Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-00365/USCOURTS-azd-2_05-cv-00365-0/pdf.json

Nature of Suit Code: 830
Nature of Suit: Patent
Cause of Action: 35:145 Patent Infringement

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Verve, L.L.C., 

Plaintiff, 

vs.

Hypercom Corp., 

Defendant. 

Hypercom Corp.

Counter-Claimant,

vs.

Verve, L.L.C., Raymond M. Galasso,

Kevin R. Imes, Simon, Galasso & Frantz

P.L.C.

Counter-Defendants. _________________________________

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No. CV-05-0365-PHX-FJM

ORDER

The court has before it Hypercom Corporation's ("Hypercom") motion for summary

judgment (doc. 243), Verve, L.L.C.'s ("Verve") response (doc. 260), and Hypercom's reply

(doc. 274); Verve's motion for summary judgment (doc. 240), Hypercom's response (doc.

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Verve submits each of its pleadings in its name only, notwithstanding the fact that

Hypercom seeks summary judgment against all counter-defendants. Nevertheless, arguments

on behalf of individual counter-defendants are set forth throughout Verve's documents.

Therefore, we construe Verve's pleadings as submitted on behalf of each counter-defendant.

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261), and Verve's reply (doc. 273).1

 We also have before us Gabroy, Rollman & Bossé,

P.C.'s motion to withdraw (doc. 275) and Hypercom's response (doc. 278).

I. Background

Hypercom alleges that Verve, Raymond Galasso, Kevin Imes and the law firm of

Simon, Galasso & Frantz P.L.C. ("SGF Firm") (collectively "counter-defendants") engaged

in a harassment campaign against Hypercom and others by instituting costly, inconvenient,

and groundless patent infringement lawsuits for the sole purpose of extorting "settlements"

of these claims. Verve contends that it is a patent holding company that acquires patent

rights in order to generate revenue from those patents, either through licensing agreements

or infringement litigation. Omron Corporation ("Omron") purported to assign several of its

patents to Verve in exchange for a percentage of the revenue generated by Verve. Raymond

Galasso is the founder and 50% owner of Verve, and is the head of the intellectual property

practice at the SGF Firm. Kevin Imes is a patent agent, registered to practice before the U.S.

Patent and Trademark Office, and a 50% owner of Verve. 

In order to evaluate the cross-motions for summary judgment, we first examine the

parties' extensive litigation history. On September 11, 2003, Verve filed an action in the

Eastern District of Michigan against Hypercom and other unrelated companies, alleging

infringement of U.S. Patent No. 4,678,895 ("895 patent") (the "Michigan action"). In June

2004, one month after Hypercom succeeded in severing and transferring the Michigan action

to the District of Arizona, Verve voluntarily dismissed the action.

On February 4, 2004, Verve filed a second patent infringement complaint against

Hypercom and seven other companies in the Western District of Texas, alleging infringement

of U.S. Patent No. 4,562,341 ("341 patent"). On December 29, 2004, the Texas action was

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Both the Texas and Arizona phases of this action are referred to herein as "the Texas

action."

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transferred to this court and is the case presently before us.2 Hypercom filed its

counterclaims on November 16, 2005, against Verve, Galasso, Imes and the SGF Firm,

alleging (1) malicious prosecution, (2) abuse of process, and (3) violation of 28 U.S.C. §

1927. On December 13, 2005, Verve's claims against Hypercom were dismissed when Verve

failed to comply with our order to retain counsel (doc. 172). All that remains in this case are

Hypercom's counterclaims. 

Verve next filed a complaint with the International Trade Commission ("ITC") in

Washington, D.C., on August 2, 2004, alleging that Hypercom and others had infringed U.S.

Patent No. 5,012,077 ("077 patent") ("ITC action"). The ALJ determined that Verve did not

have standing to independently assert patent rights; concluded that Verve's actions amounted

to bad faith and abuse of process; and issued an order imposing sanctions in the amount of

$1,000,000 against Verve, Galasso, Imes and the SGF Firm payable to the United States

Treasury. The Commission reviewed the sanctions order on appeal and concluded that the

ALJ had improperly applied a bad faith, rather than an objectively unreasonable standard,

and remanded the case to the ALJ for application of the appropriate standard. That action

remains pending.

On August 30, 2004, Verve filed another complaint against Hypercom and others in

the Northern District of California ("California action"), again alleging infringement of the

077 patent. After Hypercom threatened to seek Rule 11 sanctions against Verve, Verve

dismissed the complaint. 

II. Federal Preemption

Verve first contends that Hypercom's state law claims are preempted by federal law.

It asserts that by virtue of 35 U.S.C. § 285, which provides that a "court in exceptional cases

may award reasonable attorney fees to the prevailing party" in patent cases, Congress has

occupied the field, and accordingly state law claims for malicious prosecution and abuse of

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process are preempted. This argument is without merit. In U.S. Aluminum Corp. v. Alumax,

Inc., 831 F.2d 878, 881 (9th Cir. 1987), the court stated that "[w]hile we do not deny that

conflict is possible between state malicious prosecutions laws and federal patent laws, the

policies underlying each are not inherently antithetical. Patents do not create an exemption

from state malicious prosecutions laws." Id. (citing Handgards, Inc. v. Ethicon, Inc., 601

F.2d 986, 998 n.17 (9th Cir. 1979)). See also Hydranautics v. FilmTec Corp., 204 F.3d 880,

886 (9th Cir. 2000) (approving a state law malicious prosecution claim arising from patent

infringement action). Federal law does not preempt Hypercom's state law claims. 

III. Hypercom's State Law Claims

A. Malicious Prosecution

Under Arizona law, a malicious prosecution claim exists where a defendant "(1)

instituted a civil action which was (2) motivated by malice, (3) begun without probable

cause, (4) terminated in plaintiff's favor and (5) damaged plaintiff." Bradshaw v. State Farm

Mut. Auto. Ins. Co., 157 Ariz. 411, 417, 758 P.2d 1313, 1319 (1988). Hypercom's malicious

prosecution claim is based on Verve's allegedly tortious conduct in filing patent infringement

lawsuits in Michigan, Texas, California, and the ITC. 

Hypercom contends that counter-defendants conducted virtually no pre-filing

investigation prior to filing the infringement claims and therefore the actions were instituted

without probable cause. The existence of probable cause is measured by the objective

standard of Rule 11, Fed. R. Civ. P. See Wolfinger v. Cheche, 206 Ariz. 504, 509-10, 80

P.3d 783, 788-89 (Ct. App. 2003). Under Rule 11, a lawyer "must possess a good faith

belief, formed on the basis of a reasonable investigation, that a colorable claim or defense

exists." Id. at 510, 80 P.3d at 789. In the patent litigation context, probable cause requires

a reasonable pre-filing investigation of the accused product in comparison to the patent

claims. See e.g., Judin v. United States, 110 F.3d 780, 784 (Fed. Cir. 1997) (finding a Rule

11 violation where neither patentee nor his attorney compared the accused devices with the

patent claims or otherwise made a reasonable inquiry to determine that the complaint was

well grounded in law and fact). "In bringing a claim of infringement, the patent holder, if

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Although the Commission subsequently remanded the ITC action to the ALJ, it left

undisturbed the ALJ's findings related to the lack of pre-filing investigation, abuse of

process, and bad faith.

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challenged, must be prepared to demonstrate to the court . . . exactly why it believed before

filing the claim that it had a reasonable chance of proving infringement. Failure to do so 

. . . should ordinarily result in . . . sanctions." View Eng'g, Inc. v. Robotic Vision Sys., Inc.,

208 F.3d 981, 986 (Fed. Cir. 2000) (imposing Rule 11 sanctions where patent holder

performed no independent claim construction or written infringement analysis).

Hypercom relies on the testimony of its expert, Laurence Pretty, who concluded, in

part, that (1) counter-defendants filed each action without a reasonable pre-filing

investigation; (2) there was no infringement of any of the patents; (3) counter-defendants

improperly prolonged the ITC action after Hypercom conclusively established that its

terminals did not infringe the 077 patent; (4) Verve lacked probable cause to file the actions

in its own name when Omron retained substantial rights to the patents; (5) Verve's service

of a complaint for infringement of the 341 patent three months after the patent had expired

demonstrated an improper purpose in bringing the action; and (6) Verve's overall actions in

filing multiple lawsuits, in multiple jurisdictions against Hypercom, without any reasonable

explanation, demonstrated an improper purpose.

Hypercom also contends that lack of probable cause is evidenced by the ALJ's

conclusion in the ITC action that "Verve's filing of the complaint in the face of virtually no

pre-filing investigation of Hypercom's accused products demonstrates an abuse of process

and bad faith." ALJ Order No. 48 at 17. Because Verve asserted the same allegations in the

California Action only weeks later, and counter-defendants fail to show any interim

investigation, Hypercom contends that the ALJ's finding of lack of probable cause applies

equally to the California Action.3

 

Hypercom further asserts that the lack of probable cause, bad faith, and malice is

evidenced by counter-defendants' intentional misrepresentation of the relationship between

Verve and Omron during the ITC action. Verve represented that it was "the owner" of the

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Notwithstanding these rather suspect facts, the ALJ declined to sanction counterdefendants based on Verve's erroneous assertions that it was the "owner" of the patents and

had standing to assert the claims. ALJ Order No. 40 at 22. 

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This is a separate and independent reason to accept as true Hypercom's assertion that

counter-defendants failed to perform a pre-filing investigation of these claims and therefore

lacked probable cause. See LRCiv 7.2(i), and Rule 56(e), Fed. R. Civ. P. 

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077 patent, notwithstanding that the Omron-Verve assignment agreement left Omron with

substantial rights in the patents, thereby depriving Verve of standing to sue. Pretty Report

at 23-24. Hypercom alleges that counter-defendants affirmatively concealed from

Hypercom, the ITC, and its own counsel, Dewey Ballantine, L.L.C., the existence of an April

2004 addendum to the assignment agreement, which revealed that Verve lacked standing to

bring the ITC action. Only after Verve and Dewey Ballantine verified in interrogatories that

"Omron did not retain any right, title or interest in the '077 patent," did Verve finally disclose

the April 2004 addendum to Dewey Ballantine. Shortly thereafter, Dewey Ballantine

withdrew from representation of Verve.4

 HSOF ¶¶ 69-72.

In opposition to Hypercom's motion for summary judgment on the malicious

prosecution claim, Verve only discusses its alleged pre-filing investigation of the ITC action.

It fails to discuss what evidence, if any, established that it performed a pre-filing

investigation of the Michigan, Texas or California actions. Verve Response at 4-7.5

 With

respect to the ITC action, Verve relies solely on the testimony of Kevin Imes and SGF

attorney Christopher Walton. In his declaration, Walton broadly stated that he reviewed the

language of the 077 claims and the "product specification literature for each of the accused

products," and "conducted an infringement analysis." VSOF, Ex. E ¶¶ 3, 6. Walton's

declaration, however, fails to identify what literature he reviewed or how this review led to

the infringement determination. He simply states that he reviewed unspecified literature and

made a comparison. This type of vague, conclusory testimony is insufficient to raise a

genuine issue of fact regarding probable cause. 

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Imes testified that he read the claims and specifications of the 077 patent, but he only

compared those specifications to products of another company, not Hypercom. VSOF, Ex.

C at 131-40, 150-52. Imes also refers to "testing" he conducted between May and July of

2004, which consisted of "observing" terminals, including Hypercom models. VSOF, Ex.

D at 58-61. But there is no indication whether these models were the accused products in the

infringement actions; Imes has no record of this testing; and there is no information

whatsoever regarding the test results. 

A further review of the record reveals that Imes never obtained a sample of any

Hypercom product and he was unsure whether he used or observed the use of any Hypercom

product before the Michigan Action was filed. HSOF, Ex. E at 36-39, 58. Although he and

the SGF Firm were "primarily" responsible for the investigation, HSOF, Ex. D at 28-29, he

testified that he did not know what investigation or information formed the basis for filing

the Michigan lawsuit. HSOF, Ex. E at 38, 58-60. Moreover, he had no knowledge of anyone

preparing a comparison of any accused Hypercom product to the 341 patent before the Texas

action was filed, beyond asserting that a comparison "would have been done." Id. at 73-75.

Although Imes testified that he believed that written comparisons were made and that the

SGF Firm would have copies of them, id. at 73-74, no such documents were produced. In

fact, counter-defendants failed to produce any written documentation of any infringement

study conducted prior to filing any of the Hypercom infringement actions. The record is

simply devoid of any evidence supporting Verve's claim that an adequate pre-filing

investigation was conducted in any action. 

We reject counter-defendants' argument that they acted on the advice of counsel

before instituting legal action and therefore probable cause is established as a matter of law.

The only outside counsel involved in any action denied that it conducted any pre-filing

investigation into any matter. HSOF, Ex. G at 2. Furthermore, counter-defendants cannot

simply rely on the representation by the SGF Firm, which is itself a counter-defendant

alleged to have maliciously prosecuted these claims. 

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Based on the undisputed facts, we conclude that counter-defendants fail to raise an

issue of material fact on whether probable cause existed to support the filing of the Michigan,

Texas, California and ITC actions. 

As to the remaining elements of the malicious prosecution claim, there is no dispute

that civil actions were instituted and that they caused damage to Hypercom. Galasso, Imes

and the SGF Firm, as instigators of the litigation, can be held liable even if the actions were

not filed in their names. See Bradshaw, 157 Ariz. at 417, 758 P.2d at 1319.

The element of malice can be proven by showing that the plaintiff filed the action for

an improper purpose, such as "forc[ing] a settlement upon an unwilling opponent." Id. at

418-19, 758 P.2d at 1320-21. Here, malice is established by the counter-defendants' wholly

insufficient pre-filing investigation of the infringement claims; representing Verve as the

proper patent owner knowing Omron held substantial rights in the patents; continuing to

pursue claims in various jurisdictions once it was established that it lacked standing; and the

tactic of filing multiple lawsuits in multiple jurisdictions without a reasonable explanation

for doing so. 

Finally, with respect to the element of favorable termination, because the ITC action

and this court's December 13, 2005 order (doc. 172) are on appeal, there has been no final

judgment in favor of Hypercom, and these actions cannot yet form the basis of a malicious

prosecution claim. See Frey v. Stoneman, 150 Ariz. 106, 109-10, 722 P.2d 274, 277-78

(1986) (stating that "if an appeal is pending, a malicious prosecution action is premature). 

Therefore, based on the foregoing, we grant in part Hypercom's motion for summary

judgment on the malicious prosecution claim as to the Michigan and California actions and

deny the motion as to the ITC and Texas actions. Conversely, we deny Verve's motion

regarding the Michigan and California actions, and grant the motion as to the ITC and Texas

actions without prejudice to Hypercom's right to reassert the claims in another action in the

event of favorable determinations on appeal. 

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We note that, unlike the tort of malicious prosecution, termination of the action in the

claimant's favor is not a requisite element of an abuse of process claim.

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B. Abuse of Process

Abuse of process is established by showing that "the defendant has (1) used a legal

process against the plaintiff; (2) primarily to accomplish a purpose for which the process was

not designed; and, (3) harm has been caused to the plaintiff by such misuse of process."

Nienstedt v. Wetzel, 133 Ariz. 348, 353, 651 P.2d 876, 881 (Ct. App. 1982). Counterdefendant's only argument in opposition to Hypercom's motion for summary judgment is that

an administrative proceeding before the ITC cannot serve as a basis for an abuse of process

claim. Verve's Response at 13-14. "Process" is broadly defined as "encompassing the entire

range of court procedures incident to the litigation process." Nienstedt, 133 Ariz. at 353, 651

P.2d at 881. Therefore, while "process" is broadly defined, it is nevertheless limited to "court

procedures." Id.; accord Competitive Techs. v. Fijitsu Ltd., 286 F. Supp. 2d 1118, 1155

(N.D. Cal. 2003) (holding that the "process that is alleged to have been abused must be a

judicial process, and courts have rejected claims based on administrative proceedings").

Accordingly, we conclude that counter-defendants' actions related to the ITC administrative

proceedings cannot form the basis of an abuse of process claim.

Because counter-defendants do not otherwise challenge the abuse of process claim,

and based on our previous rulings, we conclude that counter-defendants's litigation scheme

amounted to an abuse of process and accordingly grant Hypercom's motion for summary

judgment with respect to the Michigan, Texas,6

 and California actions, but deny the motion

as to the ITC action.

IV. Joint Liability

Hypercom relies on a conspiracy theory to support its state law claims against each

of the counter-defendants. Although there is no civil action for conspiracy, "there is an

action for damages caused by acts committed pursuant to a conspiracy." Estate of Hernandez

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We do not consider Verve's argument, raised for the first time in its reply, that

Galasso and Imes are not proper counter-defendants without first piercing the corporate veil.

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v. Flavio, 187 Ariz. 506, 510, 930 P.2d 1309, 1313 (1997). The purpose of a civil conspiracy

is not to impose additional liability, but to identify joint tortfeasors. See Pankratz v. Willis,

155 Ariz. 8, 12, 744 P.2d 1182, 1186 (Ct. App. 1987). "When a civil wrong occurs as the

result of concerted action, the participants in the common plan are equally liable."

McElhanon, Jr. v. Hing, 151 Ariz. 386, 392, 728 P.2d 256, 262 (Ct. App. 1985).

Here, Imes identified litigation targets, verified complaints, and, along with the SGF

Firm, was "primarily" responsible for conducting the pre-filing investigation. Galasso signed

the complaint and entered an appearance as counsel for Verve in the Michigan action. He

was manager of Verve, the head of the intellectual property practice at the SGF Firm, and

had control over the several SGF lawyers assigned to work on the cases. 

Verve argues that a conspiracy claim cannot stand because Galasso and Imes were

working as agents for Verve and an entity cannot conspire with itself. However, the

undisputed evidence shows that Verve, Galasso, Imes, and the SGF Firm also worked in

concert with Omron in furtherance of the litigation harassment scheme. Pursuant to a written

agreement, Omron assigned patent rights to Verve and was entitled to receive a substantial

percentage of the revenue resulting from the litigation. HSSOF ¶ 4. Omron was aware of

and consented to the counter-defendants' plan to sue Hypercom. Id. ¶ 5. Omron employees

and attorneys provided substantial assistance in preparation for the ITC proceeding, including

traveling to Japan to prepare a potential witness, and contacting a Japanese lawyer to provide

assistance to Verve. Id. ¶¶ 16-23. Omron insisted that Verve be the named party in the

infringement lawsuits so that Omron would have "zero risk." Id. at 24. This is clear and

convincing evidence of an agreement between counter-defendants and Omron.7 Wells Fargo

Bank v. Arizona Laborers, Teamsters & Cement Masons, 201 Ariz. 474, 499, 38 P.3d 12, 37

(2002) (stating that claim for civil conspiracy must include an actual agreement, proven by

clear and convincing evidence). The uncontroverted evidence establishes that each counterCase 2:05-cv-00365-FJM Document 287 Filed 08/18/06 Page 10 of 13
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defendant participated in the underlying scheme, rendering each a joint tortfeasor liable for

damages resulting from both the malicious prosecution and the abuse of process claims. 

V. 28 U.S.C. § 1927

As an alternative theory of recovery, Hypercom alleges in count III that the counterdefendants violated 28 U.S.C. § 1927, which provides that "[a]ny attorney or other person

admitted to conduct cases in any court of the United States . . . who so multiplies the

proceedings in any case unreasonably and vexatiously may be required by the court to satisfy

personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such

conduct." We have previously dismissed Verve from this claim because it is not an "attorney

or other person admitted to conduct cases in any court." (doc. 172). For the same reason,

we also conclude that Imes is not subject to § 1927 liability. 

Counter-defendants now argue that Galasso and the SGF Firm should also be

dismissed from this claim. The SGF Firm is not, strictly speaking, an "attorney or otherwise

admitted to conduct cases." Although there may be other avenues of authority to sanction

a law firm, see Lockary v. Kayfetz, 974 F.2d 1166, 1170 (9th Cir. 1992), such authority does

not lie under § 1927. F.T.C. v. Alaska Land Leasing, Inc., 799 F.2d 507, 510 (9th Cir. 1986).

Galasso, on the other hand, is an attorney and has participated as an attorney at various stages

of the relevant proceedings. As owner and managing partner of Verve, as well as head of the

intellectual property practice at the SGF Firm, he was directly involved in unreasonably and

vexatiously multiplying the proceedings against Hypercom. 

Galasso's only argument in opposition to Hypercom's motion for summary judgment

is that § 1927 is intended to apply only to the case presently before the court and therefore

cannot be used to impose upon him fees and costs incurred in the Michigan, ITC or

California actions. Galasso cites no legal authority to support this contention and Hypercom

does not respond. Although we have found no case directly addressing the issue, those

courts finding § 1927 liability based on the filing of multiple lawsuits have imposed

sanctions in the form of costs and attorneys' fees associated with the instant action only. See,

e.g., Stone v. Baum, 409 F. Supp. 2d 1164, 1172 (D. Ariz. 2005); Pentagen Tech. Int'l Ltd.

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v. United States, 172 F. Supp. 2d 464, 474 (S.D.N.Y. 2001). We follow this lead and

conclude that sanctions against Galasso in the form of attorneys' fees and costs incurred in

defending the Texas action are warranted. 

VI. Motion to Withdraw

Counter-defendants' lawyers filed a motion to withdraw as counsel citing a conflict

among the counter-defendants (doc. 275). Substitute counsel entered appearances on behalf

of Verve, Galasso and the SGF firm, but stated that they were not appearing for Imes. We

grant the motion to withdraw with respect to Verve, Galasso and the SGF firm because

substitute counsel has confirmed, in accordance with LRCiv 83.3(b)(3), that they will be

prepared for trial on October 12, 2006. We deny the motion with respect to Imes, however,

because there is no indication that he can obtain substitute counsel or will otherwise be

prepared for trial. Under ER 1.16(c), Arizona Rules of Professional Conduct, a lawyer shall

continue to represent a client, notwithstanding good cause for termination of the

representation, upon order of the court. Here, we are too close to trial to permit withdrawal

of counsel that will leave a party unrepresented. In any event, having ruled on the issues of

liability, it is doubtful whether any conflict of interest remains in this case. 

VII. Conclusion

Based on the foregoing, IT IS ORDERED GRANTING Hypercom's motion for

summary judgment on count I against all counter-defendants with respect to the Michigan

and California actions, and DENYING the motion as to the Texas and ITC actions (doc.

243). 

IT IS FURTHER ORDERED GRANTING Hypercom's motion for summary

judgment on count II against all counter-defendants as to the Texas, Michigan and California

actions and DENYING the motion as to the ITC action (doc. 243).

IT IS FURTHER ORDERED GRANTING Hypercom's motion for summary

judgment on Count III against Galasso only and DENYING the motion as to Imes and the

SGF firm (doc. 243). 

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IT IS FURTHER ORDERED GRANTING Verve's motion to dismiss count II as

to the Texas and ITC actions without prejudice, and GRANTING Verve's motion on count

III of the complaint with respect to Imes and the SGF Firm (doc. 240). 

IT IS FURTHER ORDERED DENYING Verve's motion for summary judgment

on all other counts (doc. 240). 

IT IS FURTHER ORDERED GRANTING IN PART AND DENYING IN PART

counsels' motion to withdraw (doc. 275).

DATED this 16th day of August, 2006.

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