4508 1 IN THE IOWA DISTRICT COURT FOR POLK COUNTY 2 ----------------------------------------------- 3 JOE COMES; RILEY PAINT, ) INC., an Iowa Corporation;) 4 SKEFFINGTON'S FORMAL ) WEAR OF IOWA, INC., an ) NO. CL82311 5 Iowa Corporation; and ) PATRICIA ANNE LARSEN; ) 6 ) TRANSCRIPT OF Plaintiffs, ) PROCEEDINGS 7 ) VOLUME XVII vs. ) 8 ) MICROSOFT CORPORATION, ) 9 a Washington Corporation, ) ) 10 Defendant. ) ----------------------------------------------- 11 12 The above-entitled matter came on for 13 trial before the Honorable Scott D. Rosenberg 14 and a jury commencing at 8 a.m., December 13, 15 2006, in Room 302 of the Polk County 16 Courthouse, Des Moines, Iowa. 17 18 19 20 21 HUNEY-VAUGHN COURT REPORTERS, LTD. 22 Suite 307, 604 Locust Street 23 Des Moines, Iowa 50309 24 (515)288-4910 25 4509 1 A P P E A R A N C E S 2 Plaintiffs by: ROXANNE BARTON CONLIN 3 Attorney at Law Roxanne Conlin & Associates, PC 4 Suite 600 319 Seventh Street 5 Des Moines, IA 50309 (515) 283-1111 6 RICHARD M. HAGSTROM 7 MICHAEL R. CASHMAN Attorneys at Law 8 Zelle, Hofmann, Voelbel, Mason & Gette, LLP 9 500 Washington Avenue South Suite 4000 10 Minneapolis, MN 55415 (612) 339-2020 11 STEVEN A. LAMB 12 DOUGLAS J. ROVENS Attorneys at Law 13 Zelle, Hofmann, Voelbel, Mason & Gette, LLP 14 550 South Hope Street Suite 1600 15 Los Angeles, CA 90071 (213) 895-4150 16 ROBERT J. GRALEWSKI, JR. 17 Attorney at Law Gergosian & Gralewski 18 550 West C Street Suite 1600 19 San Diego, CA 92101 (619) 230-0104 20 KENT WILLIAMS 21 Attorney at Law Williams Law Firm 22 1632 Homestead Trail Long Lake, MN 55356 23 (612) 940-4452 24 25 4510 1 Defendant by: DAVID B. TULCHIN 2 STEVEN L. HOLLEY SHARON L. NELLES 3 JOSEPH E. NEUHAUS JEFFREY C. CHAPMAN 4 Attorneys at Law Sullivan & Cromwell, LLP 5 125 Broad Street New York, NY 10004-2498 6 (212) 558-3749 7 ROBERT A. ROSENFELD KIT A. PIERSON 8 Attorneys at Law Heller Ehrman, LLP 9 333 Bush Street San Francisco, CA 94104 10 (415) 772-6000 11 STEPHEN A. TUGGY Attorney at Law 12 Heller Ehrman, LLP 333 South Hope Street 13 Suite 3900 Los Angeles, CA 90071-3043 14 (213) 689-0200 15 BRENT B. GREEN Attorney at Law 16 Duncan, Green, Brown & Langeness, PC 17 Suite 380 400 Locust Street 18 Des Moines, IA 50309 (515) 288-6440 19 20 21 22 23 24 25 4511 1 RICHARD J. WALLIS STEVEN J. AESCHBACHER 2 Attorneys at Law Microsoft Corporation 3 One Microsoft Way Redmond, CA 98052 4 (425) 882-8080 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4512 1 (The following record was made out of 2 the presence of the jury at 7:58 a.m.) 3 MR. CASHMAN: Good morning, Your 4 Honor. 5 THE COURT: Good morning. 6 MR. CASHMAN: The first item of 7 business this morning, it appears, is the 8 testimony of Pete Peterson at page 152, line 13 9 through page 154, line 4. 10 THE COURT: Correct. That's what I 11 understood. 12 MR. CASHMAN: Plaintiffs request that 13 its motion or their motion be granted 14 precluding the use of this testimony in opening 15 statement for a couple reasons. 16 And that is, first of all, it's 17 hearsay. The Special Master has ruled it's 18 hearsay, and I understand that Microsoft is not 19 appealing that determination of hearsay. 20 I understand that Microsoft's sole 21 argument is that it should be permitted to use 22 this testimony for nonhearsay purpose, 23 allegedly to show the effect on the recipient 24 of the statement pursuant to the Roberts v. 25 Newville case. 4513 1 Plaintiffs submit that Microsoft has 2 no nonhearsay purpose for this testimony. 3 First of all, there is no proof in the 4 testimony that Mr. Peterson read or received 5 the article in question. And, therefore, he 6 could not have -- the article itself could not 7 have had an effect on Mr. Peterson. 8 You'll note from the testimony I've 9 quoted here that nowhere did they ask 10 Mr. Peterson if he read this article. 11 So the testimony fails for that basic 12 purpose. They don't -- Microsoft doesn't even 13 come close to satisfying the test. 14 Also, I refer the Court to its recent 15 order on head fake and product reviews. And 16 the Court states there that the Defendant may 17 use certain exhibits in opening, quote, for the 18 express purpose of the limited nonhearsay use 19 of reaction to, notice of, or knowledge of the 20 existence of the exhibits. 21 And here, Mr. Peterson clearly has no 22 notice of this article. He is not reacting to 23 this article. He does not have knowledge of 24 that article. 25 The testimony which preceded this 4514 1 which Microsoft chose not to use for opening 2 statement underscores that Mr. Peterson was 3 simply aware in a general sense that Bill Gates 4 was saying write for Windows amongst other 5 things. 6 And so what he testifies to in 7 relation to the article is simply saying that 8 it's -- that what they've showed him is 9 consistent with what he already knew apparently 10 based on his hearsay conversations with 11 Mr. Gates. 12 But that doesn't satisfy the 13 nonhearsay use test. 14 Secondly -- or just to wrap up on 15 that, the Roberts versus Newville case that 16 Microsoft cites in its chart in support of its 17 testimony doesn't support its position. That's 18 a state of mind case. 19 There Mr. Roberts, the plaintiff in 20 that case, was in an auto accident with 21 Newville, and Roberts sued and claimed loss of 22 earnings and earning capacity. And he claimed 23 that he was less productive at work and that 24 this caused him stress and depression. 25 Newville, the defendant, disputed 4515 1 those claims and said that Roberts had stress 2 and anxiety before his accident and that it was 3 these things that caused his lack of 4 productivity in what he -- 5 At trial Mr. Roberts was allowed to 6 testify that his boss basically had told him 7 that if he didn't improve his performance, he 8 would be subject to getting fired. 9 In fact, his boss said you've got to 10 improve your performance or maybe you should 11 think about resigning. 12 And there was an objection, but 13 ultimately the Iowa Court of Appeals in the 14 Roberts V. Newville case said that the 15 objections were properly overruled because 16 those statements were offered to show that 17 Roberts' state of mind, that his stress and 18 anxiety was caused by what he had been told by 19 his employer and that it explained his 20 fluctuations in productivity. 21 So, in other words, the Court in that 22 case was saying it didn't matter, it didn't 23 matter whether or not the out-of-court 24 statements by the boss were true or what they 25 were stated to be by Mr. Roberts. 4516 1 The important thing was the effect it 2 had on Mr. Roberts and, in particular, a couple 3 of his damage claims. 4 And so in that case there was a clear 5 effect, notice to and effect on the recipient, 6 Mr. Roberts. 7 Here, the testimony from Mr. Peterson, 8 there is no notice to or effect on Mr. Peterson 9 as a result of this article upon which he is 10 being examined. So they fail on that element. 11 Now, I'm going to turn to the other 12 part of this -- this is both really related to 13 the Roberts v. Newville case and, as is evident 14 from the testimony here and from your order, is 15 that this is really hearsay, that the Microsoft 16 folks want to use this for a hearsay purpose. 17 And that is because, in this instance, 18 it would matter whether Peterson believed what 19 Mr. Gates is alleged to have been saying in the 20 article here. 21 And because the probative value in 22 this testimony is whether or not Mr. Peterson 23 believed that, it's hearsay under the Gacke 24 case that we talked about last week. 25 As the Court may recall, Gacke was a 4517 1 case where there was a hog farming operation, 2 and the Gackes collected some questionnaires 3 from some of the other farmers in the 4 neighborhood, all of whom said there was a 5 severe odor problem at the hog farming 6 operation. 7 In the course of discovery in that 8 case those questionnaires were turned over to 9 the hog farming operation. And so they were 10 then on notice that the neighbors were 11 complaining about the odor. 12 And those questionnaires -- the 13 question was whether those questionnaires were 14 hearsay or not and whether they should be 15 admitted into evidence. 16 And the Court in Gacke concluded that 17 they were hearsay because in order for those 18 questionnaires to be relevant, they had to be 19 believed as true. 20 And, in particular, the hog farming 21 operation, once it received those 22 questionnaires, had to believe that they were 23 true in order to make it relevant that it 24 failed to take any action on those. Now -- any 25 action on the claims of an odor problem. 4518 1 And the Gacke case is very similar to 2 what's happening here, what Microsoft is 3 offering Peterson's testimony for here. 4 In Gacke, they had the questionnaires 5 being offered with the out-of-court statements 6 of an odor problem. 7 Here we have testimony about an 8 article in which Mr. Gates is saying develop 9 for Windows. 10 Both in Gacke and here, those 11 out-of-court statements are being offered to 12 show the effect on the recipient. 13 As we saw in Gacke, there's no 14 question that they had the actual notice of the 15 exhibits, of the out-of-court statements. 16 Here we have no evidence at all. In 17 fact, Mr. Peterson is never even asked whether 18 he read this article. 19 But the alleged effect of the 20 questionnaires in Gacke was that the farming 21 operation, the hog farming operation, took no 22 action. And that's exactly the purpose for 23 which the statements in the article shown to 24 Mr. Peterson -- that's what the purpose of that 25 testimony is here, to show that WordPerfect 4519 1 should have been taking action to write for 2 Windows. 3 So that's the purpose for it. 4 And the probative value, therefore, of 5 this testimony is dependent on whether or not 6 Mr. Peterson believed that WordPerfect should 7 be writing for Windows. 8 If he read the statements -- assuming 9 that he had read this article, if he had read 10 it and decided that he didn't believe it and 11 didn't take any action as a result of not 12 believing it, the article and this testimony is 13 irrelevant. 14 If, however, he read it and did 15 believe it, he would have to be -- believe the 16 out-of-court statement is true to make it 17 relevant, obviously. 18 So, under the Gacke case, we believe 19 that this is clearly hearsay. 20 So, for both of those reasons, we 21 submit that this testimony should not be 22 permitted to be shown in opening statement. 23 Thank you. 24 THE COURT: Thank you. 25 Mr. Tuggy? 4520 1 MR. TUGGY: Yes, Your Honor. 2 I have Microsoft's memorandum in 3 support of its resistance to the Plaintiffs' 4 motion to prevent Microsoft from using this 5 testimony in its opening statement. 6 And addressing the Plaintiffs' motion. 7 Originally it was captioned as an 8 appeal of the Special Master's rulings, and in 9 fact, the way Mr. Cashman just described it is 10 correct. 11 The role of this Court, and what the 12 Plaintiffs are requesting, is to determine 13 whether it is appropriate for Microsoft to use 14 this information in its opening statement. 15 The process that we have in place for 16 appealing Special Master rulings relating to 17 testimony by individual witnesses is a process 18 we have already engaged in, for example, with 19 Richard Williams where the Court has the 20 advantage of reviewing all the objections and 21 all the appeals relating to a particular 22 witness in a single setting. And, in that 23 setting, the Special Master's rulings ought to 24 be considered on appeal. 25 Here the issue is whether Microsoft 4521 1 will be permitted during its opening statement 2 to show to the jury testimony by Mr. Peterson 3 that the Special Master has ruled has a proper 4 nonhearsay purpose, and Microsoft's proposal is 5 in its opening to use it for that nonhearsay 6 purpose. 7 The issue we are presented here today 8 is whether Microsoft has a good faith basis to 9 believe that this testimony will be admissible 10 at trial. And Microsoft has that good faith 11 belief. 12 It is reasonably based on the law and 13 on the facts which I will discuss. And 14 Microsoft requests that this Court do, as it 15 did with the trade press, which is to issue an 16 order permitting Microsoft to use this 17 testimony in its opening statement, but 18 reserving for the appropriate time when 19 Microsoft offers evidence for admission at 20 trial to determine its ultimate admissibility. 21 With respect to the designations at 22 issue, they begin at page 152 of the 23 transcript. 24 An actual fact, when the Special 25 Master ruled on the designations, there were 4522 1 two parts. 2 There was a designation that began at 3 page 150 and ended at page 152. And in that 4 designation, it's important to understand that 5 designation in the context of the one we are 6 about to discuss. 7 Mr. Peterson describes statements that 8 Mr. Gates made to Mr. Peterson -- statements 9 that Mr. Peterson heard Mr. Gates say. 10 Now, in the transcript of 11 Mr. Peterson's deposition that's described at 12 page 151, beginning at line 5, there the 13 question was asked. 14 Question: All right. We'll talk 15 about that in a minute, but I want to focus on 16 one point. You said you were at a conference 17 -- you were at conferences in 1989 in which -- 18 in which Bill Gates said that people should be 19 writing for both Windows and OS/2. 20 Answer: That's right. He would say 21 write for Windows. One side of Microsoft would 22 say write for OS/2 and then Bill Gates was kind 23 of this, you know, lone man in the wilderness 24 saying write for Windows, write for Windows. 25 Question: And Mr. Gates was giving 4523 1 that advice to you and other ISVs? 2 There was an objection. 3 The question, again, was: Who was 4 Mr. Gates giving that advice to? 5 Answer: As I remember it, at in -- 6 not like if we'd go to a conference and you'd 7 see him up there in a regular interview. He 8 wasn't talking about Windows, but, afterwards, 9 you know, you'd go to the bar. You'd be 10 talking with friends and he'd come in and out 11 and that's when he would be saying it. 12 Question: And the advice he was 13 giving? 14 Answer: Offhanded advice, yes, write 15 for Windows, don't get left behind. 16 Question: And you heard him say this? 17 Answer: Yes. 18 These statements by Mr. Gates are 19 offered to put -- because they show what 20 information was available to Mr. Peterson 21 regarding statements Microsoft made about 22 developing for Windows. 23 Now, the section that's now at issue 24 begins at page 152, line 13. 25 Here Mr. Peterson is presented with 4524 1 Exhibit 14 in the deposition. And on line 13 2 of the deposition, the examiner asked, I've 3 marked as Exhibit 14 an article that is dated 4 February 27th, 1989. The article is entitled 5 Microsoft details, broad applications, OS 6 strategy. It's a PC Week article. 7 Now, Exhibit 14 in the deposition is 8 the same document as Defendant's Exhibit 381 as 9 to which this Court has already ruled that it 10 may be used in the opening statement for the 11 limited nonhearsay use of reaction to notice 12 of, or knowledge of the existence of the 13 exhibit. 14 So the first question asked of 15 Mr. Peterson was whether this -- whether PC 16 Week as a publication was widely read in the 17 computer industry. 18 And Mr. Peterson answers yes. 19 Then the question was: Did you, 20 Mr. Peterson, read this magazine on a weekly 21 basis, I mean, on a regular basis? 22 The answer was yes. 23 Then the examiner -- so the foundation 24 the examiner has already laid in these two 25 questions is that PC Week is widely read and 4525 1 that Mr. Peterson regularly reads it. 2 Then the examiner points to a 3 particular language in the article. The 4 examiner on page 153 quotes this part of the 5 article. 6 Our direction is, within the next 18 7 months, to have a whole family of applications 8 under Macintosh, OS/2, and Windows said 9 Microsoft chairman Williams Gates. Anybody 10 who's not doing what we're doing is crazy. 11 The question was: Is that information 12 that you likely would have been aware of in 13 February 1989? 14 The answer was yes. 15 And that's consistent with what I 16 heard when he'd talk -- when he'd talk to me. 17 So, in that answer, he's referring 18 back to the prior testimony about the things 19 Mr. Gates said specifically to Mr. Peterson. 20 And that's the section that Microsoft 21 seeks to play in its opening statement, the 22 section being that part of the testimony where 23 the foundation is laid that it was widely read, 24 that he read this publication on a regular 25 basis, and that this information was 4526 1 information about which he would likely have 2 been aware in February 1989 when the article 3 was published. 4 That's offering this for a classic 5 nonhearsay purpose. 6 Now, the nonhearsay purpose for which 7 this is being offered is to show that this 8 information was -- the information being this 9 article reporting this statement by 10 Mr. Gates -- was available in the market and 11 including to Mr. Peterson, and that it can be 12 reasonably inferred from the fact that this was 13 widely read -- that he read this on a regular 14 basis, and he said he likely would have been 15 aware of it, it can reasonably be inferred from 16 those facts in his testimony that he was aware 17 of this article. 18 And that is -- Microsoft is offering 19 this to show the fact that he was aware of this 20 report of a statement by Mr. Gates. 21 Now, the statement by Mr. Gates is not 22 being offered for its truth. 23 For example, the first part of the 24 statement is our direction is within the next 25 18 months to have a whole family of 4527 1 applications under Macintosh, OS/2, and 2 Windows. 3 Now, the Plaintiffs' head fake theory 4 is that Microsoft told developers to write for 5 OS/2 while secretly it was working on Windows. 6 So one of the facts that Plaintiffs 7 seek to prove in this case is that, in fact, 8 Microsoft was working on Windows and that it 9 was doing so secretly. 10 The statement that's attributed to 11 Mr. Gates here is that Microsoft was working on 12 Windows. That's what the Plaintiffs want to 13 prove. 14 Microsoft agrees that it was working 15 on Windows. The question is whether there was 16 some form of deception. This information, 17 because it was published to the market, is 18 relevant to whether there was a deception. 19 In other words, if Mr. Peterson, who 20 was the executive at WordPerfect, responsible 21 for marketing at the company -- Mr. Peterson 22 was an executive vice president of WordPerfect. 23 Mr. Peterson was one of three members 24 of the WordPerfect board of directors. 25 Mr. Peterson was a very high-level executive at 4528 1 WordPerfect testifying about what WordPerfect 2 -- what information WordPerfect received or 3 didn't receive. 4 The question is whether in light of 5 receiving this information is the deception the 6 Plaintiffs allege plausible. 7 For example, upon receiving this 8 report, should Mr. Peterson have picked up the 9 phone and called Mr. Gates, what do you mean 10 it's crazy to develop for Windows? Haven't you 11 been telling me to write for OS/2? 12 The question whether in light of this 13 report of information, which this evidence 14 provides a reasonable basis to believe 15 Mr. Peterson received, was his so-called 16 reliance on other statements Plaintiffs may 17 bring up from the press in not developing for 18 Windows justifiable. That is an element of any 19 deception claim. 20 So the issue is whether Mr. Peterson 21 had access and likely saw this information in 22 1989. That is the foundation. 23 We already have for the admissibility 24 of this exhibit -- I'm sorry, for the ability 25 of Microsoft to use this exhibit in its 4529 1 opening, which you have already approved. 2 And now the question is whether 3 Microsoft can offer part of the foundation for 4 the admissibility of that exhibit, which is 5 this testimony about what Mr. Peterson likely 6 saw in 1989. 7 Now, Plaintiffs would like to put 8 Microsoft to an impossible test. The 9 Plaintiffs have decided to assert claims 10 involving conduct of Microsoft in 1988, which 11 is 18 years ago. 12 I have no ability to recall what I 13 read 18 years ago. I read a lot of magazines. 14 I subscribe to magazines, but to ask a witness 15 18 years -- in this case, the deposition was in 16 2002. 17 To ask a witness 14 years after an 18 article was published whether that witness read 19 that particular article and for the law to be 20 that it could only be admitted as information 21 available to the person and to the market would 22 make it impossible to show notice when it 23 involves publications such as this, which is 24 why in Fanning versus Mapco, which was argued 25 extensively to you before, the issue was 4530 1 whether it was widely read in the relevant 2 community. 3 Mr. Peterson is part of the relevant 4 ISV community. He testified it was widely 5 read, and that he read it on a regular basis. 6 And this is likely information about which he 7 would be aware. 8 So this is a classic nonhearsay use of 9 evidence. 10 The examination in the deposition 11 proceeded on a nonhearsay basis. This is 12 information that was reported. This is 13 information about which he would have been 14 aware. Laying the proper foundation. 15 It is not being offered for the truth 16 of two things. It's not being offered for the 17 truth that this was actually a correct quote of 18 a statement by Mr. Gates. It's not being 19 offered for the truth of statements that are 20 attributed to Mr. Gates. 21 It's being offered to show that this 22 is information available to Mr. Peterson, which 23 is relevant to whether he could somehow 24 justifiably rely, without taking any other 25 action on other information that he may have 4531 1 received regarding developing applications for 2 OS/2 versus Windows. 3 Now, as for ultimate admissibility, 4 there's other evidence that will be presented 5 at trial regarding, for example, the readership 6 of PC Week and who would have the information 7 identified in this article. 8 There is -- Mr. Gates will be 9 testifying, and may testify about what he told 10 or what he likely told reporters during this 11 time period. 12 There's all sorts of additional 13 foundation that can affect the admissibility of 14 this testimony and of the exhibit that 15 underlies it. 16 The question for the opening is 17 whether Microsoft has a good faith basis to 18 believe that this can be admitted and so can 19 tell the jury that this is what the evidence 20 will show. 21 Based on the examination and the 22 foundation laid in this examination, that 23 reasonable good faith belief exists. And 24 Microsoft respectfully requests that it be 25 permitted to show this in its opening as what 4532 1 it expects the evidence will show. 2 Mr. Cashman's final argument is on the 3 Gacke case. And he offered an argument that 4 would have, of course, practically eliminate 5 the hearsay -- the nonhearsay use for notice. 6 In Gacke, the question was whether a 7 standard of care was triggered when the 8 recipient received certain information. 9 When the recipient in that case 10 received information which was generated in a 11 very unreliable way, in the context of 12 litigation, that there were some odors, did 13 that trigger an obligation, a legal obligation 14 for the defendant to take steps to abate a 15 nuisance. 16 To offer those statements in such a 17 way as to trigger that legal obligation, that 18 standard of care under the law, there would 19 have to have actually been a nuisance. If 20 there's no nuisance, there's no legal 21 obligation. 22 And in that context, the Gacke court 23 said these statements are actually being 24 offered for their truth because they're trying 25 to use them to trigger an obligation to abate a 4533 1 nuisance. 2 This situation is completely 3 different. And this situation, the testimony 4 by Peterson is actually a classic nonhearsay 5 use, which it doesn't matter if Mr. Gates was 6 accurately quoted. It doesn't matter if his 7 statements are accurately true. 8 What matters is it was a statement 9 that was not only available to Mr. Peterson, 10 but one which he likely read. 11 And based on that foundation, it is 12 admissible as a nonhearsay use. 13 And for the purposes of this argument, 14 it is evidence that Microsoft ought to be 15 entitled to show the jury what evidence we 16 expect will be admissible at trial. 17 Microsoft, for those reasons, 18 respectfully requests that under Fanning versus 19 Mapco and the McElroy case, that this testimony 20 be admitted for -- that Microsoft be permitted 21 to use this in its opening for a nonhearsay 22 purpose. 23 THE COURT: Mr. Cashman, can you sum 24 up in a few minutes? 25 MR. CASHMAN: Well, it may take a 4534 1 little bit longer than that, Your Honor. 2 I suppose we can pick up at lunch 3 because I think there's some comments that I 4 would like to address. 5 THE COURT: Well, I'm going to go 6 ahead and rule. It's not admissible. It 7 doesn't show any effect on the listener. 8 Denied. 9 MR. CASHMAN: Thank you, Your Honor. 10 MR. GRALEWSKI: Your Honor, do we have 11 five or ten minutes on Sculley? 12 THE COURT: No. 13 MR. WILLIAMS: Your Honor, before the 14 jury comes in, there are a few matters I'd like 15 to address. 16 THE COURT: No. 8:30 we are starting. 17 We are not going to keep the jury waiting. 18 (The following record was made in the 19 presence of the jury at 8:31 a.m.) 20 THE CLERK: All rise. 21 THE COURT: You may proceed, sir. 22 MR. TULCHIN: Thank you, Your Honor. 23 Ladies and gentlemen, good morning. 24 We were talking yesterday at the end 25 of the day about competition in the operating 4535 1 system market and specifically about 2 competition between Microsoft and Digital 3 Research, which is sometimes referred to, as 4 you know, as DRI. 5 And at the end of the day yesterday, 6 just at 2:30, I was coming to the point of 7 telling you that there will be evidence at the 8 trial about contracts, licenses that Digital 9 Research itself used in the operating system 10 market. 11 You will -- 12 MR. HAGSTROM: Objection, Your Honor. 13 MR. TULCHIN: Your Honor ruled 14 yesterday on this, I believe. 15 THE COURT: Overruled. Continue, 16 please. 17 MR. TULCHIN: Thank you, Your Honor. 18 You will remember that the Plaintiffs 19 have made allegations about contracts that 20 Microsoft used. And we will show you evidence 21 at trial from Peter DiCorti, who was the chief 22 financial officer of Digital Research, that at 23 the time Digital Research used a type of 24 contract which was very much like a per 25 processor license that required the OEM, the 4536 1 person getting the license, to distribute 2 DR-DOS with every unit of a particular type of 3 computer. 4 And there will also be evidence from 5 another DRI employee named Robert Gunn, 6 G-u-n-n, that DRI used contracts that were 7 essentially the same as the per processor 8 license agreements that Microsoft used up until 9 -- Microsoft used them up until July of 1994. 10 So there was competition in the 11 marketplace using these types of contracts. 12 And we believe -- and I will come to this later 13 today -- that Microsoft prevailed in the 14 competition against DRI on the merits because 15 people wanted the Microsoft operating systems, 16 MS-DOS and Windows. 17 And we also need to spend some time, 18 which I'm going to do right now, talking about 19 competition between Microsoft and DRI. 20 The Plaintiffs allege that Microsoft 21 acted wrongfully when it portrayed DR-DOS as 22 having bugs and technical problems. 23 And I spoke yesterday about FUD and 24 what it meant at Microsoft -- and Plaintiffs in 25 their opening on December 1st, their very first 4537 1 day, said the same thing that I told you 2 yesterday. Truthful information, that's not 3 FUD. 4 So I think we agree, although our 5 definitions are different, we use FUD to mean 6 comparative statements about products. But 7 there's nothing wrong with telling people the 8 truth about someone else's product. 9 So I'm going to get into right now the 10 question of whether or not there were indeed 11 technical problems with DR-DOS. Very relevant 12 to the Plaintiffs' allegation that Microsoft 13 should not have been telling people that there 14 were. 15 And let's look first at Defendant's 16 Exhibit 230. 17 This is a DRI document from 1988. 18 It's handwritten, but I think we'll be able to 19 make it out. 20 It's Richard Dixon of DR-DOS writing a 21 note to Dick Williams, who was one of the 22 senior executives at DRI, about an OEM named 23 Essex, E-s-x -- sorry, E-s-s-e-x. 24 And as you can see, what Mr. Dixon 25 reports is that they, referring to this OEM, 4538 1 will not proceed with DR-DOS agreement and 2 payment due of $57,500 until tech issues, 3 referring to technical issues, with DR-DOS and 4 responsiveness of DRI to their request are 5 answered promptly. 6 We're going to come to the question of 7 how responsive DRI was. 8 But there's a clear reference to the 9 fact that this OEM is not entering into a 10 contract or paying money to DRI because of tech 11 issues. 12 And let's look at another piece of 13 this handwritten memorandum by Mr. Dixon. 14 They claim no acceptance in market for 15 DR-DOS -- and I believe the word due is left 16 out here -- due to too many tech problems. 17 They, Essex, this OEM that DRI wanted 18 as a customer, claim no acceptance in market 19 for DR-DOS due to too many tech problems. 20 This is what Microsoft was telling 21 others as well; that there were technical 22 problems with the DR-DOS product. 23 And you'll remember that the 24 Plaintiffs said that the real competition 25 between Microsoft and DRI began in around May 4539 1 1990. That's when DR-DOS 5.0 came out. 2 Around the same time, of course, that 3 MS -- sorry -- Windows 3.0 came out. But the 4 Plaintiffs say the real competition begins when 5 DR-DOS 5.0 comes out in May '90. 6 I guess implying that the competition 7 before then was somewhat less than real. 8 But let's see what DRI itself thinks 9 of DR-DOS 5.0. 10 This is from June 1980. It's 11 Defendant's Exhibit 80. 12 So this is just the next month after 13 this product comes out. 14 And John Constant, who Plaintiffs say 15 will be a witness here, he was then the product 16 development manager at DRI. 17 And you will see in this document that 18 Mike Shelton writes a memorandum to 19 Mr. Constant and two other people at Digital 20 Research. And we've blown up the whole first 21 page of this document because I think it's 22 worth your attention for a minute or two. 23 A month after DR-DOS first ships, 24 here's Mr. Shelton reporting to Mr. Constant. 25 Just a quick note to document my concern at the 4540 1 release of DR-DOS 5.0 at this time on two 2 counts. 3 Now, he then reports on the number of 4 outstanding category 3 and category 2 SPRs. 5 The evidence will be that SPR stands for 6 software problem reports. 7 The evidence will also be that the 8 category 3 problems are the most severe. 9 They're so severe in DRI's lexicon that 10 customers will have either their data corrupted 11 or lost. 12 And there are 56 outstanding category 13 3 problems with what the Plaintiffs say was 14 this great 5.0 product. 15 And 61 of the slightly less severe 16 category 2 problems. 17 And then Mr. Shelton goes on to report 18 to Mr. Constant in the paragraph beginning with 19 the Number 2. 20 He says, the number of major software 21 products that are known to have 22 incompatibilities with DR-DOS 5.0 -- and he 23 lists there around 10 what he described as 24 major software products, major applications 25 that have incompatibilities with this operating 4541 1 system, one of which is worth noting, 2 WordPerfect. 3 So if a customer had MS-DOS 5.0 and 4 wanted to run the WordPerfect word processing 5 program with that operating system, there would 6 be incompatibilities. It would not work. 7 And then Mr. Shelton goes on to say, 8 although I fully appreciate the effort that has 9 gone in to fix other issues and the pressure to 10 release the product on time, I feel these 11 issues seriously undermine the stability of the 12 product. 13 We do not need many journalists to 14 find these problems before we get tarred with a 15 DOS 4.0 brush. 16 So when Microsoft was telling people 17 about technical problems, we can see here that 18 DRI itself found the same problems internally. 19 Of course, they didn't want the 20 journalists to find out, but these 21 incompatibilities between their operating 22 system and major applications were known and, 23 of course, were going to be discovered by 24 people in the market. 25 And then let's look at the next DR-DOS 4542 1 product. It's DR-DOS 6.0. That was released 2 in September 1991. 3 And we have testimony from Anthony 4 Ingenoso, who was an IBM employee, and who 5 tested operating systems to make sure that they 6 worked correctly. 7 Here is Mr. Ingenoso telling us, 8 testifying at deposition, about what he found 9 when he looked at the DR-DOS 6.0 product. 10 (Whereupon, the following video was 11 played to the jury.) 12 Question: Have you ever used the term 13 roach motel to describe DR-DOS 6? 14 Answer: Yes. 15 Question: What did you mean by that? 16 Answer: Roach motels are normally 17 full of bugs. 18 Question: And DR-DOS 6? 19 Answer: It had a number of bugs. It 20 had more bugs than, I think, we shipped in the 21 IBM and Microsoft product. 22 Question: So, overall, what was your 23 opinion of the DR-DOS 6 product after you had 24 tested it? 25 Answer: It needed work. 4543 1 Question: How much work? 2 Answer: To achieve a level of quality 3 and completeness, I felt it needed more than a 4 year's worth of work, probably 18 months worth 5 of concerted effort to put the missing pieces 6 in place. 7 (Whereupon, playing of video 8 concluded.) 9 MR. TULCHIN: So there we are, an IBM 10 employee who looked at DR-DOS 6.0, and you 11 heard it, he called that product a roach motel. 12 So when Microsoft was in the market 13 spreading truthful information that DR-DOS 14 operating systems had bugs, we contend there's 15 nothing wrong with that. I think the 16 Plaintiffs agree. 17 And let's look at DX 1046. 18 This pertains to DR-DOS 7.0, the next 19 product it came out with in the operating 20 system field. This was released, DR-DOS 7.0, 21 in January of 1994. 22 Now, by this time -- there are a lot 23 of dates and facts that you won't be able to 24 all remember, but by this time, as the 25 Plaintiffs told you, DRI was owned by Novell, 4544 1 and DR-DOS 7.0 was actually now called Novell 2 DOS 7. Novell took over. 3 And here's a document written by a 4 Novell employee, someone at Word -- I'm sorry. 5 That was my error. 6 Shawn Lynn wrote this document. He 7 then worked at WordPerfect, which was just 8 about to be purchased by Novell as well. 9 Novell bought DRI. 10 Now we're talking about 1994, and they 11 are about to buy WordPerfect. And Shawn Lynn, 12 a technician at WordPerfect, writes an analysis 13 of Novell DOS 7, and he calls it -- I don't 14 know if you can see the title at the very 15 top -- waltzing through the minefield. 16 Right at the top almost of his memo, 17 Mr. Lynn starts off by saying, so, what we've 18 got here is a product that is less of an 19 operating system than it is a minefield, and a 20 new dancing partner that we can't afford to 21 offend. 22 Dancing partner because WordPerfect 23 and DRI are about to become part of Novell 24 together. 25 So, what do we do? We waltz through 4545 1 the minefield. We waltz very carefully, but we 2 waltz through the minefield. 3 And then here's a little bit more of 4 what Mr. Lynn says at the bottom of page 1 of 5 Defendant's Exhibit 1046. 6 I'm not overstating it when I say that 7 the installation and setup programs for Novell 8 DOS 7 are, quite simply, the worst that I have 9 ever encountered. 10 So, when thinking about competition in 11 the operating system market between Microsoft 12 and DRI and the allegations that Microsoft did 13 something wrong in that competition, I think 14 it's important to remember what DRI itself, 15 what Mr. Ingenoso of IBM, what WordPerfect's 16 person, Shawn Lynn, they are about to become a 17 family at Novell, said about these successions 18 of DRI products. 19 All right. Let's turn to what the 20 Plaintiffs called vaporware. 21 And I want to point out here that, 22 again, we believe -- and I think the way the 23 Plaintiffs said it, they agree -- that there's 24 nothing wrong with announcing that a product is 25 coming out, making a preannouncement. 4546 1 Saying, for example, in May we expect 2 to announce to have on the market a product in 3 December. Nothing wrong with that. And 4 nothing wrong with missing the date. 5 Software can be complicated. There 6 are changes that come about. And if you miss 7 the date that you've predicted for good 8 business reasons, because you've had problems, 9 in fact, getting the product out on time, 10 nothing wrong with that. 11 The allegation here is that Microsoft 12 misled people because Microsoft itself knew 13 that it couldn't meet the dates that it 14 predicted the product would be out. 15 And the main part, the main part of 16 the story, which I want to come to in just a 17 moment, that the Plaintiffs told pertained to 18 MS-DOS 5.0 and the testimony of Mark Chestnut. 19 But I showed you yesterday that Lotus 20 1-2-3 for the Mac, Lotus announced in October 21 '87 that the product would be out in '88. And 22 it wasn't released until the very end of '91, 23 more than three years after Lotus predicted it 24 would be out. 25 Now, we don't contend that Lotus 4547 1 misled anyone. This is what can happen when 2 you make these announcements with software. 3 And, in fact, Novell DOS 7.0, which we 4 just talked about, Novell announced in March 5 '93 that the product would be available this 6 summer. In fact, it wasn't. It was delayed by 7 almost six months, and it came out in December 8 of '93. 9 WordPerfect announced in 1990, in 10 June, that it would have a new product out by 11 January of '91. 12 And Mr. Peterson of WordPerfect will 13 testify by deposition that the announcement 14 that the product would be out next January was, 15 quote, the most optimistic date I could give 16 them and still not be a total liar, unquote. 17 I think what Mr. Peterson is saying, 18 quite plainly, is that WordPerfect made an 19 announcement using the most optimistic date 20 they could give them and not be a total liar. 21 Instead of January '91, the product 22 came out in November 1991. 23 So with that context, I want to turn 24 to the testimony of Mark Chestnut. 25 The Plaintiffs showed you a piece or 4548 1 two of what Mr. Chestnut said. I want to fill 2 in the story, if I may, and just to go back and 3 give you the context. 4 Mr. Chestnut was the DOS product 5 manager. And in 1989 -- he was the product 6 manager in '89. And Microsoft announced that 7 MS-DOS 5.0 announced in 1990 that MS-DOS 5.0 8 would be available and released to the market 9 in August or September. 10 Now, let's look at the first piece of 11 this testimony from Mr. Chestnut. 12 (Whereupon, the following video was 13 played to the jury.) 14 Question: Did you tell them when it 15 would be available for shipment? 16 Answer: Our plan at that point in 17 time was to have it shipping in -- I believe it 18 was September time frame. 19 Question: September 1990? 20 Answer: Yes. 21 Question: And this is May 1990? 22 Answer: Yes. 23 (Whereupon, playing of video 24 concluded.) 25 MR. TULCHIN: Okay. So our plan in 4549 1 May '90, when the announcement was made, was to 2 have the product released in September. 3 And the question for you, we submit, 4 will be whether or not Microsoft believed when 5 it made that announcement that MS-DOS 5.0 was 6 going to be available in September. 7 And let's look at the next piece of 8 testimony from Mr. Chestnut. 9 (Whereupon, the following video was 10 played to the jury.) 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 (Whereupon, playing of video 19 concluded.) 20 MR. TULCHIN: Well, there's 21 Mr. Chestnut quite unequivocally saying that 22 when they made the announcement, they believed 23 they would make that September date. 24 Now, in fact, Microsoft did not make 25 the September date. MS-DOS 5.0 was not shipped 4550 1 when Microsoft first predicted it would be. 2 And you may remember from the 3 Plaintiffs' presentation in their opening on 4 this point that after the announcement was 5 made, a man named Brad Silverberg at Microsoft 6 took over as the person in charge of MS-DOS 7 5.0. 8 And the evidence will be that when 9 Mr. Silverberg took that responsibility, he 10 decided to make changes in the product that 11 caused a delay in the actual release of MS-DOS 12 5.0. 13 But the evidence will be at this trial 14 that Microsoft's announcement in that case was 15 based on its good faith belief about when the 16 product would ship. 17 The product didn't ship with MS-DOS 18 5.0 when Microsoft predicted, but not because 19 of any attempt to mislead anyone. 20 And the vaporware allegation, I think 21 both sides agree, is dependent upon proof that 22 Microsoft deliberately misled the market. 23 All right. I'm still talking about 24 the operating system market and competition in 25 that market. And I want to pause and talk 4551 1 about intellectual property, something the 2 Plaintiffs spoke of as well. 3 And you'll remember that the 4 Plaintiffs said on December 7, intellectual 5 property is just like any other kind of 6 property. 7 And we agree with that. We agree that 8 you shouldn't have to give away your property 9 to competitors. Certainly, you shouldn't have 10 to do it for nothing. And, certainly, you 11 shouldn't have to give away your property so 12 that competitors can compete better against 13 you. 14 Now, intellectual property includes 15 things like trade secrets, copyrighted source 16 code. And many of you may be aware that an 17 author writing a book is entitled to a 18 copyright. 19 You get a copyright, which means that 20 no one else can take the words in your book and 21 go sell them. This is your property, your 22 work, written work is yours. It belongs to 23 you. 24 And source code has the same copyright 25 protection. The author, in this case 4552 1 Microsoft, is entitled to a copyright and, 2 indeed, source code was always subject to 3 copyright. 4 Intellectual property also includes 5 patents awarded by the U.S. Patent and 6 Trademark Office. 7 And we'll come to a little bit more 8 about patents and how many patents Microsoft 9 had for its inventions a little bit later. 10 But I want to talk about this in the 11 context of some of the technologies that the 12 Plaintiffs referred to. 13 The Plaintiffs said just as you can't 14 use a piece of physical property like a 15 baseball bat on a car window, that can give 16 rise to liability. The use of IP to bludgeon 17 competitors may also give rise to liability. 18 Now, we ask you to think about what 19 the Plaintiffs are really saying. Are they 20 saying that it's necessary for Microsoft to 21 give away its property so that its competitors 22 can take that so-called baseball bat and pound 23 Microsoft on the head with it? 24 If this property belongs to Microsoft, 25 is it a requirement that it be given to 4553 1 competitors? 2 And let's start with OLE. You 3 remember the Plaintiffs referred to OLE and 4 OCX, and they said -- and let me stop here to 5 remind you. OLE means object linking and 6 embedding. And what it really means is it 7 allows the user to transfer data between 8 different applications using drag and drop 9 operations. 10 And controls and file extensions are 11 called OCX. So this would allow you, for 12 instance, to paste a spreadsheet or a portion 13 of a spreadsheet onto a memorandum 14 automatically by this OLE/OCX technology. 15 Now, who invented this? Although you 16 didn't hear this before, this was invented by 17 Microsoft. Not IBM. Not Lotus. 18 The Plaintiffs did call it, quote, a 19 new advanced technology on December 7th. And 20 that's correct. It was a new advanced 21 technology. 22 And what the Plaintiffs asserted was 23 that in '94 or '95 Microsoft should have made 24 this technology available to Lotus because 25 Lotus -- you remember Mr. Mendelsohn -- asked 4554 1 for it so that Lotus could compete better with 2 Microsoft access. 3 And Sara Williams, who's now named 4 Sara Spaulding, of Microsoft, and 5 Mr. Mendelsohn, had e-mail exchanges back and 6 forth. 7 Mr. Mendelsohn of Lotus in his e-mails 8 tries to use some leverage, and I guess you'd 9 call it wheedling pressure, to get this 10 technology for Microsoft. And Microsoft 11 declined to give it to him, and that's the 12 testimony you'll hear from Sara Spaulding. 13 It's important to keep in mind the 14 evidence in this case that OLE and OCX were 15 Microsoft's intellectual property. 16 And the idea that there's some 17 requirement that you give it away so your 18 competitor -- in this case Lotus -- competing 19 in the spreadsheet business, can use it to 20 compete against you is an idea that I don't 21 think makes any sense. 22 Define handle table. This is an API 23 that Microsoft created that would allow a user 24 to go beyond what was then the 640K memory 25 limit. 4555 1 Excel, Microsoft's product, was using 2 the define handle table API. 3 Other companies wanted it. Lotus 4 wanted it so that they could use it for their 5 own 1-2-3 spreadsheet. 6 And, of course, it's the same story. 7 Microsoft did not give it away for nothing to 8 Lotus. Microsoft owned that property. 9 And then there was the CPT hook. And 10 the arguments that the Plaintiffs made -- CPT 11 stands for computer-based training. 12 It basically allows one application to 13 manipulate keyboard or mouse activity in 14 another application. 15 Again, this was created, invented by 16 Microsoft and used by Microsoft in its 17 applications such as Word. 18 The Plaintiffs say in 1988 Microsoft 19 should have made this publicly available, given 20 it away for nothing by documenting an API so 21 that WordPerfect could compete better against 22 Microsoft Word in that market. 23 Well, Coke didn't give away its 24 formula to RC Cola, some smaller competitor. 25 And Coca-Cola doesn't give away advantages that 4556 1 it has. 2 For example, a big company like 3 Coca-Cola can get the most preferred shelf 4 space in a supermarket or in a drugstore, let's 5 say Walgreens. 6 RC Cola or some small competitor may 7 get relegated to a less ideal spot on the 8 shelf, maybe the bottom shelf, which is less 9 visible. Your eye doesn't go there 10 automatically. You'd have to reach all the way 11 down. 12 And it's true that companies in those 13 businesses compete to get shelf space, the best 14 shelf space, from retailers. 15 Coca-Cola is entitled to do that. 16 They're entitled to compete on that basis. 17 There's no reason that everyone has to be 18 equal. That's not competition. 19 And let's talk about DPMI again for a 20 moment. I touched on it yesterday. 21 I told you that it was invented by a 22 young man named David Weiss in the summer of 23 1988. He was a recent college graduate. He 24 had started at Microsoft shortly before then. 25 And he figured out how to make Windows 4557 1 invoke the so-called protective mode of an 2 Intel microprocessor. 3 Windows 3.0, when it came out in May 4 1990, used protected mode. It did this by 5 incorporating a technology known as a DOS 6 extender. 7 And I'm sorry. We get a little 8 complicated here, but the story here, what this 9 case is all about is not complicated. It's 10 about causation and prices, whether there was 11 any overcharge. 12 But occasionally we have to go down 13 the road that the Plaintiffs went in order to 14 provide what we think is some balance and to 15 tell you what we think the evidence actually 16 will show about a particular subject matter. 17 So here's DPMI. And in late '89, as 18 Microsoft was still working on Windows 3.0, 19 Microsoft learned that a DOS extender that 20 Lotus was using called VCPI was not compatible 21 with Windows. 22 And Ralph Lipe, I mentioned here 23 yesterday -- he had many patents awarded to him 24 when working at Microsoft -- solved this 25 compatibility program by coming up with the DOS 4558 1 protected mode interface, DPMI. 2 This all stemmed from Mr. Weiss' 3 invention, and Mr. Lipe saw the compatibility 4 program which enabled Lotus to fix the problem 5 between 1-2-3 and Windows. 6 Now, Defendant's Exhibit 661 is what 7 Lotus said about DPMI itself at the time in 8 1989. 9 And I'm sorry. We don't have a slide 10 on this, but you'll see this evidence, Exhibit 11 661. 12 And Lotus says this: Before we go 13 charging off with our VCPI banners raised on 14 high, we should understand the technical 15 realities. The protected mode interface 16 proposed by Microsoft is superior to VCPI. 17 Again, Microsoft's technical 18 abilities, its inventions, the software it 19 created was superior. 20 And the idea that Microsoft was 21 required to share that superior technology with 22 other companies, we think, is wrong. Those 23 inventions can be kept at Microsoft. They are 24 Microsoft property. 25 And I want to pause here and tell you 4559 1 one more thing about DPMI, which is important. 2 There were allegations made by the 3 Plaintiffs that Microsoft failed to give IBM 4 DPMI, the DOS protected mode interfaces. 5 There was lots of time spent on this 6 last Wednesday, a week ago, by the Plaintiffs. 7 They pointed to an exhibit called PX 8 3448. And you'll remember that was an e-mail 9 in March of '91 from Steve Ballmer at Microsoft 10 that said take out the DPMI functionality and 11 send them 3.1 sources in a month. We only owe 12 them source once a month. 13 Now, what Plaintiffs did not tell you 14 about what happened with DPMI right at that 15 time. Mr. Ballmer's e-mail is March 3rd, '91, 16 was that IBM, in fact, got the full source 17 code, including DPMI, on March 15th, 12 days 18 later, despite what Mr. Ballmer said in his 19 e-mail. 20 Here's a March 26th e-mail from Andrew 21 Hill of Microsoft. It's Defendant's Exhibit 22 898. 23 And what Mr. Hill reports is as 24 follows. Let's see if we can bring this out. 25 The DPMI sources were shipped with the 4560 1 3.1 drop we gave you on 3/15. 2 And I should say that Mr. Hill is 3 sending his e-mail to IBM. You can see IBM 4 Boca. IBM had a software facility in Boca 5 Raton, Florida. And Mr. Hill of Microsoft, on 6 March 26th, is telling IBM that they already 7 have DPMI. 8 The DPMI sources were shipped with the 9 3.1 drop we gave you on 3/15, March 15. 10 So when the Plaintiffs made these 11 allegations that we should have given DPMI to 12 IBM in March '91, and they showed you 13 Mr. Ballmer's e-mail where he says we only have 14 to give them code once a month, source code 15 once a month, they didn't quite finish the 16 story. 17 On March 15th -- in fact, IBM as a 18 result -- sorry. 19 Microsoft, as a result of its contract 20 with IBM, did provide this technology to IBM. 21 So let's go back and talk a little bit 22 about undocumented APIs and documented APIs. 23 As I showed you yesterday, with each 24 version of Windows, Microsoft makes available 25 to all applications developers more and more 4561 1 APIs. 2 By the time we got to Windows XP, 3 there were 6,000 that Microsoft opens up and 4 shows to all developers inviting them to use 5 the technology in the operating system to make 6 their product better and to hook up with 7 Windows. 8 And the Plaintiffs allege that 9 Microsoft should have disclosed other APIs that 10 they were undocumented. 11 Although when the Plaintiffs began 12 talking about this subject, again, a week 13 ago -- or maybe this was last Thursday and not 14 exactly a week ago -- they acknowledged that 15 not all APIs should be or can be documented. 16 And the evidence at this trial will be 17 that there are good business reasons not to 18 document all APIs. 19 Doing so actually can eventually break 20 some applications, that the undocumented APIs 21 that the Plaintiffs say Mr. Schulman found way 22 back 15 years ago could be found by software 23 developers. 24 Mr. Schulman did. Others found them 25 too and used them. And that the undocumented 4562 1 APIs explain nothing about Microsoft's success 2 in either the operating system market or the 3 applications market. 4 And, again, let's go back and think 5 about Microsoft's success on the Macintosh 6 where Microsoft does not have access to any 7 so-called undocumented APIs. 8 Professor Murphy, one of Microsoft's 9 experts from the University of Chicago, will 10 touch on this subject. 11 And Microsoft wrote great software to 12 the Mac that was highly successful and that 13 has, as you saw yesterday, a great market 14 share -- in some cases 90 percent or above -- 15 just as it did to Windows, without any 16 so-called advantage. 17 Now, let's talk for a moment about the 18 Chinese wall. 19 The Plaintiffs say there was something 20 wrong with what Microsoft did. That the two 21 sides of Microsoft, the operation -- sorry, 22 operating systems side and the applications 23 side, should not be talking to or cooperating 24 with each other. 25 And there's no rule that a company has 4563 1 to have that kind of a wall internally. In 2 fact, if the operating system people and the 3 applications people have lunch together, talk 4 together, work together to make their products 5 better, we contend there's nothing at all wrong 6 with doing that. 7 No obligation to go out and help a 8 competitor who might not have an integrated 9 company. Let's take Lotus. Lotus made 10 spreadsheets. Lotus did not make an operating 11 system at the time. We're going back, let's 12 say, to around 1990. 13 Lotus had a spreadsheet. 14 If Microsoft had an advantage because 15 it had both Windows and Excel and it could use 16 its people to make both those products run 17 better together, well, that's just a normal 18 business advantage. It's called competition. 19 And if Lotus is disadvantaged by that, 20 Lotus has every right to come up with its own 21 operating system. 22 And Mr. Peterson of WordPerfect, 23 again, the executive vice president in charge 24 of the WordPerfect product, will testify that 25 when he was asked about the Chinese wall at 4564 1 deposition, he said no one actually believed 2 that there was a Chinese wall at Microsoft. 3 What he testified to was that he 4 understood that, in the industry, Microsoft 5 would have people internally working together 6 from both sides. 7 So will a man named Paul Brainerd, who 8 was the CEO of a company called Aldus, 9 A-l-d-u-s. 10 Aldus made an application called page 11 maker. It also made other desktop publishing 12 software. 13 And he, too, will testify he wasn't 14 misled by any statement about some separation 15 between church and state or Chinese wall. 16 He didn't believe there was any such 17 thing at Microsoft. He expected that the two 18 sides of the company were working together. 19 And, indeed, we think the evidence 20 will very strongly support your conclusion that 21 that was so, and that was proper. 22 So, I want to go back now and talk a 23 little bit more about Digital Research. 24 And we touched on some of the 25 Plaintiffs' allegations about the competition 4565 1 between Microsoft and Digital Research. But 2 there's much more to say. 3 The Plaintiffs spent, I would think, 4 more time on this subject than on any other 5 subject. 6 And I want to start by reminding you, 7 as you heard me say earlier, that according to 8 the Plaintiffs, it was in May of 1990 when the 9 real competition between the two companies 10 begins. 11 And I also want to remind you of 12 something that Professor Noll, the Plaintiffs' 13 expert, has testified to in another lawsuit. 14 Sorry. I should have stopped and 15 showed you this. This is the Plaintiffs' 16 statement about the real competition, and 17 here's Professor Noll saying that Windows 3.0 18 was a revolutionary technological leap. 19 Now, there's one other point that 20 Professor Noll has testified to that I think is 21 important in understanding what was going on in 22 1990 and what the market looked like. 23 I told you in some detail about the 24 beginnings of Microsoft, going back all the way 25 into the '70s, and the good fortune -- or maybe 4566 1 good business skill that Mr. Gates had in 1980 2 when he landed that first contract with IBM. 3 By 1986 or '87, according to 4 Plaintiffs' expert, and he testified that he 5 didn't look back any earlier than that, he 6 started his analysis in '86 or '87. 7 By that time, according to Professor 8 Noll, Microsoft already had monopoly power in 9 the operating system market. 10 Microsoft had a large market share 11 with MS-DOS. 12 And the question put to Doctor Noll 13 was whether he had any claim -- he was making 14 any claim in this other case, that Microsoft 15 obtained that monopoly power, the power it had 16 by 1987, by virtue of anything anticompetitive. 17 And he responded that he was not 18 making that claim. 19 And here's the next question and 20 answer. 21 Question: So in 1986 and 1987, 22 assuming that Microsoft had that monopoly 23 power, it had a monopoly that was, as far as 24 you're concerned, completely lawful? 25 Answer: To the best of my knowledge, 4567 1 I have no reason to doubt that. 2 Now, I'm taking a minute or two on 3 this subject because I think it's important to 4 set the context for what competition was like 5 at the time. 6 You'll remember -- and we've covered 7 this before. I won't spend a lot of time on it 8 now. You'll remember the Court's instructions 9 to you that having a monopoly, acquiring 10 monopoly power, is not in and of itself 11 unlawful. 12 If you get a monopoly by virtue of 13 better products, lower prices, good business 14 decisions, even luck, there's nothing unlawful 15 about that at all. 16 And here is the Plaintiffs' expert 17 acknowledging that by 1986 and '87, Microsoft's 18 monopoly in operating systems, what he called 19 Microsoft's monopoly power, was completely 20 lawful. 21 He says, I have no reason to doubt 22 that. 23 So when we go through some of these 24 allegations about the competition between 25 Microsoft and DR-DOS, remember, according to 4568 1 the Plaintiffs' own expert, Microsoft lawfully 2 was entitled to its market position by '86 or 3 '87. 4 And this fact is also going to be 5 important in thinking about causation. 6 Did any anticompetitive acts against 7 DR-DOS, if there were any, did any 8 anticompetitive acts cause the market to be so 9 different from what it was that the Plaintiffs' 10 experts have any justification in coming up 11 with models that predict in this but-for world 12 a state of competition where there are four or 13 five companies with low market shares competing 14 against each other. 15 Remember, Microsoft's operating system 16 monopoly was held lawfully. 17 So, let me get to some of the specific 18 allegations. 19 They spent a lot of time on this. It 20 will take a little bit of time for me to 21 respond. 22 But the Plaintiffs did say -- they 23 predicted what I would tell you about this 24 state of competition. And here I think they 25 predicted it pretty well. 4569 1 One of the things they said Microsoft 2 would say was that DR-DOS was history in any 3 event. And they told you that we would talk 4 about Jody Clifton and the kind of business 5 that DRI was running at the time -- and I'm 6 talking about responding to customers. 7 Pretty basic thing for any business. 8 If customers call and have a problem and you 9 don't respond to them, well, I think it's fair 10 to say, and the evidence will show, that 11 customers go away. They find someone who does 12 respond. 13 And I'm going to show you some 14 documents that deal with this critical time, 15 according to Plaintiffs, starting May 7th, 1991 16 -- this is slide -- sorry, Exhibit 196. 17 And here is a memorandum, May 7th, 18 1991, at DRI. And you'll see it's to 19 Mr. VanDaele, I think his name is pronounced. 20 A copy goes to DiCorti, whose name I 21 mentioned; Dick Williams, who was in charge of 22 this. 23 And it says status of GPOS technical 24 support. 25 Let's see what was going on at DRI at 4570 1 the time. 2 Other factors to consider -- this is 3 on the first page, second paragraph of the text 4 -- are the abandoned call rate, which is people 5 who get tired of waiting for technical support 6 or customer service and simply hang up. The 7 following are statistics for March and April. 8 Again, it's 1991. 9 Customer service, technical support -- 10 and you'll see there are thousands of people 11 calling. They've got a problem. They want to 12 talk to someone at Digital Research about their 13 problem. 14 And thousands of people -- this is 15 what DRI reports internally itself. Thousands 16 of people each month get tired of waiting and 17 simply hang up. 18 So let's look at the next one, 19 Defendant's Exhibit 2565. This is from 20 November of that same year. 21 And this is a memorandum from Jody 22 Clifton, who's name you were given by 23 Plaintiffs. And she writes to some of the same 24 people, Dick Williams, Pete DiCorti, Toby 25 Corey. We'll come back with Mr. Corey a little 4571 1 bit later. Follow-up on technical support 2 overlead problem. 3 And what does Jody Clifton say? 4 Here's what she says. I am getting complaints 5 from customers about have the answering service 6 take messages. I get anywhere from three to 7 five a day in addition to the other irate 8 individuals I already receive. 9 What they are complaining about mainly 10 is not that someone is taking a message, but 11 that they are told that no one will return 12 their call for three to four days. 13 As a result of having this service, we 14 now have 627 messages and no one to call them 15 back. 16 On the next page of this memo, second 17 page, right down at the bottom. This is what 18 Miss Clifton adds. 19 We need to solve this problem as soon 20 as possible. We are losing a large market 21 share and right now we are Microsoft's biggest 22 endorser. 23 Majority of all the irate individuals 24 I speak with say that they are going back to 25 Microsoft because at least they provide 4572 1 support. 2 Now, this is direct competition 3 between DRI and Microsoft. 4 When you're using -- particularly if 5 you cast your mind back to 1991, and to the 6 character-based world that we talked about, 7 that's the world that DRI lives in. 8 Their operating system has no GUI. So 9 you have that black screen and the C prompt and 10 you have to type things in, and things are a 11 little more complicated than now. 12 And talk about competition. What's 13 more basic than responding to your customers? 14 And when Miss Clifton says now we are 15 Microsoft's biggest endorser, what is it that 16 she's telling people at DRI? 17 But let's see whether or not this got 18 much better. 19 January 7th, 1992, just at the turn of 20 the next year. Again, an internal memo at DRI 21 from Dave Valentino to Joe Taglia and the same 22 subject is explored. 23 According to Sue Nageotte, there are 24 approximately 6,500 callbacks in backlog at 25 tech support and they will not be able to call 4573 1 at least 5,000 of those at all. These are end 2 users who are having a problem with DR-DOS. 3 That's why they called. 4 And 5,000 are not going to get a 5 return call at all. 6 So just to summarize, the three 7 documents we just looked at -- and the last one 8 I may not have given you the exhibit number. 9 It was 2582, DX 2582 -- sorry. 10 These three documents, which we 11 summarize here, tell you what was going on 12 internally at DRI in May, in November, and then 13 at the turn of the year in January of 1992. 14 Customers got tired of waiting and 15 hung up. 627 messages and no one to call them 16 back. 6,500 in a backlog in January. End 17 users who are having a problem with DR-DOS and 18 there's no one to return their phone call. No 19 one. 20 So in thinking about competition, one 21 has to ask is Microsoft doing a better job 22 competing against DRI or is DR-DOS failing for 23 some other reason? 24 And then let's look at the question of 25 DRI, again, living in this character-based 4574 1 world. 2 And you remember the Plaintiffs told 3 you that DRI had no GUI, no graphical user 4 interface. And they predicted that we would 5 discuss this with you. And, in fact, they 6 talked about the fact that DRI tried three 7 times to develop a GUI. 8 DRI indeed had three projects. The 9 Plaintiffs mentioned them. One was called Gem, 10 G-e-m; the other Cutlass; and the third was 11 called Star Trek. 12 Three times they tried to develop a 13 GUI. Legitimate competition, Microsoft has 14 Windows, DRI should develop its own GUI. 15 And they tried. But the point that 16 we're about to get to is that it's not just 17 Microsoft saying now that DRI could not succeed 18 in the market without a GUI. DRI knew this as 19 well. 20 And let's look at -- I guess what 21 we're looking at first, my apology, is the 22 testimony of Toby Corey. And before we play 23 this, let me tell you who Toby Corey is. You 24 saw his name a moment ago on one of the 25 memoranda. 4575 1 Toby Corey was vice president of 2 marketing at DRI, and then after the merger he 3 became -- the merger with Novell -- Novell 4 bought DRI -- he kept that job as director of 5 marketing. 6 And the Plaintiffs told you that we 7 would offer evidence to you about DRI's efforts 8 to come up with some GUI that competed with 9 Windows. 10 And, again, one of the three projects 11 was called Cutlass. There was also Star Trek. 12 And there was Gem. 13 Let's look at what Mr. Corey testified 14 to by deposition. 15 (Whereupon, the following video was 16 played to the jury.) 17 Question: Did you think that DRI 18 needed some kind of a graphical user interface 19 strategy in order to be successful? 20 Answer: Yes, I did. 21 Question: Why did you think that? 22 Answer: Well, the marketplace had 23 been -- was beginning to move off of a 24 character DOS operating system. And the lure 25 of graphical user interface making PCs easier 4576 1 to use was compelling. 2 Question: That's simply that it was 3 easier for people to use a mouse and have 4 little pictures of icons on the screen than it 5 was the way things were done under DOS, is that 6 basically what you're saying? 7 Answer: That's correct. 8 Question: Did others at DRI feel the 9 same way, that a graphical user interface 10 strategy was important to the success of DRI? 11 Answer: Yes, I believe that we all 12 shared that point of view. 13 Question: Did you think this would 14 have been an important way to keep the DR-DOS 15 business going? 16 Answer: I felt it was a necessity to 17 keep the DR-DOS business going, to have -- the 18 company needed a graphical user interface 19 product in order to meet the market demand. 20 (Whereupon, playing of video 21 concluded.) 22 MR. TULCHIN: There is the guy who is 23 director of marketing at Digital Research 24 talking about what we're going to show you more 25 of in a moment and what the Plaintiffs 4577 1 predicted we would say. 2 DRI knew at the time that without a 3 GUI, they could not compete with Microsoft. 4 They knew that it was a necessity to use the 5 word that Mr. Corey just used. 6 And, again, you just saw his 7 testimony. And he was asked whether or not 8 others at DRI felt the same way, that a 9 graphical user interface strategy was important 10 to the success of DRI. 11 Answer: Yes, I believe that we all 12 shared that point of view. 13 And in his next answer he said, I felt 14 it was a necessity to keep the DR-DOS business 15 going. 16 And the Plaintiffs also said on 17 Monday, December 4th, that you would see some 18 strong language in DRI's own documents where 19 DRI recognizes -- and I'm using the Plaintiffs' 20 words -- that it was history, that it was 21 history if it wasn't able to develop some GUI, 22 some GUI that could compete with Windows. 23 Let's look at Exhibit 240. 24 This is Defendant's Exhibit 240. It's 25 from someone named Mas Morimoto, who's with DRI 4578 1 in Japan, writing to Dick Williams, again, the 2 boss in August of 1990. 3 Remember, the Plaintiffs said the real 4 competition began in May of '90. Well, this is 5 just a few months later. 6 First, Mr. Morimoto says we have 7 agreed to form a swat team to target a group of 8 major OEMs around the world. If we have 9 executed the plan, although we have not, 10 substantial technical resources are required at 11 EDC. 12 And then he says, we also have not 13 executed on our obligation to ASCII, a customer 14 with respect to Cutlass -- Cutlass is their 15 code name for one of their GUI projects -- even 16 though every one of us involved believe that we 17 must address the issues of Cutlass in order for 18 our long-term survival. 19 Well, let's go to the next month, 20 September of '90. 21 This is Defendant's Exhibit 120. 22 It's another internal memo at Digital 23 Research. And you can see at the very top, 24 it's not real easy to read, Digital Research 25 Japan. 4579 1 And it's from Phillip Balma, 2 B-a-l-m-a, not to be confused with Steve 3 Ballmer of Microsoft. 4 Mr. Balma to Steve Tucker of Digital 5 Research. 6 Subject: DR-DOS 6.0 meeting. They 7 haven't issued DR-DOS 6.0 yet, but they're 8 working on it. 9 And here's what this memo says at DRI. 10 Again, talking about Cutlass. 11 We all feel that this is our only 12 long-term answer. If we don't start addressing 13 this, then forget all the interim stuff; we'll 14 be history. 15 So when the Plaintiffs predicted that 16 we'd say that DRI would be history if it 17 couldn't come up with a GUI, well, DRI said so 18 itself. 19 Let's look at another one, Defendant's 20 Exhibit 106. 21 This is now the next year. No, I beg 22 your pardon. We're still in 1990. It's 23 October. 24 And here's Mr. Balma again. We 25 believe that it is essential for us to develop 4580 1 Cutlass if we are to stay in this business. 2 Defendant's Exhibit 3 -- sorry, 106. 3 And I don't know if I mentioned the 4 last one, which we went by quickly, was 5 Defendant's Exhibit 136. This one is 106. 6 And here is a memorandum in February, 7 proposition for a global graphic strategy. 8 DRI sure is thinking about their 9 future and how they're going to compete with 10 Microsoft which has Windows. 11 You know that Windows 3.0 is this 12 revolutionary technological leap. And DRI in 13 this memorandum says, in the future within four 14 years -- they were right on, Windows '95. 15 Within four years, people will buy a 16 whole product, an operating systems, plus a 17 graphical interface. It will be difficult, not 18 to say impossible, then, to sell only operating 19 systems without offering a global solution. 20 DRI in these four exhibits recognizes 21 the point that I'm making. 22 The point merely being that the 23 evidence in this case will show that in the 24 competition between Microsoft and DR-DOS, 25 between MS-DOS and DR-DOS, between Windows and 4581 1 DR-DOS, Microsoft had an advantage, a perfectly 2 legitimate advantage. 3 It's called coming up with a better 4 product, Windows. A product that everyone 5 wanted, that people from 1990 with Windows 3.0, 6 and in 1995 with Windows 95, very, very much 7 wanted on their computers. 8 That's a legitimate business 9 advantage. That's called competition. 10 And DRI knew it, and they knew that 11 without their GUI -- and all these projects 12 that they tried failed. They never came up 13 with one that they marketed. They never 14 released a GUI commercially. 15 Without that, they were history. 16 Looking at Exhibit 120. 17 So, let's look at the testimony of 18 Toby Corey on this question of the extent to 19 which DRI went to try to develop a GUI. 20 (Whereupon, the following video was 21 played to the jury.) 22 Question: Were there other efforts, 23 either by DRI or by Novell, to figure out ways 24 to come up with a graphical user interface 25 strategy? 4582 1 Answer: Yes, there were. The one 2 that I think had -- drew the most resources and 3 time and efforts was a top secret project 4 called Star Trek. 5 Question: What can you tell us about 6 Star Trek? What was that about? 7 Answer: Star Trek was an initiative 8 to build a competitor to the Windows operating 9 system. It was a partnership between Novell 10 and Apple Computer. This initiative would have 11 started early 1992. 12 Let me think here. Is that right? It 13 was in 1992, I believe, and Novell and Apple 14 combined -- each took some of our top 15 engineers, located them off-site in Santa Clara 16 to begin porting the graphical user interface 17 aspects of the Macintosh operating system to 18 run on Intel architecture on the DR-DOS 19 operating system. 20 (Whereupon, playing of video 21 concluded.) 22 MR. TULCHIN: So here's Mr. Corey 23 telling you that Novell and Apple got together 24 using the DRI engineers, and yet they were 25 unable to. They never came out commercially 4583 1 with any graphical user interface. 2 So, on this subject, if I may go back 3 to the slide rule, the evidence will be that 4 DRI, in effect, was making a slide rule at a 5 time when the market was going to hand-held 6 calculators to make scientific calculations. 7 Nobody was sticking with the 8 character-based world. And DRI had no answer. 9 They knew they couldn't survive without an 10 answer. They never came up with one. 11 Your Honor, I'm prepared to continue 12 if you think this is a good time for a break. 13 I'll go into another subject. 14 THE COURT: Okay. Why don't we take 15 about a 10-minute recess. 16 Remember the admonition previously 17 given. Leave your notebooks here. They will 18 be quite safe. 19 See you in 10 minutes. 20 (The following record was made out of 21 the presence of the jury at 9:43 a.m.) 22 THE COURT: Mr. Williams, how many 23 more things do we have in your estimation? 24 MR. WILLIAMS: Your Honor, we have 25 several items that we'd like to discuss with 4584 1 the Court. Some of them will be relatively 2 short. 3 There's one I think that is going to 4 take a bit more time. That's the matter that 5 was discussed at the end of Mr. Tulchin's 6 opening yesterday having to do with the 7 everybody was doing it defense. 8 I think both sides have some 9 authorities they'd like to hand up and make 10 some argument on that. 11 THE COURT: And is this important 12 before he goes on with his opening or is this 13 something that can be taken up later in the 14 day? 15 MR. WILLIAMS: Well, without arguing 16 the motion, Your Honor, one of the things we 17 are asking for is a corrective discussion. 18 In our view, the damage has sort of 19 been done. I don't want to take up the jury's 20 time any more than we have to. 21 THE COURT: You may be seated, please. 22 MR. WILLIAMS: So, you know, it's 23 really up to Your Honor. I think it won't take 24 more than ten minutes to argue that issue. 25 THE COURT: Okay. What else do we 4585 1 have? Do you have anything else? 2 MR. WILLIAMS: There's a few other 3 issues, Your Honor. 4 Like I said, I think they'll be 5 relatively brief arguments on. There's -- but 6 they do go to some of the other statements that 7 Mr. Tulchin made to the jury. 8 THE COURT: Okay. Mr. Cashman left, I 9 see. 10 Was there other -- Mr. Hagstrom, other 11 exhibits or -- Mr. Gralewski is here. Any 12 other exhibits or items that need to be 13 discussed that are the subject of Mr. Tulchin's 14 opening? 15 MR. GRALEWSKI: Your Honor, Mr. Tuggy 16 is not here. I don't see him. I believe he's 17 the person prepared to argue anything related 18 to Mr. Sculley and Mr. Erickson. 19 I don't believe that based on Mr. 20 Tulchin's subject matter -- but, of course, I 21 don't know where he's going -- that those will 22 come up in the next hour. 23 THE COURT: Okay. 24 MR. GRALEWSKI: Perhaps we can address 25 them at the lunch break. If they do come up, 4586 1 we are prepared to make our objection at the 2 time. 3 THE COURT: Okay. Anything for the 4 defense that needs to be addressed relatively 5 soon? 6 MR. TULCHIN: No, Your Honor. 7 THE COURT: Okay. All right. Great. 8 Thanks. 9 (A recess was taken from 9:45 a.m. 10 to 10:04 a.m.) 11 THE CLERK: All rise. 12 THE COURT: Everyone else may be 13 seated. I gave you a little more time than 10 14 minutes, but I'm sure you are not discouraged 15 about that. 16 MR. TULCHIN: All right. Just to 17 pause for a moment. 18 As you know, we are talking about 19 competition between Microsoft and Digital 20 Research, DRI. 21 I hope to be able to finish that up by 22 around lunch time, and then we'll get to 23 competition between Microsoft and IBM. 24 So we're still with Digital Research. 25 The Plaintiffs, you will remember, 4587 1 talked a little bit about what they called 2 incompatibilities. 3 And I think it's important to set the 4 stage here when they think about 5 incompatibilities with something that the 6 Plaintiffs themselves told you in their opening 7 statement. 8 Again, we have common ground here. 9 Both sides agree with this. 10 The Plaintiffs said, we are not saying 11 that Microsoft has an obligation to make its 12 products compatible with DR-DOS. 13 Now, that's important when we try to 14 understand what the evidence will be about the 15 so-called incompatibilities. 16 Again, both sides agree -- and it's 17 nice occasionally. Occasionally that we find 18 places where we can agree. Both sides agree 19 Microsoft has no obligation to make its 20 products compatible with DR-DOS. 21 And we think the evidence will show 22 you that the incompatibilities, the -- let me 23 try that again. 24 The incompatibilities that arose 25 between DR-DOS and Microsoft were not 4588 1 Microsoft's fault and are an effort to blame 2 Microsoft for the problems that DRI had itself. 3 Now, DR-DOS, the operating system made 4 by DRI, was supposed to be a clone, c-l-o-n-e, 5 a copy of MS-DOS. 6 In other words, Digital Research set 7 out to try to make its product as close to 8 MS-DOS as it could. Perfectly legitimate 9 business competition. 10 If you're not taking anyone else's 11 trade secrets improperly, but you simply try to 12 copy what someone else has done, perfectly 13 legitimate. And they had a right to make a 14 clone. 15 But bugs are inevitable. Problems are 16 inevitable in software. 17 When you're working on a very complex 18 product that has sometimes millions, literally 19 millions, of lines of code, source code, which 20 is written and becomes the product. 21 So the bugs that popped up -- and 22 we'll come to this -- popped up because of 23 problems that Digital Research itself had. 24 And let's talk about some of the 25 allegations that I've sort of put together here 4589 1 that I think we can put under the category of 2 incompatibilities. 3 The first was the AARD code. The 4 Plaintiffs spoke of this, A-A-R-D. And the 5 evidence at trial will show that Microsoft was 6 concerned about the cost to Microsoft of 7 supporting Windows on top of an operating 8 system made by another company. 9 And there was a decision to display a 10 message in a beta version, a beta version, of 11 Windows 3.1 in December of 1991. 12 The AARD code was inserted into the 13 beta. The beta is a test version. It's not 14 the copy that gets sold to the public. It's a 15 test version that goes out to a limited 16 universe of people who, in effect, act as 17 testers for Microsoft to see if the source code 18 -- sorry -- if the product has any problem. 19 And the AARD code did not make -- 20 there's no evidence that it made DR-DOS 21 malfunction. It merely came up and said 22 nonfatal error. Nothing fatal about this. It 23 didn't break DR-DOS. 24 So there's no evidence -- there won't 25 be any evidence that any end user -- because 4590 1 this was only in the beta version. 2 When Microsoft commercialized Windows 3 3.1, when it came out with the actual product 4 which it sold to the product, to end users, 5 that AARD code was inactivated. It was not 6 present. No one could see it. 7 And the question of whether the AARD 8 code was a significant problem or whether it 9 was benign has been addressed in discovery in 10 this case. 11 John Constant, who the Plaintiffs say 12 will come into this courtroom to testify, has 13 testified at deposition that he concluded that 14 the AARD code was -- I'm using the word in the 15 deposition -- benign. 16 Here's the question: And you 17 concluded that those messages were benign; is 18 that correct? 19 Answer: That was our evaluation after 20 testing was done in Provo. Provo is Provo, 21 Utah, where DRI had a facility. 22 And those messages, the evidence will 23 show, refers to this AARD code in the beta. 24 There's also an internal document at 25 DRI. It's Defendant's Exhibit 19. 4591 1 This is from 1992, just a couple of 2 months later. March 3rd, '92. 3 The AARD code was in this beta in 4 December of '91. And here's a memo at Digital 5 Research. Again, the subject is they're 6 working on DR-DOS 6.0, but here's the portion 7 that I bring to your attention now. 8 Windows 3.1 support. Some progress 9 has been made. There are four benign error 10 messages. All we need is a patch to fix 11 problems. 12 So what DRI is saying, we think the 13 evidence will show you, is that this AARD code 14 was, to use their word, benign, and it was a 15 simple matter to get a patch to fix it. 16 Let's talk about what the Plaintiffs 17 call the nested task flag. 18 Now, this is actually not a bug. And 19 sorry to get a little bit technical with you. 20 The nested task flag is a registered 21 setting in the Intel processor, and the setting 22 can be either 1 or 0. It's just a binary 23 setting. 1 or 0. Zero is the normal default 24 setting. 25 Now, what DRI did is to set the 4592 1 default at 1 instead of 0 and not tell anyone 2 that they had done that. 3 Mr. Constant, we believe, will testify 4 that this was part of a research exercise that 5 DRI was then engaged in. 6 So the nested task flag when set at 1 7 caused Windows 3.1 to fail when an end user 8 tried to use DR-DOS on top of Windows 3.1. 9 This was not Microsoft's fault. The 10 nested task flag problem was a problem created 11 by DRI when they changed this setting in the 12 microprocessor from 0 to 1. 13 Further, this problem was fixed by 14 DRI. They created it, they should have fixed 15 it, and they did. 16 Here's Defendant's Exhibit 318. 17 No, wrong number. Defendant's Exhibit 18 3656. I was reading my notes incorrectly. My 19 apology. 20 3656. And this is a memo internally 21 at DRI. You'll see it was written by 22 Mr. Constant, and he writes to a number of 23 other people, including Mr. Tucker, whose name 24 you've seen before, March 4th, '92. And here's 25 the portion of this that we think is important 4593 1 when it comes to the nested task flag. 2 And you'll see that Mr. Constant is 3 referring to just what I was telling you. The 4 nested task flag is set by default on DR-DOS. 5 He seems to acknowledge here that the 6 problem was DRI's. Windows cannot be installed 7 because of this problem, and then he says this 8 has been fixed by a two-byte patch to 9 IBMDOS.com. So the problem was DRI's. It was 10 just an error in this setting, 0 or 1, and they 11 put it at 1. And they fixed it on March 4th, 12 of '92. 13 And Mr. Constant, we believe, will 14 testify that this problem was just as I 15 explained it to you. DRI created it, and they 16 solved it easily in March of '92. 17 And then, thirdly, under the same 18 category of incompatibilities, the Plaintiffs 19 talked about something called Bambi. 20 And I think the Plaintiffs told you 21 that this was some sort of a scheme by 22 Microsoft involving a disk caching utility. It 23 wasn't a scheme by Microsoft. It was about as 24 innocent as the Bambi name is in referring to a 25 baby deer. 4594 1 Bambi was a code name for a beta 2 version of Microsoft's SmartDrive disk caching 3 utility. That's not the operating system. 4 It's just a utility that works with it. 5 And, again, Bambi was not incompatible 6 -- Bambi was incompatible with DR-DOS 6.0. It 7 was, but it was not incompatible because of 8 anything Microsoft did. 9 Mr. Alepin, the Plaintiffs' expert, 10 who they will call as their witness in this 11 case, has previously testified -- and I believe 12 he will acknowledge to you here -- that Bambi 13 was incompatible with DR-DOS because of DRI's 14 support for a Compaq standard for a laptop. 15 And this gets very technical. But it 16 was a DRI choice in the way they supported this 17 Compaq standard for a laptop drive that caused 18 the incompatibility. 19 Again, DRI did this. They caused it. 20 And if anyone had an obligation to fix the 21 Bambi problem, it was DRI. 22 Okay. The beta blacklist. 23 Well, it sounds a little bit maybe 24 less than innocent. 25 But the beta blacklist just referred 4595 1 to a list that Microsoft had of who would get 2 the beta, and, yes, who would not get the beta. 3 And this goes back exactly to the 4 point I made to you earlier about sharing your 5 intellectual property with your competitors. 6 Microsoft on some occasions decided 7 that the beta, which is Microsoft's property, 8 would not be shared with competitors who might 9 use that property against Microsoft in the 10 competition between these two companies. 11 The beta is a preview of what 12 commercially will be released later. It 13 contains lots of very critical, valuable, 14 confidential business information about your 15 product. 16 And Microsoft, we believe, had the 17 right to give the beta to those it wished to 18 give it and not to give it to competitors who 19 could use that preview of a new product to help 20 improve their own product in the competition 21 between these two companies. 22 And in connection with this, I think 23 it's important, because this is right on the 24 same subject, to refer to what the Plaintiffs 25 said to you way back on December 1st. 4596 1 In talking about the beta, and in 2 talking about bugs in DRI's software, in 3 DR-DOS, the Plaintiffs said that these bugs 4 could have been easily cured if DRI simply had 5 the Windows 3.1 beta. 6 They told you that DRI could have 7 fixed the problems of Bambi and nested task 8 flag if only Microsoft had given DRI the beta 9 for Windows 3.1. 10 On December 4th, the Plaintiffs said 11 the problem could have been easily cured if DRI 12 had had the beta. 13 That's a quote from their opening 14 statement. 15 And that may have given you the 16 impression that DRI never got the beta to 17 Windows 3.1. But, of course, the evidence will 18 show you that's not correct. 19 And let me be clear about this. 20 The Plaintiffs said the problem could 21 easily have been cured. 22 And DRI had that beta. They didn't 23 tell you that. DRI had the Windows 3.1 beta. 24 In January of '92, Mr. Constant, same 25 fellow, the engineer at DRI, went to Provo, 4597 1 Utah. He was actually visiting what was a 2 Novell facility. Novell had just bought DRI. 3 MR. HAGSTROM: Your Honor, may we 4 approach? 5 THE COURT: Yes. 6 (Off-the-record sidebar discussion was 7 held.) 8 MR. HAGSTROM: Thank you. 9 THE COURT: You may continue. 10 MR. TULCHIN: Thank you, Your Honor. 11 In January '92, as I was saying, 12 Mr. Constant, the engineer at DRI, went to 13 visit Novell's facilities. Novell had just 14 bought DRI. 15 And Mr. Constant writes a memo about 16 that trip he made to Provo. 17 This is Defendant's Exhibit 145. 18 Here is what Mr. Constant said he did 19 on that trip to Novell 25 January, 1992. 20 You see from Mr. Constant -- let's 21 look at the memo. 22 Test latest Windows 3.1 -- and then 23 you'll see what we believe the evidence will 24 show is the symbol for beta. You see it's 25 actually the beta sign. It looks like a B -- 4598 1 with DR-DOS 6.0 to confirm reports that the 2 final beta displays the error number, et 3 cetera. 4 And the point here is that Defendant's 5 Exhibit 145 is proof that DRI had the beta. 6 So when the Plaintiffs gave you the 7 impression that these problems, nested task 8 flag and Bambi, all of the problems could have 9 been solved if they only had the beta, they 10 did. And Mr. Constant shows this in his memo 11 at the right time, January of 1992. 12 So, still talking about DR-DOS. 13 I want to talk a little bit about 14 incompatibilities. That's what we've been 15 talking about. 16 And let's talk a little bit about what 17 DRI's customers noticed around the 1990 time 18 frame. 19 Rockwell International was an OEM that 20 had been evaluating DR-DOS. They had been 21 testing it, looking at it, trying to make a 22 decision about whether to buy DR-DOS from DRI. 23 And we're back to Mr. Constant in 24 Defendant's Exhibit 1008. It's a little 25 illegible. This was prepared long ago. 4599 1 But we believe that the evidence will 2 show you that this is November 30th, 1990. 3 It's hard to read, but we believe we can prove 4 this to you. 5 And what Mr. Constant -- this is a 6 memo to Mr. Constant. And what is told to 7 Mr. Constant in November of 1980, is that 8 Rockwell, the OEM, has been evaluating DR-DOS 9 5.0 in the hopes of standardizing on DR-DOS -- 10 on DR-DOS. 11 Now, this is an opportunity, 12 obviously, for DRI. They're competing against 13 Microsoft. Of course, Microsoft has Windows 14 3.0 on the market by now. But they're trying 15 to make a sale with Rockwell. 16 And here's the point. Rockwell says 17 they like the product very well. However, 18 today, the evaluation ran into an unpleasant 19 snag. 20 Rockwell was under the impression that 21 -- and then there's -- this one is tough to 22 read and it's EMM386.SYS, we believe -- 23 supported Windows 3.0's enhanced mode, which, 24 of course, it does not. 25 Greg Raines, their chief evaluator, 4600 1 advised me that they will not be able to decide 2 in favor of DR-DOS 5.0 until this issue is 3 resolved. 4 And then the memo goes on to say: 5 Direct support for 3.0 is one of our most 6 popular enhancement requests. 7 Their customers, in other words, are 8 saying if we are going to use DR-DOS -- if we 9 are going to use DR-DOS 5.0, we request that it 10 work with Windows 3.0. Again, Windows 3.0 is 11 blowing the market away. 12 This is extremely important for 13 corporate customers and for the successful 14 sales of DR-DOS into corporate America. 15 I know you are aware of this, and that 16 the IDC I think it is, or EDC, has been working 17 on this compatibility issue for several months. 18 Yes, DR-DOS is working on their 19 compatibility issues, and they know it's very 20 important for their success in corporate 21 America to be able to come up with a product 22 that's compatible with Windows 3.0. 23 But as the slide I showed you as I 24 started about incompatibilities indicates, the 25 Plaintiffs don't argue that Microsoft was 4601 1 obligated to make Windows compatible with 2 DR-DOS. It's the other way around. 3 If DR-DOS wants to compete in 4 corporate America, it's up to them to make 5 their product compatible with Windows, so that 6 they work together. 7 Why? Because people want Windows. 8 They tried for months. They weren't 9 successful. 10 And then we can look at DR-DOS 6.0, 11 which came out later. 12 Let's look at Defendant's Exhibit 32. 13 This is in October 1991. John Linney 14 of DRI sends a memo to a lot of people, 15 including, again, Mr. Constant. 16 And he says at the top: Here is some 17 additional information regarding the interim 18 DR-DOS 6.0 BUS. Please use it to assist, et 19 cetera. 20 This is strictly confidential and 21 should, on no account, be given directly to any 22 nonDRI personnel. This includes OEMs, end 23 users, and members of the press. 24 And you'll see in just a moment why 25 DRI doesn't want in October '91 anyone outside 4602 1 the company to see what the real facts are 2 about its product. 3 When EMM386.SYS is used with 4 /FRAME=NONPARAMETER in conjunction with Windows 5 3.0, unreliable operation of the system may 6 result. 7 DOS applications can lock the system 8 when run under Windows. 9 Now, this was fixed, but, obviously, 10 this was a problem that existed for some time 11 in the compatibility between DR-DOS 6.0 and 12 Windows. 13 And then there's another problem. 14 When running Windows 3.0 in standard mode with 15 certain features locked -- sorry -- loaded, 16 some unreliability of operation was possible. 17 So you can see that DRI is having some 18 trouble, some serious trouble, in making its 19 operating system compatible with Windows. 20 Now, the Plaintiffs also told you that 21 Microsoft did some testing and had some 22 independent testing done on the DR-DOS 23 products. 24 When DR-DOS 6.0 first was released, 25 Microsoft took a look at it, as any competitor 4603 1 would do with his competitor's product. 2 And this is October of 1991, Exhibit 3 111, Defendant's Exhibit 111. 4 This is a memo written by Richard 5 Freedman in which he reports the results of 6 their first look at DR-DOS 6.0. 7 He reports on some testing of that 8 product, and here's what the testing results 9 in. 10 This section discusses differences in 11 compatibility and testing between MS-DOS 5 and 12 DR-DOS 6.0. We were surprised by number and 13 severity of the incompatibilities we found. 14 In short, it looks like they took 15 DR-DOS 5.0, which was already problematic 16 enough to have been through these releases in 17 eight months, made some minor changes, added in 18 some third-party utilities, and called it 6.0. 19 So Microsoft's first look at DR-DOS 20 6.0 shows you some of the same problems. 21 Let's look at another page of this 22 same memo. Exhibit 111. 23 Compatibility. Digital Research 24 themselves positioned DR-DOS 6.0 as another 25 operating system, in their words, a fully 4604 1 DOS-compatible operating system. 2 The irony, of course, is that they're 3 not DOS compatible. I say this because the 4 tests run by the independent lab, XX -- I'm 5 having trouble speaking, forgive me -- XX CAL, 6 turned up a series of problems. I've 7 highlighted some of them below. 8 And here's sort of the punch line. 9 DR-DOS 6.0 broke some major applications, like 10 WordPerfect and Windows. And this test I 11 specified was quite similar to the Suite XX CAL 12 ran on MS-DOS 5. 13 So here we are at an important time 14 period, according to the Plaintiffs, October 15 1991. DR-DOS is coming out with this new 16 product, 6.0. And Microsoft does some testing, 17 and it does not work well. It broke some major 18 applications, like WordPerfect. 19 Imagine you have your WordPerfect word 20 processing system and you want to run it on top 21 of the DR-DOS operating system and WordPerfect 22 breaks. 23 Now, this is the competition between 24 Microsoft and DRI. This is what's really 25 happening in the marketplace. 4605 1 So let's look quickly at the actual XX 2 CAL report. It's DX 843. It's a report XX CAL 3 testing laboratories performed. It's a memo 4 dated November 13th, '91, that's sent to 5 Microsoft. Final report. DR-DOS version 6.0. 6 An independent testing lab, XX CAL, 7 the evidence will be, is not a Microsoft 8 subsidiary or a Microsoft business. It's an 9 independent lab. 10 And what do they find? 11 First, when the WordPerfect 5.1 12 installation program was invoked, the program 13 loaded and began installing the first disk, 14 then locked up, requiring a warm boot to reset. 15 The machine locked up during 16 WordPerfect invocation also, with the same 17 results. 18 So this is consistent with the idea. 19 It's just not running with WordPerfect well. 20 And then let's look at a little bit 21 more. 22 This is installing 1-2-3, the 23 spreadsheet, Lotus 1-2-3. 24 Various functions were tested. Upon 25 trying to save a worksheet or a graph, the 4606 1 machine would, again, lock up. 2 This is DR-DOS trying to compete 3 against Microsoft, and here's their product. 4 It's not working well. 5 Let's look at another part of this 6 same document. 7 Upon exiting Desqview 386. And the 8 testers report these were the big DOS or the 9 DOS Windows. When Desqview asked are you sure 10 upon quitting and when Y for yes was entered, 11 the platform would lock up. 12 So all the allegations that the 13 Plaintiffs make about competition between DRI 14 and Microsoft, the allegations that Microsoft 15 did something wrong, those allegations are not 16 correct. 17 And the real story of the competition 18 in the marketplace is that the DR-DOS product 19 is not very good. 20 They're having a hard time competing 21 with Microsoft for the real business reasons 22 that normally prevail in any marketplace. 23 If one product is better than another, 24 if the world is going to a GUI like Windows 25 3.0, if DRI has no GUI despite their projects, 4607 1 Cutlass and Gem and Star Trek, time after time 2 they recognize they're history, they're toast 3 without a GUI. They can't come up with one. 4 And even with their character-based 5 system, they have problems, compatibility 6 problems because DRI has not done a good enough 7 job in writing their software. 8 And in finishing up this story now, I 9 want to play for you the testimony of a number 10 of employees of OEMs. 11 And we submit that this is testimony 12 that should be very important to your 13 consideration of the issues in the case. 14 During the trial we will play much 15 larger excerpts from the depositions than what 16 I'm going to show you now. 17 But what I'm going to show you now, I 18 think, is a fair summary of what was going on 19 in the marketplace. 20 Because, as the Plaintiffs have said, 21 with operating systems, very often, usually, 22 most operating systems are sold to OEMs who 23 then preinstall them on the computers that all 24 of us buy. 25 So a lot of the competition, the 4608 1 competition in this case between Microsoft and 2 DRI, is to convince OEMs to buy the product. 3 Yes. 4 And here's the testimony from several 5 OEMs as to why they chose the Microsoft 6 operating system as compared to DRI's. 7 Let's start with Gary Bachelor, who 8 was the VP of sales and marketing for U.S. 9 Integrated Technology from '89 to '92. 10 (Whereupon, the following video was 11 played to the jury.) 12 Question: So am I correct that at 13 that time you were using DR-DOS on all of the 14 computers that you were marketing under the 15 USIT name; is that correct? 16 Answer: That's correct. 17 Question: And your customers were 18 saying as long as you have DR-DOS on them, they 19 weren't going to sell those computers? 20 Answer: Correct. 21 Question: Now, my final question. If 22 you had known in advance what your experience 23 was going to be with DR-DOS, would you have 24 done anything differently? 25 Answer: Yes. 4609 1 Question: What would you have done 2 differently? 3 Answer: We would not have signed the 4 agreement with DR-DOS. We would have gone 5 directly to Microsoft and not -- it was -- it 6 became a very expensive exercise going with 7 Digital Research. 8 (Whereupon, playing of video 9 concluded.) 10 MR. TULCHIN: Here's Mr. Bachelor who 11 worked at an OEM called U.S. Integrated 12 Technologies testifying that there was a time 13 during this period '89 to '92 when that OEM 14 used DR-DOS on all of their computers. 15 And what their customers were saying 16 to them was as long as you have DR-DOS, you 17 aren't going to sell any. Nobody wanted them. 18 And then he goes on to talk about how 19 expensive it was going with DR-DOS. 20 And when you see the testimony at 21 trial, you'll see why, because of these 22 technical problems with the DR-DOS product. 23 So let's look at Kent Markley. He 24 worked at MidWest Micro from '91 to '97 and was 25 at one point vice president and later president 4610 1 of that company. 2 (Whereupon, the following video was 3 played to the jury.) 4 Question: Did you consider bundling 5 DR-DOS on your PCs? 6 Answer: Yes, we did. And we did 7 bundle DR-DOS. 8 Question: And for how long did you do 9 so? 10 Answer: I believe the time period was 11 six months. 12 Question: And why did you stop 13 bundling DR-DOS after that six-month period? 14 Answer: No demand. 15 Question: Did MidWest Micro ever 16 consider bundling OS/2 on its PCs? 17 Answer: Yes. 18 Question: And did you? 19 Answer: Yes. 20 Question: And do you recall for what 21 period and for how long? 22 Answer: It would have been in the mid 23 '90s. Again, it was very short-lived. 24 Approximately six months. 25 Question: And, again, do you recall 4611 1 why you discontinued bundling OS/2 on your PCs 2 after that short of period? 3 Answer: Very little customer demand. 4 (Whereupon, playing of video 5 concluded.) 6 MR. TULCHIN: Well, we just got a 7 little bit into the story of the competition 8 between IBM and Microsoft because we thought 9 we'd play this for you at one time. It would 10 be a little more efficient. 11 But let's just stick for a moment with 12 DR-DOS. 13 Here's Kent Markley of an OEM, MidWest 14 Micro. He was vice president and later 15 president of that company. 16 And the Plaintiffs, of course, say 17 that the reason that Microsoft prevailed in the 18 operating system market, or at least a reason, 19 was because Microsoft locked up the OEMs -- 20 somehow locked them up as if something there 21 was wrongful in the competition. 22 And here's Mr. Markley, an OEM, saying 23 that there was a time when he used DR-DOS on 24 almost all the MidWest Micro PCs. 25 And he did that for about six months. 4612 1 He says we did bundle DR-DOS. I believe the 2 time period was six months. 3 Question: Why did you stop bundling 4 DR-DOS after that six-month period? 5 Answer -- and this is the answer that 6 really answers the question about competition 7 in this market. 8 Answer: No demand. 9 No demand. Nobody wanted DR-DOS for 10 all the reasons that you've seen. The problems 11 with that product and the superiority of what 12 Microsoft had to offer. 13 Again, Microsoft had Windows. 14 Something that Mr. Gates had decided working on 15 beginning, you'll remember, in the early to 16 mid-'80s when he first saw the Apple GUI, and 17 Windows 1.0 had come out in 1985, and 2.0 18 later. 19 Neither of those were very successful. 20 But, boy, when the problem of calling on 21 sufficient memory was solved -- and you will 22 remember David Weiss of Microsoft -- and when 23 Windows 3.0 came out in May of '90, that 24 revolutionary technological leap, Microsoft's 25 product was much, much better than DRI's. 4613 1 And that's Mr. Markley's testimony. 2 No demand. 3 Now, he also says very little demand 4 when talking about OS/2 later in the mid '90s. 5 And I'll come to the IBM issues later 6 today. 7 So there's a third OEM who testified 8 on this subject, a man named Pete Scamardo. He 9 was director of marketing and later vice 10 president of Micron, an OEM located in Boise, 11 Idaho. 12 And let's see what Mr. Micron says -- 13 Mr. Scamardo of Micron. 14 (Whereupon, the following video was 15 played to the jury.) 16 Question: Okay. Do you know if 17 Micron ever considered bundling DR-DOS on its 18 PCs? 19 Answer: No. We never considered it. 20 Question: And why did you not 21 seriously consider preinstalling DR-DOS? 22 Answer: There was no customer demand 23 for it. And we committed ourselves with 24 focusing on the bulk of the market. 25 (Whereupon, playing of video 4614 1 concluded.) 2 MR. TULCHIN: Now, here's a man who 3 never put DR-DOS on his PCs. 4 Micron decided they weren't going to 5 use DR-DOS, unlike the first two we looked at. 6 Mr. Scamardo was asked, well, why? 7 Why didn't you consider using DR-DOS? And his 8 answer was, there was no customer demand for 9 it. No customer demand. 10 In the competition between Microsoft 11 and Digital Research, that's the answer as to 12 why one won and one didn't. 13 And then you'll remember that the 14 Plaintiffs talked a little bit about Acer, an 15 OEM, on a different subject, which I will come 16 to. 17 There's the deposition of Michael 18 Culver, C-u-l-v-e-r, who is general manager of 19 the consumer division of Acer from January '96 20 to February '99. He had other positions at the 21 company at other times. 22 And here's his deposition. Again, 23 this was taken -- this deposition was taken in 24 2002. 25 (Whereupon, the following video was 4615 1 played to the jury.) 2 Question: Did you have any 3 understanding as to why Acer did not use OS/2 4 as the operating system for its PCs? 5 Answer: I can only speak to the North 6 American market for Acer. And there was simply 7 no consumer or commercial demand that we saw 8 that would justify coming up with some SKUs 9 that would have that operating system 10 preloaded. Purely business reasons. 11 (Whereupon, playing of video 12 concluded.) 13 MR. TULCHIN: So there you are. It's 14 about OS/2 because it's a later time period. 15 But it's the same story. No consumer or 16 commercial demand. 17 The deposition of a gentleman from 18 Gateway was taken. His name is David Reiss. 19 Let's see what he says. Again, now we are 20 talking about OS/2. 21 (Whereupon, the following video was 22 played to the jury.) 23 Question: How about OS/2? Did 24 Gateway bundle OS/2? 25 Answer: No. 4616 1 Question: Do you know why not? 2 Answer: Customer demand balanced out 3 with cost of compatibility testing and support. 4 Question: What about customer demand, 5 I'm sorry? 6 Answer: The customer demand wasn't 7 there for OS/2, as far as from a Gateway 8 product line. 9 And in order for us to release any 10 product, it had to go through extensive 11 compatibility testing for past, present, and 12 future computers that we have and every 13 component within the computer. 14 So it was a -- you know, a fiscal 15 consideration, financial consideration, that it 16 would cost too much for not enough return. 17 Question: Did Gateway bundle -- or 18 excuse me, do you know why Gateway bundled 19 Microsoft operating systems? 20 Answer: Customer demand, clearly. 21 (Whereupon, playing of video 22 concluded.) 23 MR. TULCHIN: That was OS/2. 24 Now, we are going to go back to a 25 company called, you all know them, Compaq 4617 1 computer. 2 The evidence will be that from 1994 to 3 2000, Compaq was the number one OEM in the 4 world. Dell computer now is, but Compaq was 5 for those years. 6 And the deposition of Gary Stimac of 7 Compaq was taken. And we are going back now to 8 cover DR-DOS. 9 (Whereupon, the following video was 10 played to the jury.) 11 Question: Did you back then -- 12 whether you stated it or not, did you think 13 DR-DOS was superior to Microsoft DOS? 14 Answer: No. 15 Question: And why is that? 16 Answer: Because customers were 17 wanting MS-DOS at the time. 18 We were testing MS-DOS on our -- on 19 our machines and applications on top of MS-DOS 20 and that's what customers were demanding. And 21 they were not -- we had never heard of any 22 demand for DR-DOS from our customer base. 23 (Whereupon, playing of video 24 concluded.) 25 There's Stimac saying we had never 4618 1 heard of any customer demand for DR-DOS. 2 And I want to show you a slide that 3 puts together the testimony from all of these 4 OEMs. 5 The ones that you just looked at. 6 Gary Bachelor, Kent Markley, Pete Scamardo, 7 Michael Culver, David Reiss, Gary Stimac. 8 And they are all singing the same song 9 independently. 10 When it comes to operating systems, 11 OEMs -- here's testimony from six of them. 12 OEMs are saying there's no demand for DR-DOS or 13 no demand for OS/2. People in the marketplace 14 just don't want them. 15 And if an OEM is going to make 16 decisions about what operating system to 17 preinstall, to bundle, as they sometimes say, 18 on their PCs, they're going to want to try to 19 put something on their PCs that will sell, that 20 people want. That's business. 21 And here are six of them saying, in 22 one fashion or another, whether it's about 23 DR-DOS or OS/2, that there just wasn't customer 24 demand for OS/2. 25 So as you listen to the evidence over 4619 1 what will be a lengthy period of time -- and 2 the Plaintiffs come in with their theories, 3 primarily theories that will be advanced by 4 their experts, keep in mind, please, this 5 evidence, when our turn comes, we'll show you 6 these depositions, that the OEMs themselves 7 chose Microsoft on the merits for good solid 8 business reasons. 9 Because, as you know, Microsoft had 10 the better product. 11 There's no secret about why Microsoft 12 was so successful. I told you a little earlier 13 this morning that the Plaintiffs' expert, 14 Doctor Noll, has acknowledged that in '86 or 15 '87, Microsoft had monopoly power. And he says 16 not because of anything wrongful. Microsoft 17 lawfully had it. 18 And the evidence we will show you is 19 that when Microsoft was competing against 20 DR-DOS in the early '90s -- and, remember, the 21 Plaintiffs said that the key period began in 22 the middle of 1990. That's when the real 23 competition began between Microsoft and DR-DOS. 24 The real reason that Microsoft 25 succeeded and DR-DOS did not is that Microsoft 4620 1 had Windows. It had a better product. DR-DOS' 2 product was flawed, often had 3 incompatibilities. 4 DR-DOS couldn't even answer the 5 telephone when customers called. They were 6 running a business that they recognized was 7 soon to be history. Not because of any 8 unlawful conduct, but because of the business 9 realities, lawful competition. 10 And when Plaintiffs said that the most 11 effective tactic that Microsoft had was its 12 licensing contracts -- there's testimony that 13 you will hear from Pete Scamardo of Micron, you 14 saw him a moment ago. 15 Question: To your knowledge, did any 16 of the terms of Micron's agreements with 17 Microsoft for operating systems prevent Micron 18 from bundling or preinstalling on its PCs 19 non-Microsoft operating systems? 20 Answer: No. 21 Here's Mr. Scamardo. The theories 22 that the OEMs were all locked up, tied down, 23 had no choice. There's Mr. Scamardo. 24 Question: Did any of the terms of 25 these contracts prevent you from bundling or 4621 1 preinstalling non-Microsoft operating systems? 2 Answer: No. 3 And here's Mr. Stimac, again, of 4 Compaq. For years the number one OEM in the 5 world. 6 Question: Do you recall whether your 7 decision not to offer DR-DOS was influenced in 8 any way by anything in the Microsoft Compaq 9 license arrangements? 10 Answer: It had nothing to do with 11 that. 12 Question: So, as far as you know, 13 there was nothing in the license arrangements 14 between Microsoft and Compaq that would have 15 affected your decision to offer DR-DOS if you 16 would otherwise wanted to do so; is that right? 17 Answer: That was correct. 18 So there we are on the competition 19 between Microsoft and Digital Research. 20 We think the competition was won fair 21 and square by Microsoft as a result of the 22 factors that you've heard so much about. 23 Now, let me start with IBM and OS/2 24 before lunch, and we'll finish later today. 25 The story with IBM and OS/2 in the end 4622 1 is quite similar. In the end. 2 And you've seen just a little bit of 3 the testimony from the OEMs about why they 4 chose Microsoft operating systems. 5 And I want to start this section about 6 IBM by showing you a graph. You will see this 7 during the evidence, that I think is, let's 8 say, quite telling. It's quite devastating to 9 the Plaintiffs' position about what was 10 happening between IBM and OS/2. 11 Let's show this. 12 This is a graph which shows you what 13 the IBM PC company was doing with their PCs 14 during the period 1987 through 2001. 15 And you remember the Plaintiffs' 16 lawyer, when talking about streaming media, 17 there was reference to the fact that Microsoft 18 is the part owner of a TV network called MSNBC. 19 You remember that when we were talking about 20 streaming media? 21 And the Plaintiffs said that Microsoft 22 had to force MSNBC to use the Windows Media 23 Player in preference to the RealNetworks media 24 player. But why do I bring that up now when 25 I'm talking about IBM? 4623 1 Because, yes, IBM had a software 2 division, and it had the PC company. 3 IBM owned both. They were both part 4 of IBM Corporation. 5 IBM could not even force the PC 6 division, the IBM OEM, to put OS/2 on IBM 7 computers. 8 After lunch I'm going to show you lots 9 of evidence, but it's just a piece of what 10 you'll see at the trial about the quality of 11 the work that IBM did on OS/2, compared to 12 Microsoft. 13 But this sort of answers the question 14 before you see all the rest of the evidence. 15 What was it that IBM itself thought 16 about OS/2 and how good an operating system it 17 was? 18 After all, IBM's in the marketplace 19 selling their computers, their PCs. 20 You heard Plaintiffs' lawyer talk 21 about the strength of IBM. And year after 22 year, they're selling millions of PCs, 2 23 million in '87, up to a high of just over 9 24 million in 2000. 25 And when they come out with OS/2 as 4624 1 their operating system, IBM certainly wasn't 2 locked up. They could put their own operating 3 system on their own PCs any time they wanted 4 to. 5 And here's what they actually did. 6 Here's what IBM actually did. 7 In 1992, when they sold more than 3 8 million PCs, just a small portion of them had 9 OS/2 on them. You'll hear evidence about the 10 operating systems that are represented by this 11 gray bar. We'll talk about that after lunch. 12 But I think you know where IBM wound 13 up going. 14 In '93, IBM -- again, there are even 15 fewer OS/2 operating system computers, though 16 their sales are now going up to above 4 17 million. Same in '94, the number of computers 18 that contain OS/2 is down compared to '92. 19 Now, in '95, when Windows 95 comes 20 out, IBM has a big jump up with OS/2, but it's 21 still far less than half of the PCs that IBM 22 itself sells. 23 And then you see what happens in '96. 24 Look at this in '97. 1997. Just a 25 little sliver. 4625 1 And these purple lines here for '98, 2 '99, 2000, and 2001, you can hardly see them. 3 You can hardly see them. 4 Which operating system did IBM itself 5 prefer? Well, I think you are getting a sense 6 of this. 7 They had their own, OS/2. They had 8 every right to put their own operating system 9 on their own PC. 10 Which operating system do you think it 11 turns out IBM preferred? 12 Well, it's a matter of business 13 reality. The evidence will be that IBM 14 discovered what all those other OEMs testified 15 to, that consumer demand out in the marketplace 16 was not for OS/2. 17 Your Honor, this is a convenient time. 18 THE COURT: Ladies and gentlemen of 19 the jury, we'll take our lunch recess. 20 Remember the admonition previously 21 given. You can leave your notebooks here. 22 They will be quite safe. 23 See you at noon. 24 Thank you. 25 All rise. 4626 1 (The following record was made out of 2 the presence of the jury at 10:59 a.m.) 3 MR. GRALEWSKI: I want to hand this 4 up, Your Honor. It's something I provided 5 Mr. Tuggy last night. It's just to make the 6 argument on Sculley more efficient 7 THE COURT: For this afternoon? 8 MR. GRALEWSKI: Yes. 9 MR. WILLIAMS: Your Honor, could I 10 just hand up some cases we cite? I don't know 11 if Microsoft has handed up theirs. 12 THE COURT: Sure. 13 You got some too? 14 MR. HOLLEY: I thought this had been 15 handed up previously and it has not. 16 THE COURT: Oh, it has not. Is this 17 for Sculley? 18 MR. HOLLEY: That's for the question 19 about whether something has to be illegal in 20 order to be covered by your in limine motion. 21 THE COURT: Okay. Thanks. 22 (A recess was taken from 11:01 a.m. 23 to 12:05 p.m.) 24 THE CLERK: All rise. 25 THE COURT: Everybody else may be 4627 1 seated. Sorry we are five minutes late. Not 2 too bad. 3 [Juror Name]: Getting better. 4 MR. TULCHIN: We've done better and 5 we've done a little worse on occasion. 6 Good afternoon. It is a little warm 7 in here. I know that Carrie was trying to see 8 if the thermostat could be turned down. 9 Just before lunch, you'll remember we 10 were looking at this chart of sales of PCs by 11 IBM, and, of course, I was pointing out to you 12 that the IBM PC company could have included on 13 PCs any operating system it wished. 14 And, certainly, IBM when they make an 15 operating system could, if they so chose, give 16 instructions to the PC company because they're 17 part of IBM that makes PCs, to put operating 18 systems on it that are made by IBM. 19 And we're going to talk now about 20 OS/2, the IBM operating system. 21 And there are really two parts of the 22 OS/2 story that I want to direct your attention 23 to. 24 One has to do with the competition 25 between IBM and Microsoft and the other has to 4628 1 do with what happened in the applications 2 business when Lotus and WordPerfect made the 3 business decision to concentrate their efforts 4 at a critical time in writing their 5 applications, Lotus 1-2-3 and WordPerfect, for 6 OS/2, not for Windows. 7 A business decision that turned out to 8 be a very poor one. 9 And so there are two parts of this. 10 One has to do with operating systems and one 11 with applications. 12 And, in that connection, I want to 13 just point out to you on the applications side 14 of this that Professor Noll, the Plaintiffs' 15 expert on liability, the economist from 16 California, has included in his report his 17 opinion that it was not until the second half 18 of 1993 that WordPerfect and Lotus introduced 19 products that were at least as good as the 20 Microsoft products that competed with them. 21 So we'll come to more of this later. 22 But, again, to go back to some of the time 23 frame, you'll remember that Windows 3.0 -- 24 you've heard me say it before -- came out in 25 May of 1990. 4629 1 And Microsoft, with its experience 2 writing applications to GUIs, to the Apple 3 Macintosh, and then to Windows, was ready to go 4 with high-quality applications, the Excel 5 spreadsheet and Word, written to Windows. 6 And we will come in a little while to 7 what Lotus and WordPerfect did. 8 Again, they were concentrating on 9 writing to OS/2, not to Windows. They made the 10 bet, if you will, that OS/2 was going to be the 11 big success and they'd be ready to go with 12 their applications written to work on OS/2. 13 And, of course, the market moved the 14 other way. Windows was the big success, the 15 revolutionary technological leap. And so the 16 Microsoft applications that competed with Lotus 17 and WordPerfect had an advantage in the 18 marketplace. Lotus and WordPerfect missed that 19 boat. 20 But let's go back a step. And I know 21 you remember -- I'm going to go back to the 22 operating system competition involving OS/2. 23 And I know you remember that the Plaintiffs 24 told you that OS/2 was better -- OS/2 was 25 better than Windows. 4630 1 And they sought to explain the result 2 in the marketplace from conduct that is 3 supposedly anticompetitive. 4 I think the slide that we looked at -- 5 let's look at it just one more time -- is a 6 full answer to that. If OS/2 is better, why 7 didn't IBM use it? 8 They used it in a minority of their 9 own machines. Even at the high stage, around 10 '95 and '6, a decided minority. 11 And in this connection, I want to 12 remind you of two of the findings of fact. 13 First, Finding of Fact 115, it's on 14 page 22, where the Court says few consumers 15 would buy IBM PC systems if those systems did 16 not work well with Windows and, further, if 17 they did not come with Windows included. 18 Well, you heard the testimony from 19 other OEMs before lunch that there was no 20 demand for other operating systems, that they 21 wanted Windows on their PCs because that's what 22 the customers wanted. 23 And here's Finding of Fact 115 where 24 the Court says that IBM relies on Microsoft and 25 few consumers would buy IBM PCs if they did not 4631 1 come with Windows. 2 Finding of Fact 54 puts a little more 3 flesh on the same bone. It's page 8 in your 4 book. 5 Because that finding says, for 6 example, in 1995, at a time when IBM still 7 placed hope in OS/2's ability to rival Windows, 8 the firm, nevertheless, calculated that its PC 9 company would lose between 70 percent and 90 10 percent of its sales volume if it failed to 11 load Windows 95 on its PCs. 12 So, again, consistent with the chart, 13 even IBM -- and we think the evidence will show 14 this. 15 Even IBM that at that point owned OS/2 16 completely, knew that to sell PCs, to give 17 consumers what they want, you need to put 18 Windows on them. 19 And let's go back and talk about some 20 of the early years with OS/2. 21 We're now in the late 1980s. 22 And as you may have picked up, at that 23 point Microsoft and IBM are working together. 24 It's a joint project. Working to develop OS/2. 25 Later on you'll remember IBM and 4632 1 Microsoft went their separate ways, and IBM 2 took control of OS/2. 3 But there is a period of two or three 4 years there when the two companies are working 5 together to try to come up with this OS/2 6 operating system. 7 Microsoft and IBM were jointly writing 8 source code. Microsoft engineers would write 9 some of it. IBM engineers would write other 10 parts of the source code. 11 And, of course, there's nothing wrong 12 with Microsoft working on Windows at the same 13 time it's working on OS/2 with IBM. Everyone 14 will say that's pro-competitive, including the 15 Plaintiffs' experts. 16 I think you may know by now that as it 17 turned out, the plans of IBM and Microsoft to 18 work together did not come to fruition. 19 Eventually there was what has 20 sometimes been called the divorce. IBM and 21 Microsoft splitting apart and going their 22 separate ways on OS/2. 23 But I want to bring to your attention 24 when the Plaintiffs say that OS/2 was better, 25 some of the important evidence that you will 4633 1 hear during the trial about the development of 2 OS/2 and whether the problems that OS/2 3 eventually ran into were Microsoft's fault. 4 Did Microsoft somehow torpedo OS/2? 5 Did Microsoft do a bad job writing its part of 6 the code, the source code, or what the facts 7 are there? 8 And I want to start with Defendant's 9 Exhibit 534. 10 You remember Mr. Riesweig of IBM. 11 This is an e-mail to him from Dale Heuer, 12 H-e-u-e-r, Defendant's Exhibit 534, in late 13 1989. 14 And let's bring up the part of this 15 that is of interest here now. 16 You'll see the e-mail says IBM 17 confidential. Subject, Microsoft Windows 18 version 3 and IBM Windows connection. 19 And the author of the e-mail to 20 Mr. Riesweig is reporting right at the end of 21 1989, our customers, including our top 10, top 22 10 IBM customers, have chosen Microsoft Windows 23 as a migration path to OS/2, even though we, 24 IBM, continue to enforce the IBM vision that 25 OS/2 is the only thing they should choose. 4634 1 In some respects they know that 2 DOS/Windows is a better migration path; 3 probably with Microsoft's help. 4 Here we are the top 10 IBM customers, 5 though IBM is trying to convince them 6 otherwise, choosing Windows. 7 And then Mr. Heuer goes on to say, our 8 customers' decisions are based on function 9 required and the cost of the systems required. 10 Well, let me just pause before going 11 on with the Heuer e-mail. 12 You will all, of course, remember that 13 this is a case in which the Plaintiffs say that 14 they were overcharged; that they paid too much; 15 that Microsoft's prices are too high. 16 And here's what the IBM employee says 17 about the IBM customers. They cannot afford to 18 upgrade immediately to PS/2s that are OS/2 19 communications compatible. DOS/Windows gives 20 them an entry position on old hardware as well 21 as low cost PS/2 entry solutions. 22 Well, it's in a little bit of software 23 language, but you'll see that customers of IBM 24 are choosing Microsoft software as the low-cost 25 PS/2 entry solutions. 4635 1 And I think the evidence will show you 2 through the trial that Microsoft's software was 3 less expensive and less costly to customers 4 than OS/2. 5 So I want to look at Finding of Fact 6 46. 7 This, of course, was written by the 8 Court in 1999, in Washington, D.C. It's part 9 of the findings that you must accept. 10 The fact that IBM no longer tries to 11 compete with Windows is evidenced by the fact 12 that it prices OS/2 Warp at about two and 13 one-half times the price of Windows 98. 14 That's from Finding of Fact 46 on 15 pages 4 to 5 in your notebook in the Court's 16 preliminary instructions. 17 So we saw an e-mail from 1989 at IBM 18 saying that Microsoft's software is the 19 low-cost solution. And here's a finding of 20 fact from 1999 referring to the fact that OS/2, 21 now called OS/2 Warp, is priced at about two 22 and a half times the price of Windows 98. 23 So let's go back to early 1990 and 24 talk about the quality of OS/2 and which of the 25 two companies that worked on OS/2 was 4636 1 responsible for that quality. 2 We're going to look at Defendant's 3 Exhibit 2701. 4 And I should tell you first that this 5 document was produced in discovery by IBM. It 6 came from -- it was written by IBM, but it was 7 a joint effort of two people, Ed Lassettre of 8 IBM, and Darrell Reuben of Microsoft. 9 And I'll explain what was going on in 10 just a minute, but let's look at 2701. 11 The overall assessment that these two 12 gentlemen make of OS/2, one from IBM and one 13 from Microsoft -- they were working together at 14 that point -- was that as of February 1990, 15 OS/2 had some strong points, some points that 16 were okay, four weak points, and the conclusion 17 was good, but not good enough. 18 That's February of '90. 19 And Mr. Lassettre is an executive at 20 IBM. 21 And let's look at Defendant's Exhibit 22 553. 23 OS/2 assessment-phase II. 24 Now, the evidence will be -- and this 25 is important in looking at this document -- 4637 1 that Mr. Lassettre and Mr. Reuben, Lassettre of 2 IBM, Reuben of Microsoft -- decided because of 3 some disputes between the two companies, 4 disputes that were taking place as they were 5 trying to build an OS/2 operating system, they 6 decided to look at the source code. And they 7 both did it on a blind basis. 8 In other words, Lassettre looked at 9 some source code without knowing which of the 10 two companies had written it. He didn't know 11 if it was Microsoft code or IBM code. 12 And Reuben of Microsoft did the same 13 thing. He looked, again, on a blind basis at 14 the source code. 15 So that the two of them could 16 impartially evaluate who was doing a good job 17 at writing code and which company wasn't. 18 Again, there was tension between IBM 19 and Microsoft. IBM was working on this mostly 20 in Boca Raton, Florida, Microsoft Redmond, 21 Washington. And there were some problems. 22 They decided we'll have an impartial 23 look at this. Neither companies' executive 24 will know when he's looking at source code 25 whether it's his company's or the other guy's 4638 1 company's. We'll do this blind. 2 And we'll evaluate together, Lassettre 3 and Reuben, the source code that had been 4 written up until that time. 5 We go into this document a couple 6 pages later. Again, this is Exhibit 553. 7 And this is at page -- production page 8 406. So it will be the twelfth page of the 9 document. 10 And this is their overall conclusion 11 of this blind review that they have made of the 12 source code written for OS/2 so far. 13 Now, this is just quite a dramatic, 14 dramatic piece of evidence when the Plaintiffs 15 say that OS/2 was better. 16 Because here we have the portions 17 written by Microsoft, and these two executives 18 from their blind look rate the Microsoft source 19 code in three categories, efficiency, logic, 20 and then the last one says algorithms/data 21 structures. 22 And they come up with this -- they do 23 it blind before they know which is Microsoft's 24 and which is IBM. 25 And you'll see, for efficiency, 4639 1 Microsoft's grades are okay, and in one case 2 great. 3 For logic, Microsoft gets okays or 4 okay pluses. Algorithms/data structures, 5 Microsoft gets okays, great, or slick. 6 So you can see on a blind review two 7 executives, not knowing whose code is whose, 8 concluded that the Microsoft code is very good. 9 Now, look what they say about the IBM 10 code from this blind review. 11 Here it is. They have the same three 12 columns, and they've looked at the IBM code 13 that's going to go into OS/2. 14 For efficiency, they have fat slow. 15 And I promise you, the evidence will be at the 16 trial that if you're writing source code, 17 you're trying to produce software, fat slow is 18 not good. Fat's not good and slow's not good. 19 And all of it -- all of the IBM code 20 is rated fat slow or slow or fat. 21 And then for logic. One of the 22 ratings is tangled. There are four okays, but 23 there are three disorganized, one monolithic, 24 one hard to follow. 25 And then for the column algorithms. 4640 1 Wow. IBM gets one okay for the control panel 2 source code. 3 But what do they get for the rest of 4 it? One of them is fumbled abstractions, and 5 then you have eight ratings of inappropriate. 6 Defendant's Exhibit 553, this blind 7 joint IBM/Microsoft review of who's doing what 8 when they are writing source code. 9 Now, this is consistent, of course, 10 with what we've said before. 11 IBM had great people working for it, 12 great software engineers. 13 From the beginning of this company 14 when Bill Gates and Paul Allen founded it, very 15 often the software engineers at Microsoft 16 worked very hard. Sometimes 12, 14, 16 hours a 17 day, and often six or seven days a week. 18 These were people dedicated to doing a 19 good job. 20 And we know what the results are with 21 the Microsoft operating system products and 22 with the applications too. 23 But here on a blind test, it's in 24 front of you in black and white, as plain as it 25 can be, Microsoft does a good job, and at least 4641 1 in this case, the IBM people did not. 2 There's more in this document. It's 3 four pages further in. 4 And it says -- it sort of presents the 5 results of the evaluation of the source code in 6 a more graphical way. 7 IBM versus Microsoft code. 8 Now, the yellow there is what we've 9 done. The rest of it is just as it is, those 10 lines and those graphs. 11 But all of the IBM code is rated 12 unacceptable or marginal. And you'll see that, 13 you know, at the top of this, it's sort of on 14 the line between the two. And all of the 15 Microsoft code is meets criteria or exceeds 16 criteria. 17 Again, it's just a devastating piece 18 of evidence when it comes to the assertion that 19 Microsoft somehow did something wrong to 20 torpedo OS/2 or that IBM wrote software that 21 could legitimately compete well in the 22 marketplace against what Microsoft did. 23 And you'll remember that the 24 Plaintiffs showed you some testimony by a man 25 whose name I believe is Zbikowski. I wish I 4642 1 could remember his first name. It might be Ed, 2 but I've forgotten. 3 And they played that video to you last 4 week and said that this was proof that OS/2 was 5 better than Microsoft operating systems. 6 Mr. Zbikowski worked on OS/2, but the 7 last version of OS/2 that he worked on, that he 8 wrote code for, was OS/2 1.2, which was 9 released in 1989. 10 Now, why is that important? Because, 11 you know, when Windows 3.0 came out, the 12 revolutionary technological leap in May of 13 1990. They jumped way, way ahead of anything 14 that anyone had done before. 15 And I'm now switching gears on OS/2 16 for the time being to talk about this question 17 of whether Lotus and WordPerfect in the 18 applications field made an error when they 19 decided to write their applications for OS/2. 20 So let's step back just a minute. I 21 know that you remember that Lotus and 22 WordPerfect -- I showed you yesterday those two 23 graphs where up above the line we saw all the 24 products that Microsoft had written for 25 graphical user interface platforms, operating 4643 1 systems. 2 And below the line, the very few that 3 Lotus and WordPerfect had ever written, mostly 4 quite unsuccessfully. 5 And you'll hear from David Reed from 6 Lotus, for instance, on exactly that point. 7 But the evidence at this trial will be 8 that from a relatively early time, for their 9 own selfish reasons, Lotus, which was then 10 number one in the spreadsheet business, by far 11 the top, number one product, and WordPerfect, 12 which was number one in the late '80s in word 13 processing, both decided that they wanted to 14 distance themselves from Microsoft; that they 15 wanted to do what they could to try to see if 16 Microsoft could fail. 17 And I'm going to show you a fair 18 amount of evidence now -- there will be more at 19 the trial -- about what Lotus and WordPerfect 20 were considering in the late 1980s and why they 21 made the mistake that they did, the mistake of 22 not writing their applications to Windows, but 23 instead concentrating at a critical moment on 24 OS/2. 25 Remember, Microsoft had MS-DOS, hugely 4644 1 popular, and Windows 1.0 and 2.0 were not. 2 They were not great successes in the 1980s. 3 Meanwhile, Lotus making spreadsheets, 4 of course, understands that Microsoft is a 5 competitor in the spreadsheet business. 6 Microsoft has Excel, but Lotus is by 7 far more popular. They have this dominant 8 market share. Excel is quite small. 9 And from the point of view of Lotus, 10 if they write to Windows and they put their 11 very popular spreadsheet on the Windows 12 platform, what are they doing? They're helping 13 Microsoft. 14 Because to the extent that an 15 operating system has value, it's because there 16 are good applications written to it. 17 You want your operating system so you 18 can run applications like spreadsheets and word 19 processing on them. 20 So from Lotus' point of view, if we 21 write to Windows, hey, we may be helping 22 Microsoft. Maybe we'll sell our spreadsheet on 23 Windows, but Microsoft will make money on the 24 operating system. It may help Windows become a 25 success. 4645 1 And if Microsoft makes money, well, 2 then they have more money to improve Excel, to 3 use their R and D, and more money to compete 4 against Lotus itself in this other market of 5 spreadsheets. 6 So let's look at some of this 7 evidence. 8 First, going back to 1985, Defendant's 9 Exhibit 665. 10 Ed Belove is the vice president, 11 research and development of Lotus. And he's 12 writing a memorandum to a number of people, but 13 I want to point out Jim Manzi. Jim Manzi, 14 who's name is about in the middle, is the boss 15 at Lotus at this time. And you'll also see 16 David Reed, whose name I mentioned earlier. 17 In 1985 -- so Microsoft is just 18 getting started on the GUI with its 19 applications written to Windows 1.0 and to the 20 Mac. 21 And here's what Mr. Belove says. 22 In particular, it is important to 23 distance ourselves from Microsoft as quickly as 24 possible, both for the reasons already 25 mentioned, as well as to avoid helping to 4646 1 establish MS/Windows and DOS 4.0 as industry 2 standards. 3 As early as 1985, Lotus is saying 4 we've got to stay away from Microsoft. We want 5 to avoid helping Microsoft succeed. 6 If Windows turns out to be great -- 7 and we know it did beginning in 1990, but if 8 Windows turns out to be great and becomes an 9 industry standard, well, it just means 10 Microsoft will compete against us. 11 So you can see where Lotus in '85 is 12 going, what they're rooting for. 13 And then I want to show you a little 14 bit of the testimony of Steve Crummey, whose 15 name we mentioned before. He's senior vice 16 president of worldwide sales of Lotus. 17 And this goes to the same point, and I 18 think it's important for you to see now. 19 (Whereupon, the following video was 20 played to the jury.) 21 Question: Now, how did Mr. Manzi -- 22 when you urged Mr. Manzi to start developing 23 for Windows, what was his response? And I 24 understand that it may have occurred in a 25 series of meetings. 4647 1 Answer: I always had the impression 2 that Mr. Manzi had a very bad case of Gates 3 envy, and anything that would help Microsoft, 4 he wouldn't do. And I challenged him on that. 5 Question: You had a discussion with 6 him on that? 7 Answer: Yes, I did. 8 Question: What did he say? 9 Answer: How can we not be porting to 10 what could be the most important platform ever? 11 And I always had that feeling -- couldn't prove 12 it -- that if it was for Gates, he wouldn't do 13 it. That was my feeling. 14 Question: And what was the basis for 15 your impression about Mr. Manzi? 16 Answer: I just felt he was very 17 jealous of Bill Gates. That was -- I wasn't 18 the only one who thought that, but I certainly 19 felt that very strongly. 20 Question: Was it based on anything he 21 said? 22 Answer: Not that I can pinpoint, no. 23 No. 24 Question: Well, when you said -- when 25 you said we should develop for Windows in 4648 1 mid-1989, did Mr. Manzi agree to do that? 2 Answer: No, not at the time. 3 Question: Did he -- 4 Answer: And just to be fair, that 5 wouldn't have -- that decision wouldn't have 6 gotten made there on the spot, either. I mean, 7 that's not the way the company worked. 8 Question: Fair enough. Did -- well, 9 was this a point that you pursued with 10 Mr. Manzi more than once during the mid-1989 11 period? 12 Answer: I pursued that all the time. 13 It eventually cost me my job. 14 (Whereupon, playing of video 15 concluded.) 16 MR. TULCHIN: So here's Mr. Crummey -- 17 we are going to hear a little bit more from him 18 later, and his testimony will be played for you 19 at the trial, but here's Mr. Crummey saying 20 that even in mid-1989, he's pointing out to the 21 boss, Jim Manzi, Windows could be the most 22 important platform ever. You'll see some more 23 about this soon. 24 And what he's saying is that Jim 25 Manzi, the CEO and president of Lotus, had what 4649 1 he called a case of Gates envy. He didn't want 2 to do anything that would help Microsoft and 3 Bill Gates. 4 Lotus at the time -- we think the 5 evidence will show Lotus at the time, as the 6 big guy in spreadsheets, number one company, 7 felt that it was powerful enough to affect the 8 outcome of competition in the operating system 9 business. 10 If Lotus had no spreadsheet available 11 on Windows, Lotus believed, Windows would be 12 less attractive to consumers. And that would 13 increase the chance that Mr. Gates would not 14 succeed. 15 Of course, that bet turned out to be 16 terribly, terribly wrong. 17 And let's look at Mr. Peterson of 18 WordPerfect. Again, the guy in charge of their 19 WordPerfect word processing product, executive 20 vice president. 21 (Whereupon, the following video was 22 played to the jury.) 23 Question: So is what you're saying 24 here, in essence, you were rooting for anyone 25 but Windows to win? 4650 1 Answer: We were rooting for anybody 2 but Microsoft to win. If they'd have given 3 Windows to another company, then we would have 4 rooted for Windows. 5 Question: So is it true that as long 6 as -- as long as Microsoft was developing 7 Windows, you didn't want Windows to succeed? 8 Answer: That's absolutely true. 9 Question: So did you do anything to 10 -- did you -- did you want Windows to be 11 successful or not at that point? 12 Answer: No. 13 Question: So did you do anything to 14 prevent that? 15 Answer: We didn't write for Windows 16 at that point. 17 Question: And was that, in part, 18 because you didn't want Windows to succeed? 19 Answer: Yes. We did not want Windows 20 to succeed. 21 (Whereupon, playing of video 22 concluded.) 23 MR. TULCHIN: Well, there you are. 24 That's Pete Peterson of WordPerfect testifying 25 similarly to what Mr. Crummey told you. 4651 1 WordPerfect did not want Windows to 2 succeed. 3 And we'll come to what happened to 4 WordPerfect as a result of that desire. 5 But let's stay sort of chronological 6 for a moment. 7 I want to show you Defendant's Exhibit 8 664, which is another Lotus memo, internal at 9 Lotus, from David Reed -- Mr. Reed was the 10 chief scientist of Lotus at the time -- to some 11 of the other top officers at the company. 12 This is September 2nd, 1986. 13 And he's reporting on a Microsoft 14 visit. In fact, Mr. Gates in 1986 went to 15 visit Lotus. 16 And what Mr. Gates tells Lotus in the 17 memorandum that Mr. Reed writes -- and you see 18 he writes it to Jim Manzi, the boss at the 19 time, and Ed Belove, whose name you saw before, 20 and he says that Bill Gates said that all 21 future apps development was under Windows. 22 So Lotus knew, and you'll see that 23 WordPerfect knew, that Microsoft was going to 24 write their applications for Windows. They 25 simply chose to take a path which turned out to 4652 1 be a big mistake. 2 Now, you'll remember that -- or maybe 3 you won't remember. It's on December 1st. 4 The Plaintiffs referred in their 5 opening to what they called influential trade 6 press. And I'm going to show you now some 7 pieces of trade press that attribute certain 8 statements to Microsoft executives, the pieces 9 of trade press contain a reference to or quote 10 from something that was supposedly said by 11 someone at Microsoft. 12 This evidence is not offered to you, 13 and won't be at the trial, to show that the 14 people at Microsoft actually said what's 15 reported in a newspaper or magazine. 16 The evidence will be offered only to 17 show that ISVs, software developers, had 18 available to them in these trade press articles 19 information about Windows development efforts. 20 So let's look first at DX 305, an 21 article from November 1988 from the Computer 22 Reseller News. 23 And what this reports first is that 24 Peterson of WordPerfect has hesitated to allow 25 WordPerfect to support Windows, lest it 4653 1 effectively bankroll Windows. 2 Now, this is just what I was telling 3 you before and consistent with what 4 Mr. Peterson actually testified to. 5 WordPerfect did not want to help Microsoft. 6 And these two companies, both number 7 one in their markets, believed that writing 8 good software to the Windows platform would 9 help Bill Gates and bankroll Microsoft and, in 10 fact, help Microsoft compete against them in 11 the applications business. 12 Let's move on. 13 And then the article quotes Scott Oki 14 of Microsoft as saying he cannot go on ignoring 15 the fact that his customers are asking for 16 Windows. 17 And, again, this isn't meant to show 18 you what Mr. Oki said, but only what was 19 available in the press to Lotus and WordPerfect 20 about where development efforts were going on 21 Windows. 22 Let's look at Exhibit 252. 23 This is from a different publication. 24 It's called Infoworld. It's from November of 25 1988. Around the same time, I believe, as the 4654 1 prior article. 2 252. And Infoworld reports on the 3 front page, popularity of Windows delays OS/2 4 acceptance. 5 And it says, In an odd twist of the 6 market, unanticipated by IBM and Microsoft, 7 customers are moving to Windows in droves. 8 They're not waiting for Presentation Manager. 9 You'll remember Presentation Manager 10 is the OS/2 GUI, the IBM GUI for OS/2. 11 Okay. Is there another piece of this? 12 Yeah. 13 On the next page of this Infoworld 14 article -- sorry, did I skip something or is 15 that my mistake, Chris? 16 It is. It's my mistake. 17 This is now Defendant's Exhibit 381. 18 My apologies. 19 From PC Week in February of 1989. 20 And PC Week has an article which 21 contains a statement attributed to Bill Gates 22 which says, our direction is, within the next 23 18 months, to have a whole family of 24 applications (under Macintosh, OS/2, and 25 Windows) said Microsoft chairman William Gates. 4655 1 Anybody who's not doing what we're doing is 2 crazy. 3 Again, information available to ISVs, 4 including WordPerfect and Lotus, about where 5 the market may be going. 6 As you know, Mr. Gates eventually will 7 be here in this courtroom, and he can testify, 8 he will testify, about what he was telling 9 WordPerfect and Lotus at the time. 10 But WordPerfect and Lotus both adhered 11 for a long period of time to this same position 12 that they weren't going to try to help 13 Microsoft. They weren't going to write 1-2-3 14 and WordPerfect to the Windows platform. 15 Here's Exhibit 667 from July 13th, 16 1989. 17 It's David Reed, the chief scientist 18 at Lotus. 19 Three issues for Lotus. We have no 20 GUI applications ready to go for Windows 3.0. 21 Later, just down on the same page, if 22 a Windows 3.0 bundle replaces DOS, on 386 and 23 486 platforms, 1-2-3 release 3 will not work at 24 all, due to the lack of protected mode support. 25 So here we are in July of '89. 4656 1 Windows 3.0 is coming out in May 1990. That 2 is, you know, about ten months later. 3 And the Lotus people, David Reed, 4 chief scientist, recognized we have nothing 5 ready to go for Windows. 6 If Windows 3.0 bundle replaces DOS -- 7 and you know what happened in the market. He's 8 already anticipating it. If Windows 3.0 9 becomes real successful, 1-2-3 release 3.0 will 10 not work at all. 11 So that's a memo from Mr. Reed at 12 Lotus. 13 Let's go further down in this memo. 14 It's now, I believe, the sixth or seventh page 15 of the same memo. 16 And Mr. Reed says what to do? 17 Obviously, begin work. That presumes that 18 Windows/DOS of some form will be the next DOS 19 available around 1/1/90. It turned out to be 20 May. 21 We need to hedge the major incursion 22 that Microsoft applications can make if this 23 happens. Well, it did happen. 24 And let's look at the deposition again 25 of Steve Crummey. We told you he was head of 4657 1 worldwide sales for Lotus, a deposition in 2 which he tells you what was going on in Lotus 3 in this same time frame, around the middle of 4 1989. 5 (Whereupon, the following video was 6 played for the jury.) 7 Question: And what was your sales 8 force reporting to you about the relative 9 interest of customers in Windows versus OS/2? 10 Answer: What time frame? 11 Question: Mid-1989. 12 Answer: The drum beats were starting 13 on Windows. No question about it. 14 Question: Did you have discussions 15 with Mr. Manzi about that? 16 Answer: Oh, all the time. 17 Question: What did you tell 18 Mr. Manzi? 19 Answer: Well, it wasn't just me. It 20 was sort of the management committee that would 21 sit around the table every Monday morning. 22 Clearly customers were starting to ask 23 about Windows. 24 Question: And what was your view of 25 what Lotus' strategy should be toward Windows 4658 1 in 1989? 2 Answer: We should be developing for 3 it because, you know, you've got to hedge your 4 bets, as I said earlier. If you're going to 5 develop for all the platforms, why would you 6 miss the one that turned out to be the most 7 important. 8 Question: Were there any other 9 significant platforms that you weren't 10 developing for? 11 Answer: No. 12 Question: Did you -- during this 13 period, mid-1989, did you urge Mr. Manzi to 14 develop for Windows? 15 Answer: Yes, I did. 16 Question: What did you say to him? 17 Answer: I told him the customers were 18 asking for it and that it's silly to just hedge 19 our bets with IBM. We ought to be multi- 20 platform. We already are and we ought to have 21 a version for Windows. 22 Question: What did you say to 23 Mr. Manzi? 24 Answer: I said that we're behind on 25 the eight ball on Windows development. 4659 1 Customers love it. There is this tidal wave 2 coming and we've got to get our act together. 3 Question: This was in December 1989? 4 Answer: It was before then. I'm just 5 saying when I saw Windows 3.0 in beta, which 6 was, I think, November, December of '89, 7 roughly, I knew that we were in serious 8 trouble. 9 (Whereupon, playing of video 10 concluded.) 11 MR. TULCHIN: So here's Lotus. They 12 get the beta, the test version of Windows 3.0 13 in around November, December of 1989. 14 The Lotus guy who is in charge of 15 worldwide sales, Mr. Crummey, says I can see 16 the tidal wave coming. They've seen the beta. 17 They've seen this preview of what Windows 3.0 18 will be. 19 And he says to Mr. Manzi, the boss, 20 you know, we got to develop for Windows. 21 And the fact is that Manzi continued 22 until -- according to Professor Noll, it wasn't 23 until the last half of '93 that Lotus came out 24 with a spreadsheet for Windows that was as good 25 as the Microsoft product. 4660 1 So Lotus continued to delay and wound 2 up missing this transition, this critical 3 period when the market went from 4 character-based systems to graphical systems. 5 And Microsoft Excel was ready to go on Windows. 6 Not because Microsoft did anything to 7 disadvantage Lotus, except make a great 8 product. Not because Microsoft kept from Lotus 9 any key information, technical information, 10 that Microsoft had an obligation to turn over. 11 Nothing like that at all. 12 You see the evidence from Lotus 13 itself. Mr. Crummey is quite eloquent on this 14 subject. Lotus did not want to help Microsoft 15 and Bill Gates. And so they made a decision to 16 write and concentrate on writing for OS/2. 17 It turned out to be a bad one. 18 And WordPerfect, let's look at the 19 deposition of Norm Creighton. He is at 20 WordPerfect at that time the team lead of the 21 development unit working on developing 22 WordPerfect for Windows. He was in that role 23 from 1990 to 1995. 24 And let's see what Mr. Creighton says 25 about the same time period and the same issues. 4661 1 (Whereupon, the following video was 2 played to the jury.) 3 Question: Do you recall a meeting 4 with a Microsoft representative in the summer 5 of 1989 at WordPerfect's Orem, Utah, 6 headquarters? 7 Answer: The first meeting that I 8 recall with Microsoft would have been about 9 that time frame. 10 Question: Do you recall who it was 11 from Microsoft that attended that meeting? 12 Answer: I think it was Sheri 13 Richardson. 14 Question: And do you have an 15 understanding of what her role was at 16 Microsoft? 17 Answer: Well, as I recall, she was a 18 tech evangelist for Windows 3.0. 19 Question: And another one of those 20 basic questions. Can you -- can you tell us 21 what a tech evangelist is in the parlance? 22 Answer: Well, you know, I think 23 Microsoft invented it, but I'm not sure. 24 In any case, a tech evangelist means a 25 person who has pretty good technical 4662 1 understanding of something, in this case 2 Windows 3.0, who then tries to get other ISVs, 3 engineers, interested in that technology. 4 And so it's really sort of a marketer 5 to propeller heads. So this is the people who 6 talk to people like me. So they're marketing, 7 but they're not marketing to the masses. 8 They're marketing to technical people. 9 Question: During this meeting with 10 Ms. Richardson, is that what she was trying to 11 do? Was she trying to encourage WordPerfect to 12 write for the Windows 3.0 platform? 13 Answer: Yes. 14 (Whereupon playing of video 15 concluded.) 16 MR. TULCHIN: So there it is. Same 17 point. Microsoft is going to WordPerfect and 18 saying, please write for Windows. 19 And what really happened to both 20 companies, of course, as we've discussed, is 21 they did not. They did not. 22 They waited for years. They waited 23 until the market made it very clear to them 24 that Windows 3.0 was going to be a huge 25 success. 4663 1 Let's look at Defendant's Exhibit 677. 2 This is a David Reed e-mail from 3 September 1990. 4 Again, from David Reed and it's dated 5 18 September 1990. It's a Lotus document. 6 By this time Lotus had been acquired 7 by IBM, by the time the document is produced. 8 So you see the IBM production number there. 9 But let's see what Mr. Reed says in 10 1990. 11 He says, back in February 1989, when I 12 got the first rumors of Windows 3 being pushed 13 as an alternative to OS/2, I raised the first 14 warning that our product strategy needed a 15 serious response to the boost this gave Excel. 16 Of course, you know, Excel is 17 Microsoft's product that competes with the 18 Lotus 1-2-3 product. 19 I think we can be a little bit proud 20 that we succeeded in delaying this by working 21 our relationship with IBM. 22 As the author of the first (August 23 1989) of many design proposals for making a 24 Windows 3 version of release 3, I feel saddened 25 by the fact that serious work on this project 4664 1 did not start until August 1990 (a one-year 2 delay). 3 And I attribute this in large part to 4 believing our own BS, or a tendency to regard 5 winning a customer or IBM officer away from 6 Windows as indication of peace in our time. 7 So here's Mr. Reed acknowledging that 8 Lotus delayed for a year, a critical year, 9 while Microsoft was working away at writing 10 Excel to Windows. 11 And Pete Peterson of WordPerfect was 12 asked at his deposition whether he recalled 13 that by January '90, Microsoft and other 14 companies, Samna and NBI, had all released word 15 processing products for Windows 3.0, and he 16 said yes, he did remember. 17 Question: So when your product came 18 out in November 1991, you were about two years 19 behind all three of those competitors? 20 Answer: Yes. 21 And Mr. Peterson, the evidence will 22 be, acknowledges in his testimony that the 23 delay in starting the Windows product work was 24 WordPerfect's doing. It was their error. It 25 was their mistake. 4665 1 Again, not because Microsoft withheld 2 anything or did anything anticompetitive. 3 So -- I'm about to go on to another 4 subject, but I want to conclude this one by 5 saying, again, at the critical time when 6 Windows 3.0 was about to come out, the 7 applications business was going to move from a 8 character-based platform to a GUI platform, one 9 that it turns out most people preferred. 10 IBM was working on OS/2. Microsoft 11 was working on Windows. 12 And the two application companies that 13 were at the time leaders in their markets, both 14 for similar reasons, bet against Windows, wrote 15 for OS/2. And it wasn't until late '93 that 16 their products were as good as Microsoft's. 17 By then Microsoft's market share in 18 word processing and spreadsheets had increased 19 significantly. Microsoft's products, which 20 turn out to be products that people want and 21 prefer, great products. And, you'll remember, 22 at low prices. 23 The prices have come down steadily 24 over the years. Turned out to take high market 25 share from those two companies that had been 4666 1 dominant and leading in their markets. 2 Okay. Let's go to GO. You heard a 3 little bit from the Plaintiffs about GO. 4 GO did not make a PC operating system. 5 And you'll see evidence that GO did not believe 6 it was in the PC operating system business at 7 all. 8 And it wasn't an applications company. 9 It didn't make word processing software or 10 spreadsheet software. It made a pen-based 11 tablet computer. 12 And the Plaintiffs said on December 13 4th, Monday, the 4th, you can't imagine the 14 challenge, way back then, in the early '90s, of 15 developing software that would recognize 16 handwriting. 17 Indeed, it was a huge challenge, and 18 GO did not succeed in it. 19 GO went out of business in 1994. And 20 the Plaintiffs would have you believe that that 21 was Microsoft's fault. AT&T then bought what 22 remained of GO in 1994. 23 GO failed because it was trying to 24 sell the pen computer -- sorry -- pen-based 25 tablet computer, but hadn't solved the problem 4667 1 of how to make a good one. 2 The testimony that you'll see at the 3 trial from Mr. Kaplan, the guy who founded and 4 was heading GO, was that the computers that 5 they were making at the time were too heavy, 6 too expensive, and, most importantly, not good 7 at recognizing handwriting. 8 This is Mr. Kaplan himself. 9 Between one-third and one-half of the 10 words written on a hand-held computer using the 11 GO operating system would be misspelled by the 12 computer. 13 That's what they had at the time, a 14 system where between a third and a half of the 15 words that you wrote on your tablet would not 16 be recognized properly and translated properly 17 by the computer into what looks like type. 18 Mr. Kaplan himself said in prior 19 testimony that one out of three words that are 20 written down are going to wind up being 21 misspelled by the computer. And he said, yes, 22 you will need some form of correction. 23 Elsewhere he said the error rate would 24 be about 45 percent of the words. 25 And let's not forget the price of 4668 1 these tablet computers. They were selling for 2 about $4,000 in the early 1990s. They didn't 3 work well, they were expensive, and they were 4 very heavy, bulky. And they had problems with 5 their power, their battery supply. 6 So Mr. Kaplan himself testified in an 7 earlier proceeding that GO had handwriting 8 recognition problems, problems with accuracy in 9 laying down ink exactly under the pen tip so it 10 looked like something that could be recognized, 11 the battery life problem, durability of the 12 machines, and size and weight. 13 And the evidence will be that in the 14 early 1990s, nobody in the technology world, 15 the world of computers and software, was able 16 to produce a commercially successful product 17 during that period. 18 GO had as its partner at the time IBM. 19 And later the GO business was acquired by AT&T. 20 And there isn't any assertion by the Plaintiffs 21 or evidence that Microsoft did anything to 22 prevent IBM from selling the GO tablet computer 23 or interfered in any way with what IBM and GO 24 were trying to do together. 25 If people wanted the product and it 4669 1 was a good one, IBM, and later AT&T, had every 2 incentive to sell it. 3 IBM, as you know from our prior chart, 4 sold millions of computers, PCs, not these 5 tablet computers, every year. 6 But, as Mr. Kaplan has testified, the 7 IBM hardware that got released ran the GO 8 software, the GO operating system for that 9 tablet computer, but was not compatible with 10 anything that Microsoft was doing. 11 So, again, for IBM to sell something 12 when people wanted Microsoft Windows was not 13 going to work. 14 You also saw Exhibit 395, which was -- 15 let me make sure I have the right number. 16 Plaintiffs' Exhibit 359. I inverted 17 the numbers. 18 -- which was an e-mail that Lloyd 19 Frank had sent around. And, of course, you 20 will remember that Lloyd Frank in Plaintiffs' 21 Exhibit 359 asked everyone who had received his 22 prior information to destroy the GO information 23 that he had mistakenly circulated. 24 So one other thing that we need to say 25 about GO. 4670 1 The Plaintiffs asserted to you on 2 December 6th that they could meet their burden 3 of showing causation; that anything that 4 happened towards GO was a material cause of 5 some injury by saying that if Microsoft's 6 actions harmed GO and they were a material 7 cause of GO's demise, that the Plaintiffs 8 somehow could meet their causation burden. 9 And with all respect, I want to direct 10 you to Instruction Number 14, which is at page 11 22 of your instructions. 12 And what Instruction 14 says -- sorry, 13 I think I have it handy. 14 Thank you. Ms. Nelles has helped me 15 out here. I thought I had it right here, but I 16 don't. 17 But I'm looking at Instruction Number 18 14. It's at page 22 of Judge Rosenberg's 19 preliminary instructions. 20 And you'll see the sentence here which 21 is the one I want to point out to you. 22 The Plaintiffs do not have to prove 23 that an antitrust violation was the only cause 24 of their injuries, but they must show that it 25 was a material cause. 4671 1 So the question of causation here is 2 not a question of whether or not Microsoft's 3 conduct caused or was a material cause of GO's 4 demise. 5 The Court's instructions to you are 6 that the question for you is whether or not 7 anything that happened to GO was a material 8 cause of the Plaintiffs' injuries. 9 GO is not seeking anything in this 10 case. As you know, the four Plaintiffs are two 11 individuals and two businesses in Iowa who 12 claim that they were overcharged for operating 13 system software, not for tablet computers, for 14 operating system software. And that they 15 should be compensated on account of security 16 vulnerabilities, which they claim were caused 17 by anticompetitive conduct in which Microsoft 18 engaged. 19 Now, we've been talking in part -- in 20 talking about OS/2, in part about the operating 21 system business and in part about applications. 22 And I think this is a good time to 23 talk about the testimony of Ricardo Correa. 24 You will recall that the Plaintiffs 25 have said that Mr. Correa will come here into 4672 1 this courtroom to testify. 2 And Ricardo Correa worked at a company 3 called Acer. Acer was an OEM. 4 In fact, you may recall that this 5 morning I showed you testimony of Mr. Culver, 6 who was senior to Mr. Correa at the company. 7 And Mr. Culver testified that there was no 8 demand for operating systems other than 9 Microsoft's. 10 But the Plaintiffs in their opening 11 statement, at some length, and apparently in 12 the thought that this would be an important 13 piece of evidence for you to be considering, 14 told you that Ricardo Correa would testify that 15 he tried to get Acer in 1997 to preinstall on 16 their PCs applications -- we're not talking 17 about operating systems now -- applications 18 like Lotus SmartSuite, Corel's WordPerfect, and 19 QuatroPro, and even something called World Book 20 Encyclopedia into certain lines of Acer 21 computers. 22 The Plaintiffs said that Mr. Correa 23 will testify that, in his judgment, those 24 applications made by other companies, 25 non-Microsoft applications, Lotus, Corel, et 4673 1 cetera, were preferable to the competing 2 applications made by Microsoft Word -- made by 3 Microsoft such as Word and Encarta, Microsoft's 4 encyclopedia. 5 The evidence will be that Correa's 6 supervisors, the people to whom he reported, 7 believed otherwise. 8 In other words, here's Acer, an OEM. 9 Mr. Correa thinks, hey, it would be great if we 10 put things on like Lotus SmartSuite, which is a 11 suite that competes with Office. 12 And Mr. Correa will testify, I guess, 13 that he thought that those products were better 14 than Microsoft's applications. 15 His supervisors believed otherwise. 16 Apparently, the testimony from Mr. Correa will 17 be that he got frustrated that Acer wasn't 18 doing what he wanted Acer to do, and, as a 19 result, he quit. 20 I hope I was listening carefully. I 21 think I was. I heard nothing in this story 22 about Mr. Correa. Nothing at all to indicate 23 that Microsoft did anything wrong to cause Acer 24 to make this business decision. 25 Far from it. What I heard -- and, of 4674 1 course, the evidence will be from the witnesses 2 and from the documents. It's not opening 3 statement. 4 But what I heard is that there was 5 just competition in applications. One 6 employee, lower level, preferred Lotus 7 SmartSuite, and his bosses preferred 8 Microsoft's competing product. 9 We think the evidence will show that 10 Acer simply made what it thought was the 11 correct business decision about what software 12 to put on its PCs. 13 And we think that the evidence will 14 show that Acer had good business reasons for 15 doing this and that nothing whatsoever that 16 Microsoft did was anticompetitive. 17 And Mr. Culver's deposition, as you 18 know, was taken in this case some time ago. 19 Let's look at it. 20 (Whereupon, the following video was 21 played to the jury.) 22 Question: You were explaining -- you 23 were describing to me Mr. Correa's 24 recommendation that Acer bundle SmartSuite on 25 all the PCs in the Aspire line going through 4675 1 the main retail channel. 2 And I was -- if you had not finished 3 describing that recommendation, I would ask you 4 to do so. 5 Answer: When I -- Ricardo's interest 6 in bundling Lotus SmartSuite came from purely 7 -- he thought it was going to be perceived as a 8 better value than Microsoft Works in the 9 marketplace. Robert Olstad talked to me about 10 -- and my sales director talked to me about 11 their opinion of whether it added any 12 marketability. 13 If we offered a computer side by side 14 with Lotus SmartSuite versus Microsoft works, 15 would customers buy more of that computer 16 versus the other one? 17 In their opinion, they believed that 18 Lotus SmartSuite did not have the marketing 19 value that, say, an MS office would for the 20 same money, and that we were not going to sell 21 any more computers if we bundled Lotus 22 SmartSuite than if we bundled Microsoft Works. 23 (Whereupon playing of video 24 concluded.) 25 MR. TULCHIN: So there is Mr. Culver 4676 1 telling you, and there's a little bit more, why 2 it was that Acer chose to stay with Microsoft 3 in these applications products. 4 Ricardo Correa thought that it would 5 add value to the Acer PCs to use Lotus 6 SmartSuite. His supervisors disagreed, and 7 they chose the Microsoft product. 8 And then let's look at some testimony 9 as to why Acer preferred Microsoft over Corel's 10 product. 11 (Whereupon, the following video was 12 played for the jury.) 13 Question: To your knowledge, did Acer 14 consider bundling a Corel suite on its consumer 15 PCs? 16 Answer: Ricardo evaluated Corel, 17 their Office Suite, I think about a year later 18 after the Lotus SmartSuite bundle. 19 There again, he -- apparently, if I 20 recall, was given a good price, royalty price 21 on Corel. 22 But we had the same discussions and 23 this time discussion was even shorter than with 24 the Lotus one, that it was total cost. And the 25 Corel product had even more compatibility 4677 1 problems than even Lotus had in our 2 compatibility test labs. And we thought it was 3 overly complicated and the overall cost would 4 be more than supporting Microsoft Works. And 5 there wasn't much discussion on that. 6 (Whereupon playing of video 7 concluded.) 8 MR. TULCHIN: So, there again, 9 Plaintiffs say that they'll bring Mr. Correa in 10 to testify. About what, I'm not sure. 11 What Mr. Culver says is that Acer 12 chose Microsoft's product over the Corel 13 product. 14 And he said that the Corel product had 15 even more compatibility problems than Lotus 16 after they tested the products in their 17 compatibility test labs. 18 As he just testified, we thought it 19 was overly complicated, and the overall cost 20 would be more than supporting Microsoft Works. 21 So, again, the Plaintiffs say, 22 apparently, that Acer should have picked Lotus 23 SmartSuite or Corel in preference to Microsoft. 24 This is just normal business everyday 25 conduct. An OEM is deciding which applications 4678 1 software to put on its computer, and it chooses 2 the one that it thinks is best for it. 3 Did Microsoft do anything 4 anticompetitive there? 5 Well, let's hear from Mr. Culver. 6 (Whereupon, the following video was 7 played to the jury.) 8 Question: Mr. Culver, to your 9 knowledge, did anyone at Microsoft contact you 10 about Acer's plans to preload SmartSuite? 11 Answer: No, they did not. 12 Question: To your knowledge, did 13 anyone at Microsoft pressure anyone at Acer not 14 to bundle SmartSuite? 15 Answer: Not to my knowledge. 16 Question: Again, I'd like to ask you, 17 Mr. Culver, did anyone at Microsoft contact you 18 about Acer's plans to preload applications made 19 by Corel? 20 Answer: No, they did not. 21 Question: To your knowledge, did 22 anyone at Microsoft pressure anyone at Acer not 23 to bundle Corel applications? 24 Answer: Not to my knowledge. 25 (Whereupon playing of video 4679 1 concluded.) 2 MR. TULCHIN: Well, there we are. 3 Whatever Mr. Correa has to offer, his superior 4 at Acer has told you what was going on. Just 5 normal everyday business conduct. 6 One OEM, Acer, deciding that it thinks 7 that the Microsoft product is preferable to the 8 products of competitors. 9 Your Honor, if this is convenient for 10 the Court, this would be a good time. 11 THE COURT: All right. We'll take a 12 break for 15 minutes at this time. 13 Remember the admonition previously 14 given. Leave your notebooks here. 15 All rise. 16 (A recess was taken from 1:16 p.m. 17 to 1:34 p.m.) 18 THE CLERK: All rise. 19 THE COURT: Everybody else may be 20 seated. 21 Please continue. 22 MR. TULCHIN: Thank you, Your Honor. 23 Just a small point, ladies and 24 gentlemen, that I want to make in connection 25 with this Ricardo Correa and Acer testimony 4680 1 that we looked at. 2 The Plaintiffs also told us a little 3 bit about the Be operating system, and they 4 mentioned that three OEMs, Hitachi, Compaq, and 5 Fujitsu, had considered using the Be operating 6 system. 7 Apparently, from all that I can tell, 8 those three OEMs considered Be. And, 9 eventually, if I understand what the evidence 10 will be, decided not to use the Be operating 11 system, but, instead, to stay with Microsoft 12 Windows. 13 Again, I'm not aware of any evidence 14 that will indicate that Microsoft did something 15 anticompetitive as opposed to normal business 16 competition that determined the outcome there, 17 that Microsoft somehow applied some improper 18 pressure or used some tactics that you will 19 consider to be in any way anticompetitive. 20 We believe, again, that the evidence 21 is only, just like with Acer, that these OEMs 22 chose Microsoft's Windows in preference to Be 23 because they thought it would be better for 24 their customers and better for their business. 25 They would sell more computers. 4681 1 Okay. I want to turn for maybe the 2 second time -- we touched on it on Monday, 3 Monday afternoon, I believe, but I want to turn 4 to the question of prices, and I want to spend 5 a few minutes on the question of what 6 Microsoft's prices have been. 7 After all, as you know, the principal 8 allegation, the main theory of the case, is 9 that Microsoft overcharged for Windows, for 10 Word, and for Excel. 11 And you heard the testimony of the 12 OEMs about no demand for other companies' 13 products. And you've heard evidence that 14 Microsoft prevailed in its competition against 15 other companies because of Microsoft's good 16 business decisions, including, as we've talked 17 about, the 1980 contract with IBM, which put 18 Microsoft in a great position in operating 19 systems to the point where, as Professor Noll 20 has testified, he doesn't know of anything 21 unlawful that Microsoft did to acquire its 22 monopoly power in that business. 23 And we heard of Microsoft's decision 24 early on to develop for the GUI systems, 25 Macintosh, as well as Windows, and Mr. Gates' 4682 1 belief, really from 1983, that computing would 2 become widespread, that there would be a 3 computer on every desk and in every home in our 4 country when the GUI system as opposed to the 5 character-based system was widely adopted. 6 And we've heard about quality and the 7 quality of Microsoft software as compared to, 8 for example, DRI's software, DR-DOS, and the 9 quality of Microsoft Excel versus 1-2-3. 10 We've heard about Lotus' mistake in 11 deciding not to develop for Windows and the 12 Windows 3.0 product, which came out in May '90 13 and which was so important and so great. 14 And we've heard the same thing about 15 WordPerfect. 16 And I want to show you -- we're going 17 to look at Number 21. 18 We're going to talk about prices. But 19 you remember that we talked about market share 20 a day or two ago. And here we are -- again, 21 this is market share for Microsoft Word. 22 And you will hear from Professor 23 Murray -- Murphy I should say. I think I said 24 Murray and that was in error. Murphy, Kevin 25 Murphy, and he will testify from lots of data 4683 1 about Microsoft's market share in the word 2 processing market. 3 You will see that we don't shy away 4 from -- we don't shrink from the high market 5 shares that Word has been able to gain. 6 We say, of course, that these high 7 market shares are the result of legitimate 8 business competition. A better product at a 9 lower price, high quality and people who choose 10 value when they decide what software they want. 11 And you'll remember that we talked 12 about the theory that as you are getting higher 13 and higher market share, boy, you have monopoly 14 power in the marketplace. 15 And that, listening at least to what 16 the Plaintiffs alleged, that one might think 17 that as you get that high market share and all 18 that power, your prices would go up. 19 But, as you know, the very opposite 20 has occurred. 21 You heard me speak about first copy 22 costs and economies of scale. That unlike in 23 most markets, in software, the second copy and 24 the two millionth copy and the 20 millionth 25 copy cost almost nothing. And that the more 4684 1 you sell, the lower your prices can be. 2 Okay. Let's look at spreadsheets. 3 We'll come back to prices in a moment. 4 Because it's the same general story 5 when it comes to market share in spreadsheets. 6 We spoke earlier today about the 7 evidence of what Lotus was doing in the late 8 '80s when Windows 3.0 was almost coming out. 9 And here we are -- excuse me, Mr. 10 Wallis -- in '88 and '89, and you can see that 11 Microsoft Excel is a very small factor in the 12 marketplace. This line is 20 percent. 13 And, for the years in question, Excel, 14 '88, '89, and '90, is well below 20 percent of 15 the market. 16 And let's go back to what we just 17 looked at for Word. 18 No, no, we want to go back one. My 19 fault. Sorry for the technical difficulties. 20 They are what we might call incompatibilities. 21 But it's my fault, not Chris. 22 I think I surprised him in the order 23 in which I went. My apologies, Chris. 24 Here's Microsoft Word. And just like 25 Excel, in the late '80s the market share of 4685 1 Word is relatively low. Again, this line is 20 2 percent. 3 So only beginning in 1990 does Word 4 get above 20 percent market share in the market 5 for word processors. 6 And we won't spend a lot of time on 7 this, but, again, when Windows 3.0 comes out, 8 as Mr. Crummey testified, there was a drumroll. 9 Customers were going to Windows 3.0 in droves. 10 And the market moved in that 11 direction. And Microsoft software became much 12 more successful, applications software. So 13 Word's market share by '94 is over 60 percent. 14 Remember, Professor Noll will say that 15 Lotus and WordPerfect did not come out with 16 good applications for Windows, applications at 17 least as good as Microsoft's, until late '93, 18 the second half of '93. 19 By then you can see where the market 20 is going. Microsoft's products are succeeding. 21 So let's just jump one ahead to Excel. 22 There we go. 23 Same general picture. 24 And, of course, when we looked at 25 prices briefly -- and what we've done, I remind 4686 1 you, is to include all the revenues to 2 Microsoft divided by the number of licenses. 3 That gives you a true average of what 4 the prices are. 5 Here is the price of Word. As the 6 market share went up, the price of Word 7 actually went down. Not just a little. 8 And, by the way, if anyone is 9 wondering whether or not we adjusted these 10 prices for inflation, we did not. 11 There is inflation, of course. And if 12 your price stays the same over time, in effect, 13 it's going down because of inflation, but 14 there's no adjustment here. It's just the raw 15 average price. 16 And as Microsoft's market share for 17 Word goes down, in a case where the Plaintiffs 18 say there's an overcharge -- I should say as 19 the market share goes up. I don't want to get 20 this wrong. As the market share goes up. 21 Well, the Plaintiffs say you gain 22 monopoly power and so you're overcharging 23 consumers. 24 Well, we think the evidence will show 25 just the reverse. That as our market share 4687 1 went up, the price of Word, the average price, 2 the true average, all revenue divided by all 3 licenses to Microsoft has gone down. 4 If we adjusted for inflation, if we 5 made that adjustment, the price would go down 6 even further, of course, if we made any 7 adjustment. 8 But here we have not. 9 And this comes from Professor Murphy's 10 expert report. Professor Murphy from Chicago 11 will be here and testify for you. 12 I don't believe that the Plaintiffs' 13 experts have information using all the data 14 that is radically different than from what we 15 show. 16 We'll talk about their data in just a 17 minute. 18 Now, let's look at the prices for 19 Excel. 20 Very, very similar story. 21 I told you when I started my opening 22 statement Monday at, I think it was about 1:15 23 or 1:30, that while there were a lot of 24 complicated terms, and there were concepts in 25 the case that would be complicated, the true 4688 1 issues in the case are actually quite simple. 2 The true real issues that we think 3 should guide your determination ultimately. 4 Was there an overcharge? Well, here 5 we have Excel. 6 As Microsoft's market share goes up, 7 the prices come down. 8 And, again, this is from Professor 9 Murphy. He will be here. It will be a while 10 before he does because we have to wait. The 11 Defendant has to wait until the Plaintiffs put 12 on all their evidence. 13 We don't get to interrupt. They will 14 go as long as they go, and then we will call 15 our witnesses. 16 And we've shown you -- and I want to 17 show you again -- the prices for operating 18 systems. 19 Again, we've broken it down into the 20 consumer version of Windows and the 21 professional version. 22 You've seen this before. I want to 23 spend just a minute on it. 24 Revenue per license, Professor Murphy 25 again, taking all the data, not just a little 4689 1 slice of it, all the data from all sales by 2 Microsoft, all sales of the consumer versions 3 through the OEM channel. 4 Now, remember, about 85 percent, as 5 the Plaintiffs said, of operating systems are 6 sold through OEMs. Most people prefer to have 7 a computer that has an operating system already 8 installed on it. 9 And this is through the OEM channel, 10 full versions, the consumer operating system 11 prices. 12 Over time, you'll see that the price 13 of Windows has stayed roughly about the same. 14 No adjustment for inflation. If we did, well, 15 of course, the later prices would look a little 16 bit lower. 17 If we adjusted for inflation, they 18 would look like they're going down. Instead, 19 they've been about flat. 20 And then let's look at the next one. 21 Professional operating system prices. 22 For instance, Windows NT Professional, 2000 23 Professional, Windows XP Professional, and 24 those prices have stayed, through the OEM 25 channel again, roughly flat. Back in '94, $105 4690 1 according to Professor Murphy; by 2005, $98. 2 With a little bit of jumping around in 3 the middle, but all, give or take, $10 around 4 100 -- around $100 for the professional version 5 of Windows acquired by OEMs. 6 Now, we're going to talk tomorrow 7 about pass-through and whether the OEMs pass 8 through any overcharge. 9 But when you buy a Dell computer or a 10 Compaq computer or Gateway, or some other kind, 11 if you have Microsoft Windows on it and you 12 choose the professional version, that's what 13 you want. 14 This is the price that Microsoft has 15 charged the OEM for Windows. The prices have 16 not gone up. 17 And I'm going to tell you about -- I'm 18 going to tell you a little bit about 19 improvements that have been made in those 20 products. 21 Because, in our view, the evidence 22 will show you that this is not like buying, for 23 example, a tube of toothpaste in 1994 and then 24 a tube of toothpaste in 2006. 25 The tube of toothpaste maybe has 4691 1 improvements in it. The makers of the 2 toothpaste every few years may tell you it's 3 new and improved, but, more or less, it's the 4 same product. 5 What we think the evidence will 6 show -- we will come to this -- is that in the 7 case of Windows, there have been really 8 dramatic improvements with every version of the 9 product. 10 So while you're paying about the same, 11 you're getting more and more, a better and 12 better product with each version. 13 And you heard me say when I started my 14 opening statement late on Monday afternoon that 15 Plaintiffs' expert, Professor Noll, testified 16 in another case that each version of Windows 17 has indeed been an improvement over the prior 18 version. 19 So we think the evidence will be that 20 there will not be any dispute about the point 21 that important improvements are made in the 22 product each time. 23 Now, I believe you will see from at 24 least one of the Plaintiffs' experts, you will 25 see data about prices of these products, 4692 1 Windows, Word, and Excel that don't match 2 exactly the data that I've shown you and that 3 our witnesses will testify to. 4 And I want to talk about that briefly, 5 if I may. 6 Let's look at the next demonstrative 7 exhibit. 8 Professor Mackie-Mason, who's an 9 expert for Plaintiffs, has submitted an expert 10 report in this case. 11 And when the Plaintiffs came around to 12 calculating prices, what we think the evidence 13 will show you is that Professor Mackie-Mason 14 wound up counting only about 5 percent of the 15 total operating system licenses. 16 And what he did was to take that 17 little sliver by taking mostly retail sales of 18 Windows. 19 So, in other words, if you go to a 20 company like Best Buy, you go to a retail 21 outlet, and you pull off the shelf a copy of 22 Windows, maybe you want to upgrade. 23 You have Windows 98 and you want to 24 move to a more modern system with more 25 functionality, more features, improvements. 4693 1 The price in a retail store is indeed 2 almost always going to be higher than the price 3 that Microsoft charges to the OEMs for 4 operating systems. 5 Same for applications. 6 So Professor Mackie-Mason is going to 7 show you charts, I believe, that will show 8 pricing information that differs from the 9 charts that I showed you. 10 And, again, we think the evidence will 11 show that the reason for that is that Professor 12 Mackie-Mason picked out 5 percent of the number 13 of units of Windows and did an average of those 14 prices, mostly in the retail channel. 15 And so, of course, he's got the 16 highest prices, much higher than the total 17 average. 18 In the applications part of the case, 19 with Word and Excel, it's a similar story. 20 He chose about 15 percent of the total 21 available data, taking price information, 22 mostly from the retail channel, to make 23 calculations about Microsoft's products that 24 show different prices and maybe different sorts 25 of lines and charts than those that Professor 4694 1 Murphy has compiled and that I've shown you so 2 far. 3 I think the evidence will show you 4 that particularly in software, most people do 5 not acquire software at what you might call the 6 full sticker prices. 7 Most people get software at much less 8 than these high prices in a retail store. 9 The lowest prices usually are 10 elsewhere in other channels. 11 And as we've said, the great majority 12 of operating system licenses or sales are made 13 through the OEM channel. 14 So, Professor Murphy and Professor 15 Hubbard will explain that they relied on the 16 vast majority of prices, not just a little 17 sliver of them. 18 And they will explain why they think 19 that Professor Mackie-Mason, in effect, is 20 doing some cherry-picking with the prices. 21 And before moving on, I want to show 22 you some testimony from just a few people by 23 video deposition. There are four segments that 24 go directly to this question of price. 25 It's a case about an overcharge. Was 4695 1 the price too high? 2 Let's look at the deposition from 3 2002. It is four years ago, but from 2002 of a 4 man named Jeffrey Cohen who was the chief 5 information officer of JetBlue Airlines. 6 (Whereupon, the following video was 7 played for the jury.) 8 Question: So based on your 9 experiences as the CIO of JetBlue, how do you 10 regard the Windows operating system in terms of 11 its overall value for the price? 12 Answer: I think today I think it's an 13 incredible value. It's just gotten better and 14 better and, pricewise, it hasn't gotten any 15 more expensive. 16 For us, it's pretty much the same 17 price as it was three years ago and/or two and 18 a half years ago when I started at JetBlue. 19 Windows NT4 didn't cost us any more 20 than Windows XP costs us today. And it's 21 gotten significantly better. 22 Question: How do you regard the 23 office productivity suite in terms of its 24 overall value for the price? 25 Answer: I think it's unbelievable. 4696 1 We develop software in-house ourselves and, you 2 know, the amount of time, the amount of effort, 3 the amount of work that goes into, you know, 4 the collaborative tools that are in Office XP, 5 I mean, I would have to have hundreds upon 6 hundreds of people to be able to develop that 7 and to be able to sell to us for 250, including 8 the upgrades and the Windows operating system, 9 plus the Office package is obviously an 10 extremely good buy for us. 11 (Whereupon playing of video 12 concluded.) 13 MR. TULCHIN: And next I want to show 14 you a little more testimony from Pete Peterson. 15 Now, this testimony, to be clear, 16 applies to the fall of 1990 -- that was the 17 context in the deposition -- when Mr. Peterson 18 first learns about Office, Microsoft Office for 19 Windows. 20 Remember, Peterson is at WordPerfect. 21 He's the executive VP, and he's being asked 22 about conditions in the market in the fall of 23 1990. 24 (Whereupon, the following video was 25 played to the jury.) 4697 1 Question: Well, what do you recall 2 about the price that was being offered for 3 Office? 4 Answer: I recall that we were scared 5 to death. 6 Question: Why were you scared? 7 Answer: Because it was an attractive 8 price and an attractive product. And while we 9 weren't too worried at first because DOS was a 10 more important platform at the time, we could 11 kind of see that we were in trouble. 12 Question: What steps did you -- did 13 you take to -- well, what steps did you start 14 taking in the fall of 1990 to respond 15 competitively to that -- to that offering? 16 Answer: Other than talking about it, 17 I don't think we did anything concrete. 18 (Whereupon playing of video 19 concluded.) 20 MR. TULCHIN: So you have Mr. Cohen 21 talking about 2002. There's Mr. Peterson 22 talking about his reaction in 1990. 23 Scared to death. 24 And then there's a deposition from 25 2002 of a man named Eli Hertz, sort of like the 4698 1 car rental company, spelled the same. He's the 2 president of Hertz Computer. 3 Let's look at that. 4 (Whereupon, the following video was 5 played to the jury.) 6 Question: How do you feel about the 7 price that you paid for Microsoft operating 8 system software? 9 Answer: I think it's fair. 10 Question: What was your view of 11 Microsoft's operating system software in terms 12 of its performance for the price? 13 Answer: At that time, it was a very 14 small dollar number compared to the entire 15 configured machine. And so, in relationship to 16 dollars, the contribution of the operating 17 system was tremendous. 18 Question: Do you recall how you felt 19 about the price that you were paying for 20 Microsoft products relative to their 21 performance and functionality? 22 Answer: Well, I was quite exposed to 23 the mainframe business, in the development of 24 software for the big machines, I actually was 25 amazed that software, productivity software 4699 1 such as Microsoft is publishing would cost so 2 little. 3 (Whereupon playing of video 4 concluded.) 5 MR. TULCHIN: This will be part of the 6 evidence at the trial. 7 Mr. Hertz, he was born overseas. He's 8 an immigrant, so he does have an accent, but I 9 think you heard him. 10 Mr. Hertz testified, I actually was 11 amazed the productivity software such as 12 Microsoft is publishing would cost so little. 13 And then let me show you testimony 14 taken in the year 2001. It's a little bit 15 longer. At the deposition of Eileen Rudden, 16 R-u-d-d-e-n. 17 Eileen Rudden had been a senior vice 18 president of Lotus. Lotus, of course, was a 19 competitor of Microsoft's. 20 In many ways Lotus, which eventually 21 was purchased by IBM, Lotus was a bitter 22 competitor with Microsoft. 23 And you've seen some of the evidence 24 about IBM and Microsoft sort of scratching and 25 clawing at each other in the market. 4700 1 But let's see what Ms. Rudden says on 2 the subject of prices. 3 (Whereupon, the following video was 4 played to the jury.) 5 Answer: Microsoft had established 6 itself as the single supplier of the operating 7 system that generated huge profits. Those 8 profits were very successfully and very smartly 9 reinvested in the business applications. 10 They established that as a major next 11 footing, and one of its key weapons, besides 12 building good products, was to, you know, be 13 unbelievably to cut price, bring prices down, 14 and that is not the first approach that a 15 company -- independent software company like 16 Lotus could take as their strategy. 17 I mean, no one is contesting here 18 whether it's better for consumers or not if 19 they have lower prices. I mean, it's really 20 about what strategies are available to 21 independent companies when they are competing 22 on -- in this kind of very competitive 23 marketplace. 24 Question: And your point that -- 25 given Lotus' circumstances, that wasn't a 4701 1 strategy that was available to him then? 2 Answer: Exactly. 3 Question: Now, when Microsoft -- 4 MR. TULCHIN: Chris, if you will stop. 5 Sorry. 6 I just wanted to make a comment about 7 that first segment of Ms. Rudden's testimony. 8 We'll get to the next one in a moment. 9 Just so that we're clear there -- 10 sorry to repeat this -- but Eileen Rudden, a 11 senior vice president of Lotus, testifies that 12 Microsoft unbelievably cut prices. It brought 13 prices down. 14 Now, in a sense, I guess, she's 15 complaining about it because she says it was a 16 strategy not available to Lotus. 17 But if you look at the Court's 18 instructions -- and I think it's common 19 sense -- competing on price is perfectly 20 legitimate competition. 21 Not only perfectly legitimate, but 22 it's the essence of pro-competitive conduct. 23 Charging less. 24 And, as Ms. Rudden just testified, 25 quote, I mean, no one is contesting here 4702 1 whether it's better for consumers if they have 2 lower prices. 3 Well, maybe no one was contesting 4 there, but apparently the Plaintiffs are 5 contesting it here. 6 Lower prices. Lotus recognizes that, 7 according to Ms. Rudden. 8 And the next segment of her testimony, 9 so that we're clear, concerns a period of time 10 after November 1990, when Office first was 11 released. 12 And let's hear what Ms. Rudden says 13 about Microsoft Office. 14 (Whereupon, the following video was 15 played to the jury.) 16 Question: Now, when Microsoft came 17 out with the Office suite approach, had it also 18 invented a new category? 19 Answer: No. 20 Question: Why not? 21 Answer: What that was was -- it was a 22 new phase of competition in the desktop 23 applications market. 24 It was a bundle of the major 25 applications that existed on their own, and it 4703 1 was basically -- it was more of -- it was more 2 of a pricing play, although there were some 3 features that were developed, you know, to make 4 the products easier to use together. 5 The most salient aspect of the Office 6 suite really was its -- it was an unbelievable 7 deal. 8 Question: It was an unbelievable deal 9 for consumers? 10 Answer: Yes. It was priced at two -- 11 if you were going to buy, I think it was 12 roughly one and a half of these applications, 13 you could get four or five for that same price. 14 You know, that was a very, very appealing 15 compelling offer. 16 (Whereupon playing of video 17 concluded.) 18 MR. TULCHIN: I think you know what 19 I'm going to say, and forgive me, again, for 20 repeating this as well, but it's just so 21 important to the merits of this case. 22 It's so important because, as we said 23 Monday afternoon, the real issues are not 24 complicated. 25 The real issues come down to whether 4704 1 or not consumers were overcharged as a result 2 of anything that Microsoft did that might have 3 been anticompetitive. 4 And if you start with the question of 5 overcharge, that is, if you look at the case 6 looking first at the ultimate question, was 7 anyone overcharged, you have Eileen Rudden 8 talking about Office, Office which Microsoft 9 released in November 1990. 10 She works at Lotus. Her deposition 11 was taken in November of 2001, eleven years 12 after Office was released. 13 But you can see the impact that it had 14 on her, even eleven years later. 15 Her testimony, the most salient aspect 16 of the Office suite really was its -- it was an 17 unbelievable deal. 18 Question: It was an unbelievable deal 19 for consumers? 20 Answer: Yes. 21 And she goes on to say, you know, it 22 was a very, very appealing, compelling offer. 23 In the time left this afternoon, I 24 want to talk a little bit -- since we've been 25 talking about price -- about improvements in 4705 1 these products because in thinking about price, 2 we think the evidence to you will be that one 3 needs to consider overall value. 4 Sure, you can buy an automobile made 5 by some companies for $15,000, or you can buy a 6 used car, let's say, that's 10 years old for 7 much, much less. 8 Some people would prefer, let's say, a 9 fancier car at $40,000. Not because they think 10 they're getting overcharged. Because they 11 think they are getting value for their money. 12 Now, in thinking about software, I ask 13 you to consider not just price, but the other 14 half of the value equation, which is 15 improvements. 16 And here's what the evidence will be. 17 We spoke earlier about research and 18 development. 19 The Plaintiffs said on Wednesday, the 20 6th, a week ago, quote, and, of course, it 21 always takes time and money to design any new 22 product. 23 We agree with that. It takes time and 24 money. Sometimes lots of it to make good 25 software. 4706 1 Let's look at the next slide. 2 This comes from the expert report of 3 Professor Hubbard. And I know I've said a lot 4 to you over the past day or so, but I mentioned 5 yesterday that Professor Hubbard is at Columbia 6 University, and is the former chairman of the 7 council of economic advisors; that is, chairman 8 of the advisory body that advises the 9 president. 10 Of course, he's an economist. We 11 think his testimony will be useful to you in 12 considering the issues. 13 And Professor Hubbard did some work to 14 calculate the R and D, research and development 15 expenses -- one might call it investment -- 16 that Microsoft has made. And then the 17 investment made by the other top ten software 18 firms. 19 And let me explain something here. 20 Prepackaged means software that you can buy 21 commercially. Some software is made specially. 22 So, for example, a software company, 23 even a company like IBM, might make software 24 specially for some bank. It's not commercially 25 available, but IBM will put together a piece of 4707 1 software made just for that one customer. 2 That's in a different category. 3 That's not prepackaged software as Professor 4 Hubbard has it. 5 But this comes from public data of 6 these ten software firms. 7 And you'll see the R and D investment 8 of Microsoft in this -- I don't know if you 9 call this blue or purplish or bluish-purple or 10 something color, and then the red for the other 11 ten companies. 12 Now, lest there be any confusion here, 13 this red bar is not the average of what the 14 other top ten software firms spend in R and D. 15 It's not the average. 16 You can't take this and multiply it by 17 10 to see how Microsoft compares with the other 18 ten combined. 19 This is the other ten or the other 20 nine combined. 21 This is R and D by the other top ten 22 software firms, the red, and here's the 23 Microsoft line. And you'll see even going back 24 to the beginning of the class period, Microsoft 25 is making R and D investments. 4708 1 This line, by the way, this line that 2 says $1,000, it's expressed in millions so that 3 1,000 stands for $1 billion per year in R and D 4 investment. 5 At the beginning of the class period, 6 Microsoft's R and D is less than 1 billion, but 7 the better part of it. 8 Beginning in '95, it exceeds $1 9 billion for that year. 10 And as time goes on, Microsoft spends 11 more and more and more in research and 12 development. Research and development to 13 improve existing products, as well as to come 14 up with new products. 15 This is all Microsoft R and D. 16 So by the time we get to 2004, which 17 was the last year for which Professor Hubbard 18 had his numbers, Microsoft was at 7 billion, $7 19 billion in R and D, while all these other top 20 companies combined were still less than 1 21 billion. 22 Microsoft is spending more than seven 23 times as much as all the other in the top ten 24 combined. 25 And I told you yesterday as well that 4709 1 one of our witnesses would be Ralph Lipe, 2 L-i-p-e. 3 One of the things that Mr. Lipe of 4 Microsoft will testify about is Microsoft 5 inventions, innovations. Inventions that have 6 led to the award by the U.S. patent office of 7 United States patents. 8 Lipe himself has gotten a number of 9 patents which are then assigned to the company. 10 That's the normal practice, that an employee 11 who gets a patent assigns the patent to the 12 company for which he's working. 13 And as of 2001, Office, Microsoft 14 Office, had within it, within its 15 interworkings, the source code, inventions for 16 which 190 U.S. patents had been awarded. 17 I tell you this not because we have 18 any intention of running through dozens and 19 dozens of very complicated patents about 20 software, but because, again, the point is that 21 Microsoft is working hard to improve its 22 patents. And that work has resulted in the 23 grant of patents. 24 I said -- I misspoke. I'm going too 25 fast. It's almost 2:20. 4710 1 Microsoft is working hard to improve 2 its products. And the result of that is 3 patents that have been awarded. 4 As of 2001, for Windows there were 5 hundreds of patents that had been awarded to 6 Microsoft for the technology that is used to 7 build the Windows system. 8 And, of course, we've talked about 9 copyright as well as part of the intellectual 10 property. 11 And before we get too much further 12 into this question of improvements, I want to 13 go back and spend just a few minutes on 14 reminding you of what an operating system is. 15 As we discussed yesterday, like all 16 software, an operating system is a set of 17 written instructions or code that tells a 18 computer what to do. 19 The code can be very complex. It is 20 for a product like Windows. And many, many 21 developers, programmers with high levels of 22 training will work on software code. 23 I want to give you just an example of 24 what software code is because we've talked 25 about it and sometimes we've referred to it as 4711 1 source code. 2 This is an example of actually what 3 the programmers do. 4 It's a tiny little excerpt of a source 5 code that's used for peripheral devices to 6 conserve computer process and memory resources. 7 And we won't spend a lot of time on 8 this, but this is the sort of thing that the 9 programmers write. 10 Very few people, I submit, can 11 understand it. While the English language is 12 used, most laymen, people who are not software 13 engineers, are not going to be able to make 14 heads or tails of it. 15 But I show this to you just to give 16 you a sense of what software code is. 17 This is just a few lines of code. And 18 when we talk about lines, we're literally 19 talking about lines. Here's one line, two, 20 three lines, four, five, six, seven, et cetera. 21 Those are the lines. 22 Now, the process of writing software 23 code can be very, very lengthy. 24 Windows has literally millions, 25 millions of lines of this code written for it. 4712 1 And as you might imagine, if there's a 2 mistake in the code, if there's a mistake, even 3 in one line, a typographical error or mistake 4 in the punctuation -- you see there are places 5 where there are periods and commas and 6 semicolons. 7 If there are errors, errors that you 8 might refer to as bugs, those errors can cause 9 a software program not to perform properly or 10 to perform differently than expected, or even, 11 in some cases, to cause serious damage to the 12 system as a whole. 13 Windows XP has 45 million lines of 14 code. 15 And, again, a mistake here or there in 16 one line or two can cause serious problems and 17 jeopardize the performance of the Windows 18 operating system. 19 It's a big job to write software code, 20 and Microsoft spends lots of time and money to 21 try to get it just right. 22 Now, I want to give you an 23 illustration of how an operating system works 24 with hardware and peripheral devices. 25 And, again, consistent with what we 4713 1 discussed yesterday, the operating system is 2 sending instructions to lots of different 3 devices, to your keyboard. 4 If you have a digital camera plugged 5 into your computer, as you might, the operating 6 system has to work with that. Of course, 7 there's a monitor. Most people use a mouse, a 8 printer, et cetera, et cetera. 9 The microprocessor, of course, is the 10 key piece of the computer itself. 11 And those instructions have to go 12 flawlessly from the operating system to these 13 peripheral devices and to other parts of the 14 computer. 15 One other thing that maybe you've 16 considered in this connection. It's actually 17 quite important. And when you think about it, 18 it's quite significant in a very real sense in 19 this case. 20 When a company that makes operating 21 systems comes out with a new product, let's say 22 Microsoft had Windows 95, three years later 23 Windows 98. 24 When you come out with a new product, 25 you have to make sure that while you're writing 4714 1 all that source code and trying to make Windows 2 better and adding new features to it, you have 3 to make sure that you don't do anything to 4 affect what they call backward compatibility. 5 Now, what is backward compatibility? 6 It sounds sort of like a difficult concept. 7 It's not. 8 If you're running Windows 95, and you 9 may not have had a digital camera then, but you 10 certainly probably had a printer. That printer 11 may have been made by Hewlett-Packard in 1992 12 or '3, or who knows when. 13 As you probably know, Microsoft is not 14 in the printer business. Hewlett-Packard is 15 number one in that business. 16 If you're coming out with a new 17 operating system, Microsoft is going to make 18 sure that that system will run perfectly with 19 all these old devices. Backward compatibility. 20 Hewlett-Packard may have produced a 21 printer to run well with Windows 3.0 or MS-DOS 22 or Windows 95. 23 As you come out with a new operating 24 system, Windows 98 or Windows XP later on, 25 Microsoft wants to be sure that that operating 4715 1 system continues to work well with all the 2 devices you or a business at which you work 3 use. 4 Again, using a printer as an example. 5 There are literally thousands of 6 printers out there. Thousands of different 7 printers made by dozens of different companies. 8 Hewlett-Packard is just one. 9 And so as Windows improves, Microsoft 10 is going to try very, very hard to achieve 11 backward compatibility. Improve the product. 12 Change Windows. Add new features. Make it 13 better for consumers. 14 But at the same time, make sure that 15 if you have a computer with Windows XP in it, 16 you can still use that Hewlett-Packard printer 17 that you might have in your house that maybe is 18 ten years old. Plug it right in. It will work 19 with XP just the way it did with Windows 3.0 or 20 3.1. 21 Your Honor, probably because I'm tired 22 of talking, but also because it's a good break 23 point, if we could, this would be a good time. 24 THE COURT: Very well. 25 Ladies and gentlemen of the jury, we 4716 1 will excuse you for the day. 2 Remember the admonition previously 3 given, and we'll have you report at 8:30 4 tomorrow morning. 5 Have a good evening. 6 All rise. 7 (The following record was made out of 8 the presence of the jury at 2:29 p.m.) 9 MR. WILLIAMS: Your Honor, I have a 10 number of things that I'd like to have heard 11 today if there's time. 12 I can hand those up to you now or we 13 can wait and see if we get to them. My 14 understanding is that there's some other 15 business that needs to be addressed first. 16 THE COURT: Yeah. Why don't we just 17 do it as we get to them. 18 Is that all right? 19 MR. WILLIAMS: All right. I've served 20 Microsoft's -- 21 THE COURT: I'll wait. You guys get 22 settled and tell me when you are ready. 23 MR. CASHMAN: Good afternoon, Your 24 Honor. 25 THE COURT: Which -- good afternoon. 4717 1 I'm sorry. 2 THE CLERK: Did you want me to give 3 this to them? 4 THE COURT: Oh, yeah. We got a note 5 from one of the jurors. I will give it to 6 counsel to look at. 7 While they're looking at that, we got 8 about four or five motions, I think, going. 9 MR. CASHMAN: I think we should finish 10 up with the Sculley issue first, Your Honor. 11 THE COURT: Sculley. 12 MR. CASHMAN: And Mr. Gralewski is 13 handling that issue. 14 THE COURT: Okay. 15 MS. CONLIN: Your Honor, do you know 16 from which juror? 17 THE COURT: No, I don't know. Which 18 juror gave it to you? Do you know what number? 19 THE CLERK: The lady with the bag that 20 gives it to me every time I walk out. I don't 21 know for sure. 22 MS. CONLIN: Do you know which one -- 23 where she's sitting? 24 THE CLERK: I think she's in the back 25 row. 4718 1 THE COURT: [Juror Name], in the front 2 row? 3 THE CLERK: Possibly. She has 4 glasses. Dark hair. 5 THE COURT: That's [Juror Name], I think, 6 [Juror Name]. 7 MR. TULCHIN: Is that the back row or 8 front row? 9 THE CLERK: I think the back row. 10 She's skinnier, dark hair. She always carries 11 in the bag with her. 12 MR. GREEN: At the end? 13 THE CLERK: Yeah, I think she's at the 14 end. 15 MS. CONLIN: That would be [Juror Name] 16 or -- 17 MR. HOLLEY: [Juror Name]. 18 MS. CONLIN: [Juror Name]. 19 MR. TULCHIN: Seat number 6? 20 THE CLERK: I believe so. I can check 21 tomorrow real quick. Yeah, because I handed 22 her down a notebook. 23 Because the two ladies in the front is 24 the blonder lady with the kids and the other 25 dark-haired lady with glasses; right? So this 4719 1 is the other lady. 2 MR. TULCHIN: Sorry, Carrie, I missed 3 that. 4 THE CLERK: Isn't in the front we have 5 gentleman, gentleman, and then we have the two 6 ladies that sit next to each other and then the 7 two guys. 8 MR. TULCHIN: Yes. 9 THE CLERK: So on the back, it's the 10 one that sits on the end. 11 THE COURT: That would be [Juror Name]. 12 THE CLERK: Because we have this lady 13 that sits here. 14 MS. CONLIN: Yeah, [Juror Name], [Juror Name]. 15 THE CLERK: See, I didn't have to name 16 them all. 17 MR. HAGSTROM: [Juror Name], [Juror Name]. There's 18 [Juror Name] over here. 19 THE CLERK: It's [Juror Name] in the last 20 then. 21 THE COURT: [Juror Name] is in the last. 22 She's number 6. 23 MS. CONLIN: Your Honor, I assume that 24 this is not something that we are going to 25 address. 4720 1 THE COURT: Well, I want you to look 2 at it. Then we'll talk about it. We don't 3 need to talk about it now. We'll talk about it 4 tomorrow if you want to. 5 The procedure -- I think I'm supposed 6 to give you the note and let you look at it. 7 MS. CONLIN: Right. I don't -- we 8 don't see this as a matter that requires 9 discussion at least from our side. 10 Mr. Tulchin can do what he wants. 11 THE COURT: Okay. 12 MR. TULCHIN: This is one of those 13 occasions where I'm happy to report that the 14 two sides agree. 15 THE COURT: Okay. 16 MS. CONLIN: That will be the last 17 time today, Your Honor. 18 MR. TULCHIN: Last time today or ever? 19 MS. CONLIN: Well, maybe ever. 20 THE COURT: So the suggestion to the 21 parties is not to make any answer to the 22 question; is that correct? 23 MS. CONLIN: Yes, Your Honor. 24 MR. TULCHIN: Yes, Your Honor. 25 THE COURT: Okay. I agree. 4721 1 THE CLERK: So if she asks me, I just 2 say -- 3 THE COURT: I will prepare a note for 4 the parties to look at tomorrow which I will 5 return to her which will say the Court 6 basically cannot make any answer to your 7 question. 8 I'll type something up tonight and let 9 you look at it tomorrow just to make sure it's 10 okay. 11 MR. HOLLEY: Thank you, Your Honor. 12 THE COURT: I think I should tell her 13 yes or no that I can't answer it. 14 All right. 15 You said -- 16 MR. CASHMAN: Mr. Sculley. We'll 17 finish up with Mr. Sculley. And Mr. Gralewski 18 was handling that and we'll wrap it up. 19 THE COURT: All right. Let me find my 20 Sculley stuff. I got part of it. Yep. Okay. 21 I got it. 22 MR. GRALEWSKI: Your Honor, if I may 23 proceed. 24 THE COURT: Sure. 25 MR. GRALEWSKI: To aid in efficiency, 4722 1 I handed up to Your Honor right before the 2 lunch break a supplemental brief which just 3 puts in writing the arguments that I was going 4 to make today to try to get through things 5 quickly. 6 The summary basically is on a rereview 7 of the transcript. To look for foundation, I 8 found facts that confirm that Mr. Sculley 9 doesn't have foundation. He basically says 10 that he doesn't know any details of OEM 11 contracts. 12 Attached to the brief, also, are OEM 13 contracts for application software, which 14 confirm that the sales price for those software 15 items are unknowable to Mr. Sculley. 16 The last point before I conclude is at 17 the end of the day yesterday, there was 18 suggestion that because the Plaintiffs' counsel 19 asked these questions, that somehow converted 20 them into appropriate questions and answers. 21 And we have articulated for Your Honor 22 that it's not the Plaintiffs' counsel in a 23 discovery deposition asking questions to, upon 24 getting an answer, establish lack of 25 foundation. 4723 1 It would be Microsoft's job if they 2 want to rely on that answer later or in the 3 future to lay foundation on redirect. 4 And in this situation, they didn't do 5 that. When Microsoft's lawyers redirected 6 Mr. Sculley, they just asked a few questions 7 about a copyright lawsuit that Apple had 8 brought against Microsoft in previous years and 9 then concluded the deposition. 10 To conclude, Your Honor -- and I would 11 submit we don't need to go through these blocks 12 of testimony one by one. 13 It was helpful to be sitting at 14 counsel table this afternoon when Mr. Tulchin 15 started talking about prices. 16 He told the Court and the jury what is 17 necessary to know what Microsoft's prices are 18 and whether they've fallen or risen and whether 19 they are low or high. 20 You have to look at Microsoft's 21 revenues. Your Honor may recall this from 22 about an hour ago. You have to look at 23 Microsoft's revenues and divide that by the 24 number of licenses that were sold. 25 And, certainly, that's expert 4724 1 testimony. There's no foundation and no 2 concrete facts anywhere in the Sculley 3 deposition that he has access to any of this 4 type of information like revenue or number of 5 licenses. 6 So there's no need to go through one 7 by one with him. 8 In the supplemental brief, Your Honor, 9 we also are adding an appeal to page 9814 to 10 9915. That testimony is attached as Exhibit A 11 to the supplemental brief. 12 And it raises identical issues. These 13 are -- this is testimony where Mr. Sculley 14 testifies about Microsoft prices. 15 Thank you, Your Honor. 16 THE COURT: Mr. Tuggy, I can't seem to 17 locate the exact deposition of Sculley. Was 18 that attached to your -- 19 MR. TUGGY: I have an extra copy, Your 20 Honor. 21 THE COURT: Let's just see. I 22 probably have it up here. I just can't locate 23 it right now. 24 Can I see what it looks like? I've 25 got numerous things. What's it attached to? 4725 1 Did you attach it to something? 2 MR. TUGGY: No. 3 THE COURT: Did you guys attach it to 4 something? 5 MR. GRALEWSKI: Your Honor, I handed 6 up yesterday as a separate document just a few 7 pages, just about this thin, which is the 8 testimony at issue. 9 MR. TUGGY: Your Honor, may I approach 10 with a transcript? I'll be using much of it. 11 THE COURT: All right. 12 MR. GRALEWSKI: And then Exhibit A to 13 the supplemental brief is that one extra page 14 of testimony. 15 THE COURT: Okay. What portion do we 16 want to talk about now? 17 What portion are we on, page and line? 18 MR. TUGGY: We are on the portion 19 that's 134, line 13. 20 THE COURT: Okay. Great. 21 MR. TUGGY: To 135, line 5. 22 Mr. Sculley's testimony in this 23 section, and in the others that Plaintiffs have 24 identified here for appeal, fall -- there are 25 two aspects of this testimony that need to be 4726 1 clarified and understood. 2 The first is that when Mr. Sculley has 3 testified in his deposition about price, he's 4 not offering that testimony in a pure vacuum. 5 He's discussing how it is -- the fact 6 that Microsoft's low price strategy affects the 7 ability of competitors, both in the operating 8 systems market and the applications market, how 9 it affects their ability to enter the market. 10 And his testimony to that effect in 11 his direct examination occurs at page 98 of his 12 transcript through page 99. 13 In particular, on page 99, lines 4 to 14 8, Mr. Sculley, speaking of the operating 15 system market says, and, second of all, it 16 makes it almost impossible for anyone else to 17 come up with a competitive operating system 18 without the critical mass of the installed base 19 of computers that Microsoft has and be able to 20 compete. 21 And earlier in that answer Mr. Sculley 22 is describing how Mr. Gates was aggressive in 23 keeping his prices low and how that made it 24 impossible for a competitive operating system 25 without a critical mass of installed base to 4727 1 compete. 2 Similarly, Mr. Sculley testified at 3 page 162, lines 4 to 15 -- and this is within 4 one of the sections that's being challenged by 5 Plaintiffs. 6 Mr. Sculley testified, I think the 7 issue is not whether you have a monopoly. It's 8 whether you abuse the position of having a 9 monopoly. 10 I think Microsoft is an extremely 11 tough competitor and it puts a lot of pressure 12 on young companies to figure out how to find a 13 way to build a business. 14 That if they are successful, they can 15 pretty well count that what they do is going to 16 be -- going to become part of what Microsoft 17 does so that it is constantly forcing the young 18 companies to innovate. 19 It's either innovate or die. 20 THE COURT: Is it okay if I write on 21 this? Is this mine? 22 MR. TUGGY: I'm sorry? 23 THE COURT: Is it okay if I write on 24 this? 25 MR. TUGGY: Yes, that's fine. 4728 1 I offer this description to say -- at 2 the beginning of the argument to say that when 3 Mr. Sculley is describing Microsoft's low 4 price, he is describing how that strategy 5 affects the market, including his own 6 participation in the market. 7 As I will describe below, 8 Mr. Sculley -- and as I'll point out in the 9 record of Mr. Sculley's deposition, Apple 10 considered competing with Microsoft both in the 11 applications market and in the operating 12 systems market. 13 And this testimony he's giving about 14 Microsoft's pricing strategy is relevant to 15 that consideration of Apple. And it is in the 16 process of considering whether to enter those 17 markets that Mr. Sculley would consider a price 18 and the effect on price on Apple's entry into 19 the market. 20 The second fact about this testimony 21 that is important to identify is that 22 Mr. Sculley is discussing the difference 23 between low prices and high prices, a low price 24 strategy versus a high price strategy. 25 He is not in his testimony attempting, 4729 1 for example, to prove -- or we're not using the 2 testimony to prove that when Microsoft sold 3 operating systems to Dell computers, that 4 Microsoft offered those operating systems for a 5 particular price, like $15 per operating system 6 or $30 per operating system. 7 It's not Mr. Sculley's testimony 8 that's at issue here where he is testifying 9 about a particular price. He's testifying 10 about whether Microsoft -- what Microsoft's 11 business strategy was, a low-price strategy. 12 It would be as if the president of 13 Nordstrom, when discussing the competitive 14 strategies of Wal-Mart, says Wal-Mart has a 15 low-price strategy, and ours is not the same. 16 We have a different business approach, 17 a different strategy. Wal-Mart's is low price. 18 It's difficult to compete against a low-price 19 strategy. 20 Wal-Mart -- and there would also be 21 the same sort of testimony, for example, from a 22 mom and pop shop attempting to compete against 23 a new Wal-Mart entering into the community. 24 If the person were to testify this 25 Wal-Mart strategy of low prices is making it 4730 1 very difficult for me to compete, it is not an 2 appropriate attack on that person's testimony 3 to say that that person doesn't know the 4 specific pricing at Wal-Mart of an item of 5 clothing or the food that is sold. 6 It's a description of the overall 7 business strategy of the company. It's a low- 8 price competitor. 9 And those businesses that are in 10 competition with Wal-Mart for the sales of 11 clothes, for example, a mom and pop shop, or a 12 Nordstrom, the people who run those businesses 13 are going to know what the business strategies 14 of their competitors are. 15 And in this testimony, that's the kind 16 of testimony Mr. Sculley is giving. 17 So the question is -- and the question 18 that Plaintiffs have posed and challenged, all 19 this testimony is on basically a single ground. 20 And, that is, how does Mr. Sculley 21 have foundation to say that Microsoft has a 22 low-price strategy; that Microsoft charges low 23 prices for its operating systems and low prices 24 for its applications in such a way that it 25 interferes with the ability of competitors to 4731 1 enter the market, competitors such as Apple? 2 The sources of information that are 3 available to Mr. Sculley about prices are many. 4 And they include, for example, IDC, another -- 5 International Data Corporation, and other 6 commercial publications, third-party sources 7 such as NPD and PC Data, customer interviews. 8 There's a myriad of ways customers 9 such as Mr. Sculley can learn about the pricing 10 strategy of one of that person's major 11 competitors. 12 For example, in this action, the 13 Plaintiffs' expert, when considering pricing of 14 Microsoft products, has looked to publicly 15 available information on pricing. 16 And do you have a copy of the brief we 17 submitted this morning? 18 THE COURT: Hang on. I know I've got 19 it somewhere. 20 What's it titled, can you tell me? 21 MR. TUGGY: The title is Microsoft's 22 memorandum in support of its resistance to 23 Plaintiffs' motion to prevent Microsoft from 24 referring to prior testimony of John Sculley. 25 And I have an extra copy. 4732 1 THE COURT: I'm sure I have it. Hang 2 on. 3 Microsoft's memorandum in support of 4 its resistance to Plaintiffs' motion to prevent 5 Microsoft from referring to prior testimony of 6 John Sculley and Willard Peterson in its 7 opening statement? 8 MR. TUGGY: Yes, Your Honor. 9 THE COURT: Got it. 10 Okay. Go ahead. 11 MR. TUGGY: So I'd like to direct the 12 Court to Exhibit B. 13 THE COURT: B? 14 MR. TUGGY: Yes, Exhibit B or Tab B. 15 Tab B is an excerpt from the expert 16 report of Jeffrey Mackie-Mason submitted in 17 this action. 18 And in footnote 21, Mr. Mackie-Mason 19 is describing the basis for his calculation 20 regarding Microsoft products. 21 And he states that the calculations he 22 makes are for products sold in retail and 23 corporate outlets as reported by PC data, now 24 NPD intellect marketing. 25 And he goes on to say that Microsoft 4733 1 uses PC data as a reliable source of 2 information on Microsoft and its competitors in 3 the retail market. 4 We provide this example in our 5 briefing as an example of the way that a 6 competitor can learn about another competitor's 7 pricing. This is publicly available 8 information that Mackie-Mason, their expert, 9 relied upon. 10 With that background -- and 11 Mr. Sculley's testimony is in the context of 12 describing Microsoft's business strategy and 13 its effect on competition, first. 14 Second, he's discussing low price 15 versus higher price strategies. That's what 16 the testimony at issue is about. 17 And information about pricing is 18 readily available in this market. 19 It's important that we take a look at 20 Mr. Sculley himself. 21 What was his role at Apple and what 22 did Apple do in the markets at issue and what 23 information would that provide Mr. Sculley with 24 respect to the pricing of Microsoft's products? 25 And, in particular, what Microsoft's 4734 1 pricing -- overall pricing strategies were? 2 Mr. Sculley's foundation to give lay 3 opinion on Microsoft's pricing approach, its 4 low pricing strategy, comes from three sources. 5 The first source is his considerable 6 industry knowledge based on his position as the 7 chief executive officer of Apple. 8 And this is a position that during 9 prior oral argument, Microsoft explained that 10 in his capacity as CEO Mr. Sculley would have, 11 through a 10-year period at Apple, access to 12 information about Microsoft's business 13 strategies, including the pricing of its 14 product, and that general industry knowledge 15 provides the foundation for lay opinion. 16 In our brief we cite to authority for 17 that proposition in the Eighth Circuit. The 18 case is Burlington Northern Railroad Company 19 versus State of Nebraska. 20 THE COURT: Is this your new brief? 21 MR. TUGGY: Correct. 22 THE COURT: Okay. What page is that 23 on if you're referring to a page? Is that page 24 4? 25 MR. TUGGY: Yes, Your Honor. It's at 4735 1 the bottom of page 4. And I have a copy of the 2 case if I may approach. 3 THE COURT: Okay. Thank you. 4 MR. TUGGY: If I may direct Your 5 Honor's attention to what's page 14 of 16 in 6 the top right-hand corner. 7 THE COURT: Okay. 8 MR. TUGGY: And it is, within the 9 opinion, a quote crossing over pages 1004 to 10 1005. 11 THE COURT: Okay. 12 MR. TUGGY: And it's on the left-hand 13 side of the page, about an inch down from the 14 first column from the top. 15 THE COURT: I see it. 16 MR. TUGGY: The statement -- the Court 17 states, personal knowledge or perception 18 acquired through review of records prepared in 19 the ordinary course of business or perceptions 20 based on industry experience is sufficient 21 foundation for lay opinion testimony. 22 Now, in this case, Burlington Northern 23 Railroad Company, the issue was whether trains 24 with cabooses were safer than trains without 25 cabooses. 4736 1 And officers of one of the companies 2 testified, or was expected to testify, that, in 3 their experience, trains with cabooses were no 4 safer than cabooseless trains. 5 So a little bit like Dr. Seuss. 6 But when the officers testified to 7 that or offered that testimony, the district 8 court would not permit it to be given. 9 And the argument that was made is that 10 when the officers made these -- were making 11 these lay opinions about which cabooses were 12 safer or more dangerous than others, they were 13 relying on accident reports they had received 14 and on just generally what they had observed in 15 their positions as officers of the company. 16 And here the Court of Appeal concluded 17 that the failure to consider the evidence was 18 an abuse of discretion because the railroad 19 executive's testimony, based on knowledge 20 derived from supervising railroad operations, 21 years of experience in the industry, and review 22 of employee accident reports prepared in the 23 ordinary course of business satisfies the 24 foundation requirements for lay opinion 25 testimony. 4737 1 And that is from page 1005 of the 2 Burlington Northern Railroad case. 3 So, as I said, there were three 4 sources of information that provide foundation 5 for Mr. Sculley's lay opinions. 6 The first is his considerable industry 7 knowledge based on his years at Apple. 8 The second is direct competition 9 between Microsoft and Apple in both the 10 operating systems and applications markets. 11 So it's not just that he had general 12 industry knowledge from being the chief 13 executive officer of Apple for ten years, but 14 he also competed directly with Microsoft in 15 these markets and would have an understanding 16 of Microsoft's strategies in that event. 17 Third; the third source of information 18 is the fact that Apple considered the 19 commercial viability of entering into the 20 Intel-compatible PC market. 21 So there was a time when Apple both 22 for -- or there were times actually when Apple 23 considered under Mr. Sculley's leadership 24 making its operating system available on 25 Intel-compatible personal computers. 4738 1 And its considering of the commercial 2 viability of that also is a source of 3 information for Mr. Sculley on what Microsoft's 4 general pricing strategies and business 5 strategies were. 6 So then the question is what evidence 7 or what foundation is in the record about these 8 three sources of information for Mr. Sculley to 9 be able to testify about Microsoft's low-price 10 strategy and its affect on competitors during 11 the time that Mr. Sculley was the CEO of Apple. 12 Well, first, as we have pointed out 13 before -- and the information that I'm 14 communicating about Mr. Sculley's foundation 15 appears at page 5 of the brief that we've 16 provided to you. It crosses over from page 5 17 to page 6. 18 And the citations to the record, the 19 deposition of Mr. Sculley, where this 20 information exists is in Tab C of what I 21 provided to you. 22 It would probably be more convenient 23 to use Tab C than the transcript I handed up 24 because Tab C has the excerpts marked. 25 So the first fact is that Mr. Sculley 4739 1 was Apple's CEO and president from April 1983 2 through June 1983. And that information is in 3 the questions and answers at pages 6 and 7 of 4 his deposition, the second page at Tab C, where 5 he testifies in lines 17 through 22 on page 6, 6 the bottom left-hand bracket, that he was CEO 7 and president of Apple for ten years, and on 8 the right-hand side, right-hand column, the 9 bracket up to the right, that the period was 10 April 6, 1983 till June 1993. 11 The second fact we identify is that 12 Mr. -- is that Apple had a software division 13 called Claris. And that division developed a 14 suite of software that included word processing 15 and spreadsheets, which are products that 16 competed with Microsoft's comparable offerings. 17 And that is at page 26 of the transcript, 18 starting at line 24, going through page 28, 19 line 8. 20 And the testimony about the 21 relationship between the Microsoft products and 22 the Apple products are at page 28, line 2, 23 where the question is asked, did it -- that's 24 referring to Microsoft's product -- compete 25 with Claris Works? Claris is the division of 4740 1 Apple. 2 And the answer was it competed with 3 Claris Works. And it was a very difficult 4 product -- I'm sorry. And it was very 5 different from Microsoft Office or Microsoft 6 Word or Microsoft Excel. It was not nearly as 7 robust. Fewer features. Much simpler user 8 interface. Very similar to the Claris Works. 9 This is referring to the Microsoft 10 Works products, which has a simpler word 11 processing and spreadsheet functioning than the 12 larger Microsoft office software. 13 Now, the third fact to which we point 14 is that Apple considered developing 15 applications software for the Windows Intel 16 platform, but focused its efforts on the Mac 17 platform. 18 And that's on page 30 of Mr. Sculley's 19 deposition, lines 14 to 17. 20 The question was asked, Now, did 21 Claris develop applications for the Windows 22 platform? 23 And the answer was, We talked about it 24 a lot, but we focused on the Macintosh. 25 With respect to applications, that's 4741 1 the evidence in the record about Mr. Sculley 2 considering talking about within Apple 3 developing applications for the Windows 4 platform, but not doing it. 5 When Mr. Sculley was first appointed 6 Apple CEO, as we point out in the brief, its 7 annual revenues were $583 million. 8 And when he left the company ten years 9 later, it had grown to annual revenues of 8.3 10 billion. 11 It had become a major player in the 12 software industry. And that is in the Sculley 13 depo transcript, page 9 line 6 to 13. 14 As we also point out, it was under 15 Mr. Sculley's leadership that Apple's flagship 16 Macintosh line of computers was launched. 17 And in connection with Mr. Sculley's 18 activities as the president and CEO of Apple, 19 as we point out in the brief, he was fully 20 aware of its business activities, including the 21 efforts of Apple to attract ISV support to the 22 Mac platform and many other activities of 23 Apple, as indicated in the testimony of 24 Mr. Sculley in his deposition. 25 In other words, he was not an absent 4742 1 or uninvolved CEO. He was very active in 2 operations and in the business of Apple and 3 knew it well. 4 And the testimony makes that clear, 5 including the testimony about this particular 6 aspect of the company's business that we cite, 7 which is page 17 through 18 of the transcript. 8 Now, in addition, the evidence shows 9 that in Mr. Sculley's deposition, that Apple 10 considered competing with Microsoft on the 11 operating systems side. 12 And this evidence I'm not going to 13 walk through again because we did it last time. 14 It was the evidence about the Star Trek project 15 and that work that Apple did. 16 Now, the question is: With all this 17 information, Mr. Sculley would be expected to 18 receive as the CEO of Apple regarding 19 Microsoft's business strategies and its 20 pricing, what other evidence do we have that 21 Mr. Sculley was aware at the time of what 22 Microsoft's pricing was because, as Plaintiffs 23 have provided to you, several contracts which 24 have confidentiality provisions, and they also 25 provide it with their original briefing. 4743 1 What I'd like to provide to the Court 2 is Mr. Sculley's testimony in the deposition 3 about what he thought the prices were. 4 Mr. Sculley testified on page 75 of 5 the deposition, lines 15 to 23. 6 And if -- Your Honor, may I approach 7 with this? 8 THE COURT: Is that in here? 9 MR. TUGGY: Yes, but there's 10 additional information I'd like to provide. 11 THE COURT: Okay. Thank you. 12 Now, it's not at Tab B; is that right? 13 MR. TUGGY: Right. This one would be 14 in the entire -- 15 THE COURT: Oh, okay. 16 MR. TUGGY: -- transcript. 17 THE COURT: Okay. 18 MR. TUGGY: At page 75 of his 19 deposition, Mr. Sculley testified about his 20 strategy and thinking with respect to whether 21 the Mac operating system should be moved over 22 to OEMs who could load it on their machines, 23 similar to Microsoft strategy. 24 And at line 15, Mr. Sculley says, Now, 25 at that same point in time, Microsoft was 4744 1 selling MS-DOS for an average price between 14 2 to 17 dollars per copy to their PC OEMs. 3 This is a statement of fact he made 4 about price. And, actually, that's fairly 5 precise. 6 Unlike the sections of the deposition 7 to which Plaintiffs object, here he's actually 8 giving a price range. 9 What I've attached to that testimony 10 is an excerpt from the expert report of Kevin 11 Murphy. This is an expert Microsoft has 12 designated in this case, and this is a report 13 that we served on the Plaintiffs in August 14 2006. 15 And Exhibit 11 to that report lists 16 the average MS-DOS revenue per license. 17 Remember, Mr. Gralewski's argument was 18 just that it is revenue per license that 19 constitutes price. 20 And Mr. Murphy provides information on 21 what the revenue per license was from 1986 to 22 1989 while Mr. Sculley was the CEO of Apple. 23 And the price in Mr. Murphy's report is $14.77. 24 Mr. Murphy in developing this 25 information actually developed it from a data 4745 1 base Microsoft maintains internally regarding 2 its pricing. 3 So, in fact, Mr. Sculley was 4 remarkably accurate when he indicated his view 5 that Microsoft's sales price to OEMs was 6 between 14 and 17 dollars per copy. 7 This report by the expert in 8 connection with pricing analysis in this case 9 supports almost precisely the number that 10 Mr. Sculley provided. 11 It is possible, of course, to guess 12 exactly right. 13 But Mr. Sculley had foundation based 14 on the sources of information I described 15 before to be able to come up with his 16 understanding of what the price was. And that 17 is here. 18 So with that information and as 19 background regarding Mr. Sculley's foundation 20 to testify about price, the first place where 21 Plaintiffs have their objection in their motion 22 is 134, 13, through 135, 5 of Sculley's 23 deposition. 24 MR. GRALEWSKI: Your Honor, before we 25 go line by line, all of these arguments that 4746 1 Mr. Tuggy made were global arguments. I'd like 2 an opportunity to respond. 3 MR. TUGGY: Your Honor, may I do it 4 line by line so we can start integrating this 5 general discussion with -- 6 THE COURT: Are we going to -- we're 7 still talking on page 152, aren't we? 8 MR. TUGGY: Now, we are on page -- I 9 think the first one is 134. 10 THE COURT: I'm sorry, 134. I'm 11 looking at the wrong one. 12 Here it is. Okay. 13 MR. TUGGY: All right. 14 THE COURT: This is the one you want 15 to start with? We are still talking about 16 this? 17 MR. TUGGY: Yes. 18 THE COURT: Okay. Go ahead. 19 MR. TUGGY: And as I mentioned, in the 20 deposition before this, during the direct 21 examination, Mr. Sculley has given a 22 significant amount of testimony regarding his 23 background, regarding his business strategies, 24 Microsoft's business strategies, and the impact 25 of the price on those strategies. 4747 1 Plaintiffs do their cross-examination, 2 and that is the part of the deposition we're 3 now in. 4 And Plaintiffs say, if Microsoft were 5 charging monopoly prices for applications 6 software, would that be a good thing for 7 consumers? 8 Mr. Sculley's answer was, I don't know 9 what you mean by monopoly price. Monopoly 10 price can be high or low. If the price is low, 11 I would say that would be good for consumers. 12 Question: What about if the monopoly 13 price were high? 14 That wouldn't be good for consumers. 15 And I think one of the unusual 16 characteristics of this situation is that, in 17 my opinion, without being a lawyer, Microsoft 18 appears to have a monopoly, but it's not a 19 monopoly where they raise the prices. It's a 20 monopoly where they've used it to keep the 21 prices low. 22 So there Mr. Sculley is saying that 23 Microsoft has a low price strategy even if, as 24 the Plaintiffs embedded in their question, 25 Microsoft may have a monopoly. 4748 1 Mr. Sculley makes clear in his 2 testimony that he's not attempting to be a 3 lawyer, to try to define what the Plaintiffs' 4 questions mean on cross-examination. 5 He is just explaining that whatever 6 Microsoft -- whatever you might call it and 7 they might appear to be a monopoly, it's a 8 monopoly where they've kept the prices low. 9 And he's just describing Microsoft's 10 business strategy, which he has full foundation 11 to know. 12 So with respect to this portion of 13 Mr. Sculley's deposition, his foundation is 14 clear, and his ability to render lay opinion on 15 Microsoft business strategies is clearly 16 permitted by the Burlington Railroad case. 17 For that reason, Microsoft requests 18 that the ruling of the Special Master that this 19 evidence is not improper opinion, that that 20 objection ought to be overruled, be affirmed, 21 and that Microsoft be permitted during opening 22 statement to show this evidence as evidence 23 that we believe will be shown in trial. 24 THE COURT: Okay. 25 Response? 4749 1 MR. GRALEWSKI: I think Mr. Tuggy, 2 Your Honor, with all due respect to him, did an 3 excellent job of confusing the issues. 4 First, I need to correct the record. 5 It is not the Plaintiffs' position, 6 and I did not intend to say that the correct 7 measure of what prices are is to take revenue 8 and divide that by the number of licenses. 9 That's what Mr. Tulchin said about an 10 hour and a half ago during his opening. I 11 don't want that to be twisted later to say that 12 that is Plaintiffs' position going forward. 13 But I do think it's telling because 14 nowhere in that half-hour to 35-minute argument 15 did we see any evidence that Mr. Sculley has 16 that knowledge. 17 Now, Mr. Tuggy handed up and referred 18 the Court to page 75 of Mr. Sculley's 19 deposition to try to establish some foundation 20 that Mr. Sculley has personal knowledge of what 21 Microsoft's prices are. 22 Now, I think Your Honor is required to 23 go back an additional page -- and I don't think 24 that Mr. Tuggy pointed this out, and I don't 25 think it was intentional, but I need to make 4750 1 sure that the record is clear. 2 What is happening here is -- first of 3 all, it's important for you to realize that 4 this is testimony about prices in 1983. 1983. 5 And what the questioning is about is 6 at the time Mr. Sculley comes in to take over 7 Apple and thinks about whether to take the 8 Apple operating system and license it out to 9 other OEMs. 10 As Your Honor may know, Apple didn't 11 do that at the time and doesn't do that today. 12 It just works on the Apple proprietary 13 computers. 14 But at the time Mr. Sculley was 15 thinking about it. 16 And so maybe in 1983 he knew what 17 Microsoft was charging for their operating 18 systems. That cannot form the basis to allow 19 the jury to hear what Mr. Sculley thinks in 20 1998 or 1999 or 2002, five, ten years after he 21 leaves Apple and he is out of the industry, 22 that he knows what the prices are. 23 Let's look at the issue of Claris. 24 Mr. Tuggy brought up the issue a 25 couple times, first with respect to 4751 1 applications and then with respect to operating 2 systems, that Apple considered competing. 3 I asked the Court or, I submit, how 4 does the mere consideration of competing with 5 Microsoft prior to the damages period in the 6 case -- and first of all, they ended up not 7 competing with the Star Trek program. 8 With respect to Claris, there's a 9 collaterally estopped finding of fact that the 10 Apple products did not compete against the 11 Intel-based products. Okay. 12 But setting that aside, how does the 13 mere consideration of the fact that you might 14 want to compete in 1991 or 1992 give you a 15 reason after you leave the industry to know 16 what prices are in 1995 or 1999 down the line? 17 It just doesn't make sense. 18 But that's all argument, as 19 Mr. Tuggy's position is all argument. 20 Mr. Tulchin put a slide on the screen. 21 Of course, argument isn't evidence. 22 Let's look at the evidence, Your 23 Honor. 24 This is in my supplemental brief at 25 pages 144 and 145. It's attached as Exhibit B 4752 1 to the supplemental brief. 2 This is a line of questioning. It 3 starts at about page 143. And Mr. Sculley is 4 asked about this potential competition with the 5 Star Trek program, potential competition with 6 operating systems. 7 And his testimony is -- basically 8 dooms their motion, Your Honor. 9 He admits -- and let me get the exact 10 line so I can direct Your Honor to it. It's on 11 page 145, lines 10 to 12. 12 Basically, he's being asked, Well, did 13 Microsoft's prices and Microsoft's contracts 14 that it had with OEMs preclude you, Apple, from 15 basically porting your operating system to 16 those OEMs? 17 THE COURT: Just for clarification, is 18 this the same depo? 19 MR. GRALEWSKI: It's all the same 20 depo. 21 THE COURT: Okay. I just wanted to 22 make sure. 23 MR. GRALEWSKI: It is. It's all the 24 same depo. 25 So I know this is -- it took me a 4753 1 while. 2 What's going on, Your Honor, there's a 3 line of questioning. Apple is thinking about 4 licensing its operating system to other OEMs. 5 And the question is, Well, did the contracts 6 that Microsoft had with those OEMs affect your 7 decision? 8 And, again, these contracts, Your 9 Honor, are the contracts at issue where the 10 prices are contained. Okay. 11 And on page 145, 10 to 12, Mr. Sculley 12 states, I don't know the details of Microsoft's 13 contract -- I think that should be contracts -- 14 with its PC OEMs. 15 If Mr. Sculley during his deposition 16 admits -- and this is 1992 when he's still 17 there. If he admits that he doesn't know the 18 details of Microsoft's contracts with its PC 19 OEMs, with Microsoft's OEMs, he cannot know the 20 prices that Microsoft is charging. 21 Then if you remove that five, ten 22 years afterwards, he certainly can't know what 23 Microsoft's prices are. 24 Let's look at the case that Mr. Tuggy 25 presented. It's a fairly hornbook statement of 4754 1 what the law is. 2 I would submit that the cases, Your 3 Honor, that the Plaintiffs provided the Court 4 yesterday are more on point where the cases 5 talk about needing to provide concrete facts to 6 establish personal knowledge before, before 7 allowing the improper opinion. 8 All this says is that personal 9 knowledge or perception acquired through review 10 of records prepared in the ordinary course or 11 experience in the industry is sufficient 12 foundation. 13 Here we have -- okay, let's talk about 14 review of records prepared in the ordinary 15 course. 16 We have provided concrete evidence, 17 which I just discussed, which confirms that 18 Mr. Sculley did not have knowledge of the 19 business records that would have provided him 20 with the knowledge of what the prices are. 21 Then let's talk about the next prong 22 of this test that Mr. Tuggy presented to the 23 Court, which is perceptions based on industry 24 experience. 25 As I've said 15 times -- and I fear 4755 1 that I'm testing the Court's patience on 2 this -- he left the industry. He left the 3 industry. He was pushed out from Apple before 4 the damages period in the case. 5 He testified that he was on the 6 periphery of the industry subsequent to that. 7 Now, maybe the analysis under 8 Mr. Tuggy's case is different if Mr. Sculley 9 stayed in Apple for the duration of the class 10 period or if he actually competed. 11 If there wasn't a collaterally 12 estopped finding of fact that said they did not 13 compete with each other, maybe it would be a 14 different issue. But here, Your Honor, this 15 case doesn't support their position. 16 As I just said, he wasn't in the PC 17 industry. He just thought about competing. 18 He's in a separate relevant market. And, of 19 course, that fact is collaterally estopped. 20 I think -- there's one other point 21 before I sum up, Your Honor. 22 Mr. Tuggy says that the only basis we 23 have to support our argument is the first prong 24 of the improper opinion test, which is that 25 these opinions are not based on personal 4756 1 knowledge. 2 We certainly argue that. But to 3 remind the Court, there's the second prong of 4 the test. And, as we've argued, we certainly 5 think that that fails as well. 6 And the issue there, to remind the 7 Court is, this is not helpful to the jury. 8 It's not helpful to the jury to talk about high 9 or low prices. 10 The issue here is, what would the 11 price have been absent anticompetitive conduct? 12 One dollar? 50 cents? 20 cents? Is that low? 13 It may be. 14 But if that price is artificially 15 inflated due to Microsoft's anticompetitive 16 conduct, the Plaintiffs win. 17 It doesn't matter if this is a good 18 value or high or low. They want to confuse the 19 jury by providing the jury with this improper 20 expert opinion to suggest that they're getting 21 a good deal. 22 It's okay. The prices are low. 23 That's not what this case is about. 24 Your Honor recognized that on December 25 6th, when we were talking about the issue of 4757 1 fairness, and Your Honor got it right on. He 2 said this case is about cost. It's not about 3 value. It's not about high-low. It's about 4 cost. 5 We can go through these designations 6 one by one. I think that although Microsoft 7 attempted to do a good job and provide Your 8 Honor with the foundation, I really think that 9 those concrete facts that are required are 10 lacking and the Sculley testimony should not be 11 admitted. 12 THE COURT: Anything else on the 13 proposed testimony at page 134, lines 13 14 through 25? 15 MR. TUGGY: Yes. 16 MR. GRALEWSKI: There's one more 17 thing, Your Honor. 18 THE COURT: Sorry. I thought you were 19 done. 20 MR. GRALEWSKI: I apologize. 21 This is from the United States versus 22 Trenton Potteries case, which is 273 U.S. 392 23 at 398. 24 And I just want to for the record note 25 that this court held that, and I'll quote, we 4758 1 should hesitate to adopt a construction making 2 the difference between legal and illegal 3 conduct in the field of business relations 4 depend upon so uncertain a test as whether 5 prices are reasonable. 6 A determination which can be 7 satisfactorily made only after a complete 8 survey of our economic organization and a 9 choice between rival philosophies. 10 So, essentially, this is saying what I 11 just said, Your Honor. 12 The issue here is what would the price 13 have been absent the legal conduct? 14 THE COURT: See if he's finally done. 15 Are you done? 16 MR. GRALEWSKI: Hold on one second. 17 I'll check with my boss, Your Honor. 18 Your Honor, that case has held that 19 since 1927. 20 THE COURT: Okay. 21 Mr. Tuggy? 22 MR. TUGGY: Your Honor, there was an 23 argument that he just made that I need to 24 respond to because it wasn't made earlier. 25 And it is important today to clarify 4759 1 the difference between using this evidence for 2 liability purposes and using it in some 3 relation to the damages period. 4 Microsoft is not offering this 5 evidence in connection with the damages period. 6 It's offering this evidence in connection with 7 the time Mr. Sculley was CEO of Apple on issues 8 of liability. 9 And it's important that that 10 distinction be made and understood how -- why 11 does Microsoft regard this kind of evidence, 12 much of which you heard just before the end of 13 today, as critical and fundamental evidence on 14 understanding why it was that Microsoft was 15 successful and why it was other competitors 16 were not. 17 During the period 1988 through 1993, 18 Microsoft competed in the operating system 19 market against OS/2 and DR-DOS. 20 And during Plaintiffs' opening 21 statement, we all heard a huge amount of 22 evidence and argument relating to Microsoft's 23 competition against DR-DOS and OS/2. 24 During the period 1988 to 1993, 25 Microsoft competed against WordPerfect and 4760 1 Lotus. 2 And, during that period, Microsoft 3 went from lower market shares compared to those 4 companies to much higher market shares compared 5 to those companies. 6 Now, Microsoft's contention is that 7 its success in the market was due to a low 8 price, high quality strategy. 9 Mr. Sculley is testifying about the 10 fact that Microsoft had a low price, a very 11 aggressive low price strategy during this 12 period. It's directly supportive of 13 Microsoft's defense to Plaintiffs' liability 14 claims. 15 The Plaintiffs also very importantly 16 claim that Microsoft stifled innovation. 17 Now, the claim to the extent that they 18 seek to apply collateral estoppel relates to 19 the period covered by the government case. 20 The period during which Mr. Sculley 21 was CEO of Apple was before the government 22 case. 23 And what Mr. Sculley testified to, as 24 you may recall and as I read the testimony, is 25 that Microsoft's low pricing strategy, among 4761 1 other things, forced companies that may want to 2 become entrants into its market to innovate 3 very aggressively. 4 Microsoft's low price, high quality 5 strategy required of its competitors that they 6 innovate, that they reduce their prices, that 7 they attempt to compete on the field on which 8 Microsoft was competing. 9 The fact that they were unsuccessful 10 is the reason Microsoft succeeded. That's 11 Microsoft's -- that is an element of 12 Microsoft's defense, that there is no 13 causation. 14 That is not the anticompetitive 15 conduct Plaintiffs allege relating to OS/2 or 16 to DR-DOS that explains why those companies 17 failed. It's because Microsoft had a low price 18 strategy, and entrants into the market were 19 unable to compete at that level. 20 And, also, the companies who were in 21 the market had to compete against that kind of 22 strategy. 23 So during that period, 1988 to 1993, 24 Microsoft's low price strategy is an extremely 25 important fact in this case and one about which 4762 1 the jury is entitled to learn from one of 2 Microsoft's key competitors. 3 It was also a company with whom 4 Microsoft cooperated, as you've heard in 5 opening statements, in developing software. 6 But as Mr. Sculley testified, these 7 companies were also in competition. And he 8 describes Microsoft's low price strategy and 9 the impact that that had on Apple as a 10 competitor and on the market during the period 11 that Mr. Sculley was the president and the CEO 12 of Apple. 13 So Plaintiffs' argument that this 14 testimony is not about what the market -- what 15 the market was like during their damages period 16 is a red herring because it assumes that this 17 testimony is offered to -- with respect to that 18 period. 19 This testimony is offered as part of 20 showing Microsoft's low price strategy during 21 the entire period that Plaintiffs have put at 22 issue in this case. 23 They have not put at issue only the 24 damages period when it comes to issues of 25 liability. They brought this case way back 4763 1 into the mid to late 1980s, which is during the 2 time that Mr. Sculley was the chief executive 3 officer of Apple. 4 So the second response that I had to 5 Mr. Gralewski's clarifications is when 6 Mr. Sculley was identifying the price as 7 between 14 to 17 dollars per unit, he wasn't 8 talking about 1983. 9 The whole line of questioning moves 10 him back to 1983. He describes a letter he 11 received from Gates in 1985, a letter which you 12 saw in opening statements. 13 And then it was after that that he 14 began considering strategies for putting the 15 Macintosh on machines created by OEMs. 16 And it was in that context that he 17 understood what the prices were, stated what 18 the prices were. 19 And if you remember the expert report, 20 it goes back from 1986 to 1989. His pricing 21 information was actually correct, objectively 22 correct. 23 Finally, he talks about these OEM 24 contracts. And the most important point is 25 that his testimony is about pricing strategy, 4764 1 Microsoft's business strategies. 2 It's not attempting to establish what 3 the per copy unit cost is. It's just was he 4 aware that Microsoft had a pricing strategy and 5 that its prices were very low in a way that 6 affected the way competitors, including Apple, 7 could respond to Microsoft. That's the 8 foundation that he had. 9 The segment to which Mr. Gralewski 10 pointed is a place where the Plaintiffs were 11 asking Mr. Sculley, Are you aware that 12 Microsoft had per processor licensing 13 agreements, and, if so, how would that have 14 affected the way that you could compete? 15 And Mr. Sculley said, Well, I'm not 16 aware of those terms of the OEM agreements. 17 He wasn't saying he wasn't aware of 18 price. There's no price discussion. It's a 19 discussion in that part of the deposition about 20 whether Microsoft had per processing licensing 21 agreement and how that might affect Apple if it 22 were to attempt to enter into the market, more 23 cross-examination on the point about whether 24 it's pricing or something else that inhibited 25 competitors from succeeding when dealing with 4765 1 Microsoft. 2 My final point, Your Honor, is that -- 3 is to come back to almost where I began, which 4 is this is Plaintiffs' cross-examination that 5 we are discussing. 6 And in this cross-examination, they 7 are responding to prior testimony by 8 Mr. Sculley that is going to be admitted. It's 9 evidence that has been either not objected to 10 or objections have been withdrawn. 11 No appeals have been taken or the 12 Special Master has already been -- ruled in our 13 favor. 14 And now we are at the place in the 15 deposition where the Plaintiffs are themselves 16 asking questions of Mr. Sculley, attempting to 17 attack his prior testimony, and are objecting 18 to their own questions. 19 How could a question include the term 20 monopoly? It's asking for an improper opinion. 21 But it's their question. 22 And they -- there's no objection 23 asserted to it. If it's their question, I 24 submit that the Plaintiffs waive objections to 25 the question. 4766 1 But, in any event, as we argued last 2 time we were here, the fact that the term 3 monopoly is referenced doesn't mean that a 4 legal opinion is being rendered. 5 What it means is that a business 6 person is using business parlance. And as the 7 Special Master has ruled in very similar 8 circumstances, which we describe in our 9 briefing to you in Tabs E and F, that there are 10 multiple circumstances in this case where the 11 term monopoly may be used, and if it's used not 12 in the legal sense, the witness is not being 13 asked to define what a monopoly means, but it's 14 used in more common parlance. 15 It is not the expression of an 16 improper opinion; it's a lay opinion properly 17 expressed using that term. 18 For those reasons, we ask that the 19 Special Master's ruling on this segment be 20 affirmed. 21 MR. GRALEWSKI: Your Honor, to be 22 brief and to limit the issues. 23 We're not proceeding on the improper 24 opinion objection concerning the use of 25 monopoly in this instance. 4767 1 I heard something absolutely 2 incredible two or three minutes ago. And I 3 actually may want to talk to my team to see if 4 we want to stipulate to this. 5 Mr. Tuggy basically said that you -- a 6 party should not be able to object to their own 7 questioning. We actually might take them up on 8 that. 9 I mean, there are probably 250 10 depositions in this case taken by Microsoft 11 where they ask questions where we're trying to 12 offer the testimony and that's why we're here 13 before Your Honor day in and day out arguing 14 about whether their objections to questions 15 that they ask are appropriate. 16 Now, of course, that shouldn't be the 17 standard that's applied, Your Honor. I just 18 point that out to demonstrate the flaw in 19 Mr. Tuggy's argument. 20 Your Honor, maybe I should have said 21 this at the very beginning. One of these 22 questions at issue is my question. 23 I followed up on a question that was 24 asked by Sullivan & Cromwell. 25 THE COURT: So it's your fault? 4768 1 MR. GRALEWSKI: It's all my fault. 2 Everything is my fault, Your Honor. 3 But this is the point, Your Honor, and 4 I said this before. 5 It's not -- in a discovery deposition, 6 we're entitled to test the witness. Okay. And 7 it is not our burden to follow up and establish 8 lack of foundation when lack of foundation is 9 evident from the prior testimony from the 10 documentary evidence. 11 Sullivan & Cromwell's lawyers on 12 redirect needed to ask the foundational 13 questions if they wanted to rely on this 14 question later. And they didn't, Your Honor. 15 They did not do that. 16 If I had asked the foundational 17 questions at the time, I may have gotten fired. 18 I still may. 19 Now, to sum up and move on, I think we 20 can move on to other issues. 21 What makes this testimony so 22 dangerous -- and Your Honor honed in on this 23 yesterday -- is that it's not confined to a 24 time period. 25 And Mr. Tuggy has argued that they're 4769 1 not offering this testimony for the damages 2 period. 3 Well, that would be spectacular and 4 that would be really nice. But there's nothing 5 in any of the testimony that limits the answers 6 to times prior to 1992. 7 And, also, I would submit that by 8 making this argument, they're almost conceding 9 that he doesn't have foundation to offer the 10 opinion about price for the damages period, but 11 I'm not going to make that argument. 12 But there's nothing at 134 -- let's 13 talk about -- since we're talking about 134 to 14 135, the testimony is simply -- and it starts 15 at line 22 on 134. 16 What if the monopoly price were high? 17 Your Honor, this wasn't my question. 18 Line 22. That wouldn't be good for 19 consumers. And I think one of the unusual 20 characteristics of this situation is that, in 21 my opinion, without being a lawyer, Microsoft 22 appears to have monopoly, but it's not a 23 monopoly where they raise the prices. It's a 24 monopoly where they've used it to keep the 25 prices low. 4770 1 There's nothing in that answer -- when 2 it gets thrown up on that screen, there's 3 nothing in that answer where the jury is going 4 to say, you know what, he's obviously just 5 talking about the time period prior to the 6 damages period in this case. 7 The effect will be obvious, especially 8 coming from, as Mr. Tuggy mentioned yesterday, 9 the luminary, John Sculley. 10 This is improper expert opinion and 11 all of these lines of testimony including the 12 lines at 9814 and 9915 should be excluded, Your 13 Honor. 14 Nothing further from the Plaintiffs on 15 the Sculley issue. 16 THE COURT: Anything more? 17 MR. TUGGY: Nothing else, Your Honor. 18 THE COURT: Do you mind if we take 19 about a five-minute break or 10 minutes? 20 MR. TUGGY: That's fine. 21 MR. CASHMAN: That's fine, Your Honor. 22 (A recess was taken from 3:36 p.m. 23 to 3:45 p.m.) 24 THE COURT: Is there another part of 25 Sculley we want to go on to now? 4771 1 MR. GRALEWSKI: Your Honor, the 2 Plaintiffs -- there are four designations. 3 THE COURT: From Sculley? 4 MR. GRALEWSKI: Yes. 5 Those four designations, I believe, 6 Your Honor, are taken care of with my global 7 comments. 8 Plaintiffs rest on Mr. Sculley. 9 THE COURT: The other designations go 10 to the same issue? 11 MR. GRALEWSKI: Every single one, Your 12 Honor. 13 THE COURT: Okay. 14 MR. GRALEWSKI: Your Honor, 134, 13, 15 to 135, 5, what we were sort of focusing our 16 attention on in connection with both sides' 17 global comments, the testimony there basically 18 was this is not the kind of monopoly that 19 raises prices. Instead, it keeps prices low. 20 So the issue there was price. 21 THE COURT: And you got page 16 -- or, 22 I'm sorry, it's not 16. What is that? 23 MR. GRALEWSKI: 161, 10 to 163, 6. 24 THE COURT: Yeah. 25 MR. GRALEWSKI: Again, the testimony 4772 1 at issue, Your Honor, is Mr. Sculley talking 2 about not being aware of Microsoft's prices 3 being higher despite its monopoly, and then 4 talking about how their role in the industry 5 results in low prices. 6 Again, it's all the same issue, Your 7 Honor, we believe. 8 THE COURT: Okay. 9 MR. GRALEWSKI: And then 181, 23, to 10 182, 25. Again, he talks about Microsoft, 11 quote, kept its prices very low, close quote. 12 Your Honor, the supplemental brief 13 also adds testimony from 9814 to 9915, and that 14 testimony, again, talks about the witness 15 testifying, Bill has continually kept his 16 prices low, and then he summarizes his answer 17 and says the business justification of giving 18 him the ability to be aggressive with prices. 19 So it's all -- we believe these four 20 issues anyway -- relate to Sculley's lack of 21 knowledge about prices. 22 THE COURT: Do you agree with all of 23 those, the same issue? 24 MR. TUGGY: Yes, Your Honor. You may 25 rule based on the argument we currently have on 4773 1 these four. 2 THE COURT: Okay. What's the next 3 one? 4 MR. TUGGY: A witness named Erickson 5 was one of the resellers. 6 MR. HAGSTROM: Your Honor, we were 7 wondering -- we've got some opening issues. 8 Kent Williams has a few. I've got one. I 9 wonder since they might be of greater priority 10 if we could do those first? 11 THE COURT: What do they relate to? 12 Stopping certain conduct or what? 13 MR. HAGSTROM: One is value. One is 14 the everybody was doing it defense. 15 I think the other one was -- had to do 16 with the class action instruction. 17 And there's one more; is that right? 18 MR. WILLIAMS: Yeah, there's a few 19 others. 20 But the first two are the main ones, 21 Your Honor. 22 MR. HOLLEY: Your Honor, the issue was 23 resolved yesterday afternoon about this 24 everybody else is doing it. 25 What the Court asked for was 4774 1 supplemental authority to support the parties' 2 positions. 3 This issue has been argued and argued 4 and argued, and there's no point for the Court 5 to reconsider what preliminary Instruction 6 Number 8 says. 7 They don't like preliminary 8 Instruction Number 8, but it's been delivered. 9 They asked for an instruction multiple times 10 that monopolist's conduct is different from 11 everybody else's conduct in the marketplace. 12 They argued about that I think 13 literally, Your Honor, for several hours over 14 the course of two weeks. 15 The Court gave the instruction it 16 gave, and we're never going to get out of here 17 if every other day they try to reargue the same 18 points. 19 At some point, you have to just 20 concede the fact that you either have an issue 21 for appeal or you don't. 22 But revisiting these same things over 23 and over and over again is not, frankly, a good 24 use of the Court's time or our time. 25 Nothing new is said in their papers on 4775 1 this subject, literally. They copy in block 2 quotations the very same arguments they made to 3 the Court during our very extensive discussion 4 about the preliminary jury instructions. 5 What is so important about this point 6 that requires them to reargue it continually? 7 Nothing has changed. 8 MR. WILLIAMS: Your Honor, can I 9 respond to that? 10 THE COURT: Yes. 11 MR. WILLIAMS: Your Honor, a couple of 12 points actually. 13 The first being that we are not 14 seeking Your Honor to revisit Instruction 15 Number 8. We're asking Your Honor to enforce 16 it. 17 We believe it's been violated. Your 18 Honor left it open to the parties yesterday to 19 submit authority on that. Both parties have 20 done so. 21 And I would like an opportunity to 22 talk about those authorities, the authorities 23 that we submitted and the authorities that 24 Microsoft submitted because, frankly, Your 25 Honor, we believe that the cases that they cite 4776 1 are inapposite. 2 I'm fully prepared to explain how and 3 why. 4 We brought -- I mean, it's absolutely 5 correct that there's been a lot of argument on 6 this. 7 And we don't understand -- in light of 8 that argument and in light of the fact that we 9 got an instruction on this or an order on this, 10 we don't understand why Microsoft continues to 11 violate it. But we think they have, and we'd 12 like to explain why to Your Honor. 13 THE COURT: What is the title of this 14 motion? 15 MR. HOLLEY: Well, there is no motion, 16 Your Honor, and that's my point. 17 MR. WILLIAMS: There is a motion, Your 18 Honor. 19 MR. HOLLEY: That's my point. 20 MR. WILLIAMS: There is a motion. 21 MR. HOLLEY: Excuse me, Mr. Williams. 22 MR. WILLIAMS: I'm just correcting 23 your misstatement, sir. 24 The motion is entitled Plaintiffs' 25 motion for a corrective instruction. 4777 1 MR. HOLLEY: That was argued yesterday 2 afternoon and denied, Your Honor. 3 How many times are the Plaintiffs 4 going to make the same motion seriatim, over 5 and over and over again? 6 And the other problem, Your Honor, is 7 that this strategy, which is a strategy, is 8 working. 9 We need to know what Mr. Tulchin is 10 entitled to say or not say in his opening 11 statement. We need to know what deposition 12 excerpts we can play. This is not fair. 13 If they had these issues, they should 14 have raised them in a timely fashion. 15 MR. HAGSTROM: Your Honor, they were 16 raised back when the motions in limine were 17 filed. Your Honor granted our motion in limine 18 barring this type of statements in the case. 19 MR. HOLLEY: That is -- 20 MR. HAGSTROM: And as a result of 21 that, in our opening statement, we did not 22 address these issues. 23 We relied upon that order precluding 24 Microsoft from making these very arguments 25 about everybody's doing it with regard to per 4778 1 processor license, vaporware, FUD. 2 So I don't want to hear Mr. Holley 3 come in here and suggest that we're rearguing. 4 He and Mr. Tulchin are violating the order. 5 It was raised at the end of the day 6 yesterday momentarily. Your Honor asked for 7 further submissions on it, and we are making 8 that further submission. 9 The case law is quite clear that a 10 defense of everybody is doing it is absolutely 11 inappropriate as a matter of law. 12 MR. HOLLEY: That's not our defense, 13 Your Honor. 14 And with respect -- and Mr. Hagstrom 15 can use all the emphatic tone he wants. The 16 Plaintiffs asked in every set of preliminary 17 jury instructions that they submitted for the 18 following sentence, Conduct that might 19 otherwise comply with the antitrust laws may be 20 impermissibly exclusionary when done by a 21 monopolist. 22 The Court declined to put that 23 sentence in the preliminary jury instructions. 24 And in their objections and exceptions 25 to the preliminary jury instructions, the 4779 1 Plaintiffs say that the instruction fails to 2 instruct the jury that conduct which might 3 otherwise not be anticompetitive may become so 4 when engaged in by a monopolist. 5 They can take that issue up with the 6 Iowa Supreme Court if and when we get there. 7 But it isn't appropriate to continue 8 to raise this issue over and over and over 9 again. 10 Now, there was a motion in limine 11 which was granted in part and denied in part. 12 They want to make it sound like it was 13 granted in full. It was not. 14 And as the Court pointed out 15 yesterday, the order on that motion in limine 16 is very clear. What it says is that Microsoft 17 can't refer to other people's illegal behavior 18 as some effort to justify its illegal conduct. 19 We're not doing that, Your Honor. 20 We're not. 21 Instruction Number 8 asks the jury to 22 determine whether Microsoft's conduct is 23 consistent with competition on the merits and 24 whether it makes business sense, apart from its 25 adverse affect on competitors. 4780 1 How is the jury to make that 2 determination unless they know what is standard 3 in the business world? 4 And I'm not making this up. There are 5 numerous cases that we cite in our papers that 6 make exactly this point. 7 For example, in the IBM against Telex 8 case -- just bear with me one moment. 9 MR. WILLIAMS: Your Honor, just a 10 point of order here. We have brought a motion. 11 -- apparently, now, we are arguing the motion. 12 And my understanding of the practice 13 in this court is that the movant goes first. 14 I'd like an opportunity to present my 15 argument since we are now getting into 16 apparently the very thing that Mr. Holley says 17 we shouldn't be arguing. 18 MR. HOLLEY: Your Honor, I have a 19 procedural objection. 20 I object to their ability to obstruct 21 our opening argument by raising issues and 22 demanding that the Court address them instead 23 of addressing the issues which are important to 24 whether or not we can play things in the 25 opening tomorrow. 4781 1 They can raise this issue on appeal. 2 It's well preserved. 3 But what they shouldn't be allowed to 4 do is demand, as they are doing now, that the 5 Court put aside the evidentiary issues which 6 are important to us and take up the time 7 between now and 4:30 and between 8:00 and 8:30 8 tomorrow morning to do what they want to do. 9 They don't get to determine what the 10 Court spends its time on. 11 We should deal with the issues which 12 are teed up and ready to go, not a bunch of 13 motions that were tossed at us this afternoon. 14 Why is that fair? 15 MR. WILLIAMS: Your Honor, that is 16 another misstatement by opposing counsel. 17 This motion was served on opposing 18 counsel this morning. He knows that. 19 Your Honor, this is teed up. And I 20 find it very curious that yesterday we heard 21 from Mr. Holley the accusation that we were 22 contorting one of this Court's order when in 23 recounting for Your Honor the language of the 24 order at issue now, he leaves out the sentence 25 that we are asking you to enforce, which is a 4782 1 defense of everybody is doing it will not be 2 allowed. 3 That's the issue, Your Honor. They 4 are putting on evidence that goes exactly to 5 that defense, specifically to it. 6 And we are prejudiced, as my colleague 7 pointed out, because we relied on that and we 8 relied on Your Honor's order. And we expected 9 Microsoft to respect that order and to obey it, 10 and they have not. 11 And we didn't, therefore, address 12 these issues that they're raising about other 13 companies, companies without monopoly power, 14 many of them even without market power, 15 engaging in fear, uncertainty, and doubt, 16 engaging in vaporware and doing other conduct 17 that doesn't have anticompetitive effect and 18 isn't illegal because they aren't monopolists. 19 But, Your Honor, when a monopolist 20 does it, it is different. And the cases say 21 that, and even some of their cases say that, 22 Your Honor. 23 And if I'm given an opportunity to 24 present my argument, which I believe is 25 perfectly proper procedurally to do because it 4783 1 goes right to the opening, right to statements 2 that Mr. Tulchin has been making, statements 3 that we are prejudiced by. 4 So, again, Your Honor, obviously you 5 conduct your courtroom how you see fit. You 6 order these issues how you see fit. I'm 7 stating Plaintiffs' position as to why this 8 needs to be put at a very high priority. 9 MR. HOLLEY: Your Honor, I don't mean 10 to -- I don't want to take up the Court's 11 valuable time engaged in this fight, but 12 Mr. Williams has parachuted himself back into 13 this proceeding. 14 He was not here, I will observe, 15 during all of the many, many arguments in which 16 Mr. Hagstrom and I debated this issue about 17 whether the behavior of a monopolist is 18 different. 19 And as I just pointed out, and as he 20 did not respond to, we had this debate. 21 They've taken an exception to the Court's 22 instructions on this point. 23 I know they don't like it, but that 24 doesn't entitle them to demand that this issue 25 be resolved right now, especially when there 4784 1 are other matters which Mr. Tuggy and 2 Mr. Cashman or Mr. Gralewski are prepared to 3 argue and that we need resolved before tomorrow 4 morning because Mr. Tulchin needs to know what 5 he can say in his opening argument. 6 MR. WILLIAMS: Well, it's obvious what 7 Mr. Holley is trying to accomplish now, and 8 that's a fait accompli. 9 He wants -- because of this procedural 10 obstacle that he is setting up, he wants it to 11 be the case that Mr. Tulchin continue saying 12 these things, things that obviously violate the 13 order and get a fait accompli. 14 And then we're left to go until April 15 or May when the trial is over and there's 16 closing argument to respond and explain to the 17 jury why it is that what they're talking about 18 is irrelevant. 19 Again, Your Honor, he not only omits 20 any reference to the sentence that I read to 21 Your Honor, but, Your Honor, if you were to 22 take their interpretation of this order the way 23 they are casting it, which is that it's limited 24 merely to a legal anticompetitive conduct, that 25 would mean that the only conduct we could -- or 4785 1 that would be excluded is conduct that 2 Microsoft would say here's some illegal 3 conduct. We did the same thing, but it's okay 4 because they did it too. 5 And, Your Honor, that's just 6 ridiculous. They would never make that 7 argument. They would never hold up another 8 company's product to be illegal and then say we 9 did the same thing, but it's okay. 10 If they did make that argument, we 11 certainly wouldn't object to it. We wouldn't 12 seek to exclude it. 13 So, Your Honor, what they are 14 advocating here and what they are trying to 15 spin out of this order is a completely 16 toothless or, I may say, edentulous standard 17 that, in fact, Your Honor, I believe or I 18 surmise acknowledged that by adding the 19 sentence a defense of everybody else is doing 20 it will not be allowed. 21 The mere fact that we asked for a 22 different sentence that didn't make it into 23 this order doesn't mean that -- it doesn't mean 24 what we say that it means and what that 25 sentence obviously means. 4786 1 We relied upon it. They are violating 2 it, and that's why we need to get this issue 3 resolved, Your Honor. 4 MR. HOLLEY: Your Honor, just I think 5 the sort of stake in the heart of this argument 6 from Mr. Williams is the example of the beta. 7 Novell stole the beta for Windows 3.1 8 from Microsoft. They stole it. 9 Now, I appreciate we're going to abide 10 by the Court's order that we're not telling 11 this jury that they stole it. 12 But there is, obviously, a distinction 13 between conduct that is illegal and conduct 14 that is used routinely by people in the 15 business. 16 And I repeat my argument, and I note 17 that Mr. Williams has not said one word to 18 respond to it, the Court Instruction Number 8 19 has told the jury that what it needs to 20 determine, and the Court has already said this 21 is an often difficult distinction to draw, 22 which I think we can all appreciate, needs to 23 distinguish between aggressively 24 pro-competitive conduct on the one hand and 25 anticompetitive conduct on the other. 4787 1 And what the Court's instruction tells 2 the jury that it needs to think about is 3 whether the conduct is consistent with 4 competition on the merits. 5 And the second one is whether it 6 provides benefits to consumers, but I'm not 7 sure that's relevant for this purpose. 8 And the third issue, does the conduct 9 make good business sense absent whatever 10 adverse effect it has on competitors. 11 Well, as the DC circuit said very, 12 very clearly in U.S. v. Microsoft in 13 determining whether something is 14 anticompetitive, in that particular instance 15 bundling new functionality into an operating 16 system, you need to look at what other people 17 in the marketplace are doing. 18 And as the DC circuit in its en banc 19 decision said, firms without market power will 20 bundle two goods only when the cost savings 21 from joint sale outweigh the value consumers 22 place on separate choice. 23 So bundling by all competitive firms 24 implies strong net efficiencies. 25 That is exactly -- and, Your Honor, 4788 1 that's at 253 F. 3rd, page 88. 2 This is exactly what the Eighth 3 Circuit was talking about in the Trace X 4 Chemical case, Your Honor, that ordinary 5 business practices typical of a competitive 6 market are not anticompetitive. 7 How are these 12 jurors to determine 8 whether what Microsoft did is an ordinary 9 business practice, typical of a competitive 10 market, unless they find out what is market? 11 What do people do in the software market? 12 In the more recent case of Concord 13 Boat against Brunswick Corporation, also an 14 Eighth Circuit case. And this is 207 F. 3rd at 15 1062. 16 The Plaintiffs were claiming that the 17 Defendant engaged in price cutting tactics and 18 that those were anticompetitive. 19 And the Court said, no, they're not. 20 And the reason why because, quote, competitors 21 also cut prices in order to attract additional 22 business confirming that such a practice was a 23 normal competitive tool, closed quote. 24 We need evidence in the record from 25 which this jury can determine whether things 4789 1 are ordinary business practices, as all per 2 processor licensing was, or, instead, something 3 that is anticompetitive. 4 The Plaintiffs want to deny the jury 5 any context in which it can make this decision, 6 but it can't be made in a vacuum. 7 Now, I obviously understand why the 8 Plaintiffs hate all of this evidence because it 9 establishes what is ordinary business practice. 10 But there is no collateral estoppel 11 effect from the government case on vaporware, 12 FUD, per processor licensing, beta blacklists, 13 or technical incompatibilities. Those issues 14 are not addressed in the government case. 15 It is the Plaintiffs' obligation to 16 prove with no assistance from the government 17 case that these acts are anticompetitive. 18 They want to label them illegal and 19 therefore bring them within the coverage of the 20 Court's in limine ruling, but that's just 21 sophistry. 22 They have to prove that they're 23 illegal. There is no determination from any 24 court that they're illegal. No one has ever 25 held that. 4790 1 So they would bootstrap the entire 2 inquiry by saying we think these things are 3 illegal and, therefore, you can't prove that 4 they're not. That sounds a lot like collateral 5 estoppel to me, Your Honor. 6 But where do they get it? They have 7 to prove it. And they have to prove it 8 consistent with the Court's preliminary 9 Instruction Number 8, which tells the jury that 10 they get to compare what Microsoft did against 11 competition on the merits and things that make 12 business sense. 13 Thank you, Your Honor. 14 MR. WILLIAMS: Well, Your Honor, 15 apparently we are arguing now. So I'm just 16 going to get into my argument to respond to 17 counsel's statements. 18 Your Honor, as you know, there have 19 been several remarks made by Mr. Tulchin with 20 respect to vaporware and FUD and its 21 restrictive or exclusionary licensing practices 22 by companies other than Microsoft, companies 23 that do not have monopoly power or even market 24 power. 25 And the authorities are clear, Your 4791 1 Honor -- they couldn't be clearer -- that that 2 does make a difference. 3 Now, first of all, Your Honor, they 4 say that in one of their -- in one part of 5 their submission they try to do a little bit of 6 gotcha, and they say that we somehow conceded 7 that they can talk about other companies 8 engaging in these kinds of tactics because of 9 some comments that were made with respect to it 10 not being illegal to be tough, it not being 11 illegal to be ruthless. 12 But, Your Honor, if you look at Tab G, 13 which is appended to Microsoft's motion or to 14 Microsoft's brief, it's clear that in making 15 that comment to the jury, counsel for the 16 Plaintiffs preceded it with the statement the 17 rules also say that monopolies cannot abuse 18 their power. 19 And, furthermore, down at the end of 20 the page, right after the language that 21 Microsoft loves so much to cite, she said it 22 isn't illegal to become or remain a monopoly as 23 long as you don't break the rules to do that. 24 Microsoft did break the rules. 25 So there's absolutely no question, 4792 1 Your Honor, that this has not been conceded at 2 all. 3 And, furthermore, Your Honor, if you 4 look at the cases that we submitted -- and I'm 5 not going to go through all of them, but 6 there's a couple of them I would like to point 7 out to Your Honor. 8 The first one is United States v. 9 Dentsply, I believe is how you pronounce it. 10 It's among the submissions that we made to Your 11 Honor. And I'm going to refer to the printed 12 -- the printer page, page 6. 13 THE COURT: Did you give that to me in 14 a bundle? 15 MR. WILLIAMS: Yes, Your Honor. 16 That's in a bundle. They are alphabetically 17 arranged. I'm sorry. They are not tabbed. 18 THE COURT: I seem to have misplaced 19 the bundle. Was it a title? 20 MR. WILLIAMS: No, it was just a 21 series of cases. 22 THE COURT: Oh, I've got it right 23 here. I've got it. Thank you. 24 MR. WILLIAMS: It's on page 5. 25 THE COURT: Page 5 of your brief? 4793 1 MR. WILLIAMS: I'm sorry, Your Honor. 2 I was speaking to opposing counsel. Apparently 3 they didn't have the page referenced to Your 4 Honor's order on the motion in limine. 5 No, Your Honor, I was referring you to 6 page 6. It's in the upper right-hand corner of 7 the page. I'm just going to refer to that 8 because it's just easier to find in the 9 Dentsply International case. 10 THE COURT: Okay. 11 MR. WILLIAMS: All right. And in 12 here, Your Honor, I highlighted it for 13 everyone. There's language -- I believe I did, 14 maybe I didn't. If not, I apologize. 15 But I direct you to the left-hand 16 column, the first paragraph. And in the middle 17 of that paragraph, it says that behavior that 18 otherwise might comply with antitrust law may 19 be impermissibly exclusionary when practiced by 20 a monopolist. 21 And then it refers to the LePage's 22 opinion. And it says a monopolist is not free 23 to take certain actions that accompany 24 anticompetitive or even oligopolistic market 25 may make because there's no market constraint 4794 1 on a monopolist's behavior. 2 And that, Your Honor, is a large part 3 of the distinction between this case and the 4 cases that they cite to Your Honor. 5 Many of the cases, Your Honor, refer 6 to defendants where monopoly power had not yet 7 been established. 8 I'm going to go through those, Your 9 Honor, because I think it's very important to 10 understand that. And I think actually 11 examining the cases that the Defendant cites 12 help you flesh that out and help you decide 13 this issue and decide whether or not this 14 conduct or evidence of this conduct by other 15 companies should be excluded. 16 The question, Your Honor, really is 17 when is lawful behavior to be excluded when 18 it's done by a monopolist? 19 Some of the things the courts look at 20 are things like -- or, otherwise, lawful 21 behavior. 22 Let me just give an example, Your 23 Honor, before I get into that. 24 If you and I were to agree that we're 25 going to fix the prices of highlighter pens, 4795 1 highlighter pens at $5, it's not 2 anticompetitive. It's not an antitrust 3 violation because, as far as I know, you don't 4 have market power and neither do I. So it 5 doesn't really matter. 6 But, Your Honor, if between the two of 7 us we had 90 percent of the market share for 8 highlighter pens here in the courthouse and if 9 that were a relevant market, then, this 10 otherwise non- or nonillegal behavior or legal 11 behavior would be illegal because of that. 12 And that's what's important in this 13 case, Your Honor. 14 Another distinction is whether or not 15 there are barriers to entry. Even if a company 16 has a monopoly -- and you'll see this in the 17 case -- even if they have a monopoly, the 18 conduct that they engage in may not be illegal 19 because there are not barriers to entry. 20 Another example might be if there are 21 pro-competitive justifications. You just heard 22 Mr. Holley talk about a couple of their 23 favorite cases which have to do with price 24 cutting. 25 These are predatory pricing cases, 4796 1 Your Honor. Probably the most difficult kind 2 of antitrust case to prove because what you 3 have is a defendant -- a company, defendant in 4 the case, who has been cutting prices and 5 cutting prices and cutting prices, all of which 6 are pro-competitive acts. 7 And they only become anticompetitive 8 when they cross the line into predatory 9 pricing, where they price below their variable 10 cost. 11 But, actually, the closer they get to 12 the line, the more competitive it is. So the 13 courts look at scads of those kinds of cases 14 and they're very difficult to prove. 15 And if you go through those cases -- 16 and we will in a moment -- you will see that, 17 that a lot of the cases have to do with that. 18 So on the flipside, when is this 19 conduct unlawful when done by a monopolist? 20 Well, one example would be if they've 21 already been determined to have an unlawful 22 monopoly during the time in question. That's 23 certainly a relevant factor. 24 And, Your Honor, yesterday Mr. Tulchin 25 talked about Windows 95 and talked about a FUD 4797 1 campaign that IBM engaged in. 2 And then he said that when Mr. Ballmer 3 went around and essentially retaliated against 4 IBM with Microsoft's own FUD campaign, that 5 they were just doing what had been done to 6 them. 7 So what's wrong with that? Well, the 8 difference, Your Honor, is during that time 9 period in question, it's already been 10 established that Microsoft had an illegal 11 monopoly, that they were illegally monopolizing 12 through anticompetitive conduct the operating 13 systems market for Intel-compatible computers. 14 So it is relevant, Your Honor. 15 Another difference, obviously, would 16 be a barrier to entry. And it's 17 well-established that there were barriers to 18 entry in this case. 19 And then, finally, pro-competitive 20 justifications. 21 If you look at the conduct that's at 22 issue in the cases that they cite, oftentimes 23 it's conduct that does have very obvious 24 pro-competitive justifications. 25 Not so here. How is FUD 4798 1 pro-competitive? How is something -- fear, 2 uncertainty, and doubt about your competitor's 3 product, essentially manipulating the 4 information out there, manipulating consumers 5 into feeling fear, uncertainty, and doubt about 6 a product, a competitor's product. 7 How is that pro-competitive, Your 8 Honor? How does that help consumers make an 9 informed decision about what products to buy or 10 what about vaporware? 11 Let's talk about vaporware. How is 12 that pro-competitive, Your Honor? Essentially 13 preannouncing the release of software that you 14 know you're not going to be releasing far, far 15 into the future and the only reason you do that 16 is because you want to kill the launch of one 17 of your competitor's products. 18 How is that pro-competitive? How does 19 that help consumers? How does that stimulate 20 innovation? It doesn't, Your Honor. 21 And that's the point is that when you 22 look at the conduct that was at issue like 23 price cutting and other conduct like that, you 24 do have to look at whether it's pro-competitive 25 or not. That's what we're saying. 4799 1 And we're saying vaporware, FUD, 2 restrictive exclusionary licenses for OEMs is 3 not pro-competitive. And that's a big part of 4 the issue here. 5 I do want to get to the cases they 6 cite, Your Honor, because I find them actually 7 very interesting. And, actually, you will find 8 I believe that they help Plaintiffs far more 9 than they help the Defendant. 10 The first case is one that Mr. Holley 11 mentioned. That's the Trace X Chemical case, 12 Your Honor. And I would ask you if you have it 13 available, to get the binder of cases that 14 Microsoft provided. 15 This particular case is at Tab 7. 16 I'll give you a moment to get to that 17 case, as well as opposing counsel. 18 THE COURT: Okay. 19 MR. WILLIAMS: All right. I'm going 20 to -- throughout this argument, Your Honor, I'm 21 going to refer to the page numbers in the upper 22 right-hand corners. I just find them easier to 23 focus on. 24 Now here, Your Honor, we have a case 25 where if you would turn to page 7. 4800 1 THE COURT: The highlighted portion? 2 MR. WILLIAMS: It says to be labeled 3 -- the part that I'm going to focus on, Your 4 Honor, is on the right-hand column, the 5 paragraph that begins acts, which would 6 constitute. 7 THE COURT: Okay. 8 MR. WILLIAMS: And at the end of that 9 paragraph it says, to be labeled 10 anticompetitive, the conduct involved must be 11 such that its anticipated benefits were 12 dependent upon its tendency to discipline or 13 eliminate competition and thereby enhance the 14 firm's long-term ability to reap the benefits 15 of monopoly power. 16 Now, Your Honor, it's certainly 17 established in this case with respect to the OS 18 market that they had monopoly power and, in 19 fact, had a monopoly. 20 I believe, Your Honor, the evidence is 21 clear -- and I don't think Microsoft disputes 22 that they had market power, if not monopoly 23 power, in the OS systems prior to that time in 24 that market. 25 And so what you need to look at is 4801 1 whether what they're doing would be 2 pro-competitive and that it would have benefits 3 to competition as opposed to whether it would 4 tip the other way and be more likely to 5 discipline or eliminate competition and thereby 6 enhance the firm's monopoly power in that 7 market. 8 And so that's what we're asking you to 9 look at, Your Honor, is thinking about FUD and 10 vaporware and restrictive licensing. 11 Is that the sort of legitimate 12 business conduct such as price cutting, which 13 Mr. Holley mentioned, or is that more like 14 conduct that actually would hurt competition, 15 would not be beneficial to consumers because it 16 would manipulate them into perhaps purchasing 17 something that isn't in their best interest to 18 have or would otherwise restrict the free 19 flowing of information and innovation and 20 thereby protect Microsoft's monopoly? 21 And in that particular case, Your 22 Honor, the Trace X case, the conduct at issue 23 there was the defendant's refusal to extend 24 credit to a competitor. 25 Well, there's lots of reasons why a 4802 1 firm wouldn't do that, Your Honor. 2 And, in fact, those reasons were set 3 forth in the evidence that apparently the firm 4 in question, the plaintiff, had gone into 5 bankruptcy. 6 There are all sorts of legitimate 7 reasons why they wouldn't do that. 8 And so its long-term effect wouldn't 9 be the sort of thing that would hurt 10 competition. And there were valid reasons for 11 doing it. 12 Here we're talking about dirty tricks. 13 That's really what we are talking about, dirty 14 tricks. Are dirty tricks the kind of thing 15 that it's perfectly all right for a monopolist 16 to do? 17 Notwithstanding the fact that firms 18 that aren't monopolists do it because we're not 19 talking about their conduct and whether it's 20 anticompetitive. 21 I'll move on, Your Honor, to the 22 Brunswick case. This one is at Tab 1. 23 In the Brunswick case, Your Honor, I 24 would like to direct your attention to page 21. 25 And here, Your Honor, I mentioned 4803 1 before the distinction between this case and a 2 predatory pricing case. 3 Of course, we are not alleging that 4 they monopolize the market through predatory 5 pricing, but here, Your Honor, if you look at 6 headnote 30 there in the right-hand side, it 7 says the supreme court. And Brunswick was a 8 predatory pricing case. They were alleging 9 monopolization through predatory pricing. 10 And it says there the Supreme Court 11 has urged great caution and a skeptical eye 12 when dealing with unfair pricing claims. 13 THE COURT: I'm sorry. What page are 14 you on? 15 MR. WILLIAMS: I'm sorry. I'm on page 16 21 at Tab 1. 17 THE COURT: Okay. Thank you. 18 What paragraph? 19 MR. WILLIAMS: It's Number 30 there. 20 That's the headnote. 21 THE COURT: I got it. 22 MR. WILLIAMS: Reading on -- there's a 23 cite there and then reading on, this is because 24 low prices benefit consumers regardless of how 25 those prices are set. 4804 1 And so long as they are above 2 predatory levels, they do not threaten 3 competition. Hence, they cannot give rise to 4 antitrust injury. 5 And this is what I was talking about 6 before, Your Honor, is apparently in this case 7 the evidence was that the defendant had been 8 cutting prices and the plaintiff complained 9 about that and said it was predatory and the 10 evidence showed that it wasn't. 11 And the evidence of other firms 12 cutting prices was important in that case, Your 13 Honor, because those kinds of activities do 14 have pro-competitive benefits. 15 Obviously, cutting prices is 16 competitive or is pro-competitive and is 17 beneficial to consumers. 18 And if you look at page 22, the very 19 next page, the Court talks about that. It says 20 in the first full paragraph, because cutting 21 prices in order to increase business often is 22 the very essence of competition, which 23 antitrust laws were designed to encourage. 24 It is beyond the practical ability of 25 a judicial tribunal to control above cost 4805 1 discounting without courting intolerable risks 2 of chilling legitimate price cutting. 3 Now, Your Honor, what is legitimate 4 about FUD, vaporware, and restricting licensing 5 to OEMs, exclusionary conduct, Your Honor. 6 That's what this was. 7 The fact that other firms that didn't 8 have monopoly power or even market power tried 9 it doesn't make any difference. 10 I think -- Your Honor, I have two 11 daughters. They are two years apart. And when 12 they were 5 and 3, the 3-year-old might take a 13 swing at the 5-year-old and the 5-year-old 14 would hit her back and knock her down, and her 15 excuse was, well, she did it to me. 16 But it's a little different, Your 17 Honor. I mean, one was twice as big as the 18 other. 19 And I know that's a rather simplistic 20 analogy to make, but that's really what the law 21 -- the idea that the laws are trying to capture 22 here. 23 The next case, Your Honor, is the 24 Stearns Airport Equipment case. And, here 25 again, you are going to find that there are 4806 1 distinctions. This is at Tab 5 of the binder. 2 I'll direct your attention on this one 3 to page 5. 4 I'm sorry, page 10 in the bottom 5 right-hand corner. 6 I won't read the entire point, Your 7 Honor. Obviously, the Defendant cites this 8 because they like the result of the case. 9 But in reasoning through this, the 10 Court gives some examples of conduct that might 11 be exclusionary or anticompetitive, and it 12 refers to bribery or threats. 13 Bribery or threats doesn't mean you 14 have an antitrust claim. There's something 15 wrong with them. 16 Threats, is that illegal? It may or 17 may not be, I suppose, depending on how the 18 threat is made. 19 Is it anticompetitive? No, not if you 20 don't have market power or monopoly power. But 21 it is the kind of conduct that is exclusionary 22 and is anticompetitive if you have monopoly 23 power. And that's the problem, Your Honor, and 24 that's the distinction. 25 Microsoft had monopoly power. And 4807 1 when it did these things, it did them in order 2 to protect that power. 3 And that's the problem. And that's 4 the distinction. 5 It says -- it goes on at the top of 6 page 11, several cases have found violations of 7 Section 2 when a monopolist engages in what 8 appears to be normal competitive behavior, but 9 has manipulated representatives of the consumer 10 to the point that the integrity of the 11 decisional process has been violated. 12 Vaporware, FUD. This is manipulating 13 the decisional process. Restricting OEMs, 14 influentials who recommend products through 15 obfuscating the marketplace and sewing seeds of 16 confusion and fear and uncertainty and doubt. 17 This is the kind of thing they are talking 18 about. 19 And you ask, Your Honor -- and, again, 20 I pointed out. What is this case more like? 21 Is it more like that? Is it more like 22 threatening manipulative behavior? Exerting 23 improper influence in the market? Is it like 24 that? We submit that it is. 25 We submit to you that it's certainly 4808 1 more like that than it is like price cutting, 2 which are the kinds of cases that Microsoft is 3 relying upon. 4 Next is the Telex Corp. case. This is 5 at Tab 6, the very next tab, another predatory 6 pricing case. 7 I won't belabor the point, Your Honor, 8 but I do want to point to one thing. 9 You go to page 249. 10 Here's an example of a case where it 11 was not at all clear that IBM had monopoly 12 power. That's in the middle of the big 13 headnote 6 there on the left-hand side about 14 three-quarters of the way down. 15 It says, From these facts it must be 16 concluded that IBM did not use monopoly power 17 even if it assumed that it possessed such 18 power. So, apparently, it was not established. 19 But, Your Honor, I want to direct your 20 attention to the quote from the United States 21 v. Griffin case, a Supreme Court case that 22 cited in that opinion -- and it says there in 23 the bottom, the left-hand side corner, the 24 antitrust laws are as much violated by the 25 prevention of competition as by its 4809 1 destruction. 2 It follows a fortiori that the use of 3 monopoly power however lawfully acquired to 4 foreclose competition to gain a competitive 5 advantage to destroy a competitor is unlawful. 6 And in that case, Your Honor, again, 7 in the Telex -- in the Telex Corp. case, it was 8 predatory pricing. And the Court found that it 9 didn't tip over to the anticompetitive side. 10 Now, the next case they rely on is 11 United States v. Microsoft. And, as you can 12 see, they relied very heavily on it in their 13 brief. 14 And Mr. Holley mentioned it in his 15 arguments as well. So let's go to that one. 16 That's at Tab 10. Because there are some very 17 important points I want to make about that, 18 that case. 19 Obviously, a significant case. 20 In that case, Your Honor, the section 21 that they are citing has to do with the 22 bundling issue and where the Court looked at 23 whether other firms bundled products. 24 The reason the Court got into that, 25 Your Honor, first of all, is because what it 4810 1 was trying to determine was whether the 2 district court applied the proper standard in 3 reviewing Microsoft's conduct. 4 And that was whether to apply a per se 5 standard or a rule of reason standard. And the 6 district court applied per se standard. The 7 Court of Appeals said, well, that was improper. 8 And to support that reasoning and that 9 analysis, it looked at what other firms were 10 doing. 11 And the reason it did that is because 12 it said there might be pro-competitive reasons 13 for why the two would be bundled together. 14 Okay. 15 The other thing that it said, and the 16 other thing that's important here is this was a 17 tying claim. Tying between Windows and 18 Internet Explorer. 19 And we are not making any such claim, 20 Your Honor, so we find it to be not relevant at 21 all here because the question here, of course, 22 is whether Windows was monopolized as well as 23 the applications that are at issue here. 24 And, again, I point Your Honor to the 25 point that FUD, vaporware, and exclusionary OEM 4811 1 licensing is not in any way pro-competitive. 2 The next case, Your Honor, is the 3 Syufy case, S-y-u-f-y. It's at Tab 10. 4 This is an interesting case, Your 5 Honor, and it's going to require us to go back 6 to the Microsoft case because of what Microsoft 7 has done in quoting this case. 8 I'd like to direct you, first of all, 9 Your Honor, to page 13. 10 Here at the upper right-hand corner of 11 page 13 there's some language that they cite. 12 Your Honor, the language that they 13 cite in their brief -- I don't know if you have 14 that in front of you -- but it's page 8 of 15 their brief. 16 And here's how they quote the 17 language. The language that they focus on is 18 in the upper right-hand corner. 19 It says -- it starts with, If a 20 dominant supplier acts consistent with a 21 competitive market out of fear perhaps that 22 potential competitors are ready and able to 23 step in, the purpose of the antitrust laws is 24 amply served. 25 Well, what Microsoft does in quoting 4812 1 that is omits the phrase out of fear perhaps 2 that potential competitors are ready and able 3 to step in. 4 And the reason, of course, is that in 5 this case potential competitors were not able 6 and ready to step in. 7 That isn't only borne out by the 8 evidence. It's in the findings of fact and 9 it's in the Court of Appeals' opinion that we 10 just discussed a moment ago that Microsoft 11 relies upon so heavily. 12 And I want to go back to that, Your 13 Honor, because it has some important things to 14 say that directly affect their citation to you 15 of this case. 16 If you just keep your thumb there on 17 page 13 and go back to the previous tab, which 18 is the Microsoft case, and go to page 367. 19 And I'd like to direct your attention 20 to headnote 56 there on the left-hand side. 21 It says Microsoft next argues that the 22 applications barrier to entry is not an entry 23 barrier at all, but a reflection of Windows' 24 popularity. 25 That was their argument in the 4813 1 government case to the Court of Appeals that, 2 essentially, we're so successful and this 3 applications barrier to entry exists because 4 our products are so popular. 5 Then if you go down, you can see how 6 that comes out for the Court of Appeals. 7 Because the applications barrier to 8 entry protects a dominant operating system 9 irrespective of quality, it gives Microsoft 10 power to stave off even superior new rivals. 11 The barrier is, thus, a characteristic 12 of the operating system market, not of 13 Microsoft's popularity or, as asserted by a 14 Microsoft witness, the company's efficiency. 15 So here we have not only there being a 16 barrier to entry, but this language from the 17 Court of Appeals debunks the notion that 18 Microsoft's popularity had anything at all to 19 do with that applications barrier to entry. 20 Now, I asked you to keep your thumb on 21 page 13. And this is the reason why. 22 If you go to the left-hand column of 23 the case, and this is back to -- I keep 24 forgetting how to pronounce the name, the Syufy 25 case. 4814 1 S-y-u-f-y for the court reporter. 2 If you go to the left-hand column 3 there, in the first full paragraph, the 4 government's claims are described. 5 It says there in the second sentence, 6 the government is not claiming that Syufy 7 monopolized the market by being too efficient, 8 but that Syufy's effectiveness as a competitor 9 creates a structural barrier to entry rendering 10 illicit Syufy's acquisition of its competitor's 11 stream. 12 So there the government was making the 13 argument that Syufy was -- that the barriers to 14 entry existed because Syufy was effective as a 15 competitor. 16 The very notion that the Court of 17 Appeals debunked in U.S. v. Microsoft. That's 18 what I wanted to point out to Your Honor. 19 That's yet another distinction. 20 I do want to go back, Your Honor, 21 because I believe I may have misspoke when I 22 said we are not making a time claim. 23 What I meant to say by that is that we 24 are not saying that FUD and vaporware had 25 anything to do with time. So I apologize if I 4815 1 misspoke on that point. 2 Moving on, Your Honor, to the next 3 case that they cite -- and this is the United 4 States Football League case. This is at Tab 8. 5 And it's page 23 that I'd like to focus on. 6 In the bottom right-hand corner, they 7 cite some language that they like. If you look 8 at the bullet point in their brief, that 9 language is cited. 10 I want to focus Your Honor's attention 11 on some other language that's right next to the 12 language that they cite, language that they do 13 not cite. 14 And that is if you go to the bottom 15 right-hand corner -- and here the Court is 16 recounting the instruction that was made to the 17 jury. 18 And the Court says, in the middle of 19 that paragraph, under the antitrust laws, a 20 monopolist is encouraged to compete vigorously 21 with its competitors and to remain responsive 22 to the needs and demands of its customers. 23 So, again, Your Honor, I point out 24 that what we're talking about here, the 25 specific conduct that's at issue was not 4816 1 responsive to the needs and demands of its 2 customers. 3 Why would customers -- consumers 4 seeking information about the best products to 5 buy want to be exposed to fear, uncertainty, 6 and doubt? Why would they want to be misled by 7 vaporware, misled into thinking that a product 8 was going to be coming out soon when, in fact, 9 it was not. 10 That's the proper inquiry. 11 And, then, going on in that same 12 section, Your Honor, it says, in addition, 13 there's nothing in the antitrust laws that 14 requires a monopolist to act against its own 15 self-interest so long as the monopolist does 16 not at the same time exercise its power to 17 maintain that power. 18 And that's what we're talking about, 19 Your Honor. That's what they were doing. 20 Something that monopolists cannot do, that a 21 company that is not a monopolist could do and 22 not run afoul of the antitrust laws. 23 The next case is Olympia Equipment 24 Leasing, Your Honor, and this is a very 25 interesting case because of the conduct that 4817 1 was at issue. 2 Now, if you go to page 6, you can see 3 there's a huge block that they want you to 4 read. 5 THE COURT: What tab? 6 MR. WILLIAMS: I'm sorry, Your Honor, 7 this is Tab 4. 8 THE COURT: Okay. 9 MR. WILLIAMS: Okay. Tab 4. If you 10 look at page 6, there's the block of text that 11 they want you to read. But I want to direct 12 your attention to the previous page, page 5. 13 Because here we get to see what the 14 plaintiff was complaining about in this case. 15 Now, this case had to do with a 16 company -- it was Western Union or Western 17 Telegraph, I believe. And they were selling 18 equipment for telephone terminals. They were 19 selling telephone terminal equipment. 20 And that was the issue, is whether the 21 defendant in that case was engaging in 22 anticompetitive conduct. 23 And if you look at it's headnote 4, 24 and if you look at the second sentence, it says 25 and far from abusing any monopoly power, it may 4818 1 have had by excluding independent providers of 2 terminal equipment from selling to its Telex 3 customers, Western Union encouraged the entry 4 of independent providers. 5 And now it lists the things that 6 Western Union did. It did this by unbundling 7 its Telex prices. 8 What do we have in this case? Well, 9 we have bundling and commingling of code. 10 Commingling at least which was found explicitly 11 by the Court of Appeals, and we have collateral 12 estoppel on it. 13 By shortening its lease terms. What 14 do we have in this case? We have lock-in 15 periods with respect to OEMs by Microsoft. 16 By ceasing to buy additional 17 terminals. In other words, not expanding its 18 presence in the market. 19 Obviously, Microsoft took many steps 20 to do otherwise in this case. 21 By creating a sales commission 22 structure that encouraged its salesmen to push 23 equipment supplied by independent providers. 24 And here we have disincentives that 25 Microsoft implemented against OEMs who dealt 4819 1 with Microsoft's competitors as well as the FUD 2 and the vaporware. 3 And, lastly, again, back to the 4 Western Union case, by putting the names of 5 those providers on a list for its salesmen to 6 show new Telex subscribers. 7 And here we have in contrast Microsoft 8 blacklisting companies that it didn't like and 9 that it wanted to hurt competitively. 10 The Court says in the Western Union 11 case, obviously, none of this conduct violated 12 the antitrust laws. The alleged violation came 13 when having created and nurtured new 14 competition, Western Union stopped helping the 15 new competitors because it found it could not 16 liquidate its terminal inventory as rapidly as 17 it had hoped to be able to do. 18 So what the Plaintiffs were saying in 19 that case was they were helping us and then 20 they stopped, and that's an antitrust 21 violation. 22 Completely unlike anything in this 23 case, Your Honor, where we have affirmative 24 misconduct being committed by Microsoft along 25 the lines of what I described. 4820 1 And in that case, if you read on, it 2 says we are cited to no case where an antitrust 3 violation has been found on such facts. The 4 lack of precedent is not surprising. 5 Well, Your Honor, what's surprising is 6 that Microsoft would cite this case to Your 7 Honor because we think it's completely 8 inapposite and is without precedent and really 9 is limited to its facts notwithstanding 10 Microsoft's heavy reliance on this case as 11 indicated by their huge highlighting of it on 12 the next page, the part that they like. 13 The last case I want to talk about, 14 Your Honor, is the Telex Corp. case, again, in 15 their brief. I've already addressed that one. 16 So what does that leave us? They need 17 to have a couple of things. 18 The basic test for anticompetitive 19 conduct as defense counsel pointed out to you 20 is whether there is any pro-competitive 21 justification, whether it makes business sense 22 apart from its effect on competitors or 23 competition. 24 We submit to you that for FUD, 25 vaporware, exclusionary licensing provisions, 4821 1 that there is none. 2 Certainly, none that is of the same 3 impact as price cutting and the other types of 4 conduct that their cases -- the cases that they 5 relied on -- that they rely on talk about. 6 Your Honor, in considering their 7 argument that the actions of other companies 8 are relevant to whether Microsoft's conduct is 9 anticompetitive, you must consider the fact 10 that Microsoft did have monopoly power 11 throughout the time in question, that Microsoft 12 has already been determined to have illegally 13 monopolized one of the markets, and, again, 14 that the specific acts at issue were 15 manipulative and they were coercive and they 16 were much more like threats and bribery than 17 they were about pro-competitive legitimate 18 business conduct or ending assistance that had 19 been given to one's competitors or refusing to 20 extend credit to a previously bankrupt company. 21 And what we're talking about here are 22 dirty tricks. We're not talking about 23 legitimate business conduct even if other 24 companies without monopoly power engaged in 25 that conduct. 4822 1 Your Honor, this really boils down to 2 relevance. Because these acts of FUD and 3 vaporware are not relevant when committed by 4 other companies. 5 They are not a benchmark for what's 6 legitimate business conduct in these markets, 7 Your Honor. The mere fact that other companies 8 do it does not mean that. 9 Your Honor, we brought a motion to 10 exclude the defense of everybody's doing it. 11 We believe that motion was granted. 12 We got the language -- it wasn't the 13 exact language. We got the language that we 14 thought did the job, that put Microsoft on 15 notice that these kinds of arguments in 16 evidence would not be tolerated. 17 They have decided to read that 18 sentence right out of your order. We believe 19 that that is improper. 20 And the fact that we didn't get 21 another sentence and an instruction that we 22 wanted is irrelevant. It doesn't mean 23 anything. 24 Your Honor, we embrace the part of 25 Instruction 8 that I have referred to asking 4823 1 for evidence of pro- -- or putting the issue as 2 one being of pro-competitive conduct. And we 3 submit to Your Honor that they have not 4 provided it. 5 So where we're at now, Your Honor, is 6 that this order and these concepts have been 7 violated repeatedly by Mr. Tulchin in his 8 argument to the jury. 9 We believe it's prejudicial because we 10 didn't have an opportunity to address it in our 11 opening in reliance on the order. And now 12 we're going to have to wait several months 13 before we can. 14 And so, Your Honor, we do need to have 15 a corrective instruction on this. 16 Your Honor, besides enforcing your 17 order and prohibiting Mr. Tulchin from 18 continuing to make these remarks, we ask you to 19 instruct the jury that it is irrelevant in this 20 case that firms other than Microsoft engaged in 21 FUD, engaged in vaporware, and in the 22 restrictive licensing agreements. 23 We ask that you instruct them that 24 evidence going to those topics, to those 25 tactics by other firms will not be permitted. 4824 1 We ask that you tell them that they 2 should not give any consideration to such 3 evidence or arguments submitted by defense 4 counsel. And that they are to disregard any 5 comments or arguments that have been made by 6 Microsoft's counsel about those tactics. 7 That's all I have, Your Honor. 8 THE COURT: Respond? 9 MR. HOLLEY: Yes, Your Honor. 10 Mr. Williams talked very fast and he 11 talked very long, but he didn't address the 12 principal issue which is before the Court. 13 The order which the Court issued says 14 the Defendant may not produce evidence of other 15 entity's illegal anticompetitive conduct merely 16 to show that the illegal conduct occurred, ala 17 Novell stealing the Windows 3.0 beta, or to 18 justify its own conduct. 19 Such evidence must be relevant to a 20 specific defense or claim that is appropriate. 21 A defense of everybody else is doing it will 22 not be allowed. The Court will consider such 23 offers of evidence on an issue-by-issue basis. 24 What the Plaintiffs are effectively 25 doing, Your Honor, is seeking partial summary 4825 1 judgment on some very important issues in this 2 case. 3 It is for the jury to decide whether 4 providing accurate information about defects in 5 competitors' products is pro-competitive or 6 anticompetitive. And no amount of name calling 7 is going to alter that fact. 8 It is for the jury to decide whether a 9 blacklist where you don't give your 10 confidential intellectual property about 11 products under development to your direct 12 operating system competitors is pro-competitive 13 or anticompetitive. 14 It is for the jury to decide whether 15 preannouncing products so that people who make 16 compatible products have time to get their 17 products into the marketplace is 18 pro-competitive or anticompetitive. 19 It is for the jury to decide whether 20 licensing practices that the evidence will show 21 OEMs liked because they gave them price 22 protection against any change in the cost of an 23 operating system over an extended period of 24 time were pro-competitive or anticompetitive. 25 Now, all of the efforts that 4826 1 Mr. Williams made to distinguish the cases that 2 we cite fall flat. 3 He made a terrible mistake, which he 4 tried to get out of, in distinguishing United 5 States against Microsoft. 6 He said that the case was irrelevant, 7 even though obviously it involves this 8 Defendant. And a finding that this defendant 9 had monopoly power. 10 So, obviously, we're not talking about 11 one of the circumstances where somebody doesn't 12 have monopoly power. 13 They are making a tying claim in this 14 case involving Internet Explorer and Windows. 15 So that distinction goes right out the window. 16 And as the DC circuit said on remand, 17 it directed the district court, quote, if OS 18 vendors without market power also sell their 19 software bundled with a browser, the natural 20 inference is that sale of the items as a bundle 21 serves consumer demand and that unbundled sale 22 would not. For, otherwise, a competitor would 23 profitably offer the two products separately 24 and capture sales of the tying good from 25 vendors that bundle. 4827 1 That is exactly our point. 2 And Mr. Williams did not address the 3 controlling law in this case as articulated by 4 the Court's Instruction Number 8. 5 It was, I guess, a deft attempt at it, 6 but he only read one sentence, one of the three 7 parts of the Court's articulated test. 8 What the Court told the jury that they 9 had to figure out was, In determining -- and 10 I'm reading the last sentence of Instruction 11 Number 8, Your Honor, which is annexed as Tab D 12 to our brief. 13 In determining whether Microsoft's 14 conduct was anticompetitive or whether it was 15 legitimate business conduct, you should 16 determine whether the conduct is consistent 17 with competition on the merits, whether the 18 conduct provides benefits to consumers, and 19 whether the conduct would make business sense 20 apart from any effect it has on excluding 21 competition or harming competitors. 22 It is the Plaintiffs' position, it is 23 their argument, that we failed this test. But 24 we are obviously entitled to put on evidence 25 about this question. 4828 1 It cannot be that having opposed our 2 motions for partial summary judgment on the 3 grounds that there were fact issues that had to 4 be resolved at trial, that the Plaintiffs can 5 now turn around and say that there are no fact 6 issues, that these matters have been decided 7 already. Where have they been decided already? 8 Mr. Williams accurately stated that 9 these issues were not, not covered by United 10 States against Microsoft, the case in which 11 there is collateral estoppel effect applicable 12 to 146 of Judge Jackson's findings. 13 They must prove under the relevant 14 legal standards, which we'll get to when we get 15 to final jury instructions, that what they call 16 FUD and they call vaporware and they call 17 exclusionary licensing practices were, in fact, 18 those things. 19 They have to prove that what Microsoft 20 did was a dirty trick. Name calling is not 21 enough. 22 And in trying to determine whether 23 what Microsoft did is pro-competitive or 24 anticompetitive, the jury must, as the DC 25 circuit noted and as all of the other cases 4829 1 that we cite note, the jury must be able to 2 determine what is an ordinary business 3 practice. 4 You can always try to distinguish some 5 case by saying, well, that was Tuesday and this 6 is Thursday and it's not on all fours and, 7 therefore, it doesn't matter. 8 These cases have principles that can 9 be derived from them. We've been through this 10 over and over and over again. Mr. Williams 11 wasn't here, but we argued about this a lot. 12 And they cited exactly the same cases, 13 Your Honor, that they're citing to you now. 14 The principal cases that they urged 15 this Court to adopt were United States against 16 Dentsply International and LePage's, Inc., 17 against 3M. 18 This, the latest version of this, Your 19 Honor, was Plaintiffs' comments and objections 20 to the Court's proposed preliminary jury 21 instructions filed November 28 of this year. 22 They made the very same argument that 23 they're making here. Mr. Williams says don't 24 worry about that, that's a different matter. 25 We didn't get the sentence we wanted, but it 4830 1 doesn't make any difference. 2 Your Honor, it makes a great deal of 3 difference. The Court correctly instructed the 4 jury on a sentence that the Plaintiffs 5 requested, quote, conduct that might otherwise 6 comply with the antitrust law may be 7 impermissibly exclusionary when done by a 8 monopolist, closed quote, is not in the 9 preliminary jury instructions. 10 That was a correct decision by the 11 Court and it is not open to the Plaintiffs to 12 attack that now. 13 Your Honor, with apologies for going 14 on this long, this is just a collateral attack 15 on the Court's preliminary instructions. 16 And we've now taken an awful lot of 17 time that we needed to devote, quite frankly, 18 to the issues that my partner, Mr. Tulchin, 19 needs to know the answers to in order to open 20 tomorrow. 21 But that's our position. They are 22 collaterally attacking the Court's preliminary 23 jury instructions. Their motion should be 24 denied. 25 THE COURT: Anything further on this 4831 1 issue? 2 MR. WILLIAMS: Your Honor, I have two 3 very small points. They will take 30 seconds. 4 The first is that with respect to the 5 OEM issue, the OEMs supposedly referring the 6 licensing provisions at issue, they can submit 7 evidence on that, Your Honor, but what we're 8 protesting is the submission of evidence about 9 other companies engaging in similar conduct. 10 And the other thing, Your Honor, that 11 I'd just like to cite you to, it's transcript 12 44 -- or page 4413 of the transcript. It's 13 from Mr. Tulchin's remarks from yesterday. 14 And here he was talking about 15 essentially the retaliatory FUD campaign that 16 Mr. Ballmer did against IBM. 17 And what Mr. Tulchin said is -- this 18 is at lines 12 through 15 -- and what Steve 19 Ballmer did, the so-called bad app campaign 20 that Microsoft engaged in, was nothing more 21 than a response to what IBM had earlier done. 22 And our point boils down to this. It 23 was something more, Your Honor, because this 24 app campaign was during the class period, 25 during the time when Microsoft was exercising 4832 1 anticompetitive conduct in order to protect its 2 monopoly. 3 It was something more because 4 Microsoft was a monopolist and an illegal 5 monopolist. IBM was not. 6 MR. HOLLEY: Your Honor, just one 7 minute. 8 The argument in United States against 9 Microsoft was that the integration of 10 functionality into Windows was illegal even 11 though everybody else had put a web browser 12 into their operating system because Microsoft 13 was a monopolist. 14 And what the DC circuit instructed the 15 district court to do before the government 16 abandoned this claim because they knew they 17 could never prove it was to look to see whether 18 everybody else in the market bundled a browser 19 with their operating system because the natural 20 inference would be that if everybody did it, it 21 was a normal business practice that was profit 22 maximizing. That's our point, Your Honor. 23 You have to look at what other people 24 do in a competitive market to determine what is 25 consistent with competitive -- with competition 4833 1 on the merits. 2 And there's no way to do that but to 3 look at what other people are doing. 4 Thank you, Your Honor. 5 THE COURT: Well, would you agree 6 though, Mr. Holley, that if the jury does find 7 that your client engaged in anticompetitive 8 conduct and also this other evidence of other 9 competitors may also be some type of 10 anticompetitive conduct similarly? That that's 11 irrelevant to whether or not Microsoft engaged 12 in anticompetitive conduct? 13 MR. HOLLEY: I -- well, it's a 14 hypothetical. I'm not sure how it would ever 15 occur. I mean, I suppose -- 16 THE COURT: In other words, can the 17 jury -- the jury certainly couldn't be allowed 18 to excuse anticompetitive conduct by your 19 client just because, let's say, IBM did. 20 MR. HOLLEY: The jury could conclude 21 from the Court's Instruction Number 8 that the 22 practice being attacked, for example, product 23 preannouncements, are consistent with 24 competition on the merits and make business 25 sense, quite apart from their adverse effect on 4834 1 competitors, in part, because everybody who is 2 releasing a software product, like an operating 3 system who hopes that people will build 4 compatible products also preannounces their 5 products to give people leeway to develop those 6 products. 7 So they need to look at that. 8 Now, they may conclude, Your Honor -- 9 and I understand what you're saying. They may 10 conclude that, yes, it's consistent with 11 competition on the merits, but it doesn't 12 provide any benefit to consumers. 13 And they think that in the balance of 14 the adverse effect on competitors versus its 15 pro-competitive justification, they come out on 16 the other side of the balance. And if IBM was 17 with us here, they would say you're both bad. 18 But Instruction Number 8 gives them 19 that opportunity. And what I'm -- my argument 20 is we need to give them that context. Let them 21 know what happens in the competitive 22 marketplace so that they can make the 23 determination consistent with the Court's 24 instructions about what they think is 25 anticompetitive. 4835 1 The Plaintiffs seek to deprive them of 2 the relevant context and ask them to decide 3 this issue in a vacuum. And that can't be 4 right. 5 THE COURT: Well, let's say that all 6 that comes in as a hypothetical, okay, what 7 other people do. 8 But let's say in the final 9 instructions the Court or at some time tells 10 the jury that if you find from the evidence 11 that Microsoft engaged in anticompetitive 12 conduct, you cannot excuse that conduct by 13 making a similar finding that other competitors 14 engaged in like or similar conduct. 15 MR. HOLLEY: Your Honor, I think that 16 the Court could give such an instruction, but 17 it would be after telling the jury -- let's 18 take vaporware for an example. 19 It will be our position, and we will 20 ask for an instruction from the Court, that 21 something can be labeled anticompetitive 22 vaporware only if the statement about a new 23 product coming down the pipe was knowingly 24 false at the time the statement was made. 25 If the jury finds that Microsoft made 4836 1 knowingly false statements about product 2 preannouncements, it shouldn't be a 3 justification that WordPerfect lied to the 4 market and IBM lied to the market and Lotus 5 lied to the market. That shouldn't be a 6 defense. I accept that, Your Honor. 7 But the Plaintiffs have a much more 8 sweeping view of this. They're seeking to 9 prevent the jury from finding out what occurs 10 in the marketplace to give them context to 11 decide when the Court does instruct them at the 12 end of the case about whether something 13 constitutes vaporware or not. 14 THE COURT: Thank you. I appreciate 15 that. 16 Anything else before we conclude for 17 the day? 18 I want to let Sandy go. 19 MR. WILLIAMS: Nothing from 20 Plaintiffs, Your Honor. 21 MR. HOLLEY: Your Honor, and I 22 appreciate that the Court is here and the 23 Court's staff is here far beyond their normal 24 working hours, which we very much appreciate. 25 I do have the problem, which is there 4837 1 are -- and I'm going to be the one who gets it 2 in the neck. 3 MS. NELLES: Me. 4 THE COURT: You have to report to Mr. 5 Tulchin. 6 MR. TUGGY: I'm not even going back. 7 MR. HOLLEY: There are things that we 8 would like to play for the jury tomorrow which 9 we don't have an answer about. 10 THE COURT: Okay. Just for a time 11 frame, how long will it take to go through 12 that? Is there a lot? 13 MR. TUGGY: Three segments of 14 Erickson. 15 Based upon the way we've gone, I would 16 say 20 to 25 minutes. 17 MR. HOLLEY: Your Honor, could I -- 18 and I hate to interfere with this, but could we 19 play a game of this version of lightning chess? 20 I'm serious. 21 I know that you don't like to cut 22 lawyers off, but could we agree that each side 23 will argue this position for five minutes or 24 six minutes and then that's it and you have to 25 make your best points and let's move on. 4838 1 Because it's very late. 2 THE COURT: You mean tomorrow or 3 tonight? 4 MR. HOLLEY: I would suggest, Your 5 Honor, if possible, now and we give Mr. Cashman 6 five minutes, Mr. Tuggy five minutes and they 7 make their best points, and that's what they've 8 got. 9 THE COURT: Okay. Let me check with 10 Sandy first. 11 (A recess was taken from 5:02 p.m. 12 to 5:12 p.m.) 13 THE COURT: All right, Mr. Tuggy. 14 MR. GRALEWSKI: You're right. It is 15 our motion. Their testimony, our motion. 16 MR. TUGGY: We are ready to go. 17 THE COURT: All right. Orville 18 Erickson. 19 MR. GRALEWSKI: Your Honor, Bob 20 Gralewski for the Plaintiffs. 21 We have brought this motion which we 22 began arguing, I believe, yesterday. Once we 23 determined based on an e-mail we received that 24 Microsoft would seek to play certain testimony 25 during their opening statement. 4839 1 We have now been provided three 2 portions of the deposition that Mr. Tulchin 3 seeks to play in his opening statement. 4 THE COURT: Okay. 5 MR. GRALEWSKI: The first one that we 6 would like to discuss with Your Honor is 23, 6 7 to 17. And I fear that the copy of the 8 transcript that you have -- or I should ask 9 first if -- yes. 10 THE COURT: Page 23? 11 MR. GRALEWSKI: Yes. And the copy of 12 the transcript that you have is a -- yeah, it's 13 a rough transcript. It's not a rough 14 transcript, but it's printed out like a rough. 15 So what you need to do is -- I believe 16 if you turn to page 39, at the bottom it says 17 p-a-g-e 39. 18 THE COURT: Oh, I see. Okay. 19 MR. GRALEWSKI: And the page numbers 20 are actually -- 21 THE COURT: 23. I see. The page 22 numbers are in the top right in the middle; 23 right? 24 MR. GRALEWSKI: Yeah, that's right. 25 So that the portion of the testimony we're 4840 1 talking about here is -- for the record, is 2 Erickson 23, 6 to 17, which appears on page 39 3 of your transcript. 4 THE COURT: I got it. 5 MR. GRALEWSKI: Just to confuse the 6 matter at 5:17 in the afternoon. 7 Your Honor, cutting to the chase, the 8 issue here is whether Mr. Erickson -- 9 Mr. Erickson is a consumer of Microsoft 10 products in the state of Iowa who happens to 11 also operate a business as a reseller -- 12 whether he can offer testimony about the 13 stability and reliability and quality of 14 Microsoft products, specifically here Windows 15 XP. 16 This particular question and answer 17 session is confined to Windows XP. 18 And, Your Honor, we object to this 19 testimony as irrelevant for a couple of 20 reasons. 21 It is irrelevant whether or not 22 Windows XP is of high quality or not. This is 23 a variation simply on the reasonable price 24 argument. 25 To determine in this case whether 4841 1 Microsoft's conduct is illegal or not, the test 2 cannot be for this jury whether something is 3 good or whether it's of high quality or whether 4 it's reliable. 5 We've talked about the Trenton 6 Potteries in connection with the Sculley 7 testimony. And there, Your Honor, the U.S. 8 Supreme Court made clear that the difference 9 between legal and illegal conduct in the field 10 of business relations cannot be a test 11 concerning whether something is reasonably 12 priced or not. 13 And here we have a similar thing. The 14 test cannot be whether something is good. The 15 test cannot be you look inside of the object 16 and say, well, that's a good enough product so 17 it doesn't matter if they've engaged in 18 anticompetitive conduct and are charging more. 19 That's not the test. 20 So whether or not this Iowa consumer 21 says that Windows XP is stable or reliable is 22 irrelevant. 23 I would also note, Your Honor, that on 24 cross he admits -- Mr. Erickson that is -- that 25 he's unaware of many things that are important 4842 1 to this type of testimony, such as he has no 2 idea about the number of fixes that have been 3 issued for various Microsoft products. 4 He also testifies that he has no way 5 of knowing whether or not the product would be 6 more stable or secure but for Microsoft's 7 conduct. 8 This is testimony that anybody on the 9 street could offer. And, for those reasons, we 10 believe it's irrelevant, Your Honor. 11 THE COURT: Mr. Tuggy? 12 MR. TUGGY: Yes. 13 Mr. Gralewski characterized 14 Mr. Erickson as a user of software who happens 15 to be a reseller and then made two arguments. 16 One, the latter being lack of 17 foundation. Basically, that he doesn't have 18 the foundation to say what he says about the 19 quality of Windows XP over time. 20 And then he argues his point about the 21 relevance of the testimony. 22 I'd like to begin with Mr. Gralewski's 23 first point on who Mr. Erickson is, and that's 24 important to be able to resolve these issues to 25 have that understanding clear. 4843 1 Mr. Erickson is the owner of a 2 business called Computer Works. At page 5 of 3 the transcript he states that he owns Computer 4 Works. 5 According to Mr. Erickson's testimony, 6 at Computer Works, what he does is he repairs 7 computers, he works with customers on 8 implementing computer systems in their small 9 businesses and in their homes. And he has 10 testified that he started his business as a 11 reseller in the year 2000. 12 At page 7, line 17, Mr. Erickson was 13 asked, can you describe the business of 14 Computer Works generally since 2000, please? 15 Answer: We build computers. We do 16 small business networking, a lot of computer 17 repair, both hardware and software, removing 18 viruses, that sort of thing. Do some home 19 networking, those kinds of things. 20 So what Mr. Erickson is is a system 21 builder. His business is located in the state 22 of Iowa. His customers are, in many instances, 23 members of the class because he sells Microsoft 24 software and, as we'll see, Microsoft operating 25 systems. 4844 1 When he is conducting his business 2 activity, according to him at page 9 of his 3 deposition, at line 16, Mr. Erickson was asked, 4 Do you assist your customers in choosing the 5 computers that they're going to purchase? 6 Answer: I do. 7 Question: Tell me how you do that. 8 Answer: Well, generally when a 9 customer comes in, if it was a home customer, 10 they'll usually come to us and we'll sit down 11 with them and just kind of see what they are 12 going to use their computer for. 13 And what you find out most of the 14 time, except for some of the younger folks who 15 are really into hard core games, most people 16 just want to check their e-mail and, you know, 17 type a letter to gramma and that type of thing. 18 So we try to help them with their 19 price point to get what they want that's going 20 to meet their needs. 21 If its businesses, we tend to go to 22 them and then kind of see what they are trying 23 to do and how they are going to use their 24 computer and then customize the computer based 25 upon what their needs are going to be. 4845 1 Mr. Erickson further explained at page 2 13 of his deposition that he builds the 3 computers from the ground up. 4 Page 13 at line 12, the question is 5 what types of computers do you sell? 6 The answer is: When we sell new 7 computers, we custom build from the ground up 8 so we buy all our components individually and 9 assemble them in our shop and build them from 10 the ground up because we're kind of picky about 11 our components. 12 And in the course of doing this system 13 building, Erickson's small company installs 14 Microsoft operating systems and applications. 15 At page 17 of the deposition, at line 16 6, that's page 17, line 6, Mr. Erickson is 17 asked: Do you install Microsoft operating 18 systems software on those computers that you 19 build for customers? 20 Answer: We do. 21 Question: What versions of Microsoft 22 operating systems software have you installed 23 on those computers since 2000? 24 Answer: Windows 98, Windows ME, 25 Windows XP Home, Windows XP Professional. 4846 1 So it is clear from the testimony that 2 Mr. Erickson has installed since his business 3 began in the year 2000 a series of Microsoft 4 operating systems, including Windows 98, ME, 5 and then various versions of XP. XP was 6 released in October 2001. 7 These dates are important, in 8 particular, for other sections of this when 9 they make objections relating to collateral 10 estoppel. 11 It's also important to know that it's 12 not an exclusive Microsoft shop. 13 Mr. Erickson, as he builds these 14 systems, also installs competing products. 15 He testifies to that effect on page 16 18, beginning at line 11. 17 He's asked: Have you installed 18 non-Microsoft software on the computers that 19 you build for customers? 20 Answer: Sure. 21 Question: What non-Microsoft software 22 have you installed since 2000? 23 Answer: Oh, all sorts of things. A 24 lot of our users request Mozilla Firefox, for 25 example. That's sort of the browser du jour, I 4847 1 guess. We have installed things like Pinnacle 2 Studio with customers like the customer that I 3 had mentioned that's into the videography 4 stuff. 5 Then he goes on in a long answer to 6 describe non-Microsoft software that he 7 installs. 8 Finally, and importantly as he's asked 9 questions about the stability and security of 10 these operating systems, his business is 11 directly involved in assisting customers with 12 problems they have in their systems with 13 viruses. 14 So on page 7, in a section I had read 15 that you may recall before on line 21, he 16 confirms that he removes viruses from software. 17 On page 8, lines 21 to 25, he says -- 18 page 8, lines 21 to 25. 19 We don't have any real large business 20 customers, but lots of small business 21 customers, you know, need a machine here or 22 there, need their network fixed, need somebody 23 to come out and remove a virus, that sort of 24 thing, as he describes what they do. 25 And, finally, in his establishing 4848 1 foundation for the removal of viruses for a 2 computer, on page 14, lines 16 to 22, he says 3 as he describes the work, the non-Microsoft -- 4 Well, the software that they use, he 5 says, Adobe Reader so they can view PDFs and 6 then we usually help them choose some sort of 7 antivirus and spyware types of protection 8 because there's a lot of different options out 9 there for that kind of thing. All the way from 10 free ones they can download themselves to 11 Norton and McAfee, those sorts of things. 12 So in the testimony that's at issue, 13 which is at lines 23, 6 to 17, he's first 14 asked: What is your view as a reseller of 15 Microsoft software? 16 And his answer was: My view as far as 17 the stability and the usability of Windows XP 18 Home or Pro is that they're the best operating 19 systems Microsoft has ever made. 20 He has the foundation to do that 21 because that's the exact operating system among 22 others from Microsoft he preloads. 23 Do you have view as a reseller of 24 Microsoft software of the reliability of the 25 Windows XP operating system? 4849 1 Again, he says that I do have a view. 2 I think they have a very high quality. 3 So what he's testifying about are 4 operating systems with which he works and he 5 works on their security aspects of those 6 systems all after the year 2000 and clearly has 7 the foundation to do so. 8 So the only remaining issue is whether 9 this is relevant testimony. 10 And there are two reasons why it's 11 relevant. The first is it's relevant to 12 causation. Microsoft contends that the reason 13 it's successful is because it offers low price, 14 high-quality software. 15 Here, Mr. Erickson is testifying that 16 the Microsoft software is of high quality. It 17 is a good product. It is an improving product. 18 This is part of Microsoft telling its 19 affirmative story on the reason for its 20 success. It's not anticompetitive behavior. 21 It's high-quality products. 22 The second source of relevance for 23 this testimony is to respond to Plaintiffs' 24 accusations regarding the effect of 25 anticompetitive conduct on Microsoft's 4850 1 products. 2 If I may just approach to provide the 3 Court with some excerpts from Ms. Conlin's 4 opening. 5 I'll just briefly mention these. 6 In this information I've provided to 7 the Court, at the third page of that there is 8 text from Ms. Conlin's opening. 9 And she says, The evidence will prove 10 that Microsoft has violated Iowa's competition 11 law and that it has deprived class members of 12 choice and innovation and that it charges -- 13 overcharges Iowa consumers in the applications 14 market. 15 So here she argues and states that 16 Microsoft deprives consumers, class members 17 here, of innovation. 18 And Mr. Erickson is testifying that 19 Microsoft's operating systems are of high 20 quality and improve over time. 21 In this last page of what I provided 22 to you, Ms. Conlin says, so if Microsoft 23 destroyed Iowans' opportunity to have 24 competition in a free market, then Iowans were 25 deprived of those better goods that would have 4851 1 been better quality and had better security. 2 Mr. Erickson is testifying that, in 3 fact, Microsoft's products ought to have high 4 quality security and are reliable to rebut this 5 evidence rebuts Plaintiffs' claim that 6 Microsoft has engaged in conduct that has 7 undermined product quality and security after 8 the class period. 9 So both on the issue of causation and 10 rebutting Plaintiffs' arguments on quality, 11 this evidence is relevant. 12 For that reason, we request for 13 permission to use it in the opening. 14 THE COURT: Anything else? 15 MR. GRALEWSKI: Yes. I restricted my 16 comments because I thought we were playing 17 lightning chess. 18 I know the hour is getting late, but I 19 do need to respond. 20 And I think this argument, Your Honor, 21 relates to the second of three portions too. 22 So we'll maybe kill two birds with one stone 23 here. 24 What I'd like to do is break this down 25 to its basic elements, Your Honor. 4852 1 Your Honor's coffee pot broke today 2 and we're all disappointed about that. You've 3 told us, and we're not going to hold you to it, 4 but you're going to pick up a new coffeemaker 5 soon. Okay. 6 Let's suppose -- 7 THE COURT: Provided I get home. 8 MR. GRALEWSKI: Let's suppose -- 9 there's a really cool new cafe across the 10 street called Amici. And they have some 11 really, really fancy cool nice coffeemakers in 12 there, some of the best I've ever seen, Your 13 Honor. 14 I mean, I think there's one in there 15 for 1,000 bucks, and you can plug it into the 16 wall and you can put milk in it and it keeps 17 the milk cold and it grinds the beans and you 18 push a button and it makes probably the 19 tastiest cup of cappuccino you could ever make. 20 Okay. 21 So let's say Your Honor decides to 22 treat everyone here and decides to purchase 23 that for us. 24 I would suspect that if it worked 25 really well and gave pleasure to everybody and 4853 1 there were really tasty cups of coffee and if 2 someone were to ask you what do you think of 3 the quality of that coffeemaker, you'd probably 4 say, well, you know what, it's the best 5 coffeemaker I've ever owned. I mean, the bells 6 and whistles are amazing on it. 7 Then let's jump ahead and we find out 8 that the maker of that coffeemaker engaged in a 9 conspiracy to fix the price of that 10 coffeemaker. And you were overcharged for the 11 coffeemaker by, let's say, $250. 12 It would be irrelevant, completely 13 irrelevant, whether or not you were getting a 14 good cup of cappuccino from that coffeemaker. 15 The only issue that would be relevant in that 16 antitrust case is whether you paid too much for 17 it. 18 It's the same issue here, Your Honor. 19 It doesn't matter if Windows XP has all the 20 bells and whistles known to mankind. 21 The issue here, Your Honor, is but for 22 anticompetitive conduct, would the price have 23 been lower? 24 Your Honor recognized this concept on 25 December 6th when he said in response to our 4854 1 fair value motion that cost is the issue here, 2 not value. 3 And then later on you suggested that 4 the context in which Mr. Tulchin was going to 5 use a particular comparison was totally 6 irrelevant fundamentally because of this 7 concept that cost is the issue, overcharge is 8 the issue, not value. 9 It doesn't matter if the coffeemaker 10 is the best coffeemaker in the world. It 11 doesn't matter if XP is the best operating 12 system in the world. 13 THE COURT: Very well. 14 MR. GRALEWSKI: Your Honor, I'm sorry. 15 There's just one other point. 16 The DC circuit in their opinion 17 affirming at 253 F. 3rd 34, the jump site is 18 56. 19 Although in the context of the U.S. v 20 Microsoft case stated a universal proposition 21 which is consistent with everything I just 22 said. 23 And there they basically said that 24 quality and popularity, quality and popularity, 25 which is what this testimony is about, is not 4855 1 the question in situations like this. 2 The issue in situations like this is 3 anticompetitive conduct. 4 THE COURT: Very well. 5 MR. TUGGY: I think also that argument 6 and the arguments we've been making relate to 7 the second of the three segments. 8 The second segment is 24, 18 through 9 25, 5. 10 THE COURT: 24, 18, through 25, 5. 11 MR. TUGGY: At that segment the 12 question's asked: As a reseller of Microsoft 13 software, do you consider the Windows XP 14 operating system to be a good value for the 15 price that you paid for it? 16 Answer: Yes, I think it's a good 17 value. And then he explains why. And he also 18 references -- he says, I think it's a good 19 value. I mean, I guess I base that on when you 20 look at how Windows has improved over the years 21 stabilitywise, functionalitywise, featureswise, 22 the price has stayed about the same and you get 23 a lot more. 24 I remember my Windows 98 computer, you 25 know, reboot it, you know, all the time; 4856 1 whereas, the Windows XP, we don't seem to have 2 nearly the stability issues, those sorts of 3 things. 4 Now, as he's testified before, in his 5 business he has worked with Windows 98 6 computers, ME, XP. And he's stating here that 7 value has improved over time, but price hasn't 8 increased. 9 And Ms. Conlin in her opening, and the 10 Plaintiffs' theory in this case, one of their 11 theories of liability, is that Microsoft, 12 because of its monopoly, has stifled innovation 13 during this period, has not produced better 14 products for consumers. 15 That's the statements -- these are the 16 statements that I provided to you from her 17 opening. 18 And these -- it is not solely a claim 19 Plaintiffs are making based on overcharge. 20 They're making a security claim. They're 21 claiming that because Microsoft is a 22 monopolist, it has deprived Iowans of 23 innovation and good -- and quality goods. 24 That's the words that Ms. Conlin used. 25 This evidence is directly relevant to 4857 1 rebutting that. 2 And in the conversation you had with 3 Mr. Tulchin, it was clear that what you didn't 4 want was for comparisons to be made between 5 software and something totally different. 6 The price of software and the price of 7 a -- I don't remember the exact example, but it 8 may have been a hamburger or something to that 9 effect. 10 Are you really going to try to 11 convince the jury that they should compare it 12 to coffee and TVs? That's not what 13 Mr. Erickson is doing here. He's a reseller. 14 He's someone who uses Microsoft software. He 15 uses competitor software. 16 And in the context of that environment 17 where it's comparing apples and apples, 18 software to software, he's saying Microsoft's 19 product is a good value. That's what the case 20 is actually really about. 21 It is about does Microsoft produce 22 high-quality software at low prices and does 23 that explain its success or is its success the 24 result of the anticompetitive conduct that 25 Plaintiffs claim. 4858 1 And this evidence is relevant to that 2 point. 3 THE COURT: Okay. 4 MR. TUGGY: I think the third -- 5 MR. GRALEWSKI: May I respond? 6 MR. TUGGY: I'm sorry. 7 THE COURT: Okay. Go ahead. 8 MR. GRALEWSKI: I'm glad we are 9 talking about Ms. Conlin's opening. 10 Basically, what Mr. Erickson is 11 testifying about here is that Windows XP is 12 priced fairly. 13 When Ms. Conlin brought in the issue 14 of fairness to her opening, on a break Ms. 15 Nelles took strong issue with that concept and 16 argued strenuously -- and I don't have the text 17 with me, but my recollection, Your Honor, is 18 she argued strenuously exactly what I argued 19 for probably 45 minutes with Mr. Sculley and 20 about 10 minutes just a moment ago. 21 And that is that this case is about 22 anticompetitive conduct, not a question about 23 fairness or whether something is a good price. 24 Amazingly, I've just been handed by 25 Mr. Hagstrom what Ms. Nelles said. 4859 1 This is Ms. Nelles talking. The 2 difference between unfair and illegal is 3 critical to this case, Your Honor. It is 4 critical. It is what Plaintiffs have to prove. 5 They have to prove anticompetitive conduct. 6 They don't have to prove unfair conduct. 7 Now, I want to remind the Court what 8 happened. 9 At the urging of Microsoft, Your Honor 10 did not admonish Ms. Conlin, but Ms. Conlin, 11 when we went back on the record, made it clear 12 to the Court that she wasn't going to be 13 talking about issues of fairness and issues of 14 things of that nature. 15 She made clear to the jury this case 16 is about illegal conduct, anticompetitive 17 conduct. 18 So what Microsoft wants now with the 19 introduction of Mr. Erickson's testimony and a 20 lot of the other testimony you've seen on the 21 screen today, which we now need to go back and 22 reevaluate, but what they want to do is have 23 their cake and eat it too. 24 They don't want us to be able to talk 25 about fairness or whether something is good or 4860 1 not, but they want to be able to mount a 2 vigorous defense using those exact same things 3 that we are not allowed to. 4 This is irrelevant testimony, both 5 chunks of testimony that we've been talking 6 about. 7 THE COURT: What's the third one? 8 MR. GRALEWSKI: The third one, Your 9 Honor, we think is hopefully -- well, I want to 10 move to strike my comment. 11 The third one, Your Honor, is 28, 17 12 to 29, 19, and that is at numbered page 48 and 13 49. 14 Now, to understand what's going on 15 here, we're talking about at line 17, the 16 witness starts, I actually think that Microsoft 17 has made innovation possible, et cetera, et 18 cetera. It goes on to talk about innovation. 19 The question which Microsoft doesn't 20 even want to display to the jury apparently is 21 on the prior page, page numbered 47, which is, 22 for the record, 28, 4 and 5. 23 As a reseller of Microsoft software, 24 do you believe that Microsoft has stifled 25 competition? 4861 1 This question -- 2 THE COURT: Innovation? 3 MR. GRALEWSKI: I'm sorry, Your Honor. 4 THE COURT: I think the word is 5 innovation. 6 MR. GRALEWSKI: Yes. Did I say 7 competition? I misspoke, Your Honor. Thank 8 you. 9 Certainly my entire argument hinges on 10 that distinction, so I appreciate that 11 clarification. 12 This question seeks directly -- now, I 13 will note it is not confined -- this question 14 is not confined to a particular time period or 15 a particular product. 16 The question is simply broadly phrased 17 as a reseller of Microsoft software. Do you 18 believe that Microsoft has stifled competition? 19 Finding of fact -- 20 THE COURT: Innovation. 21 MR. CASHMAN: Innovation. 22 MR. GRALEWSKI: Thank you. 23 Finding of Fact 412, Your Honor -- and 24 I'm going to try to get it right this time, 25 concerns innovation. 4862 1 Finding of Fact 142. 2 Most harmful of all is the message 3 that Microsoft actions have conveyed to every 4 enterprise with the potential to innovate. 5 And then it continues and makes clear 6 that Microsoft's past success in hurting such 7 companies has stifled innovation. 8 So what they're trying to do, Your 9 Honor, is undermine the findings of fact. 10 Now, Mr. Tuggy is going to tell you, 11 because we've met and conferred on this -- I 12 don't mean to put words in his mouth, but I'll 13 try to make my argument now so I don't need to 14 respond -- that because Mr. Erickson did not 15 become a reseller until 2000, which is after 16 the findings of fact -- the period at issue in 17 the findings of fact, that this question and 18 answer cannot seek to undermine that. 19 A couple responses. 20 First of all, and most clearly, when 21 it goes up on the screen, there's no 22 restriction here. 23 As I said, the question is broadly 24 phrased and the answer is broadly phrased. 25 Secondly, later on in the deposition 4863 1 on cross-examination, my colleague, Mr. Reece, 2 says: 3 Question: Are your views, 4 Mr. Erickson, as you have expressed them here 5 today also in part based upon your actual 6 working with and use of these products that you 7 have had? 8 He says, Answer, I suppose they would 9 have to be to some degree because I can't 10 separate that in my own mind. 11 And earlier in the transcript he 12 testifies as a class member he's purchased 13 products during the period in time encompassed 14 by the findings. 15 So when he answers the broad question 16 saying I actually think that Microsoft has made 17 innovation possible and then goes on and on for 18 several pages, he actually is answering with 19 all of his experience and belief during the 20 entire period of time encompassed by the 21 findings. 22 Thank you, Your Honor. 23 THE COURT: Mr. Tuggy? 24 MR. TUGGY: Yes, very briefly. 25 This is a primarily collateral 4864 1 estoppel argument. 2 And the other thing I proposed in the 3 meet and confer is to add some lines so that it 4 would be clear that this is not stepping on a 5 finding of fact. 6 And so what I proposed -- what I 7 propose is that we add lines -- on page 27, 8 lines 13 to 15, which says have you been a 9 reseller of Microsoft software since 2000? 10 And the answer is yes. 11 And then lines 4 and 5 of line 28, 12 which says, As a reseller of Microsoft 13 software, do you believe that Microsoft has 14 stifled innovation? 15 So, in that way, we through the 16 testimony that is given -- he's clearly asked 17 this in his capacity as a reseller, which is 18 what he's done since the year 2000. 19 And that ought to limit, properly 20 limit, the application of the response because 21 the response was given to a question that was 22 asking him this information for after the year 23 2000 as a reseller of Microsoft software. 24 So there was no intent here to step on 25 findings of fact, although it is, I think, 4865 1 worth mentioning that this deposition was 2 taken, I believe, before a final decision was 3 made on what findings of fact would be subject 4 to collateral estoppel. 5 But the questioner, I think, used 6 adequate care here so that the jury would not 7 be led to believe if these sections are added 8 that this response relates to something that's 9 covered by a finding of fact. 10 Now, I should also mention that in the 11 answer, on page 29, lines 13 to 14, he says, 12 Even in the short time that I have been in the 13 business, light years what you can do with 14 computers. 15 He has in his answer information that 16 helps limit it to the period about which he's 17 asked. And that is after the year 2000. 18 So Microsoft respectfully requests 19 that it be permitted to use this in its opening 20 statement, adding in the additional lines so 21 that it's clear both from the answer and the 22 question asked that nothing is being done here 23 to try to contradict a finding of fact which 24 relates to an earlier period. 25 THE COURT: Anything else on these 4866 1 three? 2 MR. GRALEWSKI: Your Honor, the 3 testimony, I would submit, is flawed because 4 the question is flawed. 5 I disagree with Mr. Tuggy that 6 Microsoft was careful here. 7 The question like -- and they knew how 8 to do this because some of the other questions 9 were confined to Windows XP. 10 The question here is, As a reseller of 11 Microsoft software, do you believe that 12 Microsoft has stifled innovation I? 13 It's broad. It's not limited. It 14 shouldn't be allowed. 15 Also, Your Honor, setting aside the 16 finding of fact, Mr. Erickson -- and this is 17 demonstrated on cross -- has no foundation to 18 opine about stifling innovation. He hasn't 19 considered any documents. He doesn't know any 20 facts whatsoever concerning innovation. 21 THE COURT: Anything else? 22 MR. TUGGY: On the last new foundation 23 argument, I believe my argument before about 24 his background covers that. So I have nothing 25 further. 4867 1 THE COURT: Very well. 2 The Court finds that for the reasons 3 set forth by the Plaintiffs, all three are 4 excluded. 5 Anything else? 6 All right. 7 See you at 8:30 tomorrow. 8 (Proceedings adjourned at 5:48 p.m.) 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4868 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 13th 19 day of December, 2006. 20 21 22 ______________________________ Certified Shorthand Reporter(s) 23 24 25