Free Reply - District Court of Arizona - Arizona

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FENNEMORE CRAIG, P.C. Ray K. Harris (No. 007408) 3003 North Central Avenue Suite 2600 Phoenix, AZ 85012-2913 Telephone: (602) 916-5000 Email: [email protected] Attorneys for the Nelcela Defendants

UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA Merchant Transaction Systems, Inc., Plaintiff, v. Nelcela, Inc., an Arizona corporation; Len Campagna, an Arizona resident; Alec Dollarhide, an Arizona resident; Ebocom, Inc., a Delaware corporation; POST Integrations, Inc., an Illinois Corp., Defendants. And Related Counterclaims, CrossClaims and Third-Party Claims. The Joint Parties' Response concedes: 1. 2. 3. A three year statute of limitations applies, 17 USC 507(b); Lexcel was aware of potential infringement by June 4, 2001; Lexcel did not move to intervene until four years later on June 15, 2005. No. CV-02-1954-PHX-MHM REPLY REGARDING STATUTE OF LIMITATIONS

Nelcela contends that Lexcel is barred from claiming ownership of the Nelcela software, or infringement by Nelcela, unless Lexcel can show both: (1) direct

infringement within three years prior to the motion to intervene; and (2) conduct by
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Nelcela that either constitutes direct infringement or gives rise to vicarious liability. I. The Scope of the Pending Motion The Joint Parties argue Lexcel's failure to pursue an infringement claim does not deprive Lexcel of ownership of its software. Ownership of the Lexcel software is not in dispute and the Joint Parties' focus on the Lexcel software obscures the real issue: ownership of the Nelcela software. Lexcel seeks a judgment that Lexcel owns the Nelcela software. The statute of limitations bars Lexcel's assertion of ownership of the Nelcela software more than 3 years after Nelcela put Lexcel on notice of its claim of sole ownership of the Nelcela software. Zuill v. Shanahan, 80 F.3d 1366, 1369 (9th Cir. 1996), cert. denied, 519 U.S. 1090 (1997) ("claims of co-ownership, as distinct from claims of infringement, accrue when plain and express repudiation of co-ownership is communicated to the claimant, and are barred three years from the time of repudiation.") Nelcela consistently claimed the software it copyrighted was its own and denied Lexcel had any rights in the software. This repudiation caused Lexcel's ownership claim to accrue. A claim for declaratory judgment or any relief ancillary thereto had to be commenced within 3 years. Id., at 1371. See Merchant v. Levy, 92 F3d 51, 56 (2nd Cir. 1996), cert. denied, 519 U.S. 1108 (1997) (declaration of copyright ownership rights "and any remedies that would flow from such a declaration" were time barred); Barksdale v. Robinson, 211 FRD 240, 244 (SDNY 2002) (defendant made "an express assertion of sole authorship or ownership" and declaratory judgment of ownership more than 3 years later was time barred); Dewan v. Blue Man Group LP, 73 F.Supp.2d 382 (SDNY 1999) (same); Fort Knox Music, Inc. v. Baptiste, 47 F.Supp.2d 481 (SDNY 1999), app. dismissed on jurisdiction grounds, 257 F.3d 108 (2nd Cir. 2001) (sole ownership claim time barred). Nor is Lexcel entitled to a finding of infringement, the other relief Lexcel has sought. That relief is also time barred. Even though Lexcel owns the Lexcel software, it
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can not assert infringement based on action by Nelcela outside the 3 year statute of limitations. Whether Lexcel can prevent others from copying the Lexcel software is not at issue and characterizing Nelcela's argument in those terms is itself "ridiculous." Lexcel must prove Nelcela engaged in "infringing acts within the limitation period." II. Nelcela is Not Liable for Direct Infringement A. No Direct Infringement by Nelcela Occurred After August 2001

Lexcel attributes direct infringement to conduct by Electronic Payment Exchange (EPX) and its successor InterCept Payment Solutions. Lexcel contends that loading the Nelcela software into random access memory constitutes copying. MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511, 519 (9th Cir. 1993). Peak did not address the statute of limitations. The issue in Peak was whether loading into RAM constituted direct infringement.1 Assuming, for purposes of this motion only, that loading into RAM occurred after June 13, 2002,2 then the direct infringer was EPX or InterCept, not Nelcela. Lexcel also contends that as compensation for use of the Nelcela software "Dollarhide was employed by EPX at an enormous salary and given a substantial amount of EPX stock." Response at 5.3 When EPX was acquired by InterCept "Dollarhide became employed by Intercept." Id. at 6. When the assets of InterCept were subsequently acquired by a company called Phoenix Payment Systems, Dollarhide became employed by Phoenix Payment Systems. Id. at 7. With regard to EPX and its successors, Lexcel contends that Dollarhide was employed by EPX and its successors to modify the Nelcela
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Lexcel does not offer any evidence of when such "loading" occurred in this case. Lexcel also assumes that the Nelcela software included infringing software. The terminal driver software is not infringing, but for purposes of this motion only it can be assumed the 2001 license included infringing software. 3 Lexcel also contends EPX paid rent "to Campagna for use of the Nelcela facilities." Id. No compensation to Nelcela is claimed and the reasonableness of the rent is not questioned.
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software and oversee its implementation and use. Motion at 5 (EPX), 6 (InterCept). Since Nelcela ceased doing business in 2001, there is no evidence that Alec Dollarhide was employed by Nelcela. Nor is there evidence that Nelcela received any benefit from Mr. Dollarhide's employment by third persons or from use of the Nelcela software by third persons. Lexcel offers no evidence to support its assertion that Nelcela distributed, modified, copied and oversaw use of the software by EPX (Motion at 6), and Intercept (Motion at 6-7). To the contrary, Lexcel asserts that Alec Dollarhide modified and oversaw use of the Nelcela software while acting as an employee of third parties. Lexcel's own argument is inconsistent with the exercise of any control by Nelcela. B. Lexcel Can Not Rely on Earlier Conduct by Nelcela

EPX obtained the Nelcela software in 2001. Thus distribution to EPX is outside the statute of limitations period. Continuing use by successors to EPX based on Nelcela's distribution outside the statutory period cannot give rise to liability for Nelcela. Bridgeport Music, Inc. v. Diamond Time Ltd., 371 F.3d 883, 890-91 (6th Cir. 2004) (`plaintiffs may not "piggy back" [Defendant's] conduct from outside the period onto the alleged direct infringement of another within the period"); Accord Makedwde Publishing Co. v. Johnson, 37 F3d 180, 182 (5th Cir. 1994) ("Jones is only liable for his acts of infringement committed within three years prior to Plaintiffs' lawsuit."); Iverson v. Grant, 946 F. Supp. 1404, 1415-16 (DSD 1996), aff'd, 133 F.3d 922 (8th Cir. 1998). The Joint Parties cite no contrary authority. III. Nelcela is Not Liable for Indirect Infringement A. Contributory Infringement

"One infringes contributorily by intentionally inducing or encouraging direct infringement...." Metro-Goldwyn­Mayer Studios Inc. v Grokster Ltd., 545 U.S. 913, 930, 125 S.Ct. 2764 (2005). Lexcel must provide evidence that Nelcela "with knowledge of the infringing activity, induces, causes or materially contributes to the infringement
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conduct of another." Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2nd Cir. 1971); Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 264 (9th Cir. 1996). Nelcela filed suit against InterCept to prevent use of the Nelcela software. Nelcela cannot be deemed to have materially contributed to use of the software when it was actively litigating to block access. Cf A&M Records, Inc v. Napster Inc., 239 F.3d 1004, 1021-22 (9th Cir. 2001) (knowledge infringing music files were available and assistance in accessing such files while failing to block access to infringing music constitutes a material contribution to infringement). To prevent liability as a contributory infringer the

defendant must "take simple measures to prevent further damage." Perfect 10, Inc. v. Amazon, Inc., 487 F.3d 701, 729 (9th Cir. 2007). "Contributory liability is based on the defendant's failure to stop its own actions which facilitate third party infringement." Id., 487 F.3d at 731. Here, Nelcela itself took no action that contributed to infringement within the statute of limitations period and took extraordinary measures (by filing suit against InterCept) to prevent infringement. B. Vicarious Infringement

One "infringes vicariously by profiting from direct infringement by declining to exercise a right to stop or limit it." Grokster, 545 U.S. at 930. The defendant must have the "right and ability to supervise the direct infringer." Id. 545 U.S. at 930 n. 9. Not only did Nelcela not derive any profit from the third party conduct, the need for litigation demonstrates that Nelcela had no control of the direct infringer. "[V]icarious liability is based on the defendant's failure to cause a third party to stop its directly infringing activities." Perfect 10, 487 F.3d at 731. Nelcela's actions in supplying software to EXP were in 2001 and outside the statute of limitations period. Thereafter, Nelcela lacked the ability to stop or limit the directly infringing conduct of third parties and lacks the control necessary for vicarious liability. Id.
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IV.

The Statute of Limitations was Not Tolled after June 2001 First, Lexcel refers to assurances made in 1999 that are not material to the delay in

filing suit after June 2001. Second, Lexcel's offer of a license in 2003 confirms that Lexcel understood Nelcela was asserting rights adverse to Lexcel and Lexcel made a tactical decision not to pursue its rights. Nelcela's good faith response that it had legally copyrighted its own work does not excuse Lexcel's failure to enforce its rights within the statutory time period. To the contrary, Nelcela's consistent repudiation of Lexcel's rights triggered Lexcel's obligation to assert its ownership interest. More than Nelcela's denial of liability is required to toll the statute; otherwise, the statute of limitations would be rendered ineffectual. Indeed, "A plaintiff who

unreasonably relies on the reassurances of a wrongdoer has not satisfied th[e] obligation of due diligence." Weber v. Geffen Records, Inc., 63 F. Supp. 2d 458, 466 (SDNY 1999) (quoting Netzer v. Continuity Graphic Associates, Inc., 963 F. Supp. 1308, 1316 (SDNY 1997)). Moreover, "relying on the legal opinion of another's attorney is unreasonable when both parties are aware adverse interests are being pursued." Kregos v. Associated Press, 3 F.3d 656, 661 (2d Cir. 1993), cert. denied, 510 U.S. 1112 (1994). Lexcel has not shown it delayed suit based on reasonable reliance on any assurances from Nelcela. Again, Lexcel cites no relevant copyright cases. Lexcel bases its estoppel argument on a single Arizona case, which states: A defendant will be estopped from asserting the defense of the statute of limitations if by its conduct the defendant induces the plaintiff to forego litigation by leading plaintiff to believe a settlement or adjustment of the claim will be effected without the necessity of bringing suit. Roer v. Buckeye Irrigation Co., 167 Ariz. 545, 809 P.2d 970, 972 (App. 1990). Lexcel cites no conduct within the scope of this case. Nelcela asserted its rights and Lexcel was not permitted to delay for over 4 years before contesting Nelcela's rights. ...
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V.

The Post and MTSI Claims The claims by MTSI and Post for fraud against Nelcela have been addressed in

Nelcela's response to their pending motion for summary judgment. MTSI and Post do not have standing to assert Lexcel's copyright ownership (especially where Lexcel's assertion of those rights is time barred). Lexcel does not "own" the Nelcela software. Nelcela owns at least those portions of the Nelcela software created by Nelcela. Ownership of the original portions of a derivative work (even if unauthorized) is not conveyed to a nonauthor by any provision of the Copyright Act. Conclusion Entry of a judgment conveying ownership of the Nelcela software to Lexcel is barred by the statute of limitations and unauthorized by the Copyright Act. DATED this 6th day of November, 2007. FENNEMORE CRAIG, P.C. By s/Ray K. Harris Ray K. Harris Attorneys for Nelcela Defendants CERTIFICATE OF SERVICE I hereby certify that on November 6, 2007, I electronically transmitted the attached document to the Clerk Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/EMF registrants:
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Nicholas J DiCarlo [email protected] Local Counsel for Merchant Transaction Systems William Albert McKinnon [email protected] Attorney for Merchant Transaction Systems Peter D Baird [email protected]

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· · ·

Robert H McKirgan [email protected] Richard A Halloran [email protected] Kimberly Anne Demarchi [email protected] Attorneys for POST and Ebocom George Chun Chen [email protected] Attorneys for Lexcel, Inc.

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s/Melody Tolliver

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