Free Brief in Opposition to Motion - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 1:04-cv-01769-MSK-CBS A MAJOR DIFFERENCE, INC., a Colorado corporation, Plaintiff, v. ERCHONIA MEDICAL, INC., an Arizona corporation, ERCHONIA MEDICAL LASERS, L.L.C., an Arizona limited liability company, ERCHONIA PATENT HOLDINGS, L.L.C., an Arizona limited liability company, Defendants.

ERCHONIA MEDICAL, L.L.C., an Arizona limited liability company, ERCHONIA MEDICAL, INC., an Arizona corporation, Counter-Claimants and Third-Party Plaintiffs, v. A MAJOR DIFFERENCE, INC., a Colorado corporation, ROBERT E. MORONEY, an individual, ROBERT E. MORONEY, L.L.C., a Colorado limited liability company, MIKI SMITH, an individual, KMS MARKETING, INC., a Colorado corporation, and STARGATE INTERNATIONAL, INC., a Colorado corporation, Counter-Defendants and Third-Party Defendants.

RESPONSE IN OPPOSITION TO THE ERCHONIA DEFENDANTS' MOTION FOR LEAVE TO AMEND COUNTERCLAIMS AND THIRD-PARTY COMPLAINT BASED ON ALLEGEDLY NEWLY-DISCOVERED EVIDENCE

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I.

INTRODUCTION Defendants Erchonia Medical, Inc., Erchonia Medical Lasers, L.L.C. and Erchonia Patent

Holdings, L.L.C. (collectively "Erchonia") seek to amend their Counterclaims against Plaintiff A Major Difference, Inc. ("AMD") and third party claims against others to assert that sale of Excalibur Lasers is an infringement of U.S. Patent No. 6,746,473 ("the '473 patent"). Erchonia should have known about AMD's Excalibur Laser at least as early as the spring of 2004 and did know about the product in March 2005. Despite that knowledge, Erchonia did not bother to obtain the product or investigate whether it allegedly infringed the '473 patent until October 2005. Thus, Erchonia has not been diligent in seeking its amendment. The proposed late amendment will also be highly prejudicial to AMD and the other Defendants. For these key reasons, AMD requests that the Court deny Erchonia's Motion to Amend the Counterclaims and to assert new third-party claims. II. FACTUAL BACKGROUND AMD and Erchonia are direct competitors in the sale of hand-held therapeutic cold laser devices and have been so since August of 2002. (Declaration of Neill Moroney ("Moroney Dec."), ¶¶ 1-5.) By early 2004, AMD was openly selling to the marketplace a Quantum System Laser and Excalibur Laser. (Id.) On June 8, 2004, U.S. Patent No. 6,746,473 ("the '473 patent") entitled "Therapeutic Laser Device" issued to Erchonia Patent Holdings, L.L.C. Erchonia next informally asserted that AMD's sale of the Quantum System Laser, but not the Excalibur Laser, infringed the '473 patent. AMD investigated Erchonia's charge, determining that the '473 patent's claims were invalid, not infringed by the accused AMD product, and that the '473 patent was unenforceable and sued for a declaration to that effect. Erchonia answered AMD's Complaint on October 5, 2004, denying all material allegations, asserting counterclaims and 2

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third-party claims alleging that the Quantum System Laser, but not the Excalibur Laser, infringed the '473 patent. Neill Moroney was deposed by Erchonia on March 16, 2005 in another case. During that deposition, Mr. Moroney advised Erchonia that both the Quantum System Lasers and Excalibur Lasers were then being sold by AMD. (Moroney Dec., ¶ 6.) Despite this knowledge, Erchonia apparently did nothing to obtain an Excalibur Laser from the market or to investigate whether the product allegedly infringed any claims of the '473 patent. In April 2005, the Court ordered Magistrate Judge Shaffer to enter a general Scheduling Order, which he did. There, the Court noted that the deadline to amend the pleadings expired prior to June 3, 2005 and that deadlines set by the Rule 16 Order could only be changed upon a showing of good cause. After the time period to amend the pleadings had closed, Erchonia sought to obtain information concerning AMD's Excalibur Lasers through discovery. AMD objected on, among others, the grounds of relevancy. Erchonia pressed, with AMD responding: Stargate's[/AMD's] relevancy objection is also appropriate. As you have tacitly recognized, Erchonia has only asserted infringement of U.S. Patent No. 6,746,473 ("the '473 patent") against the Quantum System Laser ("Accused Product") manufactured by Stargate and sold exclusively by AMD. No other products are part of this action, and the time period to add new products has long since passed. (Scheduling Order, ¶ 7a (deadline for amendment of pleadings closed by June 3, 2005).) All requested documents concerning the Accused Product and items designed to be used or sold with that Product, i.e., the infra-red, two-diode and four-diode probes, have already been produced. Information concerning unaccused products, not designed to work with or be sold with the Accused Product, are simply irrelevant. Erchonia suggests that any products that are sold with the Accused Product may be relevant to a convoyed sales analysis and that information concerning such 3

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products should be produced. Information concerning convoyed products, i.e., the interchangeable probes, has already been provided. Stargate sells nothing else to AMD which logically results from its sale of the Accused Product to AMD. Accordingly, none of its other products can properly be considered convoyed. RightHeight Corp. v. Kelly Co., 56 F.3d 1538 (Fed. Cir. 1995) (there can be no recovery for items that have essentially no functional relationship to the patented invention and that may have been sold with an infringing device only as a matter of convenience or business advantage). If necessary, Stargate[/AMD] will prove this point through the declarations of Robert Walker and Robert Moroney filed in support of a motion for protective order. If Erchonia has contrary evidence, please state what it is and Stargate[/AMD] will further respond. Second, Erchonia suggests that Factor No. 6 from Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) ("GP") requires production of requested information. That is simply untrue. In GP, the court found that "both the hypothetical licensor's [, Erchonia,] expectant loss of collateral sales . . . and the hypothetical licensee's [, Stargate,] expectation of profits on its collateral sales . . . are irrelevant elements to be considered in determining a reasonable royalty." Id. at 1131-32. Obviously, Stargate[/AMD] has no information concerning what Erchonia may expect to sell. Collateral products sold by Stargate to AMD as a result of Accused Product sales are limited to the interchangeable probes. Requested information concerning these probes has already been produced. None of the other products Stargate sells to AMD, or to anyone else for that matter, operate with the Accused Product or are marketed in combination with the Accused Product. If you disagree with this assessment, please explain the factual predicates of Erchonia's position and Stargate[/AMD] shall further respond. Micro Motion, Inc. v. Kane Steel Co., 894 F.2d 1318, 1326 (Fed. Cir. 1990) (requested information is not relevant in a pending action if the inquiry is based on the party's mere suspicion or speculation; something more must be presented to make discovery relevant). In any case, nonconvoyed products are simply irrelevant under GP Factor No. 6. Finally, Erchonia suggests that it has the right to information concerning unaccused products so that Erchonia can assess whether one, some or all of those unaccused products are allegedly infringing upon claims of the '473 patent. Since 2000, when the definition of "relevancy" was amended by the Federal Rules of Civil Procedure, such fishing expeditions have been specifically precluded. As I am sure you are aware: "Parties may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party . . . ." Fed. R. Civ. P. 26(b)(1). As set forth in the Comments to Fed. R. Civ. P. 26(b)(1), this definition of relevancy "signals to the parties that they have no entitlement to discovery to develop new claims or defenses that are not already identified in the pleadings." (Ex. 1.) 4

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Erchonia, apparently recognizing the propriety of AMD's position, did not seek an order to compel production of information concerning the unaccused Excalibur Laser. Instead, Erchonia finally obtained a copy of the product from the marketplace and had it reviewed by its technical expert. With that information in hand, Erchonia moved to amend its Counterclaims. Erchonia has not acted with diligence and AMD and other Defendants would be prejudiced should the amendment be granted. Erchonia's amendment should not be allowed. III. ARGUMENT Where, as here, a motion to amend the pleadings . . . is filed after the scheduling order deadline, a "two-step analysis" is required. Once a scheduling order's deadline for amendment has passed, a movant must first demonstrate to the court that it has a "good cause" for seeking modification of the scheduling deadline under Rule 16(b). If the movant satisfies Rule 16(b)'s "good cause" standard, it must then pass the requirements for amendment under Rule 15(a). . . . Colorado Visionary Academy v. Medtronic, Inc., 194 F.R.D. 684, 687 (D. Colo. 2000). A. AMD Demonstrates Good Cause For Its Requested Amendment

Rule 16(b)'s "good cause" standard is much different than the more lenient standard contained in Rule 15(a). Rule 16(b) does not focus on the bad faith of the movant, or the prejudice to the opposing party. Rather, it focuses on the diligence of the party seeking leave to modify the scheduling order to permit the proposed amendment. Properly construed, "good cause" means that scheduling deadlines cannot be met despite a party's diligent efforts. In other words, this court may "modify the schedule on a showing of good cause if [the deadline] cannot be met despite the diligence of the party seeking the extension." Carelessness is not compatible with a finding of diligence and offers no reason for a grant of relief. (Id.) Erchonia was aware of the Excalibur Laser at least by March 2005. Nevertheless, Erchonia apparently did nothing at that time to determine whether the product infringed the '473 patent.

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Indeed, Erchonia did not even attempt to seek (improper as it was1) discovery in this action concerning the Excalibur Laser until mid-June 2005, weeks after the time period to amend the pleadings had already passed. Erchonia was not diligent and its request to amend the pleadings should be denied. B. AMD's Proposed Amendment To The Complaint Is Proper Under Rule 15(a)

Rule 15(a) provides that: A party may amend the party's pleading once as a matter of course at any time before a responsive pleading is served or, if the pleading is one to which no responsive pleading is permitted and the action has not been placed upon the trial calendar, the party may so amend it at any time within 20 days after it is served. Otherwise a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires. "In the absence of a specific factor such as flagrant abuse, bad faith, or truly inordinate and unexplained delay, prejudice to the opposing party is the key factor to be evaluated in deciding a motion to amend." Fed. Deposit Ins. Corp. v. Berr, 643 F. Supp. 357, 359 (D. Kan. 1986). Legal prejudice is present where a party's actual legal rights are threatened or "where monetary or other burdens appear to be extreme or unreasonable." Boyce v. Augusta-Richmond County, 111 F. Supp. 2d. 1363, 1374 (S.D. Ga. 2000), citing, Green Giant Co. v. M/V Fortune Star, 92 F.R.D. 747, 748 (S.D. Ga. 1981).

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Erchonia claims it could not investigate the Excalibur Laser without receiving discovery from AMD. As outlined above, Erchonia was not entitled to any discovery concerning the Excalibur Laser. More to the point, however, Erchonia's actions prove it easily could obtain the product from the marketplace, and with that product, conduct its investigation. 6

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1.

Erchonia Has Unduly Delayed In Seeking Amendment

As set forth above, Erchonia has not acted with diligence and has unreasonably delayed in seeking amendment of its Counterclaims. This factor thus tips squarely against granting Erchonia's Motion to Amend. 2. AMD and Others Will Suffer Prejudice Should Erchonia's Proposed Amendment be Allowed

Erchonia filed its Motion to Amend on October 25, 2005. At that point in time: · the parties' ability to propound interrogatories and requests for documents had expired; · several sets of requests for admission had been served, with the parties' ability to propound additional requests for admission being severely limited; · · several party and numerous third-party depositions had been concluded; primary expert reports had been prepared and propounded.

By the time Erchonia's Motion to Amend will likely be heard and decided: · rebuttal expert reports will almost certainly have been prepared and served (currently due November 14, 2005); · virtually all additional party and third-party depositions will have been concluded. Indeed, it is more than possible that the entire discovery period (currently set to close on December 12, 2004) will be expired before the present Motion is decided. The timing of Erchonia's Motion to Amend has clearly prejudiced AMD and others in their ability to take full, fair and inexpensive discovery on Erchonia's proposed new claim. Moreover,

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while the Court could potentially reset the discovery time period to eliminate this prejudice, other prejudice cannot be so resolved. For instance, AMD and the other Defendants have finite resources available to defend against Erchonia's claims. Decisions needed to be made early on in this action as to how those resources would be spent. If Erchonia is allowed to amend its Counterclaims at this last date, much of the discovery and case management strategy devised early on in the case will be wasted. Moreover, there very well now may be insufficient available resources remaining to even adequately discover all relevant information concerning Erchonia's new infringement allegation. In short, AMD and others will suffer substantial economic and discovery-related prejudice, the extent of which cannot fully even be determined at this point, should the Court allow Erchonia to amend its Counterclaims and third-party claims. C. Erchonia's Proposed Amendment Should Not Be Allowed Without Condition

Rule 15 allows a court to impose conditions upon a party seeking to amend the pleadings where it would be just and equitable to do so. In this case, if the Court were inclined to allow Erchonia to amend the pleadings, AMD requests that such amendment be conditioned upon Erchonia paying AMD's and the Third-Party Defendants' costs associated with taking discovery, including expert discovery, concerning the new infringement charge. IV. CONCLUSION Erchonia has not been diligent in seeking its Motion to Amend. Further, granting of the Motion to Amend will work great prejudice to AMD and others. Due to these two critical factors, the Court should deny Erchonia's request to amend the pleadings. However, should the Court allow amendment, AMD requests that such only occur on the condition that Erchonia pay all fees incurred

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by AMD and the other Defendants in defending against the new claim through at least the filing of rebuttal expert reports. Respectfully submitted,

Dated: November 4, 2005

By:

s/ Robert R. Brunelli Robert R. Brunelli [email protected] Benjamin B. Lieb [email protected] SHERIDAN ROSS P.C. 1560 Broadway, Suite 1200 Denver, CO 80202-5141 Telephone: 303-863-9700 Facsimile: 303-863-0223 E-mail: [email protected] ATTORNEYS FOR A MAJOR DIFFERENCE, INC., ROBERT E. MORONEY, ROBERT E. MORONEY, L.L.C., MIKI SMITH, KMS MARKETING, INC. AND STARGATE INTERNATIONAL, INC.

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CERTIFICATE OF SERVICE

I hereby certify that on this November 4, 2005, I electronically filed the foregoing with the Clerk of Court using the CM/ECF system which will send notification of such filing to the following e-mail addresses: Richard L. Gabriel, Esq. [email protected] Holme Roberts & Owen, LLP 1700 Lincoln Street, Suite 4100 Denver, Colorado 80203 John R. Mann, Esq. [email protected] Charles R. Ledbetter, Esq. [email protected] Valerie A. Garcia, Esq. [email protected] Kennedy Christopher Childs & Fogg, P.C. 1050 17th Street, Suite 2500 Denver, Colorado 80265

and I hereby certify that I have mailed or served the document or paper to the following non-CM/ECF participants in the manner (mail, hand-delivery, etc.) indicated by the non-participant's name: Ira M. Schwartz, Esq. [email protected] DeConcini McDonald Yetwin & Lacy, P.C. 7310 N. 16th Street, Suite 330 Phoenix, Arizona 85020 Via U.S. First Class Mail

s/ Lori R. Brown Lori R. Brown Assistant to Robert R. Brunelli SHERIDAN ROSS P.C. 1560 Broadway, Suite 1200 Denver, CO 80202-5141 Telephone: 303-863-9700 Facsimile: 303-863-0223 E-mail: [email protected] [email protected]
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