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M S DOCUMENT IS NOT N PR OPERFORMACCORDINO T FEDERAL AND/OITOCAL RULES PRACTI CES O ANDIS s u n = TO

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RECCIVE0 C O P Y

1
2 3 4 5

REFERENCE;

Michael F. Bailey (#00451 Joel W. Nomldn (#011939) Chad S. Campbell (#012080) BROWN & BArN, P.A. 2901 North Central Avenue Post Ofce Box 400 Phoenix, Arizona 85001-0400 (602) 351-8000

DEC 2 3 1999
L u M 01111 E DIVAICT OFAftIZONAI BY t OEPI ty Nio r C O U R T

Of Counsel 6 Laurence R. Hefter 7 Christopher P. Isaac FINNEGAN, HENDERSON, FARABOW, 8 GARRETT & DUNNER, 1300 I Street, N.W. Washington, D.C. 20005-3315 9 (202) 408-4000 Phone 10 (202) 408-4400 Fax 11 Attorneys for Plaintiff 12 13 14 15 UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA

AXXESS TECHNOLOGIES. INC.. a Del 16 corporation, 17 18 Plaintiff,

'99 225 1P X C HR B
VERIFIED COMPLAINT

V . 19 ROBERT E. and YVONNE ALMBLAD, husband and wife; and LASER KEY II LP, an 20 Illinois limited partnership, 21 22 23 24 25 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 in Defendant,

26 Tempe, Arizona.

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Defen d an ts Robert E. and Yvonne Almblad are citizens of Illinois. Robert

2 Almblad was one of the founders of a predecessor of Axxess. Yvonne Almblad is named 3 a s a defendant because, upon information and belief, Robert Ahnblad holds his assets in 4 h e r name to shield them from creditors. 5 3 . U p o n information and belief, defendant Laser Key II LP ("Laser Key") is a

6 limited partnership organized and existing under the laws of Illinois, with its principal 7 pl ace of business in Libertyville, Illinois. Upon information and belief, no partner or 8 limited partner of Laser Key is a citizen of Arizona. 9 10 J 4 U . R I S D I C T I O N

Defen d an ts have caused events to occur in the District of Arizona out of

11 wh i ch this action arises, have agreed to submit to the jurisdiction of this Court and have 12 conducted business activities in this District sufcient to confer in personam jurisdiction 13 o n this Court. 14 5 . T h i s Court has subject matter jurisdiction pursuant to 15 U.S.C. 1121

15 a n 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 in 17 controversy in this case exceeds the sum or value of $75,000, exclusive of interest and 18 costs. Accordingly, the Court also has jurisdiction under 28 U.S.C. 1332. 19 20 F 6 . A C T U A L ALLEGATIONS

Defen d an ts claim to have developed some "revolutionary" key-duplication

21 technology (the "New Technology"). Plaintiff has had a limited opportunity to review 22 som e aspects of that technology, and conducted a limited eld test of two vending 23 machines incorporating some of the New Technology for the purpose of determining 24 whether it presented a commercially viable business opportunity. Certain agreements 25 exi st between plaintiff and defendants, pursuant to which plaintiff enjoys rights of rst 26 negotiation and rst refusal with respect to the sale or license of the New Technology.

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7. T h e eld tests were a near-term commercial failure, although Axxess believes 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 misleading statements about Axxess and its product line. A copy of the Press Release, as it was transmitted to Axxess from one of the major customers of Axxess (Wal-Mart), is attached as Exhibit A to this complaint.

8 9 10 11 12 13 14 15 16

9. M o s t signicantly, the Press Release deceptively appeared to be a joint press release issued together by defendants and plaintiff (and a third company, SunSource), which greatly multiplied the damaging effect of the statements that were made about Axxess and its products. 10. T h e Press Release made false and disparaging statements about the products and business plans of A O C S including the following: J CS, A. A x x e s s ' technology was said (apparently by Axxess itself) to be obsolete and inferior to defendants' New Technology, B. A x x e s s was said to be planning to replace its installed base of keyduplication equipment with defendants' New Technology as soon as possible, and

18 19 20 21 22 23 24 25 26

was 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 Axxess technology, 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 Axxess equipment is less than 5%. D. F i e l d tests of defendants' software were said to have been completed by Axxess at two Fred Meyer Stores in a vending machine model, where as the eld tests related to commercial acceptance of the vending machine, not to analysis and verication of defendants' software.

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T h e Press Release stated that the New Technology, having passed

2 s u c c e s s f u l eld trials, was about to go into volume production. Instead, upon 3 i n f o r m a t i o n and belief, defendants have abandoned the product that actually was eld 4 t e s t e d because the test was commercially unsuccessful. Upon information and belief, 5 D e f e n d a n t s have neither the right nor a near-term plan to go into volume production 6 f o r sale or license of the New Technology. 7 1 1 . Ax x e s s and SunSource, Inc. ("SunSource"), recently announced plans for a

8 merger of the two companies (the "Proposed , cqui si ti on"), 9 Aacquire Axxess. The Proposed Acquisition presently is undergoing regulatory review and u n d e r 10 due diligence investigation, as defendants are well aware. w h i c h 11 S u n S o c e 12. Kn o wi n g u the announced acquisition by SunSource and, upon of r w i l l 12 information and belief, for the purpose of disrupting the proposed acquisition, defendants 13 14 15 16 17 18 19 20 21 22 23 24 25 26 rst offered (in violation of their agreement with Axxess) to sell or license to Sun Source the New Technology, and thereafter wrote the Press Release in a way that assured SunSource would receive it. 13. Defendant Robert Almblad proposed in writing to an Axxess ofcer that: Axxess should acquire us [Laser Key], or our machine, before we gain any more momentum, i.e. nancing, distribution agreements, and so on. Warburg [the largest Axxess shareholder] can take less than they planned [from the proposed merger with SunSource] and make a deal with us. Sooner or later this will become clear to all parties. Upon information and belief, Defendant's conduct toward Sun Source has been an attempt to 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 was a party to the Press Release, that Axxess had tested defendants' technology in its current conguration and that Robert Almblad was "some sort of a partner" of Axxess. 15. Ax x e s s has approximately 10,000 installations of its own patented key duplication technology. Its customers include substantial retail institutions as such WalMart, K-Mart and Home Depot. Axxess has invested approximately $30 million in

7 placing and maintaining its patented key duplication technology in retail sites. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 16. Ax x e s s ' relationship with its customers and its proposed merger partner depends in large part upon the trust and goodwill that exists between those customers and Axxess. The false statements in the Press Release already have damaged kocess' relationship with at least one major customer, and threaten its relationship with others and with its merger partner. Moreover, the false statements in the Press Release threaten irreparable injury to A SS by disrupting the sale of its current technology to new XXC customers. 17. Un l ess defendants are restrained from continuing their false publicity campaign 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 publicity campaign in an amount to be proven at trial. 19. P l ai n ti 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 rst negotiation and a right of rst refusal with respect to such technology, which Mr. Almblad must honor before he sells or licenses such technology or any portion of it. 20. A present dispute exists about the rights of the parties under the Technology Agreement. Mr. Almblad has asserted a right to sell product incorporating

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1 technology subject to the Technology Agreement without regard to his obligations to 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 plaintiff under the Technology Agreement. He has offered to sell or license technology subject to the agreement to at least SunSource and Wal-Mart, in derogation of plaintiff's rights under the Technology Agreement. CLAMS FOR RELIEF COUNT I 21. Defendants' statements in the Press Release misrepresented defendants' afliation, connection or association with Axxess and the origin, sponsorship or approval by Axxess of defendants' commercial actions, in violation of 43(a) of the Trademark Act of 1946 (the "Lanham Act"), as amended, 15 U.S.C. 1125(a). 22. Defendants' misrepresentations in the Press Release about AXXeSS and Axxess' technology constitute false and misleading advertising, because they misrepresent the nature, characteristics and qualities of Axxess' products, all in violation of 43(a) of the Lanham Act. 23. A x x e s s has suffered, and will continue to suffer, irreparable injury as a result of defendants' false and misleading statements in violation of the Lanham Act. COUNT II 24. Defendants' conduct in connection with the Press Release constitutes unfair competition in Arizona and is a violation of the common law of Arizona, by reason of which Axxess has suffered, and will continue to suffer, irreparable injury. 25. Defendants' conduct has been willful, wanton and was undertaken with an evil mind. COUNT III 26. Defendants' false and misleading press campaign denigrated the quality of Axxess' key duplication technology and misrepresented Axxess' business plans. The false statements in the Press Release were made with intent to cause harm to Axxess'

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1 business. Defendants made those statements knowing them to be false and with reckless 2 3 4 5 disregard for the truth. 27. Defendants' false publicity campaign constitutes product disparagement and trade libel in violation of the common law of Arizona, by reason of which Axxess has suffered, and will continue to suffer, irreparable injury. COUNT IV 7 8 9 10 11 12 13 14 15 16 17 18 28. Defendants made the false representations in, and thereafter publicized, the Press Release with full knowledge of Axxess' business relationships with, among other companies, Wal-Mart, K-Mart, Home Depot and SunSource, Inc. Defendants' motive was to disrupt those existing relationships and to interfere with Axxess' prospective business advantage with potential customers of Axxess' products. 29. Defendants' conduct constitutes improper interference with both current and prospective business relationships of Axxess in violation of the common law of Arizona, by reason of which Axxess has suffered, and will continue to suffer, irreparable injury. COUNT V 30. P l ai n ti ff seeks a declaratory judgment against defendants Robert E. Almblad and Laser Key II LP (which is an entity controlled by Mr. Almblad within the

19 meaning of the Technology Agreement) declaring the rights of the parties under the 20 21 22 23 24 25 26 Technology Agreement. NOW THEREFORE, Axxess prays for relief as follows: A. Tem porary, 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's products;

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

2) D e l e t e , remove and destroy any copies of the Press Release that are available for view by the public, whether they are available on the intemet or otherwise; 3) Di scl o se forthwith to the Court and to plaintiff the identity of each and every person, web site, e-mail address and other location to which the Press Release or any similar misleading communication, has been sent, together with such information as defendants have about the further distribution by third parties of the Press Release or similar communication; and 4) P r o m p tl y correct the false and misleading statements made in the Press Release by transmitting in the same manner in which the Press Release was originally transmitted, a copy of the temporary restraining order. B. F o r money judgment in favor of Axxess sufcient to compensate Axxess for the damages it has suffered and will suffer as a result of defendants' misconduct; in an amount sufcient to punish the defendants for their misconduct; and in an amount sufcient 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 plaintiff and defendants Robert E. Almblad and Laser Key II LP under the Technology Agreement. D. F o r such other and further relief as is just and proper,

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1 Dated: December'tl 2 , 1 9 9 9 . 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 OF COUNSEL Laurence R. Hefter Christopher P. Isaac FINNEGAN, HENDERSON, FARABOW, GARRETT & DINNER, L.L.P. 1300 I Street, NM. Washington, D.C. 20005-3315 (202) 408-4000 Phone (202) 408-4400 Fax

Respectfully submitted BROWN & BAIN, P.A.

By

Michael F. BaiTy Joel W. Nomkin Chad S. Campbell 2901 North Central Avenue Post Ofce Box 400 Phoenix, Arizona 85001-0400

Attorneys for Plaintiff

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
71816_1

VERIFICATION

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

1. T h a t he is Vice President, Sales and Service, of Axxess Technologies, Inc., which is the plaintiff in this action; 2. T h a t he has read the foregoing Veried Complaint; and 3. 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 true and he believes them to be true. Executed this , 12, d a y o f D e c e m b e r , 1 9 9 9 , i n M a r i c o p a C o u n t y , A r i z o n a .

David M. Richards

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Sent: M o n d a y . December 20, 1999 7:02 AM 3 0 l E A To: 0k d h a r r i s i S axxesstech.com . -1; Subject: R A , : Press release 1 2 1 : A x x e s s 4 What's up with this? 7. T e c h n o l o Z. John , K O a in alMessage e n rig r H a r r i s Sent: , Friday, December 17, 1999 6:44 AM I To: Sandy Chapman; Jesus Garcia; Christopher Hynes; Paul Jurczak; Scott Nielson; John Niznik: Crister Ringkvist; Crister ag Ringkvist; Crister F Ringkvist, Janusz Ruszel: Roger Sanders: Paula Studt I ,Subject: P r e s s release

From:0J: o h n Niznik opnizninwel-mart.comi 14

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4.

1 ' Laser Key Announces New Digital Software . <h tt LIBERTYVILLE, Ill., Dec. 16 /PRNewswirei -- Laser Key ll LP announced 0 that its 0 new Laser Key 2000 digital imaging software has successfully completed eld tests and will begin serial production in the 1 :"Digital u a r t technology is transforming the key duplication industry Et q Imaging e r o f by 0 0 0 . 2 & making possible a key duplication machine that does not really duplicate keys," said Robert Almblad, President. "Instead, the machine takes a q digital 0 picture of a customer's key and compares that digital image with original ,equipment manufacturers (OEM) specications, which are stored in the machine's memory, and then reproduces an original key according to those 1 specications with a micro controller and servo motors. No human skill i is involved. All other machines rely on the skill of an operator to trace i cut a key and that is why 30% to 50% of keys don't work. Digital imaging has i eliminated the human skill factor in making a key and this technology will i replace existing key cutting machines in the very near future? After testing the machine, Jonathan Taylor, formerly head of Taylor -Lock tCompany said: "Customers can now get their keys cut and have complete condence that they will work, rst time, every time. Just like customers A have the condence that their new TV will work after they take it home 0 from the 0 store, so too will their Laser Key work properly. No more look outs, no more 4 aggravation of returning to the store," The eld tests of the software were completed by AxxeSs Technologies (at two 0 Fred Myers stores in Tempe, AZ in a vending machine model. "We chose Axxess Technology to carry out some of the rst eld tests ,because I was the original Founder of Axxess in 1985, and because Axxess has 0 s m -

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successfully placed my older style key cutting machine I invented 10 years ago in about 8,000 locations including Wal-Mart, K-Mart and Home Depot," Almblad said. "Right now we are discussing the best method of replacing these older Axxess machines. Both Axxess and the stores that have seen the Laser Key machine agree that they want to replace these old machines with the new digital imaging based machines as soon as possible." According to a recent PR Newswire release, SunSource (NYSE) has agreed to acquire Axxess and will be the new owner of Axxess. Laser Key II LP is a leading edge digital imaging R and 0 rm located in Libertyville, IL, Axxess Technologies (htto://www.Axxesstech.com 4itto://www.axxesstech.com/>) manufactures and distributes high-tech and conventional key duplication systems, as well as an innovative, consumer-operated identication engraving system. Axxess is also a leading manufacturer of letter, numbers and signs, key accessories and emergency keys. SunSource Inc. is one of the nation's leading providers of value-added services and products to retail and industrial markets in North America. Its Industrial Services businesses provide parts supply, engineering and repair services throughout the U.S., Canada and Mexico. Its Hillman Group subsidiary is a leading provider to hardware outlets of merchandising systems, in-store service work and small parts such as fasteners, letters, signs and keys. Its Harding Glass subsidiary operates the largest chain of full service glass shops, in the U.S. SOURCE Laser Key II LP Web Site: htt : / / w w w . A ) _ p _ , tes s tec h.c or n < h t t p : / / w w w . a x x e<http://www.pniewswire.corn/index.shtml> PR Newswire Logo s s t e c h . c o r n t > (Today's News) <htto://www.ornewswire.cornitnwitnw.shtml> (Company News On-Call) <http://www.prnewswire.cornicnocionoc.html> (Search) <htto://www.prnewswire.comitnwitoda s2.shtml> (Feature News) <http://www.prnewswire.com/featurestindex.shtml> (Automotive) <httpl/www.prnewswire.com/autokdex.shtml> (Energy) < 1 (Entertainment) <http://www.ornewswire.com/ent/index.shtml> (Flnanciai) <h t t p : / / A < ar _ w lw t tnpe A v v i v r i e n / healthMidex.shtml> (Hispanic) p : <ht_le;//w. a n i c _ k _ t c _ l e ) (.shtml> (Latin America) w /s w i r / <htto://www.pmewswire.com/latarritindex.shtml> (Sports) e.com/ v r m taricia e I/in w dex.sh s

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<tAtAp v0 ._ .L .4 ,p jL ie ws chttoliwww.prnewswire.comitech/index.shtml> (Washington) c . , s h t r r i l > e . c o r p a .<http://www.prnewswire.comtwashingtonndex,shtml> (Mountain News)e < h t thp :n / w wlw op r n e w s w i r e / o . g y ( T c Services) <ht : / / wirlq wswire , co mico mm_ y% ijndex,shtm1> (Ask PRN) t ) <htt ://vmmt. r i i c a an > c o m i m o u n t a nn ie n v l e x .l s h t m il a s 1 j > (Links) <1211p,://www.prnewswire.comicorr_(s.html> (PRN Events) ( P R N <t lt ://mgrw, d e uv ec n tt s s 2 , h t m l > i P r o &

Q 1 9 9 6 -1 . Redistribution, retransmission, republication or commercial exploitation 999 of the contents of this site are expressly prohibited without the written P R consent of PR Newswire. N e w s w i r These pages have been optimized for Netscape v.2,0 or later e . A l l r i Kindest personal regards, g h Robert Almblad t s r e Laser Key II LP, 1840 Industrial Drive, Unit 110 s e Libertyville, IL 60048, Voice 847 816 7786 Ext 14 r 847 816 0569 E-mail address: almbladqvahoo.com v Fax e d .

Do You Yahoo!? Thousands of Stores. Millions of Products. All in one place, Yahool Shopping <http://shoppino.vahoo.comi>.

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FILED L O D M RECEIVED C O P Y

1 Michael F. Bailey (#004528) Joel W. Nornkin (#011939) 2 Chad S. Campbell (#012080) BROWN & BAIN, P.A. 3 2901 North Central Avenue Post Ofce Box 400 4 Phoenix, Arizona 85001-0400 5 (602) 351-8000 Of Counsel 6 Laurence R. Hefter 7 Christopher P. Isaac FINNEGAN, HENDERSON, FARABOW, 8 GARRETT & DUNNER, L.L.P. 1300 I Street, N.W. Washington, D.C. 20005-3315 9 (202) 408-4000 Phone 10 (202) 408-4400 Fax 11 Attorneys for Plaintiff 12 13 14 15 Axxess Technologies, Inc., a Delaware 16 corporation, 17 18 V. Plaintiff,

D G23 1999 E
bitptIOT fcr A Z FART

UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA S No C I V - 9 9 --2 4 1 - P H X - R C B/ FOR APPLICATION TEMPORARY RESTRAINING ORDER

19 Robert E. and Yvonne Almblad, husband and wife; and Laser Key II LP, an Illinois limited 20 partnership, 21 Defendant, 22 23 24 Preliminary Statement Last Friday (December 17, 1999), Axxess Technologies learned that Laser Key

25 and Robert Almblad are now disseminating to a wide public audience a false and 26 misleading press release about Axxess, its established product line and its planned

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1 direction over the next few calendar quarters. [DDR 2 ] p r e s s 2 1 T h e Thursday (December 16, 1999), falsely impugns the capabilities of existing published on r e l e a s e , r s t 3 Axxess products, falsely suggests that Axxess has endorsed products that Laser Key 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 "DDR" refers to the Declaration of David M. Richards In Support of Plaintiffs Application for Temporary Restraining Order, led with these papers; "VCOMP" refers to the Veried Complaint in this action. 2 alleges are in advanced development and falsely asserts a plan by Axxess to replace the existing product line with the products Laser Key claims are about to enter volume production. [V CO M P r 8-10 and Ex. A] The false statements in the press release already have reached key Axxess customers and other business afliates and have damaged relationships with those parties. [VCOMP 1 1 - 1 2 , 14; DDR11T2-3] Axxess 11 seeks a temporary restraining order to prevent any further dissemination of false and misleading statements by defendants and to minimize to the extent possible the resulting harm. In addition to the harm that otherwise would ow from damage to customer relationships, continued dissemination of defendants' false public statements could negatively impact a pending merger of A?ocess with SunSource (now set to close in January 2000). [DDR $ 2] That merger depends in large part on the market value of the technology and customer relationships threatened by defendants' false statements. Defendants have expressed and demonstrated an intent to inject themselves into the merger transaction however possible. [VCOMP It$ 11-13] Using false statements to undermine customer condence in the existing technology is the apparent tactic of choice. Defendants' conduct violates * 43(a) of the Lanham Act (in addition to Arizona law) and should be enjoined without delay. Axxess also intends to seek a preliminary injunction to be entered upon the expiration of the TRO sought in this Application. A motion for immediate leave to

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1 conduct limited discovery in support of the preliminary injunction request accompanies 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 this Application. Defendants' counsel was provided with a courtesy copy of this Application and the accompanying papers before they were led with the Court. Discussion A. A x x e s s Is a Recognized Technology Leader in Key Duplication Systems 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 identifying key blanks and cutting the blanks to make replacement keys for locks of nearly all types and sizes. Axxess customers include retailers such as Wal-Mart, K-Mart and Home Depot, which use Axxess systems and machines to produce and sell replacement keys to shoppers in their stores. Axxess key-duplication equipment is installed at more than 10,000 customer locations throughout the United States. [DDR 5 ] The Axxess key duplication technology is patented. Before Axxess introduced the technology, customers had to have replacement or spare keys cut by a locksmith or store associate who would use conventional cutting tools. The quality and reliability of keys produced 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 is labor- and skill-intensive, [ DDR1 6] With the Axxess system and equipment, an unskilled sales clerk can identify the proper blank to insert into the Axxess cutting machine and with the press of a button can deliver an automated reproduction of the customer's keyall within a few moments. [ D D R 1 keys with the Axxess technology averages about ve percent, well below the error rate I 17] T h e e r r o r for a t e r conventional machines. The low error rate was a signicant factor underlying the o n d u p l i c a t i n g successful 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 Axxess manufactures, maintains, and owns. A t present, Axxess has more than $30 million invested in equipment at the 10,000 plus customer locations that make up the installed

5 base. [DDR If 9] 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 B. T h e r e Is No Laser Key Product that Axxess Has Successfully Field Tested 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 early 1999 with an invitation to review what was described as break-through key-making technology that employed digital imaging to identify the key type and specications of the original for duplication. [DDR 1110] A t Almblad's urging, Axxess agreed to 1 participate in a limited eld test of a Laser Key vending machine at two retail stores near the Axxess engineering department in Tempe in late Summer to early Fall 1999. The vending machines were fully automated and robotically-enabled to produce duplicate keys without any operator assistance or intervention. According to Laser Key, the point was to enable key-making machines to be deployed in outlets such as grocery stores, where stafng levels ordinarily do not allow for a machine operator at the key duplicating station. [ DDR 1 1 ] Although thc concept was interesting, the eld tests demonstrated that the vending machine was not commercially viable. Indeed, the cost to build one exceeds the cost to manufacture an Axxess machine by more than a factor of eight. The eld trial demonstrated that the vending machine generated sales well below what would be adequate for a viable business based upon it. After the eld tests, Laser Key abandoned the vending machine idea. [DDR 1 2 ]

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PRGE1S

1 2 3 4 5 6 7

On November 28, 1999, Axxess received a videotape from Almblad that depicted what Laser Key and Almblad say is a recently developed operator-assisted key-making machine that uses imaging software similar to the software in the abandoned vending machine model. Axxess has expressed an interest in evaluating the operator-assisted model, but Almblad and Laser Key have refused to make a prototype available for evaluation. P D R 1 3 ] Axxess has not eld tested the new model, does not have the data necessary to evaluate manufacturing costs (assuming a working machine really

8 exists), and lacks anything other than Almblad's unsupported assertions that the new 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 model represents a commercially viable advance in the art. [DDRI 14] Without data on manufacturing costs and the opportunity to evaluate the new model (including in eld trials), Axxess is in no position to consider whether to introduce the model into its installed customer base at any point in the future. [DDR If 15] Given the information presently available to Axxess, there is no basis to conclude that Laser Key's alleged new model can be manufactured at a cost that would make it commercially viable. Even if everything that Almblad alleges about the new Laser Key model were to be veried by Axxess in lab evaluations and eld trialsnone of which are scheduleda decision to introduce new equipment is at least months away. I f a decision were ever made to replace existing equipment, replacement throughout the installed 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 though Axxess (and SunSource) jointly issued it with Laser Key or endorsed its contents. The press release makes repeated reference to alleged cooperation and agreements between defendants and Axxess and concludes with a recitation of "biographical" information about Axxess. With the exception of one typographical error, the biographical

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1 information was copied word for word, without permission, from the Axxess home page 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 on the intemet. [DDR1117] Ordinarily, such biographical information at the end of a press release is provided about the participants in the release. [DDR 1 7 ] The resulting and misleading impression that Axxess and Sun Source participated in or endorsed the press release is reinforced by the prominent display of the Axxess intemet address both in the biographical section and in the credits following the text of the release. The credits read: SOURCE Laser Key H LP Web Site: httx/Iwww,Axxesctech.com [VCOMP Ex. A] In fact, Axxess had no input into the press release and no warning that it was being prepared or would issue. [IDDR 1 8 ] Thc clear contrary implication magnies the harm that now ows 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 cut a key and that is why 30% to 50% of keys don't work. Digital imaging has eliminated the human skill factor in m ak cutting machines in the very near future. ing [VCOMP Ex. a Axxess duplicating equipment has a proven error rate that averages A] k about 5%. Moreover, there is no operator skill required to trace cut a key using the e y Axxess system. Once the blank and original key are inserted in the machine, the operator a merely presses a button to start the cutting process. The safety housing for the cutting n mechanism prevents access to the cutting process by anyone. [DDR If 6-8] d t h i s t e c 6 h n

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3. F a l s e report that Laser Key products passed eld trials conducted by Mixes& The opening sentence of the press release announces that "new Laser Key 2000

digital imaging software hassuccessfully completed eld testsand will begin serial
production in the 1st quarter of 2000." Later in the release, defendants state, "The eld tests of the software were completed by Axxess Technologies at two Fred Meyers stores in Tempe, AZ in a vending machine model." [VCOMP Ex. A] Those statements are literally false in addition to being highly misleading. Axxess did not conduct a general test of software. The only eld test conducted by Ancess was to determine whether the Laser Key vending machine was commercially viable. The vending machine failed the test, and even defendants told Axxess they would not pursue further development or marketing of that product. kcxess has never even seen the product that the press release states will begin "serial production" in the rst quarter of 2000. [DDR111 11-15] 4. F a l s e statement that Artess plans to replace its established products and has reached any agreement with defendants to do so. The Press Release quotes Almblad regarding his alleged contributions to the established key duplicating technology of Axxess now in place at more than 10,000 locations (the Press Release says 8,000 locations). Immediately thereafter, Almblad is quoted as stating, Right now we are discussing the best method of replacing these older Axxess machines. Both Axxess and the stores that have seen the Laser Key machine agree that they want to replace these old machines with the new digital imaging based machines as soon as possible.

[VCOMP Ex. A]

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1 2

Axxess has made no decision to replace the equipment it owns at any customer location let alone all 10,000 locations. AXXeSS has no interest whatever in Laser Key's

3 vending machine, which is the only imaging product that Axxess has actually seen. 4 5 6 7 Although Axxess is willing to evaluate an operator assisted product for reliability, cost of manufacture, ease of use and servicealong with the myriad other factors that would inuence a decision to introduce such a product at customer locations, Axxess has never seen or tested such a product. Axxess has not considered replacement as an option and

8 has not "agreed" that it wants to replace proven technology with Laser Key's product 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 concept. [ DDR 1 2 - 1 6 ] D. O n g o i n g Dissemination of Defendants' False Statements Is Causing Irreparable Injury. On Monday and Tuesday (December 20-21, 1999), Wal-Mart complained to Axxess about the press release and asked specically why Wal-Martone of the largest customers of Axxesshad learned of the alleged developments and alleged problems with existing Axxess machines and systems by receiving a copy of the press release from Laser Key rather than hearing about those matters from Axxess directly, and much earlier. Wal-Mart said it had believed the Press Release was issued jointly by Axxess and Laser Key. [DDRI! 3; VCOMP 11141 The impact of the press release on potential new sales of existing Axxess systems will likely be devastating unless Axxcss gets immediate relief. Who would choose technology that the manufacturer itself supposedly has confessed is error-prone, obsolete and soon-to-be-replaced? Discouraged customers who have read and been misled by the Press release may be impossible to identify, and the injury to Axxess' business could reverberate in subtle ways for years to come. One of the harms threatened by continued dissemination of defendant's false statements 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. Axxess does not believe the timing of the press release and the impending closure of the merger to be mere coincidence. I n a December 8, 1999 writing, Almblad made explicit reference to the merger as a reason for Axxess to buy his technology: Axxess should acquire us [Laser Key], or our machine, before we gain any more momentum, i.e. nancing, distribution agreements, and so on. Warburg [the largest Axxess shareholder] can take less than they planned [from the proposed merger with SunSource] and make a deal with us. Sooner or later this will become clear to all parties. [VCOMP 1 1 - 1 3 ; DDR If 4 and Ex. A] E. A x x e s s Has Made a Strong Showing of Success on the Merits. Section 43(a) of the Lanham Act specically prohibits "commercial advertising or promotion" that "misrepresents the nature, characteristics, qualities, or geographic origin of his or another person's goods, services, or commercial activities," 15 U.S.C. 1125(a). The elements of a claim of false advertising under 43(a) of the Lanham Act are: (1) a false statement of fact by the defendant in a commercial advertisement about its own or another's product; (2) the statement actually deceived or has the tendency to deceive a substantial segment of its audience; (3) the deception is material, in that it is likely to inuence the purchasing decision; (4) the Defendant caused its false statement to enter interstate commerce; and (5) the plaintiff has been or is likely to be injured as a result of the false statement, either by direct diversion of sales from itself to defendant of by a lessening of the goodwill associated with its products. Southland Sod Farms v. Stover Seed Co., 108 E3d 1134, 1139 (9th Cir. 1997), The press release is lled 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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1 rate asserted. [DDR118] Axxess has not conducted eld trials of any Laser Key 2 3 4 5 equipment or software other than the vending machines, and those tests were a failure, not a success. [DDR 1 3 - 1 4 ] Axxess has no plan to replace its equipment at 10,000 locations with products that Axxess has never seen, let alone tested. [DDR 1 5 - 1 6 ] AVMS has not agreed that it wants to replace its established technology with Laser Key's

6 products and is not discussing with Almblad or Laser Key the best method for 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 implementing a replacement decision that has never been made. The false statements in the press release pack an exceptionally powerful punch because the release falsely identied Axxess with Laser Key as a co-sponsor of those statements, [VCOMP Ex. A; DDR 1 7 - 1 8 ] Because the press release is literally false, Axxess does not need to establish actual public 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 may enjoin it without reference to its impact on the consumer."); Southland Sod, 108 F.3d at 1139 (same, citing Castro!). Nevertheless, the unsolicited reaction from Wal-Martone of Axxess largest customers with 2,500 of the locationsdemonstrates actual public deception. The tendency of false statements attributed to a manufacturer to the effect that the manufacturer's goods are obsolete and inferior to other goods has an obvious tendency to affect a buying decision. The false statements and associations in the press release are therefore material. Moreover, by placing the press release on the intemet and by sending it across state lines to Wal-Mart (and presumably others), defendants caused their false statements and associations to enter interstate commerce. [VCOMP 2 - 3 and Ex. A] Finally, the prompt and negative reaction from Wal-Mart demonstrates that Axxess is likely to suffer a loss of good will in connection with its products. [VCOMP If 14; DDR 13

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The facts that underlie the Lanham Act violation also establish liability under Arizona law. In particular, false advertising under Lanham Act 43(a) is also unfair competition under Arizona law, and the knowingly false disparagement of Axxess and its technology 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 Fl d 1034 (9th Cir. 1986); Restatement (second) of Tort 623-A. Conclusion The press release was blatantly false and obviously intended to put pressure on Axxess by disrupting relations with its major customers, its merger partner and anyone else who reads it. Both federal and state unfair competition laws condemn such tactics. Dated: December 23, 1999. BROWN & BArN, P.A.

B Michaele4i , e , y c . F. Bailey d4 2 t Joel W. Nomkin Chad S. Campbell 2901 North Central Avenue g Posti Ofce Box 400 a t Phoenix, Arizona 85001-0400
Attorneys for Plaintiff OF COUNSEL Laurence R. Hefter Christopher P. Isaac FINNEGAN, HENDERSON, FARABOW, GARRETT & DUNNER, 1300 I Street, N.W. Washington, D.C. 20005-3315 (202) 408-4000 Phone (202) 408-4400 Fax