8630 1 IN THE IOWA DISTRICT COURT FOR POLK COUNTY ----------------------------------------------- 2 JOE COMES; RILEY PAINT, ) 3 INC., an Iowa Corporation;) SKEFFINGTON'S FORMAL ) 4 WEAR OF IOWA, INC., an ) NO. CL82311 Iowa Corporation; and ) 5 PATRICIA ANNE LARSEN; ) ) TRANSCRIPT OF 6 Plaintiffs, ) PROCEEDINGS ) VOLUME XXXII 7 vs. ) ) 8 MICROSOFT CORPORATION, ) a Washington Corporation, ) 9 ) Defendant. ) 10 ----------------------------------------------- 11 The above-entitled matter came on for 12 trial before the Honorable Scott D. Rosenberg 13 and a jury commencing at 8 a.m., January 17, 14 2007, in Room 302 of the Polk County 15 Courthouse, Des Moines, Iowa. 16 17 18 19 20 HUNEY-VAUGHN COURT REPORTERS, LTD. 21 Suite 307, 604 Locust Street 22 Des Moines, Iowa 50309 23 (515)288-4910 24 25 8631 1 A P P E A R A N C E S 2 Plaintiffs by: MICHAEL E. JACOBS 3 MICHAEL R. CASHMAN Attorneys at Law 4 Zelle, Hofmann, Voelbel, Mason & Gette, LLP 5 500 Washington Avenue South Suite 4000 6 Minneapolis, MN 55415 (612) 339-2020 7 ROBERT J. GRALEWSKI, JR. 8 Attorney at Law Gergosian & Gralewski 9 550 West C Street Suite 1600 10 San Diego, CA 92101 (619) 230-0104 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8632 1 Defendant by: DAVID B. TULCHIN 2 SHARON L. NELLES JOSEPH E. NEUHAUS 3 Attorneys at Law Sullivan & Cromwell, LLP 4 125 Broad Street New York, NY 10004-2498 5 (212) 558-3749 6 STEPHEN A. TUGGY Attorney at Law 7 Heller Ehrman, LLP 333 South Hope Street 8 Suite 3900 Los Angeles, CA 90071-3043 9 (213) 689-0200 10 DAVID E. JONES Attorney at Law 11 Heller Ehrman, LLP One East Main Street 12 Suite 201 Madison, WI 53703-5118 13 (608) 663-7460 14 BRENT B. GREEN Attorney at Law 15 Duncan, Green, Brown & Langeness, PC 16 Suite 380 400 Locust Street 17 Des Moines, IA 50309 (515) 288-6440 18 19 20 21 22 23 24 25 8633 1 (The following record was made out of 2 the presence of the jury at 8 a.m.) 3 THE COURT: Did you guys want to talk 4 about this trade press thing? 5 MR. GREEN: Yes, Your Honor. 6 Since I raised the objection, let me 7 tell you what we've found out. 8 At one point we did say to them that 9 we objected to the display. Mr. Tuggy sent an 10 e-mail on December 13th. 11 Subsequent to that, however, a chart 12 was sent over by another member of our team, 13 and in that we did say about this exhibit, that 14 exhibit will not be admitted, but Plaintiffs 15 may display the portions of this exhibit 16 referenced in the testimony. And we'll honor 17 that. 18 Even though I think that that was 19 maybe inadvertent, we'll honor that. 20 THE COURT: Okay. 21 MR. GREEN: However, we want to make 22 sure it is limited to what's referenced in the 23 testimony and what's displayed. 24 And we would ask that since it is 25 going to be displayed, it clearly is hearsay, 8634 1 and it's only being displayed because of the 2 reference in the deposition. 3 So we would ask pursuant to the 4 McElroy case that there be a limiting 5 instruction given with regard to it and we will 6 hand the Court what we would propose in that 7 regard. And I think that's -- 8 THE COURT: Would that be given after 9 -- when do you propose this instruction be 10 given, right after that segment? 11 MR. GREEN: Yes. 12 THE COURT: All right. 13 MR. GREEN: That would be our 14 preference, Your Honor. 15 THE COURT: Okay. 16 Mr. Cashman or Mr. Jacobs? 17 MR. CASHMAN: Your Honor, Michael 18 Cashman for the Plaintiffs. 19 Plaintiffs object to the giving of 20 this instruction because there was an agreement 21 that it could be displayed without instruction. 22 And just by way of -- backing up a 23 little bit, yesterday I told the Court I 24 thought 5166 had been discussed during 25 Mr. Chestnut's exhibit argument, and I stand 8635 1 corrected. 2 I went back and looked at the record 3 and we didn't discuss that specific exhibit. 4 THE COURT: I looked too. 5 MR. CASHMAN: And so I just wanted to 6 let the Court know that. 7 But we did confirm that Mr. Silverman, 8 on behalf of Microsoft, agreed to have 5166 9 displayed without instruction. And the only 10 limitation on 5166 is that Plaintiffs would not 11 move for its admission into evidence. 12 THE COURT: Was that in the chart, 13 that agreement? 14 MR. GREEN: No, Your Honor. There's 15 no -- there's nothing about without 16 instruction. It just says it can be displayed. 17 That portion only that is referred to in the 18 deposition testimony. There's nothing in the 19 chart. I can give the Court the chart if you'd 20 like. 21 THE COURT: No. I've got the chart. 22 MR. GREEN: I think the Plaintiffs 23 gave it to you. 24 Also, Your Honor, so we would press 25 for the instruction and say that it is called 8636 1 for once the Jury sees it, just to make sure 2 that they know it's not being admitted for the 3 truth of the fact asserted in the trade press. 4 THE COURT: Okay. 5 MR. GREEN: Also, Your Honor -- and 6 this is just for purposes of Plaintiffs -- the 7 exhibit is again referred to later on in the 8 deposition. 9 THE COURT: Same depo? 10 MR. GREEN: Yes, Your Honor. 11 THE COURT: Okay. 12 MR. GREEN: On the Chestnut 13 deposition. It's at page 169, starting at line 14 21. And we don't think that there's any need 15 to display -- we would ask that it not be 16 displayed during that reference because it just 17 -- it's only been up. 18 And what it says is can you go back to 19 Exhibit 900 -- and that's this Exhibit 5166 -- 20 one of the first exhibits that we looked at 21 this morning. Question -- that was another 22 question. It's the Ray Duncan article. 23 Question: This article came out 24 September 25, 1990; correct? 25 Answer: Correct. 8637 1 Question: This is the one that gives 2 a good review of DR-DOS 5.0; right? 3 Answer: Uh-huh. 4 Question: Do you have an opinion as 5 to what an article like that would do in terms 6 of credibility for DR-DOS 5.0? 7 Answer: I'm sure it would enhance it. 8 Question: Was that a concern to you 9 at Microsoft? 10 Answer: Later on. 11 Question: Was it a concern at the 12 time? 13 Answer: I guess. 14 We don't think it should be displayed 15 -- should not be displayed during that colloquy 16 because it's already been displayed before and 17 the Jury is going to know what they are talking 18 about. 19 MR. CASHMAN: Your Honor. 20 THE COURT: Yes. 21 MR. CASHMAN: With respect to the 22 agreement that the parties have on an exhibit 23 such as 5166, there are instances where the 24 parties have agreed during the meet-and-confer 25 process on these exhibits whether instructions 8638 1 need to be given, limiting instructions. 2 And the parties have agreed in other 3 instances that although an exhibit is not going 4 to be admitted or is just going to be 5 displayed, that no instructions need to be 6 given. 7 And that process has been going on 8 with respect to every single witness, which is 9 why I say in addition to the materials which I 10 handed up to the Court yesterday that there was 11 an agreement that no instruction had to be 12 given for 5166. 13 And as far as Mr. Green's request that 14 5166 not be displayed during one portion of the 15 testimony when Mr. Chestnut refers back to it, 16 again, it is appropriate because it was agreed 17 upon and because it is appropriate for the 18 understanding of what Mr. Chestnut is 19 testifying about. 20 THE COURT: So that first part you 21 talked about, you said there was an agreement 22 between the parties that no -- in general, no 23 limiting instructions would be given? 24 MR. CASHMAN: No. On a case-by-case 25 basis, Your Honor, when we come across this 8639 1 situation, the parties discuss whether or not 2 they think a limiting instruction needs to be 3 given. 4 THE COURT: I get you. 5 MR. CASHMAN: And because nobody 6 insisted on a limiting instruction being given 7 for this particular exhibit, therefore, it was 8 agreed there was no need for a limiting 9 instruction on this one. 10 MR. GREEN: Your Honor, I've been told 11 by Mr. Tuggy -- he can speak to it if you'd 12 like, if you want him to and with the 13 permission of the Plaintiffs -- but I've been 14 told that there was no agreement whatsoever on 15 limiting instructions one way or the other. No 16 prior agreements were made one way or the 17 other. 18 We think that the McElroy case calls 19 for it and it should be given. 20 THE COURT: Yeah, I think Mr. Cashman 21 clarified that. They said they talked on a 22 case-by-case basis. But there was no general 23 agreement? 24 MR. TUGGY: Correct. 25 THE COURT: Okay. Anything else on 8640 1 this? 2 MR. CASHMAN: Just one last point. 3 The reason -- one additional reason why the 4 Plaintiffs oppose this additional instruction 5 at this time because there's been other 6 instances, for example, by Microsoft in opening 7 statement about trade press. 8 Your Honor will recall that we 9 objected to that, but there was no limiting 10 instruction given. So it would seem out of 11 place to give one instruction for one specific 12 exhibit. 13 If we're going to do something along 14 these lines, Plaintiffs would suggest something 15 that's given separate and apart from 16 Mr. Chestnut's testimony that the parties work 17 out concerning trade press. 18 THE COURT: Was there a -- did you 19 guys ask for an instruction on other stuff 20 similar to this? 21 MR. CASHMAN: I know that we asked for 22 the instruction on that piece of trade press 23 that Mr. Holley used with Mr. Alepin, but I 24 don't recall the exact other instances right 25 now. 8641 1 THE COURT: Okay. That one I allowed, 2 I think, for a different reason. Okay. 3 Anything else? 4 MR. GREEN: No, Your Honor. Just the 5 same point that you raised. 6 If they wanted an instruction, they 7 didn't ask for it, and we are asking for it 8 here. 9 MR. CASHMAN: Nothing further for 10 Plaintiffs, Your Honor. 11 THE COURT: Okay. 12 Court -- well, then the parties have 13 agreed to display it. I believe it can be 14 displayed at both places where Chestnut refers 15 to it, and Plaintiffs may show those portions 16 actually referred to or necessary for context 17 in Mr. Chestnut's testimony. 18 I will give an instruction regarding 19 5166. And if the Plaintiffs desire any 20 instructions regarding other exhibits that 21 aren't offered for the truth of the matter 22 asserted or the Defendant wishes it, I'll be 23 happy to do the same. 24 Anything else? 25 MR. GREEN: Thank you, Your Honor. 8642 1 MR. CASHMAN: Yes, Your Honor. 2 With that ruling, Your Honor, I would 3 just make one request of a revision in the 4 proposed instruction that Mr. Green handed up. 5 And that is in the last sentence to 6 strike the word understanding and to put a 7 period after the word testimony. So that the 8 last sentence would regard portions of the 9 article were shown to you only to provide 10 context for Mr. Chestnut's testimony. 11 THE COURT: Anything else? 12 MR. GREEN: I don't think it makes a 13 lot of difference, Your Honor. 14 THE COURT: I have no problem with 15 that. I'll do that. I'll be happy to. 16 Mr. Tulchin? 17 MR. TULCHIN: Your Honor, there is 18 another issue if we may. 19 Mr. Neuhaus will address this. This 20 pertains to the Court's ruling yesterday 21 concerning one of the motions argued last 22 Friday, and we have just an issue that I think 23 is more in the way of clarification. 24 If the Court pleases, Mr. Neuhaus will 25 address this. 8643 1 MR. NEUHAUS: Your Honor, if I might, 2 we have a letter that lays out the position 3 very briefly. If I could approach and give 4 that to Your Honor. 5 THE COURT: Will the Plaintiffs be 6 given a copy? 7 MR. NEUHAUS: I'll give it to them 8 right now. 9 Just briefly, Your Honor -- 10 MR. CASHMAN: May we have a moment to 11 read this, Your Honor, before Mr. Neuhaus 12 proceeds? 13 THE COURT: Certainly. 14 MR. CASHMAN: Okay, Your Honor. We're 15 ready to listen to Mr. Neuhaus. 16 THE COURT: I am too. 17 MR. NEUHAUS: This relates to the 18 order, Your Honor, that we received yesterday 19 with respect to the Plaintiffs' motion to 20 modify the protective order to share 21 Mr. Schulman's findings with the government 22 regarding supposed violations of the final 23 judgment in the government action. 24 And we don't oppose their ability to 25 approach the government. Our only concern has 8644 1 been throughout this making sure that our 2 source code is protected. 3 In certain circumstances, there would 4 be no problem at all. If they approach the 5 technical committee, for example, that was set 6 up on the final judgment, our source code would 7 be perfectly protected, but under the order 8 that Your Honor issued, they can approach the 9 DOJ or the Plaintiffs states directly. And if 10 the Plaintiffs states, for example, requested, 11 purely requested the source code, the 12 protective order would permit the -- the order 13 yesterday would permit them to provide the 14 source code to the states. 15 And, under certain circumstances, 16 we're concerned that there wouldn't be adequate 17 protection of our -- there would be no 18 protection of our protective order -- of our 19 source code, sorry, or at least that could be 20 the case. 21 So our concern is just that we get 22 notice so that we can seek clarification or 23 protection if needed from the Court in 24 Washington or wherever would be appropriate. 25 When Mr. Jacobs argued this, he said 8645 1 it should be our burden to seek any such 2 clarification, and we can certainly live with 3 that burden. We just want to have a chance to 4 do that. But to know what path the information 5 is taking to get to the government. 6 As I said, in certain circumstances, 7 there would be no problem. There's only 8 protections built in. 9 Under the order yesterday, because it 10 could get to the government in other ways, such 11 as by an informal request where we wouldn't 12 have that protection, we want to make sure that 13 we can go into court if need be and get that 14 protection. 15 We ask for reasonable notice, 10 16 business days' notice, before they actually 17 turn anything to be able to decide if we need 18 to take any action. 19 MR. JACOBS: Your Honor. 20 THE COURT: Mr. Jacobs, you get to 21 speak. 22 MR. JACOBS: I do get to speak, Judge. 23 THE COURT: All right. 24 MR. JACOBS: I'm not entirely certain 25 what sort of notice Microsoft -- additional 8646 1 notice Microsoft is asking for here. 2 We filed a motion where we indicated 3 the entities -- the enforcement authorities we 4 wished to discuss these issues with. 5 Microsoft has been on notice now for 6 close to a month now that we intend -- we would 7 like to go forward and speak to certain 8 enforcement authorities. 9 If Microsoft wants to go to the Court 10 in Washington, D.C. now in light of Your 11 Honor's order, it seems like it ought to be up 12 to Microsoft to go to the Court now, not wait 13 to put some additional burdens in the process 14 of disclosing any sort of information to these 15 authorities. 16 Timing under this judgment, under the 17 final judgment is very important, Your Honor. 18 Timing is not something where -- the timing 19 here is not something where we can just wait 20 and put this off further and further and 21 further. 22 Under the final judgment, Microsoft 23 actually -- let me back up here. 24 Microsoft is obligated under the final 25 judgment to provide disclosures of APIs, 8647 1 application programming interfaces, that are 2 used by its middleware products before those 3 products actually hit market. 4 With Internet Explorer 7, for 5 instance, which was released to the public in 6 final version this last fall, Microsoft 7 actually had an obligation to provide 8 disclosures of all applications programming 9 interfaces used by Internet Explorer in Windows 10 at the time of the final beta version of 11 Internet Explorer 7. In other words, before 12 the final release. 13 Why is that? It's because the final 14 judgment recognizes the importance of time to 15 market and timely disclosure of this 16 information. 17 So this notion that we can just keep 18 pushing the stuff off further and further and 19 further and that there will be no harm in just 20 a couple more weeks' time here before we are 21 able to contact the enforcement authorities 22 just does not jive with how the final judgment 23 is supposed to work. 24 They've known who we want to go to. 25 They know who we want to speak with. 8648 1 We are not going to be disclosing the 2 source code. I don't think Your Honor's order 3 allows us to just go ahead and disclose the 4 source code immediately to these parties. 5 Your Honor said we can go contact 6 these parties and tell them the substance of, 7 hey, here's the information that we have. 8 We can share the basis of this 9 information later through subpoena or other 10 request from the government authorities, but 11 certainly we should be able to go forward now, 12 contact these parties immediately, and not have 13 to wait for some additional steps in the 14 process to be built in because Microsoft at 15 some later point wants to go and deal with any 16 sort of confidentiality issues. 17 MR. NEUHAUS: Your Honor, we have no 18 objection to their approaching the government 19 authorities under the relevance -- the first 20 part of your order. 21 It's in between that. If the request 22 comes, you know -- if the request is a subpoena 23 from the Department of Justice, there's no 24 problem. There's statutory protection for that 25 material. 8649 1 If the request comes as an informal 2 request from the state, it's un- -- there may 3 not be protection from, for example, a FOIA 4 request or something like this under the state 5 statute. 6 So what we are seeking is not to stop 7 them from approaching the government now in 8 what Your Honor's ruling is contemplating. 9 It's under the second part where there is a 10 wide array of potential ways in which the 11 information could get to the government where, 12 you know, we want to be able to deal with 13 whatever actually happens. 14 As I said, under a number of 15 scenarios, not a problem at all. It goes 16 straight to the technical committee, it's all 17 absolutely fine, which is the path that the 18 final judgment envisions for third-party 19 complaints. 20 And if they approach the technical 21 committee, provide the information to the 22 technical committee, it's all absolutely 23 protected. 24 But if they approach an individual 25 plaintiff state, it's a lot less clear what the 8650 1 story is. And all we want is notice in between 2 those two steps. 3 How is it going to actually happen if 4 the source code is going to be released so 5 that, if we need to, we can take steps to 6 protect it. 7 THE COURT: Anything else? 8 MR. JACOBS: Well, just one final 9 thing. It seems like at this point Microsoft 10 could be taking those steps to -- here's my 11 understanding of Microsoft's concern with the 12 protective order in the government case. 13 Seems to be that because any 14 information received from the Plaintiffs in 15 this case would not be considered Microsoft 16 information, Microsoft confidential information 17 for purposes of the protective order in the 18 government case. 19 Microsoft says because it's coming 20 from a third party, us, that somehow it 21 wouldn't be given the same treatment as 22 confidential information provided directly by 23 Microsoft. 24 I can't believe that if Microsoft were 25 to go to the Court or the parties now and say 8651 1 in light of this ruling by the district court 2 in Iowa that, you know, we want to just clarify 3 the protective order, that if any information 4 comes from the Plaintiffs -- Microsoft 5 information comes from the Comes Plaintiffs 6 that it was internal to Microsoft that it will 7 be treated as Microsoft, confidential 8 information produced by Microsoft directly in 9 the government case. 10 THE COURT: Anything else on this 11 issue? 12 MR. NEUHAUS: No, Your Honor. 13 THE COURT: I don't have time now, but 14 during the first break, I will issue an order 15 one way or the other on this request. 16 MR. NEUHAUS: Thank you, Your Honor. 17 THE COURT: All right. 18 MR. CASHMAN: Your Honor, Plaintiffs 19 have something very quickly. 20 We'd like to provide an exhibit which 21 we have labeled as an offer of proof. 22 THE COURT: Okay. 23 MR. CASHMAN: This is financial 24 evidence for the stockholdings of Mr. Chestnut 25 under the employee stock purchase plan. And 8652 1 this information was provided in response to 2 Interrogatory Number 21. 3 The Plaintiffs intend to offer -- make 4 such offers of proof for each and every 5 Microsoft employee. And I just wanted to make 6 this offer of proof for Mr. Chestnut 7 contemporaneous with his testimony. 8 It will be discussed further tomorrow 9 by Ms. Conlin. I understand there's a motion 10 on regarding financial information like this. 11 So there will be further explanation 12 for the Court on it tomorrow. 13 I just wanted it to be offered 14 contemporaneous with Mr. Chestnut's testimony. 15 THE COURT: So you want this as an 16 exhibit? 17 MR. CASHMAN: I think that Ms. Conlin 18 will address that during -- 19 THE COURT: Tomorrow? 20 MR. CASHMAN: During the motion. 21 THE COURT: I'll wait until tomorrow. 22 MR. CASHMAN: Yes. 23 MR. TULCHIN: And I understand, Your 24 Honor, this will not be shown to the Jury until 25 at least after the time that Ms. Conlin's 8653 1 motion tomorrow is decided? 2 MR. CASHMAN: That's correct. 3 MR. TULCHIN: Thank you. 4 THE COURT: Okay. Anything else? 5 Mr. Tuggy, you were anxious there. 6 MR. TUGGY: I have an agreement to 7 report involving Motion Number 10, and if I may 8 approach the Court. 9 THE COURT: Really? 10 MR. TUGGY: This obviates the need for 11 oral argument on this motion. Ms. Davis and I 12 have discussed it and I have provided a letter 13 to Mr. Cashman and I told Ms. Davis I will 14 report this to the Court. 15 This is a motion asking that you rule 16 on two exhibits in the Phase 6 appeals that 17 weren't ruled on before and so this is our 18 agreement that you may go ahead and rule on 19 that. 20 THE COURT: That's wonderful. Thank 21 you. 22 MR. CASHMAN: The parties are in 23 agreement on that, Your Honor. 24 THE COURT: And I want to take a 25 moment to tell the parties that I recognize 8654 1 that you have endeavored to in good faith 2 resolve many of these issues, evidentiary and 3 otherwise, and I appreciate it very much. 4 And although I sometimes believe we 5 revisit the same rulings in more than one 6 occasion, in comparison, though, what you guys 7 have done on both sides in resolving many, 8 many, many issues between you that the Court 9 has not agreed to address has saved a lot of 10 time and I'm grateful for that. 11 And I have been remiss in recognizing 12 that fact and I'm sorry. So I want to commend 13 the attorneys for both sides for your hard work 14 and your efforts to resolve, or at least pair 15 down your differences in a manageable level for 16 yourselves and for the Jury and for the Court. 17 I know that all of you work very hard, 18 and you continue to work hard for very long 19 hours, but I also know that your motions, your 20 briefs, and your arguments and the ruling 21 charts are not only very well done, I 22 appreciate them very much. They're thoughtful, 23 exceptional, and they're extremely helpful. 24 And I greatly appreciate it. 25 So I just wanted to mention that and 8655 1 thank you for your hard work and your endeavors 2 and for your cooperation with the Court, with 3 each other, your helpfulness, your courtesy and 4 your patience and your professionalism. Thank 5 you very much to both sides. 6 MR. CASHMAN: Thank you, Your Honor. 7 MR. TULCHIN: Thank you, Your Honor. 8 Microsoft very much appreciates the 9 Court's comments. Thanks. 10 MR. CASHMAN: Plaintiffs appreciate 11 your comments also. 12 THE COURT: Well, I'm sincerely making 13 them. 14 MR. CASHMAN: We have one more brief 15 matter, and this concerns the question by the 16 Jury yesterday about speeding up the 17 depositions. And we had some discussion about 18 it yesterday, and Plaintiffs are fine with what 19 the Court has said. 20 We would -- in light of the question, 21 however, would appreciate if the Court would 22 just make a statement to the Jury that -- about 23 why the Court has decided to -- that these dead 24 spaces need to be part of the record so that 25 the jurors don't hold either side responsible 8656 1 for that, particularly the Plaintiffs, as I 2 indicated before, since we have to rely more on 3 deposition testimony. 4 MR. TULCHIN: I don't think it's 5 necessary, Your Honor. There was a note from 6 one juror, not from 12, and it is what it is. 7 I don't think any juror will draw any 8 inference that someone is to be blamed if this 9 subject is not addressed. 10 THE COURT: All right. 11 MR. CASHMAN: Well, certainly, Your 12 Honor, there is no harm in giving that kind of 13 statement so that the jurors understand why 14 there are long pauses in the tape. 15 THE COURT: Anything else? 16 MR. TULCHIN: No, sir. 17 MR. CASHMAN: No, Your Honor. 18 THE COURT: I'll mention something in 19 passing that the long pauses are part of the 20 deposition record. 21 MR. CASHMAN: Thank you. 22 THE COURT: Not much I can do about 23 it. 24 MR. CASHMAN: Thank you, Your Honor. 25 THE COURT: I've ordered it that way. 8657 1 MR. TULCHIN: Your Honor, do I 2 understand that tomorrow we are going to break 3 at around lunchtime because -- 4 THE COURT: Yeah, I guess someone has 5 to go to a funeral. Is that okay? 6 MR. TULCHIN: Oh, yes, certainly. I 7 just wanted to make sure we knew the schedule. 8 Will we break at 11 or 12? 9 THE COURT: You know what, I don't 10 know what. I'll find out from Carrie. 11 MR. TULCHIN: Is it worth going 12 tomorrow until 12? Some of the jurors are in a 13 habit of having lunch at 11. 14 THE COURT: I think we are going to 15 11. I think the service starts at 12:00, but 16 let me ask Carrie what that lady said and we'll 17 figure out the time. 18 MR. TULCHIN: Sure. 19 THE COURT: Apparently, there is some 20 memorial service for her father-in-law. 21 MR. GREEN: Father-in-law, yeah. 22 THE COURT: All right. Well, you'll 23 get a three-minute break if you want it. Smoke 24 them if you got them outside. 25 I've got to make a quick record. I 8658 1 guess Ms. Carrie needs to make the record. 2 THE CLERK: I do. 3 THE COURT: Tell us what you were 4 told, Carrie. 5 THE CLERK: I was informed because of 6 what happened yesterday, the deputies are 7 wanting to walk them out to their car. 8 THE COURT: They want to know what 9 happened. 10 MR. CASHMAN: What happened? 11 THE COURT: I don't think you told 12 them. 13 THE CLERK: Yesterday one of the 14 jurors called in and left the message saying 15 that someone was in the parking lot taking 16 pictures of him. 17 MR. GREEN: Really? 18 THE CLERK: I haven't talked to him 19 yet this morning, but I was going to wait until 20 they all got here and a find out what happened. 21 THE COURT: I notified -- or Carrie 22 notified court administration. I also talked 23 to the assistant court administrator and I 24 talked to Carrie and I'm going to have an 25 deputy escort them outside from now on. 8659 1 MR. TULCHIN: Yeah, I think that's a 2 good idea, Your Honor. 3 Do we know whether it was a private 4 person or a member of the press? 5 THE COURT: She's going to get more 6 information. All we know is some guy in a 7 red -- 8 THE CLERK: Jacket. 9 THE COURT: Red jacket and hopefully 10 he can give identification marks to the sheriff 11 or something or to Carrie so she can pass on 12 who it is. 13 MR. GREEN: One juror, Carrie? 14 THE CLERK: One juror called in, but I 15 don't know if others saw or what exactly 16 happened. 17 THE COURT: She'll find out more, but 18 I'm going to have the deputy escort them now. 19 (A recess was taken from 8:27 a.m. 20 to 8:33 a.m.) 21 THE COURT: Did you talk to the 22 jurors? 23 THE CLERK: They told me there was 24 someone over by the Fourth Street -- Fourth 25 Street in the southeast corner with a long lens 8660 1 taking pictures. And one of them wasn't sure 2 if they were taking pictures of them, so she 3 drove by them and he snapped pictures as she 4 was going by. 5 THE COURT: Are you kidding? Did they 6 get a description? 7 THE CLERK: He was really far away. 8 They just saw him with a camera. 9 THE COURT: All right. Tell the 10 deputies that. 11 THE CLERK: So just in case, I'll try 12 to have a deputy ready right around 3:00, but 13 we need to leave a few minutes early because -- 14 like she said, she bolts out of the courthouse 15 to get to her kids on time. 16 MR. TULCHIN: I'm sorry, which one was 17 it? 18 THE COURT: Number 6. 19 MR. TULCHIN: [redacted]? 20 THE CLERK: Yeah, she has to pick her 21 kids up. 22 THE COURT: Is she the one who saw the 23 photographer? 24 THE CLERK: She, I -- no, it was 25 [redacted]. 8661 1 THE COURT: [redacted]? 2 THE CLERK: Is the one that drove past 3 to make sure he was snapping pictures of them, 4 but about four of them saw him taking pictures. 5 THE COURT: At break time, call a 6 deputy up here and I want to talk to him. I 7 -- I think we need to start an investigation. 8 THE CLERK: Sure. So are we ready for 9 the Jury this morning? 10 THE COURT: Are you guys ready? 11 (The following record was made in the 12 presence of the jury at 8:36 a.m.) 13 THE COURT: Everyone else may be 14 seated. 15 A few things. First, ladies and 16 gentlemen of the jury, I apologize for being 10 17 minutes late here. 18 One, there was a question about the 19 long pauses in the depo. That's part of my 20 doing. I wanted the record to come in just as 21 it is. So I apologize for that. 22 The other problem, I guess we had an 23 issue with someone taking photographs in the 24 parking lot. A deputy will escort you from now 25 on from the courthouse to your car. 8662 1 And I'm going to request that the 2 deputies do something as far as some type of 3 investigation to find out what's going on. 4 If you see something like that again, 5 please report it to Carrie and try to get a 6 description, if you can, so we can find out. 7 From now on, you'll be escorted by a 8 deputy out of the courthouse. 9 Okay. Also, the testimony of 10 Mr. Chestnut which you are hearing today, there 11 was a reference to a Plaintiffs' Exhibit 5166. 12 The exhibit is hearsay, will not be admitted 13 into evidence. You may not consider its 14 contents for the truth of what is stated in the 15 article. Portions of the article were shown to 16 you or will be shown to you to provide context 17 for Mr. Chestnut's testimony. 18 With that, you may start -- oh, we 19 need to get the lights. 20 MR. CASHMAN: Plaintiffs re-call 21 Mr. Mark Chestnut. 22 THE COURT: It's all ready to go. 23 (Whereupon, the following video was 24 played to the jury.) 25 Question: My question was focused 8663 1 only on what he was saying here, not what he 2 was not saying. And the paragraph that I read, 3 the statements that he makes there, aren't 4 those statements accurate as a matter of fact? 5 If you know. 6 Answer: I have no reason to think 7 that they're inaccurate. 8 Question: Okay. He goes on to state 9 in the next paragraph, beyond that, DR-DOS 5.0 10 leapfrogs MS-DOS 3.3 and 4.0 in some important 11 ways. 12 Do you agree or disagree with that 13 statement? 14 Answer: I disagree to the extent that 15 the problem with compatibility that I mentioned 16 before that you moved to strike basically 17 negates some of the benefit that it would have 18 otherwise offered. 19 I mean, the key feature the users 20 cared about was the ability to load DOS HI. If 21 in the process of loading it high you couldn't 22 run applications because they broke, in my mind 23 that negates it, and that certainly discounts 24 his claim that it leapfrogs the MS-DOS 25 releases. 8664 1 Question: So Ray Duncan just missed 2 the fact that there were problems with the 3 ability to load high and that that was somehow 4 a critical shortcoming of the DR-DOS product? 5 Answer: My -- I'm not basing this on 6 specific memory of what happened at the time, 7 but my interpretation based on reading this and 8 based on my recollection of what was happening 9 at the time was, we did some very rigorous 10 testing of DR-DOS 5.0. 11 We sent it out to an outside testing 12 lab. They beat the thing to death. 13 Ray was basically doing a product 14 review of the thing. I don't know that he 15 tested it with a wide suite of applications 16 with DOS loaded high. 17 You know, I have to believe -- as I 18 recall, Ray was very thorough and very 19 conscientious about what he wrote. I have to 20 believe that he was aware of that stuff he 21 would have written it. 22 The fact that he didn't write it leads 23 me to believe that he probably hadn't done 24 extensive enough testing to uncover some of the 25 incompatibilities that we found. 8665 1 Question: So the short answer to my 2 question, I think, is that he just missed this 3 problem, the ability to load high? 4 Answer: That would be my 5 interpretation. 6 Question: Okay. Now, this outside 7 testing laboratory that you just referred to, 8 that was -- the acronym I think is NSTL? 9 Answer: I don't know. 10 Question: You don't remember, okay. 11 You used the words, you know, beat the 12 thing to death. Was that your assignment to 13 NSTL was to really put it through the grinder? 14 Answer: I believe we asked the 15 outside testing lab, and I don't recall if it 16 was the company that you mentioned, it strikes 17 me that it was a different company, but we 18 asked them to thoroughly test it. 19 (Whereupon, playing of the video 20 adjourned.) 21 MR. GREEN: Your Honor, I think we're 22 done with the document. I don't know why it's 23 continued to be displayed. 24 MR. CASHMAN: Your Honor, maybe we 25 should have a sidebar. 8666 1 MR. GREEN: Well, I don't know if we 2 need a sidebar. 3 THE COURT: Is he moving on in his 4 testimony? 5 MR. CASHMAN: I think so. 6 THE COURT: Okay. Take it down there. 7 Continue. 8 (Whereupon, the following video was 9 played to the jury.) 10 Question: So the short answer to my 11 question, I think, is that you just missed this 12 problem, the ability to load it high? 13 Answer: That would be my 14 interpretation. 15 Question: Okay. Now, this outside 16 testing laboratory that you just referred to, 17 that was, the acronym I think is NSTL? 18 Answer: I don't know. 19 Question: You don't remember, okay. 20 You used the words, you know, beat the 21 thing to death. Was that your assignment to 22 NSTL, was to really put it through the grinder? 23 Answer: I believe we asked the 24 outside testing lab, and I don't recall if it 25 was the company that you mentioned, it strikes 8667 1 me that it was a different company, but we 2 asked them to thoroughly test it. 3 Question: And they found it to be 4 compatible with Windows 3.0, didn't they? 5 Answer: I believe so, yeah. 6 Question: Okay. Microsoft thereafter 7 did its own internal testing to confirm that 8 DR-DOS was somehow incompatible with Windows 9 3.0; isn't that correct? 10 Answer: I'm not sure about that. 11 Question: But if Microsoft had, in 12 fact, done its own internal testing and found 13 out that -- and by that testing come up with 14 incompatibilities with Windows 3.0, would you 15 expect that the incompatible information about 16 Windows 3.0 was communicated to your sales 17 force or the objective review that was done by 18 the outside testing lab on Windows 3.0? 19 Answer: I guess I don't understand 20 the question. Are you saying if Microsoft had 21 done testing and found results contrary to what 22 the testing lab had found, would they show 23 those results? 24 Question: Yes. 25 Answer: I would imagine so. 8668 1 Question: So you had compatibility 2 testing done by an outside lab; correct? 3 Answer: (Witness nodded head.) 4 Question: That outside lab found 5 Windows 3.0 to be compatible; correct? 6 Answer: I don't recall them making an 7 issue of it being incompatible with Windows 8 3.0. I don't specifically recall that they 9 said, hey, it really runs great with Windows 10 3.0. But I just don't recall. 11 I would have remembered if they'd 12 said, hey, it doesn't work at all with Windows 13 3.0. And I knew they didn't say that. 14 Question: And you don't recall if 15 Microsoft went on to do its own Windows 3.0 16 compatibility testing? 17 Answer: I don't. 18 Question: Let me hand you what's 19 previously been marked as Exhibit 816. This is 20 actually a series of e-mails. And please 21 familiarize yourself with it, but I first want 22 to direct you to the last page because I think 23 that's where the thread begins. 24 It's a message from -- it says 25 W-Maria, but I think that that's Marianne 8669 1 Allison's e-mail -- 2 Answer: Yes. 3 Question: -- name? 4 Answer: Yes. 5 Question: And it's to you, Brad 6 Silverberg and Russ Werner. 7 And it -- that message on October 8, 8 1990, states in full, what can we really say 9 about bona fide compatibility issues with 10 DR-DOS. I always hear vague stuff about this 11 that relates to MS products which makes us look 12 self-serving. 13 If we have a real user alert type 14 story to tell about DR-DOS compatibility 15 issues, PR should be all over it. I don't 16 think compatibility problems with a future, 17 unshipping Microsoft products is a very good 18 story. 19 Then the press could say, good, if 20 it's not shipping, you have time to fix it. 21 FUD about compatibility is our best weapon, but 22 we need real stuff. Any input? Marianne. 23 Did I read that correctly? 24 Answer: Uh-huh. 25 Question: Are you familiar with the 8670 1 term FUD? 2 Answer: Yes. 3 Question: Can you give me your 4 understanding of that term, what it means and 5 how it's used? 6 Answer: Sure. It's an industry-wide 7 term. I first became aware of it when I was at 8 HP selling computers in the early to mid-'80s. 9 It's fear, uncertainty and doubt. 10 It's the -- my understanding is it's 11 the practice of sharing information about -- 12 typically about competitors that would create 13 hesitancy in the buyer's mind before making a 14 decision. 15 Question: And are typically the 16 points that would create such hesitancy 17 concerns about compatibility? 18 Answer: In the case of this product, 19 yes, that's probably true. 20 Question: And so she is soliciting 21 from you and some others, you know, FUD points 22 to start getting out as a matter of PR; is that 23 correct? 24 Answer: She's asking are there other 25 more -- are there other, you know, examples of 8671 1 incompatibility that we can let people know 2 about. 3 Question: And you provided her with a 4 lengthy list, which if you go back to the first 5 page, the remainder of the thread is simply -- 6 and tell me if I'm incorrect, but that is your 7 response to Marianne Allison when she requested 8 FUD points, you passed along all of the 9 attached information on the next three pages; 10 correct? Next four pages. 11 Answer: It looks like my e-mail was 12 in response to Marianne's e-mail, yeah. 13 Question: She says in the last 14 paragraph, FUD about compatibility is our best 15 weapon but we need real stuff. 16 Do you agree with that statement? 17 Answer: I believe that the major 18 weakness of the DR-DOS product relative to our 19 product was compatibility. 20 Question: So you do agree with that 21 statement? 22 I didn't get a yes or no, so I just 23 wanted to clarify. 24 Answer: I don't know that I would 25 agree with the choice of words. I wouldn't 8672 1 have worded it that way if I were communicating 2 that. 3 FUD implies that there was some 4 nefarious intent that we're, you know, let's 5 spread lies about these guys. 6 I mean, FUD has a connotation of being 7 less than truthful. I never had any intent of 8 spreading information about DR-DOS that was not 9 truthful. 10 Question: Okay. If you'll go back up 11 to the first page, first paragraph. 12 This is what begins your reply to her 13 e-mail. 14 Attached is a summary of DR-DOS 5 15 compatibility issues. The compatibility 16 testing was done by an outside testing lab. I 17 have their formal write-up if you need it. The 18 Windows 3.0 compatibility testing was done 19 internally. 20 Did I read that correctly? 21 Answer: You did. 22 Question: And we have, I believe, 23 already gone over the fact that the outside 24 testing lab had confirmed that Windows 3.0 was 25 compatible with DR-DOS 5.0; correct? 8673 1 Answer: I believe that was the case. 2 I don't specifically remember. 3 I do know that they didn't come back 4 and say it was incompatible with 3.0, and 5 that's really all that I remember specifically. 6 Question: And so to your outside PR 7 person, when she's asking for compatibility 8 problems, you had in hand outside testing lab 9 results showing Windows 3.0 compatibility, and 10 yet Microsoft went on to do internal testing 11 and you passed along information about 12 incompatibilities? 13 Answer: No, no. 14 Question: Isn't that correct? 15 Answer: That's not correct. 16 I don't know specifically that they 17 tested it for Win 3.0 compatibility. I'm 18 looking at an e-mail that I wrote nine years or 19 eight years ago, and it says that the Windows 20 compatibility testing was done internally. 21 If you're asking did I specifically, 22 you know, ignore testing results by that 23 testing lab about Windows 3.0 compatibility so 24 that we could get better results out of our 25 internal group, no, that's absolutely not how I 8674 1 remember it. 2 Question: Okay. If Windows 3.0 was 3 found to be compatible by the outside testing 4 lab, you didn't pass that along to your PR 5 person, did you? 6 Answer: I don't have any memory of 7 what they tested relative to 3.0 or if they 8 tested it at all. 9 I specifically don't remember 10 willfully excluding 3.0 test results given to 11 me by the testing lab to the PR people. 12 Question: Okay. Just to make sure 13 that the statement here is accurate, the last 14 sentence of that paragraph says, the Windows 15 3.0 compatibility testing was done internally. 16 And if you go to the bottom of the 17 next page, it says, Windows 3.0 compatibility 18 issues, and then there is an entire page and a 19 little bit more about Windows 3.0 compatibility 20 problems. 21 And is that the testing and results 22 that was done internally? 23 Answer: Apparently. 24 Question: For a product like an 25 MS-DOS version, do you have an understanding of 8675 1 what the expected life cycle would be of the 2 product in terms of how long it would be out 3 there before the next version came along? 4 Answer: You know, very roughly, 12 5 months was probably the estimation at that 6 time. 7 Question: Do you have an 8 understanding that MS-DOS 3.0 was released in 9 or around August 1984? 10 Answer: Yeah. I believe 3.0 was 11 introduced when the IBM NT was introduced, 12 which is about that time period. 13 Question: And then MS-DOS 4.0, I 14 guess it was 4.01 you said, that was released 15 in November of 1988? 16 Answer: Well, understand that our 17 experience as a company in developing software 18 extended to products beyond MS-DOS. 19 Question: Oh, absolutely. I mean, 20 you have applications and others -- you had 21 Windows -- 22 Answer: Right, so the normal 23 expectation was a major time period between 24 releases -- between major releases should be 25 about 12 months. 8676 1 MS-DOS was always sort of an anomaly 2 because there was a period of time there. I 3 believe -- I want to say it was 1987 when there 4 was this big grand announcement with IBM and 5 the joint development agreement and OS/2 and 6 ya-da-ya-da. 7 Question: Is that the DOS is dead 8 announcement? 9 Answer: Basically the implied 10 understanding was that, yeah, MS-DOS was going 11 to be quickly supplanted by OS/2 and it was a 12 -- sort of a drying product. And that played 13 out otherwise and the market acceptance of OS/2 14 was not what people expected. 15 Question: And that was at the COMDEX 16 event in November of 1987 where this 17 announcement was made? 18 Answer: That sounds right. 19 Question: Okay. And Microsoft and 20 IBM, and I believe it was Bill Gates and Jim 21 Canovena? 22 Answer: Could be. 23 Question: On stage together. 24 But the perception in the industry was 25 that Microsoft and IBM had just announced that 8677 1 DOS is dead and would be supplanted by OS/2; 2 correct? 3 Answer: That is what most people 4 assumed. The question was how long would it 5 take for the version of OS/2 that was going to 6 be the killer OS to arrive and therefore 7 supplant MS-DOS. 8 Question: You said that DOS was kind 9 of an anomaly in terms of the 12-month span 10 between major versions which was typical at 11 Microsoft? 12 Answer: Well, only because IBM was 13 involved in the development -- 14 Question: Right. 15 Answer: -- and it wasn't just a 16 Microsoft product. 17 Question: So typically it was much 18 longer than 12 months between versions of 19 MS-DOS; correct? 20 Answer: Yeah. In the case 3.0 to 4.0 21 it was -- 22 Question: Four years? 23 Answer: Right. In the case of, you 24 know, 4.0 to 5.0 and 5.0 to 6.0 it was much 25 less than that. 8678 1 Question: Let me hand you what's 2 previously been marked as Exhibit 22, and this 3 is something you authored and is from November 4 3, 1989. The subject is MS-DOS upgrade 5 marketing plan; correct? 6 Answer: Correct. 7 Question: Do you recall this 8 document? 9 Answer: Yes. 10 Question: And this is addressed to -- 11 on the front page Bill Gates, who's CEO, Jon 12 Shirley, who is -- who was then the president, 13 and Steve Ballmer who basically is the number 14 two guy at Microsoft; correct? 15 Answer: Well, he was number three, I 16 guess, at one point. 17 Question: And point 2 says, establish 18 a retail presence for MS-DOS and reduce the 19 potential appeal of MS-DOS clone products in 20 the retail channel. 21 Answer: Uh-huh. 22 Question: And by that it means that 23 MS-DOS did not have any presence in the retail 24 channel at the time; correct? 25 Answer: As a shrink-wrapped product, 8679 1 no, it did not. 2 Question: And Microsoft was aware 3 that DOS clone products were trying to find 4 their way into the retail channel; correct? 5 Answer: I was aware of that, yes. 6 Question: And the product 7 specifically that you were aware of trying to 8 gain a foothold in this channel was DR-DOS; 9 correct? 10 Answer: Correct. 11 Question: And so because DR-DOS was 12 trying to move into the retail channel, 13 Microsoft decided to do what it had never done 14 previously, and that is develop an MS-DOS 15 product to go after the retail channel; 16 correct? 17 Answer: No, I would disagree very 18 strongly that statement. 19 It was certainly not because DR-DOS 20 was in that channel. DR-DOS was selling the 21 product at retail and really having no success. 22 Question: Were you worried that they 23 might begin encounters success? 24 Answer: Well, let me just finish what 25 I wanted to say in response to your first 8680 1 question, which is that it had nothing to do -- 2 our initial impetus to create a retail upgrade 3 of the product had nothing to do with DR-DOS 4 having a retail version of the product. 5 At the time that we -- that Steve 6 Ballmer really pushed for that, which is before 7 I was even on board as product manager, DR-DOS 8 hadn't even come to market. 9 Question: Okay. 10 Answer: So it was clearly not because 11 of DR-DOS that we wanted to do that. 12 Now, if you can your repeat your -- 13 Question: And if you'll turn to page 14 -- back to page 10. 15 On timing and availability, it talks 16 about some beta releases and then concludes 17 with, final release to manufacturing February 18 1, 1990. Ship date to distributors and directs 19 February 18, 1990. And did I read that 20 correctly? 21 Answer: Yes, you did, but I'm 22 surprised that I would have listed those dates 23 because the first beta release -- the date of 24 the document was November 3rd, and I know we 25 didn't have that beta release so I must have 8681 1 not captured it accurately. 2 Question: It says the first beta 3 release, October 6, 1989. 4 Answer: Yeah. It didn't happen. 5 Question: There was no beta release? 6 So that's just -- 7 Answer: Not that I can remember. 8 Question: So that's just inaccurate? 9 Answer: I must have just -- yeah. 10 Question: Okay. Is it inaccurate 11 that the plan was to have the final release in 12 manufacturing on February 1, 1990? 13 Answer: Well, I don't doubt that that 14 was the plan at one point in time, but I 15 suspect -- and I'm only basing this on my 16 interpretation of this document reading it, you 17 know, nine years after the fact. 18 Question: Right. 19 Answer: This document is dated 20 November 3rd. It shows a schedule where the 21 first beta release occurred a month prior to 22 that, and I know it didn't happen. 23 So I don't know if I screwed up and 24 put a earlier version of the schedule that was 25 clearly outdated by the time this document, you 8682 1 know, was published. I don't know if I screwed 2 up or what. 3 Question: So actually, then, all 4 these dates actually might be adjusted later so 5 that the beta releases would have been later 6 and thereby the release to manufacturing would 7 have been later. 8 Answer: Well, software schedules are 9 always somewhat of a moving target until the 10 product gets a little more firm up. But I 11 believe that in this particular case all I'm 12 saying is I think I screwed up and put an 13 obsolete schedule in this document. 14 Question: Was this product in any way 15 firmed up at this time, based on your review of 16 this marketing plan? 17 Answer: The 4.1 product that IBM was 18 developing was -- I mean, there was a 19 specification and, you know, I believe that 20 they, you know, had working code. I don't 21 believe it was ready for a beta release or 22 something like that. 23 Question: So there was not even -- 24 there was not a 4.1 beta out, to your 25 knowledge, at this time? 8683 1 Answer: Oh, there certainly wasn't, 2 no. 3 Question: Was there ever? 4 Answer: No. It was shortly after 5 this that we made the decision, I believe, to 6 bring development in-house and focus on a DOS 5 7 release. 8 Question: To get back to where we 9 were, as of November 1989, Microsoft's internal 10 plan, which is reflected in this document that 11 you wrote, was to have a final release to 12 manufacturing in February 1990 of a upgrade 13 product for 4.1; correct? 14 Answer: As reflected in this 15 document, yeah. 16 Question: And if Microsoft was going 17 to be releasing a 4.1 upgrade product in 18 February of 1990, what is your understanding of 19 the likelihood of releasing a 5.0 product also 20 in 1990? 21 Answer: As I said, I didn't have any 22 expectation that we would have a 5.0 product 23 shipping in '90 after shipping a 4.1 product in 24 '90, at that point. 25 Question: If you'll go to page 2 of 8684 1 the document, there's a little chart that shows 2 percent and total units of the DOS installed 3 base. 4 Answer: Uh-huh. 5 Question: And, you know, my simple 6 addition of this indicates that the DOS 3.X 7 versions in total added up to 90 percent of the 8 installed base and at this point DOS 4.0X had 9 only achieved 1 percent of the installed base; 10 is that correct? 11 Answer: Yeah. It's correct as far as 12 your interpretation of the data. 13 Question: Okay. Am I missing 14 something? 15 Answer: Well, the thing that's a bit 16 misleading is that MS-DOS 4.0 didn't start 17 shipping from OEMs to end users until about 18 January of '89. 19 Question: Okay. 20 Answer: And OEMs reported royalties a 21 quarter in arrears, so there was not a lot of 22 numbers yet from royalty reports on DOS 4.0 23 shipments to customers. 24 Question: There had been enough time, 25 though, to get feedback that MS-DOS 4.01 was a 8685 1 buggy product; correct? 2 Answer: There were reports of 3 incompatibilities, as we mentioned before, in 4 the Norton Utilities. 5 Question: But you would yourself 6 characterize the market perception was that 7 MS-DOS 4.01 was a buggy product? 8 Answer: There was a perception that 9 it was a buggy product. 10 Question: The fact that Microsoft had 11 a shipping product that had a perception that 12 it was buggy out there meant that Microsoft 13 knew it was going to have to really spend some 14 time and get out a rock solid product on the 15 next version; right? 16 Answer: True. 17 Question: As far as competition in 18 the DOS market when you were product manager of 19 MS-DOS, did you consider DRI to be your major 20 competitor worldwide? 21 Answer: Yes. 22 Question: Yeah, while you were 23 product manager, and specifically let's just 24 limit it to your perception at the beginning of 25 1990. 8686 1 Answer: The other competitors that I 2 was aware of at that time, there was a company 3 called Data Light that had a product called ROM 4 DOS. There was a company out of the UK called 5 DIP. 6 Question: Would you agree that MS-DOS 7 had a monopoly as far as sales to OEMs? 8 Answer: We certainly had a 9 significant market share. I'm not -- 10 Question: Did you have a greater than 11 90 percent market share? 12 Answer: I believe so. 13 Question: Okay. When did you first 14 become aware of DR-DOS 5.0? 15 Answer: About the time it was 16 released. 17 Question: Let me hand you an exhibit 18 that is marked Exhibit 25. 19 And just to note for the record, I 20 think that this got also marked as Exhibit 821, 21 different Bates numbers, but I believe that 22 they're substantially identical, apart from 23 Bates numbering. 24 And this is a document that you wrote 25 in May -- on May 2, 1990, and the subject is 8687 1 DR-DOS 5.0 competitive analysis; correct? 2 Answer: Correct. 3 Question: And do you recall this 4 document? 5 Answer: I do. 6 Question: Turning to the first page 7 of text, begins with marketing overview. 8 It states, DRI announced the next 9 version of DR-DOS version 5.0 on 4/26 in the UK 10 for mid-June 1990 delivery to OEMs. 11 And is that an accurate statement of 12 what DRI had, in fact, announced on April 26? 13 Answer: I believe so. 14 Question: And then you make the 15 comment, this is a very significant release. 16 And that was your perception of what 17 you had heard about DR-DOS version 5.0; 18 correct? 19 Answer: That was my perception based 20 on what I knew at that time, yeah. 21 Question: You go on to say, it 22 addresses many of the compatibility problems 23 that plagued earlier DR-DOS releases while also 24 introducing several important new features. 25 How did you know that version 5.0 8688 1 addressed those compatibility problems? Was it 2 just based on what was said at the 3 announcement? 4 Answer: Well, at this point, 5 everything I knew about DR-DOS 5 came from what 6 DRI was saying publicly about the product. 7 I didn't have access to the product 8 and I was taking basically what they were -- 9 and I think I qualified that at some point in 10 this document basically saying, you know, if 11 what they're saying is true. 12 But my analysis of the features of the 13 product and the compatibility issue was based 14 on what DRI themselves were saying publicly, 15 which we hadn't yet gotten through to test the 16 product, et cetera. 17 Question: The last sentence of that 18 paragraph says that, they -- by that I think 19 you're referring to DR -- are telling OEMs that 20 Microsoft has no ongoing commitment to MS-DOS 21 and are hoping to get some quick OEM design 22 wins before MS-DOS 5.0 becomes generally 23 available. 24 That's your perception at the time of 25 what DRI was saying? 8689 1 Answer: Uh-huh. 2 Question: If DRI was telling people 3 that Microsoft had no ongoing commitment to 4 MS-DOS, do you agree or disagree with that 5 statement? 6 Answer: I strongly disagree. My 7 point was they were spreading misinformation 8 about our commitment to MS-DOS. In fact, we 9 were increasing staff for MS-DOS. 10 Question: But at least as far as 11 through 1988 and 1989, following the November 12 1987 COMDEX event, Microsoft and IBM had 13 announced that DOS is dead and things were 14 going to be moving to OS/2; correct? 15 Answer: I don't believe it was ever 16 announced that DOS was dead. It may have been 17 interpreted that way by people, but there was 18 no official announcement, DOS is hereby dead. 19 Question: But you described that DRI 20 was out there spreading misinformation, and I 21 just wanted to correct or clarify that I 22 believe that I had your understanding that the 23 general perception was that Microsoft was 24 moving to the development of OS/2 and wanted 25 that to be the next operating system. 8690 1 Are you going back on the testimony 2 from earlier? 3 Answer: No, I'm not. 4 There was a point in time where a lot 5 of people assumed, including many of us at 6 Microsoft, that DOS was basically going to be 7 quickly supplanted by OS/2. 8 It became clear, the initial releases 9 of OS/2, which I believe occurred in the '88 10 and '89 time frame, were not exactly stellar. 11 I think that certainly the Microsoft perception 12 changed, and you can even read some of the 13 articles that I've seen in some of these 14 exhibits, editorials -- you know, editorial 15 observers were noting that, hey, DOS isn't 16 really dead after all, that sort of thing. 17 But my point was in this time frame, 18 MS-DOS was something that we were investing in. 19 There was a period of time where earlier, prior 20 to that, that it was sort of dead. 21 But at this point in time we were 22 investing in it, we had a major new release 23 under development, and DRI was continuing to 24 tell people, oh, hey, these guys aren't doing 25 anything in terms of DOS or not investing their 8691 1 -- they have nobody working on it, and it 2 wasn't true. 3 Question: Well, the first paragraph 4 of this comparison section says, assuming that 5 all of DRI's claims about DR-DOS 5.0 are true, 6 it appears that the two release are fairly 7 comparable, but, on balance, MS-DOS 5.0 is a 8 little stronger. 9 There's a footnote to this statement 10 and it says down at the bottom, this was the 11 opinion of two U.S. OEMs who had been briefed 12 both by Microsoft and DRI, AST and Tandon. 13 Did you do those briefings? 14 Answer: I was certainly -- yeah, I 15 was certainly present at both meetings. I 16 don't -- there may have been other people 17 involved. I'm not sure. 18 Question: Do you recall -- so this 19 was a briefing about MS-DOS 5.0? 20 Answer: Yes. 21 Question: Do you recall what you told 22 them? 23 Answer: I described the basic feature 24 set that we had outlined in the specification 25 and asked for their reaction and feedback. 8692 1 Question: Did you tell them when it 2 would be available for shipment? 3 Answer: Our plan at that point in 4 time was to have it shipping in I believe it 5 was September time frame. 6 Question: September 1990? 7 Answer: Yes. 8 Question: And this is May 1990? 9 Answer: Yes. 10 Question: And you haven't even 11 released your first beta; is that correct? 12 Answer: We were planning to release 13 beta in June, but, yes, you're right, we hadn't 14 released beta yet. 15 Question: Is it your opinion that a 16 rock solid MS-DOS 5.0 product could be 17 developed from June 1990 when the first beta 18 went out to September 1990 when you were 19 promising that it would be shipping to OEMs? 20 Answer: Answering the question now 21 based on what I know now, I don't think that 22 it's realistic that we could have done that. 23 At the time we believed that because 24 we had developed the code. It wasn't the stuff 25 that IBM had developed that it was -- we were 8693 1 starting with good code. We could get away 2 with a short beta period and have a good 3 product. That was our belief at the time. 4 Question: So you acknowledged that 5 you were anticipating a short beta period to 6 come out with the MS-DOS 5.0 product? 7 Answer: We were planning a relatively 8 short beta period. 9 Question: And even though you knew 10 you were having to overcome the buggy 11 perception of MS-DOS 4.01, that's your 12 testimony? 13 Answer: It is. We thought we had the 14 capability to do that. 15 Question: And you do acknowledge that 16 you told -- do you recall when your briefings 17 were at AST and Tandon? 18 Answer: I don't. 19 Question: You do acknowledge that you 20 told both of them there would be a shipping 21 product by September of 1990? 22 Answer: I don't specifically recall 23 what I told them as far as schedules, but in 24 general I believe we were telling people in 25 that approximate time frame that we expected 8694 1 the product to be available in September of 2 1990. 3 Question: When you met with AST and 4 Tandon, did you press them for details about 5 DR-DOS 5.0? 6 Answer: I recall -- I don't recall 7 discussing it with AST. I do recall discussing 8 in general terms with some of the Tandon 9 people, you know, what their opinion was of 10 what we were -- you know, the MS-DOS 5.0 11 product relative to the DR-DOS product. 12 Question: You met with Tandon the day 13 after DRI announced DR-DOS on April 26th; 14 correct? 15 Answer: Could be. I don't recall 16 specifically. 17 Question: Well, let's make sure. 18 I'll hand you what's marked as Exhibit 19 261. And it says this is a Tandon meeting 20 report from April 30, 1990. It's sent to you 21 and Jeff Lum, Richard Fade and Tom Lennon 22 prepared by Karen Hurlbut. 23 Summary section at the beginning says, 24 Mark Chestnut and I visited Tandon headquarters 25 in Moonpark, California on April 27, 1990. 8695 1 That is the day after the UK 2 announcement of DR-DOS; correct? 3 Answer: I believe so, yeah. 4 Question: And it says at the 5 beginning of the next paragraph, Mark Chestnut 6 gave a complete DOS 5.0 presentation including 7 ROM DOS plans. 8 That's an accurate statement; correct? 9 Answer: I believe so. 10 Question: What does a complete DR-DOS 11 5.0 presentation include? What does it mean? 12 Answer: I don't know what Karen 13 thought it included. It did not include a 14 demonstration of the product. I'm sure I had 15 some PowerPoints and talked about the features 16 of the product and -- 17 Question: So you put up transparency 18 slides for them to look at? 19 Answer: I believe so, yeah. 20 Question: And you talked about 21 specific features? 22 Answer: I'm sure I did, yeah. 23 Question: Was Tandon considering DRI 24 at the time? 25 Answer: It's hard to say. In some 8696 1 cases, OEMs would bring up DRI just in the 2 course of negotiation. 3 It's like, well, gee, maybe if you 4 won't give me the royalty I want, I'll just do 5 this DR-DOS thing. 6 I mean, it was hard to discern in some 7 cases how real -- you know, how seriously they 8 were considering DR-DOS. 9 Question: You had a perception that 10 OEMs -- 11 Answer: They certainly -- 12 Question: -- at least were saying 13 that, that they were considering it. 14 Answer: Some OEMs, yeah, were -- I 15 mean, I believe they represented that they were 16 considering it or looking at it or something 17 like that. 18 Question: How about Tandon in 19 specific? Do you have a recall? 20 Answer: Yeah, I was referring to 21 Tandon actually. I'm not sure -- 22 Question: Tandon had at least said 23 that they were considering DR-DOS -- 24 Answer: Right, but I wasn't sure if 25 it was just sort of a negotiation ploy or how 8697 1 seriously they were considering it. 2 Question: And other OEMs had 3 communicated that to you, whether or not you 4 thought it was a ploy or legitimate? 5 Answer: There were other OEMs that 6 were either considerating it or were using it 7 as a bargaining chip, you know, trying to get a 8 better deal out of us for MS-DOS or something. 9 Question: Towards the end of that 10 second paragraph it says, overall, Tandon was 11 impressed with our DOS 5.0 plans and feel that 12 based upon our schedule they can deliver the 13 product in the calendar Q4, Q1 time frame. 14 And would that -- would that 15 correspond with you telling them that it would 16 be released to them in September 1990? 17 Answer: Yeah, it would seem to. 18 Question: The next paragraph goes on 19 to say, we dismissed the engineering and 20 support people and discussed DRI. 21 Do you remember why you dismissed the 22 engineering and support people? 23 Answer: I didn't dismiss them. I 24 don't know why they were dismissed. 25 Question: Do you remember who was 8698 1 left at the meeting? And it refers to Peter 2 and Eric. Do you know who they they are? 3 Answer: I remember Peter. I guess I 4 remember Eric. I'm sure they were involved. 5 They were sort of the two principal guys. 6 Question: Gotcha, okay. 7 So you stayed in with the director of 8 OEM products and the director of engineering, 9 okay. Correct? I mean, based on -- 10 Answer: Yes, I believe that's 11 correct. 12 Question: -- what it says up there? 13 And then it indicates that they were 14 hesitant to divulge any competitive information 15 about DRI; is that correct? 16 Answer: I don't recall. 17 Question: It goes on to say, but 18 after asking a few round-about questions, we 19 were able to find out that DRI has been very 20 aggressive in trying to sell Tandon DRI DOS and 21 had been there recently with a full 22 presentation and demonstration. 23 Is that correct? 24 Answer: It's correct that that's what 25 it says. 8699 1 Question: That you learned that? Do 2 you recall learning that? 3 Answer: I don't recall learning that. 4 I just don't recall. 5 Question: Do you have any reason to 6 believe that that's not so? 7 Answer: No. 8 Question: It goes on to list -- it 9 goes on to state that, Peter and Eric assured 10 us that our DOS 5.0 product was as good as 11 DRI's current version, but, according to Peter, 12 we still had some work to do in the following 13 areas in order to be competitive. And then it 14 lists a few areas; correct? 15 Answer: Uh-huh. 16 I'm sorry. Yes. 17 Question: And this is the information 18 that you're just summarizing in the one-line 19 footnote that we were looking at back on 20 Exhibit 25; correct? 21 Answer: Well, you know, my 22 interpretation of this meeting and the meeting 23 with AST is not necessarily going to match how 24 Karen would write up a meeting report as the 25 account manager. 8700 1 My take-away from those meetings was 2 that we had a product that competed very well. 3 There was a couple of nice features that DR-DOS 4 had that we should look at it. 5 Question: What features in response 6 to DR-DOS 5.0 were added after May 2, 1990? 7 Answer: In response to DR-DOS, my 8 recollection is that we added the file transfer 9 utility and the ability to load device drivers 10 in high memory. 11 Question: And even though features 12 were going to be added after May 1990 in 13 response to DR-DOS 5.0, is it still your 14 testimony that you believed Microsoft was going 15 to be able to do a short beta test and have 16 this product out by September 1990? 17 Answer: We believed that, yes. 18 Question: What was the basis of that 19 belief? 20 First of all, you say that we believed 21 that. Who believed that? 22 Answer: The product team; Tom Lennon, 23 myself, Mike Dryfoos, Russ Werner. 24 Question: What was the basis for that 25 belief? 8701 1 Answer: The basis for that belief was 2 that we had developed it ourselves. We knew it 3 was a solid code base, that there may have been 4 an arrogance factor there. We believed -- or 5 our development guys believed that they were a 6 lot better than IBM's development team. We 7 believed that most of the things that we were 8 introducing were not of such a magnitude of 9 rearchitecting the product that it should 10 require elaborate, extensive beta test periods. 11 We thought we could do a reasonable 12 beta cycle in a period of about three months. 13 Question: I believe that you've 14 testified that you believed a short beta test 15 cycle could be done and the product would ship 16 by September 1990; correct? 17 Answer: We believed that a 18 three-month beta cycle would be sufficient to 19 test the product and have a solid product to 20 ship in September of 1990, yes, that is 21 absolutely true. 22 Question: And as far as MS-DOS goes, 23 you certainly didn't have any knowledge or 24 basis to make an assessment of how long a beta 25 test cycle was going to be; correct? 8702 1 Answer: I personally had no 2 experience with that, that's true. 3 Question: When did MS-DOS 5.0 4 actually release to manufacturing? 5 Answer: I'm not positive, but -- 6 well, I know that it was publicly announced in 7 June of -- I think June of '91. When it 8 released to manufacturing, I'm not sure. 9 Question: So 13 months after this 10 memo was written is when MS-DOS 5.0 actually 11 hit the market; correct? 12 Answer: When it was publicly 13 announced, yeah, I believe it was released to 14 manufacturing a few weeks prior to announcement 15 because I believe we had product in the retail 16 channel when we announced. And there was a 17 period of a few weeks prior to the announced 18 date when it was released to manufacturing. So 19 it would be on the order of 12 months, I would 20 imagine. 21 Question: The beta test cycle 22 actually took -- the beta test cycle and then 23 the release to manufacturing, in fact, took 13 24 months after this memo; correct? 25 Answer: I think it was more like 12 8703 1 months but -- 2 Question: Twelve months, okay. 3 Going to the -- it's the page that 4 starts competitive response to DR-DOS 5.0. 5 We're, again, looking at Exhibit 25, Bates 6 number X 566373. 7 No, a few more pages. Yeah, that. 8 The first paragraph says, on the PR 9 side, we have begun an aggressive leak campaign 10 for MS-DOS 5.0. What is -- what do you mean by 11 an aggressive leak campaign? 12 Answer: What I meant was we weren't 13 officially announcing the product to editors, 14 but we were going to tell them about the 15 product, our plans for the product. You know, 16 give them some information about schedule and 17 what features it would include. 18 Question: And you gave them a 19 schedule? 20 Answer: I don't think we handed over 21 the schedule, but I think we talked about 22 release dates. 23 Question: And you told them -- 24 Answer: I don't remember exactly what 25 we told them. I think -- I think we told them 8704 1 by the end of 1990, but I don't specifically 2 recall. 3 Question: To use the word aggressive 4 leak, what do you mean by aggressive? You're 5 actually going out to the editors and telling 6 them this? 7 Answer: Well, as I mentioned earlier, 8 part of the terminology and tone that I use is 9 to in some sense promote myself that, look, I'm 10 doing something proactive here. Aggressive -- 11 it means that we were calling them, basically. 12 It doesn't mean that we were breathing fire on 13 them. 14 Question: No, but you were calling 15 them to tell them about Microsoft's plans for 16 version 5.0? 17 Answer: As I recall, we did a few 18 phone interviews, told them a little bit about 19 the product and consulted some of the articles 20 that you see attached here. 21 Question: And that's what you did? I 22 mean, as this states, that's what you did as a 23 competitive response to DR-DOS 5.0; correct? 24 Answer: In part. I mean, the context 25 of this document is were we getting a better 8705 1 response to DR-DOS 5.0. The reason for going 2 to the press was broader than just responding 3 to DR-DOS 5.0. 4 Question: What were the goals? 5 Answer: Well, specifically we had 6 just come off the experience of introducing 7 Windows 3.0 without saying much of anything to 8 the press prior to its public announcement. 9 And we had some feedback from the 10 press that, gee, they'd sure like to get a 11 little bit more of a heads-up on future major 12 releases of products like this. 13 And part of it was an attempt to build 14 stronger relationships with editorial contacts 15 to give them more information sooner about 16 MS-DOS 5.0. 17 Question: And you also wanted to 18 diffuse any momentum that DR-DOS was going to 19 be getting with its version 5.0; correct? 20 Answer: That was certainly part of 21 the reason for doing that. 22 Question: The second sentence says, 23 the goal is to build anticipation for MS-DOS 24 5.0, and diffuse potential excitement/momentum 25 from the DR-DOS 5.0 announcement. Correct? 8706 1 Answer: Correct. 2 Question: So calling the editors and 3 giving them information about 5.0 was done to 4 rob DR-DOS of momentum that it was going to get 5 by announcing its 5.0 product; correct? 6 Answer: And to build anticipation for 7 MS-DOS 5.0. 8 Question: Okay. Which means you 9 wanted people to wait for MS-DOS 5.0; correct? 10 Answer: Sure. 11 Question: Okay. So you give this 12 information to the editors with the expectation 13 that on the one hand it's going to diffuse 14 excitement about DR-DOS 5.0 and on the other 15 hand cause people to wait for MS-DOS 5.0? 16 Answer: To start creating awareness 17 that there is going to be an MS-DOS 5.0 and 18 that it will have these features, and yes. 19 Question: And it says, at this point, 20 we are telling the press that a major new 21 release from Microsoft is coming this year 22 which will provide significant memory relief 23 and other important features. And were you 24 involved in telling the press that directly? 25 Answer: I recall having some 8707 1 interviews with press people. I think Russ 2 actually did more of the interviews than I did. 3 Question: And there are attached 4 articles that you refer to from PC Week, 5 Computer World and InfoWorld that you believed 6 to have been written in response to the 7 aggressive leak campaign; correct? 8 Answer: Correct. 9 Question: It then says, the last 10 paragraph, in addition to all of the above, we 11 have for the past several weeks been 12 implementing a competitive response plan, which 13 was put into effect when we first learned of 14 DRI's plans for this new release. 15 The purpose of the plan was to get the 16 MS-DOS 5.0 message out quickly to OEMs 17 worldwide, and to resellers in the U.S., is 18 that a correct statement of fact, what was in 19 fact occurring since the DRI announcement? 20 Answer: I believe so. 21 Question: And you were responsible 22 personally for a lot of the communication of 23 the messages to OEMs? 24 Answer: Yes, that's true. 25 Question: For instance, one of them 8708 1 was Tandon and we've already seen that; 2 correct? 3 Answer: Correct. 4 Question: That trip report, on the 5 next page there's a feature comparison. At the 6 bottom it says OEM availability. Late August 7 1990? For MS-DOS 5.0. 8 Answer: Right. 9 Question: Is that what you were 10 communicating to OEMs, when it was going to be 11 available? 12 Answer: I don't know if I 13 communicated that to OEMs specifically. I 14 don't know if I was promising a late August '90 15 date. I don't recall. 16 Question: Would you have -- I mean, 17 perhaps that's September 1990? 18 Answer: I recall telling people 19 September 1990. I don't recall telling OEMs 20 August 1990. 21 Question: On the next page it says 22 DR-DOS competitive response plan, and that's 23 what was -- what you referred to a couple of 24 pages ago. 25 I just want to go through a couple of 8709 1 the things and make sure that this accurately 2 reflects everything that had been done or was 3 to be done. 4 And it says, in the -- under OEM for 5 the U.S., it says, direct calls to vulnerable 6 OEMs, done. That's correct, vulnerable OEMs 7 had been contacted? 8 Answer: I believe so. 9 Question: Had you contacted any of 10 them? 11 Answer: Yeah. 12 Question: Did that include AST and 13 Tandon? 14 Answer: I'm sure it did, yeah. 15 Question: Who else did it include? 16 Answer: I don't recall others 17 specifically. 18 Question: But there were others? 19 Answer: There may have been others. 20 I don't recall. 21 Question: DR-DOS backgrounder to OEM 22 sales. That has a status of May 4? 23 Answer: Uh-huh. 24 Question: What was the backgrounder 25 going to be? 8710 1 Answer: I believe it was some of this 2 information, the table of features comparison 3 and so forth. 4 Question: And was that to be -- was 5 that, in fact, given to OEM sales? 6 Answer: I believe it was, yeah. 7 Question: And was it expected that 8 that material would be used by sales directly 9 with representatives of OEMs to say, here's 10 what's coming in MS-DOS 5.0 and here's how it 11 compares to DR-DOS 5? 12 Answer: It was meant to be a sales 13 tool to be used by account managers at their 14 discretion as they saw fit. 15 Question: And then they could use it 16 that way and disclose that information; 17 correct? 18 Answer: Sure. 19 Question: Did that include shipment 20 date of September 1990? 21 Answer: I don't -- I don't know if 22 what we distributed to OEM sales included 23 September 1990. I wouldn't be surprised if it 24 did. 25 Question: It also says, DOS 5 8711 1 presentation with script to OEM sales, done. 2 Does that mean that they were given 3 PowerPoint slides and speaking points for them? 4 Answer: Yeah, I'm sure that's what it 5 meant. 6 Question: And it would be like the 7 PowerPoint slides that you're referring to when 8 you were talking about the Tandon presentation? 9 Answer: Right. 10 Question: Would have features and it 11 would also have a potential shipping date? 12 Answer: I believe so, yeah. 13 Question: Then for the Far East and 14 ICON, what does ICON stand for? 15 Answer: ICON was basically -- I think 16 it was intercontinental or something. It was 17 basically Africa, Middle East. 18 Question: It says, the first thing, 19 Markche, C-H-E. That's Mark Chestnut, correct, 20 that's you? 21 Answer: Correct. 22 Question: Mark Chestnut DOS 5 23 presentations to NEC, Toshiba, Epson, Acer, 24 done. Is that correct, you had already done 25 those? 8712 1 Answer: Apparently, yeah. 2 Question: Where are they located? 3 Are they in the U.S. or did you fly to the Far 4 East already and do these briefings? 5 Answer: I didn't travel to -- these 6 are all Japanese OEMs. 7 Question: Those are all Japanese? 8 Answer: And I didn't travel to Japan 9 in that time frame so they must have been in 10 Redmond. Those companies frequently came to 11 Redmond. 12 Question: And it says next, Mark 13 Chestnut training session for MS Taiwan OEM 14 sales force, done. Had the MS Taiwan OEM sales 15 force traveled to Redmond to get a training 16 session from you? 17 Answer: Well, I'm trying to remember 18 if that was during the period of time before we 19 had the subsidiary in Taiwan or if we were 20 covering it out of Redmond. 21 But at that point I hadn't traveled to 22 -- I went to Taiwan I think in June so it must 23 have been at Redmond, wherever it was -- 24 Question: So they were brought to 25 Redmond and were given a presentation? 8713 1 Answer: Or maybe they were there for 2 some other purpose and I had a session with 3 them while they were there or something, I 4 forget. 5 Question: It also indicates that the 6 DR-DOS backgrounder is going to go to OEM sales 7 on May 4. And then it says, DOS 5 presentation 8 with script to OEM sales, that's already done. 9 And then Ron H., that's Ron Hosogi? 10 Answer: Correct. 11 Question: Presentation at Far East 12 OEM sales meetings, that's done. What was 13 that? 14 Answer: I think I gave him a set of 15 PowerPoints and said, Ron, I don't want to make 16 the trip. Why don't you make the presentation 17 and get these guys fired up. 18 Question: And who was that to, was 19 that Microsoft salespeople? 20 Answer: Yes. 21 Question: That's not to OEMs 22 directly? 23 Answer: No. Ron was responsible for 24 Far East OEM sales organization at that time. 25 Question: And then it indicates that 8714 1 a schedule was being set for meetings with 2 Taiwan and Korean OEMs for the Computex show in 3 June? 4 Answer: Correct. 5 Question: And that's just what you 6 referred to, you traveled to do that show -- 7 Answer: That's correct. 8 Question: -- in June of 1990? 9 Answer: Yes. 10 Question: Do you recall which Taiwan 11 and Korean OEMs you met with? 12 Answer: I recall meeting with Acer, I 13 recall meeting with -- in Korea I recall 14 meeting with Goldstar, Hyundai and what was the 15 other one? 16 Question: Daewoo, Samsung? 17 Answer: Samsung. I didn't meet with 18 Trigem. I believe I met with just Samsung, 19 Daewoo, and Hyundai. In Taiwan I met I think 20 with several OEMs, but I specifically remember 21 Acer. 22 Question: And then in Europe it 23 indicates that the DR-DOS backgrounder is going 24 to go out to OEM sales and the DOS 5 25 presentation with script to OEM sales is done. 8715 1 And it indicates that you are going to be in 2 Paris on May 9 to give a presentation to MS 3 Europe OEM sales? 4 Answer: Correct. 5 Question: And were you? 6 Answer: Yes, I was. 7 Question: And you gave that 8 presentation? 9 Answer: I did. 10 Question: And then it says Mark 11 Chestnut to visit European OEMs May 7 to May 12 16; correct? 13 Answer: Correct. 14 Question: And did you visit European 15 OEMs? 16 Answer: I did. 17 Question: Do you recall which ones? 18 Answer: I visited Olivetti, Siemens, 19 I met with a company called Sion in the UK. I 20 met with a company called DIP in the UK. I met 21 with -- who were the French OEMs? Oh, gosh, 22 what was it? 23 Question: You met with some French 24 OEMs? 25 Answer: Alcatel -- Alcatel, is that 8716 1 who it was? 2 Question: What countries did you 3 visit, OEMs? 4 Answer: Germany, France, UK -- 5 Germany, France, UK, Netherlands. I met with 6 two up in the Netherlands. Italy. 7 Question: So was it like a day in 8 each country? 9 Answer: Yeah, roughly, couple days. 10 One to two days. 11 Question: Do you know how many OEMs 12 totally you visited in Europe? 13 Answer: I think it was probably in 14 the neighborhood of a dozen. 15 Question: Did you meet with Vobis? 16 Answer: I did meet with Vobis? 17 Question: Did you meet with Amstrad? 18 Answer: I did not meet with Amstrad. 19 Question: And all of these U.S., Far 20 East, ICON and European OEMs were all given a 21 presentation about DOS 5.0? 22 Answer: Yes. 23 Question: And were told that it would 24 be available in September 1990; correct? 25 Answer: I believe that's what we were 8717 1 telling them at the time, yes. 2 Question: And then down further it 3 says for PR DOS 5 RUP, that's retail upgrade 4 package or product? 5 Answer: Product. 6 Question: Retail upgrade product beta 7 release scheduled for late May. Briefing of 8 key editors, done. 9 Who were the key editors? 10 Answer: Oh, gosh. 11 Question: Is it like -- what 12 magazines, I'm talking about -- 13 Answer: PC Week, PC Magazine. 14 Question: InfoWorld? 15 Answer: InfoWorld. 16 Question: Computer World? 17 Answer: Possibly. 18 Question: Byte? 19 Answer: I don't think we talked about 20 Byte at that time. 21 Question: There may be others? 22 Answer: The main ones were PC Week, 23 PC Magazine and InfoWorld. 24 Question: And by briefing them, it 25 was to give them plans about a DOS 5 retail 8718 1 product? 2 Answer: Yes. 3 Question: Oh. And specifically to 4 tell them that there was a beta coming out in 5 late May; correct? 6 Answer: I don't recall what we were 7 saying about the beta. I'm not sure. 8 Question: And then it says, very 9 widespread distribution of beta release, being 10 implemented. Was there a widespread 11 distribution of that beta release? 12 Answer: I think what this meant was 13 that, in the beta program, that they would be 14 included, that editors would be included in the 15 broad distribution release of the beta. 16 Question: Why was -- why is -- I 17 mean, in this DR-DOS competitive response plan 18 why is it listed as one of the points that 19 there was going to be a very widespread 20 distribution of the beta release? How does 21 that respond to the DR-DOS threat? 22 Answer: Again, probably because I was 23 trying to convince people that I was doing just 24 a whole hell of a lot to, you know, increase 25 revenues for MS-DOS and I wanted to give people 8719 1 a very broad sense of all the things I was 2 doing. I don't know -- in hindsight, I don't 3 know how it specifically related to DR-DOS. I 4 think it was just trying to -- 5 Question: And at this point Microsoft 6 was trying to get the first beta out the door; 7 correct? 8 Answer: At this point being May 19 -- 9 Question: May 2, 1990. 10 Answer: Yeah, we were planning for a 11 June beta release. 12 Question: And having a product out in 13 beta gives a perception that it's a much more 14 near-term product; correct? 15 Answer: I suppose. 16 Question: And I also want to be 17 clear. 18 After the first beta went out, and 19 that was in June of 1990, it was even after 20 that first beta that the features that we 21 talked about before, the file transfer 22 utilities and stuff, those features were not 23 added until the second beta release; correct? 24 Answer: I don't specifically recall 25 when in the beta cycle they were introduced. 8720 1 Question: So you don't remember one 2 way or the other? 3 Answer: I don't. 4 Question: Let me hand you what I've 5 marked as Exhibit 901, which appears to be a 6 May 1990 monthly report that you wrote to Russ 7 Werner. 8 Do you recognize this? 9 Answer: I do. 10 Question: Turning to the first page 11 of the text, it's indicating -- it gives a 12 summary of what you've done. 13 I just want to confirm that it's 14 accurately reporting what you've done in the 15 month of -- and this would be all in May 1990; 16 correct? 17 The fourth point is, held very 18 successful DOS 5 OEM seminar in Taiwan on 6/13, 19 2 days prior to DRI's Taiwan announcement of 20 DR-DOS 5, 15 OEMs attended. 21 And is that -- that's accurate, you 22 held that seminar? 23 Answer: Yes. 24 Question: And there were 15. Was it 25 all Taiwanese OEMs? 8721 1 Answer: I believe so. 2 Question: Do you recall which OEMs it 3 might have been? 4 Answer: Gosh, I don't. 5 Question: The next was the successful 6 DOS 5 seminar in Korea held on 6/15, June 15, 7 12 OEMs attended; is that correct? 8 Answer: I believe so. 9 Question: Again, at both of these 10 seminars, you were disclosing DOS 5 features 11 and an anticipated ship date of September 1990; 12 correct? 13 Answer: Correct. 14 Question: Do you recall -- you had 15 given me some of the OEMs that you believe from 16 Korea that attended. Does this in any way 17 refresh your recollection of who might the 18 others be? 19 Answer: Well, as I recall, there was 20 a general presentation to a number of OEMs and 21 then I had individual meetings with some of the 22 larger OEMs. 23 So, for example, I don't believe that 24 like Acer attended the general briefing, but I 25 had a separate meeting with them. 8722 1 And in Korea, I don't know that 2 Samsung, for example, attended that. I think I 3 had a separate meeting with them. 4 Question: Okay. So when you had 5 given me the list before and it included like 6 Samsung and Hyundai and Goldstar -- 7 Answer: Those are individual meetings 8 that I recall. 9 Question: So these are 12 other OEMs 10 that you briefed? 11 Answer: I think that's true, but I'm 12 not positive. 13 Question: Do you recall any names? 14 Answer: I don't. 15 Question: These are the smaller OEMs, 16 I guess? 17 Answer: I think a lot of them were 18 smaller, yeah. 19 Question: Had DRI been more 20 successful in going after smaller OEMs, to your 21 knowledge? 22 Answer: They had their best success 23 with smaller OEMs in Taiwan in particular. 24 Question: What about in Korea? 25 Answer: I do recall they had some 8723 1 success with Trigem. I think Trigem licensed 2 DR-DOS, but I think that was the only one I was 3 aware of that had any success. 4 Question: The next point says DOS 5 5 schedule has now changed to 9/30, September 6 30th final release. 7 So now it -- I guess by the end of 8 May, this is dated June 22nd, the schedule that 9 you believed you were on was for a September 30 10 final release; right? 11 Answer: Right. 12 Question: Addition of significant new 13 features, task switcher, EMM386 and shell 14 enhancements, is cause of delay. 15 Is that correct, that you viewed those 16 three features as a significant -- 17 Answer: Yeah. 18 Question: On the next page it says 19 under product development, DOS 5. We are now 20 planning to include a task switcher, load high 21 capability for EMM386, and further improvements 22 to the shell. All of these will be 23 incorporated in the second beta release planned 24 for late July. 25 Does that refresh your recollection 8724 1 that when the first beta shipped, it did not 2 include the features that were being added in 3 in response to DR-DOS 5.0? 4 Answer: Yeah, it does. 5 Question: So these features weren't 6 even included until a beta scheduled for late 7 July; right? 8 Answer: Right, but specific -- 9 Question: Did it go out in late July, 10 that beta? 11 Answer: Mr. Eskridge, your previous 12 question was -- I think I may have missed some 13 words. Was it something like, were these three 14 in response to DRI; was that your question? 15 Question: It was part of my question, 16 it wasn't the question. 17 Answer: Just to address the specific 18 point, the load high capability was in response 19 to DRI. The task switcher and the others I 20 don't believe were in response to DRI or DR-DOS 21 5.0. 22 Question: Load high was? 23 Answer: Load high was. 24 Question: Do you recall when the 25 second beta actually went out? 8725 1 Answer: I don't. 2 Question: Then under product 3 marketing it says, Taiwan and Korea seminars 4 successful in gaining OEM enthusiasm for DOS 5 5 and diffusing threat for DRI's new release. 6 That was your perception of the 7 success of those seminars that we just 8 discussed; right? 9 Answer: Right. 10 Question: Why did you believe it was 11 successful to diffusing the threat for DRI's 12 new release? 13 Answer: I'm assuming, I don't 14 specifically remember it, but I'm assuming it 15 was based on the positive reception that we got 16 from customers in presenting our plans for the 17 products. 18 Question: Was part of the -- it said 19 you were successful in gaining OEM enthusiasm. 20 Was part of the enthusiasm that you were 21 gaining for the fact that it was going to be 22 shipping to them in September 1990, that that 23 was their belief? 24 Answer: I'm sure some of the 25 enthusiasm was based on the fact that it was a 8726 1 relatively near-term release. 2 Question: And the fact that it was 3 being disclosed as a relatively near-term 4 release was at least in part what made your 5 seminar successful in diffusing the threat from 6 DRI's new release; correct? 7 Answer: It would be reasonable to 8 probably assume that. 9 Question: I don't want to just assume 10 it. I mean, but do you think that -- 11 Answer: I don't know. I honestly 12 don't know. I mean, it certainly would have 13 been less well received if we had said, oh, 14 it's going to ship in 1992, are you excited or 15 what? They probably wouldn't be very excited. 16 Question: But if you had said it was 17 going to ship in June of 1991, it being June of 18 1990 when you were talking about them -- 19 Answer: At the time I had no reason 20 to state that because that wasn't the schedule. 21 Question: Well, of course, that 22 wasn't the schedule, but do you think that they 23 would have been more or less excited about the 24 product if you had been there saying that this 25 will ship to you in June 1991? 8727 1 Answer: Had I said that, I'm sure 2 they would have been less excited. 3 Question: Let me hand you what I'm 4 marking as Exhibit 902, which state that they 5 are meeting minutes from an HP/Microsoft 6 meeting on June 27. 7 I'll represent that within the 8 document it says that a demo was given on 9 Windows 3.0, and so I'm assuming that June 27 10 means June 27, 1990, assuming that you're 11 demoing Windows 3.0. But do you think that 12 might be '89 or '91? 13 Answer: I don't know. It looks like 14 it was probably 1990, but there's a couple of 15 references there that don't make sense in terms 16 of the time frame. 17 Question: So this was a meeting with 18 Hewlett Packard desktop PC personnel? 19 Answer: Yes. 20 Question: And it indicates that you 21 were in attendance along with some others from 22 Microsoft; right? 23 Answer: Yes, it does. 24 Question: It says one of the 25 objectives is to deliver the status of MS-DOS 8728 1 5.0. And on the next page my question was, it 2 says you didn't have a lot to say about DOS 5.0 3 at this point and I'm wondering why because -- 4 Answer: I'm wondering the same thing. 5 It was actually in beta at that point. So I 6 don't know if it was because they had already 7 seen it, they had already been disclosed, I had 8 nothing further to add. I'm assuming that's 9 probably the case. 10 Question: It indicates in that 11 paragraph, the one important issue that came up 12 about DOS was later at dinner. A. J. Brown 13 continually brought up DR-DOS as a possible 14 alternative for HP, for Hewlett Packard. 15 Were you at that dinner? 16 Answer: I don't -- no, I'm sure I was 17 not. 18 Question: So you don't know whether 19 or not he was interested in DR-DOS being an 20 alternative for Hewlett Packard? 21 Answer: Yeah, I don't recall ever 22 discussing with this group of people. I worked 23 a lot with Larry Inman, I knew him quite well. 24 I worked a lot with Tom Mulsolf. And other 25 than kind of the token, you know, bringing it 8729 1 up as a negotiating ploy. I don't recall that 2 group of people ever seriously considering 3 DR-DOS. 4 Question: And what does the term 5 vaporware mean? 6 Answer: Nonexistent hardware or 7 software, I guess. 8 Question: And when is that -- do you 9 have an understanding that that term has ever 10 been used about Microsoft products? 11 Answer: By Microsoft critics, sure. 12 Question: Was that charge ever 13 leveled against MS-DOS 5.0? 14 Answer: Oh, I'm sure it was. 15 Question: I mean, you know that it 16 was, don't you? 17 Answer: Well, I know that Digital 18 Research salespeople made that claim frequently 19 to customers. 20 Question: You know that PC Week wrote 21 an article stating exactly that, don't you? 22 Answer: I recall PC Week writing a 23 negative article in that time frame, yes. 24 Question: And I mean, to call 25 something vaporware is a pejorative term in the 8730 1 industry; correct? 2 Answer: Sure. 3 Question: And it means that a product 4 has been preannounced when really there was 5 absolutely no way that the product was going to 6 ship in the disclosed time frame; correct? 7 Answer: Vaporware, I mean, you'll 8 probably get different definitions. There's 9 not a -- I don't think there's good dictionary 10 definitions of the word vaporware. Vaporware 11 to me means a product that doesn't exist, 12 period. 13 All products in this industry, if you 14 look at Microsoft and other software vendors, 15 how often do they meet schedules that are 16 announced several months prior to product 17 shipments or, you know, approximate schedules 18 that are given, very rarely are they met. 19 Schedules frequently ship. 20 I don't think that Windows 98 was 21 considered vaporware in the fall of this year 22 simply because it hadn't shipped yet. It was 23 -- you know, it was a real product, people 24 could wrap their arms around it, you can get a 25 beta release. The same was true of DOS 5. It 8731 1 was not vaporware. 2 MR. CASHMAN: Your Honor, this would 3 be a good place for the morning break. 4 THE COURT: Okay. We'll take a recess 5 at this time. 6 Thanks for reminding me. And remember 7 the admonition previously given. We'll be 8 recessed for 10 minutes. 9 Leave your notebooks. 10 (A recess was taken from 9:50 a.m. 11 to 10:17 a.m.) 12 THE COURT: Everyone else may be 13 seated. Thank you for your patience. 14 Please continue. 15 MR. CASHMAN: Plaintiffs continue with 16 the testimony of Mark Chestnut. 17 THE COURT: Thank you. 18 (Whereupon, the following video was 19 played to the jury.) 20 Question: I'll give you an article 21 that's a reprint of an InfoWorld article from 22 July 2, 1990, and I've marked that as Exhibit 23 Number 903. 24 Do you recall this article? 25 Answer: Yes. 8732 1 Question: And you're quoted in it a 2 couple times; right? 3 Answer: Right. 4 Question: The headline is, DOS 5.0 5 access more memory on 286s, 386s; updated 6 MS-DOS will use extended memory. 7 The first paragraph says that, a new 8 version of DOS that accesses significantly more 9 memory is likely headed for an early release, 10 according to beta testers, but Microsoft will 11 only confirm the product will ship by the end 12 of the year. 13 When it says that Microsoft will only 14 confirm that, are you the one that gave that 15 confirmation to Stuart Johnston? 16 Answer: Probably. 17 Question: Then it goes on to have 18 several items either quoting you or attributing 19 things to you, and I just want to make sure 20 that, you know, they haven't misrepresented 21 what you told them. 22 The second paragraph says, the update, 23 called MS-DOS 5.0 will use extended on memory 24 on 286- and 386-based PCs with at least 1 25 megabyte of RAM to hold much of its operating 8733 1 system code, freeing memory for user 2 applications, according to Mark Chestnut, 3 Microsoft product manager for DOS. 4 Did you give that information to 5 Stuart Johnston? 6 Answer: Generally, yes, although his 7 technical description of it using extended 8 memory is incorrect. It was actually used the 9 high memory area. Extended memory was actually 10 something else. 11 Question: Then in the fourth 12 paragraph it says, Windows 3.0 users who run 13 DOS programs will benefit as well because the 14 memory gains are reflected in Windows DOS 15 virtual machines, VMs, Chestnut said. 16 Did you tell him that? 17 Answer: I'm pretty sure I probably 18 did, yeah. 19 Question: And then the next paragraph 20 says that you've added, DOS 5.0's smaller 21 kernel benefits even users of 8088-based PCs 22 because it will take less conventional memory. 23 Any reason to doubt that you told him 24 that? 25 Answer: No. 8734 1 Question: And it says that you 2 confirmed users' claims of improved size and 3 speed of the user shell. 4 Answer: Uh-huh. 5 Question: Do you believe that you did 6 that? 7 Answer: I believe so. 8 Question: And then it says that you 9 also told him that, support for the virtual 10 control program interface will also be included 11 in a version of the EMM386 LIM emulator program 12 to ship with DOS 5. 13 Answer: Yeah, I think I said that. 14 Question: So does that help refresh 15 that you also had confirmed the product would 16 ship by the end of the year? 17 Answer: It's very likely that I would 18 have said that, I just don't specifically 19 recall telling him that. 20 Question: Can you go back to Exhibit 21 900. It was one of the first exhibits that we 22 had looked at this morning. 23 It's the Ray Duncan article. 24 This article came out September 25, 25 1990; correct? 8735 1 Answer: Correct. 2 Question: This is the one that gives 3 a good review of DR-DOS 5.0; right? 4 Answer: Uh-huh. 5 Question: And do you have an opinion 6 as to what an article like this would do in 7 terms of credibility for DR-DOS 5.0? 8 Answer: I'm sure it would enhance it. 9 Question: Was that a concern to you 10 and Microsoft? 11 Answer: Was it a concern at the time? 12 I guess. 13 Question: Do you recall Commodore 14 being a DR-DOS user or a potential customer? 15 Answer: I do recall something about 16 Commodore looking at DR-DOS. I don't believe I 17 ever met with them. 18 Question: Do you have any recall of 19 negotiations with Commodore in the summer of 20 1990? 21 Answer: I don't. I was not involved 22 in those negotiations. 23 Question: By the time -- let me start 24 that over. 25 In June of 1990 you had been 8736 1 disclosing to OEMs, and I also believe you said 2 to some editors that MS-DOS 5.0 would be 3 shipped by September 1990? 4 Answer: Right. That was the schedule 5 at that time. 6 Question: Right. And by September 7 1990, that obviously hadn't happened and wasn't 8 really even close to happening; right? 9 Answer: As I recall, we -- in about 10 July, latter part of July 1990, shortly after 11 Brad Silverberg came on board, we decided to 12 add some features to the product, extend the 13 beta period, and at that time we were planning 14 for a COMDEX announcement, which was like late 15 November. So the schedule shifted from 16 September at that point to late November, as I 17 recall. 18 Question: So a whole new beta cycle 19 had been calendared in by, what time frame did 20 you say? 21 Answer: Well, as I recall, Silverberg 22 came on board and replaced Russ Werner in about 23 June, and I was off on a Far East trip and I 24 came back and Brad was on board. 25 And while I was gone -- because I was 8737 1 communicating from the Far East on the phone to 2 Tom Lennon, basically Brad had made the 3 decision that he wanted to extend the beta 4 period. 5 And it was also decided to add some 6 additional features that -- the one I remember 7 specifically was the task switcher, that at 8 that point we hadn't made a firm decision to 9 include it or not. 10 And they decided, primarily based on 11 Brad's input, I believe, to have the task 12 switcher as well as extend the beta cycle. 13 And that pushed out to a COMDEX -- 14 part of it too was Brad said, well, look, let's 15 just shoot for a COMDEX announcement. That's 16 the major milestone here. A September 17 announcement is not going to buy us that much 18 anyway. Why don't we have a more reasonable 19 beta period, add some features, hit COMDEX and 20 we'll be in great shape. 21 Question: So it was Brad Silverberg's 22 opinion that the three-month short cycle was 23 not a reasonable beta period? 24 Answer: That was his opinion, yeah. 25 Question: Let me hand you what I've 8738 1 just marked as Exhibit 906, and this is from 2 Carrine Greason of Weggener Edstrom, and 3 Kathryn Hinsch. Who was Carrine Greason? Did 4 she take over for Marianne Allison? 5 Answer: I believe so, yeah. 6 Question: The subject of this is what 7 to acknowledge about MS-DOS 5.0. 8 And this was sent on September 13, 9 1990, to you, Steve Ballmer, Bill Gates, Scott 10 Oki, Brad Silverberg, Russ Werner and Marty -- 11 it is Taucher or Taucher? 12 Answer: Taucher. 13 Question: Taucher. Do you recall 14 this memo? 15 Answer: Not specifically. 16 Question: The first sentence says, 17 this memo outlines our recommendations for 18 information that leaked about MS-DOS 5.0 that 19 we will acknowledge as true, prior to the 20 product announcement the information that 21 they're talking about leaking, is that a 22 reference to the press -- excuse me. 23 Is that a reference to the aggressive 24 leak campaign that we saw previously along with 25 your tour of the OEMs in June of 1990? 8739 1 Answer: I'm not sure what she means. 2 I mean, we were -- I mean, we were quoted, Russ 3 and I were quoted in the press print to that. 4 I don't know if she means confirming 5 what we've already told him, yeah, that was 6 really true. That doesn't make sense to me. 7 I'm not sure what she was referring to. 8 Question: It says under the heading 9 what we have already said or confirmed, with 10 MS-DOS 5.0, we have already acknowledged a 11 great deal more than we had with Microsoft 12 Windows. 13 Is that an accurate statement? 14 Answer: I believe so. 15 Question: So Microsoft had not 16 disclosed as much as -- is that referring to 17 Windows 3.0? 18 Answer: Yes. 19 Question: And the rollout of 20 Microsoft Windows 3.0 was a huge event by the 21 time 3.0 shipped; right? 22 Answer: Yes. 23 Question: It was, of the year, wasn't 24 it? 25 Answer: It was successful, but there 8740 1 was negative feelings in the editorial 2 community as a result of not providing them 3 advance information. 4 Question: Did Kathryn Hinsch know 5 what she was doing? 6 Answer: Kathryn at the time was also 7 a relatively junior person. Marianne Allison 8 was a much more senior person, much more 9 respected in the industry. I'm not slighting 10 Carrine at all, but at this point in time she 11 was not, you know, highly regarded. 12 Question: So you're just -- so we had 13 someone who was relatively new and the other 14 one was not very highly regarded and you're 15 just -- 16 Answer: Well, Kathryn -- 17 Question: I mean, are you trying to 18 distance yourself from what is in this memo? 19 Answer: What I'm trying to tell you 20 is that this is a memo written by someone who 21 didn't really know what they were talking about 22 making some recommendations that weren't 23 followed or taken very seriously, as I recall. 24 Question: Okay. I mean, this memo is 25 written at almost exactly the same time that 8741 1 Microsoft became aware that it was going to be 2 receiving some negative press from PC Week 3 because they were investigating an article 4 about their belief that you had preannounced 5 MS-DOS 5.0 to preempt sales for DR-DOS 5.0; 6 correct? 7 Answer: I recall the article you're 8 referring to. Whether it coincided with this 9 or not, I don't know that. 10 Question: Let me hand you what I've 11 now marked as Exhibit 907, which is the PC Week 12 article that I was just referencing. 13 And it's titled Microsoft outlines DOS 14 5.0 to ward off DR-DOS. And this was printed 15 and published on October 22, 1990; correct? 16 Answer: Correct. 17 Question: And Microsoft was aware in 18 advance of this article that it was being 19 investigated; correct? 20 Answer: I don't know that to be true, 21 no. 22 Question: Well, you, in fact, talked 23 to Paul Sherer yourself about this article 24 before it was written and published; correct? 25 Answer: I did talk to Paul. Your 8742 1 question was earlier, did we know about this 2 article when this was published. I have no 3 idea, and I assumed in your last question that 4 you meant the same thing. 5 Question: Okay. 6 Answer: I talked to Paul Sherer 7 before the article. Did I have advanced 8 warning of what exactly he was going to write? 9 No, I don't recall having any such advanced 10 warning. 11 Question: You're saying that when you 12 talked to Paul Sherer at this point in time, 13 you didn't realize that he was about to write a 14 negative article about the time frame of the 15 announcements, the preannouncements for MS-DOS 16 5.0? 17 Answer: I do not recall prior to 18 discussing with Paul Sherer what the tone or 19 content of this article was going to be. I do 20 not recall having any prior knowledge of that. 21 I may have gotten some indication 22 based on how my conversation with him went, but 23 as I recall, he was not terribly effusive about 24 what he was writing, as a lot of those editors 25 were. 8743 1 Question: The first paragraph says, 2 although the release of Microsoft Corporation's 3 new MS-DOS 5.0 operating system is months away, 4 product details are emerging in a steady 5 stream. 6 Do you disagree with the assertion 7 that product details were emerging in a steady 8 stream to put the squeeze on DRI? 9 Answer: I strongly disagree with that 10 statement. 11 Question: Even though we saw the 12 competitive response plan back in Exhibit 25 13 which talked about an aggressive leak campaign, 14 the fact that you visited Tandon the day after 15 their announcement and the fact that you 16 presented to Korean and Taiwanese OEMs two days 17 before their Far East announcement, you 18 disagree with that statement? 19 Answer: We shared information about 20 the product and the schedule that accurately 21 reflected what our internal schedule and 22 product specification were. 23 Question: My question was not whether 24 that was what your internal schedule said when 25 the ship date would be. 8744 1 The question was whether all those 2 product details emerged in a steady stream to 3 put a squeeze on DRI. 4 And my question was whether you had 5 engaged in the aggressive leak campaign and 6 visited Tandon the day after the UK 7 announcement and the Korean and Taiwanese OEMs 8 two days prior to DRI's Far East OEM 9 announcement to give all those details. 10 Answer: Let me make sure I understand 11 your question. 12 Your question is, was there an 13 aggressive leak campaign, multiple OEM visits, 14 sharing of product details for the sole purpose 15 of putting the squeeze on DRI? 16 Question: Right. 17 Answer: No, it was not the sole 18 purpose. 19 Question: Do I not remember Exhibit 20 25 right? I thought that it said all those 21 things were going to be happening under the 22 heading of DR-DOS competitive response plan? 23 Answer: As much as perhaps you and 24 DRI or whatever they are these days would like 25 to believe that all I did was live and breathe 8745 1 and think about how to kill DRI all day, that 2 wasn't true. 3 I wrote a document that specifically 4 talked about what we were doing about DRI. 5 That doesn't mean that was an entire 6 description of my job. 7 Question: Of course, I'm not saying 8 that. 9 Answer: The set of activities that 10 you are asking about, the providing information 11 in advance to the press, the meetings with the 12 OEMs and so forth were certainly in part to 13 have a competitive response to Digital 14 Research. 15 In addition, it was to create 16 awareness, build excitement, gain mindshare for 17 an upcoming release of a product that we knew 18 was significant, that we knew was going to sell 19 in high volumes of the retail channel, none of 20 which had anything to do with Digital Research. 21 Question: Well, except to the extent 22 that Digital Research was to market one year in 23 advance of MS-DOS 5.0 and you and Microsoft did 24 not want to be losing those sales to DRI; 25 correct? 8746 1 Answer: The threat with DRI was 2 always greater in terms of its potential than 3 what it actually was. 4 The fact of the matter was, their 5 product was a bomb in the retail channel. They 6 priced it way too high. They sold, you know, 7 diddly amount of copies. 8 Was I laying awake nights thinking, 9 oh, my gosh, DRI is going to own the retail 10 market? No, I wasn't. They really were having 11 really very little success at all. 12 Question: And part of the reason of 13 having product details emerge in a steady 14 stream was to ensure that they continued to 15 have as little success as possible; correct? 16 Answer: My job was to maximize sales 17 of MS-DOS. 18 Part of maximizing sales of MS-DOS is 19 educating the sales force on competitive 20 product information. Part of that included 21 information on DR-DOS. I don't know how else 22 to answer your question. 23 Question: The fourth paragraph of 24 this article says, Microsoft, in a shift in its 25 policy of not commenting on unreleased 8747 1 products, has been unusually cooperative in 2 confirming details about MS-DOS 5.0. 3 Two questions. Do you believe that 4 Microsoft was being unusually cooperative in 5 confirming details about MS-DOS 5.0? 6 Answer: In contrast with Windows 3.0 7 experience, yeah, it was quite different. 8 Question: So it is also correct that 9 that is a shift in its policies of not 10 commenting on unreleased comments? 11 Answer: I don't recall if we had an 12 official policy on not commenting on unreleased 13 products. We had so many products under 14 development all the time that I don't think 15 there was such a blanket policy. Because I 16 know there were other instances where people 17 talked about products in advance. 18 Question: Do you remember your 19 conversation with Paul Sherer when he was 20 investigating this article? 21 Answer: A little bit. 22 Question: What do you recall? 23 Answer: I recall that it was -- he 24 had a very kind of hostile tone. He was 25 digging for lots of information, asking loaded 8748 1 questions. And I was giving him very short, 2 curt answers. 3 Question: Let me hand you what I've 4 marked as Exhibit 908. 5 And the thread -- the e-mail thread 6 that begins at the bottom of the page is from 7 you back to Carrine Greason. And it's 8 responding to her message to you on the next 9 page where she says at the top of the page, 10 Mark, Paul wants to talk to you about the beta 11 program and why we are being somewhat more open 12 about MS-DOS before it ships than we have been 13 with past products. 14 Here's what I think he's doing. He's 15 trying to put together a story suggesting that 16 Microsoft chose to have this large beta program 17 and is being more open in a deliberate attempt 18 to squash DR-DOS. 19 Did I read that right? 20 Answer: Uh-huh. 21 Question: And she actually had it 22 right on the button that that's what he was 23 getting ready to do; right? 24 Answer: Yeah. It looks like that's 25 what he wrote. The very next Monday was when 8749 1 that article was published. 2 Question: Just the standpoint of -- I 3 mean, you knew that a lot of the information 4 that was out there about MS-DOS 5.0 was not a 5 leak from beta sites or anything like that, but 6 it was out there because Microsoft and you, in 7 particular, had communicated most of that 8 information; correct? 9 Answer: Yeah, I wouldn't disagree. 10 Question: Going back to your 11 response, you stated at the beginning, I'm 12 afraid that this guy is going to write that we 13 are being open about DOS 5 beta because we are 14 trying to preempt DR-DOS 5 sales. 15 And you actually were correct about 16 that, that was the tenor of the article; right? 17 Answer: That was the tenor of this 18 article. 19 Question: I tried real hard to 20 present a different point of view, but I don't 21 think he bought it. 22 Do you recall -- what point of view 23 did you try to present to him that he wasn't 24 buying? 25 Answer: Much of the same point of 8750 1 view I've been presenting today which is that, 2 look, we didn't intentionally mislead people 3 about this product. 4 We have a real product. We're letting 5 you know about it. It's not just to preempt 6 DR-DOS that we're talking about it. 7 Question: It was not just to preempt 8 DR-DOS, that was just one of the reasons why 9 you were doing it? 10 Answer: I will acknowledge that part 11 of the reason we were talking to the press and 12 OEMs and so forth was to -- as a competitive 13 response -- preemption, if you'd like, about 14 DR-DOS. It was not the only reason. 15 Question: The final sentence of your 16 response says, this was the toughest interview 17 I've done. I felt like Richard Nixon giving 18 his, I am not a crook speech. 19 Why did you have that feeling? 20 Answer: Because I felt like Paul had 21 already made up his mind that -- that I wasn't 22 going to tell him the truth. I felt like he 23 was perceiving me as Richard Nixon before I -- 24 I'd never met the guy or talked to him before 25 this conversation. 8751 1 He had a clear point of view before he 2 talked to me. And I think he had already made 3 up his mind that I was just going to tell him a 4 bunch of things that weren't true. 5 That was why -- it was in that 6 context, it wasn't -- you know, it wasn't that 7 I gave him information or was dishonest with 8 him. It was because I felt like he was 9 perceiving me that way just because he had 10 already made up his mind. 11 Question: Just for context, when 12 Richard Nixon gave his I'm not a crook speech, 13 that's prior to a lot of the investigation that 14 happened and the fact that he subsequently 15 resigned; right? Do you remember that? 16 Answer: I don't remember when he 17 specifically gave his I am not a crook speech. 18 I just remember that as sort of a phrase that 19 stuck. 20 Question: Well, because he gave that 21 speech and events -- 22 Answer: I wasn't being -- 23 Question: -- turned out to prove the 24 fact that, in fact, Richard Nixon was lying in 25 that speech and he was a crook; correct? 8752 1 Answer: I don't know. I don't 2 remember specifically the context of the I am 3 not a crook speech. 4 However, I will tell you that I was 5 not making an analogy between Richard Nixon 6 lying to people and my lying to Paul Sherer. I 7 was not lying to Paul Sherer. 8 My comment here was meant to convey 9 that he made me feel like -- he was assuming 10 that I was a Nixon, that I was lying to him, 11 when, in fact, I was not. 12 Question: I'll hand you next another 13 e-mail that you wrote. That previous e-mail 14 that we were looking at was from October 17, 15 1990, and that's regarding your call to Paul 16 Sherer. 17 Here's an e-mail that you sent on 18 October 18, 1990, the next day. I've marked it 19 as Exhibit 909. 20 If you want to take a chance to look 21 at it, I'm talking about the one that begins at 22 the bottom of the page. 23 You sent it to Kathryn Hinsch, Carrine 24 Greason, Marianne Allison, and cc'd Brad Chase 25 and Brad Silverberg. 8753 1 It begins, Paul's big unanswered 2 question was, why is DOS any different from 3 other products like Excel, et cetera. 4 Microsoft never says anything prior to 5 announce about new releases for any other 6 products. Having thought about it, this is how 7 I would answer today, and there's a list of 8 bullet points. 9 And the fourth one on the second page 10 being, if we really wanted to preempt DR-DOS 11 sales, we'd be fully divulging the features of 12 DOS 5, because they do, in fact, compare very 13 favorably to DR-DOS; i.e., we have all the 14 features that they offer plus a lot more. 15 Have I read that right? 16 Answer: Uh-huh. 17 Question: And, in fact, you were 18 fully divulging the features of DOS 5 to OEMs, 19 weren't you? 20 Answer: Yes, but that was under 21 nondisclosure. 22 Question: What does that have 23 anything to do with whether or not sales are 24 going to be preempted from DR-DOS? 25 Answer: The difference is we were not 8754 1 publicly announcing the same level of detail 2 and making that freely available for any 3 publication to publish and disseminate broadly. 4 Question: My point is, when you're 5 looking at this, it says, if we really wanted 6 to preempt DR-DOS sales, we'd be fully 7 divulging the features of DOS 5. 8 And when you went and visited all of 9 those OEMs in Korea, Taiwan, the UK, throughout 10 Europe and the U.S., you fully divulged the 11 features of DOS 5, didn't you? 12 Answer: We're comparing apples and 13 oranges and we're -- 14 Question: Did you or did you not, and 15 then I'll let you explain. Did you or did you 16 not fully divulge all the features of DOS 5 17 when you went and met with all of those OEMs in 18 late May and June of 1990? 19 Answer: With the OEMs that I met with 20 in that time frame under nondisclosure, I gave 21 fairly detailed information about the features 22 of the product. 23 Question: And the fact that you would 24 give a full picture of those features, you know 25 that that would preempt sales of DR-DOS to that 8755 1 OEM, don't you? 2 Answer: I've acknowledged that part 3 of the reason for doing that was to not lose 4 business at DRI, that is clear. 5 Question: And now you've said we're 6 comparing apples to oranges, and is that 7 because of the difference in presenting to the 8 media as opposed to presenting to OEMs? 9 Answer: The context we're talking 10 about here is, what do we say to Paul Sherer? 11 The context is how do we prevent this guy from 12 writing an article like what we wrote, how do 13 we salvage something out of this? 14 And basically I'm talking in the 15 context of what were we saying to editors at 16 that point. We weren't telling the Paul 17 Sherers of the world all of the details. 18 We did in our press tour, and I'm 19 pretty sure that was under nondisclosure, 20 provide more details, but we weren't broadly 21 going out in the press providing every bit of 22 detail that we had on the product. 23 Question: On the article, if you 24 still have it, it's Exhibit 907. 25 And that first paragraph says, 8756 1 although -- just to refresh, although the 2 release of Microsoft Corporation's new MS-DOS 3 5.0 operating system is months away, product 4 details are emerging in a steady stream. 5 Do you read that to be that details 6 are emerging in a steady stream in the media or 7 emerging in a steady stream to OEMs? 8 Answer: I'm not sure what Paul meant. 9 Question: Because it was -- 10 Answer: It's not clear, to me at 11 least. 12 Question: Would you agree that it was 13 -- it wasn't just that details were emerging in 14 a stream to OEMs, they were given a complete 15 picture of what MS-DOS 5.0 was going to be; 16 correct? 17 Answer: OEMs were given a fairly 18 complete picture, yes. 19 Question: Have you ever seen it 20 expressed in any Microsoft -- are you familiar 21 with a postmortem? 22 Answer: Sure. 23 Question: And that is simply 24 something that's written down to inform the 25 team and others what was learned during the 8757 1 writing of the code and the launch of the 2 product and it's done shortly after to, you 3 know, solidify what was learned and what to do 4 better next time? 5 Answer: Yes. 6 Question: Are you familiar with any 7 postmortem that was written in 1990 that said 8 that there was a problem in motivating the team 9 to meet fake ship dates? 10 Answer: I'm not aware of -- 11 Question: Would you have any 12 understanding of what fake ship dates are? 13 Answer: Do I understand what that 14 phrase means? Yes, I understand what that 15 phrase means. 16 Question: What does it mean? 17 Answer: Ship dates that aren't true, 18 I don't know. 19 Question: I mean, if it was -- I'm 20 just wondering, is that a Microsoft term that 21 you're familiar with? 22 Answer: First time I've heard it. 23 Question: Are aggressive ship 24 schedules promulgated at Microsoft to try to 25 keep the team focused and motivated to work 8758 1 quickly? 2 Answer: I don't know. 3 Question: Are they set by upper 4 management without really a reality check as to 5 how much time is going to be needed to actually 6 code and get a product through beta testing in 7 a stable form to ship it? 8 Answer: I can only speak from my 9 experience in the DOS group. I can't speak 10 generally. 11 Question: And what's your experience 12 in the DOS group? 13 Answer: My experience was that we 14 would, amongst us in the group, us being Tom, 15 myself, Mike Dryfoos, Russ Werner, namely, Brad 16 Silverberg would come up with some kind of a 17 schedule. 18 And it was typically then something 19 that we presented to upper management, Bill 20 Gates, Steve Ballmer, Joachim Kempin, and they 21 would have the opportunity to tell us if they 22 thought we were on drugs or whether that was 23 achievable. 24 Question: Did Bill Gates think a 25 three-month beta cycle for MS-DOS 5.0 was 8759 1 achievable? 2 Answer: I don't know what he thought 3 specifically. 4 Question: Let me hand you a copy of 5 what's been marked as Exhibit 912, and it is 6 dated January 15, 1991. 7 It is from you to Richard Fade. It 8 says it's the quarter two fiscal year '91 9 review and quarter three '91 plans for the MC 10 team. I guess that's the Mark Chestnut team. 11 So this is a report that you prepared 12 for Richard Fade shortly after taking over 13 group sales? 14 Answer: Yes. 15 Question: And I believe that you said 16 that your team was primarily domestic accounts 17 and even further, large domestic accounts? 18 Answer: Yes. 19 Question: Is that right? Okay. 20 Domestic being U.S.? 21 Answer: Yes. 22 Question: On page -- if you'll look 23 at the numbers down at the bottom of the page, 24 which are almost illegible themselves, X 25 0597516, at the top of the page it says overall 8760 1 group objectives for Q3. 2 The first goal is stated at maximize 3 MS design wins. And the first objective, DOS 5 4 per processor licenses signed for all 5 applicable OEM accounts. 6 First of all, that's -- I mean, that 7 correctly states what the objective was for 8 your entire group at this point in time; right? 9 Answer: Yes. 10 Question: And that was to get per 11 processor licenses for all of your OEM 12 accounts? 13 Answer: (Witness nods head.) 14 Question: It says all applicable OEM 15 accounts. Does that mean simply the OEMs that 16 reported to -- that your people were 17 responsible for? 18 Answer: Well, there were some OEMs 19 that didn't actually -- weren't in the business 20 of shipping PCs. We had at the time an 21 initiative to sell to printer manufacturers a 22 product called True Image, so I think the 23 reference was there were some OEMs that we sold 24 to that were not candidates to license MS-DOS. 25 Question: Basically, then, would it 8761 1 be for -- you wanted to have per processor DOS 2 5 licenses for any OEM account that was in the 3 business of manufacturing desktop PC? 4 Answer: That was in my group of 5 assigned accounts, yes. 6 Question: Right. And this is written 7 -- I think we had established before that 8 MS-DOS 5.0, the announcement was ultimately on 9 June 6, 1991; right? 10 Answer: Yes. 11 Question: And this memo being written 12 in January 15, 1991, we're talking about the 13 sales period that was the buildup to that 14 announcement; right? 15 Answer: Yeah. Here we're talking 16 about Q3 which would have been the period 17 January 1 to March 31 of '91. 18 Question: And the key result number 1 19 is, signed DOS 5.0 per processor licenses with 20 all OEMs by 3/31/91, which was going to be the 21 end of that quarter; right? 22 Answer: Right. 23 Question: So in the buildup to the 24 announcement, you wanted to have your OEMs 25 signed up for a per processor license; right? 8762 1 Answer: Right. 2 MR. CASHMAN: Your Honor, at this time 3 Plaintiffs would like to offer the exhibits 4 discussed in Mr. Chestnut's testimony. 5 May I approach? 6 THE COURT: You may. 7 MR. CASHMAN: I'm handing up to the 8 Court one copy of the exhibits and two CDs. 9 THE COURT: Thank you. 10 MR. CASHMAN: Plaintiffs move for the 11 admission of Plaintiffs' Exhibits 103, 274, 12 276, 381, 420, 427, 429, 521, 5067, 5127, 13 5131A, and 5180A. 14 THE COURT: Any objections? 15 MR. GREEN: No objection, Your Honor. 16 THE COURT: They are admitted. 17 MR. CASHMAN: Thank you, Your Honor. 18 THE COURT: Does that conclude the 19 depo? 20 MR. CASHMAN: Pardon me? 21 THE COURT: That concludes the 22 deposition? 23 MR. CASHMAN: That does conclude the 24 deposition of Mark Chestnut. 25 THE COURT: We'll take our lunch now. 8763 1 Remember the admonition previously 2 given. We'll be in recess until noon. 3 You can leave your notebooks here. 4 We'll see you back then. 5 Thank you. 6 (The following record was made out of 7 the presence of the jury.) 8 THE COURT: I handed you a note from 9 one of the jurors. We'll discuss it at noon. 10 MR. TULCHIN: Thank you, Your Honor. 11 MR. CASHMAN: Thank you, Your Honor. 12 (A recess was taken from 10:54 a.m. 13 to 12:01 p.m.) 14 MR. CASHMAN: Your Honor, in response 15 to the -- 16 THE COURT: Note? 17 MR. CASHMAN: To the note from the 18 juror, Plaintiffs have a proposed instruction 19 in response. 20 MR. GREEN: Your Honor? 21 THE COURT: Yes. 22 MR. GREEN: We don't think that 23 instruction is -- we think, as a matter of 24 fact, it's just going to confuse them more and 25 not be an accurate reflection of what the Court 8764 1 did. 2 We discussed this, but we think what 3 the Court should do is just say in response to 4 this question just read the prior instruction 5 again because this would -- this last statement 6 in particular of this proposed instruction 7 would believe that they can take it as being 8 true when, in fact, they cannot because that 9 was the ruling. 10 It was not admitted for the truth of 11 the matter asserted on the document. So we 12 think it's better just to reread your prior 13 instruction, but tell them that it's 14 specifically in answer to Juror Number 3's 15 question. 16 MR. CASHMAN: Your Honor, Plaintiffs 17 think that Microsoft's proposal is inadequate. 18 Clearly that caused the confusion as reflected 19 in this juror note. And the instruction that 20 we proposed clarifies the situation. 21 And Plaintiffs submit that if the 22 prior instruction is just read again or if 23 nothing is said, that prejudice will result due 24 to the confusion that's expressed by Juror 25 Number 3. 8765 1 MR. GREEN: Well, the instruction that 2 they gave you is just a wrong statement of the 3 law of what you said. Because you're not 4 required to believe it as being true, which 5 means they can take it as being true, which 6 specifically they cannot, because of the 7 hearsay. 8 It tells them to consider it for the 9 purpose, for the context, and the instruction's 10 import that it can consider it or not consider 11 it. 12 MR. CASHMAN: Well, Your Honor, as the 13 Court recognized from the prior arguments, the 14 exhibit was agreed between Microsoft and 15 Plaintiffs to be displayed for the very purpose 16 of context. 17 And when the Court made its ruling 18 this morning, I think the transcript will 19 reflect that the Court said that it is for 20 context and it's appropriate to display it for 21 context. 22 And so the proposed instruction that 23 the Plaintiffs have supplied this afternoon is 24 exactly consistent with the law and with what 25 the Court ruled. 8766 1 What Microsoft wants, Your Honor, is 2 -- in essence, they want to go back on their 3 agreement, in spite of Mr. Green's statement 4 this morning that they would honor it. 5 And by doing what Mr. Green requests 6 would be to -- would be contrary to his 7 representation this morning that they would 8 abide by their agreement that 5166 could be 9 displayed. 10 MR. GREEN: Your Honor, you already 11 said in your prior instruction that the 12 portions are shown to you only to provide 13 context for the understanding of Mr. Chestnut's 14 testimony. 15 I mean, you've already told them that. 16 We are not going back on the agreement as we 17 stated. This instruction is just going to be 18 misconstrued in what the Court intended in its 19 ruling. 20 THE COURT: How about adding this, 21 using the prior instruction that I gave, but 22 changing the last sentence by saying you may 23 consider the portions of the article that were 24 shown to you only to provide context. And then 25 I'm going to put the language in that was left 8767 1 out before, for understanding Mr. Chestnut's 2 testimony about certain statements made in the 3 article. 4 MR. GREEN: That's okay. 5 MR. CASHMAN: Well, Your Honor, 6 Plaintiffs submit that it should be more 7 explicit because the juror note here questions 8 whether they can disregard Chestnut's 9 testimony. 10 And I don't think that the Court's 11 proposed amendment accomplishes an answer to 12 the question posed by Juror Number 3, which is 13 why, again, we think that the instruction that 14 I've proposed this afternoon is appropriate. 15 MR. GREEN: Well, the fact that they 16 can disregard is only the general instruction. 17 So I don't think -- I think what you suggest, 18 Your Honor, is fine. 19 THE COURT: I could add Mr. Chestnut's 20 testimony should be considered by you like any 21 other witness. 22 MR. CASHMAN: And what would the 23 entire instruction read, then, under that 24 formulation? 25 THE COURT: I would just add a 8768 1 sentence to that last part. 2 MR. TULCHIN: Your Honor, that seems 3 to be fine. 4 I mean, I don't think we want to give 5 more prominence to Mr. Chestnut's testimony 6 because of this note than it would have had 7 without it. 8 THE COURT: Right. All right. So 9 it's going to -- here's my proposal. 10 You have just heard testimony by 11 Mr. Chestnut regarding an article about DR-DOS 12 that was identified as Plaintiffs' Exhibit 13 5166. This exhibit is hearsay. It will not be 14 admitted into evidence. You may consider its 15 contents for the truth of what is stated in the 16 article. You may consider the portions of the 17 article that were shown to you only to provide 18 context for understanding Mr. Chestnut's 19 testimony about certain statements made in the 20 article. 21 Mr. Chestnut's testimony should be 22 considered by you like any other witness. 23 MR. TULCHIN: Could we say may be 24 considered by you instead of should be? 25 MR. CASHMAN: No. Plaintiffs object 8769 1 to that because the instruction the way it's 2 worded right now, Your Honor, gets confused 3 between whether it's talking about Plaintiffs' 4 Exhibit 5166 or Mr. Chestnut's testimony as a 5 whole, again, will just lead to more confusion. 6 And I think any instruction that's 7 given along the lines the Court is suggesting 8 needs to reference the instruction that was 9 given this morning and specifically 5166. 10 And also, Your Honor, I think it's 11 appropriate that the instructions say -- in 12 addition to saying that 5166 is hearsay, should 13 point out that context is an appropriate 14 nonhearsay use. 15 That's what this exhibit -- what the 16 agreement was between the parties and why it 17 was displayed in the first instance. 18 MR. GREEN: Your Honor, I think it's 19 fine the way you suggested it. Otherwise, it's 20 going to get out of hand and complicated. 21 Like Mr. Tulchin says, it's going to 22 highlight his testimony as something more than 23 other witnesses. 24 MR. CASHMAN: Your Honor, if the Court 25 isn't inclined to give the instruction we just 8770 1 proposed earlier, you could say something 2 simple such as, this morning I gave you an 3 instruction about PX 5166. It was shown for 4 context purposes. 5 And then just -- the only thing you 6 need to say in addition to that is the 7 testimony of Mr. Chestnut should be considered 8 like any other witness. 9 THE COURT: Okay. 10 MR. GREEN: The fact that it's hearsay 11 is not -- it loses the whole import of what you 12 did this morning. 13 MR. CASHMAN: You made that -- you 14 just made the instruction or the point, 15 Mr. Green, that the Court already told the Jury 16 that the exhibit was hearsay this morning. So 17 that doesn't need to be repeated. 18 MR. GREEN: Well, I think it does in 19 light if there's going to be a clarification. 20 THE COURT: Well, I'm going to give a 21 clarification and I'm going to do it as I 22 stated earlier. 23 The last sentence will be consider 24 Mr. Chestnut's testimony as you would any other 25 witness. 8771 1 All right. Let's get the Jury. And 2 you want lights out? 3 MR. CASHMAN: No, because this will be 4 a reader. 5 THE COURT: Oh, it's a reader. Sorry. 6 Who's reading? 7 MR. CASHMAN: Mr. Gralewski is 8 reading. 9 MS. NELLES: Your Honor, you will be 10 explaining this process to the Jury before we 11 begin? 12 THE COURT: Yes. 13 MS. NELLES: Thank you. 14 THE COURT: Who is he playing the part 15 of? 16 MR. CASHMAN: He's playing the part of 17 Mr. Rick Apple. 18 THE COURT: Rick Apple. 19 MR. GREEN: We understand he's not 20 going to go off for a Golden Globe on this? 21 THE COURT: Maybe a golden apple. 22 MR. CASHMAN: Your Honor, what I had 23 proposed to say when we started is I was going 24 to say Plaintiffs present the testimony of Rick 25 Apple taken in the case titled Gordon versus 8772 1 Microsoft on April 5, 2004. 2 This testimony will be presented by a 3 reader because the deposition -- or the 4 testimony was not videotaped. 5 That's consistent with the practice we 6 had before relative to when we called witnesses 7 by videotape. I'm just telling the Jury it's 8 by reader. 9 MS. NELLES: It's not, Your Honor. We 10 have a very firm understanding and agreement 11 that either party -- when either party 12 introduces prior testimony, they give the name, 13 the date, and the prior proceeding, but 14 explanations as to procedure are always to be 15 done by the Court. And I would ask that we 16 continue to follow that practice. 17 THE COURT: Anything else? 18 MR. CASHMAN: Nothing further, Your 19 Honor. 20 THE COURT: Read that part up to that 21 and I'll tell Mr. Gralewski is going to do it. 22 Did I pronounce it right; Bob? 23 MR. GRALEWSKI: Yes, sir. 24 MS. NELLES: Just so the Court knows, 25 I believe it's Richard Apple, not Rick Apple. 8773 1 THE COURT: All right. 2 MS. NELLES: Not that it matters. 3 Just correct. 4 (The following record was made in the 5 presence of the jury at 12:14 p.m.) 6 THE CLERK: All rise. 7 THE COURT: Everyone else may be 8 seated. 9 Ladies and gentlemen of the jury, 10 before we have our next witness, there was a 11 question from Juror Number 3. 12 We have just heard testimony by 13 Mr. Chestnut -- this is my answer to the 14 question. 15 You have just heard testimony from 16 Mr. Chestnut regarding an article about DR-DOS 17 that was identified as Plaintiffs' Exhibit 18 5166. This exhibit is hearsay. It will not be 19 admitted into evidence. You may not consider 20 its contents for the truth of what is stated in 21 the article. 22 You may consider the portions of the 23 article that were shown to you only to provide 24 context for understanding Mr. Chestnut's 25 testimony about certain statements made in the 8774 1 article. Consider Mr. Chestnut's testimony as 2 you would any other witness. 3 Call your next witness. 4 MR. CASHMAN: Plaintiffs call and 5 present the testimony of Richard Apple, which 6 was taken in the case titled Gordon versus 7 Microsoft on April 5th, 2004. 8 THE COURT: And ladies and gentlemen 9 of the jury, this is going to be presented by 10 deposition, but it's not going to be by tape. 11 It will be by Mr. Gralewski who is with 12 Plaintiffs' attorneys. 13 He will play the part of Mr. Apple, 14 and it will be question and answer. He will be 15 reading the deposition. 16 Raise your right hand, please. 17 (Whereupon, Mr. Gralewski was sworn by 18 the Court.) 19 THE COURT: Proceed. 20 (Whereupon, the following deposition 21 was read to the jury.) 22 Question: I want to start by asking 23 you how you came about to be here today. Did 24 you receive a subpoena? 25 Answer: I did. I was subpoenaed to 8775 1 appear here today. 2 Question: Are you presently employed? 3 Answer: I am. 4 Question: And where are you employed? 5 Answer: Company's name is Sky Media. 6 Question: And what do you do at Sky 7 Media? 8 Answer: I'm the chief executive. 9 Question: And what does Sky Media do? 10 Answer: We're a mail order company. 11 We produce catalogs for hobby groups, hobby 12 enthusiasts in three different markets, 13 aviation lovers, railroad lovers, and civil war 14 lovers. 15 Question: Okay. And how many 16 employees does Sky Media have? 17 Answer: Oh, about 18 or 20. 18 Question: Where do you live? 19 Answer: I live in the western suburbs 20 of Minneapolis. 21 Question: And did you grow up in 22 Minnesota? 23 Answer: I did. 24 Question: Go to high school there? 25 Answer: Yes. 8776 1 Question: Where? 2 Answer: Hopkins. 3 Question: And did you go to college? 4 Answer: I did. 5 Question: Where did you go? 6 Answer: Pennsylvania. 7 Question: What college? 8 Answer: University of Pennsylvania. 9 Question: And when did you graduate? 10 Answer: 1983. 11 Question: What type of degree did you 12 receive? 13 Answer: I went to the business 14 school, and the degree was a bachelor of 15 science in economics. 16 Question: Was that business school, 17 was that Wharton? 18 Answer: That was the Wharton Business 19 School. 20 Question: And what did you do after 21 you graduated from the Wharton Business School? 22 Answer: Went into a career in 23 marketing, in direct marketing. 24 Question: And where was that? 25 Answer: Fingerhut Corporation. 8777 1 Question: And where was Fingerhut 2 located? 3 Answer: Minnetonka, Minnesota. 4 Question: And what did you do at 5 Fingerhut? 6 Answer: Well, I started out as an 7 entry level marketing analyst. And spent four 8 years there, ultimately becoming an assistant 9 manager or a manager of catalogs. 10 Question: And how long did you stay 11 at Fingerhut? 12 Answer: It was about four years. 13 Question: So left in? 14 Answer: 1987. 15 Question: And where did you go after 16 that? 17 Answer: I went to a company called 18 COMB, which stood for close out merchandise 19 buyers, which was another direct marketer of 20 low price liquidation goods. 21 Question: And who did you work for at 22 COMB? 23 Answer: My direct supervisor was a 24 woman named Nancy Evenson. 25 Question: And who owned COMB? 8778 1 Answer: COMB was a division of CVN 2 Companies, and the chief executive was Ted 3 Deikel, and ownership was at one time Irwin 4 Jacobs and Ted Deikel. I don't remember if the 5 company was public at that point or not. 6 Question: And so how long were you at 7 COMB? 8 Answer: About two years. Almost 9 exactly two years. 10 Question: So you left in 1989 then? 11 Answer: Late 1989. 12 Question: And why did you leave 13 there? 14 Answer: QVC, which is an East Coast 15 shopping channel, bought CVN, which was COMB's 16 owner. CVN was the shopping channel located 17 here in Minnesota. And as a result of that 18 acquisition, the COMB business was essentially 19 liquidated. 20 Question: And where did you go after 21 COMB? 22 Answer: After COMB I started about 23 six weeks later at a PC manufacturer called 24 ZEos. 25 Question: And where was ZEos located? 8779 1 Answer: We were in a suburb of 2 Minneapolis, a northern suburb, New Brighton. 3 Question: And so did you start at 4 ZEos in 1989-1990? 5 Answer: January of 1990. 6 Question: And what was your position 7 at ZEos when you started? 8 Answer: When I started I was the 9 director of marketing. 10 Question: And how long were you at 11 ZEos? 12 Answer: I was at ZEos -- there was a 13 name change along the way. It was called ZEos 14 until April of '95. And I continued active 15 employment until late in '95. 16 Question: And did your job title 17 change over that period of time? 18 Answer: Yes, from director of 19 marketing to vice president of marketing. And 20 from that to vice president of sales and 21 marketing. 22 Question: And did your 23 responsibilities change over time? 24 Answer: Yes. Ultimately, I was 25 responsible for product development, product 8780 1 pricing, promotion, sales management -- we were 2 a direct marketer, so most of our sales took 3 place over the phone. So I was responsible for 4 that group. 5 And I was also responsible for our two 6 outlet stores. We had factory outlet stores 7 here in Minnesota. 8 Question: Were those outlet stores 9 located in the Twin Cities? 10 Answer: One was in Arden Hills and 11 one was in Golden Valley. 12 Question: Now, you said there was a 13 name change to ZEos? 14 Answer: Yes. In 1995, we merged with 15 another PC manufacturer called Micron Computer. 16 And, technically, we were the acquiring 17 company, although it was really a merger of 18 equals. 19 And we changed the name -- we kept 20 neither name. We changed to the name of Micron 21 Electronics. 22 Question: And so you were with Micron 23 Electronics for how long? 24 Answer: Actively working, six months. 25 There was a period at the end where I was a 8781 1 nonactive employee for another six months. 2 Question: When? In terms of years? 3 Answer: From the merger in April of 4 '95 until about Labor Day of '95 is when I was 5 actively involved in the business. 6 Question: And why did you leave 7 Micron Electronics? 8 Answer: Because really I had actually 9 been offered a position -- a promotion. But 10 the catch with the promotion was that it was -- 11 the job was in a suburb of Boise, Idaho. 12 And growing up and loving Minnesota 13 and having family here, I didn't want to go. 14 So rather than accepting the promotion, I told 15 them I would just work with them on a gradual 16 phaseout, because the company was moving. 17 Question: Now, in your positions at 18 ZEos and later Micron, did you have any 19 responsibility for negotiating any contracts 20 for parts purchases in your computers? 21 Answer: Yes, I did. 22 Question: And can you generally 23 describe what that responsibility was, what you 24 did? 25 Answer: My responsibility was to 8782 1 determine the configurations in which our 2 computers would be offered, what parts would go 3 into them, and what the prices of the computers 4 would be. 5 Question: Now, when you -- were there 6 any sort of corporate goals at ZEos kind of in 7 terms of what you were trying to deliver for 8 consumers? 9 Answer: As the corporate mission -- I 10 remember my first week maybe even asking what's 11 our corporate mission statement? 12 And my boss who was the CEO said, our 13 mission is to sell as many computers to as many 14 people as possible. 15 Question: Now, back in 1990, do you 16 recall approximately the revenues of ZEos? 17 Answer: 1990 was a real growth year 18 for ZEos. In 1989, my recollection is the 19 company did around 11 million in sales, maybe 20 15 million in sales. In '90, my recollection 21 is we did more like 100 million in sales. 22 Question: What was the reason for 23 that difference? 24 Answer: Really came out with some 25 outstanding new products. We had good press 8783 1 coverage of those products. We had a product 2 line expansion. And new promotional 3 strategies. 4 Question: And what specifically were 5 those products? 6 Answer: Well, the first big winner 7 was in January of '90, in fact, was called the 8 ZEos 386SX, which was a computer based on an 9 Intel 386 chip that was, it was kind of new. 10 It was a low-cost version of the 386. It was a 11 little stripped down so it was less expensive 12 than a standard 386, but really a great 13 performer. And we won some editorial awards in 14 fact. 15 In those days, it was difficult for 16 consumers to know which brand of computer to 17 buy. 18 So many consumers would choose to -- 19 magazines, like PC Magazine or Computer 20 Shopper, for advice because those magazines 21 would review brand versus brand in their 22 testing labs. 23 And in January of '90, when they 24 tested computers based on this 386SX chip, they 25 chose ZEos as the number one editor's choice. 8784 1 So people looking for advice from 2 unbiased experts saw that ZEos was their 3 computer of choice. 4 Question: Now, was this 386, was this 5 what's called a desktop computer? 6 Answer: It was a desktop computer, 7 yes. 8 Question: Were there other models of 9 desktop computers that ZEos was selling back in 10 the 1990 time frame? 11 Answer: Yes. We sold the full 386, 12 and the 486, which was a step up. And I think 13 we had probably at that point just about 14 discontinued the previous generation, which was 15 a 286. 16 Question: Now did ZEos also sell 17 laptop computers? 18 Answer: We introduced a laptop, our 19 first laptop, I believe, in 1990. 20 Question: And were there similar 21 designations for the laptop, like 286, 386, so 22 forth? 23 Answer: Yeah. The first laptop was 24 actually truly a laptop. It was big enough to 25 sit on a lap. And you had to plug it in. It 8785 1 constitutes too much power to use a battery. 2 And then the subsequent generation 3 were the notebook computers as we know them 4 today. The first one of those was called the 5 ZEos 286. And the next one was the ZEos 386 6 notebook we called it. 7 (Whereupon, reading of the deposition 8 adjourned.) 9 MR. CASHMAN: Your Honor, may I 10 approach the witness? 11 THE COURT: You may. 12 (Whereupon, the following deposition 13 was resumed being read to the jury.) 14 Question: Mr. Apple, I'll hand you 15 what I think is a laptop. Can you describe for 16 the Jury what that is? 17 Answer: Yeah. This is one of those 18 ZEos notebook 386s. It was our first true 19 battery -- the 286 version and this were our 20 first true battery-operated notebook computers. 21 Question: And did ZEos provide any 22 unique features for this type of a laptop as 23 opposed to competitor's products? 24 Answer: Yeah, this was really a 25 terrific product. And one of the magazines in 8786 1 their surveys had us listed with 7 percent U.S. 2 market share in notebooks with this product. 3 It had neat stuff, like a built-in handle, 4 which to this day is hard to find. It had 5 easily rechargeable batteries. I mean, there 6 were a number of removable batteries, which was 7 unique at that time. 8 There were a number of features about 9 this product, even its -- I won't do it here, 10 but even its ability to crash onto the floor 11 and survive. It was rated very well by these 12 impartial magazines that did all this testing. 13 Question: Now, did this computer, 14 notebook computer have a modem? 15 Answer: It was an optional modem. 16 This particular unit does. And that was 17 something that a customer could choose to buy 18 or not. 19 Question: And when you say optional 20 and customer could choose to buy, so was that 21 an added feature then that cost extra? 22 Answer: Yes, that's right. 23 Question: Were there -- let me back 24 up. 25 When a customer apparently would call 8787 1 ZEos to order a computer, is that generally how 2 it happened? 3 Answer: Yes, that's right. 4 Question: What was the process in 5 ordering? In other words, were there options? 6 And how were those discussed with a customer? 7 Answer: Yeah. What we -- our, one of 8 our strategies as a company to compete with -- 9 you know, back in those days IBM and Compaq 10 were big names in the PC business. And one of 11 the benefits of our channel was that people 12 were calling the factory directly to buy their 13 computer. 14 And what we could do that these 15 bigger, more well-known companies couldn't do, 16 was build the computer exactly the way they 17 wanted it. And that was really a novel idea in 18 the early '90s. 19 So what people would do is call, and 20 they'd see the award in the magazine or they'd 21 see one of our advertisements and say I'm 22 interested in your computer. 23 Our salespeople would find out what 24 their needs were, how they were going to use 25 the computer, and then we could customize their 8788 1 configuration to best fit their needs. 2 They could get more memory, they could 3 get a bigger hard drive, they could get a 4 choice of monitors. Very much what people 5 become accustomed to in custom ordering today. 6 Question: So each of these different 7 options had different pricing components for 8 them? 9 Answer: That's right. So there would 10 be a base configuration. And every upgrade 11 that a customer chose would have a certain 12 cost, additional cost to it. 13 Question: Now, during the time period 14 that you were at ZEos, who were your -- who was 15 ZEos's major competitors? 16 Answer: There was a -- Dell computer 17 was a major competitor. In fact, at the 18 beginning I'm not sure it was even called Dell. 19 It was first called PCs Limited. I don't know 20 when the name change occurred. But it was 21 Dell, Gateway. And there was another local 22 company ironically called Northgate Computer 23 that was also probably -- probably those three 24 were our biggest competitors. 25 Question: Now, I asked you a moment 8789 1 ago about a modem on this notebook? 2 Answer: Yeah. 3 Question: What is a modem? 4 Answer: A modem is a device that 5 allows you to plug into a phone jack and 6 communicate with other computers over the 7 Internet or through other online services. 8 Question: Have you heard the term 9 SCSI? 10 Answer: SCSI, yes, I have. 11 Question: And what's that? 12 Answer: SCSI, the acronym stands for 13 small computer systems interface, I believe. 14 But, more importantly, what it was was a plug. 15 It doesn't exist in this computer. But it 16 would be a plug that looks something like this 17 on the back of the computer that would allow 18 one to connect up to I think it was eight 19 devices to that computer, eight external 20 devices, like a scanner or another hard drive 21 or a certain kind of printer. 22 Question: And was that a feature that 23 was on some of ZEos's desktop computers? 24 Answer: Yeah. One of the things that 25 ZEos tried to do to distinguish itself among 8790 1 the competitors I mentioned was to 2 differentiate our product. 3 Winning awards from magazines was 4 important, but also providing the best user 5 experience possible was important. 6 And so we wanted to not have our 7 computers work exactly the same way or have the 8 exact same features as every other computer. 9 So we designed ourselves or hired 10 companies to design for us our own internal 11 circuitry, a motherboard it's called, where the 12 Intel chip is plugged in, where the other chips 13 are plugged in. 14 And one of the features that we 15 included in our computers, I don't know if it 16 was starting in '90 or '91, but somewhere in 17 the early '90s was this SCSI feature. Which 18 people could buy a card to add to most 19 computers for about $150. But we were 20 including it right on our motherboard. 21 So that if somebody wanted SCSI, they 22 could simply plug in a chip that cost about 23 $30. 24 So it was just one of many features we 25 tried to develop to distinguish our brand from 8791 1 others. 2 Question: Now, where were your 3 customers located? 4 Answer: All over the country and some 5 even internationally. 6 Question: And what type of -- who 7 were you selling to? Was it just consumers, 8 businesses, both? 9 Answer: You know, we sold to 10 consumers all the way up to big business and 11 government. But our primary market, our 12 primary customer was consumer and small 13 business. 14 Question: During the time that you 15 were at ZEos, what was the high number of the 16 computers it sold in any one calendar year? 17 Answer: Oh, gosh, in a calendar year, 18 we probably had -- it would be somewhere 19 between 50 and 100,000 would be my estimate. 20 Question: Now, you mentioned that one 21 of your responsibilities at ZEos was to address 22 pricing. 23 Answer: Yes. 24 Question: And can you briefly tell 25 the Jury what your responsibilities were with 8792 1 regard to pricing for ZEos computers? 2 Answer: Yeah. It was a challenging 3 process because the industry was so 4 competitive. What we tried to do was figure 5 out a price at which people would buy our 6 computers in sufficient numbers, but that at 7 which we could also make some money. 8 And because of the intensely 9 competitive nature of the business, that wasn't 10 easy to do. The margins got fairly thin. 11 But what I would do is look at 12 everything that went into that computer. If 13 I'm going to sell this, what does it cost me to 14 provide it. And I knew I couldn't sell it for 15 less than that or there was no reason to be 16 there. 17 And then I would do a competitive 18 analysis saying where are my competitors. And 19 with my cost as a floor and my competition 20 being somewhere else, at what price should I 21 price my product. And that's the analysis I 22 would do. 23 Question: And how did you know what 24 your competition was doing? 25 Answer: What happened -- in January 8793 1 of '90, I didn't. One of the first things I 2 did when I joined the company was an intensive 3 competitive analysis to see where our prices 4 stood for -- compared to our competitors, for 5 comparably configured computers. 6 And I kept at that almost -- probably 7 monthly. The business was changing so fast 8 that prices would change monthly or 60 days. 9 And probably a price would last no longer than 10 90 days. So I continued to monitor the 11 competition. 12 And it didn't take very long to 13 develop a feel for what my competitors would do 14 based on how technology and technology's costs 15 were changing. 16 Question: And what did you do to keep 17 track of the costs of components to ZEos? 18 Answer: What I actually did was I 19 created a spreadsheet, and I would have a row 20 of -- for each item that went into the 21 computer. 22 One line for the hard drive, one line 23 for the memory, one line for the monitor, one 24 line for the operating system, and build up all 25 my costs, all my components, and give me a 8794 1 total cost. 2 And at the top I would plug in, you 3 know, a potential selling price. And that 4 would show me how much money I would make on 5 that computer and my margin as a percentage of 6 sales. 7 Typically, in retail businesses, if 8 you walk into a store, typically stores make 50 9 percent margins on goods. Our margins were 10 nowhere near that, but I would track that 11 percentage. 12 Question: What was that percentage? 13 Answer: Well, typical retail is about 14 50 percent. Our margins were often in the 15 teens and 20s. 16 Question: And was that a target 17 margin that you used in pricing the ZEos 18 products? 19 Answer: Well, what happened from the 20 competitive analysis -- you know, it's always 21 nice to know where your competitors are going 22 to price their products before they come out. 23 Well, the competitors don't tell us 24 that, of course. But what I could do was 25 predict what they were going to do by looking 8795 1 at my margin. 2 So, for example, if I introduced a new 3 desktop computer and priced it such that it 4 gave me a 30 percent margin, I could -- I knew 5 that that would be uncompetitive. 6 That Gateway, for example, would be 7 hundreds of dollars less than me. They would 8 not price it -- their product at a price that 9 would allow me to make 30 points. 10 So I knew if I wanted to be really 11 competitive, I needed to be at 18 or 20 points. 12 So I could predict where I would fall 13 in the marketplace compared to my competition 14 based on my margin. 15 Question: I'm a little unclear. 16 Answer: It's a little confusing. 17 Question: You said if you priced at a 18 30 percent margin, you knew Gateway would 19 undercut you. 20 Answer: Right. 21 Question: How could you know what 22 Gateway would do? 23 Answer: Well, it appeared that they 24 had a consistent business strategy. And the 25 same could be said for Dell and Northgate. 8796 1 But I could very accurately predict 2 the prices of their new computers. Because 3 most of our components were pretty well shared. 4 If I paid something for a hard drive, 5 they were buying basically the same hard drive, 6 if not exactly the same hard drive. 7 So I knew that, for example, on a 8 certain line of desktop computers, 18 percent 9 margin is what I could make, what I could set 10 my price at in order to be competitive with 11 Gateway's as yet unannounced price. But I knew 12 that would be competitive because we were 13 sharing most components. 14 Question: So when you say sharing, 15 each of your competitors were basically using 16 the same type of -- 17 Answer: We would have the same 18 suppliers. 19 Question: So if you used an Intel 20 chip, was Gateway or Dell doing similar things? 21 Answer: Exactly right. One of the 22 few exceptions. I mentioned earlier how we 23 designed our own, this one particular 24 motherboard, the internal circuit that we 25 designed ourselves was a point of 8797 1 differentiation. But there weren't very many 2 points of differentiation. 3 Question: Did you do anything to try 4 and get component hardware costs at a less 5 price? 6 Answer: Yeah. I mean, that was 7 always, it was absolutely a driving factor in 8 the business. Getting costs down was key. 9 Because it was an intensely price-competitive 10 business. 11 And even though I could predict that I 12 needed to be, for example, at an 18 percent 13 margin to be competitive, there was no 14 guarantee that I could make money as a business 15 with 18 percent margins. 16 So getting costs down was key. That 17 would allow me to be increasingly competitive 18 to get my volume up to make the business more 19 viable. 20 Question: Have you heard the acronym 21 OEM? 22 Answer: Yes, I have. 23 Question: What does that stand for? 24 Answer: Original equipment 25 manufacturer. 8798 1 Question: And was ZEos an original 2 equipment manufacturer? 3 Answer: Yes, we were. 4 Question: And would that same term 5 apply to companies like Dell, Gateway, IBM? 6 Answer: Correct, yes. 7 Question: Have you heard the term 8 cost plus? 9 Answer: Yeah. In fact, what I just 10 described to you, it's very much how I wound up 11 pricing the ZEos product, was taking our cost 12 and adding a certain percentage to it, and that 13 would really set our selling price. 14 Question: Is there sort of a 15 simplified way of describing for the Jury what 16 cost plus was? 17 Answer: Yeah. Cost plus would 18 basically be taking the cost of the computer, 19 adding the plus, certain extra margin to it, 20 and that would determine the retail price. 21 Question: And why did ZEos operate on 22 a cost-plus basis? 23 Answer: Because of the competitive 24 nature of the industry. That's -- that's -- 25 that was the way of assuring that I could, I 8799 1 could be competitive in my pricing. It was 2 that intensely competitive. 3 Question: Now, did ZEos carry a large 4 inventory of component parts? 5 Answer: Well, in fact, one of the 6 keys to the direct channel success -- when I 7 say direct channel, I mean those people like 8 Dell, Gateway and ZEos, where you could call up 9 and order a computer, one of the keys to our 10 success was just-in-time inventory delivery. 11 For example, IBM or Compaq computer 12 sold through a retail channel, they would build 13 the computer, ship it to a store. The store 14 would put it on the shelf and hopefully sell 15 it. 16 Well, the time from purchasing 17 components to actually being sold to a consumer 18 could be months in that scenario. 19 Well, in those months, because of 20 technology costs for components would have 21 fallen, so it was much better for the consumer 22 to buy a computer that had just -- where the 23 components had just been bought by the 24 manufacturer. 25 So if we sold a computer, for example, 8800 1 in April, in mid-April, and bought the Intel 2 chip in early April, our cost on that Intel 3 chip would have been better than a competitor 4 who had bought that same chip in, say, January 5 or February. 6 Question: So what was the effect of 7 that, then, for ZEos as compared to an IBM, for 8 example? 9 Answer: Well, it allowed us to sell 10 our computers at much more competitive prices. 11 Question: And by competitive, are you 12 saying lower? 13 Answer: Lower. Lower prices, thank 14 you. 15 Question: So since there was such a 16 short turnaround then with regard to the time 17 between the order placed by the customer and 18 apparently then the -- well, I should ask. 19 How fast then was a computer assembled 20 then once the order was placed? 21 Answer: A custom computer, we would 22 often start building it the same day it was 23 ordered. It would take couple hours to build. 24 We had a 24-hour testing process. So 25 completely custom-built would probably ship 8801 1 within two or three days of the customer 2 ordering it. 3 Question: Now, you mentioned in your 4 answer a few minutes ago, you know, the 5 advantages of this -- one of the advantages of 6 this short turnaround was falling prices? 7 Answer: Correct. 8 Question: Can you explain that a 9 little bit further? 10 Answer: Well, it sounds funny, but I 11 often likened computer components to fruit. 12 That if they stay on the shelf, they start to 13 get stale and rot. 14 Because technology improves so quickly 15 and so regularly, that yesterday's technology 16 is devalued because people don't want it so 17 much anymore. Because the new technology is 18 not only better, but often times cheaper to 19 produce. 20 So you didn't want the old stuff 21 around because it just lost its value on almost 22 a daily basis. 23 Question: And when you refer or use 24 the term computer technology, are you talking 25 about hardware? 8802 1 Answer: Hardware. 2 Question: Okay. So we'll talk about 3 software in a few minutes? 4 Answer: Yes. 5 Question: So, and by hardware what 6 are you referring to? 7 Answer: Everything from Intel 8 microprocessors to memory chips to hard drives, 9 those kinds of items. 10 Question: And we mentioned Intel. 11 Did ZEos use any other microprocessor or chip 12 from other suppliers? 13 Answer: Yeah, ultimately we did. In 14 1990, my recollection was that Intel was the 15 only supplier that even made those kinds of 16 chips. 17 But in the early '90s, a company 18 called Cyrex introduced a competitive 19 compatible chip that worked the same way as the 20 Intel chip, would run the same software the 21 same way, and that's why it was called 22 Intel-compatible. But they were a different 23 manufacturer with a competitive product. 24 Question: Have you heard of a chip 25 manufacturer called AMD? 8803 1 Answer: AMD was another one just like 2 Cyrex. I had discussions with AMD -- and 3 frankly, I don't recall if we sold their 4 product or not. But it would have been Intel, 5 Cyrex, AMD, same kind of thing. 6 Question: AMD, that's what, advanced 7 micro devices; is that right? 8 Answer: Correct, that's right. 9 Question: Now when you -- excuse me. 10 I think you said you did purchase some chips 11 from Cyrex? 12 Answer: Correct. 13 Question: And how, how were the -- 14 how did the Cyrex chips compare to Intel chips? 15 Answer: Cyrex's strategy to us was to 16 offer us more computing power for less money 17 compared to Intel. So by buying the lesser 18 known brand, a consumer was able to buy more 19 computing power for less money. 20 Question: And did ZEos have success 21 selling computers with the Cyrex chips? 22 Answer: We did. And we had a 23 marketing strategy for those that might be 24 concerned about buying something other than 25 Intel. We told our consumers that if they 8804 1 bought a Cyrex and ran into a compatibility 2 problem where it didn't work like it was 3 supposed to, that we would, for free, replace 4 the computer with an equivalent Intel-based 5 ZEos computer. 6 Question: Having worked in the 7 industry for some time, did you have an 8 understanding why Cyrex was pricing its chips 9 lower than Intel? 10 Answer: Well, yeah. I mean, there 11 was no question that Intel would work with -- 12 just as Intel was supposed to, because that was 13 the name brand. 14 Cyrex was the lesser known or in many 15 cases unknown brand. So attempting to break 16 into a new market, they chose price as a 17 strategy for gaining market share from Intel. 18 Question: And when you say price, are 19 you -- 20 Answer: Lower price. 21 Question: Now, you also mentioned 22 that quality of products were constantly 23 changing. 24 Does that mean they were constantly 25 improving? 8805 1 Answer: They were constantly 2 improving. In the early days, something like a 3 hard drive, people would worry about, you know, 4 is this going to keep my data or not. 5 Later on, the time -- it was called 6 MTBF, meantime between failures, meaning on 7 average these drives would last for hundreds of 8 thousands of hours of use on average. 9 I mean, it was amazingly -- amazingly 10 high quality. 11 Question: Now, I think you also 12 mentioned the term hard drive. 13 Answer: Yes. 14 Question: Can you tell the Jury what 15 a hard drive is? 16 Answer: Yeah. A hard drive is just 17 the device inside the computer that stores 18 one's software, the applications, and the data. 19 And even when the computer is turned 20 off and data is always there, because it's 21 stored on this -- it's a magnetic device called 22 a hard drive. 23 Question: And who did ZEos use for 24 its hard drive suppliers? 25 Answer: We used a few suppliers. The 8806 1 primary one was a company called Seagate. But 2 we also bought on occasion from companies, 3 Western Digital or Quantum was another one. 4 And maybe occasionally from a Mac store. But 5 Seagate was number one. 6 Question: Your number one supplier? 7 Answer: Yeah. 8 Question: And how did pricing compare 9 between Seagate, Western Digital, and Quantum? 10 Answer: I remember I used to say to 11 people, I'm glad I'm in the -- in the hard 12 drive business because it was intensely 13 competitive. 14 I mentioned we would sell between 50 15 and a hundred thousand computers in a year, 16 that's a lot of hard drives. 17 So we were a valued customer to these 18 suppliers. And there were times -- as I 19 mentioned, Seagate was the primary supplier. A 20 primary supplier would get about 90 percent of 21 our business or more. 22 But a company called Western Digital 23 would come in with new products, new technology 24 at cheaper prices, and if they got ahead of the 25 curve through innovation, if they had a better 8807 1 product, and Seagate was lagging, Western 2 Digital could earn our business. 3 And suddenly, Seagate would lose 4 almost everything and Western Digital might be 5 our suppliers for six months. 6 And then Seagate would come out with a 7 better product still and cheaper prices and 8 come in and earn the business back. 9 So it was a constant leapfrogging, 10 higher capacity, lower cost. And they would 11 make regular visits to our offices bidding on 12 our business. 13 Question: So this bidding on your 14 business between Seagate and Western Digital, 15 for example, was that beneficial to ZEos's 16 business? 17 Answer: Absolutely, we encouraged it. 18 You know, the lower we could get our costs and 19 the better technology we could offer them, the 20 better off we were. 21 Question: And was that competition, 22 for example, between Western Digital and 23 Seagate beneficial to ZEos's customers? 24 Answer: Yeah, it certainly led to 25 lower prices for our computers. And I would 8808 1 consider that beneficial to our customers. 2 Question: Now, I think you also 3 mentioned a while back there was the 286, the 4 386, 486, and these are, what, Intel chip 5 processor designations? 6 Answer: Correct. 7 Question: Mr. Apple, I think the 8 question was where were -- what happened when 9 new chip models hit the market in terms of 10 pricing for the old chips? 11 Answer: Well, the older technology 12 world drop in price. What was the greatest 13 thing now became the second greatest thing, and 14 so on down the line. 15 And the older slower technologies 16 would continue to decline in price and 17 ultimately no longer even be available at any 18 price, they would just -- Intel would stop 19 manufacturing them. 20 Question: Now, for instance, the 21 notebook computer that you have in front of you 22 I think you said was a 386? 23 Answer: This is a 386. 24 Question: Was there a later 486 25 notebook of ZEos? 8809 1 Answer: Yeah, ultimately the entire 2 product was discontinued and we discontinued 3 the manufacture of any ZEos 386 notebook 4 computers in favor of 486. 5 Question: Do you recall approximately 6 what the price of the 386 ZEos notebook was 7 when it was first released? 8 Answer: I believe the entry level 9 price was about $2,000. 10 Question: And after the 486 ZEos 11 notebook was released, where was the pricing of 12 the 386 notebook? 13 Answer: Well, ultimately this would 14 have dropped any hundreds of dollars and then 15 be discontinued. I don't recall what the final 16 price would have been. But probably around 17 1500. 18 Question: Have you heard the term 19 volume pricing? 20 Answer: Yes. 21 Question: And what does that mean? 22 Answer: Well, what it means is that 23 you buy more, your cost per unit goes down 24 because you're a larger customer. 25 Question: And did you have a volume 8810 1 pricing arrangement with any of your suppliers? 2 Answer: Yes, absolutely. 3 Question: Can you give the Jury some 4 examples? 5 Answer: Well, we can continue the 6 Intel example. When a new microprocessor came 7 up from Intel, they would ask us how many we 8 wanted to buy. And they would show us a price 9 schedule that would show the cost of that 10 microprocessor at various volume levels. 11 So if we bought 1,000 units, you know, 12 X might be the price. If we bought 5,000 13 units, it would be cheaper. If we bought 14 10,000 units, it would be cheaper still. 15 Question: With the volume pricing, 16 were you then locked in to buying whatever that 17 volume was? 18 Answer: We made the commitment to buy 19 that certain volume in order to get that 20 certain price. 21 Question: So although the higher 22 volumes might have been cheaper, did you have 23 to make a reasoned judgment as to where your 24 volume would be? 25 Answer: Yeah, absolutely. 8811 1 Question: Have you heard the term 2 minimum commitment? 3 Answer: Yes. 4 Question: And what does that mean? 5 Answer: That would be the quantities 6 that we agreed to in order to get the certain 7 price. 8 Question: Were there volume discounts 9 that you knew about, but that ZEos couldn't 10 qualify for? 11 Answer: Yes. When we would see from 12 Intel, for example, a price chart, sometimes we 13 would see a price that looked awfully 14 attractive, but the volume was just -- we knew 15 we couldn't get there. 16 And we knew also there were even 17 higher volume commitments that one could make 18 for even lower prices that Intel wouldn't even 19 show us because they felt that we would not 20 have a chance of reaching those commitments and 21 didn't want to give out its information for 22 what larger customers might be paying. 23 Question: Now, in the ZEos desktop 24 computers that were sold, were there operating 25 systems installed on the computers? 8812 1 Answer: Initially almost always. 2 Very shortly after I got there, always. 3 Question: When you say initially 4 almost always, can you explain that a little 5 bit more? 6 Answer: Yeah, in early 1990, there 7 were -- we would offer a computer without an 8 operating system installed because we had a 9 price list that included a choice of operating 10 systems. 11 We would let people choose the system, 12 their operating system, or make no choice at 13 all because they may already have an operating 14 system from an old computer or may want to use 15 a public domain operating system or something 16 else. 17 Question: What's a public domain 18 operating system? 19 Answer: Well, there are 20 user-supported operating systems that, you 21 know, in those days one could get from a 22 bulletin board, which is kind of the -- kind of 23 like the Internet, only before the Internet, 24 that people would contribute to, publicly, for 25 free, to develop that. And then in turn be 8813 1 able to use it for free. 2 Question: So in the public domain 3 operating systems, what was the cost to a 4 consumer for that operating system? 5 Answer: Cost would be zero. 6 Question: So were your computers 7 designed such that those public domain 8 operating systems could be used on them? 9 Answer: Well, our computers were 10 designed to be Intel-compatible, so that any 11 operating system designed to run on any Intel 12 microprocessor would work on our computer. 13 Question: Now, you said, I think, in 14 the early 1990s there were choices of some 15 other operating systems. 16 Can you tell us what those were? 17 Answer: There was, in January of '90 18 when I started, we were offering DOS. We were 19 offering a version of UNIX. I don't recall if 20 at that point we were offering OS/2 or not, but 21 it was there. I don't recall if we were 22 offering or not DR-DOS, but we may have been. 23 And then later there were -- we were 24 offering Novell NetWare, I remember. And later 25 there were other operating systems presented to 8814 1 us that we never adopted for other reasons. 2 But that's where we stood in 1990. 3 Question: Now, you used two terms. 4 One you said DOS, and then you said 5 DR-DOS? 6 Answer: Right. 7 Question: What's the difference? 8 Answer: First one, MS-DOS, Microsoft 9 DOS. The second one, DR-DOS, which was a 10 compatible operating system. It was called 11 DR-DOS because it was made by a company called 12 Digital Research. 13 Question: With the options of these 14 different operating systems to your customers, 15 were there different prices for those? 16 Answer: Yes. Yes. 17 Question: I think you mentioned that, 18 I'm not sure if I'll get the words correctly, 19 but I think you said in the prior answer that 20 you stopped offering some of these other 21 choices for other reasons. 22 Answer: Well, and there were some 23 choices we never introduced. There was one I 24 recall, BeOS, an operating system -- B-E-O-S, 25 comes to mind. But we stopped offering 8815 1 products like DR-DOS. If we did offer it, we 2 certainly stopped offering it. 3 Question: Why was that? 4 Answer: Because we entered into a new 5 agreement with Microsoft in 1990 that we had 6 not previously had. 7 Question: And can you describe 8 generally the nature of that agreement with 9 Microsoft? 10 Answer: Yeah. In the beginning of 11 1990, we bought Microsoft DOS on a prepackaged, 12 per-unit basis. You know, buy a piece of 13 software and pay for that piece of software. 14 We got to a point where Microsoft 15 offered us as a company a deal that basically 16 would save us money by -- by paying for DOS 17 essentially by becoming a DOS licensee. 18 Question: MS-DOS? 19 Answer: MS-DOS. 20 Question: Now, I think you said you 21 were purchasing MS-DOS on a prepackaged basis? 22 Answer: Correct. 23 Question: And when you say 24 prepackaged, is that like in a package or -- 25 Answer: Yeah. Literally, we were 8816 1 buying from an authorized distributor of 2 Microsoft product just like a consumer would 3 buy on a store shelf, is my recollection, 4 manuals and disks and everything. 5 Question: And so when you were 6 purchasing on a, you know, a prepackaged basis, 7 how did that product, then, get to your 8 customers? 9 Answer: We included it in the 10 shipping going out with our computer. 11 Question: Did ZEos preinstall the 12 operating system then? 13 Answer: You know, the switch to the 14 license agreement happened very soon after I 15 arrived at ZEos, so I don't recall for sure. 16 Question: So what was the difference, 17 then, in packaging once you went to the MS-DOS 18 licensing agreement? 19 Answer: Well, once we went to 20 licensing, basically we were paying Microsoft a 21 royalty for -- for including the product with 22 the machines. 23 And if we wanted to give out disks to 24 our customers and manuals to our customers, we 25 actually produced them ourselves. 8817 1 So the marketing cost for the physical 2 goods came to us. And at that point we 3 certainly did install the operating system on 4 the machine. And I don't recall if we were 5 required to send the disks and manuals or not, 6 but we did. 7 Question: With the -- with the prior 8 way you were selling MS-DOS, the prepackaged 9 version, there was something physical that you 10 received from your distributor, something came 11 in a box? 12 Answer: That's right. 13 Question: Now, once you did the 14 licensing agreement with Microsoft for MS-DOS, 15 what did you get from Microsoft? 16 Answer: Well, when a new version of 17 their software came out or when we first signed 18 the deal, they gave us a master disk. 19 And essentially that was the software 20 that we could then duplicate and load onto 21 customers' machines. 22 Question: So previously when you were 23 buying packaged software and if you sold 10,000 24 units, what were you receiving? 25 Answer: Well, we would buy from our 8818 1 distributor, if we sold 10,000 computers, we'd 2 buy some number of thousands of boxes of disks 3 and manuals of DOS. 4 Question: Okay. After the license 5 agreement was signed with Microsoft, what were 6 you receiving from Microsoft for the 10,000 7 operating systems then you sold to your 8 customer? 9 Answer: Well, we would receive one 10 disk in the beginning and that would be it. 11 Question: So for those 10,000 12 operating systems as an example, did -- what 13 did ZEos have to do to get the operating system 14 to its customers? 15 Answer: We, in the manufacturing 16 process, would actually plug a wire into the 17 back of the computer and download from a 18 central computer, from our central computer, 19 the software onto the customer's machine. 20 And then we would include in their 21 package disks and manuals that we had 22 manufactured under license from Microsoft. 23 Question: Have you heard of the 24 acronym COG? 25 Answer: Cost of goods. 8819 1 Question: Cost of goods. Or COGS, 2 cost of goods sold? 3 Answer: Cost of goods sold, yes. 4 Question: So with regard to those 5 10,000 units of operating system, Microsoft 6 operating system, who had the cost of goods 7 sold with regard to that? 8 Answer: Once we were -- when we were 9 licensee, we bore all the costs of goods sold. 10 Question: And in return for you 11 bearing all the costs of goods sold, what did 12 you get from Microsoft? 13 Answer: I'm not sure I understand. 14 Question: Well, you got your license? 15 Answer: We got our license. 16 Question: And did you have to pay any 17 -- pay anything for that list license? 18 Answer: Yes, we would pay them for 19 every copy -- every computer we sent out. 20 Sounds strange. 21 Whether or not it included the 22 software, we paid them for every computer we 23 shipped. 24 Question: So for each operating 25 system sent out by ZEos, each Microsoft DOS 8820 1 operating system, what did your costs include 2 for that? 3 Answer: Well, our costs were there -- 4 I hesitate to frame it for each operating 5 system sent out, because our costs weren't 6 really for each operating system. 7 We had a cost -- a certain cost if the 8 customer chose not to buy the operating system. 9 We had the royalty cost to Microsoft. 10 If the customer did choose the 11 operating system, we had the royalty and the 12 cost of the disks and manuals. 13 Question: I think before the break we 14 were talking about operating system manuals. 15 Were manuals provided to ZEos 16 customers for the MS-DOS operating system? 17 Answer: Yes. Yes, we did provide 18 them. 19 Question: And under the license 20 arrangement with Microsoft that you spoke of 21 earlier, who -- who printed off copies of those 22 manuals? 23 Answer: They would give us a master 24 on disk and then we would -- we hired the 25 printer and paid for the printing of manuals. 8821 1 Question: So with regard to the 2 MS-DOS operating system what -- what were the 3 items that ZEos paid for in getting that 4 product to consumer? 5 Answer: The royalty to Microsoft, the 6 manufacturing of the disks and manufacturing of 7 the manuals. 8 Question: Now, you mentioned, I think 9 you had your office in New Brighton, Minnesota? 10 Answer: That's right. 11 Question: Is that where the 12 manufacturing was as well? 13 Answer: Yes. We opened the new 14 facility later on, but, in 1990, everything was 15 in New Brighton. 16 Question: Where was the new 17 manufacturing facility? 18 Answer: We ultimately did some 19 manufacturing in Arden Hills, but the bulk of 20 it in Minneapolis. 21 Question: I put up there on the 22 counter a notebook that contains some exhibits, 23 and if you could turn to the tab that's labeled 24 PX 4435. 25 Answer: Okay. 8822 1 Question: Do you have that? 2 Answer: Yes. 3 Question: This is an exhibit that's 4 several pages long. Can you tell me what this 5 exhibit is? 6 Answer: This would be the agreement, 7 it looks like, prior to the license agreement, 8 where we were buying the packaged goods -- the 9 packaged MS-DOS. 10 Question: I can't remember if you 11 told us who hired you when you started at ZEos. 12 Who was that? 13 Answer: Mr. Greg Herrick. 14 Question: And over the course of your 15 employment, did you become familiar with his 16 signature? 17 Answer: Yes. 18 Question: If you'd look at the last 19 page of this exhibit, does that appear to be 20 his signature on one of the lines there? 21 Answer: Yes, it does. 22 Question: Mr. Apple, you mentioned 23 that this exhibit related to prepackaged 24 software? 25 Answer: Correct. 8823 1 Question: And so what products were 2 covered by this agreement? 3 Answer: MS-DOS. 4 Question: This was an agreement 5 between what parties? 6 Answer: Microsoft and ZEos. 7 Question: Now, do you see somewhere 8 in here the cost per unit of the MS-DOS? 9 Answer: Yes. 10 Question: And where do you see that? 11 Answer: Bottom of page 1, $60. 12 Question: And is that paragraph 3? 13 Answer: Paragraph 3. 14 Question: And when you say MS-DOS, 15 was there a particular version that this 16 related to? 17 Answer: Well, it says the then 18 current release. I don't see -- I haven't read 19 the whole thing, but I don't see offhand a 20 particular version. 21 Question: Okay. 22 Next I'd like to ask you to take a 23 look at a document that's in the notebook. 24 It's 4421. 25 Actually, let me go back a minute to 8824 1 4435. 2 What was the date of that exhibit? 3 Answer: That was dated April 2nd, 4 1989. 5 Question: Okay. Let's turn to 4421. 6 And can you tell me what this document 7 is? 8 Answer: This is a license agreement 9 for MS-DOS. 10 Question: And if you take a look at 11 page 14 of that agreement, do you see some 12 signatures there? 13 Answer: Yes. 14 Question: And do you recognize that 15 as Mr. Herrick's signature? 16 Answer: Yes, I do. 17 Question: Now, what was the date of 18 this particular agreement? 19 Answer: Well, the effective date was 20 January 1, 1990, although it was -- the date of 21 issue was January 3rd and it was signed late 22 January. 23 Question: So would this have been 24 signed as of the time you were -- had just 25 begun employment? 8825 1 Answer: This would have not been 2 signed. I started probably January 10th or so, 3 and Mr. Herrick signed it on January 25th. 4 Question: So he -- he -- he signed it 5 during your tenure at ZEos? 6 Answer: Correct. 7 Question: Now, I think in your 8 testimony before the break you were describing 9 a license agreement. And is this the type of 10 license agreement that you were describing? 11 Answer: Yes, that's right. 12 Question: If you could turn to page 13 19 of the exhibit, it's Exhibit B, payment 14 schedules. 15 Do you that have? 16 Answer: Yes. 17 Question: And there's a heading that 18 says minimum commitment. 19 Do you see that? 20 Answer: Yes. 21 Question: What was your understanding 22 of this contract item? 23 Answer: Well, this was the minimum 24 payment that we had to pay to Microsoft. 25 Question: Over the course of what 8826 1 period? 2 Answer: It looks like a one-year 3 period -- I'm sorry, nine months. 4 Question: And the amount that ZEos 5 was required to pay was how much? 6 Answer: I'm sorry. This is -- it's 7 neither nine months nor a year. It was 8 approximately a year. I'm sorry. 9 Question: And the amount that ZEos 10 was required to pay Microsoft during this time 11 frame? 12 Answer: $740,000. 13 Question: Now, if you turn the page, 14 page 20, you see a reference to a second period 15 of agreement? 16 Answer: Yes. 17 Question: So were there additional 18 payments required in a subsequent period? 19 Answer: Yes. 20 Question: And so was that during the 21 following year? 22 Answer: Yes. 23 Question: And how much was required 24 under that term? 25 Answer: Almost 740,000. 8827 1 Question: And was -- was that payment 2 required regardless of whether or not ZEos sold 3 that many Microsoft operating systems? 4 Answer: Yes, it was. 5 Question: If you would turn to page 6 21, it's Exhibit C1. 7 Answer: Okay. 8 Question: Now, you see the heading 9 name product at the top -- 10 Answer: Yes. 11 Question: -- and the version number? 12 So what -- what does this page 13 reference? What's going on on this page? 14 Answer: This is what we would usually 15 refer to as MS-DOS version 4.01. 16 Question: So it says system 17 commitment at the top of the page. 18 What did that mean? 19 Answer: Well, the payment to 20 Microsoft was calculated based on how many 21 systems -- how many computers -- a system is a 22 computer -- how many computers we shipped, not 23 on how many copies of DOS we shipped. 24 So as a system commitment, because if 25 some percentage of the systems went out without 8828 1 DOS, we paid for DOS anyway. 2 Question: Can -- can you give me an 3 example of that? 4 Answer: Well, if somebody wanted 5 Novell NetWare on their computer instead of DOS 6 because they were in a networking primary and 7 that was more appropriate for their need, that 8 would be a computer that would have ZEos. 9 So we would pay Microsoft the dollar 10 amount under this license agreement even though 11 DOS wasn't on the machine. 12 Question: And what was the dollar 13 amount under this licensing agreement at this 14 time? 15 Answer: Well -- 16 Question: I think if you look further 17 down the same page, page 21. 18 Answer: $35. 19 Question: If a customer wanted to 20 have DR-DOS on one of the desktop computers 21 that ZEos sold during the effective date of 22 this agreement, how -- how did the pricing 23 work? 24 Answer: Well, we would have had to 25 price DR-DOS to cover the cost of DR-DOS and 8829 1 cover the cost of MS-DOS, because, in that 2 scenario, we would pay Microsoft and Digital 3 Research. 4 Question: And I think you described a 5 situation earlier where sometimes customers did 6 not want an operating system on their computer. 7 Could you under this license 8 agreement, charge a customer nothing for an 9 operating system? 10 Answer: We could charge the customer 11 nothing, but we had to pay Microsoft. So 12 whether or not we could afford to charge 13 nothing was a different issue. 14 I mean, essentially this -- because 15 our cost plus pricing that we talked about 16 earlier, this $30 cost would be built into any 17 system prices. 18 Question: I think you said 30, $30 or 19 -- 20 Answer: $35. I'm sorry. 21 Question: Now, at the top of the same 22 page it says, product deliverables. 23 Do you see that? 24 Answer: Yes. 25 Question: Tell me what the purpose of 8830 1 this provision was. 2 Answer: Well, my recollection is this 3 is what Microsoft was going to give to us. 4 Basically, A, is the operating system 5 itself on disk, and then the master copies of 6 the following five documents under -- under B, 7 we could then reproduce for our customers. 8 Question: Could you turn to page 26 9 of this exhibit? It says Exhibit M at the top. 10 Answer: Yes. 11 Question: It says company's customer 12 systems. 13 Can you tell me what the purpose of 14 this provision was? 15 Answer: This defined the systems -- 16 any system we shipped based upon these 17 microprocessors would -- the royalty would be 18 due to Microsoft. 19 Question: So if I understand you 20 correctly, for each computer that had one of 21 these processors in it, what did ZEos have to 22 do in terms of payment to Microsoft? 23 Answer: Pay $35 to Microsoft. 24 Question: Could you next take a look 25 at what's been previously marked as Plaintiffs' 8831 1 Exhibit 4422? It's in your notebook. 2 If you take a look at page 14, does 3 that appear to be Mr. Herrick's signature? 4 Answer: Yes. 5 Question: And what is this document? 6 Answer: This is also a license 7 agreement for DOS, Windows, and OS/2. 8 Question: Between what parties? 9 Answer: Between Microsoft and ZEos. 10 Question: And what's the date of this 11 agreement? 12 Answer: It was -- effective date was 13 June 1st. 14 Question: Of what year? 15 Answer: 1990, I'm sorry. 16 Question: Mr. Apple, if you'd take a 17 look at page 21 of the agreement, Exhibit C1. 18 Answer: Okay. 19 Question: And under product it refers 20 to MS-DOS and Shell 1.0 and Version Number 21 4.01. 22 Do you see that? 23 Answer: Yes. 24 Question: Can you tell me what that 25 means? 8832 1 Answer: MS-DOS version 4.0, and then 2 the shell was an early user interface to try 3 and make DOS a little easier to use. 4 Question: And if you'd look down to 5 the heading royalty payments and reporting 6 requirements. 7 Do you see that? 8 Answer: Yes. 9 Question: And what was the license 10 fee under this agreement? 11 Answer: $29. 12 Question: And did the same terms 13 apply under this license agreement as the one 14 we had just looked at; in other words, for 15 every processor that ZEos sold, the license fee 16 would apply? 17 Answer: That's correct. 18 Question: Now, if you turn to page 19 32, Exhibit C1, system commitment, what product 20 and version number does this page refer to? 21 Answer: Windows 3.0. 22 Question: What was Windows at this 23 time? 24 Answer: Windows was a user interface 25 -- a graphical user interface that allowed one 8833 1 to basically do what we're accustomed to today, 2 to use a mouse to point and click to do things 3 on a computer. 4 Question: Sometimes people say 5 something sits on top of something. What was 6 the relationship between Windows and MS-DOS? 7 Answer: Well, MS-DOS was the basic 8 operating system that -- that made the computer 9 work. 10 You could start up your computer, and 11 people might remember the old C prompt. There 12 would be a cursor on the screen. And the 13 computer worked just fine. It would do things, 14 and that's the way it worked for years. 15 If you wanted to point-and-click 16 capability, you would then run Windows on top 17 of that. 18 After DOS loaded on a computer, the 19 customer would then have the option to load 20 Windows on the computer and use that graphical 21 interface. 22 Question: The term graphical user 23 interface, is that sometimes referred to as an 24 acronym? 25 Answer: Yeah, GUI, graphical user 8834 1 interface. GUI. 2 Question: G-U-I? 3 Answer: G-U-I. 4 Question: And what was the royalty 5 rate under this agreement for the Windows 3.0? 6 Answer: $25. 7 Question: Did you have an 8 understanding as to whether or not a consumer 9 could have run the Windows 3.0 on top of 10 DR-DOS? 11 Answer: My understanding was that 12 DR-DOS was compatible with -- with MS-DOS, and, 13 therefore, Windows should work the same way 14 under DR-DOS as it would under MS-DOS. 15 Question: Next let me ask you to take 16 a look at Exhibit M, which is page 25. And 17 there's a list of customer systems here. 18 Can you tell the Jury what -- what 19 this provision means? 20 Answer: Those are the systems that, 21 when shipped, would require the now 29 plus 25, 22 the two royalty payments, the $54 in royalties 23 to Microsoft. 24 Question: And under this agreement, 25 what if ZEos shipped a 386-16SX desktop that 8835 1 did not include the MS-DOS and Windows that are 2 referred to in this agreement? 3 Answer: In terms of payment to 4 Microsoft, it wouldn't matter, we would still 5 pay the $54. 6 Question: Let me next direct your 7 attention to Exhibit 4423. 8 Do you have that? 9 Answer: Yes. 10 Question: Can you tell us what this 11 agreement is? 12 Answer: It's an amendment to the 13 agreement we just spoke about, excluding 14 Windows royalties on certain systems for a 15 60-day period, I believe. Yeah. 16 Question: And on -- 17 Answer: And then also under a 18 seven-month exclusion on the DOS royalty for 19 systems where we bought MS-DOS prepackaged. 20 Question: And on the second page of 21 this exhibit, does that appear to be 22 Mr. Herrick's signature? 23 Answer: Yes. 24 Question: Now, was it common in 25 dealing with these license agreements that 8836 1 there were amendments from time to time? 2 Answer: From time to time, sure. 3 Yeah. 4 Question: And I think the -- one of 5 these agreements had -- it looked like a 6 two-year term -- or approximate two-year term 7 to it. 8 Was it customary for your agreements 9 with Microsoft to extend over a multi-year 10 period? 11 Answer: Yes. My recollection is that 12 was the norm. 13 Question: Now, you mentioned a few 14 moments ago prepackaged MS-DOS software? 15 Answer: Yes. 16 Question: Were you looking at 17 paragraph 5? 18 Answer: Yes. 19 Question: What was the purpose of 20 that provision? 21 Answer: Well, as I read it, I don't 22 recall if at the time, but what this would do 23 is -- would set aside the need to pay a royalty 24 where we had already paid for the prepackaged 25 product, which would basically avoid the -- the 8837 1 need for us to pay twice for the same product. 2 Question: So that's where you had 3 already purchased under the prepackaged 4 agreement? 5 Answer: Exactly. 6 Question: If you would next take a 7 look at Plaintiffs' Exhibit 4424. 8 Answer: Yes. 9 Question: This is a several-page 10 exhibit. 11 Can you tell me what this document is? 12 Answer: Another amendment to the -- 13 the DOS license. 14 Question: Now, you referred to, I 15 think it was 4422, so is this an amendment to 16 that license agreement? 17 Answer: This -- yes, this would be an 18 amendment to that agreement. 19 Question: And does this appear to be 20 Mr. Herrick's signature on the page? 21 Answer: Yes. 22 Question: So what was the purpose of 23 this amendment, Mr. Apple? 24 Answer: This appears to have 25 coincided with the introduction of a new 8838 1 version of DOS, version 5. And so this would 2 modify the original agreement to include DOS 3 5.0. 4 Question: And what was the date of 5 this agreement? 6 Answer: This is dated January 1st, 7 1991. 8 Question: Okay, let's next take a 9 look at 4425. 10 Can you tell us what this document is? 11 Answer: Another amendment. 12 Question: Does this amend the same 13 agreement -- the same license agreement? 14 Answer: Yes, it does. 15 Question: And what's the date of this 16 agreement? 17 Answer: April -- no, I'm sorry. 18 January 1, 1992. 19 Question: And if you look at the 20 second page of this agreement, does that appear 21 to be Mr. Herrick's signature? 22 Answer: Yes. 23 Question: Now, this amendment which 24 is amendment Number 3 to the earlier license 25 agreement, which was 4422, did this extend the 8839 1 time period of that original contract? 2 Answer: Yes. The original one, my 3 recollection here is it was approximately a 4 two-year agreement, and this looks -- it 5 certainly extends it into 1994 -- or through 6 1994. 7 Question: And if you look at page 7 8 of the agreement -- 9 Answer: Yes. 10 Question: -- you'll see a reference 11 to the fifth period of this agreement? 12 Answer: Yes. 13 Question: So that takes it to the end 14 of 1994? 15 Answer: Correct. 16 Question: Now, did this particular 17 agreement -- tell me, what products did this 18 agreement cover? 19 Answer: Which Microsoft products or 20 ZEos products? 21 Question: Yes, Microsoft products. 22 Answer: Well, the agreement covered 23 DOS and Windows, MS-DOS and Windows. 24 Question: Did it also cover Windows? 25 Answer: Yes. Yes. Oh, this -- this 8840 1 amendment does not. I'm getting there. 2 Question: If you look at page 13. 3 Answer: Okay, there's Windows, DOS 4 and Windows. 5 Question: And then if you turn to 6 Exhibit M, which is the -- which is on page 17 7 -- 8 Answer: Okay. 9 Question: -- can you tell us, again, 10 what this means? 11 Answer: Those are the ZEos systems 12 covered by the agreement. 13 Question: Now, I noted that the 14 designations of the systems seem to have 15 changed from earlier contract. 16 Can you tell me why that is? 17 Answer: Yeah. The other ones were 18 more specific, and because of the changing 19 technology, it was concluded it was -- it was 20 wiser to be more general so that all 486s would 21 be covered, for example, rather than specify 22 which speed of 486, so that we didn't have to 23 add on a new product every time -- every time 24 it came out. 25 Question: Now, are these numbers that 8841 1 we see, for instance 80386SX, was that a ZEos 2 model number for a computer? 3 Answer: That was actually an Intel 4 model number that we referred to our computers 5 by which an Intel microprocessor was inside. 6 Question: So the license agreement 7 tracked the type of chip, is that it? 8 Answer: Yes. 9 Question: Now, have you heard of the 10 term per processor license agreement? 11 Answer: Yes. 12 Question: And is that what these 13 were? 14 Answer: Yes. 15 Question: Now, did your license 16 agreements with Microsoft get amended as the 17 Intel Corporation came out with new 18 classifications of microprocessor chips? 19 Answer: Yes. For example, subsequent 20 to this, this was a Pentium microprocessor that 21 would have been incorporated. 22 Question: And I don't recall if you 23 told us, and I apologize if I'm repeating, but 24 can you tell us what a chip does, a 25 microprocessor chip? 8842 1 Answer: A microprocessor is basically 2 the brain of the computer. It does all of the 3 thinking. The rest of the computer takes all 4 the action. The Intel chip tells it what to 5 do, and that results in the monitor displaying 6 what we see or the data being printed to a 7 printer or what have you. 8 Question: And I've also heard the 9 term RAM, R-A-M. What is that? 10 Answer: That's random access memory. 11 That's basically the work area of the computer. 12 When the computer is turned on, that's the part 13 of the computer that's holding the data for the 14 microprocessor to use. 15 Question: And back in 1990 when you 16 started at ZEos, what was the typical amount of 17 RAM in the computers that ZEos sold? 18 Answer: Well, I think the starting 19 point was probably 512K, which is also known as 20 about a half of a megabyte, on up to 1, 2, 21 maybe 4 megabytes was -- was sort of the 22 high-end system. 23 Question: And have you kept track of 24 where computers have gone even through today? 25 Answer: I buy them on occasion. 8843 1 Question: And what's the typical RAM 2 size today? 3 Answer: For a business use in 4 particular, 128, 256 megabytes is on it. 5 Question: So that's megabytes as 6 compared to the 512 -- 7 Answer: Half of a megabyte. 8 Question: Okay. 9 And is that Mr. Herrick's signature on 10 the first page of this exhibit? 11 Answer: Yes, it is. 12 Question: Now, is this document then, 13 the fourth amendment to the license agreement 14 that we saw which was 4422? 15 Answer: Yes. 16 Question: So what was the purpose of 17 this amendment? 18 Answer: To include a new Microsoft 19 product. 20 Question: And what was the per 21 processor fee for the Windows 3.1? 22 Answer: $25. 23 Question: Let's take a look at the 24 next one, 4427. 25 And is this yet another amendment to 8844 1 the licensing agreement? 2 Answer: Yes. 3 Question: What's the date of it? 4 Answer: October 1, 1992. 5 Question: And is that Mr. Herrick's 6 signature? 7 Answer: Yes. 8 Question: And what was the purpose of 9 this amendment, Mr. Apple? 10 Answer: This was including a new 11 component of MS-DOS, CD-ROM extensions. 12 Question: And what's a CD-ROM 13 extension? 14 Answer: That's the piece of -- of DOS 15 that would have allowed a CD drive to work. 16 Question: And that's a CD drive as 17 opposed to what? 18 Answer: Well, a floppy disk. A 19 floppy drive. 20 Question: Now, the notebook computer 21 that you have up there, what type of drive was 22 in that? 23 Answer: This was a floppy drive. 24 Question: And was there a benefit to 25 a CD drive as opposed to a floppy drive? 8845 1 Answer: Yeah. CDs, as we know, many 2 computers don't have floppies anymore, have 3 much higher capacity than floppy disks did. 4 So it's much easier to work with, and 5 software is much easier to distribute on CD. 6 Question: And when you say higher 7 capacity, what do you mean? 8 Answer: It will hold more information 9 -- much more information. 10 Question: A CD holds more information 11 than a floppy? 12 Answer: Yes. About 400 times as 13 much. 14 Question: Okay. Let's next take a 15 look at 4428, and can you tell us what this 16 document is? Can you tell us what this 17 document is? 18 Answer: I'm sorry. It's amendment 19 number 6. 20 Question: To the same license 21 agreement? 22 Answer: Yes. 23 Question: Do you know a man by the 24 name of James Tickner? 25 Answer: Jim Tickner, yes. James 8846 1 Tickner. 2 Question: And who is he? 3 Answer: He was our VP of procurement. 4 Question: At ZEos? 5 Answer: At ZEos. 6 Question: And during the course of 7 your employment at ZEos, did you come to 8 recognize Mr. Tickner's signature? 9 Answer: Yes. Not as much. 10 Question: On page 6 of this 11 agreement, does that appear to be his 12 signature? 13 Answer: I believe so. 14 Question: And what's the date of this 15 agreement? 16 Answer: January 1, 1993. 17 Question: And this is amendment 18 number 6? 19 Answer: Yes. 20 Question: To the same license 21 agreement? 22 Answer: Yes. 23 Question: And when we say the same 24 license agreement, how can you tell that? 25 Answer: The license agreement it 8847 1 refers to here dated April 1, 1990. 2 Question: And it refers to the 3 contract number at the top? 4 Answer: Yes. 5 Question: Is that the original 6 license agreement 4422 -- Exhibit 4422? 7 Answer: Yes, it is. 8 Question: And so what was the purpose 9 of this amendment? 10 Answer: Okay, this one looks like DOS 11 6 is added. 12 Question: And did the time period of 13 the agreement also get extended by this 14 agreement? 15 Answer: Yes, it did. 16 Question: Now, we've seen several 17 amendments. 18 Can you tell me, what was the process 19 by which ZEos received amendments from 20 Microsoft to the licensing agreement? 21 Answer: We had a salesperson assigned 22 to our account. Microsoft assigned a person to 23 our account who communicated to us when new 24 products were coming and when the product 25 introductions would be. And he would prepare 8848 1 the amendments that would enable us to -- to 2 include those products. 3 Question: And so was ZEos simply 4 presented with an agreement to sign? 5 Answer: Yes. 6 Question: Was there any negotiation 7 between ZEos and Microsoft regarding terms of 8 the agreement? 9 Answer: We attempted on many 10 occasions to alter terms. We didn't -- 11 fundamentally, we didn't like the structure of 12 the agreement, and we wanted something really 13 quite different from -- from what we got. 14 Question: What did ZEos want? 15 Answer: Well, as -- at its most basic 16 level, we did not appreciate and did not want 17 to and did not consider it in our best business 18 interest to have to pay Microsoft for products 19 that we weren't selling. 20 If a customer didn't want a Microsoft 21 product on a computer, we didn't feel we should 22 have to pay Microsoft a royalty on that 23 computer. 24 This license agreement required us to 25 do that, and we tried to offer an alternative 8849 1 idea, but could not get Microsoft to agree to 2 it. 3 Question: What type of alternative 4 did you request of Microsoft? 5 Answer: We wanted an alternative, as 6 I described, that we had with Intel, where we 7 would be presented with a price for the 8 royalties based on the volume that we were -- 9 we were to agree to. 10 So if we wanted to agree to a thousand 11 units, that would be one, 5,000 another, and so 12 on. It would be volume driven, not per system 13 driven. It was a very frustrating experience. 14 Question: Were you able to convince 15 Microsoft to go with a volume-based pricing 16 rather than a per-processor licensing? 17 Answer: No. 18 Question: Let's next turn to 4429. 19 And can you tell us what this document 20 is? 21 Answer: This is Amendment Number 7 to 22 that same agreement. 23 Question: To the same license 24 agreement? 25 Answer: Yes. 8850 1 Question: And on page 7, does that 2 appear to be Mr. Tickner's signature? 3 Answer: Yes. 4 Question: And what's the date of this 5 agreement? 6 Answer: The amendment date is 7 September 30, 1993. 8 Question: And, Mr. Apple, what was 9 the purpose of this amendment? 10 Answer: Let's see. Oh, a new version 11 of Windows is included in this amendment. 12 Question: Okay. What was that 13 version? 14 Answer: Windows for WorkGroups, 15 Version 3.11. 16 Question: And what was -- can you 17 describe for us the difference between Windows, 18 for instance, the 3.0 and 3.1 that we saw in 19 the prior amendments and Windows for WorkGroup 20 3.11? 21 Answer: Windows for WorkGroups 22 included additional capability for allowing 23 computers to talk to each other, networking, so 24 that a workgroup of computers could actually be 25 connected, and this had that functionality 8851 1 built in. 2 Question: Now, did ZEos continue to 3 offer, then, Windows 3.1? 4 Answer: For a while. I don't recall 5 exactly how long. 6 Question: Was there another version 7 of Windows that ZEos offered, in other words, a 8 version higher than 3.1? 9 Answer: Well, when Windows for 10 WorkGroups came out, we were offering 3.1 and 11 Windows for WorkGroups, but ultimately Windows 12 3.1 was -- was discontinued by Microsoft. 13 Question: So what was left remaining? 14 Answer: Just Windows for WorkGroups. 15 Question: Was Windows for WorkGroups 16 more expensive than 3.1? 17 Answer: It was. 18 Question: And under this particular 19 amendment, what was the per processor license 20 for Windows for WorkGroup? 21 Answer: $30.50. 22 Question: And if we turn to Exhibit M 23 of this agreement, page 10, these are the 24 processor types that this -- that now the 25 license agreement applied to; correct? 8852 1 Answer: Correct. 2 Question: And what were they? 3 Answer: 80386 Family to 80486 Family, 4 and the Pentium class. 5 Question: And what does Pentium refer 6 to? 7 Answer: That's what -- what -- until 8 its release, the trade referred to as the 9 80586. It was the next generation that 10 ultimately was not called 80586, but, rather, 11 was called Pentium instead, but Intel 12 microprocessor. 13 Question: And were there numeric 14 designations for the Pentium chips? 15 Answer: There were different speeds 16 of Pentium. I don't recall how they were 17 designated, but this would have covered them 18 all. 19 Question: So if there's a Pentium 1, 20 for instance, was that covered by this 21 agreement? 22 Answer: Yes. 23 THE COURT: Let's take a break here. 24 Remember the admonition previously 25 given. We will take a ten-minute recess. 8853 1 Leave your notebooks here. Thanks. 2 (A recess was taken from 1:31 p.m. 3 to 1:45 p.m.) 4 MR. CASHMAN: Plaintiffs resume with 5 the testimony of Richard Apple. 6 THE COURT: Okay. 7 (Whereupon, the following deposition 8 was read to the jury.) 9 Question: Mr. Apple, let's next take 10 a look at 4430. Do you have that? 11 Answer: Yes. 12 Question: And can you tell us what 13 that document is? 14 Answer: This is Amendment Number 8. 15 Question: And what's the date of it? 16 Answer: It is January 31, 1995. 17 Question: And it looks like for ZEos 18 there's a person that is named Larkin? 19 Answer: Yes. Judi Larkin. 20 Question: And do you recognize her 21 signature? 22 Answer: I would not. I do not 23 recognize her signature. 24 Question: Do you recognize this as a 25 business record of ZEos? 8854 1 Answer: Yes, I believe so. 2 Question: And what was the purpose of 3 this amendment? 4 Answer: To extend the agreement. 5 Question: To what period? 6 Answer: April 30th, 1995. 7 Question: Do you recall if sometime 8 in 1995 a product came up from Microsoft called 9 Windows 95? 10 Answer: Yes. 11 Question: And do you recall if that 12 was subsequent to this amendment, which is 13 Exhibit 4430? 14 Answer: Yes. Its launch was after 15 April. 16 Question: I think we saw in one 17 exhibit where there were some changes of 18 designations of MS-DOS, for instance, it went 19 3.0 to 3.1. 20 What was generally occurring with the 21 software, as you know it? 22 Answer: There would, on occasion, be 23 new features added, there would be bug fixes, 24 that -- that sort of thing. 25 Question: When you say bug fixes, 8855 1 what -- what -- 2 Answer: Well, errors in -- in the 3 software, where the computer wouldn't operate 4 as it was supposed to because of a mistake in 5 the -- in the writing of the software. 6 As those were found, they could be 7 fixed and applied to later generations. 8 Question: Did the presence -- or 9 potential presence of the bugs in these -- as 10 they relate to particular designation of .0 or 11 .1, did that have any effect on ZEos sales of 12 those products? 13 Answer: Yes. When -- when a brand 14 new, what we call a major release came out, for 15 example, 4.0, a lot of customers were hesitant 16 to go to 4.0 because there was -- as -- as a 17 major release, a product with more changes and 18 more new features, there was an increased 19 chance of bugs. 20 And so many customers were more 21 comfortable staying with the older, more proven 22 version of the software. 23 Question: Until when? 24 Answer: Well, until maybe 4.1 would 25 come out or 4.2, the upgrades that people would 8856 1 expect. 2 In a sense, they thought, it's much 3 easier for me as a consumer to let others 4 encounter the problems. Let Microsoft fix 'em. 5 I'll get a letter generation once all that's 6 been worked out. 7 Question: Was there any licensing 8 arrangement that you could have -- you at ZEos 9 could have entered into with Microsoft that was 10 not a per processor license arrangement like 11 we've seen in these contracts? 12 Answer: Well, it was an arrangement 13 we asked for that we never -- never got, but -- 14 but we wanted something. 15 Question: That was the volume-based 16 arrangement you were hoping to get? 17 Answer: Correct. 18 Question: Have you ever heard the 19 term per-copy license? 20 Answer: Right. That's -- that's what 21 we wanted. 22 Question: And did Microsoft have a 23 type of per-copy license? 24 Answer: They did. They offered to 25 sell us their products on a per-copy basis, but 8857 1 at a cost that was -- I think the right word is 2 ludicrous. I mean, it was so much higher than 3 the license fee that it made it a 4 nonalternative. 5 Question: When you say so much 6 higher, can you give us some idea how much? I 7 mean, was it just $.50 higher? 8 Answer: No. Multiples higher, like 9 maybe two times as high or three times as high. 10 A number that would make it economically 11 foolish for any business to -- to sign up for. 12 Question: Now, we looked at Exhibit 13 4435 earlier. That was a prepackaged license 14 agreement. 15 Was that -- was that a typical 16 per-copy license agreement, or was there some 17 other license arrangement where you didn't have 18 to physically get a package every time you sold 19 an operating system, Microsoft operating 20 system? 21 Answer: Well, what we wanted was the 22 latter of what you just described, where we 23 were even willing to commit to the same volume 24 on -- on a per-copy basis as we did on a 25 per-system basis; we merely wanted the freedom 8858 1 to not charge customers for the operating 2 system when they weren't getting the operating 3 system. 4 So if we were using five or 10,000 5 copies a month, we were still willing to do the 6 five or 10,000 copies a month, but don't make 7 us pay for people that don't get the product. 8 Question: So the per-processor 9 license was cheaper than the per-copy license 10 to ZEos? 11 Answer: Given the percentage of 12 people that would want Microsoft products, and 13 the Microsoft product was the leader, the most 14 popular, given that percentage, the 15 per-processor in total was much cheaper to 16 those customers that didn't want the Microsoft 17 product, the per-processor was much more 18 expensive. 19 Question: So what did the 20 per-processor license arrangement do in terms 21 of choice for consumers? 22 Answer: Well, what it did was it took 23 alternatives off our price list. I mean, there 24 were products that it was nonsensical to offer. 25 And -- and you can use, we referred to 8859 1 earlier, DR-DOS, the Digital Research version 2 of DOS. If Microsoft DOS cost a consumer $50 3 from us or $90 from us, or whatever it was, 4 DR-DOS would have had to be less expensive to 5 the consumer to compete, because it wasn't as 6 well known a brand. 7 If I had to pay the Microsoft cost and 8 the DR-DOS, Digital Research, of course, we'd 9 be more expensive and had no chance whatsoever. 10 Question: So under that arrangement, 11 was there benefit to that type of consumer for 12 you to have a per-processor license 13 arrangement? 14 Answer: It was not only not a 15 benefit, it was detrimental. 16 Question: Now, the part of the 17 consumer systems that ZEos sold, I think you 18 mentioned earlier today that it included a 19 mouse. 20 Answer: Yes. 21 Question: And what is a mouse? 22 Answer: A mouse is a thing that you 23 hold onto on your desk. 24 Question: Mr. Apple, we were talking 25 about mice and I think you said that the mice 8860 1 is a thing that you hold onto. 2 Answer: Yes. That little device at 3 the desk that you grab onto to move the 4 onscreen cursor. That's one right there. 5 Question: I happen to have one on the 6 table. Something like this? 7 Answer: Yes. 8 Question: And back in the early '90s 9 with ZEos, who is ZEos purchasing mice from? 10 Answer: Well, common usage of mice 11 began with -- with Windows, and Microsoft was 12 our supplier of mice. 13 Question: And why, again, did the use 14 of mice begin with Windows? 15 Answer: Well, because it's the 16 graphical mater of the interface. Moving a 17 cursor on screen, that is what a mouse does. 18 Before Windows, most computing was done by 19 typing. 20 Question: And did there come a time 21 in the early 1990s when ZEos was looking at 22 another supplier of mice to be sold with ZEos 23 computer systems? 24 Answer: Yes. Yes. 25 Question: And can you describe for us 8861 1 briefly what happened? 2 Answer: Microsoft made a good mouse, 3 which is why we were using it. 4 Another company also had a good mouse, 5 another named brand company that was known -- 6 had a good reputation for input devices of 7 various types, and that company was called 8 Logitech. 9 So we started talking to Logitech 10 about using their mice on our computers rather 11 than the Microsoft product, and Microsoft -- 12 I'm sorry. Logitech gave us some samples. 13 We tested them out. They worked 14 great. They were willing to put our logo on 15 the mouse as opposed to Microsoft mouse which 16 had the Microsoft logo on it. So we liked that 17 aspect of it. And they were willing to offer 18 us a better price than we could get from 19 Microsoft. 20 So a good product, our logo, better 21 price, good reputation from the manufacturer, 22 it was -- it was a good deal. 23 Question: And how much better was the 24 price going to be? 25 Answer: About $3, is my recollection. 8862 1 Question: And once you heard that you 2 could get each of your mice at $3 less from 3 Logitech, what did you do? 4 Answer: Well, we ultimately made the 5 decision to make the change. So we, of course, 6 had to tell Microsoft that we wouldn't be 7 buying their product anymore. So we talked to 8 our salesman about it. 9 He scheduled a meeting with me -- a 10 face-to-face meeting with me at a trade show 11 called COMDEX, where we talked about it 12 further. And he gave me at that show quite a 13 surprise. 14 Question: Well, what was the 15 surprise? 16 Answer: The surprise was, he said, 17 well, you're, of course, free to buy mice from 18 whomever you want, but you do realize, don't 19 you, that the mouse driver that comes with 20 Windows won't come with Windows anymore unless 21 you pay an extra fee for it, and that fee is 22 $5. 23 So, yeah, go ahead and buy mice 24 somewhere else, but if you do that, your 25 Windows cost is going to go up by five bucks. 8863 1 Question: So what was the net dollar 2 effect to ZEos if you decided to go with a 3 Logitech mouse? 4 Answer: Well, the net effect was a, 5 instead of being a cheaper alternative, 6 Microsoft, rather than lowering their price, 7 actually figured out a way to make the 8 competitor's product cost more. 9 Question: And you mentioned a mouse 10 driver in Windows? 11 Answer: Yes. 12 Question: Did you do anything with 13 regard to the license agreements that we looked 14 at to see if there was any provision about 15 that? 16 Answer: At the time I was completely 17 shocked. And to this day I don't recall ever 18 being told I'm getting something for free 19 because I'm buying a mouse or any -- I don't 20 recall anything in the contracts about a $5 fee 21 being waived because I was buying mice. 22 Question: Was there a printer driver 23 in Windows that you were selling? 24 Answer: Well, there were several 25 print drivers included in Windows. 8864 1 Question: Did any packages after 2 computer system sold by ZEos include printers? 3 Answer: Actually, I don't think so. 4 Question: Do you know if you were -- 5 if you would have sold printers whether or not 6 printers from some other manufacturer, if there 7 would have been some upcharge on Windows? 8 Answer: We got those printer drivers 9 included and paid nothing for them, and that 10 was just a part of the product. 11 Question: So what was the result, 12 then, of this whole process of negotiating with 13 Logitech and then discussing it with Microsoft? 14 Answer: The end result was we had to 15 -- it pains me to this day to say it, but we 16 had to walk away from Logitech and stay with 17 Microsoft at the higher price. 18 Question: And had ZEos compared 19 quality of the Logitech mice to Microsoft? 20 Answer: Yeah. I mean, both -- both 21 products were excellent. I mean, they measure 22 their lifetime -- when you move it around the 23 desk, they measured the life of -- of a mouse 24 in thousands of miles. I mean, these things 25 last. 8865 1 Question: Mr. Apple, I'd like you to 2 turn in your notebook to 4437. 3 Answer: Okay. 4 Question: And can you tell us what 5 this document is? 6 Answer: It's the distribution 7 agreement between ZEos and Microsoft regarding 8 the Microsoft mouse. 9 Question: And what's the date of the 10 document? 11 Answer: May 22, 1990. I'm sorry. 12 April 18, 1990. 13 Question: That's the date of issue? 14 Answer: That's the date of issue. 15 Question: If you turn to page 13, is 16 that Mr. Herrick's signature? 17 Answer: Yes, it is. 18 Question: Mr. Apple, can you tell me 19 what the purpose of the contract was? 20 Answer: This covered the inclusion of 21 the Microsoft mice with ZEos systems. 22 Question: And the Logitech mouse 23 event that you told us about before the lunch 24 break, did that happen towards the end of this 25 contract? 8866 1 Answer: Correct. 2 Question: How many mice did ZEos sell 3 per year approximately in the 1990 to '91 time 4 frame? 5 Answer: I'm going to estimate 6 approximately 50,000, but that's hard to 7 remember. Approximately 50,000, maybe. 8 Question: 50? 9 Answer: 50. 10 Question: And so how much could the 11 Logitech deal have saved ZEos? 12 Answer: Oh, each year, probably 13 150,000, but we were growing. So our 14 anticipated demand for future years was larger, 15 so maybe 150,000 in the first year and growing 16 after that. 17 Question: Now, were there subsequent 18 amendments to this mouse agreement? 19 Answer: I believe so. 20 Question: What was the term of this 21 particular agreement, 4437? 22 Answer: It appears to be one year. 23 Question: And where do you find that? 24 Answer: I'm looking at the minimum 25 payment schedule on page 16 which went out for 8867 1 a year. 2 Question: So under this contract, 3 under the minimum payment schedule, ZEos was to 4 pay Microsoft over $1 million? 5 Answer: That is correct. 6 Question: If you look on page 7 under 7 term of agreement, paragraph 9. 8 Answer: I'm sorry, page? 9 Question: 7. 10 Answer: 7. 11 Question: Is that the one-year 12 provision? 13 Answer: That's the one year, yes. 14 Question: Was there any provision in 15 this contract that if you stopped purchasing 16 Windows from Microsoft, that the price of mice 17 would go up? 18 Answer: Not that I recall. 19 Question: I'd like to next direct 20 your attention to Exhibit 4438. Do you have 21 that? 22 Answer: Yes. 23 Question: And what's the date of this 24 document? 25 Answer: May 22, 1990. 8868 1 Question: And what is this document? 2 Answer: An amendment to the mouse 3 agreement we were just discussing. 4 Question: And is that Mr. Herrick's 5 signature? 6 Answer: Yes, it is. 7 Question: Mr. Apple, can you tell us 8 what the purpose of this Amendment 1 was? 9 Answer: To extend the period of the 10 original agreement. 11 Question: And did it modify any of 12 the minimum commitment payment provisions? 13 Answer: The first point relieves ZEos 14 of existing minimum commitments and the second 15 point agrees -- or outlines new minimum 16 commitment. 17 Question: And on the second page of 18 this exhibit, there's a description of product 19 hardware and a version and then underneath that 20 there's another description in the column and 21 there's an X in front of the nine-pin serial. 22 Can you tell us what that refers to? 23 Answer: That is the exact part number 24 of the mouse that we would have been shipping. 25 Question: And if you look over to the 8869 1 right column under price, $18, what does that 2 represent? 3 Answer: That would be our cost of the 4 mouse. 5 Question: From Microsoft? 6 Answer: From Microsoft. 7 Question: And if you would turn next 8 to Exhibit 4439. 9 Do you have that? 10 Answer: Yes. 11 Question: Can you tell us what that 12 document is? 13 Answer: This is the second amendment 14 to the mouse agreement. 15 Question: And what's the date of it? 16 Answer: May -- I'm sorry -- February 17 1, 1992. 18 Question: And on the second page, is 19 that Mr. Herrick's signature? 20 Answer: Yes. 21 Question: What was the purpose of 22 this, Mr. Apple? 23 Answer: Again, it redefined our 24 minimum commitment. It extended the agreement 25 and it changed -- it added a second product and 8870 1 changed the price. 2 Question: And what was the second 3 product that was added? 4 Answer: Different form of mouse. 5 Question: And the price for each 6 model of mouse was what? 7 Answer: $17. 8 Question: And if you would next turn 9 to Exhibit 4440. 10 Do you have that? 11 Answer: Yes. 12 Question: And what is this document? 13 Answer: Another amendment to the 14 mouse contract. 15 Question: And is that Mr. Tickner's 16 signature on that document? 17 Answer: Yes, I believe it is. 18 Question: Did we get the date? 19 Answer: March 1, 1993. 20 Question: What was the purpose of 21 this third amendment to the mouse agreement? 22 Answer: We added still more products. 23 I don't see that it changed the length of the 24 agreement. 25 Question: So there were some 8871 1 additional mouse models that were included now? 2 Answer: Exactly. 3 Question: Did ZEos ever sell 4 computers with Microsoft operating systems 5 installed but no mouse? 6 Answer: Yes, particularly in early 7 1990, Windows wasn't even an option in our 8 computers. There was no need for a mouse. 9 Question: How about after Windows was 10 being installed on the ZEos computers? 11 Answer: Yes, we did. 12 Question: Was it always with a mouse? 13 Answer: Usually, but not always. 14 Question: In those circumstances that 15 ZEos sold a computer with MS-DOS and Windows on 16 it, but no mouse, was there a charge for the 17 existent mouse by Microsoft? 18 Answer: Not that I recall. 19 Question: So the operation of the 20 mouse agreement was different than the 21 per-processor licensing agreement? 22 Answer: Correct. 23 Question: Can you tell us why ZEos 24 simply didn't choose not to enter into a per 25 processor license agreement with Microsoft and 8872 1 instead just buy from DR-DOS? 2 Answer: Because Microsoft was the 3 dominant name in the industry. There's no way 4 we could have let alone thrived. I don't think 5 there was any way we could have existed as a 6 company without Microsoft as an option. 7 Question: Last Thursday we heard some 8 written testimony of a former CEO of Netscape. 9 Have you ever heard of Netscape? 10 Answer: Yes. 11 Question: And in that written 12 questions and answers he said, quote, no PC OEM 13 on the planet can exist for more than a few 14 hours without a Windows 95 contract, close 15 quote. 16 Do you agree with that testimony? 17 Answer: Yeah, I absolutely agree with 18 that. 19 Question: Why is that? 20 Answer: Because Windows was the -- 21 particularly on the Intel platform, it was the 22 most preferred operating system. 23 So if you excluded from the market the 24 majority of people, you would not have a chance 25 as a PC manufacturer. 8873 1 Question: So did you consider the 2 availability of MS-DOS and Windows to ZEos as 3 necessary to the successful operation of ZEos? 4 Answer: Absolutely. 5 Question: Did you believe that 6 Microsoft's per processor licensing agreements 7 that we have examined here today had a positive 8 or negative impact on ZEos? 9 Answer: A negative impact. 10 Question: And why is that? 11 Answer: Because if we had had the 12 type of agreement we wanted to, we could have 13 charged a fair price for the people that didn't 14 want a Microsoft product and we could have also 15 offered alternatives to Microsoft product. And 16 alternatives and customization were a key 17 concept to our business. 18 Question: Did any other company that 19 you dealt with while you were employed at ZEos 20 require contracts similar to Microsoft's 21 per-processor licenses? 22 Answer: No. 23 Question: When you installed Cyrex 24 chips on ZEos computers, did you have to pay 25 any license fee to Intel? 8874 1 Answer: No. 2 Question: In your view, did 3 Microsoft's per-processor licenses have the 4 practical effect of excluding other operating 5 system competitors from selling their products 6 through ZEos? 7 Answer: Yes. 8 Question: Did Microsoft ever give you 9 any reasons for why it believed per-processor 10 licenses were beneficial to ZEos? 11 Answer: No. I mean, we argued on 12 many occasions for volume pricing where we 13 would just pay for what we used, pay less if we 14 sold more, pay more if we sold less. 15 And we even said if we're willing to 16 commit to say, for example, 10,000 units a 17 month, why do we have to pay more if that -- if 18 that same 10,000 units per month represents 19 less than 100 percent of our systems going out? 20 And the answer was that Microsoft 21 wanted 100 percent commitment from ZEos and it 22 showed our -- that paying on every system 23 whether it included a Microsoft product or not, 24 showed our 100 percent commitment to Microsoft. 25 We didn't feel a 100 percent 8875 1 commitment to Microsoft. We didn't want it to 2 be that way. We wanted the volume pricing. 3 But that was really -- that 100 percent 4 commitment to Microsoft was the answer that we 5 got back. 6 Question: And that's an answer that 7 you liked or didn't like? 8 Answer: I did not like. 9 Question: Do you believe that ZEos's 10 business would have been affected either 11 positively or negatively if it had refused to 12 do business with Microsoft? 13 Answer: I believe we would have 14 ceased to exist as a business. 15 Question: Have you ever heard the 16 term vaporware? 17 Answer: Yes, I have. 18 Question: Can you tell us what 19 vaporware is? 20 Answer: Vaporware refers to usually 21 software that has been announced from a 22 software manufacturer, but is not yet shipping. 23 And the term particularly comes from 24 the use when a product is late, when it was 25 supposed to have shipped by a certain time and 8876 1 never showed up, never made it to the store 2 shelves, that's usually called vaporware. 3 Question: Does preannouncing a 4 product with a certain shipment date, but then 5 is late, is there some effect on the 6 marketplace from that? 7 Answer: Yeah. One of the things 8 about the PC business and technology in general 9 is people like to get the latest and the 10 greatest. It's better to have today's model 11 than last month's model. 12 So a new product announcement, people 13 would get excited about, but if a product was 14 announced today for delivery next month, people 15 would wait a month to place their order. 16 Question: Could vaporware be used by 17 one competitor to adversely affect another 18 competitor? 19 Answer: I can certainly see of such a 20 scenario. 21 Question: Mr. Apple, did you see any 22 vaporware announcements while you were at ZEos? 23 Answer: Yes. 24 Question: Can you give us some 25 examples? 8877 1 Answer: Well, since we're talking 2 about Microsoft, a Microsoft product comes to 3 mind which was a different version of Windows. 4 We were at one time developing a 5 computer that you would actually hold like a 6 tablet of paper and write on the screen with a 7 stylist, like a pen. 8 And there was an operating system 9 called PenWindows or Windows for Pens PC or 10 something like that. That was an announced 11 product that our product would have run that I 12 don't think that Microsoft product shipped. 13 I'm not sure, but I don't think so. 14 Question: You said you had a product? 15 Answer: Well, we were developing a 16 computer that would have run that software. 17 Question: Did you hear if there were 18 any other pen operating systems out there that 19 could have been put on ZEos computers? 20 Answer: Yeah. The one that was 21 actually shipping and in the marketplace at 22 that time was from a company called GO. I 23 don't remember the name of the operating 24 system, but it was a pen operating system. 25 Question: Have you ever heard the 8878 1 term FUD, F-U-D? 2 Answer: Yes, I have. 3 Question: What does FUD stand for, 4 F-U-D? 5 Answer: A FUD is fear, uncertainty 6 and doubt. 7 Question: And while you were at ZEos 8 did you observe any examples of FUD in the 9 computer industry? 10 Answer: Yes, certainly. 11 Question: And can you give us some 12 examples? 13 Answer: Well, the product we were 14 just talking about could be an example of FUD. 15 What a company could do is announce a 16 product to create FUD in the minds of 17 consumers, fear, uncertainty and doubt. 18 What's the future going to be? What 19 should I commit my computing dollars to? If 20 one can create confusion and uncertainty, that 21 would tend to disrupt the entrenched leader. 22 Question: If we go back to a few 23 answers ago, you mentioned your customer's 24 desire -- I think you said the latest and 25 greatest. 8879 1 Answer: Yes. 2 Question: While you were at ZEos, did 3 you have any products that you were expecting 4 to resell to consumers that were late, in other 5 words -- 6 Answer: Yes. 7 Question: -- late on their 8 production? 9 Answer: Absolutely. 10 Question: Can you give us some 11 examples? 12 Answer: One of the future generations 13 of product that replaced this we were late to 14 market with for technical reasons. 15 Question: And did that have any 16 adverse impact on the marketability of that 17 product? 18 Answer: Yes, because when -- at the 19 scheduled ship date, it was very leading edge. 20 With the delay, other product had a 21 chance to catch up and so it became less 22 leading edge and our competitors had a stronger 23 -- had stronger comparison. 24 Question: And what period of delay 25 are we talking about? 8880 1 Answer: Oh, it can be as little as 2 months or even weeks. 3 Question: So just a couple of months 4 can make a big difference? 5 Answer: Oh, yeah. 6 Question: When we say a big 7 difference, can you expound on that a little 8 bit? 9 Answer: We often had products whose 10 whole life cycle was maybe six months, so if we 11 introduced a new computer, we typically had its 12 replacement under development and even its 13 replacement under development. 14 So if a product was designed for all 15 -- all the work we put into it, all the 16 development effort, if we were to get our 17 return in six months, if we lost, say, a third 18 of that, a two-month delay could typically wipe 19 out the profitability of that product. 20 Question: And is that because other 21 competitors would move? 22 Answer: Absolutely. 23 (Whereupon, the deposition stopped 24 being read to the jury.) 25 MR. CASHMAN: That is the end of 8881 1 Plaintiffs' direct examination of Mr. Apple. 2 MR. GREEN: This is the 3 cross-examination of Mr. Apple in the same 4 proceedings. 5 (Whereupon, the deposition resumed 6 being read to the jury.) 7 Question: Good afternoon, Mr. Apple. 8 Answer: Good afternoon. 9 Question: I will be questioning you a 10 little bit this afternoon on behalf of 11 Microsoft. 12 First, Mr. Apple, you testified that 13 you are appearing here today pursuant to a 14 subpoena; is that correct? 15 Answer: Correct. 16 Question: So I take it you received a 17 subpoena from Plaintiffs to testify in this 18 action; is that correct? 19 Answer: That's right. 20 Question: Now, before today you and I 21 did not meet, did we? 22 Answer: No, we did not. 23 Question: And you and I have never 24 discussed your testimony before today, have we? 25 Answer: That's correct. 8882 1 Question: And before today you never 2 discussed your testimony in this action with 3 anyone from Microsoft; is that correct? 4 Answer: Correct. 5 Question: Now, prior to today, did 6 you have any discussions at all with either 7 Mr. Hagstrom, Mr. Gralewski or any of the 8 lawyers representing Plaintiffs in this action? 9 Answer: Yes, I did. 10 Question: When did either 11 Mr. Hagstrom or one of his colleagues first 12 contact you about this case? 13 Answer: Maybe six, eight weeks ago. 14 Question: And how many discussions 15 did you have with the Plaintiffs' lawyers about 16 this case prior to today? 17 Answer: Discussion meaning anything 18 -- any contact at all? 19 Question: How many times did you talk 20 with Mr. Hagstrom or any of his colleagues 21 about this case prior to today? 22 Answer: Maybe six. 23 Question: So that's six discussions 24 maybe in the last six or eight weeks; is that 25 right? 8883 1 Answer: Something like that. 2 Question: Were these discussions on 3 the telephone? 4 Answer: All but one. 5 Question: Was that one other 6 discussion a face-to-face meeting? 7 Answer: Yes. 8 Question: And when was that? 9 Answer: Friday, just a few days ago. 10 Question: And with whom did you meet? 11 Answer: Mr. Hagstrom. I'm sorry, 12 I'll butcher the last name, but the gentleman 13 next to him. 14 Question: Mr. Gralewski? 15 Answer: Mr. Gralewski, and the 16 gentleman in back. I'm poor with names. I'm 17 sorry. 18 Question: And how long was this 19 meeting on Friday? 20 Answer: About three hours. 21 Question: And during the course of 22 this meeting, did you discuss with Mr. Hagstrom 23 and Mr. Gralewski your testimony in this 24 action? 25 Answer: They asked me questions 8884 1 related to the case. 2 Question: Were those questions 3 remarkably similar to the questions 4 Mr. Hagstrom asked you this morning? 5 Answer: Which would be remarkable? 6 Question: Were they similar? 7 Answer: Some were. 8 Question: But you and I have never -- 9 I have never had an opportunity before today to 10 ask you my questions; correct? 11 Answer: I don't know if you had the 12 opportunity to, but you did not. 13 Question: Now, you started at ZEos 14 more than 14 years ago in January of 1990; is 15 that correct? 16 Answer: That's right. 17 Question: And you worked at ZEos in 18 sales and marketing for a little less than six 19 years; is that correct? 20 Answer: Excuse my fingers. A little 21 less than six years, that's right. 22 Question: In 1995 ZEos International, 23 your company, merged with another company 24 called Micron Technology, Inc.; is that right? 25 Answer: Not exactly. We merged with 8885 1 two divisions that Micron Technology, Inc., was 2 the parent of. 3 Question: Micron Technology, Inc., 4 was a parent that had two subsidiaries? 5 Answer: Correct. 6 Question: And you merged with those 7 two subsidiaries; is that correct? 8 Answer: That's right. 9 Question: And the combined entity 10 changed its name to Micron Electronics, 11 Incorporated; is that right? 12 Answer: That's right. 13 Question: Now, in September of 1995 14 you received a notice of termination from 15 Micron Electronics; is that correct? 16 Answer: Correct. 17 Question: And following receipt of 18 notice of termination from Micron Electronics, 19 you personally sued Micron Electronics, didn't 20 you? 21 Answer: Yes, I did. 22 Question: And you ended up losing 23 that lawsuit, did you not? 24 Answer: Actually, we settled the 25 case. 8886 1 Question: Now, after September of 2 1995, you were relieved of active 3 responsibilities at Micron Electronics? 4 Answer: That was the notice of 5 termination that you referred to was a document 6 that was created upon the merger of the two 7 companies. 8 So in early '95, the agreement was 9 that when I was notified of termination, I 10 would remain an inactive employee for six 11 months and during that period also not work for 12 a competitor. 13 Question: My question was -- and 14 maybe I wasn't clear. I apologize. 15 After receipt of the notice of 16 termination in September of 1995, you were an 17 inactive employee at Micron Electronics for the 18 next six months; is that correct? 19 Answer: That's correct. Correct. 20 Question: Now, since ceasing active 21 responsibilities for Micron Electronics in 22 September of 1995, you have not worked for 23 another personal computer manufacturer, have 24 you? 25 Answer: Correct. 8887 1 Question: So your testimony in this 2 action, Mr. Apple, is it fair to say is limited 3 to the time period 1990 to 1995 when you worked 4 at ZEos International and later for a short 5 time at Micron; correct? 6 Answer: Well, not completely. For 7 example, the question about how does one 8 megabyte of memory in 1990, what do people get 9 today. 10 Question: Your testimony here as 11 someone who worked at a personal computer 12 manufacturer or OEM is limited to the period 13 January 1990 to September 1995; is that 14 correct? 15 Answer: That -- those are the -- 16 that's the time frame at which I worked at a 17 computer OEM. 18 Question: And while working at ZEos 19 International from January 1990 to September 20 1995, you were responsible for sales and 21 marketing; correct? 22 Answer: Initially just marketing, and 23 then later added sales to the responsibility. 24 Question: Now, you were not directly 25 responsible, were you, sir, for purchasing PC 8888 1 components like microprocessors and hard 2 drives; is that correct? 3 Answer: I was directly responsible 4 for selecting which components to purchase. I 5 was not responsible for filling out the 6 purchase orders. 7 Question: The other people in 8 procurement were responsible for actually 9 purchasing the hardware and software components 10 from the vendors from which ZEos acquired it, 11 correct? 12 Answer: When you say responsible for 13 purchasing, I'm not sure what you mean. They 14 were responsible for filling out the purchase 15 orders. 16 Question: For a while ZEos had a 17 separate person who was director of 18 procurement? 19 Answer: Yes. 20 Question: Mr. Tickner; is that 21 correct? 22 Answer: Correct. 23 Question: And what does procurement 24 do? 25 Answer: Acquires product. 8889 1 Question: And procurement is 2 responsible for actually acquiring the 3 components that are then used to assemble and 4 make the PCs; correct? 5 Answer: Yes. 6 Question: Now, did someone at ZEos 7 named Jay Crawford assume responsibility for 8 ZEos's relationship with Microsoft in November 9 of 1992? 10 Answer: No. 11 Question: You're not familiar with a 12 gentleman named Jay Crawford at ZEos? 13 Answer: I believe Jay Crawford was 14 our in-house legal counsel. 15 Question: After November of 1992, was 16 Mr. Crawford primarily responsible for 17 negotiating agreements with Microsoft? 18 Answer: No. 19 Question: Was Mr. Herrick the person 20 primarily responsible for negotiating 21 agreements with Microsoft? 22 Answer: Well, he was captain of the 23 ship, so to speak. He was chairman. I was the 24 sales and marketing guy. 25 Question: So the answer to my 8890 1 question is Mr. Herrick was the person 2 principally responsible for negotiating with 3 Microsoft; is that fair? 4 Answer: I think it's fair to say that 5 it was probably never -- I think it's fair to 6 say that it was probably never a meeting where 7 Mr. Herrick met with Microsoft alone. It was a 8 team effort. I don't know that it would be 9 fair to say one person was primary. 10 Question: Well, Mr. Herrick 11 ultimately signed the license agreements and 12 amendments with Microsoft, correct? 13 Answer: Absolutely. 14 Question: And at a certain point in 15 time, Mr. Tickner signed the amendments and 16 license agreements with Microsoft; correct? 17 Answer: That's correct. 18 Question: And you personally never 19 signed any of the licensing agreements with 20 Microsoft, correct? 21 Answer: Correct. 22 Question: Now, you testified that 23 beginning in 1990, ZEos preinstalled operating 24 system software on all of the new computers it 25 sold; is that correct? 8891 1 Answer: I don't know if we 2 preinstalled on all of them. I believe we did. 3 Question: And ZEos preinstalled 4 operating system software on its new computers 5 because it wanted those computers to function 6 fully right out of the box; is that correct? 7 Answer: No. When we -- never did we 8 actually want to install an operating system on 9 all of the computers. When we did install with 10 them on the computers, it was due to our 11 contractual agreement with Microsoft. 12 Question: Wasn't the reason why ZEos 13 preinstalled operating system software on its 14 computers is it wanted those computers to be 15 fully functional as possible when they arrived 16 at the customer's doorstep? 17 Answer: That's why we installed 18 Microsoft's operating systems when the customer 19 wanted Microsoft's operating systems. 20 Question: Well, do you recall giving 21 deposition testimony in October of 1998 in 22 connection with some of the issues you 23 discussed in your testimony today as part of 24 another lawsuit? 25 Answer: Yes. I don't recall the 8892 1 date. I remember another incident around that 2 time period. 3 Question: Mr. Apple, is this a 4 transcript of your deposition from October 7, 5 1998 in that prior case? 6 Answer: It appears to be. 7 Question: And you were under oath at 8 this deposition? 9 Answer: I believe so. 10 Question: And did you have an 11 opportunity to review this transcript after the 12 deposition? 13 Answer: I don't recall. 14 Question: Can you look, sir, at page 15 13, beginning at line 17, and carrying through 16 to page 14, line 1, and let me know when you're 17 there. 18 Answer: Through line 1 of page 14? 19 Question: Yes. 20 Answer: Okay. 21 Question: Do you remember being asked 22 the following question and giving the following 23 answer at your deposition on October 7, 1998? 24 QUESTION: Now, these 25 computers, personal computers that you 8893 1 manufactured and sold, were they normally sold 2 with computer software operating systems on 3 them? 4 ANSWER: Yes, they were. The 5 intention was for them to be as fully 6 functional as possible aside from applications, 7 but when they arrived at the customer's 8 doorstep, we wanted them to be able to open it 9 and turn it on and have a nicely working 10 computer. 11 Answer: I agree with that. 12 Question: And you don't see anything 13 here in connection with this testimony about 14 ZEos deciding to preinstall operating system 15 software on its machine because it was 16 contractually obligated to do so, do you? 17 Answer: This is -- normally people 18 wanted Microsoft DOS and Windows. And the best 19 way to give it to them, their best experience 20 was to give them what they wanted, load it on 21 the machine ready to run. 22 Question: ZEos believed that the 23 customers who wanted MS-DOS and Windows would 24 have a better experience if their new PC came 25 in those operating systems preinstalled and 8894 1 thus were fully functional right out of the 2 box; is that correct? 3 Answer: Yes. 4 Question: Now, during your testimony 5 in response to questions from Mr. Hagstrom, you 6 testified about the modem in the ZEos notebook 7 386. 8 Do you recall that testimony? 9 Answer: Yes. 10 Question: And at one time a modem was 11 an optional feature on a personal computer; is 12 that correct? 13 Answer: Yes. 14 Question: And over time as more and 15 more customers demanded a modem, the modem 16 became the standard feature on the PC; is that 17 correct? 18 Answer: No. We had a different 19 philosophy. We always offered and wanted to 20 offer a bare bones machine without a modem, 21 without an operating system, et cetera, because 22 people -- some people didn't want it and we 23 didn't think they should have to pay for it. A 24 lot of people had product from their previous 25 machine, people were updating machines. 8895 1 We were now to an update market and 2 they may have had a perfectly good, fast modem 3 in their old computer that was no longer useful 4 that they could plug into their new machine. 5 So we tried to minimize what we forced 6 customers to take. We wanted to offer that 7 bare bones option. 8 Question: Now, the ZEos notebook 386 9 you have in front of you, what year was that 10 product released, approximately? 11 Answer: Approximately '91. Maybe 12 '92, but '91, I think. 13 Question: Now, in 1991 and 1992, 14 fewer computer users were interested in online 15 access to things such as Internet and other 16 online services; correct? 17 Answer: Fewer than when? 18 Question: Fewer than today, for 19 example. 20 Answer: I think that's a fair 21 statement. 22 Question: So in 1991 and 1992, ZEos 23 made the modem an optional feature so those few 24 people who wanted to dial up to an online 25 service could have a modem and those who did 8896 1 not would not have to pay for it, correct? 2 Answer: Correct, other than to say -- 3 to characterize them as those few people, my 4 recollection is probably over half the people 5 took the modem. 6 Question: Since 1991 and 1992, more 7 and more computer customers have become 8 interested in having a modem on their PC; is 9 that correct? 10 Answer: Well, today that might be 11 quite the opposite. I'm not so sure. 12 Question: Well, at the height of the 13 Internet frenzy in '96, '97, '98, and '99, 14 didn't just about every customer want a modem 15 on his or her PC? 16 Answer: I wasn't in the industry 17 then. The trend when I left in '95 was that 18 way. Now, I suspect it would be different. 19 Question: And as the trend went in 20 favor of more and more customers wanting a 21 modem, a modem became more of a standard 22 feature in PCs offered by OEMs; correct? 23 Answer: We included it in probably 24 more of our packages. 25 Question: And that's a common 8897 1 phenomenon, is it not, as more and more 2 customers want a feature, that feature becomes 3 more and more standard with the computer 4 offerings offered by OEMs, correct? 5 Answer: Yeah, that's a fair 6 statement. 7 Question: Now, I think you testified 8 that the large majority of ZEos customers 9 wanted Microsoft operating system software 10 installed on their PCs; is that correct? 11 Answer: Yes. 12 Question: And as a result, in the 13 early 1990s, ZEos preinstalled Microsoft's 14 MS-DOS operating systems on its new PCs, 15 correct? 16 Answer: No, I would not say that's 17 correct. I'm not sure when we started to 18 install it, but I believe the installation was 19 driven by contractual arrangements, not due to 20 customer demands at the outset. It was a fair 21 investment for us to install the centralized 22 computers and equipment to download the 23 operating system onto all of these PCs that we 24 were manufacturing. 25 Question: Let me ask the question 8898 1 this way. You agree, don't you, that the large 2 majority of ZEos customers wanted Microsoft 3 operating systems in their computers? 4 Answer: Microsoft or 5 Microsoft-compatible wanted DOS on their 6 computers. 7 Question: Oh, you mean you don't 8 think that the customers wanted Microsoft 9 operating systems, the market leader, isn't 10 that what you've been saying today? 11 Answer: It depends on what year 12 you're talking about. In January of 1990, I 13 think it wasn't so clear. 14 When DOS 4.0, for example, came out, 15 customers did not want 4.0. They were afraid 16 of 4.0. They did not want to use it at that 17 time. Just because it was Microsoft did not 18 necessarily mean people wanted it. 19 Question: Well, ZEos in 1990 signed 20 two license agreements to license Microsoft's 21 MS-DOS and Windows operating system, correct? 22 Answer: Yes. 23 Question: And ZEos did that because 24 it determined that its customers wanted those 25 operating systems on their PCs, correct? 8899 1 Answer: The majority of its 2 customers. 3 Question: The large majority, 4 wouldn't you agree, not 51 percent, the large 5 majority? 6 Answer: Where does large cut in? 7 Question: The phrase large majority 8 is not one that you understand? 9 Answer: Well, 51 percent isn't large, 10 I agree. I don't know where you draw the line 11 for large. 12 Question: It was in excess of 51 13 percent? 14 Answer: Yes. 15 Question: And for certain of its 16 high-end PCs beginning in the early 1990s, ZEos 17 preinstalled the Windows operating system on 18 it, correct? 19 Answer: Correct. 20 Question: Now, you testified earlier 21 that over the years, ZEos customers sometimes 22 requested a non-Microsoft operating system; is 23 that correct? 24 Answer: That's right. 25 Question: But you don't recall 8900 1 yourself, sir, any ZEos customer ever 2 specifically requesting the DR-DOS operating 3 system, do you? 4 Answer: Oh, I bet in my five years 5 there, I probably spoke to fewer than ten 6 actual customers. 7 Question: My question, sir, is do you 8 recall any ZEos customers ever specifically 9 requesting the DR-DOS operating system? 10 Answer: No. 11 Question: And ZEos never licensed 12 DR-DOS, did it? 13 Answer: No. 14 Question: Now, you instead recall, 15 don't you, sir, ZEos receiving requests for 16 Novell NetWare and various forms of Unix, 17 correct? 18 Answer: Well, again not -- I did not 19 speak to customers directly who asked for that. 20 Question: So you don't recall ZEos 21 customers requesting Novell NetWare and various 22 forms of Unix? 23 Answer: We sold it and I heard it 24 through our salespeople, but I did not talk to 25 the customers. 8901 1 Question: My question was, do you 2 recall ZEos customers requesting Novell NetWare 3 and various forms of Unix as their operating 4 system for their PC? 5 Answer: Yes. I recall selling PCs 6 that way, presumably at the customer's request. 7 Question: Can you look at page 15 of 8 your deposition, line 2 through line 16. Do 9 you recall, sir, being asked the following 10 question and giving the following answer: 11 QUESTION: Do you recall what 12 some of those other operating systems were that 13 customers were requesting? 14 ANSWER: There were various 15 forms of Unix that were requested. Network 16 operating systems were requested I recall at 17 the time. Novell NetWare was an item that was 18 requested. There were other networking 19 operating systems that we would occasionally 20 hear about get requests for. 21 The period 1990 to 1992 I don't 22 recall if OS/2 was important at that time. I 23 do recall it was on our price list, OS/2 was. 24 It was very expensive at that time. I don't 25 recall if we had much demand for it, but I 8902 1 think it did arise occasionally. 2 Do you see that testimony, sir? 3 Answer: Yes, sir. 4 Question: Do you recall giving that 5 answer in response to that question at your 6 October 1998 deposition? 7 Answer: I don't recall giving the 8 answer, but I think it's a reasonable answer, 9 yes. 10 Question: So you do recall ZEos 11 receiving requests from customers for Novell 12 NetWare and various forms of Unix operating 13 systems, correct? 14 Answer: Yes. 15 Question: But you do not recall ZEos 16 receiving requests from customers for the 17 DR-DOS operating system, do you? 18 Answer: No. 19 Question: Now, the deposition 20 testimony that I referred to -- withdrawn. 21 Novell NetWare was a network operating 22 system, correct? 23 Answer: Correct. 24 Question: It was not a desktop 25 operating system like MS-DOS; is that correct? 8903 1 Answer: Well, I'm not -- I can't tell 2 you what it would do for the individual sitting 3 at the desk. Clearly it had functionality for 4 them. But it also had the functionality like 5 Windows for WorkGroups connecting with other 6 computers. 7 Question: Well, what is a network 8 operating system? 9 Answer: A network operating system is 10 an operating system with networking capability. 11 That's the way I'm referring to it right now. 12 Question: Well, Novell NetWare did 13 not compete directly with Microsoft's MS-DOS, 14 did it? 15 Answer: The users tended to have very 16 different needs. 17 Question: A user would acquire Novell 18 NetWare if it wanted to use that computer to 19 set up a network of other computers, correct? 20 Answer: That's right. 21 Question: And a user would purchase 22 MS-DOS to install on his or her own computer to 23 use as a one-person desktop operating system; 24 is that correct? 25 Answer: That would be very typical. 8904 1 Question: And you recall ZEos 2 receiving requests from customers for network 3 operating systems such as Novell NetWare; is 4 that correct? 5 Answer: Correct. 6 Question: And the Unix referred to in 7 your testimony there, those two were also used 8 as network operating systems, correct? 9 Answer: Could be. 10 Question: Or sometimes they were used 11 as high-end workstation operating systems, 12 correct? 13 Answer: Sure. 14 Question: But they typically were not 15 the kind of operating systems that an 16 individual user sitting at his or her own desk 17 with a PC would install on their machine, 18 correct? 19 Answer: Typical, no. Clearly a 20 minority of users of PC buyers were using Unix 21 in that way. Some would I'm sure. 22 Question: But that was atypical, was 23 it not, sir? 24 Answer: That was atypical. 25 Question: Now, you testified earlier 8905 1 about operating systems that were available in 2 the public domain in the early 1990s. 3 Do you recall that testimony? 4 Answer: Yes, sir. 5 Question: And which ones were they, 6 sir? 7 Answer: You know, I don't remember. 8 There were various flavors of Unix. I just 9 don't remember which ones at which times. 10 Question: And these were available 11 either to users or to ZEos free of charge? 12 Answer: Well, ZEos didn't get 13 involved with public domain software, but users 14 free of charge. 15 Question: And ZEos did not get 16 involved with public domain software because 17 there was no customer demand for it at that 18 time; is that correct? 19 Answer: No. I didn't -- that would 20 -- there is more compatibility testing, more 21 technical support. There are things beyond the 22 software's ability to run on a machine than we 23 as a manufacturer would want to get involved 24 with. 25 Question: The cost of using the 8906 1 public domain operating system software would 2 far outweigh any potential economic benefit to 3 ZEos of installing it on its machines, correct? 4 Answer: Having never done an 5 analysis, it would -- I did not believe at the 6 time and I still don't believe it would have 7 been worth our while to start installing public 8 domain software. 9 Question: You were aware that this 10 public domain operating system software existed 11 in the early '90s, weren't you? 12 Answer: Probably, yeah. 13 Question: And you were aware that it 14 was available free of charge for no royalty; is 15 that correct? 16 Answer: Yes. 17 Question: Yet you decided to license 18 operating system software from Microsoft at a 19 positive royalty because you thought that's 20 what the large majority of your customers 21 wanted, correct? 22 Answer: We signed the license 23 agreement because that was the best of the -- 24 the better of the two deals offered to us from 25 Microsoft and we did want Microsoft software. 8907 1 We needed Microsoft software. 2 The license we signed was the better 3 of the two alternatives. 4 Question: And you needed Microsoft 5 software because that's what your customers 6 wanted, correct? 7 Answer: That's what most customers 8 wanted. 9 Question: Now, ZEos entered into 10 license agreements with Microsoft for Microsoft 11 operating system software; is that correct? 12 Answer: Yes. 13 Question: And we saw two of those 14 license agreements, plus a number of amendments 15 this morning, did we not? 16 Answer: Yes. 17 Question: And ZEos needed a license 18 from Microsoft's operating system software 19 because MS-DOS and Windows were Microsoft's 20 copyrighted intellectual property; is that 21 correct? 22 Answer: Yes. 23 Question: And Microsoft gave ZEos the 24 option of licensing MS-DOS and Windows on a 25 per-copy basis; is that correct? 8908 1 Answer: Did you say licensing on a 2 per-copy basis? 3 Question: Yes. 4 Answer: I don't recall if it was 5 purchasing finished goods or license 6 arrangements, but we could pay for it on a 7 per-copy basis. 8 Question: You could pay for it on a 9 per-copy basis, but it would have been more 10 expensive to acquire it on a per-copy basis, 11 correct? 12 Answer: Far more expensive. 13 Question: And I don't want to get 14 hung up on words, but did Microsoft offer ZEos 15 the option of licensing MS-DOS on a per-copy 16 basis? 17 Answer: I think that's what we were 18 just talking about. Yes, I believe so. 19 Question: And under a per-copy 20 license, ZEos would have owed Microsoft for 21 royalty for every copy of MS-DOS and Windows 22 that ZEos actually installed on its PCs; is 23 that correct? 24 Answer: Separate agreements for DOS 25 and Windows, but that's correct. 8909 1 Question: And ZEos ultimately chose 2 not to enter into a per-copy license because 3 that option was more expensive than the 4 alternatives; is that correct? 5 Answer: Given the price difference 6 between the license fee and the per-copy basis 7 and the percentage of people that would want 8 Microsoft, it was cheaper on the licensing 9 basis. 10 Question: It was cheaper to not use a 11 per-copy license and then use one of the 12 alternative licenses to acquire MS-DOS and 13 Windows; is that correct? 14 Answer: It was -- it was cheaper for 15 ZEos as a company, fewer outlaying dollars to 16 Microsoft for the license agreement versus the 17 per-copy agreement. It was more expensive for 18 the consumers that didn't want the Microsoft 19 product. 20 Question: But the licensing option 21 that ZEos chose enabled ZEos to provide to its 22 customers that wanted Microsoft operating 23 system software that Microsoft operating system 24 software at the lowest possible price, correct? 25 Answer: The lowest possible price for 8910 1 Microsoft software. Not the lowest price for 2 Microsoft-compatible software. 3 Question: I want to limit my 4 questions to the customers that wanted 5 Microsoft operating system software on their 6 PCs. 7 Answer: Okay. That was a better 8 deal. The licensing deal was a better deal for 9 those who wanted the Microsoft software. 10 Question: ZEos chose the licensing 11 option that enabled ZEos to provide Microsoft 12 operating system software to those customers 13 who wanted at the lowest possible price, 14 correct? 15 Answer: Correct. 16 Question: Now, we were talking about 17 licensing alternatives. In addition to a 18 per-copy license, Microsoft also offered ZEos 19 two other licensing options, namely, a 20 per-system license and a per-processor license; 21 is that correct? 22 Answer: I don't recall any difference 23 between a per-system and a per-processor. My 24 recollection is that the terms were used 25 interchangeably with us. 8911 1 Question: You recall hearing some 2 licenses being referred to as per-system and 3 others being referred to as per-processor; is 4 that correct? 5 Answer: I recall both terms. I don't 6 recall a difference between those terms. 7 Question: Sitting here today ten 8 years later, you do not recall what the 9 specific differences were between a per-system 10 license and a per-processor license; is that 11 correct? 12 Answer: Correct. I remembered there 13 was discussion about could we exclude certain 14 systems, but, again, I -- I think the systems 15 were defined by which processor they had in 16 them, so I'm not sure there was a difference. 17 Question: And six years ago at your 18 deposition, do you recall being asked lots of 19 questions about the differences between 20 per-system licenses and per-processor licenses? 21 Answer: I don't. 22 Question: Did you review your 23 deposition testimony in preparation for today? 24 Answer: No. 25 Question: But in any event, you 8912 1 recall that ZEos chose the licensing option 2 available from Microsoft that enabled ZEos to 3 acquire Microsoft operating system software at 4 the lowest possible price, correct? 5 Answer: At the lowest price for those 6 people who wanted the software and at the 7 lowest total outlay for ZEos. 8 Question: It was the cheapest option 9 both for ZEos customers that wanted Microsoft 10 operating system software and for ZEos overall 11 given the licensing options available, correct? 12 Answer: Yes. 13 Question: Now, you testified about 14 this earlier, but under the licensing agreement 15 that ZEos chose, ZEos owed Microsoft a royalty 16 for every PC -- for every PC that included a 17 microprocessor identified in exhibits to ZEos's 18 licensing agreement, correct? 19 Answer: Yes. 20 Question: Now, in order to obtain the 21 lowest possible price for Microsoft, ZEos had 22 to commit to a higher volume and forego some 23 flexibility in its choice of software; is that 24 correct? 25 Answer: Well, I believe the licensing 8913 1 would have been available at many volume 2 commitments. I don't think one had to be as 3 large as ZEos to get a licensing deal, but we 4 had to commit to a volume to get the price. 5 Question: And to obtain the lowest 6 possible price, ZEos had to agree to give up 7 some flexibility, did it? 8 Answer: No. We had to agree to pay 9 whether we included the software or not. 10 Question: So I think you testified to 11 this earlier, if a customer requested a 12 non-Microsoft operating system on a PC covered 13 by ZEos' license, ZEos might have to pay for 14 two operating systems in connection with that 15 PC; is that right? 16 Answer: That's right. 17 Question: But ZEos nevertheless 18 concluded that given the discount available for 19 a per-processor license and the number of ZEos 20 customers that wanted Microsoft operating 21 systems, it was cheaper for ZEos to double pay 22 for operating systems in those instances when a 23 customer requested a non-Microsoft operating 24 system than it would be to use a per-copy 25 license instead, correct? 8914 1 Answer: That's part of it. 2 The other part of it was we withdrew 3 some operating systems from our price list. 4 For example, DR-DOS that you've spoken 5 about, we would have wanted to offer only at a 6 lesser price. We did not put it on our price 7 list because, in that example, paying twice for 8 that one would have made no sense at all. 9 Question: But you testified, sir, 10 that you do not recall any customer requests 11 for DR-DOS, correct? 12 Answer: There was a lot of things we 13 sold, but I don't recall customer requests for 14 it. 15 Question: Do you ever recall meeting 16 with people at Digital Research about the 17 possibility of licensing DR-DOS? 18 Answer: I remember discussions were 19 going on -- and I'm not sure if DR-DOS was on 20 the price list when I got to the company or 21 not. There may have been some 1989 business. 22 I just don't know. 23 Question: Well, during your tenure at 24 ZEos, did anyone from ZEos ever discuss with 25 Digital Research or Novell about the 8915 1 possibility of licensing DR-DOS? 2 Answer: I just don't recall. 3 Question: And you don't recall ever 4 getting any pricing information from Digital 5 Research or Novell about DR-DOS, do you? 6 Answer: I don't. 7 Question: Now, we were talking about 8 ZEos's choice of licenses. 9 It's fair to say, isn't it, that given 10 the discount available on a per-processor 11 license and the percentage of ZEos's customers 12 that wanted Microsoft operating systems, that 13 ZEos concluded that the per-processor license 14 made the most sense for its business? 15 Answer: Between the two alternatives 16 given, yes. 17 Question: And you were involved in 18 ZEos's decision regarding which Microsoft 19 licensing options to choose, weren't you? 20 Answer: Yes. 21 Question: And in making that 22 decision, ZEos concluded that the savings 23 available to ZEos under a per-processor license 24 outweighed the benefits of a per-copy license; 25 is that correct? 8916 1 Answer: Yes. 2 Question: And that was a calculated 3 business decision, was it not? 4 Answer: That's right. 5 Question: And you believed it was a 6 sensible business decision at the time, didn't 7 you? 8 Answer: For the company, it was 9 absolutely sensible. 10 Question: And ZEos was offered the 11 option of a per-copy license, was it not? 12 Answer: A ludicrous option, yes. 13 Question: An option that you thought 14 was too expensive; correct? 15 Answer: Yes. 16 Question: And an option whose 17 benefits you thought were outweighed by the 18 price discount given in connection with the 19 per-processor license; is that correct? 20 Answer: Whose benefits were 21 outweighed. I can't think of a benefit the way 22 it was structured. 23 Question: Well, the benefit would be 24 it would give ZEos maximum flexibility about 25 which operating system to install on its 8917 1 machines, correct? 2 Answer: Yes. 3 Question: And in your experience, you 4 as a customer of Microsoft were able to get the 5 best pricing option from Microsoft on a 6 per-system or per-processor license, correct? 7 Answer: That's absolutely the best 8 pricing they offered us. And it's absolutely 9 not what we asked for on a repeated basis. 10 Question: And you agree, don't you, 11 that it's easier to account for royalty 12 obligations on a per-system basis than a 13 per-copy basis because under the former 14 options, Microsoft and the OEM need only keep 15 track of the total number of systems sold, 16 correct? 17 Answer: Absolutely not correct. We 18 took orders for and custom-built computers. 19 To keep track of how many people 20 actually order DOS or Windows was absolutely 21 trivial. 22 This is like, you know, charging 23 people that walk into Target for everything in 24 an aisle because it would be easier than going 25 through their shopping cart. 8918 1 Question: Well, what about for larger 2 OEMs such as Compaq and IBM that had many 3 different models and sold through many 4 different channels? Do you think it was easier 5 for them to account for royalty obligations on 6 a per-system basis? 7 Answer: I would think that it should 8 take no more than a clicking of a few fingers 9 on a computer to figure out how much a company 10 sold, particularly a company in the computer 11 business who is obviously computerized. 12 Question: So you think it's just as 13 easy to keep track for a large OEM operating 14 systems on a per-copy basis as it is on a 15 per-system basis? 16 Answer: Absolutely. I mean, they 17 know whatever customer has in their computer. 18 You call them for tech support, give them a 19 serial number, they know what's in that 20 computer. 21 Question: I have proposed a five 22 percent exclusion for systems sold to the 23 federal government. And this proposal appears 24 to be acceptable to you. 25 Do you see that? 8919 1 Answer: Yes. 2 Question: And what was that 3 exclusion? 4 Answer: That exclusion was that we 5 could not pay the royalty on those systems sold 6 to the federal government that included NetWare 7 installed with a maximum of five percent of our 8 sales. 9 Question: The federal government 10 wanted to install a network operating system 11 such as Novell NetWare on some of the computers 12 it purchased from ZEos; is that correct? 13 Answer: Yes. In this agreement it 14 had to be not just such as Novell NetWare. It 15 had to be Novell NetWare. 16 Question: Well, sir, isn't it true 17 that under the exclusion, ZEos could sell 18 computers to the government with either no 19 operating system on it or a network operating 20 system on it and owe no royalty to Microsoft 21 even though those computers were covered by 22 ZEos's license agreement with Microsoft? 23 Answer: I don't recall if the no 24 operating system applied. 25 Yes on your answer to the -- Novell 8920 1 was installed up to a maximum of five percent 2 of our sales. 3 Question: Can you look, sir, at 4 Plaintiffs' Exhibit 4425? It was admitted into 5 evidence during Mr. Hagstrom's examination of 6 you. 7 Answer: Okay. 8 Question: And I'd ask you to refer 9 specifically to paragraph 8 of that document. 10 Answer: Okay. 11 Question: Now, this is the amendment 12 to ZEos's licensing agreement that effectuated 13 the exception for the federal government that 14 we were talking about earlier? 15 Answer: Yes. 16 Question: And, under this exception, 17 ZEos could provide computers to the federal 18 government with either no operating system 19 provided or a non-Microsoft operating system 20 provided and owe no royalty to Microsoft under 21 ZEos's per-processor license? 22 Answer: Yes. 23 Question: Now, this language of the 24 amendment here, paragraph 8, it includes no 25 requirement that the non-Microsoft operating 8921 1 system be Novell NetWare, does it? 2 Answer: You're right. That's right. 3 Question: And it also enables ZEos to 4 ship computers to the federal government with 5 no operating system installed on it, correct? 6 Answer: Correct. 7 Question: Well, look at the last 8 paragraph of the letter. Defendant's Exhibit 9 3747. 10 Answer: Yes. 11 Question: Which reads, enclosed is an 12 amendment 3 which incorporates this exclusion. 13 If this is acceptable, please execute both 14 originals and return to me. 15 Do you see that? 16 Answer: Yeah. 17 Question: And that's a reference to 18 amendment Number 3, which is Plaintiffs' 19 Exhibit 4425, correct? 20 Answer: Yes. The amendment must have 21 been backdated. 22 Question: I think you testified 23 earlier that ZEos never licensed DR-DOS; is 24 that correct? 25 Answer: Not while I worked there. 8922 1 Question: And you don't recall while 2 you worked at ZEos anyone from ZEos having 3 discussions with Digital Research or Novell 4 about possibly licensing DR-DOS, do you? 5 Answer: I don't think -- I just don't 6 recall it. 7 Question: And you certainly don't 8 recall any discussions with Digital Research or 9 Novell about the price of DR-DOS, do you? 10 Answer: No. 11 Question: But you agree, don't you, 12 that because DR-DOS wasn't a well-known brand, 13 that customers wouldn't be interested in it 14 unless it was less expensive than the Microsoft 15 operating system, correct? 16 Answer: Yes. I believe that our 17 interest in offering DR-DOS would have been 18 only if we could have offered it at a lesser 19 price than MS-DOS. 20 Question: And you believe that your 21 customers would not have been interested in a 22 computer with DR-DOS on it rather than MS-DOS 23 unless that computer cost less, correct? 24 Answer: From 1990 on, yeah, I believe 25 that. 8923 1 Question: If customers were going to 2 get a less-known brand, they wanted to get it 3 at a discount, correct? 4 Answer: Yes. 5 Question: Now, you don't recall one 6 way or another whether ZEos ever tested DR-DOS, 7 do you? 8 Answer: I don't recall. 9 Question: Now, there were reports in 10 early 1990s that DR-DOS had compatibility 11 problems with Windows, weren't there? 12 Answer: I don't know. 13 Question: You don't recall such 14 reports? 15 Answer: No. By the time we had the 16 license agreement, I was pretty much done 17 looking at DOS alternatives. 18 Question: After you signed the 19 license agreement with Microsoft, you stopped 20 monitoring what was going on with competing 21 operating systems? 22 Answer: DOS alternatives. 23 Question: Did ZEos ever test DR-DOS 24 6.0 with Windows on its notebook computers? 25 Answer: In 1991, we weren't offering 8924 1 DR-DOS. 2 Question: So you would not have 3 tested it? 4 Answer: We would not have tested it. 5 Question: Well, if it's true that 6 there was such compatibility problems between 7 DR-DOS 6.0 and Windows, would that have 8 affected ZEos's willingness to license DR-DOS 9 6.0 with its machines? 10 Answer: Well, Digital Research would 11 have had a responsibility to make it work. 12 Question: Such compatibility problem 13 would be of concern to you as a personal 14 computer manufacturer, correct? 15 Answer: They would have to be fixed, 16 yes. 17 Question: And a lot of your customers 18 wanted Windows installed on their machines, 19 correct? 20 Answer: Yes. 21 Question: And you would not have 22 wanted to install a DR-DOS on your machine, a 23 version of DOS on your machine that might be 24 incompatible with Windows, correct? 25 (Whereupon, reading of the deposition 8925 1 to the jury adjourned.) 2 MR. CASHMAN: Objection. 3 Answer: Well, depends -- 4 THE COURT: Just a minute. 5 MR. GREEN: What did I do? 6 MR. CASHMAN: Restate the question. 7 MR. GREEN: I'll do it again. I'm 8 sorry. 9 (Whereupon, reading of the deposition 10 to the jury resumed.) 11 Question: And you would not have 12 wanted to install a DOS on your machine, a 13 version of DOS on your machine that might be 14 incompatible with Windows, correct? 15 Answer: Well, depends how you define 16 incompatible. So, you know, a piece of 17 software may have to be loaded differently or 18 another software substituted to make it 19 compatible. 20 Clearly DR-DOS and MS-DOS were not 21 identical in their technical workings. What I 22 would care about as a ZEos marketing person 23 would be that the end user's experience would 24 be the same. 25 Question: Now, was DR-DOS considered 8926 1 to be a clone of MS-DOS? 2 Answer: Functionally equivalent. 3 Question: Is the word clone sometimes 4 used in connection with that? 5 Answer: Well, clone we used in the 6 industry as an exact copy, you know. I don't 7 know that I would go so far as to say it was an 8 exact copy. 9 Question: Did you ever hear DR-DOS 10 being referred to as a clone of MS-DOS? 11 Answer: I heard the term clone 12 applied more to PC hardware themselves as 13 opposed to software. 14 Question: The fact that they were not 15 identical might mean that DR-DOS would have 16 compatibility issues with other software 17 written for MS-DOS; is that correct? 18 Answer: It might. 19 THE COURT: Okay. We are going to 20 pause here for the day. Mark that spot. 21 Ladies and gentlemen of the jury, 22 remember the admonition previously given. 23 Leave your notebooks here. 24 We'll see you at 8:30 tomorrow 25 morning. Please drive carefully. 8927 1 Tomorrow I need to tell you one of the 2 jurors has to go to a memorial service, so you 3 will only be in session until 11 a.m., and then 4 you'll be off the rest of the day tomorrow. 5 Okay. 6 (The following record was made out of 7 the presence of the jury.) 8 THE COURT: Take a recess for ten 9 minutes. 10 (A recess was taken from 2:57 p.m. 11 to 3:24 p.m.) 12 THE COURT: All right. Mr. -- which 13 one? 14 MR. CASHMAN: Michael Cashman for 15 Plaintiffs, Your Honor. 16 THE COURT: Didn't know if you were 17 going to do it again today. 18 Page 330. 19 MR. CASHMAN: We are talking about the 20 testimony of Richard Dixon, who was a DRI 21 executive. 22 I just want to note that virtually all 23 of the appeals that we have discussed so far in 24 Dixon and that we will be discussing are no 25 different than the testimony that was provided 8928 1 by Mr. Speakman. 2 Your Honor, you will recall from 3 watching the testimony of Mr. Speakman that he 4 spoke throughout about his personal knowledge 5 which was based largely on his interactions 6 with OEMs. And all this testimony is in the 7 same category as that which was provided by 8 Mr. Speakman. 9 During the course of Mr. Speakman's 10 testimony, I wrote down various page and line 11 numbers which were virtually the same as what 12 is being offered through Mr. Dixon, but they 13 were so voluminous that it seemed unnecessary 14 or pointless to go through them all. 15 And suffice it to say that they were 16 extremely voluminous, and it's Plaintiffs' 17 position that all of Mr. Dixon's testimony 18 falls in the same category of personal 19 knowledge, not hearsay, that should be admitted 20 and the Special Master's rulings on these 21 particular appeals should be overruled. 22 With that, turning to the first 23 designation, which is at page 330, line 18. 24 Here Mr. Dixon is asked based on his 25 understanding of how the Microsoft contract 8929 1 worked with his OEMs is asked for his 2 understanding of what would happen if a 3 customer had committed to buy 500,000 units 4 from Microsoft. 5 And Microsoft has objected to this 6 testimony because Mr. Dixon did not read the 7 contract. 8 Again, there is no requirement that a 9 witness read a contract to have personal 10 knowledge of what he understands its contents 11 are, which is the case here. 12 Clearly, the witness does have 13 knowledge because it was explained to him on 14 multiple occasions, as is evident from the 15 testimony, by his customers. 16 And these are exactly the kind of 17 business inferences that a business executive 18 such as Mr. Dixon is entitled to draw, and 19 which business executives do draw on an 20 everyday basis. 21 And under the cases that we've 22 provided to the Court previously, we believe 23 this testimony should be admitted. 24 And, in particular, the Agfa case 25 again, which is the Seventh Circuit case by 8930 1 Judge Posner in which he indicates that 2 knowledge acquired through others may be 3 personal knowledge, and it's not hearsay, and 4 that's particularly true in the case of 5 business executives. 6 Thank you. 7 THE COURT: Thank you, sir. 8 Mr. Tuggy? 9 MR. TUGGY: Yes. The fact that 10 Microsoft allowed certain Speakman testimony 11 into evidence in the course of our meet and 12 confer and through the Special Master process 13 does not make Mr. Dixon's testimony at issue 14 today somehow admissible. 15 With respect to page 330, lines 18, to 16 331, line 3, here the witness is testifying 17 about Microsoft's contracts. And he's saying 18 that Microsoft provides in its contracts for a 19 certain minimum commitment, and then if the 20 customer cannot satisfy that minimum 21 commitment, then credits can be carried over to 22 the subsequent contract. 23 And the witness states at page 331, 24 line 1, that the credits would apply only if 25 the customer continued to license full 8931 1 Microsoft products, but would not apply, 2 according to the witness, if they were going to 3 be using a mix of DR-DOS product. 4 Now, the witness at page 331, lines 6 5 to 10, explains that this information was not 6 something within his personal knowledge, but it 7 was information told him by executives of 8 certain OEMs. 9 At page 331, line 7, the witness 10 explains that the information was provided to 11 me again by Hyundai and by Trigem executive 12 management in discussing how they could license 13 our product and the licensing policies that 14 Microsoft was providing to them. 15 So under Frunzar versus Allied 16 Property, the Iowa Supreme Court case at 548 17 N.W. 2d 880, and Howell versus Mandelbaum and 18 Sons -- that's M-a-n-d-e-l-b-a-u-m -- at 160 19 Iowa 119, this testimony lacks foundation 20 because it's based on hearsay. 21 The Special Master ruled, sustained 22 Microsoft's lack of personal knowledge and 23 insufficient foundation objection based on the 24 argument that this was not within the witness's 25 personal knowledge, but was information that 8932 1 the witness learned only because he was told 2 that by someone else. 3 So because the deposition contains 4 testimony which confirms that these statements 5 are not within the witness's personal 6 knowledge, but information told him by others, 7 it lacks foundation, he lacks personal 8 knowledge, and the Special Master's ruling 9 should be sustained. 10 And just in addition, at page 325, 11 lines 2 to 10, is the testimony where, in a 12 general sense, this witness explained that when 13 he's testifying about Microsoft's contracts, 14 it's not based on information provided to him 15 by Microsoft or contracts he has read. It's 16 based upon what he was told by others. 17 And as such, he lacks personal 18 knowledge and this objection should be 19 sustained. 20 MR. CASHMAN: Your Honor, first of 21 all, the hearsay argument is without merit 22 because there's no hearsay objection here. 23 There was no hearsay ruling. 24 Secondly, the Frunzar and Howell cases 25 are inapposite for reasons I've previously 8933 1 identified. They don't have anything to do 2 with foundation or personal knowledge. It's 3 clear that the witness does have personal 4 knowledge and does have foundation to testify 5 as he did. 6 If Microsoft thinks there's a problem 7 about his knowledge of the contracts, that's an 8 issue that goes to weight, not admissibility. 9 And they had full opportunity to 10 cross-examine Mr. Dixon on the extent of his 11 knowledge. 12 And that yet highlights, again, from 13 the Frunzar and Mandelbaum cases or Howell 14 versus Mandelbaum cases are inapposite, because 15 in those cases you are talking about a discrete 16 statement that was made by an out-of-court 17 declarant where only those statements were 18 being offered for their truth. 19 And they couldn't be cross-examined, 20 their veracity couldn't be questioned, and 21 that's wholly, wholly different than what's 22 happening with Mr. Dixon where he can be 23 cross-examined. He could have been 24 cross-examined, what's the extent of your 25 knowledge, what's the basis for your knowledge, 8934 1 where did you get it? 2 That's all fair game. That's how the 3 cross-examination process works. 4 It doesn't make his testimony 5 inadmissible because he acquired his knowledge 6 through the course of contact with his 7 customers. 8 And the fact that this isn't hearsay 9 and that he does have foundation is highlighted 10 by the testimony which Mr. Tuggy cites in an 11 effort to say why it should be excluded. 12 And I'm specifically referencing line 13 -- 331, line 15. 14 There Mr. Dixon is asked if this is, 15 you know, one conversation or whatnot, and he 16 says it was a lot. Quote, it was a lot. 17 So that shows that this is 18 accumulation of knowledge and that he's not 19 citing a single statement made to him by -- as 20 in the case of the Frunzar case, one single 21 assertion by another person about uninsured 22 motor vehicle status. 23 So the fact that you're talking about 24 cumulative information underscores that this is 25 personal knowledge, not hearsay. And that 8935 1 Mr. Dixon does have foundation and personal 2 knowledge to testify about these things. 3 And, again, that's exactly what 4 Speakman was doing when he testified earlier 5 today. 6 This is -- I think I mentioned this to 7 the Court the last time we talked about Dixon, 8 but this is akin -- the trustworthiness of 9 personal knowledge acquired by business people 10 is akin to the residual exception under the 11 Iowa Rules 803(24), which didn't exist at the 12 time that the Howell versus Mandelbaum case was 13 decided, of course, and I believe was adopted 14 in Iowa in 1983. 15 And the courts which have interpreted 16 that rule and have said that five criteria must 17 exist to use 803(24). Those five criteria are 18 trustworthiness, materiality, necessity, 19 notice, and service in the interest of justice. 20 And the main Iowa case on 803(24) is 21 State versus Rojas, 524 N.W. 2d 659, and they 22 discuss that exception at 662 to 663. That's 23 Iowa Supreme Court 1994. 24 And the reason I cite 803(24) is 25 because, again, it underscores that even if 8936 1 under some interpretation this could be viewed 2 as hearsay, it should be admitted because it's 3 trustworthy. 4 That's what business people do every 5 day. That's basically what they recognize -- 6 Judge Posner recognized in the Agfa case. He 7 said it wasn't hearsay. 8 But assuming that the conclusion that 9 was drawn that it was hearsay, it still should 10 be admitted because it's trustworthy. It's the 11 kind of thing that happens on a day-to-day 12 basis with businessmen. 13 It's material, obviously, because of 14 reasons we've discussed in connection with the 15 Callahan issue; that this is material to 16 Microsoft's conduct or misconduct. 17 Necessity because it's necessary to 18 prove the claims. 19 Notice. Microsoft is well aware of 20 all this evidence, so it's not something that's 21 at the last minute. 22 And service of the interest of justice 23 because, again, we shouldn't have to go all 24 over the world to find these OEMs to obtain 25 their testimony when it's clear and based on 8937 1 the testimony provided by Mr. Dixon and so many 2 of the other people who had dealings with OEMs 3 that this kind of testimony should be admitted 4 on these claims. 5 So Plaintiffs submit that these 6 objections should be overruled. 7 Thank you. 8 THE COURT: Anything further, 9 Mr. Tuggy? 10 MR. TUGGY: There was a new argument 11 and that had to do with 803(24), the catch-all 12 exception to the hearsay rule, which is 13 narrowly applied. 14 That does not apply to this testimony 15 because -- well, for three reasons at least. 16 One is that these communications 17 received from OEMs in the course of 18 negotiations are not inherently trustworthy. 19 That's something we've discussed over time. 20 Second, there's no showing of 21 necessity. You may recall that earlier in 22 argument, Mr. Gralewski pointed out that 23 Microsoft ought to be able to cross-examine 24 these people by going overseas, finding them, 25 and conducting our examination of the OEM 8938 1 representatives. 2 But, here now, the Plaintiffs say that 3 it's necessary that they have this hearsay 4 admitted because they shouldn't have to look 5 for these people and have their depositions 6 taken, which is not the case. 7 In fact, Plaintiffs have no necessity 8 for this evidence and have no reason or basis 9 for not having conducted the examinations of 10 these OEMs that could permit them to use the 11 evidence at trial. 12 And, finally, this is not to be 13 admitted in the interest of justice when 14 Plaintiffs could have gotten testimony, when 15 it's untrustworthy, statements made in the 16 course of negotiations, and where it is not 17 necessary that this hearsay somehow be 18 admitted. 19 In addition, Plaintiffs suggest that 20 Microsoft somehow has adequate notice of their 21 argument that this would be admitted under the 22 catch-all exception to the hearsay rule. 23 And this is the first they've said 24 that they think somehow this particular part, 25 this particular item of testimony ought to be 8939 1 admissible under that section of the hearsay 2 rule. 3 And, in other words, no notice has 4 been given to Microsoft that they intended to 5 offer this under that exception. And for those 6 reasons, under the catch-all exception, this 7 testimony ought not be admitted. 8 MR. CASHMAN: Well, Your Honor, just 9 to be clear, I think the testimony is clear and 10 the law is clear that this is not hearsay. 11 And so the arguments that I have 12 advanced relative to Callahan and relative to 13 the exception to the hearsay rule are arguments 14 in the alternative. 15 The Plaintiffs submit that this 16 testimony is not hearsay because there are no 17 statements. We went over that -- and I'm not 18 going to reargue what we talked about before, 19 but there are no statements. 20 And the cases are crystal clear that a 21 party can obtain personal knowledge from 22 statements of others. 23 The authorities are clear, the 24 evidence authorities and the cases. 25 So this isn't hearsay. 8940 1 But on the alternative argument, as it 2 relates to 803(24), I think that Microsoft is 3 incorrect in several respects. 4 First of all, when the rule was 5 initially adopted in Iowa, the cases stated 6 that it should be narrowly applied, but that 7 view has -- with experience with that rule has 8 been -- I don't want to say rejected, but has 9 not been applied the way that Microsoft 10 suggests. 11 That's why these five factors are what 12 would be applied in the case of looking at 13 whether there's reason for it to come in under 14 the residual exception. 15 And Microsoft is incorrect because 16 there is no reason to suspect that the personal 17 knowledge that Mr. Dixon obtained from his 18 customers is untrustworthy. 19 Mr. Tuggy is confusing trustworthiness 20 with truth, and that's not what is required. 21 Trustworthiness means is it -- is the 22 information that Mr. Dixon has trustworthy and 23 reliable. 24 And when you deal with a multitude of 25 customers and can triangulate the information 8941 1 that they give you and come to some personal 2 conclusions, again, that's personal knowledge, 3 but it also underscores why it's trustworthy 4 and reliable. 5 Necessity, there is necessity here 6 because of the kind of case we've got. 7 You know, the Plaintiffs were never in 8 a position where they could go all over the 9 world and take these depositions. 10 Rather, it was always agreed that we 11 would be able to use the evidence from the MDL 12 proceeding and the California proceeding and 13 the other proceeding. 14 And that also relates to notice 15 because Mr. Tuggy is incorrect. It's not 16 notice of the argument that counts. It's 17 notice of the evidence. 18 The cases make it clear that it's 19 notice of the evidence. And Microsoft has 20 known about this evidence for many, many, many 21 years. 22 The interests of justice are served 23 because -- again, this relate -- all these are 24 related, but when we have independent proof, 25 through people such as Speakman, and we have 8942 1 independent proof that is coming in in terms of 2 the contracts themselves and other testimony 3 about the contracts, testimony from people like 4 Mr. Apple this afternoon, verifies that this 5 evidence is reliable. 6 And so it serves the interest of 7 justice that the Plaintiffs be permitted to 8 introduce evidence that is material, that is 9 reliable, is trustworthy, and is necessary, and 10 of which Microsoft has had notice for years. 11 So there's a variety of reasons why 12 these arguments that Microsoft is throwing up 13 in opposition to plainly admissible testimony 14 should be rejected. 15 Thank you. 16 THE COURT: You've covered, it seems 17 to me -- I may be wrong, but it seems like you 18 covered 331, 6 through 19, also; is that right? 19 MR. TUGGY: It's all part of the same 20 group of testimony. 21 MR. CASHMAN: I just -- the only 22 comment I want to make about 331, Your Honor -- 23 THE COURT: Go ahead. 24 MR. CASHMAN: -- is to highlight that 25 the hearsay objection is without merit given 8943 1 the cumulative nature of the knowledge that's 2 being described here, and, for that reason, 3 clearly is not a statement under the hearsay 4 rule. 5 There's no statement. There's no 6 out-of-court statement, and there's no 7 out-of-court statement that's being offered as 8 an assertion of truth. 9 Rather, Mr. Dixon is testifying about 10 what he knows based on his interactions with 11 his customers. 12 MR. TUGGY: To respond to that narrow 13 argument, the fact that there is a lot of 14 hearsay doesn't make it nonhearsay. 15 He's testifying that I spoke with a 16 lot of my customers and a lot of them spoke to 17 me about Microsoft policies and licenses. 18 He doesn't say that a lot of people 19 spoke to him on a particular subject or that a 20 lot of OEMs spoke with him about the Trigem 21 contract. 22 He's just saying I spoke with a lot of 23 people on a lot of subjects relating to 24 Microsoft policies, and that's what occurred in 25 my practice, in my job function for DRI. 8944 1 And the fact that he spoke to a lot of 2 people, we all do in the course and scope of 3 our employment, doesn't mean that what they say 4 to us becomes nonhearsay. 5 It has to satisfy the hearsay 6 exception. And here the Plaintiffs are 7 claiming that it's not hearsay, it actually 8 becomes the personal knowledge of Mr. Dixon, 9 which the Frunzar and Mandelbaum case stand 10 firmly against. 11 To the extent that a witness testifies 12 to a fact, and it is educed on examination that 13 that fact is based solely on information told 14 him by another, that is inadmissible hearsay. 15 And it's on that basis that the 16 Special Master sustained Microsoft's 17 objections, and Microsoft requests that his 18 rulings be sustained here as well. 19 MR. CASHMAN: Well, Your Honor, I 20 mean, this is -- the argument is a silly one. 21 And I'm going to start again with 22 Frunzar and Mandelbaum. 23 That Mandelbaum case, first of all, 24 was about corporate admission. And that's a 25 1913 case that should not be relied on in light 8945 1 of the development of the cases which we've 2 cited. 3 Mr. Tuggy cites it overly broadly and 4 as well as the Frunzar case. 5 Under his definition, any assertion of 6 fact by any witness would constitute hearsay, 7 and that's not the rule. 8 In the Frunzar case, the witness was 9 repeating one statement from one individual. 10 One statement from one individual. 11 And in the Mandelbaum case, that was 12 one statement from one individual. 13 Here, in contrast, if we look 14 specifically at the testimony, it's obvious why 15 Microsoft is incorrect. 16 The question at line 6, where did you 17 learn that? Where did he get his knowledge? 18 That's at line 6 on page 31. 19 There's nothing inappropriate about 20 that question. 21 Then you come to the answer. That was 22 information provided me, again, by Hyundai and 23 Trigem executive management in discussing how 24 they could license our product. 25 So up to that point, there's not 8946 1 anything there that could be construed as a 2 statement under any circumstances and the 3 licensing policies that Microsoft was providing 4 to them. 5 So in that answer, line 6 through 10, 6 there is not a single assertion of any sort, 7 let alone an assertion of fact that's a 8 statement attributed to an individual. 9 It's clearly not hearsay. All that 10 Mr. Dixon is doing is identifying where he got 11 his information. So there's no hearsay there. 12 Okay. Next question, by the way, when 13 these customers you were talking about would 14 talk to you about Microsoft practices or 15 policies or licensing terms, would they just do 16 it on one occasion or would they come up 17 frequently? 18 So the question is, did you have one 19 conversation or did you have multiples? 20 And he says multiples. 21 So he's saying -- it doesn't even come 22 close, again, to hearsay question, nor could it 23 be construed as speculation because all he's 24 saying is I have cumulative knowledge over 25 weeks, months, years of dealing with these 8947 1 people. 2 So the objections clearly have no 3 merit here. 4 Continuing on to the next question. 5 How do you know it was not just -- what led you 6 to believe it was not just a polite way of them 7 telling you to get lost? 8 Actually, I'm going to stop there 9 because that's not part of the designation, 10 Your Honor. 11 But the two questions and answers that 12 I read just prior have no relationship to any 13 hearsay issue and clearly are within the 14 personal knowledge of Mr. Dixon to say where he 15 got his information and how often he had 16 conversations. 17 Thank you. 18 THE COURT: Any more comment on that 19 before we go to the next one? 20 MR. TUGGY: No, Your Honor. 21 THE COURT: Okay. So I guess we are 22 on Number 8; is that right? 23 MR. CASHMAN: Number 8. 331, 20. 24 THE COURT: The one you were going to 25 start on. 8948 1 MR. CASHMAN: Right. And 332 -- 2 through 332, 7. 3 So, here again, the same arguments 4 apply, but he is simply being asked how do you 5 know they weren't being polite. And that can't 6 be construed as something that's outside of the 7 witness's personal knowledge when he's being 8 asked what is your reason for thinking that 9 somebody wasn't just being polite. 10 So those objections should be 11 overruled clearly. 12 And then hearsay, the witness doesn't 13 identify a person that he's quoting, which 14 distinguishes it from the Frunzar case and 15 Mandelbaum. 16 He identifies cumulative knowledge 17 that he has over the years, which he contrasted 18 from a statement of fact by an out-of-court 19 person that is being asserted for its truth. 20 That's not present here. 21 But, rather, he's citing his knowledge 22 which put it in the realm of the Agfa, 23 Robinson, and Kansas City Power and Light, and 24 the IBEW cases. 25 So Plaintiffs submit that these 8949 1 objections to these lines of testimony should 2 be overruled. 3 Thank you. 4 THE COURT: Thank you. 5 MR. TUGGY: Your Honor, the Special 6 Master sustained two sets of objections to this 7 testimony. 8 The first is the hearsay objection and 9 the second was insufficient foundation and lack 10 of personal knowledge, each of which are being 11 appealed by Plaintiffs. 12 In this block of testimony, the 13 witness was asked whether these OEM 14 representatives were, in fact, being 15 trustworthy when they spoke with the witness, 16 and the witness speculates about two things in 17 his answer. 18 The witness speculates about why it 19 was Trigem, a particular OEM, licensed DR-DOS. 20 The witness says they -- this is at line 25, 21 page 331. They were so convinced that they had 22 a great market opportunity with our product for 23 their home computer that they went ahead and 24 licensed from us DR-DOS and put that on the 25 system. 8950 1 Now, the fact that the OEMs licensed 2 DR-DOS is within the witness's personal 3 knowledge. But why it was the OEM decided to 4 do that is not. This is the witness 5 speculating about what is in the OEM's mind, 6 and there's no testimony here to the effect, 7 for example, that that statement is based on 8 what Trigem said to him. 9 Then, the witness says, beginning at 10 page 332, line 4, additionally, Trigem sent a 11 check to Microsoft for MS-DOS even though that 12 wasn't even on the computer itself. 13 The fact that Trigem sent a check to 14 Microsoft for MS-DOS is not something within 15 the witness's personal knowledge. He doesn't 16 know that that occurred except that perhaps 17 that was something told him by Trigem. So for 18 that information, it's not within his personal 19 knowledge. 20 As a result, Microsoft's objection 21 based on lack of personal knowledge and 22 insufficient foundation should be sustained for 23 both of these elements of the answer. That is, 24 speculating about what's in the mind of Trigem 25 and what Trigem's relationship was with 8951 1 Microsoft. 2 Microsoft's hearsay objection should 3 be sustained as to that portion of this 4 testimony where the witness is testifying about 5 Trigem's relationship with Microsoft. And that 6 is that Trigem both paid Microsoft for MS-DOS 7 while also paying DR-DOS -- or DRI for DR-DOS. 8 Again, the fact that Trigem licensed 9 from DRI, the fact that Trigem paid DRI a 10 licensing fee is within the witness's personal 11 knowledge. 12 But what Trigem's relationship was 13 with Microsoft is something the witness has 14 admitted in this deposition, including at page 15 325, lines 2 to 10, is not something that he 16 knows personally. It's only information that 17 he obtained from statements by representatives 18 at Trigem. 19 And for that reason Microsoft's 20 hearsay objection should be sustained. 21 Now, as to the first sentence of his 22 answer, the witness says at page 331, line 23, 23 because in some circumstances the OEMs would 24 actually go ahead and pay the penalties of 25 licensing both sides. 8952 1 Now, what the OEMs did by way of 2 paying Microsoft is not something that the 3 witness states is within his personal 4 knowledge, and, in fact, he states that the 5 relationship Microsoft had with OEMs was not 6 within his personal knowledge. All he knows is 7 what the OEM did with DR-DOS. The other part 8 is just testimony based on hearsay. 9 Now, the Plaintiffs, as you heard 10 today, put testimony on by ZEos about what ZEos 11 did. 12 You will -- I assume you will deal 13 with testimony by Adam Harris, who is an OEM 14 with whom Mr. Speakman dealt, who will testify 15 about the OEM relationship with Microsoft. 16 Microsoft has produced its licensing 17 agreements, and Plaintiffs can use those for 18 what they wish. 19 Microsoft has produced for deposition 20 many of its executives in its OEM division who 21 could have been examined about what Trigem did 22 in its relationship with Microsoft. And those 23 would have been -- that would have been 24 information within the personal knowledge of 25 those who testified. 8953 1 But for Mr. Dixon to testify about 2 this violates the rule against hearsay and he 3 lacks personal knowledge because he's simply 4 stating information based upon the authority of 5 another. That is, the persons at the OEMs who 6 told him this is what occurred. 7 And Mandelbaum is decided, as 8 Plaintiffs say, in 1913, and Frunzar was 9 decided in 1996. And both cases say the same 10 thing, which is testimony of this type is 11 clearly inadmissible hearsay and ought to be 12 excluded. 13 And so for those reasons Microsoft 14 requests that the Special Master's rulings on 15 this section of testimony be sustained. 16 MR. CASHMAN: Your Honor, Microsoft's 17 position on these designations is ludicrous 18 because under their interpretation, no witness 19 would ever have personal knowledge, except a 20 Microsoft employee or something. And that's 21 just -- that's absurd. Truly absurd. 22 And if we look at this testimony, the 23 question is how do you know it was not just -- 24 what led you to believe it was not just a 25 polite way of them telling you to get lost, 8954 1 blowing you off? 2 So if we look at this in the hearsay 3 context first, this answer does not quote an 4 out-of-court statement to prove that they were 5 just being polite to him. He's instead 6 reciting his reasons for his belief that he had 7 accurate information. That's what this is 8 about, accurate information. 9 And he's got knowledge upon which he 10 can base his opinion, his personal opinion or 11 his personal conclusion because the OEMs would 12 go ahead and pay penalties of licensing both 13 sides. 14 Clearly, he's had experience with his 15 OEMs where they have paid under the contracts, 16 as was described today in Mr. Apple's 17 testimony. And he says Trigem is an example of 18 ultimately -- and is somebody who ultimately 19 did that. 20 That statement, for example, Trigem 21 ultimately did that, is a statement of personal 22 knowledge. He's not citing any out-of-court 23 statement. He's citing something he knows. 24 They were so convinced that they had a 25 great market opportunity with our product for 8955 1 their home computer that they went ahead and 2 licensed from us DR-DOS and put that on the 3 system. 4 That's everyday run-of-the-mill 5 knowledge that you gain from dealing with your 6 customers. 7 He's not quoting somebody or citing an 8 individual to say that they had in response to 9 the question whether they were just blowing him 10 off or not, he's explaining his basis based on 11 his personal knowledge for whether he thinks he 12 was getting accurate information. That's not 13 hearsay. 14 And it really boggles the mind to 15 think that Microsoft believes that the hearsay 16 rule, let alone foundation, precludes this kind 17 of testimony. 18 A witness wouldn't be able to testify 19 about anything under their formulation of these 20 rules. 21 Their claim should be rejected, Your 22 Honor, and these objections overruled. 23 Thank you. 24 THE COURT: Thank you. 25 Anything else, Mr. Tuggy? 8956 1 MR. TUGGY: Nothing further, Your 2 Honor. 3 MR. CASHMAN: The next designation 4 would be 332, 8, through 333, 2. 5 Here the question is, how long did you 6 understand the Microsoft contracts to be? 7 So, again, the question is the first 8 tip-off, because they're asking for the 9 witness's understanding, and his testimony in 10 that regard then is not proof -- he's not 11 providing an out-of-court statement by some 12 other person to prove that the Microsoft 13 contracts were of a specific duration or not. 14 That's not the purpose of the question 15 nor of the testimony. Rather, what's happening 16 is what's your understanding, Mr. Dixon? 17 What's your understanding? 18 He says, our understanding, they were 19 on a two-year basis. That was a point in time 20 in which they were trying to get a three-year 21 term, but, basically, they were a two-year 22 agreement. 23 So, again, no out-of-court statement 24 by a person, no assertion of fact by an 25 out-of-court declarant. It's not hearsay. 8957 1 The fact that Mr. Dixon gathers his 2 knowledge in the everyday course of his base 3 from his OEMs and comes to a belief such as he 4 states here, an understanding, is personal 5 knowledge, not hearsay. 6 I think the next question in the 7 designation goes on, how did you find out that 8 they tried to get a three-year term? 9 Answer: Customers would ask us about 10 what was our three-year pricing. 11 That's personal knowledge. 12 What was the term of our agreement? 13 Microsoft was offering them a three-year 14 agreement. How would we compete against that? 15 It was general discussion. 16 There's the key, general discussion. 17 That was held with the executives when 18 we were talking terms and conditions of 19 agreements. That is everyday run-of-the-mill 20 contract negotiation. 21 Again, it's incredible that Microsoft 22 thinks that somebody like Mr. Dixon wouldn't 23 have personal knowledge of the very contract 24 negotiations that he's involved in or that it 25 would be hearsay for him to talk about what he 8958 1 experienced in his contract negotiations. 2 This is just another example of 3 Microsoft talking out of both sides of the 4 mouth. We've heard it over and over again. 5 And, again, back to Mr. Sculley, if 6 Microsoft's rule were the rule, Mr. Sculley 7 couldn't have testified to anything in his 8 deposition, let alone the excerpts which they 9 wanted to put up in opening statement. 10 This is just plain old businessman's 11 personal knowledge based on contract 12 negotiations, and both of these objections 13 should be overruled. 14 Thank you. 15 THE COURT: Thank you. 16 Mr. Tuggy? 17 MR. TUGGY: Yes, Your Honor. 18 In this segment of testimony, 19 Mr. Dixon testifies about two things. 20 One, the length of Microsoft 21 contracts, which he says are two years; and, 22 second, whether Microsoft had attempted to get 23 three-year agreements. 24 Now, as for the testimony that 25 Microsoft's contracts were on a two-year basis, 8959 1 Mr. Dixon has testified in this deposition that 2 his knowledge about Microsoft's contracts were 3 not based on reviewing any Microsoft contracts. 4 They were not based on statements by Microsoft. 5 They were based on what was told him by OEMs. 6 In other words, an OEM representative 7 saying my contract with Microsoft is two years. 8 And then Mr. Dixon says, as if he knows it, 9 that Microsoft's contracts are two years in 10 terms. 11 But he doesn't know that through his 12 personal knowledge, which is why the Special 13 Master sustained the lack of personal knowledge 14 objection. And it's based on hearsay, which is 15 why the hearsay objection ought to be 16 sustained. 17 As to the second comment by Mr. Dixon, 18 which is that they were trying to get a 19 three-year term, that being Microsoft, here the 20 witness frankly comes closer to testifying 21 based on personal knowledge. 22 What he says was is my customers came 23 to me and said they wanted a three-year term, 24 and I -- and basically the way I understand the 25 testimony is he inferred from that that 8960 1 Microsoft must be offering a three-year term, 2 which is why his customers are asking for the 3 same thing. 4 So that would be an inference drawn 5 from personal knowledge. It is undisputed -- 6 not undisputed. The customers, he's testifying 7 my customers came to me and asked for a 8 three-year term. That is not subject to a 9 hearsay objection. It's not a statement being 10 offered for its truth. It's just what the 11 customers told him. 12 And he's inferring from that that 13 Microsoft must have asked for a three-year 14 term. Otherwise, why would my customers be 15 asking that of me. 16 Now, Microsoft's position is that it's 17 not a fair inference. Just because customers 18 come to you and say they want a three-year 19 term, that's not enough information upon which 20 to infer that Microsoft is asking for a 21 three-year term. 22 And the witness confirms that by 23 following up in his answer and saying, 24 Microsoft was offering them a three-year 25 agreement, how we could compete against that. 8961 1 It was a general discussion that was 2 held with the executives when we were talking 3 in terms and conditions of agreements. 4 And although the testimony is not 5 clear, I grant it, it appears what he's saying 6 is they asked for a three-year term and the 7 executives told me that's what Microsoft was 8 offering them. And based on the combination of 9 those things, I'm inferring that Microsoft is 10 offering them a three-year term. 11 And Microsoft's position -- and this 12 is also based on not only the Howell and 13 Frunzar case, but Ruby versus Easton, this is 14 Justice McCormick's opinion about testimony 15 based on hearsay. 16 And in that case, a police officer was 17 determining the point of impact of an accident, 18 and he based it both on things he personally 19 observed, like skid marks and the like, but 20 also it was based on interviews, information 21 given to the officer. 22 And because he couldn't draw the 23 conclusion about point of impact solely based 24 on what he personally observed, the evidence 25 was excluded as hearsay because it was, in 8962 1 part, necessarily based on specific hearsay. 2 And, for those reasons, Microsoft 3 requests that the testimony to which it has 4 objected here be excluded and that the Special 5 Master's rulings be sustained. 6 And I should point out that 7 Mr. Cashman has said that Microsoft's position 8 boggles the mind, is ludicrous, and is 9 incredible, and, however, he fails to 10 acknowledge that Justice McCormick sustained 11 the objections. 12 These are good objections and they 13 ought to be sustained. And his ruling ought to 14 be sustained and Microsoft requests that this 15 Court sustain Special Master McCormick's 16 rulings. 17 THE COURT: Anything else on this one? 18 MR. CASHMAN: Well, Your Honor, these 19 objections are not well taken. That's 20 demonstrated, I think, by Microsoft's clinging 21 on to two cases, which clearly are not even 22 remotely similar to the situation at hand. 23 They don't deal with any of the cases 24 which we've provided to the Court and which 25 make it clear that this kind of testimony is 8963 1 personal knowledge and is not hearsay. 2 The cases which the Plaintiffs have 3 cited are directly on point and are in stark 4 contrast to the claims, the unsupported claims 5 by Microsoft when it comes to the legal 6 authority. 7 Mr. Tuggy has reverted to arguing the 8 Ruby case, which I previously pointed out to 9 the Court isn't the law for the proposition for 10 which it stands, and, furthermore, is an 11 opinion case. 12 These aren't opinions. These are 13 facts that the witness is testifying about as 14 he understands them. 15 And, again, it is appropriate, and the 16 only way -- oftentimes the only way for 17 somebody to gain knowledge is through 18 conversation. 19 It would be as if Mr. Tuggy told me he 20 lives in Los Angeles and I believe him and so 21 that becomes part of my personal knowledge. 22 But I've never been to his house. I 23 don't know that he actually has a residence in 24 Los Angeles. 25 There are a lot of things about 8964 1 Mr. Tuggy that I don't know as a fact in the 2 sense that they describe it that would take it 3 outside the objections which they've made here. 4 But, in fact, when he tells me over 5 and over again, I live in Los Angeles, I don't 6 like to gamble in Las Vegas, and whatnot, I'm 7 not reciting his statements as truth, I take 8 that and it becomes part of my personal 9 knowledge. 10 And I would be entitled to testify 11 about the personal knowledge that I had gained 12 through my everyday interactions. 13 And the kind of testimony from 14 Mr. Dixon here is just the same. It's personal 15 knowledge he gets right through the course of 16 his business, and he's entitled to testify 17 about it. 18 Thank you. 19 THE COURT: Anything else on this one 20 before we move to 333? 21 MR. TUGGY: Nothing further. 22 THE COURT: All right. Number 12. 23 Page 333, lines 3 through 13. 24 MR. TUGGY: Your Honor, if I may. I 25 know the Plaintiffs are going next, but I 8965 1 wonder if we ought to combine 334, 1 to 16 2 because it is quite similar if Plaintiffs 3 agree. 4 MR. CASHMAN: Pardon me? 5 MR. TUGGY: The next segment is 333, 3 6 to 13. It seems to me that 334, 1 to 16, are 7 basically the same segment, and we can deal 8 with all these at once. 9 MR. CASHMAN: Well, we can -- this 10 will be quick. 333, 3 to 13, is a simple case 11 where Mr. Dixon is asked if he's aware of any 12 cases where Microsoft tied MS-DOS to the 13 purchase of Windows. 14 So he's asked for examples. 15 And the witness says yes. 16 There's no hearsay there, and that's 17 clearly personal knowledge. 18 When and where did that happen? It 19 happened on many occasions. Trying to think of 20 an example. 21 That's at 12 to 13. 22 Clearly that's personal knowledge. 23 There's no out-of-court statement by a person 24 being offered as an assertion of truth. 25 So then continuing over on to 334, 1 8966 1 through 16, Mr. Dixon is merely identifying the 2 circumstances, the examples that he was asked 3 to identify, and he describes that examples. 4 And he further identifies some of the 5 foundation for his conclusions. 6 These clearly fall in the category of 7 the Agfa case, which, as the Court will recall, 8 states that business executives are entitled to 9 testify on the personal knowledge they gained 10 through their contacts with customers. 11 And the Robinson case, the Kansas City 12 Power and Light case, and the IBEW case all are 13 directly on point. 14 Thank you. 15 THE COURT: Mr. Tuggy? 16 MR. TUGGY: Yes, Your Honor. 17 In this segment of testimony, 333, 18 lines 3 to 13, and 334, lines 1 to 15, the 19 witness is testifying about how Microsoft's 20 structured the pricing in its contracts. 21 The witness testified in this 22 deposition, however, that he does not have 23 personal knowledge of how Microsoft structures 24 the pricing in its contracts. 25 And that testimony is at page 56 and 8967 1 57 of the transcript, and I'll -- and in that 2 section of testimony, the witness is asked 3 whether to his knowledge -- the question at 4 page 56, line 15, is, but, to your knowledge, 5 you hadn't heard any of these OEMs tell you 6 that Microsoft required them to buy MS-DOS if 7 they bought Windows? 8 Answer: I would say no. 9 Question: And the bundle that you -- 10 that you're talking about is a pricing option 11 where individual companies would get the option 12 of buying both products, presumably at a 13 discount if they bought both together; correct? 14 Answer: Well, my understanding was 15 that the customer, then, shipped that bundle 16 out with his designated computer. 17 Question: Correct. But I'm talking 18 on the purchase side. On the licensing side 19 for the OEM. 20 Answer: I cannot speak to Microsoft 21 contracts, and I don't know how they were, you 22 know, structured in that way. 23 So here the line of questioning is how 24 is -- is there this tying, this bundling that 25 occurs in a way Microsoft prices Windows. 8968 1 In other words, does Microsoft price 2 Windows low if you buy MS-DOS, but high if you 3 buy DR-DOS. 4 And the witness is testifying that 5 under Microsoft's contracts with its OEMs, it 6 changes its price of Windows based upon whether 7 the underlying operating system is MS-DOS or 8 some non-MS-DOS product. Could be DR-DOS. It 9 could be PC DOS. It could be several forms of 10 DOS that were available during this period. 11 That testimony is not based upon 12 reviewing Microsoft contracts. It's not based 13 upon statements by Microsoft. It's based upon 14 what OEMs told Mr. Dixon was the contents of 15 Microsoft contracts. 16 And Mr. Dixon in his second segment of 17 testimony identifies those OEMs as Trigem, 18 about whom he's spoken before, and Compal, 19 C-o-m-p-a-l, which is an OEM in Taiwan that is 20 sometimes confused with Compaq, which is a 21 U.S.-based OEM. 22 And the Special Master sustained both 23 the lack of personal knowledge objection 24 because Mr. Dixon does not know how Microsoft 25 structures the pricing of its contracts and, in 8969 1 fact, the Plaintiffs have lots of licensing 2 agreements they can use if they want to prove 3 this point. 4 Obviously, they don't support what 5 Plaintiffs are trying to prove. Otherwise, 6 this testimony would, I guess, not be as 7 important to them. 8 In addition, the Special Master 9 sustained Microsoft's hearsay objection because 10 Mr. Dixon's statements about how Microsoft's 11 contracts were structured are not based on his 12 personal knowledge. Because when Microsoft was 13 doing the examination in April 1998, Mr. Dixon 14 answers the questions by saying I don't know 15 what the contracts say. 16 And then a month later, after meeting 17 with Caldera's lawyers, and again paid as a 18 consultant for Caldera, he begins testifying 19 about how he knows it because that's what OEMs 20 told him. 21 And try as the Caldera lawyers might 22 to show that that's somehow admissible because 23 that's what he was told by his customers, it 24 fails because under Iowa law it's hearsay and 25 he lacks personal knowledge and the evidence 8970 1 should be excluded and the Special Master's 2 ruling sustained. 3 MR. CASHMAN: Your Honor, Mr. Tuggy's 4 comments demonstrate why their objection should 5 be overruled. Because they point out the 6 cross-examination that they did, and that just 7 highlights why it goes to weight, not to 8 admissibility. 9 Furthermore, it's a misdirection play 10 because Mr. Dixon is not asked in these 11 segments of testimony about contract terms. 12 Mr. Dixon -- and this is Line 3 -- 13 were you aware of any cases where Microsoft 14 tied MS-DOS to the purchase of Windows? And by 15 that I mean pricing Windows so high, when one 16 would be purchased without MS-DOS, OEMs simply 17 couldn't afford to run Windows without another 18 operating system. 19 They aren't asking him for his 20 knowledge about contract terms. They are 21 asking him for examples where this situation 22 happened. 23 And then he says, yes, I know of 24 examples. 25 When and where did that happen? 8971 1 Then he says, several circumstances, 2 and he discusses one of which he is aware, 3 which he learned of through his personal 4 interactions with Trigem and others. 5 So not only is the argument that 6 Mr. Tuggy raises about the lack of personal 7 knowledge about the contracts irrelevant. It 8 also is true that they had full opportunity to 9 cross-examine on the level of knowledge 10 Mr. Dixon has on subjects such as this. 11 That's how it works. That's the right 12 way for a cross-examination to test a witness's 13 knowledge, the level of their knowledge. 14 Everything that Mr. Tuggy is arguing 15 is that. It's argument that they can make to 16 the Jury. It has nothing to do with the 17 admissibility of this testimony because it is 18 not hearsay. It's personal knowledge. 19 And right or wrong, whether the 20 witness is right or wrong about his belief 21 isn't the point. That is his belief. That's 22 his understanding. That's his knowledge. And 23 that's why they can go and cross -- have the 24 ability to cross-examine him. 25 They did cross-examine him. And then 8972 1 they can make the arguments whatever they want 2 to the Jury. But it doesn't have anything to 3 do with the objections which they've asserted 4 here. Because they are without merit and 5 should be overruled. 6 Thank you. 7 That takes us, I believe, Your Honor, 8 to 334, 1 through 16 -- or, I beg your pardon, 9 334, 20 -- 10 THE COURT: Did you have anything 11 more? 12 MR. TUGGY: Nothing further, Your 13 Honor. 14 THE COURT: Okay. So now we are on 15 334; right? 16 MR. CASHMAN: 334, 20. 17 THE COURT: I think so. 18 MR. TUGGY: Correct. 19 THE COURT: Okay. Line 20. 20 MR. CASHMAN: It starts on line 20, 21 and I think it would start with, let me just 22 ask you, were there situations where certain 23 software applications would not run on your -- 24 provided by MS, by Microsoft, would not run on 25 DR-DOS? 8973 1 Yes, that's true. 2 So, again, Mr. Dixon is being -- I 3 mean, the question is so clear that he's being 4 asked for personal knowledge. 5 His answer continues over on to 335 6 through line 16, I guess 15 it looks like. 7 There was a condition that took place 8 in Korea in which at the time Microsoft had 9 produced applications. 10 So the witness is just testifying here 11 about the circumstances under which he learned 12 the information to which he responds to the 13 question. 14 There's no hearsay here. The witness 15 is talking about what his understanding is. 16 So these objections should be 17 overruled. 18 I'm not going to repeat all the same 19 arguments that we went through. 20 THE COURT: Mr. Tuggy, how is this 21 hearsay? 22 MR. TUGGY: Yes, Your Honor. 23 This is -- actually, yeah, this 24 testimony is about whether Microsoft included 25 software code in MS -- I'm sorry, yeah, in 8974 1 MS-DOS -- strike that. 2 The question here is whether Microsoft 3 included software code in certain applications 4 that caused them not to run when they were used 5 with DR-DOS. That's the question. 6 And so the witness is asked about 7 whether certain applications would not run on 8 DR-DOS. 9 Now, if the witness had said I 10 observed Excel and Word running on DR-DOS and 11 they crashed, that would be testimony, that 12 would be admissible based on his personal 13 knowledge, and, in fact, Microsoft has not 14 objected to that. 15 If you take a look at page 336, 16 beginning at line 2, the question is, you 17 actually sat in a room where they were trying 18 to run one of these Microsoft programs, Excel 19 or Word or something like that on top of DR-DOS 20 and it -- 21 Question: Stopped? 22 Answer: Yes. 23 I mean, did you see that happen on the 24 computer screen? Yes. 25 All right. So what he's testifying to 8975 1 based on personal knowledge is that when one of 2 these applications ran on DR-DOS, it crashed. 3 Now, the reason why an application 4 might crash running on DR-DOS, the reasons are 5 many. There are many possibilities. 6 For example, DR-DOS may be 7 incompatible with the application causing the 8 application to crash. It may be that the 9 hardware configuration used with Excel or Word 10 was inappropriate causing the system to crash. 11 There's many different possibilities. 12 What the witness says is that the 13 cause of the crash was a software lock. 14 This is at page 335, line 6, where the 15 witness -- the sentence begins at line 5. 336, 16 line 5. 17 And they had a new addition that 18 appeared in the Korean market that had a 19 software lock on it which is a piece of 20 software that interrogates the computer and 21 says are you MS-DOS or are you DR-DOS or what 22 are you? Are you MS-DOS? If you're not 23 MS-DOS, then that application would terminate, 24 would stop running. 25 So the question is how does this 8976 1 salesman, Mr. Dixon, know that there's internal 2 code in Word and Excel that interrogates the 3 system to find out what underlying operating 4 system is running causing Word and Excel, only 5 in Korea by the way, to crash when it's run 6 with DR-DOS. 7 And during Microsoft's examination of 8 this witness, at pages 41 and 42 of the 9 deposition, the witness explains how he came to 10 this information. 11 There is a VAR, V-A-R, which stands 12 for value-added reseller, which is a company 13 that has a relationship with DR-DOS that 14 purchases DR-DOS product and then adds value to 15 the product somehow by putting it on a machine 16 or selling it in some other way, but licenses 17 it to others. And the name of this VAR is Hope 18 Electronics. It's a separate company. It's 19 not part of DR-DOS. 20 Hope Electronics engineers, according 21 to Mr. Dixon, tested this software. And 22 according to Mr. Dixon, he's not personally 23 aware of whether even Hope Electronics 24 decompiled the code. He doesn't know all the 25 tests that Hope Electronics conducted. But 8977 1 Hope Electronics told him that there's a 2 software lock that caused this software to 3 crash. 4 That's at pages 41 -- it's page 41, 5 line 18, to 42, line 10. 6 THE COURT: What page again? 7 MR. TUGGY: Page 41, line 18. 8 THE COURT: Okay. 9 MR. TUGGY: To page 42, 10. 10 And, then, the fact that Hope 11 Electronics made no effort to test the software 12 on other non-MS-DOS machines is at page 53, 21 13 to 24. 14 And the reason why that's important is 15 there is -- if, in fact, the software code 16 looked for MS-DOS and then crashed the system 17 if it couldn't find it in Word or Excel, you 18 would expect that if it were run then on PC DOS 19 or other underlying operating systems, it would 20 have the same effect. And none of that kind of 21 testing was done. 22 In other words, what this part of the 23 transcript shows is that this Hope Electronics 24 testing was not done with some high level of 25 expertise that you would expect, for example, 8978 1 of an expert like Mr. Schulman who Plaintiffs 2 will bring in to testify about subjects such as 3 this. 4 So they have a value-added reseller 5 with some engineers that conduct some tests in 6 Korea who then tell Mr. Dixon what the results 7 are. Mr. Dixon testifies here like it's true, 8 that there's these software locks. 9 The testimony is based on hearsay, not 10 based upon the witness's personal knowledge, 11 and it is not admissible under the Howell and 12 Frunzar cases. 13 For those reasons, the Special 14 Master's ruling sustaining Microsoft's hearsay 15 objection should be sustained. 16 MR. CASHMAN: Your Honor, I just have 17 some quick comments before we wrap up for the 18 day. 19 First of all, you'll notice that 20 Mr. Tuggy, whenever we start talking about a 21 designation, never talks about really what's in 22 the designation. 23 He goes on to talk about stuff that he 24 knows, information that he claims to be the 25 case from his knowledge of the case. 8979 1 Microsoft's position in the case. 2 And he doesn't focus on the 3 designation at hand, other than to pick out his 4 self-serving word or phrase. 5 But the question and the answer are 6 clear that Mr. Dixon is being asked for his 7 understanding or belief or his knowledge. 8 And, again, just because Mr. Dixon's 9 knowledge might be -- and I'm not saying this 10 is the case, but in the worst-case scenario, if 11 Mr. Dixon's knowledge was imperfect or 12 incomplete or wrong, those are all the subjects 13 of cross-examination. 14 And, again, Mr. Tuggy has highlighted 15 that very point when he cites other testimony 16 that Microsoft cross-examined this witness on. 17 The very fact that they could 18 cross-examine Mr. Dixon, it shows you that the 19 objections are wrong and should be overruled 20 because, A, the witness has personal knowledge 21 that can be tested. 22 B, his knowledge was tested, which is 23 one of the reasons for their hearsay rule, 24 primary reason for the hearsay rule when 25 there's an out-of-court statement that's 8980 1 offered for its truth where there is no 2 possibility of cross-examination. 3 So Mr. Tuggy has underscored why this 4 testimony is appropriate and should be 5 admitted. 6 That's all I'm going to say about that 7 particular designation. 8 The Plaintiffs are willing to submit 9 the rest of the designations without further 10 argument so that the Court can rule on 11 Mr. Dixon because time is short and Plaintiffs 12 would like to be in a position to play this 13 testimony soon. And also Miss Harlan, who I 14 think is ripe for rulings. 15 And furthermore, for the record, the 16 Plaintiffs, to expedite it for Your Honor are 17 going to withdraw the relevance objections to 18 the appeals which Microsoft had at 4 through 19 12. That's the last page of your rulings 20 chart. 21 THE COURT: You're withdrawing your 22 appeals? 23 MR. CASHMAN: We're withdrawing our 24 opposition to those designations. 25 MR. TUGGY: I don't have the same 8981 1 document as you, Mr. Cashman. Could you tell 2 me what designations those are so I can find 3 it? 4 THE COURT: It's the last page, page 5 6. You don't have it? 6 MR. TUGGY: Correct. I use a 7 different document for oral argument. 8 THE COURT: Oh. 9 MR. CASHMAN: 143, 3 to 8. 141, 16 to 10 17. 142, 6 to 22. 236, 6 to 22. 238, 17 to 11 244. 284, 14, to 284, 19. And 285, 10, to 12 286, 9. 13 THE COURT: What about the exhibits? 14 MR. CASHMAN: The exhibits, I am going 15 to review those one more time and I'm going to 16 advise Mr. Tuggy tonight. 17 MR. TUGGY: And those are -- pardon 18 me. 19 The relevance objections are your only 20 objections to that testimony so that clears 21 that testimony out; correct? 22 MR. CASHMAN: Yeah, the testimony 23 would be clear. 24 THE COURT: Okay. 25 MR. TUGGY: I would like to move this 8982 1 along as well. 2 The problem is that for each of these 3 subject matter areas, there's testimony in the 4 deposition where the witness says this 5 information was provided to me by someone else. 6 Like this last example, Hope 7 Electronics information, which is, I think, 8 important for the consideration of these 9 issues. 10 I could submit a letter with that or 11 we could -- I think we could do a fast oral 12 argument where the focus of my argument would 13 be just to provide you that information. But I 14 do think that that's important. 15 MR. CASHMAN: This is -- Plaintiffs 16 just proposed that the Court rule -- I mean, 17 the issues are the same. 18 We've told the Court that the witness 19 obtains his knowledge from OEMs is not hearsay. 20 So I don't think that Mr. Tuggy needs to 21 identify where they say he obtained the 22 information. That's not -- that's not 23 relevant. 24 The witness clearly has personal 25 knowledge that he gained from his interactions 8983 1 with OEMs, and it doesn't make any difference 2 in the context that Mr. Tuggy claims. 3 So we think that these issues should 4 be ruled on. We think that all of these 5 objections should be overruled. 6 And we'd like to be in a position 7 where we could prepare this so that it could be 8 played on Friday, Your Honor, and Ms. Harlan as 9 well. 10 THE COURT: Very well. 11 MR. TUGGY: If Plaintiffs are willing 12 to concede that the basis for Mr. Dixon's 13 statements that remain at issue were statements 14 made to him by OEMs and he does not have that 15 information based on reviewing Microsoft 16 contracts or hearing it from Microsoft, then on 17 that basis we could submit because that's the 18 information I would provide. So then it 19 becomes a legal issue. 20 MR. CASHMAN: No, the Plaintiffs do 21 not agree to that because we believe that the 22 testimony designation should be looked at where 23 objections have been lodged. 24 We've made argument which is on the 25 record, but we don't see any need for 8984 1 additional argument such as Mr. Tuggy is 2 suggesting. 3 They could have provided that 4 information long ago. They've never provided 5 it to the Plaintiffs. They didn't provide it 6 in the Special Master process. But the issues 7 are pretty straightforward. We think that the 8 rulings can be made, Your Honor. 9 THE COURT: Anything else? 10 MR. CASHMAN: Nothing for Plaintiffs. 11 THE COURT: So you want oral argument 12 on this? 13 MR. TUGGY: Yeah. I think it would be 14 quick, but I think we ought to have another 15 half-hour. 16 THE COURT: Well, we've got motions 17 tomorrow, so I don't know when we can do it. 18 I will rule on Harlan. That's already 19 done; right? 20 MR. CASHMAN: Right. 21 THE COURT: I'll have that done by 22 tomorrow. 23 MR. CASHMAN: Thank you, Your Honor. 24 MR. TUGGY: Perhaps we can -- 25 THE COURT: And we'll pick another 8985 1 time to do this, I guess. 2 MR. TUGGY: We can do it -- it seems 3 to me we've got all tomorrow afternoon. We 4 ought to be able to fit it in. 5 THE COURT: I doubt it. We've got 6 like six, seven motions. 7 MR. CASHMAN: Plaintiffs were 8 withdrawing those objections to expedite this 9 matter. I'm going to make that withdrawal 10 contingent then because Microsoft is not moving 11 the process along. 12 And so we'll just review all of our 13 relevance objections and we'll advise the Court 14 of our position on that tomorrow. 15 THE COURT: All right. So you are 16 withdrawing your former withdrawal motion? 17 MR. CASHMAN: Well, I'm just going to 18 make it contingent. 19 THE COURT: Okay. I'll try to squeeze 20 it in sometime. 21 Anything else? 22 MR. TUGGY: Nothing further, Your 23 Honor. 24 THE COURT: I'll have the Harlan done 25 tomorrow. That was the shorter one; right? 8986 1 MR. TUGGY: Yes, Your Honor. 2 THE COURT: There were only a few on 3 that one. 4 Okay. Have a great evening. Thank 5 you very much. 6 I appreciate your expediting this. 7 Thanks. 8 (Proceedings adjourned at 4:40 p.m.) 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8987 1 CERTIFICATE TO TRANSCRIPT 2 The undersigned, Official Court 3 Reporters in and for the Fifth Judicial 4 District of Iowa, which embraces the County of 5 Polk, hereby certifies: 6 That she acted as such reporter in the 7 above-entitled cause in the District Court of 8 Iowa, for Polk County, before the Judge stated 9 in the title page attached to this transcript, 10 and took down in shorthand the proceedings had 11 at said time and place. 12 That the foregoing pages of typed 13 written matter is a full, true and complete 14 transcript of said shorthand notes so taken by 15 her in said cause, and that said transcript 16 contains all of the proceedings had at the 17 times therein shown. 18 Dated at Des Moines, Iowa, this 17th 19 day of January, 2007. 20 21 22 ______________________________ Certified Shorthand Reporter(s) 23 24 25