BORIS FELDMAN, State Bar No. 128838
DOUGLAS J. CLARK, State Bar No. 171499
CHERYL W. FOUNG, State Bar No. 108868
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304-1050
Telephone: (650) 493-9300
Facsimile: (650) 565-5100

Attorneys for Defendants/Counter-Claimants
ELECTRONICS FOR IMAGING, INC., DAN
AVIDA, and ERIC SALTZMAN and Former
Defendants/Proposed Counter-Claimants
JEFFREY LENCHES and FRED
ROSENZWEIG

NOTICE OF MOTION AND MOTION

MEMORANDUM OF POINTS AND AUTHORITIES

STATEMENT OF FACTS

ARGUMENT

I. THE COUNTERCLAIM MAY BE AMENDED AS OF RIGHT WITHOUT MOTION

II. IN THE ALTERNATIVE, LEAVE TO AMEND SHOULD BE GRANTED

CONCLUSION

Calmar, Inc. v. Emson Research, Inc., 850 F. Supp. 861 (C.D. Cal. 1994)

DCD Programs, Ltd. v. Leighton, 833 F.2d 183 (9th Cir. 1987)

Exchange Nat'l Bank v. Abramson, 45 F.R.D. 97 (D. Minn. 1968)

Genentech, Inc. v. Abbott Labs., 127 F.R.D. 529 (N.D. Cal. 1989)

Griggs v. Pace American Group, Inc., 170 F.3d 877 (9th Cir. 1999)

In re Digital Microwave Corp. Secs Litig., [1992 Transfer Binder]
     Fed. Sec. L. Rep. (CCH) ¶96,954 (N.D. Cal. Jul. 10, 1992)

Midatlantic Commercial Co. v. Prime Sportswear Corp., No. 95 CIV 10192
     (SWK), 1996 WL 361539 (S.D.N.Y. June 27, 1996)

Satellite Fin. Planning Corp. v. First Nat'l Bank, No. 85-463 CMW,
     1987 WL 7189 (D. Del. Feb. 5, 1987)

Sierra Rutile Ltd. v. Katz, No. 90 Civ. 4913 (JFK), 1996 WL 556963
     (S.D.N.Y. Oct. 1, 1996)

United States Information Agency v. Krc, 905 F.2d 389 (D.C. Cir. 1990)

United States v. Ownbey Enters., Inc., 780 F. Supp. 817 (N.D. Ga. 1991)

15 U.S.C. § 78aa

28 U.S.C. § 1367

Fed. R. Civ. P. 13

Fed. R. Civ. P. 13(a)(1)

Fed. R. Civ. P. 13(h)

Fed. R. Civ. P. 15(a)

Fed. R. Civ. P. 20(a)

California Corporations Code § 25400

California Corporations Code § 25500

6 Charles Wright et al., Federal Practice and Procedure (2d ed. 1990)

NOTICE IS HEREBY GIVEN THAT ON SEPTEMBER 24, 1999, at 9:30 a.m., or as soon thereafter as counsel may be heard, in the Courtroom of the Honorable Charles A. Legge, at the United States District Court for the Northern District of California, located at 450 Golden Gate Avenue, San Francisco, California, Defendants Electronics for Imaging, Inc. ("EFI"), Dan Avida ("Avida"), Eric Saltzman ("Saltzman"), and former defendants/proposed counter-claimants Jeffrey Lenches ("Lenches") and Fred Rosenzweig ("Rosenzweig") (collectively "the moving parties") will move this Court for an order confirming they may amend the Counterclaim as of right, or in the alternative, granting leave to amend the Counterclaim to add Lenches and Rosenzweig as counter-claimants pursuant to Fed. R. Civ. P. 15(a).

This Motion is based on this Notice of Motion and Motion, the Memorandum of Points and Authorities, the attached proposed amendment, an exhibit hereto, and any oral argument of counsel or other matters that may be submitted.

Jeffrey Lenches and Fred Rosenzweig were originally named as defendants from the time plaintiffs filed their complaint on December 31, 1997. They remained as defendants in this action until recently. On June 15, 1999, they filed a motion to dismiss the complaint. On July 16, in response to the motion to dismiss, plaintiffs filed a notice of voluntary dismissal dismissing defendants Lenches and Rosenzweig.

At the same time that defendants Lenches and Rosenzweig filed their motion to dismiss the complaint, on June 15, 1999, defendants EFI, Avida, and Saltzman filed their answer to the complaint. On July 2, 1999, defendants EFI, Avida, and Saltzman filed an amended answer and asserted a Counterclaim. The Counterclaim asserts in relevant part that "the facts as alleged in the Complaint are not sufficient to plead violations of California Corporations Code §§ 25400 and 25500." Counterclaim ¶ 5. On July 20, plaintiffs moved to dismiss the entire action, including the Counterclaim, in favor of proceeding in state court. In the state court Steele action, EFI, Avida, and Saltzman, together with Lenches and Rosenzweig, are defendants.

The purpose of this Motion is to bring Lenches and Rosenzweig back into this proceeding as counter-claimants so that the entirety of plaintiffs' claim may be adjudicated in one forum.

Defendants and Mssrs. Lenches and Rosenzweig request that this Court determine that the Counterclaim may be amended as of right, or if not, that leave to amend be granted.¹

I. THE COUNTERCLAIM MAY BE AMENDED AS OF RIGHT WITHOUT MOTION

Fed. R. Civ. P. 15(a) provides in relevant part:

Amendments. A party may amend the party's pleading once as a matter of course at any time before a responsive pleading is served . . . . Otherwise a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.

Rule 15(a) applies where the proposed amendment seeks to add parties or claims. DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 185-86 (9th Cir. 1987); 6 Charles Wright et al., Federal Practice and Procedure § 1474 (2d ed. 1990).

The moving parties respectfully submit that they need not move for leave to amend their Counterclaim because to date, plaintiffs have not filed a reply to the Counterclaim. The decision in United States Information Agency v. Krc, 905 F.2d 389 (D.C. Cir. 1990), is instructive. There, the defendant filed a counterclaim, to which the plaintiff filed motions for summary judgment and dismissal. While those motions were pending, the defendant filed an amended counterclaim. The Court of Appeals held that the district court erred in failing to consider the amended counterclaim. Because the plaintiff had never answered the original counterclaim, the defendant was entitled to "amend '. . . as a matter of course'" and hence the "amended counterclaim was properly before the district court." Id. at 399 (citation omitted). See United States v. Ownbey Enters., Inc., 780 F. Supp. 817, 819 (N.D. Ga. 1991) ("Here, the Plaintiff has only filed a Motion to Dismiss, which is not a responsive pleading. . . . Accordingly, Defendant exercised its legal right to amend prior to the filing of a responsive pleading and, therefore, this Court will consider the counterclaim as presented in the amended form.") (citation omitted). The fact that plaintiffs have moved to dismiss defendants' Counterclaim is irrelevant for this purpose. The filing of a motion to dismiss the Counterclaim does not remove the right of defendants to freely amend the Counterclaim. Id. ("[m]otions for summary judgment or dismissal [   ] do not constitute responsive pleadings that prevent a party from amending without leave of court.")

II. IN THE ALTERNATIVE, LEAVE TO AMEND SHOULD BE GRANTED

In the event this Court concludes that the moving parties are not entitled to amend the Counterclaim as of right, they move in the alternative for leave to amend under Rule 15(a).² The Ninth Circuit has held that Rule 15's "'policy of favoring amendments to pleadings should be applied with "extreme liberality."'" DCD Programs, 833 F.2d at 186 (citations omitted).³ The rule of liberality "is not dependent on whether the amendment will add causes of action or parties." Id. This rule of liberality is subject to the qualification that the amendment not cause the opposing party undue prejudice, is not sought in bad faith, does not constitute an exercise in futility, and is not made with undue delay. Id. The determination to grant a motion to amend "should be performed with all inferences in favor of granting the motion." Griggs v. Pace American Group, Inc., 170 F.3d 877, 880 (9th Cir. 1999) (reversing denial of motion to amend). The non-moving party bears the burden of demonstrating why leave to amend should not be granted. Genentech, Inc. v. Abbott Labs., 127 F.R.D. 529, 530-31 (N.D. Cal. 1989) (court granted leave to amend even though depositions would have to be re-taken).

Here, none of the four qualifying factors dictate denial of the motion to amend. First, defendants propose adding two parties to the Counterclaim; their addition can hardly prejudice plaintiffs where plaintiffs made Lenches and Rosenzweig party-defendants to this action from the outset, they have become non-parties for only a matter of a few weeks, and they are still party defendants in the state case. Moreover, a counterclaim by two additional parties seeking declaratory relief that they did not violate the state securities laws is an argument that will be asserted against the plaintiffs in the state case in any event.⁴

Second, there is no possible inference that this Motion is made in bad faith. Plaintiffs filed their motion to dismiss the federal action in its entirety on July 20. Plaintiffs now concede the argument that defendants have made from the outset, i.e., that the issues should be litigated in one forum. The moving parties respectfully submit that the federal forum is the only forum that can adjudicate all claims because this Court alone has exclusive jurisdiction over the federal claims. 15 U.S.C. § 78aa. Having Lenches and Rosenzweig re-enter this action (after a few weeks' absence) ensures that this forum can adjudicate all issues that are presently pending in the parallel Steele state action.

Third, the addition of two parties to the existing Counterclaim hardly constitutes a futile act. This issue is discussed at length in Defendants' Opposition to Plaintiffs' Motion to Dismiss, which defendants incorporate by reference. The Counterclaim states a cause of action, is a compulsory counterclaim, Fed. R. Civ. P. 13(a)(1), and is properly before this Court under principles of supplemental jurisdiction. 28 U.S.C. § 1367.

Fourth, this Motion has not been brought with undue delay. On the contrary, the moving parties filed this Motion within a few weeks of the filing of the July 2 Counterclaim, the July 16 voluntary dismissal of Lenches and Rosenzweig as defendants, and the July 20 motion that plaintiffs filed to dismiss the federal action.

In sum, this Court should grant leave to bring Lenches and Rosenzweig back into this suit as counter-claimants.

For the reasons stated, the moving parties respectfully request that this Court order that the proposed amended Counterclaim is filed as of right, or in the alternative, that leave to amend is granted.

¹ See Sierra Rutile Ltd. v. Katz, No. 90 Civ. 4913(JFK), 1996 WL 556963, at *1 (S.D.N.Y. Oct. 1, 1996) (defendants moved for confirmation that they may amend counterclaim as of right or alternatively leave of court to amend); Exchange Nat'l Bank v. Abramson, 45 F.R.D. 97, 101 (D. Minn. 1968) (intervenor requested "a determination that said counterclaim is properly filed or if not, that leave therefor be granted.")

² It is clear that the answer is considered distinct from the counterclaim in determining what time period is allowed to amend the counterclaim. See Section I, supra. What is not clear is whether, having amended the answer to include the counterclaim, defendants may now amend only the counterclaim portion consistent with Rule 15(a)'s provision that "[a] party may amend the party's pleading once as a matter of course". The moving parties have researched but not found law which squarely addresses this question. Accordingly, they seek leave to amend in the alternative.

Similarly, the moving parties believe that Rule 15(a) controls the adding of Mssrs. Lenches and Rosenzweig as counter-claimants. To the extent that this Court instead determines that Fed. R. Civ. P. 13 or 20 control, the amendment nonetheless should be permitted in light of the total absence of prejudice to plaintiffs, a standard similar to that under Rule 15(a). See Exchange Nat'l Bank, 45 F.R.D. 97, 105 (irrespective of whether Rule 15(a) or 13(f) applies, amendment to counterclaim was allowed "since there is absolutely no showing of inexcusable delay, neglect or lack of good faith in asserting the claim"); Satellite Fin. Planning Corp. v. First Nat'l Bank, No. Civ. A 85-463 CMW, 1987 WL 7189 at *2 (D. Del. Feb. 5, 1987) (court granted leave to amend counterclaim to include further counterclaims and to add new parties under Rules 15(a), 13(h) and 20); Midatlantic Commercial Co. v. Prime Sportswear Corp., No. 95 CIV 10192 (SWK), 1996 WL 361539 at *5 (S.D.N.Y. June 27, 1996) (motion to join parties as defendants to counterclaim was granted under Rules 13(h), 20(a), and Rule 15(a) where claims are based on same transaction and adjudication will not cause a significant delay). Accordingly, the moving partiess alternatively request that leave be granted under Rules 13 and 20.

³ See also Calmar, Inc. v. Emson Research, Inc., 850 F. Supp. 861, 864-65 (C.D. Cal. 1994) ("In light of the Ninth Circuit's policy favoring amendments," court granted leave to amend answer to assert new affirmative defenses where discovery was still continuing and where amendment was not likely to expand scope of discovery or prejudice the opposing party); In re Digital Microwave Corp. Secs Litig., [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,954, at 94,062 (N.D. Cal. Jul. 10, 1992) (court granted leave to add additional allegations of fraud and new party as defendant.)

⁴ See Satellite, 1987 WL 7189 at *2 (no prejudice where "[a]ll but one of the counterclaims First National is asserting against the proposed third-party defendants are already being asserted against the plaintiffs in response to plaintiffs' amended complaint.")