Free Transcript - District Court of Arizona - Arizona

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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

MERCHANT TRANSACTION SYSTEMS, INC., et al.,

) ) ) Plaintiff, ) ) vs. ) ) NELCELA INCORPORATED, INC., et al. ) ) ) ) Defendants. ) )

NO. CV 02-1954 PHX-MHM Phoenix, Arizona March 11, 2008 2:19 p.m.

REPORTER'S TRANSCRIPT OF PROCEEDINGS 11 (Motions Hearing) 12 BEFORE THE HONORABLE MARY H. MURGUIA 13 14 15 16 17 18 19 20 21 22 23 24 25 Proceedings taken by stenographic court reporter Transcript prepared by computer-aided transcription Court Reporter: Merilyn A. Sanchez, CRR 401 W. Washington, SPC 37 Phoenix, AZ 85003-2118 (602) 322-7250

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1 2 3 4 5 For Lexcel, Inc.: 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 For POST, Ebocom, Gerts, McKinney: For Nelcela, Campagna, Dollarhide:

A P P E A R A N C E S

For Merchant Transaction Systems, Inc.:

Nicholas J. DiCarlo DiCarlo Caserta & Phelps, PLLC 8171 E. Indian Bend Rd. Ste. 100 Scottsdale, Arizona 85250 George Chun Chen, Esq. Bryan Cave, LLP 2 N. Central Avenue, Suite 2200 Phoenix, Arizona 85004 Ray K. Harris, Esq. Fennemore, Craig 3003 N. Central Ave, Suite 2600 Phoenix, Arizona 85012 Veronica L. Manolio, Esq. Ronan & Firestone 9300 Raintree Drive, Suite 120 Scottsdale, Arizona 85260 Richard A. Halloran, Esq. Robert H. McKirgan, Esq. Lewis & Roca, LLP 40 N. Central Avenue Phoenix, Arizona 85004

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1 2 3 4 5 6 7 8 9 Witness: David Posner By Mr. Halloran By Mr. Harris Jeffery Pell By Mr. Harris By Mr. Halloran By Mr. Halloran Direct 45

I N D E X

Cross

Redirect

Recross

VD

58 76 86 99

E X H I B I T S 10 No. 11 1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2 3 4 5 6 7 8 9 10 11 G H Account_master table definition Lexcel source code files Lexcel database schema files Lexcel source code files Lexcel source code files Lexcel database schema files Lexcel source code files Lexcel source code files Lexcel database schema files Lexcel database schema files Lexcel database schema files Lexcel to Nelcela comparison Trial Exhibit 54 57 49 49 49 49 49 49 49 49 49 49 60 58 Description Identified Admitted

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P R O C E E D I N G S

THE COURTROOM DEPUTY CLERK:

Civil case 02-1954 Motion re

Merchant Transaction, et al versus Nelcela, et al.

Joint Party Motion For Partial Summary Judgment and oral argument re briefing on analytical dissection and statute of limitations. Counsel please state your names for the record. MR. HARRIS: Ray Harris on behalf of the Nelcela, And with me is

Inc., Len Campagna, and Alec Dollarhide. Veronica Manolio. MR. HALLORAN: and POST parties. McKirgan. MR. CHEN: the Lexcel parties. Kubitz. MR. DiCARLO:

Richard Halloran on behalf the Gerdts

And with me is Mary Gerdts and Robert

Good afternoon, George Chen on behalf of With me here today is Carl Kubitz and Pete

And finally Nicholas Dicarlo on behalf

of Merchant Transaction Systems, Inc. THE COURT: It's been a while. Good afternoon. You may be seated. I would Thank you. Welcome.

We are here on the motions that were listed.

like to talk to you about how we should proceed today because I think most of the time should go toward analytical dissection and the analytical dissection hearing, especially in light of

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the fact that you all have expert testimony that you are prepared to present. I'm happy to hear you out on the motions for summary judgment, but -- and I'll set some time out for the motions on the statute of limitations. That was a question whether we But I don't

would deal with that and we can deal with that. think that should take too much time.

Let me talk to you about the motions for summary judgment. I -- I have looked at them and I was -- I would like But the -- as I review all of the issues

to address them.

today, I think it may be more prudent for the Court to hold off on ruling on the motions for summary judgment. I don't think And I do

there -- the analytical dissection is dispositive.

appreciate the point that the joint parties have made that it could be viewed separately. But there's also here a potential

issue regarding derivative copyright that could flow from the ownership and the copyright infringement claims that are being made by the defendants and as well as the tortious -- aiding and abetting of the tortious conduct, and I guess, to some extent, the conversion. And I think it would be best to proceed one step at a time and, just to be abundantly cautious here, to resolve the analytical dissection issue and then give the parties, in light of the Court's ruling on the analytical dissection, to move again for summary judgment as they so choose in a more clear

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way based on the results of the analytical dissection decision. I think that would be more prudent, but if you all -I'll give you a chance to convince me otherwise if you feel strongly about that. So let's take up that issue first. Then

we will take up the statute of limitations, which I don't think I'll give you more than ten minutes, and then we will proceed with the analytical dissection. And I have more to say on the

analytical dissection, but let's take up this issue first. So, Mr. Halloran? MR. HALLORAN: Thank you, Your Honor.

Your Honor, I apologize, this worked just five minutes ago. It doesn't seem to be working right now. Is it turned to

the podium? Well, Your Honor, I think the place to begin and to end on summary judgment is the jury verdict, because the question to the jury was does Nelcela own the Authorization System and does Nelcela own the Merchant System or does Lexcel own the Authorization System and does Lexcel own the Authorization System. And the jury answered that very clearly. We find

What I wanted to show you is the actual jury verdict:

that Lexcel is the owner of the Authorization System at issue in this case. We find that Lexcel is the owner of the Merchant And they found that Nelcela is Copyright -- a claim for

System at issue in this case. not.

And that ends the question.

copyright infringement requires ownership.

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The very question the jury was asked to decide, they decided against Nelcela, and that precludes Nelcela's claims for copyright infringement. And that has -- analytic Analytic dissection is

dissection has nothing to do with that.

important to Lexcel, whether Lexcel can maintain a claim for damages against Nelcela. If the Court finds that the Lexcel software is not copyrightable, Lexcel will have no claim against Nelcela. it's not going to vest Nelcela with ownership. already addressed that question. doesn't own it. But

The jury has

The jury has ruled Nelcela

If they don't own it, they can't sue on it. They can't sue for

They can't sue for copyright infringement.

conversion, because their conversion claim, if you look at their own amended -- it's their amended answer and counterclaim, it's paragraphs 109 and 110, what they claim is that the cross-defendants licensed the software and they modified the software, and they used the software. their conversion claim. That's

That was our claims covered by the

copyrighted code in the ownership. And then lastly, for aiding and abetting, if there is not copyright infringement, there can't be aiding and abetting. So, Your Honor, respectfully, the jury has decided the issue. THE COURT: And I understand that. And I

don't necessarily disagree with what -- everything that you've said. I don't disagree with that. But what you all didn't

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discuss in your papers and I think is a potential issue here, is the derivative copyright over any material or new material that Nelcela may have added to the Merchant and the Authorization System. I guess, what is your response to that? respond in writing to that. opportunity. You didn't

So I don't know that you had an

I don't know when it was raised, but I think you

had an opportunity to in your reply to respond to that, and you didn't, so -MR. HALLORAN: Well, I think we go back to February of

2006, when the parties filed their motions for summary judgment on copying and identified what they claimed was copied. wasn't a claim at that time. There

I mean, what was identified at

that time as having been copied, that's what went to the jury. You can't allow them now, after the jury has decided, to come and raise new claims. THE COURT: claims. disagree. Well, I'm not letting them raise new Again, I don't necessarily

And I understand.

I just -- you agreed at the last hearing that

analytical dissection needed to be done and that it would -could be dealt with at this time. it. Now, as you know, we have to go -- at least I think you know, we have to go through an element-by-element analysis now that the copyright -- or the different items are being And so we are dealing with

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questioned regarding their protection of copyright.

And I

think that we need to see, well, what is -- is left and does that affect the ownership issue at all. And if it does, does

it affect, you know, does the Court necessarily have to look at the derivative copyright that may exist and then determine whether or not you're -- everything that you said still is true. I think it very well still may be true, but I'm just

looking at this sort of out of an abundance of caution and taking this step by step. should happen first. And I think this step probably

But you're disagreeing with me on that.

But the derivative copyright issue or potential derivative copyright issue really wasn't squarely addressed. MR. HALLORAN: First, as we told you at the last

hearing, we believe that analytic dissection is a Phase II issue. It's now being decided in Phase II. We think that is

appropriate.

We think it's an issue that goes to whether or

not Lexcel has a claim for damages for copyright infringement that they can go to the jury on. If you find that the Lexcel

software is not copyrightable, then you are going to find that Lexcel cannot go further on its copyright claim. But the jury

has already decided that Nelcela cannot go forward on their copyright claim. In terms of the derivative copyright claim, I'm not sure of what portions of the Nelcela code you are talking about. But Nelcela, in February of 2006, at the time of

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summary judgment motions where each side had their experts articulate what was supposedly copied, all of that that was identified has gone to the jury. The jury has decided that. That's what their

They said that Nelcela owns none of it. verdict was.

If what you're saying is that now Nelcela should be able to identify other things, we are way past that. identified what they claim was copied as did Lexcel. experts spoke on it. the jury answered it. They The And

We had a jury trial on ownership. Nelcela doesn't own it.

And if they

don't own it, they can't sue for copyright infringement. THE COURT: Let me hear from Mr. Harris. I think,

Mr. Harris, are you speaking on this issue? MR. HARRIS: brief. Yes, Your Honor. Well, I can be very

I agree with you.

There is an issue here, Your Honor,

with regard to not what the jury verdict form says, but what does it mean from a legal point of view and from a practical point of view in this case. The joint parties keep talking about owning it. And

the jury verdict form talks about the Authorization System and the Merchant System. But it is not disputed that the only

similarity that was presented to the jury with regard to the Merchant System was some 80 some field names. lot more to the Merchant System. There's a whole

And if that whole lot more to

the Merchant System was created by Nelcela, then Nelcela owns

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it. We need to do the analytic dissection first to figure out whether there can be copyright ownership. Then we can get

to the issue of whether there's infringement of that copyrighted material. correct one. The process that you propose is the

We should begin with analytic dissection. All right. Thank you.

THE COURT:

Let's -- if you want to say anything else on this issue, you may. MR. HALLORAN: Just briefly, Your Honor. It's 17 U.S.C. 103. The -You can't get

there's a statute on point.

a derivative work copyright if you copied somebody else's software without permission. there's cases on that. I mean, that's the law. And

And we've cited them to you before.

But what Mr. Harris didn't identify was anything that they claim was copied that the jury didn't decide already that Nelcela doesn't own. And that's what's happened. The jury had

everything and they said Nelcela doesn't own it, Lexcel does, which means Nelcela has no claim for copyright infringement. THE COURT: All right. Thank you. Let's move on to

the statute of limitations. MR. HARRIS:

Ms. Manolio?

Or Mr. Harris?

Your Honor, I agree with you that we It's been heard by the Court The facts are simple.

should address this quickly.

several times in several contexts.

The infringement was discovered no later than June 4,

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2001.

The last act by Nelcela relating to the alleged

infringement was receipt of a license payment in August of 2001. Lexcel brought the suit in June of 2005. It's barred by

the three-year statute.

It doesn't matter whether they talk The three-year statute applies to

about damages or ownership. both types of claims.

That is the effect of the Zwill versus

Shanahan case in the Ninth Circuit that we cited in our briefs. To get around the bar as a result of no conduct by Nelcela within the three-year period, the joint parties argue some kind of contributory or vicarious infringement. Again,

under the Bridgeport Music case out of the Sixth Circuit in 2004, which we cite in our briefs, Nelcela must act within the three-year period even to have liability for contributory or vicarious infringement. three-year period. In addition, there are other elements to the contributory or vicarious infringement that are not present. With regard to contributory infringement, Nelcela sued Intercept to stop the infringement. the infringement. infringement. Now, Nelcela contended then and contends now that it was infringement of Nelcela software. And the joint parties Nelcela was not promoting There is no action within the

Nelcela was attempting to prevent the

claim there is no Nelcela software, it's all Lexcel software. But what is clear, is Nelcela wasn't trying to expand the use

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of the software. software.

They were trying to prevent the use of the

And with regard to vicarious infringement, there has to be an element of profit. And while in their brief they talk

a lot about Alec Dollarhide, they point to no profit to Nelcela since August of 2001. In the absence of any profit, there So the statute of

can't be any vicarious infringement.

limitations has run with regard to any of the claims that Lexcel seeks to assert, either for damages or for ownership of the disputed software. THE COURT: Well, Mr. Harris, it seems, isn't --

aren't the critical questions when did Lexcel discover the infringement and was the statute of limitations period tolled and was there any infringement within the statute of limitations period? MR. HARRIS: questions. THE COURT: All right. And so isn't there a question Yes. Those are the -- those are critical

of fact with respect to those -- those questions -- to those answers to those questions? MR. HARRIS: No, Your Honor. The evidence is clear

that the discovery was no later than June 4 of 2001, from the testimony of both Mr. and Mrs. Kubitz at trial. is -- is not disputed on that. With regard to tolling, their only argument is: Well, The testimony

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Nelcela told us that they owned the software or they would stop somehow. THE COURT: MR. HARRIS: Right. We have cited the cases that say you

cannot rely on that kind of a representation in an adversarial context to toll the statute of limitations. THE COURT: Mr. Harris. But that's the question, though,

I mean, because the question is presented whether

Nelcela's assurances that it would not or was not using Lexcel's source code is sufficient conduct to toll the statute of limitations and allow Lexcel to obtain the damages to any infringement that occurred prior to the -- I think is it June of 2002. But isn't that a question now of fact for the jury?

I mean, because there was this discussion, I think I understand your position that, oh, whatever the discussion was, it wasn't enough. Is that what your position is? I mean, but it seems

like that -- I think the other side is going to argue that it was. And so, therefore, the time is tolled. And so I just don't see how this isn't a question of fact. MR. HARRIS: to June of 2001. Those discussions, Your Honor, were prior

In June of 2001, the representatives of

Lexcel were both aware of Nelcela's claim of ownership and of Nelcela's activities with regard to this software. The

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discovery was complete. know.

There was nothing else for them to

And waiting more than three years from that date was

simply not reasonable, and they've cited no basis that it would be. THE COURT: MR. HARRIS: All right. And candidly I've forgotten the third

element, but I don't think there's an issue with regard to accrual, or with regard to any tolling of the statute of limitations. THE COURT: MR. CHEN: well. All right. Thank you, Your Honor. I'll be brief as

I would like to address a few points and then clarify a First point is that this case, We have Phase I. We

few things as well, if I may.

as you know, Your Honor, is bifurcated. have Phase II.

Phase I is limited to ownership.

Discovery

that has been completed in Phase I has been limited to ownership. We have not started discovery in Phase II. Phase

II is limited to infringement. regarding infringement.

We have not conducted discovery

The events that Mr. Harris is

referring to appear to me to be related to infringement and not to ownership. That's point one.

Point two is that since we are dealing with the statute of limitations regarding ownership, I want to make sure that we are clear on what ownership we are referring to. We

have the Lexcel software and then we separately have the -- the

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Nelcela software.

I'll just use that phrase for convenience.

In its reply brief regarding the statute of limitations, Nelcela concedes that the ownership of the Lexcel software is not in dispute. It says: And that's a quote from their brief on page 2.

Ownership of the Lexcel software is not in dispute.

Therefore, the statute of limitations, if it were to apply at all, only applies to whether Lexcel can claim ownership to the Nelcela software. Now, as Your Honor I believe also knows, as was pled in the briefs previously as well as in the current case, in the current set of briefs, the copyright statute of limitations only applies to the copyright holders' remedies against an infringer, and two, it does not apply to the substantive rights itself. The Zwill case, in fact, that Mr. Harris has pointed And it even

to just earlier, in fact holds for that principle.

cites a portion of the legislative history for the copyright statute of limitations. And a portion of that legislative Under the, what's now the

history states and I quote:

copyright statute of limitations, the basic right is not extinguished but the limitation is applied merely to the remedy. Now, Your Honor, in your previous order after the trial, it's docket number 547, it's the order from August 22nd, 2007, Your Honor stated that the Court rejected Nelcela's argument that Nelcela could somehow be deemed to be the owner

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of the software should Lexcel's assertion of ownership turn out to be time barred. And in fact, that principle is -- is held

in the Picket v. Prince case, which is in the briefs, 2000 -it's a Seventh Circuit case from 2000 which states that an argument that failure to file suit within three years of infringement causes software to fall, quote, into the public domain and became fair game for infringers is, quote, ridiculous. And so the statute of limitations argument again will not provide ownership of the Nelcela software to Nelcela. Now, Mr. Harris has also indicated that the -- the meeting between Nelcela and Lexcel in 1994 that Your Honor has referenced that would create the tolling or the equitable estoppel, I believe that Your Honor is correct in that, at a very minimum, creates an issue of fact. But certainly from our

perspective, actually tolls, does toll the statute of limitations if not actually stops Nelcela from raising that statute of limitations defense. The -- and all along, Nelcela has been alleging that it's a different piece of software, not the same piece of software. And the cases that Nelcela cites in its brief, in

particular its reply brief, all of those cases are easily factually distinguished from the current situation at hand. Those cases relate to co-ownership. There were two different

entities that agree that -- well, one side says that they

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contributed to the work.

The other side says, no, you didn't.

What we had here in the history of the events that occurred that led to this lawsuit, Nelcela has been alleging all the time that it has created its own software, that its software is completely unrelated to the Lexcel software, which the jury in April of last year has found to -- to not to be the case. THE COURT: Could I just ask you, because I gave you

all a limited time to conduct discovery on statute of limitations. So what -- what are you talking about when you

say -- you made a reference earlier that was kind of confusing to me. Did you not conduct discovery on the statute of I gave you --

limitations issue already? MR. CHEN:

There was -- there was -- Your Honor did. And I

And I believe the August 22nd, 2007 Order stated that. believe the Nelcela parties had stated that there was no statute of limitations discovery that was needed.

And so -- so

that's -- I would assume then that they felt that there was sufficient evidence in the record to support that. Honor, we disagree. THE COURT: So the answer to my question is, no, there And, Your

was no discovery done on the statute of limitations? MR. CHEN: I don't -There was, Your Honor. We got out documents. We took in a We cited them

MR. HALLORAN: request for production.

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to you in our briefs, and we've attached them to our Statement of Facts. MR. CHEN: I apologize, Your Honor, I misremembered

that, yes, thank you. THE COURT: MR. CHEN: All right. So just in conclusion, Your Honor, the

statute of limitations defense does not give ownership of the software to Nelcela. And the statute of limitations -- it

certainly has been tolled and if not -- if Nelcela, in fact, is not actually estopped from raising the actual statute of limitations defense. And, again, the cases that Nelcela has

cited are factually distinguished from the current case at hand, not the least of which is the co-ownership issue. Thank you, Your Honor. THE COURT: Thank you.

Anything else, Mr. Harris? MR. HARRIS: Your Honor, there are several cases cited There

in our briefs that relate to co-ownership of copyrights.

are other cases following the same three-year statute applying it to sole ownership. One example is the Barksdale versus

Robinson case from the Southern District of New York in 2002. The rule is the same: Unless there is some reasonable basis

for delaying, and they have not identified it, despite the discovery that has occurred, there is no tolling and the three years have passed.

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THE COURT: MR. CHEN:

All right. Your Honor, if I may be very brief? Again,

those cases are factually distinguished.

Those cases relate

to, for the most part, music, publicly available sold items that one party is either saying created with the other or that someone created exclusively. The difference we have here is that this software is not publicly available. And Nelcela from the beginning has not And so Lexcel is

stated that it's the same piece of software.

not in a position to be able to make that determination. It did send letters, in addition to having that in-person meeting. The -- you know, Nelcela or excuse me,

Lexcel wanted to believe that Nelcela was telling the truth for several reasons: One of which is the fact that both

Mr. Campagna and Mr. Dollarhide used to rent space from Lexcel. They used, you know, to be -- and have daily contact with each other, had developed a friendship, and there was some family issues as well. So that was -- that was the reasonableness for that. THE COURT: MR. CHEN: THE COURT: rule on it. All right. Thank you. Just go ahead and deal with this issue and It seems --

It has been brought up several times.

I think you -- both sides are familiar with the law on this with respect to statute of limitations and estoppel. The

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question here, I think when you boil it all down, is whether Nelcela's assurances, because that's what the plaintiff is contesting or putting before this Court, is whether Nelcela's assurances that it would not and was not using Lexcel's source code is sufficient conduct to toll the statute of limitations and allow Lexcel to obtain damages for any infringement that occurred prior to June 13th of 2002. As I referenced earlier, it seems more to the point that equitable estoppel, seems that the law is clear, will not apply to a claim of estoppel to assert the statute of limitations unless the plaintiff shows either an affirmative statement that the statutory period to bring the action was longer than it actually was, promises to make a better settlement of the claim if the plaintiff did not bring the threatened suit, or similar representations or conduct on the part of the defendants. And it seems the law is clear, a plaintiff who unreasonably relies on the reassurances of a wrongdoer has not satisfied the obligations of due diligence. This -- all of these are different statements of the law here in the Ninth Circuit. And so at this point, it's

unclear to this court whether Nelcela's acts were calculated to mislead Lexcel as to have reasonably caused Lexcel's failure to file suit at that time and thus whether equitable estoppel applies to bar Lexcel's claim of infringement prior to June of

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2002. And it seems like where the facts are undisputed, and only one inference may be drawn from them, the question of estoppel is one of law. But otherwise, it is one of fact.

And here it seems like it's at least a mixed question of fact and law. And the only response from Nelcela it seems, But

on this issue, is that the statements were not material. that seems to be a question more suited for the jury. It

appears inappropriate for the Court to foreclose discovery or this issue or issue an order stating that Lexcel is foreclosed from seeking to establish an equitable estoppel exists to allow it to recover for acts of infringement by Nelcela prior to June 13 of 2002. And just let me state, in addition, it seems the record indicates that Nelcela did engage in acts of continuing infringement during the limitations period. June of 2002 and '05. And that's between

Nelcela, I think, had contended that it

had not distributed any credit card processing software since early 2001. And the final payment Nelcela ever received for

any software was on August 13th, 2001. But these statements appear to fly in the face of the evidence, at least that was submitted by Lexcel and I find warranted allowing further discovery on the issue of infringement during the limitations period. The cases that the defendants cite, I think, are

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distinguishable for the reasons that Mr. Chen stated.

They

also cite the Court a Sixth Circuit decision that states that the plaintiffs cannot basically piggyback a defendant's conduct from outside the limitations period onto the alleged direct infringement of another party within the period. not what's going on in this case. And so I find the cases to be distinguishable and so these -- the information before the Court and the exhibits appear to indicate that Nelcela was still conducting business during the limitation period and that Nelcela continued to license and exert control over Nelcela's software at issue in this case. So based on the evidence presented by Lexcel and the applicable law, I find that it would be inappropriate to find that Lexcel is barred by the statute of limitations, and any questions concerning the damages that Lexcel can recover in light of the statute of limitations is a matter for the jury in Phase II of this litigation. So that is the statute of limitations issue. Let's proceed to analytical dissection. As you all It was But that's

know, the jury returned a verdict in April of 2007. April the 25th.

And I believe it was towards the end of the

trial, it may have been during the charge conference that for the first time the defendants challenged the -- or presented an issue of the -- whether or not the elements were protectable

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and were covered by copyright. copyright protected material.

They were challenging the There had been no -- at least to

this court's recollection, any presentation of that issue up to that point. In fact, throughout the motions for summary

judgment the experts focused on whether there was copying and whether to try to determine possession, whether it was substantially similar. It wasn't until very late in the trial that I believe Mr. Firestone presented the issue of challenging copying as a legal matter. It seems before then the focus was on factual

copying and that it was going -- we were going to be able to resolve the ownership issue at that time. We went ahead with the trial. verdict. The jury returned its

And it does appear, just in reviewing the Court's

order regarding the original summary judgment, that the defendants' experts, what they submitted to the Court and during the motions for summary judgment, agree that the best explanation of the similarity and overlap between the Lexcel software and the Nelcela software is the existence of copying. At no time did I see or was it presented or highlighted that the reason for it was because it wasn't copyrightable, because they got it from some common source, because it wasn't protected. This issue then was raised very late. appears it's a question of a matter of law. And then it

And so the

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defendants raised it, I think it was at the charge conference or right before the charge conference, sometime during the trial. And so it's a question of a matter of law for the Court We proceeded with the jury trial, which because it

to decide.

seemed correct to go forward and have the jury decide the issue of ownership on who owned these source codes and the systems that were being questioned and challenged. The jury returned a verdict. And then we had to

address this issue of challenging the copying as a legal matter and doing analytical dissection. I have received the briefs of both of the parties. But I should say the plaintiffs identified -- I'm sorry, yeah, the joint parties did produce a list of common features and elements between the Lexcel software and the Nelcela software. And then both the parties submitted briefs. But neither side,

and I think the defendants probably did a little bit more, but they didn't complete the test, went through a complete examination of the analytical dissection test that the Court has to, I think at this point, conduct. And so I'm hopeful at the hearing today you all will focus on the test and have your experts focus on the parts, the elements, and present the evidence in a way that the Court can apply the test that needs to take place at this time. The Court needs to determine, you know, now that this copying is being challenged as a legal matter, the copyright

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protected material, the Court has to see -- identify copyright protected material, see if it's identified by dissecting the plaintiff's work into elements, and then evaluating the protectability of each element and then filtering out the unprotected elements, leaving only the main golden nugget, so to speak, of what was there to see whether there's substantial similarity. And this requires consideration of the types of people to whom the works seem similar. There's a type similarity and

the nature of the similarity and the degree of similarity that amounts to substantial. And then there's another part of the

test, substantial similarity between the element of the defendant's work and this -- the crux of the plaintiff's work and substantial similarity of the two works as a whole. And so I'm hopeful that the parties will go, present here today with their experts and highlight what needs to be highlighted based on these tests, because the pleadings, I didn't think, take -- take us through the application of analytical dissection. So I think we are ready to proceed. Do you want to present any statements and then proceed with your experts? How do you -- how do you want to do this? Well, Your Honor, I would like to make

MR. HALLORAN:

a short presentation and proceed with the experts, if that's okay with you.

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THE COURT:

All right.

How long is your presentation?

MR. HALLORAN: THE COURT: MR. HARRIS: THE COURT:

Ten minutes. Mr. Harris?

Okay.

That sounds fine to me. Okay, why don't you proceed. Let me try one more time to get the

MR. HALLORAN: computer to work.

First, I think we need to start with the fact that analytic dissection is a defense. had the burden of raising. It's a defense that Nelcela

And the discussion of it being a They

defense is set out very well in the Nimmer Treatise. didn't raise it.

And the Court had no obligation to raise it That's

and the joint parties had no obligation to raise it. the law. By not raising it, they waived it. it at summary judgment. for consideration. THE COURT:

They didn't raise

They didn't raise it in their motion

And I'm curious about that, because as you

know, that's caused me great heartburn that it was raised so late. Is there any authority for that? Because if there is, I would like to

is there case law directly on point on that? know that. MR. HALLORAN: There is.

The Softel versus Dragon

Medical talks specifically about the question of whether or not the Court has to look into this if the parties don't raise it.

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And it says no.

And the Nimmer Treatise had a discussion of It is

the fact the reason for that is because it's a defense.

the party that is being sued for copyright infringement has the burden of asserting that defense. THE COURT: concluded? MR. HALLORAN: Well, and that is not unusual, I mean, They didn't raise it in What if they raise it before the trial is

in terms of how you deal with it. summary judgment. reconsideration. pretrial order.

They didn't raise it in the motion for And they didn't raise it in their joint It wasn't an issue to be tried.

At the time they finally raised it, as you said, right before the jury instructions, that's too late. was being tried. That's not what

It's not a defense that they had asserted.

And then as a hail Mary play, you can't then try to raise a new defense that isn't something that was the subject of discovery, that was the subject of all the things that need to be done to assert that defense. THE COURT: Even -- even though it's a question of a

matter of law for the Court? MR. HALLORAN: Well, it's a question as to whether or And by

not there is objective evidence of copyrightability.

not raising the defense, they are not making a claim that there wasn't objective evidence of copyrightability. involve questions of law. Many defenses

But if you don't raise the defense,

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you don't have the Court deal with it. happened here.

And that's what

They only raised it when it was way too late.

And

they tried to completely change the dynamics of what was being tried. By not including it in the Joint Pretrial Order, not

including it in summary judgment, they waived it in terms of Phase I. Now they've raised it for purposes of Phase II. II deals with a question of damages. It's a question of Phase

whether Lexcel gets to go to the jury in Phase II and seek damages for copyright infringement. So on that, the question

that we are looking at in analytic dissection is the question of copyrightability. at. That's what the Court is asked to look

Analytic dissection is a tool to make that assessment. And for copyrightability, you are looking at

originality.

And what the Ninth Circuit has said is that the

showing of originality to get a case to a jury is very low. And this is a quote: All that is needed to satisfy originality

is for the author to contribute something more than a merely trivial variation. If the Court finds that that's the case, And that's what we are here to talk

the case goes to the jury.

about for analytic dissection. And here we have further in Swirsky dealing specifically with the question of summary judgment and whether you go to the jury on the question. You're entitled to the

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jury trial unless no reasonable jury could find a substantial similarity of ideas and expression between the two softwares. And that's the Swirsky case. And Swirsky then cites a number

of other cases that talk about what you look for is, is there an indicia of a sufficient disagreement concerning the substantial similarity of the two works, such that the jury has to decide that. Today, you are going to hear Dr. Posner testify. likely that Mr. Pell is going to testify to something different. There's going to be a disagreement that will It's

require a jury trial, a jury to make the ultimate determination of whether or not it is copyrightable and whether it's been infringed. The Court looks at this from an objective analysis. Objectively is there enough evidence of copyrightability to send it to the jury. But before you even get there, when you

look for substantial similarity, almost all the cases, they are not identical. And what the courts say is, well, that's

because if it's nearly identical copying, that goes to the jury. And here what we have, and what we've provided to you in It is copied

our Exhibits 1 through 11, is identical copying. word for word.

And many of the words are made-up words that

are copied identically. This case, these similarities go to the jury under the Apple case before you even get to the question of analytic

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dissection.

We also have -And so you don't address the virtual You just focus on substantial similarity.

THE COURT: identical standard. Tell me why that is.

MR. HALLORAN: test the courts look at.

Well, substantial similarity is the That's what the jury has to decide, There's two ways to look at

are they substantially similar. it.

There's the extrinsic test that's done by a court that is

an objective test that uses expert testimony, and the intrinsic test that's done by the jury. But when you have them identical, when you have verbatim copying, the jury gets to decide that question, because the courts have said that even if they are non copyrightable elements, a compilation of non copyrightable elements, that is entitled to copyright protection. verbatim copying, it goes to the jury. Microsoft Apple case, they said: If there's

And that's what the

Well, we don't have verbatim

copying here, so we are going to apply the analytic dissection. Now, we have here copyright registrations. The

Copyright office requires someone seeking a copyright on a software to deposit portions of their code. The Copyright

office that issued copyrights, they presumptively show that Lexcel source code is copyrightable. THE COURT: Let me be sure I understand what you're

proposing or arguing or presenting, because I want to make sure

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I understand this.

Are you alleging or arguing verbatim

copying of the entire works in suit or only alleging copying of common elements in the works? MR. HALLORAN: Verbatim copying of portions of the We are not --

Lexcel source code, absolutely. THE COURT: source code. MR. HALLORAN: Yes.

Verbatim copying of portions of the Lexcel

And we've identified those

portions in yellow highlighting in our Exhibits 1 through 10 and a multi-color highlighting in Exhibit 11 of what was copied verbatim. Other -- we are not saying that they are similar. Those portions are identical. And we are

They are identical.

also saying that the Court should give great weight to the issuance of copyright registration, also the fact that Nelcela and Mr. Harris himself submitted the Nelcela software for copyright registration showing that they believed it was copyrightable. And they had copyright registrations issued.

But going to the analytic dissection test, I think where you start is the fact that computer software is expressly copyrightable. The Copyright office has said that. Their

Circular 61, which we marked as a trial exhibit, that goes through that in detail, and the courts have said that. The

Ninth Circuit in particular has said that computer software is copyrightable. THE COURT: And let me just make sure. You agree or

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disagree that the jury looks at the works as a whole?

Does the

jury look at the works as a whole or just the parts that you're talking about? MR. HALLORAN: I think the jury looks at the parts And the jury decides whether

that are substantially similar.

or not those portions were copied. And then there's a test for -- if you're asking about de minimus copying, that certainly is one of the things that would go to the jury. But the jury looks at what is similar

between the two works and then makes the assessment as to whether or not it was copied, and if so, whether damages are appropriate for that copying. Phase II of this case. It's not -- I know it's said in some of Nelcela's briefing that if you don't copy the entirety, that doesn't count. Well, that's not the law. That's not the law. You And that's what should happen in

look at what was copied.

And you look at whether the portion

that was copied is significant in the work that it was copied from. That's the test. And we've cited that case law to you And here we are entitled to have the

from the Ninth Circuit.

jury make the finding that, yes, it was copied, and, yes, it's a significant portion of the Lexcel software that was copied. And if so, that's copyright infringement. Now, even if you go to analytic dissection, you find here that we had a case that should go to the jury. What

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analytic dissection does, is it's a means for the Court to take an objective analysis of the work, in this case, the Lexcel software, and decide whether or not objectively it's copyrightable. And what you do is you want filter out the

portions that lack originality, you want to filter out the portions that flow naturally from basic ideas. And you want to

filter out the parts that can only be written in just a few ways. And that's what is done in the Apple case and the Brown Bag Software case. To do that, you start with the

highest level of generality, which is why in our list of common features we start at the highest level of generality. Both the

Lexcel and Nelcela software are for credit card processing. They share that common idea that their function is to process credit cards. So you then look at the next level: for computers? Yes they were. Were they written

In fact, they were written for So you go to

the same kinds of computers, personal computers. the next level.

And when you keep going down through our list

of common elements, the lowest level you can get to is the source code. That's because that's what's actually the And here, when you go

creative work done by the programmer.

all the way to the source code, you find not just similarities, you find verbatim, identical portions. the Court looks at. And that's then what And for those

You look at those portions.

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portions, you then apply the tests that are set up by the Court. And what we would like to do is have Dr. Posner explain to you that the similarities between the Lexcel and the Nelcela software, they are not constraints imposed by the programming languages used, and that they are not the result of common programming conventions. And they are not the result of They are not

a third-party source or manual or other source. required by VISA. computer programs.

And they are not standard components of Instead, they are an expression of creative

input by the programmers of Lexcel and thus entitled to copyright protection. And what I expect we will hear from

Nelcela's expert is very similar. But I think this quote from Nimmer is exactly what we have here. "Computer programming is highly creative. And a

court should not be led by defense counsel to believe that complex programs consist only of commonly known techniques and materials strung together without significant originality or skill." That's what you are being told, and it's not correct. At trial, Nelcela's own expert, Jeffrey Pell, testified that the database field names are unique and arbitrary and created by Lexcel, and that the functions, parameters, variable names and comments of the Lexcel software are not dictated by any manual, but are rather unique determinations made by the programmers who created the Lexcel

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source code. Thank you.

And I expect he will tell you that again today.

MR. HARRIS: was just read. here.

Let's start with the Nimmer quote that

On page -- gee, I don't see a page number on

Page 4 of our reply brief, we in fact quoted that "The court

language as well as the following sentence.

likewise should be unpersuaded by plaintiff counsel's focus on the sheer number of the bits and pieces of the two programs without an adequate explanation of those similar components and how they might have come about. Two authorities that I want to bring to your attention in light of the comments that Mr. Halloran has made: First,

with regard to the burden of proof, there is nothing in Apple that says it is the defendant's burden of proof to identify the copyright protected material. The case that appears to me to be most similar to ours is Baystate Technologies, Inc. versus Bentley Systems, Inc., which is cited in both our opening and reply briefs. It's from

the District of Massachusetts, 946 Federal Supplement 1079. In this case, the Court was considering the names of data structures and the organization of files within the data structures. The Court found that even though words and

abbreviations were used in these file names, these were -these file names and the data structures themselves were not protected. The burden was on Baystate, the plaintiff, to

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demonstrate the significance of the copied data structures. And in this court's opinion, Baystate did not meet that burden. Now, of course, we have before us the issue of whether the joint parties or Lexcel can meet the burden here. THE COURT: What -- all right. When we talk about

burdens, you're saying you're not sure it's the defendant's burden to raise this issue or to prove protectability? MR. HARRIS: THE COURT: Both. You don't think it was the defendant's

burden to raise this issue? MR. HARRIS: I wish they had. But I think it is the

plaintiff's burden to prove ownership of copyright protected material and infringement of that material ultimately. purposes of this trial -THE COURT: through on this. these systems. And in doing so, because I want to follow But for

They presented copyright registrations for

So it seems like based on that, the burden

would have been on the defendant to challenge the copyrightable material, that it was not copyrightable. happen. And so now, okay, and so I don't know, I wanted to ask both parties who had the burden. It seems to me, logically, Again, that didn't

based on the fact that they had copyright, and they showed ownership and copyright registration, the defendant had a burden to challenge the copyrightability.

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Next, once the defendant does, regardless, apparently, how late in the game, but I'm going to look at this case and the -- and the point that Mr. Halloran made whether or not this was waived, but now that it has, does the burden shift then to the plaintiff to show copyrightability. saying this case stands for. MR. HARRIS: always there. THE COURT: MR. HARRIS: Well, okay. But, the conceptual problem here, No, I'm saying it never shifted. It was That's what you're

Your Honor, between how the joint parties want to argue and how I'm arguing is the joint parties keep coming back to Lexcel -Nelcela claimed they own it. regard to it. Nelcela did all these things with There -- the it And that is the The it that

Well, the "it" is the problem.

is not a Merchant System with 80 file names. extent of the software. That is not the it.

Nelcela owns and that Nelcela copyrighted, as they claim, is much more than 80 file names for a Merchant System. And that's

why we have an issue now as to whether copying those 80 file names will suffice to constitute infringement and indeed whether those 80 file names are themselves copyrightable. The fact that Lexcel or Nelcela went out and got a copyright registration for their software isn't linked to these 80 file names. The Lexcel software consisted of much more. And contrary to

The Nelcela software consisted of much more.

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how Lexcel wants to characterize our argument, we are not denying that Lexcel can own a copyright in software. We are denying that they own a copyright in the 80 file names that they have identified as the only infringement and talking about "it" as it leads to confusion. What we need

to be careful about is, once the plaintiff has identified what constitutes the material infringed, we have to look at that material, we have to analytically dissect it to ascertain, one, whether it is protectable, and, two, what the standard is to determine whether that protection has been infringed. THE COURT: here? MR. HARRIS: Let's talk about the Merchant System. And your -- what are you saying the it is

And the Merchant System, the it is the 84 field names that are identified in trial Exhibit 504. With regard to the Authorization System, it is the lines of code that are identified in trial Exhibit 509. are the its. Those are the things that are alleged to There's Those

constitute copyrightable material that was taken.

probably a great deal of other copyrightable material in Lexcel's software, but there's no allegation that it was taken. The only things taken alleged by Lexcel are identified in Exhibit 504 and 509. And the only obligation that my client

had in my view was to raise the issue, should have raised it sooner in a perfect world, to raise the issue that what the

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jury was being asked to decide, they were not being given the necessary tools to decide. The jury was being asked to decide

who owns something, but they weren't told that the only material that was alleged to be copyrighted and infringed was in these exhibits 504 and 509. Mr. Halloran. THE COURT: Well, I guess I have to take issue with And again, I disagree with

you a little bit here, Mr. Harris, because you said the jury was asked to decide who owned something. Well, they were I don't have the

clearly asked to decide who owned the system.

language of the instruction in front of me or the jury verdict. But they were clearly asked to decide who owned, I think, the Authorization System or code, I'm not sure how it was phrased and the Merchant System code, and that Nelcela did not. So -- and as you identified, it wasn't raised. In

fact, it was never raised and it was agreed upon not only was it not raised, it was agreed upon by the defendants that ownership should be decided first. And then you had Phase I

and Phase II and that in fact that the ownership, if I recall correctly, because it was compelling to me at the time, might potentially resolve all of the other issues. Quite the contrary has happened now, because this issue was raised late in the game. But, it may have been

raised in enough time that I have to deal with it at this point. I think that's really what's happening here. And so I

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guess, though, when you say the jury was asked to decide something, what do you say they did decide? MR. HARRIS: at says: Well, the verdict form that I'm looking

Based on the evidence presented at trial, we, the

jury, find and this, they've checked, that Lexcel, Inc., is the owner of the "Authorization System" at issue in this case. There wasn't -- that implies that there is a system at issue. There was a Nelcela system and there was a Lexcel And the same instruction was given There's a Nelcela system They were not

system with some overlap.

with regard to the Merchant System.

and a Lexcel system with some overlap. instructed what that overlap meant. THE COURT:

And under --

Did the defense ever request an I don't remember.

instruction to that degree? MR. HARRIS: THE COURT: MR. HARRIS:

They tell me they did. Okay. Go ahead.

Under Harper House versus Thomas Nelson,

Inc., which is a 1989 Ninth Circuit case, 889 F.2d 197, the instructions must adequately explain to the jury which material was in fact protectable. the software as a whole. Because the jury just doesn't look at They look at what is protectable to

see if that has been misappropriated. Now, ordinarily, these trials are of both ownership and infringement at the same time. Here's what I think One by

happened is there have been two significant rulings:

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the Court prior to trial in response to motions for summary judgment where you concluded that copying occurred. THE COURT: And the key being in response to the Go ahead.

motions for summary judgment by both sides. MR. HARRIS: with that conclusion. Right. Correct.

And I'm not quibbling

We can assume copying occurred, because

we've cited the cases that said copying alone is not infringement. material. When the jury ruled that Lexcel is the owner of the Authorization System and the Merchant System, I think because they didn't have any other instruction on how to get there, they were concluding that the Lexcel software was written first by Lexcel and so Lexcel owns it. But that does not transfer And it has it to be copying of the protected

ownership of Nelcela's software that wasn't copying the Lexcel software. If Nelcela wrote software that was not a copy of the Lexcel software, Nelcela owns that. And there isn't any

dispute that there's more to both of these systems, at least with regard to Merchant System, than the 80 file names. Now, we will hear for purposes of the analytic dissection, what is the importance of those 80 file names. need to get on to the experts before the day is done. But what I want you to understand from our point of view is we don't deny that we have claimed ownership of the We

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Nelcela software. Nelcela software. software.

We have always claimed ownership of the We don't claim ownership of the Lexcel

We don't deny at this point in these proceedings Because you have found there is.

that there was copying.

We deny that that copying was of copyright protected material, either as shown in Exhibit 504 or as shown in Exhibit 509, and that's what you need to hear the expert testimony about. I don't think our expert is going to say much more than

he has already put in his declarations, but I have him here to rebut the testimony of Mr. Posner. And unless you have any

questions for me, I think we need to get on with that. THE COURT: We do need to get on with that. Let me

ask you this question:

I guess I would like your -- your take

on whether or not we need to answer to what extent the presence of these particular elements, if found to be protectable, significantly alter the software as a whole. MR. HARRIS: I think you need to assess as part of

determining whether there's substantial similarity or virtual identity, you are going to need to decide which criteria to apply. You're going to need to assess the importance of the

software copied, the 504, 509 stuff; you are going to need to assess the importance of that in the context of the Lexcel Merchant and Authorization code systems. cases say. In order to determine the substantiality of the That is what the

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copying, you look at whether the golden nugget, in the words of Altai, has been taken from the plaintiff's software. And in

this case, Lexcel stands in the position of the plaintiff. THE COURT: Okay, thank you. Mr. Halloran, I'll give

you brief -- do you need -- do you want to respond at all? MR. HALLORAN: testify. THE COURT: be sworn. THE COURTROOM DEPUTY CLERK: your name for THE record. THE WITNESS: David Posner, P-o-s-n-e-r. Thank you. Please raise Please state and spell Let's go. Please come forward, sir, and I will just as soon call Dr. Posner to

THE COURTROOM DEPUTY CLERK: your right hand.

(The witness, David Posner, was duly sworn.) THE COURT: I want to make sure that I'm fair to each I had given you all until four,

side with respect to the time.

but this is taking a little bit longer, but these proceedings need to end at 4:30. So I think that's more than enough time

to hear the critical parts from each of the experts and to allow for direct and cross-examination. Just please work So

within that time frame, both of you be respectful of that. basically, you each have half an hour to use as you wish. MR. HALLORAN: THE COURT: Thank you, Your Honor.

Thank you.

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DAVID POSNER DIRECT EXAMINATION BY MR. HALLORAN

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. HALLORAN: Q. Dr. Posner, could you please identify yourself for the DIRECT EXAMINATION DAVID POSNER, called as a witness herein, having been duly sworn, was examined and testified as follows:

Court. A. Q. A. My name is Dr. David Posner. Can you tell us your background, sir? Have a Ph.D. in mathematics from U. C. Berkeley. I got

that in 1977. for two years.

I was a professor at the University of Chicago I was then a professor at San Jose State I, during that time, became

University for five years.

involved in software consulting and eventually left the academic environment and became the head architect for programming languages at a company that was doing geometric modeling. I then went to a company that was doing statistical databases. I was then head of compiler technology at a company And then following that, I went to Oracle

called Lucid.

Corporation where I was a principle member of the technical staff and the -- in the colonel group, of the PL/SQL colonel group at Oracle. So I am an expert in all aspects of computer

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

software design and implementation.

And I'm also an expert in

particular in program language design and implementation and in database design and implementation. I'm currently chief scientist at a company called Encirq. I've been that for eight years which I cofounded. And

the job of our company is to deliver tools to enable database developers -- I mean developers of software applications to imbed database and data management software in their applications. Q. So is it fair to say, sir, that you consider yourself an

expert in computer programming, computer programming languages and computer databases? A. Q. A. Absolutely. Can you tell us what computer source code is? Computer source code is the mechanism, is the language

which a computer programmer uses to instruct the computer what -- what actions to take and what -- and what actions to take in general, and then it will describe in particular the kinds of data that the program will manipulate, how that data is represented, how that data is operated on, and the exact sequence in which those actions are performed. Q. Would you please tell