3076 1 IN THE IOWA DISTRICT COURT FOR POLK COUNTY ----------------------------------------------- 2 JOE COMES; RILEY PAINT, ) 3 INC., an Iowa Corporation;) SKEFFINGTON'S FORMAL ) 4 WEAR OF IOWA, INC., an ) NO. CL82311 Iowa Corporation; and ) 5 PATRICIA ANNE LARSEN; ) ) TRANSCRIPT OF 6 Plaintiffs, ) PROCEEDINGS ) VOLUME XII 7 vs. ) ) 8 MICROSOFT CORPORATION, ) a Washington Corporation,) 9 ) Defendant. ) 10 ----------------------------------------------- 11 The above-entitled matter came on for 12 trial before the Honorable Scott D. Rosenberg 13 and a jury commencing at 8 a.m., December 6, 14 2006, in Room 302 of the Polk County 15 Courthouse, Des Moines, Iowa. 16 17 18 19 20 HUNEY-VAUGHN COURT REPORTERS, LTD. 21 Suite 307, 604 Locust Street 22 Des Moines, Iowa 50309 23 (515)288-4910 24 25 3077 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, Iowa 50309 (515)283-1111 6 RICHARD M. HAGSTROM 7 AARON McPARLAN MICHAEL R. CASHMAN 8 Attorneys at Law Zelle, Hofmann, Voelbel, 9 Mason & Gette, LLP 500 Washington Avenue South 10 Suite 4000 Minneapolis, Minnesota 55415 11 (612)339-2020 12 ROBERT J. GRALEWSKI, JR. Attorney at Law 13 Gergosian & Gralewski 550 West C Street 14 Suite 1600 San Diego, CA 92101 15 (619) 230-0104 16 17 18 19 20 21 22 23 24 25 3078 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, New York 10004-2498 6 (212)558-3749 7 ROBERT A. ROSENFELD Attorneys at Law 8 Heller Ehrman, LLP 333 Bush Street 9 San Francisco, California 94104 (415)772-6000 10 STEPHEN A. TUGGY 11 HEIDI B. BRADLEY Attorneys at Law 12 Heller Ehrman, LLP 333 South Hope Street 13 Suite 3900 Los Angeles, CA 90071-3043 14 (213) 689-0200 15 DANIEL S. SILVERMAN Attorney at Law 16 Heller Ehrman, LLP 4350 La Jolla Village Drive 17 Seventh Floor San Diego, CA 92122-1246 18 (858) 450-8400 19 20 21 22 23 24 25 3079 1 BRENT B. GREEN Attorney at Law 2 Duncan, Green, Brown & Langeness, PC 3 Suite 380 400 Locust Street 4 Des Moines, Iowa 50309 (515)288-6440 5 RICHARD J. WALLIS 6 STEVEN J. AESCHBACHER Attorneys at Law 7 Microsoft Corporation One Microsoft Way 8 Redmond, California 98052 (425)882-8080 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3080 1 MR. CASHMAN: Good morning, Your 2 Honor. 3 THE COURT: Good morning. 4 You had some issue you wanted to take 5 up before we went into Williams? 6 MR. CASHMAN: Yes. 7 Michael Cashman for the Plaintiffs. 8 And this morning I would like to 9 address one exhibit which Ms. Conlin would like 10 to use in her opening statement. If I may 11 approach, please. 12 THE COURT: Yes. 13 MR. CASHMAN: I'm handing the Court a 14 copy of Plaintiffs' Exhibit 3034. 15 THE COURT: Was this the Phase 6? 16 MR. CASHMAN: No. And I'm also 17 handing the Court some agreements that the 18 parties entered into on November 29, 2006. 19 And, in particular, I'm directing the Court's 20 attention to paragraph A1. 21 The reason I've given these two 22 documents to the Court is Plaintiffs' Exhibit 23 3034 has embedded hearsay in it on the first 24 page where that objection was sustained by the 25 Special Master. 3081 1 That embedded hearsay is indicated in 2 the material that's bracketed in yellow on the 3 first page. 4 Ms. Conlin wishes to use this document 5 in opening statement, but is not going to be 6 displaying or discussing any of that embedded 7 hearsay. She is going to be referring to the 8 last page of this document. 9 And I have bracketed the information 10 which Ms. Conlin is going to use in her opening 11 as you can see, near the top of the last page. 12 THE COURT: In pencil there? 13 MR. CASHMAN: Pardon me? 14 THE COURT: It's in pencil? You 15 bracketed in pencil? 16 MR. CASHMAN: Yes, I bracketed in 17 pencil. 18 That information is not subject to any 19 objection that has been sustained by either the 20 Special Master or the Court. 21 Microsoft is objecting to the use of 22 this exhibit on the basis of a collateral 23 estoppel objection. 24 The Plaintiffs believe initially that 25 collateral estoppel objection is not well 3082 1 taken. And at the appropriate time during 2 trial, when and if this exhibit is proffered, 3 we submit, would be the time when to take up 4 that objection. 5 But, more importantly for the moment, 6 is the agreement that I've handed up to the 7 Court regarding the use of evidence in opening 8 statements. 9 And as the Court will see in paragraph 10 A1, the parties have agreed that any evidence 11 that was designated in the course of pretrial 12 activities essentially, as indicated here, may 13 be used in opening statement if the proponent 14 of the evidence believes in good faith they 15 will be admitted for the purpose that the 16 evidence is being used in opening. 17 And then the agreement describes the 18 good faith standard. And it's undisputed that 19 collateral estoppel objections do not preclude 20 the use of such evidence in opening statement. 21 So, the Plaintiffs believe that on the 22 basis of our agreement with Microsoft, we 23 should be able to use this document, 24 Plaintiffs' Exhibit 3034, without objection. 25 And I also note for the Court's 3083 1 information, paragraph A3, which says 2 objections to evidence used in opening 3 statements are not waived if they are not 4 asserted during the opening. 5 Therefore, again, if and when this 6 exhibit is proffered, during the course of the 7 trial is the right time to take up the merits 8 of any collateral estoppel objection. 9 Thank you. 10 THE COURT: Mr. Tuggy? 11 MR. TUGGY: Yes, Your Honor. 12 With respect to Plaintiffs' Exhibit 13 3034, the portion Plaintiffs seek to use -- I 14 don't have the bracket Mr. Cashman provided to 15 you, but I believe it's the first paragraph on 16 the last page. 17 Is it the one that begins Bengt 18 Akerlind and ends at the word them? 19 THE COURT: Starts Gates. 20 MR. TUGGY: I see. Underneath that 21 line. 22 What this handwritten note says, and 23 we don't -- I don't know who within IBM wrote 24 this note. It says Gates, and then an arrow, 25 why are we working with IBM when they are doing 3084 1 these deals? Don't work with them. 2 It's unclear, based on the document, 3 whether that's a statement attributed to Gates, 4 a statement attributed to Akerlind. It's just 5 unclear what this evidence is just from the 6 face of the document. 7 Now, it does appear it was marked as 8 an exhibit in the government case, and perhaps 9 there's testimony there that has not been 10 provided to us that they intend to use to 11 enlighten us on the meaning of this document, 12 but I say all of that to point out that there 13 are ambiguities about this statement and what 14 force it ought to have at trial. 15 Now, this statement -- as you know, 16 the issue of whether Microsoft put improper 17 pressure on IBM not to preload SmartSuite was 18 part of the findings of fact that have been 19 read to the Jury, and that this relates to 20 SmartSuite can be seen from the line above the 21 part that the Plaintiffs intend to use. In 22 that line, it references SmartSuite. 23 In paragraph 132, or Finding of Fact 24 Number 132, Judge Jackson wrote, in sum, from 25 1994 to 1997, Microsoft consistently pressured 3085 1 IBM to reduce its support for software products 2 that competed with Microsoft's offerings. 3 And this note is dated February 19, 4 1997. 5 This document offered as an exhibit in 6 the government case is specifically in support 7 of Finding of Fact Number 132 and the preceding 8 findings of fact relating to this issue and 9 SmartSuite. 10 So it's Microsoft's position that this 11 evidence is barred by the collateral estoppel 12 issue. Both because under the collateral 13 estoppel doctrine, the preclusion of evidence 14 works both ways and Plaintiffs are not 15 permitted to present evidence supporting 16 findings of fact unless they can identify some 17 alternative purpose which they haven't done 18 here. 19 And, also, that it will result in 20 prejudicial effect. I fully expect that if 21 Microsoft attempted to explain this document, 22 examine witnesses on what it meant, Plaintiffs 23 would object that Microsoft shouldn't be 24 permitted to do that based upon the preclusive 25 effect of collateral estoppel. 3086 1 So Microsoft asserts that this ought 2 not be shown to the Jury because this part of 3 the document is barred by the collateral 4 estoppel. 5 Now, as to the agreement, under the 6 agreement, it is true that the parties have 7 agreed that where a party has a good faith 8 belief that a document is going to be admitted 9 at trial, they can use it in their opening 10 statements. And there are certain definitions 11 of what constitutes a good faith belief. 12 In our view, this issue is now before 13 you. And if this Court should rule that this 14 exhibit ought to be barred by the collateral 15 estoppel doctrine for being presented at trial, 16 then Plaintiffs cannot have that good faith 17 belief and use it in their opening statement. 18 So the issue is being presented to you 19 before the opening statement, whether it ought 20 to be admitted. And if you rule that it 21 shouldn't be because of the collateral estoppel 22 doctrine, then, they can't have a good faith 23 belief in its admissibility to use it in 24 opening statements. 25 Based on those considerations, we 3087 1 respectfully request that Plaintiffs not be 2 permitted to show Plaintiffs' Exhibit 3034, 3 and, particularly, the section bracketed by 4 Mr. Cashman in their opening statements. 5 THE COURT: Anything further? 6 MR. CASHMAN: Yes, Your Honor. 7 Plaintiffs believe Mr. Tuggy is just 8 plain wrong on all counts. 9 First of all, the agreement is clear 10 that we are entitled to use this. This 11 document is not being moved into evidence at 12 this time. Therefore, their objections to it 13 are not right and should be taken up at the 14 time the document is proffered. 15 They are not entitled to object under 16 our agreement to the use of this document 17 during opening statement as a preliminary 18 matter. 19 Turning to the collateral estoppel 20 objection that Mr. Tuggy claims. First, he 21 started out by saying the document is unclear 22 and that it has ambiguities. 23 Well, if that were so, first of all, 24 that's a matter to clarify -- that Microsoft 25 could clarify through whatever witness it comes 3088 1 in at trial or on its own case, if they choose. 2 But that claim that it's ambiguous or 3 unclear undercuts their objection of collateral 4 estoppel because Plaintiffs don't agree with 5 this, obviously, as we've said before, but, 6 even under Mr. Tuggy's claim standard, that 7 they have to make a clear link between a 8 collaterally estopped finding and the evidence 9 at hand. If you're talking about evidence 10 which is ambiguous or unclear, they can't even 11 make their own claimed burden. 12 Furthermore, Mr. Tuggy attempts to say 13 that this is collaterally estopped under 14 Finding 132. 132 makes no mention of this 15 document or anything in Plaintiffs' Exhibit 16 3034. 17 Furthermore, Mr. Tuggy himself 18 acknowledges that Plaintiffs' Exhibit 3034 19 talks about SmartSuite applications. And we've 20 already been through the fact that applications 21 is a separate, independent claim in this 22 lawsuit and that Plaintiffs are certainly 23 entitled to use underlying evidence from the 24 government case to support claims such as its 25 applications claim. 3089 1 So the Plaintiffs, as explained 2 before -- I think all these collateral estoppel 3 objections are without merit, but for the 4 reasons I've addressed specifically relative to 5 3034, this exhibit should be permitted during 6 opening statement. 7 Thank you. 8 THE COURT: Anything further? 9 MR. TUGGY: Nothing further, Your 10 Honor. 11 THE COURT: I'll allow you to use it 12 during opening statement. 13 Do you want these back? 14 MR. CASHMAN: Yes. Thank you, Your 15 Honor. 16 THE COURT: Do you want to go with 17 Williams now? 18 MR. GRALEWSKI: If Your Honor is so 19 inclined. I know there's ten minutes. 20 THE COURT: The Court looked over the 21 four objections or, rather, appeals, I guess, 22 in regard to pages 218 of the deposition up 23 through page 222. 24 As far as 218, lines 5 through page 25 220, line 2, Court sustains the ruling of the 3090 1 Special Master, except as to page 219 where 2 lines 16 to 22 may be admitted. 3 Page 220, lines 13 through 25, the 4 appeal is sustained or, rather, the ruling on 5 appeal is affirmed. I'm sorry. 6 Next one was page 221, line 5, to 222, 7 line 5. Affirmed except for lines 5 through 14 8 may be used. 9 Page 222, lines 6 through 17, ruling 10 of the Special Master is affirmed. 11 So now you are on 227; right? 12 MR. GRALEWSKI: Yes, Your Honor. 13 227, 3 through 228, 12. 14 THE COURT: Okay. 15 MR. GRALEWSKI: We've rounded second 16 base. We've picked up the third base coach and 17 we are being waved home and have six left in 18 Williams. 19 227, 3 to 228, 12, Your Honor, is, 20 first of all, not hearsay by and large. The 21 chunk from 227, 3 to 228, 1, there are no 22 statements there by Mr. Williams being offered 23 for their truth. 24 The Plaintiffs would submit that to 25 the extent there is hearsay, it picks up at 3091 1 228, 2 through 12, and we believe it fits 2 squarely within Callahan because Williams is 3 repeating statements by his customers 4 explaining their motive, namely, why the 5 customers are going with Microsoft over DRI. 6 He repeats what he's being told by OEMs. 7 In sum and substance, there is a huge 8 machine behind Microsoft's products, et cetera, 9 et cetera. 10 That's 228. 11 THE COURT: Mr. Tuggy? 12 MR. TUGGY: Yes, Your Honor. 13 First section of this -- well, just by 14 way of background, the reason why there is no 15 ruling by the Special Master on this excerpt is 16 because the Plaintiffs added this after the 17 Special Master process. 18 The adding of this testimony was 19 pursuant to agreement, and we don't object to 20 that. 21 The first part of the testimony, 22 beginning at page 227, line 3, is a question 23 that references paragraph 158 of Mr. Williams' 24 declaration. 25 The question asked, in paragraph 158 3092 1 of your declaration you say that, quote, Egg 2 Head wrote DRI on May 16th, 1991, indicating 3 they would no longer carry the DRI product, end 4 quote. 5 As you know, this declaration by 6 Mr. Williams was submitted to the FTC in 1993, 7 and a copy of that has been provided to you. 8 If needed, I have a copy that I can 9 provide to the Court, but I think for the 10 purposes of this argument carrying forward what 11 we discussed last time about that declaration, 12 it itself is hearsay, and the examiner here is 13 trying to determine the foundation for 14 Mr. Williams' statement to this effect in the 15 declaration. 16 And Mr. Williams, in responding says 17 he does not have a copy of the Egg Head letter, 18 he does not recall what was said in the letter 19 or why, and doesn't recall being told by any 20 distributors the things that are said in the 21 letter. 22 So Plaintiffs apparently are offering 23 this for the truth of the statement in 24 Mr. Williams' declaration which is hearsay, 25 and, in addition, are doing so even though 3093 1 Mr. Williams admits he doesn't have personal 2 knowledge of the matters stated in his 3 declaration. 4 So, for that reason, that first 5 Section 227, line 3, to 228, line 1, is 6 inadmissible as hearsay within hearsay. 7 With respect to the second section 8 Mr. Gralewski referred to, that is page 228, 9 lines 2 through 12, these statements are not 10 statements by an OEM of an OEM's state of mind. 11 What Mr. Williams says is that he had 12 conversations with OEM and retail distribution 13 executives outside the company, he says, saying 14 that one of their real obstacles was the huge 15 machine behind Microsoft's products. 16 That's simply a statement of fact, a 17 belief about Microsoft's process for marketing 18 its products, and it's being offered for the 19 truth of that fact. 20 It's not being offered for an OEM 21 state of mind, and in particular, there is no 22 statement by the declarant here, Mr. Williams, 23 that an OEM made a statement of its state of 24 mind. 25 It's just OEMs making statements about 3094 1 Microsoft's marketing process. That is not 2 state of mind evidence and under Callahan 3 should not be admitted as such. 4 In addition, even if this were somehow 5 state of mind evidence, this certainly isn't 6 evidence of a then existing state of mind. 7 In other words, there's no statement 8 here by an OEM of its then existing state of 9 mind regarding its motives or plans with 10 respect to the marketing or sale of products by 11 Microsoft or Digital Research. 12 For those reasons, Microsoft's hearsay 13 objection to this entire section of testimony 14 should be sustained. 15 MR. GRALEWSKI: Your Honor, taking the 16 second chunk of testimony. 17 I fail to see the difference between 18 statements in Callahan where the customer said 19 I didn't buy beer because, and the statements 20 here where the customers say I didn't buy DRI's 21 products because. 22 In Callahan, the because was or the 23 motive was the prices were higher. In this 24 chunk of testimony, Your Honor, here the motive 25 or the reasons is because of the huge marketing 3095 1 machine that Microsoft has. 2 I think that these 11 lines of 3 testimony are directly analagous to the 4 Callahan situation. 5 As far as the first chunk of 6 testimony -- and often times during the meet 7 and confer process we accuse Mr. Tuggy of 8 having a photographic memory of all the 9 documents. So I think he'll correct me if I'm 10 wrong -- but this Egg Head document that's 11 referenced in paragraph 158 of Mr. Williams' 12 declaration, I believe, is clean and has been 13 or will be admitted as a DRI business record. 14 And I believe the document says, it's 15 a letter from Egg Head to DRI -- Egg Head was a 16 software distributor. I'm not sure they are 17 still around, but at this point in time they 18 were a software distributor. 19 And Egg Head wrote DRI and said, hey, 20 we're not carrying your products because we're 21 carrying Microsoft's products exclusively. 22 And so simply what's going on here is 23 that the examining attorney is asking the 24 witness about an otherwise admissible business 25 record. 3096 1 MR. TUGGY: If I may respond only to 2 the new argument about the otherwise possible 3 admissibility of the Egg Head letter. 4 I do recall that being an exhibit, but 5 I, frankly, don't recall the status of 6 objections to it. 7 Because -- but whether or not that 8 exhibit is admissible and could be the subject 9 of argument is not relevant to the 10 admissibility of this testimony because the 11 question is whether Mr. Williams' 12 characterization of the letter in his 13 declaration can be admitted for its truth, 14 which it can't both because he lacks personal 15 knowledge and because it's hearsay within 16 hearsay. 17 THE COURT: What's the state of mind 18 in lines 2 through 12 on page 228? Tell me the 19 state of mind. 20 MR. GRALEWSKI: The state of mind of 21 the OEMs in explaining the reasons why they are 22 not going to purchase DRI's products. 23 THE COURT: Where does it say they are 24 not going to purchase DRI's products? 25 MR. GRALEWSKI: Well, the whole -- 3097 1 those words probably aren't on those lines, 2 Your Honor, but this -- these 11 lines can't be 3 read in a vacuum. 4 This line of questioning concerns the 5 reasons why Microsoft -- I'm sorry, OEMs are 6 buying Microsoft's products instead of DRI's 7 products. 8 And Mr. Williams testifies, so let me 9 get to your answer basically, and he says, OEMs 10 and retail distribution executives -- so these 11 are his customers -- tell me that one of the 12 things that -- one of the real obstacles in 13 purchasing my product was this huge machine 14 behind Microsoft products. 15 And that's exactly the kind of quote 16 or a customer statement at issue in Callahan. 17 THE COURT: Anything else on this 18 issue? 19 MR. GRALEWSKI: Not from Plaintiffs, 20 Your Honor. 21 MR. TUGGY: Nothing further, Your 22 Honor. 23 THE COURT: Page 227, lines 1 through 24 12 are hearsay and not admissible. The 25 remaining lines on 227 to 228 are admissible. 3098 1 We're going to take a brief break 2 here, so I can get the Jury notebooks. Then we 3 will bring the Jury in. 4 MR. GRALEWSKI: Thank you, Your Honor. 5 MR. CASHMAN: Thank you, Your Honor. 6 (A recess was taken from 8:29 a.m. 7 to 8:35 a.m.) 8 THE CLERK: All rise. 9 THE COURT: Everyone else may be 10 seated. Thank you. 11 You may proceed. 12 MS. CONLIN: Thank you, Your Honor. 13 Good morning. 14 We were just about done with GO, this 15 little computer here. As a matter of fact, the 16 page that I'm beginning on is titled the end, 17 and it's the end of GO that I'm talking about. 18 One of GO's partners is a company 19 called EO, and that is a part of AT&T. 20 In mid-1991, GO spins the hardware 21 manufacturing part of its company off to EO, 22 and then a little bit later, AT&T proposes that 23 it buy GO. And GO merges with AT&T, and, 24 shortly thereafter, GO is gone. 25 But what about Microsoft's pen 3099 1 project? Microsoft's Winpad, the software that 2 Microsoft touted all over the world and sold to 3 or licensed to OEMs, it's vaporware. It is 4 never released. It never comes out. 5 No final version ever ships of 6 Microsoft's Winpad. 7 And the evidence will be that with no 8 competition from GO, Microsoft simply doesn't 9 finish the product. And that's the end of the 10 tablet computer until after the millennium. 11 You can get one now, as of November of 12 -- I beg your pardon. November 2002 is when 13 finally pen handwriting tablets of this sort 14 are finally available to consumers. 15 You can see the similarities with the 16 GO tablet back in the late '80s and early '90s. 17 The pen -- this is the GO, and that's the 18 current tablet PC. 19 So consumers wait for ten years until 20 -- for a convenient handwriting technology. 21 You may recall from Monday the 22 document, which is 310A, where Microsoft says 23 it will crush GO, and GO is crushed and 24 consumers wait. 25 What will Microsoft's evidence be 3100 1 about this GO PenPoint computer? Was it really 2 a good product? Of course, as with any 3 complicated, brand-new, groundbreaking 4 technology, there were lots of challenges. 5 There were lots of obstacles. 6 Handwriting recognition is very hard. 7 There's no question about it. Even today you 8 can't get 100 percent reading of handwriting. 9 It was also difficult, Mr. Kaplan will 10 say, to figure out how to build a screen. 11 We're kind of accustomed now with PDAs and that 12 sort of thing, you know, to a screen that can 13 sense whether a letter is a B or a D or an E or 14 an I, but at the time this was being developed, 15 that was very, very unusual. And, in fact, 16 didn't exist. 17 And, of course, it always takes time 18 and money to design any new product. 19 Like most products of the era -- I do 20 want to make one thing clear. The lugable that 21 we showed you -- I didn't ask Mr. Smith to 22 bring it back. He's perfectly capable of doing 23 that. But that was from the '80s. 24 By the early '90s, there were tablet 25 computers. I beg your pardon. There were 3101 1 laptop computers, not tablet computers, but 2 laptop computers. They were pretty clunky too, 3 but nothing like the 1987 lugable. 4 But like most products, the IBM 5 tablet, which State Farm used, I think it 6 cost -- I think Mr. Kaplan says that cost about 7 5,000. The manufacturer suggested retail price 8 was about 5,000. And -- no, I guess that was 9 about 3,000. And then it dropped to between 2- 10 and 4,000, the right price. You will hear 11 that, I think, a lot. 12 It was about the same as the bigger 13 laptops in 1992. 14 Microsoft will also produce evidence 15 that Mr. Kaplan wrote a book after he -- after 16 the business failed and he went on to other 17 things. The book is called Start-Up. 18 When he wrote the book, he did not 19 know -- he didn't have access to the documents 20 that you have seen and will see. He would 21 certainly write it differently today. 22 Microsoft will also point out that in 23 this GO computer, the operating system and the 24 user interface, the GUI, were combined, and the 25 implication is that GO is just like Microsoft, 3102 1 like Microsoft Windows in '95, but GO was a 2 little start-up company and Microsoft was and 3 is a monopoly controlling access to an 4 essential part of computers. 5 Also, be clear that Mr. Kaplan makes 6 no claim to having invented laptop computers. 7 This is a tablet computer, and he does claim, 8 and has a right to claim, that he and his 9 company were the creators of this. 10 He conceived it, he designed it, and 11 he's entitled to say so. 12 Microsoft's examination of Mr. Kaplan 13 may seek to confuse you on that point. 14 There were also -- besides the heavier 15 laptops, there were also little PDAs that came 16 out right around the same time. But, of 17 course, you couldn't use the laptop with 18 handwriting. And the PDAs at that time had 19 very little functionality. 20 Microsoft also makes the point -- we 21 believe their evidence will be that Mr. Kaplan 22 does not think he is developing a product for 23 the desktop market. 24 Even though it runs on the desktop, 25 Mr. Kaplan thinks he's developing a product 3103 1 that is a tablet computer. 2 It is Microsoft itself who targets GO 3 as a competitor on the desktop. And, indeed, 4 in some of the documents that we've already 5 seen, Microsoft says GO is trying to take over 6 the laptop. 7 So even though Jerry Kaplan doesn't 8 want to take over the desktop -- that's what I 9 meant, the desktop -- Microsoft seems to think 10 he does or he might or he could. 11 Microsoft will also focus on an 12 agreement, which we've touched on, between IBM 13 and GO. 14 GO asks IBM to build a dedicated 15 computer that only runs PenPoint because if 16 it's built to run both Pen Windows and 17 PenPoint, it will have to be heavier. It will 18 have to be larger in size. It will have to 19 have a disk. It will be more fragile, more 20 likely to break, and clumsier. 21 GO asking IBM to build a dedicated 22 machine is nothing like Microsoft telling OEMs 23 that they can only get the operating system if 24 they buy Windows or only get Windows if they 25 buy the operating system. 3104 1 It is not an exclusive arrangement 2 between GO and IBM of the sort that we believe 3 the evidence will show Microsoft forced OEMs 4 into. 5 When little GO asks IBM not to 6 cooperate with Microsoft on the pen computer, 7 it has no leverage. It can't make threats that 8 will kill IBM's business. Unlike with 9 Microsoft, IBM is free to agree or disagree. 10 When Microsoft, on the other hand, 11 says do not cooperate with so-and-so, they can 12 and have, in fact, backed up those demands by 13 withholding products or withholding information 14 or betas. You've also seen some of those 15 documents. 16 We believe that the evidence will show 17 that Microsoft used against GO several 18 exclusionary tactics. 19 The exclusionary license practices, 20 vaporware, the beta blacklist, difficulties 21 honoring its contracts with GO, FUD, threats 22 and intimidation, and technology espionage. 23 Does GO fail because it's a poor 24 product, its marketing isn't good enough or it 25 doesn't sell many systems or the schedule slips 3105 1 or all of the other things? We believe the 2 evidence will show that Microsoft's conduct was 3 a cause of GO's failure. 4 Instruction 14, the Court said, quote, 5 the Plaintiffs do not have to prove that an 6 antitrust violation was the sole cause of their 7 injuries. 8 What we have to show is that it was a 9 cause and that it was a material cause, but it 10 need not be the only cause. And we will prove 11 that Microsoft's conduct was a cause of GO's 12 demise. 13 The evidence will show that Microsoft 14 was unwilling to compete with GO on the merits. 15 And part of the reason for that, 16 according to its own executives, it was a year 17 or more behind. Indeed, no product was 18 released until 2002. And consumers did not 19 have access to tablets for ten years. I 20 believe the evidence will be that that was 21 because of Microsoft's anticompetitive conduct. 22 Let me move on to OS/2. 23 In the mid-1980s, IBM and Microsoft 24 agree to jointly develop a new desktop 25 operating system to be called OS/2 with the 3106 1 stated goal between Microsoft and IBM of making 2 the world's most advanced commercially 3 available operating system. 4 Returning for a moment to DRI. 5 Almost from the beginning, almost from 6 the very beginning, MS-DOS was kind of an aging 7 operating system. 8 When originally written by Tim 9 Paterson of Seattle Computer, QDOS, quick and 10 dirty operating system, that Mr. Paterson 11 wrote, he wrote that as a clone of CP/M, which 12 was the DR, Digital Research product, and CP/M 13 was the operating system of the '70s. 14 So the core of the MS-DOS technology 15 is not designed for advanced functionality. 16 When MS-DOS was taken from QDOS, which 17 was taken from CP/M, it was -- there was no 18 advanced functionality. 19 The APIs for MS-DOS are not robust, 20 nor are there standard ways of creatively 21 solving some of its inherent limitations. 22 This results in some software just not 23 playing very well together because the various 24 software manufacturers, the various software 25 developers, are doing things differently. 3107 1 For another thing, PC users running 2 MS-DOS cannot multitask. They cannot do more 3 than one thing, run more than one application 4 together. And MS-DOS doesn't have protected 5 memory, which means that one program may 6 overwrite the data from another program at any 7 time. 8 Finally, MS-DOS suffers from this 640 9 K barrier. We've talked a bit about the memory 10 limitations. These are the memory limitations. 11 And that hampers an ISVs ability to harness all 12 the power that hardware has, computer hardware 13 has. 14 And even as MS-DOS is aging, there are 15 huge improvements in the underlying hardware. 16 By the mid-1980s, computer chips, Excel, the 17 processors, Excel-compatible processors are 18 getting a lot faster. 19 In order to take advantage of these 20 improvements in the chips, in the hardware, a 21 computer's operating system must be coded in a 22 way that supports those new features. And 23 MS-DOS is not. 24 As part of the joint agreement, the 25 JDA between Microsoft and IBM, a brand-new GUI, 3108 1 graphical user interface, is developed. It's 2 called PM or presentation manager, and it's 3 designed specifically for the new operating 4 system OS/2. 5 Microsoft already has a GUI. It is 6 Windows. And it was developed prior to the 7 joint development agreement between IBM and 8 Microsoft. 9 It was -- Windows was, of course, 10 originally designed to run only on MS-DOS, and 11 MS-DOS -- or Microsoft is already actively 12 marketing Windows. 13 And the first Windows -- I don't know 14 if we've talked about this -- the first Windows 15 1.1, 1.0 came out in 1985. But even early on, 16 Microsoft toys a bit with the idea of making 17 Windows the dominant desktop GUI system. 18 And despite concurrent efforts by IBM 19 to develop presentation manager for OS/2, 20 Microsoft actually spends a good deal of time 21 and research and money prior to 1989 trying to 22 make Windows run on OS/2. 23 Nathan Mhryvold, who you've heard from 24 before, who is sort of the strategic technology 25 guru at Microsoft, gets very frustrated with 3109 1 Microsoft's efforts in connection with putting 2 Windows on OS/2 and with respect to the 3 confusion at Microsoft between presentation 4 manager, PM, and Windows. 5 And he writes to Bill Gates and Steve 6 Ballmer complaining about Microsoft's inability 7 to properly plan and execute on this product. 8 And this is Plaintiffs' Exhibit 19, 9 and it is a very lengthy memo, and it is -- 10 there's quite a bit of coarse language in this 11 document. 12 And I'm going to read a relative -- 13 well, given the size of the memo, this is a 14 relatively brief part that I want to focus your 15 attention on. 16 Mr. Myhrvold's e-mail, lengthy e-mail 17 dated -- now, this is one of those documents 18 that has two dates on it. Can you see that at 19 the top? There's your top date of June 10th of 20 1988 and the bottom date of March 9th of 1992. 21 So from the context, we believe this 22 is an older -- that the older date appears to 23 be given what seems to be going on in the 24 company at the time. 25 Here's what he says. Our systems 3110 1 software strategy is a rambling litany of 2 failure. We have patched together a bunch of 3 shitty technology with the incredible personal 4 performance -- performances of a couple of 5 outstanding individuals. 6 I could list endless examples of this, 7 but one will suffice. The near miss we had 8 with presentation manager. We lost the fucking 9 business, and then got it back, but as a guy 10 who was there, let me tell you, it was close. 11 This scared the shit out of me. 12 Stop and think for a moment what it 13 would have meant to have lost that, what the 14 fuck -- what the fuck would that leave us? We 15 would be way up shit creek without PM, 16 presentation manager, the GUI for OS/2. 17 Recall that this would not just have 18 meant losing to IBM. They pitched Lotus about 19 doing it -- making the PM GUI. 20 The only reason that we got the PM 21 business was that we had Windows, a piece of 22 technical that we could both threaten IBM with, 23 and also position as something we could bring 24 to the party. In terms of its origin, however, 25 Windows was a complete accident. 3111 1 In my view, Microsoft is a 2 nontechnical company. The one thing that we 3 know how to do is compete with an existing guy 4 who might have some vision, and that is how we 5 got into the Windows business. 6 The Windows story was not all happy. 7 We had absolutely no idea as to what it would 8 take to put it on OS/2. Absolutely none. 9 No one had thought through even the 10 most basic issues for making this stuff work 11 together. 12 There has been an incredible amount of 13 work in both the base and in PM that we have 14 had to stumble our way through. There was also 15 a lot of work that IBM made us commit to which 16 we did not understand. 17 The clear message that I got from the 18 PM experience was that our system software 19 strategy was virtually nonexistent. We have a 20 neat bag of tactics to limp between one IBM 21 crisis to another, but no idea of how to keep 22 them in the long term. 23 We can lie, cheat, or steal in the 24 heat of the moment to get over a critical 25 issue, like the PM business. Doing this 3112 1 repeatedly without coming up with any solutions 2 or even any plan for a solution can only be 3 called one thing, mismanagement. 4 We have seriously and stupidly 5 mismanaged the most valuable software asset in 6 the world. 7 This goes out to executives. But even 8 after this happens, there's still confusion 9 about how Microsoft should move forward. 10 Should Windows be with OS/2 or should it be PM? 11 And where should Microsoft be? Does it stay 12 with its MS-DOS, even though it has its JDA, or 13 does it commit its resources solely to OS/2? 14 Let's talk a bit about the technical 15 superiority of OS/2. 16 The DOS plus Windows combination, two 17 separate products, MS-DOS, Windows, is inferior 18 technology to OS/2 and presentation manager, 19 and everyone, including Microsoft, including 20 Bill Gates, is aware of that. 21 In fact, Bill Gates refers to OS/2 as 22 the big brother of Windows and admits it's 23 better than Windows. 24 This is Plaintiffs' Exhibit 126. 25 E-mail re: Windows PR. 3113 1 He says, as far as OS/2 goes, we are 2 working internally on how we position OS/2 as 3 the big brother to Windows. Maybe we should do 4 some naming changes. 5 OS/2 should be viewed as Windows plus. 6 We need to make it clear that Windows success 7 ensures OS/2 success since OS/2 is better. 8 Nathan Mhryvold also knows that the 9 Windows plus DOS combination is inferior 10 technology, but Mr. Mhryvold, Nathan Mhryvold 11 -- there are two Mhryvolds, they are brothers. 12 Both work at Microsoft. 13 Nathan is just the one we've heard 14 from and Cameron we will hear from more in 15 connection with the applications business. 16 This is Nathan. Nathan thinks it's 17 important to come up with some product that can 18 achieve market dominance because of how much 19 money Microsoft can make on a monopoly. 20 This is Plaintiffs' Exhibit 258. It's 21 called Microsoft system software focus. 22 Mr. Mhryvold says, we are presently 23 engaged in a number of battles. The most 24 important one, in my mind, is to retain our 25 dominant position for desktop PC operating 3114 1 systems in the midst of changing to new 2 technology base to escape the inherent 3 technical limitations of DOS. That is what I 4 just talked to you about. 5 This is proving much harder than we 6 originally thought. 7 OS/2 will not be the near term 8 successor to DOS, and it may never be. Windows 9 is only a temporary solution to the problem 10 because it still has severe internal 11 limitations, IE based on DOS, hard to put 12 security in, so on. 13 Nevertheless, this is our calling. We 14 are in a terrific position to achieve this, and 15 it would be crazy to abandon it. The size of 16 the opportunity is enormous. There is a huge 17 value to a monopoly, and we have the position 18 and skills that it makes sense for us to shoot 19 for it. 20 OS/2 breaks new ground in the PC 21 industry by introducing support for a lot of 22 advanced new features. Preemptive 23 multitasking, multithreading, interprocess 24 communication features, virtual memory support, 25 fully protected memory, dynamic linking library 3115 1 support. 2 I can see that you all know all about 3 this. Don't worry. There will be explanations 4 for these differences, these advances that OS/2 5 includes in the operating system. They will 6 not, however, come from me at this time. 7 And also I wanted to -- OS/2, this is 8 OS/2 2.0. This was produced by IBM. We'll get 9 to the part of the story where they go their 10 separate ways, IBM and Microsoft. 11 None of these things, preemptive 12 multitasking and multithreaded and DLL support 13 and so on, none of those things are supported 14 at first by MS-DOS. 15 The difference between the two 16 operating systems is very, very great. 17 One, OS/2 is well designed, stable, 18 and easy to use. 19 The other, the MS-DOS Win combination 20 is unstable, tricky, and as Anthony Short, who 21 was the director of OS/2 development, writes 22 bluntly to Steve Ballmer and Brad Silverberg in 23 1991, OS/2 just works, whereas, MS-DOS requires 24 what Mr. Short calls black magic. 25 This is Plaintiffs' Exhibit 601. 3116 1 Finally, with OS/2, you just install 2 it and it works. You don't have to fiddle 3 around with UMBs. That's upper memory blocks. 4 These things are completely black magic. 5 You have to try loading different 6 combinations of things up there and watch to 7 see if your machine crashes. This is the most 8 important difference between DOS and OS/2. You 9 should try to install DOS and Windows and 10 Landman on PS/2. That's personal systems 2, 11 which was an IBM piece of hardware at the time. 12 For corporations and governments, 13 large clients, the advanced features of OS/2 14 are particularly important and corporations and 15 governments adopt OS/2. They make -- at least 16 they get internal plans. They make plans to 17 adopt OS/2. 18 The high end versus the low end. So 19 virtually everybody agrees that OS/2 is a 20 better, more advanced, more robust operating 21 system. 22 And one of the things that makes OS/2 23 more advanced is that it is optimized for 24 Excel's newest processors, the 386 and 486 25 series. 3117 1 However, Microsoft decides to abandon 2 OS/2 on the desktop in favor of the MS-DOS 3 Windows combination. 4 You will hear more about the reason 5 for Microsoft's decision, but let me give you a 6 quick preview. 7 Microsoft sees a Windows' centric 8 strategy as a means not only to dominate the 9 operating system market, but the evidence will 10 show that clear back, Microsoft saw Windows as 11 a way of seizing control of the important 12 applications markets as well. 13 That's the word processing and 14 spreadsheet markets, which are a part of this 15 case. 16 On August 14, 1990, Paul Maritz 17 distributes a memo to Gates, Ballmer, and other 18 members of the executive staff containing the 19 brand-new strategy as of August of 1990 for 20 committing to Windows and dead-ending 21 presentation manager. 22 This is Plaintiffs' Exhibit 365. And 23 Mr. Maritz says, do not forward a copy -- do 24 not forward or copy. We do not want press 25 speculation on the contents of this memo. 3118 1 We have decided to use Windows instead 2 of PM. This change raises -- you know, I'm 3 skipping these things because, otherwise, we'll 4 just be here even longer than we have been. 5 You will have the whole document. I 6 am trying to keep the context clear. 7 We've decided to use Windows instead 8 of PM. This change raises a question about 9 what our strategy is for Windows, OS/2, and NT 10 OS/2. That is -- NT means their new 11 technology. Has to do with a networking 12 system. 13 In light of our ongoing discussion 14 with IBM, many factors are subject to change. 15 The following points are not public and all of 16 our comments to ISVs, applications developers, 17 OEMs, the press, et cetera, should not 18 communicate any change in strategy for Windows 19 or OS/2. 20 He goes on to say, our long-term 21 product strategy is Windows on DOS and Windows 22 on OS/2. 23 Our goal is to simplify our message to 24 ISVs and focus all of our development and 25 marketing energy behind the Windows API. 3119 1 Without announcing a change -- without 2 announcing a change in strategy, we are telling 3 ISVs to write for Windows. 4 The model we want to present to 5 customers and ISVs is a single, consistent 6 Windows interface running on DOS, on the 32-bit 7 OS/2 base, and eventually on NT. 8 As radical as this may sound, very 9 little has changed near term and we want to 10 avoid giving the appearance to customers or 11 ISVs that we are abandoning OS/2. 12 Then he does this sort of series of 13 questions and answers in this document. 14 Does this mean that PM is dead? And 15 the answer he provides is no. It is 16 dead-ended. 17 Microsoft PM development will not 18 continue beyond Cruiser. Cruiser is OS/2 -- 19 these code names are -- Cruiser is OS/2 2.0, 20 this OS/2 2.0. 21 And we will discourage or stop 32-bit 22 PM applications development as we will not 23 migrate that API forward. 24 Does IBM buy into dead-ending PM? No. 25 That is why we should be careful what we say in 3120 1 public to ISVs and OEMs. 2 Does this mean we are killing OS/2? 3 No. We are starting down a path toward merging 4 Windows and OS/2 functionality. 5 What should we tell corporate 6 accounts? For the time being, nothing 7 different. 8 What should we tell ISVs, the software 9 developers? Absolutely nothing. We must be 10 extremely careful that our change in strategy 11 not be leaked to the press, particularly prior 12 to reaching an agreement with IBM. 13 What do we plan to tell the press? 14 Nothing. We have a lot to lose and nothing to 15 gain by communicating that we are changing our 16 strategy before we know what the implementation 17 will be. 18 On August 15, 1990, Silverberg, Brad 19 Silverberg, Paul Maritz, and a guy whose name 20 you haven't heard yet I don't think, Bob -- I 21 think it is Muglia, M-u-g-l-i-a, produce a memo 22 further planning their upcoming dealings with 23 IBM in which they discuss PM and what to do 24 with OS/2. 25 The stated objective of the memo is to 3121 1 figure out how to make Windows dominant. And 2 this is Plaintiffs' Exhibit 9654. 3 And in that document Microsoft -- 4 written here, Microsoft says assertion. We 5 should absolutely minimize our support for PM. 6 In the end, what Microsoft decides to 7 do is give OS/2 back to IBM. As this memo 8 discusses, there are a number of reasons for 9 this choice. 10 By transferring OS/2 to IBM, Microsoft 11 can free up over 150 people to work on projects 12 which provide significant benefit for the 13 company. This also provides us with a great 14 way to get out of the PM mess. Don't do 15 anything except develop and announce MS plans 16 to enhance Windows. 17 For OS/2 2.0, this means: 18 One, transfer control of OS/2 2.0, and 19 all future release to IBM ASAP. 20 Number 2, don't waste any energy on 21 OS/2 content. 22 And, Number 3, don't do an OS/2 2.0 23 packaged product. 24 The decision to abandon OS/2 and focus 25 on Windows, according to Microsoft during this 3122 1 time frame, must be kept a secret. 2 Paul -- the orders that Mr. Maritz 3 gave in his Microsoft memorandum on August 4 14th, 1990, are followed by Microsoft's 5 marketing and PR forces because more than a 6 month later, on September 17th, 1990, Collins 7 Hemingway of Weggener Edstrom, the outside PR 8 firm, distributes to U.S. marketing a rude Q 9 and A about Microsoft strategy. 10 Rude Q and A. We've seen these 11 before. Microsoft's attempt to prepare for any 12 questions they think might come. 13 And this certainly reflects 14 Mr. Maritz's admonition not to disclose their 15 change in strategy. 16 This is Exhibit 389. IBM Q and A. 17 Is the JDA, joint development 18 agreement, dead? No. The JDA between IBM and 19 Microsoft is extended. Q, does this signal a 20 change in the joint IBM/Microsoft fall COMDEX 21 1989 announcement? No, this does not signal a 22 change. 23 And that is said despite 365 in which 24 Mr. Maritz says we have decided to use Windows 25 instead of PM. 3123 1 Doesn't this signal that Microsoft is 2 not fully committed to OS -- not as fully 3 committed to OS/2 as we thought? No. We are 4 fully committed to OS/2. 5 Though Mr. Maritz says a month earlier 6 it's dead-ended. 7 Is Microsoft giving up on OS/2 2.0 8 development because of the success of Windows 9 3.0? We are not giving up on OS/2 2.0 10 development. 11 Though Mr. Maritz says our goal is to 12 focus all our development and marketing energy 13 behind the Windows API a month earlier in 14 Exhibit 365. 15 Question: The industry sees a 16 competition between OS/2 and Windows. Doesn't 17 this signal that Microsoft is betting on 18 Windows in the short run? 19 No. We will provide technology that 20 will leverage the popularity of Windows and 21 Windows applications to OS/2. 22 And this, despite Mr. Maritz's 23 direction, we will discourage or stop 32-bit 24 applications development. 25 How many copies of OS/2 have shipped 3124 1 to date? Shipments aren't what you expected, 2 right? 3 Answer: While our initial 4 expectations for OS/2 were very aggressive, 5 OS/2 is meeting and exceeding our current 6 expectations. 7 Q. Is Microsoft still committed to 8 doing presentation manager applications? You 9 bet. 10 That, of course, is directly contrary 11 to what has been decided more than a month 12 earlier. 13 And this strategy of stalling and 14 misrepresenting goes on from September until 15 early March of 1991. 16 And this time, without any fireworks, 17 is best summed up by a March 4th, 1991, e-mail 18 exchange between Cameron Mhryvold, Nathan's 19 brother, and Bob Muglia, and Bob Jones, who is 20 a special marketing manager at Microsoft. 21 This is Plaintiffs' Exhibit 592, and 22 Mr. Jones says, do you think we can lull IBM to 23 sleep for another year by telling them that we 24 believe this while we steal more oil wells with 25 Windows? 3125 1 Microsoft declares war on OS/2. Those 2 are not my words. Those are Microsoft's words. 3 It starts with an OS/2 slogan called 4 better Windows than Windows. 5 In early March 1991, Pam Edstrom of 6 Weggener Edstrom is notified that the Wall 7 Street Journal is going to do an article on 8 OS/2 and Windows. 9 And, from Microsoft's perspective, 10 it's not going to be a friendly article. And 11 for one thing it will highlight some of the 12 problems with Windows, but, more importantly to 13 Microsoft, it will contain a claim by Lee 14 Riesweig, an IBM executive who is in charge of 15 OS/2, that OS/2 is a, quote, better Windows 16 than Windows because of its ability to run 17 applications, Windows applications out of the 18 box. 19 One of the reasons Microsoft is 20 worried about this claim is that OS/2 is 21 developed all along to be an advanced operating 22 system. That was what they intended from the 23 very beginning. 24 Windows, on the other hand, suffers 25 from the problems we talked about. The 3126 1 problems of robustness, memory, and so on. 2 On April 24th, 1991, Silverberg writes 3 to Gates, to Ballmer, and others expressing his 4 concern about the quality of Windows. 5 This is Plaintiffs' Exhibit 699. 6 April 24th, 1991. 7 He says -- Mr. Silverberg says, while 8 we are all very upset with IBM and may severely 9 doubt their ability to deliver better DOS than 10 DOS, better Windows than Windows, one thing is 11 very clear. IBM has hit a very raw nerve with 12 our customers about Windows robustness. People 13 are sick and tired of UAEs. Unexpected 14 application errors, UAEs. Not good things. 15 I never thought I'd see people 16 actually rooting and cheering for IBM. But 17 it's happening now. 18 A few weeks after the Wall Street 19 Journal article appears and the big IBM better 20 Windows than Windows announcement, the two 21 companies, Microsoft and IBM, meet to discuss 22 what to do going forward. 23 On April 20th, 1991, Tony Audino sends 24 an e-mail recap of the meetings to Gates, 25 Silverberg, Joachim Kempin, Paul Maritz, and 3127 1 Steve Ballmer, and writes in Plaintiffs' 2 Exhibit 689A, subject IBM briefing. Jim and 3 Joe, IBM people, made it clear IBM was going it 4 alone. It is now undeniably clear that we have 5 a major competitor in the OS business. 6 Knowing that IBM is now competing 7 against them, Microsoft circles the wagons and 8 quite literally declares war on IBM. 9 On April 22nd, 1991, Silverberg writes 10 an e-mail to Ballmer asking him to give a 11 speech. 12 This is Plaintiffs' Exhibit 691. 13 There are other documents about this, and I was 14 going to read some others of them, too, but I 15 cut them out. 16 What's going on here is they are 17 planning to have a big meeting, you know, of 18 lots of employees, and Mr. Silverberg, who's 19 the planner of the meeting, wants Mr. Ballmer 20 to come along personally. 21 He says, I would really like you to be 22 there to give the declaration of war speech. 23 And, apparently, that does occur. 24 Mr. Ballmer comes along and does give the 25 declaration of war speach. But because of what 3128 1 we've already discussed in connection with DRI, 2 the per processor licenses, the minimum 3 commitments, the PPBs, the long terms, the war 4 is over before it even begins. 5 It's a foregone conclusion that 6 Microsoft, because of these exclusionary 7 contract terms, is going to prevail. 8 The per processor pricing scheme, as 9 you will recall, offers significantly lower 10 prices if the OEM is willing to pay for every 11 machine of a particular processor type that 12 goes out the door, whether or not the computer 13 has the Microsoft operating system on it. 14 Therefore, if an OEM did want to ship 15 machines with OS/2 on them, they would have to 16 pay for two licenses. The per processor 17 license they're paying to Microsoft and then 18 they would have to pay IBM for the OS/2 19 license. 20 Microsoft clearly realizes how 21 important these exclusionary licenses -- these 22 exclusionary license restrictions are. 23 Mr. Kempin, worldwide director of OEM 24 sales at Microsoft, says -- this is an e-mail 25 between he and others. 3129 1 And he responds to an observation that 2 our revs margin and OEM business will decrease. 3 Our revenues, our margins in the OEM business 4 will increase because of OS/2. And here he 5 says no. He says, no, our revenues and margins 6 will not decrease. This is Plaintiffs' Exhibit 7 690. 8 He says, Mr. Kempin says, decrease in 9 margin only if people vote to buy retail from 10 OS -- retail OS/2 from IBM, which I doubt. 11 All key OEMs are committed to DOS 5.0 12 and Win 3.x for the next two, three years. 13 Most of them per processor or at least per 14 system. This will give us time to respond 15 technically. 16 In other words, Microsoft recognizes 17 that IBM is effectively locked out of the OEM 18 channel. And that is the most important 19 channel for the distribution of operating 20 systems. 21 We will prove these effects are not 22 accidental. They are designed, they are 23 implemented specifically to lock out 24 competition and to preserve Windows market 25 share. 3130 1 On April 12th, 1991, shortly before 2 the declaration of war against IBM, there is a 3 management conference, Microsoft management 4 conference, held in a place called Sudden 5 Valley, and one of the topics for discussion is 6 how to push Windows, separate GUI product, how 7 to push the Windows market share up to 90 8 percent. 9 Jeremy Butler writes a summary of the 10 conference. 11 This is Plaintiffs' Exhibit 675. Memo 12 re: Presentations given at the Sudden Valley 13 management conference. 14 Our vision is that all personal 15 computers use a graphical user interface. For 16 the vast majority of workstations, that means 17 Windows. 18 How can we assure that Windows is used 19 on 90 percent of all machines as quickly as 20 possible? The answer to that question is 21 provided on the next page of the memo, the next 22 page of 675, and it includes bundling. 23 This is -- the title of this bullet 24 point is Microsoft levers -- what Microsoft has 25 that can get it to 90 percent share of the 3131 1 Windows -- on the desktop of the Windows GUI. 2 Bundling. Put it together with the 3 already dominant, already monopoly DOS. Dealer 4 incentives. Pricing. One Windows worldwide. 5 And then on the next page -- actually, 6 we skip two pages. What must be done in the 7 market? Strong identification with DOS. A DOS 8 5.0 RUP, R-U-P, bundle. We think that's retail 9 upgrade. We've got different opinions about 10 what it was from Microsoft folks. 11 And it may mean different things in 12 different contexts too. But that appears to be 13 a retail upgrade bundle. Put the two products 14 together. 15 Combined setup with DOS. Promote as 16 preferred DOS shell. Remove DOS shell. 17 DOS comes with a little shell of its 18 own which pretty soon is removed. This is 19 bundling strategy, of putting the two products, 20 the monopoly product, the then monopoly 21 product, DOS, MS-DOS, together with Windows GUI 22 is, again, mentioned as an effective technique 23 against Microsoft in a memo from Tony Audino to 24 Gates, Silverberg, Ballmer and others about the 25 failed negotiations with IBM on April 20th, 3132 1 1991. 2 After Mr. Audino recounts IBM's 3 statements of continued commitment to OS/2, he 4 lists a few tactics that can be used against 5 them. 6 He writes in Exhibit -- in Plaintiffs' 7 Exhibit 689A, 8, we need to aggressively pursue 8 OEMs with DOS/Windows bundle deals as a 9 preemptive strike against IBM. 10 If they, these are the OEMs, have per 11 system deals with us on Windows now, they will 12 be hard-pressed to do deals with IBM on OS/2 13 2.0. 14 The reason, once again, that OEMs 15 would be hard-pressed to work with IBM is 16 because of the nature of per processor pricing. 17 Nobody wants to pay for a product they 18 can't use. If they are already paying 19 Microsoft for every machine sold, then Windows 20 is what they'll have to bundle. They can't 21 afford to seek out another licensing deal with 22 IBM at the very same time. 23 Microsoft knows that. 24 Another tactic that Microsoft adopts, 25 and one that we have seen before, is the 3133 1 creating incompatibilities between products. 2 At the outset of Microsoft's war 3 against IBM, it is, as I have mentioned, clear 4 that OS/2, IBM, has a superior operating system 5 on the merits. 6 Steve Ballmer is trying to find a way 7 to defeat the better Windows than Windows 8 claim. 9 On March 8, 1991, David Cole sends 10 Mr. Ballmer an e-mail, which appears to be in 11 response to some prior request from 12 Mr. Ballmer, informing Mr. Ballmer that it will 13 be very hard to prevent IBM from running 14 Windows on OS/2, even if they do all the tricks 15 and traps that they know of. 16 Here's Mr. Cole's memo. And it's 17 Plaintiffs' Exhibit 601, and the title of it is 18 e-mail, Subject: Win 3.1 and DPMI. 19 DPMI -- again, we will leave it to the 20 experts to explain that, but the letters mean 21 DOS protected mode interface. And that is a 22 method prescribed by Microsoft for creating 23 compatibilities between OS/2 so Windows 24 applications could be run on the OS/2 operating 25 system. 3134 1 And here is what he says. Just to let 2 you know what's up/down on our end. Preventing 3 IBM from running Windows in protect mode on 4 OS/2 2.0, will be very hard, if not impossible. 5 We can do all the tricks and traps we 6 know of to give them a hard time, but the fact 7 that they get source to everything means they 8 could figure it out. 9 Because of the agreement between IBM 10 and Microsoft, IBM gets access to the source 11 code for the products. 12 The best we can do is stall them. Let 13 me know what we are really trying to do here 14 and I'll -- probably I'll do the best I can on 15 this end to accommodate. 16 Mr. Cole continues to hunt for ways, 17 for tricks and traps, that will harm OS/2. 18 And just as Mr. Ballmer leans on him 19 to find ways to do it, he's asking others. 20 He's asking for suggestions from others. 21 And one of these people is a 22 programmer named Tony G. He writes to David 23 Cole on March 7th, 1991. This is Plaintiffs' 24 Exhibit 7558. And the subject is they don't 25 stand a chance. 3135 1 He says, On further investigation, 2 OS/2 doesn't stand a chance of running the 3 current kernels for the following reasons. 4 One, selector tiling. And selector 5 tiling comes up several times. 6 The second is a suggestion that we 7 should put a version check in this routine and 8 abort the boot under OS/2, exclamation point. 9 Yes, that exclamation point. 10 Okay. A version check in this routine 11 and abort OS/2 is probably apparent to you, but 12 the idea is to figure out whether or not what's 13 going on is that OS/2 is running and if OS/2 is 14 running or is the underlying operating system, 15 then it won't -- it won't work. 16 We remember this with DRI, Bambi, 17 nested task. This is a suggestion to do the 18 same kind of thing in this. 19 And Aaron Reynolds, who we saw, Aaron 20 knows some other gotchas, which they would have 21 to work around too. 22 David Cole thinks that the selector 23 tiling issue may have some potential. He 24 responds to the e-mail from Tony G. and copies 25 a bunch of people including another programmer 3136 1 named Earl Horton asking them to do some more 2 work on the issue. 3 It's a continuation in 7558 with the 4 subject matter. They don't stand a chance. 5 Can you guys do me an additional favor 6 on this and follow up with one of the old 7 Cruiser guys about the tiling system? Scott 8 Lu. maybe -- Scott Ludwig is an old Cruiser 9 guy. This is incredibly key. 10 Now, that would be -- check with a 11 Microsoft employee who has worked on OS/2 and 12 see what we can do with the selector tiling 13 issue to abort OS/2. 14 On March 8th, 1991, Earl Horton sends 15 Scott Ludwig, e-mails Scott Ludwig about the 16 problem, and he says, we are being asked to 17 make it impossible to run Windows 3.1 in 18 protected mode under any DPMI -- DPMI server on 19 OS/2 1.x. 20 The evidence will be that what 21 Mr. Ballmer intends to do and what he has David 22 Cole and others searching for is the ability to 23 -- is to destroy the ability of OS/2 to run 24 Windows applications. 25 Okay. You remember applications 3137 1 barrier to entry is something that Judge 2 Rosenberg has talked to you about the findings 3 in fact. We'll be talking about it quite a bit 4 more this morning. 5 But there are all kinds of 6 applications out there for Windows. And the 7 Windows applications run on OS/2 2.0, then the 8 applications barrier will not be effective to 9 protect Microsoft's monopoly. And so what 10 they're searching for is a way to make that not 11 happen. 12 And this technology, this DPMI, 13 Microsoft has just recently pushed the industry 14 to adopt this DPMI. And it is important, 15 critical to IBM's ability to run the Windows -- 16 to run Windows and Windows applications on 17 OS/2. 18 What this would allow is for Windows 19 users to make the jump to OS/2 without 20 abandoning all of their old applications. 21 One of Microsoft's tactics to prevent 22 this from happening is to simply stonewall the 23 delivery of the Windows source code to IBM 24 despite a contractual obligation to do so. 25 Ballmer, Mr. Ballmer, knows how 3138 1 important this DPMI is to IBM. So there's a 2 brief e-mail exchange over the issue, and 3 Mr. Ballmer himself decrees that Microsoft 4 should hold back that code, the DPMI code. The 5 exchange starts on March 1st, 1991, in an 6 e-mail from Sherrie V. to Mr. Ballmer. 7 This is Plaintiffs' Exhibit 3447. 8 March 1st, 1991, Windows source code 9 to IBM. And this Sherrie V. says to 10 Mr. Ballmer, what they really want is 3.1 11 source to evaluate the DPMI client code. We 12 didn't send it to them. 13 Brad S-I, Silverberg, said you wanted 14 to hold off and mentioned the concern about IBM 15 incorporating 3.1 as WABBC, which means binary 16 compatibility, onto OS/2 2.0 and not paying any 17 royalty on it. 18 I see three options. 19 Number 1, send it to them. They know 20 the DPMI functionality is in there, and have a 21 license to preliminary source code no less 22 frequently than monthly, so are making a 23 legitimate request. 24 Two, don't send it to them. I tried 25 to buy some time with DeAnn Safford, at IBM by 3139 1 telling her the code was still prebeta and not 2 in a suitable state to send out, but she, IBM's 3 representative, refused to wait and insisted on 4 immediate delivery. 5 Number 3, do something slimey like 6 send it to them, but break key parts of the 7 code. 8 On March 3rd, a couple of days later, 9 Mr. Ballmer tells Sherrie V. to withhold the 10 code. This is Plaintiffs' Exhibit 3448. 11 And this is what Mr. Ballmer says. 12 Take out the DPMI functionality and send them 13 3.1 sources in a month. We only owe them 14 source once a month. 15 Microsoft originally announces that 16 Windows 3.1 will be what is called a DPMI 17 client. They incorporate this DPMI, obviously, 18 because they believe this will help Windows 3.1 19 in the market. 20 David Cole writes Mr. Silverberg back 21 on January 30th, 1990. This is before the 22 change in plans with respect to OS/2. This is 23 back more than a year. 24 And this is Plaintiffs' Exhibit 9508. 25 Windows everywhere, right? Making 3140 1 Windows a DPMI client will make this easier. 2 But then after Microsoft's decision 3 concerning DPMI and Windows 3.1 changes as 4 their strategy with respect to OS/2 changes. 5 And on April 3rd, 1991, Mr. Silverberg 6 writes in an internal e-mail, which is 7 Plaintiffs' Exhibit 9449. I see in -- who's he 8 writing to here? David, I think that's David 9 Wozniak. 10 I see in PC Week this week you mention 11 that Win 3.1 will be a DPMI client. Not so. 12 At least the retail version of 3.1 will not be 13 a DPMI client. This is a change as of a few 14 weeks ago. 15 Why make this fundamental technical 16 change? The value to Microsoft of its change 17 in position is explained by reading these 18 internal e-mails from Mr. Silverberg in August 19 of 1991. And this is Plaintiffs' Exhibit 4180. 20 Which OEMs are asking for DPMI in Win 21 3.1 and why? It really only makes sense when 22 you're trying to host Windows on non-DOS 23 systems. It's not something we're eager to do. 24 What he's asking there is -- or what 25 he's saying there is you really only need for 3141 1 Win 3.1 to be a DPMI client if you want to run 2 it on something other than MS-DOS. So who's 3 asking for it. 4 And, eventually, Windows 3.1 is not a 5 DPMI client. 6 Microsoft realizes that DPMI might 7 allow consumers to move easily from Windows to 8 OS/2. So August 22nd, 1991, Plaintiffs' 9 Exhibit 9507 says, we are willing to produce 10 DPMI-client versions of Windows for OEMs who 11 license Windows and make corresponding 12 commitments to Windows. We will not be 13 providing the DPMI-client version as the retail 14 product. 15 From this and other documents, you 16 will see that Microsoft is prepared to limit 17 distribution of the DPMI client version of 18 Windows 3.1 to those OEMs who can be counted on 19 not to use it with OS/2. 20 Other Microsoft customers who might 21 want to use it on OS/2 receive Windows 3.0 22 without the DPMI, which makes it possible or 23 makes it easier to run the Windows and Windows 24 applications. 25 Now, what happens, of course, is IBM 3142 1 has to change -- has to change horses in the 2 middle of the stream. And they do that, but it 3 substantially delays the release of OS/2 2.0. 4 One of our technical and industry 5 experts, Mr. Ron Alepin, will talk to you 6 further about the background and the 7 significance of this DPMI issue and will, as I 8 said, explain to you what that means. 9 On April 29th, 1991, Steve Ballmer, 10 again, receives some ideas about how to create 11 incompatibilities in OS/2. This time from a 12 guy named Stu K. Stu's proposal is to check 13 whether a Windows application is being run on 14 OS/2. If it is, he suggests they display a 15 warning about the application not being 16 certified. 17 He writes in Plaintiffs' Exhibit 695, 18 to discount the better Windows than Windows 19 claim. Put in OS/2 2.0 and WLO-detection into 20 Win 3.1. If an app is -- I used to know how to 21 pronounce -- how they pronounce that, but I 22 just can't remember. So we'll just say WLO, 23 then run it. 24 If OS/2 2.0 exists and the app is not 25 a WLO app, then put up an error message 3143 1 indicating that the app is not certified by MS 2 and that it can be run at one's own risk. Hard 3 for IBM to make a better Windows claim with 4 such a scheme in place. 5 Once we detect the existence of OS/2 6 2.0, there may be other special warnings we can 7 emit that highlight legitimate problems with 8 Windows apps running on top of OS/2 2.0. 9 For example, a message each time one 10 prints, that says the Windows and OS/2 printer 11 models are different and that output will be 12 different between the two systems. 13 What Stu K. is suggesting here is that 14 Windows display warnings to users of Windows 15 applications when they try to run them on OS/2. 16 Like the verified DOS that Mr. Gates ordered 17 back in 1988 for DRI. 18 And like the one -- like the AARD code 19 that went into the Christmas beta in December 20 of 1991, a few months after this exchange. 21 Now, we do not know whether or not 22 this suggestion was implemented. In his 23 examination of Microsoft's source code for 24 MS-DOS 6.0, Andrew Schulman found code in the 25 combined setup for Windows and MS-DOS that 3144 1 tests for OS/2 and displays a warning. 2 On October 30th, 1991, Bill Gates 3 himself weighs in. He knows what to do and he 4 wants to do it. 5 This is Plaintiffs' Exhibit 1059. 6 Mr. Gates says, we should design some 7 of our extensions explicitly so that IBM can't 8 run them under OS/2. We need to put some real 9 thinking into this. 10 Just a month later, there is a formal 11 OS/2 attack plan -- it is 20 pages long -- by 12 Joseph Crawczak, the product manager, which 13 includes the following ideas of OS/2, attack 14 plan, draft only. Plaintiffs' Exhibit 1116. 15 He says, it is therefore critical that 16 we prevent OS/2 2.0, from eroding Windows 17 momentum and defeat IBM's attempt at gaining a 18 foothold on the desktop with OS/2. 19 To do this we must: Pursue a product 20 development strategy that prevents IBM from 21 claiming Windows compatibility. Prevent 22 Windows applications from running correctly on 23 OS/2. 24 Next, set a new bar for Windows 25 functionality and requirements for 3145 1 compatibility. 2 And reposition OS/2 as impractical and 3 incompatible in the minds of customers. 4 We have seen these tactics before. 5 The technical sabotage, FUD, deception, 6 Microsoft makes its products incompatible on 7 purpose and then uses the incompatibilities 8 that it has created to claim that OS/2 is a bad 9 product. 10 In early February -- and we're a 11 couple of years beyond -- I guess, a year 12 beyond. In early February 1993, Mr. Gates 13 writes to Silverberg and Maritz about how good 14 OS/2 still is. OS/2 2.0 has come out now, and 15 how Microsoft will continue to have trouble 16 with its message as long as OS/2 is perceived 17 as a high-end product in the marketplace. 18 He writes in Plaintiffs' Exhibit 1554, 19 the subject of which is OS/2 2.1. I am really 20 concerned over everything I am hearing about 21 OS/2 2.1. 22 As usual, they get total credit for 23 being crash-proof. Our inability to explain 24 they are not crash-proof is going to kill us. 25 I don't understand what they did 3146 1 technically, but I am very, all caps, 2 impressed. I thought the mapping they had to 3 do would prevent them from ever getting this 4 good. 5 Gates himself drives the campaign 6 against OS/2 and puts executives on -- puts 7 pressure on executives to keep on it. 8 In a June 27th, 1991, e-mail to 9 Silverberg and Ballmer, Gates asks them about 10 some features that could be added to Windows to 11 make it more robust and discusses the 12 effectiveness of discrediting OS/2. 13 He writes in Plaintiffs' Exhibit 808, 14 IBM is putting our lack of protection between 15 applications in their ads, and there is no good 16 response. We can try to say that OS/2 isn't 17 robust either, but that is a hard point to 18 make. 19 And it is because, as you have seen 20 from the documents, Microsoft knows that OS/2 21 is robust. 22 Back to 808 -- and this is a response 23 from Brad Silverberg to what Mr. Gates says. 24 Mr. Silverberg tells him that adding 25 protection to Windows would be hard from a 3147 1 development perspective, but he has another 2 thought. He suggests that attacking OS/2 3 robustness might not be as hard as Gates 4 thinks. 5 This, again, is 808. Yes, this would 6 be a fairly disruptive thing to do. On the 7 other side, though, we do have some apps 8 developed by Eric Fo -- that is Eric Fogland, 9 which will crash OS/2 2.0. We will do more of 10 these. 11 What the app that Mr. Silverberg 12 refers to is -- referred to by the executives 13 as the bad app. It is not a real application. 14 It is developed by Earl Fo specifically to 15 allow Microsoft to spread FUD about the 16 robustness of OS/2. 17 Just a few days before Silverberg's 18 e-mail to Gates, Eric Fo, himself, 19 Mr. Fogland, briefly describes what the bad app 20 does. And this is Plaintiffs' Exhibit 797. 21 Do you see the subject matter -- this 22 is to Mr. Maritz, called one bad app. 23 This is June 26, 1991. 24 I have written a PM, presentation 25 manager, app that hangs the system. Sometimes, 3148 1 quite graphically. You can look at it any 2 time, just let me know. 3 The reason Microsoft creates or has 4 Mr. Fogland create this bad app isn't to 5 distribute it to users, isn't to distribute it 6 to customers. It doesn't do anything useful 7 for customers. This bad app is entirely for 8 FUD purposes. Fear, uncertainty, and doubt. 9 And with this application in hand, 10 Microsoft sends Mr. Ballmer out to do a tour 11 demonstrating that OS/2 is unstable by 12 showing -- putting in Mr. Fogland's bad app and 13 showing how it crashes the system. 14 While on July 24th, when Mr. Ballmer 15 is on the tour, Mr. Gates reads a Seybold 16 report on office computing that praises OS/2. 17 He, Mr. Gates, feels apparently they are not 18 succeeding in their FUD efforts and criticizes 19 his executives and the PR folks in Plaintiffs' 20 Exhibit 860, which is an e-mail re: Seybold 21 report on office computing. 22 This report highlights our failure to 23 get our message out. It praises OS/2 2.0 24 endlessly, using the charts from the IBM white 25 papers. It praises the better Windows than 3149 1 Windows capability. 2 Turning the page. I am sure I will 3 get back some message about how Steve will see 4 these people and it will all be better. It 5 won't be better. No one is taking 6 responsibility for getting our message out 7 broadly. We should recognize we are losing 8 this battle and we need a lot more creativity 9 to get on top of it. 10 And, of course, he does get an e-mail 11 back about Mr. Ballmer's tour and the efforts 12 to crash OS/2. 13 On July 25th, 1991, Claire Lematta, 14 you've heard her before, from Weggener Edstrom, 15 responds to Mr. Gates, Silverberg, Allchin, 16 Maritz, Ballmer, with the details of the tour. 17 And she writes in Plaintiffs' Exhibit 18 860, the title of which is Steve B. press tour 19 trip report, long mail. 20 Steve B. went on the road to see the 21 top weekly's industry analysts, and business 22 press. The meeting included demos of Windows 23 and OS/2, including a performance comparison to 24 Windows and a bad app that corrupted other 25 applications and crashed the system. 3150 1 It was a very valuable trip and needs 2 to be repeated by other Microsoft executives 3 throughout the next month so we hit all 4 publications and analysts. 5 The demos of OS/2 were excellent. 6 Crashing the system had the intended effect, to 7 FUD OS/2 2.0. 8 The bad app, one purpose only, to FUD 9 OS/2 2.0. 10 So what has happened here is 11 Mr. Ballmer goes around the country with the 12 bad app and shows that OS/2 can be made to 13 crash. 14 Now, he does not reveal that the app 15 that crashes OS/2 was especially written to do 16 one thing and one thing only, and that is to 17 crash OS/2. 18 No consumer will ever use it. No 19 consumer will ever see it. It won't be 20 crashing their computers. It is Microsoft FUD. 21 On July 28th, 1991, Mr. Muglia writes 22 Mr. Maritz from the road about how popular the 23 bad app is with Microsoft salespeople. They 24 just can't hardly wait to get their hands on 25 it. 3151 1 This is Plaintiffs' Exhibit 7603. PM 2 bad app is a great thing. When I mentioned 3 this app to the sales force, they practically 4 begged me for a copy. 5 However, I agree with Eric Fo that we 6 absolutely should not give out this app. The 7 potential backlash of Microsoft spreading OS/2 8 viruses is not worth it. A really good video 9 like this will blow apart whatever momentum IBM 10 has achieved with 2.0. 11 This goes on, this bad app -- and 12 eventually it becomes known as the 13 Terminator -- I'm sure named after Arnold 14 Schwarzenegger's movies -- for its ability to 15 destroy OS/2. 16 Rob Horowitz recounts a Ballmer 17 demonstration of the Terminator in a July 30th, 18 1991, e-mail summary. This occurs at a 19 financial analysts meeting. 20 This is Plaintiffs' Exhibit 5330. 21 Robustness? Not a lot more robust than 22 Windows. Demoed an OS/2 app (Terminator) 23 running under OS/2 2.0, which corrupts other 24 apps and eventually brings down the system. 25 I do want you to note there that this 3152 1 says that it brings down OS/2 2.0. I'm going 2 to show you a little bit more about that. 3 Despite the success of Ballmer to the 4 bad app and other FUD efforts, Silverberg is 5 still pushing hard on doing more against -- 6 more anti-OS/2 propaganda. 7 On December 25th, Christmas day, 1991, 8 he writes to Ballmer, Cole, Maritz, Pam 9 Edstrom, of the need to blitz OS/2 in order to 10 avoid a repeat of the DR-DOS situation. And 11 you will see that the title of the e-mail is 12 blitzing OS/2 2.0. 13 This is Plaintiffs' Exhibit 1153. 14 As OS/2 is starting to come near -- 15 and he means OS/2 2.0 -- we need to build our 16 artillery against it and take the battle to 17 them. I don't want a repeat of the DR-DOS 18 situation where the reviews came out first and 19 then we were forced to react. 20 DR-DOS got good reviews for 21 compatibility, momentum, and then we're placed 22 on the defensive having to demonstrate and get 23 the word out on its problems. 24 We can't let this happen with OS/2. 25 We need to know the problems, especially with 3153 1 Windows compatibility and performance and let 2 the reviewers know before they do their 3 reviews. 4 Let's blitz them before they get 5 started. 6 By February of 1992, the bad app has 7 become known as TIII, Terminator 3, and 8 Silverberg is still keen on how effective it is 9 in the fight against OS/2. 10 He believes that it is effective FUD 11 and wants a list of what it does, and he writes 12 to a guy named Doug Hogarth in Plaintiffs' 13 Exhibit 1236. 14 Re: OS/2 protection myth. 15 And the first thing he asks is what 16 are the things that TIII exploits? Later in 17 the day on February 24th, Mr. Hogarth responds 18 to Silverberg. But Mr. Hogarth is 19 uncomfortable with the bad app. 20 And what it does, especially since it 21 has actually been developed for an earlier 22 version of OS/2. Not OS/2 2.0, but OS/2 1.3, 23 the one that comes out before OS/2. 24 And Ballmer has implied on his tour 25 that it was being used on the new version of 3154 1 OS/2 2.0. 2 And in 1236 Mr. Hogarth says due to 3 the sensitive nature of the bad app, I'd prefer 4 to demonstrate/discuss only in person. 5 Ballmer went on a press tour with this 6 thing and lots of the press perceived it as an 7 I can crash the OS/2 2 beta when it really is a 8 version of a 1.3 style app. 9 I can't stress enough how sensitive 10 the code is considered. It is -- I think that 11 meant -- it is meant only to point out what you 12 said, that OS/2 is not bullet proof. 13 On February 27th, there's another 14 meeting of Microsoft executives and the 15 Weggener Edstrom PR folks in which they discuss 16 an escalation of the FUD campaign. Now they're 17 calling it crush OS/2. 18 Claire Lematta writes the following to 19 Silverberg, Maritz, and others. And this is 20 Plaintiffs' Exhibit 1254. 21 This is what we agreed to. Next week 22 the OS/2 swat team are going to aggressively 23 put together the crush OS/2 data. We need to 24 demonstrate that it is not better Windows than 25 Windows. 3155 1 At the end of the week, PR brains are 2 put -- PR brains are put to determining what is 3 the best way to present, leverage, communicate 4 this information. 5 Mr. Marty Towcher is an in-house PR 6 person at Microsoft, and he's not too happy 7 with the plan. He feels that it makes them 8 look bad, and he writes to Mr. Silverberg, 9 Maritz, and others. Puts in his two cents. 10 My two cents is that we look bad and 11 uncredible when we demonstrate OS/2 problems. 12 We can talk about them and hand evaluation 13 guides, but actually showing the product makes 14 us look bad. 15 But Silverberg continues his campaign 16 against OS/2 for the rest of 1992. 17 On August 12th, 1992, he writes an 18 e-mail to Gates in which he reiterates the need 19 to keep up the pressure on OS/2 by hammering -- 20 by, quote, hammering a few more nails in its 21 coffin. 22 This is Plaintiffs' Exhibit 1393. 23 Update. We keep trying to put nails in the 24 OS/2 coffin. They keep pushing the lid up. We 25 should hammer a few more nails in now and not 3156 1 let them get momentum. 2 And hammer in a few more nails is just 3 what they do. There's a relentless, continuous 4 FUD campaign against IBM. 5 Would now be a good time, Your Honor? 6 THE COURT: Sure. 7 Ladies and gentlemen, we will take a 8 break right now. 15 minutes. Remember the 9 admonition previously given. 10 Please leave your notebooks here and 11 we'll see you in about 15 minutes. 12 (A recess was taken from 10 a.m. to 13 10:18 a.m.) 14 THE CLERK: All rise. 15 THE COURT: Everyone else may be 16 seated. 17 My court attendant told me some of you 18 wanted some legal pads. That's fine. There is 19 a thing in the back you can get them in. I'll 20 give you a minute to get organized. Do you 21 want to go ahead and put those on your thing? 22 And other problems with the notebooks? 23 We'll wait. 24 [Juror Name]: Oops. 25 MS. CONLIN: Those little things 3157 1 always stick to my fingers. 2 THE COURT: Got it? Hope those work. 3 [Juror Name]: Yep. 4 THE COURT: All right. You may 5 continue, ma'am. 6 MS. CONLIN: Thank you, Your Honor. 7 We were talking about OS/2, and I'm 8 going to tell you -- I've told you about the 9 bad app and some of the other things, 10 intentional incompatibilities, but there was 11 more. 12 Microsoft uses access to Windows 95 13 betas, Chicago betas, and programming 14 information as a lever against OS/2, as it used 15 the beta of MS-DOS, betas of MS-DOS and Win 3.0 16 against DR-DOS. 17 ISVs and OEMs are very keen to get 18 their hands on this Chicago beta. And they 19 need early betas because applications, ISVs, 20 applications vendors, and others, need them to 21 test the system and make sure their own 22 applications are going to work with this new 23 Chicago -- with the Chicago system and that 24 their applications can come out at about the 25 same time that the Windows 95 hits the market. 3158 1 On May 13th, 1993, Barry Spector 2 writes Joachim Kempin about an announced deal 3 between IBM, AST, OS/2. This is Thursday, May 4 13th, 1993. 5 Mr. Spector says -- this is 6 Plaintiffs' Exhibit 1661 -- as we suspected, 7 AST will stand on stage with IBM next week, 8 announce that they will sign a license with IBM 9 for OS/2. I tried to convince them not to 10 stand on stage with them. 11 Kempin's response is to withhold 12 cooperation and code from AST and IBM. He 13 writes -- this is also 1661 -- very clear to 14 me. No Chicago. No cooperation. No beta. No 15 alpha code. Total war. 16 Yet another way in which Microsoft 17 uses Chicago as a lever against IBM is to 18 withhold a license to IBM -- you remember the 19 two parts of IBM, the hardware part that must 20 have Windows to survive and the software part 21 which develops OS/2 and other software that 22 competes with Microsoft. 23 The software department creates and 24 sells OS/2. The hardware part needs Windows 95 25 to sell its PCs. 3159 1 OS/2 has a very small market share. 2 And despite the fact that it's IBM's own 3 operating system, IBM still needs to be able to 4 license Windows or it won't be able to sell its 5 machines. And IBM knows this. 6 And on August 14th, 1994, Kempin 7 proposes that Microsoft invoke its ability 8 under its contracts to audit IBM. 9 Until this audit is over, they do, in 10 fact, withhold a license to Windows 95 from 11 IBM. 12 This is back August 14th, 1994. This 13 is Mr. Kempin, and he is -- this is Plaintiffs' 14 Exhibit 9624, confidential MS OS/2 royalty 15 numbers, quick analysis. 16 Mr. Kempin says let's do it, audit 17 them. Reason to say, when auditing them, 18 according to their bragging in the press, we do 19 not believe they are reporting correct OS/2 20 numbers and we do not believe their last Win, 21 Windows report. 22 As Judge Rosenberg told you, and as 23 we'll discuss in a minute, as he told you when 24 reading the findings from the government case 25 that are already proven, this audit is a part 3160 1 of Microsoft's effort to get IBM to stop using 2 its own products, OS/2 and Lotus SmartSuite on 3 its own PCs. 4 Microsoft did not grant IBM a license 5 to preinstall Windows 95 until 15 minutes 6 before Windows 95 launched on August -- before 7 the launch event on August 24th, 1995. 8 So Microsoft uses against IBM, against 9 OS/2, many of the same tactics that it has used 10 against DRI. The exclusionary contract's 11 probably the most effective of those tactics 12 because that locks OS/2 out of the OEM channel. 13 They use the technological sabotage, 14 creating extensions that aren't compatible on 15 purpose, threats, intimidation, fear, 16 uncertainty and doubt. And that does, in fact, 17 drive OS/2 off the desktop and into a small 18 niche market. 19 This operating system that everybody 20 agrees is better, is the better of the two, 21 cannot win on the merits against Microsoft's 22 monopoly power. 23 What will Microsoft's evidence be? 24 Microsoft will say that its anticompetitive 25 conduct toward OS/2 did not affect consumers, 3161 1 did not affect Iowa class members, and that 2 OS/2 would have failed in the market on its 3 own. But, obviously, not because of merits. 4 Please keep in mind what Judge 5 Rosenberg told you. The Plaintiffs do not have 6 to prove -- as I just said in GO, the 7 Plaintiffs do not have to prove that 8 Microsoft's anticompetitive conduct was the 9 sole reason for the failure of OS/2. Only that 10 it was a cause, and a material cause, of the 11 failure. 12 Microsoft also made claim that OS/2 13 failed because it made business mistakes. Of 14 course, IBM will have made mistakes along the 15 way. DRI. GO. And Microsoft will make 16 business mistakes along the way, and you will 17 hear about them. 18 And the question is, was it the 19 business mistakes that were the sole cause? 20 And we will prove it was not. That, in fact, 21 the cause, a cause, a material cause of the 22 failure of OS/2, a very meritorious operating 23 system, was Microsoft's anticompetitive 24 conduct. 25 Microsoft may also argue that OS/2 had 3162 1 technical problems, particularly with respect 2 to memory. That it used too much memory for 3 the computers available at the time. 4 But you will hear Mark Zbikowski. Mr. 5 Zbikowski is a software engineer at Microsoft. 6 He happens to be the third longest serving 7 employee at Microsoft. Gates, Ballmer, Mark 8 Zbikowski. 9 He was a software engineer on the OS/2 10 design team back in the late '80s and the early 11 '90s. He doesn't believe that OS/2 failed 12 because it wasn't a good product. He doesn't 13 believe that OS/2 failed because of any 14 technical issues. 15 Let me show you a piece of the 16 deposition that I took of him a few months ago. 17 (Whereupon, the following video was 18 played to the Jury.) 19 MS. CONLIN: Did you feel OS/2 as you 20 developed it was a good product? 21 MR. ZBIKOWSKI: Very much so. 22 MS. CONLIN: Did it have some 23 particular features that you felt were very 24 valuable for end users? 25 MR. ZBIKOWSKI: Yep. Yes. 3163 1 MS. CONLIN: Give me some examples of 2 those applications that could be written to 3 OS/2 because of the features of the operating 4 system. 5 MR. ZBIKOWSKI: Okay. An example would 6 be multiple threads, multi- -- that's allowing 7 an application to have multiple things going on 8 within it at the same time. 9 So, for example, word processors in 10 the DOS time frame would -- as you would type 11 into your word processor, it would be trying 12 its hardest to keep the -- your paragraphs, the 13 words flowing correctly in your paragraphs 14 being adjusted, you know, having your margins 15 adjusted. 16 And if your -- if you typed fast 17 enough, you'd get ahead of it, and it would 18 stop doing the flowing until you finished 19 typing and then it would catch up, because the 20 programming model only allowed one thing to be 21 done by an application at a time. 22 In the case of -- with multiple 23 threads, that allowed the application to have 24 background activity waiting in between each key 25 stroke of re- -- of realigning the text on the 3164 1 screen while another activity was waiting for 2 the next key stroke from the user. That's one 3 example. 4 And another example would be 5 background printing. For example, today we 6 take it for granted that you can print a 7 document and then keep on editing the document 8 while it's printing in the background. That in 9 those days, you could not do that. 10 You'd ask your application to print 11 and you'd have to sit there and wait for it to 12 complete printing before you could continue. 13 So there's two significant -- a rather 14 limited piece of technology that gives some 15 significant benefit to the end user. No other 16 operating system had threads at the time. 17 MS. CONLIN: Besides threads, what 18 other features did the OS/2 operating system 19 have in 1989 and through 1991 that permitted 20 applications to be written that were beneficial 21 to the end user? 22 MR. ZBIKOWSKI: There was the ability 23 to handle -- to give the applications the 24 illusion that there was more memory than there 25 really was. Physical memory on the system was 3165 1 called virtual memory. 2 The application could deal with very 3 large documents and the operating system would 4 parcel out the physical memory to the 5 application allowing the application to use it. 6 And when the application exceeded the capacity 7 of the physical memory, the operating system 8 could take pieces of the physical memory, write 9 them onto disk, change some indirection, and 10 then give the -- allow the application to 11 continue but use the newly freed memory. 12 This gave the -- this gave you the 13 ability to write applications to deal with 14 larger documents, larger spreadsheets, larger 15 databases. It freed the application writer 16 from having to do this sort of maintenance on 17 his own. 18 In this time frame, every application 19 writer that wanted to deal with large volumes 20 of data had to write their own what's called 21 memory manager, and that -- that resulted in 22 memory managers not being uniform among 23 different applications that allowed there to be 24 different bugs between different applications 25 when memory pressures were high. 3166 1 By doing it in one place in the 2 operating system, this allowed many 3 applications to be -- applications to be 4 written that were much better, much better 5 behaved than in previous OSs. 6 MS. CONLIN: Were you proud of the 7 product that you shipped that bore the name 8 OS/2? 9 MR. ZBIKOWSKI: I was -- of all the 10 products, all the versions of OS/2 that I was 11 -- that I had contributed for, that was OS/2, 12 1.0 through OS/2 1.1, I was very proud not only 13 of my contribution, but I was very proud of the 14 product as it came out. 15 (Whereupon, playing of the video 16 concluded.) 17 MS. CONLIN: That from a Microsoft 18 current employee who worked on the product at 19 this time. 20 Microsoft might even argue that IBM's 21 PC division wanted to preinstall Windows on the 22 computers it sold. That, of course, is called 23 choice. And, of course, also by a certain 24 point in time, OEMs must offer Windows to 25 remain commercially viable. That is part of 3167 1 the findings of fact that are already proven 2 that Judge Rosenberg read to you. 3 And once Windows becomes a necessity 4 for OEMs, that is when Microsoft uses it as a 5 club against -- against IBM and withholds it 6 from IBM because IBM wants to load OS/2, its 7 own product, on some of its PCs. 8 Finally, whatever the excuse offered 9 by Microsoft now, remember the documents that I 10 have shown you. 11 Remember what Mr. Gates and 12 Mr. Ballmer and others at Microsoft are saying 13 at the time about the quality and merits of 14 OS/2 and about what Microsoft is willing to do 15 to defeat it. 16 And then remember that e-mail from 17 Mr. Kempin, all key OEMs are committed to DOS. 18 This is Plaintiffs' Exhibit 690. All 19 key OEMs are committed to DOS 5 and Win 3.x for 20 the next two or three years, most of them per 21 processor or at least per system. This will 22 give us time to respond technically. 23 What this says, in effect, is we've 24 got the OEM market locked up. And while we 25 have it locked up, we'll try to make a better 3168 1 -- we'll try to make our product equal to the 2 already existing OS/2 product already on the 3 market. 4 If OS/2 would have failed anyway, 5 Microsoft would not have needed to lock down 6 the OEM channel to prevent OS/2 from reaching 7 consumers. 8 All right. We are done with story 9 three. 10 I'm going to walk you through the 11 findings of fact. Those findings of fact that 12 Judge Rosenberg read you at the beginning of 13 the case. 14 And we -- let me tell you what we have 15 done that we hope will make this process a bit 16 easier. 17 I know -- I saw that you were 18 listening intently. I had to read that -- 19 those findings of fact to myself many, many, 20 many times before I understood all of the ins 21 and outs, because there are lots of different 22 products involved, different people, and so we 23 are going to walk through them. 24 And on this screen the actual finding, 25 the whole finding of fact will be there for you 3169 1 to look at. 2 If I was just going to read them to 3 you again, that would not be terribly useful, 4 so I'm going to read them -- you are going to 5 have them to read, plus on the other screen, 6 you'll see the documents and the other things 7 that -- and graphics and the like that we hope 8 will help this -- help make this a bit clearer 9 to you. 10 When the government took Microsoft to 11 court -- and that is the federal government and 12 the 19 states, including Iowa -- that judge 13 looked at the evidence and made the findings of 14 fact about what Microsoft did which Judge 15 Rosenberg read to you. 16 Since that's already been done, those 17 facts don't have to be proven again. As the 18 Judge told you, these are findings that are the 19 truth. 20 The first of which is Microsoft has a 21 monopoly. One of the facts proven is Microsoft 22 has a monopoly in operating systems. 23 Please remember that this is in 24 operating systems, the part that is already 25 proven. And, of course, this is a very 3170 1 important fact. 2 The applications barrier to entry is a 3 barrier to competition. There is -- this is 4 the barrier that is particularly important to 5 Microsoft and particularly important to its 6 being able to protect its monopoly. 7 Finding of Fact 36 explains the effect 8 of the applications barrier to entry. 9 Sometimes this is called the chicken 10 and egg problem. This is not an egg. This is 11 an attempt to graphically display the 12 applications barrier to entry. The 13 applications barrier to entry is portrayed as 14 that sort of barrier around the relevant 15 market. 16 It's called the chicken and egg 17 problem because you cannot sell an operating 18 system unless it has applications. Things to 19 do with the computer. 20 And the ISVs who write applications do 21 not want to write applications to an operating 22 system until it already has plenty of 23 customers. 24 MR. TULCHIN: Your Honor, we object to 25 all of this for the grounds stated on 3171 1 collateral estoppel. 2 THE COURT: Overruled. 3 Proceed. 4 MS. CONLIN: Thank you, Your Honor. 5 Simply put, it discourages competitors 6 from competing with Windows because it is so 7 difficult to get other companies to write 8 applications for a new operating system. 9 New operating systems don't begin life 10 with a lot of customers. But without many 11 applications, it's difficult to attract 12 customers even when Windows is priced, as the 13 finding of fact says, substantially above 14 competitive levels for a significant period of 15 time. 16 Now, I didn't say this in the 17 beginning. I am not going to cover all of the 18 findings of fact. Some of them are more 19 properly a part of Mr. Hagstrom's discussion 20 with you about causation and damages. He's 21 going to talk about markets and that sort of 22 thing. 23 But what the findings of fact say is 24 that Microsoft's market share does not drop 25 when it raises prices. People simply pay the 3172 1 higher price for Windows. 2 What Microsoft -- some of the 3 companies, some of the products that the judge 4 -- that the findings of fact cover are 5 Netscape, Sun's Java, Microsoft's conduct 6 against other middleware, RealNetworks, Apple 7 QuickTime, Microsoft's conduct with respect to 8 Intel, and a section on Microsoft's conduct 9 with respect to IBM. 10 And that conduct is the kind of 11 conduct that we have -- that Microsoft uses 12 over and over again against its competitors, 13 and sometimes against its customers. 14 According to the findings of fact, 15 Microsoft imposes monopoly prices. 16 While Microsoft does sell operating 17 systems off the shelf, retail, the original 18 equipment manufacturers, OEMs, are actually the 19 most important direct customers of Microsoft's 20 operating system. 21 And it is through the OEMs that 22 Microsoft exerts a great degree of control over 23 the price of Windows. 24 MR. TULCHIN: Same objection, Your 25 Honor, to Ms. Conlin's interpretation of what 3173 1 the findings say. 2 THE COURT: Overruled. 3 MS. CONLIN: Thank you, Your Honor. 4 OEMs have no alternative. As Finding 5 of Fact Number 54 discusses, the competition 6 among OEMs is intense. 7 They are both customers themselves and 8 they are representatives of the ultimate 9 purchasers of their machines. All OEMs 10 preinstall -- virtually, all OEMs preinstall 11 Windows on the majority of the PCs they sell. 12 Moreover, the OEMs uniformly believe 13 there is no viable alternative to Windows even 14 in the face of significant price increases. 15 Microsoft knows that OEMs have no 16 choice but to sell their PCs with Windows 17 preinstalled. 18 As Finding of Fact 55 describes, the 19 OEMs believe there is nothing keeping Microsoft 20 from raising prices at will. Without any 21 viable competitors, Microsoft is free to set 22 Windows prices without even considering what 23 other operating system vendors are charging, 24 and that is exactly what they did with Windows 25 98. 3174 1 Consider the testimony of Joachim 2 Kempin. I have to read this to you. You did 3 not have the video clip of this. Mr. Kempin 4 says -- 5 MR. TULCHIN: Same objection, Your 6 Honor, for the record, on collateral estoppel. 7 THE COURT: Overruled. 8 MS. CONLIN: Question: In considering 9 what the level of the royalty should be, did 10 you consider what royalty other vendors then 11 Microsoft charged for their systems? 12 Answer: We look at some of them once 13 in a while, but, in this particular case, we 14 really compared it with Windows 95. 15 Question: Why is that? 16 Answer: It was the closest in value 17 you could get. 18 This is from Mr. Kempin's October 1st, 19 '98 deposition. 20 Another thing that the findings of 21 fact determine is prices are not affected by 22 the older versions of Windows. 23 Even though an operating system never 24 wears out, the price Microsoft charges OEMs for 25 the newest version of Windows is not affected 3175 1 by how many licenses to older versions are 2 still out there. 3 Microsoft takes pains to make sure 4 OEMs are preinstalling the most recent version 5 of Windows on their PCs. 6 The primary way it does this is by 7 increasing the price of the older versions when 8 new ones are released. This gives the OEMs an 9 incentive to always ship the latest version. 10 This is, of course, unlike almost, 11 almost all other products with an older 12 version, when a new version comes out, the 13 price of the older version decreases. Doesn't 14 become as expensive or more expensive than 15 newer versions. 16 Also, Finding of Fact 58 talks about 17 prices as affected or not affected by piracy. 18 There is no legal secondary market for 19 Windows. You can't transfer your license. But 20 there is an illegal one. But it too fails to 21 affect the prices Microsoft charges for its 22 products. 23 Prices are consistent with monopoly 24 behavior. Microsoft's pricing behavior is, 25 according to Findings of Fact 62 and 63, what 3176 1 you would expect from a firm with monopoly 2 power in the Intel PC -- Intel-compatible PC 3 market. 4 Paragraph 62 and 63 list the pricing 5 actions Microsoft has taken, which show its 6 monopoly power in the relevant market. 7 First, Microsoft does not consider 8 what other operating system vendors are 9 charging. Mr. Kempin told you. 10 Microsoft raises the price of old 11 products when new ones are released. It did 12 this for Windows 95 when Windows 98 was 13 released. 14 Finally, in November 1997, an internal 15 Microsoft study showed that it could sell its 16 Windows 98 upgrade profitably at $49 per 17 license, yet Microsoft decided to maximize its 18 profit by charging $89, nearly double the price 19 for the upgrade. 20 Here is Plaintiffs' Exhibit 6128. It 21 is a memorandum or an e-mail from Christian 22 Wildfeuer dated Thursday, August 21, 1997. It 23 goes to Mr. Allchin, Mr. Maritz, Mr. Kempin, 24 and the subject is Windows 98 pricing update. 25 MR. TULCHIN: For the record, Your 3177 1 Honor, same objection. 2 THE COURT: Overruled. 3 MS. CONLIN: John Ro -- I believe that 4 is John Roberts -- asked me to send an update 5 on where we are at with the pricing -- with 6 pricing the retail version of Windows 98. 7 Summary. Price elasticity research 8 done with consumers in the U.S. shows that $89, 9 street, is the optimal price point for the Win 10 98 retail upgrade. 11 The elasticity curve shows that at 12 $89, we would be selling 33 percent less units 13 compared to $49, but more than make up for the 14 loss due to the higher price. The net increase 15 would be 28 percent in gross revenues. 16 Additionally, OEM is projecting we 17 would lose -- OEM means Microsoft's internal 18 OEM department. 19 OEM is projecting we would lose about 20 200 million in annual revenues due to lost 21 DSP -- meaning delivery service partner -- in 22 annual revenues due to lost DSP sales, and the 23 associated increase in PSS cost, product 24 support services, the people who answer the 25 telephone when you have problems, if we decided 3178 1 to go with $49. 2 Given our objective to maximize 3 revenues and coordinate prices across all 4 channels, this strongly argues for a $89 street 5 price. But the press may ding us for $89. 6 As the finding of fact tells you, 7 Microsoft thus opted for the higher price. The 8 study identifies $89 as the revenue maximizing 9 price. Microsoft thus opted for the $89 price. 10 What that finding of fact indicates is 11 Microsoft can set its prices without regard to 12 competition because there isn't any. 13 Restrictions are also imposed by 14 Microsoft to strengthen the monopoly. 15 Microsoft uses its monopoly power not 16 just to charge higher prices, but also to 17 impose burdensome restrictions on its customers 18 for the sole purpose of enhancing its monopoly 19 position. 20 Finding of Fact 66 lists a few of the 21 things that Microsoft does to keep the monopoly 22 secure. These are restrictions, the purpose of 23 which is to protect Microsoft's monopoly. 24 And this is Finding of Fact. 25 First, Microsoft attaches license 3179 1 conditions to Windows that restrict OEMs from 2 offering software that Microsoft doesn't like. 3 And usually that is software, as we 4 will see coming up, that weakens the 5 application barrier to entry. Or that competes 6 directly with Microsoft. 7 Also, Microsoft charges a lower price 8 to OEMs that agree to ship most computers with 9 an operating system preinstalled. 10 This prevents end users, consumers, 11 from knowing the true cost of Microsoft's 12 products, of the operating system. It's 13 included as a part of the price of the 14 computer. So, that makes it impossible for 15 consumers to know when the price goes up. 16 In addition, this further dampens 17 consumer demand for operating systems that are 18 not preinstalled. Such as Linux. 19 The Judge read you a paragraph about 20 Linux, which is the free software available on 21 the Internet created by volunteers that we'll 22 talk about probably tomorrow or Friday. 23 Most consumers don't want to install 24 and run two operating systems on the same 25 computer. There's a big performance hit if you 3180 1 do that. They run slower. They're less 2 stable. 3 So if you have your operating system 4 on when you buy it, then, most people won't 5 unload and reload or put two operating systems 6 on the computer. 7 Microsoft goes to great lengths to 8 monopolize. Microsoft goes to great length to 9 monopolize the operating system market. 10 Charging high prices isn't the only 11 way that Microsoft wields its monopoly power. 12 It also uses its monopoly power and 13 its market strength to reinforce and extend its 14 dominance over the competition. 15 Frequently, it does so by stopping 16 innovative new technologies or by targeting 17 businesses with competing products. 18 Finding of Fact 67 explains that some 19 of the actions Microsoft has taken over the 20 years would actually be harmful to Microsoft if 21 they did not actually enhance or extend its 22 monopoly position. 23 As the findings of fact show, 24 Microsoft used a variety of tactics to protect 25 the applications barrier to entry and to 3181 1 protect and enhance its monopoly power. 2 As we go through the rest of the 3 findings of fact, we will see that Microsoft 4 uses tactics such as exclusionary contract 5 terms, threats, and intimidation, deception, 6 and misinformation, technical sabotage, buying 7 out the competition, dividing the market, 8 unequal treatment, and tying and bundling. 9 Microsoft prevents the development of 10 middleware. One of the targets of Microsoft's 11 monopoly power is middleware. 12 All right. You see on this graphic -- 13 I think I have showed this to you before. 14 Microsoft's, MS-DOS, Windows, and then the 15 middleware is such things as Sun's Java, 16 Netscape Navigator, QuickTime, and 17 RealNetworks. They are a layer between the 18 operating system and the applications. 19 And Finding of Fact 68 discusses the 20 nature of middleware and why Microsoft fears 21 it. 22 There are at least three reasons why 23 Microsoft views middleware as a potential 24 threat. 25 First, because it exposes those APIs, 3182 1 those application programming interfaces, which 2 ISVs, the independent software vendors, can 3 write applications for. 4 And if they write applications for the 5 APIs on the middleware, then it doesn't matter 6 what the operating system is. Any operating 7 system will do. 8 By exposing APIs, I mean that these 9 APIs are available to a developer to build on. 10 Second, these APIs could become, 11 according to the Court, so numerous and varied 12 that a significant number of fully featured 13 applications written to the middleware APIs, 14 instead of Windows APIs, could become 15 available. 16 And, finally, because of the portable 17 nature of middleware, these applications would 18 run as written, without changing them. They 19 would be portable. And they would run on any 20 of the non-Microsoft operating systems. 21 So you got your middleware, and it can 22 plug itself into a GO operating system or a Sun 23 Solaris operating system or a Linux or the BeOS 24 that we'll also talk about later, as written. 25 Any operating system can host the 3183 1 middleware. And that, of course, reduces the 2 importance of Windows. 3 While any middleware has the potential 4 to weaken the applications barrier to entry, 5 there are two technologies in particular which 6 working together have the greatest potential to 7 erode the applications barrier. 8 These two technologies are the 9 Netscape web browser, which is called 10 Navigator, and Sun's Java technologies. 11 And Microsoft engages in more 12 anticompetitive conduct against these two forms 13 of middleware than any others. 14 Microsoft first became concerned about 15 Java -- the inventors of Java at Sun 16 Microsystems. And you will be hearing from 17 Mr. Gosling, who was the original author of 18 Java and the Java technology at Sun. 19 He and others designed the technology 20 to specifically make applications run across 21 platform, on any operating system as Finding of 22 Fact 74 explains, Sun's slogan is write once, 23 run anywhere. 24 In other words, the goal is that an 25 application written in the Java language to the 3184 1 Java runtime will run anywhere. 2 And it can run on Windows or Linux or 3 GO or BeOS or Mac, the Apple operating system, 4 or any other without the developers having to 5 rewrite their code or port the code from one 6 operating system to another. 7 When they write once, they write to 8 the Java APIs, which then those APIs handle the 9 translation to the other operating systems. 10 This makes it very easy for 11 developers. 12 And the more applications that are 13 written for the non-Microsoft operating 14 systems, the more Microsoft's application 15 barrier to entry is eroded. 16 The barrier that protects Microsoft's 17 monopoly in operating systems is eroded by 18 Sun's Java because people are writing to the 19 Sun Java APIs, then the applications they write 20 don't need Windows to run. 21 In May 1995, Sun announces the 22 development of the Java programming language, 23 and that's when Microsoft becomes very 24 concerned. 25 The reason is, in order to protect its 3185 1 monopoly market share, the applications barrier 2 to entry must be preserved. 3 If it is eroded, the Windows operating 4 system and its importance is diminished. 5 People will be able to use their applications 6 no matter what operating system is installed. 7 That is Finding of Fact 74. 8 So Sun then teams up with Netscape. 9 As Finding of Fact 76 explains, Sun's strategy 10 can only succeed if its Java technologies can 11 find their way onto a large number of machines. 12 They got to get it out there for it to 13 be an effective product and for it to erode the 14 applications barrier to entry. 15 Specifically, Sun needs something 16 called the Java runtime environment. Oh, 17 you'll see that a lot in documents. JRE, Java 18 runtime environment. And that needs to be on 19 the computer for the applications written in 20 the Sun Java language to work. 21 Furthermore, that JRE, Java runtime 22 environment, must be compatibility with the Sun 23 Java standards. 24 You'll be hearing some about the Sun 25 Java standards. 3186 1 If it's not compatible with the Sun 2 Java standards, then it won't run properly or 3 it won't run as designed. 4 Microsoft realizes that the whole 5 purpose of Java is to erode the applications 6 barrier to entry. 7 So, naturally, Sun cannot count on 8 Microsoft to distribute the runtime environment 9 with Windows. 10 So, instead, Sun approaches Netscape, 11 and which agrees to use the Java runtime and 12 send it out with every copy of Navigator. And 13 that -- at that time Navigator is a very 14 popular browser. Everywhere Netscape goes, 15 Java is sure to follow. 16 And because Navigator is at that point 17 the most popular browser, getting the JRE, Java 18 runtime environment, distributed with Netscape 19 Navigator is a great vehicle for Java. 20 THE COURT: Ms. Conlin, we are going 21 to take our break now. It's 11 o'clock. 22 MS. CONLIN: Oh, I'm sorry, Your 23 Honor. 24 THE COURT: We'll be in recess until 25 12:00. 3187 1 Remember the admonition previously 2 given. Leave your notebooks here. 3 See you at 12:00 in the Jury lounge. 4 All right. 5 (The following record was made out of 6 the presence of the jury.) 7 MR. TULCHIN: Microsoft objects very 8 strenously, Your Honor, to what Ms. Conlin has 9 done in the last 30 or 35 minutes, on three 10 grounds. 11 One, she is providing the Jury with 12 her interpretations of what the findings of 13 fact said. 14 That is not proper under the doctrine 15 of collateral estoppel. 16 The Jury was told that these are the 17 findings and that they must be accepted as 18 true. 19 A lawyer's spin on what those findings 20 mean or stand for or are meant to communicate 21 to the Jury is improper. 22 Secondly, Ms. Conlin has not only used 23 findings -- just one example, Finding 63 -- but 24 then has used the very document that underlies 25 that finding, PX 6128. 3188 1 When Plaintiffs sought collateral 2 estoppel for Finding 63, and obtained it, by 3 definition they made the choice not to offer 4 into evidence Exhibit 6128, the document that 5 underlies the finding issued by Judge Jackson. 6 They cannot have it both ways. 7 Both sides are bound by that finding. 8 And if the Plaintiffs are permitted to argue 9 about the underlying evidence for Finding 63, 10 then, of course, Microsoft must be permitted to 11 put in its own evidence that surrounds the same 12 subject. 13 And, thirdly, Ms. Conlin has 14 consistently used the present tense when giving 15 her interpretation of Microsoft's conduct. 16 So she talks about each finding as if 17 the conduct is still taking place, directly 18 contrary to the instructions that the Court 19 gave the Jury and as to which there was 20 extensive argument that these findings pertain 21 to the period July 15th, 1995, up to June 24th, 22 1999. 23 Thank you. 24 THE COURT: Response? 25 MR. HAGSTROM: Thank you, Your Honor. 3189 1 I'm not sure if I wrote down 2 everything Mr. Tulchin said. 3 On the last item, the issue about 4 present tense, I think there's intermingling of 5 past tense and present tense, but, as I recall 6 in listening to the statements this morning 7 about the findings of fact, I think Ms. Conlin 8 has been very careful to identify the dates 9 with regard to those particular findings. 10 Secondly, with regard to 11 characterizing this as an argument, that's 12 simply incorrect, Your Honor, because these 13 statements about the history here and how these 14 facts interrelate with each other is something 15 that is going to be presented by various 16 witnesses, live, and by prior testimony, 17 including the experts. 18 So, I think Mr. Tulchin characterized 19 his argument, but it's clearly a statement of 20 what the evidence will show during the course 21 of this trial and, of course, in the documents 22 themselves. 23 So this is certainly appropriate to 24 do. We have addressed this issue numerous 25 times. So we believe that this is entirely 3190 1 appropriate. 2 THE COURT: Anything else? 3 MR. TULCHIN: Just very briefly, Your 4 Honor. 5 I think Mr. Hagstrom has just 6 confirmed, as I suspected, that the Plaintiffs 7 intend throughout the trial to lengthen these 8 proceedings by continuing to ask witnesses, in 9 quoting documents on the same subjects that are 10 supposedly subject to collateral estoppel. 11 They can't do that. They can't have it both 12 ways. 13 They represented to the Court in March 14 when they made their motion, March 2006, that 15 granting their motion for collateral estoppel 16 would save judicial resources and would save 17 trial time. 18 What we're seeing is that no saving 19 was ever intended, that that was a 20 misrepresentation, that what they want to do is 21 have both the findings and all the evidence 22 that pertains to it. Not for any other 23 purpose, but to prejudice us in front of the 24 Jury. That choice was made. 25 Thank you, Your Honor. 3191 1 MR. HAGSTROM: May I respond? 2 THE COURT: Yes. I want to hear your 3 response. 4 MR. HAGSTROM: The purpose of 5 collateral estoppel is to identify those facts 6 that have been established from a prior 7 litigation. 8 Obviously, with regard to an issue 9 like collateral estoppel, where there are facts 10 contained in the findings of fact, those facts 11 need to be put together in a story. 12 The experts will be putting together 13 that story explaining the story to the Jury. 14 For them to just look at the facts in and of 15 themselves, are they supposed to interpret the 16 story? Of course not. 17 But these facts are established and 18 that's what the experts and others will do in 19 explaining the entire story. 20 THE COURT: Do you intend to put into 21 evidence every piece of evidence that supported 22 the findings of fact? 23 MR. HAGSTROM: Absolutely not. 24 THE COURT: Because if you are going 25 to do that, I'm not going to allow it. 3192 1 MR. HAGSTROM: No, absolutely not. 2 THE COURT: Because, then, you are 3 wasting judicial resources and time. 4 MR. HAGSTROM: This will be a very 5 efficient process, Your Honor. The government 6 case involved 76 days of trial on these 7 specific findings and others, and we're not 8 going to be repeating that. 9 But, as I said, to simply look at 10 these findings, they have to have explanation 11 to them. They have to be linked, and that's 12 what the experts will be telling the Jury. 13 Ms. Conlin is telling the Jury now 14 what they are going to hear from the experts, 15 from other witnesses, and from the prior 16 testimony. 17 MR. TULCHIN: With all due respect, 18 Your Honor, that's exactly what the Plaintiffs 19 cannot do, is to put in testimony through 20 experts and to put in the same documents they 21 try to link and explain the findings. 22 They either take the findings for what 23 they are, which is what they asked for in March 24 in their motion, or -- and this was a choice 25 that was open to them, but they went on the 3193 1 other path -- or they try to prove up to the 2 Jury the matters that were at issue in the 3 government case. 4 Mr. Hagstrom says, well, not 5 everything that was involved in the government 6 case will be submitted here. That may be so, 7 not every document, not every piece of 8 testimony, but, clearly, they intend to make a 9 substantial duplication of what was done in the 10 government case. 11 What Ms. Conlin just referred to in 12 the exhibit that I just mentioned, 6128, is but 13 one example of what's happening. 14 That document says nothing other than 15 what is encapsulated in Finding of Fact 63. It 16 adds no evidence. It gives the Jury nothing 17 more than what the Court has already instructed 18 the Jury they must accept in that finding. 19 That's the document about whether an 20 upgrade should be priced at $49 or $89 or some 21 other price. And Judge Jackson explained it in 22 the findings. 23 And what we're doing now -- and this 24 trial is going down, with all respect, the 25 wrong road. 3194 1 What we're doing is allowing the 2 Plaintiffs apparently, at least in their 3 opening, to give the Jury not just the 4 findings, not just a spin on the findings, not 5 just some prediction that some expert will 6 explain the findings, none of which is 7 permissible, but also allowing the Plaintiffs 8 to put in the underlying evidence. That's 9 having it both ways. 10 Does Mr. Hagstrom honestly contend 11 that Microsoft cannot respond to testimony from 12 their experts or the introduction of PX 6128? 13 Once they go behind the findings and 14 around them and explain them and try to link 15 them through their experts, or other documents, 16 then, we have to be permitted to respond. 17 And what, then, does it mean to have 18 instructed this Jury about the 146 findings? 19 MR. HAGSTROM: Your Honor, Instruction 20 Number 12 says the lawyers may use them -- 21 that's referring to these facts and conclusions 22 of law -- in their opening and closing 23 statements and with witnesses and they may read 24 them to you during the trial. 25 And Microsoft apparently is suggesting 3195 1 that we get the findings, but, you know, you 2 can't -- you can't use them for purposes of 3 causation or damages or anything of that 4 nature. 5 Now, if Microsoft wants to admit 6 liability, admit causation, and all we have to 7 do is prove up a dollar amount, that's fine. 8 But until Microsoft does that, we're 9 entitled to link these facts together through 10 our witnesses, through our experts, and to tell 11 the story to the Jury. 12 And that's what -- that's what this is 13 a preview of right here. 14 MR. TULCHIN: If I may, Your Honor, 15 just one more thing. 16 I want to disabuse Mr. Hagstrom of the 17 notion that Microsoft is going to admit 18 liability or causation. 19 My every intent, every bone of my body 20 hopes we go to verdict and there will be no 21 admission of anything. 22 But what the Court said in Instruction 23 Number 12 is this: The lawyers may use them -- 24 referring to the findings -- in their opening 25 and closing statements and with witnesses, and 3196 1 they may read them to you during the trial. 2 What the Plaintiffs are suggesting -- 3 not suggesting, but the Plaintiffs have already 4 done, it goes way beyond using the findings or 5 reading them. 6 I intend to read from some of the 7 findings myself in my opening statement. But 8 providing extra spin on them or perhaps 9 suggesting to the Jury that they don't mean the 10 words that they say or responding to 11 Ms. Conlin's assertion about what they really 12 do mean, how you should understand a particular 13 finding goes way, way beyond Instruction Number 14 12 on page 20 of the Court's preliminary 15 instructions. 16 And we're back to the same points. 17 This is a tremendous misunderstanding of the 18 doctrine of collateral estoppel. It allows the 19 Plaintiffs to have something which they chose 20 in March not to get. 21 THE COURT: Anything else? 22 MR. HAGSTROM: I've stated our 23 position. 24 We have additional things to prove, as 25 Mr. Tulchin has just asserted, and this is a 3197 1 part of that process of being able to prove the 2 additional elements of our causes of action. 3 THE COURT: The original objection as 4 it was made during the opening statement was 5 that there was collaterally estopped findings. 6 Now you've offered three, I guess, further 7 subdivisions of your objections. 8 One, interpretations of collaterally 9 estopped findings. That's more in the way of a 10 closing statement. I'm not going to allow 11 that. 12 Secondly, if you are going to 13 introduce exhibits which -- or were used in the 14 collaterally estopped findings, you can do 15 that. 16 I would just state that I hope you 17 maintain what you've told me, Mr. Hagstrom, 18 that this isn't going to be a continuous 19 process of showing exhibit after exhibit after 20 exhibit for each finding of fact. 21 If that happens, I'm not going to 22 allow it because, then, it's cumulative and 23 it's prejudicial at that point. 24 Present tense is well taken. You 25 should emphasize to the Jury that these were 3198 1 findings back during the class period when 2 Judge Jackson made the findings, and that only 3 applies to that period, and to the operating 4 systems. 5 You can state in your opening 6 statement the collaterally estopped facts. In 7 doing so, I would hope that you are going to 8 say that they will help with other facts to 9 prove another fact such as causation or injury 10 or something like that. 11 The problem you run into is if you 12 start interpreting whatever collateral fact, 13 estopped fact is, to me, that's closing 14 argument. 15 I'm not going to let you do that. 16 MS. CONLIN: Well, Your Honor, up to 17 this point have I been all right? 18 THE COURT: Well, I'd have to go 19 through the record again and look at it. 20 MS. CONLIN: Okay. Well, I don't want 21 to -- I want to understand what you want. 22 THE COURT: I don't want you to take a 23 collateral fact and say not only what the fact 24 says, but that reach some conclusion from it. 25 You can say that the collaterally 3199 1 estopped fact we anticipate will help prove 2 that there was a willfulness on the part of the 3 Defendant or help in proving some other element 4 of your case and it shows this or such and 5 such. 6 I don't know if I made myself clear or 7 not on that. 8 MR. TULCHIN: For example, Your 9 Honor -- and I don't have the transcript, of 10 course, in front of me either, but Ms. Conlin 11 looked at a finding which refers to Microsoft's 12 ability to charge monopoly prices. And I 13 believe she told the Jury that Microsoft has 14 charged monopoly prices. It's not what the 15 finding says. The government case said nothing 16 about it. 17 Microsoft imposes monopoly prices. 18 First of all, stated in the present tense, and, 19 secondly, not just her spin of a finding, but 20 an absolute and complete unjustified and wrong 21 statement of what the finding says. 22 The ability to impose monopoly prices 23 is quite different from charging a monopoly 24 price. 25 And, of course, during the government 3200 1 -- during the period covered by the government 2 case, yes, Microsoft had a monopoly in the 3 operating system market. We're not going to 4 deny it. We embrace it. 5 Whether it charged monopoly prices is 6 an important issue in the case. And there is 7 nothing in the findings that says that 8 Microsoft ever did so. 9 And for a lawyer to get up and give 10 that spin, when it's not there, the words 11 aren't there, and they're very, very different 12 than what the actual words are, is just wrong. 13 THE COURT: My point is, is that she 14 can state what the collaterally estopped 15 findings were, and, in addition to that, state 16 that we will tend to show from the other facts 17 that, for instance, the Defendant was able to 18 charge monopoly prices. 19 MR. TULCHIN: Yes, of course, she can 20 say that, Your Honor. That's my point. 21 THE COURT: That's what I'm saying 22 they ought to do. 23 MR. TULCHIN: Thank you. 24 THE COURT: Do you understand? 25 MS. CONLIN: I hope so, Your Honor. 3201 1 THE COURT: Okay. Anything else? 2 No other record? 3 MS. CONLIN: No, Your Honor. 4 THE COURT: All right. 5 MR. TULCHIN: Your Honor, the only 6 question is whether the Court would find it 7 appropriate at 12 o'clock to give the Jury a 8 short instruction that arguments about what the 9 findings say are different than what the actual 10 findings say, that they should distinguish 11 between an argument and the words of the 12 finding. 13 The only thing that they've been given 14 that they must accept as true are the words of 15 the findings. 16 MS. CONLIN: Your Honor, I would hope 17 the Court would not feel it necessary to 18 instruct the Jury on that point during my 19 opening statement. 20 You have already told the Jury that 21 opening statement is not evidence. You have 22 emphasized that. There's no need to say that 23 again. And to do so would certainly be harmful 24 and prejudicial to the Plaintiffs. 25 THE COURT: The only problem is, is 3202 1 that you are getting dangerously close when you 2 are talking about some facts collaterally 3 estopped or not, there has to be some preface 4 at some point that we intend -- we expect the 5 evidence will be this and it will show this. 6 MS. CONLIN: I'm trying to do that, 7 Your Honor. 8 But in this case -- I beg your pardon, 9 Your Honor. 10 THE COURT: Go ahead. 11 MS. CONLIN: These collaterally 12 estopped facts are not evidence. They are the 13 facts of the case. 14 And so I have tried to say when I'm 15 speaking of the evidence that will come in, I 16 have tried to be careful to say the evidence 17 will show. 18 THE COURT: Good point. They are 19 facts of the case. 20 MS. CONLIN: Right. 21 THE COURT: And you can state what the 22 facts are and you can state what these facts 23 and other facts will show as far as what the 24 evidence will show. 25 MS. CONLIN: Correct, Your Honor. 3203 1 That's what I'm telling you. 2 THE COURT: But as far as any legal 3 conclusion, no, or any spin on these facts, no. 4 But you can state, for instance, Fact 5 whatever, 136, says this. We expect to show, 6 along with other testimony from Witness A, that 7 this shows a willfulness on the part of the 8 Defendant. That's fine. 9 MS. CONLIN: All right, Your Honor. 10 THE COURT: I just don't want it to 11 get into a closing thing. 12 MS. CONLIN: All right. 13 MR. GREEN: That was that issue we 14 raised the other day, Your Honor. You already 15 cautioned her on it once. 16 I mean, I'm just afraid that she's not 17 going to stop it. She should know better and 18 she's already been warned once. So I don't 19 know. 20 It just -- it doesn't seem like any 21 warning is going to help her. 22 THE COURT: Well, everyone knows my 23 position on it. 24 MR. TULCHIN: Would it be appropriate, 25 Your Honor, at 12 o'clock simply to say to the 3204 1 Jury that opening statements -- as a reminder, 2 opening statements are not evidence, that they 3 should distinguish between argument and 4 evidence, and that the findings as written are 5 what the Jury must accept as true, not the 6 lawyers' discussion of what they mean? 7 MS. CONLIN: Your Honor, I have put up 8 the findings for the Jury to avoid any of this 9 kind of discussion. It is there for them to 10 read. 11 All I am doing is a summary. All I'm 12 trying to do is help the Jury to understand 13 what these findings are. 14 And, really, it took -- it took me an 15 awfully long time to understand what the 16 findings are. 17 THE COURT: Well, the findings are 18 what they are. 19 MS. CONLIN: Yes, Your Honor. 20 THE COURT: And your summary cannot go 21 into an interpretation of what they say unless 22 you are going to make an argument as to some 23 other issue in the case or some other cause of 24 action in the case that you want to prove. 25 So if you are going to say Finding 67 3205 1 shows that -- let's say, for instance, it says 2 they charged $49, and you tell them they 3 charged $49. That's absolutely true. 4 If you say something further, it shows 5 they charged $49, but they should have charged 6 $69 for it, that's not in the finding of fact. 7 You can say that this fact, along with 8 other evidence we intend to show, will prove 9 that they could have charged $69 or something 10 like that. 11 Do you see what I'm saying? 12 MS. CONLIN: I hope so, Your Honor. 13 But in the case of that, that I was 14 closely adhering to what the findings said, 15 which is they could have charged 49, but they 16 did, in fact, charge 89. That's right in the 17 finding of fact. 18 THE COURT: That's fine. That's what 19 the finding says, that's fine. Stay with what 20 the finding says. 21 MS. CONLIN: I will. 22 THE COURT: Anything else? 23 MR. TULCHIN: No, sir. 24 MR. HAGSTROM: Your Honor, we filed a 25 motion, I think, yesterday on use of the 3206 1 concept of value. 2 Microsoft has been playing out in the 3 press -- and we'd like to address that as soon 4 as possible -- because if this is something Mr. 5 Tulchin is addressing in his opening statement, 6 we would need to know that so that we can 7 anticipate that before our opening statements 8 are completed. 9 THE COURT: All right. 10 MR. TULCHIN: I didn't get a draft of 11 Mr. Hagstrom's opening. I don't think he 12 should have a draft of mine. 13 MR. HAGSTROM: Well, it's not an issue 14 of having a draft. It's an issue about putting 15 before the Jury a completely irrelevant, and 16 that's the purpose of the motion in limine. 17 THE COURT: All right. We'll take it 18 up at 2:30. 19 MR. HAGSTROM: Thank you. 20 THE COURT: Anything else? 21 MR. HOLLEY: Take up the scheduling, 22 Your Honor, or take up the motion? The motion 23 in limine is out of time. It was filed 24 yesterday. We need an opportunity to respond. 25 It should be -- it was not filed as an 3207 1 emergency motion, Your Honor. We have whatever 2 time the rules provide us to respond, and the 3 matter should be taken up then. The motion in 4 limine is completely out of time. 5 THE COURT: You're saying that a 6 person at trial can't make a motion to exclude 7 something? 8 MR. HOLLEY: They can make a motion in 9 limine when they had notice that this matter 10 was going to be raised months ago in accordance 11 with the Court's scheduling order, which they 12 did not do. 13 Now they are trying to tell us that we 14 respond in 24 hours to motions that they file. 15 THE COURT: What if you go ahead and 16 talk about it in your opening and it is 17 objectionable and they object? Do you agree -- 18 just a minute. 19 MR. TULCHIN: They are the same 20 objection. 21 THE COURT: Just a minute. Can I talk 22 to Mr. Holley? You agree with that, don't you, 23 Mr. Holley? 24 MR. HOLLEY: They are free to object, 25 Your Honor, and the Court can rule at that 3208 1 time. 2 I would just point out that the motion 3 not only is untimely, but is entirely baseless. 4 The Court told the public, the members 5 of the class, in the notice that the Plaintiffs 6 propose that Microsoft would make this defense. 7 The defense is listed in the Court's 8 preliminary jury instructions. 9 THE COURT: Okay. 10 MR. HOLLEY: How on earth can they 11 file a motion in limine to prevent us from 12 making a defense which the Court's notice to 13 the class has said we will make and which the 14 Court's jury instructions tell the Jury that we 15 will make and which Ms. Conlin told the Jury 16 that they could anticipate us making? 17 This motion is utterly baseless. 18 THE COURT: Okay. I understand that. 19 Mr. Tulchin, I'm sorry to cut you off. 20 MR. TULCHIN: No. Mr. Holley said 21 what I was thinking I might say myself. 22 THE COURT: Okay. Mr. Hagstrom, 23 what's the basis of this motion? 24 MR. HAGSTROM: The basis of the motion 25 is the statements in the press by Mr. Wallis 3209 1 saying that the issue in this case is the value 2 of these products to the Jury or, I should say, 3 that you compare the value of the Microsoft 4 operating system products to things like a tank 5 of gas or dinner at some restaurant. 6 And that's not an appropriate issue in 7 this case. And there's nowhere in these 8 instructions that contemplate that is something 9 to be addressed in this case. 10 The issue is are there interchangeable 11 products to these -- to the operating systems, 12 word processing, Excel, et cetera? Value is 13 not an issue. 14 The issue is whether or not there was 15 a monopoly price charge, whether or not there 16 was an overcharge with regard to these 17 products. 18 THE COURT: Doesn't that go to value? 19 MR. HAGSTROM: Not at all, Your Honor. 20 To compare -- to compare a product, an 21 operating system to the cost of a cup of 22 coffee, it's irrelevant. That has no relevance 23 whatsoever to any issue in this case. 24 The relevance has to do -- to be 25 relevant, you'd have to look at the price of 3210 1 OS/2, for instance, as compared to Windows or 2 the price of WordPerfect as compared to Word or 3 the price of Lotus 1-2-3 as compared to Excel 4 or the price of SmartSuite as compared to 5 Office. 6 Those are relevant questions. But not 7 the price of Office as compared to, you know, a 8 TV set. That's absolutely irrelevant. 9 Does a consumer make a choice that, 10 well, I'm thinking about purchasing Office for 11 my computer, but let me think, well, maybe I'll 12 go buy a 13-inch TV instead? I mean, that's -- 13 there's absolutely no relevance of that for 14 purposes of this case. 15 THE COURT: That's what you anticipate 16 they are going to try to show in their 17 evidence? 18 MR. HAGSTROM: Yes, Your Honor. 19 THE COURT: Compare prices of 20 computers to coffee or a TV? 21 MR. HAGSTROM: That's what they're 22 suggesting in the press, and that's the purpose 23 of the motion. 24 And all that does is it confuses the 25 issues. It is prejudicial to the Plaintiffs, 3211 1 and that's why we want to raise this issue. 2 MR. TULCHIN: Your Honor, if I may? 3 A couple of things. 4 It was Ms. Conlin during the voir dire 5 to these 12 jurors who talked about a 6 comparison of price of software with a tank of 7 gas. And then she spoke about a comparison of 8 the price of software with dinner at the Olive 9 Garden or Olive Branch. We didn't raise that 10 with these 12. The Plaintiffs' lawyers did. 11 The idea that Mr. Hagstrom just 12 floated, that value is not the issue, the value 13 of this product, because he says -- I mean, 14 after all, this is an overcharge case, Your 15 Honor. 16 The main claim in this case is that 17 the price is too high; that Microsoft 18 overcharged, charged too much for Windows and 19 Word and Excel. 20 And what the Plaintiffs want to do is 21 somehow get this Jury thinking that common 22 sense -- when we talk about an overcharge or a 23 price that's too high, that common sense has no 24 bearing whatsoever on the issue of price. 25 That the only people who are capable 3212 1 of measuring whether something is charged -- 2 whether the price is too high are their 3 experts, who have been paid millions of dollars 4 themselves for these opinions. 5 Their experts who can come in and 6 offer theories based on models that, with all 7 respect, I don't think the jurors can 8 understand. And that's where confusion and 9 prejudice comes in. 10 I am not disclosing to these lawyers 11 now what I intend to say in my opening. If I 12 say something that they think is objectionable, 13 they should be in the same position that I'm 14 in. They should have to object. 15 I make no promises that I'm going to 16 talk about a tank of gas. In fact, I have no 17 intention of talking about a tank of gas. 18 But, the idea here that they can make 19 a motion in limine and seek to block us in our 20 opening from discussing the same subjects that 21 Ms. Conlin discussed in voir dire, and that 22 they can do this by representing to the Court 23 that in an overcharge case, value -- the value 24 of the product -- is irrelevant. 25 It's just -- it's astounding. That's 3213 1 what the case is about. It's the value of the 2 product. 3 THE COURT: It's the cost, not the 4 value. 5 MR. TULCHIN: Excuse me, Your Honor? 6 THE COURT: It's the cost, not the 7 value. 8 MR. TULCHIN: No, I disagree, Your 9 Honor. 10 Because no matter what it is -- 11 THE COURT: Are you really going to 12 try to convince the Jury that they should 13 compare it to coffee and TVs? 14 MR. TULCHIN: No. No, Your Honor. 15 THE COURT: That's totally irrelevant. 16 MR. TULCHIN: I haven't said that I'm 17 going to do that. 18 THE COURT: All right. If you do, 19 it's irrelevant. 20 MR. TULCHIN: Your Honor, with all due 21 respect, value is the essence of what we're 22 talking about when we talk about an overcharge. 23 Because cost is only one part of the 24 equation. If you're buying a car, you know, 25 you can say well, what's the cost? Some people 3214 1 prefer a $20,000 car, and some people prefer a 2 $40,000 car. 3 But just because you've chosen the 4 latter and chosen to buy a more expensive brand 5 doesn't mean you've been overcharged. 6 THE COURT: True. 7 MR. TULCHIN: You're getting value. 8 To the person who makes that choice, 9 the 40,000 is worth it, for whatever reason. 10 THE COURT: Right. And I agree with 11 your example 100 percent because you're talking 12 about two of the same products. 13 But if you start talking about 14 televisions compared to a software system, 15 that's irrelevant. 16 MR. TULCHIN: And where is -- where is 17 the good faith basis for a motion about what I 18 intend to say in my opening statement? 19 THE COURT: Well, I agree with you. 20 MR. TULCHIN: And why don't we make 21 dozens of motions seeking to block Ms. Conlin 22 based on some suspicion we have of what's 23 coming? 24 I'm sitting here. I'm going to object 25 to anything she says that I think is wrong, 3215 1 with the risk that I'll be overruled and look 2 bad in the Jury's eyes. 3 Why they should get a preview of my 4 opening today, I don't know. 5 THE COURT: I agree with you. I'm not 6 going to do it. 7 You have to make your objections just 8 like everybody else. 9 Anything else? 10 MR. HAGSTROM: That's it, Your Honor. 11 MR. TULCHIN: Thank you, Your Honor. 12 MS. CONLIN: Thank you, Your Honor. 13 What time? 14 THE COURT: Noon. 15 MS. CONLIN: Okay. 16 (A recess was taken from 11:32 a.m. 17 to 12:01 p.m.) 18 (The following record was made out 19 of the presence of the jury.) 20 MR. TULCHIN: Your Honor, can we go 21 back on the record very briefly. I hope it's 22 very briefly. 23 THE COURT: Yes. 24 MR. TULCHIN: Your Honor, to continue 25 our discussion, we've been trying to look 3216 1 quickly through the rough transcript. 2 And one of the most egregious things 3 that happened before lunch, is that -- and this 4 is page 73 of the rough of this morning. 5 Ms. Conlin said the following, quote, 6 according to the findings of fact, Microsoft 7 imposes monopoly prices, unquote. 8 The findings of fact don't say that. 9 It's used in the present tense. There are at 10 least two things wrong with that. 11 And I would just, again, ask the Court 12 to tell the Jury that the opening statements 13 are not evidence, that they are to accept the 14 findings of fact and not any lawyers' 15 interpretation of what those findings of fact 16 may mean. 17 THE COURT: Anything else? 18 MR. TULCHIN: No, sir. 19 THE COURT: Mr. Hagstrom, anything 20 else? 21 MR. HAGSTROM: Well, Your Honor, I 22 think that Ms. Conlin previously stated that 23 that would be prejudicial to make that 24 statement at this time. 25 And in the interpretation, I guess 3217 1 that Mr. Tulchin mentions, I think it's rather 2 -- rather odd, but, you know, the evidence will 3 show certain things. I mean, there's the 4 findings. 5 We've indicated that the experts are 6 going to link the findings with other evidence 7 to put everything in context, and that's what 8 Ms. Conlin is telling the Jury about. 9 It's in the instructions already that 10 -- I can look real quick and see which 11 instruction, but one of them specifically 12 states that opening statements and closing 13 arguments are not evidence. And that should be 14 sufficient. 15 MR. TULCHIN: Your Honor, it's not 16 what Ms. Conlin said. Mr. Hagstrom is talking 17 about something that I didn't say because 18 Ms. Conlin didn't say. 19 Her statement in full is as follows, 20 page 73, lines 22 to 23 of this morning's 21 rough. Quote, according to the findings of 22 fact, Microsoft imposes monopoly prices, 23 unquote. 24 If she had said that our experts will 25 use the findings of fact and will testify that 3218 1 they believed that Microsoft imposes monopoly 2 prices, I wouldn't be making this argument. 3 She said, According to the findings of 4 fact. The findings of fact never say Microsoft 5 has ever imposed monopoly prices, let alone 6 that it does so in the present tense. 7 MR. HAGSTROM: Well, Your Honor, I 8 guess if Mr. Tulchin is suggesting that we can 9 go for a period of time and then get an 10 instruction later, I guess that's groundwork 11 rule that both sides need to be aware of, but 12 it seems to me if Mr. Tulchin heard that at 13 that time, he should have objected at that 14 time. 15 MR. TULCHIN: I did, Your Honor. It's 16 in the transcript. It was overruled. 17 THE COURT: Very well. The Court is 18 going to find that I'm not going to give an 19 instruction again at this point. They have 20 already been instructed. 21 I will remind Plaintiffs, though, you 22 better stick to what the findings of fact says. 23 MS. CONLIN: I will, Your Honor. 24 THE COURT: I think Mr. Tulchin has a 25 good point. 3219 1 Ready for the Jury? 2 MS. CONLIN: Yes, Your Honor. 3 (The following record was made in the 4 presence of the jury at 12:07 p.m.) 5 THE CLERK: All rise. 6 THE COURT: Everyone else may be 7 seated. 8 You may continue, Ms. Conlin. 9 MS. CONLIN: Thank you, Your Honor. 10 THE COURT: You're welcome. 11 MS. CONLIN: Good afternoon. 12 A couple of things before we go back 13 to the findings of fact that I want to remind 14 you of. 15 These findings of fact cover the 16 period from 1994 to 1999. We're in 2006. And 17 so even though I am speaking sometimes in the 18 present tense, please remember 1994 to 1999 is 19 the time period that is covered. 20 Also, remember that the findings of 21 fact, which are binding -- that there are other 22 things that we need to prove for that time 23 period that are essential to us in terms of 24 whether or not the consumer -- the class 25 members in Iowa can recover damages. And those 3220 1 things are causation. 2 Did -- what Microsoft did as set out 3 in the findings of fact, did that cause harm to 4 Iowa class members? And, then, of course, what 5 was the harm. How much was the harm? 6 And, also, on the verdict form, you 7 are likely to be asked another question, and 8 that question will ask you to determine whether 9 or not Microsoft's conduct was willful and 10 flagrant. That's sort of a separate issue. 11 But that is an issue that juries in 12 cases of this kind are often asked to 13 determine. 14 I also want to tell you that in 15 speaking with you about monopoly prices, I 16 believe that I did misstate something, and I 17 want to correct the record. 18 I said that Microsoft imposes monopoly 19 prices. That's not in the findings of fact. 20 That is something that we believe evidence will 21 show that Microsoft did, in fact, impose 22 monopoly prices. 23 I'm going to talk with you now about 24 several different acts of Microsoft set out in 25 the findings of fact, acts with respect to 3221 1 Netscape and having a special relationship and 2 not providing the RNA, API. 3 I'm going to talk to you about Intel's 4 native signal processing software, about 5 QuickTime, Apple's QuickTime, and what 6 Microsoft did in connection with Apple's 7 QuickTime, and with Real, another media type 8 software, and also Microsoft's actions against 9 IBM and treatment of IBM. 10 With respect to each of those, we 11 believe that the evidence will show that those 12 acts were willful and flagrant. 13 And do also keep in mind that, though, 14 I am summarizing for you, what you are bound 15 by, what the Court has found has already been 16 proven are the words that you have in your 17 notebooks and that you see on the screen. 18 And as I also indicated, I'm not going 19 through every single one. That doesn't mean 20 they are not all important. They are, but I'm 21 going to go through those that I think are 22 helpful to you in proving the other kinds of 23 things that we have to prove in this matter. 24 Let's go to the Netscape offers 25 Microsoft -- or I beg your pardon. Microsoft 3222 1 offers Netscape a special relationship. 2 Netscape is an applications developer 3 developing for the Windows operating system, 4 but developing the middleware layer. In the 5 case of Netscape, that's the browser. 6 And because it works on the Windows 7 platform, Netscape needs certain information, 8 critical technical information about how the 9 operating system works. 10 As Finding of Fact 90 explains, 11 Microsoft is aware that Netscape needs the 12 information in order to release Navigator in 13 time for the release of Windows 95. 14 At a June 21st meeting, Netscape 15 requests documentation from Microsoft so its 16 browser can work on Microsoft called the RNA 17 API, remote network access. 18 And Microsoft responds -- when 19 Netscape asks for the RNA API, Microsoft 20 responds with a proposal for what Microsoft 21 calls a special relationship. 22 And as a part of this special 23 relationship, if Netscape agrees to market only 24 a simple browser that does not expose APIs to 25 developers, then Microsoft says it will give 3223 1 them the information they need. 2 If they don't, they won't get the 3 information that they need to make their 4 browser work on Windows. 5 Specifically, Microsoft executive 6 James Allard tells Netscape CEO James Barkdale 7 that the way the meeting ends will determine 8 whether Netscape gets the API immediately or in 9 three months. 10 Mark Andreessen's notes -- Mark 11 Andreessen was an officer, an executive present 12 at the meeting for Netscape, and he made notes 13 there, Plaintiffs' Exhibit 4396. 14 And J. Allard, this is depending on 15 how we walk out of this room today, we have a 16 solution for your problem, or else in three 17 months. 18 DR, that's Dan Rosen, a Microsoft 19 employee, if we had a special relationship, you 20 wouldn't be in this position. 21 According to Finding of Fact 91 -- 22 and, again, members of the jury, we think that 23 this goes to the issue of whether or not, 24 together with other evidence, we will prove 25 whether or not Microsoft's conduct was willful 3224 1 and flagrant. 2 Finding of Fact 91, Netscape declines 3 this special relationship, and, as it threatens 4 to do, Microsoft does withhold the information 5 on the RNA API. 6 Netscape's executives ask for this for 7 many weeks following the call, but Microsoft 8 does not release the RNA API to Netscape until 9 October. That's more than three months after 10 the June 21st, 1995 meeting. 11 Because of this delay, Netscape cannot 12 implement the RNA, remote network access, API 13 Navigator in time for the 1995 release of 14 Windows 95, which occurs in August of 1995. 15 Also, then Netscape misses the holiday 16 selling season. And, meanwhile, Microsoft is 17 able to release its browser, Internet Explorer, 18 at the same time as Windows 95, before Netscape 19 can get its browser to market. 20 Again, on the issue of whether or not 21 Microsoft's conduct is willful and flagrant, we 22 believe Finding of Fact 92, along with the 23 other evidence that we will offer, will prove 24 that. Because the RNA API is not the only 25 thing that Microsoft withholds. 3225 1 92 explains that Microsoft withholds a 2 license to a scripting tool that is necessary 3 for Netscape to work with Internet service 4 providers. You'll hear this ISP quite a bit 5 coming up. 6 ISP, Internet service provider, 7 examples might be American Online -- America 8 Online and Prodigy. 9 Microsoft provides this tool, this 10 scripting tool, to ISPs and drafts an agreement 11 with Netscape so they can use it too, but, as 12 of mid-July 1996, this agreement awaits until 13 the signature of an authorized Microsoft 14 executive in order to go into effect. 15 Microsoft does not sign it. Instead, 16 in mid-August 1996, Netscape is informed that 17 the license to the scripting tool already 18 provided to ISPs -- the license to the 19 scripting tool has been linked to the 20 resolution of all issues between the two 21 companies, between Netscape and Microsoft. 22 Without the tool, Netscape cannot do 23 business with some of the ISPs. 24 Plaintiffs' Exhibit 4516 is dated 25 Wednesday, August 14th, and it is from John 3226 1 Freeborg, who is a Netscape product manager, 2 and it's to Julie Herendeen. 3 And it says Julie Herendeen and I 4 talked with Will Poole of Microsoft today. 5 Mr. Poole is senior director of the streaming 6 media business at some point, though maybe not 7 right at this point. This is back in 1996. 8 He, Mr. Poole, advised us that Paul 9 Maritz has written a letter to Rick, Netscape 10 man, listing all open issues between Microsoft 11 and Netscape, one of which will be the 12 scripting tool, the scripting license, where 13 they feel both parties could be more 14 cooperative. 15 He wouldn't elaborate on specifics, 16 but they are unwilling to keep the Win 95 17 scripting license as a separate issue. 18 The findings of fact conclude in 19 Finding of Fact 93, other firms in the -- I'm 20 reading this directly for you. 21 I'm not sure we have it to put up, but 22 I wanted to call your attention to Finding of 23 Fact 93 on the issue of willfulness and 24 flagrancy of Microsoft's conduct. 25 Other firms in the computer industry 3227 1 have had encounters with Microsoft similar to 2 the experiences of Netscape described above. 3 Those interactions demonstrate that it 4 is Microsoft's corporate practice to pressure 5 other firms to halt software development that 6 either shows the potential to weaken the 7 applications barrier to entry or competes 8 directly with Microsoft's most cherished 9 software products. 10 Finding of Fact 95 deals with Intel's 11 development of software called native signal 12 processing, NSP. 13 Even as Microsoft is attempting to 14 suggest that Netscape not develop these 15 cross-platform APIs that can be used on any 16 operating system, it's also trying to stop 17 Intel from developing software in house that 18 also exposes APIs and is cross-platform. 19 While Intel's primary business is 20 making computer chips, it also develops 21 software at the Intel architectural labs, IAL. 22 Intel develops software to help spur 23 demand for chips. That's what it's interested 24 in. 25 In early 1995, the Intel architectural 3228 1 labs is nearing completion of software that 2 allows micro processors, the chips, to perform 3 tasks that they haven't been able to do before. 4 Prior to the work at Intel labs, video 5 and graphics performance has not been handled 6 by the microprocessor, by the chips, but by a 7 separate chip called a digital signal 8 processor. 9 Intel's research will substantially 10 bolster the ability of the chip itself, the 11 microprocessor, to handle video and graphics. 12 And that is called the native signal 13 processing. 14 As Finding of Fact 100 describes, 15 Microsoft sees this Intel software as a 16 violation of Microsoft's turf and various 17 executives begin to complain to Intel about it. 18 In May 1995, a group of Microsoft 19 executives travel to Intel to give the message 20 that developing platform-level software is for 21 Microsoft to do, not for Intel to do. 22 Upon returning from the meeting, some 23 Microsoft executives advocate that Microsoft 24 try to prevent Intel from developing any 25 platform level software, even if that means 3229 1 that Intel cannot improve its own product, the 2 chips. 3 Carl Stork, who is manager in the 4 hardware evangelism group -- let me stop for a 5 moment. 6 Microsoft has groups, has divisions, 7 departments called evangelism departments. 8 This is the evangelism -- the hardware 9 evangelism group. There are others. 10 And from the documents and the 11 testimony, I believe that you will find that 12 that means that these are people who go out and 13 tout Microsoft's products to these various 14 groups. And they call that within Microsoft 15 evangelism, and they call the people who do it 16 evangelists. 17 And Mr. Stork is the manager of the 18 hardware evangelism group. And he summarizes 19 the May 9th, 1995 meeting between Intel and 20 Microsoft which is attended by, you can see 21 there, Mr. Maritz, Mr. Silverberg, and 22 Mr. Stork himself. 23 This is Plaintiffs' Exhibit 2299. 24 He says, there was no dramatic outcome 25 to the meeting. We were clear that: 3230 1 One, we regard NSP as a system 2 software platform. Paul termed the -- Paul 3 coined the term underwear. 4 Two, we have technical problems with 5 major components of NSP. 6 Three, we aren't going to make 7 compatibility with NSP or preservation of 8 Intel's development investments a priority for 9 Microsoft. 10 And, four, the visibility and focus 11 that Intel has put on NSP means that we have to 12 communicate with OEMs and IHVs, independent 13 hardware vendors, IHVs, what we do support and 14 what we don't. We were pretty frank. 15 This too is a long memo. 16 The bottom line is that Intel wants to 17 enable new hardware functions in our operating 18 systems and to set underwear system software 19 standards without being dependent on 20 Microsoft's inclination or execution. 21 Microsoft is going to create, 22 evangelize, and support only those APIs or DDIs 23 that are part of our platform. 24 The conclusion. We should go ahead 25 with our IPC -- which I believe the evidence 3231 1 will show is interprocess communications. We 2 should go ahead with our IPC plans as set. 3 Meetings with OEMs, SDR -- that is a 4 system design review where Microsoft brings in 5 people and goes over what they're planning. 6 The likelihood is that we will need to 7 communicate our opposition broadly to the 8 industry. 9 And the document indicates the 10 opposition is to Intel's native signal 11 processing, Intel's software developed by Intel 12 architectural labs, that enables advanced audio 13 and video. 14 At least one Microsoft executive 15 thinks Intel's only winning path is to ask 16 Microsoft to add new functions to the operating 17 system as opposed to putting those functions 18 into Intel's product, the chip. 19 This is -- Stork says in his May 10th 20 report -- again, Plaintiffs' Exhibit 2299 -- 21 the winning path is to work with us, convince 22 us it's important and to resource it, figure 23 out who writes specs, who implements, what an 24 acceptable time schedule is, et cetera. 25 Sometimes Intel would have to accept 3232 1 the outcome that the time isn't right for us. 2 In July 1995, Bill Gates meets with 3 Intel's CEO, Andy Grove, and he tells Andy 4 Grove two things. 5 One, not to ship NSP; and, two, to 6 reduce the number of people working on software 7 at Intel. 8 We believe the evidence will show, 9 together with this finding of fact, that this 10 is willful and flagrant conduct on Microsoft's 11 behalf. 12 In a subsequent memorandum to his 13 senior executives, Gates reported that he had 14 tried to convince Grove to basically not ship 15 NSP and, more generally, to reduce the number 16 of people working on software at Intel. 17 Despite Microsoft's fears, Intel does 18 not intend to challenge Windows. 19 Finding of Fact 101 describes the two 20 specific actions Microsoft takes aimed at 21 preventing the spread of native signal 22 processing. 23 First, it promises Intel that it will 24 put new functions into Windows that do the same 25 thing as NSP as long as Intel stops promoting 3233 1 NSP. 2 And, second, Microsoft pressures OEMs, 3 the computer hardware manufacturers, not to 4 install the NSP software on their PCs until the 5 native signal processing APIs are removed. 6 Here is one of the documents 7 discussing what Microsoft is doing to Intel 8 around native signal processing. 9 Paul Maritz writes Ron Whittier. 10 Mr. Whittier is in charge of the Intel 11 architectural lab. This is dated June 22, 12 1995. It is Plaintiffs' Exhibit 2334. 13 Our current stance to OEMs and ISVs is 14 that we have major issues with NSP, and our 15 advice to them is not to use it. 16 We are more or less forced into this 17 overt stance as we have detected no slackening 18 in the Intel sales in evangelism efforts around 19 NSP. 20 Since Intel's only way, only method of 21 distributing NSP is through the OEMs, it has no 22 choice but to stop developing it. 23 By the end of July 1995, Intel has 24 stopped developing native signal processing. 25 The problem for end users, people who 3234 1 purchase computers, is that even as late as 2 1998, Microsoft has yet to implement the 3 functions in Windows that Intel was prepared to 4 offer to consumers in 1995. 5 As Finding of Fact 102 makes clear, 6 stopping NSP is not enough for Microsoft. 7 On August 2nd, 1995, Mr. Gates meets a 8 second time with Andy Grove, CEO of Intel. And 9 this time he tells Grove he has a fundamental 10 problem with Intel developing free platform 11 level software. 12 He tells Doctor Grove that Microsoft 13 will stop supporting Intel chips as long as 14 Intel persists in developing platform software. 15 Of course, Intel can't sell chips without 16 Microsoft's cooperation. 17 And he knows there are two things that 18 Microsoft can do that will make it really hard 19 for Intel to sell its microprocessors. 20 For one thing, it can stop making 21 Windows compatible with Intel's chips. For 22 another, it can start simply saying to the 23 OEMs, hardware people, the computer makers, 24 that it no longer supports Intel's chips. 25 In the face of these threats from Bill 3235 1 Gates, Intel surrenders, and this is directly 2 quoting from the -- where is it? 3 Intel agreed to stop developing 4 platform level interfaces that might draw 5 support away from interfaces exposed by 6 Windows. 7 Finding of Fact 103 explains that OEMs 8 are Intel's primary customers, but OEMs are 9 also Microsoft's primary customers. 10 Without computer makers to buy its 11 chips, Intel can't market them. And OEMs, 12 according to these findings of fact, have no 13 alternative to Windows. 14 Because of Microsoft's monopoly power, 15 the OEMs would have to switch to another chip 16 maker. 17 In October 1995, Mr. Gates writes -- I 18 know this may not be Mr. Gates. This is 19 Exhibit 2418. I believe it is Mr. Gates. Can 20 we see at the top, Darin? Is that from 21 Mr. Gates? Yes. I wasn't sure all of a 22 sudden. But, yes. 23 This is October 1995. 24 This is good news because it means 25 OEMs are listening to us. Andy, Andy Grove, 3236 1 believes Intel is living up to its part of the 2 NSP bargain and that we should let OEMs know 3 that some of the new software work Intel is 4 doing is okay. If Intel is not sticking 5 totally to its part of the deal, let me know. 6 So that is the Intel story. And that 7 is a part of the Intel story. You'll hear a 8 little bit more in the findings of fact, but, 9 in addition to that, we'll have additional 10 evidence to present to you about what Microsoft 11 does with respect to Intel. And we believe 12 that that shows that Microsoft's conduct was 13 willful and flagrant. 14 Now, I'm going to talk to you about 15 the whole multimedia software area. Multimedia 16 software, also a middleware technology. We'll 17 talk about QuickTime, Apple's QuickTime and 18 RealNetworks media player. 19 And it is another area where Microsoft 20 has become concerned about the spread of 21 middleware. 22 Middleware -- multimedia players and 23 content authoring tools. Content authoring 24 tools are what people who want to create 25 content to play, display, you know, audio or 3237 1 visually on the Internet need to have to make 2 that content. 3 Multimedia players and these content 4 authoring tools from both Apple and 5 RealNetworks have been developed for many 6 operating systems and they expose APIs, making 7 Real and the other multimedia efforts 8 cross-platform, and making them have the 9 potential to erode the applications to barrier 10 to entry. 11 QuickTime is Apple's software 12 architecture for creating, editing, publishing, 13 and playing media. 14 Finding of Fact 104 explains that 15 QuickTime runs on both the Mac operating system 16 and on Windows. And it offers APIs for 17 developers to use. 18 A developer can create multimedia for 19 both Mac and Windows using the QuickTime 20 technology. 21 QuickTime competes with two of 22 Microsoft's products, the DirectX APIs and what 23 becomes the Windows Media Player. 24 Like Java or Netscape Navigator, it's 25 cross-platform, it's middleware, it offers APIs 3238 1 to developers and, like Java or Netscape that 2 these findings of fact talk about later, 3 Microsoft views QuickTime as a threat to the 4 applications barrier to entry. 5 This effort by Microsoft against 6 Apple's QuickTime is another thing that we 7 think together with other evidence will prove 8 that Microsoft's conduct in the operating 9 system market was willful and flagrant. 10 Beginning in the spring of '97 and 11 continuing into the summer of '98, Microsoft 12 tries to persuade Apple to stop producing a 13 Windows 95 version of its multimedia playback 14 software. 15 The software offers to developers 16 these APIs. And just as it made its proposal 17 to Netscape in that June 21 meeting, June 21, 18 1995, to divide the markets, it makes the same 19 kind of proposal to Apple. 20 If Apple agrees to use the DirectX 21 APIs instead of offering its own APIs, 22 Microsoft would agree not to enter the 23 content -- the multimedia content authoring 24 business and would instead help Apple sell 25 tools for developing multimedia content. 3239 1 In other words, Microsoft takes the 2 players, the client software, and Apple would 3 do the content authoring tools. 4 From this -- according to finding of 5 fact 105, from the spring of '97 until the 6 summer of '98, Microsoft keeps trying to get 7 Apple QuickTime and the QuickTime people to 8 stop, stop producing Windows versions of 9 QuickTime. 10 If Apple agrees, Microsoft promises 11 not to enter the authoring business, to assist 12 Apple in selling the tools to content authoring 13 developers. 14 Microsoft says Apple could market a 15 media player on top of DirectX as long as it 16 did not expose APIs. 17 And this finding of fact indicates 18 that Microsoft was aware that that did not 19 leave Apple with much opportunity to earn 20 income, with much earning potential. 21 Finding of Fact 106 talks about 22 Microsoft's discussions with Apple regarding 23 QuickTime. 24 During these discussions, Microsoft 25 makes it clear that if Apple continues to 3240 1 market the media playback software for Windows, 2 in competition with Windows product, then 3 Microsoft will offer content authoring tools 4 that compete with the QuickTime tools. 5 Microsoft tells Apple that it will 6 spend whatever it needs to -- whatever 7 resources it needs in order to keep developers 8 using its APIs. And that it doesn't care 9 whether it makes a profit or not. 10 Finding of Fact 110 concludes that 11 Microsoft's primary motivation in dealing with 12 Apple and QuickTime and trying to persuade 13 QuickTime not to write for Windows is to limit 14 as much as possible the development of 15 multimedia content that can run cross-platform 16 on many -- on different operating systems. 17 That is the -- that's what happened 18 with Apple in terms of QuickTime. 19 But RealNetworks isn't -- is also 20 writing a media player. 21 And Finding of Fact 111 refers to the 22 story of RealNetworks. 23 We will talk about RealNetworks 24 separately later. 25 It too is that cross-platform 3241 1 middleware which Microsoft views as a threat to 2 the applications barrier to entry. 3 Judge Rosenberg has read you these 4 findings of fact concerning IBM. We believe 5 that these findings of fact, together with 6 others that we will prove, shows willful and 7 flagrant behavior. 8 We also think that these findings of 9 fact, together with others, will prove, without 10 question, that Microsoft used anticompetitive 11 tactics to get -- to monopolize the 12 applications market. 13 Middleware is not the only thing that 14 Microsoft views as a threat to the applications 15 barrier to entry. 16 There are companies who write software 17 that compete directly with Microsoft's 18 applications. Word, Excel, and Office. 19 Microsoft tries to harm companies who 20 make these applications. The paragraphs I'm 21 going to be referring to are paragraphs between 22 115 and 132, which describes Microsoft's 23 actions against a company that has application 24 software that competes with Microsoft's. 25 Finding of Fact 115 says -- and I'm 3242 1 sure you've definitely got this by now -- IBM, 2 hardware, software. 3 On the hardware side, it makes 4 Intel-compatible PCs, and is heavily dependent 5 on Microsoft's cooperation because it can't 6 sell PCs without Windows. 7 On the other hand, the software side 8 develops software in competition with 9 Microsoft. And IBM's OS/2 that we talked about 10 is a competing operating system. 11 And SmartSuite -- Andrew, do we have a 12 SmartSuite? SmartSuite is a Lotus Office 13 Suite. We will talk about it more in the 14 applications case, but -- and we might not have 15 brought it with us. 16 But it includes a spreadsheet, a word 17 processor, and other applications. 18 The fact that IBM's software division 19 competes directly with Microsoft's most 20 important products frustrates -- oh, there it 21 is. Okay. There's SmartSuite. Ooh, would you 22 take that? Sorry. I have not been lifting my 23 weights. 24 That's a SmartSuite. 25 And the fact that it competes directly 3243 1 with Microsoft's Office and Word and Excel 2 makes -- makes it very frustrating to keep the 3 relationship between Microsoft and IBM, to keep 4 a cooperative working relationship. 5 The trouble lies in the fact that 6 Microsoft controls and licenses Windows, and 7 the hardware part has to have that product. 8 Finding of Fact 116 indicates that 9 Microsoft is aware, of course, that the 10 hardware division needs to license Windows on a 11 timely basis and at a competitive price. 12 Microsoft tries to convince IBM 13 software division not to sell software that 14 competes with Microsoft's products. 15 When IBM refuses, Microsoft punishes 16 the hardware division by raising prices, by not 17 giving IBM a license to Windows 95 until 15 18 minutes before the official launch, and by 19 withholding technical and marketing support for 20 Windows. 21 Despite this, according to Finding of 22 Fact 120, IBM decides to compete vigorously 23 with Microsoft. 24 In late 1994, Microsoft begins 25 aggressively promoting OS/2 warp, the warp 3244 1 product, as a competing operating system to 2 Windows. 3 Then in June -- July of 1995, IBM 4 further intensifies the rivalry by acquiring 5 Lotus, and that produces the SmartSuite 6 product. 7 You will see from other documents, 8 before the period of '94, that Microsoft has 9 already identified Lotus Notes, a different 10 product than this warp, a groupware product as 11 a potentially competing middleware. It exposes 12 APIs. 13 Microsoft also, of course, recognizes 14 that SmartSuite is a direct competitor. 15 Shortly after this acquisition, in 16 mid-July 1995, IBM announces that it will make 17 SmartSuite its primary desktop productivity 18 software on its own PC hardware. 19 Finding of Fact 122 and 124. IBM and 20 Microsoft have been negotiating a license to 21 Windows 95 since March of '95, late March of 22 '95. 23 These negotiations go smoothly for a 24 while, for the first couple of months, until 25 IBM announces the Lotus acquisition. Then, 3245 1 Microsoft starts to stonewall the negotiations. 2 For example, the Microsoft executives 3 negotiating the contract start cancelling 4 meetings with IBM, stop returning phone calls, 5 stop returning drafts of the contract. 6 Then when IBM announces its intention 7 to put SmartSuite on all of its PCs, you know, 8 first it announces the acquisition and then it 9 announces -- IBM announces it's going to put 10 its newly acquired product, Lotus SmartSuite, 11 on its hardware, on its PCs. 12 When IBM announces that, three days 13 later, on July 20th, Microsoft informs IBM that 14 they will no longer negotiate with the company 15 for a Windows 95 license. 16 At this time Microsoft had already 17 released what's called a golden master to other 18 OEMs. It's the product in such a way that 19 that's what the OEMs use to load the product on 20 their hardware. 21 Microsoft had refused to release the 22 golden master to IBM, which Microsoft -- or 23 which IBM needs to have. Even though they 24 release that code to IBM's hardware competitors 25 on July 17th, 1995. 3246 1 Now, along comes this audit. You saw 2 a document -- when I told you about OS/2, you 3 saw Mr. Kempin's document about, you know, 4 let's do it and offer certain reasons. 5 But here at this point in time, in 6 July of 1995, Microsoft ties the audit that 7 they are doing of IBM and claims that IBM owes 8 them royalty for past operating system deals. 9 I didn't make that very clear. 10 They tie the audit that's already 11 ongoing to the Windows license. And that's the 12 first time that that's happened. 13 Prior to July 20th, Microsoft had not 14 claimed that these allegedly new past royalties 15 were linked to the license for Windows 95. 16 Of course, this is very distressing to 17 IBM, and, in part, because all of the 18 competitors already have their licenses in 19 hand. They're going to be ready to go. 20 The crucial back-to-school selling 21 season is approaching. And IBM, of course, 22 needs time to preinstall Windows. Otherwise, 23 it's going to lose a lot of business to its 24 competitors. 25 In Finding of Fact 123, the end of the 3247 1 audit appears months away, and IBM is facing 2 the prospect of missing not only the 3 back-to-school session, but also the holiday 4 selling session, season, if these issues cannot 5 be resolved. 6 So, IBM pleads with Microsoft to sever 7 the license negotiations from the audit. And 8 IBM even offers Microsoft two carrots to help 9 free up negotiations. 10 First, Microsoft offers a $10 million 11 bond to cover any -- to cover Microsoft in the 12 event of any discrepancies revealed by the 13 audit. 14 And, second, IBM offers to pay 15 penalties and interest if the audit does reveal 16 underreporting of past royalties. 17 This is IBM's effort to get the 18 license negotiations for Windows 95 moving 19 forward. 20 Finding of Fact 124 says, on August 21 9th, in the midst of this disagreement and 22 struggle, an IBM executive travels to Redmond 23 to meet with Joachim Kempin, the Microsoft 24 executive in charge of OEM sales. 25 At this meeting, Kempin offers to 3248 1 accept a single lump sum payment from IBM that 2 will close all of the outstanding audits. He 3 offers to reduce the amount of this payment if 4 IBM offers a concession that Kempin can then 5 take back to Bill Gates. 6 Kempin suggests that an appropriate 7 concession would be for IBM to stop 8 preinstalling SmartSuite for at least six 9 months on its own computers. Six months to a 10 year. 11 And he goes on to explain that the 12 true issue between the companies is that 13 SmartSuite threatens Office. IBM rejects this 14 suggestion. 15 Then in a follow-up letter, Kempin 16 tells IBM that Microsoft will require $25 17 million from IBM in order to settle all the 18 outstanding audit issues. 19 Alternately, he writes in Plaintiffs' 20 Exhibit 2386 -- this is Mr. Kempin. This is 21 the August 9th letter. 22 If you believe that the amount I am 23 asking for is too much, I would be willing to 24 trade certain relationship-improving measures 25 if IBM, too, agrees to promote Microsoft's 3249 1 software products together with their hardware 2 offerings. 3 The message to IBM is clear. IBM 4 would be able to resolve the audit problems and 5 get its Windows license if it stopped promoting 6 its own software and started promoting 7 Microsoft's instead. 8 In Finding of Fact 125, IBM doesn't 9 agree. Microsoft is unable to get IBM to agree 10 to stop promoting its own products. 11 Nor does IBM agree to increase its 12 support for Microsoft. 13 In the end, IBM is finally able to get 14 its Windows 95 license, but just 15 minutes 15 before the initial launch, the official launch 16 event on August 24th, 1995. 17 On the same day, August 24th, 1995, 18 the audit issue is settled and IBM ends up 19 giving Microsoft $31 million. 20 The release of Windows 95 had been 21 postponed a number of times prior to the 22 launch. 23 Finding of fact tells us that many 24 consumers were delaying their new PC purchases 25 so they could get the new Windows 95, and the 3250 1 pent-up demand causes a huge surge in PC sales 2 after the release of Windows 95. 3 Other OEMs reap the fruits of this 4 search, but IBM does not. Because it can't get 5 its Windows license in time to get its products 6 on the market for the back-to-school season, 7 Microsoft's tactics cause IBM to miss these 8 opportunities and IBM does lose substantial 9 revenue as a result. 10 Finding of Fact 132 says that 11 Microsoft charges the IBM hardware division 12 more for Windows than it charges other OEMs, 13 such as Compaq and Hewlett Packard. 14 Gateway also pays these higher prices 15 to Microsoft because it too has displeased 16 Microsoft. 17 We say the evidence will show that the 18 reason that Microsoft charges IBM and Gateway 19 higher prices is because Microsoft believes 20 that IBM and Gateway are resisting Microsoft's 21 abuse of its monopoly power. 22 When we talk later about the 23 applications case, we believe that these 24 findings of fact will help you to conclude, 25 along with other evidence, that Microsoft's 3251 1 treatment of IBM, its threats toward IBM, its 2 attempts to withhold the Windows license from 3 IBM, all increased Microsoft's ability to 4 monopolize the applications business. 5 Finding of Fact 132 indicates that 6 this type of conduct is a pattern of 7 Microsoft's. 8 Its interaction with Netscape, IBM, 9 Apple, RealNetworks, all reveal a business 10 strategy of using its monopoly power to force 11 other companies to abandon projects that 12 threaten Microsoft's position and Microsoft's 13 business strategy to punish those companies 14 that resist. 15 Moving on to Netscape. And putting 16 the findings of fact into context, in the 17 mid-'90s -- for those of us who use computers, 18 it's kind of hard to remember when there was no 19 Internet. 20 You couldn't just get on and find, you 21 know, answers to problems and use, you know, 22 various services to find the answer to really 23 any problem, any question. 24 But there was a time, and it wasn't 25 all that long ago. 3252 1 But by 1995, Netscape is the most 2 popular browser. It's sort of the industry 3 darling, if you will. 4 And it is perceived by the industry 5 generally as a dynamic company, and its 6 flagship product is called Navigator. 7 And beginning with Finding of Fact 8 134, the findings of fact chronicle Microsoft's 9 effort to destroy Navigator and protect Windows 10 and the applications barrier to entry from the 11 threat posed by Navigator. 12 Navigator was the first browser to 13 capture major public attention. And Microsoft 14 thereafter created a browser called Internet 15 Explorer to compete with Navigator, and 16 Navigator is a cross-platform piece of 17 middleware. 18 Internet Explorer is late to the game. 19 Finding of Fact 134 explains it has some 20 catching up to do both functionally and from a 21 public perception standpoint. 22 Microsoft's management believes that 23 -- Microsoft's management believes that no 24 matter what the company does, Internet Explorer 25 won't capture a large share of browser usage as 3253 1 long as it remains notably inferior to 2 Netscape. 3 So, job one for Microsoft is for the 4 technical people to make it comparable to 5 Navigator. 6 In Finding of Fact 143, we are told, 7 and it is proven, that the executives at 8 Microsoft also believe that the technical 9 improvements alone won't be enough for Internet 10 Explorer to overtake Navigator in terms of 11 appeal to consumers. 12 In that same finding of fact, 13 Microsoft views Navigator as a platform threat. 14 And the decision-makers at Microsoft worry that 15 even developing their own product and giving it 16 away for free, and promoting it vigorously, 17 will not divert enough usage share away from 18 Netscape to neutralize Netscape as a threat, a 19 platform threat, to the applications barrier to 20 entry. 21 A platform threat is a threat to the 22 -- a platform is software that ISVs, the 23 independent software vendors, can use to build 24 on. 25 Microsoft's belief is due, in part, to 3254 1 Netscape's large base of existing users and to 2 its status as being nearly synonymous with the 3 web. 4 If Microsoft is going to raise 5 explorer's market share and lower Navigator, it 6 believes it must block Netscape's access to the 7 most effective ways of distributing the 8 browser, distributing the browser to the end 9 users, to consumers. 10 Paragraphs 144 and 145 describe how 11 web browsers find their way to consumers and 12 how Microsoft attempts to exclude Netscape from 13 the market. 14 Microsoft identifies preinstallation 15 by OEMs as one of the most effective ways to 16 get browsers to consumers and bundling by 17 Internet access providers as the second most 18 effective way to get browsers to consumers. 19 There are two reasons why these two 20 ways are so efficient. 21 For one thing, a consumer must get a 22 computer and connect to the Internet before 23 they browse the web. 24 So distributing browsers with 25 computers and with Internet signups provides 3255 1 access to virtually every single browser user. 2 You got to have the computer before 3 you can browse the web. And so if the browser 4 is on the computer when you turn it on, that is 5 an efficient way of getting a browser to a 6 consumer. 7 For another thing, both OEMs and IAPs, 8 Internet access providers, have the ability to 9 put browser software in front of consumers 10 without the consumer having to do very much. 11 For example, if an OEM preinstalls a 12 browser and puts the icon on the desktop, the 13 user will see it as soon as the operating 14 system appears. 15 Likewise, if an Internet access 16 provider like AOL bundles the browser with its 17 Internet access software, then users will have 18 that browser by default, meaning they'll have 19 it when they get the Internet access provider 20 software. And it will be there whenever they 21 connect to the web. 22 Finding of Fact 144 indicates that 23 Microsoft itself relies on studies showing that 24 consumers tend strongly to use whatever 25 software, whatever browser software is the 3256 1 handiest. And once they have acquired the 2 browser, they are very unlikely to switch to 3 using another. 4 In addition, a very large majority of 5 browser users obtain their software either with 6 their PC or through their IAP subscriptions. 7 Indeed, no other method -- no other 8 distribution method for browsing software even 9 approaches the efficiency of preinstalling or 10 bundling with the IAP subscriptions. 11 And the reason for this, the single 12 biggest reason for this, is that all the other 13 methods require the user to use effort to 14 obtain the browser. 15 The traditional retail method, for 16 example, requires that the consumer go to the 17 store, pick out the browser software, purchase 18 it, bring it home, put it on the computer, load 19 it on the computer. 20 And, not surprisingly, once Microsoft 21 and Netscape began offering browsers for free, 22 there aren't too many people left who want to 23 pay for it. 24 Finding of Fact 154. This is 25 Microsoft bundles Internet Explorer with 3257 1 Windows. 2 Let me return for a moment to this 3 distribution that we talked about, the most 4 efficient way of distributing the software. 5 And one of the reasons that we believe 6 this finding of fact, along with others, will 7 pertain to your consideration of how the 8 Windows Media Player is distributed and how 9 Microsoft's bundling of the Windows Media 10 Player and using the most efficient method of 11 distribution, that is OEMs, displaced and 12 destroyed competition in the media player 13 market. 14 Back to Finding of Fact 154. 15 That concludes that web browsers and 16 operating systems are separate products. And 17 let me quote from the finding. 18 In conclusion, the preferences of 19 consumers and the responsive behavior of 20 software firms demonstrate that web browsers 21 and operating systems are separate products. 22 There is no question about that. That 23 is Finding of Fact 154. That is a proven fact. 24 Finding of Fact 157 tells us that as 25 late as January of 1995, Microsoft's plan is to 3258 1 ship a separate frosting package. They call 2 this a frosting package. 3 It will be separate from the operating 4 system, but it will be bundled. There will be 5 -- in the frosting package there will be 6 Microsoft Internet Explorer. 7 But by April or May of that year, 8 Microsoft's top executives see Netscape's 9 browser as an even more important threat to the 10 applications barrier to entry and believe that 11 the best way to maximize Microsoft's browser 12 share is to make sure that every single copy of 13 Windows they ship includes a copy of Internet 14 Explorer. 15 So they go from the frosting to 16 including a copy of Internet Explorer with 17 Windows. 18 And, again, members of the jury, we 19 believe that Microsoft's conduct, the conduct 20 not only with respect to the RNA API and the 21 scripting tool, but also with respect to what 22 they do with Netscape and the bundling and 23 joining of the product proves that along with 24 other evidence Microsoft's conduct is willful 25 and flagrant. 3259 1 The plan changes two days after June 2 -- after the June 21 meeting, June 21, 1995, 3 the meeting between Netscape and Microsoft. 4 You saw the notes of that from Mr. Andreessen. 5 A Microsoft executive named John Ludwig sends 6 e-mail to the other Microsoft executives 7 leading the browser effort. 8 This is Plaintiffs' Exhibit 9420. 9 And he says, Mr. Ludwig says, 10 obviously Netscape does see us as a client 11 competitor. We have to work extra hard to get 12 Internet Explorer on the OEM disks. 13 So frosting first, and then a package, 14 the OS package and the Internet Explorer 15 package together. Now Mr. Ludwig suggests on 16 the disks that go to the OEM. 17 And Finding of Fact 158 discusses that 18 during the summer of 1995 Microsoft does manage 19 to get Internet Explorer 1.0 bundled with 20 Windows 95, with the Windows 95 that it 21 licenses to OEMs. 22 And the terms of the license, which we 23 will be discussing, the terms of this license 24 prohibit OEMs from modifying or deleting any 25 part of Windows 95, including Internet Explorer 3260 1 prior to shipment. 2 This presents a bit of a problem for 3 the OEMs. The OEMs want to meet consumer 4 demand for PC operating systems that don't have 5 Internet Explorer, but the restriction, 6 Microsoft's restriction, is made a 7 nonnegotiable term of the Windows 95 license. 8 And, again, the OEMs have no 9 alternative to Windows. And this policy 10 ensures that virtually every PC that a consumer 11 purchases has Internet Explorer already on it. 12 Again, let me remind you, I hear 13 myself talking in the present tense, which is 14 something that I tend to do. 15 '94 to '99. Okay. This is the 16 period of time covered by the findings of fact. 17 We believe that the evidence will show 18 that, you know, both before and after Microsoft 19 did anticompetitive acts that monopolized the 20 markets and operating system and also in 21 applications, but these findings of fact have a 22 boundary around them, a barrier even. 23 The policy -- in Finding of Fact 159, 24 because virtually every PC comes with Internet 25 Explorer and because, according to the Windows 3261 1 95 license, you can't take it off, the OEMs 2 can't get rid of it, the OEMs are unlikely to 3 preinstall Navigator. And Microsoft knows 4 this. 5 And preventing them from uninstalling 6 Internet Explorer makes it highly unlikely they 7 would make an additional deal with Netscape. 8 And there are several reasons for that listed 9 in the Finding of Fact 159. 10 First, the OEMs must pay for customer 11 support. If something goes wrong with the 12 computer, the OEM takes the call from the 13 computer. 14 Whatever part of the computer goes 15 wrong, if it's a Dell or a Gateway, the 16 consumer can call Dell or Gateway for 17 assistance. 18 Second, installing more than one 19 product increases support calls. 20 We'll talk a little bit about why that 21 is. Perhaps it's apparent to you. 22 Third, installing more than one 23 product in the same product category, such as 24 browsers, increases an OEMs' testing costs. 25 Of course, each thing you put on the 3262 1 computer has to be tested to make sure that it 2 works with all the other things that are on the 3 computer. 4 And, fourth, installing more than one 5 product per category may not be a good use of 6 -- may be a poor use of scarce and valuable 7 space on the PC's hard drive. 8 Microsoft's -- this is one aspect, the 9 contract aspect. Then there is a technological 10 aspect. 11 Microsoft executives in charge think 12 that these contract provisions that we have 13 discussed won't be enough to reduce Navigator's 14 browser usage share. So they set out to bind 15 Internet Explorer more tightly to Windows as a 16 technical matter. 17 Paragraphs 160 to 167 discuss the 18 technical binding in more detail. 19 Beginning with Finding of Fact 160, 20 the reason Microsoft binds the two products 21 together is to make it very difficult for 22 anyone, including systems administrators, you 23 know, the people who know about computers at 24 corporations and administer the systems, and 25 for users, to remove Internet Explorer from 3263 1 Windows. 2 Another effect of this action is to 3 create a negative experience for people using 4 another browser, like Navigator, on Windows. 5 As Microsoft executive Brad Silverberg 6 put it in a 1995 e-mail -- this is Plaintiffs' 7 Exhibit 4601 -- we will bind the shell to the 8 Internet Explorer so that running any other 9 browser is a jolting experience. 10 The shell is the external part visible 11 to the user, external part of the operating 12 system. 13 And Microsoft creates this jolting 14 experience by putting actual source code, 15 binary code, for Internet Explorer into the 16 same files, computer files, as the operating 17 system code as code needed by the core 18 operating system to function. 19 And, remember, 154 says that these two 20 products, the Internet Explorer and the 21 operating system, are by virtue of the 22 preference of consumers and responsive behavior 23 of software firms which demonstrates that they 24 are separate products. 25 Finding of Fact 166. 3264 1 Starting in late 1996, Mr. Allchin -- 2 you remember Mr. Allchin, very high-level 3 Microsoft executive -- begins to argue that 4 Microsoft must bind the operating system and 5 browser even closer together. 6 In late December 1996, Mr. Allchin 7 makes his case to fellow senior executive Paul 8 Maritz. 9 He writes in Exhibit 2605, I don't 10 understand how IE is going to win. The current 11 path is simply to copy everything that Netscape 12 does packaging and productwise. 13 Maybe being free helps us, but once 14 people are used to a product, it is hard to 15 change them. Consider Office. We are more 16 expensive today and we're still winning. 17 Let me stop there and point out to 18 you, members of the Jury, that this is 19 Mr. Allchin speaking to the Navigator, Internet 20 Explorer issue, but, in doing so, he provides 21 you a comparison between the applications 22 Office and says here that people -- once people 23 are used to a product, it's hard to change 24 them. Consider Office. We are more expensive 25 today and we're still winning. 3265 1 He goes on to say with respect to 2 Navigator and Internet Explorer, my conclusion 3 is that we must leverage Windows more. 4 Treating IE as just an add-on to 5 Windows, which is cross-platform, means losing 6 our biggest advantage, Windows market share. 7 We should dedicate a cross-group team 8 to come up with ways to leverage Windows 9 technically more. We should think about an 10 integrated solution. That is our system. 11 Again, we believe this is flagrant and 12 willful. 13 He follows that up with another. This 14 time on January 2nd, 1997. 15 This is Exhibit 2615. And he says, 16 you see -- this is to Mr. Maritz, again, from 17 Mr. Allchin. 18 You see browser share as Job 1. I do 19 not feel we are going to win on our current 20 path. We do not use our strength, which is 21 that we have an installed base of Windows and 22 we have a strong OEM shipment channel for 23 Windows. 24 Pitting browser against browser is 25 hard since Netscape has 80 percent market share 3266 1 and we have less than 20. I'm convinced we 2 have to use Windows. This is the one thing 3 they don't have. 4 We have to be competitive with 5 features, but we need something more, Windows 6 integration. 7 If you agree that Windows is a huge 8 asset, then it follows quickly that we are not 9 investing sufficiently in finding ways to tie 10 Internet Explorer and Windows together. 11 Memphis -- and that is Windows 98 -- 12 Memphis must be a simple upgrade, but most 13 importantly -- is that what that says? 14 Memphis must be a simple upgrade, but, 15 most importantly, it must be killer on OEM 16 shipments so that Netscape never gets a chance 17 on these systems. 18 Mr. Maritz responds to this second 19 e-mail from Mr. Allchin. He expresses his 20 agreement when he says in exhibit, the same 21 Exhibit 2615, we have to make Windows 22 integration our basic strategy. 23 The implication of making Windows 24 integration the basic strategy is that the next 25 version of the operating system, Windows 98 -- 3267 1 code name Memphis -- will have to be delayed 2 until the browser code can be fully integrated 3 into the operating system. 4 As Finding of Fact 167 explains, 5 delaying the release of Windows 98 will damage 6 OEMs, damage consumers. 7 Nevertheless, Microsoft concludes that 8 browser system integration in Windows 98 is -- 9 back to Exhibit 2615 -- the only thing that 10 makes sense even if OEMs suffer. 11 Microsoft's technical personnel do, in 12 fact, implement Allchin's integration strategy 13 according to Finding of Fact 170. 14 One of the decisions regarding the 15 strategy is that they will not provide users 16 with the ability to uninstall Internet Explorer 17 from Windows 98. 18 The decision is especially conspicuous 19 given that Microsoft does provide users with 20 the ability to uninstall other things that it 21 claims are integrated into Windows 98. 22 Would this be a good time, Your Honor? 23 THE COURT: We'll take a recess, then, 24 for ten minutes. 25 Remember the admonition previously 3268 1 given. 2 All rise. 3 (A recess was taken from 1:17 p.m. 4 to 1:31 p.m.) 5 THE CLERK: All rise. 6 THE COURT: Everybody else be seated. 7 You may proceed. 8 MS. CONLIN: Thank you, Your Honor. 9 Most of the rest of the findings of 10 fact do focus on Netscape Navigator and 11 Microsoft's actions against Netscape Navigator, 12 though, the findings of fact also deal with 13 Java, which, as you will recall, was being 14 distributed with the Netscape Navigator. 15 That's how it was getting onto 16 people's desktops so applications written in 17 Java could play on people's desktops. 18 Netscape and OEMs were not the only 19 people harmed by Microsoft's integration 20 strategy. 21 As Finding of Fact 173 explains, 22 consumers -- some consumers do not want a 23 browser. They don't want any browser at all, 24 and they are harmed by the integration of the 25 browser into the operating system because they 3269 1 have to put up with a machine that runs more 2 slowly than if it there were no integration. 3 Not only that, but, more generally, 4 Microsoft forces Windows 98 users who aren't 5 interested in browsing to have extra software 6 that provides no benefits and causes harm. 7 These harms include performance 8 degradation, increased risk of 9 incompatibilities, more bugs and system 10 crashes, and security risks. 11 That is Finding of Fact 173. 12 And, of course, as you have heard, one 13 of the damages that end users, Iowa class 14 members, seek in this case is damage for the 15 security risks that come from binding the 16 operating system and the browser together. 17 Corporations who need the hardware 18 support and other nonbrowsing features of 19 Windows 98, but don't want browsing at all are 20 also damaged because without the ability to 21 remove Internet Explorer, they can't easily 22 stop employees from browsing on the web when 23 they are supposed to be working. 24 In addition, Microsoft's actions harm 25 consumers who do want to use Internet Explorer, 3270 1 who do want to use Internet Explorer with 2 Windows 98. 3 This is because, as Finding of Fact 4 174 explains, putting browser code in the 5 operating system jeopardizes its security and 6 its stability. 7 Specifically, Windows 98 is more 8 likely to crash. It's easier for viruses to 9 infect the operating system, and that is 10 because of the integrated code in the same 11 files. 12 Remember Finding of Fact 174, which 13 you have in your notebook. And, again, of 14 course, rely on that finding of fact when we 15 discuss the damage to Iowa class members from 16 the security problems Microsoft's introduction 17 and combination and integration of the 18 operating system and the browser together has 19 caused. 20 Finding of Fact 175 indicates that 21 what makes the harm of browser integration more 22 frustrating is there is no technical 23 justification for doing it, for doing what 24 Microsoft did, for binding these two otherwise 25 separate products together. 3271 1 Finding of Fact 177 says Microsoft 2 could easily supply a version of Windows 98 3 that does not provide a browser. Then users 4 would be able to add their own browser of 5 choice. 6 It's even possible for an expert to 7 re-find and remove the browser code from 8 Windows without hurting the nonbrowsing 9 features of the operating system. 10 There are benefits, especially 11 hardware improvements, that Windows 98 offers. 12 And as Finding of Fact 192 explains, 13 these benefits that Windows 98 offers are not 14 related to browsers at all. 15 And as Finding of Fact 194 concludes, 16 Microsoft's refusal to offer a version of 17 Windows 98 in which the browser is either 18 absent or at least removable has the purpose 19 and effect of quashing innovation that might 20 increase competition in the market for 21 operating systems. 22 This is my summary heading. These 23 findings of fact and other evidence that we 24 will present, Microsoft uses its monopoly to 25 exclude Netscape from original equipment 3272 1 manufacturers. 2 And in its efforts to overtake 3 Netscape, Microsoft believes it needs to bring 4 the OEMs into line with its strategic goals 5 very quickly. 6 As Finding of Fact 203 explains, it 7 does this by threatening OEMs with the use of 8 its monopoly power unless they cooperate. 9 In fact, Microsoft threatens to 10 terminate Windows licenses if OEMs were to 11 remove the Internet Explorer icon from the 12 desktop and replace it with Netscape Navigator. 13 Microsoft's goal of capturing browser 14 market share would be undermined. And the same 15 would be true if OEMs promoted the Netscape 16 Navigator before Windows 98 could promote the 17 Internet Explorer. 18 Finding of Fact 203 says, therefore -- 19 and now, again, I'm not quoting precisely. In 20 order to -- well, I think I might be here. 21 In order to bring the behavior of OEMs 22 in line with its own strategic goals, Microsoft 23 threatens to terminate the Windows license of 24 any OEM that removes Microsoft's chosen icons 25 from the Windows desktop or from the start 3273 1 menu. 2 It also threatens to do so if an OEM 3 adds programs that promote other software to 4 the Windows boot sequence. Remember, that's 5 when you first turn it on and it boots up. 6 And this is directed toward OEMs and 7 it prevents them from adding anything to the 8 boot sequence. 9 While these restrictions promote 10 Microsoft's short-term goals of increasing 11 browser share, they also frustrate innovation 12 that might make computers more satisfying for 13 users. 14 Microsoft, however, believes that it 15 must shut Netscape out of this channel, out of 16 the vital OEM channel entirely, or in so far as 17 it can. 18 In fact, as Finding of Fact 208 19 describes, Microsoft actually terminates the 20 license of Compaq when Compaq removes the 21 Internet Explorer icon from the desktop. 22 Plaintiffs' Exhibit 2501 is a May 31, 23 1996 letter, the subject of which, this goes to 24 Mr. David Cabello of the Compaq legal 25 department and re: Notice of intent to 3274 1 terminate license agreement number dated 2 October 1, 1991. 3 That is not the date of the letter. 4 That is the date of the -- I beg your pardon. 5 October 1, 1992. That is the date of the 6 license that Compaq has for Windows. 7 And here is the content of the letter. 8 I'm not reading all of it to you. You'll have 9 it, as I said, Exhibit 2501. 10 As per -- it has come to Microsoft's 11 attention that Microsoft Windows 95 is being 12 distributed by Compaq with Compaq Presario 13 systems in a form which has been modified by 14 Compaq. 15 As per the terms of Section 10, 16 default and termination of the agreement, this 17 letter is written notice of Microsoft's 18 termination of the agreement. 19 As per Section 10, termination will be 20 effective 30 days after this notice unless 21 Compaq cures the above violation within the 22 30-day period. 23 That is from a Microsoft employee 24 named Peter Miller. 25 Plaintiffs' Exhibit -- there's some 3275 1 communication in between here. I'm not -- I 2 was going to show it all to you and I thought 3 better of it. 4 So here's Plaintiffs' Exhibit 2515, 5 and this is dated June 21, 1996. This is from 6 Compaq to now a man named Don Hardwick, who is 7 a group manager in the OEM sales division. 8 It is from Celeste Dunn, who is vice 9 president of consumer software business unit at 10 Compaq. 11 And she says, we have received your 12 letter dated June 8th, 1996, and have made the 13 changes you requested to the Windows 95 desktop 14 of the current release of the Compaq Presario 15 systems. 16 We have replaced the Microsoft network 17 and Internet Explorer icons on the Windows 95 18 desktop as executable icons so they look and 19 function exactly the same as how we originally 20 received them from Microsoft and have placed 21 Microsoft network, Internet Explorer icons, and 22 Internet setup wizard icons in their original 23 locations under the start button on the Windows 24 95 desktop. 25 Exhibit 2515 sent by Ms. Dunn to 3276 1 Microsoft indicating that Compaq has, by this 2 date, put everything back exactly as Microsoft 3 demanded. And, really, as we see from the 4 previous findings of fact, they don't -- they 5 do not have a choice. 6 But Microsoft is willing to go to the 7 brink of losing all Windows sales with Compaq, 8 its single largest volume OEM, in order to 9 enforce its prohibition against removing the IE 10 icon from the desktop. 11 As you will see, the Compaq Presario 12 also removed the MSN network icon as well. 13 In an effort to prevent OEMs from 14 modifying the desktop, Microsoft does more. 15 In the spring of 1996, to require of 16 OEMs that they accept a series of restrictions 17 on their ability to reconfigure the Windows 18 desktop and the boot sequence, Finding of Fact 19 231 -- this is a graphical summary -- you have 20 the Finding of Fact 213 on the other screen. 21 That finding of fact describes -- 22 MR. TULCHIN: Object to the summary, 23 Your Honor. 24 THE COURT: Overruled. 25 MS. CONLIN: Finding of Fact 213 3277 1 describes these restrictions. 2 There are five. The first restriction 3 is a complete prohibition on the removal of any 4 icons folders or start menu entries Microsoft 5 itself places on the Windows desktop. 6 Second, Microsoft prohibits OEMs from 7 modifying the initial boot sequence. 8 Third, Microsoft prohibits OEMs from 9 installing programs which launch automatically 10 when Windows is done coming up, done booting. 11 Fourth, Microsoft prohibits OEMs from 12 adding icons or folders to the desktop unless 13 they are similar to Windows icons. Similar in 14 size, similar in shape. 15 And, finally, number five, when 16 Microsoft later introduces the active desktop, 17 it prohibits OEMs from using the active desktop 18 to promote any other software. 19 In Finding of Fact 214, there are 20 several OEMs, which together represent over 90 21 percent of the sales of Intel-compatible PCs. 22 These OEMs all believe that the new 23 restrictions Microsoft has placed, these, on 24 modifying Windows will make PCs more confusing 25 and difficult for people to use and, therefore, 3278 1 less acceptable to consumers. 2 These OEMs predict that the 3 restrictions will increase the rate of product 4 returns, the product support costs that the 5 OEMs bear, and generally lower the value of 6 personal computers to users. 7 Gateway, Hewlett Packard, and IBM all 8 oppose these restrictions and urge Microsoft to 9 lift them. 10 214 includes a letter from the manager 11 of research and development at Hewlett Packard. 12 He sends a letter to Microsoft in 13 March 1997, and he writes -- I'm not going to 14 read it all to you. I'm reading directly from 15 the Finding of Fact 214. 16 Microsoft's mandated removal of all 17 OEM boot sequence and auto start programs has 18 resulted in significant and costly problems for 19 the HP Pavilion line of retail PCs. 20 This is a major concern in that we are 21 taking a step backward in meeting consumer 22 satisfaction needs. 23 From the consumer perspective, we are 24 hurting our industry and our customers. 25 PCs can be frightening and quirky 3279 1 pieces of technology into which they invest a 2 large sum of their money. 3 It is vitally important that the PC 4 suppliers dramatically improve the consumer 5 buying experience out of the box as well as the 6 longer term product usability and reliability. 7 Our consumers hold HP accountable for 8 their dissatisfaction with our products. We 9 bear the cost of returns of our products. We 10 must have more ability to decide how our system 11 is prepresented to our end users. 12 If we had a choice of another supplier 13 based on your actions in this area, I assure 14 you that you would not be our supplier of 15 choice. 16 That goes back to earlier findings of 17 fact indicating that OEMs really don't have a 18 choice. They need Windows. 19 And, yet, despite these costs of 20 complying with Microsoft's restrictive 21 licenses, the OEMs do so. 22 Once again, because they have no 23 alternative. 24 Finding of Fact 217 explains 25 Microsoft's license agreements have never -- 3280 1 please listen carefully to this because this 2 may -- this has been a bit confusing to me. 3 More than a bit sometimes. 4 Microsoft's license agreements have 5 never prohibited OEMs from installing programs, 6 including Navigator, on their PCs. 7 OEMs may place icons and entries for 8 those programs on both the Windows desktop and 9 the start menu, but this does not make it 10 inexpensive for OEMs to add Navigator. 11 This is because they already got 12 Internet Explorer. Whether they want it or 13 not, Internet Explorer is there. 14 Because, given the required presence 15 of Explorer, adding a Navigator icon increases 16 the amount of clutter on the desktop, and that 17 -- too much clutter causes confusion among 18 consumers. And that increased confusion causes 19 increased support calls to the OEMs and even 20 additional product returns. 21 OEMs are not prevented from making 22 Navigator the default browser. They can make 23 it the browser that that goes on. 24 But even where Navigator is the 25 default browser, there are circumstances under 3281 1 which Internet Explorer launches anyway, even 2 if the user has chosen Navigator as the default 3 browser. I hope that's clear. 4 What I believe this finding of fact 5 tells you, 217, is that even though the user 6 says Navigator is my browser of choice, this is 7 what I want to use, Internet Explorer will 8 launch anyway, under some circumstances. 9 The bottom line is in order to protect 10 its monopoly power, Microsoft makes sure that 11 it is very difficult for anybody to use any 12 browser other than Internet Explorer for 13 surfing the web. 14 And in Finding of Fact 228, it's 15 explained that while Microsoft holds copyrights 16 on its software and licenses OEMs to sell 17 copies of them, these restrictions, the ones we 18 just talked about, are not necessary for 19 Microsoft to protect its intellectual property. 20 This reality, Microsoft's own 21 documents, reflect the fact that it is -- that 22 its primary concern is not protecting its 23 intellectual property, but they are concerned 24 with Navigator's market share, the applications 25 -- keeping the applications barrier to entry. 3282 1 Ultimately, Microsoft's restrictions 2 burden OEMs and users with substantial costs 3 and harm Microsoft's relationship with OEMs, 4 with major OEMs. 5 And the reason they do it is to get 6 more browser share for Internet Explorer and to 7 decrease the browser share of Navigator so that 8 it cannot erode the applications barrier to 9 entry and make it possible for people to use 10 this middleware layer and not care what the 11 operating system is. 12 Finding of Fact 241, ultimately, 13 Microsoft is successful in its two -- its twin 14 aims. 15 One, to secure for Explorer the vital 16 OEM distribution channel; and, two, to 17 foreclose Netscape from that very same channel. 18 And Microsoft achieves this by using a 19 complimentary set of tactics. 20 First, it forces OEMs to take Explorer 21 with Windows. That's number one. Number two, 22 it forbids them, OEMs, from removing it and 23 from obscuring the Explorer icon. 24 And this ensures that there will be 25 prominent placement for Explorer on the Windows 3283 1 desktop while simultaneously increasing the 2 cost OEMs have for doing the same thing with 3 Navigator for the reasons previously discussed 4 in the findings of fact. 5 Three, Microsoft imposes additional 6 technical restrictions to increase the cost of 7 promoting Navigator even more. 8 Four, Microsoft offers OEMs valuable 9 things, valuable inducements, if they promote 10 Explorer exclusively. 11 And, finally, Microsoft threatens to 12 penalize any OEMs that insist on preinstalling 13 and promoting Navigator. 14 There is a second channel, and that is 15 the IAPs, the AOLs, the Prodigies, and the 16 like. 17 That is the second -- there are two 18 channels that are most important distribution 19 channels. And we've talked about the OEMs. 20 Now we are going to talk about the IAPs. 21 Just as Microsoft targets the OEMs 22 with tactics designed to exclude Netscape, it 23 targets the IAPs with the same goals. 24 Finding of Fact 242. By late -- 25 before I go on to the IAPs, I do want to make 3284 1 one comment. 2 We believe that the evidence with 3 respect to Netscape and the browser will also 4 be useful to you as you consider the 5 applications issue. 6 We believe the evidence will be that 7 Microsoft saw Netscape Navigator not only as an 8 operating system threat, but also as a threat 9 directly to Office. 10 Now, moving on to the IAPs. 11 By late 1995, several of the most 12 popular IAPs are already shipping Navigator. 13 Recognizing that it's starting from 14 behind, Microsoft devises an aggressive 15 strategy to capture the IAP channel from 16 Netscape. 17 Findings of Fact 243 to 245 explain 18 what Microsoft does. 19 The first step for -- the first step 20 for Microsoft is to get a small ISP, Internet 21 service provider, to distribute Internet 22 Explorer as their default browser by offering 23 it for free, along with a software kit that 24 makes it easy for the ISPs to bundle the 25 Internet Explorer. 3285 1 Microsoft believes that if IAPs give 2 new subscribers a choice, most will choose 3 Navigator. Both because its name has become 4 synonymous with the web, and because it has a 5 much better reputation for quality than 6 Explorer. 7 In addition, Microsoft decides to 8 supplement its free distribution of Explorer 9 with other tactics. These tactics are designed 10 to do the same two things. 11 To get IAPs, Internet access 12 providers, to distribute and promote Explorer, 13 and to severely limit the distribution and 14 promotion of Navigator, and to convert existing 15 subscribers of these IAPs away from Navigator. 16 Exhibit 244. Microsoft's -- I'm 17 sorry. Finding of Fact 244. 18 Microsoft's first tactic is to include 19 an Internet signup program within Windows that 20 makes it easy for users to subscribe to a list 21 of IAPs assembled by Microsoft. 22 The first thing I'm going to talk 23 about is the Internet signup program. 244. 24 To get on this list, IAPs must agree 25 to Microsoft's requirements. 3286 1 And, number one, that they distribute 2 and promote Internet Explorer. Number two, 3 that they refrain from promoting any other 4 browser. And, three, that they distribute 5 Navigator to only a small percentage of their 6 subscribers. 7 And this was -- this could vary, but 8 the most common -- the most common percentage 9 was 25 percent as set by Microsoft. 10 Then there was a second tactic, and 11 that involves the creation of an online 12 services folder. 13 On the Windows desktop, for the most 14 important access providers, in exchange for 15 placement in the folder and preinstallation of 16 their software -- in other words, Microsoft 17 would preinstall the software for these IAPs in 18 the Internet -- in the online services folder, 19 the IAPs have to agree to similar terms as the 20 IAPs participating in the Internet signup 21 program. 22 They must agree to, one, distribute 23 and promote Internet Explorer. Refrain from 24 promoting other browsers, and also not 25 distribute other browsers to more than 15 3287 1 percent of their subscribers. 2 So two tactics. One, the Internet 3 signup, which they include as a part of their 4 monopoly operating system to limit the 5 distribution of Navigator by Internet access 6 providers, and two, the online services folder, 7 also included with the monopoly operating 8 system to do the same thing. 9 In Finding of Fact 253, in the late 10 summer of 1996, Microsoft introduces another -- 11 yet a third kind of a thing for Internet access 12 providers as an inducement. And that is called 13 the Internet connection wizard. 14 This is a feature of a later release 15 of Windows 95. 16 And as Finding of Fact 253 describes, 17 what that does is it allows -- the ICW allows a 18 user to click on an icon on the Windows desktop 19 which initiates a phone call to the Windows 20 referral server. 21 The referral server then transmits a 22 list of the IAPs providing service in that 23 user's immediate vicinity. 24 So the user would click on the icon. 25 There would be a phone call. It would go 3288 1 through the Windows -- it would go to the 2 Windows referral server, and then the referral 3 server would transmit a list of IAPs providing 4 service in -- you know, in Des Moines or 5 Burlington or wherever. In the user's 6 immediate vicinity. 7 IAPs view the Windows referral server 8 as valuable for a number of reasons. And here 9 are those as listed and summarized by me, but 10 listed in Finding of Fact 254. 11 First, the ICW icon is prominent on 12 the Windows desktop. And the Windows desktop 13 is, of course, a monopoly product appearing on 14 most PCs. 15 Second, inclusion in the referral 16 server is a highly focused promotion. 17 What that means is PC users, by 18 design, must show some interest in Internet 19 access just by clicking on the icon. 20 If they click on the icon, it's 21 because they have some interest in connecting 22 to the Internet. 23 Third, it is an easy-to-use tool. And 24 users who start the process are likely to 25 complete it and become subscribers, which is 3289 1 the goal of the Internet access providers. 2 And, finally, it's relatively 3 inexpensive to the IAPs. 4 Findings of Fact 256 and 258 describe 5 that Microsoft is successful with this referral 6 server plan. 7 Between July of 1996 and September of 8 1997, Microsoft enters into referral server 9 agreements with 14 IAPs, including some of the 10 largest, AT&T, EarthLink, Prodigy, Sprint. 11 The IAPs included in the Windows 95 12 referral server as of September 1997 represent 13 10 of the 15 top APIs in North America. 14 Finding of Fact 258 indicates that in 15 exchange for these perks, the top 10 APIs are 16 required to offer Explorer as their default or 17 preferred browser. 18 Not only that, they must also agree to 19 limit their promotion and distribution of any 20 other browser. 21 Specifically, they cannot provide 22 links or otherwise promote Netscape on their 23 home page. 24 The home page being where if you put 25 in WWW, you know, AOL.com, when you got there 3290 1 to the home page, there would be no link or 2 promotion of Netscape or any other browser. 3 They cannot even tell their subscriber 4 it's possible to use another browser other than 5 Internet Explorer with that API's service. 6 They cannot provide their subscribers with 7 another subscriber unless a subscriber 8 specifically requests it. 9 And they must give Microsoft the right 10 to remove them from the referral service if 11 that IAP allows any other browser to climb 12 above a specified percentage. 13 And that percentage varies in the 14 agreements from 15 percent to 50 percent with 15 25 percent being the most common. 16 As Finding of Fact 262 explains, 17 blocking consumers' access to other browsers 18 does nothing to help consumers. 19 Instead, Microsoft's real motivation 20 is its belief that even if APIs are compelled 21 to promote and distribute Explorer, most 22 subscribers will still use Navigator if it is 23 readily available. 24 As Finding of Fact 272 explains, 25 American Online is the largest and most 3291 1 important IAP, and, of course, Microsoft is 2 well aware of that. 3 They know -- Microsoft executives know 4 that if they can convince AOL to distribute 5 Internet Explorer, they can capture a large, 6 huge chunk of the IAP channel all at once. 7 And in early 1996, they are able to 8 cut a deal. Microsoft exchanges favorable 9 placement on the Windows desktop and other 10 things for AOL's agreement to distribute and 11 promote Internet Explorer to the near exclusion 12 of Navigator. 13 This one deal causes an enormous surge 14 in Explorer's usage share and a corresponding 15 decline in Navigator's. 16 And to supplement this deal, Microsoft 17 enters into similar agreements with some of the 18 other smaller online service providers. 19 The terms of the AOL deal restrict the 20 distribution of Netscape. 21 These negotiations between Microsoft 22 and AOL take place through February and early 23 March. 24 Then, as Finding of Fact 287 25 describes, on March 11th, 1996, AOL announces 3292 1 that it has selected Navigator as the primary 2 browser for GNN. 3 GNN is AOL's basic ISP service, but it 4 represents 2 or 3 percent of the AOL subscriber 5 base. 6 And the next day, the GNN deal is 7 overshadowed as AOL announces that it has 8 chosen Internet Explorer as the primary browser 9 for the AOL flagship service. 10 As paragraphs 288 and 289 explain, the 11 terms of the deal are unlike the other IAP 12 deals that we've already discussed. 13 First, AOL is allowed to modify the IE 14 source code and customize it for use with AOL 15 software. 16 Microsoft grants AOL free worldwide 17 distributions for Internet Explorer and agrees 18 to distribute AOL's Internet access software 19 within Windows. 20 Microsoft also agrees to put an AOL 21 icon in the online services folder on the 22 Windows desktop. 23 In return for these promises from 24 Microsoft, AOL agrees to base its Internet 25 access software on Explorer 3.0. 3293 1 And, furthermore, as explained in 2 Exhibit 3737, AOL must also agree that it and 3 its affiliates will exclusively promote, 4 market, and distribute, and have promoted, 5 marketed, and distributed Internet Explorer on 6 or for use by subscribers to the AOL flagship 7 service. 8 In addition to this general provision, 9 AOL also agrees to a number of more specific 10 provisions, which I have summarized for you. 11 They are in Finding of Fact 289. 12 First, it must ensure that the number 13 of copies that Navigator ships -- number of 14 copies of the Navigator it ships through any 15 subchannel -- let me stop for a moment. 16 I imagine what this says, though I 17 can't see it behind me, is another browser. 18 But the other browser that was prominent -- the 19 other browser with the big market share is 20 Navigator, but it would affect any other 21 browser if there had been any other browser. 22 It must ensure that the number of 23 copies of Navigator it ships through any 24 channel, including GNN, and the number of new 25 subscribers accessing AOL with Navigator will 3294 1 not exceed 15 percent of subscribers. 2 Second, AOL must agree not to 3 distribute Navigator to more than 15 percent of 4 its subscribers, even if the subscribers 5 specifically request Navigator. 6 Third, while AOL may provide a link 7 within its service through which subscribers 8 could reach a website to download Navigator, it 9 may not express or imply that people could 10 actually use Navigator with AOL software. 11 And, finally, AOL agrees not to 12 include instructions for getting Navigator on 13 its website or on any other place where there 14 are -- there's browsers. 15 Finding of Fact 289. 16 Since downloading a large program like 17 Navigator can involve considerable time and is 18 often frustrating for average users with 19 average equipment, and most people at this 20 time, of course, had a dial-up connection, the 21 chances are slim that many AOL users who tend 22 to be novices anyway would make the effort to 23 seek out the Netscape website and download the 24 browser that way. Especially when Microsoft's 25 browsing software has already been included 3295 1 with AOL. 2 The Finding of Fact 291 explains the 3 restrictions Microsoft imposes on AOL serve no 4 purpose but to maximize Explorer's usage share 5 at Navigator's expense. They don't increase 6 efficiency. Rather, they hamper the ability of 7 consumers to choose between competing browsers. 8 Furthermore, through the AOL deal, 9 Microsoft even undermines its own MSN service, 10 Microsoft network server. Like AOL. 11 It undermines its own MSN service, a 12 project on which it had spent hundreds of 13 millions of dollars. 14 Finding of Fact 289. 15 These tactics are so effective that 16 when Microsoft learns that 92 percent of AOL 17 subscribers use AOL, it can rest assured that 18 virtually the same percentage of those users 19 are actually using Explorer. 20 AOL and its subsidiary, CompuServe, 21 account for 65 percent of the combined 22 subscriber base of the top 80 IAPs in 1997. 23 The restrictive terms that Microsoft 24 imposes on AOL successfully preempt Netscape's 25 access to a substantial part of the IAP channel 3296 1 and route that business instead to entity 2 Explorer. 3 And Microsoft's power is perhaps never 4 more apparent, then, when that somewhat ironic 5 twist, AOL buys Netscape. This is Finding of 6 Fact 301. 7 Because even after AOL buys Netscape, 8 AOL does not terminate its Internet Explorer 9 agreement with Microsoft. 10 In a November 17th, 1998 board 11 meeting, the executives from AOL explain that 12 even though AOL now owns Netscape, it's not 13 practical to leave Internet Explorer for 14 Netscape because, if it did so, though it would 15 have 65 percent of the market, the Windows 16 desktop and staying in Microsoft's good graces 17 are more important. 18 Finding of Fact 304. 19 AOL subscriber base numbers about 16 20 million during this time frame that we're 21 talking about. Now, we are in the later part 22 of the time frame. 23 And a substantial portion of 24 web-browsing is done through its services. 25 Giving AOL valuable desktop real 3297 1 estate to the detriment of its own MSN, 2 Microsoft is able to capture and hold for at 3 least four years, which is the term of the 4 contract with AOL, the lion's share of one of 5 the two most important distribution channels 6 for browsers. 7 And then developers see that other 8 browsers won't win -- won't win over Explorer. 9 And Microsoft uses this four-year interval of 10 its contract with AOL to enhance the 11 developers' dependence on Microsoft's Internet 12 Explorer. 13 Finally, the AOL deal is a very 14 expensive venture for Microsoft, and perhaps, 15 more importantly, it costs consumers their 16 freedom of choice. 17 In the end, the effort is worth it for 18 Microsoft because -- 19 MR. TULCHIN: Continue to object to 20 the characterizations and interpretation. 21 THE COURT: Which part are you 22 summarizing? 23 MS. CONLIN: Finding of Fact 304, Your 24 Honor. I'll get it. 25 MR. TULCHIN: Ms. Conlin's statement 3298 1 that this was worth it for Microsoft, the 2 findings of fact say what they say, Your Honor. 3 And these continued interpretations and 4 restatements of what they mean, I think, are 5 improper. 6 THE COURT: Sustained. 7 MS. CONLIN: Let me go directly to 8 that. 9 The AOL coup, which Microsoft 10 accomplished only at tremendous expense to 11 itself and considerable deprivation of 12 consumers' freedom of choice, thus contributed 13 to extinguishing the threat that Navigator 14 imposed to the applications barrier to entry. 15 As Finding of Fact 309 concludes, 16 Microsoft is successful -- I'll keep these with 17 me -- is successful at locking Netscape out of 18 the IAP channel. 19 Here is what that says. A study 20 Microsoft conducted shows that at the end of 21 1997, Internet Explorer enjoyed a 94 percent 22 weighted average share of shipments by ISPs 23 that had agreed to make Internet Explorer their 24 default browser. 25 And it goes on to talk about what -- 3299 1 when Internet Explorer had only 14 percent 2 share of shipments of browsing software by 3 Internet service providers that did not agree 4 to these agreements that we have talked about. 5 And restricting -- Microsoft also 6 restricted Netscape's access to other important 7 channels. 8 Microsoft uses its monopoly power 9 against middleware, as we've discussed. I beg 10 your pardon. Against middleware through the 11 OEMs, through the IAPs, and also we are going 12 to talk about Internet -- about independent 13 software vendors. 14 Finding of Fact 337 explains that, 15 since 1995, more and more independent software 16 vendors have been enhancing the features of 17 their applications by designing them to take 18 advantage of the browsers. 19 An increasing number of these 20 applications actually rely on browsing software 21 to function. 22 And, as the trend increases, Microsoft 23 also seeks to get these companies, the Internet 24 -- I'm sorry, the independent software vendors 25 using Internet Explorer instead of Netscape. 3300 1 Paragraphs 339 and 340 describe -- I'm 2 glad the day is just about gone here. It's so 3 dry in here -- describe how in dozens of first 4 wave agreements between the fall of 1997 and 5 the spring of 1998, Microsoft promises to give 6 preferential support, such as early Windows 98 7 betas, technical information, and Microsoft 8 seals of approval to important ISVs that agree, 9 among other things, to use IE as the default 10 browser for their applications. 11 And, two, to use Microsoft's HTML 12 help, which is accessible only through Internet 13 Explorer as their applications help system. 14 In Finding of Fact 340, Microsoft 15 thinks that through these first wave 16 agreements, it can get the most popular 17 applications to rely on Internet Explorer. 18 And through the Internet -- or through 19 the ISVs, the independent software vendors, 20 there will be millions of consumers of these 21 applications who are, then, also likely to use 22 Internet Explorer's technology rather than 23 Navigator's. 24 And this is another example of 25 Microsoft taking action to preserve the 3301 1 applications barrier to entry. 2 I mentioned earlier the issue of 3 Office, and that is coming up in Finding of 4 Fact 342. 5 This, however, is not Office on the 6 PC. This is Mac Office. This is the Office 7 product that Microsoft produces for people who 8 use the Macintosh. 9 Preinstallation and -- did I tell you 10 342? Preinstallation and promotion by Apple is 11 one of the most effective means of raising 12 usage share on Apple PCs. 13 Mr. Gates recognizes this and urges 14 Microsoft executives to get Apple to preinstall 15 IE and feature it more prominently than 16 Navigator. That is discussed in findings of 17 fact 342 and up to 352. 18 And, again, we believe that this shows 19 flagrant, willful violation of Iowa's laws that 20 protect competition. 21 By the summer of 1996, Apple is 22 shipping Internet Explorer with the Mac, but 23 it's also preinstalling Navigator, and it's 24 making Navigator the default browser. 25 Gates meets with Apple about this in 3302 1 June of 1996, and afterward writes to his top 2 executives in Exhibit 2519. 3 He says, I have two key goals -- 4 MR. TULCHIN: Same objection, Your 5 Honor, to the use of the document rather than 6 the finding. 7 THE COURT: Overruled. 8 MS. CONLIN: I have two key goals 9 investing in the Apple relationship. 10 One, maintain our applications share 11 on the platform. 12 And, two, see if we can get them to 13 embrace Internet Explorer in some way. 14 Later in the same message, he says he 15 wants to get Apple to agree immediate -- agree 16 to immediately ship Internet Explorer on all 17 their systems as the standard web browser. 18 In Finding of Fact 344, Microsoft has 19 leverage with Apple because 90 percent of Mac 20 users who use Office productivity applications 21 use Microsoft's Mac Office. 22 In 1997, Apple is in the midst of a 23 steep decline, and many doubted will survive. 24 If Microsoft were to announce that it 25 will no longer develop new versions of Mac 3303 1 Office, it will be the end of Apple. 2 In 349 -- 3 MR. TULCHIN: Object to that 4 characterization. Again, Your Honor, it's not 5 what it says. 6 THE COURT: Sustained. 7 MS. CONLIN: Microsoft recognizes in 8 349 the importance of Mac Office to Apple's 9 future success and threatens to cancel it 10 unless Apple agrees to distribute and promote 11 Internet Explorer as opposed to Navigator. 12 In the midst of the negotiations, 13 Gates tells his executives in Exhibit 2726 that 14 discussions are not -- have not been going well 15 at all. 16 One of the reasons for this is that, 17 in Gates' words, Apple has let us down on the 18 browser by making Netscape the standard 19 install. 20 Gates then reports that he called 21 Apple's CEO, Gil Amelio, to inquire how -- 22 Can you make that any bigger? Maybe 23 not. 24 How we should announce the 25 cancellation of Mac Office? 3304 1 Within a month of this call to 2 Mr. Amelio, he, Mr. Amelio is gone and Steve 3 Jobs is reinstalled as the CEO of Apple, and 4 the two companies settle their outstanding 5 issues in a series of three agreements. 6 One of the agreements requires 7 Microsoft to continue to release Mac Office for 8 at least five years. 9 On Apple's side, it must also agree to 10 do several things. 11 First, Apple must bundle Internet 12 Explorer with every version of Mac OS that it 13 ships. 14 Second, it must make IE the default 15 browser even if it chooses to bundle another 16 browser. 17 After this agreement is signed, Apple 18 does not include Navigator in the default 19 installation of the Mac OS 8.5 upgrade. 20 Most users who upgrade are unable to 21 access Navigator and won't try because IE is 22 already installed with the upgrade. 23 Finding of Fact 352. There is -- 24 that's one of the agreements is called the 25 technology agreement. 3305 1 And that says Apple may not put 2 Navigator -- put the Navigator icon on the Mac 3 desktop. In addition, the agreement provides 4 that Apple may not promote other browsers. 5 And, finally, Apple must also agree to 6 display the Internet Explorer logo on all Apple 7 web pages where any browser is displayed. 8 In other words, if there is going to 9 be a browser logo, it must be the Internet 10 Explorer logo on the Apple web page. 11 As Finding of Fact 355 concludes, 12 Apple increases its distribution and promotion 13 of Internet Explorer not because it's better 14 than Navigator and not because consumer demand 15 was greater, but, rather, because of 16 Microsoft's threat to stop producing Mac 17 Office. 18 This is, for Microsoft, an unusual 19 thing to do. Mac Office is a profitable 20 product. It costs them a substantial amount of 21 money. 22 And the reason Microsoft did that, 23 threatened to cancel Mac Office, was to protect 24 the applications barrier to entry by excluding 25 Navigator from the Mac OS desktop. 3306 1 As Finding of Fact 356 explains, 2 Microsoft knows that PC users tend to use the 3 browser that comes with their machines. 4 Microsoft's agreement with Apple 5 ensures that most users of Apple will use 6 Internet Explorer and not Navigator. 7 The number of Mac users is very small 8 compared to Windows. But it's still the second 9 most important operating system. 10 And by getting from Apple terms that 11 diminish Navigator's usage share, Microsoft 12 severely inhibits Navigator's potential to 13 weaken the applications barrier to entry. 14 Would this be a good place to stop, 15 Your Honor? 16 THE COURT: This is a good point. 17 Ladies and Gentlemen of the Jury, 18 we'll take our recess for the day. 19 Please remember the admonition you 20 were given earlier. Leave your notebooks here. 21 We'll lock them up as usual. We'll 22 have you report at 8:30 a.m. tomorrow morning. 23 Have a good night. 24 All rise. 25 We'll take a 15-minute recess. Then 3307 1 we'll start again on your evidentiary motion. 2 (A recess was taken from 2:27 p.m. 3 to 2:44 p.m.) 4 (The following record was made out of 5 the presence of the jury.) 6 MR. HOLLEY: Your Honor, there's one 7 matter that we would like to address briefly. 8 It's repeating an issue that we've raised 9 several times now today. 10 But I'd like to hand up to the Court a 11 memorandum which explains in greater detail 12 what problems we're having with this concept of 13 -- 14 THE COURT: Okay. 15 MR. HOLLEY: -- people being allowed 16 to introduce evidence underlying findings of 17 fact given collateral estoppel effect. 18 And we note in the memorandum, Your 19 Honor, that we were told by Plaintiffs' counsel 20 on the 28th of November that they would come 21 forward with additional authority for this 22 proposition that even though there has been 23 collateral estoppel on 146 findings of fact, 24 that Microsoft is bound by those facts, but the 25 Plaintiffs are free to bolster, emphasize, use 3308 1 for other purposes those findings of fact by 2 introducing other documents into evidence. 3 There have been no cases provided to 4 the Court for that proposition for the simple 5 reason that there are no such cases. 6 There is no case which we're aware -- 7 and we have looked long and hard -- where a 8 party has been allowed to elect collateral 9 estoppel effect for findings and then turn 10 around and introduce evidence underlying those 11 findings. 12 And a couple times today, Your Honor, 13 and I won't go into the gory details of this, 14 the problem was demonstrated fairly 15 graphically. 16 Ms. Conlin referred the Jury to a 17 finding about something called Intel native 18 signal processing. And she then put up a 19 document, or several documents actually, 20 internal Microsoft documents underlying that 21 finding of fact about MSP. 22 In those documents, only portions of 23 which are quoted in the findings, there are 24 references to Microsoft's serious technical 25 concerns with NSP which was designed for use 3309 1 with Windows 3.0, not Windows 95 and didn't 2 work with Windows 95. 3 If the Plaintiffs are allowed to put 4 those documents up on the screen and get them 5 into evidence, it seems to us, Your Honor, that 6 fairness dictates -- in an effort to somehow 7 emphasize the portions of the documents that 8 they like, fairness dictates that we get to 9 look underneath the finding of fact as well and 10 say, fine, then look at the section of this 11 document in which Mr. Maritz explains all of 12 the problems that Microsoft had with NSP. 13 But, then, as Your Honor has pointed 14 out, why are we doing this collateral estoppel 15 thing at all? If we are going to reopen the 16 can of worms and everybody is going to redebate 17 what this evidence means, we haven't saved any 18 time. 19 And, in fact, I think you sort of blow 20 the top off of the government case and you 21 start retrying it. 22 We would be delighted with that 23 outcome, Your Honor, even though at some point 24 we'd like to get ready to go home, because we 25 believe an opportunity to relitigate those 3310 1 facts in front of this jury would result in a 2 very different outcome than was obtained in the 3 government case. 4 But that is not our understanding of 5 what the Court's collateral estoppel order 6 requires. 7 So we've explained this we think, Your 8 Honor, as clearly as we can in this brief. 9 We do, as Mr. Tulchin says, have a 10 continuing objection to this idea that every 11 time the Plaintiffs refer to a finding of fact 12 in this opening, or almost every time, they 13 refer to some underlying evidence and sometimes 14 multiple documents. 15 I had understood Mr. Hagstrom to say 16 in defending this practice that it was going to 17 happen every once in a while. That isn't what 18 happened this afternoon. We don't think it 19 should be allowed to happen at all. 20 But certainly not with the frequency 21 that has been going on in this opening, Your 22 Honor. 23 MR. CASHMAN: Your Honor? 24 THE COURT: Yeah. 25 MR. CASHMAN: Michael Cashman for the 3311 1 Plaintiffs. 2 Unfortunately, Microsoft has just 3 sprung this on us. So, in their fashion, have 4 attempted to gain surprise. 5 But I have -- I do have some comments. 6 First of all, I want to bring to the 7 attention of the Court obviously its order on 8 the collateral estoppel issues relative to 9 Mr. Gates. 10 And there it was pretty clear that all 11 collateral estoppel objections and the other 12 objections relative to that testimony were 13 overruled for the reasons that we discussed in 14 the hearing. 15 Now, I did say that I'd provide the 16 Court with additional authority, but the Court 17 ruled before we had a chance to provide that 18 authority. And, therefore, it seemed like a 19 moot point. 20 I would like to, however, point out 21 that in the argument on collateral estoppel, 22 Mr. Tulchin stated on more than one occasion 23 that he was satisfied with a global ruling on 24 collateral estoppel issues. 25 And so it's improper for Microsoft now 3312 1 to try to come back for a second bite at the 2 apple. 3 And, in particular, I want to point 4 the Court to the transcript of proceedings on 5 November 28th, 2006, in which Mr. Tulchin 6 states, for example. 7 So, Your Honor, I want to join 8 Mr. Cashman in saying that if the Court wants 9 to hear about individual segments of Gates' 10 deposition, we'll be happy to go through it. 11 Mr. Tuggy can do that. But I see no need for 12 that here. 13 So Mr. Tulchin took the view, as the 14 Court will recall, that a ruling on the 15 collateral estoppel objections in global was 16 appropriate, and that's what the Court did when 17 it issued its order the next day. 18 Now, turning to the comments that Mr. 19 Holley is making this afternoon, apparently 20 Microsoft just hasn't looked hard enough. 21 And if I may approach, Your Honor. 22 THE COURT: Yes. 23 MR. CASHMAN: I'm handing up to the 24 Court the case called Bradburn Parent Teacher 25 Store, Inc., versus 3M, that's Minnesota Mining 3313 1 and Manufacturing. The cite is 2005 Westlaw 2 736629. It's an Eastern District of 3 Pennsylvania case. 4 And I'm going to note for the record, 5 importantly here, that Heller Ehrman 6 represented 3M. 7 Now, this case when you read through 8 it, you will see that collateral estoppel was 9 an issue that was front and center. And 10 collateral estoppel was adopted. 11 This is an antitrust case. Collateral 12 estoppel was adopted for many of the issues 13 that 3M had litigated in an antitrust matter 14 with an outfit known as LePage's, Inc. 15 3M, then, tried to take advantage of 16 the collateral estoppel findings. Actually, 17 they -- I should say that they sought to oppose 18 collateral estoppel by saying, for example, 19 Bradburn is going to have to prove a lot of 20 other issues in this case. 21 And, therefore, you shouldn't adopt 22 collateral estoppel on these particular issues 23 because you're not going to save much time. 24 You're not going to have judicial economy, 25 which is the primary purpose of collateral 3314 1 estoppel. 2 And the Eastern District of 3 Pennsylvania court said that's nonsense. 4 Because -- and this is just the point we made 5 to Your Honor on November 28th -- that, in 6 fact, by not relitigating the liability or the 7 issues established in the prior litigation, you 8 are saving substantial time and resources, even 9 though the evidence is going to be the same or 10 could be the same for other issues that are 11 involved in the litigation. 12 And that discussion occurs at some 13 length starting, I believe, at -- starting at 14 -- it's on page 11 of this Westlaw version that 15 I have handed up to the Court, under fairness 16 considerations, which continue with judicial 17 economy and other assertions that 3M made in an 18 effort to say that even though you get 19 collateral estoppel on some issues, you 20 couldn't have collateral estoppel at all 21 because we have to use some of the same 22 evidence. 23 So, Microsoft is just plain wrong. 24 Now, that addresses their argument in 25 a pretty direct way, but I want to take a step 3315 1 back because what Microsoft continually glosses 2 over here is that the Plaintiffs were not 3 parties in the government litigation. And you 4 cannot collaterally estop a party, a nonparty 5 on matters that were involved in the prior 6 litigation. 7 That would be contrary -- if you were 8 to estop Plaintiffs now, it would be contrary 9 to every single collateral estoppel decision 10 that has been handed down by any court. 11 And let me just explain how silly 12 Microsoft's position is. 13 What they're saying is the only thing 14 that Plaintiffs can get from the government 15 action is the findings of fact, nothing else. 16 But that would be like saying -- 17 putting collateral estoppel aside, that if we 18 had claims independent, which we do, 19 independent of the liability determination on 20 the operating system for the period of time 21 involved in the government action, that if we 22 were seeking discovery from Microsoft, that 23 they wouldn't have to produce any of the 24 evidence that was involved in the government 25 action even though it supports the claims we 3316 1 have here. 2 And, by extension, they'd be arguing 3 that even though the evidence supports the 4 claims we have here or is pertinent to the 5 claims we have here, you can't use it. 6 That is just plain out and out 7 ridiculous and contrary to every decision and 8 contrary to common sense. 9 If you were to take Microsoft's 10 position to the absurd length, which they are, 11 no party would want collateral estoppel because 12 there would be no purpose for it. There would 13 be no benefit for it. 14 And that's clearly not what collateral 15 estoppel is designed to do. Here it is working 16 and will work as it should because Microsoft is 17 the estopped party and the cases are legion, 18 which state that the Plaintiffs, such as the 19 Plaintiffs here, are entitled to benefit from 20 those estopped findings. 21 And we cannot be punished for 22 obtaining collateral estoppel against 23 Microsoft, which is what Microsoft is seeking 24 to do. That's just downright contrary to the 25 law. 3317 1 THE COURT: Where's it say in the case 2 here that you can go ahead and reprove the 3 facts? 4 MR. CASHMAN: I believe, for example, 5 under judicial economy -- 6 Let me find my marked-up version. 7 THE COURT: Page 12, is that it? 8 MR. CASHMAN: I'm trying to find my 9 annotated copy, if the Court will bear with me. 10 I seem to have misplaced it. But, for 11 example, there's one comment, for example, in 12 the distortion of the issues of juror 13 confusion. 14 3M further argues that the Court 15 should refuse to grant Bradburn the defense of 16 the collateral estoppel because the application 17 of estoppel would unfairly prejudice 3M by 18 distorting the issues in this case and creating 19 jury confusion. That contention was rejected. 20 And you might note, for example, that 21 the case -- that the Court is relying on there 22 the Coleburn case, is one of the cases that 23 Microsoft in its briefing last week 24 mischaracterized to the Court to suggest that 25 it supported their position. 3318 1 So I do know that there are other -- 2 for example, at the top of page 12, when 3M 3 further argued that collateral estoppel should 4 not be granted in LePage's because Bradburn 5 will still have to prove market definition and 6 market power issues for the time period October 7 13, 1999, to the present. 8 That's similar to what we've been 9 telling you, that there are other issues to 10 which the findings and the evidence pertain and 11 to which Plaintiffs are entitled to use that 12 evidence. 13 So the 3M court here rejected the very 14 argument that Microsoft is making. 15 THE COURT: That doesn't say it's 16 going to produce the same evidence. That just 17 says that that evidence is -- okay, to be 18 collaterally estopped. That saves resources. 19 Where's it say it can resay it all over again? 20 MR. CASHMAN: Well, the point is, Your 21 Honor -- 22 THE COURT: That's their argument, as 23 I understand it. 24 MR. CASHMAN: No. What they are 25 trying to do is broaden -- first of all, again, 3319 1 Microsoft didn't move for collateral estoppel. 2 And there is a test for application of 3 collateral estoppel. 4 THE COURT: I understand. 5 MR. CASHMAN: They can't meet and have 6 not met any of the elements for the application 7 of collateral estoppel against Plaintiffs. 8 They can't meet those requirements 9 because, A, the Plaintiffs were not parties in 10 the government action. That's a fundamental. 11 So what they're really telling you is 12 that they should be allowed to benefit from 13 collateral estoppel and prevent Plaintiffs from 14 putting on evidence to support their case. 15 It's like a sub silentio summary 16 judgment motion. They can't do it. It's not 17 allowed under the law. 18 And Bradburn stands for that 19 proposition. It's clear from Bradburn that the 20 Plaintiffs when they have other cases which are 21 not -- other issues which are not covered by 22 collateral estoppel, you're entitled to 23 litigate those just like you would litigate any 24 other claim. 25 MR. HOLLEY: Your Honor, I don't mean 3320 1 to interrupt Mr. Cashman, but could I just -- 2 MR. CASHMAN: I'm not finished. 3 MR. HOLLEY: Sorry. Okay. 4 MR. CASHMAN: Now, what Microsoft is 5 trying to do is make up an argument on a whole 6 plot. 7 The cases which they cited to you last 8 week do not support their claim, not one of 9 them. 10 In many instances, they cited cases to 11 you where the Plaintiffs in underlying 12 litigation were identical, and then said that 13 stood for the proposition that you can preclude 14 Plaintiffs from putting on evidence where they 15 weren't parties to the government action. And 16 that's just wrong, plain wrong. 17 So it is so fundamental that 18 collateral estoppel is indeed a one-way street 19 under the law, in every jurisdiction, that 20 Plaintiffs are entitled to use the same 21 evidence if that pertains to other claims. 22 It's no different than somebody saying you're 23 entitled to use the evidence when it supports 24 multiple claims. 25 That's all we're talking about here. 3321 1 It's a very straightforward thing. 2 And Microsoft, contrary to every 3 decision about collateral estoppel, is trying 4 to turn that doctrine on its head. And that 5 would be a fundamental error to grant the sort 6 of relief that they're requesting. 7 Indeed, I note we have another case 8 which -- one moment, please. 9 Well, the point I was going to make, 10 Your Honor, is that there are multiple cases 11 which stand for the proposition that collateral 12 estoppel is to benefit the party which obtains 13 the collateral estoppel. And the party which 14 is being estopped is not entitled to benefit. 15 They are the ones -- Microsoft in this 16 case is the party which had the full 17 opportunity to litigate the issues in the 18 government action. 19 They are not entitled under any law, 20 under any case, to take advantage of that 21 offensively against the Plaintiffs. That just 22 runs counter to every collateral estoppel 23 decision ever issued. 24 So, the Plaintiffs submit that this 25 issue as Microsoft just keeps trying to create 3322 1 is a phantom issue. They are trying to 2 convince you that somehow there is going to be 3 relitigation of the issues, which is simply not 4 the case. There's not going to be a 5 relitigation of Microsoft's liability in the 6 operating systems market for the period of time 7 at issue in the government action. 8 It's very straightforward. 9 But the Plaintiffs are entitled to use 10 those findings and the underlying evidence to 11 support their other claims in the case, which 12 enumerated, in part at least, when we had 13 argument on the 28th. 14 So we request that Microsoft's 15 collateral -- so-called collateral estoppel 16 objection be, again, rejected on the merits out 17 of hand. 18 Thank you. 19 THE COURT: Thank you, sir. 20 Mr. Holley? 21 MR. HOLLEY: Your Honor, I stand by my 22 statement. 23 There is not a single case in this 24 country, which has ever held that once you get 25 collateral estoppel effect for a finding of 3323 1 fact, you are entitled to reprove it by 2 introducing the evidence underlying. That is 3 certainly not what this Bradburn case says. 4 In Bradburn, 3M was arguing that the 5 Court should not even permit the application of 6 offensive collateral estoppel because it 7 wouldn't really be efficient. It would be 8 unfair, distorted. 9 We're way past that, Your Honor. The 10 Court has already found that there is 11 collateral estoppel effect for 146 findings in 12 the government case. 13 As Your Honor pointed out, and asked 14 Mr. Cashman quite directly, and he failed to 15 answer the question, there is not one line of 16 this Bradburn decision that says that once you 17 do get collateral estoppel, you can turn around 18 and seek to introduce the evidence that 19 underlies the findings that have conclusive 20 effect. 21 That isn't fair because it suggests to 22 the Jury that somehow there are pieces of the 23 findings that are more important than others or 24 that somehow this evidence bolsters the 25 significance of those findings. And it creates 3324 1 an entirely one-sided situation where one side 2 gets to pile on by putting in all this evidence 3 in order to reprove the findings and the other 4 side has to stand mute because the finding is 5 binding on it. 6 Now, this notion that everyone 7 understands that collateral estoppel is 8 unidirectional and has no support in the law. 9 The case that the Plaintiffs cite 10 talks about whether or not collateral estoppel 11 can apply in a second case when the party 12 seeking it wasn't a party in the first case. 13 And, in that context, the Supreme 14 Court talks about nonmutuality. 15 Of course, you can get nonmutual 16 offensive collateral estoppel. That's what 17 this Court has already held. These folks were 18 not parties in the government case, but for the 19 policy reasons that the Supreme Court has 20 articulated in Park Lane Hosiery, they can 21 still get the benefit of collateral estoppel as 22 to some of the findings in the government case. 23 But a fact is a fact is a fact. If 24 Judge Jackson found and this Court has given 25 collateral estoppel effect to a finding that X 3325 1 and Y and Z occurred, that is a fact. It is 2 equally binding on the Plaintiffs as it is on 3 Microsoft. 4 And all of the arguments they have 5 come up with about how somehow it's a fact for 6 one purpose and not another with respect make 7 no sense at all. 8 For example, Ms. Conlin tried today 9 after lunch to say what she was doing by saying 10 that she was introducing evidence underlying 11 findings of fact because somehow the evidence 12 underlying the findings went to willfulness. 13 Well, how? Either the fact as found 14 by Judge Jackson shows that Microsoft engaged 15 in willful and wanton behavior or whatever the 16 standard is under the Iowa Competition Law, or 17 it doesn't. 18 The evidence underlying those findings 19 don't change Microsoft's intent or the nature 20 of Microsoft's behavior. 21 So the argument doesn't make any 22 sense. 23 Equally true, the argument that these 24 documents provide context for the findings, 25 well, the findings say what they say. They are 3326 1 Judge Jackson's view of what was necessary to 2 explain his decision. 3 What context of any meaningful nature 4 is provided by showing the Jury the language 5 that is quoted in the document? 6 At one point Plaintiffs suggested that 7 somehow this was all necessary to prove that 8 Judge Jackson meant what he said. 9 Well, there isn't any doubt about 10 that. Everyone knows that Judge Jackson said 11 what he said. 12 We're not -- it's not open to us to 13 suggest that somehow he didn't really mean what 14 he said. And we don't have any intention of 15 doing that. It would be entirely 16 inappropriate. 17 So there's no need to somehow give the 18 Jury a heightened sense of significance of the 19 findings. 20 The Court read the findings to the 21 Jury. They're in the Jurors' preliminary 22 notebooks. They can refer to them whenever 23 they like. They have been told by the Court 24 that they must accept those findings. 25 So there's no reason for Plaintiffs to 3327 1 somehow seek to bolster the findings. 2 And allowing them to do that, Your 3 Honor, is just unfair, because they get to pile 4 on and we have to keep our mouths shut. And 5 that's not what the doctrine of collateral 6 estoppel provides. 7 Thank you, Your Honor. 8 MR. CASHMAN: Your Honor, Mr. Holley 9 couldn't be more wrong if he was living on the 10 moon. 11 What he said is preposterous. The 12 doctrine of collateral estoppel, the cases are 13 legion, from the first time collateral estoppel 14 ever was used, that the purpose is to benefit 15 the plaintiff or the party -- in the issues, 16 the Plaintiffs here. 17 He says, well, it's not fair to 18 Microsoft because we're going to have to stand 19 by mute and we can't relitigate. 20 And, again, that is such a blatant 21 misdirection because we are not talking about 22 relitigating the liability of Microsoft in the 23 operating system market for the period of time 24 at issue in the government action. 25 Nobody's talking about that. What 3328 1 we're talking about is all these other issues. 2 And, you know, from sitting in this courtroom 3 for the last many months and years listening to 4 these issues, these other issues, that 5 Microsoft is doing anything but standing by 6 mute. 7 And that's because they know that they 8 are entitled, just like we are entitled, to 9 litigate those other issues. 10 That means that Plaintiffs are 11 entitled to put on their evidence on those 12 claims, and Microsoft can defend them. 13 MR. TULCHIN: Your Honor, I just can't 14 help but make this observation. I don't think 15 that Mr. Cashman was in the courtroom today 16 when Ms. Conlin kept putting up on the screen a 17 particular finding, very often a finding that 18 contained a quote from a Microsoft document, 19 and then showing the Jury the underlying 20 document and arguing from it. 21 So when he says the Plaintiffs have no 22 intention of relitigating the government case, 23 I don't think he was here. I don't think he 24 saw what Ms. Conlin did. 25 THE COURT: Do you have any other 3329 1 cases or authorities you want to give the 2 Court? 3 MR. CASHMAN: Well, Your Honor, since 4 Microsoft just sprung this on us, we could, but 5 I think that the Bradburn case is pretty clear. 6 And I think that the basic principles 7 of nonmutual offensive collateral estoppel make 8 it clear that Microsoft cannot, cannot prevail 9 on what they're trying to do here. 10 THE COURT: Anything else on this 11 issue? 12 MR. HOLLEY: Your Honor, just finally. 13 And this may be just because 14 Mr. Cashman walked out of the courtroom. But 15 after the Gates' argument, Mr. Hagstrom and I 16 then got into a discussion in relation to the 17 preliminary jury instructions about the scope 18 of collateral estoppel. 19 And I said, on the record, because I 20 just read it again today, that we were anxious 21 to see what additional authorities the 22 Plaintiffs could come forward with to support 23 this proposition that you can introduce 24 evidence underlying findings of fact. 25 Mr. Hagstrom was under no 3330 1 misapprehension, or I don't know how he could 2 have been, given what I said and what the Court 3 asked that somehow they had been excused from 4 providing this authority. 5 And with respect -- the reason that 6 all they have a week later is a Bradburn case, 7 which doesn't say what they say it says, is 8 because we are right on the law on this one, 9 Your Honor. 10 Thank you. 11 MR. CASHMAN: Well, Your Honor, I'll 12 just make one comment in response. And that is 13 that Mr. Holley and Microsoft don't have a 14 single case because there isn't a single case 15 which says that Plaintiffs who aren't involved 16 in a prior litigation and don't have a chance 17 to litigate in that prior litigation issues 18 which might be claims of their own in 19 subsequent litigation, that they make -- that 20 they are forced to make some kind of election 21 about whether to seek offensive nonmutual 22 collateral estoppel because it doesn't exist, 23 because that's not the law, because -- because 24 that's so fundamental. 25 There wouldn't be a collateral 3331 1 estoppel doctrine or there wouldn't be a party 2 that would seek it as a practical matter if 3 Microsoft had anything to support its position. 4 They don't. 5 The only cases that they have been 6 able to cite to you are uncontroversial 7 decisions where you have the same parties 8 litigating the same issue. 9 And as the Plaintiffs have advised the 10 Court, and as is clear from the pleadings, and 11 as is clear from the evidence, Plaintiffs have 12 multiple other claims which they are entitled 13 to litigate. And they cannot be deprived of 14 their right to use the evidence that supports 15 those claims. 16 Thank you. 17 THE COURT: Anything else? 18 MR. HOLLEY: Your Honor, I would just 19 encourage the Court -- I know you have a lot of 20 things that people are asking you to read, but 21 I would encourage the Court to look at the memo 22 we submitted this afternoon. 23 I think it's, frankly, devastating to 24 the Plaintiffs' position. 25 Thank you, Your Honor. 3332 1 THE COURT: The Court will review this 2 matter. I'll issue a ruling tomorrow morning 3 on the issue. 4 We'll move on to the -- 5 MR. CASHMAN: Well, Your Honor, just 6 one point of clarification on that. 7 Plaintiffs respect the right -- 8 respectfully request the right to respond to 9 what Microsoft has provided here. 10 THE COURT: Very well. When are you 11 going to provide me with something? 12 MR. CASHMAN: Well, can we advise the 13 Court in the morning after we have a chance to 14 see what they've provided? 15 THE COURT: Okay. 16 MR. CASHMAN: Thank you. 17 MR. GRALEWSKI: Return to Williams, 18 Your Honor? 19 THE COURT: Yeah. 20 MR. GRALEWSKI: I think we can 21 accomplish the conclusion of our task in ten 22 minutes or so and get to the trade press 23 motion. 24 THE COURT: Great. 25 MR. GRALEWSKI: Does Your Honor have 3333 1 the rulings chart? 2 THE COURT: Got it. Should be on page 3 229? 4 MR. GRALEWSKI: Yeah. At the bottom 5 of page 2, Your Honor, the parties in between 6 this morning's argument and now have reached 7 agreement on all but two chunks of testimony -- 8 THE COURT: Okay. 9 MR. GRALEWSKI: -- just to advise the 10 Court. 11 And, for the record -- and this is 12 with the consent of Mr. Tuggy -- the two 13 entries at the bottom of the rulings chart, 14 229, 9, and 230, 7, Microsoft withdraws its -- 15 I'm sorry, Microsoft withdraws its objection. 16 THE COURT: Okay. 17 MR. GRALEWSKI: The next one, right 18 below that, 230, 21 to 25, Microsoft withdraws 19 its objection. 20 Skipping over to the next page, Your 21 Honor. 22 THE COURT: Okay. 23 MR. GRALEWSKI: Skipping over to the 24 next page, the final entry at 290, 2 to 23, 25 Microsoft withdraws its objection. 3334 1 Of course, Mr. Tuggy wouldn't allow me 2 to get away with striking a deal where all I 3 did was withdraw objections. 4 So, in return, the Plaintiffs -- and 5 this is just for the record. This is not 6 before you. The Plaintiffs withdrew their 7 embedded hearsay objection to DX 230 and has 8 allowed Microsoft to add the following 9 testimony to the Williams designations. 10 291, 17 to 22, that will not count 11 against any line limitations that they have, 12 and we have no objection to those additions. 13 MR. TUGGY: Just to clarify. 14 I think the end -- at least the end of 15 the rulings chart, I have has Defendant's 16 Exhibit 230 listed. And that's the way -- the 17 embedded hearsay objection has been withdrawn. 18 THE COURT: On this one? On the 19 chart? 20 MR. GRALEWSKI: He is right, Your 21 Honor. You have to turn two more pages, I 22 believe. 23 THE COURT: Oh, you're right. It's 24 there. Okay. Sorry. 25 So you're withdrawing your objection? 3335 1 MR. GRALEWSKI: Yes, Your Honor. To 2 the embedded hearsay on DX 230. 3 THE COURT: What about the relevance? 4 MR. GRALEWSKI: Yes. We didn't 5 discuss that, but I'll do that on the fly. 6 THE COURT: Oh, great. 7 Okay. 8 MR. GRALEWSKI: So Your Honor -- 9 THE COURT: So we got two left. 10 MR. GRALEWSKI: The two remaining 11 issues, back to the second -- no, the third 12 page of the rulings chart. 13 282, 19, to 283, 5 -- oh, I should say 14 there was one other concession. Mr. Tulchin 15 may appreciate that. I agreed that I would 16 make my arguments and not respond to anything 17 that Mr. Tuggy said. 18 So he gets -- Microsoft gets the last 19 word here, Your Honor, and then we can move on 20 to the trade press motion. 21 MR. TULCHIN: I didn't know I was 22 involved in that deal, but whatever. 23 THE COURT: And I want to thank the 24 attorneys for narrowing this down to two 25 issues. 3336 1 MR. GRALEWSKI: You're welcome, Your 2 Honor. 3 THE COURT: Okay. 289. 282, I'm 4 sorry. 5 MR. GRALEWSKI: 282 at the bottom, 283 6 at the top. 7 THE COURT: Okay. 8 MR. GRALEWSKI: Here again, Your 9 Honor, I think this was a dead ringer for what 10 was happening in Callahan. 11 We have Mr. Williams repeating 12 customer statements. Here he identifies those 13 statements as ones from Samsung and Hyundai. 14 Those are Korean OEMs. 15 And what he basically says is because 16 of volume deals that those OEMs have with 17 Microsoft, they cannot buy DRI's product. 18 Because if they do buy DRI's product, 19 the prices of the Microsoft product is going to 20 become exorbitant. 21 And I would submit, Your Honor, this 22 is exactly like the situation in Callahan, 23 where you have a customer telling the supplier 24 I'm not going to buy my beer from you because 25 of a price consideration. 3337 1 THE COURT: Mr. Tuggy? 2 MR. TUGGY: Yes, Your Honor. 3 Plaintiffs' position on the law 4 appears to be that whenever a customer or 5 potential customer makes a statement regarding 6 that person's state of mind relating to a 7 transaction, that it becomes admissible under 8 Rule 5.803(3). 9 It is Microsoft's position that there 10 is an additional step in the analysis. And, 11 that is, a determination has to be made whether 12 the statement is in a context where it can be 13 trusted, it's trustworthy. 14 The party making the statement 15 regarding that party's state of mind must be 16 doing it in a context where that party does not 17 have an incentive to conceal or otherwise 18 misstate that party's state of mind. 19 The authority that we have relied on 20 for this is the -- are several. 21 One is United States versus Naiden, an 22 Eighth Circuit case, in which the Court stated 23 that Partyka, another case, illustrates how our 24 court has focused on whether the declarant's 25 statement is, quote, trustworthy, end quote, 3338 1 when it has had occasion to analyze the 2 admissibility of hearsay evidence under the 3 Rule 8033 exception. 4 So it's the -- it's that 5 trustworthiness requirement that Microsoft 6 argued before the Special Master. 7 We explained how the relationship 8 existed between Digital Research on the one 9 hand and these Korean OEMs on the other. And 10 the fact that there was -- there were two 11 possible contexts for the statements that 12 Mr. Williams reports in his deposition. 13 The first is a negotiation. And that 14 is Digital Research was negotiating with these 15 Korean OEMs regarding the licensing of this 16 operating system to them. 17 And the Korean OEMs in the course of 18 that negotiation said, well, Microsoft is 19 offering these prices or is going to increase 20 our prices if we buy your product as part of a 21 negotiation ploy to cause Digital Research to 22 respond with lower prices of its own in the 23 negotiation context. 24 And Digital Research even in that 25 context didn't trust what the Korean OEMs were 3339 1 saying. They were looking for confirmation 2 about what Microsoft was asking or was stating 3 to the Korean OEMs because Digital Research 4 knew that the Korean OEMs were just working at 5 getting a reduction in the price from Digital 6 Research. 7 Now, the Special Master in working 8 through these issues had a large volume of 9 information available to him. Many documents 10 relating to these negotiations were submitted 11 to him for ruling, as well as testimony. 12 I'd like to hand up some information 13 in this regard so that this Court has it as 14 well. 15 This is some testimony from a witness 16 Richard Dixon, a Digital Research employee, who 17 reported to Mr. Williams. 18 And at page 293 of Mr. Dixon's 19 testimony, he testifies about the Digital 20 Research negotiations with Hyundai. 21 In there, Richard Dixon says -- the 22 question was asked, Who was it -- this is line 23 2, page 293. This is a deposition taken of 24 Mr. Dixon in the Caldera case. 25 Who was it at Hyundai that was 3340 1 describing for you that Microsoft had offered 2 to them? I think it was YH Lee, Doctor Lee. 3 Question: Did he ever show you any 4 Microsoft documents or was this all verbally 5 through Mr. Lee? 6 Answer: I sit down with him and he 7 was referring to a Microsoft document and gave 8 me information about that. And I wrote it down 9 in my notes and relayed it here. 10 Question: Did he ever show you the 11 Microsoft document? 12 Yeah, I think he said, you know, this 13 is my proposal from Microsoft. 14 And then on page 294, the question was 15 asked: Well, what did you do in response? 16 This is Line 19. Page 294, Line 19. 17 And what did you do in response, what 18 was your -- 19 Answer: And he -- according to this, 20 he showed me the DR-DOS pricing as it compared 21 to the MS-DOS pricing that he understood from 22 Microsoft. 23 Okay, but he said he didn't have it in 24 writing from Microsoft; correct? 25 Yes. 3341 1 Question: Now, what was the bid that 2 -- how did DRI compete with the bid offered by 3 Microsoft? 4 It was very difficult for us to 5 compete. 6 Well, what did you do? 7 Gee, I don't remember. 8 Question: Did you lower your price? 9 Answer: We could have, yes. 10 Question: Well, did you lower your 11 price? 12 Answer: I don't remember. I mean, 13 logic would tell me that if faced with kind of 14 competitive pressures from Microsoft, we'd have 15 no alternative but to do that. 16 Then following that, in the materials 17 I've given you, is a fax from Mr. Dixon to 18 Mr. Williams where Mr. Dixon is reporting on 19 his meetings with Hyundai. 20 And on the second page of that fax, in 21 a paragraph numbered 4, there is a discussion 22 of the Hyundai pricing as verbally presented by 23 Microsoft. 24 And number item 3 just above it is 25 that Microsoft will not provide the pricing 3342 1 targets in writing to Hyundai as they had 2 requested. 3 And then on Number 6, one of the other 4 OEMs mentioned in this testimony, Trigem, has 5 both DR-DOS and MS-DOS license and no penalty 6 has been enforced against them yet. 7 I provide all this context mainly to 8 provide the foundation for the argument we made 9 before the Special Master, which was that the 10 comments made by Hyundai as reported here by 11 Mr. Williams were in the context of a 12 negotiation where the OEM had an incentive to 13 misstate state of mind just to get a better 14 deal from Digital Research. And it actually 15 had that effect. 16 Now, the other context is in the 17 course of this relationship with Hyundai, 18 Digital Research and Hyundai worked together to 19 present claims to the Korean FTC. And, in that 20 context, statements were obviously exchanged 21 between them regarding this issue as well. 22 So on the testimony here by 23 Mr. Williams, he says -- actually, we are at 24 page 282, and Microsoft's objection begins at 25 line 23, which is where -- the witness actually 3343 1 answers the question. 2 The question at line 19 was, I was 3 asking if they could conceivably have a per 4 processor license that did that. 5 Answer: I certainly thought it was 6 conceivably possible. I don't recall that we 7 ever achieved that. 8 And then he launched into the hearsay 9 within hearsay. He says, and when we got into 10 this detailed discussions with Samsung and 11 Hyundai and others, particularly in Korea, they 12 ended up coming back to us saying can't do it, 13 Microsoft won't let us do it. Here is the 14 effect of volumes. And if we split anything to 15 DRI, I mean, even -- I mean, even for our 16 identical volumes, if they did anything with 17 DRI, all of a sudden the price is becoming 18 exorbitant. 19 So Microsoft's objection begins at 20 line 23 where he begins his discussion of what 21 was purportedly told him by these OEMs and ends 22 at line 5 on page 283. 23 So Microsoft's position, which was 24 adopted by the Special Master, is that Rule 25 8033 requires -- has trustworthiness component. 3344 1 That has not been satisfied with this 2 testimony because the statements by the OEMs 3 that are being offered here for their truth 4 regarding the state of minds of the OEMs should 5 not be accepted for the truth as to their state 6 of minds because they have an incentive to 7 prevaricate, to assemble, or to conceal their 8 states of mind. 9 And, for that reason, we ask that the 10 Special Master's ruling sustaining our hearsay 11 objection be affirmed. 12 MR. GRALEWSKI: May I make a motion 13 for 20 seconds? 14 THE COURT: You may. 15 MR. GRALEWSKI: Your Honor, Footnote 16 11 in Callahan deals with trustworthiness. It 17 says the only issue is whether it's a statement 18 of customers. 19 In Callahan, there was one statement 20 that was admitted. That is pure posturing. 21 If you look at it that way, and that 22 is one of the customers said, hey, we want a 23 better deal. You lower your price and we'll 24 buy from you. And the supplier said no, I 25 can't do that. That's at least akin to what's 3345 1 going on here, a reliability issue. 2 THE COURT: Okay. 3 MR. TUGGY: And as we, I think, have 4 argued before, in Callahan, the issue of 5 trustworthiness was not addressed. 6 And, in addition, those were 7 individual consumers in conversation with a 8 retail store where if I went into the retail 9 clerk or the owner of a retail store and said, 10 you know, if you had a little better prices, 11 I'd buy your products is not exactly the 12 negotiation situation that exists with these 13 sophisticated negotiators. 14 THE COURT: Anything else on page 282 15 and 283? 16 MR. TUGGY: Nothing further, Your 17 Honor. 18 THE COURT: It's denied in part, 19 granted in part. Lines 19 through 25 on page 20 282 are fine up to and including line 1 to the 21 first phrase can't do it. 22 After that, the rest is not 23 admissible. 24 288? 25 MR. GRALEWSKI: May I ask a point of 3346 1 clarification on that, Your Honor? 2 THE COURT: Yes. 3 MR. GRALEWSKI: So what is acceptable 4 is up to can't do it? 5 THE COURT: That's right. 6 MR. GRALEWSKI: Okay. Thank you, Your 7 Honor. 8 Last one, it's appropriate that we end 9 on this one. We've come full circle after 10 three or four sessions. This is one we sort of 11 started on. It's in our brief. 12 I'll be brief, Your Honor, because 13 this was argued about, as I said. 14 What's going on here -- and when we 15 first talked about this, Mr. Tuggy pointed out 16 that ultimately when Mr. Williams started to 17 answer, he said it's late in the day, you've 18 got me at a disadvantage. 19 All that's going on here is he's been 20 being grilled by Microsoft's lawyers for six 21 hours. Sort of throat clearing. 22 When he gets to the answer, what he's 23 saying is -- and this is what most of the 24 entire deposition is about. What the 25 deposition is about is why OEMs aren't buying 3347 1 DR-DOS. Okay. 2 What he says at lines 10 through 15 is 3 he explains their reasons or their motives or 4 their state of mind for not buying DR-DOS. 5 In the Callahan case, it was about 6 price. The motive was price. 7 Here, the motive is incompatibilities. 8 They are motivated not to buy DR-DOS because 9 they've been informed by Microsoft that 10 presently DR-DOS is incompatible and it will be 11 in the future. 12 One last point, Your Honor, which 13 Mr. Tuggy may raise, and I want to deal with 14 now because I really do intend to not say 15 anything on this one unless he has all this 16 extra testimony and stuff that he's so used to 17 doing, which is appropriate, of course. 18 Here you have Williams testifying 19 about what a customer said Microsoft said. So 20 the analysis would go like this, Your Honor. 21 The Microsoft statements are 22 admissions. The customer comments come in 23 under Callahan and the other cases we've 24 presented the Court. And, certainly, the 25 Williams testimony is appropriate under the 3348 1 former testimony exception. 2 Thank you, Your Honor. 3 THE COURT: Thank you, sir. 4 Mr. Tuggy? 5 MR. TUGGY: Yes, Your Honor. 6 The statements -- the question that 7 was asked of the witness was -- this is at page 8 288, line 2. 9 A minute ago you said can you think of 10 any other instances that you think constitute 11 actions by Microsoft intentionally to make 12 Windows incompatible with DR-DOS? 13 The answer was: We had continual 14 feedback from OEMs that Microsoft personnel 15 called on them and said the DR-DOS was 16 incompatible with Windows and then instances 17 where they said if it isn't now, it will be in 18 the future and that we will ensure it will be. 19 These statements attributed to OEMs 20 are not statements -- they are not declarations 21 of state of mind. 22 In the -- there is nothing in the 23 context of the deposition that would suggest 24 that Mr. Williams here was communicating about 25 OEM states of mind. 3349 1 The question and the line of 2 questioning had to do with the issue of 3 intentional incompatibilities between Windows 4 and DR-DOS. 5 There is not a shred of evidence to 6 support this testimony to the effect that any 7 OEM reacted to these statements by not buying 8 or by buying DR-DOS. 9 In Callahan, the state of mind 10 evidence is where a customer states one way or 11 the other what their plan is with respect to 12 the purchase of a product. 13 This testimony that's stated here is 14 not of that type. It's just a statement of a 15 fact remembered. This is what OEMs told me. 16 I'm offering that for its truth. 17 And under 5.803(3), a statement of a 18 fact remembered or believed offered for the 19 truth is not admissible as state of mind 20 evidence. 21 And, alternatively, even if it were 22 somehow construed to be state of mind evidence, 23 it suffers from the same infirmity that the 24 other evidence Plaintiffs have offered relating 25 to conversations with OEMs, where they have an 3350 1 incentive to prevaricate or to posture when 2 negotiating with Digital Research so as to get 3 better terms in their deals with Digital 4 Research. 5 Because these comments were not made 6 in connection with any purchasing transaction, 7 there isn't the same foundation. I don't have 8 papers to hand up to you as I did before, but 9 what that showed that the negotiations with 10 this occurred, which is just further evidence 11 that these statements are not state of mind 12 evidence, but, instead, they are purely 13 statements of a fact remembered or believed 14 offered to prove the truth of it. 15 This testimony, which is highly 16 prejudicial and rank hearsay, ought to be 17 excluded and the Special Master's ruling 18 sustaining Microsoft's objection to this ought 19 to be affirmed. 20 MR. GRALEWSKI: No oral motion. 21 THE COURT: No more? 22 MR. GRALEWSKI: No. 23 THE COURT: Special Master's affirmed. 24 Appeal denied. 25 MR. GRALEWSKI: Thank you, Your Honor. 3351 1 THE COURT: Is that it? 2 MR. GRALEWSKI: Almost. 3 MR. TUGGY: I was -- perhaps this is 4 what you were going to say. 5 Your rulings chart should also have a 6 place for the FTC testimony. 7 You may recall that Mr. Chapman 8 argued -- and I think it submitted the question 9 whether the declaration Mr. Williams submitted 10 to the FTC is admissible under the former 11 testimony exception. 12 And we request that the Special 13 Master's ruling sustaining our hearsay 14 objection be sustained as well. 15 THE COURT: That's the declaration I 16 looked at before that you showed me? 17 MR. TUGGY: Yeah. 18 MR. CASHMAN: You will recall we 19 argued before Mr. Williams, Mr. Dixon, and 20 Mr. Singh. 21 MR. GRALEWSKI: Practically speaking 22 now, Your Honor, this is the last ruling that 23 we need for us to do the work in the back 24 office to get ready to play Mr. Williams. 25 Not to reargue what Mr. Chapman and 3352 1 Mr. Cashman argued about, but, if I may, you've 2 seen references throughout Mr. Williams' 3 designations to paragraph 152, paragraph 163. 4 You'll see now in context that what's 5 going on is Microsoft is crossing Mr. Williams 6 on that FTC declaration. 7 MR. TUGGY: If I may respond to that. 8 As you may recall from the testimony, 9 which is where you sustained hearsay objection, 10 Mr. Williams kept saying he couldn't remember 11 the basis for what he has said in his 12 declaration, which is part of the problem with 13 relying on it, relying on a subsequent 14 deposition to somehow bring a declaration to 15 the former testimony exception. 16 THE COURT: You want a ruling on the 17 Special Master's ruling; right? 18 MR. TUGGY: Correct. 19 THE COURT: Anything else? 20 MR. GRALEWSKI: No, Your Honor. 21 THE COURT: It's affirmed. 22 MR. GRALEWSKI: Your Honor, that does 23 conclude the Williams. 24 Before -- 25 MR. TUGGY: I hate to -- I hate to 3353 1 throw the water on this, but there is one issue 2 that I wanted to make sure that we had 3 addressed, because it also is something I think 4 that's submitted, but we haven't heard back. 5 THE COURT: On Williams? 6 MR. TUGGY: With Mr. Williams, I 7 think, if I recall correctly, the Plaintiffs' 8 direct is about two hours and 14 minutes. And 9 we have like maybe 15 minutes of cross, and 10 then we have 35 minutes of testimony we 11 designated as affirmative designations and they 12 crossed that. 13 So what we had asked is that all this 14 be played together because it will be confusing 15 to split it between the two cases and so -- 16 THE COURT: And they -- I'm sorry. Go 17 ahead. 18 MR. TUGGY: So that needs to be 19 decided and then we can finish. 20 THE COURT: Ruled on. You still 21 object to that; is that right? 22 MR. GRALEWSKI: Yes. And if the Court 23 will recall, Mr. Tulchin presented Microsoft's 24 position and I presented the Plaintiffs' 25 position about ten days ago. 3354 1 THE COURT: Yeah, I remember that. 2 Okay. 3 Objection's sustained. You present 4 your case. 5 MR. GRALEWSKI: Thank you, Your Honor. 6 THE COURT: Okay. 7 MR. TUGGY: Actually, the question I 8 have, then, is some of it is quite closely 9 related to their affirmatives. 10 And I wonder whether -- well, I'll 11 negotiate with Mr. Gralewski, because it may be 12 that from now on we'll have to move some 13 affirmatives into cross. We'll work it out. 14 THE COURT: Okay. I don't want -- 15 okay. All right. 16 Does that answer the question? 17 MR. GRALEWSKI: Well, I'm not -- I'm a 18 little bit more dubious that we'll work out 19 changing affirmative designations into cross, 20 which seems to me that all that would do is 21 circumvent Your Honor's ruling, but I'm happy 22 to talk to Mr. Tuggy. 23 And, if we have a problem, we'll come 24 back. 25 MR. TUGGY: Let me give you an 3355 1 example. 2 There's a witness where our 3 affirmative designations, and I was going to 4 say project that was spread out among many -- 5 but affirmative designations where we asked the 6 witness whether they met with the lawyer before 7 the deposition affecting the credibility of the 8 witness. 9 In my view, those should have been 10 cross-designations, but they are affirmatives. 11 It would be very odd to play Williams' 12 testimony now and then six months later play 13 some testimony about -- 14 THE COURT: I understand. 15 MR. TUGGY: -- you know, the fact that 16 they met with their lawyers before the 17 deposition. 18 THE COURT: I understand. 19 MR. GRALEWSKI: And, Your Honor, we 20 have discussed this in the meet and confers. 21 If it relates to bias or things like 22 that, I don't think we will have a problem. 23 Where the problem will come up is if 24 they change substantive -- 25 THE COURT: I have no problem either. 3356 1 But if it goes to bias or prejudice, I 2 have no problem with that. If you can work it 3 out, fine, but I see your point. I don't 4 disagree. 5 MR. GRALEWSKI: Thank you. 6 THE COURT: It's basically cross. 7 MR. TUGGY: Right. 8 THE COURT: Okay. 9 All right. Williams is put to bed. 10 MR. CASHMAN: I believe next up, Your 11 Honor, then will be -- 12 THE COURT: Trade press. 13 MR. NEUHAUS: Your Honor, do you want 14 to do that now? Does the courthouse close at 15 4:30? 16 THE COURT: 4:30. 17 MR. NEUHAUS: Do you want to try to 18 get this in or do you want to put it over for 19 the day? 20 THE COURT: I don't have to go 21 anywhere. 22 MR. CASHMAN: I mean, it's fine with 23 us if we do it tomorrow. I think this is going 24 to take a fair amount of time. 25 THE COURT: Well, how much time? You 3357 1 only have a half hour before the Jury is here 2 even tomorrow. 3 MR. CASHMAN: I mean, I was thinking 4 after court and -- 5 THE COURT: Does that screw up your 6 schedule? 7 MR. TULCHIN: No, Your Honor. If 8 Mr. Cashman is suggesting 2:30 tomorrow and Mr. 9 Neuhaus, and if that works for the Court, I 10 think that might make more sense because it's 11 ten to 4:00. 12 THE COURT: Fine. I have no problem. 13 I just thought you -- 14 MR. CASHMAN: And then we have one 15 witness that Mr. Gralewski would be prepared to 16 address today. I believe, Freedman. 17 MR. GRALEWSKI: Yeah. I just 18 conducted a two-second meet and confer, and we 19 are not ready to mutually do Freedman. 20 MR. CASHMAN: Oh -- 21 MR. GRALEWSKI: I thought we were. 22 MR. CASHMAN: Pardon me, Your Honor. 23 I'm sorry. 24 MR. GRALEWSKI: I want to give -- I 25 want to give Mr. Tuggy a chance to withdraw 3358 1 objections before presenting them to you. 2 MR. TUGGY: We can argue the 3 objections, but think I that we might make more 4 progess tonight. 5 THE COURT: Do you want to talk about 6 it tomorrow morning? Is this something we 7 could talk about tomorrow morning? 8 MR. GRALEWSKI: We could do Freedman 9 before the Jury. 10 THE COURT: All right. Let's try that 11 then. Okay. 12 MR. GRALEWSKI: They are only four and 13 they are pretty straight up. 14 THE COURT: 8 o'clock on that 15 tomorrow? 16 MR. TUGGY: Sure. 17 THE COURT: And Mr. Neuhaus? 18 MR. NEUHAUS: Yeah. 19 THE COURT: It's okay with your 20 schedule? 21 MR. NEUHAUS: Absolutely. 22 THE COURT: I don't want to screw you 23 guys up. 24 MR. CASHMAN: 2:30 tomorrow. 25 THE COURT: All right. 3359 1 MR. TULCHIN: All right, Your Honor. 2 Have a nice evening. 3 (Proceedings adjourned at 3:47 p.m.) 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3360 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 19 day of , 2006. 20 21 22 ______________________________ Certified Shorthand Reporter(s) 23 24 25