Free Brief in Support of 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.

BRIEF IN SUPPORT OF A MAJOR DIFFERENCE, INC.'S MOTION TO AMEND ITS COMPLAINT TO WITHDRAW CLAIMS 5, 6, 7, 9 AND 11 AND TO STREAMLINE ITS PATENT UNENFORCEABILITY CLAIM (CLAIMS 3 AND 4)

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I.

FACTUAL BACKGROUND In 2001, Erchonia Medical, Inc. ("EMI") manufactured a BioCleanse ionization footbath and

PL2000 and PL3000 hand-held therapeutic cold lasers. The BioCleanse, an unpatented device, was sold exclusively by Robert E. Moroney ("Moroney"). The PL lasers, which EMI claims are covered by U.S. Patent No. 6,013,096, were never sold by Moroney. The Moroney/EMI relationship terminated in early 2002. Moroney formed Robert E. Moroney, LLC ("REM"), which in approximately August 2002 began purchasing hand-held therapeutic cold lasers from a foreign supplier. REM, and later Plaintiff A Major Difference, Inc. ("AMD") sold those devices throughout the United States under the trademark Quantum IV. EMI sued REM, AMD and others, claiming that the Quantum IV lasers infringed the '096 patent, and also asserted other claims. REM subsequently sued EMI and others for dissemination of false and misleading statements about REM and its products, including the false allegation that REM's ionization foot bath product poses a shock hazard. Those and other cases were consolidated into a single action which is currently pending in the United States District Court for the District of Arizona. AMD discontinued selling the Quantum IV Laser and, by 2004, was selling a Quantum System Laser and Excalibur Laser. (Declaration of Neill Moroney ("Moroney Dec."), ¶¶ 2-5.) Subsequently, U.S. Patent No. 6,746,473 ("the '473 patent") entitled "Therapeutic Laser Device" issued to Erchonia Patent Holdings, LLC ("EPH"). EMI, EPH and Erchonia Medical Lasers, Inc. (collectively "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,

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determining that the '473 patent's claims were invalid, not infringed by the accused AMD product, and that the '473 patent was unenforceable. AMD next sued Erchonia seeking a general declaration of noninfringement, invalidity and unenforceability of the '473 patent. AMD also asserted claims against Erchonia for false advertising, violation of the Colorado Consumer Protection Act and Arizona Consumer Fraud Act, unfair competition, intentional interference with actual economic advantage, product defamation and trade libel. Erchonia answered AMD's Complaint on October 5, 2004, denying all material allegations, asserting a Counterclaim and several third-party claims alleging that the Quantum System Laser, but not the Excalibur Laser, infringed the '473 patent. In April 2005, the Court ordered Magistrate Judge Shaffer to enter a general Scheduling Order, which he did on June 3, 2005. In that Order, Judge Shaffer 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. By July 2005, AMD was completing development of the damage model it would present to a jury. (Moroney Dec., ¶ 7.) Through that process, AMD determined that, while it has undoubtedly suffered some monetary loss due to Erchonia's tortious conduct, proving those damages would be quite expensive. (Id.) Armed with that information, AMD contemplated whether it wished to continue pursuing its non-patent related claims. AMD reached the decision that it did not by early August 2005, then advising Erchonia that it wished to withdraw Claims 5 through 11 from the action. (Id.) The parties' subsequent communications on this issue are fully outlined in the Certificate of Compliance set forth in AMD's accompanying Motion to Amend and shall not be here repeated. 3

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As one would expect, Erchonia propounded written discovery concerning, among other things, AMD's Eighth (Intentional Interference With Actual and Prospective Economic Advantage) and Tenth (Business Disparagement/Trade Libel) Claims for Relief. Erchonia found AMD's responses unacceptable, threatening that if Claims 8 and 10 were not voluntarily withdrawn, Erchonia would move for sanctions pursuant to Fed. R. Civ. P. 11(c). (Ex. 1.) By that point in time, AMD had decided not to press Claims 5 through 11 and thus agreed to dismissal of Claims 8 and 10, which occurred on October 6, 2005. (Ex. 2.) During both written and deposition discovery, Erchonia also sought to obtain information concerning AMD's Excalibur Lasers. AMD objected to providing any information concerning the unaccused product on, among others, the grounds of relevancy. (See Ex. 3.) Apparently recognizing the strength of AMD's position, Erchonia did not seek an order to compel production of information concerning the unaccused product. Instead, Erchonia recently moved to further complicate this case by the addition of a new infringement claim against the Excalibur Laser. Despite its lack of diligence in seeking the amendment, AMD suggested that if Erchonia would agree to allow withdrawal of Claims 5-7, 9 and 11 immediately and without condition, AMD would similarly stipulate to amendment of Erchonia's Counterclaims. Erchonia rejected AMD's proposal. (Ex. 10.) II. 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).

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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 published the false and misleading statements which formed the basis of Claims 5-7, 9 and 11 in late summer 2004. Over the ensuing months, AMD monitored damages it suffered from that conduct. For AMD to determine the true impact of Erchonia's false publications, however, it needed to give the marketplace sufficient time to react to those publications. AMD estimated that all impact from the statements could accurately be measured within a year of the marketplace being exposed to Erchonia's false statements. Once that time had passed, AMD conducted its analysis, determining that provable damages would likely be minimal. AMD then immediately conducted its cost benefit analysis, reaching its conclusion that it made no economic sense to continue pressing Claims 5-7 and 11. AMD immediately thereafter communicated to Erchonia its decision to withdraw those claims. AMD has obviously acted with diligence. 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

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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. See also, Foman v. Davis, 371 U.S. 178, 182 (1962). While grant or denial of the present Motion is fully within the discretion of the Court, a refusal to grant leave to amend without substantial justification would be "inconsistent with the spirit of the Federal Rules." Id. Indeed, refusing leave to amend is only justified upon a showing of undue delay, bad faith, or undue prejudice to the opposing party. Childers v. Indep. School Dist. No. 1, 676 F.2d. 1338, 1343 (10th Cir. 1982). "[S]imilar standards govern the exercise of the court's discretion under both Rule 41(a) and Rule 15(a). . . ." Anderberg v. Masonite Corp., 176 F.R.D. 682, 686 (N.D. Ga.1997). "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). It is Erchonia's burden to show any such prejudice. Classic Commc'n, Inc. v. Rural Tel. Serv. Co., Inc., 180 F.R.D. 397, 400 (D. Kan. 1998). 1. AMD Has Not Unduly Delayed

As set forth above, AMD had acted with diligence and has not unreasonably delayed in seeking amendment of its Complaint. This factor tips squarely in favor of granting AMD's Motion to Amend.

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2.

AMD is Not Acting in Bad Faith

AMD seeks to simplify, not complicate, this case by only pursuing claims that are meaningful to the parties' overall dispute. Moreover, AMD sought its simplifying amendment in August, while there was still almost four months left in the discovery time period. That timing allowed the parties ample opportunity to assess how they should reallocate litigation resources and adjust overall litigation strategy. AMD's good faith and diligence can only tip in favor of allowing AMD's proposed amendment. 3. Erchonia Will Suffer No Prejudice by AMD's Amended Complaint

Erchonia will not be prejudiced by the withdrawal of Claims 5-7, 9 and 11 "because it will no longer have to defend them." Boyce, 111 F. Supp. 2d at 1375. Such is especially true here, where AMD has agreed never to reassert Claims 5-7, 9 and 11 against Erchonia. Furthermore, Erchonia's claim that it will suffer prejudice because it may lose counsel retained by its insurance carrier is meritless. Erchonia always is free to continue utilizing its current insurance counsel, albeit it may have to do so at its own cost. Having to pay for legal representation cannot be considered legal prejudice. In short, the third and final factor to be considered under Rule 15(a) clearly demonstrates that AMD's Motion to Amend be granted. C. AMD's Proposed Amendment Should Be Allowed Without Condition

Erchonia has and undoubtedly will continue to argue that it is entitled to an award of at least some attorney's fees and costs incurred in defending against Claims 5-7, 9 and 11 as a condition precedent to amendment. Erchonia's plea must be rejected for any one of the three following separate reasons.

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1.

Claims 5-7, 9 and 11 Were Not Brought in Bad Faith and Are Not Being Withdrawn for an Improper Purpose

AMD agrees that it will not reassert Claims 5-7, 9 and 11 against Erchonia in the future. In a case when a defendant has no threat of having to defend against withdrawn claims in the future, attorney's fees and costs may not be awarded without a showing of exceptional circumstances. Aerotech, Inc. v. Estes, 110 F.3d 1523, 1527-28 (10th Cir. 1997); Freymiller v. CMS Trans. Serv., Inc., No. 98-6190, 1998 U.S. App. LEXIS 27683, at *8 (10th Cir. 1998). Though the Tenth Circuit has not specifically defined such circumstances, it has noted that an award of fees is contrary to the American Rule and that the underlying rationale for fee shifting is punitive, requiring a showing of "bad faith" as an essential predicate. Freymiller, 1998 U.S. App. LEXIS at *8, citing, San Juan Prods., Inc. v. San Juan Pools of Kan. Inc., 849 F.2d 468, 476 (10th Cir. 1988). In defining "bad faith" sufficient to sustain an award of fees, the Tenth Circuit has held that a claim must be entirely without color and asserted wantonly, for purposes of harassment or delay or for other improper reasons. San Juan Prods., 849 F.2d at 476. Neither meritlessness alone nor improper motives alone will suffice. Id. Moreover, bad faith findings must be narrowly drawn to avoid deterring litigants with colorable, though untested, claims from seeking a federal forum. Id. For these reasons, the Tenth Circuit has repeatedly held that an attorney fees penalty can be imposed only in the most exceptional of cases and only for the most dominating reasons of justice. Id.1

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Other courts have reached similar conclusions. See Colombrito v. Kelly, 764 F.2d 122, 133-34 (2d Cir. 1985) ("When a lawsuit is voluntarily dismissed with prejudice under Fed. R. Civ. P. 41(a)(2), attorney's fees have almost never been awarded."); Cauley v. Wilson, 754 F.2d 769, 772 (7th Cir. 1985) ("Fees are not awarded [under Rule 41(a)(2)] when a plaintiff obtains a dismissal with prejudice because the defendant cannot be made to defend again." (internal quotations omitted)); Smoot v. Fox, 353 F.2d 830, 833 (6th Cir. 1965) (court holding that attorney's fees are not proper under Rule 41(a)(2) where the dismissal is with prejudice). 8

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As outlined above and in its Motion to Amend, AMD did not assert its claims in bad faith and does not seek to withdraw them for any improper purpose. AMD's claims were and remain highly meritorious. The reason for withdrawal of Claims 5-7, 9 and 11 is purely economic. Under the circumstances of this case, justice requires that attorney's fees and costs not be awarded Erchonia, as to do otherwise could only deter these and other litigants from pursuing more than colorable claims in a federal forum. 2. Erchonia Has Not Satisfied Rule 11 and is Thus not Entitled to an Award of Fees

Granting Erchonia an award of fees and costs as a condition precedent to withdrawal of Claims 5-7, 9 and 11 would violate the statutory safe-harbor provisions of Fed. R. Civ. P. 11. Erchonia has not formally questioned the propriety of or provided AMD with a Rule 11 motion outlining why it believes Claims 5-7, 9 or 11 are unsupported by the law or facts of this case or are otherwise improperly pled. If Erchonia really believed the claims were improper, it should have moved to dismiss2 them and provided AMD with a Rule 11 motion. At least then AMD would have been on notice of Erchonia's position and could have rationally decided how best to proceed. Instead, Erchonia did nothing, leaving AMD to conduct its own timely cost benefit analysis and to reach a conclusion based solely thereon. Erchonia now seeks to take advantage of AMD's good faith. Such action should not be tolerated and, in any case, is not supported by the letter or spirit of Rule 11.

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AMD notes that Erchonia did in fact move to dismiss one of its claims that it now seeks to withdraw. As the Court has already found, that claim was properly pled. 9

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3.

Erchonia Likely Cannot Prove Fees Devoted Exclusively to Claims 5-7, 9 and 11

At best, Erchonia may only recover defense costs: (1) that are solely related to Claims 5-7, 9 and 11; (2) which would not have been incurred in defending against AMD's declaratory judgment claims or asserting its Counterclaims; (3) which were incurred before AMD put Erchonia on notice of its intent to withdraw Claims 5-7, 9 and 11; and (3) only if Erchonia can show that it acted reasonably in incurring those attorney's fees and costs. Anderberg, 176 F.R.D. at 687. AMD is unaware of any activities conducted on behalf of Erchonia that could possibly meet all of these requirements. For this reason, as well as those already articulated, the Court should not condition withdrawal of Claims 5-7, 9 and 11 upon anything. III. CONCLUSION AMD's proposed amendment is timely and based upon a desire to pursue only meaningful claims. The proposed amendment will greatly simplify this case, a benefit to all concerned and is certainly in the interests of justice. AMD's agreement not to reassert the to-be-withdrawn Claims in the future also makes it practically impossible for Erchonia to claim it will suffer legal prejudice should the proposed amendment be allowed. AMD thus requests that the Court immediately enter its first Amended Complaint, without the imposition of any condition, specifically including the condition that AMD pay anything to Erchonia.

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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]
J:\4888\-10\PLEADINGS\BRIEF IN SUPPORT OF MTN TO AMEND COMPLAINT TO WITHDRAW NON-PATENT CLAIMS.wpd

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