05-16 Doc #30-3 AxxessDoc

EXHIBIT C
Case: 1:13-cv-01297 Document #: 30-3 Filed: 05/16/13 Page 1 of 11 PageID #:124

..r (,
1 Michael F. Bailey (#004528)
Chad S. Campbell (#012080)
2 BROWN & BAIN, P.A.
2901 North Central Avenue
3 Post Office Box 400
4
Phoenix,)vizona 85001-0400
(602) 351-8000
5 Of Counsel
Laurence R. Hefter
6 Christopher P. Isaac
7 FINNEGAN, HENDERSON, FARABOW,
GARRETT & DUNNER, L.L.P.
1300 I Street, N.W.
8 Washington, D.C. 20005-3315
9 (202) 408-4000 Phone
(202) 408-4400 Fax
10
Attorneys for Plaintiff
FilED LODGED
RECcl'vi:::l.r _ COpy
K. FES 2 5 2000
i ~ u $ biSfRI9f COLIRT
DISTRICT OF ARiZoNA'
BY ' '_. ,2- DEPU"C(
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UNITED STATES DISTRICT COURT
DISTRICT OF ARIZONA
15
Axxess Technologies, Inc., a Delaware
16 corporation,
No. CIV-99-2251-PHX-RCB
19 Robert E. and Yvonne Almblad, husband and
wife; Laser Key II LP, an Illinois limited
20 partnership,
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v.
Plaintiff,
Defendants.
OPPOSITION TO DEFENDANTS'
MOTION FOR LEAVE TO FILE
COUNTERCLAIM
23 Introduction
24 Axxess recognizes that even a thin motion to amend (or supplement) should be
25 granted in ordinary circumstances. As discussed below, however, these circumstances
26 are extraordinary and because the proposed counterclaims are baseless, this motion
/'
IS
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should be denied. The fact that the claims are legally baseless would be enough to justify
denial of the motion to amend as a matter oflaw. Jones v. Community Redevelopment
Agency, 733 F.2d 646, 650 (9th Cir. 1984) ("We will not, however, allow 'futile
amendments. ''') (citation omitted) The additional discussion of the underlying facts in
this memorandum is not intended to "argue the case," but to show that there truly are
special circumstances, which Axxess respectfully submits should lead the Court to
exercise its discretion against permitting these claims. Weeks v. Atlantic National Ins.
Co., 370 F.2d 264,271-272 & n. 23 (9th Cir. 1964) (a motion to supplement presents "a
federal procedural question" that "is addressed to the sound discretion of the court" and
therefore may be denied when it would cause injustice).
The Facts
A. The Parties.
Axxess is the country's leading manufacturer and marketer of key identification
and duplication systems. Its customers include mass market retailers such as WalMart,
K-Mart and Home Depot. It has systems installed at approximately 10,000 retail
locations. [12/23/99 Richards Dec!., , 5 (on file)]
Defendant Robert E. Almblad was co-founder of a predecessor company of
Axxess. In 1990, he sold his interest in that predecessor. Since then, Axxess has been
successful and Mr. Almblad has repeatedly attempted to insert himself into its business
dealings to extract financial gain. Two previous instances in which he attempted to be
paid more were settled in 1994 and 1997. Those settlements gave Axxess rights of
negotiation and first refusal with respect to any new key-cutting technology (''New Key
Technology") that Mr. Almblad or his companies developed between May 1994 and
September 7, 2000, together with some rights to Mr. Almblad's key-cutting technology
as of May 1994. A copy of the "First Refusal Right" language is attached under Tab A of
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these materials. [Declaration of David M. Richards, ~ 2, Tab A (submitted herewith)
("2/25/00 Richards Decl.")
B. Mr. Almblad's Proposals in 1999.
During 1999, Mr. Almblad approached Axxess with a series of proposals. In
September, for example, he proposed a joint marketing test of two fully automated
"robot" key making machines. The tests were conducted, but the machines proved to be
commercially impractical. [12/23/99 Richards Decl., ~ ~ 11-12]
C. The Merger Announcement.
On October 28, 1999, Axxess and a publicly traded NYSE-listed company,
SunSource, Inc., announced a definitive merger agreement between them, under which
100% of the outstanding stock of Axxess would be acquired for a total of$125 million.
The press release disclosed that the transaction was expected to close in December 1999.
[2/25/00 Richards Dec!., ~ 3, Tab B]
D. Mr. Almblad's Reaction to the Merger Announcement.
Mr. Almblad began a series of maneuvers to draw attention to himself. In
November, he sent Axxess a video tape about what he said was another new key
identification and cutting machine. The new system was not fully automated, but was
said to be cheaper than the market-tested "robot" version. On November 27, he proposed
that Axxess should buy rights to the new machine for $25 Million (North America rights
only) or $40 Million (worldwide rights) plus a 16% running royalty. He warned Axxess
that "on Monday, December 6th we plan to send out copies [of a second, commercially
produced video tape advertisement] to just about everybody of any importance to the
industry." Mr. Almblad already had sent a copy of the first video to the chairman of
SunSource, together with a cover letter that proclaimed his new machine to be "a
revolution! A revolution that will change the key-cutting industry!" He offered to sell or
license the technology to SunSource. [2/25/00 Richards Decl., ~ 3, Tabs C and D]
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1 On December 8 Mr. Almblad sent an e-mail message to Axxess. He said that he
2 had "tried to keep this technology out of your way until after your closing," but added,
3 "Axxess should acquire us, or our machine, before we gain any more momentum, i.e.
4 financing, distribution agreements, and so on. [ ~ A x x e s s ' largest shareholder] can take
"
5 less than they planned [from the merger] and make a deal with us. Sooner or later this
6 will become clear to all parties." "Presently you have my co-operation and good
7 intentions. But this co-operation can fade away ...." [2/25/00 Richards Dec!., ~ 3, Tab
When Mr. Almblad stated his intention to flood the market with video tapes, the
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E. First Refusal Right: Disagreement.
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parties disagreed about the requirements of the First Refusal Right that Mr. Almblad had
sold to Axxess in settlement of the earlier cases. The agreement provides:
(i) Start of the Process. With respect to any portion of the
New Key Technology, Robert will make a one-time request
for an offer from Axxess prior to licensing or selling any
portion ofthe New Key Technology to any other parties than
Almblad Parties.
(ii) Disclosure of New Key Technology. Upon making each
such request, Robert will make the applicable ,Portion of the
New Key Technology available to Axxess subject to [a
confidentiality agreement]. Robert reserves the right, at his
election, to delay making the request for an offer and
withhold information about the New Key Technology until
Patent Applications on the applicable New Key Technology
have been made.
[Tab A (Addendum to Settlement and Compromise Agreement, ~ 21 (a)(i) and (ii))
(emphasis supplied)] The parties disagreed about whether the initial thirty day period
would begin to run without a sufficient disclosure to permit intelligent evaluation of New
Key Technology by Axxess, and whether Mr. Almblad was permitted to offer the New
Key Technology for sale or license to other third parties before the Phase 1 negotiating
period concluded. [2/25/00 Richards Dec!., ~ 4]
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1 F. Laser Key's Press Release.
2 On December 16, 1999, Mr. Almblad's "cooperation" faded away. He unilaterally
3 issued a press release that appeared to have come jointly from Laser Key, Axxess and
4 SunSource. The press release announced that Laser Key's new digital imaging software
5 had successfully completed field tests conducted by Axxess, and that Axxess agreed that
6 its current technology was obsolete. Mr. Almblad quoted himself: "Right now we [Laser
7 Key and Axxess] are discussing the best method of replacing these older Axxess
8 machines. Both Axxess and the stores that have seen the Laser Key machine agree that
9 they want to replace these old machines with the new digital imaging base machines as
10 soon as possible." Predictably, the press release made its way both to SunSource and to
11 such major Axxess customers as WalMart. [Verified Complaint, ~ ~ 8-12 (on file)] If
12 believed, a more damaging announcement to a merger partner during pre-closing "due
13 diligence" could scarcely be imagined.
14 In response, Axxess filed this action on December 23, 1999. The first four counts
15 ofthe Verified Complaint related to the press release. Axxess sought a temporary
16 restraining order to require retraction and correction of the press release and to prohibit
17 further false and misleading press releases. Mr. Almbald immediately agreed to entry of
18 a preliminary injunction granting the relief that Axxess requested. [Stipulated
19 Preliminary Injunction, January 5, 2000 (on file)]
20 G. First Refusal Right: Cooperation.
21 In the fifth count of the Verified Complaint, Axxess sought a declaratory judgment
22 about the rights and obligations of the parties under the First Refusal Right. Upon
23 stipulating to the preliminary injunction, Mr. Almblad's attorney suggested that the
24 parties should focus their attention on those rights. In connection with the Rule 26(f)
25 conference on January 7, 1999, Mr. Almblad's attorney said that Laser Key wished to
26 avoid litigation. He proposed that the parties should simply proceed under Axxess'
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1 interpretation of the First Refusal Right. Although defendants did not agree that Axxess'
2 interpretation was correct, they sent a letter outlining Mr. Almblad's wants and needs for
3 the purpose of starting the process, agreed not to promote the new system elsewhere
4 during the initial thirty day negotiation period and further agreed to make the new
5 machine available for analysis in Laser Key's Illinois offices. [2/25/00 Richards Decl., 11
6 5, Tab F]
7 The next item of business should have been a confidentiality agreement acceptable
8 to Mr. Almblad. Instead he asked for a written assurance of good faith by Axxess.
9 Axxess provided it. He also asked for a copy of the existing confidentiality agreement
10 between the parties, presumably to determine whether he found it adequate for the agreed
11 disclosure at Laser Key's offices. Axxess provided it. Next, he asked for an up-front
12 financial guarantee from Axxess based on an "assumption" that the technology would be
13 good and the cost to produce it would be low. Axxess declined that request. By the time
14 Axxess had responded to each new twist, the original thirty days had nearly expired, there
15 was no confidentiality agreement in place, and the agreed disclosure of the new machine
16 in Illinois had not been made. Accordingly, Axxess exercised its right to extend the
17 Phase 1 negotiation period for an additional sixty days (assuming it had begun at all, with
18 no meaningful disclosure of any New Key Technology). [2/25/00 Richards Decl., ~ 6,
19 Tabs G, H, I and J]
20 H. Another Merger Announcement.
21 On February 9, 2000, SunSource issued another press release about the proposed
22 merger. That press release disclosed that the purchase price had been adjusted downward
23 and that a closing was expected soon. Defendants promptly filed this motion to add three
24 $100,000,000 counterclaims. Again, it would be difficult to come up with a maneuver
25 better calculated to disrupt the near-term closing of a substantial securities transaction.
26 Axxess immediately declared an end to Phase 1 negotiations for New Key Technology,
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1 leaving defendants free to pursue whatever other opportunities they think they may have.
2 [2/25/00 Richards Decl., ~ 7, Tabs K and L]
3 Discussion
4 A. The Counterclaims are Meritless, so it Would be Futile to Permit Them.
5 Count I of the proposed counterclaim (a contract claim) admits that Laser Key
6 agreed to negotiate exclusively with Axxess for some period (specifically, for thirty days
7 from January 11), but complains (a) that Axxess thereafter refused to commence
8 negotiations, and (b) that Axxess is "utilizing the current litigation to prevent Laser Key
9 from negotiating with third parties." Supposedly, refusing to commence negotiations and
10 maintaining this action have cost Mr. Almblad $100,000,000 over the past month.
11 Counts II andIII add "good faith and fair dealing" and "intentional interference" legal
12 theories to the same alleged set of facts.
13 The proposed counterclaims are baseless.
14 (1) Axxess has a constitutional right to seekjudicial relief
15 The only thing Axxess has done in litigation with respect to its First Refusal Right
16 is ask for a declaratory judgment to settle a disagreement about the parties' rights and
17 obligations. "Defendants admit that a present dispute exists regarding the rights of the
18 parties under the Technology Agreement." [Answer, ~ 16] As a matter oflaw, therefore,
19 Axxess' request for a declaratory judgment is not meritless, and the alleged subjective
20 intent ofAxxess in petitioning the government to resolve the dispute is irrelevant,
21 because the conduct is privileged. Professional Real Estate Investors, Inc. v. Columbia
22 Pictures Industries, Inc., 508 U.S. 49, 60 (1993) ("Only if challenged litigation is
23 objectively meritless maya court examine the litigant's subjective intent.")
24 (2) The law does not require Axxess to agree with defendants.
25 Axxess has taken the positions (a) that Phase 1 negotiations do not commence
26 until defendants have made a meaningful disclosure of the New Key Technology for
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1 which they solicit an offer, and (b) that no meaningful disclosure of that technology has
2 been made. Defendants apparently allege that Axxess is wrong, and that it is unlawful
3 for Axxess to insist that it is right.
4 Significantly, the proposed counterclaims do not allege that Axxess has made any
5 unlawful threats or false statements to defendants, or that Axxess has engaged in any
6 conduct at all with respect to any third party, particularly Ace Hardware (with whom
7 Axxess has had no contact). [2/25/00 Richards Dec!., ~ 8]
8 Instead, the alleged Axxess misdeeds consist either of talking to Mr. Almblad
9 (taking positions about the First Refusal Right with which he disagrees) or of not talking
10 to him ("refusing to commence negotiations or even acknowledge a deadline.") But no
11 matter who is correct about the First Refusal Right, neither party has the slightest
12 obligation to waive its rights or any ability to interfere improperly with third party
13 relationships simply by talking or not talking to the proposed plaintiff.
14 Ifthere is no exclusivity obligation during Phase 1, Laser Key and Mr. Almblad
15 may offer New Key Technology to third parties. Alternatively, they may agree not to do
16 so, as they admit they did in this case. If, as Axxess contends, there is an exclusivity
17 requirement, they could still follow the same course, but they may be liable to Axxess for
18 damages and be subject to other legal remedies for breach of contract.
19 Ifno disclosure of New Key Technology was required under the First Refusal
20 Right, or if defendants already made an adequate disclosure to start the agreed Phase 1
21 negotiation period, the fact that Axxess disagrees has no effect on defendants rights. If
22 Phase 1 has expired, defendants may offer their technology for sale elsewhere. If not,
23 they do so at their peril, but because of what they agreed, not because of what Axxess
24 says or does not say. Where parties disagree about their rights under a contract, they may
25 say so (as Axxess has done) and they may seek a judicial determination of the issue (as
26 Axxess has done).
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1 Axxess denies Defendants' allegations of bad faith and wrongful intent, but those
2 allegations are beside the point as a matter oflaw. Exercising agreed contract rights and
3 talking about what those rights are do not add up to breaches of contract, breaches of the
4 covenant of good faith and fair dealing or the tort of intentional interference, no matter
5 what Defendants may speculate about the intent with which those things have been done.
6 Ulan v. Lucas, 18 Ariz. App. 129, 132,500 P.2d 914,916 (1972) ("The doing of a lawful
7 thing in a lawful way is not tinctured or made less lawful by elsewhere describing it as
8 the product of derogatory motives on the part ofthe doer.") (citation omitted).
9 B. The Proposed Counterclaims Are Being Asserted In Bad Faith.
10 Particularly where a proposed amendment is unmeritorious, evidence that the
11 proponent is acting in bad faith in asserting the claimjustifies denial ofleave to amend.
12 Schlacter-Jones v. General Telephone, 936 F.2d 435,443 (9th Cir. 1991) ("The presence
13 of such factors counsels against granting leave to amend." The Court's list of factors
14 included bad faith motive by the proponent, futility because oflack of merit and
15 prejudice to the party opposing the amendment); Hughes Aircraft Co. v. National
16 Semiconductor Corp., 857 F. Supp. 691, 701 (N.D. Cal. 1994) (bad faith and
17 questionable merits justify denial of motion to amend).
18 These claims, each for an eye-catching $100,000,000 damages number are based
19 on an alleged delay in negotiations that extended for at most one day beyond the
20 moratorium to which defendants agreed. That number in those circumstances suggests
21 that something improper is going on here. Defendants' motives are further revealed by
22 Mr. Almblad's prior attempts to divert merger proceeds to himself, his threat that
23 "cooperation and good intentions" were about to "fade away," his outrageous December
24 16 press release and the timing of this motion immediately after a second public
25 announcement of delicate negotiations to close a major securities transaction.
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1 Conclusion
2 Defendants' motion to file a supplemental counterclaim should be denied.
3 Dated: February 25,2000.
4 BROWN & BAIN, P.A.
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OF COUNSEL
Laurence R. Hefter
Christopher P. Isaac
FINNEGAN, HENDERSON, FARABOW,
GARRETT & DUNNER, L.L.P.
1300 I Street, N.W.
Washington, D.C. 20005-3315
(202) 408-4000 Phone
(202) 408-4400 Fax
Copy of the foregoing mailed
February 25, 2000, to:
Ray K. Harris
FENNEMORE CRAIG
Suite 2600
Phoenix, Arizona 85012-2913
Michael R. McKenna, Esq.
The Law Firm of Michael R. McKenna
500 West Madison Street, Suite 3800
Chicago, IL 60661

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By !ai:eyCryw
Chad S. Campbell
Post Office Box 400
Phoenix, Arizona 85001-0400
Attorneys for Plaintiff

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EXHIBIT C

Case: 1:13-cv-01297 Document #: 30-3 Filed: 05/16/13 Page 1 of 11 PageID #:124

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