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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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(,

1 Michael F. Bailey (#004528)Chad S. Campbell (#012080)2 BROWN & BAIN, P.A.2901 North Central Avenue3 Post Office Box 4004 Phoenix,)vizona 85001-0400(602) 351-80005 Of CounselLaurence R. Hefter6 Christopher P. Isaac7 FINNEGAN, HENDERSON, FARABOW,GARRETT & DUNNER, L.L.P.1300 I Street, N.W.8 Washington, D.C. 20005-33159 (202) 408-4000 Phone(202) 408-4400 Fax

10 Attorneys for Plaintiff

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UNITED STATES DISTRICT COURTDISTRICT OF ARIZONA

15 Axxess Technologies, Inc., a Delaware16 corporation,

No. CIV-99-2251-PHX-RCB

19 Robert E. and Yvonne Almblad, husband andwife; Laser Key II LP, an Illinois limited20 partnership,

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2122

v.Plaintiff,

Defendants.

OPPOSITION TO DEFENDANTS'MOTION FOR LEAVE TO FILECOUNTERCLAIM

23 Introduction24 Axxess recognizes that even a thin motion to amend (or supplement) should be25 granted in ordinary circumstances. As discussed below, however, these circumstances26 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 justifydenial of the motion to amend as a matter oflaw. Jones v. Community RedevelopmentAgency, 733 F.2d 646, 650 (9th Cir. 1984) ("We will not, however, allow 'futileamendments. ' ' ') (citation omitted) The additional discussion of the underlying facts inthis memorandum is not intended to "argue the case," but to show that there truly arespecial circumstances, which Axxess respectfully submits should lead the Court toexercise 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 "afederal procedural question" that "is addressed to the sound discretion of the court" andtherefore may be denied when it would cause injustice).

The FactsA. 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 retaillocations. [12/23/99 Richards Dec!., , 5 (on file)]

Defendant Robert E. Almblad was co-founder of a predecessor company ofAxxess. In 1990, he sold his interest in that predecessor. Since then, Axxess has beensuccessful and Mr. Almblad has repeatedly attempted to insert himself into its businessdealings to extract financial gain. Two previous instances in which he attempted to bepaid more were settled in 1994 and 1997. Those settlements gave Axxess rights ofnegotiation and first refusal with respect to any new key-cutting technology (''New KeyTechnology") thatMr. Almblad or his companies developed between May 1994 andSeptember 7, 2000, together with some rights to Mr. Almblad's key-cutting technologyas ofMay 1994. A copy of the "First Refusal Right" language is attached under Tab A of

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these materials. [Declaration ofDavid 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 ofproposals. 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 becommercially 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 which100% of the outstanding stock ofAxxess 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 ofmaneuvers to draw attention to himself. In

November, he sent Axxess a video tape about what he said was another new keyidentification and cutting machine. The new systemwas not fully automated, but wassaid to be cheaper than the market-tested "robot" version. On November 27, he proposedthat Axxess should buy rights to the new machine for $25 Million (North America rightsonly) or $40 Million (worldwide rights) plus a 16% running royalty. He warned Axxessthat "on Monday, December 6th we plan to send out copies [ofa second, commerciallyproduced video tape advertisement] to just about everybody of any importance to theindustry." Mr. Almblad already had sent a copy of the first video to the chairman ofSunSource, together with a cover letter that proclaimed his new machine to be "arevolution! A revolution that will change the key-cutting industry!" He offered to sell orlicense 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 he2 ha d "tried to keep this technology out o f y ou r w ay until after your closing," bu t 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 this6 will become clear to all parties." "Presently you have my co-operation and good7 intentions. Bu t 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

8 E]9

10E. First Refusal Right: Disagreement.

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parties disagreed about the requirements o f the First Refusal Right that Mr. Almblad hadsold to Axxess in settlement o f the earlier cases. Th e agreement provides:

(i) Start o f the Process. With respect to any portion o f theNew Ke y Technology, Robert will make a one-time requestfor an offer from Axxess prior to licensing or selling anyportion ofthe Ne w Ke y Technology to any other parties thanAlmblad Parties.(ii) Disclosure o f Ne w Ke y Technology. Upon making eachsuch request, Robert will make the applicable ,Portion o f theNe w Ke y Technology available to Axxess subject to [aconfidentiality agreement]. Robert reserves the right, at hiselection, to delay making the request for an offer andwithhold information about the Ne w Ke y Technology untilPatent Applications on the applicable Ne w Ke y Technologyhave 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 periodwould begin to ru n without a sufficient disclosure to permit intelligent evaluation of Ne wKe y Technology by Axxess, an d whether Mr. Almblad was permitted to offer the Ne wKe y Technology for sale or license to other third parties before the Phase 1 negotiatingperiod 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 unilaterally3 issued a press release that appeared to have come jointly from Laser Key, Axxess and4 SunSource. The press release announced that Laser Key's new digital imaging software5 had successfully completed field tests conducted by Axxess, and that Axxess agreed that6 its current technology was obsolete. Mr. Almblad quoted himself: "Right now we [Laser7 Key and Axxess] are discussing the best method of replacing these older Axxess8 machines. Both Axxess and the stores that have seen the Laser Key machine agree that9 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 to11 such major Axxess customers as WalMart. [Verified Complaint, ~ ~ 8-12 (on file)] If12 believed, a more damaging announcement to a merger partner during pre-closing "due13 diligence" could scarcely be imagined.14 In response, Axxess filed this action on December 23, 1999. The first four counts15 of the Verified Complaint related to the press release. Axxess sought a temporary16 restraining order to require retraction and correction of the press release and to prohibit17 further false and misleading press releases. Mr. Almbald immediately agreed to entry of18 a preliminary injunction granting the relief that Axxess requested. [Stipulated19 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 judgment22 about the rights and obligations of the parties under the First Refusal Right. Upon23 stipulating to the preliminary injunction, Mr. Almblad's attorney suggested that the24 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 to26 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 for3 the purpose of starting the process, agreed not to promote the new system elsewhere4 during the initial thirty day negotiation period and further agreed to make the new5 machine available for analysis in Laser Key's Illinois offices. [2/25/00 Richards Decl., 116 5, Tab F]7 The next item ofbusiness should have been a confidentiality agreement acceptable8 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 agreed11 disclosure at Laser Key's offices. Axxess provided it. Next, he asked for an up-front12 financial guarantee from Axxess based on an "assumption" that the technology would be13 good and the cost to produce it would be low. Axxess declined that request. By the time14 Axxess had responded to each new twist, the original thirty days had nearly expired, there15 was no confidentiality agreement in place, and the agreed disclosure of the newmachine16 in Illinois had not been made. Accordingly, Axxess exercised its right to extend the17 Phase 1 negotiation period for an additional sixty days (assuming it had begun at all, with18 no meaningful disclosure of any New Key Technology). [2/25/00 Richards Decl., ~ 6,19 Tabs G, H, I and J]20 H. AnotherMerger Announcement.21 On February 9, 2000, SunSource issued another press release about the proposed22 merger. That press release disclosed that the purchase price had been adjusted downward23 and that a closing was expected soon. Defendants promptly filed this motion to add three24 $100,000,000 counterclaims. Again, it would be difficult to come up with a maneuver25 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 Discussion4 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 Key6 agreed to negotiate exclusively with Axxess for some period (specifically, for thirty days7 from January 11), but complains (a) that Axxess thereafter refused to commence8 negotiations, and (b) that Axxess is "utilizing the current litigation to prevent Laser Key9 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" legal12 theories to the same alleged set of facts.13 The proposed counterclaims are baseless.14 (1) Axxess has a constitutional right to seekjudicial relief15 The only thing Axxess has done in litigation with respect to its First Refusal Right16 is ask for a declaratory judgment to settle a disagreement about the parties' rights and17 obligations. "Defendants admit that a present dispute exists regarding the rights of the18 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 subjective20 intent ofAxxess in petitioning the government to resolve the dispute is irrelevant,21 because the conduct is privileged. Professional Real Estate Investors, Inc. v. Columbia22 Pictures Industries, Inc., 508 U.S. 49, 60 (1993) ("Only if challenged litigation is23 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 commence26 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 has2 been made. Defendants apparently allege that Axxess is wrong, and that it is unlawful3 for Axxess to insist that it is right.4 Significantly, the proposed counterclaims do not allege that Axxess has made any5 unlawful threats or false statements to defendants, or that Axxess has engaged in any6 conduct at all with respect to any third party, particularly Ace Hardware (with whom7 Axxess has had no contact). [2/25/00 Richards Dec!., ~ 8]8 Instead, the alleged Axxess misdeeds consist either of talking to Mr. Almblad9 (taking positions about the First Refusal Right with which he disagrees) or ofnot talking

10 to him ("refusing to commence negotiations or even acknowledge a deadline.") But no11 matter who is correct about the First Refusal Right, neither party has the slightest12 obligation to waive its rights or any ability to interfere improperly with third party13 relationships simply by talking or not talking to the proposed plaintiff.14 If there is no exclusivity obligation during Phase 1, Laser Key andMr. Almblad15 may offer New Key Technology to third parties. Alternatively, they may agree not to do16 so, as they admit they did in this case. If, as Axxess contends, there is an exclusivity17 requirement, they could still follow the same course, but they may be liable to Axxess for18 damages and be subject to other legal remedies for breach of contract.19 Ifno disclosure ofNewKey Technology was required under the First Refusal20 Right, or if defendants already made an adequate disclosure to start the agreed Phase 121 negotiation period, the fact that Axxess disagrees has no effect on defendants rights. If22 Phase 1 has expired, defendants may offer their technology for sale elsewhere. Ifnot,23 they do so at their peril, but because ofwhat they agreed, not because ofwhat Axxess24 says or does not say. Where parties disagree about their rights under a contract, they may25 say so (as Axxess has done) and they may seek a judicial determination of the issue (as26 Axxess has done).

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1 Axxess denies Defendants' allegations ofbad faith and wrongful intent, but those2 allegations are beside the point as a matter oflaw. Exercising agreed contract rights and3 talking about what those rights are do not add up to breachesof contract, breaches of the4 covenant of good faith and fair dealing or the tortof intentional interference, no matter5 what Defendantsmay speculate about the intent with which those things have been done.6 Ulan v. Lucas, 18 Ariz. App. 129, 132,500 P.2d914,916 (1972) ("The doing of a lawful7 thing in a lawful way is not tinctured ormade less lawful by elsewhere describing it as8 the product of derogatory motives on the partofthe doer.") (citation omitted).9 B. The Proposed Counterclaims Are Being Asserted In Bad Faith.

10 Particularly where a proposed amendment is unmeritorious, evidence that the11 proponent is acting inbad faith in asserting the claim justifies denial ofleave to amend.12 Schlacter-Jones v. General Telephone, 936 F.2d 435,443 (9th Cir. 1991) ("The presence13 of such factors counsels against granting leave to amend." The Court's listof factors14 included bad faith motive by the proponent, futility because oflack ofmerit and15 prejudice to the party opposing the amendment);Hughes Aircraft Co. v. National16 Semiconductor Corp., 857 F. Supp. 691, 701 (N.D. Cal. 1994) (bad faith and17 questionable merits justify denial ofmotion to amend).18 These claims, each for an eye-catching $100,000,000 damages number are based19 on an alleged delay in negotiations that extended for at mostone day beyond the20 moratorium to which defendants agreed. That numberin those circumstances suggests21 that something improper is going on here. Defendants' motives are further revealed by22 Mr. Almblad's prior attempts to divert merger proceeds to himself, his threat that23 "cooperation and good intentions" were about to "fade away," his outrageous December24 16 press release and the timing of this motion immediately after a second public25 announcement of delicate negotiations to close a major securities transaction.26

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1 Conclusion2 Defendants' motion to file a supplemental counterclaim should be denied.3 Dated: February 25,2000.4 BROWN & BAIN, P.A.56789

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OF COUNSELLaurence R. HefterChristopher P. IsaacFINNEGAN, HENDERSON, FARABOW,GARRETT & DUNNER, L.L.P.1300 I Street, N.W.Washington, D.C. 20005-3315(202) 408-4000 Phone(202) 408-4400 FaxCopy of the foregoing mailedFebruary 25, 2000, to:Ray K. HarrisFENNEMORE CRAIG3003 North Central AvenueSuite 2600Phoenix, Arizona 85012-2913Michael R. McKenna, Esq.The Law Firm ofMichael R. McKenna500 West Madison Street, Suite 3800Chicago, IL 60661

J h ~ r Q . ) / J- 10 -

By ~ !ai:eyCryw ~Chad S. Campbell2901 North Central AvenuePost Office Box 400Phoenix, Arizona 85001-0400

Attorneys for Plaintiff


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