Free Response to Motion - District Court of Arizona - Arizona

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LAW OFFICES

RONAN & FIRESTONE, PLC
9300 E. RAINTREE DRIVE, SUITE 120 SCOTTSDALE, ARIZONA 85260 (480) 222-9100

Merrick B. Firestone, SB #012138 Veronica L. Manolio, SB #020230 Attorneys for the Nelcela Defendants

UNITED STATES DISTRICT COURT IN AND FOR THE DISTRICT OF ARIZONA Merchant Transaction Systems, Inc., Plaintiff, vs. Nelcela, Inc., an Arizona corporation; Ebocom, Inc., a Delaware Corporation; POST Integrations, Inc., an Illinois Corp., et. al. Defendants. And Related Counterclaims, Cross-Claims and Third-Party Complaint. No. 02-CV-1954 - PHX-MHM NELCELA, INC., LEN CAMPAGNA AND ALEC DOLLARHIDE'S RESPONSE TO JOINT PARTIES' MOTION IN LIMINE NO. 3 TO EXCLUDE EXPERT TESTIMONY REGARDING LEXCEL'S COPYING, CONTENT OF THE 1994/95 DISKS, AND THE IMPROPER ANALYSIS BY THE "CODEMATCH" TOOL (Oral Argument Requested) (The Honorable Mary H. Murguia) I. INTRODUCTION Nelcela, Inc., Len Campagna and Alec Dollarhide (collectively "Nelcela") respond to the joint parties' motion to exclude expert testimony by Nelcela's experts. That motion must be denied as it is a classic case of the proverbial, "pot calling the kettle black." The joint parties seek to exclude opinions/testimony that were not previously disclosed but fail to remember that Post's own expert disclosed both an Addendum Report and then included a "Redline Report" well after the close of discovery. Neither of his supplemental findings were disclosed timely or properly, yet the joint parties intend to use his additional findings at trial. The joint parties want to exclude the rebuttal Nelcela has offered, which are directed at those supplemental Post expert opinions, only because Nelcela's experts can resolve all issues (including the "first in time" question) in favor of Nelcela.

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Before considering whether Nelcela's experts and Post's expert should have been permitted to "supplement" their reports, it is essential that the Court remember the PROCEDURE of this case. We should all be very mindful that Post, MTSI and Lexcel were not always the, "Joint Parties." Actually, Post is and always has been a defendant in this case. Only MTSI and Lexcel are Plaintiffs. Accordingly, when Post disclosed its expert report, it did so at the same time as Nelcela's experts because both Post and Nelcela are defendants. The Post and Nelcela expert reports were launched in rebuttal to MTSI and Lexcel. Some time along the way, Post decided it would "gang up" on Nelcela and would align itself with the Plaintiffs. Post then shifted its focus from rebutting MTSI/Lexcel to rebutting Nelcela and did so by way of offering an Addendum and a Supplemental "Redline" Report, both after the close of discovery. Nelcela was never given any opportunity to disclose a rebuttal expert report to Post's supplemental expert reports because discovery was closed. Nelcela's supplemental expert opinions only address the portions of Post's expert reporting that it was not previously permitted to address. Nelcela cannot now be prejudiced because Post decided to change sides of this fight mid-stream and submitted new opinions. The joint parties ask this Court to exclude supplemental testimony only because Nelcela's experts can show: 1) Lexcel did not have a Merchant System in 1994/1995, making Nelcela's Merchant System is undoubtedly "first in time"; 2) The 1994/1995 Lexcel diskettes were not altered by Nelcela in any way whatsoever; and 3) The "CodeMatchTM" tool is not a recognized software tool and is not generally accepted in the relevant industry. There is no legal basis to exclude Nelcela's rebuttal(s); the joint parties only seek exclusion because the evidence disproves their case.

REBUTTAL LAW AND ARGUMENT A. The Joint Parties Misstate What Nelcela's Experts Intend to Establish at Trial.

In their motion to exclude, the joint parties misstate that Nelcela's experts will offer testimony that Lexcel copied software from Nelcela. See, joint motion No. 3 at p. 2. For this fake proposition, they cite Exhibit 3 of the Joint Pretrial Order ("PTO"). Id. Contrary to that assertion,

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Exhibit 3 of the Joint PTO provides that Kevin Faulkner is anticipated to testify that: 1. The 1994/1995 Lexcel floppy disks do not contain an operable system for the "processing of credit card transactions"; The 1994/1995 Lexcel floppy disks examined in this case have not been altered, deleted, or otherwise manipulated; Nelcela's software, which was copyrighted in 1998, was the first software produced here that was either intended for or could process credit card transactions for merchants; The Nelcela Merchant System is not derivative of or copied from the Lexcel floppy disks, and the 2001 Lexcel CDs do not come "first in time"; The similarities in any code as between Lexcel and Nelcela exist only in naming conventions, "tables," or regulations/guidelines that are provided by the credit card industry; The Lexcel and Nelcela software do not "match" in their functionality; Post has portions of Nelcela software in its current software; Post's code continued to contain elements created by Nelcela even after it allegedly "cut over" to a new system after having been ordered by the State Court in the initial proceedings of this matter; and Post's programmer(s) could not likely have written an entirely new software for processing credit card transactions in the10 weeks they alleged they did.

2.

3.

4.

5.

6. 7. 8.

9.

See, Joint PTO Exhibit 3 attached here as Exhibit A and incorporated by this reference. Likewise, Jeff Pell is anticipated to testify that: 1. 2.
3.

The Nelcela Merchant system is not derivative of Lexcel code; The 1994/1995 Lexcel floppy disks do not contain an operable system for
the processing of credit card transactions; The 1994/1995 Lexcel floppy disks examined in this case have not been altered, deleted, or otherwise manipulated; It is highly unlikely Post could have written a new software to process transactions within the 10 week period of time it claims to have developed new software;

4.

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5.

Many of the "similarities" noted by the other experts in this case exist in mandated regulations of the credit card industry ­ not copying in functionality of software; and

Zeidman's "CodeMatch" program is not a commonly-used tool or generally accepted in the relevant computer software community. Id. (Exhibit A, supra) Nelcela never identified that either of its experts would testify that Lexcel copied. Id. Nelcela's experts will provide the above testimony, and if the jury infers that Lexcel copied Nelcela's Merchant System (because Nelcela's came first in time), that is up to the jury. The Court cannot limit what the jury will deduce, and there is nothing properly before the Court to exclude.

6.

B.

The Joint Parties Misstate the Circumstances of the 1994/1995 Lexcel Disks.

Nelcela first notified all the parties in this action that it possessed the 1994/1995 Lexcel floppy disks back on September 28, 2004. See, Nelcela's 13th Supplemental Disclosure Statement (from the related state court action) attached here as Exhibit B and incorporated by this reference. After this Court entered a Protective Order that allowed the parties to exchange source code, Nelcela hand-delivered copies of the 1994/1995 Lexcel floppy disks back on April 28, 2005. See, Letter of hand-delivery from 4/28/05 along with Post's request for the disks and Lexcel's permission, all collectively attached as Exhibit C and incorporated here. From 2004 until December 2006 (just last month), no party ever asked to inspect the original 1994/1995 Lexcel floppy disks. Post had requested and was given full access to all of the hardware, but it never asked to inspect the disks. On November 20, 2006, this Court heard oral argument because the joint parties tried to readdress summary judgment dressed up as a "Motion to Appoint Technical Advisor." This Court blatantly told Mr. Halloran that the joint parties, "dropped the ball in trying to establish the connection between `94 and `95 and `01." See, Transcript of Oral Argument held 11/20/06 on file with this Court (Docket #412) at p. 19, ll. 15-19. The Court informed the joint parties that they had not shown a connection in the 1994/995 Lexcel floppy disks and the 2001 Lexcel software and that she would not allow them to re-raise the issue they "missed" in arguing on summary judgment. Id.

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Nelcela had always argued that the 1994/95 Lexcel floppy disks bore no resemblance to the 2001 Lexcel software, and both of its experts ­ Kevin Faulkner and Jeff Pell ­ had included their distinctions in software in their expert reports. See, e.g., Exhibit A, supra (which outlines the anticipated testimony on this topic). Once the Court realized that the 1994/95 Lexcel floppy disks (which were older) had nothing in common with Nelcela's code (written in 1996-1997), the Court agreed that this timing, "does affect [] who had this first." Docket #412, supra, at p. 19, ll. 24-25. Then, two weeks after the Court's ruling (and more than a year after the close of discovery), Post asked to see the original 1994/95 floppy disks for the first time. See, Email from Richard Halloran dated December 8, 2006 attached as Exhibit D, incorporated by this reference. Nelcela responded by reminding Post that discovery was closed. See, Email Response also dated December 8th as Exhibit E here. Nelcela further reminded Post, "We disclosed those diskettes months and months (if not years) ago, and there has never been any request for inspection [of the originals] at all." Id. Knowing that the 1994/95 Lexcel floppy disks do not contain a Merchant System and that Nelcela's Merchant System is truly "first in time," Post then attempted to create an "authenticity" issue of the 1994/1995 Lexcel floppy disks. Post's counsel wrote a second email on December 8th stating that he was "entitled to examine the actual materials" to be used at trial to find if they were authentic reproductions. See, Second email from Richard Halloran dated December 8, 2006 attached here as Exhibit F and incorporated by this reference. For the first time ever, Post argued that these diskettes, "might not be accurate reproductions of the original diskettes...." Id. Humorously, Post also argued that this was not "discovery," but just a, "confirmation of authenticity."1 Id. Post then threatened to, "take [the issue] to Judge Murguia." Id. Noticeably, the joint parties did not file this motion in limine as one attacking authentication of the 1994/1995 Lexcel floppy disks (like they did with the 1995 Agreement) because they know they never properly raised an authentication issue. The joint parties have known of the existence of the 1994/1995 floppy disks since 2004 but never sought an inspection or review of the original disks. The only request for inspection came last month, when discovery had been closed more than a year. The joint parties do not argue authentication problems to the Court now because they had an affirmative duty to seek the originals should they have had questions about the content of Nelcela's cop(ies) of the 1994/1995 disks.
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The joint parties are again attempting to make this a one-sided trial. They want to present evidence (or create an inference) that alteration of the 1994/1995 Lexcel floppy disks occurred, but they want this Court to preclude Nelcela from disproving their myth. Nelcela's experts evaluated the original copies of the 1994/1995 floppy disks to confirm, "The 1994/1995 Lexcel floppy disks examined in this case have not been altered, deleted, or otherwise manipulated." See, Exhibit A. That expert review was done in response to Post's assertion that it would argue at trial that the disks were "inauthentic" or were not, "accurate reproductions of the original diskettes." See, Exhibit F. The review was not done without merit; it was in response to what the joint parties stated their anticipated trial inferences/testimony will be. Id. The joint parties cannot offer evidence that the 1994/1995 original Lexcel floppy disks were deleted or altered without allowing Nelcela to rebut that inference. To exclude the rebuttal testimony would be highly prejudicial to Nelcela and would create reversible error. See, e.g., United States v. Hitt, 981 F.2d 422, 424 (9th Cir. 1992) (The probative value of the joint parties' evidence/inference of "tampering" would create a prejudicial effect, and such testimonial evidence should be excluded. If the Court allows the joint parties' evidence without Nelcela's offered rebuttal, there is a strong likelihood of unfair prejudice or a risk of misleading the jury that could be deemed an abuse of discretion.)

C.

The Joint Parties Misstate the Facts About the Expert Report of Zeidman.

As fully outlined above, the "joint parties" were not always "joint." Originally, MTSI was the only plaintiff, and Nelcela and Post both defendants. When Lexcel was permitted to intervene, a second plaintiff was added. Nelcela and Post remained defendants. When expert reporting was first due, Lexcel was not even a party here. The first expert report submitted was by MTSI only, and that was done in July 2005. Lexcel was then permitted to intervene, and Lexcel (as a plaintiff) produced its expert report on September 6, 2005. See, Email from Bridget Bade confirming delivery of Lexcel's report attached here as Exhibit G and incorporated by this reference. Neither Nelcela nor Post were made to provide reports until September 26th, and both reports were due the same date.

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Depositions of the expert witnesses occurred between October and December 2005. MTSI and Lexcel were still plaintiffs; Nelcela and Post still defendants. Thus, MTSI and Lexcel were both trying to prove ownership, and Nelcela and Post's experts were both aimed at rebutting the MTSI and Lexcel experts. Nelcela and Post were not aimed at rebutting each other. Then, miraculously, in January 2006, Post and MTSI both decided to pay off Lexcel and that all three (3) parties would "align" against Nelcela. They entered a "Settlement Agreement" on January 20, 2006. During the expert reporting and deposition period(s), Nelcela did not aim its reporting at Post (or Robert Zeidman). Its focus was disproving that either MTSI or Lexcel owned the code at issue. Thus, when Post's counsel asked Mr. Pell whether he had any opinions about Mr. Ziedman's report or analysis, he was correct in stating he had none, "at this time." See, Exhibit 1 to the joint motion. Mr. Pell's supplemental opinions about Mr. Zeidman came from two facts: 1. Mr. Zeidman filed an Addendum Report on November 13, 2006 ­ well after the close of discovery, after his time for deposition correction had passed, after the time for Pell's expert report to have been submitted, and after the time Pell was deposed; and 2. Mr. Zeidman filed a third report entitled, "Redline Report" consisting of four hundred and fifty-seven (457) pages on October 20, 2006 ­ more than a year after the expert depositions were taken, and almost a year after discovery had been closed. See, Docket #387. Any "supplemental" opinions that Nelcela's experts intend to offer about Robert Zeidman come from these supplemental, late reports that Nelcela's experts never had an opportunity to rebut. Primarily, Mr. Zeidman's first expert report showed there was "no correlation" in the codes he analyzed, and then his Addendum report re-wrote his findings. Mr. Pell was confused how his analyses could differ and is now prepared to testify that Mr. Zeidman's reporting is inept because he relied on CodeMatchTM, a tool that is not widely recognized, accepted, or used in the industry. See, e.g., Nelcela's Daubert Motion/Motion in Limine No. 1 (Docket #422) (Addressing that the CodeMatchTM results must be excluded for scientific unreliability.)

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Nelcela's anticipated supplemental testimony is not an issue of undisclosed reporting.

When disclosing its original report (or when the experts were deposed), Nelcela could not have known that Mr. Zeidman would change his results and offer additional expert reports. Nelcela could not have offered any supplemental disclosure or opinions when it learned of Zeidman's Addendum Report/Redline Report because disclosure and discovery were closed. Nelcela is entitled to rebut those newly-offered opinions. Nelcela has properly and fulsomely disclosed its intent to rebut any information by Robert Zeidman that it did not properly have the chance to rebut earlier. That disclosure is proper and makes the anticipated testimony admissible at trial. See, Miller v. Pfizer, Inc., 356 F.3d 1326, 1332 (10th Cir. 2004)(An expert report cannot always anticipate every possible challenge to the report. Thus, it is appropriate to allow an expert to submit supplements to its expert report in response to assertions by opposing experts.); see also, Dodge v. Cotter Corp., 328 F.3d 1212, 1228 (10th Cir. 2003) (A court's failure to permit supplementation by an expert to his report could constitute an abuse of discretion in some circumstances.) An expert, like Mr. Pell, cannot be held to being "prophetic" and cannot predict in his original expert report what may be later opined by competing experts. See, Pfizer, supra, 356 F.3d at 1332. Under circumstances like these, Nelcela's experts must be permitted to offer supplemental testimony on supplemental expert reporting by the joint parties. Id.

CONCLUSION The joint parties have misstated facts about what Nelcela's experts intend to establish at trial.

Nelcela has properly (and timely) supplemented the anticipated expert testimony, and that testimony cannot be limited because Post submitted supplemental reports after the close of discovery and disclosure. There is no legal basis to grant any of the joint parties' requested exclusions. /// ///

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RESPECTFULLY SUBMITTED this 2nd day of February, 2007. RONAN & FIRESTONE, PLC

/s/ Veronica L. Manolio Merrick B. Firestone Veronica L. Manolio 9300 E. Raintree Drive, Suite 120 Scottsdale, Arizona 85260 Attorneys for Nelcela, Inc., Leonard Campagna and Alec Dollarhide ORIGINAL filed electronically with the Clerk's Office and COPIES electronically transmitted to the following CM/ECF registrants this same date to: Nicholas J. DiCarlo [email protected] Local Counsel for Merchant Transaction Systems William McKinnon [email protected] Attorney for Merchant Transaction Systems George C. Chen [email protected] or [email protected] Attorneys for Lexcel, Inc. and Lexcel Solutions, Inc. Peter D. Baird [email protected] Robert H. McKirgan [email protected] Richard A. Halloran [email protected] Kimberly Demarchi [email protected] Attorneys for POST, Ebocom, Mary Gerdts, and Douglas McKinney

/s/ Diana Renteria

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