursuant to which the Lexcel Software was created and which expressly vested ownership in Lexcel (Exhibit 1), and the written settlement agreement between Lexcel and CCS which also expressly acknowledged Lexcel's ownership of the software (Exhibit 3). In short, the jury's verdict is consistent with the evidence, so the Nelcela Parties' motion to set aside the verdict should be denied. II. Nelcela's Statute of Limitations Argument Was Properly Reserved for Phase II of This Litigation. The Court, in its summary judgment ruling, deferred Nelcela's statute of limitations defense to Phase II "where this issue may be more fully developed." Order at 17 lns.11-13 (Dckt. 383). The Court then confirmed that determination prior to trial. (Dckt. 463 p. 21-23 (Trans. of 3/26/07 hearing)). The Court's deferral of Nelcela's limitations defense to Phase II was proper. As set forth in detail in the Joint Parties' Response to Nelcela's "Supplemental Briefing Re: Inconsistent Verdicts" (Dckt. 411 at 3-5), the copyright statute of limitations (17 U.S.C. § 507(b)) applies to the remedies sought, and 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))). The copyright laws do not enable Nelcela to obtain ownership by adverse 2
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possession of the Lexcel software.1 Rather, if the statute of limitations on Lexcel's claims against Nelcela has run, Lexcel will not be able to recover damages for copyright infringement. But nothing in 17 U.S.C. § 507 or any other provision in the Copyright Act would divest Lexcel of ownership of the software it created. That is, even if Lexcel's present claims against Nelcela were stale (they aren't) Lexcel could still enforce its rights against subsequent infringements by Nelcela or other infringers that occur within the limitations period. Roley v. New World Pictures, Ltd., 19 F.3d 479, 481 (9th Cir. 1994)(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" (quoting Hoey v. Dexel Sys. Corp., 716 F.Supp. 222, 223 (E.D.Va.1989)); Bridgeport Music, Inc. v. Diamond Time, Ltd., 371 F.3d 883, 889 (6th Cir. 2004) ("Because each act of infringement is a distinct harm, the statute of limitations bars infringement claims that accrued more than three years before suit was filed but does not preclude infringement claims that accrued within the statutory period."). Moreover, Nelcela has sued POST and MTSI for copyright infringement. The statute of limitations has no bearing on POST's and MTSI's defense that Nelcela does not own the software, and therefore cannot assert claims for copyright infringement. Hence, even if Lexcel was time-barred from litigating a claim to own the software, POST and MTSI remain entitled to prove that Nelcela does not own the software, which is precisely what they did in Phase I by obtaining the jury's verdict that Lexcel owns the software. Nelcela's arguments about the evidence are equally unfounded. Lexcel did not put on evidence to defeat Nelcela's statute of limitations defense because it was not an issue for trial in Phase I. But the evidence that was admitted tends to show that Lexcel's claims are timely. For example, the evidence admitted at trial shows that in 1999, Mr. Campagna assured Lexcel that Nelcela would not make further use of the Lexcel Software (e.g., Trial Testimony of C. Kubitz (April 11 & 13, 2007)). Lexcel relied on
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Nelcela expressly disavowed a claim of adverse possession prior to trial: "Nelcela does not ask this Court to declare it the owner of the Code by `adverse possession.'" (Nelcela Reply Regarding Supplemental Briefing at 4 lns.3-4 (Dckt. 413)). 3
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Mr. Campagna's assurances, and did not learn until years later that Nelcela had continued to infringe Lexcel's copyrights. (Id.). This evidence precludes Nelcela's motion for entry of judgment as a matter of law. Polar Bear Productions, Inc. v. Timex Corp., 384 F.3d 700, 706-707 (9th Cir. 2004) ("[T]he statute of limitations does not prohibit recovery of damages incurred more than three years prior to the filing of suit if the copyright plaintiff was unaware of the infringement, and that lack of knowledge was reasonable under the circumstances."). Furthermore, one of the key reasons that Nelcela's statute of limitations defense is an issue for Phase II is that Lexcel has not yet had a chance to obtain full discovery on this issue. For example, it appears that Nelcela licensed the so-called Nelcela Merchant System to third parties including Electronic Payment Exchange, Phoenix Payment Systems, Inc., and The Bancorp Bank. If Nelcela has caused the software to be used by any of these third-parties since June 2002, such actions will be another fact defeating Nelcela's statute of limitations defense. Roley, 19 F.3d at 481 ("In a case of continuing copyright infringements, an action may be brought for all acts that accrued within the three years preceding the filing of the suit."). The Joint Parties will take discovery on this issue during Phase II. III. Nelcela's "Analytic Dissection" Argument Does Not Warrant Setting Aside the Jury's Verdict. A. Nelcela Waived Resolution of Its "Analytic Dissection Argument" During Phase I

Nelcela's assertion that the Court was required to engage in "analytic dissection" before issuing its summary judgment ruling is unfounded because Nelcela never raised this argument during the summary judgment briefing or oral argument. As the party opposing summary judgment on ownership, Nelcela had an affirmative obligation to come forward with any theories on which judgment should not be entered against it, along with sufficient supporting facts to establish a triable issue on those theories. See Fed. R. Civ. P. 56(e). Nelcela's failure to raise its analytic dissection argument during the summary judgment proceedings means that Nelcela has waived this challenge to the 4
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Court's summary judgment ruling. USA Petroleum Co. v. Atlantic Richfield Co., 13 F.3d 1276, 1283 (9th Cir. 1994) (a party that fails to raise a ground, legal or factual, in opposition to summary judgment motion cannot later assert that ground to challenge the summary judgment ruling). Similarly, to the extent Nelcela contends that its analytic dissection argument should have been adjudicated during the Phase I trial, Nelcela has waived that argument. Nelcela did not raise its analytic dissection defense prior to trial: not in the parties' Joint Proposed Pretrial Order (Dckt. 424); not in the jury instructions Nelcela proposed prior to trial (Dckt. 424 ex. 11; Dckt. 466); and not ­ contrary to its current assertion ­ in its pretrial motion for clarification, which only sought guidance on whether the Court had found copying in both the merchant and authorization systems and whether Lexcel would be required to prove ownership of all five of its registered copyrights (Dckt. 461). Fairness does not permit Nelcela to raise this issue now, in the context of a post-trial Rule 50 motion. Rather, Nelcela will have a full and fair opportunity to present this issue during Phase II. B. Nelcela Misconstrues the Evidence Admitted at Trial

Had Nelcela timely raised its analytic dissection argument (it has not), Nelcela's motion would nevertheless be unfounded. Nelcela failed to show at trial that all of the copying between the Nelcela and Lexcel software was the result of unprotected elements dictated by conventions, software logic, or third-party sources. See, e.g., Data East USA, Inc. v. Epyx, Inc., 862 F.2d 204, 208 (9th Cir. 1998) (discussing analytic dissection); Apple Computer, Inc. v. Microsoft Corporation, 35 F.3d 1435, 1442-43 (9th Cir. 1994) (same). Nelcela did not offer proof of a single third-party source dictating the elements that appear in both the Lexcel and Nelcela software. Although various phantom manuals, appendices, and software samples were mentioned by Nelcela's counsel and witnesses as possible sources of common code, Nelcela never actually produced such documents during discovery or the summary judgment proceedings, nor did Nelcela offer such documents as evidence at trial.
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The only potential common source that actually was introduced into evidence at trial ­ the VISA manual specifying the format in which VISA requires that transaction data be transmitted (which was admitted over Nelcela's objection) ­ does not dictate the form of the source code organizing, storing, or manipulating that data. (See Trial Exhibit 681). This deficiency was most graphically illustrated when Nelcela's expert, Jeff Pell, could not use the VISA manual to derive a single abbreviation of the VISA terms that matched the unique abbreviations used verbatim in both the Nelcela and Lexcel code. (See Trial Testimony of J.Pell (April 19, 2007)). Mr. Pell likewise acknowledged, on cross-examination, that the computer code in Lexcel's Software reflects unique and arbitrary programming decisions made during the creation of the source code. (Id.). He specifically testified that these programming decisions were not dictated by programming conventions, programming manuals, or requirements imposed by VISA. (Id.) Accordingly, if analytic dissection was an issue being tried in Phase I (it was not), the evidence at trial would not support Nelcela's motion for judgment as a matter of law on the basis of its analytic dissection argument. C. Nelcela Can Pursue Its Analytic Dissection Defense In Phase II

Despite Nelcela's waiver, this Court has generously permitted Nelcela the opportunity to pursue its analytic dissection defense during Phase II of these proceedings. If Nelcela can meet its burden of proving that the Lexcel Software is not protectable under the copyright laws, then Nelcela will prevail on Lexcel's copyright infringement claims. Nelcela thus has not been prejudiced in any way. IV. A New Trial Is Unnecessary and Would Be Inappropriate. While the standard for granting a new trial is not as onerous as the standard for entering judgment notwithstanding the verdict, largely because it does not require the Court to weigh the evidence in favor of the non-moving party, it does require more than the losing party's dissatisfaction with the verdict. Specifically, the trial judge is charged with weighing the evidence and determining whether, "having given full respect to the jury's findings, the judge on the entire evidence is left with the definite and firm 6
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conviction that a mistake has been committed." Landes Constr. Co. v. Royal Bank of Canada, 833 F.2d 1365, 1371 (9th Cir. 1987) (internal quotations omitted). A new trial may be appropriate if the jury's verdict "is against the clear weight of the evidence." Id. In this case, Nelcela has not argued that the weight of the evidence supports its position. Rather, its arguments for a new trial are based on two of Nelcela's infringement defenses ­ statute of limitations and analytic dissection ­ which the Court has reserved for Phase II of this case, the Phase in which the parties stipulated that infringement would be tried. As set forth in detail above, to the extent that Nelcela actually has any hope of proving either defense, it will have the opportunity to do so in Phase II. Justice in this case requires that the parties move forward to Phase II of the litigation, not that the Joint Parties and the Court be required to repeat a lengthy and resource-intensive trial because Nelcela wishes that it had better framed its defenses at the summary judgment stage or because it hopes to misapply the infringement statute of limitations to ownership of copyright. V. Conclusion For the foregoing reasons, this Court should deny Nelcela's motion to set aside the jury's verdict or for a new trial. The Joint Parties are ready to proceed with discovery in Phase II without delay.

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RESPECTFULLY SUBMITTED May 24, 2007. BRYAN CAVE LLP By s/ George C. Chen George C. Chen Attorneys for Lexcel, Inc. and Lexcel Solutions, Inc. 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 May 24, 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, Esq. [email protected] Veronica L. Manolio, Esq. [email protected] RONAN & FIRESTONE, PLC 9300 East Raintree Drive, Suite 120 Scottsdale, Arizona 85260 Attorneys for Defendants Nelcela Incorporated, Alec & Diane Dollarhide, and Len & Helga Terry Campagna Diana Clauser LEWIS AND ROCA LLP By s/ Richard A. Halloran 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

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