Free Brief (Non Appeal) - 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 POST, LEXCEL, AND MTSI PARTIES' RESPONSE TO NELCELA'S "SUPPLEMENTAL BRIEFING RE: INCONSISTENT VERDICTS"

Nelcela has been trying for months to avoid the narrow issue the Court has set for trial in Phase One: Which parties' software was created first? At the summary judgment hearing, Nelcela proposed scrapping the trial on Phase One altogether, and instead proceeding directly to discovery on Phase Two.1 Having failed in that proposal, Nelcela now seeks to add extraneous issues to the Phase One trial in a further attempt to divert attention from the ownership issue. Nelcela's efforts to complicate the trial should be rejected.
1

See Sep. 11, 2006 Tr. at 86 ln.22 ­ 87 ln.4 (Dckt. 382).
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I.

Introduction To support its latest effort to avoid the narrow issue set for trial by this Court,

Nelcela advances a new legal theory in its "Supplemental Briefing." This new theory concedes that Nelcela did, in fact, copy Lexcel's software. This concession comes after years of litigation and sworn testimony by Nelcela's representatives in which Nelcela claimed that its software was "independently" prepared and that Nelcela had not copied the Lexcel software. In short, Nelcela has done a complete 180 degree turnabout. Why? Because the evidence--as the Court properly found--shows, without a doubt, that copying between the Nelcela software and Lexcel software took place. Faced with this evidence, Nelcela now asserts that it did, in fact, copy the Lexcel software but that it also "adversely possessed" the Lexcel software such that Nelcela now owns the software. Nelcela also asserts that it may sue the other parties--MTSI and Post--for infringing on the software that it essentially stole from Lexcel. Nelcela's new theory is wholly inconsistent with its previous position in this litigation and the sworn testimony of its representatives. And, as explained below, the theory is also without a legal basis. Nelcela is trying to play a game similar to the school-yard game of "finders, keepers; losers, weepers," although under Nelcela's theory it would be something like "infringers, keepers; losers weepers." Nelcela's theory would turn copyright law on its head. The basic principle of copyright law is that the person who authors a work owns that work. See 17 U.S.C. § 201. The author controls ownership of the copyright. 17 U.S.C. § 201. An author can sell her ownership interest, and she can delay too long in bringing suit against others who infringe her ownership interest, but there is no support in either the copyright statutes or any decisional law for the proposition that, if an author fails to bring suit against an infringer within the three-year statute of limitations, ownership is transferred to the infringer.2
2

Lexcel disputes Nelcela's assertion that the statute of limitations on its claims has run, as set forth in detail in the Joint Parties' response to Nelcela's motion for summary judgment. (Dckt. 351 at 18-20.) This issue will be the subject of discovery in Phase Two, once the preliminary question of ownership is resolved.
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Under Nelcela's "adverse possession theory," copyright ownership would be determined by a mad scramble among infringers to prove who was "first to infringe and not get sued" and, even worse, the mad scramble would go on and on as each successive "adverse possessor" would sue the previous infringer-turned-owner on the same theory. In short, nobody would ever know who really owns a copyright as ownership would turn into a succession of judicially sponsored "jump balls" among infringers. Nelcela Cannot Obtain Ownership of Software It Did Not Author by "Adverse Possession." As stated by Congress when enacting the copyright statute of limitations, 17 U.S.C. § 507(b), "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." S. Rep. 851014 p. 1963 (1957) (emphasis added) (quoted in Zuill v. Shanahan, 80 F.3d 1366, 1369 n.1 (9th Cir. 1996)). Under § 507, if the statute of limitations on Lexcel's claims against Nelcela has run, Lexcel will not be able to recover damages for infringement. But, nothing in § 507 or any other provision in the Copyright Act would divest Lexcel of ownership of the software it created. Nelcela's entire argument to the contrary turns on its misreading of a single case, Zuill v. Shanahan, 80 F.3d 1366 (9th Cir. 1996), which Nelcela claims creates an "adverse possession" claim to copyright ownership similar to that found in the common law of real property. Although the case is ten years old, no other court has read the case in the way Nelcela suggests, and review of the court's actual decision explains why. The Zuill case involved a dispute between co-authors of the children's reading program Hooked on Phonics. 80 F.3d at 1367. Mr. Shanahan, the defendant, came up with the idea for the program and the original musical score. Id. He later brought in two collaborators, Mr. Zuill and Mr. Rossi, to help him make the music used in the program more enjoyable. Id. at 1368. A 1987 written agreement between Shanahan, Zuill, and Rossi specified that Shanahan's company would be the sole owner and copyright holder of the resulting Hooked on Phonics program. Id. Four years later, after Hooked on Phonics became a
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successful product, Zuill and Rossi filed suit claiming that they were joint creators, and thus co-owners, of the program. Id. at 1369. The Ninth Circuit applied the three-year statute of limitations period specified in 17 U.S.C. § 507(b) and held that Zuill and Rossi's co-ownership claims were timebarred. The Court noted that application of the statute of limitations to these coownership claims created stability of title in the copyright context, analogizing to the similar function served by the common law of adverse possession. Id. at 1369. The Zuill Court merely mentioned adverse possession doctrine as an analogy, not a source of Shanahan's rights. The Court did not find that Shanahan had obtained rights through adverse possession; rather, it held that Zuill and Rossi had waited too long to bring claims alleging co-ownership. Id. at 1368-69. Indeed, it would make no sense to apply the doctrine of adverse possession itself in the Zuill case, since Shanahan's possession and use of the copyrighted work was not adverse or hostile to the ownership rights of his coauthors. See, e.g., Gaiman v. McFarlane, 360 F.3d 644, 654 (7th Cir. 2004) (citing Zuill) (co-author's possession and use of the copyrighted work is not adverse to the rights of the other co-authors; just as co-tenants of real property may each occupy and use the property, co-authors each own the work). The Zuill case is markedly different from the dispute between Lexcel and Nelcela. First, Zuill applied the copyright statute of limitations to protect a copyright owner from belated claims alleging co-ownership, whereas Nelcela seeks to use the statute to divest the owner ­ Lexcel ­ of its software. Neither Zuill nor any other case we have found has applied the copyright statute of limitations to transfer ownership. And second, in the present case, unlike Zuill, there is no allegation of joint creation. Rather, Lexcel seeks damages for copyright infringement as a result of Nelcela's outright copying of Lexcel's computer software. The Court in Zuill made clear that its holding does not apply to infringement claims because declaratory judgment claims of co-ownership are "distinct from claims of infringement . . . ." Zuill, 80 F.3d at 1369. "An infringement occurs

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every time the copyrighted work is published, but creation does not." Zuill, 80 F.3d at 1371. In short, if the statute of limitations on Lexcel's infringement claim has in fact run, then Lexcel's remedies will be impacted. Regardless, nothing in the copyright laws or the Zuill case supports Nelcela's theory that they should be given ownership rights as a result of their infringement of the Lexcel software. III. Trying Ownership Now, As Ordered by This Court, Does Not Raise the Prospect of Inconsistent Results. Because copyright law does not transfer ownership through "adverse possession," there is no risk of inconsistent verdicts here. Nelcela's statute of limitations defense affects only Lexcel's remedies, not its substantive rights. If Nelcela is successful on its statute of limitations defense, then Nelcela will avoid owing damages to Lexcel. That result would not be inconsistent with a declaration of Lexcel's ownership in Phase One because regardless of Nelcela's success on its statute of limitations defense, Lexcel's substantive rights of ownership will remain intact. Lexcel will be entitled to enforce its rights of ownership against Nelcela for new infringements, and Lexcel will be entitled to enforce its rights of ownership against third-party infringers. Furthermore, Lexcel's ownership of its software is important not just to Lexcel's claims, but also to the claims of the other parties. Lexcel's ownership of the software is a dispositive issue regarding POST's claims for fraud, and Nelcela's claims of copyright infringement. Even if Lexcel's damages claims are found to be stale in Phase Two, Lexcel's ownership must nevertheless be decided to resolve the other parties' claims. IV. Conclusion. Nelcela's attempt to avoid the bifurcation to which it agreed and to cloud the issues for trial in Phase One should be rejected. The Phase One jury trial set for April 2007 should be limited, as this Court has already ruled, to the issue of which party's software came first. (Dckt. 383 at 30 ll. 18-20 (entering summary judgment that the software at issue was copied and that the sole remaining issue was which software was
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created first (and therefore copied from)); see also Nov. 20, 2006 Tr. at 29 ll. 20-21 ("we are at a narrow issue of which came first"). RESPECTFULLY SUBMITTED December 11, 2006. 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 December 11, 2006, 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/ May Livingston

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