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LOS ANGELES DAILY JOURNAL
September 10, 1999

In a breach of contract case between two technology companies, lawyers Gerald A. Klein & Mark B. Wilson enhanced the impact of their arguments through the use of multimedia tools.

By Diane Taylor

The key to the Affinitec Corp.'s $4.9 million victory in a complex breach of contract suit may not have been any of the witnesses' testimony or the documents submitted to the jury. Rather, the Missouri-based software company's lawyers, Gerald A. Klein & Mark B. Wilson, believe what made the difference was the way they relied on cutting-edge multimedia gadgets throughout the three-week trial to synthesize the case for the jury.

Klein & Wilson used a 6-foot projection screen to show videotaped depositions, which allowed the jurors to avoid reading lengthy, complex transcripts and see the witnesses' facial expressions and gestures as they were being deposed. They also used an "ELMO" projector, which works like a hand-held camcorder, to show documents while the witnesses were being questioned about them.

Additionally the two lawyers, both of whom are partners at Newport Beach's Klein & Wilson, used laser discs to present evidence, coupled with a bar-code presenter that allowed them to seamlessly move from one video clip to another, by simply swiping a pen-like instrument across a particular bar code. Klein & Wilson obtained some of these devices from Trial Vision Inc., a company Klein owns that helps lawyers prepare multi-media presentations.

"The technological aids helped us capture the jury's attention and interest, and made a very convoluted set of facts comprehensible," Klein says.

The Byzantine facts Klein alludes to stem from a contractual relationship between Affinitec and Siemens Business Communication Systems Inc. - a Santa Clara-based telecommunications systems and applications provider - which went awry after five years of symbiosis. The agreement involved the sale of Affinitec's software products under Siemens' brand name, as well as Affinitec providing service to the customers who purchased its products. In the Orange County Superior Court action, one of Affinitec's chief allegations was that Siemens seriously underreported the customers receiving maintenance service from Affinitec, and that it owed Affinitec approximately $1 million.

Suzanne E. Tracy, a partner at Los Angeles' Beck, De Corso, Daly, Barrera & Kreindler, represented Siemens in the trial, but would not comment on the case when contacted by the Daily Journal. During trial, she argued that Affinitec's damage claims were unsubstantiated, inflated and barred by the statute of limitations.

The relationship between the two companies started in 1992, when Siemens enlisted Affinitec to create and manufacture telephone software products that Siemens would sell under its own brand name. The software was designed to help call centers for airlines, ticket and marketing companies calculate which hours have the highest volume of telephone calls, which agents are handling the most calls, how long each call takes and how long people are on hold.

Under the contract, Affinitec was to provide maintenance and support to all of Siemens' customers who purchased the software. In exchange, Siemens would pay Affinitec $1,000 to $4,000 for software configuration and approximately $500 to $2,500 for all customers who were on warranty the first year. Other maintenance services provided by Affinitec would be on an hourly time and materials basis, or for a maintenance contract annual fee. Even though Affinitec was to furnish all maintenance and support services for its products, it was required to represent itself to customers as being a part of Siemens and not a separate entity.

Both parties agreed that Siemens was to notify Affinitec of all new customers purchasing Affinitec's products and new maintenance contracts. Siemens would handle all the customer billing. However, the only way Affinitec knew whether a particular customer had purchased a maintenance contract was if Siemens told them. According to Klein, Siemens' poor handling of that notification precipitated the lawsuit.

"Siemens' technical support staff told Affinitec that virtually every customer had a maintenance contract," he says. "This meant that Affinitec would not charge Siemens for supporting these customers, since they supposedly had a contract on file, had paid a fee and were entitled to support. However, Siemens' accounting department grossly underreported the number of customers Affinitec was handling on a maintenance-contract basis."

Additionally, Siemens purportedly sent all customers who had Affinitec products to Affinitec for technical help, irrespective of whether that customer actually had a maintenance contract with Siemens for an Affinitec product. Therefore, many customers who had not purchased a maintenance contract and should have been billed on a time and materials basis were allegedly not billed at all for Affinitec's maintenance and support services.

In the summer of 1997, Affinitec asked for an updated list of maintenance contract customers. "When Affinitec technician Dave McGaughey received the list, he was shocked," says Klein. "It contained a large number of customers and accounts which Siemens had never disclosed to Affinitec's accounting department. As a result, in August 1997, Affinitec sent Siemens a bill for approximately $1 million, which included a five-year period of past bills which were owed for these accounts."

At first, Siemens allegedly ignored the invoices. On February 16, 1998, Siemens executives sent a letter to Affinitec, asserting that Siemens owed no money on the $1 million invoices. The letter stated that Affinitec misunderstood the documents identifying these customers and that the invoices were untimely.

"Notwithstanding this letter, the depositions of Siemens' management revealed that they were completely confused regarding what was owed to Affinitec," Klein says. "For months, Siemens managers played rugby by tossing the issue from one to another, trying to determine whether the invoices were valid or not. By February 1998, it was evident that Siemens itself did not know which customers had Affinitec's products or were entitled to Affinitec's maintenance support."

While that dispute was ongoing, Siemens and Affinitec entered into an oral contract extension. On February 25, 1998, Affinitec sent Siemens and invoice confirming a one-year contract extension for $720,000, to be paid in three installments. Although Siemens paid the first two installments, it later refused to pay the third, claiming that the contract extension was for 120 days, but was then renewed for an additional 120 days.

On the same day Affinitec and Siemens agreed to extend their contract, Affinitec filed a breach of contract suit against Siemens, seeking payment of the $1 million invoices.

"After filing the complaint we didn't serve it right away, hoping that the matter could be resolved informally," Klein says. "Two weeks later, however, a random attorney checked the court records and found out about the lawsuit. He then contacted Siemens, informed the company that it had been sued and asked if he could represent it.

"When Siemens discovered the lawsuit, they were very angry," Klein continued. "At that point, they refused to pay a second set of invoices totaling approximately $200,000, which they had previously not disputed. In discovery, we obtained Siemens' check request for these invoices, which specifically states at the top that the check was not issued because Affinitec filed suit."

Meanwhile, in January 1998, Siemens started to transition customers who used Affinitec products to a direct service relationship with Affinitec. At that time, an Affinitec sales manager sent a letter to approximately 100 Siemens customers who were using Affinitec products. The letter attempted to solicit direct contracts with these customers by telling them that Siemens significantly marked up the prices of Affinitec products and that Affinitec would charge less for the software. Affinitec maintained that this western regional sales manager acted entirely on his own and without the approval of Affinitec's management.

"When Siemens obtained this letter its associate general counsel, Colleen Engelman, immediately called Affinitec's president," according to Klein. "She told him that this letter was libelous and actionable and that Siemens had a 'battery of New York lawyers chomping the bit' to sue Affinitec. She also said that unless Affinitec gave up its claim of $1 million, Siemens would file suit against Affinitec for trade libel, interference with contract, etc."

Despite this alleged conversation, Siemens did not file suit at that time, instead agreeing to a contract extension a month later. In October 1998 Siemens filed a cross-complaint for trade libel, interference with contract and prospective advantage, misappropriation of a customer list, breach of contract and violation of the Trade Secrets Act. With the exception of the misappropriation claim, those charges were later dismissed by Siemens before the trial started.

At her deposition, which was videotaped and shown at trial, Engelman produced a document that stated Siemens could use the potential libel lawsuit as a lever to dispose of Affinitec's claims against Siemens.

Also, Klein & Wilson showed the jury pivotal deposition testimony from Rick Taylor, Siemens' vice-president, and Al Hasson, a senior-level manager at the company. Both testified in their depositions that after they received the $1 million invoice from Affinitec, they believed their subordinates reviewed the bill and performed the calculations to determine whether any money was owed. They also testified that when they rejected the $1 million demand in a letter sent to Affinitec, they had all of the information necessary to justify that decision.

However, later in his deposition, Hasson backtracked and admitted that he didn't do anything to determine if Affinitec's claim was valid, and he didn't have any personal knowledge of anyone who did.

According to Klein & Wilson, the soundbytes of the foregoing testimony - together with clips from various Siemens employees, who all testified that they did not analyze Affinitec's bill or perform any calculations to assess its accuracy - ultimately eroded Siemens credibility. On April 26, 1999, the jury awarded Affinitec $148,000 on the originally undisputed invoices, $240,000 on the extension of contract claim and $3.8 million on the unpaid fees for the maintenance contracts.

The jury did find in favor of Siemens on its misappropriation claim, but awarded no damages. On July 30, 1999, Siemens motions for judgment notwithstanding the verdict and a new trial were denied. Since then, Siemens retained the Los Angeles office of Crosby, Heafey, Roach & May to help handle its appeal.

How did the original $1 million figure Affinitec cited grow to approximately $4 million? Klein & Wilson say that through discovery and the meticulous work of Affinitec technician McGaughey, the company was able to re-compute the amount Siemens owed with more accuracy.

McGaughey used Affinitec's own computer records in conjunction with Siemens' discovery documents to create a spreadsheet of customers who had purchased maintenance contracts. At trial, he testified as to how he prepared the spreadsheet and demonstrated the process for the jury on the computer screen, which was projected onto the 6-foot television screen.

Klein & Wilson believe that McGaughey's testimony and detailed presentation of the spreadsheet were absolutely critical in demonstrating the basis of Affinitec's damage claim for $4 million.

"We kept telling Siemens throughout trial - tell us why the spreadsheet is wrong," Klein says. "Instead, Siemens only attacked one customer on the list, saying that if this customer was wrong, then all the information on the spreadsheet was unreliable and inaccurate. Siemens' gamble did not pay off."

Even during his two-hour closing argument, Klein continued to use the technological tools to encapsulate all of the key bits of testimony in the trial.

"As the trial progressed, the judge was concerned that the jury wouldn't be able to understand all of this information," Wilson says. "But Gerry's closing argument finally put all of the pieces together so that they made sense to the jury. And the multimedia presentation definitely helped in this regard."

SIDEBAR

Type: Breach of contract, trade libel, misappropriation of trade secrets

Verdict: $4,972,677, plus costs

Case/Number: Affinitec Corporation v. Siemens Business Communication Systems, Inc. / 790903

Court/Date: Orange County West / April 26, 1999

Judge: Hon. John H. Smith, Jr.

Attorneys: Plaintiff - Gerald A. Klein & Mark B. Wilson, Newport Beach's Klein & Wilson

Defendant - Suzanne E. Tracy and Timothy Thornton, Los Angeles' Beck, De Corso, Daly, Barrera & Kreindler

Experts: Plaintiff - Richard Squar, certified public accountant, Newport Beach's Squar, Milner & Reehl

Defendant - Robert Knudsen, certified public accountant, Newport Beach office of PricewaterhouseCoopers

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