Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_08-cv-00613/USCOURTS-caed-1_08-cv-00613-1/pdf.json

Nature of Suit Code: 820
Nature of Suit: Copyright
Cause of Action: 28:1446 Petition for Removal

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

XCEL DATA SYSTEMS, INC., a

California corporation,

Plaintiff,

v.

DEREK BEST, an individual, and

DOES 1 through 25, inclusive,

Defendants.

________________________________

DEREK BEST, 

Third-Party

Plaintiff,

v.

MICHAEL MORENO,

Third-Party

Defendant.

 

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1:08-cv-0613 OWW GSA

ORDER AFTER SCHEDULING

CONFERENCE 

I. Date of Scheduling Conference.

September 19, 2008.

II. Appearances Of Counsel.

Klein, DeNatale, Goldner, Cooper, Rosenlieb & Kimball, LLP

by James M. Duncan, Esq., appeared on behalf of Plaintiffs Xcel

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Data Systems, Inc., and Michael Moreno. 

John F. Early, Jr., Esq., appeared on behalf of Defendant

Derek Best. 

III. Summary of Pleadings. 

1. Plaintiff Xcel Data Systems, Inc., has previously

informed the Court that it is presently a suspended corporation. 

The Court has, by previous order, granted Xcel Data Systems,

Inc., until September 30, 2008, to reinstate its corporate status

with the California Secretary of State.

2. On August 19, 2008, Defendant Derek Best filed a

Counter-Claim and Third-Party Complaint, adding Michael Moreno,

an individual, as a Third Party Defendant to this action. 

Michael Moreno has answered and intends to file a counter-claim.

Plaintiff’s Contentions

3. Xcel Data Systems (“Xcel”) contends as follows:

4. In 2001, Michael Moreno (“Moreno”) and Derek Best

(“Best”) incorporated Xcel, which was producing and marketing

computer software known as Xpawn. In March 2002 an agreement was

entered into between Moreno and Xcel on the one hand, and Best on

the other, by which Xcel and Moreno agreed to purchase the Xpawn

software and to acquire Best’s interest in Xcel. The agreement,

entitled the “Software Purchase Agreement” (the “Agreement”), was

primarily drafted by Best, reviewed by Bakersfield Attorney Greg

L. Ferrari and executed by all parties in Bakersfield,

California.

5. Under the terms of the Agreement, Best agreed to sell

to Xcel and Moreno (collectively, the “Purchasers”), among other

things, one hundred percent ownership in the Xpawn software and

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all service contracts for the Xpawn software. The copyright in

Xpawn, and an assignment of the same, was to be held in escrow

with a mutually agreed-upon Third Party for the duration of the

performance of the Agreement. Upon the completion of the

purchasers’ performance, the assignment of the Xpawn software was

to be released to the Purchasers. It was Best’s obligation under

the Agreement to engage a third party escrow agent. Best never

engaged a third party escrow agent. Best also agreed to transfer

and assign to the Purchasers the domain name XPawn.com upon

execution of the Agreement.

6. In consideration for the rights to the software, the

Purchasers agreed to pay the sum of $69,154.30 to Best, which was

payable with an initial payment of $20,000 and the balance

payable with eight percent interest in 48 monthly installments of

$1,200.00. The Purchasers also agreed to pay Best the sum of

$12,500 in payment for an outstanding capital loan, which was

paid at the execution of the Agreement. As further

consideration, the Purchasers agreed to guarantee Best four

hundred hours of contract programming and/or support services

from the date of execution until January 14, 2003, where Best was

to be compensated at a rate of $25.00 per hour. This obligation

was extinguished if Best became unable to and refused to perform

the services. The Purchasers also agreed to pay Best a royalty

of $150.00 per copy of Xpawn which was sold or licensed for a

period of 48 months from the date of execution of the Agreement.

7. Under the Agreement, Best was granted an exclusive

royalty-free license to sell the Xpawn software in the United

Kingdom for a period of forty years and Xcel and Moreno agreed. 

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The Purchasers agreed that they would not distribute, sell,

license, etc., the Xpawn software in the United Kingdom. Best

agreed that for a period of seven years that he would not sell

competing software outside of the United Kingdom for a period of

seven years.

8. Following execution of the Agreement, in performance of

their obligations, the Purchasers made the monthly payments set

forth in the Agreement for a period of approximately twenty-six

months. The Purchasers also paid Best the royalty required under

the terms of the Agreement. In addition, the Purchasers engaged

Best to perform contract programming work.

9. In contrast, Best failed to perform a number of

material obligations under the Agreement. Among these failed

obligations, Best failed to designate a third party escrow agent

to hold the copyright assignment. He failed to transfer the

Xpawn.com domain name thereby compelling the Purchasers to file

an arbitration action under the Uniform Domain Name Dispute

Resolution Policy to compel transfer of the domain name. When

the Purchasers referred contract services to Best, on a number of

occasions, Best stopped working on the projects which made him

unreliable in providing the needed services. Most significantly,

notwithstanding Best’s agreement to transfer all rights in the

Xpawn software to the Purchasers and his agreement to not sell

competing software outside of the United Kingdom, shortly after

executing the Agreement Best continued to market and sell the

Xpawn software in the United States, to create derivative works

in the same. In addition, notwithstanding his agreement to

transfer all service contracts in the Xpawn software to the

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Purchasers, Best provided technical support and custom

programming for a number of Xpawn users.

10. The Purchasers made demand upon Best to cease sales of

the Xpawn software in the United States but Best continued to

sell the exact same software to which, under the terms of the

Agreement he had granted completely to the Purchasers except for

rights in the United Kingdom.

11. In February 2008, based on the claim that the

Purchasers failed to perform under the Agreement, counsel for

Best made demand upon the Purchasers to cease using, selling, and

distributing the Xpawn software and to return all source code,

files, documentation and related items to Best. Xcel thereafter

filed a complaint for declaratory relief in the Kern County

Superior Court. Best thereafter removed this matter to this

Court.

12. Xcel contends that Best materially breached the

Agreement by the activities discussed above. Xcel further

contends that it substantially performed its obligations under

the Agreement, and was excused from any non-performance by Best’s

material breach.

13. Xcel seeks a declaration of judgment that the

Purchasers substantially performed their obligations under the

Agreement, that any non-performance was excused by Best’s

material breach of his various obligations under the Agreement,

and that the Purchasers have no further obligations under the

Agreement. Xcel further seeks a declaration of judgment that the

Purchasers are the owners of copyrights, trademarks, and rights

related to the Xpawn software subject to no claim of right by

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Best. Xcel further seeks a recovery of attorney’s fees as

provided for under the Agreement.

Defendant’s Contentions.

14. In 1996 Defendant, Best, decided to create a Pawn shop

computer system for Microsoft Windows, and after great effort it

was ready for use by 1999. He began to sell and support the

program which was called “Xpawn” and obtained a U.S. Copyright on

the Xpawn software.

15. But it was very difficult for Best to work by himself

so he made an arrangement to go into business with Moreno in

Bakersfield, California. They formed a new company named “Xcel

Data Systems, Inc.” Fairly soon, Best became uncomfortable with

the situation there. Moreno’s managerial style was very

disorganized, and he seemed to be always operating in crisis

mode. They argued frequently and the relationship deteriorated. 

Finally, in frustration, Best offered to sell Xpawn to Moreno on

an installment plan, with title passing to him when he completed

all payments due.

16. He agreed instantly, as if he had been expecting and

waiting for such a thing. He retained attorney (Greg Ferrari) to

draw up an agreement. The agreement was not drafted by Best who

is not an attorney and lacked the skill and knowledge to write

such a document.

17. The parties signed the contract at Ferrari’s office. 

Best spent two or three days giving Moreno all passwords,

usernames, source code, customer lists, contact names, website

codes and scripts, etc. There were some loose ends which were

inevitable because Moreno wanted Best to leave fairly quickly. 

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Among the “loose ends” was the transfer of the Xpawn domain name. 

We simply could not find anyone who could tell us authoritatively

how to do that. We agreed that when Moreno acquired the

necessary documents he would send them to me and I would sign

them. The documents were finally sent to me by attorney James

Duncan many years later, only because of the fact that the domain

name was apparently about to expire and so once again Moreno was

reacting to a crisis. 

18. The contract had numerous terms and conditions, but

essentially provided that the Plaintiff was to pay the Defendant

for the Xpawn Software, some additional support services, and for

various other items. The Plaintiff was to pay most of the

consideration in installments extending over a 48 month term. 

The contract also required the Plaintiff to pay the Defendant a

royalty of $150.00 per copy for every copy of Xpawn sold by the

Plaintiff over a 48 month period of time. The contract also

included non-compete provisions that prohibited the Defendant

from providing support to the Plaintiff’s customers or from

selling them any software without the Plaintiff’s approval.

19. In addition, the contract included a security

agreement, which stated that the ownership of Xpawn Software and

the other subjects of the contract automatically reverted to the

Defendant upon the Plaintiff’s failure to pay any amount due

under the agreement.

20. Certain amounts were paid under the agreement, however,

the Plaintiff is in default and still owes a substantial number

of installments, the royalties called for in the contract, an

amount for additional support and programming, and the

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Defendant’s attorney’s fees.

21. The Plaintiff breached the contract by failing to pay

the Defendant. The Plaintiff also breached the contract by

failing to fulfill other terms of the agreement. Upon failure of

the Plaintiff to perform the contract, ownership of the software

automatically reverted back to the Defendant. The non-compete

provisions in the contract are overbroad and oppressive and

should be struck from the contract. The Defendant should be

permitted to provide support to the users of Xpawn software

without any interference from the Plaintiff.

22. The Defendant is seeking damages and compensation for

legal fees as provided for in the contract. The Defendant is

seeking damages for the Plaintiff’s violation of the Defendant’s

copyright in the software. The Defendant is also seeking to

restrain the Plaintiff from selling or distributing the software. 

IV. Orders Re Amendments To Pleadings.

1. Amendments required by Plaintiff: Once its corporate

status has been reinstated, Xcel anticipates that amendment of

its complaint will be necessary. 

2. Amendments required by Defendant: the Defendant may

seek to amend the Counterclaim and the Third-Party Complaint

based on the answers filed by the Plaintiff and the Third-Party

Defendant or other facts that may become known through discovery. 

The Defendant’s attorney is reviewing all of the documents filed

thus far in the action and may make certain other amendments

based on the review. 

3. The parties agree that any amendments shall be

accomplished by stipulation and shall be filed on or before

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October 20, 2008.

V. Factual Summary.

A. Admitted Facts Which Are Deemed Proven Without Further

Proceedings. 

1. The Agreement was executed in Bakersfield,

California, by Best and Moreno, individually and on behalf of

Xcel in March 2002. 

2. At the execution of the Agreement, a payment of

$32,500 was paid to Best.

3. Xcel has continued to market and distribute the

Xpawn software in the United States.

4. Best has obtained a copyright registration in the

United States for the Xpawn software.

5. No assignment of the Xpawn software has ever been

deposited into a third-party escrow.

B. Contested Facts.

1. Whether the Agreement was substantially prepared

by Best.

2. Whether Best received any of the monthly payments

due under the Agreement.

3. Whether Best received any of the royalty payments

due under the Agreement.

4. Whether Best ever served a notice of default on

Purchaser.

5. Whether, after execution of the Agreement, Best

was marketing, distributing, and selling forms of the Xpawn

software outside of the United Kingdom before serving any notice

of default on the Purchasers.

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6. Whether, after execution of the Agreement, Best

was providing programing services to purchasers of the Xpawn

software before serving any notice of default on the Purchasers.

7. Whether the Plaintiff has paid the royalties

provided for in paragraph 1.06 of the agreement in the amount of

50% of all licensing revenues for pawn magic.

8. Whether the Plaintiff distributed all profits or

draws remaining due to the Defendant as of March 31, 2002.

9. Whether the Plaintiff paid the Defendant for the

minimum of 400 hours of programming and support.

10. Whether the Defendant was removed from the notes

and leases of the Plaintiff by March 31, 2002, as required by

paragraph 1.03(k) of the contract.

11. Whether the Plaintiff issued the Defendant 100

shares of Xcel stock.

12. Whether the Plaintiff paid the late payments

required by 3.02(b)(ii).

13. Whether the Plaintiff removed the copyright

designation from the opening screen of the Xpawn Software.

VI. Legal Issues.

A. Uncontested.

1. Jurisdiction exists under 28 U.S.C. § 1331 and the

United States Copyright Act. 

2. The matter of venue is disputed. There is a

motion under submission concerning the proper place for trial. 

3. For supplemental claims under 28 U.S.C. § 1367,

the parties agree that the substantive law of the State of

California provides the rule of decision. 

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B. Contested. 

1. Whether the suspension of Xcel by the California

Secretary of State was a breach of the Agreement. 

2. Whether all interest in the Xpawn software reverts

to Best subject to a provision in the Agreement granting Best a

security interest in the software and the other assets

transferred to the Plaintiff.

3. Whether Best materially breached the Agreement.

4. Whether material breaches of the Agreement by Best

excused the Purchasers from further performance.

5. Whether the Purchasers materially breached the

Agreement.

6. Whether material breaches of the Agreement by the

Purchasers excused Best from further performance.

7. Whether, in view of the equities, reformation of

the Agreement is required.

8. Whether, in view of the equities, rescission of

the Agreement is required.

9. Whether the Plaintiff can prevent the Defendant

from providing support to the users of Xpawn software.

VII. Consent to Magistrate Judge Jurisdiction.

1. The parties have not consented to transfer the 

case to the Magistrate Judge for all purposes, including trial.

VIII. Corporate Identification Statement.

1. Any nongovernmental corporate party to any action in

this court shall file a statement identifying all its parent

corporations and listing any entity that owns 10% or more of the

party's equity securities. A party shall file the statement with

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its initial pleading filed in this court and shall supplement the

statement within a reasonable time of any change in the

information. 

IX. Discovery Plan and Cut-Off Date.

1. The parties have agreed to have the matter referred to

voluntarily dispute resolution. Before commencement of

discovery, the parties shall obtain the form for such consent

from the Courtroom Deputy and discovery will be held in abeyance

pending completion of the voluntary dispute resolution. The

parties are advised to notify the Court once the voluntary

dispute resolution proceedings have concluded, as to whether such

proceedings have been successful. 

2. The parties have agreed to make their initial

disclosures within thirty (30) days following the conclusion of

voluntary dispute resolution proceedings. 

3. If voluntary dispute resolution is unsuccessful, a

scheduling conference shall be held within forty-five (45) days

following the parties’ notification that voluntary dispute

resolution has not succeeded. The Courtroom Deputy shall set the

further scheduling conference in accordance with the parties’

notice. 

 IT IS SO ORDERED.

Dated: September 19, 2008 /s/ Oliver W. Wanger 

emm0d6 UNITED STATES DISTRICT JUDGE

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