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SCO v. Novell, Day 8, Wednesday, March 17, 2010; McBride, Pisano, Botosan - as text - Updated
Tuesday, October 05 2010 @ 12:56 AM EDT

This is the text transcript of day eight of the second SCO v. Novell trial. The trial began on Monday, March 8, 2010 and ran for 15 days, Monday through Friday, for three weeks, with the Hon. Ted Stewart presiding. This day, then, is Wednesday, March 17, and the witnesses that day were Darl McBride, back on the witness stand for the third day, and then SCO's two experts, Dr. Gary Pisano and then Dr. Christine Botosan with some very funny math. Here's Dr. Pisano's expert report, if you are curious. Dr. Botosan's you will find here. Here is Groklaw's eyewitness report from the trial for that day.

This is the day McBride was confronted with the 8K SCO filed, telling the SEC, SCO's partners, and the public that SCO didn't need the copyrights to run its business. To my mind, that was the single most significant moment of the trial, the day that SCO lost, for sure.

If you'd like to jump directly to the transcript, you certainly can. And if you'd like to jump to a transcript of any other day of the trial, here you go:
March 2010
M Tu W Th F
08 09 10 11 12
15 16 17 18 19
22 23 24 25 26

Before the jury enters:

The housekeeping today was mainly about the upcoming testimony of SCO's expert, Christine Botosan:

THE COURT: All right. Three issues were raised about the Botosan testimony. First of all, the argument is that she cannot rely on -- rely on Dr. Pisano's testimony. I believe for the underlying reason that the court just addressed that the court will have to deal with that after Dr. Pisano has testified.

Secondly, it is asserted that she ought not to be allowed to testify beyond the dates of her report because there has been no supplement. And third, the defendants have argued that she ought not to be permitted to testify regarding prejudgment interest.

The court has looked at the prejudgment interest and is convinced that that is a correct statement and she should not be allowed to provide testimony as to an amount of prejudgment interest.

As to the second issue, how do you wish to respond to that, Mr. Hatch? MR. HATCH: First, on the interest, we agree with Your Honor that she was not going to testify as to that. I think that to the extent interest is available, that would be a legal question for Your Honor at a later time.

As to the issues regarding the event study, we have contemplated your ruling of yesterday overnight and this morning and have decided that we will not elicit testimony on the event study today. So that issue is moot.

So SCO either lost or gave up on two of the three issues, leaving just letting her rely on Dr. Pisano's testimony, but provisionally, meaning the judge would decide the Pisano issue after the testimony, something he'd ruled on earlier at a hearing, at which Novell's lawyer, Sterling Brennan, called her report "junk science" and utterly unreliable:
MR. BRENNAN: Your Honor, I think really, cutting through the arguments, there are probably two to three critical issues that we believe would suggest that the Court ought to grant the motion. And the first that I wish to focus on is the so-called event study that is really the linchpin of Dr. Botosan's analysis. We believe, as we have described, there are at least two fundamental problems with the event study.

The first is the lack of relevance to the event study to the lost profits claim. This Court has already ruled that a drop in stock price is not going to be a subject of the claims in this case. It's already ruled on that. The event study and the analysis that goes with it is really intended to focus on a track or an attempted correlation between NASDAQ and SCO's stock performance. That's not at issue here. That's not a relevant inquiry for purposes of lost profits.

What Dr. Botosan does attempt to do is to draw some correlation between SCO's stock price and NASDAQ and then adhere to that some sort of event study to suggest that individuals who otherwise might have taken licenses under the SCOsource programs chose not to do so because of statements or events involving Novell's claim of ownership in the UNIX copyrights.

So the event study analysis is fatally flawed, not merely irrelevant but fatally flawed because it doesn't focus on the real issue in a lost profits analysis, and that is the question of whether or not SCO lost revenues and thus profits from the sale of SCOsource licenses because of any conduct by Novell. Instead, it's all attempted to track or correlate to NASDAQ and the performance. And the problem there, Your Honor, is there simply is not a correlation, as we demonstrated in the papers.

The regression analysis shows that there simply is not a predictability factor that would allow this Court to allow this analysis to get past the gatekeeper function that this Court performs.

Now we did not and our expert for Novell did not have a chance, until very recently, to see really what the output was by Dr. Botosan. Our expert did attempt to do some sort of reverse engineering, as it were, to find out really even what the so-called R2 measurement was, which is the predictor of a correlation. And that reverse analysis suggested that the correlation was so low as to have absolutely no meaning.

In the declaration that was just submitted to this Court, I believe this past Monday, it was suggested that the predictability factor was a mere 14 percent. And so that demonstrates by the authorities that we've cited that there really is not a sustainable, reliable predictability factor that's even built into the progression analysis that Dr. Botosan did.

We've also referenced to the Court case law that suggests that even a correlation factor as high as .45, or 45 percent, is not sustainable and should not be accepted for purposes of statistical analysis to demonstrate a purported correlation between the events at issue and the claim.

So here we face a situation where not only is the event study irrelevant to the issue of lost profits, but even the regression analysis that was performed itself demonstrates that there is no correlation between the events that are being presented to the Court. And in Dr. Botosan's late filed submission, she suggests that the correlation factor, as I said, is a mere 14 percent, which is well below the threshold that's been accepted by courts.

THE COURT: Mr. Brennan, isn't that simply your expert's view of Dr. Botosan's conclusions? I mean isn't that best dealt with by those two experts going toe to toe and you, on your best behavior, cross-examining the expert of plaintiff and so on? I just don't know whether or not -- I mean I'm not disputing your expert's calculation, but it is something that the jury ultimately gets to decide, doesn't it?

MR. BRENNAN: Well, I certainly do agree that would and could be a battle between experts and we would be able to, through cross-examination, demonstrate the failure of Dr. Botosan to make any correlation that has any meaning. No question about that. The issue here I believe, however, is whether or not we should even get to that point because the presentation and the analysis that's done is not limited merely because of a weight issue but because it doesn't even meet an acceptable standard. We were, in fact, dealing with so-called junk science here.

As we demonstrated, the authorities show that in a correlation factor as low as Dr. Botosan states, and I'm going to rely upon her number in her declaration rather than our expert's calculation of a much lower coefficient, with an R2 as low as .14, it doesn't even get close to the threshold that courts already have rejected as being too low to allow the issue to even get to the jury for purposes of weight analysis.

So I certainly do agree with the Court that the experts could, in essence, battle it out and we could diminish the weight of the argument by cross-examination, but I'm suggesting to the Court that we need not and should not get there because of the gatekeeper function. This jury should not be required to, in essence, endure what I call is junk science.

Your Honor, the other points that we raised I do believe also could suggest to the Court that Dr. Botosan's testimony ought not be allowed and we have the problem where she is relying upon not mere inadmissible hearsay on its own, but is being used as a conduit to pass through information that is inappropriate. We've cited some of the examples to the Court. For example, some of the projection analysis, we've had no ability to analyze whether it's reliable, nor does Dr. Botosan in her report suggest that there has been any independent analysis by her on the projections that she's relying upon.

Instead, her testimony is being offered, again, as a mere conduit to pass through information where she's not independently analyzed it. She has not independently verified that it's reliable. Nor does she know or does she purport to know whether or not those projects meet any sort of rigor of reliability. That's another problem, Your Honor. And I believe under the gatekeeper function, that would be a basis for you to reject Dr. Botosan and her analysis and it ought not to go to the jury.

She was allowed to testify, to an extent, anyway, but that testimony was absurd, to me, which is maybe why in the end the jury and the judge didn't credit either of them. I know I didn't. Here's Pisano's expert report for SCO, if you wish to decide for yourself, or go here to read his and Dr. Botosan's. The first link, though, is where I listed some errors, as I viewed them, in his report. When we first got to see their reports in February, I wrote this:
I don't know if I should describe the reports as absurdly fascinating or fascinatingly absurd. Their version of UNIX history and the history of SCO's litigation is an alternate universe far from any I know or think of as reality.
Novell accused her of being "a mere conduit for opinion testimony" -- meaning Pisano's opinion, which was as follows: after interviewing Darl McBride and Chris Sontag and reading the laughable Yankee Group report, whose methodology I wrote about here, he concluded that if Novell hadn't spoken up, SCO would have sold millions and millions of SCOsource licenses:
49. I conservatively estimate the total potential market for the SCOsource Right to Use license during the damages period at 7.4 million servers.
That's his conservative estimate just for North America. Not that Dr. Pisano seems to have known as much about the methodology of that study as I did. He said he assumed they were reliable, because that is what they do for a living.

Considering that it turned out SCO didn't own the copyrights in the first place, that would have been fraud on a fairly large scale, wouldn't it, had SCO sold millions and millions of SCOsource licenses? When you add in that the SCOsource license conflicts with the GPL, which is Linux's license, that would have made it bad, even if SCO owned the copyrights. Anyway, you can't force people to license your copyrighted materials. They can just say no. It's not like patents, which SCO pretended to own and then acknowledged it didn't.

Here's another survey from 2003, which found that half of the companies surveyed said that after they'd checked with their company's lawyers, they were not interested in a SCOsource license, because their lawyers told them the GPL was all the protection they needed. Pisano seems not to have read that one or factored it in.

So I'm quite sure SCO wouldn't have sold millions and millions in any case. How many did it sell between the first announcement of SCOsource in either late December of 2002 or January of 2003 and May 28, 2003, when Novell spoke out? Two, right? So when, and why, were the millions of licenses supposed to start to kick in? Here are some reasons why folks didn't want a SCOsource license in 2003, not one on the list being Novell. Most everyone I know realized very early that SCO was not going to prevail in court on the copyright issue or the infringement, even if it got the copyrights.

As you will see when Dr. Botosan takes the stand, all of this matters, because SCO is appealing their loss, and one prong of their appeal has to do with Novell being given permission to raise the prior legal rulings against SCO on cross examination of Dr. Botosan. Maybe it would have been better for SCO if Botosan had never taken the stand at all, frankly. Her damages report was so fanciful, absent all real-life events that would have made people not buy a SCOsource license, that it opened the door, as I'll show you in detail when we get to that day's events. Essentially, the court allowed the jury to hear at least one thing that she left out, namely that no one was going to buy a license when the court had already ruled SCO didn't own the copyrights, and even much earlier that it didn't look like they owned them. So, this is the buildup to that element of SCO's appeal, so that is why I'm highlighting it for you.

Next, they move on to discussing some things related to Darl McBride. The day before, his second day on the witness stand, he had testified that SCO needed the copyrights to conduct business. Novell immediately served SCO notice that it was going to add an exhibit, one it intended to use to impeach his testimony, namely his SEC filing in which he said SCO didn't need the copyrights. SCO tries to stop Novell from being able to use this exhibit, but the judge lets it in. The reason I believe this was the single most important moment in the trial is because if you can prove a witness wasn't telling the truth, the whole truth and nothing but the truth in one area, the jury tends to discount everything else he said on the stand. And so would you, likely, even in real life. The judge does tell Novell to be careful to avoid mentioning to the jury prior court rulings against SCO, though:

MR. SINGER: Well, I was just going to note that the exact statement pertaining to the UnixWare and the OpenServer Business and there is no contention that those businesses couldn't be run in light of the summary judgment ruling. The issue is, of course, the SCO source and the effect of copyright enforcement.

MR. ACKER: The issue is that Mr. McBride said the exact opposite thing on the stand yesterday.

THE COURT: Well, I am aware of this document and I will allow you to use it. But I will have to tell you, Mr. Acker, that if either advertently or inadvertently that it comes out that Judge Kimball's summary judgment ruling, then as I have stated before, the court will be required to inform the jury that as to the issues before it that was reversed by the Tenth Circuit which I frankly think is something you ought to be very cautious about. And so I will allow it, as I do believe it is important for your purposes on impeachment, but I would caution you to try to avoid violating the court's prior ruling on not permitting reference to prior court rulings coming before this jury.

MR. ACKER: Very well, Your Honor. I understand….

MR. HATCH: The same thing would apply to Dr. Botosan. And largely what she will be doing is the event study won't be spoken about, just doing a calculation of damages in the same manner that Mr. Singer just talked about.

THE COURT: All right. Everyone has had their say, including the court. All right. And I just want you to remember that the court feels very strongly about this because of its prior ruling, number one.

But number two, again I believe that any reference to prior court rulings by Judge Kimball must result in the Tenth Circuit reversal being made known to the jury. And I have got to believe that if a jury hears that, it is probably going to consider that a more rigor matter than the preliminary summary judgment rulings. So anything else, counsel?

MR. SINGER: No, Your Honor. May we have a minute to discuss this issue with Mr. McBride?

THE COURT: Yes, go ahead.

Again, this ended up in SCO's appeal, the issue of the jury eventually getting to know about those rulings. But how do you like this "but for" world, where it is assumed as true that SCO owned the copyrights? And SCO wanted not only to present it that way, and calculate damages that way, but also to prevent Novell from bursting that bubble with real events that made it, frankly, impossible to make such assumptions, even if Novell had never said a word?

Darl McBride, back in the saddle again: His testimony today begins with SCO's lawyer Stuart Singer asking the questions on redirect. He walks McBride through some material about how much he believes in the company, how he manifested that by not selling any stock, and then he asks him about the "important business opportunity for SCO" in 2003, with Google. Darl was personally involved in discussions with Google, "the largest Linux customer in the world", as he describes them, with over 500,000 servers. But in the end, Darl says, sadly the millions and millions he hoped to get didn't come through, because Google decided to wait and see who actually owned the copyrights, Novell or SCO.

Darl personally talked to Michael Dell, also, by phone, who then turned it over to Dell's general counsel, Tom Green. Darl claims they wanted to resell SCOsource licenses:

Q. What was the nature of the business opportunity involving SCO source licensing that you were discussing with Dell?

A. Um, Dell's idea was they wanted to be able to go to market with a SCO source license to be able to provide indemnification for Linux users. And specifically, they wanted something that would allow them to position themselves stronger than what HP's program was.

Q. Would Dell have been reselling SCO source licenses?

A. Yes, that is correct.

Now, this is Darl talking, and this isn't my first rodeo, so I take what he says as something to look into to see if it's so. But considering that Dell did resell those loathsome Microsoft-Novell chits, maybe it is true. Anyway, Dell dropped out, again, according to Darl, because of the Novell claim.

And then we have Novell's attorney, Eric Acker, who begins recross of Mr. McBride with some pleasantries, but then gets to the meat of the day, the SEC filing. But first he gets Darl to say that it was Novell posting its ownership claim on its website on December 22, 2003 that scuttled the Google and Dell interest.

That's odd. On his second day on the stand, McBride indicated interest died on May 28th, 2003. Yet here he is, negotiating with Google and Dell, and to hear him tell it, almost succeeding. So was the May 28th announcement not so bad after all, or what?

I know. I jest. But it's because I take all this testimony as being absolutely ridiculous. Is it any wonder the jury didn't credit it either?

Here's Darl's answer to my question: it was like dropping napalm on somebody, he says. "It didn't kill people immediately, but over time it did."

Um. Napalm often kills people if you drop it on them in war. Someone should probably pay me for all the helpful corrections of SCO facts.

Next, there's some info about HP and SCO. If you recall, HP was a sponsor of SCOforums, and here's the backstory, from an email from a Mr. Joe Beyers at HP:

Q. (By Mr. Acker) Why don't we take a look at what Mr. Beyers said on August 15th, 2003…. Mr. Beyers wrote to his colleagues at HP, "Today I threatened SCO that HP would not attend the SCO forum next week if they did not sign the HP UNIX release today." Do you see that?

A. Yes.

Q. "They responded by signing the release and they also provided a letter that we can show our UNIX customers." Do you see that?

A. Yes, I see that.

Q. So wasn't it the case that after the SCO source program was announced, um, you were in negotiations with HP and HP was going to participate in your SCO source forum in Las Vegas; correct?

A. Yes, that is correct.

Q. And a week before the forum, SCO is demanding, I believe, a certain number of millions of dollars from HP; correct?

A. We were in negotiations over something that they were -- had initiated. We were talking about millions of dollars, yes.

Q. And what HP said to you, we're not going to pay you millions of dollars, and if you don't give us a release for free, we're not going to come to your SCO forum; right?

A. That is part of what they said.

Q. Why don't we highlight the number of points below, if we could. And this is the release that HP wanted. "SCO releases/forgives any past actions by HP (and its future direct consequences) which may have been in violation of its UNIX licenses."

A. Right.

Q. Two, "The HP UNIX license now becomes "unconditionally irrevocable", even for future "bad" acts." Three, "HP has no restrictions on what it does or says about the IBM case or the Linux case." Do you see that?

A. Yes.

Q. And four, "Publicity: SCO has provided us a letter to Carly," who is the CEO, Ms. Fiorina, CEO of HP at the time, "that we can show to our customers that states that SCO believes that HP is in compliance with its UNIX license." That is what they wanted, correct?

A. Yes.

Q. And then the financial terms are also there at number four, right?

A. Yes. Q. And the financial terms are zero, right?

A. For that release.

I remember at one of the earliest hearings in the SCO v. IBM litigation, IBM's David Marriott mentioned the HP release. And now we know the rest of the story. But actually, there's more. Here's why Darl claims HP didn't take a license:
A. So the big issue then was the reason that they broke down. And the reason that they broke down was they were pointing to the copyright problem. And when they brought it up, I said whoa, Joe, we put that to bed months ago. That -- I was -- I wasn't thinking when he first said Novell copyright issue that they hadn't even been following what happened after Messman had announced they owned it and that we had come back and put that to bed. So I went through that story with him and he said no, no, no, no, we got all of that. What you don't understand, Darl, is that Novell is gearing up for another run and you will eventually see them come out public again and they will say that they own the copyrights. That was the first time that I had heard that, in fact, Novell was going to take this public position and it was from Hewlett Packard in the context of not doing this deal.

Q. So you knew that information in September of 2003 that Novell was going to claim ownership of the UNIX copyrights?

A. That was the first time I had heard about it.

Q. But you had that in your mind as the CEO of SCO in September of 2003 that Novell was going to reassert its ownership of the UNIX copyrights?

A. Based on that we started watching.

Q. And despite having that knowledge in September of 2003, you and your CFO continued to tell the market that that issue was put to bed, right?

A. The things that you pointed to yesterday were predating that.

Q. There was a -- you had a conference call in November of 2003 where Mr. Bench your CFO said this issue is put to bed, and you were sitting right next to him. And now you have told the jury that you had that knowledge in your head in September of 2003 that Novell was going to reassert its ownership to the UNIX copyrights?

A. We had a lot of things in our heads. And every time we would turn around from May, June, July, August we were hearing something different. And what happens with these SEC filings is you have to state things based on material changes. And until they went public, we did not view that as a material change. The fact that they were behind the scenes saying this or saying that, is not a materiality threshold by which you would adjust your 10-K filings for the investing public.

They had a lot of things in their heads. He goes on and on trying to justify not telling the public that Novell was continuing to contest the ownership, but it just makes your stomach queasy:
Q. So let me get it clear. It is your testimony that when the general counsel of Novell wrote you a letter on August 4th, 2003 and said Amendment Number 2 did not transfer the copyrights, you as the CEO of SCO did not believe that was a material event that needed to be reported to the marketplace?

A. I believe I have answered that question, Mr. Acker.

Q. You haven't answered that question, Mr. McBride.

THE COURT: Answer the question if you please, Mr. McBride.

THE WITNESS: I did not believe that to be material at that point in time.

Q. (By Mr. Acker) So as the CEO of SCO, the fact that Novell was claiming ownership of the UNIX copyrights was not a material fact to you?

A. Not at that point in time.

I believe it was Groklaw that first pointed out SCO's failure to tell the public that Novell was continuing to contest the point about copyright ownership, as soon as I saw the Novell letters and I asked why it wasn't listed as a risk factor, and I made a list of all the opportunities SCO had to tell the public about the Novell letters prior to Novell putting them on their website in December of 2003 -- 12 separate events, so it is very gratifying to me to see this matter brought up at the trial. SCO not only didn't mention the Novell letters and the dispute, it went further and claimed Novell had backed down, three times, which I culled from Groklaw's Quote Database:
"We stopped our battle with IBM for basically four days; we stamped out the Novell attack and put that one behind us. Now we're back on what our original focus was, which is resolving the issues we have with IBM."-- Darl McBride, CNET News, 2003-06-16

"It threw Novell out in front of the bus a couple of weeks ago and Novell got run over. It's a unique situation when a company as powerful as IBM has somebody coming at it with such strong claims as we have in a very public forum."-- Darl McBride, V3.co.uk interview, 2003-06-30

"Yeah well, the Novell thing. They came out and made a claim that held up for maybe four days and then we put that to bed. If you go back and talk to Novell I guarantee what they'll say, which is they don't have a claim on those copyrights anymore."-- Darl McBride, ZDNet interview by Dan Farber, video, 2003-07-21

SCO all the time was getting the Novell letters, saying that it continued to contest. So Darl's explanation would maybe fly for a few feet if he had stayed silent during the debate with Novell behind the scenes, but that isn't what he did. He affirmed at least three times that there was no debate going on, because Novell had backed off.

Singer tries to rehabilitate Darl, but what can anyone do? It's a job for Superman. And I'm pretty sure Superman wouldn't touch this with a ten-foot pole. But there is one interesting detail:

Q. And when you saw that public assertion which you were just asked about, where you said that you would be able to operate the UNIX and UnixWare business?

A. Yes.

Q. Would you have been able to do licensing deals such as you did with Microsoft and Sun?

A. No.

Q. If you didn't own the copyrights?

A. No, not at all.

Q. Would you have been able to take any action to enforce your intellectual property if you didn't own the copyrights?

A. No. The copyrights were a prerequisite to enforcing the intellectual property.

Q. What you would have -- so were you referring to just the ability to sell product, the UNIX and UnixWare products?

A. Yes.

Would that not indicate that both companies bought a SCOsource license? If he couldn't do the deal at all with those two without copyrights, as he testifies, but he could sell products without copyrights, then what were those two companies buying if not a SCOsource license as opposed to a product? Or was Darl just kissing the Blarney Stone again? And what about Sun and Microsoft? Sun told us it was mainly about drivers. And Microsoft said they were licensing code for their Unix-related products. Doesn't anybody in corporate America tell the truth any more? If so, where exactly on this map is it?

[Update: I noticed how Darl described the deals with Sun and Microsoft at the May 28, 2003 teleconference. Let's see if it matches what he said at this trial:

McBride: Yeah. The deals that have been done on SCOsource side relate more, not too much to our direct lines under SCOx product line, but more to taking our core thread of Unix that we own and giving access to portions of that to these other companies to be able to integrate their product lines better from a Unix operability standpoint.
That sounds to me like SCO could do those deals, subject to Novell's approval in some instances, without the copyrights. It was about licensing them code. SCO could do that without owning the copyrights. Doesn't it sound that way to you? One of the more disturbing elements of the SCO side of the story is how it continually morphs.]

The other thing I couldn't help noticing was that HP's Martin Fink wrote a memo listing all the pros and cons of getting a SCOsource license. He was against it, but he says this in the internal email, and remember this is the primary Linux person at HP at the time, the one that got sent to LinuxWorld and such venues to talk about Linux:

As you know, I oppose moving forward, although I will do my best to support the larger HP position if we decide to move forward.
I guess one can look at the larger picture of the email's contents, and one can see that HP didn't go forward, although Darl claims they were going to until Novell posted the letters in December of 2003, and no doubt this memo had something to do with HP not going forward in the end, so that's on the plus side. But if this is the best Linux advocates can do inside a corporation, and it may be, then it highlights precisely why Andy Updegrove of the Linux Foundation wrote the other day that FOSS projects can't be owned by corporate entities. It just doesn't work out. They sooner or later have "larger positions" that can really do damage to the community's interests, which are not always aligned.

Dr. Gary Pisano Testifies:

Pisano now takes the stand. He gives his credentials. He is a professor at Harvard University, with a PhD, which I trust means that the University is thoroughly mortified about this testimony. It also makes me wonder about Harvard inviting Darl to speak there. Remember how we puzzled?

Pisano says he doesn't often act as an expert in litigation. This is his first time testifying at trial, but you'll remember he was also used by SCO in the IBM litigation, which hasn't reached trial yet. He charged SCO $600 per hour. Normally he charges up to $1,250 an hour. So… he is doing a favor for SCO? Why would he?

Anyway, he is there to describe in glowing terms what life for SCO would have been like, had Novell not claimed it owned the copyrights. And here is what this expert tells the court about Unixware:

A. UnixWare was an important product because UnixWare was an operating system for servers that could run on types of a computer servers that were called Intel architecture. That is, they had Intel chips in them. And that was a very fast growing part of the computer server market. And until that time, there was no -- there had been no other UNIX products that could run on an Intel based machine.
That, of course, is not true. There were others. Here's a list of the Intel players. Xenix, which later became OpenServer, sort of, ran on Intel and it was Unix System III. Xenix was the first Unix on Intel. SCO did that, but I'm just saying UnixWare was not the first. And just for historical clarity, UnixWare was originally released by Univel, not SCO, and that was in 1991. At around that time, a year before, Dell System V Release 4 came out, on Intel. It was announced in October of 1990 and available in December.

Sun had SunOS, for another example, that ran on Intel, and SunSoft, the Sun subsidiary, announced Solaris in 1991 which ran on Intel too. BSD ran on Intel, too. Here's a press release from 2000 with a quotation from a company running BSDi's BSD/OS on Intel. So did Sequent, which released Intel 80386-based Symmetry in 1987, and Unisys did too, I think, and IBM, but I didn't check all that. My point is just that this expert didn't do research as deeply as one could have. And he got paid $600 an hour. I just took a half hour for free to show you that he wasn't correct on his facts.

His descriptions of Linux are equally absurd. He says it's written by anonymous users. That is hilariously wrong, and easily checkable. The credits file lists all the folks whose code is in the product, after all. It's on the Internet.

He also claims no one used Linux in the enterprise except for simple tasks until 2.4 in 2001. That's not true either. Here's an article from 1999, just for one example, Will commercialism help or hurt Linux?. Even in 1998, there was a lot of buzz about Linux at Comdex.

$600/hour might be a little too high, I'm thinking, for what SCO got. And may I ask how you can teach business at Harvard and not know these things? I mean, does Microsoft give them contributions or something? I found that in about five minutes. And for sure, if I had been sitting on the jury, and we know some with computer skill did, I'd have been zoning out, realizing what I was hearing wasn't accurate.

In fact, I am zoning out. He's at the part where he compares SCOsource to indemnification, and he measured how many folks want indemnification, instead of how many want SCOsource. Lordy. One study found 19% interested in indemnification, and Yankee Group did a separate study and found the same 19% deeply worried about it and 26% kind of concerned, and instead of concluding that they were sort of comparable and that about 19% might buy SCOsource, he adds 19 and 26 and says 45% of the market would be interested in SCOsource. Here's what he says about the second study, which was asking how people felt about indemnification:

And what they found is that 19 percent of their respondents said that it was either a top priority or they were very concerned about indemnification. And then another 26 percent said somewhat concerned. And that is a harder one to interpret.

So again, my view was at a minimum 19 percent, and then sort of think on that continuum of the 26 percent we don't know which of those are concerned enough to be buying, but a maximum it would be 45 percent. We add the 26 to the 19, there is 45 percent.

Huh? My brain is rejecting those numbers and refusing to listen to another word. Being interested in indemnification or even very worried about it doesn't mean any of them were interested in SCOsource. Nobody asked them. For all we know, they'd rather die than give SCO money. I know I would. Let's jump ahead to Dr. Botosan.

Kidding. I'd love to, but I'm nothing if not thorough. So, slogging on, we find him applying his numbers to the number of servers out there, another fanciful figure, if you consider that you can make as many copies of Linux as you please without having to tell a soul.

With the Pisano higher math, we get, therefore, 3.3 million licenses. That figure alone would have informed me that something was wrong. If SCO only got two from January of 2003 to December of 2003, what might one conclude about that 3.3 million projection? Class? Anyone?

His "expert opinion", elicited by Singer, is that the only reason that we didn't see such numbers is because of Novell. I guess this means he doesn't teach logic at Harvard. That's OK. We can't all be geeks. Although I must add that if the whole world were geeks, it'd be a more logical and a nicer world.

Mr. Acker then stands up to do cross examination. By now, he's probably salivating. For sure, he wants to discredit this man, but not in an obviously nasty way. So he asks him how many hours he spent on this. Hundreds, is the answer. As of 2007, he'd been paid $120,000, and he admits that now it's over the $200,000 mark. Man, you'd think he'd at least have looked up how much a SCOsource license cost. He testified it cost $695, but that's not quite right either. It was $699.

Acker reads to him from one of the reports Pisano wrote:

Based on my knowledge of the industry, in my research and analysis in this case, I am not aware of any causes for SCO's loss of those SCOsource license sales other than Novell's conduct during the relevant time period.
The time frame is 2003 to 2007. No other reason. He clarifies that he means no other reason why the 45% group would not take a license. Then the report isn't accurate in this one statement, is it, Acker inquires. It is, Pisano says, offering, "I think we are violently agreeing." Acker: "I don't think we are, Doctor." And he takes him to another part of the report, and Pisano admits that the Yankee study he relied on was actually done over the web, and you know if it's on the Internet, it must be true. Snort. And nobody was asked in the Yankee Group study about whether they'd want a SCOsource license or about the Novell statement. By that time, 2004, Pisano says, SCOsource was pretty much dead.

To which my logical brain asks, how then is the Yankee Group study relevant to SCOsource? Whatever the responders said, they were not thinking about SCO.

Acker mentions to Pisano that Darl said in public that other indemnification programs hurt SCOsource. Yet Pisano just said that in his opinion, they were all inadequate compared to SCOsource. So…

Q. And my question was really pretty simple. Were you aware that Mr. McBride believed that other indemnification programs were harming the SCOsource licensing program? Were you aware of that fact?

A. I was not aware of that.

Q. And now, if you assume that fact, that, in fact, Mr. McBride himself thinks that the SCOsource licensing program was harmed by other indemnification programs, does that change your opinion at all?

A. No. Not one bit. Not one bit.

Q. But it is your opinion that your proxy, and that is, the basis for your opinion, is that there is an analogy between an indemnification program and the SCOsource licensing program. Do I have that right?

A. Absolutely. You know, they were potential -- you know, potential substitutes. I actually interpret his statement there, as I'm looking at it --

THE COURT: Dr. Pisano, there is no question.

THE WITNESS: Okay. I'm sorry.

THE COURT: Thank you.

A flustered doctor on the stand. Acker shows an internal email where a SCO employee, Janet Sullivan, tells Brent, probably Stowell, that SCO can't really indemnify, because they can only indemnify against SCO going after someone, but there's lots of code in Linux that comes from third parties. Acker is letting the jury know that Pisano's opinion of the superiority of SCOsource over other indemnification offerings isn't shared with the world, not even inside SCO, where Janet Sullivan wrote, "That's the whole problem with Linux. Because of the GPL, no one can in indemnify. We know that SCO IP found its way into Linux, but we have no way of knowing if there is other code in there that belongs to someone else. Therefore we can't indemnify. We can't indemnify against the others". So, Acker asks, did anyone ask in their studies if people would want a SCOsource license if all it indemnified was against SCO, or might they want another actual indemnification, like Red Hat's? No, Pisano says. Then he's shown the HP document, listing the reasons not to take a SCOsource license, which, incredibly enough, SCO lawyers never showed him.

No doubt that illuminates as to why he couldn't find any reason people wouldn't take a SCOsource license other than Novell's statements. Acker goes down the list, asking if respondents in the studies were asked about all the negative reasons on that list. Of course, no, they were not asked. Nobody was asked, for example, if they'd worry about taking a SCOsource license due to fears that the Open Source community would respond negatively to their company. Big oversight there. HP had written that paying SCO would be like supporting terrorism. Anybody asked about that? No.

Acker asks him if he's seen any of the letters SCO got from folks refusing to take a license. 8 out of 32 mentioned Novell, but notice this brilliant exchange:

A. Those were the 32 letters I had, right.

Q. And of those 32 letters, only eight gave any mention of Novell, correct?

A. That's correct.

Q. And how many of those eight that made mention of Novell also made mention of other reasons why they weren't willing to take a SCOsource license?

A. I don't recall off the top of my head.

Q. And you can't tell this jury that, in those eight letters of the 32, that, in fact, those eight that did mention Novell said Novell was the only reason that they wouldn't take a license from the SCOsource program, correct?

A. Just a sec. Can you repeat the question?

Q. Sure. The eight that mentioned Novell, all you can recall is it simply mentioned Novell, right?

A. Yes.

Q. And you can't tell this jury that, in fact, those eight that did mention Novell actually said Novell was the reason why they weren't taking a license, correct?

A. Sure. Now, again, as I mentioned in my report, you know, that's right. These are just pieces of data, the letters, what they write, what companies write back. The same with their internal documentation. And if they are writing a letter to a company like SCO, they have to be very careful in how they -- in how they couch it, particularly if there is a legal issue at stake. So you can imagine they could couch that letter very carefully. So it's very hard to interpret those customer -- those customer letters.

Q. So, are you trying to tell the jury that you believe that when companies wrote letters back to SCO, they didn't provide the real reason why it was that they weren't taking a SCOsource license?

He says no, but he did kind of say that, as I read his testimony, and likely the jury saw it that way too. He's shown a letter from GE, which he doesn't think he's seen before:
Q. So, of the 32 letters that counsel provided to you, this was not one of those?

A. Again, I want to be careful that counsel provided me letters. In this research, I was free to ask for whatever I wanted to get in terms of documents and letters, so it wasn't like they were just providing it. And I can't recall the specifies around the 32 when they came out. I think those were the ones cited in your expert's report and therefore I looked at the analysis around those.

Q. Did you ask for all the letters that customers wrote indicating why it is they weren't taking a SCOsource license?

A. I did not.

Q. You didn't think that was something that you should have?

A. No. I had plenty of other data and plenty of other information. And, again, those would be reflected -- the customers -- think of it. You have these customer responses. You know, in the survey methodology, we pick up all these issues that we are talking about. If they didn't think there was infringement, they are showing up in the survey as not being interested. They are in that other group.

So the customer letters gave us a very small and potentially biased sample. For example, if SCO sent those letters to the ones they thought were most likely to be concerned, there could have been a very high response rate. That would have biased my level upward, and I didn't want to do that. I wanted to give the fairest view. The survey, I thought, gives the fairest view of this. And these kinds of issues that are being raised in these letters, concerns like in the HP document, those are -- those are concerns lots of companies had. That wasn't unique to HP. That wasn't unique to GE.

And that's why I don't estimate the market at a hundred percent. Nineteen to 45 percent is a small percentage, small percentage. A lot of people had these concerns.

Q. Doctor, so -- so the jury understands, you were relying more on a survey of anonymous companies, you don't know who they are, as opposed to actual letters from companies telling you the reasons they are not taking a SCOsource license. Do I have that right?

A. I think that's a more objective way to do it, absolutely. That's exactly the way I would do it in my academic research.

Q. So, in your academic research, you would rely on an anonymous survey, as opposed to what happened in the real world?

A. I wouldn't make that as a generalization, but for this kind of problem, for understanding this kind of issue, that's what I would do, absolutely.

Q. Anonymous survey, as opposed to what happened in the real world?

Eek. Really? That's how academics do research? And people give them awards for such as this?

When lawyers ask the same question twice, they are signaling to the jury that the answer is incredible.

Acker is really impressive here. First, he gets Pisano to admit he never saw the letter, but Pisano volunteers that it's not SCO's fault, as they gave him whatever he asked for. So that opens another door, and Acker's next questions imply that Pisano must not have been very eager for information, then, which undermines his testimony. How can you trust the conclusions he reached, if he only saw some information, but not the complete picture? Pisano then tries to say that he based his opinion on the number of potential licensees on people not directly asked about SCO instead of people actually nudged by SCO to take a license because the former would be less biased.

I am rolling my eyes. Probably the jury was too, by then. One of our reporters said the jury seemed to be paying less attention one day during Acker's questioning. I see now why. I think they had heard enough to adequately evaluate the worth of the testimony and didn't care any more what the witness said further.

Would you like to know what Sprint said in its letter to SCO, refusing to take a license? Here you go:

I take comfort that SCO has been a Linux distributor, with the associated GNU license rights the public has come to rely on. Sprint will continue to depend on SCO's public statements and past actions.
And that's the most important reason in the real world that no one wanted that stupid license. It's the same reason that I knew FROM THE VERY FIRST DAY that SCO would lose in the end. The GPL.

Acker then introduces the Gartner Group report from 2003, telling companies not to take a license. SCO's Singer tries to block it, but the judge allows it, after Acker points out that SCO opened this door by asking Darl McBride why people were not taking a SCOsource license. Here's what Gartner suggested:

Customers with large Linux commitments should avoid paying SCO server license fees, since they appear arbitrarily high, representing concession to SCO's claims and will expose them to ever larger fees. Moreover, SCO's claims challenge the foundation of GPL.
And yet, in Pisano's report, the only reason he could find for his group not taking a license was Novell. And it's brought out that to do a study that would have asked all the unasked questions could have been done for between $10-$20,000. But nobody bothered to do it. Pisano testifies that no one could have done the study after Novell's statement, because by then everyone knew the license was worthless, because Novell was credible. But there were only two takers prior, so what are we looking at here? A but-for world that never existed and never could, in my opinion.

Judge Stewart tells Dr. Pisano he is free to leave:

THE COURT: That means you may return to Harvard, if you want to. After this experience, you may want to charge more next time, at least what you have to do in the courtroom, all right. Thank you, Dr. Pisano. We do appreciate it.
In other words, the judge knew he was chopped into hamburger by Acker.

Dr. Christine Botosan:

Dr. Christine Botosan is now called to the stand, but of course we already know she relied on Dr. Pisano, which undermines her credibility with me, right there. But she gives her credentials at the University of Utah, mentions her articles and awards and such. By the way, we've now switched from SCO's Stuart Singer to Brent Hatch asking the questions.

She's an accounting professor. She specializes in "financial accounting and financial statement analysis," teaching students how to read them. Well, someone has to. And I'm sure you and I don't want to.

She's been used as an expert in litigation around seven times in the last ten years. That's almost one a year. She doesn't think that's a lot, but I do. She's been working on this case since 2007, asked to compute the amount of damages to SCO from "Novell's harmful acts." She came up with these numbers: between $114 million and $215 million.

How did she get there? By figuring the amount of sales SCO lost, a "lost profits analysis", then subtracting what it would have cost to generate those sales. As to SCOsource, she calculated both vendor SCOsource licenses lost and end user "right to use" licenses under SCOsource. On the first, she says:

SCO's management and external analysts projected that there would be up to 15 -- potentially 15 of these types of deals, and that they would generate $10 million per deal on average.
So, I think that means IBM was not intended to be the only victim. As for end users:
…external analysts predicted there would be hundreds of thousands of those sorts of licenses and that they would sell for between $100 and $300.
That's not what SCO told us, of course. And which analysts predicted that?
And I had two sources of forecasts. Internal SCO forecasts, so these would be forecasts that management generated themselves, and then also external forecasts that were prepared by financial analysts that worked for investment banks. Now given the opportunity to use both of those, if I had forecasts from both sources, my preference would be to use an external analyst forecast because they are going to be more objective. Management tends to be optimistic about things. And if you think about an analyst who's external to the company, they don't have any dog in the fight. They want to try to do the best job they can to forecast because they are providing information to their clients that are making investment decisions. The way an analyst is going to build their own reputation in the market is to do a good job of forecasting. So my preference would be to use a pre-litigation forecast from an external source when it's available.
And which noble firm is she talking about?
A And those beliefs were confirmed in an external forecast that I had available from Deutsche Bank. The Deutsche Bank analyst also said in his analysis that he agreed that there were 15 potential deals and that the amount of revenue that would be generated by each of these deals might range between five million and $20 million. So he gave quite a broad range between five and 20 million. So at the end of the day, in doing his own forecasts, he also said I think $10 million is the most likely amount.

Q Tell us for a second, if you would -- you say you relied on Deutsche Bank. What is Deutsche Bank?

A Deutsche Bank is a very large investment bank. They have an excellent reputation. They've been around since 1870, so they are a very well established firm. They have over 80,000 employees. They operate in 70 countries. So they are well known for providing this sort of information to their clients.

Q Were they independent or are they related to SCO in any way?

A Totally independent.

Did SCO keep their experts in some hermetically sealed off room, where they read nothing but the funny papers? Deutsche Bank? Independent? Brian Skiba of Deutsche Bank independent? In what sense? Deutsche Bank invested in SCO, at the same time BayStar did. As Botosan is shown on her second day on the stand, Deutsche Bank was a market-maker for SCO stock. By the way, she didn't have to choose Deutsche Bank. There were plenty of other analysts predicting things regarding SCO. Like Doom. Here's a nonexclusive list from July 2003. And let me repeat what I wrote that day:
Why Deutsche Bank, you may ask? For the moment, I'll just list a few links you can go to and see how Canopy Group companies and Deutsche Bank have been holding hands for some time. Make of it what you will. You might want to start here, where in August DB was fined by the SEC for improprieties in the HP-Compaq merger, failing to disclose a conflict of interest. Then check out the history of Deutsche and Canopy companies here and here and here and here (where we learn that Deutsche Bank migrated to Linux itself after SCO's warning, oddly enough), and here (Altiris was another Canopy company), and here and here.

The only other analyst tracking SCO said that DB has "made a mistake":

The only other analyst who covers SCO is Dion Cornett of Decatur Jones Equity Partners, according to Thomson First Call. He has an underperform rating on the stock.

"Investing in SCO is like buying a 'lottery ticket'," Cornett said Wednesday. "I think at the end of the day, the lottery ticket is not a winner," he added. "They will not prevail in their lawsuit against IBM." ... Cornett believes that IBM fights to the death when it believes it's right, as it clearly does here, and therefore a settlement is unlikely.

Hmm. Linux. Lottery ticket. That reminds me of something.... Even if SCO could convince a jury it was right, IBM would win on appeal, this analyst says:
"I think it's a stretch to think that an appellate court is going to overturn 100 years of copyright law," he said. Cornett has a $6 price target on SCO, based on a discounted cash flow analysis.
Oh, that. The old-fashioned kind of analysis. Discounted cash flow, indeed. Of course, whoever made out like a bandit today doesn't care what Mr. Cornett thinks. The folks selling today did just fine, thanks. And as for making a mistake, well, maybe they're just playing a different game.

And as for Skiba's "analysis" that SCO could hit the jackpot, it's based in part, according to the document, on his belief that SCO, if it wins, will be able to sue millions of Linux users. Dream on. If, in some upside-down crazed legal world SCO won, nobody would use Linux any more rather than pay a dime to SCO, I'm certain. We'd all switch to BSD or the HURD or whatever new stuff those wonderful programmers come up with like magic. And SCO would be left with a legacy version of software nobody would ever touch or fix for them to time indefinite, even forever. Then they'd have two old legacy operating systems nobody wants.

Funny. None of SCO's experts read these other analysts? And I gather SCO didn't give them any information and evidence from Groklaw. Hardy har.

By the way, Skiba was saying this in August of 2003:

But so far, most CIOs have not really changed their plans, Skiba said.

"At this point it hasn't really hit the radar," he said. "They're aware of the suit but it hasn't materially changed their plans at this point. Ninety percent of the people say 'IBM is a bunch of smart guys, they're a credible company. If they say it's okay, then it's okay, despite the fact that they won't indemnify us.' IBM lends credibility to Linux, clearly, as well as legal credibility."

That's born out in a survey recently completed by Evans Data Corp. The survey found that few Linux developers are troubled by SCO's assault on Linux.

"SCO has not done its job in making its case," Nicholas Petreley, Linux analyst with Evans Data, noting that recently released Summer 2003 Linux Development Survey showed that Linux adoption has accelerated, not declined, since SCO began its crusade against IBM.

By the way, when Skiba was advising hedge funds to invest in SCO stock, he was also telling widows not to, because of the risk:
Although his buy rating was triggered by the legal case, Skiba calculated his $45 price target by forecasting earnings and revenue based on licensing agreements for Unix and other licensing opportunities....Skiba acknowledges that his call on SCO may be taken as heresy in the Linux community, but said it's important to separate the stock from the company....

The largest risk is SCO Group's legal claims being without merit, Skiba wrote. "A lawsuit against a large and rich company such as IBM is a dangerous undertaking, and it could cause SCO to overextend its legal reach and budget," he wrote.... "This is not for widows and orphans," Skiba said of an investment in SCO. "Hedge funds would be a more appropriate market to buy this stock."

Hedge funds, however, may be on the other side. Currently, almost 12% of the stock's float is short, and the days to cover short interest went up to 5.13 on Sept. 15 from 4.51 on Aug. 15.

Where is that risk factored in to the experts' calculations? Did you notice that the risk related to IBM, not Novell? And may I ask these business and financial reporting experts a question: what does it usually mean when a company's stock is heavily shorted?

Hatch has her use Dr. Pisano's higher math to do some mathematical figuring on a whiteboard, showing the highest and lowest figures on what SCO lost overall. It's dizzying numbers, but then so is the underpinning. And then they must break for the day, and Dr. Botosan will return the following day. As the judge and the lawyers talk about who will be on the stand that day also, he asks the Novell side if there is any estimate on how long Mr. Brennan's cross exam of Botosan will be. Brennan's pithy answer: "Longer than the direct."

The transcript of this day is in three parts: part 1 [PDF] [Text], part 2 [PDF] [Text] and part 3 [PDF] [Text].

********************************************

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
In re: )
)
THE SCO GROUP, INC., a )
Delaware corporation, )
)
)
Plaintiff, )
)
vs. )Case No. 2:04-CV-00139TS
)
NOVELL, INC., a Delaware )
corporation, )
)
)
Defendant. )
)
________________________ )
BEFORE THE HONORABLE TED STEWART

March 17, 2010

Jury Trial

REPORTED BY:
Laura W. Robinson
Rebecca Janke
Patti Walker
[Address]
U.S. Courthouse
Salt Lake City, Utah [Zip]

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A P P E A R A N C E S
For the Plaintiff: Brent Hatch
Attorney at Law
HATCH JAMES & DODGE
[Address]
Salt Lake City, Utah [Zip]

Stuart Singer
Attorney at Law
BOIES SCHILLER & FLEXNER
[Address]
Fort Lauderdale, Florida [Zip]

Edward Normand
Attorney at Law
BOIS SCHILLER & FLEXNER
[Address]
Armonk, New York [Zip]

For the Defendant: Sterling Brennan
Attorney at Law
WORKMAN NYDEGGER
[Address]
Salt Lake City, Utah [Zip]

Eric Acker
Michael Jacobs
Attorneys at Law
MORRISON & FOERSTER
[Address]
San Francisco, California [Zip]

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I N D E X
Witness Examination Page
Darl McBride
 
Redirect
Mr. Singer
1200
 
Recross
Mr. Acker
1208
 
Further Direct
Mr. Singer
1226
 

Gary Pisano
 
Direct
Mr. Singer
1233
 
Cross
Mr. Acker
1271
 
Redirect
Mr. Singer
1340
 

Christine Botosan
 
Direct
Mr. Hatch
1346
 

EXHIBITS RECEIVED INTO EVIDENCE
Defendant's Q45 1211
Defendant's D20 1222
Defendant's R45 1224
Plaintiff's 750 1235
Defendant's M18 1292
Defendant's D16 1302
Defendant's V15 1306
Defendant's Z18 1309
Defendant's X22 1312
Defendant's W24 1314
Defendant's T25 1315
Defendant's F26 1317
Defendant's F27 1319
Plaintiff's 188 1343
Plaintiff's 187 and 227 1343
Plaintiff's 749 1347
Defendant's M27 1328

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Salt Lake City, Utah, March 17, 2010

(8:30 a.m.)

THE COURT: Next time I am tempted to give you ten minutes off at the end of the day, remind me not to do it because doing so resulted in a flood of papers from both sides. Let me deal with some of these issues before we go to some argument on others.

On the question of the plaintiff's proposed use of certain deposition testimony taken in the case of SCO versus IBM, specifically plaintiff's desire to use the deposition testimony of three former SCO employees, Lawrence Gasparro, Phillip Langer and Gregory Pettit, the court would note that in the Tenth Circuit, the Bedrock rule is, quoting, that testimony adduced in a prior suit may be admissible in a subsequent suit even if the parties are not identical so long as the issues are so similar that the party opponent in a prior case have the same interests and motives in his cross-examination that the present opponent has, end of quote. That comes from the case of Minyen versus American Home Assurance Company, 443 F.2d 788, Tenth Circuit decision from 1971.

The court would rule that in this case there is a substantial identity of the issues. The defendant's own filing in this case requesting that either the IBM case and this case be consolidated, or that both cases be handled by

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a single judge supports this finding. In that filing, defendant stated quoting, the heart of both case is SCO's claim that IBM and Novell have infringed SCO's alleged right related to the Linux Computer Operating System, end of quote. Defendant further stated that the claims and defenses in the two cases overlap in numerous respects. Defendant went on to detail those areas where the claims and defenses are similar including SCO's contention that it acquired ownership of the UNIX copyrights through the APA, and Novell and IBM's contentions that SCO does not own UNIX copyrights.

Defendant further stated that, quoting, because this case presents so many of the same issues as SCO versus IBM, judicial economy and efficiency would be best served by ensuring the same judges decide both cases, end of quote.

In essence, the court will find that based on the cited Minyen case that there is the similarity of issues, and that the interest and motives of cross-examination were similar enough that the depositions will be permitted. It will be up to the plaintiffs and defendants, however, to agree to the designation of the testimony from those depositions.

This morning SCO filed a -- well, I don't know when it was filed, the court received it this morning, a request that the court re-examine its ruling not allowing

1187

Mr. McBride to testify as to the intent of those entities that had originally discussed going to SCO source and ultimately decided not to and the court precluded testimony as to what was stated to Mr. McBride as to why they made that decision. It was my understanding yesterday that both sides had agreed to allow that testimony. It was the court's ruling that precluded it.

Mr. Acker, are you still willing to agree to allowing that testimony?

MR. ACKER: I'll allow that testimony as long as Mr. McBride is subject to cross-examination on 15 or 16 customer letters in which there is no mention of Novell. So it will take about 45 minutes to an hour to go through that, I would imagine.

MR. SINGER: We accept that position. If it is good for the goose, it is good for the gander. We believe that the evidence ruling should apply both ways.

THE COURT: The court will do so not just because you have agreed to it, but I believe that this finding this morning and reference to cases indicated that the court's narrow ruling yesterday based on the criminal case was not appropriate. So the court will permit that. Again, I do have to say, and I think that this is obvious to you, that the court will allow what would otherwise be hearsay testimony as to the intent of those parties who decided not

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to go with SCO source but it cannot be used in any way to try to establish the proof of Novell's claims to the copyrights or SCO's claims of the copyrights.

MR. SINGER: We understand that, Your Honor.

THE COURT: All right. As to Mr. Pisano's expert testimony, is Mr. Pisano going to be called, first of all?

MR. SINGER: Yes. I don't know why -- perhaps the reason there was confusion is we initially were going to call Ms. Botosan before Professor Pisano, but given that Mr. Pisano needs to leave town today, we switched the order. But it was always our intent and we do intend to call him.

THE COURT: The court will note that the defense had argued this in a motion in limine, the court had denied it. And what the defendant has now done is come up with a case which the court has reviewed. The court is going to allow Mr. or Dr. Pisano to testify, but the court will state that if his ignorance of the underlying studies is established by cross-examination, that the court will entertain a motion to strike the testimony of Dr. Pisano.

MR. BRENNAN: Thank you, Your Honor.

THE COURT: And finally --

MR. BRENNAN: Your Honor, can I just make one point of inquiry on that?

THE COURT: You may.

MR. BRENNAN: Would the court permit voir dire of the

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expert at the outset before he goes into the substance of his opinions so that determination can be made at the outset?

MR. SINGER: Your Honor, we would object to that. The issue of voir dire goes to qualifications of the expert. We think that was raised, properly disposed of on Daubert motions, and it would not be appropriate to have a separate voir dire on the predicate for particular opinions. Because if that was true, every cross-examination -- every examination of expert witness would be broken up into a series of direct and crosses on that.

THE COURT: Mr. Brennan, I think it is going to be better to let this be played out in a normal fashion so that I would not permit a voir dire in that narrow way. You will have to deal with it on cross-examination.

MR. BRENNAN: I understand. Just so I'm clear, Your Honor, understanding the court's preference and ruling, if in fact through cross-examination it is demonstrated that Dr. Pisano does not have the requisite information, if you will, regarding the survey, then his testimony will be subject of being stricken.

THE COURT: That is what I just said, I thought.

MR. BRENNAN: That is what I understood, Your Honor. Thank you.

THE COURT: All right. Three issues were raised about

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the Botosan testimony. First of all, the argument is that she cannot rely on -- rely on Dr. Pisano's testimony. I believe for the underlying reason that the court just addressed that the court will have to deal with that after Dr. Pisano has testified.

Secondly, it is asserted that she ought not to be allowed to testify beyond the dates of her report because there has been no supplement. And third, the defendants have argued that she ought not to be permitted to testify regarding prejudgment interest.

The court has looked at the prejudgment interest and is convinced that that is a correct statement and she should not be allowed to provide testimony as to an amount of prejudgment interest.

As to the second issue, how do you wish to respond to that, Mr. Hatch?

MR. HATCH: First, on the interest, we agree with Your Honor that she was not going to testify as to that. I think that to the extent interest is available, that would be a legal question for Your Honor at a later time.

As to the issues regarding the event study, we have contemplated your ruling of yesterday overnight and this morning and have decided that we will not elicit testimony on the event study today. So that issue is moot.

THE COURT: All right. Thank you. Counsel, is there

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anything else before we -- Mr. Singer?

MR. SINGER: Yes. Your Honor, early this morning we received notice that Novell is adding or seeking to add an additional exhibit to their list to use with Mr. McBride. That is a statement in a SCO filing pertaining to the effect of the summary judgment ruling in 2007 that since has been reversed.

This is yet another attempt to introduce, through one way or another, what the court has already recognized repeatedly would be irrelevant, prejudicial, confusing to this jury, would be a decision reversed by the court of appeals. And we don't think that should be allowed. Aside from that, it is being raised at the last moment and wasn't something I covered in redirect and so it wouldn't be proper on re-cross in any event. But our basic -- our principal objection is that this is right in the face of the court's prior rulings.

MR. ACKER: Your Honor, the evidence that we're talking about is a form 8-K that Mr. McBride filed -- SCO filed with the SEC following Judge Kimball's ruling on the summary judgment motion. In the 8-K statement, Mr. McBride said explicitly that SCO did not need to own the copyright in order to run its software business which is directly contrary to the sworn testimony that he has given in this court. And we think that given that, clearly this is

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something that impeaches his testimony. It is extremely probative. And if the court is still concerned given the court's ruling with respect to damages experts on whether they truly have opened the door to this issue, we would be willing to redact those portions of the 8-K and my questioning would not directly refer to Judge Kimball's ruling but would ask Mr. McBride if, in fact, he submitted a statement to the federal government saying that he could run his business without the copyrights.

THE COURT: Okay. Go ahead, Mr. Singer.

MR. SINGER: Well, I was just going to note that the exact statement pertaining to the UnixWare and the OpenServer Business and there is no contention that those businesses couldn't be run in light of the summary judgment ruling. The issue is, of course, the SCO source and the effect of copyright enforcement.

MR. ACKER: The issue is that Mr. McBride said the exact opposite thing on the stand yesterday.

THE COURT: Well, I am aware of this document and I will allow you to use it. But I will have to tell you, Mr. Acker, that if either advertently or inadvertently that it comes out that Judge Kimball's summary judgment ruling, then as I have stated before, the court will be required to inform the jury that as to the issues before it that was reversed by the Tenth Circuit which I frankly think is

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something you ought to be very cautious about. And so I will allow it, as I do believe it is important for your purposes on impeachment, but I would caution you to try to avoid violating the court's prior ruling on not permitting reference to prior court rulings coming before this jury.

MR. ACKER: Very well, Your Honor. I understand.

MR. SINGER: Your Honor, in connection with that issue, might I note first that I don't think there was anything in redirect that would raise that issue and we're now on re-cross.

THE COURT: Well, the dilemma is that redirect is going to be opened up substantially by the court's ruling allowing you to get in with Mr. McBride the issue about the customs. And I think it is purely for impeachment purposes, Mr. Singer, so I have got to allow it.

MR. SINGER: Your Honor, in light of the court's ruling on that, may we speak to Mr. McBride so he doesn't inadvertently refer to the 2007 ruling or the court of appeals ruling because when he sees this he might assume that somehow that has changed.

MR. ACKER: I was actually going to suggest that that be done.

THE COURT: Yes. I would request that you do so. Okay. Is there anything else?

MR. BRENNAN: Yes, Your Honor. Thank you. I do

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appreciate the determination announced in court this morning by SCO that it will not be proffering the event study. And I am also mindful of the court's comments regarding the possible impacts of raising these court decisions. Just so that at least we're clear from our side of the courtroom, there are aspects of Dr. Pisano's testimony and Dr. Botosan's testimony unrelated to the event study that still could implicate, in essence, the opening of the door on these court decisions.

In particular, both experts, even in the portions of their testimony that is expected that do not result to an event study, are focusing their opinions on reactions of the marketplace and potential licensees through the period of 2007. Dr. Botosan, in particular, through October 31st, 2007. The significance of that, of course, is that there is an analysis done of certain so-called risk factors. What is it that the -- either the marketplace or in particular potential licensees may or may not have reacted to in making decisions regarding the taking of licenses. So we will be mindful of the court's comments, but I also wanted to indicate that the mere removal of the event study does not avoid this opening of the door issue. So that is more just to inform the court.

THE COURT: Mr. Singer?

MR. SINGER: Your Honor, I will address this with

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respect to Mr. -- to Dr. Pisano and Mr. Hatch will address Dr. Botosan.

With respect to Dr. Pisano, his is examining the "but for world" and what would have happened to this business line if there had been no slander of title, if copyright ownership is assumed, and if slander of title had not occurred. But that type of testimony there is no reason in the world that any court decision that occurred in a real world and was reversed in the real world needs to come in. And I haven't heard anything that would suggest otherwise.

MR. HATCH: The same thing would apply to Dr. Botosan. And largely what she will be doing is the event study won't be spoken about, just doing a calculation of damages in the same manner that Mr. Singer just talked about.

THE COURT: All right. Everyone has had their say, including the court. All right. And I just want you to remember that the court feels very strongly about this because of its prior ruling, number one.

But number two, again I believe that any reference to prior court rulings by Judge Kimball must result in the Tenth Circuit reversal being made known to the jury. And I have got to believe that if a jury hears that, it is probably going to consider that a more rigor matter than the preliminary summary judgment rulings.

So anything else, counsel?

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MR. SINGER: No, Your Honor. May we have a minute to discuss this issue with Mr. McBride?

THE COURT: Yes, go ahead.

MR. BRENNAN: Your Honor, in light of the comments perhaps we could have just a minute ourselves to caucus relative to the court's suggestions this morning.

THE COURT: Yes. Yes, go ahead.

MR. BRENNAN: Your Honor, we're just going to step outside for a moment.

THE COURT: Sure.

(Whereupon, there was a brief pause in the proceedings.)

MR. HATCH: Your Honor, when Dr. Botosan gets up, I need to set some easels and things.

THE COURT: I will try to remember that.

MR. HATCH: I don't know whether we will be near the break at that point. Maybe that will be a good point to break, if we can.

THE COURT: Okay.

MR. HATCH: Your Honor, we will put up two boards. Do you have any preference where they go?

THE COURT: No. As long as the jury can see them and --

MR. HATCH: I'm not sure where I can put them where you can see them, too.

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THE COURT: Probably right over here is probably the safest for all purposes.

MR. HATCH: I'm going to ask her to get up and to do some teaching.

THE COURT: That is fine. It either has to be right there (indicating) or back there (indicating) or the people in the courtroom can't see it.

MR. SINGER: Your Honor, before the jury comes in, I think there is one point that we wish to clarify lest there be any confusion among either side. It is our understanding that the court's ruling is that the reference to prior decisions of Judge Kimball should not come in. It is not that Novell has an option that if they want that to come in there is a --

THE COURT: That is correct. The court has ruled on the motion in limine that they're not to come in. If, however, it does come in inadvertently, then the court will be compelled to make reference to the Tenth Circuit in jury instructions or some other special instruction.

MR. SINGER: We just wanted to make clear that this was not an option that the defendant could exercise one way or the other.

THE COURT: Counsel, let me ask you about jury instructions. Mr. Normand?

MR. NORMAND: Yes, Your Honor.

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THE COURT: Where are we?

MR. NORMAND: We are going to submit to the court by the end of the day today a joint filing reflecting agreement on, I would say, half of the instructions, and another half on which we would, for Your Honor's and clerk's convenience, set forth the party's respective arguments in favor of their version of the instruction after having identified the disagreements in the instructions. So we met again last night, spoke on the phone for a couple of hours, and got even closer, and that is the filing that is going to happen.

MR. JACOBS: That is correct, Your Honor. It will be as -- the filings will clearly show what the point of disagreement is, and then have both sides arguments about that point of disagreement so that the court can call it and then what the resulting instruction should follow from the legal determination of the court.

THE COURT: All right.

MR. NORMAND: We did all of that work, Your Honor, with the assumption, I think as Your Honor had said, that you would then send to us in a few days time your proposed instructions and we would offer our comments, for what they're worth, on those.

THE COURT: Yes. And hopefully we'll get those to you no later than Monday morning so you will have next week to prepare your responses as well as your final arguments.

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MR. NORMAND: Thank you.

THE COURT: Are we ready now, counsel?

MR. SINGER: Yes, Your Honor.

MR. BRENNAN: Your Honor, I just had one last inquiry, I make my apologies as I cross the courtroom. Back to Dr. Botosan, as I understand, by eliminating inquiry regarding the event study, I assume that means that Dr. Botosan will not be offering an opinion regarding causation?

MR. HATCH: Yeah, that is correct.

THE COURT: Okay. All right.

MR. BRENNAN: Thank you.

THE COURT: Let's bring the jury in. Please be sure and tell them that we have been working. We didn't have a mass sleep in this morning.

THE CLERK: All rise for the jury.

(Whereupon, the jury returned to the courtroom.)

THE COURT: Good morning, ladies and gentlemen. We will continue with the redirect examination by Mr. Singer of Mr. McBride.

Mr. Singer?

MR. SINGER: Thank you, Your Honor.

REDIRECT EXAMINATION

BY MR. SINGER:

Q. Good morning, Mr. McBride.

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A. Good morning, Mr. Singer.

Q. Do you recall there was some testimony or some questions yesterday regarding your stock options; is that correct?

A. Yes, that is correct.

Q. Is it typical, to your knowledge, for the chief executive officers of public companies for a significant part of their compensation to be in the form of stock options?

A. Yes, that is very typical.

Q. Now, if you had wanted to do so, could you have exercised those stock options you held and at certain points sold the stock and made a substantial profit?

A. Yes, for sure.

Q. Did you do that?

A. No, I did not.

Q. Did you sell any of your SCO stock?

A. Since I have joined the company, I have only bought stock. I have yet to sell any, whether as options or as stock.

Q. Did you believe in this company?

A. Yes, I did.

Q. I would like to ask you about a couple of business opportunities that we alluded to yesterday. One of those was with Google?

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A. Yes.

Q. Just to set the foundation for that, can you tell us what the time frame was that you had discussions with Google regarding a potential SCO source type business arrangement?

A. Yes. It was initiated in late 2003 and it ended in early 2004.

Q. Was Google an important business opportunity for SCO?

A. Yes, for sure.

Q. Can you explain why?

A. Because they were apparently the largest Linux customer in the world. They reportedly, in their own words, had over 500,000 servers running Linux.

Q. Were you personally involved in the discussions with Google?

A. Yes, I was.

Q. And can you discuss how far the discussions went with respect to potential pricing of a SCO source license with Google?

A. Yes. We entered into discussions, we had a number of discussions with them, and we got to a point where they wanted a severe volume discount. We agreed to discount the -- on a volume basis from our 699 per server price down to $100 per server, but that was where it stopped.

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Q. At $100 per server, if there were 500,000 servers running Linux, how much in revenue would that have meant for SCO Group?

A. Um, I don't have my calculator. I think that comes up to about 50,000,000.

Q. And can you tell us whether or not the issue of Novell's assertions to own the copyrights to UNIX came up in the course of your discussions with Google?

A. Yes, it came up in the end. When we were trying to get them to the $100 per number of servers, that was the point in time that they came up, they brought it up as an issue, and that is when the discussions broke down.

Q. Do you have an understanding as to whether in your judgment a deal would have been able to have been reached if it had not been for the assertions of copyright ownership by Novell?

MR. ACKER: Objection, calls no speculation, Your Honor.

MR. SINGER: It goes based on his conversations, he is in negotiations, he is able to express that view.

MR. ACKER: He is asking for Mr. McBride to divine the thinking of Novell or Google executives, Your Honor.

THE COURT: I think if you would like to elicit more foundation for the conclusion the court will allow that.

MR. SINGER: Yes, Your Honor.

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Q. (By Mr. Singer) Were the discussions that you had with Novell, excuse me, with Google over a number of months?

A. Yes, they were.

Q. Did it involve senior people at Google?

A. Yes, it did.

Q. Were there face-to-face meetings?

A. I wasn't involved in the face-to-face, I was involved in some phone calls, but yes, it is my understanding that there were face-to-face calls.

Q. For the meetings that you weren't present, did you receive reports from people who were?

A. Yes, I did.

Q. With respect to the opportunity, did this occur during the -- during the time frame of the Google discussions, did Novell come forward with its December 22, 2003 public announcement that they were asserting a claim to ownership?

A. Yes. Yes, it was in that same time frame.

Q. Before that occurred, was the last public statement that Novell had made the retraction on June 6, 2003?

A. Yes, that is correct.

Q. Did Google, after Novell's December 22, 2003 statement, make specific reference to Novell having asserted

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copyright ownership?

A. Yes, they did.

Q. And on the basis of that, were you able to move the discussions forward?

A. No, we were not. Basically the discussions died off at that point.

Q. Given that course of dealing, in your view, was the assertion of a claim to copyright ownership a substantial factor in Google's decision not to go forward and take a SCO source license?

MR. ACKER: Same objection. Calls for speculation, Your Honor.

MR. SINGER: I think there is sufficient foundation for this witness.

THE COURT: I will overrule the objection.

THE WITNESS: Yes, there was.

Q. (By Mr. Singer) Okay. Mr. McBride, I would like to talk a little bit about Dell. Can you again set the time frame as to when you were in discussions with Dell?

A. Yes. It was roughly the same time frame as the Google discussions. And, again, the late 2003 first couple of months of 2004 is when we were talking to Dell.

Q. Did you have personal conversations with representatives of Dell?

A. Yes. The first conversation was a phone call

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between myself and Michael Dell who is the CEO of Dell.

Q. Did you also have conversations with anyone else at Dell?

A. Yes, I did.

Q. Who was that?

A. There was -- Michael handed it over to their general counsel, a gentleman by the name of Tom Green. He is general counsel and also over their licensing group. Talked to him. Mr. Green had some other people on the calls that we had. I don't recall their names offhand. And then there were some other people inside of Dell as well.

Q. What was the nature of the business opportunity involving SCO source licensing that you were discussing with Dell?

A. Um, Dell's idea was they wanted to be able to go to market with a SCO source license to be able to provide indemnification for Linux users. And specifically, they wanted something that would allow them to position themselves stronger than what HP's program was.

Q. Would Dell have been reselling SCO source licenses?

A. Yes, that is correct.

Q. Can you explain whether or not the issue of Novell's claims or ownership of the UNIX copyrights came out in the course of your discussions with Dell?

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A. Yes, they did.

Q. How was it raised?

A. It was raised by their general counsel.

Q. And was this a positive or a negative issue from the perspective of being able to do business with Dell?

A. It was definitely a negative.

Q. Um, was this raised in the aftermath of the December 22, 2003 assertion of ownership that Novell made?

A. Yes.

Q. And were you able to conclude a transaction with Dell after that assertion of ownership was made?

A. No.

Q. And in your view, based on the course of dealing you had with Dell, was there a -- what role did the Novell assertion of ownership have in that transaction not occurring?

MR. ACKER: Calls for speculation, Your Honor.

MR. SINGER: It is the same issue.

THE COURT: I will overrule the objection.

THE WITNESS: I viewed it as the primary role in the Dell deal not going through.

Q. (By Mr. Singer) Now, there were a number of business opportunities and many businesses out there which use Linux; is that correct?

A. Yes, that is correct.

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Q. Now, would you agree, in your view are there certain businesses that might have decided not to take a SCO source license for a variety of different reasons?

A. Yes, that is correct.

Q. Based on what was happening to SCO's business, after the December 22, 2003 assertion of copyright ownership and reactions in the market to that, were you able to continue successfully with the SCO source licensing business?

A. No, we were not.

MR. SINGER: I have nothing further, Your Honor.

MR. ACKER: One second, Your Honor.

RECROSS-EXAMINATION

BY MR. ACKER:

Q. Good morning, Mr. McBride.

A. Good morning, Mr. Acker.

Q. Happy Saint Patrick's Day.

A. Thank you. Same to you. Where is your green?

Q. I left it at home. Let me ask you about these -- the Dell and the Google negotiations. True is it, and let's start with Google?

A. Okay.

Q. You were not involved in any face-to-face negotiations with anyone from Google; correct?

A. I never flew out to their campus, no.

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Q. And the negotiations began sometime before Novell put up on its website both its position and SCO's position regarding this dispute over the ownership of the UNIX copyrights; correct?

A. That is my recollection.

Q. And even after those materials went up on Novell's website on December 22nd, 2003, the negotiations with Google continued for several months beyond that; correct?

A. I think they went into the January, February time frame.

Q. And so on December 22nd, Novell puts up on its website its position regarding a copyright ownership, it puts up on its website your position regarding copyright ownership, it puts up on its website the APA, it puts up on the website Amendment 1, it puts up on its website Amendment Number 2 so anybody can see it, everybody's position on all of the documents, and then Google continues to talk with you for another two months; correct?

A. Yes, that is correct.

Q. With respect to Dell, similarly negotiations with Dell began before December 22, correct?

A. Yes.

Q. And on December 22nd, everything went up on Novell's website, correct?

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A. Yes.

Q. Including your position, right?

A. It was whatever they put up.

Q. Your letters regarding your position regarding copyright ownership went up on the website, correct?

A. That is not totally correct. If you go look at the letters that Novell put up on their website, they conveniently omitted some of the letters that were very strongly in our position and that was an oddity to us. If you're going to put up the whole story, put it up. But they put up some of our position, but they didn't put up all of it. I remember that for certain.

Q. They put up the contract, the APA; correct?

A. Yes.

Q. They put up Amendment Number 1, correct?

A. Yes.

Q. They put up Amendment Number 2; correct?

A. Yes.

Q. The whole world could see that, correct?

A. Yes. But they didn't put up some of the other ones.

Q. The executives of Dell could see that, correct, right?

A. I don't know when the executives at Dell looked at it. I know that three days before Christmas a lot of

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people were not looking at Novell's website. Um, I don't know that. I do know that over time these statements that Novell put up on it's website was a little bit like dropping Napalm gas. It didn't kill people immediately, but over time, it did.

Q. And over time, you continued to negotiate with Dell for weeks, even months after December 22nd, correct?

A. Yes.

Q. Let me show you what we have marked as Exhibit Q45. Now, the gentleman that you said that you spoke with on the phone from Hewlett Packard was a man by the name of Joe Beyers; correct?

A. Yes, that is correct.

Q. And what you have in front of you, Exhibit Q45, is an e-mail from Joe Beyers discussing whether or not he will enter into -- HP will enter into a licensing agreement with SCO in the August 2003 time frame; correct?

A. Yes.

MR. ACKER: Move for admission of Exhibit Q45, Your Honor.

MR. SINGER: No objection.

THE COURT: It will be admitted.

(Whereupon, Defendant's Exhibit Q45 was received into evidence.)

Q. (By Mr. Acker) Why don't we take a look at what

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Mr. Beyers said on August 15th, 2003. Mr. Lee, if we could bring up the first paragraph beginning with the word today.

Mr. Beyers wrote to his colleagues at HP, "Today I threatened SCO that HP would not attend the SCO forum next week if they did not sign the HP UNIX release today." Do you see that?

A. Yes.

Q. "They responded by signing the release and they also provided a letter that we can show our UNIX customers." Do you see that?

A. Yes, I see that.

Q. So wasn't it the case that after the SCO source program was announced, um, you were in negotiations with HP and HP was going to participate in your SCO source forum in Las Vegas; correct?

A. Yes, that is correct.

Q. And a week before the forum, SCO is demanding, I believe, a certain number of millions of dollars from HP; correct?

A. We were in negotiations over something that they were -- had initiated. We were talking about millions of dollars, yes.

Q. And what HP said to you, we're not going to pay you millions of dollars, and if you don't give us a release for free, we're not going to come to your SCO forum; right?

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A. That is part of what they said.

Q. Why don't we highlight the number of points below, if we could. And this is the release that HP wanted. "SCO releases/forgives any past actions by HP (and its future direct consequences) which may have been in violation of its UNIX licenses."

A. Right.

Q. Two, "The HP UNIX license now becomes "unconditionally irrevocable", even for future "bad" acts." Three, "HP has no restrictions on what it does or says about the IBM case or the Linux case." Do you see that?

A. Yes.

Q. And four, "Publicity: SCO has provided us a letter to Carly," who is the CEO, Ms. Fiorina, CEO of HP at the time, "that we can show to our customers that states that SCO believes that HP is in compliance with its UNIX license." That is what they wanted, correct?

A. Yes.

Q. And then the financial terms are also there at number four, right?

A. Yes.

Q. And the financial terms are zero, right?

A. For that release.

Q. And you originally wanted $100,000,000, right?

A. In the original instance of this, we had

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$100,000,000 tied to the release and to the other SCO source agreement. What they ended up doing was separating the two. So as you recall yesterday, we had two deals going with HP. One was the release that their CEO Carly had asked for, and then the other one was this SCO source licensing deal. We had put those two together for a $100,000,000 deal. They wanted to bifurcate them and so we did. So the release ended up being for zero. The other one was the $30,000,000 that HP proposed back.

Q. All right. And we'll talk about that in a second. So as I understand it, you want -- you originally go to HP and you ask Ms. Fiorina pay me 100 million bucks, right, for both for the release and the other part of the license, right?

A. No.

Q. And then they come back to you and say, we're not going to go to your forum in Las Vegas unless you give us this release for free, right?

A. That part, yes.

Q. And you guys gave them the release for free, right?

A. We gave them the release for free, correct.

Q. This happened in August of 2003, right?

A. Yes, that is correct.

Q. And so that was a couple of months after you

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believe that Novell had retracted its claim to ownership on June 6, 2003, right?

A. That is correct.

Q. And so in your mind, there is no taint out there by Novell's position in this period of time; correct?

A. I didn't believe that -- well, yeah, I believe that we had resolved that at that point, at this point.

Q. So you buckled to HP and give them a license, a release, for no money?

A. For the UNIX business.

Q. Despite the fact that according to you, there is no suggestion by Novell in the marketplace in this period of time that they own the UNIX copyrights, right?

A. Let me -- no, that is not correct. Let me explain to you the difference. What you just said -- you said two things there. I think you crossed metaphors. I think that might have been a trick question. If you look at the copyright issue, that was one that was tied to the $30,000,000 that we were discussing still with HP.

If you look at the UNIX business issue, now if you remember we read through it yesterday, we stated in there, and I think I read it out loud before the court, we hereby certify that Hewlett Packard has done nothing wrong with their UNIX business, like IBM had done, and that is what we were giving them a release on. So that release, excuse me,

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that release for their UNIX business was fundamentally and totally independent from the copyright issue that related to the $30,000,000 deal that HP was proposing back to us.

Q. You gave them the release for free, correct?

A. For the UNIX business.

Q. And you did that in August of 2003; correct?

A. That is correct.

Q. And that was a period of time, according to you, when Novell was taking the position that you owned the copyrights, right?

A. Yes.

Q. Now, the negotiations between HP and you, you testified yesterday, they broke down in August and they were over by September of 2003, correct?

A. I don't recall testifying to that.

Q. Well, the jury knows what you said or what you didn't say?

A. I recall testifying that they broke down in September.

Q. All right. September of 2003?

A. Right.

Q. Done with HP, right?

A. Yes.

Q. But Novell didn't, according to you, say that they owned their -- owned the copyrights until December 22nd

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after the June 6th, what you believed to be, the recantation; correct?

A. Incorrect.

Q. So it is during this period of time between June 6th, 2003 when you claim that Novell has said you own the copyrights, and before December 22nd, 2003 when you say they slander you again because they put everything up on the website that negotiations with HP broke down?

A. So the big issue then was the reason that they broke down. And the reason that they broke down was they were pointing to the copyright problem. And when they brought it up, I said whoa, Joe, we put that to bed months ago. That -- I was -- I wasn't thinking when he first said Novell copyright issue that they hadn't even been following what happened after Messman had announced they owned it and that we had come back and put that to bed. So I went through that story with him and he said no, no, no, no, we got all of that. What you don't understand, Darl, is that Novell is gearing up for another run and you will eventually see them come out public again and they will say that they own the copyrights. That was the first time that I had heard that, in fact, Novell was going to take this public position and it was from Hewlett Packard in the context of not doing this deal.

Q. So you knew that information in September of 2003

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that Novell was going to claim ownership of the UNIX copyrights?

A. That was the first time I had heard about it.

Q. But you had that in your mind as the CEO of SCO in September of 2003 that Novell was going to reassert its ownership of the UNIX copyrights?

A. Based on that we started watching.

Q. And despite having that knowledge in September of 2003, you and your CFO continued to tell the market that that issue was put to bed, right?

A. The things that you pointed to yesterday were predating that.

Q. There was a -- you had a conference call in November of 2003 where Mr. Bench your CFO said this issue is put to bed, and you were sitting right next to him. And now you have told the jury that you had that knowledge in your head in September of 2003 that Novell was going to reassert its ownership to the UNIX copyrights?

A. We had a lot of things in our heads. And every time we would turn around from May, June, July, August we were hearing something different. And what happens with these SEC filings is you have to state things based on material changes. And until they went public, we did not view that as a material change. The fact that they were behind the scenes saying this or saying that, is not a

1218

materiality threshold by which you would adjust your 10-K filings for the investing public.

Q. Let me ask you this. Do you believe that when the general counsel of Novell sent you a letter on August 4th, 2003 and said Novell still owns the copyrights, do you believe that was a material fact that you were obligated to take to the market?

A. First of all, he didn't say we still own the copyrights. Secondly, I didn't believe that his statement trumped what Mr. Messman had told me.

Q. So it is your testimony that when the general counsel of Novell said that Amendment Number 2 did not transfer the copyrights to SCO, when he said that to you in no uncertain terms on August 4th, 2003, that was not material to you?

A. I didn't believe that it trumped Messman's statement.

Q. My question was, was it or was it not a material fact?

A. At that point in time.

Q. Let me finish my question. Was it or was it not a material fact that you were obligated to take to the market?

A. At that point in time, no. And because their letters kept changing. If you read the June 6th letter, it

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says one thing. If you read the June 26th letter, it says another thing. If you read the August 4th letter it says another thing. We can't go to the investing public every time that Novell changes, and every time they sneeze we can't go out and say Novell sneezed. Once they came out publically, then we did address it.

Q. So let me get it clear. It is your testimony that when the general counsel of Novell wrote you a letter on August 4th, 2003 and said Amendment Number 2 did not transfer the copyrights, you as the CEO of SCO did not believe that was a material event that needed to be reported to the marketplace?

A. I believe I have answered that question, Mr. Acker.

Q. You haven't answered that question, Mr. McBride.

THE COURT: Answer the question if you please, Mr. McBride.

THE WITNESS: I did not believe that to be material at that point in time.

Q. (By Mr. Acker) So as the CEO of SCO, the fact that Novell was claiming ownership of the UNIX copyrights was not a material fact to you?

A. Not at that point in time.

MR. ACKER: Show you D20.

THE COURT: D20?

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MR. ACKER: D20, D as in dog, yes, Your Honor.

Q. (By Mr. Acker) Do you see, Mr. McBride, on Exhibit D20 is the internal e-mail at Hewlett Packard in which Hewlett Packard employees are discussing the reasons to move ahead with the SCO source deal and also reasons not to do the deal and it is dated September 3rd, 2003. Do you see that?

A. Yes.

MR. ACKER: I move for admission of Exhibit D20, Your Honor.

MR. SINGER: No objection.

THE COURT: It will be admitted.

(Whereupon, Defendant's Exhibit D20 was received into evidence.)

Q. (By Mr. Acker) Why don't we highlight, if we could, Mr. Lee, the first paragraph.

"There have been a bunch of messages floating about -- floating around regarding SCO. I thought it would be useful to summarize the situation, and present both sides of the argument. As you know, I oppose moving forward, although I will do my best to support the larger HP position if we decide to move forward. I would like to emphasize that there are not -- that there are open source nuances here that are not typical of normal software licensing deals. For this reason, this is "not" a licensing deal, but rather

1221

an non-asset deal, paren, (SCO -- non-assert -- non-assert deal, paren, (SCO agree to not assert rights against our customers.)"

Now Mr. Lee, if we could go down to the bottom of the e-mail which says Reasons Not to Do the Deal. "Reasons not to do the deal. One, RedHat has counter-sued SCO and will view HP as partnering with SCO and will potentially refuse to deal with HP, paren, (HP Linux biz rapidly moves to zero). B, we have strong indications that the Open Source community will revolt against HP and will block any future HP enhancements to open source projects. C, while SCO has shown Joe some code, there is still no clear evidence that IBM, paren, (or anyone else) end paren, has actually done anything wrong. D, all legal experts in the field believe SCO's case is fundamentally flawed and have published white papers to support their position and (attached). E, while we may have a quote, "most favored nation" end quote clause in the deal, our competitive advantage could evaporate in a day. The deal is not exclusive."

And then the e-mail continues onto the next page. "F, this is, in effect, support of terrorism. Rewarding SCO for this behavior opens us up to other claims. We can't predict from who/where. G, doing a deal with SCO does not provide customers with full indemnification. Customers want full indemnification, so a deal with SCO is likely not enough.

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H, SCO has shown a pattern of unpredictable and "bad" behavior. We can't predict future behavior from SCO which could negatively impact HP. I, amusingly enough, doing the deal would negatively impact our relationship with Microsoft. J, SCO is perceived very negatively in the industry at large. HP will suffer a negative image as a result."

And then he concludes, "there is obviously no easy answer here. I believe that the risks associated with points "a" and "b" are large enough that we should not do the deal."

Did you understand that that was why HP didn't do a licensing deal with SCO in September of 19 -- 2003, Mr. McBride?

A. No, I did not.

Q. Mr. McBride, yesterday you told this court and jury that you believed that you needed the UNIX copyrights in order to run your business, correct?

A. That is correct.

Q. Let me show you what we have marked as R45. Mr. McBride, R45 is a form 8-K that SCO Group filed on behalf of -- that SCO Group filed on August 14th, 2007; correct?

A. Yes, that is correct.

Q. And a form 8-K is a form where SCO is advising

1223

the SEC and the market at large of material facts that affect its business, right?

A. Pardon me, I didn't get the last question. I was looking here.

Q. Form 8-K is a form by which a company advises the Security and Exchange Commission and the market at large regarding material?

A. Yes, that is right.

Q. And you reviewed this document before it was filed with the SEC; correct?

A. Yes, I did.

Q. And you wouldn't have filed it with the SEC if you didn't think it was accurate, correct?

A. Correct.

Q. Now, I want you to listen carefully to my question, if you could, sir. It is true, isn't it, that if you turn to the last page of the document, in the one, two, three, four, fifth paragraph --

THE COURT: Why don't you offer it before we go any further, please.

MR. ACKER: I would move for admission of R45 with redactions, Your Honor.

MR. SINGER: No objection.

THE COURT: It will be admitted.

(Whereupon, Defendant's Exhibit R45 was

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received into evidence.)

Q. (By Mr. Acker) If we could go to the last page in the one, two, three, four, fifth paragraph. Mr. McBride, isn't it true that although we have redacted portions of this document that what you told the SEC and the investing public, contrary to what you have told this court, is that even without ownership of the UNIX copyrights, that SCO's "ability to continue to develop and support all versions of UnixWare and OpenServer as well as the recently announced OpenServer 6M and UnixWare 7M as well as our new mobility products will not be impacted." Didn't you tell the market that?

A. This is part of what I told them. There is more nuances in other parts of this document that, um, come into play on this.

Q. Didn't you tell them that you could run that part of your business without ownership of the UNIX copyrights?

A. I told them that we could run this part which relates to the products. That as we talked yesterday, there is the -- it is like a tree analogy of the source code coming up through the tree that was the IP licensing part. We had a licensing group and we had a products group. Yes, we believed that the branchs off this tree, UnixWare and OpenServer, we could run our business with -- without the copyrights, just like HP, IBM, all of the other licensees of

1225

UNIX can run their businesses as well. The part that we differ on here is we were unable to run our business for the licensing side without the copyrights. And the licensing side was really the future of the company.

Q. So let me get it straight so the jury understands. You could operate as a software company without the UNIX copyrights, but you couldn't run your SCO source campaign without the UNIX copyrights. Do I have that correct?

A. Mostly.

MR. ACKER: That is all I have, Your Honor.

THE COURT: Mr. Singer, I normally would not give you a third time around, but I think in light of this I will. But don't either of you think that this somehow opens the door to a third course, all right?

MR. SINGER: Thank you, Your Honor.

FURTHER DIRECT EXAMINATION

BY MR. SINGER:

Q. I just have a few questions. First of all, with respect to the press, well, the first area of examination by Mr. Acker was about Novell putting up both sides of the picture on its website. Do you recall those questions?

A. Yes, I do.

Q. I would like you to look at the press release that was issued December 22, 2003, Exhibit 517. Would you

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put that on the screen, please. Can you read this out loud?

A. Sure. Novell Statement on UNIX Copyright Registrations.

THE COURT: Not too fast.

THE WITNESS: Sorry, Your Honor. "Novell believes it owns the copyrights in UNIX, and has applied for and received copyright registrations pertaining to UNIX consistent with that position. Novell detailed the basis for its ownership position in correspondence with SCO. Copies of our correspondence, and SCO's reply, are available here. Contrary to SCO's public statements, as demonstrated by this correspondence, SCO has been well aware that Novell continues to assert ownership of the UNIX copyrights."

Q. (By Mr. Singer) Mr. McBride, did you understand this press release as simply telling people go look at our website and make up your mind?

A. No.

Q. Now, with respect to the continuation to negotiate with parties such as Google and Dell, did you try your best to dissuade them from listening to Novell's assertion of ownership?

A. Yes.

Q. Were you able to do that?

A. No, we were unsuccessful.

Q. With respect to Q45, could we put that on the

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screen, that is one of the defendant's documents relating to HP?

A. Yes.

Q. Who is Joe Beyers?

A. Joe Beyers was the vice president of Intellectual Property and Licensing at Hewlett Packard.

Q. Did you understand that he would be the decision-maker here?

A. Yes.

Q. Was Mr. Fink the decision-maker?

A. No. Mr. Fink was a Linux general manager who was -- had a very strong interest in Linux being the show within inside of HP.

Q. Was Mr. Fink, who wrote the D20 document that we looked at a few minutes ago, a vocal advocate of Linux?

A. Yes, very much so.

Q. You were negotiating with Mr. Beyers; is that correct?

A. Yes. We never had one discussion with Mr. Fink.

Q. Now, if you look at item number two where it says, um, excuse me, item number three, I don't believe this part was highlighted in the recent examination, which says, "HP has no restrictions on what it does or says about the IBM case or the Linux case." And the footnote says, and this is what wasn't highlighted, any restrictions of this

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type will only be in a Linux release, if executed. What is the Linux release pertaining to?

A. That pertains to the deal that we were working on that did not go through.

Q. And did that get to a point where a contract which we saw yesterday was presented to you from HP that could have been signed by SCO?

A. Yes.

Q. And what was the amount of the payments on that contract if you had signed it?

A. $30,000,000.

Q. Now after the -- did you have understandings as to whether or not that could have been done after Novell's statements were made to Mr. Beyers?

A. I'm sorry?

Q. You had referred that they had heard from Novell that they were going to go public with another round of comments?

A. Yes, okay. Once those statements were there, it really did kill the deal.

Q. Now, you were asked about the August 4, 2003 letter and whether or not that was viewed as an outright assertion of copyright ownership. Can we put that up on the screen. This is Exhibit 105?

A. Okay.

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Q. Can we -- this is Mr. LaSala's letter of August 4, 2003. Do you understand this is what Mr. Acker was asking you about in the cross-examination?

A. Yes.

Q. If we come down to the last paragraph, can you read that out loud?

A. "Unless and until SCO is able to establish that some particular copyright right is "required" for SCO to exercise its rights under the APA, SCO's claim to ownership of any copyrights in UNIX technologies must be rejected, and ownership of such rights instead remains with Novell."

Q. Did you believe that copyright ownership was required for SCO to exercise its rights under the APA to enforce its intellectual property?

A. Yes, absolutely.

Q. So at this point was this letter publically announced by Novell?

A. No, it was not.

Q. Did you view this as the same as when they made public announcements in May and then later in December 2003 to the effect of we own the copyrights?

A. No.

Q. Is that why this was not reported in your public securities filings until they publically made such an assertion again?

1230

A. That is correct.

Q. And when you saw that public assertion which you were just asked about, where you said that you would be able to operate the UNIX and UnixWare business?

A. Yes.

Q. Would you have been able to do licensing deals such as you did with Microsoft and Sun?

A. No.

Q. If you didn't own the copyrights?

A. No, not at all.

Q. Would you have been able to take any action to enforce your intellectual property if you didn't own the copyrights?

A. No. The copyrights were a prerequisite to enforcing the intellectual property.

Q. What you would have -- so were you referring to just the ability to sell product, the UNIX and UnixWare products?

A. Yes.

MR. SINGER: Thank you very much.

THE WITNESS: Thank you.

THE COURT: Mr. Acker?

MR. ACKER: I don't have anything else, Your Honor.

THE COURT: May this witness be excused?

MR. SINGER: Your Honor, it is possible he will need

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to be recalled.

THE COURT: All right. Mr. McBride, that means that you need to keep yourself available in that event. But I would again inform you please do not discuss your testimony with any other witness or in the presence of any other witness in the case or communicate in any way to them what the nature of your testimony is.

THE WITNESS: I understand, Your Honor.

THE COURT: Thank you, Mr. McBride.

THE WITNESS: Thank you.

THE COURT: Mr. Singer, your next witness.

MR. SINGER: Our next witness is Gary Pisano.

THE CLERK: Please raise your right hand.

GARY PISANO,
called as a witness at the request of the Plaintiff,
having been first duly sworn, was examined
and testified as follows:

THE WITNESS: I do.

THE CLERK: Thank you. Please be seated. And if you would please state and spell your name for the court.

THE WITNESS: My name is Gary Pisano, G-A-R-Y P-I-S-A-N-O.

THE CLERK: Thank you. // //

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DIRECT EXAMINATION

BY MR. SINGER:

Q. Do you need some water?

A. Yes.

THE COURT: There should be some in there.

MR. SINGER: Why don't we provide you some of ours.

THE WITNESS: It is empty.

Q. (By Mr. Singer) Good morning. Professor Pisano, how are you employed?

A. I am a professor at Harvard Business School.

Q. And do you hold a particular position at the Harvard Business School?

A. Yes. I am the Harry E. Figgie, Junior Professor of Business Administration.

Q. What does it mean to be a chaired professor?

A. That is the highest rank you can have in academia.

Q. How long have you been a professor at Harvard?

A. I have been on the faculty for 22 years.

Q. Can you briefly summarize your educational background?

A. Yes. I have a PhD in Business Administration from the University of California Berkeley, and a BA in economics with distinction from Yale.

Q. What is your area of specialty?

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A. I specialize in economics and management of technological innovations.

THE COURT: Dr. Pisano, would you please speak into the microphone and please do not speak so quickly that the court reporter cannot get what you have to say or that others cannot understand what you are saying, all right?

THE WITNESS: Thank you sir, yes. I should repeat my last answer.

Q. (By Mr. Singer) Yes. Can you explain what you mean by economics of management innovation?

A. Economics of management innovation I study a range of topics concerning how firms develop innovations, the strategies and approaches they use, and how they try to commercialize those through various mechanisms including licensing strategies.

Q. I would like you to look at Exhibit 750 on the screen. Is this a true and correct copy of your CV setting forth your expert qualifications?

A. Yes, it is.

Q. And does this set forth your various honors and awards and your publications?

A. Yes, it does.

MR. SINGER: I move the admission of Exhibit 750.

MR. ACKER: No objection, Your Honor.

THE COURT: It will be admitted.

1234

(Whereupon, Plaintiff's Exhibit 750 was received into evidence.)

Q. (By Mr. Singer) I would like to talk just a little bit about some of that, and recognizing that when you're qualifying an expert witness, it is not a time for modesty so I'm going to ask you to disclose the full extent of your honors and recognition in the field.

Has any of your work been published?

A. Yes, it has.

Q. And approximately how many articles have you published?

A. I have published 30 articles.

Q. And presentations?

A. Presentations, case studies, other materials, we do develop a lot of course material at Harvard, another 50 or 60 on top of that.

Q. Have you written books?

A. Yes, I have. I'm the author of six books.

Q. Are you on the editorial board of any journals?

A. Yes. I am an editor of a journal called Industrial and Corporate Change and I was, until a couple of years ago, the main editor, one of the main editors for the top journal in the innovation field called Research Policy.

Q. Has your work won any awards?

A. Yes, it has.

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Q. Can you explain?

A. Yes. The most recent award was a paper for an article published in the Harvard Business Review this past year in 2009 and it won an award called the McKenzie Award which is an award given to the best publication in the journal that year.

Q. Has your work been cited widely by other academics?

A. Yes. It has been widely cited and one of my papers, in particular, called Dynamic Capabilities in Strategic Management was among the most cited papers in the entire fields of business finance and economics from 2000 to 2005.

Q. Have you done any case studies in the information technology field?

A. Yes, I have done a number. I have written a case study on Amazon web services as well as case studies on Intel and IBM.

Q. And can you explain to the jury what a case study is?

A. Sure. Case studies are something that we write and describe an actual business situation that we then use in our classroom and they're used in other business schools around the world to help students come to an understanding of how to analyze certain kinds of business situations.

1236

Q. And other than your position at Harvard, what else do you do professionally?

A. I do consulting.

Q. And what type of consulting do you?

A. Um, I advise companies of a range of sizes and in a range of industries on strategies for innovation, how to develop innovation, how to introduce new products to the market, licensing strategy, development of business models, those sort of issues.

Q. Now, are you limited to a certain number of days of consulting?

A. Yes. By Harvard rules I can do up to 52 days per year of consulting.

Q. Does your work here count against that?

A. It does.

Q. Now, do you act often as an expert witness in litigation?

A. No, I don't.

Q. In fact, is this the first time you have testified in court?

A. This is the first time I have testified at a trial, yes.

Q. And have you been deposed as an expert before?

A. Yes. I was deposed in this case and in one other case which was the SCO/IBM case. I was deposed in that

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case.

Q. And is there any other litigation or arbitration that you have ever been involved in as an expert witness?

A. I did one small arbitration case back in 1996, 1997, around that time frame.

Q. Professor Pisano, are you being compensated for your work on this case?

A. Yes, I am.

Q. And do you bill by the hour?

A. Yes, I do.

Q. What is your hourly rate in this case?

A. $600 per hour.

Q. Now, what do you -- what are you able to charge for the companies that you consult with?

A. For my corporate clients, um, I can charge up to $1,250 per hour.

Q. And do you have a lot of customers at that rate?

A. Yes, I do.

Q. Now, what were you asked to do for this case? What was the scope of your engagement?

A. I was asked to conduct research on the question of how many right to use licenses SCO would have been able to sell had the slander not occurred.

Q. And why are you qualified -- do you believe you're qualified to offer an opinion on that issue?

1238

A. Yes, I do.

Q. Why is that?

A. For the past 22 years, you know, my research, my consulting, my teaching, has focused on exactly these kind of issues of a company with a -- with a new product and trying to think about the ways it can be commercialized. And in particular, I have spent quite a bit of my time thinking about licensing, which this is a license, a licensed product, and how markets for licenses work.

Q. How does that relate to this case?

A. Well, this is a -- this is a product, the right to use license, it is a license, um, and it is exactly the kind of, you know, selling it into that market it is a market for licensing as opposed to a market for a physical product.

Q. What assumptions have you made about this case for the purpose of your opinion work?

A. I have made just two assumptions. The first assumption is I assume that SCO does indeed own the copyrights at issue. The second assumption I make is that there had not been any slander. So no statements by Novell, nothing like that. So that is the second assumption.

Q. Now, is there something in your field of work called "the but for world"?

A. Yes, yeah. Yes, I mean we don't describe it

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exactly that way, I think that is more legal terminology, but it is a form of analysis and --

Q. Can you explain what that form of analysis is?

A. In essence what you're doing in a "but for world" you're trying to describe what would have happened "but for" or in the case something else didn't happen. So in this case, but for Novell's slanders, we assume that slander never occurred.

THE COURT: Dr. Pisano, will you please slow down.

THE WITNESS: Sorry, yeah.

THE COURT: I realize this is your first trial.

THE WITNESS: Yes. I think I --

THE COURT: If you're not familiar with it, when the judge suggests something, it is probably a good idea to do it.

THE WITNESS: Okay. It is advice I have gotten many times before, sir. I really work hard at it. Um, so, in this case, a but for analysis you assume there hadn't been slander. And then you ask but for that slander had not occurred, um, what would the market for RTU's have looked like? How many right to use licenses could SCO have sold?

Q. (By Mr. Singer) Now, are you aware that in 1995 Santa Cruz purchased the UNIX business from Novell?

A. Yes.

Q. Did Santa Cruz have a UNIX product?

1240

A. Yes.

Q. What was that called?

A. UnixWare.

Q. What was the significance of UnixWare?

A. UnixWare was an important product because UnixWare was an operating system for servers that could run on types of a computer servers that were called Intel architecture. That is, they had Intel chips in them. And that was a very fast growing part of the computer server market. And until that time, there was no -- there had been no other UNIX products that could run on an Intel based machine.

Q. How did Santa Cruz UNIX on Intel products do in the marketplace?

A. They did very well. By 1999, they had 80 percent of the market for UNIX that ran on Intel architectures.

Q. Did the evolution of Linux have an impact on that business?

A. Yes, it did. It had a significant impact.

Q. Can you explain?

A. Yes. Um, Linux is very similar to UNIX. It has a lot of the same functionality and, in fact, over time, Linux began to develop a lot of the same enterprise capabilities. That is, you could use it for computers that businesses were using for critical functions.

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As Linux got better, it was doing essentially the same things UNIX could do, but it was free, or at a much lower cost. So it just ate right into the market share of the UNIX on Intel products.

Q. If it was free, why would companies like IBM or Novell be interested in it?

A. There is still a way to make money on it. If you, for example, some companies like Novell take it and they can -- not everyone gets it for free. Some want a packaged version that comes with support, comes with instructions.

Q. Dr. Pisano, a little slower, please.

A. Gosh, I'm really sorry. Some companies want the version -- want a lot of support. They want instructions on how to use it. And companies like Novell can provide that. And, of course, you have to pay for that. If you just got the downloaded version, you don't get that. For companies like IBM, they can use it to enhance their hardware business.

Q. Was Linux always able to compete with UNIX?

A. No.

Q. Can you explain?

A. Yes. Initially, Linux was actually developed by a graduate student in Finland, Linus Torvalds, and initially it was really a bit of a hobbyist's toy. A few computer

1242

aficionados played with it and made contributions. Over time, however, it began to get used in businesses. Initially, just for very simple business applications. So in -- for a computer server, web serving, just serving up web pages, it is a very simple function. But over time, as it got more capability, it could -- it could take on more difficult tasks and more complex tasks for the businesses such as transaction processing.

Q. Is there something called enterprise hardening?

A. Yes.

Q. Can you explain what that is?

A. Yes. That again refers to building in capability and functionality into the operating system to make it reliable, more available, and more scalable. That is you can use it at -- for lots of -- lots of users and use many of them.

Q. Did there come a time when Linux became enterprise hardened?

A. The first point at which that really happens is with the introduction of Linux version 2.4 which is introduced to the market in January of 2001 or February of 2000 -- announced in January 2001, available in February of 2001. That really began to include some elements that made it enterprise hardened.

Q. And how did that affect Santa Cruz?

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A. This had a very significant impact on them because, again, as I explained before, you have this operating system, Linux, which could do a lot of the same things that UNIX could do and it just ate right into the market share.

Q. Do you have an understanding of how Santa Cruz responded to this competitive challenge from Linux?

A. Yes. At a point in time Santa Cruz discovered that their intellectual property associated with System Five of the -- of their UNIX product had been incorporated into Linux without their permission. And they decided to launch a licensing program and the one that I study for the purposes here today is the right to use license as a way to capture some of the value of their intellectual property which had gotten out into the market.

Q. What was a SCO source right to use license, Professor?

A. A SCO source -- SCO source right to use license is essentially an agreement, a contract, between SCO and a user of Linux that gives them permission to use it and says if you buy this license, we're not going to sue you. You have got our permission to use the product.

Q. Now, can you explain whether a right to use license is comparable to insurance?

A. It is in many ways, yes. Because a computer user

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might not know if there really was infringement. That is, they don't really know there was a dispute and debate as to whether SCO's intellectual property really was in Linux. And so you would buy the license as insurance in case -- you bought it in case there was infringement you were fine, you weren't going to be sued.

Q. Is that like homeowner's insurance?

A. Yeah. A great analogy would be homeowner's insurance. We buy homeowner's insurance against the possibility that something bad might happen to our homes. We hope it doesn't, right, and there is a probability something bad will happen like a fire or a flood and we hope it doesn't, but in case it does happen, we have insurance and that insurance protects us. So the right to use is very similar to a form of insurance for the user.

Q. Is there a difference between Linux and proprietary operating systems in the type of indemnification that they offer to people who would use their products?

A. Yes. A very big difference. So when we go out and buy say Microsoft Windows, or Microsoft Office, or another computer program from a company like that, they have controlled the development of the code. So they offer indemnification. They say to us, we buy that and you can actually read that, there is a little -- a little tab often inside of the package which will explain it to you, or

1245

sometimes it is right on the screen, that indemnifies you. It says look, if there is some intellectual property of someone else inside this system or your program, and we get sued for it, you can't get sued for it. We will protect you. Even though you're using something that you shouldn't be using, we'll kind of take care of it for you. We will protect you legally.

Linux didn't have that. Linux never had indemnification because it was being developed by users around the world, anonymous using contributing code. So no one was in a position to essentially guarantee the origins of that code. No one could say gosh, you know, we have checked and we have made really sure that there is no infringing code in here. So there was no indemnification for Linux.

Q. Now, I would like to turn to Novell's statements. Are you familiar with Novell's statements claiming copyright ownership?

A. Yes, I am.

Q. In completing your assignment, what was the first thing that you did?

A. The first thing that I did was I looked at those statements to see if there is any economically plausible way those statements could have an effect.

Q. An effect on what?

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A. On SCO's sales of right to use licenses.

Q. What did you conclude?

A. I concluded they would have an effect. And I looked at three things in that, um, or I looked at a few things.

First, one has to look at who is making the statements. Um, Novell. Novell was a credible player in the market. They were the first party to the transaction that sold the rights to SCO. So for them to challenge it, it would have to be taken seriously. It is not like some third party somebody came out of the, you know, from left field and said hey, by the way, I don't think SCO owns the rights. This was the first party.

Um, second they were -- they were public statements. Um, they made them publically so the market and potential computer users and companies who were using Linux could hear -- would hear them. And so I think those two things together convinced me that there would be an effect. And if you just go back to, again, basic economic logic, it is very hard to sell an asset that you can't claim you own.

When you go to sell your home, one of the first things that happens is a title search. If you can't prove you own the home, you're not going to be able to sell the home. And you wouldn't want to buy a home where the person selling it to you can't guarantee they actually own the home.

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Q. Now, I would like to ask you about -- did you take any steps to determine the size of the potential market for Linux?

A. Yes, I did.

Q. What did you try to do?

A. So the first step was to try to understand what is the magnitude in trying to do -- in doing one of these analysis what you do is you start out with what is the target market. What is the population of potential customers. And so I started out by looking at the total market for servers that were running Linux 2.4 and 2.6. Linux version 2.4 was the first version of Linux that SCO says its intellectual property was in. That was launched, as I mentioned before, in February 2001. So my first step was to say how many of these versions of Linux that were either sold or downloaded for free were out in the market between 2001 and 2007.

Q. Did you look at particular Linux versions?

A. Yes. Linux 2.4 and then there was another version that came out in 2003 called 2.6 and that also -- SCO also claims its code was in 2.6.

Q. What was the geographical scope of the market that you looked at?

A. I restricted my analysis to just the North American market. That is a conservative approach because

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Linux is used around the world. And as far as I understand legally, SCO would have had a right to press its copyright claims against anyone around the world.

However, there is higher costs of doing that. It is more difficult. It is easier to do it in your own market, the North American market. And, um, while IDC, the source of data I used IDC which is an extremely reliable source of data, they track it worldwide, I felt that their data would be more complete for the North American market. So I restricted my analysis to just the North American market.

Q. Did you look at all computers using Linux or just a certain type of computer?

A. So Linux can be used on both a desktop like we might have at work or at home, or it can be used on a server which is a computer that supports multiple users. And, in fact, Linux is used on both. However, SCO was targeting the right to use license to business users. And for the vast majority of business users, the relevant market is going to be the server market. And so I restricted my analysis just to looking at servers that were running Linux.

Q. How did you quantify the size of that market?

A. So I used the source of data from an organization that tracks trends in the computer and IT industries. It is called IDC and they -- they report for each year from 2001 to 2007 every year the number of both the paid shipments, so

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for instance versions of Linux that a company bought from RedHat or Novell, and the unpaid ones, that is ones that those companies downloaded for free. Many companies will buy a copy, download a few copies for free. So we really need to look at both.

Q. Are there different types of Linux shipments?

A. Yes, those are the two types. The two types are the paid and the -- what are called the non paid. Those are the ones that are downloaded for free.

Q. What years did you focus on again?

A. Again 2001 to 2007.

Q. So based on the IDC data for that time frame, what did you conclude the size of the market was?

A. There were 7.4 million Linux -- versions of Linux out there, cumulatively, between 2001 and 2007.

Q. Is that just looking at the servers in the North American --

A. Yes, just in the North American market.

Q. Did you view that to be a -- how did that relate to what the universe of potential buyers were for these right to use licenses?

A. So that starts -- that is kind of, if you will, that is the outer bounds, right. That is if you could sell 100 percent, you could penetrate 100 percent of the market, you would get all 7.4. But there are lots of reasons to

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believe they couldn't sell to 100 percent of the market because in many situations you don't. So then the next step for me was to try to assess what percentage of that total 7.4 million could they have sold to.

Q. Before we turn to that step, let me ask you, Dr. Pisano, do companies typically have multiple servers?

A. Yes, they do.

Q. What would be a range that might be useful to know?

A. It is a dramatic range. I mean a small company might have a dozen or, you know, a handful. The largest companies could have tens of thousands, hundreds of thousands. There are some reports that Google has over a million servers. So that really -- really ranges.

Q. What was the next step in your analysis?

A. So the next step was to try to assess what is the likely market penetration of the SCO right to use license in this universe of 7.4 million users.

Q. How did you go about that?

A. Well, the first step was to kind of conceptualize the problem this way. Imagine in that universe of users there is a spectrum of users. And at one extreme we have computer users or businesses that they don't think there is infringement, they don't think SCO has got any chance to prove infringement. Maybe they have looked at the data

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themselves, or they have listened to others, or they don't think they'll be caught, all right. They think they'll never find us. Or, regardless of that, they think you know what, we'll just take the risk. Some organizations are willing to take that kind of risk. That is one extreme. They're never going to buy a SCO right to use license, ever.

Imagine at the other end of the extreme we have computer users, businesses, with a very different set of preferences. They're concerned about infringement. They think there could be infringement. They're afraid they'll get caught. Well, regardless of how they view that, they just don't want to take the risk. They are conservative. They don't want to take the risk. So we have a continuum. This end of the spectrum (indicating) are the ideal customers for SCO RTU, the conservative side. This group out here, (indicating), they're not going to buy. So we want to try to then assess and think about where is the market on this continuum.

Q. How do you go about determining that then?

A. So a useful technique to try to do this in a market to estimate how much of a product might sell is to use a proxy, right. A proxy is another product that looks very similar or is almost a substitute for the product you're trying to analyze. So let me give a simple example. If you are a book publisher and you are trying to estimate

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how many -- you have got a young author who writes about courtroom dramas, right, a novelist, and you're trying to say how do they even sell a particular market, you know, say Salt Lake. How many are they going to sell here? How many of those books should we send to this market? They might use as a proxy how many sells of other books that looked very similar. They might pick John Grisham novels. They might say how many John Grisham novels sell. Because that is close to what this product, this author's book, is doing. This is very common for companies to do is to look at similar products and use that as a benchmark to decide how many might our products sell.

Q. Did you find such a proxy with respect to the SCO source right to use license?

A. The best proxy you can use here are businesses, preferences, or demands for indemnification. As I mentioned before, indemnification is something that protects you in the event of a lawsuit. So the SCO right to use license is very similar to indemnification. So if we can assess the percentage of the market that wants indemnification, that should give us a very good idea of the percentage of the market that would have bought the SCO right to use licenses.

Q. Did you find such surveys?

A. There were three such surveys. Excuse me, may I get some more water? I'm really dry.

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THE COURT: Certainly.

THE WITNESS: Dryer mountain air, I guess. Thank you. Thank you for that. Let me answer your question.

Q. (By Mr. Singer) Yes.

A. I found three surveys. One was a survey conducted by a business intelligence and analyst firm called Forrester Group. They have been around for a couple of decades and they conducted a survey. This particular survey had 36 large -- 36 large North American companies with sells greater than one billion dollars. And they asked them two questions. They asked them if they were concerned about the intellectual property issues as concerning Linux, and they specifically made reference in their question to SCO/IBM. 36 percent yes they were concerned. Um, they then asked about their interest in buying into an indemnification plan and 22 percent said they would be interested in buying into a plan.

Q. In your view was the Forrester Group a reputable source?

A. Yes. And when I look at the sources of data, when I use surveys, what I did in this research here is exactly what I do in my own academic research. It is the same standard I use when I judge other people's work in academia. There is a few things you look at.

So first you have to look at the organization. Who is

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doing the survey. And the first question is do they have any reason to be biased? That is, for example, if they have a political agenda and is there a certain issue that you would expect them to be biased on. Thank you. Or do they have an incentive to be unbiased. An organization like Forrester, their reputation hinges on doing unbiased surveys. CIO's, chief information officers, executives, other analysts use their reports, buy their work, they want unbiased information.

The second is, um, is this organization experienced at doing this. To put it in simple terms, are they amateurs or are they professionals at it. Is this the first time they're doing a survey, or is this something that they do as a matter of course. And for, um, Forrester, as I mentioned, they have been around a couple of decades. They're one of the oldest firms to do this kind of work. They do these as a matter of course. They do -- they do dozens of these things a year. So they are -- they definitely meet that criteria. And the third criteria is to look at the basic parameters of the survey design to see is there any reason to believe the result would be biased in one direction or the other.

And here they had 36 companies, larger companies. It is not a very large sample, but it is large enough, by the way, to get reliable findings. You don't need samples of

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thousands to get a reliable, you know, indicator. And there was nothing in the design that would suggest to me a strong bias in either direction.

Q. And tell us again what were the results of this first study?

A. It was 36 percent said they were -- had concerns over the intellectual property issues in Linux, and 22 percent planned or were interested in buying indemnification.

Q. Can you tell the jury about the second study that you looked at?

A. The second study was conducted by an organization called Yankee Group. Yankee is actually -- so Forrester was one of the oldest. Yankee is actually the oldest company to do business intelligence analysis for the IT sector.

And they did a survey of 1,000 organizations, and they asked about -- they asked companies about their concerns, whether indemnification was a concern, a top priority, high concern, somewhat concerned, unconcerned were the categories. And what they found is that 19 percent of their respondents said that it was either a top priority or they were very concerned about indemnification. And then another 26 percent said somewhat concerned. And that is a harder one to interpret.

So again, my view was at a minimum 19 percent, and

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then sort of think on that continuum of the 26 percent we don't know which of those are concerned enough to be buying, but a maximum it would be 45 percent. We add the 26 to the 19, there is 45 percent.

Q. And in connection with this survey, did you look at and have cited in your report Exhibit K28 which is the 2004 Windows, UNIX and Linux Comparison Survey by the Yankee Group?

A. Yes.

Q. And did this provide the methodological information regarding how this survey was conducted?

A. Yes.

Q. Did this provide you with information about how many people were surveyed?

A. Yes.

Q. The exact questions used?

A. Yes.

Q. Did it include the demographics of the different people?

A. Of the different kinds of organizations, the sectors they were, yes.

THE COURT: Mr. Singer, would you keep in mind we need to break in the next couple of minutes so when it is a good time for you.

MR. SINGER: I think after one more question.

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Q. (By Mr. Singer) In your judgment was this second survey a reliable survey for you to consider?

A. Yes. And it meets all of the same three criteria I laid out before for the first survey.

MR. SINGER: I think this would be a good time, Your Honor.

THE COURT: We'll take a 15 minute recess. Ms. Malley.

THE CLERK: All rise for the jury.

(Whereupon, the jury left the courtroom.)

THE COURT: Let's take 15 minutes, counsel.

(Recess.)

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***** Part 2 *****

THE COURT: Counsel, I want to ask Dr. Pisano a couple of questions before the jury comes back.

MR. SINGER: Yes.

THE COURT: Dr. Pisano, did you look at the methodology of the underlying Yankee Group study in order to determine whether or not it was reliable?

THE WITNESS: Yes.

THE COURT: Is the Yankee Group study the type of study that is reasonably relied upon by other experts in your field in forming similar opinions?

THE WITNESS: Yes.

THE COURT: All right. Thank you.

Anything before we bring in the jury?

MR. SINGER: No, Your Honor.

MR. ACKER: No, Your Honor.

THE COURT: Dr. Pisano, I have to warn you that we have a court reporter here who is more inclined than some to get after you if you start staking too fast.

THE WITNESS: I apologize.

THE COURT: I just want you to be aware.

THE WITNESS: I apologize. It's a bad habit. I mentioned to her, being the youngest in a large family, speaking fast --

THE COURT: You were doing well after the third or fourth suggestions. I'm just trying to warn you.

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THE WITNESS: Thank you. I appreciate it, sir.

MR. SINGER: Dr. Pisano would have been a very good college debater.

MS. MALLEY: All rise for the jury, please.

(Jury brought into the courtroom.)

Q. BY MR. SINGER: Dr. Pisano, a few more questions regarding the second Yankee -- well, the second of the studies, the Yankee study which you were talking about.

First of all, I'd move the admission of K-28.

MR. ACKER: I object, Your Honor. He can rely on it, but it doesn't come into evidence.

THE COURT: I'll sustain the objection.

Q. BY MR. SINGER: Are you aware of the number of respondents to the overall survey?

A. The overall survey was 1,000.

Q. Was the question regarding indemnification directed at a particular type of respondent?

A. Yes. It was directed at respondents. They asked: If your company is mid-size or greater than 5,000 employees, what is your -- what is your attitude toward or concern over indemnification?

Q. So a small company wouldn't necessarily have responded to that?

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A. No.

Q. Are you comfortable with the methodology, even though you don't know how many small companies might not have responded to that question?

A. Yes. I'm very comfortable.

Q. And, can you explain?

A. Yes. Again, this is a survey with a -- the biggest survey is a thousand. Now, there's a subset in there. We don't know the exact number, okay, but, again, let's go back to who this organization is and what they are about. They don't have an incentive to publish a study with, you know, an absurdly low response rate that would, in any way, bias the results.

And if we also just think demographically about businesses, it leaves out small businesses, and there's quite a few small businesses, but mid-to-large companies is also likely to be a very big chunk of their total survey. So if we are starting with a thousand, they might have a few hundred responses in there, and that certainly is sufficient to get a reliable response.

Q. I'd like to ask you about the third survey that you relied upon.

A. Yes.

Q. Can you tell us about that study?

A. Yes. That was also done by Yankee Group. That

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was 550 North American companies of all seizes, similar, similar methodology, similar -- directed at similar kind of decision-makers, chief information officers or systems administrators in these organizations and across a broad range of industries; banking, government, academia, manufacturing, professional services, etc.

Q. Can we put A-30 up on the screen for you to see? Is this the study that you're referring to is the 2005 Yankee Study?

A. Yes.

Q. And did you review the methodology of this study?

A. Yes, I did.

Q. Did you believe it was an appropriate methodology?

A. Yes.

Q. Was it a methodology of the type that people in your field would rely on for your work?

A. Yes. Absolutely.

Q. Is that true of all three of the studies?

A. Absolutely. Yes.

Q. And how many respondents did you say this particular study had?

A. This study had 550 respondents.

Q. And what did this study indicate?

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A. This study indicated that 20 percent of organizations that use Linux or are planning to use Linux were planning on buying indemnification.

Q. So, what conclusions did you reach about the reliability of these three surveys as a whole?

A. So, in one of the principles that I use, when I do my academic research, is, if you have multiple sources of data, is triangulation. Do they all point in the same direction? And there is a high degree of overlap between these. At minimum, it seems to be 19 percent penetration; at maximum, 45 percent.

But, again what I think about here with the three studies in evaluating together, is, do they triangulate? Do they point in the same direction? And, in this case, they did

MR. SINGER: Can we put up a demonstrative, which is -- Mr. Calvin.

I'd like the jury to be able to see -- this is a demonstrative exhibit, Your Honor.

THE COURT: Any objection?

MR. ACKER: No, Your Honor, none.

THE COURT: Go ahead.

Q. BY MR. SINGER: With this demonstrative exhibit, can you explain how the 19, 26 and 55 percent numbers relate to one another?

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A. Sure. So we can think about that pie as the total size of the market. That's all the Linux 2.4, 2.6. That had 7.4 million users. The 19 percent is the lower bound, the minimum estimate of what I would think the market penetration for the the SCO right-to-use license would have been. There is this other 26 that was potential. And, depending on how we would interpret the somewhat concern, we get a maximum of 45 percent. So no more than 45 percent, no less than 19 percent. It's just the range that I calculate.

Q. Were all three studies showing interest at 19 percent or higher?

A. Yes. One was showing -- yes, all three, 19 percent of higher. The minimum was 19, and the other two were -- their minimums were 20 and 22 percent.

Q. So, what was your -- did you draw a conclusion from these three surveys with respect to the purchasers for SCOsource licenses and what you've described is this but-for world if the slander of title had not occurred?

A. So, if we take the lower bound estimate of 19 percent and we apply that to the 7.4 million total potential market, we get 1.4 million SCOsource right-to-use licenses. If we go to the other extreme, the 45 percent, we get 3.3 million. So we think it's between that range, 1.4 and 3.3.

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Q. Did you view these as buyers that were likely to purchase SCO right-to-use licenses?

A. Yes.

Q. Can you explain?

A. Yes because, again, if we go back to the proxy, and the demand for indemnification, these users appear to be asking for a product that does exactly what the SCO right-to-use license does. It relieves them of the risk, of the legal risks of infringement and also the operational risks; the need to shut down your systems if you have to change things, down time, which can be extremely costly. So, again, this segment, it seems to me, really almost perfectly aligned with what the SCO right-to-use license was offering.

Q. Did you reach any conclusion about why, in the real world, not the hypothetical world, those 19 to 45 percent did not buy a SCOsource license?

A. In my opinion, it's the lack of clear ownership over the copyrights. The SCO right-to-use license, without clear ownership, is a worthless product, so it doesn't solve their problem. You know, had the ownership been clear, it solves their problem. Without that ownership being clear, it's not solving their problem. They are not going to be interested in it.

Q. Did you consider other possible reasons that

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users of Linux would not purchase a SCOsource license?

A. Yes. Absolutely. And that's the beauty of this methodology. So, for example, if there are users who say: I'm not going to buy a license. I'm not concerned about the ownership issue, but I don't think SCO has an infringement claim. They are never going to win infringement.

Well, in the survey, they are not going to show up in that 19 to 45 percent. You know, why would you be worried about indemnification if you think there is no -- there is no legal risk there? So, yeah, the infringement issue, different companies, different users have different views on the infringement. And that's okay. That's reality, and that's reflected in the answers.

Q. Did you consider whether the 19 to 45 percent of the respondents were concerned about an infringement risk other than SCO?

A. That's a great question because there was the potential for other infringement risk, other companies. Now, at the time, as we looked through the record, the historical record of what's happening, SCO is, by far -- is the most visible one. In fact, at that time, they are the only ones pressing claims for their intellectual property. There were some things out there in the press and in the literature saying that, gosh, there are 283

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patents out there and a bunch of them belong to IBM, and what happens if IBM decides to start suing people.

My view is the probability of that was very low since IBM had a very huge stake in the success of Linux. Another thought was, gosh, Microsoft might start to exert their intellectual property rights. They hadn't been doing that either. But, you know, let's just assume that that was also on people's mind.

If you were concerned -- if you were a user and you were, say, concerned with, say, IBM and the remote possibility that IBM or some third party which hadn't even expressed any issue around intellectual property was going to come after you, if you weren't concerned enough to say you wanted indemnification, you know, compared to SCO, you had to have been concerned about SCO because SCO was out there saying: We intend to press, you know, our rights for -- to claim, to make our claims, to sue people for infringement. So SCO was a real credible threat.

So, my view is if this 19 -- this certainly doesn't exclude the possibility that, in this 19 to 45 percent, there are users who are also concerned with other, unspecified intellectual property risks. That's fine.

Q. Did you consider the issue of pricing?

A. Yes. The surveys don't speak directly to

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price. But, let's, again, remember what's going on out here. First of all, SCO had already announced a price for their product. It was initially 695, and they had made various deals at lower prices, and, in fact, Deutsche Bank was forecasting that their price would be $200. So, the users certainly knew the price from SCO. They also knew the price of other indemnification out there. There were other plans out there, and they had various prices. And these are companies who are used to paying a premium for indemnification.

And in fact, in the third Yankee Group survey, they asked users.

How much are you intending to spend extra on indemnification?

And there's, again, as you would expect, a range of responses, but the median was about 150 to 200, the bracket, 150 -- I'm sorry -- 100,000 to $250 thousand per year extra on indemnification. So these users have a range of prices in their mind at which indemnification makes sense, and that's affecting their responses.

Q. Were there competitors who were also offering a similar type product?

A. Yes.

Q. How did you consider that?

A. After -- after Novell's statements, a number of

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companies, including Novell, decided to enter this market to offer indemnification, to tell users: No need to worry. We can offer you indemnification.

So there are potential substitutes. I looked at them very carefully. But if you look at the different programs that were being offered, they were very poor substitutes, very poor substitutes. So, for example, Novell's program -- Novell had a program. It capped the legal liability at $1.5 million. It required you to buy $50 thousand worth of services in the year before. It was restrictive. It didn't compensate you for down time. And several others had very significant flaws, restrictions that would make them very imperfect substitutes for a SCO RTU, right-to-use license.

Q. Did you also consider whether, if SCO's UNIX copyright ownership was decided now, in its favor, would SCO be able to go into the market and recoup those sales by going back into a SCOsource business?

A. Absolutely not. And I thought about that question as if I had never been asked to be involved in this case, but the case was over, SCO won the case, and they called me as a consultant and said: You know, Gary, can you help us figure out our strategy for the SCO right-to-use licenses? We want to go back and try to recoup those sales. What's your opinion? What's your

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advice?

And there's no way. I mean, there's just no way they could do it. The market has moved on. Time has moved on. You'd have to go back and find those people, find the number of servers. Some have changed servers. Some have outsourced their servers. Any of the possible momentum they could have had in the market -- momentum matters a lot in markets. If you can get something going, you build -- you build momentum. That's dead. The momentum is gone.

And then we also have to look at the resources available to the company today. They had a sales force in place then who could sell these. They had contacts in the market. They had relationships with people. Both some of the buyers, some of those people move on, and, as I understand it, the sales force is not here anymore, so they are just not in a position now to go back and recoup those sales.

Q. So, finally, Professor Pisano, what Is your opinion regarding how many SCOsource licenses SCO could have sold 2003 to 2007 if the ownership of its copyrights had not been called into question by Novell?

A. In my opinion, it would range between 1.4 million and 3.3 million.

Q. And does that refer to the 19 to 26 percent --

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A. Yes.

Q. -- 19 to 45 percent range?

A. Yes, sir.

MR. SINGER: Thank you.

THE COURT: Mr. Acker.

MR. ACKER: Thank you, Your Honor.

CROSS EXAMINATION

BY MR. ACKER

Q. Good morning, Dr. Pisano.

A. Good morning.

Q. Glad to see see you're a Cal Bear.

THE COURT REPORTER: Glad to see what?

MR. ACKER: A Cal Bear. We both attended the University of California, Berkeley.

Q. BY MR. ACKER: Let me ask you, first, how many hours have you spent working on this matter?

A. Oh, that's a great -- going back to the beginning? Oh, I believe hundreds. Just in the last, you know, weeks or two, 60 hours or so just in the last few weeks, just kind of refamiliarizing myself with things and the original report. I don't have that number off the top of my head, but a lot. I go back to the original, you know, creation of the report, to the original expert report written in 2000 -- 2007.

Q. And you were paid $600 for each one of those

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hours?

A. Yes.

Q. And so, would you say that it's more than a hundred hours?

A. Well, I mean, I'd really have to go back and look. Going back to 2007 -- I have the total figure off the top of my head of what I was paid. I believe it was $120 thousand total. So I'd just have to do the math, the 600, and divide it in to get that but I. --

Q. $120 thousand before -- as of when were you paid that much money?

A. As of 2007.

Q. And, since that time, have you spent another hundred hours or more on this?

A. Approximately.

Q. So, is it fair to say you have been paid over $200,000 thousand for your opinion?

A. Again, I'd want to go back and look at it, but I think it would be below 200 thousand. I'd have to go back, but it's a number like that.

Q. It's a lot of money, isn't it?

A. Yes, sir, it is.

Q. And so you have been paid a lot of money to give the opinion that you have given today, right?

A. No. I would say I have been paid a lot of

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money to do the research that I have done. The opinion was up to me to draw. I don't think I was paid for my opinion, at least I never viewed it that way.

Q. Now, you mentioned you prepared some reports. Did you actually write those reports, or did the lawyers write those reports for you?

A. I wrote those reports.

Q. So you were careful in writing those reports, correct?

A. Yes, I was.

Q. And you, a smart guy, and you spent a lot of time, and you made sure they were accurate, right?

A. That's true.

Q. Let me hand you, Dr. Pisano, your first expert report in this matter. Take a look, Doctor, and make sure I've given you the right report.

A. You have.

Q. And this is your -- the expert report and declaration of Gary Pisano, correct?

A. That is correct.

Q. And you signed it at the back, right?

A. That is correct.

Q. And I see your signature dated May 25, 2007. It looks like you signed it in Boston or in Cambridge, correct?

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A. That is correct.

Q. And you also said that -- there's a line at 97 above your signature you say: I declare, under penalty of perjury, that the foregoing is true and correct.

Right?

A. That is correct.

Q. And that's essentially the same oath that you took when you walked into this courtroom today?

A. Yes.

Q. And you read it, I assume, before you put your signature under that declaration under penalty of perjury, right?

A. Yes.

Q. If you could take a look at page 3 of your report, if you would, Doctor.

A. Yes, sir.

Q. And you see the second -- or fourth sentence down that begins with "in my professional" on the right side?

A. "In my professional opinion," yeah.

Q. You wrote: In my professional opinion, the relevant damage period extends from the date of first slander, May 28, 2003, to the end of of trial in approximately 2007.

Do you see that?

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A. Yes, I do.

Q. So that's your damages period, 2003 to 2007, right?

A. That's correct.

Q. And then if you could turn to page 5. You see paragraph 12C?

A. Yes, sir.

Q. And you wrote: Based on my knowledge of the industry, in my research and analysis in this case, I am not aware of any causes for SCO's loss of those SCOsource license sales other than Novell's conduct during the relevant time period.

Do you see that?

A. That's correct.

Q. That's a true statement?

A. Yes.

Q. And so your opinion is based on your opinion that the only thing that caused SCO to lose a license between 2003 and 2007 was statements by Novell; is that right?

A. Again, taking into account that the relevant market for them and the fact that the market they could have had was 19 to 45 percent. As I mentioned before, in my direct testimony, there were other factors that led people to not be interested, the folks on this end of the

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spectrum.

Q. But your opinion in your report is based on your knowledge of the industry and your research and analysis, which includes your analysis of these reports you have identified, correct?

A. Yes.

Q. And your conclusion was that, after doing that analysis, you were not aware of any causes for SCO's loss of the SCOsource license sales other than Novell's conduct. That's your opinion?

A. Yes.

Q. And your numbers that you gave this jury at the end is based on that opinion, that the only thing that caused SCO to lose a SCOsource license was statements by Novell?

A. You're framing it in a way that I'm not quite comfortable with. I just want to be clear and go back to the analysis which says, there were actually a bunch of players in the market who were not going to buy that had nothing to do with Novell.

They could have been players who said: I don't think there is infringement, they are out of it.

But, among the players who would have bought it -- that's the subset of the market, the 19 to 45 percent -- that's my opinion, that the statements of

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Novell take away the sales from that segment, the 19 to 45 percent.

Q. Okay. So what you actually said in your report is not exactly accurate. What you say in your report is you are not aware of them losing any sales, SCOsource losing any sales other than Novell's statement. That's what you say here.

A. I don't agree with the way you're characterizing it. Again, the lost sales were the ones they could have had. There's a whole bunch of ones they couldn't have, and so I wasn't saying they were -- Novell was taking away those sales.

Q. Well, let me just ask this. Is this statement true or false: Based on my knowledge of the industry and my research and analysis in this case, I am not aware of any causes for SCO's loss of those SCOsource license sales other than Novell's conduct during the relevant time period.

Is that statement accurate?

A. Yeah. That's an accurate statement, and it's completely consistent with my analysis.

Q. And so it's accurate, and your opinion is based on the fact that you believe the only thing that caused SCO to lose a loss of a SCOsource license was Novell's statements?

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A. Yes. Of the segment identified.

Q. Okay.

A. I think we are violently agreeing.

Q. I don't think we are, Doctor. And, again, if you take a look at page 21 of your report. Do you see that?

A. Yes, sir.

Q. And that is where you come up with your 7. -- a little over 7 million total sales of Linux between 2001 and 2007, right?

A. Sir, the table 1. That's actually -- that's the -- that's the 14.99 million, the world market. Is that the one you're referring to?

Q. Table 1 on page 21.

A. Okay. But that's not the 7.4.

Q. Well, my question is, that's the time period, 2001 to 2007?

A. Absolutely.

Q. Right? And so, in order for this jury to understand whether your analysis is accurate or not, they are going to have to understand exactly what all the factors were that may have influenced the potential licensee's decision to buy a SCOsource license between 2001 and 2007?

A. No. You'd be buying the license. Remember,

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the license is not available until August of 2003.

Q. All right. So I can change my question. So, in order for this jury to determine whether or not your analysis is correct or not, they are going to have to know all the potential factors that would influence a potential licensee between the periods 2003 to 2007?

A. Yes.

Q. And they would have to be aware of all the things that occurred in the marketplace during 2003 and 2007 to understand whether or not your analysis holds water, right?

A. They would have to be aware? I think that would be very helpful, to be aware of what's happening in the market.

Q. And the reason it would be helpful to be aware of what's happening in the market during that period is to know what factors were influencing potential SCOsource licensing and their decision whether to take a license, right?

A. Yes.

Q. Now, this Yankee survey that you relied on, true, is it that part of the reason that you believed that -- well, let me back up. You relied on three surveys. There's one Yankee survey. The third one is an IDC survey. The first one, your 19 to 49 (sic) percent,

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that really comes from the first Yankee survey, right?

A. I'm really confused. I did not use the IDC surveys to calculate the percentage. They were used for a different purpose.

Q. Okay.

A. I just want to make sure I am clear with your question.

Q. You're right. So, you've got two Yankee surveys, and you've got a Forester survey, right?

A. Yes, sir.

Q. And the one Yankee survey that you really focused on, that gave you the percentages that you relied on in the table that Mr. Singer just showed to you, that was the first Yankee survey that you talked about, correct?

A. That's correct, sir.

Q. And part of the reason that you relied on that survey was because you think Yankee is a reputable outfit that does surveys all the time, correct?

A. Yes. That's one of the factors I took into account.

Q. And, again, it would be true, isn't it, that a company like Yankee, that does this kind of stuff all the time would really -- you know, it would be like Toyota makes cars, Yankee does surveys, correct?

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A. Absolutely. I think I said that in my deposition.

Q. So you're relying on the Yankee survey because of its reputation, and you do an analogy of that to Toyota's reputation building cars; is that right?

A. Correct. I was using it as an analogy that, if a company is in a certain business, when we go to buy a car, we don't look at everything of how it was -- as a car owner, there are certain -- as a buyer, there are certain things you expect the company is doing right. And I used the analogy of Yankee is like Toyota. It was a metaphor for the fact that they -- this is a company that's in the business of collecting this kind of information. This is what they do. This is their bread and butter. If they don't do it well, they go out of business.

Q. Well, as we know, simply because somebody is in the business doesn't mean they always do it right, correct?

A. Absolutely.

Q. And, for instance, Toyota makes cars, and they don't always do it right, correct?

A. Absolutely.

Q. And you weren't involved directly in any of these surveys, correct?

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A. No.

Q. And you weren't -- you don't even have any connection with the Yankee -- you don't know what exact questions were asked of the respondents, correct?

A. That's not true. I do know the questions that were asked.

Q. And do you know the exact words that were used to every respondent that was called in that survey?

A. Yeah. They listed them in the -- in the report. They said these are the questions, and they had a series of charts. Here's the questions and here's the answers.

Q. And you know the exact words that each person communicated to the respondent during every phone conversations?

A. Well, they were web-based. So there is a standard one they were getting. I don't think they were relying on people calling. As a matter of course, they will do some followup by phone, but these were web-based. You are getting it on there. There's a standard question, and that's the question that the users are getting.

Q. Do you know how many phone conversations actually took place?

A. No. But I don't think I need to.

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Q. Do you know exactly what companies were part of the survey?

A. No. We don't know the names of the specific companies. We don't know whether it's, you know, Company X, the Hilton Hotel. We don't know the names of the companies.

Q. Do you know what exact businesses any of the companies were in?

A. Yes. There's a demographic, a report across the sectors. I don't have the numbers off the top of my head. It was like 14 percent retail, 27 percent professional services.

THE COURT REPORTER: Whoa. Please slow down. "I don't know have the numbers --"

THE WITNESS: I don't know the exact percentages here now off the top of my head, but it was something like 14 percent were retail, 27 percent were professional service, 10 percent were, I think, manufacturing. Anyway, the demographic was laid out, so we know that the distribution.

Q. BY MR. ACKER: But you don't know exactly what companies were involved or what specific industries each one of those companies was in, correct?

A. Yeah. We never know in surveys the identities. Identities are always kept secret of either individuals

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or companies in surveys. That's standard survey practice.

Q. And you also don't know exactly what the infrastructure or computer needs were of these respondents, correct?

A. No. That's not true. I mean, it describes -- the surveys describe what their infrastructures were like and what systems they were using, so I had a pretty good idea of that, too.

Q. Did you look, in your analysis, at all the other factors that were involved or all the other influences that were involved in influencing whether or not a potential licensee would take a SCOsource license between 2003 and 2007?

A. I looked at as many factors as I could think of.

Q. And, after looking at all those factors, it's your opinion that none of those factors had any bearing other than the statements of Novell?

A. Again, just to be clear, on the 19 to 45 percent, right. That's the target group.

Q. Okay. Let me ask you about some of those factors. By the way, you didn't have any direct conversations with any potential licensees to determine whether or not -- or what reasons they used or what

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reasons they justified for not taking a license from SCO, correct?

A. No.

Q. And, in the surveys that you relied on, the name of SCO, there wasn't any question that asked: Would you take a SCOsource license, and, if not, what the reasons were why you wouldn't take that SCOsource license?

That wasn't asked?

A. No. The SCOsource license was, in some sense, by that time in the market, dead.

Q. Well when you say in the market dead, what was the time frame of these surveys?

A. Well, it was not going anywhere. I mean, it wasn't going to go anywhere. It didn't have -- it wasn't making sales. But there was one survey, by the way, that did ask: Are you concerned with the intellectual property issues?

And they put in parentheses in the question, such as IBM/SCO.

Q. And my question was, what were the dates of the surveys, sir?

A. April 2000 -- I'm sorry -- May, 2004. The Yankee survey is done in April, 2004 and published in November, 2004, and then March, 2005.

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Q. And, again, in none of those surveys, were the respondents asked about any statements by Novell, correct?

A. That's correct, sir.

Q. And, in none of those surveys, were any of the respondents asked: Would you not take a SCOsource license because of something Novell may have said, or are you not taking a SCOsource license because of some other factor?

A. Right. They are not asked that question.

Q. And so none of this survey information can help this jury understand why it is a potential licensee may or may have not purchased a SCOsource license, correct?

A. That I disagree with completely.

Q. Well, those questions weren't asked of any of the respondents, correct?

A. But you don't need to. That's the beauty of the methodology. You have got a wonderful proxy here for something that would have been a great substitute for the SCO RTU.

Q. And that proxy, according to you, is indemnification, correct?

A. Yes.

Q. So, let me show you what we have marked as G-29.

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A. So this is what is just appearing on the screen?

Q. Yeah. It's going to come up on the screen.

A. Yeah.

Q. And you see Exhibit G-29 is an article, and I want you to focus your attention on Roman Numeral X, the article, SCO CEO. No Need To Sue More Customers.

A. Sure.

Q. Do you see that?

A. Yes.

Q. And if you take a look at the next page, you see the reference to IG -- IDG news --

THE COURT: Mr. Acker, before you start reading from it --

MR. ACKER: Yes.

THE COURT: I would like to you ask for its admission.

MR. ACKER: I just want to get him to a point and ask him a question, but I won't disclose the substance of it.

THE COURT: Try not to disclose the substance in the course of it.

Q. BY MR. ACKER: Well, let me hand you this. Were you aware, Professor, that Darl McBride, the CEO of SCO actually told in an interview that the SCO --

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MR. SINGER: I object, Your Honor. This is a hearsay statement that isn't in evidence.

MR. ACKER: I'm able to probe his knowledge or lack of knowledge underlying his opinion.

THE COURT: Well, by disclosing the contents of the document in the course of doing so, without the document being admitted, it's problematic.

MR. ACKER: Well, let me lay a foundation, Your Honor.

THE COURT: Go ahead.

Q. BY MR. ACKER: It's your opinion that these other indemnification programs out there, Doctor, didn't have any impact on the SCOsource licensing program because they were bad substitutes for it, right?

A. In a but-for world, okay, they would not have been good substitutes. But, remember, the SCO RTU is not out there at that point. It's not doing well on the market. These things emerge, and they are -- some people are definitely buying them. They are better than nothing. If --

Q. Well --

A. -- you don't have a SCO RTU --

Q. But so the jury understands --

THE COURT REPORTER: One at a time, please.

Q. BY MR. ACKER: So the jury understands, it's

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your opinion that indemnification programs offered by Red Hat, offered by HP, offered by Novell, that those were poor substitutes for the SCOsource program. That's your opinion?

A. Absolutely. They came with very significant restrictions. For example, if you changed on any of those programs, if you changed any of the source code -- and one of the real values of Linux is it's open source. You can do stuff with the source code. You do that, and, boom, your inindemnification is done. You are not covered. That's a huge --

Q. And would your --

A. -- restriction.

THE COURT: Just a second, counsel. Let him finish.

THE WITNESS: That's a huge restriction.

Q. BY MR. ACKER: And would that opinion change if you knew that Darl McBride indicated that, in fact --

MR. SINGER: I object, Your Honor, if he's going to read from a document --

MR. ACKER: I'm not reading from a document.

MR. SINGER: -- or proffer testimony that is not in the record.

THE COURT: You a may ask the question.

Q. BY MR. ACKER: Would that opinion, that the

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indemnification programs were poor substitutes for SCOsource change, Doctor, if you knew that Darl McBride indicated that, in fact, the SCOsource program was being harmed by other indemnification programs?

A. But, again, we have to keep in mind the analysis. This is in the real world, with the SCOsource product severely impaired, competing against real indemnification programs. You can understand it. But in a but-for world, the SCO RTU -- sorry -- the SCO right-to-use license is not impaired, so the balance shifts dramatically.

Q. And my question was really pretty simple. Were you aware that Mr. McBride believed that other indemnification programs were harming the SCOsource licensing program? Were you aware of that fact?

A. I was not aware of that.

Q. And now, if you assume that fact, that, in fact, Mr. McBride himself thinks that the SCOsource licensing program was harmed by other indemnification programs, does that change your opinion at all?

A. No. Not one bit. Not one bit.

Q. But it is your opinion that your proxy, and that is, the basis for your opinion, is that there is an analogy between an indemnification program and the SCOsource licensing program. Do I have that right?

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A. Absolutely. You know, they were potential -- you know, potential substitutes. I actually interpret his statement there, as I'm looking at it --

THE COURT: Dr. Pisano, there is no question.

THE WITNESS: Okay. I'm sorry.

THE COURT: Thank you.

Q. BY MR. ACKER: Let me hand you another document, M-18. You see, Dr. Pisano, M-18, it is an internal e-mail inside of SCO dated August 8 -- August 6, 2003, talking about ability of the SCOsource program to provide indemnification.

A. I'll have to look at it. There's a string of messages here. I'm having a little trouble in interpreting that. It's the classic kind of e-mail with the little one-line blurbs. It's actually hard for me to really figure out what they are talking about here. They are snippets, so I don't quite know how to interpret this.

Q. Well, let's take a look at the e-mail beginning down at the bottom dated 6/6/03 from Janet Sullivan. Do you see that?

A. To Blake -- I'm sorry. Is that the one that says: Folks, what would you say to this argument?

Q. Yes.

A. Okay: Folks, what would you say to this

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argument?

Yes. I mean, I've read it.

Q. And you see on the next page, on the back page, Janet writes to Blake at SCO, and he actually talks expressly about the inability of the SCOsource licensing program to indemnify. Do you see that?

A. Sorry. Could you repeat your question. I didn't get the last part of it.

Q. There is a direct reference to the SCOsource licensing program being unable to provide full indemnification. Do you see that?

A. Right. Yeah. So there --

Q. Let me just stop you there.

MR. ACKER: Your Honor, I'd move for admission of M-16 -- or M-18.

MR. SINGER: No objection to this document.

THE COURT: M-18 will be admitted.

(Novell Exhibit M-18 received in evidence.)

Q. BY MR. ACKER: And so let's start the the back, Doctor, and work our way forward. You see Joe Barr writes to Blake Stowell inside of SCO and says:

Blake, your new Linux license apparently expressly disclaims any indemnification for third-party intellectual property rights.

Do you see that?

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A. Yes. Now, again, just to make sure I'm following this. The "your new Linux license," are they referring to the right-to-use license?

Q. I don't know. Is this a document you have ever seen before, Doctor?

A. I have not seen this document.

Q. So this is news to you, this document, correct?

A. Yeah. I have not seen the document before.

Q. And you see that Blake writes -- someone writes from inside into SCO:

Your new Linux license apparently expressly disclaims any indemnification for third-party intellectual property rights. Is that an oversight or is this the sort of thing -- something you feel Red Hat should do but not you?

Do you see that?

A. Yes. I see that.

Q. And did you understand that that was the case, that Red Hat was able to provide indemnification that was broader than the indemnification that SCOsource was willing to provide?

A. Again, I don't agree with that. There were significant restrictions on the Red Hat program, very significant. It wouldn't cover you for down time. There

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were limits. In fact, initially, they didn't cover even legal costs. They promised to remove the code. So you get sued, and they will say: But, okay, if we can't fix it, we will remove it.

Well, that may not be an easy thing to do. Then you've got down time. You're shut down. So, again, I don't think this implies what you're saying. The Red Hat program was very restrictive. Early on, it didn't even cover you for legal -- if you got sued, and had legal damages, you had to pay for them.

Q. So why don't we move on the next response at the bottom of the first page. And Blake Stowell, public relations at SCO says: Folks, what would you say to this argument?

And you see there's the response above from Janet Sullivan: That's the whole problem with Linux. Because of the GPL, no one can in indemnify. We know that SCO IP found its way into Linux, but we have no way of knowing if there is other code in there that belongs to someone else. Therefore we can't indemnify.

Do you see that?

A. We can't indemnify against the others.

Of course, SCO could not indemnify if there was another party that had put something in. SCO couldn't protect them from these other parties. They could

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clearly indem -- SCO could indemnify them, again, from SCO. It wouldn't be indemnification. They would just give them a license.

THE COURT: Dr. Pisano, slow down.

THE WITNESS: Okay.

Q. BY MR. ACKER: And so, SCO would only be able to indemnify if there actually was any SCO-owned UNIX in Linux, right? That's the only protection they could provide?

A. The SCO right-to-use license, yes.

Q. Now, in your survey, were the respondents asked: Would you be willing to take a license if the only protection that you got was indemnification against SCO-owned UNIX?

A. No.

Q. Let me show you another document. Let me show you what has previously been admitted as Exhibit D-20. Can you take a minute, Doctor, and I'm going to ask you -- this is an internal e-mail inside of Hewlett-Packard regarding their decision not to take a SCOsource license. Have you ever seen this document before?

A. I don't recall seeing it, but I'm --

Q. So this wasn't something that the lawyers for SCO provided to you; is that right?

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A. No.

Q. And you see, in this document, a Martin Fink lists a number of reasons why -- in the top, why he might move ahead with a SCOsource license. And then, below, those are the numbers, 1, 2, 3, 4, 5, 6, but in the letters below, he provides reasons not to move forward. Do you see that?

A. Yes, I see that.

Q. And if we turn to those --

If we could highlight, Mr. Lee, those items, A, B, C, D and E.

And you see the first one says: Red Hat has counter-sued SCO and will view HP as partnering with SCO potentially refuse to deal with HP.

Were any of the respondents in your survey asked about whether they had a problem with alienating Red Hat?

A. No. But, again, they could take these licenses in confidential -- in confidential ways. I don't think that --

Q. You also see in B: We have strong indicatiions that the Open Source community will revolt against HP and block any future HP enhancements to Open Source SCO products.

Were any of your respondents in your survey

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said: How do you feel about the potential that the Open Source community will revolt against your enterprise organization if you take a SCOsource license?

Was that question asked?

A. No.

Q. And then you see in C, below:

While SCO has shown Joe some code, there is still no clear evidence that IBM or anyone else has actually done anything wrong.

Were the respondents in your survey asked about their understanding of whether or not SCO could actually prove there was any protected UNIX code in Linux?

A. No. No.

Q. And then you see under D, below, Mr. Fink wrote: All legal experts in the field believe SCO's case is extremely fundamentally flawed and have published white papers to support their positions attached.

Were there any questions of any respondents in the survey about the fact that SCO's case was believed to be, by legal experts in the field, fundamentally flawed?

A. It's actually picked up in the surveys. I mean, it is. I mean, this is all taken into account in the surveys. It affects the attitudes.

Q. Let's go to the next page. If we could look at item F, it says:

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This is, in effect, support of terrorism. Rewarding SCO for this behavior opens us up to other claims. We can't predict from who or where.

Were any of the respondents in your surveys asked about whether or not they were afraid that, if they took a SCOsource license, they would be essentially supporting terrorism?

A. No. I don't think they were asked the question that way.

Q. Look under G. It says: Doing a deal with SCO does not provide customers with full indemnification. Customers want full indemnification, so a deal with SCO is likely not enough.

Do you see that?

A. I see that.

Q. And you've also already told us that no one was told in this survey: How would you feel if you only received partial indemnification, as opposed to full indemnification?

Correct?

A. That's correct.

Q. H. One of the concerns of Mr. Fink is: SCO has shown a pattern of unpredictable and bad behavior. We can't predict future behavior from SCO which could negatively impact HP.

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Were the respondents asked about their concerns about the unpredictable and bad behavior of SCO?

A. Nope.

Q. First time you've seen this document, right, Doctor?

A. That's my recollection.

Q. In your work in rendering your opinion did you -- were you provided with any letters from customers of SCOsource, that those of any of the thousand company's that received one of these 15 hundred letters Mr. McBride sent out on May 12, were you given access to any of those to see how they responded and what reasons they gave for not taking a SCOsource license?

A. In my rebuttal report, I outlined those responses, and 8 out of 32 mentioned Novell lack of ownership for a reason for not taking the license, which is within my --

Q. And so --

A. Which is 25 percent, which fell within my boundary.

Q. And so, you were only given access to 32 letters; is that right?

A. Those were the 32 letters I had, right.

Q. And of those 32 letters, only eight gave any mention of Novell, correct?

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A. That's correct.

Q. And how many of those eight that made mention of Novell also made mention of other reasons why they weren't willing to take a SCOsource license?

A. I don't recall off the top of my head.

Q. And you can't tell this jury that, in those eight letters of the 32, that, in fact, those eight that did mention Novell said Novell was the only reason that they wouldn't take a license from the SCOsource program, correct?

A. Just a sec. Can you repeat the question?

Q. Sure. The eight that mentioned Novell, all you can recall is it simply mentioned Novell, right?

A. Yes.

Q. And you can't tell this jury that, in fact, those eight that did mention Novell actually said Novell was the reason why they weren't taking a license, correct?

A. Sure. Now, again, as I mentioned in my report, you know, that's right. These are just pieces of data, the letters, what they write, what companies write back. The same with their internal documentation. And if they are writing a letter to a company like SCO, they have to be very careful in how they -- in how they couch it, particularly if there is a legal issue at stake. So you

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can imagine they could couch that letter very carefully. So it's very hard to interpret those customer -- those customer letters.

Q. So, are you trying to tell the jury that you believe that when companies wrote letters back to SCO, they didn't provide the real reason why it was that they weren't taking a SCOsource license?

A. No. I used those letters -- actually, it was in response to your expert's opinion and brought them into the analysis and the discussion, and then I looked at the letters, and I made that point in my rebuttal report, if I recall, and then I also pointed out that, oh, by the way, they do mention -- eight out of the 32 -- and I did say that you have to be a little careful, as we always to have to be, in interpreting these kinds of letters. It's just good standard practice to be careful.

Q. So, being careful and being cautious about interpreting the letters, you would also have to be careful and cautious as to whether Novell is simply mentioned is what the letters -- is actually the reason why they are not taking a SCOsource license, correct?

A. Correct. And I drew no conclusions from the letters.

Q. Let me show you one of those.

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THE COURT: Which is?

MR. ACKER: D-16, Your Honor.

Q. BY MR. ACKER: Have you had a chance, Doctor, to look at D-16?

A. Yes, I have.

Q. You see it's a letter to Mr. McBride, dated June 6, 2003, from General Electric regarding the SCOsource program, correct?

A. Yes.

MR. ACKER: I'd move for admission of D-16, Your Honor.

MR. SINGER: No objection.

THE COURT: It will be admitted.

(Novell Exhibit D-16 received in evidence.)

Q. BY MR. ACKER: General Electric is a sophisticated and large company, correct?

A. That's correct.

Q. And in this letter on June 6, 2000 -- first of all, have you ever seen this letter before?

A. I don't recall. I don't believe so.

Q. So, of the 32 letters that counsel provided to you, this was not one of those?

A. Again, I want to be careful that counsel provided me letters. In this research, I was free to ask for whatever I wanted to get in terms of documents and

1302

letters, so it wasn't like they were just providing it. And I can't recall the specifies around the 32 when they came out. I think those were the ones cited in your expert's report and therefore I looked at the analysis around those.

Q. Did you ask for all the letters that customers wrote indicating why it is they weren't taking a SCOsource license?

A. I did not.

Q. You didn't think that was something that you should have?

A. No. I had plenty of other data and plenty of other information. And, again, those would be reflected -- the customers -- think of it. You have these customer responses. You know, in the survey methodology, we pick up all these issues that we are talking about. If they didn't think there was infringement, they are showing up in the survey as not being interested. They are in that other group.

So the customer letters gave us a very small and potentially biased sample. For example, if SCO sent those letters to the ones they thought were most likely to be concerned, there could have been a very high response rate. That would have biased my level upward, and I didn't want to do that. I wanted to give the

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fairest view. The survey, I thought, gives the fairest view of this. And these kinds of issues that are being raised in these letters, concerns like in the HP document, those are -- those are concerns lots of companies had. That wasn't unique to HP. That wasn't unique to GE.

And that's why I don't estimate the market at a hundred percent. Nineteen to 45 percent is a small percentage, small percentage. A lot of people had these concerns.

Q. Doctor, so -- so the jury understands, you were relying more on a survey of anonymous companies, you don't know who they are, as opposed to actual letters from companies telling you the reasons they are not taking a SCOsource license. Do I have that right?

A. I think that's a more objective way to do it, absoultely. That's exactly the way I would do it in my academic research.

Q. So, in your academic research, you would rely on an anonymous survey, as opposed to what happened in the real world?

A. I wouldn't make that as a generalization, but for this kind of problem, for understanding this kind of issue, that's what I would do, absolutely.

Q. Anonymous survey, as opposed to what happened

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in the real world?

A. Not as opposed to, but for this particular one, I did look at what's happening in the real world. There's lots of data that I looked at that was happening in the real world, real action, what was going on, historical events. There's a lot of historical analysis in my -- in my report.

Q. So let's take a look at what GE said on June 6, 2003, in writing to Mr. McBride:

Dear Mr. McBride, I am responding to your May 12, 2003 -- letter of May 12, 2003, to Jeffrey Immelt. In that letter, you accused Linux of infringing UNIX intellectual property rights that belong to SCO. Your letter also states that legal liability may arise from the Linux development process and may also rest with the end user. We assume this statement and your purpose in sending Mr. Immelt this letter is to notify GE of your belief that GE has infringed your IP rights.

We take such an assertion very seriously because GE respects the intellectual property rights of others.

If you take a look at the next paragraph, GE wrote to Mr. McBride:

However, we cannot begin to review the claims you make until you provide us with more information. We

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request that you tell us what IP rights you are alleging have been infringed, if they involve patents or copyright registrations. Please provide the specifics. In addition, please provide us the particular GE goods or services that you believe infringe your rights. Without these details, it is not possible for us to evaluate your claims.

Do you see that?

A. Yes, I do.

Q. Do you know if Mr. McBride ever responded to General Electric and told them exactly what products or what software General Electric had that Mr. McBride felt infringed any SCO protected intellectual property?

A. No, I don't.

Q. Let me show you another letter we have marked as V, as in victor, 15. Have you seen this letter before, Doctor?

A. No.

Q. And in this letter, this is a response of the Sprint Corporation to Mr. McBride dated June 4, 2003, regarding the SCOsource program, correct?

A. That's true.

MR. ACKER: And I'd move for admission of V-15, Your Honor.

MR. SINGER: No objection.

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THE COURT: It will be admitted.

(Novell Exhibit V-15 received in evidence.)

Q. BY MR. ACKER: And you see in this letter, Sprint responds to Mr. McBride's May 12 letter and writes:

Your letter does not identify a specific purpose for the letter. It does not make any request of Sprint. I understand that SCO is currently involved in a dispute with IBM. SCO's public statements are that, quote, this case is not about the Linux community or us going against them. Your letter provides no specific allegations of infringement or any information that can provide the basis of any investigation.

I understand, from other SCO public statements, that your dispute with IBM is generally a contractual matter. I take comfort that SCO has been a Linux distributor, with the associated GNU license rights the public has come to rely on. Sprint will continue to depend on SCO's public statements and past actions.

Do you see that?

A. Yes.

Q. In the survey, were any of the respondents asked about if their responses would be different if they knew that GNU license rights were at issue?

A. No. They weren't asked that.

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Q. Let me show you what we have marked as Z-18. Do you see, Doctor, Z-18 is a letter to Mr. McBride, Mr. Sontag, Kevin McBride, from Blake Stowell inside SCO on August 12, 2003, regarding Gardner's recommendation regarding whether to take a SCOsource license or not.

Do you see that?

A. Yes.

MR. ACKER: I move for admission of Exhibit Z-18, Your Honor.

MR. SINGER: Objection, Your Honor. Could we approach on this one?

THE COURT: You may.

(Discussion between counsel and the Court outside the hearing of the jury.)

MR. SINGER: Your Honor, in addition to this being hearsay, which is an article by someone that's being presented here, by some other source, it is also entirely prejudicial under 403 because it talks about claims in the IBM lawsuit by IBM, which is, I think, a subject of one of the motions in limine is not to go into other lawsuits. It talks about SCO's false -- these are IBM's claims SCO falsely gave Sequence the uniform memory access -- SCO deliberately concealed the specific code alleged to have been appropriated and other allegations related to the IBM litigation.

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In addition to hearsay, there is a strong litigation value that doesn't belong in this case.

MR. ACKER: It was their opening the door on hearsay why people weren't taking licenses. This is a respected industry group saying don't take a license and here's the reasons why. They wanted to get the evidence in. They opened the door with Mr. McBride, and I am perfectly entitled to ask this witness about these letters.

MR. SINGER: This doesn't mean that everything comes in.

THE COURT: Excuse me. Can the information, specific information about the IBM lawsuit, be redacted?

MR. ACKER: Yes.

THE COURT: Let's redact that. And then, if that's the case, I see nothing different about this and many other articles that have been permitted in this case, so I'm going to have to allow it to come in.

(Proceedings continued in open court.)

MR. ACKER: So, with the discussion at side bar, I would move for admission of Z-18, Your Honor.

THE COURT: There was an objection to it, but the Court will admit it over the objection.

(Novell Exhibit Z-18 received in evidence.)

Q. Do you see in this -- you know what the Gardner

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Group is, correct?

A. Yes.

Q. What is the Gardner Group?

A. They are a research business intelligence firm.

Q. And what is a research business intelligence firm?

A. They collect data. They track industry trends. They provide advisory services. They do consulting.

Q. And they make recommendations, correct?

A. Yes.

Q. And you see in this e-mail, Z-18, that they are making the recommendation that potential SCOsource licensees should not take a SCOsource license, correct?

A. Sure. Yep. I think others made the same recommendation.

Q. I'm sorry?

A. Yeah. They made it. I think there were others out there saying the same thing. There were lots of other players out there saying these things.

Q. And, if you take a look at the second page. Go down to the bottom. Hang on just a sec.

I gave Mr. Lee a complex task, Your Honor.

THE COURT: Okay.

MR. ACKER: Would you bring up just that portion, please.

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Q. BY MR. ACKER: And you see that what the Gardner Group is saying in their recommendation in August of 2003 --

A. Sorry. This is not very visible on this screen. Is there a part on here you could direct me? Is there a part I can read on the paper?

THE COURT: I can see why it is hard to read on the screen.

Q. BY MR. ACKER: Sure, I can do that.

A. If you just want to highlight it for me or mark it.

Q. I can trade you.

A. Yeah. You've got it marked here.

Q. You see what the Gardner Group is saying is:

Customers with large Linux commitments should avoid paying SCO server license fees, since they appear arbitrarily high, representing concession to SCO's claims and will expose them to ever larger fees. Moreover, SCO's claims challenge the foundation of GPL.

Do you see that?

A. Yes.

Q. And that was what the Gardner Group was saying about the SCOsource licensing campaign in August of 2003, correct?

A. That's correct.

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Q. Let me show you another document we have marked as X-22. Do you see X-22 is an e-mail from Larry Gasparro inside of SCO, to Reg Broughton inside of SCO, on November 13, 2003, and the subject line being RTU followup. Do you see that?

A. Yes.

MR. ACKER: I'd move for the admission of X-22, Your Honor.

MR. SINGER: May I have a moment, Your Honor?

THE COURT: You may.

MR. SINGER: No objection, Your Honor.

THE COURT: X-22 will be admitted.

(Novell Exhibit X-22 received in evidence.)

MR. ACKER: And if we could highlight the second paragraph, please, Mr. Lee.

Q. BY MR. ACKER: And, Doctor, you see, beginning in the middle of that paragraph the word "I proceeded."

A. Yes.

Q. And what Larry Gasparro is saying to Mr. Broughton regarding his presentation of SCOsource --

Well, actually, let's start the the top of the paragraph. I'm sorry:

I traveled to Knoxville, Tennessee for a meeting with the Regal Entertainment Group. The Regal Group is one of the America's largest movie theaters,

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with over 5,000 screens in the U.S. I met with the CIO, director of IT, and senior counsel at Regal. I, again, had the impression that the CIO was putting the Linux decisionmaker, director of IT, in front of SCO to learn of the potential consequences of his decision. This is not a fact but an impression.

I proceeded to give the one-hour presentation and many questions came up. SCO sold/distributed Linux. Isn't this all about SCO and IBM, etc.? Very common questions. As I presented the example of literal copying, the director of IT noted that the example was prehistoric and ultimately SCO, suggesting that we are attempting to claim copyright -- you would have a hard time proving ownership. He claimed that the example is suggesting that we are attempting to claim copyright infringement for the words, quote, "and" or "the."

I hinted that SCO is obviously not presenting evidence to the general public that we are preparing for our $3 billion lawsuit.

Do you see that?

A. Yes.

Q. Have you ever seen that e-mail before today, Doctor?

A. I don't recall, no. I don't think so.

Q. Let me show you another e-mail that we marked

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as W-24, another letter. Do you see this is a letter from a MASCO Corporation to Mr. Philip Langer at SCO on January 15, 2004, regarding the RTU license or the SCOsource program? Correct?

A. That's correct.

MR. ACKER: I'd move for admission of W-24, Your Honor.

MR. SINGER: No objection, Your Honor.

THE COURT: W-24 will be admitted.

(Novell Exhibit W-24 received in evidence.)

MR. ACKER: Why don't we highlight the second paragraph, if we could, Mr. Lee.

Q. BY MR. ACKER: In response to SCO's letter, MASCO wrote:

Given that we have only had a short period of time to investigate your latest assertions, your letter of January 13, 2004, is premature. Each of SCO's letters have been a generalized statement of its alleged rights in the Linux operating system with no specific information concerning MASCO'S use of the operating system. If you have specific knowledge of our use of Linux, we suggest that you provide such information. If not, we suggest that you allow us to continue with our investigation without repeated inquiries. We respect our -- we will report our findings once we have

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concluded our investigation related to SCO's December 19, 2003, letter.

Now, Doctor, were you -- do you know whether or not SCO ever provided any specific information regarding alleged infringement by MASCO?

A. No. I don't know.

Q. Let me show you another letter, Exhibit T-25. Do you see Exhibit T-25 is a letter from Verizon to SCO regarding the SCOsource licensing program, dated January 30, 2004? Do you see that?

A. Yes.

MR. ACKER: I'd move for admission of T-25, Your Honor.

MR. SINGER: No objection.

THE COURT: It will be admitted.

(Novell Exhibit T-25 received in evidence.)

MR. ACKER: And if we could highlight the entire letter, Mr. Lee.

Q. BY MR. ACKER: In the second paragraph, Verizon wrote:

While Verizon respects the intellectual property rights of third parties, including those of its suppliers, we do not believe that we are violating any SCO intellectual property rights with respect to Linux, UNIX or any other intellectual property. We are

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following closely SCO's efforts to document and sustain its intellectual property claim with respect to Linux. In this event, we believe that is necessary -- it is necessary -- or -- in this event, we believe that it is necessary and appropriate for us to discuss this matter further. We will arrange for such a meeting.

Are you aware if Verizon ever had any meeting with SCO?

A. No.

Q. Are you aware if Verizon ever felt it was necessary to have a meeting with SCO?

A. No. I'm not aware.

Q. Are you aware of the reasons why Verizon decided that it was not necessary to have a meeting with SCO?

A. No. I'm not aware.

Q. Exhibit F-26. Do you see Exhibit F-26 is a letter from the Oracle Corporation to Ryan Tibbitts, general counsel of SCO, dated February 6, 2004?

A. Uh-huh.

Q. Do you see that?

A. Yes.

Q. Do you see it's written in response to a letter that SCO wrote to its chairman, Oracle's chairman, Mr. Larry Ellison? Do you see that?

1316

A. That's correct. Yep.

MR. ACKER: I'd move for admission of F-26, Your Honor.

MR. SINGER: No objection.

THE COURT: It will be admitted.

(Novell Exhibit F-26 received in evidence.)

Q. BY MR. ACKER: Oracle is a pretty sophisticated company in the software and computer industry, isn't it?

A. Yes.

Q. And it's chairman, Mr. Ellison, is a pretty sophisticated guy, isn't he?

A. I would say so.

Q. And this was his response to SCOsource's demand for a license: Dear Mr. Tibbitts, I write in response to your letter dated December 19, 2003, to Larry Ellison. It is difficult to respond substantively to your letter, given the lack of any specific information for Oracle to analyze. Oracle certainly respects the intellectual property rights of others. However, based on the information provided in your letter, it is impossible for Oracle to determine whether any code in the 71 identified files may be infringing. Although it would appear in your letter that the -- that SCO alleges that portions of the 71 identified files infringe SCO's copyrights, there is no identification of any specific code with any --

1317

within any one of the 71 files.

Oracle can hardly analyze SCO's claims without such information. Moreover, Oracle would not be able to complete any such analysis, given that SCO's own investigation is ongoing. Oracle would be happy to analyze any claims SCO may have had, once SCO's investigation is complete and all of the specific code alleged to have infringed has been identified.

Do you see that?

A. Uh-huh.

Q. Doctor, do you know whether or not anyone at SCO ever identified any specific code that it believed Oracle had in its Linux operating system that was infringing any SCO UNIX copyrights?

A. I know that SCO has done its own investigations as to which code is infringing.

Q. Do you know if there -- if any specific information was ever provided to Oracle?

A. I don't know, no.

Q. Is it fair to say that the fact that no specific information regarding whether or not a potential licensee's products infringe might be a reason why someone would decide not to take a SCOsource license?

A. Absolutely. Again, I would agree with that completely. That's why my method is what it is. It

1318

picks it up, as is true for the other comments from the other letters. It's all picked up in the method.

MR. ACKER: Let me show you what we have marked as F-27. Do you see that F-27 is a letter dated March 19, 2004, from the Google Corporation to SCO, regarding SCO's SCOsource licensing program?

A. I see that.

Q. I'm sorry?

A. I do see that, yes.

MR. ACKER: Your Honor, I'd move for admission of F-27.

MR. SINGER: No objection.

THE COURT: It will be admitted.

(Novell Exhibit F-27 received in evidence.)

MR. ACKER: And if we could highlight the second, third and fourth paragraphs, Mr. Lee.

Q. BY MR. ACKER: Were you aware, Doctor, that on March 19, 2004 -- well, first of all, you know what Google is, correct?

A. Absolutely.

Q. It's a pretty sophisticated company, correct?

A. Yes.

Q. In fact, would you disagree with the statement that Google may have more servers than many other companies in the United States?

1319

A. Absolutely.

Q. So, this would be a potentially large customer for the SCOsource licensing program, correct?

A. Absolutely.

Q. And sophisticated about software. You would agree with that, correct?

A. I would agree.

Q. And you see what Google wrote back to SCO on March 10, 2004. And, again, March 10, 2004, do you believe, by that point in time, Novell had made some sort of slanderous statements in the marketplace?

A. Yes.

Q. And what is your understanding of when it is that Novell made any slanderous statements in the marketplace?

A. So, the first statements are made in May, 2003, and then again in December of 2003, and then again in January and February of 2004.

Q. Well, let's start with March -- or May of 2003. Do you know what date the statement was allegedly made?

A. May 28, 2003.

Q. And are you aware of any statement by Novell on June 6, 2003?

A. Yes.

Q. And what's your understanding of that

1320

statement?

A. That was the statement that retracted their ownership claim.

Q. That's your understanding of what that statement was?

A. That's my understanding what the public statement was, yes.

Q. Okay. And then, the next public statement by Novell was not until December 22, 2003?

A. That's correct.

Q. So there's this gap between June 6, 2003, when it's your understanding that Novell retracted its claim to ownership of the UNIX copyrights, and December 22, 2003, correct?

A. That's correct.

Q. Did your study factor that gap in, in any way?

A. Sure. I mean, the -- first let's keep in mind the SCO RTU, as a product, wasn't even available until August. In fact, even some of these letters are previous to that time. So that's clearly an issue that has to be considered. The RTU is available in August officially. And, yes, there is a gap, but once the statement is made, there is doubt. Doubt. Then it clearly corrects the doubt to some degree. But then, in December, again, it all kind of comes out.

1321

So, whatever doubt might have been removed by December, it's -- that doubt is there big time. And there's no way you're going to be able to sell RTU's at that point.

Q. So, is your analysis and your -- in your numbers based only on when the RTU license was first available?

A. No. The RTU license becomes available. But, remember, it would apply to servers going back to 2001. Any server with 2.4, Linux 2.4, would have SCO's code in it.

Q. And do you know how many of those servers that were first sold in 2001 were still operating in 2003?

A. The IDC data would -- no. You wouldn't know if somebody had pulled a server off. So, if they had a server and they took it off line, you wouldn't know that.

Q. But you're counting servers back to 2001, even though you don't know how many of those servers that went online in 2001 were no longer online in 2003?

A. Because they'd still be liable.

Q. Even though the licensing program didn't even come into place until 2003?

A. Yeah.

Q. Isn't it true that the best evidence of how

1322

successful the SCOsource licensing program may or may not be is what happens in the real world?

A. No. No. Because that's affected by factors like the slander, and, you know, we have to look at -- that's why we have to do these kind of analyses, to see what's a good -- what's a good proxy.

Q. And so, wouldn't the best information about how successful the SCOsource licensing program would be, would be what happened in the real world before you believe there was any slanderous statement on May 28, 2003?

A. Again, you know, as you say, "what happened in the real world." And there's lots of data, lots of historical records. And we have letters here from lawyers. Now, again, I think when -- you know, when lawyers write to lawyers, they couch things. They write in a certain way. I'm not sure how I would even, you know, weigh these. They are certainly a factor, but clearly, in the context of potential litigation, letters are going to be couched, I sense, in very careful ways and may not disclose all the reasons.

Q. But isn't it true that the best evidence of how successful the SCOsource program would be is what happened between SCOsource being announced, in January of 2003, and this alleged statement May 28, 2003?

1323

A. Let's remember. The SCOsource right-to-use license, which is the product I analyzed, was not introduced until August of 2003, not January.

Q. So, does your analysis not depend on any program that was announced prior to August of 2003?

A. Yeah. I don't look at any -- yes. I'm looking at a product that was launched in August of 2003.

Q. And so your analysis in no way factors in what happened between January of 2003 and May 28 of 2003?

A. I think it considers it as part of the historical context. I think I cover a pretty broad patch of the industry.

Q. And my question was: Does your numerical numbers -- in coming up with those numbers, did you consider what actually happened in the real world between January of 2003 and May 28 of 2003?

A. Sure. Absolutely.

Q. And you know what happened in the real world is there was an announcement of the SCOsource program in January of 2003, correct?

A. There was an announcement that SCO was forming a division to pursue its intellectual property claims, and there's different licenses. And the right-to-use license was not announced until August of 2003, August 6.

1324

Q. And the only licenses that were signed between January of 2003 and May, 2003, were one license to SUN, correct?

A. Yes.

Q. And one license to Microsoft?

A. Right.

Q. Correct?

A. And those were not right-to-use licenses.

Q. And those licenses were UnixWare licenses, correct?

A. That's correct.

Q. And that's what happened in the real world, right?

A. Yes.

Q. Let's go back to the Google letter and see how Google responded to this SCOsource licensing program:

In our January 28 letter, we noted that your prior letters appear to have been form letters, and it was, therefore, difficult to assess your position as it relates to our particular business. We asked that you provide us with further information, including the precise portions of the files at issue, what you believe were copied from copyrighted UNIX code, what versions of the kernel you believe contain proprietary code and so on.

1325

Instead of addressing the issues we raised, it appears that you have chosen to simply to send us another form letter. Indeed, the closing paragraph of your letter begins, quote, "please contact me by (one week from date of letter-specific date) -- and there's a (sic) -- so that we may schedule a meeting."

Presumably, you intended to replace the parenthetical with a specific date but inadvertently failed to do so. We do not believe it will be productive to engage in further discussions until you have addressed the issues raised in our January 28, 2004, letter, a copy of which is enclosed for your convenience. Once we have received a response for the issues noted in the letter, we reiterate that we will be happy to investigate the matter further and get back to you.

Do you see that?

A. I see that. Yeah.

Q. Did you -- in the survey that you relied on, were any of the respondents asked how willing they would be to accept indemnification from a company that sends them repeated form letters and forgets to fill in the dates?

A. No.

THE COURT: Mr. Acker, would this be a good time for a break?

1326

MR. ACKER: Yes, Your Honor.

THE COURT: Ms. Malley.

MS. MALLEY: All rise for the jury, please.

(Jury leaves the courtroom.)

THE COURT: How much more do you have, Mr. Acker?

MR. ACKER: Not that much, Your Honor, ten to 15 minutes.

THE COURT: We'll take a 20-minute recess.

MR. ACKER: Thank you.

(Short break.)

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***** Part 3 *****

1328

THE COURT: Anything, counsel, before we bring the jury in?

MR. ACKER: No, Your Honor.

MR. SINGER: Not from us, Your Honor.

(Jury present)

THE COURT: Go ahead, Mr. Acker.

BY MR. ACKER:

Q Let me show you one more letter, Dr. Pisano. Sir, you see this is a letter from Morgan Stanley to SCO on March 24th, 2004, again, regarding the SCOsource licensing program? Do you see that?

A Yes.

MR. ACKER: I move for admission M-27, Your Honor.

MR. SINGER: No objection.

THE COURT: It will be admitted.

(Defendant's Exhibit M-27 was received into evidence.)

MR. ACKER: Mr. Lee, go to the second paragraph, please.

BY MR. ACKER:

Q Morgan Stanley wrote to SCO in March of 2004, in our December 19th, 2003 and January 22nd, 2004 letters to you, we requested information to enable us to assess the intellectual property and other rights referred to in SCO's letters. To date, we have not received the information we

1329

requested. Although your earlier correspondence referenced ABI code that had allegedly been copied into Lunix, you did not respond to our request, contained in our January 22nd letter, for more details relating to that allegation. Moreover, the AutoZone complaint does not provide us with the information we requested; it simply lists copyright registrations for items allegedly owned by SCO, the complaint does not identify any of the specific instances of SCO's code allegedly contained within Linux. Do you see that?

A Yes, sir.

Q Have you ever seen this letter before?

A No.

Q Let me show you one more document, what has been admitted as Q-22. It is a large document, sir, but I'll be pointing you to a specific portion. Feel free to look at any portion you like. You are familiar with what a form 10-K is, correct, sir?

A Yes.

Q What is your understanding of what that document is?

A This is a detailed annual disclosure of financial information a company makes to the SEC every year.

Q What is the purpose for such disclosures to the Securities and Exchange Commission?

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A It's for -- really for investors to make sure that the material information about the company is out there in public hands.

Q When you say the material information about the company, what is material information?

A Information about the company's business, how it's doing, its financial state, so income statements and pending litigation, other things that could affect the fortunes of the company.

Q Do you believe that Novell's allegedly slanderous statements regarding ownership of the UNIX copyrights would have been material statements to SCO in 2003?

A In 2003. You know, again, depends on the timing because -- sorry. You stood up.

MR. SINGER: That's okay. I don't have an objection.

MR. ACKER: Do you want to say something to Mr. Singer?

THE WITNESS: He stood up. I thought there was an objection.

THE COURT: You did the right thing.

THE WITNESS: I slowed down for once.

You know, it's potentially material at that point. Again, it's tricky because there are statements on May 28th and then there are retractions. This document is for the

1331

fiscal year ended October 31st, 2003, so unclear at that point.

BY MR. ACKER:

Q Well, you are aware of a letter written August 4th, 2003 by general counsel, Mr. Joseph LaSala, of Novell to Mr. McBride saying that Novell owns the UNIX copyrights? You were provided that document, weren't you?

A Yes.

Q Do you believe that that is a material fact to SCO?

MR. SINGER: Way outside the scope, and irrelevant.

THE COURT: Overruled.

THE WITNESS: Again, I am not so -- again, my background is an economist. I don't do accounting. That's a whole separate area about what goes into the SEC, what's appropriate. There's a whole body of regulation. But what is considered material, I gave you kind of a general, in some sense, layman's term of material. There is a whole series of rules and regulations around that about what goes in, et cetera. So I really don't feel comfortable answering that.

BY MR. ACKER:

Q Let me ask you as an economist. In your expert opinion that you've offered here today, do you believe the fact that Mr. LaSala had told Mr. McBride on August the 4th, 2003 that

1332

Novell still owned the copyrights, do you believe that's material, from an economic standpoint?

A I think it's -- material to what?

Q To SCO's business.

A I think at that point it's hard to say. You know, again, use of the term material as it's used for statements is how the business is going to be from a very specific regulatory point of view. Was that important? I'm sure it was something important for them. But when they got the letter, I'm sure it raised potentially to certainly important.

Q As an economist offering an opinion about the effect of allegedly slanderous statements by Novell, do you believe that Mr. LaSala's August 4th, 2003 letter to Mr. McBride saying Novell still owns the copyrights, do you believe that was a material fact?

MR. SINGER: Your Honor, I object. This has nothing to do with his testimony.

THE COURT: Well, I allowed the first question because I thought that perhaps you might be able to lay a foundation that he had unique qualifications to testify as to this. But you have not laid that foundation, so I'm going to sustain this objection.

MR. ACKER: Okay. //

1333

BY MR. ACKER:

Q Sir, if you could take a look at what you have in front of you, page 36 of 87. The numbers I'm referring to are on bottom left of the document.

A Yes, I see them.

MR. ACKER: And if we could highlight the last sentence of the paragraph, Mr. Lee, that is headed our future SCOsource licensing revenue is uncertain. The sentence begins with additionally.

THE WITNESS: I'm going to take a sec to read the paragraph, if I may?

MR. ACKER: Sure.

THE WITNESS: Again, you wanted me to focus on the sentence additionally, the success, that sentence, sir?

BY MR. ACKER:

Q I'm going to ask you a question, and I want you to be fully prepared for it.

A Okay.

Q Now in the phone survey that you -- let's first start with the sentence. You see the sentence -- the last sentence reads, additionally, the success of this initiative may depend on the strength of our intellectual property rights and contractual claims regarding UNIX, including the strength of our claim that unauthorized UNIX source code and derivative works are prevalent in Linux. Do you see that?

1334

A Yes.

Q So this is SCO telling the federal government that the success of SCOsource may depend on whether or not we can prove there actually is protected UNIX source code that is prevalent in Linux?

A Yes. Absolutely.

Q During the phone survey that you relied on, were any of the respondents told, in deciding whether or not they would take a license or request indemnification, that the person offering the indemnification didn't know whether or not they could prove any infringement?

A Sir, I just want to clarify, it was not a phone survey. It was a Web-based survey. But within the follow-up, they -- again, if a party is looking -- thinking about -- somebody is thinking about do I want indemnification, they are thinking about the risk. If they think there is a low chance of infringement ever being claimed, they are not going to be interested in indemnification. If they think -- or they are just willing to take the risk. They are just willing to take the risk. Let's see what happens. It may be possibly later, but let's just take the risk. They are not going to be interested.

Q My question was were any of the respondents, either by phone or by electronic methods, told that the person offering indemnification or the person that poses the threat

1335

of which you would want indemnification doesn't think they can prove infringement? Were they told that?

A No, they didn't need to be.

Q Let me ask about that. How much would it cost to do a survey on your own that you believe would be something that you could rely upon? What would be the dollar amount?

A If I were to do the survey?

Q You or somebody you hired.

A Ten to $20,000, depending on the size and method.

Q And so you think a survey could be completed for ten to $20,000 that you would find acceptable?

A Yes.

Q So that's about one-twentieth of what you have been paid to offer your opinion in this case, correct?

A Yes.

Q And so SCO and its lawyers could have had you for $20,000 actually conduct a phone survey and ask -- or online survey, and ask respondents are you interested, what is your interest in taking the SCOsource license? That could have been done?

A That would have been absolutely flawed methodology. I'm doing this study in 2007. To try to go back and ask people about their demands during a previous time frame would be -- you would get all sorts of what we call retrospective bias. You're asking people what would you

1336

have done then. It would have been a very, very flawed methodology. That would not have passed scrutiny in peer review journals.

Q This lawsuit was filed in 2004, wasn't it, sir?

A That's true, but I was doing my study in 2007.

Q So you weren't asked to do it in 2007, but this lawsuit has been pending since 2004, correct?

A Yes, that's true.

Q So a survey could have been conducted by SCO and its lawyers at the same time as these Yankee studies that you've relied on, correct?

A Then they would presumably -- I mean, ethically disclose who they are, what they are representing. Now you have the first -- remember the first criteria I cited for trusting a survey, does the party have an incentive to be unbiased. If you have a survey sponsored by SCO or SCO's lawyers asking them questions that pertain to this case, personally, if I were just looking at that survey from the outside, that does not meet my first criteria. So I don't think they were in a good position to do that.

Q They certainly could have obtained somebody that they considered to be unbiased, somebody like yourself, correct?

A Actually, if you look at the Yankee and Forrester, they make a big deal about the fact they are unsponsored surveys.

Q Do you think you are biased here today being paid by

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SCO?

A Nope.

Q Do you think you could have conducted an unbiased survey if you had been asked to that in 2004 and actually told people on the phone or via e-mail I want to know your interest in taking a SCOsource license?

A But then you have to disclose to those people the purpose you are doing it, and they may have their own biases about SCO and opinions about SCO, et cetera. You could get very biased answers because actually respondents are affected by the outcome of the case. If somebody is planning on, you know, not taking the license and they are taking the risk of infringing, gosh, they have a real incentive to see things come out in a different direction. I think that methodology would be very problematic.

Q So is it your opinion that it would have been impossible for a survey to be conducted to actually ask the question how interested you are in taking a SCOsource license in 2004?

A At that point, remember, that's post slander. So that's post the fact that people knew the product was worthless because the ownership claims are not there. There's too much -- you can do that survey, but I don't know what you would get out of it.

Q You're saying the survey would be worthless because

1338

it's post slander?

A It would be problematic because the product, post slander -- the product was ruined by the slander. And, therefore, if you were to ask people what is your interest in taking a SCO RTU post slander, they are going to tell you exactly what the market is, I don't want this, it's worthless. These guys, I don't know if they own the copyrights, so why would I pay them. That's what you would learn. You would learn exactly what the market told you, not much interest.

MR. ACKER: Let's put up X-23.

BY MR. ACKER:

Q You've seen this document before, correct?

A Yes.

Q You realize that on December 22nd, because Mr. McBride was still in the marketplace saying that SCO owned the UNIX copyrights, Novell decided to put onto its Web site the correspondence that had been going back and forth between the companies as well as the actual contractual documents, the APA, Amendment 1 and Amendment 2. Are you aware of that?

THE COURT: Mr. Singer.

MR. SINGER: I object. This is counsel testifying about why Novell did it. The form of the question is objectionable.

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THE COURT: I will sustain the objection.

BY MR. ACKER:

Q You are aware that placed onto Novell's Web site was all of the correspondence back and forth between the parties as well as the contracts that were at issue, right?

A Yes.

Q And you would agree with me that once that material was out in the marketplace, those in the market could make up their own mind regarding the contract dispute, correct?

A Well, yes. I mean, they could make up their own mind. Again, as I mentioned earlier, Novell's statement are pretty powerful and quite credible. And if there is uncertainty over ownership, it's just -- the license is a non-starter.

Q And the reason that you would have trouble with that is because, as you just said, Novell's statements are very powerful and quite credible, correct?

A Yeah. Because, as I mentioned before, they were first party to the transaction. That's what makes them powerful. They weren't some third party saying, hey, wait a minute here, it's looks like the one who sold the assets in the first place.

Q The surveys that you relied on, did they, in any way, tell the respondents in the surveys, here is the contract at issue, here's the APA, here's Amendment 1, here's Amendment 2, here are the different arguments, and then ask them how

1340

likely or how interested they would be in asking for indemnification?

A No, certainly didn't ask that specifically.

MR. ACKER: Nothing else, Your Honor.

THE COURT: Mr. Singer.

REDIRECT EXAMINATION

BY MR. SINGER:

Q Mr. Pisano -- Professor Pisano, are surveys generally more reliable if conducted specifically for litigation or if they are designed and conducted for a non-litigation purpose?

A For a non-litigation purpose.

Q Were the surveys that you relied on here conducted for a litigation purpose?

A No.

Q If Novell thought that a survey was the right way to measure the effect of the slander at issue in this case, could they have conducted their own survey?

A Sure.

Q Now you have been shown a lot of letters -- a number of letters, and are they taking into account people who might write those letters, in your methodology?

A Sure, absolutely.

Q Would those be in the 55 percent who if in fact they weren't interested in the product?

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A Yeah. The residual group, the 55 to 81 percent, they would be in that group.

Q Now you mentioned at one point in your testimony that you looked at a series of letters that Novell's expert, Mr. Musika, had identified?

A That's correct.

Q Were you shown all of those letters here in cross-examination?

A No.

Q Did you determine whether a certain amount of those 32 letters, in fact, referenced Novell's copyright allegations as a reason for not buying the license?

A Yes. As I mentioned before, eight out of 32 referenced it.

Q That would be almost 25 percent of a group of letters that Novell's expert identified?

A That's correct.

Q Now, in addition, in your rebuttal report, did you identify letters from a variety of customers which Novell has not shown you here today?

A I believe so, yes.

MR. SINGER: Could we put on the screen SCO Exhibit 227, a letter from Ford. Let Professor Pisano see the next page of that.

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BY MR. SINGER:

Q Are you aware of this letter from Ford?

A Yes.

MR. SINGER: Can we look at Sherwin Williams, SCO Exhibit 187.

THE COURT: Are you going to ask for the admission of any of these?

MR. SINGER: I was going to ask for them after the witness was seeing all four of them.

THE COURT: All right.

BY MR. SINGER:

Q Could we look at SCO Exhibit 187, the letter from Sherwin Williams; is that correct?

A Yes.

Q And can we look at Exhibit 188, and this is a letter from Morgan Stanley?

A Yes.

MR. SINGER: I would like to move into evidence Exhibit 188.

MR. ACKER: No objection, Your Honor.

THE COURT: 188 --

MR. ACKER: May already be in.

MR. SINGER: If you go, Mr. Calvin, to the third paragraph of the letter. //

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BY MR. SINGER:

Q And in this, is this a situation where, in addition to other information, Morgan Stanley was asking, in January of 2004, for documents or information that disproved press reports that questioned SCO's claim of ownership of relevant UNIX code?

A Yes.

THE COURT: Do you move for 188?

MR. SINGER: Yes.

THE COURT: There is no objection, correct?

MR. ACKER: No objection, Your Honor.

THE COURT: It will be admitted.

(Plaintiff's Exhibit 188 was received into evidence.)

MR. SINGER: I would like to move for 227 and 187 as well.

MR. ACKER: That's fine.

THE COURT: They will both be admitted.

(Plaintiff's Exhibits 187 and 227 were received into evidence.)

BY MR. SINGER:

Q Now in connection with these letters that you were shown in cross-examination, is it surprising that companies who are asked to buy a license for something which they thought they were getting for free might push back?

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A Absolutely. It's no different than my office coffee used to be free and now you have to start paying 25 cents. Wait a minute, it used to be free. So there is a little bit of psychology here that comes into play. It's like this was ours, we assumed it was ours to use, how dare you. And I think there is a little bit of that.

Q Did it surprise you that IT directors and lawyers at some of these companies would push back an allegation that they owe a license fee rather than just write a check?

A It's not surprising at all.

Q And in your "but for world", Professor Pisano, where no slander has occurred, you wouldn't have statements then made by Novell calling into the question of copyrights; is that right?

A That's correct.

MR. ACKER: Objection, leading, Your Honor.

THE COURT: Sustained.

BY MR. SINGER:

Q In your but for world of no slander, would there have been any statements by Novell questioning copyrights?

A No.

Q And do you think when the prior seller of UNIX, Novell, says SCO doesn't even own the copyrights, do you think that may have an effect on the substance and the tone of the letters which are then being written back to SCO that you've

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seen here?

A Yes.

MR. ACKER: Objection, calls for speculation, Your Honor.

THE COURT: Overruled.

THE WITNESS: Yes, it would have a big impact.

BY MR. SINGER:

Q Now do any of those letters matter in your analysis of the "but for world" which occurs if the slander hadn't taken place at all?

A No, because the letters I think would look very different.

Q Has anything that you've seen here today in the cross-examination changed any of your conclusions as to the effect of the slander on SCO's business?

A No, not at all.

MR. SINGER: Thank you very much.

THE COURT: Mr. Acker.

MR. ACKER: Nothing further for Dr. Pisano.

THE COURT: May this witness, then, be excused?

MR. ACKER: Yes, Your Honor.

MR. SINGER: Yes.

THE COURT: That means you may return to Harvard, if you want to. After this experience, you may want to charge more next time, at least what you have to do in the

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courtroom, all right.

Thank you, Dr. Pisano. We do appreciate it.

MR. HATCH: Your Honor, we call Dr. Christine Botosan.

CHRISTINE A. BOTOSAN,
Having been duly sworn, was examined
and testified as follows:

THE CLERK: If you would please state and spell your name for the Court.

THE WITNESS: Christine A. Botosan, spelled C-h-r-i-s-t-i-n-e, Botosan is B-o-t-o-s-a-n.

DIRECT EXAMINATION

BY MR. HATCH:

Q Good afternoon, Dr. Botosan.

A Good afternoon.

Q I was hoping we would say good morning. Where do you work presently?

A I work at the University of Utah.

Q How did you come to be at the University of Utah?

A I started my career in public accounting. And after a few years in public accounting decided to pursue my dream of becoming a professor. So I went to the University of Michigan and I earned a Ph.D. in accounting. Then I took my first job as a faculty member at Washington University in St. Louis. I was there for five years.

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Then the opportunity came along to move to the University of Utah. At the time I thought it looked like a great opportunity, rewarding career, but also the opportunity to have some balance in my life and have a happy family life. At that point in my life I had been married 17 years, I wanted to make 18, and also had two children, so we decided to come to the University of Utah. I have been here 11 years and happy to report I will soon be celebrating my 29th wedding anniversary, so that worked out okay.

Q Let me give you what we've marked as SCO Exhibit 749.

A Thank you.

Q Is this a copy of your current resume?

A It is.

MR. HATCH: Your Honor, I move that Exhibit 749 be admitted.

MR. BRENNAN: I have no objection, Your Honor.

THE COURT: It will be admitted.

(Plaintiff's Exhibit 749 was received into evidence.)

BY MR. HATCH:

Q On top of the resume it gives -- is that your current position at the university?

A It is.

Q It says the George S. and Dolores Dore Eccles presidential endowed chair in ethical financial reporting,

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correct?

A That's correct.

Q How did you get that position?

A So that is a chaired position. I think, as Dr. Pisano mentioned earlier, that's the highest rank of a faculty member, so you have to move up through the ranks from assistant professor to associate professor with tenure to full professor, finally to chair professor. It's based on, you know, your accomplishments.

Q Great. Do you have an area of particular specialty?

A I do. My areas of specialty are in financial accounting and financial statement analysis.

Q How much of your professional life is devoted to giving expert testimony in litigation?

A Very little really. As I said before, I'm employed full-time as an accounting professor, and I have a demanding family life. I've got three boys to take care of. I include my husband in that. And so the time that I do have to devote to work is really committed to service to my institution, research, and I'm teaching my students how to read and analyze financial statements. So I spend more time teaching others to apply the skills and techniques that I've learned to bear when I do chose to do an expert witness engagement than actually doing them.

MR. HATCH: Mr. Calvin, if you would show us pages

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2 and 3. Start with page 2. At the top it says publications and accepted papers.

BY MR. HATCH:

Q So I take it you have written extensively in your area of expertise?

A I have.

MR. HATCH: If you go through the second page, Mr. Calvin.

BY MR. HATCH:

Q It looks like -- I have 23 articles or papers that you're written?

A That's correct.

Q Then the next page you have working papers. How are those different from the other papers we saw?

A Those are projects that I'm currently working on. So they have not yet been published, but hopefully some day will be published.

Q Have you received any awards or honors other than, of course, your chair?

A I have. So I've received teaching awards. I have also received research awards. So one of my papers won what's referred to as competitive manuscript award, which is a competitive award from my national -- from the American Academy Association, which is an organization of academics, accounting academics. We have about 8,000 members. That

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paper also won the notable contributions to accounting literature award because it was deemed to open up an entire area of research.

Q Do you have any experience in evaluating and analyzing corporate profits?

A I do. Quite a bit. As I said before, I started my career in public accounting, so it was a regular part of my job to prepare corporate financial statements, including income statements that report corporate profits. And since then, for the last 20 plus years, I've been teaching financial accounting courses that focus on the measurement and assessment and analysis of corporate profits.

Q Have you served as a financial expert in any other matters?

A I have served on probably about seven expert witness cases over the last ten years.

Q Do you do any consulting work outside of serving as an expert witness in litigation?

A I do. I also will sometimes work with financial analysts. So these are individuals that work for investment banks that are going to be forecasting future profits for the firm or perhaps providing a buy, sell or hold recommendation on the stock, and they want to make their recommendations or their forecasts based on the maximum amount of information that they can gather.

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So sometimes they will come to someone such as myself and they will say, can you go through and do an in-depth analysis of the financial statements of this company that I'm interested in and flag -- hence, the name red flag report -- any of the issues that I need to be aware of that I might need to ask management about or that I should take into consideration in preparing my forecast of corporate profits and assess what the effect of that issue would be. So I write that up in a report and then that goes back to the analysts and they use it in their assessments.

Q In addition to your teaching and your research and consulting work, are you involved in any other academic pursuits?

A So another big part of an academic's job is service, service to the academic community at large as well as service to their home institution. And so as part of my service commitments to the academic community, I am currently the associate editor of Accounting Horizons, which is one of our premier practitioner oriented journals in my field. I'm an incoming associate editor of Contemporary Accounting Research, which is one of our top academic journals. And then I was just recently elected the vice president of publications for the American Accounting Association. Again, that organization I mentioned a moment ago. And my primary role as the vice president of

1352

publications for that organization will be to chair the committee that will choose the editors for several of our top academic journals. Also for the American Accounting Association, I, in the past, served as the chair of the Financial Accounting Standards Committee, and that was a committee that I really enjoyed working on because it had potentially a lot of impact. That is the committee that would respond to standard setters when they want to change the standards. So what we did is we wrote a response to the standard setters to say, well, based on the research, we think this is a good or a not so good proposal. While I chaired and worked on that committee, I co-authored -- I think it was eight responses to the Securities and Exchange Commission, the Financial Accounting Standards Board, and also the International Accounting Standards Board. From a more sort of local perspective, my service to the University of Utah, I have served on a large number of different committees over the years. But currently the two things that are taking up most of my time are chairing the Strategic Planning Committee for the business school, and I'm also the director of our Ph.D. program for the school of accounting. So I work very close with my Ph.D. students.

Q When did you first begin to work on this case?

A January of 2007.

1353

Q What were you asked to do?

A I was asked to compute the amount of damages, if any, that SCO sustained as a result of Novell's harmful acts.

Q Were you asked to make any assumptions?

A I was asked to assume that SCO did, in deed, own the copyrights. But I was also asked to assume that we were in a "but for world" where Novell did not claim ownership of those copyrights.

Q In your work, were you able to determine damages to a reasonable degree of certainty?

A Yes, I was.

Q What did you consider in doing your work?

A I considered -- I considered external analyst forecasts of sales revenues. I considered internal forecasts as well. I also considered evidence that was available of what Novell's actions had been.

Q What is your estimate of the damages SCO suffered as a result of Novell?

A I have a range. So at the low end, the number that I computed was $114 million, and at the high end it's $215 million.

Q Now how did you arrive at your damages estimate?

A I did what is referred to as a lost profits analysis.

Q What does that involve?

A It involves, first of all, determining the amount of

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sales that the plaintiff, in this case SCO, suffered as a result of the defendant Novell's harmful acts. And then deducting from those lost revenues or lost sales, the costs that they would have incurred in generating those sales to arrive at lost profits or the amount of profit that the company lost as a result of the bad behavior.

Q You said the first prong of that is to determine the lost revenues. What types of revenues did you consider that SCO lost as a result of Novell's actions?

A The revenues that I considered were all under the SCOsource division and there were two streams of revenue within that division, the vendor license revenues and also the right to use, or RTU, license revenues.

Q The jury has been here for a week and a half. Let's make sure we are on the same page. Can you tell us what you understand vendor licenses to be?

A Certainly. So vendor license revenues were revenues that were derived from licenses that were signed with large -- the UNIX vendors. And in return for an up-front fee, what SCO provided to the vendor was the right to use their UNIX and UnixWare intellectual property in the development of their own products. And at the time that all of this was being discussed, SCO's management and external analysts projected that there would be up to 15 -- potentially 15 of these types of deals,

1355

and that they would generate $10 million per deal on average. The other type of revenue I think was --

Q There were two. What was the second one?

A Right. The second one was the right to use licenses. And the right to use licenses were licenses that would be signed with Linux end users. So, in that case, the up-front fee was being received in return for SCO's giving a right to use their intellectual property embedded in Linux to the end user. And at the time that all of this was being discussed, external analysts predicted there would be hundreds of thousands of those sorts of licenses and that they would sell for between $100 and $300.

Q Now did you consider how successful SCO had been in the vendor license program before Novell's acts complained of here?

A I did, yes.

Q What did you find?

A I found that the program was announced in January of 2003, and by February of 2003 they had negotiated an agreement with Sun which ultimately generated about $9 million in revenue for SCO. And then several months later, in April of 2003, they negotiated another agreement with Microsoft, and that agreement generated about $16 million in

1356

revenue.

Q Your understanding was that was from the SCOsource division?

A Yes.

Q How did you determine, going forward, the amount of losses to SCO from vendor license revenues?

A So I had to try to re-create how much revenue SCO would have earned if Novell had not claimed ownership of the copyrights. And so a well accepted methodology for doing that is to look at pre-litigation forecasts of what the revenues were expected to be. And so that's what I did in the case of the vendor license revenues.

Q Are you able to show those calculations?

A I am.

MR. HATCH: Your Honor, I would like to put up some boards. I promised the jury in the opening that we would calculate this for them. If you would give us a second?

THE COURT: Go ahead.

MR. HATCH: Thanks.

BY MR. HATCH:

Q Dr. Botosan, I'm going to put up a couple boards for you. I provided some erase dry markers here for you to use.

THE COURT: Mr. Brennan, if you need to move, don't hesitate.

1357

MR. BRENNAN: Thank you. I appreciate that, Your Honor. With the Court's permission, I think I will go to the other side of the courtroom?

THE COURT: Yes.

Mr. Brennan, we can move a chair up here for you if that's better for you.

MR. BRENNAN: I think I'm fine here, if it's acceptable to Your Honor. Thank you.

BY MR. HATCH:

Q Dr. Botosan, I think right now we're talking about vendor licenses, right?

A Uh-huh. (Affirmative)

Q If you could show us how you came to do your calculations for us.

A Sure. So for the vendor license revenues -- what I'll do first is I'll just write down the numbers by year that I determined and then I will explain where the numbers are coming from. So for 2003, the amount of revenue that I determined that SCO would have earned but for Novell's harmful acts was 27,250,000. And for 2004 -- this is in millions -- was 30 million. For 2005, was ten million. And 2006, ten million. And 2007, was ten million. For a total of 87,250,000. Now, as I said a moment ago, to come up with these

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numbers, I relied on pre-litigation forecasts. And I had two sources of forecasts. Internal SCO forecasts, so these would be forecasts that management generated themselves, and then also external forecasts that were prepared by financial analysts that worked for investment banks. Now given the opportunity to use both of those, if I had forecasts from both sources, my preference would be to use an external analyst forecast because they are going to be more objective. Management tends to be optimistic about things. And if you think about an analyst who's external to the company, they don't have any dog in the fight. They want to try to do the best job they can to forecast because they are providing information to their clients that are making investment decisions. The way an analyst is going to build their own reputation in the market is to do a good job of forecasting. So my preference would be to use a pre-litigation forecast from an external source when it's available. The only year that I didn't have an external forecast available was for 2003. So, in 2003, this number came from an internal forecast from SCO's management. But it just so happens that in 2003, almost all of these revenues were actually realized. So as we'll see in a moment, 2003 ultimately contributes very little to my lost profits analysis. It only contributes about one percent of the

1359

total because most of these sales were, in fact, not lost. Most of these were, in fact, earned by SCO.

Q So you are just estimating the revenues?

A I'm estimating the revenues.

Q Do you consider -- you used the word optimistic in a certain circumstance. Are these optimistic or are these conservative estimates?

A These are conservative estimates of what the revenues -- what the revenues would be.

Q Well, tell the jury why you view them as conservative.

A Okay. So I said a little while ago that at the time that they were discussing the program, SCO had projected that they thought there were going to do 15 of these $10 million deals that would be available. So, in total, they were anticipating 15 deals at $10 million a piece. And those beliefs were confirmed in an external forecast that I had available from Deutsche Bank. The Deutsche Bank analyst also said in his analysis that he agreed that there were 15 potential deals and that the amount of revenue that would be generated by each of these deals might range between five million and $20 million. So he gave quite a broad range between five and 20 million. So at the end of the day, in doing his own forecasts, he also said I think $10 million is the most likely amount.

Q Tell us for a second, if you would -- you say you

1360

relied on Deutsche Bank. What is Deutsche Bank?

A Deutsche Bank is a very large investment bank. They have an excellent reputation. They've been around since 1870, so they are a very well established firm. They have over 80,000 employees. They operate in 70 countries. So they are well known for providing this sort of information to their clients.

Q Were they independent or are they related to SCO in any way?

A Totally independent. So they also confirmed that they felt these numbers were reasonable. So if you take 15 contracts at $10 million a piece, that would imply there was a potential for up to $180 million in vendor license revenues if I had taken into consideration all 15 of the deals at $10 million a piece. So it's on that basis that I would say 87,250,000 is not conservative. It was close to half. It's a little more than half, or it could have been if I used the 15.

Q So when the jury is considering the damages to SCO is 87,250,000, the number they should use for the losses is vendor licenses?

A No. No. That is a measure of how much revenue in total I would have expected SCO to be able to generate in the "but for world". So that number represents -- I'm going to have to squeeze it in here -- expected revenue. From

1361

that number, I have to subtract off the actual revenue because, obviously, if they sold it, they didn't lose it. So from that 87,250,000, I deducted their actual revenue that they didn't lose, which was 25,846,000. And that brought me down to a lost revenue on the vendor license revenue side of 61 million for '04. That's the lost revenue for that stream.

Q So that's the lost revenues. Before we go any further with that, did you determine what the lost revenues would be for the RTU, the right to use license stream?

A I did.

Q Can you show us how you calculated that?

A I can. I'm going to go over to that board. It's going to get too crowded. There were two different ways that I went about calculating the lost revenues for the RTU stream. One of the approaches that I took was the same as what I did for the vendor license revenue. Once again, I went and looked at pre-litigation forecasts to see what people believed SCO was going to do in that market before the litigation, and that is my best estimate of what their revenues would have been in the "but for world". So that was one approach. The second approach that I used was relying on the analysis that Dr. Pisano described to you earlier today, the size of the market and the market penetration to come up

1362

with numbers of licenses that they would have been able to sell. So I did the analysis for right to use using both approaches, and then said, well, you know, I do get kind of the same answer using those approaches.

Q So could you show us how you did that for the first approach you did?

A Sure. So for the right to use licenses, this is based on the forecasts. Again, I'll just put down the numbers and then I will explain where they are coming from. So for 2003, there was no amount of RTU revenues really expected for 2003 because the program was announced so late in the year that nobody really anticipated there were going to be substantial amounts of RTU licenses sold in 2003. The program was expected to really get off the ground and substantial revenues start to be generated in 2004. So for 2004, the revenues were 23 million; 2005, 42 million; 2006, 42 million; 2007, 42,000,000. For a total of 149 million.

Q I notice that you have the exact same numbers for 2005 and 2007. Why is that?

A So in this case, I have access to forecasts for 2004 and 2005, and those are the only years that anybody forecasted RTU license revenues for. So I had those two numbers from an external source, but I didn't have any forecasts for 2006 and 2007. So, instead, what I did was make the assumption that there was going to be zero-percent

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growth in the sales over those two time periods, which I considered to be a conservative assumption, so I was comfortable.

Q Why is that?

A For a couple of reasons. First of all, if you can just look at these two numbers, the analysts that did the forecasts for '04 and '05 assumed that there was going to be 83-percent growth in sales between those two years. So one of the ways that we sort of try to project forward is to look at the past. And it would be atypical -- it would be possible, but it would be atypical for a company to generate 83-percent growth in one year and zero percent for the next. Normally you might expect some stepping down in the growth rate. The other reason why I could have supported a positive growth rate here instead of zero percent was based on Dr. Pisano's analysis of what was going on with Linux. And what he found in his analysis was that more and more people were using Linux. And so over this time period, SCO's market, the size of the market to SCO was getting bigger each year. So on the basis of the fact that more people are using Linux, you could make the argument that they are going to sell more SCOsource licenses as the market grows.

Q So over here you indicated you relied on an independent analyst, Deutsche Bank. Is that who you relied upon here?

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A So here I relied on Deutsche Bank for those two numbers, and then my growth assumption of zero percent.

Q All right. So the ultimate number you got there was how much? What was that?

A 149 million.

Q Did you consider that, like on the vendor licenses, to be a conservative or an aggressive, optimistic number?

A So I considered that number to be conservative as well. I've already indicated that I felt that the growth rate that I was assuming was conservative. But I had other evidence that provided me with comfort that this was -- this was a reasonable number as well. In the Deutsche Bank forecast, what sort of underlies these two numbers, because these two numbers came from the Deutsche Bank forecast, is an assumption that what SCO was going to be able to do was sell 650,000 licenses at $100 a piece. So that is where -- that is where this $65 million worth of revenues is coming from. In that same forecast, what the analysts did was they said, you know -- and they state in their report -- we think this is conservative. We think there are some scenarios in which SCO would do better than that. And so they described what they refer to as a best case scenario. You know, if they are firing on all cylinders, how well could they do. So they said if under the best case scenario, we think they

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could sell two million of these licenses at $200 a piece, that would have generated $400 million worth of revenues in those two years. So that was the best case scenario.

Q You say that's just for two years?

A That would be for those two years.

Q Which two years?

A 2004 and 2005.

Q So that would be -- all right. Go ahead.

A Okay. Then in between sort of this best case scenario and the scenario that they described as reasonable but conservative was another scenario where they said, well, you know, it's also possible in between there that they would sell 900,000 licenses at $100 a piece, in which case we would end up with $90 million worth of revenues in 2004 and 2005. So while those numbers were out there, I felt that it was more appropriate for me to be prudent and use the number that the analyst described as conservative and also the number that the analyst himself placed the most reliance upon. And so I used the 650,000 times 100, relying on this here, to get the $65 million worth of revenue there. And then by virtue of applying a zero-percent growth rate, what is really happening, I'm sort of building conservatism on top of conservatism. I'm starting with a low base and I'm not letting it grow. So there are two

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levels of conservatism kind of buried in those numbers. So at the end of the day I felt quite comfortable with that number.

Q I'm trying to ask what would happen if you had used, you know, kind of the best case scenario where the percentage of growth would have been increased each year?

A So if I used a positive rate of growth, then this number would be bigger obviously. If I had used, let's say, a $200 price, which the analyst actually described as the most likely price -- they thought out of the range of one to $300, $200 was the most likely price, so I could have said, well, the analyst says that's the most likely price, so I'm going to do the calculations using 200. If I had done that, that alone would double that number, right, because embedded in that is an assumption $100, which would have gotten us to close to $300 million.

Q Dr. Botosan, do you recall I asked you if the 87 million was the final number you took out of actual sales. Did you do a similar analysis with the 149 million?

A I did. So in this case, the actual sales -- so this is the amount that I would expect them to be able to generate over this time period, and then from that I took the actual sales, which was $1,214,000, which gave me lost revenues, then, of 147,786,000. So that was my loss, 147,786,000.

Q It's thousand or millions?

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A 147,786,000.

Q My apologies. Now you said you used a two-prong approach. Did you look at it from using different information?

A I did. So the other analysis that I did was based on the market analysis approach, and both of these are well accepted methods, the forecast approach and using a market analysis. So in this case, since I am not an expert in the same field that Dr. Pisano is an expert in, I'm an accountant, so I'm good at accounting, I'm not going to be the type of person that would go out and analyze the market. But, luckily, I had access to Dr. Pisano's analysis. And so he used his expertise and, as you've heard earlier, came to the conclusion that at a lower bound -- so he had a range, lower number, and at a lower bound, Dr. Pisano estimated that SCO lost -- so these were lost RTU licenses, so this is in units, at a lower bound, one million --

Q Dr. Botosan, when you say units, I want to make it clear, this is dollars up here?

A Yeah, this is in dollars.

Q Put dollars on that. Then when you say the analysis you are now doing is units, tell the jury what that means.

A That these are actual licenses. This is the number of licenses that Dr. Pisano estimated SCO lost as a result of

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Novell's conduct. So at the lower bound, it was 1,478,000 licenses, where at the upper bound it was 3,325,000 licenses. So I took his estimate of how many licenses they lost and then I multiplied that. So, again, to be conservative, I looked at the range that the analysts were talking about, $100 to $300, and said, okay, I'm going to choose the bottom of that range, $100. I took that price of $100 per license, multiplied it by the number of licenses that Dr. Pisano estimated SCO lost, and came up with another way of estimating the lost RTU revenues. And that gave me 147,800,000 at the lower bound, and 332,500,000 at the upper bound.

Q So using Dr. Pisano's numbers, that would be the range of damages using a market analysis study?

A That would be the range of lost revenues.

Q Lost revenues.

A For damages we still need to take off cost.

Q So when you compare the two forecasts, the forecast way of coming at the lost revenues and market analysis, what are the differences?

A So I took a lot of comfort from this analysis because his lower bound number gave a lot of support to the number that I had come to using entirely different methodology. Remember, I'm using the analysts' forecasts where they are

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projecting what the revenues are going to be. Dr. Pisano is looking at surveys of, you know, how many people are willing to buy indemnification and how many Linux deployments there were. So he's doing an entirely different analysis. Yet, we came back to very similar numbers at the lower bound. So I felt a lot of comfort in that because it told me that what I would expect the analysts to be doing up here when they were projecting things out repeated exactly the kind of analysis that Dr. Pisano ultimately did except they should do it in real time. They should also be asking the question how big is the market and how much do we think SCO could sell. That provided me with a lot of comfort.

Q When you talked about the range of prices, 100 to $300, you picked 100 because that was very conservative, right?

A Yes.

MR. BRENNAN: Objection, leading the witness, Your Honor.

THE COURT: Sustained.

BY MR. HATCH:

Q Why did you pick $100?

A I picked it because it was the lower bound of the range 100 to 300, because I wanted to be conservative.

Q When the independent analysts were talking about the price per unit, what did they say the best number to use was?

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A They said that the range would be 100 to 300, but they felt 200 would be the most likely price.

Q So you picked a more conservative. If you use the number the independent analysts would have used, what would the numbers be on both of those -- what would the numbers be?

A The answer to that question, I want to be a little careful, because they said 200 was the most likely price, but in forming their forecasts up here, remember, they themselves used 100, so they also were being conservative. And so if I had, instead of using 100 like the analysts did and been conservative like the analysts did, instead said I'm going to go with what the most likely price is, then I would have used 200, and that would have doubled both of those numbers. So roughly 300 million to 600 million would have been the numbers if I used 200.

Q Now we've identified two different streams of revenue, correct?

A Correct.

Q Can you combine those two for us?

A So what I did on my next step --

Q Do I need a third chart?

A No. I think I'm going to be able to squeeze it in here, depending on how many more questions you have. So what I did next is I took the lost revenue for the

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vendor license -- I'm going to say VL for now, short for vendor license, lost revenue, so that number was 61,404,000. And then I took the RTU lost revenue, based on my forecast analysis was 147,786,000. And I added those together, and it came up to $209,190,000 as total lost SCOsource revenues because, you remember, SCOsource has both components comprising it.

Q So is that the damages then?

A No.

Q What do we have to do -- what do you have to do to -- I mean, what's next?

A Okay. So that is revenue --

Q I guess I should ask, why wouldn't that be your damages?

A Because they are going to incur costs. So, you know, like any business, it takes -- you incur costs in generating revenue. So if you think about the kind of product that SCO was selling here, marketing costs are going to be probably one of the biggest components of costs they are going to incur. So I had to deduct from this number an estimate of costs.

Q Why did you pick those types of costs?

A Well, actually, I ended up going with three different big categories of costs, cost of goods sold, marketing costs, and selling general administrative costs. I picked

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those categories because those are the three categories of costs that SCO traditionally incurred in selling their products. So I used -- I just looked at, you know, what types of costs do they have, and I stuck with kind of what costs they had incurred traditionally in their business.

Q So you took these there types of costs, how did you work that into your calculations?

A So what I needed to do next was I needed to figure out for every dollar of revenue that SCO generated, how much cost would they have incurred in the "but for world" again. And so I used a very standard technique. It's a technique that we see used in expert witness engagements. It's also a technique that a company might use internal to their own operations if they are trying to figure out, you know, how much cost am I going to incur for an incremental dollar of revenue that I'm going to generate. For every dollar of revenue, how much cost am I going to have. So the technique that I used was a regression analysis. I won't go into the boring details of that. Basically what it does is it just relates costs to sales. And based on that analysis, I determined that SCO would incur 46 cents in costs for every dollar of sales.

Q And is that a conservative number?

A Again, I felt that was a very conservative -- a very conservative estimate of their costs.

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Q Can you explain to us why?

A One reason why is because if you think about the nature of the product that SCO was selling, there wasn't development that was going to be associated with this product, which is kind of different from, you know, their typical cost structure where they might have had some development. I came to that number by virtue of looking at SCO's kind of existing cost structure development costs. And then there is not going to be delivery costs associated with this product because you are just providing them with the right to use. So that is one reason why I feel this is a conservative number. I also went back working with those independent analysts reports because they talked a lot about the SCOsource business and how they -- you know, how it was going to work. And the analysts inferred frequently in their discussions that one of the great things about this SCOsource product for SCO was that it was going to generate revenues at a very low cost. In fact, some of them even implied in their discussion there might be close to no cost associated with generating SCOsource revenues. One of the analyst's quotes was to the effect of and the revenue will go directly to the bottom line. So I've got 46 cents, which is basically taking 46 percent of this number away, which was pretty generous.

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Q So did you use that number in the calculation to determine the actual cost that you needed to reduce the revenues by?

A So I took 209,190,000 times 46 cents to get the costs, which was 95,211,000, and I subtracted those off to arrive at the lost profits number of 113,979,000, which was that lower bound number that I referenced at the beginning of our discussion when I said at a lower bound their damages were 114 million. That's where that number is coming from.

Q All right. So is that the number or do we have to go another step?

A No. We're done.

Q Well, I'm not going to let you down yet -- or up yet. I think you indicated -- at the beginning of the testimony you indicated an upper bound of your estimates. I think you said that was the lower bound. You said an upper bound was 215 million. Where does that number come from?

A Where that number came from was using Dr. Pisano's -- the number implied by Dr. Pisano's upper bound of the lost units. So if I take the $332,500,000 of lost revenues on the RTUs, so instead of using 147,786,000, using that upper bound number of 332, and then adding in these vendor license revenues -- of course they are not incorporated into Dr. Pisano's numbers. He was just focused on RTU.

Q Is there room you can write this down?

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A I don't think I can squeeze it all in. But, basically, if I take those two numbers, add them together, subtract off the costs, which is going to be a higher amount of costs obviously, then I came down to -- I will just write this number down here in red, 214,000 -- well, actually closer to 215 million. Sorry. So that was my upper bound number.

Q Okay. Just so we're clear, you have taken that revenue number, you reduced it by costs, and what did we get?

MR. BRENNAN: Your Honor, I'm not sure we have a question here at this juncture.

THE COURT: We don't.

MR. HATCH: You don't have a problem if she writes it down, do you, Your Honor?

THE COURT: What?

MR. HATCH: I wanted her to write down so she had this here, so they could see how the numbers came out.

MR. BRENNAN: Your Honor, again, I'm not sure we have a question.

THE COURT: I'm not sure of the question.

BY MR. HATCH:

Q Do you have the ability to make the same calculation for the upper bound as you did the lower bound?

A I do.

Q Could you do that for us?

A 61,404,000, and then adding in the 332,500,000, which

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will give me the total lost revenues. And off the top of my head, I actually can't remember what that number was. Subtract off the cost, then that comes to $215 million.

Q All right. I think you can go back to your seat.

A Thank you.

Q I think we've run out of board.

THE COURT: Mr. Hatch, how much more do you have?

MR. HATCH: I'm just about done, Your Honor.

THE COURT: All right. Go ahead.

BY MR. HATCH:

Q All right. So are your numbers -- your numbers are all based on conservative numbers?

MR. BRENNAN: Objection, that's leading the witness.

MR. HATCH: It is leading, Your Honor. I will be happy to ask it again.

BY MR. HATCH:

Q Tell us the level of confidence you have in these numbers after having done your study?

A I'm extremely confident in the numbers, the conservative nature of the numbers.

MR. HATCH: That's all I have, Your Honor.

THE COURT: All right. We'll recess for the afternoon. When we start tomorrow, we'll go to the cross-examination of Dr. Botosan.

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(Jury excused)

THE COURT: Mr. Singer, what do we have tomorrow?

MR. SINGER: Your Honor, this is the lineup which will take us through the conclusion of our case except for the witnesses who will be appearing the following week. We have the continuation of Ms. Botosan, cross-examination and redirect.

THE COURT: Dr. Botosan, you don't need to wait here unless you want to. This may take a minute.

THE WITNESS: That sounds great. Thank you.

MR. SINGER: We would then put on the deposition of the salespeople whose depositions the Court has ruled can be used. Those are very short. I think collectively about 15 to 20 minutes, not long.

THE COURT: Are there any issues with the designation?

MR. SINGER: I would have to defer to Mr. Normand on that issue.

MR. NORMAND: I missed the question, Your Honor.

THE COURT: Are there any issues over the designation of the deposition testimony of the three --

MR. NORMAND: Nothing comes to mind. We'll speak about that and we'll get them to the Court in the next few hours. If there are issues, I think they will be very limited.

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MR. SINGER: We did plan to call Mr. Maciaszek and Mr. Nagle. Those should not be lengthy testimonies. They cover certain points. We would then call Mr. Stone, adverse, as a witness. I don't expect that to be too long either. We would then play Ms. O'Gara's deposition testimony, and then we wind up with Mr. Tibbitts.

I am hopeful we can get that all in. It depends a lot on the cross-examination.

MR. ACKER: If I just might inquire, Mr. Stone has some scheduling issues in the morning, it's a board meeting he would like to attend. If there is a time certain we could have his testimony, that would be helpful.

MR. SINGER: Is there an estimate on how long Mr. Brennan's cross-examination of Ms. Botosan might take?

MR. BRENNAN: Longer than the direct.

MR. SINGER: I would say probably 11:30 might be a good estimate.

THE COURT: Counsel, let me make you aware that tomorrow I have a meeting I have to attend during the lunch hour. So we'll recess about five minutes to 12:00 and it will be at least a half hour lunch tomorrow.

MR. ACKER: Same schedule, to 1:30, Your Honor?

THE COURT: Yes.

MR. SINGER: I believe 11:30 is an estimate. We could take him after the -- I take it we would be resuming

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at 12:30 to 1:30?

THE COURT: Yes.

MR. ACKER: Have him come at 12:30?

MR. SINGER: I think that would probably work out.

THE COURT: Let's plan on that, even if we have to interrupt the middle of another witness at that time.

MR. ACKER: I appreciate that, Your Honor.

THE COURT: Anything else, counsel, before we recess?

MR. BRENNAN: Just a housekeeping measure. I assume that the demonstratives will be maintained without disturbance?

THE COURT: Yes. We do not have hearings this afternoon, so you don't have to move everything.

MR. BRENNAN: Thank you, Your Honor.

THE COURT: If there is nothing else, we'll be in recess.

(Whereupon, the trial was continued to Thursday, March 18, 2010 at 8:30 a.m.)


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