Free Reply to 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. Nicholas J. Wallwork [email protected] Bridget S. Bade [email protected] Fredric D. Bellamy [email protected] Steptoe & Johnson LLP 201 East Washington Street, Suite 1600 Phoenix, Arizona 85004 Attorneys for Lexcel, Inc. , et al.

William McKinnon [email protected] 800 East Ocean Boulevard, Unit 501 Long Beach, California 90802-5449 Nicholas J. DiCarlo [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 LEXCEL'S, POST'S, AND MTSI'S REPLY IN SUPPORT OF THEIR MOTION FOR SUMMARY JUDGMENT RE OWNERSHIP OF SOFTWARE (Oral argument requested)

As Nelcela agrees, an entity that makes an unauthorized derivative work cannot

22 claim ownership in that work. And that is precisely what happened here: Alec 23 Dollarhide, who had access to a 1994-95 version of the Lexcel software, copied it and 24 revised it to create the software that Nelcela now claims as its own. As a result, Nelcela 25 is precluded by the Copyright laws from claiming ownership of the software. Nelcela 26 owns none of the software at issue. 27 Faced with uncontroverted facts showing that the Nelcela Software was derived

28 from the Lexcel Software, the Nelcela Parties resort to misdirection. They pin their
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hopes on creating just enough confusion and slinging just enough mud that this Court will miss the only conclusion to be drawn from the facts: Nelcela copied the Lexcel Software. I. IT IS UNDISPUTED THAT THE LEXCEL SOFTWARE WAS WRITTEN FIRST AND THAT DOLLARHIDE HAD ACCESS TO IT BEFORE "WRITING" THE NELCELA SOFTWARE. In their response, the Nelcela parties try to make much of the fact that the various experts who found substantial evidence of copying between the Nelcela and Lexcel Software did not reach specific conclusions about which software was created first. (See, e.g., Response at 2, 4.)1 Although Nelcela poses the right question ­ "which software was written first" (Response at 4) ­ its argument is a red herring. Nelcela's argument might have some force if all we had to go by was the software itself, because in the abstract, determining the date of creation of computer software just from the software itself can be tricky. But that is not this case. Here, the evidence is uncontroverted that: 1) 2) 3) 4) The Lexcel Software was created in 1994 and 1995; Carl Kubitz provided the source code for the Lexcel Software to Alec Dollarhide in 1995 for delivery to CCSL; The Nelcela Software was not written until sometime thereafter; and There is no evidence at all that Lexcel copied from Nelcela.

(Statement of Facts in Support of the Lexcel, MTSI, and POST Parties' Motion for Summary Judgment ("SOF 1"), Dckt. # 334, at ¶¶ 1, 2, 4, 6; Consolidated Statement of Facts in Support of the Lexcel, MTSI, and POST Parties' Consolidated Response to Nelcela's Motions for Summary Judgment ("SOF 2") at ¶¶ 23-26.) Indeed, we know from Alec Dollarhide's own testimony that the Lexcel Software predates the Nelcela Software.2

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Interestingly, Nelcela also attacks Lexcel's expert for relying on a copyright date in the Lexcel code (circa 1995) to make such a conclusion, contending that he should not have relied on a copyright indication whose origin he did not know. (Id. at 7-8.) 2 Alec Dollarhide testified, inter alia, that: (a) the Lexcel Software was written in 19941995; (b) Dollarhide had never written credit card processing software before he went to work in the Lexcel offices in 1994; and (c) the Nelcela Software was not written until after Dollarhide received a copy of the Lexcel Software source code for delivery to CCSL. (SOF 1 at ¶ 6; Nelcela's Omnibus Statement of Facts ("Nelcela SOF 1"), Dckt. # 326, at ¶¶ 1-2; SOF 2 at ¶¶ 1, 23-26.) 2
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When the simple, undisputed fact that the Lexcel Software came first is taken into account, the experts had little trouble opining that Nelcela copied the Lexcel Software. For example, POST's expert, Robert Zeidman, opined that based on his analysis of the Lexcel and Nelcela Software: [T]he source code from one program was plagiarized from the source code of the other program, though I have not been able to determine which source code files were the original ones. I have been informed by counsel that the Lexcel files were created first. Given that information it is apparent that the Nelcela files were copied from the Lexcel files. (Statement of Facts in Support of Lexcel, MTSI, and POST Parties' Reply in Support of Motion for Summary Judgment ("SOF 3") at ¶ II:3.) Likewise, Lexcel's expert reached the same conclusion, based on his assumption that the Lexcel Software predates the Nelcela Software: 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. Hence, because there is no genuine dispute that (a) the Lexcel Software came first, or (b) the Nelcela Software was written only after Alec Dollarhide gained access to the Lexcel source code, Nelcela's "which came first" argument affords no defense against summary judgment. THE DIFFERENCES BETWEEN THE 2001 VERSION OF THE LEXCEL SOFTWARE AND THE 1994/95 VERSION ARE IMMATERIAL. Nelcela attempts to make much of the fact that source code produced by Lexcel in this lawsuit is, in parts, an updated version of the software it provided to Mr. Dollarhide in 1995 for delivery to CCSL. (Response at 2-3.) Again, the argument is a red herring. Nelcela cannot dispute that Mr. Dollarhide had access to the Lexcel source code in 1995, when Lexcel gave him a copy for delivery to CCSL as part of the Lexcel-CCSL settlement. Mr Dollarhide himself admitted that. (SOF 3 at ¶ II:7, 13.) And Nelcela
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does not contest that the software produced by Lexcel during discovery is simply an updated version of the 1994/95 source code entrusted to Mr. Dollarhide in 1995 for delivery to Lexcel. Nelcela's own experts testified to that. (Id. at ¶ II:5.) Most importantly, Nelcela overlooks the fact that much of the 2001 version of the Lexcel Software that Lexcel's expert, David B. Posner, relied upon also appears verbatim in the 1995 version of the Lexcel Software. (Id. at ¶ II:6.) Likewise, Nelcela ignores the fact that POST's expert separately compared the Nelcela Software against both the 1995 and 2001 Lexcel Software, and concluded that Nelcela copied the 1995 Lexcel Software. (Id.) The analyses of these experts show that Nelcela's copying of the Lexcel Software was rampant and widespread, and that many lines of computer code from the 1995 Lexcel Software were copied letter-for-letter by Nelcela. For example, as set forth in Dr. Posner's report, Nelcela copied the following lines of computer code from the Lexcel source code provided to Dollarhide in 1995 letter for letter (including the programmer comments which are set off by slashes and asterisks):
/* * VISANET INTERFACE CONFIGURATION REQUIREMENTS */ typedef struct { char Name[20 + 1]; int InterchangeNo; int Priority; DBDATETIME StartTimeStamp; DBDATETIME EndTimeStamp; char TimeUnit[2 + 1]; int TimeFrame; int MessageCount; char char char int int int int int int int int comm_port[30 + 1]; /* Comm Port Name Input */ trace_option[1 + 1]; /* Print and Log Trace Msgs */ trace_file[30 + 1]; /* Logging File */ network_timeout; /* Network Timeout/seconds */ nmm_timeout; /* Network Mgmt/seconds */ output_threshhold; /* # requests sent before */ /* reading from comm */ max_reverse_retries; /* # times to retry */ /* reversal when no resp */ requests_active; /* # outstanding requests */ requests_processed; /* # rqst/resp pairs processed */ approvals; /* # of approvals */ denials; /* # of denials */

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3

int int char

char char char char char char char char int

time_outs; /* # of timeouts */ late_resps; /* # of late responses */ current_status[1 + 1]; /* L = Logged On */ /* O = Logged Off */ /* D = Communications Down */ auth_status_process_num[1 + 1]; /* */ auth_status_online[1 + 1]; /* Online = "Y" */ auth_status_connected[1 + 1]; /* Start Comm = "Y" */ auth_status_logged_on[1 + 1]; /* Log On = "Y" */ auth_status_flag[2 + 1]; /* Return Stats = "Y" */ comm_key[16 + 1]; pin_format[1 + 1]; pin_pad_char[1 + 1]; refreshInterval; /* /* /* */ */ */

/* Visa specific */ char card_acceptor_id_code[15 + 1];

/* Card Acceptor Id Code */

(SOF 3 at ¶ II:6.)3 Nelcela copied this computer code from the 1995 Lexcel Software, then Nelcela submitted the code to the U.S. Copyright Office claiming the code as Nelcela's own. This is but one of the many examples of illicit copying by Nelcela of the Lexcel Software that are detailed in Dr. Posner's and Robert Zeidman's expert reports. (Id..) This evidence of copying stands unrefuted by Nelcela, and warrants entry of summary judgment in favor of Lexcel, POST, and MTSI, and against Nelcela on this issue of ownership of the software. III. NELCELA MISCHARACTERIZES THE ANALYSIS OF POST'S EXPERT WITNESS, ROBERT ZEIDMAN. As set forth in more detail in the Lexcel, MTSI, and POST Parties' consolidated response to Nelcela's motions for summary judgment, the Nelcela parties have mischaracterized the testimony of Robert Zeidman, POST's expert, regarding his comparison of the Lexcel and Nelcela software. (Dckt. # 351 at § I.) During Mr. Zeidman's deposition, he was asked about a portion of his working notes that did not Because Nelcela submitted these lines of code to the Copyright Office and thereby made them matters of public record, they are not subject to the First Amended Protective Order. (Dckt. # 175.) By citing these lines of code, which were made public by Nelcela without Lexcel's consent, Lexcel does not waive its rights under the First Amended Protective Order to the confidentiality of code produced in this litigation. 5
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involve the analysis in his expert report. Mr. Zeidman testified that that work paper "was written before [he] received the electronic copies of Nelcela's source code" and was based on materials produced by Nelcela which Mr. Zeidman later determined were not the actual Nelcela Software. (SOF 2 ¶ 94.) Following his deposition, Mr. Zeidman double checked his analysis, and issued an Addendum confirming that "the Nelcela files were copied from the Lexcel files." (SOF 2 ¶ 95; SOF 1 at Ex. 16 (the Addendum, submitted under seal to this court, see Dckt. # 334).) IV. THE "SUPPLEMENTAL" DECICCO REPORT AND DEPOSITION CORRECTIONS ARE NOT ONLY INADMISSIBLE, BUT IRRELEVANT. Robert DeCicco, the expert software analyst Nelcela proffered in this case, accused POST in his report of having copied the "Nelcela Code." But, when that accusation was challenged at his deposition, Mr. DeCicco could provide no support. Specifically, he was provided a copy of the computer source code Nelcela submitted to the U.S. Copyright Office and asked to identify all portions of that computer code that he claims were copied by POST. Mr. DeCicco could not point to a single word that he claims was copied by POST. (SOF 1 at ¶ 30; Nelcela's Responsive Statement of Facts ("Nelcela SOF 2"), Dckt. # 350, at ¶¶ I:30, II:1, 23, 29-30.) Since then, Nelcela still has not identified a single word supposedly copied by POST. Nelcela did provide deposition "corrections" for Mr. DeCicco in which he stated that, after his deposition, he had "gone through subsequent pages from the copyright paperwork and there are matching lines of code between POST code & what Nelcela submitted for copyright." (Nelcela's SOF 2 at ¶ I:29-30.) But Mr. DeCicco once again did not identify a single word or line of code that he claimed was copied. Rather, his deposition corrections simply referenced all pages of the very same computer code that was presented to him at his deposition, and on which he could not identify a single word that was supposedly copied by POST.4 Mr. DeCicco's deposition corrections lack
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Mr. DeCicco's corrections refer to "pages USCO 00053- USCO 00072," which are the Bates numbers of deposition exhibit 307, the computer code Nelcela submitted to the U.S. Copyright Office. (SOF 3 at ¶¶ II:29-30.) 6
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credibility, because they do not identify any of the specific "matching" lines he claims to have found. Moreover, they are clearly "purposeful rewrites tailored to manufacture an issue of material fact" for the purpose of surviving a summary judgment motion by altering the substance of his testimony. They are therefore inadmissible. Hambleton Bros. Lumber Co. v. Balkin Enters., Inc., 397 F.3d 1217, 1226 (9th Cir. 2005) (rejecting unfounded, contradictory deposition corrections). In addition to the inadmissible deposition "corrections," Nelcela also offers an unsigned, undated, two-page document which Nelcela claims comprises their expert's "subsequent analysis." (Response at p. 13 ll. 21-23; Nelcela SOF 2 at ¶ I:29-30 and Ex. G.) Nelcela has never before produced this document ­ it was not included with the deposition corrections or produced to the parties before being submitted as an exhibit to this Court. The undersigned parties saw the report for the first time when they received Nelcela's summary judgment response and fact statement on April 5. Notwithstanding the obvious inadmissibility of a "report" submitted in such flagrant violation of this Court's rules, Mr. DeCicco's "subsequent analysis" backfires for Nelcela. Instead of salvaging his deposition testimony and bolstering Nelcela's claim of infringement against POST, Mr. DeCicco's report establishes conclusively that Nelcela's claim is without merit. According to Mr. DeCicco's belated attempt to identify the portions of Nelcela's copyrighted code that were supposedly copied by POST, he claims to have reviewed 22 copies of the code produced by POST in this litigation and to have found that 15 of those copies "contain code that also appears in exhibit 307" (the Nelcela copyright application). (Nelcela SOF 2 at Ex. G.) What Nelcela fails to explain is that of the 15 instances of alleged copying identified in Mr. DeCicco's "supplemental analysis," every one of those 15 instances refers to only to a single computer file: Bnkmerch.pbl. (Nelcela SOF 2 at Exhibit G.) That file in not a part of the POST Software. POST has never claimed ownership of the file Bnkmerch.pbl. Nor has POST used the file. The file Bnkmerch.pbl is not a part of the software POST has used since June 2001 to process credit card transactions. (SOF 3 at ¶ I:29-30.) Rather, Bnkmerch.pbl 7
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was a part of the code that POST licensed from MTSI. (SOF 3 at ¶ I:29-30.) POST never used the file in POST's own software because the MTSI code was not functional.5 (SOF 3 at ¶ I:29-30.) As explained in the Lexcel, MTSI, and POST Parties' Joint Motion for Summary Judgment on Ownership, in order to survive summary judgment on the issue of ownership, Nelcela was obligated to come forth with (1) evidence showing ownership of the specific elements of its copyrighted work that it claims have been copied and (2) evidence of specific copying of those elements by POST. E.g., Apple Computer, Inc. v. Microsoft Corp., 35 F.3d 1435, 1442-43 (9th Cir. 1994). Given Nelcela's inability to identify any portion of the POST Software that was allegedly copied from Nelcela, Nelcela cannot prevail on its claim for ownership of any portion of the POST Software. Accordingly, the Court should enter summary judgment in favor of POST on the issue of ownership of the POST Software. Alternatively, to the extent the Court believes that Nelcela's belated identification of the file Bnkmerch.pbl raises an issue of fact, even though POST has never used or claimed to own that file, then the Court should enter summary judgment in favor of POST and against Nelcela on the issue of ownership of all portions of the POST Software other than the file Bnkmerch.pbl. (Id.) Likewise, to survive summary judgment on its claim of copyright infringement, Nelcela was obligated to present evidence of "both valid ownership of the copyright and infringement of that copyright by the alleged infringer." Entertainment Research Group, Inc. v. Genesis Creative Group, Inc., 122 F.3d 1211, 1217 (9 th Cir.1997), cert. denied, 523 U.S. 1021 (1998). Nelcela has failed to meet both of these obligations. First, as explained previously, the uncontroverted expert testimony shows that Nelcela copied the Lexcel Software, and thus has no claim to ownership of any valid copyright interest. And second, Nelcela has offered no evidence of copyright infringement by POST. Nelcela has merely responded by naming a single file ­ Bnkmerch.pbl. Nelcela has not identified
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The MTSI code appears in the code POST produced in this litigation only because POST produced its code from backup copies of a server on which both the unusable MTSI code and the actual POST code were stored. (SOF 3 at ¶¶ I:29-30.) 8
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a single portion of the file that was used by POST in the POST Software. Nelcela's failure to offer evidence of any copying by POST of any portion of the Nelcela Software means that Nelcela cannot prevail on its copyright infringement claims against POST. Entertainment Research, 122 F.3d at 1217. Accordingly, the Court should enter summary judgment in favor of POST and against Nelcela on Nelcela's copyright infringement claim. V. THIS COURT'S RULING ON POST'S CONVERSION CLAIM IS NOT LAW OF THE CASE AND DOES NOT AFFECT THE OWNERSHIP ISSUE. Nelcela tries to bootstrap this Court's ruling dismissing POST's conversion claim involving the Nelcela Software to preclude POST's claims of ownership of the POST Software. (Response at 14.) Nelcela's argument fails. First, the Order Nelcela purports to rely upon relates to the computer code POST paid Nelcela to provide and that Nelcela refused to deliver, i.e., the customized version of the Nelcela Software. (See Dec. 19, 2005 Order, Dckt. # 310, at 9-10.) The Order does not address the computer software POST created on its own after Nelcela refused to provide the customized Nelcela Software ­ the POST Software. POST does not presently seek summary judgment that it owns the customized Nelcela Software. Rather, POST seeks summary judgment of ownership of the POST Software. As explained above, POST is entitled to summary judgment on the issue of ownership of POST's own software. The Court's December 16, 2005 Order has no impact on that determination. But even as to the customized Nelcela Software, Nelcela's law of the case argument is misplaced. The very Order Nelcela relies upon denied Nelcela's motion to dismiss POST's claims for declaratory relief, breach of contract, breach of warranty, and unjust enrichment regarding the Nelcela Software. (Id. at 6-7, 8-9, 10-11.) Accordingly, to the extent the law of the case doctrine applied, it would hold that POST has properly pled these claims for relief. The law of the case doctrine does not apply, however. The law of the case doctrine attaches once a decision is final ­ at the point when an appeal must either be 9
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taken or waived. U.S. v. Smith, 389 F.3d 944, 949 (9th Cir. 2004) ("The law of the case doctrine is `wholly inapposite' to circumstances where a district court seeks to reconsider an order over which it has not been divested of jurisdiction"). Partial dismissals, like other interlocutory rulings, are subject to revision by the Court prior to entry of final judgment, and thus do not create law of the case. City of Los Angeles v. Santa Monica Baykeeper, 254 F.3d 882, 888 (9th Cir. 2001) ("The doctrine simply does not impinge upon a district court's power to reconsider its own interlocutory order"). No final judgment, partial or otherwise, has been entered in this case, and "law of the case" therefore has not attached to the Court's December 16, 2005 rulings. VI. THE PARTIES DO NOT RELY ON THEIR SETTLEMENT AGREEMENT TO ESTABLISH LEXCEL'S OWNERSHIP OF THE SOFTWARE AT ISSUE. Contrary to Nelcela's assertions (Response at 10-11), the moving parties do not rely on their settlement agreement (in which they agree to respect Lexcel's claim to ownership) as proof that Lexcel owns the software. Rather, as explained in this reply as well as in their motion for summary judgment and in their consolidated response to Nelcela's motions for summary judgment, Lexcel's ownership of the so-called Nelcela Software is proven by the uncontroverted, unanimous expert testimony coupled with Alec Dollarhide's testimony regarding which software came first. Together, these facts show that Nelcela copied the Lexcel Software, and thus Lexcel owns the Nelcela Software because the Nelcela Software is an unauthorized derivative work. VII. SANCTIONS AGAINST MTSI ARE UNWARRANTED. Nelcela's arguments miscomprehend the facts. MTSI has not abandoned its claim to ownership of the software. As set forth in the moving parties' joint response to Nelcela's motions for summary judgment, MTSI has settled with Lexcel based on the expert reports which demonstrate that Lexcel is the true owner of the software at issue. (Dckt. # 351 at § VI:A.) MTSI believed that it owned the software up until it saw the expert analysis because it had paid Alec Dollarhide hundreds of thousands of dollars in compensation to create and improve that software as its employee and Alec Dollarhide 10
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told MTSI it owned the software. (SOF 3 at ¶ B:15-16.) That Mr. Dollarhide now recants those assertions does not cast doubt on MTSI's good faith ­ MTSI was entitled to rely on Mr. Dollarhide's statements, and did so. And in the event that this Court does not find the MTSI code to be derived from the Lexcel software, MTSI has retained its right to pursue, as an alternative argument, its claim to own that software because Mr. Dollarhide created it as a work-for-hire while in MTSI and its predecessors' employ. (Dckt. # 351 at § VI:A.) MTSI's conduct is thus proper, not sanctionable. VIII. CONCLUSION For the foregoing reasons, this Court should enter summary judgment in favor of Lexcel and against Nelcela on the issue of ownership of the Lexcel Software, the MTSI Software, and the Nelcela Software. The Court should also enter summary judgment in favor of POST and against Nelcela on the issue of ownership of the POST Software and should enter summary judgment in favor of POST and MTSI and against Nelcela on Nelcela's claims of copyright infringement. The Court should also deny Nelcela's request for sanctions.

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RESPECTFULLY SUBMITTED this 24th day of April, 2006. STEPTOE & JOHNSON LLP By __s/ Nicholas J. Wallwork__________ Nicholas J. Wallwork Fredric D. Bellamy Bridget S. Bade Attorneys for Lexcel, Inc. and Lexcel Solutions, Inc. LEWIS AND ROCA LLP By __s/ Kimberly A. Demarchi________ 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

LAW OFFICES OF WILLIAM McKINNON By: William McKinnon and DICARLO CASERTA & PHELPS PLLC

s/Nicholas J. DiCarlo Nicholas J. DiCarlo Attorneys for Merchant Transaction Systems, Inc., Gene Clothier, and Tone Clothier CERTIFICATE OF SERVICE I hereby certify that on April 24, 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

By:

s/

Debi Garrett

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