Free Motion to Strike - District Court of Arizona - Arizona

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Bryan Cave LLP Two North Central Avenue, Suite 2200 Phoenix, Arizona 85004-4406 (602) 364-7000

BRYAN CAVE LLP, 00145700 George C. Chen 019704 ([email protected]) Two North Central Avenue, Suite 2200 Phoenix, Arizona 85004-4406 Telephone: (602) 364-7367 Facsimile: (602) 364-7070 Attorneys for Lexcel, Inc. and Lexcel Solutions, Inc. 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 Telephone: (602) 262-5311 Facsimile: (602) 734-3746 Attorneys for POST Integrations, 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

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UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA Merchant Transaction Systems, Inc., Plaintiff, vs. Nelcela, Inc., et al., Defendants. ) ) ) ) ) ) ) ) No. CIV 02-1954-PHX-MHM LEXCEL, POST AND MTSI PARTIES' MOTION TO STRIKE NELCELA'S AFFIRMATIVE DEFENSES, COUNTERCLAIMS, AND THIRD-PARTY COMPLAINT

) And Related Counterclaims, Cross-Claims, ) and Third-Party Claims. ) )

Case 2:02-cv-01954-MHM

Document 410

Filed 12/07/2006

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The Lexcel, POST, and MTSI Parties (collectively "the Joint Parties") hereby move pursuant to Rules 9(b), 12(b)(6), and 12(f), Fed.R.Civ.P., to dismiss and/or strike Nelcela's untimely affirmative defenses, counterclaims, and third-party complaint (docket no. 399). This motion is supported by the attached memorandum of points and authorities. MEMORANDUM OF POINTS AND AUTHORITIES On November 17, the Friday before this Court's pretrial conference, Nelcela filed an untimely answer to the Lexcel parties' amended complaint that included for the first time counterclaims against Lexcel and third-party claims against its principals (who are not already parties to this case) alleging fraud, conversion, aiding and abetting tortious conduct, misappropriation, copyright infringement, misappropriation, and unfair competition. (Docket no. 399.) In these new counterclaims and third-party claims, Nelcela also makes inflammatory accusations against the POST and MTSI parties including conclusory accusations of fraud and conspiracy. Nelcela's deadline to amend its pleadings and add parties passed more than a yearand-a-half ago, on March 9, 2005. (Docket no. 76.) Lexcel moved to intervene in June 2005, and this Court granted permission to intervene in July 2005. (Docket no. 209.) Discovery on Phase I issues, which was extended to accommodate Lexcel's intervention, closed more than a year ago on October 14, 2005. If Nelcela wished to assert its inflammatory accusations against the POST and MTSI Parties, it was required to do so by March 9, 2005. If Nelcela wished to assert counter-claims against third-parties Carl and Flora Kubitz, it was required to do so expeditiously in response to Lexcel's intervention, and certainly before the close of discovery. And if Nelcela wanted to assert counterclaims against Lexcel, it also needed to do that before October 14, 2005. Instead, Nelcela waited until after the close of discovery, and after summary judgment, before attempting to change its theory of the case with proposed new claims and scandalous accusations. Nelcela's new claims and

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accusations come far too late, fail to meet even the basic requisite pleading standard required under Rule 9(b), and fail to state claims upon which relief can be granted. Accordingly, Nelcela's affirmative defenses related to fraud, Nelcela's counterclaims against Lexcel, and Nelcela's third-party claims against the Kubitzes should be stricken and dismissed. I. NELCELA'S COUNTERCLAIMS AND THIRD-PARTY CLAIMS ARE NOT PERMITTED BY RULE 12(a)(4)(A) The Lexcel parties filed their amended complaint on October 19, 2005. (Docket no. 277.) The Nelcela parties filed a timely motion to dismiss the amended complaint on November 11, 2005. (Docket no. 295). The filing of Nelcela's motion to dismiss tolled its deadline to answer the Lexcel parties' complaint, pending a decision on the motion to dismiss. Fed.R.Civ.P. 12(a)(4)(A). However, once this Court denied Nelcela's motion to dismiss, Nelcela had only another ten days to answer. Id. This Court denied Nelcela's motion in an order dated September 30, 2006 and docketed on October 2, 2007. (Docket no. 383.) Nelcela's answer to Lexcel's amended complaint was therefore due on October 17, 2006. Fed.R.Civ.P. 12(a)(4)(A) (answer due 10 days after notice of the Court's action denying the motion to dismiss), Fed.R.Civ.P. 6(a) (computation of periods of time less than 11 days). Nelcela neither obtained the Lexcel parties' consent to an extension nor sought this Court's permission to extend that deadline. Accordingly, Nelcela's ability to hide under Rule 12(b)(4) as a justification for its untimely pleading expired on October 17, 2006. But, Nelcela's answer, affirmative defenses, counterclaims, and third-party complaint were not filed until a month later, on November 17, 2006. Nelcela's new claims are thus untimely, and must be stricken.1 Not only is Nelcela's belated pleading untimely under the rules, without any proffered excuse for its lateness, but this case has progressed well beyond the point at which adding claims would

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Nelcela's answer and affirmative defenses are also late. 3

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be appropriate. Phase I discovery closed more than a year ago on October 14, 2005, and this matter is set for a trial on ownership in April 2007. (Docket no. 209 (extending discovery deadline in light of grant of intervention by Lexcel).) Nelcela has repeatedly reminded this Court of the status of the proceedings in an attempt to limit Lexcel's ability to pursue its claims, but now suddenly has changed its position, seeking to add new claims and parties at this late date and outside the deadlines set by this Court and the applicable rules. Nelcela's belated attempt to expand the issues in this case must be rejected, and the Phase I trial should continue as scheduled. II. NELCELA'S COUNTERCLAIMS AND THIRD-PARTY CLAIMS ARE NOT PERMITTED UNDER RULE 15 Nelcela has not sought leave to assert its untimely counterclaims and third-party claims. It would have had to do so pursuant to Fed. R. Civ. P. 15(a), which makes amendments after the filing of a responsive pleading subject to the discretion of the Court, exercised to serve the interests of justice. Fed. R. Civ. P. 15(a). In considering a request for leave to amend under Rule 15(a), the court considers "the presence or absence of undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party and futility of the proposed amendment." Moore v. Kayport Package Express, Inc., 885 F.2d 531, 538 (9th Cir. 1989). Several factors ­ undue delay, bad faith, dilatory motive, and undue prejudice to the other parties ­ are present here and fatal to Nelcela's attempted amendment. Particularly telling here is MTSI's unsuccessful effort to amend its complaint to add a party, which was denied by this Court as untimely more than a year ago. (Docket no. 162.) Prior to the close of discovery, after learning in discovery that Nelcela transferred the software that is the subject of this litigation to a third party (EPX), MTSI asked this Court to extend the deadline to add parties for an additional 60 days so that MTSI could take additional discovery on this issue and determine whether it could legitimately add a claim against EPX. (Docket no. 144.) Nelcela vehemently opposed the motion, expressly complaining about MTSI's "laziness" and calling the motion 4
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"ridiculous." (Docket no. 155 at 1.) Now, almost two years after filing that opposition and well after the close of discovery, Nelcela seeks to amend its claims with an entirely new theory, unsupported by discovery, without either seeking this Court's leave to do so or providing an opportunity for additional discovery by the other parties to this case. Nelcela's attempted amendment, judged by the very standard it articulated in opposing MTSI's amendment, is inexcusably late and not permitted under Rule 15(a). To the extent Nelcela purports to based its untimely pleading on Rule 15(b), Fed.R.Civ.P., such an argument would fail for two reasons. First, Rule 15(b) allows amendments to conform to the evidence, but only "[w]hen issues not raised by the pleadings are tried by express or implied consent of the parties." Id. (emphasis added.); In re Acquecia, Inc., 34 F.3d 800, 814 (9th Cir. 1994) (defining standard for implied consent; mere use of same evidence relevant to existing claims is insufficient). The Joint Parties do not consent to the addition or trial of these new claims. Second, Nelcela's new claims have no evidentiary support in the discovery taken to date, as reflected by the fact that Nelcela proffered neither argument nor evidence in support of this new theory in its summary judgment pleadings. The Joint Parties categorically and specifically deny each of the allegations in the counter- and third-party claims and object to their inclusion in these proceedings. Permitting Nelcela to inject these new claims without any substantiation in the considerable body of evidence adduced in discovery to date and more than a year after the close of Phase I discovery would prejudice the parties and delay the proceedings without justification. Rule 15(b) therefore does not permit these belated additions to the pleadings. See, e.g., Consolidated Data Terminals v. Applied Digital Data Sys., 708 F.2d 385, 396 (9th Cir. 1983) ("late pleading amendments are improper under [Rule 15(b)] if they cause substantial prejudice to the opposing party").

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III.

NELCELA'S AFFIRMATIVE DEFENSES, COUNTERCLAIMS, AND THIRD-PARTY CLAIMS VIOLATE RULE 9(B) Nelcela's affirmative defenses, counterclaims, and third-party claims allege a

multitude of accusations of fraud, intertwined with a broad accusation of a conspiracy between the Joint Parties. (See, e.g., Nelcela Answer, docket no. 399 at ¶ 24; Nelcela Counterclaim, docket no. 399, at ¶¶ 31-37, 41-45.) The details of the alleged fraud, however, are lacking. Nelcela fails to identify the content, and the time, place, speaker, and recipient of the supposed fraudulent representations upon which Nelcela purportedly bases its untimely claims. Nelcela's pleading woefully fails to meet the requirements of Rule 9(b), which mandates that the circumstances constituting alleged fraud must be pled with particularity. Fed.R.Civ.P. 9(b); see also In re Glen Fed Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) (describing particularity requirement). Nelcela's failure to adequately plead its averments of fraud requires dismissal of Nelcela's belated counterclaims and third-party claims. Fed.R.Civ.P. 9(b); In re Glen Fed Sec. Litig., 42 F.3d at 1548. Moreover, Nelcela's accusations of fraud fail to allege a claim upon which relief can be granted, and thus should be dismissed under Rule 12(b)(6). Nelcela's newly asserted claims depend, among other things, on Nelcela's new-found and conclusory allegations that Lexcel somehow defrauded and injured Nelcela by filing copyright applications and raising claims of ownership to the copyrighted material. Fraud has nine elements under the applicable Arizona law ­ "(1) a representation, (2) its falsity; (3) its materiality; (4) the speakers knowledge of its falsity or ignorance of its truth; (5) the speaker's intent that it be acted on by the recipient in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) the hearer's reliance on its truth; (8) the right to rely on it; (9) his consequent and proximate injury." Echols v. BeautyBuilt Homes, Inc., 647 P. 2d 629, 631 (Ariz. 1982). Nelcela fails to identify which portions of Lexcel's copyright applications it bases its claims upon, and how such portions are supposedly fraudulent. Nelcela fails to allege

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that it took any action in reliance on a belief that Lexcel's representations of ownership were true ­ indeed, it specifically denies believing that there is any similarity between the Nelcela and Lexcel software at all. (See Nelcela's Answer at ¶¶ 7-8, Nelcela's Counterclaim at 25-27.) And, Nelcela fails to allege any causal relationship between Lexcel's assertion of copyright ownership and any action taken or damage suffered by Nelcela. (See Nelcela's Counterclaim at 38 (containing only a conclusory allegation of "significant damage," without explanation).) Accordingly, Nelcela's belated counterclaims and third-party claims fail to state claims for fraud upon which relief can be granted, and thus should be dismissed under Rule 12(b)(6). Similarly, Nelcela's belated affirmative defenses related to fraud should also be striken. IV. Conclusion For the foregoing reasons, Nelcela's affirmative defenses related to fraud and all of Nelcela's counterclaims and third-party complaint should be stricken pursuant to Rules 9(b) and 12(f) and/or dismissed pursuant to Rule 12(b)(6).

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RESPECTFULLY SUBMITTED this 7th day of December, 2006. BRYAN CAVE LLP By s/ George C. Chen George C. Chen Two N. Central Avenue, Suite 2200 Phoenix, Arizona 85004-4406 Attorneys for Lexcel, Inc. and Lexcel Solutions, Inc.

LEWIS AND ROCA LLP By s/ Richard A. Halloran Peter D. Baird Robert H. McKirgan Richard A. Halloran Kimberly A. Demarchi 40 North Central Avenue Phoenix, Arizona 85004-4429 Attorneys for POST Integrations, Inc., Ebocom, Inc., Mary L. Gerdts, and Douglas McKinney LAW OFFICES OF WILLIAM McKINNON William McKinnon and DICARLO CASERTA & PHELPS PLLC By s/ Nicholas J. DiCarlo Nicholas J. DiCarlo 6750 East Camelback Road, Suite 100-A Scottsdale, Arizona 85251 Attorneys for Merchant Transaction Systems, Inc., Gene Clothier, and Tone Clothier

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CERTIFICATE OF SERVICE I hereby certify that on December 7, 2006, the foregoing Lexcel, POST and MTSI Parties' Motion to Strike Nelcela's Affirmative Defenses, Counterclaims, and Third-Party Complaint was filed electronically. Notice of this filing will be sent to all parties by operation of the Court's electronic filing system. Parties may access this filing through the Court's system.

s/ Denise M. Aleman Denise M. Aleman

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