Axxess & David Richards sues Robert Almblad

8/3/2019 Axxess & David Richards sues Robert Almblad

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Attorneys for Plaintiff

MS DOCUMENT IS NOT N PROPERFORM ACCORDINOTO FEDERAL AND/OITOCAL RULES PRACTI CESANDIS s u n = TOREFERENCE;Michael F. Bailey (#00451Joel W. Nomldn (#011939)Chad S. Campbell (#012080)

BROWN & BArN, P.A.2901 North Central AvenuePost Office Box 400Phoenix, Arizona 85001-0400(602) 351-8000

V.

Of CounselLaurence R. HefterChristopher P. IsaacFINNEGAN, HENDERSON, FARABOW,GARRETT & DUNNER,1300 I Street, N.W.Washington, D.C. 20005-3315(202) 408-4000 Phone(202) 408-4400 Fax

AXXESS TECHNOLOGIES. INC.. a Delcorporation,

UNITED STATES DISTRICT COURT

Plaintiff,

Defendant,

DISTRICT OF ARIZONA

ROBERT E. and YVONNE ALMBLAD,husband and wife; and LASER KEY II LP, anIllinois limited partnership,

VERIFIED COMPLAINT

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4. FrLZD L O D G E DRECCIVE0 C O P YDEC 2 3 1999

LE u M 01111-Nio-rC O U R T

DIVAICT OF AftIZONAIBY t OEPI ty

'99 225 1 PHXRCB

For its Complaint, Plaintiff ("Axxess"), alleges:THE PARTIES

1. P l a i n t i f f is a Delaware corporation with its principal place of business inTempe, Arizona.


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1 2 . Defendants Robert E. and Yvonne Almblad are citizens of Illinois. Robert2 Almblad was one of the founders of a predecessor of Axxess. Yvonne Almblad is named3 a s a defendant because, upon information and belief, Robert Ahnblad holds his assets in4 h er name to shield them from creditors.5 3 . U p o n information and belief, defendant Laser Key II LP ("Laser Key") is a6 l imited partnership organized and existing under the laws of Illinois, with its principal7 place of business in Libertyville, Illinois. Upon information and belief, no partner or8 l imited partner of Laser Key is a citizen of Arizona.9 J U R I S D I C T I O N

10 4 . Defendants have caused events to occur in the District of Arizona out of11 w hich this action arises, have agreed to submit to the jurisdiction of this Court and have12 conducted business activities in this District sufficient to confer in personam jurisdiction13 o n this Court.14 5 . T h i s Court has subject matter jurisdiction pursuant to 15 U.S.C. 112115 an d 1125(a) and pursuant to 28 U.S.C. 1331 and 1367. Upon information and belief,16 plaintiffs and defendants also are citizens of different states. The sum or amount in17 controversy in this case exceeds the sum or value of $75,000, exclusive of interest and18 costs. Accordingly, the Court also has jurisdiction under 28 U.S.C. 1332.19 F A C T U A L ALLEGATIONS20 6 . Defendants claim to have developed some "revolutionary" key-duplication21 technology (the "New Technology"). Plaintiff has had a limited opportunity to review22 some aspects of that technology, and conducted a limited field test of two vending23 machines incorporating some of the New Technology for the purpose of determining24 whether it presented a commercially viable business opportunity. Certain agreements25 exist between plaintiff and defendants, pursuant to which plaintiff enjoys rights of first26 negotiation and first refusal with respect to the sale or license of the New Technology.


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7. T h e field tests were a near-term commercial failure, although Axxessbelieves that the New Technology may have some long-term commercial value.

8. O n or about December 16, 1999, defendants issued a press release (the"Press Release"), in which defendants published a series of false and misleadingstatements about Axxess and its product line. A copy of the Press Release, as it wastransmitted to Axxess from one of the major customers of Axxess (Wal-Mart), is attachedas Exhibit A to this complaint.

9. M o s t significantly, the Press Release deceptively appeared to be a jointpress release issued together by defendants and plaintiff (and a third company,SunSource), which greatly multiplied the damaging effect of the statements that weremade about Axxess and its products.

10. T h e Press Release made false and disparaging statements about theproducts and business plans of AJOCCSS, including the following:

A. Axxess ' technology was said (apparently by Axxess itself) to beobsolete and inferior to defendants' New Technology,

B. Ax x es s was said to be planning to replace its installed base of key-duplication equipment with defendants' New Technology as soon as possible, andwas said to be engaged in discussions with defendants about how to do that.

C. T h e Press Release said that existing technology, such as Axxesstechnology, exhibits a 30-50% failure rate (i.e., it produces keys that do not work),although defendants are well aware that the failure rate for keys made with Axxessequipment is less than 5%.

D. F i e l d tests of defendants' software were said to have been completedby Axxess at two Fred Meyer Stores in a vending machine model, where as the fieldtests related to commercial acceptance of the vending machine, not to analysis andverification of defendants' software.

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1 E . T h e Press Release stated that the New Technology, having passed2 successfu l field trials, was about to go into volume production. Instead, upon3 i n form ati on and belief, defendants have abandoned the product that actually was field4 t e s t e d because the test was commercially unsuccessful. Upon information and belief,5 Defen d an ts have neither the right nor a near-term plan to go into volume production6 f o r sale or license of the New Technology.7 1 1 . Axxess and SunSource, Inc. ("SunSource"), recently announced plans for a8 merger of the two companies (the "Proposed, A c q u i s i t i o n " ) ,u n d e rw h i c hS u n S o u r c ew i l l

acquire Axxess. The Proposed Acquisition presently is undergoing regulatory review anddue diligence investigation, as defendants are well aware.

12. Knowing of the announced acquisition by SunSource and, uponinformation and belief, for the purpose of disrupting the proposed acquisition, defendantsfirst offered (in violation of their agreement with Axxess) to sell or license to Sun Sourcethe New Technology, and thereafter wrote the Press Release in a way that assuredSunSource would receive it.13. Defendant Robert Almblad proposed in writing to an Axxess officer that:

Axxess should acquire us [Laser Key], or our machine, beforewe gain any more momentum, i.e. financing, distributionagreements, and so on.Warburg [the largest Axxess shareholder] can take less thanthey planned [from the proposed merger with SunSource] andmake a deal with us. Sooner or later this will become clear toall parties.

Upon information and belief, Defendant's conduct toward Sun Source has been an attemptto interfere with the Proposed Acquisition for the purpose of implementing that plan.

14. Defendants know of Axxess' relationship with certain key customers,including Wal-Mart. For the purpose of improperly interfering with those relationships,Defendants sent by e-mail a copy of the Press Release to Wal-Mart, and perhaps to


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others. Wal-Mart has stated to kocess that it was misled into believing that Axxess wasa party to the Press Release, that Axxess had tested defendants' technology in its currentconfiguration and that Robert Almblad was "some sort of a partner" of Axxess.

15. Axxess has approximately 10,000 installations of its own patented keyduplication technology. Its customers include substantial retail institutions as such Wal-Mart, K-Mart and Home Depot. Axxess has invested approximately $30 million inplacing and maintaining its patented key duplication technology in retail sites.

16. Axxess' relationship with its customers and its proposed merger partnerdepends in large part upon the trust and goodwill that exists between those customers andAxxess. The false statements in the Press Release already have damaged kocess'relationship with at least one major customer, and threaten its relationship with others andwith its merger partner. Moreover, the false statements in the Press Release threatenirreparable injury to AXXCSS by disrupting the sale of its current technology to newcustomers.

17. Unless defendants are restrained from continuing their false publicitycampaign and are required to correct the false statements they already have made,plaintiff will suffer irreparable injury.

18. I n addition, plaintiff has been damaged by defendants' false publicitycampaign in an amount to be proven at trial.

19. P l ai nti ff and defendant Robert E. Almblad are parties to an agreement (the"Technology Agreement") relating to new key-duplication technology developed by Mr.Almblad. Pursuant to that agreement, plaintiff has a right of first negotiation and a rightof first refusal with respect to such technology, which Mr. Almblad must honor before hesells or licenses such technology or any portion of it.

20. A present dispute exists about the rights of the parties under theTechnology Agreement. Mr. Almblad has asserted a right to sell product incorporating


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technology subject to the Technology Agreement without regard to his obligations toplaintiff under the Technology Agreement. He has offered to sell or license technologysubject to the agreement to at least SunSource and Wal-Mart, in derogation of plaintiff'srights under the Technology Agreement.

CLAMS FOR RELIEFCOUNT I

21. Defendants' statements in the Press Release misrepresented defendants'affiliation, connection or association with Axxess and the origin, sponsorship or approvalby Axxess of defendants' commercial actions, in violation of 43(a) of the TrademarkAct of 1946 (the "Lanham Act"), as amended, 15 U.S.C. 1125(a).

22. Defendants' misrepresentations in the Press Release about AXXeSS andAxxess' technology constitute false and misleading advertising, because theymisrepresent the nature, characteristics and qualities of Axxess' products, all in violationof 43(a) of the Lanham Act.

23. Axxess has suffered, and will continue to suffer, irreparable injury as aresult of defendants' false and misleading statements in violation of the Lanham Act.COUNT II

24. Defendants' conduct in connection with the Press Release constitutes unfaircompetition in Arizona and is a violation of the common law of Arizona, by reason ofwhich Axxess has suffered, and will continue to suffer, irreparable injury.

25. Defendants' conduct has been willful, wanton and was undertaken with anevil mind.

COUNT III26. Defendants' false and misleading press campaign denigrated the quality of

Axxess' key duplication technology and misrepresented Axxess' business plans. Thefalse statements in the Press Release were made with intent to cause harm to Axxess'

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business. Defendants made those statements knowing them to be false and with recklessdisregard for the truth.

27. Defendants' false publicity campaign constitutes product disparagementand trade libel in violation of the common law of Arizona, by reason of which Axxesshas suffered, and will continue to suffer, irreparable injury.

COUNT IV28. Defendants made the false representations in, and thereafter publicized, the

Press Release with full knowledge of Axxess' business relationships with, among othercompanies, Wal-Mart, K-Mart, Home Depot and SunSource, Inc. Defendants' motivewas to disrupt those existing relationships and to interfere with Axxess' prospectivebusiness advantage with potential customers of Axxess' products.

29. Defendants' conduct constitutes improper interference with both currentand prospective business relationships of Axxess in violation of the common law ofArizona, by reason of which Axxess has suffered, and will continue to suffer, irreparableinjury. COUNT V

30. P lainti ff seeks a declaratory judgment against defendants Robert E.Almblad and Laser Key II LP (which is an entity controlled by Mr. Almblad within themeaning of the Technology Agreement) declaring the rights of the parties under theTechnology Agreement.

NOW THEREFORE, Axxess prays for relief as follows:A. Temporary, preliminary and permanent injunctive relief requiring

defendants to:1) C e a s e publication and distribution of the Press Release and of any

other false and misleading publicity or statements about plaintiff or plaintiff'sproducts;

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2) Del ete, remove and destroy any copies of the Press Release that areavailable for view by the public, whether they are available on the intemet orotherwise;

3) Di scl ose forthwith to the Court and to plaintiff the identity of eachand every person, web site, e-mail address and other location to which the PressRelease or any similar misleading communication, has been sent, together withsuch information as defendants have about the further distribution by third partiesof the Press Release or similar communication; and

4) P rom ptly correct the false and misleading statements made in thePress Release by transmitting in the same manner in which the Press Release wasoriginally transmitted, a copy of the temporary restraining order.B. F o r money judgment in favor of Axxess sufficient to compensate Axxess

for the damages it has suffered and will suffer as a result of defendants' misconduct; in anamount sufficient to punish the defendants for their misconduct; and in an amountsufficient to reimburse plaintiff for its costs and attorneys' fees incurred in this case;C. F o r a declaratory judgment stating the rights and responsibilities of plaintiffand defendants Robert E. Almblad and Laser Key II LP under the TechnologyAgreement.

D. F o r such other and further relief as is just and proper,


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Dated: December'tl, 1 9 9 9 .

OF COUNSELLaurence R. HefterChristopher P. IsaacFINNEGAN, HENDERSON, FARABOW,GARRETT & DINNER, L.L.P.1300 I Street, NM.Washington, D.C. 20005-3315(202) 408-4000 Phone(202) 408-4400 Fax

9

Respectfully submittedBROWN & BAIN, P.A.

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ByMichael F. BaiTyJoel W. NomkinChad S. Campbell2901 North Central AvenuePost Office Box 400Phoenix, Arizona 85001-0400



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States:

which is the plaintiff in this action;2. T h a t he has read the foregoing Verified Complaint; and3. T h a t the facts alleged in the complaint are true; except that with respect to

facts alleged upon information and belief, he has received information that they are trueand he believes them to be true.Executed this ,1 2 , d a yo fD e c em b e r,1 99 9,inM ar ic op aC ou nt y,A ri zo na .

71816_1David M. Richards

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VERIFICATION

David M. Richards declares under penalty of perjury under the laws of the United

1. T h a t he is Vice President, Sales and Service, of Axxess Technologies, Inc.,


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ateh 31 4 0 :0 0 E- 1 ;From: J o h n Niznik opnizninwel-mart.comiSent: M o n d a y . December 20, 1999 7:02 AMTo: l k d h a r r i s i S axxesstech.com1: A x x e s sT e c h n o l o-K a r e nH a r r i s

Subject: R A , : Press release

Laser Key Announces New Digital Software

What's up with this?JohnOriginalMessage

IF,1'.00:&q0,1iiii-tA004(0,0sm-

Sent: , Friday, December 17, 1999 6:44 AMTo: Sandy Chapman; Jesus Garcia; Christopher Hynes; Paul Jurczak; ScottNielson; John Niznik: Crister Ringkvist; Crister flag Ringkvist; CristerRingkvist, Janusz Ruszel: Roger Sanders: Paula StudtI Subject: P r e s s release

< h ttLIBERTYVILLE, Ill., Dec. 16 /PRNewswirei -- Laser Key ll LP announcedthatits new Laser Key 2000 digital imaging software has successfully completedfield tests and will begin serial production in the 1Et q u a r t e r o f2 0 0 0 ."Digital Imaging technology is transforming the key duplication industrybymaking possible a key duplication machine that does not really duplicatekeys," said Robert Almblad, President. "Instead, the machine takes adigitalpicture of a customer's key and compares that digital image with originalequipment manufacturers (OEM) specifications, which are stored in themachine's memory, and then reproduces an original key according to thosespecifications with a micro controller and servo motors. No human skillisinvolved. All other machines rely on the skill of an operator to tracecut akey and that is why 30% to 50% of keys don't work. Digital imaging haseliminated the human skill factor in making a key and this technology willreplace existing key cutting machines in the very near future?After testing the machine, Jonathan Taylor, formerly head of TaylorLockCompany said: "Customers can now get their keys cut and have completeconfidence that they will work, first time, every time. Just likecustomershave the confidence that their new TV will work after they take it homefromthe store, so too will their Laser Key work properly. No more look outs,nomore aggravation of returning to the store,"The field tests of the software were completed by AxxeSs Technologiesattwo Fred Myers stores in Tempe, AZ in a vending machine model."We chose Axxess Technology to carry out some of the first field testsbecause I was the original Founder of Axxess in 1985, and because Axxesshas

. 4 r A r,0 . h i.43A.2147 .Z .,

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4.


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successfully placed my older style key cutting machine I invented 10 yearsagoin about 8,000 locations including Wal-Mart, K-Mart and Home Depot,"Almbladsaid. "Right now we are discussing the best method of replacing theseolderAxxess machines. Both Axxess and the stores that have seen the Laser Keymachine agree that they want to replace these old machines with the newdigital imaging based machines as soon as possible."According to a recent PR Newswire release, SunSource (NYSE) has agreedtoacquire Axxess and will be the new owner of Axxess.Laser Key II LP is a leading edge digital imaging R and 0 firm locatedinLibertyville, IL,Axxess Technologies (htto://www.Axxesstech.com4itto://www.axxesstech.com/>) manufactures and distributeshigh-tech and conventional key duplication systems, as well as aninnovative,consumer-operated identification engraving system. Axxess is also aleading manufacturer of letter, numbers and signs, key accessories and emergencykeys.SunSource Inc. is one of the nation's leading providers of value-addedservices and products to retail and industrial markets in North America.ItsIndustrial Services businesses provide parts supply, engineering andrepairservices throughout the U.S., Canada and Mexico. Its Hillman Groupsubsidiaryis a leading provider to hardware outlets of merchandising systems,in-storeservice work and small parts such as fasteners, letters, signs and keys.ItsHarding Glass subsidiary operates the largest chain of full service glassshops, in the U.S.SOURCE Laser Key II LPWeb Site: htt : / /www.A) _p_,t e s s t e c h . c o r n< h t t p : / /w w w . a x x e s s t ec h . c o r n t >PR Newswire Logo (Today's News) (Company NewsOn-Call) (Search) (Feature News) (Automotive) (Energy)< 1-Ap :/ /vmew

(Entertainment) (Flnanciai) (Hispanic) (Latin America) (Sports)

PAGE13


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< t A t A p v 0 . _ . L . 4 , p j L i e w s-e . c o r p fl a . c . , s h t r r i l >( T e c h n o l o g y)

chttoliwww.prnewswire.comitech/index.shtml>(Washington) (MountainNews) < h t t p : / / w w w . p r n e w s w i r etc o m i m o u n t a i n i i n c l e x . s h t m l >( P R NP r o d u c t s&

Services) (Ask PRN) (Links) (PRN Events)

Q1996 -1.99 9P RN e ws w i re .Al lr ig ht sr es er ve d.

Redistribution, retransmission, republication or commercial exploitationof the contents of this site are expressly prohibited without the writtenconsent of PR Newswire.These pages have been optimized for Netscape v.2,0 or later

Kindest personal regards,Robert AlmbladLaser Key II LP, 1840 Industrial Drive, Unit 110Libertyville, IL 60048, Voice 847 816 7786 Ext 14Fax 847 816 0569 E-mail address: almbladqvahoo.com

Do You Yahoo!?Thousands of Stores. Millions of Products. All in one place,Yahool Shopping .

FAGE14


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Michael F. Bailey (#004528)Joel W. Nornkin (#011939)Chad S. Campbell (#012080)BROWN & BAIN, P.A.2901 North Central AvenuePost Office Box 400Phoenix, Arizona 85001-0400(602) 351-8000Of 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 FaxAttorneys for Plaintiff

Axxess Technologies, Inc., a Delawarecorporation,

V.

UNITED STATES DISTRICT COURT

Plaintiff,

Defendant,

DISTRICT OF ARIZONA

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

Preliminary Statement

S--/

No C I V - 9 9 - 2 4 1-- P H X - R C B

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FILED L O D MRECEIVED C O P Y

DEG23 1999FARTifitptIOT fcr A Z

APPLICATION FORTEMPORARY RESTRAININGORDER

Last Friday (December 17, 1999), Axxess Technologies learned that Laser Keyand Robert Almblad are now disseminating to a wide public audience a false andmisleading press release about Axxess, its established product line and its planned


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direction over the next few calendar quarters. [DDR 2 ]1 T h e p r e s sr e l e a s e , fi r s tublished on Thursday (December 16, 1999), falsely impugns the capabilities of existingAxxess products, falsely suggests that Axxess has endorsed products that Laser Keyalleges are in advanced development and falsely asserts a plan by Axxess to replace theexisting product line with the products Laser Key claims are about to enter volumeproduction. [V COMP r 8-10 and Ex. A] The false statements in the press releasealready have reached key Axxess customers and other business affiliates and havedamaged relationships with those parties. [VCOMP 11-12, 14; DDR1111T2-3] Axxessseeks a temporary restraining order to prevent any further dissemination of false andmisleading statements by defendants and to minimize to the extent possible the resultingharm.

In addition to the harm that otherwise would flow from damage to customerrelationships, continued dissemination of defendants' false public statements couldnegatively impact a pending merger of A?ocess with SunSource (now set to close inJanuary 2000). [DDR $ 2] That merger depends in large part on the market value of thetechnology and customer relationships threatened by defendants' false statements.Defendants have expressed and demonstrated an intent to inject themselves into themerger transaction however possible. [VCOMP It$ 11-13] Using false statements toundermine customer confidence in the existing technology is the apparent tactic ofchoice. Defendants' conduct violates * 43(a) of the Lanham Act (in addition to Arizonalaw) and should be enjoined without delay.

Axxess also intends to seek a preliminary injunction to be entered upon theexpiration of the TRO sought in this Application. A motion for immediate leave to

"DDR" refers to the Declaration of David M. Richards In Support of PlaintiffsApplication for Temporary Restraining Order, filed with these papers; "VCOMP" refersto the Verified Complaint in this action.


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conduct limited discovery in support of the preliminary injunction request accompaniesthis Application.

Defendants' counsel was provided with a courtesy copy of this Application andthe accompanying papers before they were filed with the Court.

DiscussionA. Axx ess Is a Recognized Technology Leader in Key DuplicationSystems and Equipment.Through a decade of investment, by the mid 1990s Axxess had become a leading

developer and supplier of systems and machines that automate the tasks of identifyingkey blanks and cutting the blanks to make replacement keys for locks of nearly all typesand sizes. Axxess customers include retailers such as Wal-Mart, K-Mart and HomeDepot, which use Axxess systems and machines to produce and sell replacement keys toshoppers in their stores. Axxess key-duplication equipment is installed at more than10,000 customer locations throughout the United States. [DDR 5 ]

The Axxess key duplication technology is patented. Before Axxess introduced thetechnology, customers had to have replacement or spare keys cut by a locksmith or storeassociate who would use conventional cutting tools. The quality and reliability of keysproduced in that manner is highly dependent upon the skill of the operator. Moreover,the process of identifying the right key "blank" to use to cut a match for an original islabor- and skill-intensive, [DDR1 6] With the Axxess system and equipment, anunskilled sales clerk can identify the proper blank to insert into the Axxess cuttingmachine and with the press of a button can deliver an automated reproduction of thecustomer's keyall within a few moments. [ D D R1I 1 7 ] T h e e r r o rr a t e o nd u p l i c a t i n g

keys with the Axxess technology averages about five percent, well below the error ratefor conventional machines. The low error rate was a significant factor underlying thesuccessful penetration of Axxess into the market. (DIM 8 ]


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Axxess does not sell its technology or its equipment to customers. Instead,customers are authorized to use the system for making keys with equipment that Axxessmanufactures, maintains, and owns. At present, Axxess has more than $30 millioninvested in equipment at the 10,000 plus customer locations that make up the installedbase. [DDR If 9]

B. T h e r e Is No Laser Key Product that Axxess Has Successfully FieldTested Or Endorsed.Contrary to the assertions in defendants' December 16 press release, the review of

Laser Key products by MUMS has been narrow. Almblad approached A)ocess in early1999 with an invitation to review what was described as break-through key-makingtechnology that employed digital imaging to identify the key type and specifications ofthe original for duplication. [DDR11110] At Almblad's urging, Axxess agreed toparticipate in a limited field test of a Laser Key vending machine at two retail stores nearthe Axxess engineering department in Tempe in late Summer to early Fall 1999. Thevending machines were fully automated and robotically-enabled to produce duplicatekeys without any operator assistance or intervention. According to Laser Key, the pointwas to enable key-making machines to be deployed in outlets such as grocery stores,where staffing levels ordinarily do not allow for a machine operator at the key duplicatingstation. [DDR 11]

Although thc concept was interesting, the field tests demonstrated that the vendingmachine was not commercially viable. Indeed, the cost to build one exceeds the cost tomanufacture an Axxess machine by more than a factor of eight. The field trialdemonstrated that the vending machine generated sales well below what would beadequate for a viable business based upon it. After the field tests, Laser Key abandonedthe vending machine idea. [DDR 12 ]


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PRGE1S

On November 28, 1999, Axxess received a videotape from Almblad that depictedwhat Laser Key and Almblad say is a recently developed operator-assisted key-makingmachine that uses imaging software similar to the software in the abandoned vendingmachine model. Axxess has expressed an interest in evaluating the operator-assistedmodel, but Almblad and Laser Key have refused to make a prototype available forevaluation. P D R 13] Axxess has not field tested the new model, does not have thedata necessary to evaluate manufacturing costs (assuming a working machine reallyexists), and lacks anything other than Almblad's unsupported assertions that the newmodel represents a commercially viable advance in the art. [DDRI 14] Without data onmanufacturing costs and the opportunity to evaluate the new model (including in fieldtrials), Axxess is in no position to consider whether to introduce the model into itsinstalled customer base at any point in the future. [DDR If 15]

Given the information presently available to Axxess, there is no basis to concludethat Laser Key's alleged new model can be manufactured at a cost that would make itcommercially viable. Even if everything that Almblad alleges about the new Laser Keymodel were to be verified by Axxess in lab evaluations and field trialsnone of whichare scheduleda decision to introduce new equipment is at least months away. I f adecision were ever made to replace existing equipment, replacement throughout theinstalled base would take years. [DDR In 15-16]

C. F a l s e and Misleading Statements in the December 16 Press Release.1. F a l s e designation of origin.

The press release issued by Almblad and Laser Key is set up to appear as thoughAxxess (and SunSource) jointly issued it with Laser Key or endorsed its contents. Thepress release makes repeated reference to alleged cooperation and agreements betweendefendants and Axxess and concludes with a recitation of "biographical" informationabout Axxess. With the exception of one typographical error, the biographical


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information was copied word for word, without permission, from the Axxess home pageon the intemet. [DDR1117]

Ordinarily, such biographical information at the end of a press release is providedabout the participants in the release. [DDR 17] The resulting and misleadingimpression that Axxess and Sun Source participated in or endorsed the press release isreinforced by the prominent display of the Axxess intemet address both in thebiographical section and in the credits following the text of the release. The credits read:

SOURCE Laser Key H LPWeb Site: httx/Iwww,Axxesctech.com[VCOMP Ex. A] In fact, Axxess had no input into the press release and no warning thatit was being prepared or would issue. [IDDR 18] Thc clear contrary implicationmagnifies the harm that now flows from the false statements the press release contains.

2. F a l s e assertion that Axxess technology is error prone.In the opening paragraph, the press release quotes a statement by Almblad that

no human skill is involved" with the Laser Key product. The quote continues,All other machines rely on the skill of an operator to trace cuta key and that is why 30% to 50% of keys don't work.Digital imaging has eliminated the human skill factor inm aki n gakeyandthistechn

cutting machines in the very near future.[VCOMP Ex. A] Axxess duplicating equipment has a proven error rate that averagesabout 5%. Moreover, there is no operator skill required to trace cut a key using theAxxess system. Once the blank and original key are inserted in the machine, the operatormerely presses a button to start the cutting process. The safety housing for the cuttingmechanism prevents access to the cutting process by anyone. [DDR Ifif 6-8]


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3. F a l s e report that Laser Key products passed field trialsconducted by Mixes&The opening sentence of the press release announces that "new Laser Key 2000digital imaging software has successfully completed field tests and will begin serial

production in the 1st quarter of 2000." Later in the release, defendants state, "The fieldtests of the software were completed by Axxess Technologies at two Fred Meyers storesin Tempe, AZ in a vending machine model." [VCOMP Ex. A]

Those statements are literally false in addition to being highly misleading. Axxessdid not conduct a general test of software. The only field test conducted by Ancess wasto determine whether the Laser Key vending machine was commercially viable. Thevending machine failed the test, and even defendants told Axxess they would not pursuefurther development or marketing of that product. kcxess has never even seen theproduct that the press release states will begin "serial production" in the first quarter of2000. [DDR111 11-15]

4. F a l s e statement that Artess plans to replace its establishedproducts and has reached any agreement with defendants to doso.

The Press Release quotes Almblad regarding his alleged contributions to theestablished key duplicating technology of Axxess now in place at more than 10,000locations (the Press Release says 8,000 locations). Immediately thereafter, Almblad isquoted as stating,

Right now we are discussing the best method of replacingthese older Axxess machines. Both Axxess and the storesthat have seen the Laser Key machine agree that they want toreplace these old machines with the new digital imagingbased machines as soon as possible.[VCOMP Ex. A]

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Axxess has made no decision to replace the equipment it owns at any customerlocation let alone all 10,000 locations. AXXeSS has no interest whatever in Laser Key'svending machine, which is the only imaging product that Axxess has actually seen.Although Axxess is will ing to evaluate an operator assisted product for reliability, cost omanufacture, ease of use and servicealong with the myriad other factors that wouldinfluence a decision to introduce such a product at customer locations, Axxess has neverseen or tested such a product. Axxess has not considered replacement as an option andhas not "agreed" that it wants to replace proven technology with Laser Key's productconcept. [DDR 12-16]

D. On g o i n g Dissemination of Defendants' False Statements Is CausingIrreparable Injury.On Monday and Tuesday (December 20-21, 1999), Wal-Mart complained to

Axxess about the press release and asked specifically why Wal-Martone of the largestcustomers of Axxesshad learned of the alleged developments and alleged problemswith existing Axxess machines and systems by receiving a copy of the press release fromLaser Key rather than hearing about those matters from Axxess directly, and muchearlier. Wal-Mart said it had believed the Press Release was issued jointly by Axxess andLaser Key. [DDRI! 3; VCOMP 11141

The impact of the press release on potential new sales of existing Axxess systemswill likely be devastating unless Axxcss gets immediate relief. Who would choosetechnology that the manufacturer itself supposedly has confessed is error-prone, obsoleteand soon-to-be-replaced? Discouraged customers who have read and been misled by thePress release may be impossible to identify, and the injury to Axxess' business couldreverberate in subtle ways for years to come.

One of the harms threatened by continued dissemination of defendant's falsestatements is an adverse impact on the pending merger of Axxess and SunSource which

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depends in substantial part on the value of Axxess technology and customer relationship.The value of both assets are undermined by Defendant's false public statements. Axxessdoes not believe the timing of the press release and the impending closure of the merger be mere coincidence. In a December 8, 1999 writing, Almblad made explicit reference tthe merger as a reason for Axxess to buy his technology:

Axxess should acquire us [Laser Key], or our machine, beforewe gain any more momentum, i.e. financing, distributionagreements, and so on.Warburg [the largest Axxess shareholder] can take less thanthey planned [from the proposed merger with SunSource] andmake a deal with us. Sooner or later this will become clear toall parties.

[VCOMP 11-13; DDR If 4 and Ex. A]E. Ax x es s Has Made a Strong Showing of Success on the Merits.Section 43(a) of the Lanham Act specifically prohibits "commercial advertising or

promotion" that "misrepresents the nature, characteristics, qualities, or geographic originof his or another person's goods, services, or commercial activities," 15 U.S.C. 1125(aThe elements of a claim of false advertising under 43(a) of the Lanham Act are: (1) afalse statement of fact by the defendant in a commercial advertisement about its own oranother's product; (2) the statement actually deceived or has the tendency to deceive asubstantial segment of its audience; (3) the deception is material, in that it is likely toinfluence the purchasing decision; (4) the Defendant caused its false statement to enterinterstate commerce; and (5) the plaintiff has been or is likely to be injured as a result ofthe false statement, either by direct diversion of sales from itself to defendant of by alessening of the goodwill associated with its products. Southland Sod Farms v. StoverSeed Co., 108 E3d 1134, 1139 (9th Cir. 1997),

The press release is filled with statements that are literally false on their face.Existing Axxess equipment is not 30 to 50% error prone; its error rate is one tenth of the


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rate asserted. [DDR118] Axxess has not conducted field trials of any Laser Keyequipment or software other than the vending machines, and those tests were a failure,not a success. [DDR 13-14] Axxess has no plan to replace its equipment at 10,000locations with products that Axxess has never seen, let alone tested. [DDR 15-16]AVMS has not agreed that it wants to replace its established technology with Laser Key'sproducts and is not discussing with Almblad or Laser Key the best method forimplementing a replacement decision that has never been made. The false statements inthe press release pack an exceptionally powerful punch because the release falselyidentified Axxess with Laser Key as a co-sponsor of those statements, [VCOMP Ex. A;DDR 17-18]

Because the press release is literally false, Axxess does not need to establish actuapublic deception to obtain an injunction. Castrol, Inc. v. Pennzoil Co., 987 F.2d 939, 943(3d Cir. 1993) ("Where the advertisement is shown to be literally false, the court mayenjoin it without reference to its impact on the consumer."); Southland Sod, 108 F.3d at1139 (same, citing Castro!). Nevertheless, the unsolicited reaction from Wal-Martoneof Axxess largest customers with 2,500 of the locationsdemonstrates actual publicdeception.

The tendency of false statements attributed to a manufacturer to the effect that themanufacturer's goods are obsolete and inferior to other goods has an obvious tendency toaffect a buying decision. The false statements and associations in the press release aretherefore material. Moreover, by placing the press release on the intemet and by sendingit across state lines to Wal-Mart (and presumably others), defendants caused their falsestatements and associations to enter interstate commerce. [VCOMP 2 - 3 and Ex. A]Finally, the prompt and negative reaction from Wal-Mart demonstrates that Axxess islikely to suffer a loss of good will in connection with its products. [VCOMP If 14; DDR


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The facts that underlie the Lanham Act violation also establish liability underArizona law. In particular, false advertising under Lanham Act 43(a) is also unfaircompetition under Arizona law, and the knowingly false disparagement of Axxess and itstechnology by defendants constitutes trade libel. See 1,1-Haul Int'l. Inc. v. Jartam, Inc.,601 F. Supp. 1140, 1150 (D.Ariz. 1984), afrd in relevant part, 793 Fld 1034 (9th Cir.1986); Restatement (second) of Tort 623-A.

ConclusionThe press release was blatantly false and obviously intended to put pressure on

Axxess by disrupting relations with its major customers, its merger partner and anyoneelse who reads it. Both federal and state unfair competition laws condemn such tactics.Dated: December 23, 1999.

OF COUNSELLaurence R. HefterChristopher P. IsaacFINNEGAN, HENDERSON, FARABOW,GARRETT & DUNNER,1300 I Street, N.W.Washington, D.C. 20005-3315(202) 408-4000 Phone(202) 408-4400 Fax

BROWN & BArN, P.A.

By cd2.4e 4i , e ,tg a i tMichael F. BaileyJoel W. NomkinChad S. Campbell2901 North Central AvenuePost Office Box 400Phoenix, Arizona 85001-0400


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Axxess & David Richards sues Robert Almblad

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