Free Response 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., ) ) ) ) ) ) ) ) ) ) ) ) No. CIV 02-1954-PHX-MHM LEXCEL, MTSI AND POST PARTIES' RESPONSE TO THE NELCELA PARTIES' MOTION IN LIMINE NO. 2 RE EXPERT ANALYSIS OF AUTHORIZATION SYSTEMS (Assigned to The Honorable Mary M. Murguia)

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The evidence that the so-called Nelcela authorization system was derived from the Lexcel Software is overwhelming. Unable to explain the evidence, Nelcela seeks to hide the evidence from the jury by claiming that the Nelcela authorization system has not been at issue in this lawsuit. The reality is that Nelcela's copying of the Lexcel Software in the Nelcela authorization system has long been one of the central issues in this lawsuit. The evidence is probative, relevant, and admissible. Accordingly, Nelcela's motion in limine should be denied.
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MEMORANDUM OF POINTS AND AUTHORITIES BACKGROUND A. The Lexcel Software

In 1994, Lexcel was hired by Credit Card Services, Ltd. to create a credit card processing software system which "consists of and includes the following: (A) Authorization System . . .; (B) Cardholder System . . .; and (C) Merchant System . . . ." (Ex. 1 ­ License/Use Agreement at p.2, § II). This software system, which from the inception of the contract with CCS has included both an authorization system and a merchant system, is owned by Lexcel, and is the computer software referred to in this lawsuit as the Lexcel Software. B. The Nelcela Software

The Joint Parties intend to prove at trial that the Nelcela Parties copied the Lexcel Software in both what Nelcela calls its authorization system and what Nelcela calls its merchant system. Nelcela would have this court believe that its authorization system and merchant system are two separate and distinct systems. This is simply not true. The Lexcel Software has three components, including an authorization system and a merchant system, which are built around the database that forms the core of the Lexcel Software. Both the Nelcela authorization system and the merchant system were derived from the same software ­ the Lexcel Software. 1. The Nelcela Authorization System

Both the Lexcel Software and the Nelcela authorization system are written in a computer programming language called "C." The evidence at trial will show that Nelcela copied large portions of the Lexcel Software letter-for-letter, then submitted that software to the U.S. Copyright Office claiming it as Nelcela's own authorization system. This evidence of Nelcela's copying is obvious and straightforward. No wonder Nelcela seeks to hide it from the jury.

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2.

The Nelcela Merchant System

The Nelcela merchant system is written in a different computer programming language called PowerBuilder. The evidence will show that Nelcela copied Lexcel's software when creating the Nelcela merchant system. However, because PowerBuilder is a different programming language from C, the evidence of copying does not consist of line-for-line copying as is the case with the Nelcela authorization system, but rather is evidenced by Nelcela's use of numerous portions of the Lexcel database that were copied verbatim by Nelcela in its merchant system software. Nelcela's copying of the Lexcel software from the C to the PowerBuilder programming language is analogous to illicitly copying parts of a novel written in English into Mandarin. The resulting works look different, but the latter was nevertheless copied from the former, in violation of the copyright laws. II. NELCELA'S AUTHORIZATION SYSTEM HAS LONG BEEN AT ISSUE Nelcela's contention that its merchant system is "[t]he only software that has ever been at issue in any phase of this litigation" is demonstrably wrong. (Nelcela Motion at 1). Nelcela's copying of the Lexcel Software in Nelcela's authorization system has long been at issue, as shown by the pleadings, depositions, and summary judgment motions. A. The Pleadings

Lexcel seeks relief from Nelcela's copying of both the authorization system and merchant system components of the Lexcel Software, and has done so since the filing of Lexcel's Motion to Intervene on June 13, 2005. (Dckt. 169). Lexcel included with its motion to intervene a proposed complaint, in which Lexcel sought relief for copying of both its merchant and authorization software. Not only did Lexcel specifically identify both its authorization and merchant software as being at issue (see id., Proposed Complaint ¶¶ 10-15), but Lexcel sought a declaration of ownership of the "three Lexcel software components and any derivative works of these three components: (i) the PC Switch, which is sometime referred to as the Authorization System; (ii) the Cardholder System; and (iii) the Merchant System." (Id. p.10, ¶ A).
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Lexcel's motion to intervene was granted on July 28, 2005, and Lexcel's Complaint in Intervention filed July 29, 2005. The Complaint expressly seeks relief for Nelcela's copying of both Lexcel's authorization system and merchant system. (See Dckt. 212 p.3 ¶¶ 10-15, p.10 ¶ A). On October 19, 2005, Lexcel filed its First Amended Complaint, in which Lexcel again expressly seeks relief from Nelcela's copying of both Lexcel's authorization system and merchant system. (See Dckt. 277 at p.3 ¶¶ 10-15 & p.10 ¶ A). Hence, Nelcela's copying of Lexcel's authorization system is an issue expressly raised in the pleadings for which a determination of ownership is sought in Phase I of this lawsuit. B. The Depositions

Nelcela's copying of the Lexcel Software in both the Nelcela authorization system and Nelcela merchant system was explored in detail during discovery. The parties' experts opined on this issue, and the parties' witnesses were deposed on the issue. For example, Lexcel's expert witness Dr. David Posner testified during his deposition that Nelcela copied the Lexcel Software in both Nelcela's authorization system and Nelcela's merchant system: Q. It's your opinion, sir, that Nelcela engaged in widespread copying of the Lexcel software. Isn't that true? A. That's correct. Q. They did it in their authorization system. Is that correct? A. That's correct. Q. And they did it in their merchant system. Is that correct? A. That's correct. (Ex. 2 ­ Dep. of D.Posner at 51:22 ­ 52:6). And, Nelcela's expert witness Jeffrey Pell testified that he could not deny that Nelcela copied the Lexcel Software in Nelcela's authorization system: Q. Okay. And you looked at -- did you look at the authorization system that Nelcela submitted to the copyright office? A. Yes, I did.
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Q. And you saw in there many, many lines that had been copied verbatim by Nelcela straight out of the code that appeared on those Lexcel discs, correct? A. I cannot reach that conclusion. What you just said there was a copy occurred. I cannot reach that conclusion based on the information given to me that a copy actually occurred. Q. Can you deny that happened, sir? A. I can neither confirm or deny it. (Ex. 3 ­ Dep. of J.Pell at 95:13-25). C. The Joint Parties Motion for Summary Judgment

Nelcela's copying of the Lexcel Software in both the Nelcela authorization system and the Nelcela merchant system was expressly addressed in the Joint Parties' Motion for Summary Judgment re Ownership of Software. In our opening brief, Lexcel sought a summary judgment of ownership of both the Nelcela authorization and merchant systems. (Dckt. 333 at 4 lns.11-16; Dckt. 334 at 3 ¶ 11). In our Summary Judgment Reply, we quoted an extensive segment of the Nelcela authorization system that was copied verbatim from the Lexcel Software. (Ex. 4 ­ Reply at 4-5 (Dckt. 358)). And, during oral argument, we again asked for a judgment that Lexcel owns both Nelcela's authorization system and merchant system because they were both derived from the Lexcel software. (Ex. 5 ­ Trans. of Sept. 11, 2006 Hearing at 43:11 ­ 46:4 (Dckt. 382)). III. THE MOTION IN LIMINE SHOULD BE DENIED Lexcel seeks a judgment in Phase I of this lawsuit that Lexcel owns both Nelcela's authorization system and Nelcela's merchant system because they were derived without consent from the Lexcel Software. Lexcel has sought such relief since its motion for intervention. And, Nelcela's copying of Lexcel's software in both Nelcela's authorization and merchant systems software was directly as issue during discovery and in the Joint Parties' motion for summary judgment. Simply put, this is not a new issue, as Nelcela would like to have the Court believe. The reality is that Nelcela seeks to hide its authorization system from the jury because it so blatantly proves Nelcela's unlawful copying of Lexcel's Software. The evidence will show that Nelcela's authorization system is comprised of many lines of
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computer code which were copied letter-for-letter from the Lexcel Software. This evidence is directly relevant to the claims at issue in Phase I because it proves Lexcel's claim that Nelcela copied the Lexcel Software. Plus, evidence that Nelcela's authorization system was copied from the Lexcel Software is probative of the fact that Nelcela's merchant system was also copied from Lexcel. Both of Nelcela's works are derived from the same software ­ the Lexcel Software. The Joint Parties will argue that Nelcela's willingness and ability to illicitly copy the authorization system from Lexcel (something Nelcela can not deny) evidences their willingness and ability to copy the merchant system, and negates any contention by Nelcela that the similarities between its merchant system and the Lexcel Software are the result of random chance. And, the evidence is also relevant to show that Nelcela witnesses, particularly its principal Alec Dollarhide, lied during their depositions about the creation of the Nelcela software. The evidence is thus relevant. And while harmful to Nelcela, the evidence is not unfairly prejudicial, as required for exclusion under Rule 403, FED.R.EVID. Sure, the evidence will do damage to Nelcela's position, but only because it proves that Nelcela copied the Lexcel Software. That is not unfair prejudice. As explained by the Ninth Circuit: "Parties always introduce evidence that will do damage to the other side's case; that's the very point of a trial. That evidence may decimate an opponent's case is no ground for its exclusion under 403. The rule excludes only evidence where the prejudice is `unfair'--that is, based on something other than its persuasive weight." U.S. v. CruzGarcia, 344 F.3d 951, 956 (9th Cir. 2003) (emphasis in original). Here, the evidence Nelcela seeks to exclude is prejudicial to Nelcela only because of its persuasive value. Consequently, the evidence should be allowed, and Nelcela's motion in limine should be denied.

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RESPECTFULLY SUBMITTED February 2, 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 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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CERTIFICATE OF SERVICE I hereby certify that on February 2, 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 Attorneys for Defendants Nelcela Incorporated, Alec Dollarhide, and Len Campagna

s/ Diana Clauser

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