3653 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 XIV 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 8, 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 3654 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 MICHAEL R. CASHMAN Attorneys at Law 8 Zelle, Hofmann, Voelbel, Mason & Gette, LLP 9 500 Washington Avenue South Suite 4000 10 Minneapolis, Minnesota 55415 (612)339-2020 11 DOUGLAS J. ROVENS 12 Attorney at Law Zelle, Hofmann, Voelbel, 13 Mason & Gette, LLP 550 South Hope Street 14 Suite 1600 Los Angeles, California 90071 15 (213)895-4150 16 Defendant by: DAVID B. TULCHIN 17 STEVEN L. HOLLEY SHARON L. NELLES 18 JOSEPH E. NEUHAUS Attorneys at Law 19 Sullivan & Cromwell, LLP 125 Broad Street 20 New York, New York 10004-2498 (212)558-3749 21 ROBERT A. ROSENFELD 22 KIT A. PIERSON Attorneys at Law 23 Heller Ehrman, LLP 333 Bush Street 24 San Francisco, California 94104 (415)772-6000 25 3655 1 STEPHEN A. TUGGY HEIDI B. BRADLEY 2 Attorneys at Law Heller Ehrman, LLP 3 333 South Hope Street Suite 3900 4 Los Angeles, CA 90071-3043 5 BRENT B. GREEN Attorney at Law 6 Duncan, Green, Brown & Langeness, PC 7 Suite 380 400 Locust Street 8 Des Moines, Iowa 50309 (515)288-6440 9 STEVEN J. AESCHBACHER 10 Attorney at Law Microsoft Corporation 11 One Microsoft Way Redmond, California 98052 12 (425)882-8080 13 14 15 16 17 18 19 20 21 22 23 24 25 3656 1 (The following record was made out 2 of the presence of the jury.) 3 THE COURT: Which one do you want to 4 start with? Head fake or product reviews? 5 MR. CASHMAN: Your Honor, I just want 6 to make a couple of additional preliminary 7 comments before we go on to some of these 8 specific articles. 9 And, first of all, I'd like to hand up 10 to the Court some evidence, which we've 11 collected which underscores the -- one moment 12 please -- underscores some of the points that I 13 was making yesterday. 14 I have here a collection and a chart 15 explaining the deposition testimony -- one 16 moment, please -- the deposition testimony of 17 certain individuals, which I'd like to go 18 through quickly for the record and explain the 19 significance of this evidence briefly for the 20 record. 21 First on the chart, we have testimony 22 which is attached then from Robert Frankenberg 23 and the testimony -- pertinent testimony there 24 is excerpted. 25 Mr. Frankenberg is president and CEO 3657 1 of Novell. The point of the testimony here is 2 that trade press is unreliable. 3 Second of all, we've got testimony 4 from Mr. Richard Freedman, who is a product 5 manager -- Microsoft product manager, and as 6 you'll see in the testimony that's excerpted 7 here, Mr. Freedman is asked about trade press, 8 and his comments are very pertinent to the 9 unreliability of trade press. He says that 10 these are just gossip columns, rumor columns. 11 Second of all -- or third of all, we 12 have testimony attached from George Grayson, 13 and he was president of a company called 14 Micrographics, and he compares Info World and 15 other trade press to the National Inquirer. 16 He says, quote, it is like the 17 inquirer of our industry, so typically, there 18 are a lot of inaccuracies. 19 Fourth, we have testimony from an 20 individual by the name of Corey Tobin, and he 21 was the senior director and vice president from 22 marketing at Novell for DR-DOS. And he says 23 again, underscores the unreliability of trade 24 press. 25 Turning to the second page of the 3658 1 chart, we have testimony from Bruce Freyer, and 2 again, he -- his testimony is pertinent in a 3 little bit of a different point. 4 When you read the testimony that's 5 attached, he describes a product in which they 6 receive multiple awards for that product, and 7 he is asked if the product was successful. He 8 says no, it wasn't successful in spite of all 9 these high awards. 10 So this shows that Microsoft has no 11 support; and even though they've not provided 12 any foundation, this shows that there's no 13 correlation between awards in product reviews 14 and success contrary to Microsoft's claim. 15 Next we have testimony from Marc 16 Andreessen, and he was the former vice 17 president of technology at Netscape. 18 And his testimony goes somewhat to the 19 same point that the trade press articles just 20 aren't reliable. And in here, this testimony 21 he describes an example of where the trade 22 press was saying that users wanted certain 23 features, and then it turned out that wasn't 24 the case at all. 25 Next we have testimony that we would 3659 1 attach from Jim Barksdale, and here he talks 2 about claims about -- that he saw in trade 3 press and in relation to Microsoft's claims 4 that Internet Explorer won 19 out of 20 5 head-to-head reviews against Navigator. 6 And Mr. Barksdale testifies how he 7 didn't think that was true, and he commissioned 8 a study of his own, which found it to be false. 9 So that underscores the unreliability 10 of the trade press and counters Microsoft's 11 unsubstantiated claims. 12 Turning to the third page, we have 13 testimony -- this is trial testimony from James 14 Gosling, who is the vice president at Sun 15 Microsystem. 16 And again, his testimony underscores 17 that trade press reviews, product reviews are 18 unreliable, and he's talking in the sense that 19 there's no -- there's no way of knowing how 20 they run their tests and what they've done. 21 Next we have testimony from Michael 22 Homer, executive VP and general manager of Net 23 Center. 24 And his testimony -- his testimony is 25 that it's, quote, common for press to misquote 3660 1 or for statements to be taken out of context 2 and that -- there's nothing that people can do 3 about the inaccuracies in product reviews in 4 trade press. 5 Next, if it may please the Court, I'd 6 like to hand up two additional pieces of 7 evidence. 8 One is Plaintiffs' Exhibit 1088. This 9 is a memo -- this is an internal Microsoft memo 10 which is reacting to positive trade press 11 product reviews for DR-DOS, and it -- a battle 12 plan of how Microsoft and their public 13 relations firm, Waggener Edstrom, are going to 14 manipulate further trade press and product 15 reviews in the future. 16 And I've provided this to the Court's 17 attention, for the Court's attention because it 18 underscores the fact that trade press is highly 19 manipulable and wholly unreliable product 20 reviews in particular. 21 And then the second deposition excerpt 22 which I just handed up, actually it's trial 23 testimony, DOJ trial testimony from an 24 individual by the name of John Soyring, and 25 I've highlighted the pertinent testimony here 3661 1 in which Mr. Soyring is talking about the fact 2 that -- I'm going to actually quote Mr. 3 Soyring. 4 This is on page 81 of his trial 5 testimony, and I'm going to focus on lines 20 6 to 23. 7 He says, so you can't make a general 8 claim in performance that one is faster than 9 the others. Different benchmarks yield 10 different results showing different products 11 performing better. 12 And that just underscores the point 13 that the product reviews are unreliable because 14 it's just a matter of subjective -- somebody's 15 subjective opinion. 16 So I think all of those pieces of 17 evidence which I have just supplied to the 18 Court underscore the unreliability of product 19 reviews in particular. 20 Next I wanted to follow up quickly on 21 my comments yesterday that Microsoft has failed 22 to provide any foundation for its claim that PC 23 Magazine, or PC World in particular, the two 24 publications that contain the product reviews 25 is either widely read. 3662 1 I've highlighted for the Court that 2 absence of foundation for that claim, but last 3 night I decided to do a little further digging 4 and I looked up the population of Iowa in 1990 5 on the U.S. census statistics in comparison to 6 the total population of the United States. 7 That shows that Iowa has about 1 percent in 8 1990, had about 1 percent of the population. 9 If we took the total alleged 10 circulation as stated in Mr. Machrone's 11 testimony about the total circulation 12 approximately at that time for either PC World 13 or PC Magazine as being one million worldwide, 14 one million copies worldwide a month, and if we 15 did just basic math and calculated how much 16 that would mean as far as copies sold in Iowa 17 or distributed in Iowa, it would be less, less 18 than 10,000 copies. 19 And that means if there were 10,000 20 copies circulated in Iowa in 1990, that would 21 be less than one-half of 1 percent of the total 22 population of this state, less than one-half of 23 1 percent. 24 Furthermore, as the Court may recall 25 from the notice plan papers that were discussed 3663 1 in Court, PC Magazine in 2006 has actually been 2 identified as having a circulation of 8,500 3 copies, 8,500 copies. I think it's a fair 4 assumption that the circulation in 1990 was 5 substantially 8,500 copies for PC Magazine. 6 Nonetheless, even if we took that 7 figure, 8,500 copies, that would mean that less 8 than one-half of 1 percent of all Iowans 9 receive PC Magazine or PC World, and that 10 certainly does not come close in any measure to 11 constituting widely read as Microsoft claims 12 sufficient to put the entire state of Iowa on 13 notice to be deemed to have knowledge of the 14 specific article in any one of the publications 15 that might have been asserted in a given month. 16 And I contrast that for the Court's 17 benefit with the situation in the Fanning case. 18 Again we're talking about a county 19 with 14,000 people at most, or I guess it's 20 just over 14,000 in 1990. And there we are 21 talking about newspaper articles, multiple 22 newspaper articles that are circulated there 23 from four different publications. 24 Of course newspapers are distributed 25 on a daily basis, so the penetration in a 3664 1 community such as Fanning in that situation 2 would have been dramatically higher than what 3 would be the case for PC Magazine or PC World. 4 Indeed, I would venture to say that 5 when you're talking about an undeniable fact 6 such as anhydrous ammonia and whether or not 7 that's dangerous and would affect property 8 value, it's in a community of 3,000 people, if 9 you're talking about Sac City, or the county of 10 Sac County 14,100 people. 11 The way that word travels in a 12 community like that is close to being judicial 13 notice, and that certainly isn't remotely 14 similar to what we have here. 15 And I just wanted to highlight, then, 16 the dramatic absence of logic in Microsoft's 17 argument because they're telling the Court that 18 product reviews allegedly are widely read and 19 that this alone constitutes a sufficient basis 20 for you to permit them to be used for not for 21 truth purpose because that's just notice to the 22 market. 23 Well, under that standard, virtually 24 any article would come in for a not for truth 25 purpose, including -- we'll put the extreme 3665 1 example aside of National Inquirer, but it 2 would include articles which bash Microsoft 3 products, and it would include blogs because 4 those are widely read. 5 It would include blogs by people who 6 say Microsoft products are the worst thing that 7 ever happened. 8 You have all that kind of testimony or 9 that kind of evidence that would be admissible 10 under the -- for a nonhearsay purpose under 11 Microsoft's theory to show that, quote, the 12 market was aware of all these negative comments 13 by Microsoft. 14 You also have all these articles which 15 talk about how Microsoft responds 16 disproportionately to threats in order to send 17 notice to the market that it is going to crush 18 competitors or potential competitors if they 19 try to enter the market and compete with 20 Microsoft. 21 So all that kind of stuff would come 22 in under the standard that they're 23 articulating. 24 Now, as I've explained before, 25 Plaintiffs believe that is -- that the standard 3666 1 articulating is wholly incorrect and should be 2 rejected and that the cases, including the 3 Fanning case, set a pretty high burden which 4 Microsoft has not and cannot meet for product 5 reviews in particular. 6 If Microsoft wants to respond to these 7 general comments before we talk about these 8 articles in particular, that's fine with me. 9 MR. NEUHAUS: I think we'll never 10 finish, Your Honor, if we don't get through 11 this. Let's let him finish. 12 Your Honor, I can respond to these 13 points. 14 We are going to go on and on and on if 15 this continues, but on all of these points, 16 first of all, on the testimony that they've 17 offered, all of this goes to the weight of our 18 evidence of whether it's widely read and what 19 the jury will think of these things when they 20 see them. 21 And Fanning does set up a test. It 22 says that the test is whether -- I'm talking 23 about the testimony about how reliable this is. 24 That goes to the weight of the evidence. 25 We have evidence from experienced 3667 1 industry participants, people who aren't all on 2 the losing end, who say that these things are 3 -- both WordPerfect, Lotus, Microsoft, who say 4 that these things are paid attention to and are 5 influential. 6 And in fact, Ms. Conlin herself said 7 yesterday twice in opening, or the other day in 8 opening, that all these -- each of these 9 publications, including PC World, including PC 10 Week are influential, widely read, and 11 important. 12 And she is relying on those very same 13 publications for her FUD and vaporware stories 14 for freezing the market. 15 So to suggest that we can't get them 16 in and they can because -- and that they should 17 be able to argue that these things froze the 18 market and we can't is not even hand or 19 reasonable. 20 Fanning sets up a test. It is a test 21 -- it is the law of Iowa that newspaper 22 articles can come in for nonhearsay purposes, 23 that is for the purpose of notice, if you show 24 that they are widely read, and we have shown 25 that. 3668 1 We've shown that through Ms. Conlin's 2 own opening, through the Plaintiffs' own 3 concessions, and through the testimony of 4 experienced participants in the market on all 5 sides, both Microsoft and WordPerfect and Lotus 6 and others. 7 On the argument that trade press is -- 8 you know, can people work to get good product 9 reviews and good trade press, that shows how 10 important it is. 11 That shows how all these marketing 12 people do spend time working with the magazines 13 to get them product and make sure -- to try to 14 get their product placed in the best light 15 because it's so important. 16 The points about the Iowa consumers -- 17 and we don't have any Iowa consumers. Iowa 18 consumers, how often do they read PC Week, I 19 return to the point I said yesterday which is 20 that Plaintiffs have told us this is a 21 worldwide market. The points we're making go 22 to sales on a worldwide basis. 23 They say that Microsoft froze the 24 market. They don't suggest that the FUD went 25 to any particular Iowa consumers. The FUD went 3669 1 worldwide, and it froze the market. 2 We say the positive reviews from 3 Microsoft contributed to the worldwide sales 4 similarly as to the head fake. 5 The head fake doesn't go to whether 6 developers are in Iowa or not, it goes to 7 developers at Lotus and WordPerfect and 8 elsewhere. And for that, the question is, do 9 they read PC Week. 10 And we've got, you know, developer 11 after developer at Lotus, WordPerfect, and 12 other software makers who will testify and who 13 have testified that they do read it and they do 14 pay attention to it and they are aware of it on 15 a regular basis. 16 The test -- the test remains on this 17 motion whether we have a good faith basis, a 18 good faith basis to believe that these exhibits 19 are admissible or the testimony about them is 20 admissible because their motion is not only to 21 deny us the ability to talk about the exhibits 22 to the -- to show the exhibits to the jury, to 23 talk about them, but to talk about any of this, 24 to talk about any of these articles, and for 25 that, we certainly have a good faith basis. 3670 1 They basically have conceded that our 2 experts are going to be getting up there and 3 talking about this matter, at least them, about 4 these articles and about the effect of them and 5 about the effect on developers. And we 6 certainly should be able to talk about what our 7 experts can say. 8 No rule that I'm aware of says that 9 just because you bring it in through experts 10 doesn't mean that you can't discuss it in 11 opening. 12 We do intend, however, to offer these 13 into evidence through fact witnesses. You 14 asked yesterday who was going to bring them in. 15 Among others, we are bringing, or we 16 expect to have testimony from the senior 17 marketing people at Microsoft. A man named 18 Robbie Bach, who was marketing -- oversaw 19 marketing efforts from Microsoft products from 20 1996 to the present. 21 Another name, Pete Higgins, was in 22 charge of all Windows and Mac desktop 23 applications from 1992 through 1996. 24 And there are also industry people, 25 plus the testimony we've gotten by deposition, 3671 1 all of which will establish the foundation that 2 we are required under Fanning to provide. 3 And to say that we don't have a good 4 faith basis to believe that we can meet that 5 standard is just not true given what we've 6 offered here and what we can expect to offer. 7 On whether -- on what the test is, as 8 I said, Fanning is dispositive on the question 9 of product reviews, and it is the law in Iowa. 10 On one other point on this idea that 11 we should have gotten Iowa people, Iowa class 12 members to talk about their product reviews and 13 whether they read the product reviews, keep in 14 mind, Your Honor, we were prohibited from 15 talking to Iowa class members. 16 On the head fake, numerous cases show 17 that when you are trying to show whether one 18 acted -- whether someone acted with the 19 requisite care, you can show newspaper articles 20 that were widely circulated to show that they 21 would or should have been aware of certain 22 facts, and that's our situation. 23 The head fake, they say we deceived 24 through trade press articles and other 25 information applications developers into 3672 1 believing that we were not developing for 2 Windows and they shouldn't develop for Windows. 3 And we should be entitled to show that 4 there is a lot of information out there in 5 which we reported we were developing for 6 Windows and that they should develop for 7 Windows. 8 Two cases we cited in our papers, 9 Coyne v. Taper Partners. I have a copy, Your 10 Honor. 11 And I'm going to talk about Associated 12 Randall Bank as well. 13 THE COURT: Thank you. 14 MR. NEUHAUS: Coyne involved a hotel 15 guest who was injured when the hotel driver 16 crossed a picket line in her car, and the 17 question was whether the hotel had exercised 18 due care in sending out the driver to cross the 19 picket line, and the Court noted that in the 20 local paper, the San Juan Star, there was 21 articles about the strike and how it was 22 turning violent. 23 And if you look on page 461, in the 24 language I've highlighted, the Court held that 25 the jury could find that the article in the San 3673 1 Juan Star furnished constructive notice of the 2 tense circumstances and the potential for 3 violence, and then the footnote goes on to say, 4 Taber argues that this article is hearsay 5 evidence. It should be excluded from 6 consideration. 7 This argument overlooks that plaintiff 8 did not offer the article for the truth of the 9 matter asserted, but rather as tending to 10 establish the hotel's management knew, or 11 should have known, of the volatile nature of 12 the labor protest. 13 Similarly here, all we are trying to 14 do is to show that applications developers in 15 companies where these very publications are 16 widely read knew or should have known that 17 Microsoft was urging developers to write for 18 Windows. 19 Associated Randall, Associated Randall 20 Bank v Griffin, Kubik, Stephens, and Thompson, 21 3 F. 3rd 208 at 211, was an investment adviser 22 who recommended risky bonds, according to the 23 Plaintiffs, when he should have known widely 24 circulation -- circulated information about the 25 bonds. 3674 1 So again it went to the investment 2 adviser, whether the investment adviser had 3 exercised care in whether he was -- whether he 4 was negligently misrepresenting in what was 5 known about the bond -- negligently 6 representing the bond. 7 And the Court said he should have 8 known about widely circulated publications, 9 specialized trade press called Bond Week, I 10 think, or something like that. 11 And on page -- well, page 3 of the 12 printout that I had given you, page 211 of the 13 reported case, you see in the highlighted 14 language Kubik subscribed to these journals and 15 he testified in his deposition read them 16 occasionally. 17 We have in our evidence, evidence that 18 the decision-makers at Lotus and WordPerfect 19 read these publications regularly. 20 And the bank and the Court held that 21 the bank could -- that these articles could be 22 used to show that the bank did not use -- the 23 bank offered them not to -- not for the 24 proposition that they were accurate; that 25 Memphis was in fact engaged in interest rate 3675 1 arbitrage. That was one of the bonds, the 2 Memphis-issued bond. Was to show that a person 3 such as Kubik offering expert advice and 4 charging accordingly should have been aware 5 that these bonds were not plain vanilla 6 offerings. 7 Again, the point is that the trade 8 press was offered to show that a participant in 9 the market should have known of the information 10 that was widely available to participants in 11 that market in widely read, or in this case 12 regularly read or occasionally read 13 publications. 14 In our case, similarly, we are trying 15 to show that the developers and other ISVs 16 should have known of the information that was 17 available. 18 Again, on whether we have offered 19 sufficient evidence, the publications are 20 widely read. We've offered it here with a good 21 faith basis, and we can bring in evidence that 22 people in the industry widely read these and 23 that consumers widely read them and they were 24 considered very important to sales success. 25 And as I said at the outset, 3676 1 regardless, we certainly should be able to 2 discuss these trade press articles in opening 3 because we have a good faith basis that they 4 will be either admissible through fact 5 witnesses or experts or relied upon by the 6 experts in their testimony. 7 THE COURT: Thank you. Anything else? 8 MR. CASHMAN: Well, I guess just a 9 couple quick comments. It looks like we'll 10 have to address the specifics afterwards, but 11 just a couple of real quick comments. 12 As I stated yesterday, Ms. Conlin did 13 not show any trade press, and that's all we're 14 really seeking here, no trade press in the 15 opening statement. 16 Then Mr. Neuhaus said he thought 17 Ms. Conlin was making the statements in opening 18 to freeze the market, and that's why they want 19 to use this information. 20 If that's the case, that's a truth 21 issue because then the issue would be about 22 whether or not the market was frozen and you'd 23 have to believe that these trade press articles 24 as being true. 25 So when we go through that, I think it 3677 1 will become apparent that you have to believe 2 them as being true to make them relevant, which 3 means that they're hearsay. 4 Next, he says well, there is going to 5 be some people who they would try to get this 6 in through, and that's fine. That's why we 7 have limited our motion to the opening 8 statement. Let's see if they can get these in 9 through those witnesses. 10 I don't think they can, but let's see 11 it at the time. 12 Next, Mr. Neuhaus says that good faith 13 is the standard, and that's wrong. 14 The question first is whether they're 15 relevant, and that means was there actual 16 notice, were they read, and were they actually 17 relied upon, did it cause the reader to take 18 any kind of action. 19 And next, good faith isn't the 20 standard because we -- I'm sure the Court 21 doesn't want to admit hearsay. If this 22 evidence is hearsay, it simply cannot be 23 permitted. 24 Mr. Neuhaus totally glosses over the 25 issue of prejudice, which is discussed in a 3678 1 number of the cases, but most pertinently the 2 Gacke case, and one that recently follows it 3 that is quite probative, and I'm -- I have 4 copies for the Court of the Gacke case. 5 And the one that I have in mind, which 6 is called Morrill versus Cedar Valley Pro 7 Fitness and Martial Arts Club. 8 The Morrill case concerns a magazine 9 article, which the proponent alleged should be 10 admitted into evidence for nonhearsay purpose 11 of showing where the -- where certain opinions 12 came from, and the Court in that case had said 13 clearly you would have to have believed those 14 magazine articles as true to make them 15 relevant. Therefore, they're hearsay. 16 And they further went on to underscore 17 that the admission of hearsay evidence is 18 prejudicial. 19 So Mr. Neuhaus is wrong in that 20 standard. 21 And then lastly, I just want to 22 comment briefly on Coyne and Associated 23 Randall. 24 As I said yesterday, those are both 25 standard of care cases, and significantly on 3679 1 the standard of care issue, I believe that 2 there's a recent Iowa Court of Appeals case, 3 and if I recall correctly, I think it's called 4 McCoy, in which the Iowa Court of Appeals said 5 that no Iowa case has allowed -- if I recall 6 the holding correctly, they say that no Iowa 7 case has allowed the use of journal articles 8 and such to establish the standard of care in 9 that case for a doctor, as I recall. 10 And they said, the Iowa Supreme Court 11 hasn't permitted it, and so the Iowa Court of 12 Appeals wasn't going to be the first one to 13 allow the use of evidence like journal articles 14 and such to establish a standard of care for a 15 doctor. 16 So I believe that pretty much runs 17 counter to what is being claimed as the 18 proposition for both the Coyne case and the 19 Associated Randall case, and I also believe 20 those are distinguishable on the facts. 21 So that authority, I believe, should 22 be rejected. 23 And that's all I have to say as far as 24 general comments, and we can take up the 25 specifics this afternoon. 3680 1 MR. NEUHAUS: Your Honor, do you want 2 to just finish this? Should we try to get this 3 done? 4 THE COURT: I don't want to keep the 5 jury waiting. 6 MR. NEUHAUS: If I could, Your Honor 7 as you know, she did show the Z-NIX article. 8 There is another one, too, that she 9 showed to the jury, another piece of trade 10 press that I'll hand up right now. 11 They called it a press release. It is 12 not a press release, it's a piece of trade 13 press that she flashed to the jury and kept on 14 the screen. Here's the excerpt from the -- her 15 opening in which she did so. 16 As I say, they called it a trade press 17 article. That's just false. It's an article 18 from News Bites, a trade press publication. 19 And these News Bites, it says at the top, 20 Microsoft has released a statement, but it 21 clearly is trade -- which is why they were able 22 to claim to the jury that it was a press 23 release, but it isn't at all. 24 If you read down into the article, it 25 says, a third bug has been reported by Stac 3681 1 Electronics, Microsoft's largest competitor in 2 data compression products. That's obviously 3 not Microsoft talking. 4 The next page, Stack's technical 5 evangelist, Bruce Bamer told News Bites that 6 the company has been running upwards of 30 7 million iterations a day of test suites on 8 double space. 9 The question is, you know, are -- it's 10 about bugs in various products. 11 Then further down, Infoworld reported 12 further down, Microsoft says Infoworld first 13 contacted technical support people at a certain 14 time. Then they report what Microsoft's DOS 15 general manager, Brad Chase, told News Bites. 16 Next page. All of this goes to show 17 that this is in fact trade press. That News 18 Bites called the support line. 19 And if you look at the tag line at the 20 end, Mr. Cashman at one point has argued that 21 this is not trade press, it's a press release 22 because it has a contact at the end, but it has 23 contacts for both Microsoft and Stac 24 Electronics. 25 News Bites practice apparently is to 3682 1 provide contacts for the various companies 2 mentioned in the stories that it publishes. 3 So she published this to the jury as 4 well. It's a piece -- and it is a piece of 5 trade press. So she's twice published trade 6 press to the jury, Your Honor, and this one was 7 also admitted in the same way as the Z-NIX 8 article was the morning of the argument under 9 the agreement that said if you have a good 10 faith basis for getting it in, we said if, you 11 know, this is trade press and it's offered for 12 notice purposes, it can be admitted, and under 13 that basis, it was admitted. 14 So that's it, Your Honor. There's -- 15 on Morrill, Morrill, as I read the case, was a 16 case in which the proponent of the articles 17 offered it for the truth. That is, that it 18 could be believed by the Court that back squat 19 machines could be used in that particular way. 20 Thank you, Your Honor. 21 THE COURT: How long do you think it 22 will take to go through the -- I want to make 23 sure I have enough time to go through this. 24 MR. CASHMAN: Maybe 30, 45 minutes, I 25 hope. 3683 1 MR. NEUHAUS: I will only react to 2 what he does. 3 THE COURT: We'll do it then. 4 MR. CASHMAN: Thank you, Your Honor. 5 THE COURT: Sorry about that. I 6 really don't want to keep the jury waiting. 7 (The following record was made in the 8 presence of the jury.) 9 THE COURT: Everyone else may be 10 seated. 11 Ms. Conlin. 12 MS. CONLIN: Thank you, Your Honor. 13 Good morning. I think that you'll 14 hear another voice today, and thank you for not 15 groaning out loud. 16 I know this has been a long haul. I 17 hope that by -- I hope that at some point, you 18 will think that this was a useful exercise. 19 The stories for today are all pretty 20 brief, Real, Be, Linux, and then as I 21 indicated, I'm going to talk a little bit about 22 spoliation. 23 So I'll begin with Real. 24 Real is a streaming media company. 25 And this is about what Real suffered at the 3684 1 hands of Microsoft. 2 As you hear about RealNetworks and 3 Microsoft, you will notice a familiar pattern. 4 Microsoft, the evidence will show, 5 breaks the rules to protect and to extend its 6 monopoly. 7 What Microsoft does with regard to 8 RealNetworks, once again, it uses a wide 9 variety of tactics to accomplish its aim of 10 monopolization of the operating system market. 11 Among the tactics it uses against Real 12 are those that we have seen in other cases; 13 buying out the competition, dividing the 14 market, threats, intimidation, tying, bundling, 15 exclusionary contract terms -- these will be 16 new exclusionary contract terms -- technical 17 sabotage, and undocumented APIs. 18 First we're going to very briefly 19 discuss some of the technology involved in this 20 area. 21 RealNetworks software involves digital 22 media. PCs can be used, of course, to listen 23 to audio content like music to view pictures, 24 to watch movies, TV programs. This content is 25 stored in digital form, which means that the 3685 1 visual and audio content has been translated 2 into numbers. 3 That numerical information gets 4 translated back into audio and visual content 5 when the user plays it. 6 Digital images, audio and video 7 together, are referred to as digital media. 8 Digital information is stored in a 9 file. The picture or song or movie in a 10 digital file is called content, and content can 11 be delivered over the network in different 12 ways. 13 One approach -- the old approach was 14 downloading in which the user first goes out 15 and gets the content and it comes onto the 16 computer via the Internet, and you have to wait 17 till all of it downloads before you can watch 18 it. 19 Here is a little demonstration of 20 downloading. 21 You see that bar? Nothing's happening 22 except the bar. And using this approach, the 23 user may have to wait a long time before 24 playing the content. 25 With a large file or a slow Internet 3686 1 connection, transferring the digital file can 2 take quite a long time, minutes, even hours. 3 Okay, let's -- now, another approach, 4 the approach most frequently used now is the 5 streaming media. It uses specialized 6 technologies to let the user begin watching or 7 listening as the digital content is arriving on 8 the computer. With streaming, the user doesn't 9 have to wait until the entire file is 10 downloaded. 11 Darin, let's show streaming. 12 Can you see that little white -- the 13 little white thing there? 14 While you're watching -- while you're 15 watching, the rest of the digital file is 16 coming. 17 With the arrival of Netscape 18 Navigator, more and more people began using the 19 Internet. Most people got the Internet with a 20 dial-up modem using ordinary telephone lines. 21 Modems are limited to receiving data 22 at speeds of 14.4 to 28.8 kilobytes per second, 23 which means really not too fast. 24 Rob Glaser, a former Microsoft 25 employee, founds RealNetworks. 3687 1 First it is known as Progressive 2 Networks. Now it is known as RealNetworks. 3 He founded it in 1994. 4 RealNetworks applies what is known as 5 realtime streaming technology, first to audio 6 files and then to video files. Beginning in 7 1997. 8 And in 1997, when you tried to watch a 9 video on your computer, it -- little 10 postage-sized screens and jerky motion and not 11 too grand. But that regularly improves. 12 And RealNetworks becomes the first 13 company to offer Internet streaming media 14 players and servers commercially and becomes 15 very quickly the leader in the field. 16 And again, as with the Internet and 17 the web browsers, Microsoft is caught 18 flatfooted. 19 Microsoft sees RealNetworks' success 20 as a threat, and one of the findings of fact 21 from the Department of Justice and government 22 cases describes the threat that Microsoft sees 23 to its monopoly from middleware technology like 24 RealNetworks, like the browser, like Java, the 25 streaming media exposes APIs. 3688 1 And as a result, Microsoft sees it as 2 a potential threat to the monopolization of the 3 operating system market. 4 Let's look at the middleware again. 5 Boy, you've seen that a lot, and I know that 6 you understand the concept. 7 Of course, with the middleware, it can 8 work on Linux, it can work on Sun Solaris. 9 RealNetworks provides the APIs on 10 which applications developers can build and 11 serves as the way to get from the application 12 to the operating system, and it doesn't matter 13 what operating system. 14 Let me show you a strategic review 15 from December 2000 by Microsoft's RealNetworks 16 strategic team led by a man named Rich 17 Lappenbusch. 18 In his presentation, the Microsoft 19 team asked the question -- and this is 20 Plaintiffs' Exhibit 6901. 21 And as I said, this is in December of 22 2000. 23 Why does Microsoft care about 24 RealNetworks? Real threatens Windows desktop 25 relevance and usage. That's what we talked 3689 1 about. That might not matter anymore what the 2 operating system was. 3 And it also says digital media is the 4 next big thing on business and consumer 5 desktops, pushing OS PC upgrades and 6 excitement. Once a user is in Real, you don't 7 need Windows for media. 8 Really threatens Windows growth 9 opportunities. In other words, as more and 10 more content is -- songs, movies, TV programs 11 are available using RealNetworks software, the 12 less important Windows becomes. 13 People can listen to or watch really 14 -- using RealNetworks software, they can do so, 15 watch content on any operating system. 16 One big difference between 17 RealNetworks and Netscape, which is a -- 18 presented a similar threat to Microsoft is that 19 Microsoft recognizes this threat much earlier. 20 In an E-mail from June 5, 1997, 21 Microsoft employee named Jim Durkin describes a 22 meeting with Bill Gates, Paul Maritz, and Bob 23 Muglia. 24 This is Plaintiffs' Exhibit 4483. 25 Basically Bill G. and Paul Ma. made 3690 1 the decision that one, we need to win the 2 streaming media battle against Progressive 3 Networks. 4 Two, gave the approval for me to go 5 buy a $65 million company, fifth largest 6 Microsoft acquisition ever, in order to win the 7 battle. 8 Bill's comment was this is a strategic 9 area and we need to win it. 10 Muglia's comment was, PN, Progressive 11 Networks, now RealNetworks, is like Netscape. 12 The only difference is we have a chance to 13 start this battle earlier in the game. 14 Microsoft embarks upon a course of 15 conduct similar to its campaign against 16 Netscape, and the pattern emerges. 17 First, as it does with Apple -- we 18 talked about this yesterday. As it does with 19 Apple and as it does with Netscape, the first 20 approach is Microsoft just tries to get 21 RealNetworks to stop competing. 22 When that doesn't succeed, Microsoft 23 begins bundling its own player with the 24 operating system. Just as it bundled Internet 25 Explorer with the operating system, it does the 3691 1 same thing with its media player. 2 Some of Microsoft's conduct with 3 respect to RealNetworks is established in the 4 government case. One of those facts which I 5 skipped yesterday, and which I will -- because 6 I wanted to talk with you about it today. 7 This is Finding of Fact 111. 8 RealNetworks is the leader in terms of 9 usage share in software that supports the 10 streaming of audio and video content from the 11 web. 12 RealNetworks' streaming soft solution 13 -- streaming software presents a set of APIs 14 that competes for developer attention with APIs 15 exposed by the streaming technologies in 16 Microsoft's DirectX. 17 This, of course, is what makes 18 middleware a threat. 19 In 1977, senior Microsoft executives 20 viewed RealNetworks' streaming software with 21 the same apprehension with which they viewed 22 Apple's playback software, as a competitive 23 technology that could develop into part of a 24 middleware layer that could, in turn, become 25 broad and widespread enough to weaken the 3692 1 applications barrier to entry. 2 And as you will recall, it is the 3 applications barrier to entry that protects the 4 operating system monopoly. 5 RealNetworks software is a platform 6 supporting millions of content files and Web 7 sites. It is cross-platform. Consumers can 8 enjoy those files on any operating system, not 9 just Windows PC. 10 In March of 1998, Microsoft's Gary 11 Schare writes in a memo about Net Show. Net 12 Show was at the time the name of what became 13 Windows media player. Microsoft's -- and it is 14 the competing software to Real. 15 This is Plaintiffs' Exhibit 6337. 16 Browser -- at the top, what's at 17 stake, browser wars two. Mr. Schare, and many 18 of the other documents you will see 19 specifically say, this is like the browser. 20 This is like the war we fought against 21 Netscape. 22 Data types beyond text and graphics, 23 audio/video scripts, URL's animations, and 24 content leads to control. 25 He's saying Real can't be permitted to 3693 1 win. If Real wins, our operating system 2 monopoly is in danger. 3 Just like the battle with Netscape, 4 it's about keeping the operating system 5 monopoly. 6 In September of 1999, Microsoft's 7 Anthony Bay writes in Plaintiffs' Exhibit 8 6644 -- this is September '99. 9 Can you make that any bigger? Good. 10 We are in a platform battle at a 11 corporate level for the next generation of 12 Internet technology; namely, Rich Digital 13 Media. Losing this would be worse than having 14 ceded control of HTML, http to Netscape. 15 Microsoft creates a new division. It 16 gets lots of different names. Sometimes it's 17 called the streaming media division. 18 One of the findings from the 19 Department of Justice and government case is 20 Finding 132. 21 It says, Microsoft's interactions with 22 Netscape, IBM, Intel, Apple, and RealNetworks 23 all reveal Microsoft's business strategy of 24 directing its monopoly power toward inducing 25 other companies to abandon projects that 3694 1 threaten Microsoft and toward punishing those 2 that resist. 3 This refers to Microsoft's first 4 response to the threat presented by 5 RealNetworks. 6 As it did with Netscape and Apple, 7 Microsoft tries to convince RealNetworks just 8 to stop competing at the platform level. 9 In 1997, Microsoft, the vice 10 president, Robert Muglia, tells Bruce Jacobsen, 11 who is the chief operating officer for 12 RealNetworks, that Microsoft will injure 13 RealNetworks' business if Real continues to 14 compete in the fundamentals of audio/video 15 streaming. 16 Mr. Jacobsen took notes of his meeting 17 with Mr. Muglia. And this is in August of 18 1977. It's Plaintiffs' Exhibit 2725. 19 And, as I said, this is Mr. Jacobsen's 20 recounting of his meeting with Mr. Muglia. 21 Mr. Muglia with Real. 22 His basic message was the, and I think 23 that's they, wanted us out of core AV, 24 audio/visual. 25 That in fact Office and Windows were 3695 1 one, since if what an operating system did was 2 to display things, then Word, Excel, Office 3 were part of the OS. And since the world was 4 going networked, that applied to browsers. 5 He said that he thought video was one 6 of the most exciting data types since monitors 7 were visual things. Video had to be thought of 8 like words. And Microsoft had to control this 9 franchise. He said that anyone who competed 10 against Microsoft in the operating system lost. 11 So the message was that if we wanted 12 to do value add on top of their video, fine. 13 If not, we were an operating system contender, 14 and Microsoft would target us for obliteration. 15 Two things are important with this. 16 First, what -- this is very like the 17 June 21, 1995 meeting with Netscape where 18 Microsoft says to Netscape, we'll be the basis 19 -- you can build what you want to on top, but 20 you can't expose APIs because that would make 21 you an operating system contender. That would 22 mean that applications vendors could build on 23 top of you. Can't have that. Threatens the 24 monopoly. 25 The second thing of importance in 3696 1 connection with this is this confirms that 2 Microsoft treats Office as part of the 3 operating system as Windows and Office are one. 4 On April 27, Microsoft's Bob Muglia 5 writes to David Cole and Anthony Bay. This is 6 an internal Microsoft communication. 7 Plaintiffs' Exhibit 5978. 8 My opinion is that we should not kid 9 ourselves. We are in competition with PN. Rob 10 Glaser has been way smarter than Netscape. 11 Netscape openly announced that their goal was 12 to replace our key asset. 13 I'm pretty sure what Rob is doing is 14 building an asset that he knows Microsoft must 15 own. Video is going to be a killer application 16 for computers, and it is critical that 17 Microsoft build the base infrastructure upon 18 which these applications are enabled. 19 My bottom line is that this is not 20 some optional area we can decide we don't 21 really care about. This is a fundamental part 22 of the computing platform for the 21st century. 23 We need to own this. 24 At the end of May, 1997, Bill Gates 25 tells a group of Microsoft executives that 3697 1 multimedia streaming is strategic ground that 2 Microsoft needs to capture. 3 Gates identifies RealNetworks as the 4 adversary and authorizes the payment of up to 5 65 million for a streaming software company. 6 You know, to just buy a streaming software 7 company to accelerate Microsoft's effort to 8 seize control of the streaming standards. 9 On June 5, 1997, Microsoft's Jim 10 Durkin reports an internal Microsoft strategy 11 meeting attended by Gates, Maritz, and Muglia. 12 And this is 4483. 13 And again he says, the battle against 14 RealNetworks is like Netscape. The only 15 difference is we have a chance to start this 16 battle earlier in the game. 17 On the same day, in an E-mail to his 18 direct reports, Mr. Durkin remarks about 19 Progressive Networks. 20 We should use our mandate from God, or 21 at least Bill G., to characterize this as an 22 all-out, full frontal assault decision to go to 23 war. 24 Let me stop just for a moment. I 25 don't want you to get confused about what the 3698 1 case is about. 2 As unpleasant as it may be to see all 3 of these documents that talk about war and, you 4 know, death spirals and things like that, 5 that's how some companies talk. That may be a 6 part of their rough-and-tumble competition. 7 We didn't sue Microsoft because they 8 use war metaphors. We sued them because they 9 monopolized the three markets that matter to 10 Iowa end users. So it's not about war 11 metaphors or, you know, the bad language that 12 you've seen. 13 So this -- but the decision to go to 14 war matters in terms of Microsoft because then 15 they start all of the tactics that we have 16 talked about. 17 Two weeks after Bill Gates authorizes 18 the purchase of a streaming media company, 19 Microsoft signs a letter of intent to buy 20 VXtreme. 21 Right after that, executives at Real, 22 perhaps sensing some impending disaster, call 23 up Microsoft and propose that the two companies 24 enter a strategic relationship. 25 Microsoft's Paul Maritz reports on 3699 1 June 16, 1997, in Plaintiffs' Exhibit 2722, we 2 signed a somewhat unorthodox deal with Rob 3 Glaser, Progressive Networks last night. 4 Rob's stated plan is that he will get 5 out of the base streaming media platform 6 business and focus on higher level solutions. 7 They'll do the base layer and they'll 8 build on top, but no APIs. 9 In the first of the two agreements 10 between Progressive Networks and Microsoft, 11 Progressive Networks agrees to license its 12 streaming media product to Microsoft. 13 By early July, Microsoft agrees to 14 distribute that Real media player with Internet 15 Explorer. Microsoft also agrees to make an 16 investment in Progressive Networks. 17 They also agree that they will keep 18 working toward an agreement to align media file 19 formats and client technology, and Microsoft at 20 least believes that will get Progressive 21 Networks out of the platform business and only 22 building solutions on top of Microsoft's 23 platform. 24 Microsoft and Real -- there are two 25 deals. There are two contracts. And they come 3700 1 very close together in July of 1997. 2 Microsoft and Real continue their 3 negotiations after the first agreement toward 4 what becomes known as the Chris Phillips deal, 5 and that's the name of one of the Microsoft 6 employees who's negotiating. 7 6077 is a July 3, 1997 memo -- E-mail 8 from Anthony Bay to Muglia and Cory Van 9 Arsdale, and he says Bob, in addition to 10 getting very involved in the second PN 11 contract, the Chris Phillips deal it is called, 12 I think you may also have to play a role in 13 sorting out final resolution of some other 14 related things. 15 And shortly thereafter, on July 21, 16 Microsoft and RealNetworks enter into the 17 second agreement. 18 Microsoft agrees to distribute a copy 19 of RealNetworks' media player with each copy of 20 Internet Explorer, to make a substantial 21 investment in RealNetworks, to license the 22 source code for certain RealNetworks streaming 23 technologies, and to develop, along with 24 RealNetworks, this common file format for audio 25 and video content. 3701 1 Muglia signs the agreement on 2 Microsoft's behalf, and Microsoft believes that 3 RealNetworks has, in turn, agreed to 4 incorporate Microsoft's streaming media 5 technologies into its products. 6 RealNetworks sees the agreement 7 differently. A few days after it signs this 8 deal, RealNetworks continues its plans to 9 continue developing the fundamental streaming 10 media software. 11 And there are more negotiations in the 12 midsummer and the fall, but they do not lead to 13 the result that Microsoft was hoping for. 14 So Microsoft withdraws from its 15 investment in RealNetworks in 1998 and 16 introduces the successor to their Net Show 17 player, which is now called the Windows media 18 player. 19 Microsoft offers the window media 20 player initially as a stand-alone product. You 21 know, not as a part of the operating system, 22 but as a stand-alone product that you can 23 download from the Internet. And that's how it 24 is offered during the time of Windows 95, 98, 25 and Windows NT. 3702 1 It is not successful as a stand-alone 2 product. In fact, so unsuccessful that in 3 December of 1997, MSNBC, which was the joint TV 4 cable network between Microsoft and NBC, 5 intends to sign a deal with RealNetworks to use 6 their streaming media technology. 7 On being informed of this, Bill Gates 8 writes in Plaintiffs' Exhibit 6265, I will jam 9 this home because I have to. However, we must 10 have a terrible product group for this issue to 11 get to this level. 12 So even though Microsoft is an owner 13 of this TV network, it has to force it to use 14 the Windows media player. 15 So Microsoft does the tying, bundling 16 tactic. It joins the media player with the 17 operating system. And this happens in June of 18 1998. 19 There is an Exhibit 9458. These are 20 the backup slides -- June 11, 1998 -- the 21 backup slides for Bill Gates, Bill G., and this 22 -- did I tell you 9458? 23 Lists as one way for winning versus 24 RealNetworks. Full client integration with 25 Windows. 3703 1 The same tactic of tying and bundling 2 that we saw with Internet Explorer, which 3 ultimately defeated Netscape Navigator and 4 protected Microsoft's monopoly power. 5 In January of 1999, Microsoft 6 executive Anthony Bay -- I believe at this time 7 he is the head of the digital media or 8 streaming media division at Microsoft. He 9 sends Bill Gates an E-mail outlining a plan for 10 Microsoft to dominate streaming media. 11 He does not recommend that Microsoft 12 compete by improving its streaming product. 13 Instead, he recommends the following. 14 And this is Plaintiffs' Exhibit 6523. 15 Our strategy. Change the rules, 16 reposition streaming media battle from Net Show 17 versus Real to Windows versus Real. Follow the 18 IE, Internet Explorer, strategy wherever 19 appropriate. 20 The net take-away we want customers 21 and analysts to have is that streaming media is 22 like the web a couple of years ago. 23 So the battle will not be Real media 24 player versus Windows media player. That 25 didn't work. It will be Real media player 3704 1 versus Windows versus the Windows operating 2 system. 3 That does work. Real no longer faces 4 the unpopular and not very good Windows media 5 player stand-alone. It faces the Windows 6 operating system, the ubiquitous Windows 7 operating system. 8 In May of 1999, Microsoft launches 9 Windows 98 SE, second edition, and that 10 includes a bundled copy of the Windows media 11 player. Out of the box, users have Windows 12 media player whether they want it or not. 13 For the launch of -- from the launch 14 of Windows 98 SE until today, Microsoft 15 distributes its Windows desktop operating 16 system bundled with a digital media player. 17 All versions of Microsoft's PC 18 operating systems licensed in the United States 19 come with the Windows media player bundled. 20 And tying the Windows media player to 21 the operating system gives that Windows media 22 player almost universal distribution. 23 Microsoft is using its monopoly power 24 in operating systems to make the Windows media 25 player as ubiquitous as Windows itself. 3705 1 Approximately 95 percent of all PCs 2 are shipped with Windows, so that means 3 approximately 95 percent of all PCs are shipped 4 with the Windows media player. 5 Neither Real media -- RealNetworks or 6 any other maker of media player software can 7 offer the universal permanent installation that 8 Microsoft achieves through this tying 9 mechanism. 10 Microsoft achieves its distribution 11 not by winning a competition on the merits, but 12 by exploiting the operating system monopoly to 13 protect the operating system monopoly. 14 And the other side of the coin is 15 content providers, people who produce the 16 content played on the media player. 17 They -- Microsoft says to them, use 18 our media formats and Codex and use our media 19 servers because only the Windows media format 20 is playable by the software certain to be 21 installed on every Windows PC. 22 Microsoft again, as we saw with 23 Internet Explorer, Microsoft claims that the 24 Windows media player is just a part of the 25 operating system. 3706 1 And you will see the evidence will 2 show it is no more true of the media player 3 than it was of the browser. 4 Having achieved near universal 5 distribution of its media player by bundling it 6 with Windows, Microsoft then uses contractual 7 restrictions to make it even more difficult for 8 PC makers to preinstall or promote competing 9 digital media players such as RealNetworks. 10 We know that OEMs in the period 11 mid-'95 to mid-'99 have no choice but to 12 preinstall Windows if they want to stay in 13 business. 14 That's Finding 54 from the government 15 case. 16 Microsoft has imposed what it called a 17 free system requirement on OEMs as a condition 18 of loading the Windows PC. 19 This means that when Windows is loaded 20 and the PC is turned on, there must be a 21 certain amount of memory that -- memory 22 resources that remain unused after the window 23 loads. 24 And remember, Microsoft is bundling 25 Windows media player with Windows at this time. 3707 1 It's making, of course, the Windows media 2 player the default player, the one that will 3 automatically be used. 4 David Richards from RealNetworks will 5 be here -- we expect him to be here, and he 6 will talk about these free system requirements 7 imposed by Microsoft. 8 They are so restrictive that loading 9 any other media player with Windows and making 10 the other media player the default player is 11 precluded. 12 This forces, he will tell you, a 13 number of OEMs with whom RealNetworks had 14 contracts to cancel the contracts. 15 Mr. Richards will also testify how 16 RealNetworks responds by developing Tinkerbell, 17 which is a smaller media player that does not 18 violate Microsoft's contractual free system 19 requirements and that would automatically 20 launch after the boot sequence. You know, when 21 it first starts up, then Tinkerbell would 22 launch. 23 The Windows license, however, prevents 24 OEMs from including any automatic launch of any 25 competing software. 3708 1 Again, Microsoft's OEM license 2 restrictions make it difficult, if not 3 impossible, for PC makers to distribute 4 competing software to consumers, even where the 5 OEMs believe consumers want it and where the 6 OEMs are willing and want to make it available 7 for consumers. 8 These actions make it more likely that 9 customers would only be able to get 10 RealNetworks by downloading it off of the 11 Internet. And Dr. Noll and others will tell 12 you that that is not likely to happen, just not 13 likely to happen. 14 In addition to the tying and bundling 15 and the restrictive contracts, Microsoft also 16 gives its media player an unfair competitive 17 advantage over others by using the undocumented 18 APIs. The sockets that programs use to plug 19 into the operating system. 20 These sockets provide access to the 21 functions and features. 22 In order to use the API, of course, a 23 developer needs to know it's there, it needs to 24 know what it does, and needs to know how to use 25 it. 3709 1 Microsoft allows the Microsoft 2 programmers who write Windows media player to 3 use APIs not available, not available to other 4 media player programmers such as people at 5 RealNetworks. 6 One of the APIs was called SH -- these 7 named are -- Sh Get View State Property Bag. I 8 don't know what it does for sure. Mr. Schulman 9 will tell you. But what a name. SH Get View 10 State Property Bag. 11 This is an important API. It has to 12 do with a display of screen arch, album arch. 13 Microsoft does eventually document it 14 in 2003 along with 290 other APIs that have 15 been previously undocumented. And this is in 16 2003. 17 As I mentioned, in 1997 Microsoft has 18 virtually no presence, none in the streaming 19 media business, but once we entered the 2000s, 20 Microsoft has become far more pervasive based 21 not on the superiority of its product, but on 22 tying and bundling, restrictive contracts, and 23 on the use of undocumented APIs. 24 You will hear likely Microsoft say 25 that Windows media is part of Windows. We've 3710 1 heard that before in terms of the Internet 2 Explorer and the browser. 3 In Finding 154 of the government case, 4 the finding of fact says the browser and the 5 operating system, two separate products, just 6 like Internet Explorer, is not a part of 7 Windows. The evidence will be that neither is 8 the Windows media player. 9 Microsoft's own licensing promotional 10 and marketing material treats the product 11 separately, plus Microsoft has released 12 versions of Windows media player to run on 13 Apple Macintosh, and maybe another one as well. 14 And they produce a version of Windows 15 in Europe that -- called Windows XPN that does 16 not include the Windows media player. 17 You might also hear them say they have 18 to include the Windows media player to protect 19 the integrity of the operating of the Windows 20 platform. There's no technical justification 21 for doing that. Mr. Schulman will talk to you 22 about that. 23 And you are -- you may also hear them 24 say how can it be bad for consumers when 25 Microsoft gives away free a media player? How 3711 1 can that possibly result in overcharging? Why 2 is that bad for consumers? 3 Well, it's bad for a number of 4 reasons. It permits Microsoft to maintain its 5 monopoly. It permits it to maintain the 6 monopoly by protecting the applications barrier 7 to entry from erosion by competing products 8 that expose APIs. 9 And if Microsoft can illegally 10 monopolize the operating system, it can 11 continue to charge its monopoly price, the 12 monopoly overcharge, without worrying that OEMs 13 will stop buying Windows and that independent 14 software vendors will find another platform 15 attractive and begin developing for it. 16 The evidence will show that Microsoft 17 is protecting the ABTE, applications barrier to 18 entry, by engaging in the same conduct toward 19 Real that it engaged in toward Netscape and 20 with the same results. 21 Real story, the end. 22 Be. I would think that not very many 23 people have ever heard of the Be operating 24 system, but there was such a thing. 25 The evidence will show that 3712 1 Microsoft's -- Be, the Be operating system. 2 It is -- the evidence will be that 3 these short names like GO and Be, they don't 4 make the product necessarily successful, but 5 they're fun. 6 Microsoft's contracts have several 7 anticompetitive terms. Some have already been 8 proven. But rather than middleware, some are 9 directed toward any potential operating system, 10 right at any potential operating system 11 competitor. 12 Here are a few of them. OEMs' PCs 13 must start up by going directly to Windows. 14 OEM PCs must start up by displaying 15 the Windows desktop. 16 They must use a no operation boot. 17 They must use Microsoft's OEM 18 preinstallation kit. That's called the OPK. 19 OEMs cannot delete or change any part 20 of the Windows installation once it's on the 21 hard disk in the OEM preinstallation kit. They 22 can't change the startup sequence. 23 And they can't launch any program 24 prior to booting Windows. 25 Microsoft uses these terms, which the 3713 1 evidence will show are anticompetitive, to 2 prevent computer manufacturers from using the 3 BeOS, the BeOS, an attractive competitive 4 operating system product. 5 There are three OEMs about whom we 6 have details, some details about their 7 interaction with Be. They are Hitachi, Compaq, 8 and Fujitsu. 9 I want to show you a screen shot of 10 Be. This is the desktop. This is what a Be 11 operating system desktop can do. 12 It is multitasking, it is 13 multithreaded. It can -- it was designed from 14 the very beginning to be a media operating 15 system and to handle the vast streams of data 16 unleashed by the multimedia revolution. 17 What makes it different is this 18 multithreaded multitasking memory protection 19 kind of a thing that you see displayed there. 20 It is particularly designed for people 21 who want to do high-end audio and video 22 production. 23 In collaboration with Intel, Be 24 creates a version of the BeOS for Intel 25 compatible PCs. 3714 1 But despite Intel's support and the 2 technical superiority of Be for such multimedia 3 applications, the evidence will be that 4 Microsoft prevents even a single major United 5 States OEM from preloading it. 6 Microsoft uses those anticompetitive 7 contract clauses, it uses threats and 8 intimidation and FUD, and despite the fact that 9 Be eventually offers this operating system for 10 free, it still cannot get on to the desktop 11 that Microsoft controls. 12 At this time, this is '98, this is an 13 emerging platform. It doesn't have a lot of 14 applications so Be devises an innovative 15 approach to surmounting the applications 16 barrier to entry. 17 Be tries to enter the market by 18 positioning Be as a complement to Windows. 19 Be offers to license its operating 20 system to computer manufacturers for 21 preinstallation in a dual boot configuration. 22 In other words, two operation -- two 23 operating systems would sit side by side, and 24 the user would decide, either at the beginning 25 using the boot loader, or at any time in the 3715 1 operation which operating system to use. 2 The boot Be produces a thing called 3 the boot manager software for Be, and that 4 allows the user to select which operating 5 system to launch after the computer is turned 6 on. 7 Rather than booting directly into 8 Windows, dual boot allows the user to choose. 9 Am I going to do multimedia today or do I want 10 to type a letter using Office? And you're 11 going to type your letter using Office, you 12 boot into Windows, and if you're going to do 13 your multimedia audio/video production, you 14 boot into Be. 15 And preinstallation, of course, as we 16 know, is the most effective way of getting an 17 operating system or any other kind of software 18 basically into the hands of computers, and here 19 is why. 20 After-market installation is 21 intimidating, complex to end users, data can be 22 lost, computers can be broken. 23 Most end users don't want to tamper 24 with their computer. And delivering the many, 25 many megabytes of software code for 3716 1 installation of the Be operating system over 2 the Internet just -- it costs more, very slow, 3 and again, people just aren't likely to do it. 4 They're just not likely to do it. 5 Microsoft is keeping very close track 6 of what's going on with Be. A particular 7 concern to Microsoft during this time frame is 8 they do not have a competing product. 9 They don't have anything that does 10 what the Be operating system can do. 11 Here is a document from David 12 Williams. It is Plaintiffs' Exhibit 9876. 13 November 2, 1998, Mr. Williams writes 14 to Carl Stork, who is general manager of PC 15 hardware strategy and evangelism. 16 He says, we are continuing to realize 17 that the BeOS dual boot with Windows 95 on PCs 18 is progressing rapidly inside OEMs. The 19 premise still being that high-end audiovisual 20 apps are better on Be than Windows 98. 21 Intel is positioning OEMs against each 22 other to generate a little fear that this -- 23 that the competitors are going to ship 24 something and get a jump on the consumer 25 market. 3717 1 Problems getting data from OEMs is 2 that some of the key folks at Compaq and HP 3 driving this work are not members of the 4 Microsoft fan club. 5 The reason OEMs can entertain this 6 functionality has several factors. 7 One, Intel and Be are positioning 8 Windows 98 lack of support in these areas as 9 the reason Be is better. 10 The mail you sent around on the 11 changes we need for DV, which means digital 12 video, capture support in WDM, Win 32 driver 13 model, is an excellent example. 14 No concrete follow-up plans from 15 Microsoft on how we are resolving these user 16 scenarios, clarity. 17 3. What I call the screw MS factor. 18 We have received proposal from Compaq telling 19 us they want now -- what they want now and in 20 the future. They think we are screwing around 21 with their product plans and are tired of 22 betting on our ability to deliver. 23 A little later, November 13, 24 Plaintiffs' Exhibit 9875, this is from 25 Mr. Stork to Jim Allchin, whose name you've 3718 1 heard often, David Cole, Brad Chase, David 2 Williams, Paul Maritz, and Eric Rudder. 3 This says, the key feature that Be is 4 leveraging is that BeOS is a far better AV 5 editing environment than Win 98 or NT. 6 One telling example is that multiple 7 OEMs have pointed out problems to us with our 8 DV, digital video capture support in WDM for 9 Win 98. 10 We have not committed to fixing them 11 or given people a time line they can count on. 12 We are hearing from OEMs that they don't think 13 they can count on us. 14 Hence, Be's product is very appealing 15 as a consumer AV editing environment. Intel is 16 very actively encouraging this. 17 Note that today Intel -- note that 18 Intel today announced a 5 percent equity 19 investment in Be. 20 So the reading of these and other 21 documents indicates that Microsoft does not 22 have a product that matches this competitor's 23 product. 24 We will look at the three examples 25 that I talked about, Hitachi, Compaq, and 3719 1 Fujitsu. 2 And in each case what happens is the 3 OEM evaluates Be on its merits and decides that 4 it wants to offer Be to its customers. 5 Then Microsoft uses its contract terms 6 coupled with its MDA, market development 7 agreement, and threats and intimidation to put 8 pressure on the OEM. 9 And then the OEM changes its plans. 10 It either abandon's Be altogether or it's 11 forced to use it in a way that prevents 12 consumers from buying a PC with Be installed in 13 a way that's easy to use that's accessible to 14 the consumer. 15 And that virtually guarantees Be's 16 failure. 17 The evidence will show Microsoft 18 forces the OEMs to abandon its plans or 19 truncatel them or discontinue them. 20 Let's start with Hitachi. 21 In early 1998, Hitachi representatives 22 enthusiastically approach Be about including 23 the Be operating system in one of its FLORA 24 models, the Prius it's called. 25 By September 1998 Hitachi has made its 3720 1 decision. 2 This is Plaintiffs' Exhibit 9133. 3 I had mastered this pronunciation, but 4 I'm going to give it a shot. 5 Hiroaki Aotsu, obviously a person in 6 power in Hitachi, writes to Jean Calmon, who is 7 a Be vice president. 8 Jean, greeting. We are planning to 9 launch Hitachi PC, FLORA series bundled with 10 BeOS, Japanese version coming this Christmas. 11 So what Be understands is the BeOS 12 would share the hard drive on the Hitachi 13 computer along with the Windows operating 14 system from Microsoft. 15 Be agrees to deliver to Hitachi both a 16 boot manager where you would -- you could boot 17 up into either operating system, depending on 18 what you wanted to do, and a desktop BeOS 19 launcher. And that's -- it's an icon on the 20 desktop. 21 You're working along in Windows, 22 you're typing your letters, and you want to 23 launch Be, because now you feel like making 24 some kind of a movie, and so you just press the 25 icon and the Be operating system launches on 3721 1 the desktop. You know, just back and forth you 2 can go easily with this icon. 3 On November 11, 1998, Hitachi publicly 4 announces in Tokyo that it is including the 5 BeOS along with Windows on one model of its 6 FLORA series of desktop PCs. 7 From Be's standpoint and from Hitachi, 8 the launch is a very successful event. 9 So what happens? Hitachi eventually 10 ships a line of computers with BeOS installed 11 on the hard drive. However, those computers 12 are not configured to allow the user to boot 13 into Be. Indeed, nothing in the computer 14 startup sequence indicates that Be is on the 15 computer. 16 To start Be, the user has to start the 17 computer, start the whole computer from a 18 floppy disk and follow an involved procedure to 19 install the boot loader software and the 20 launcher -- the boot, you know the launcher, Be 21 launcher manually. 22 The packaging for the FLORA Prius does 23 not identify the Be operating system as an 24 available preinstalled operating system, and 25 there's not even a Be sticker on the machines. 3722 1 There is a sticker apparently in the bottom of 2 the box. 3 The instructions for launching the 4 BeOS on the FLORA Prius are 11 pages long. 5 Here's just the cover. This is 6 Plaintiffs' Exhibit 9137. You'll have this to 7 leaf through perhaps. 8 Even some experienced PC users cannot 9 -- they purchase the FLORA and they can't 10 figure out how to get this BeOS booted up. 11 The utilities and applications needed 12 to configure BeOS in a dual boot configuration 13 are in Hitachi's hands. 14 In November 1998, the Hitachi 15 representatives tell the Be representatives 16 that BeOS will have to be launched in this 17 floppy diskette arrangement, and Be says why? 18 Why do you no longer intend to do what you 19 planned to do, what you said that you were 20 going to do? Hitachi says it has talked to 21 Microsoft. 22 In 1998, Hitachi's license from 23 Microsoft for Windows contains a number of 24 interlocking restrictions that effectively 25 prevent it from preinstalling any competing 3723 1 operating system in a dual boot configuration, 2 which doesn't affect Windows at all. 3 We believe that the evidence will be 4 that Microsoft's standard OEM licenses all 5 contain these provisions. 6 Hitachi changes its plans and uses Be 7 in a way that is not very attractive to 8 consumers. Eleven pages of complicated 9 instruction in order to boot up is pretty 10 discouraging to most users. 11 Hitachi, we believe the evidence will 12 show, had no real choice but to not install the 13 BeOS boot manager or the boot launcher. 14 Under the terms of Hitachi's OEM 15 license with Microsoft, Microsoft conditions 16 the level of Windows discounts on whether the 17 computer shipped by the OEM start up by going 18 directly to Windows and displaying the Windows 19 desktop. 20 In order to receive these rebates from 21 Microsoft, all Hitachi machines must use what's 22 called -- and I mentioned earlier the no 23 operation boot. 24 This means the user performs no 25 operation on his or her own when the computer 3724 1 is turned on. It boots straight into Windows. 2 Hitachi's companywide discounts and 3 rebates may be in danger if it installs any 4 boot manager that would intervene in this no 5 operation boot. 6 Microsoft's licenses also require OEMs 7 to install Windows by using only Microsoft's 8 OEM preinstallation kit. That's the OPK. 9 And that automatically wipes off any 10 operating system that happens to be on the -- 11 already on the computer hard disk. And also 12 installs Windows boot loader, which can only be 13 used with Windows. 14 Microsoft's licenses also prohibit 15 OEMs from deleting or changing any part of the 16 Windows installation once it's on the hard 17 drive. And also the licenses also say OEMs 18 cannot change the Windows startup sequence once 19 Windows has begun to boot. 20 These terms prevent any OEM with a 21 Microsoft license from preinstalling any boot 22 loader other than Microsoft, or even from 23 installing a program that would allow users to 24 install the boot loader themselves by clicking 25 on an icon rather than that floppy diskette and 3725 1 11 pages of instructions. 2 The whole concept of these dual boot 3 strategy is destroyed. 4 We talked a little bit about MDAs. 5 Microsoft grants discounts on Windows 6 to OEMs who meet certain criteria under the 7 market development agreement. 8 Achieving the highest level of 9 discounts from Microsoft on Windows is 10 important to major OEMs. We've already talked 11 about this. Hardware manufacturers work on 12 very narrow margins, and the MDAs become the 13 substitute for the per processor licenses. 14 Once per processor licenses are 15 discontinued, the MDAs come into effect, and 16 according to the testimony of Professor Noll, 17 they become -- they have the same 18 anticompetitive effect as the per processor 19 licenses. 20 Microsoft -- one feature that was 21 present in the MDAs is this. Microsoft grants 22 or withholds MDAs in its sole discretion. In 23 other words, Microsoft -- you can do -- if you 24 are an OEM, you can do everything you think 25 you're supposed to to get the maximum amount of 3726 1 the rebate, but Microsoft under the contract 2 can say well, no, you really didn't, we don't 3 think you did, and therefore, we're not going 4 to give it to you. And that's a bit of a club. 5 So OEMs do not want to risk that. 6 And under Microsoft's eligibility 7 criteria, Hitachi risks not only losing its 8 Windows discount, but the ability to display 9 the Windows logo, which OEMs think is a very 10 valuable thing. You know, the little thing on 11 the computer that says whatever it says about 12 Windows. 13 Hitachi therefore does not do with the 14 Prius what it says it wants to do, and these 15 computers ship with no indication that the 16 Prius is installed except for the complicated 17 floppy disk based installation kit. 18 Not surprisingly, it wasn't 19 successful. 20 Compaq. Compaq considers licensing 21 the BeOS for use on a dual boot Windows machine 22 also early in 1998. 23 Compaq representatives tell Be that 24 Microsoft's contractual restrictions make it 25 impossible for Compaq to preinstall Be's boot 3727 1 manager or the boot launcher, the BeOS launcher 2 or for Compaq customers to boot up the BeOS out 3 of the box. 4 Even though Compaq wants to give its 5 consumers, its customers a choice of a dual 6 boot computer, the evidence will show that 7 Microsoft would not permit it to do so. 8 Microsoft also talks to many other 9 OEMs about Be. You will see the documents that 10 support that, and most, if not all, of the 11 royalty OEMs, the big OEMs receive visits from 12 their account representatives, and the topic of 13 Be is a part of the discussion. It's therefore 14 not surprising that Be runs into these brick 15 walls, one after the other. 16 So they figure out another way to go. 17 Much like GO, you know, moves over to the 18 Hobbit, Be decides to develop its product for 19 use on something called an Internet appliance. 20 The idea here is a simple and 21 inexpensive and easy-to-use device that 22 delivers Internet access and application 23 functionality through a browser interface 24 without the need for Windows. 25 Although Microsoft is a competitor for 3728 1 Internet appliance operating systems with a 2 product called Windows CE, it doesn't have a 3 monopoly share of that market. 4 Nevertheless, Microsoft views these 5 Internet appliances as a threat to monopoly -- 6 to its monopoly on the Intel PC. 7 The Internet appliances, like 8 middleware, operating system independent. It 9 doesn't care about the operating system. 10 It is made on -- it is built on 11 cross-platform Java programming language. 12 You've heard about what Microsoft did 13 to Java in the government case in your findings 14 of fact. 15 So beginning in early 1998, Be and 16 Compaq enter into confidential discussions 17 regarding the use of the Be operating system on 18 this new Internet appliance for a street retail 19 price of under $500. 20 This is back in '98. Compaq hopes to 21 build an Internet access device with this 22 instant on capability featuring this new 23 non-Windows user interface. 24 Compaq has approached Be about using 25 Be's device, and Be's engineers devote hundreds 3729 1 of hours to building a working prototype and 2 getting ready to assist Compaq in launching 3 this new Internet appliance. 4 At the joint review meetings between 5 Be and Compaq, Be is told Compaq is absolutely 6 committed to the Be device, to the Internet 7 appliance, and to launching this new product. 8 But in November of 1998, Be's hopes 9 are dashed. First of all, Compaq vice 10 president, Trey Smith, forwards to Microsoft 11 all of Be's confidential information, all of 12 its data, all of its confidential information. 13 Later in November, the same guy, Trey 14 Smith, calls Be and tells Be that Compaq is no 15 longer interested. What's happened here? 16 Microsoft chairman Bill Gates visits Compaq 17 CEO, Eckert Pfeifer, as a part of a digital 18 appliance review. 19 Here is an E-mail from Mr. Gates about 20 that meeting. 21 Plaintifs' Exhibit 2973 dated 22 November 2, 1998. 23 Mr. Gates sends it to all of his 24 executives, Ballmer, Maritz, Kempin, Fade, Carl 25 Sittig, Pete Higgins, Brad Chase. 3730 1 This is on Monday, and he talks about 2 a meeting he has with Compaq on the preceding 3 Friday. 4 The consumer group is planning to ship 5 a portal PC in the second half of 1999. At 6 present, Microsoft is not, all caps, the chosen 7 OS vendor for this machine. I tried to probe 8 and understand why not as best I could. 9 Our relationship with Compaq should 10 avoid us being in this kind of come-from-behind 11 situation. Even if we can't meet all of 12 Compaq's needs, they should come to us first 13 and be clear about what they need. 14 I told Compaq that we should focus on 15 whether we can provide the OS. Rod feels -- 16 Compaq employee. Rod feels like Windows CE is 17 not at all focused on this kind of machine and 18 is missing the multimedia and other support 19 required. 20 So Rod tells Gates exactly what he has 21 been telling the Be people, which is CE is not 22 right for this Internet appliance. 23 Mr. Gates goes on. He is talking 24 about a machine that just does browsing. The 25 way he talked about it made me feel like maybe 3731 1 the BeOS is considered a favorite -- I'm sure 2 that's supposed to be choice. 3 It would be -- this is a long memo, 4 all of which you will have. 5 It would be a big disappointment for 6 us to have another OS to be chosen here. We 7 need to get on top of this. Trey Smith may 8 give us more insight into what is going on 9 here. 10 Trey Smith, of course, is the one who 11 ships over all of Be's plans, proposals, and 12 data which no doubt gives Microsoft more 13 insight. 14 Our OEM group needs to get to the 15 bottom of this ASAP. 16 This is an aside. I thanked Rose L. 17 for all of his trips to Seattle and his 18 willingness to distract -- I'm sure it must 19 mean something else -- a lot of time for the 20 lawsuit. 21 Mr. Rose was one of Microsoft's 22 witnesses at the government case. 23 The whole meeting included my 24 one-on-one with Pfeifer at the end was very -- 25 the whole meeting, including my one-on-one with 3732 1 Pfeifer, at the end was very friendly except 2 for my really probing Schrock on portal-related 3 issues. 4 However, we help -- however, we help 5 Compaq a lot with our front-line efforts. 6 There is tension over portable PC and appliance 7 server and portal in general. 8 In this same memo, in this same 9 exhibit Microsoft estimates the annual revenue 10 for this device at between 3 and $12 million 11 per year. 12 Shortly after the meeting with Gates 13 and Pfeifer, the BeOS device is canceled. Be, 14 just like GO before it, loses a contract that 15 it thought it had replaced by a Windows product 16 that is not appropriate for the device. 17 Compaq does eventually reengage Be in 18 -- on a line of Internet appliances. I think 19 it was late in 1999. But those appliances are 20 distributed only in Europe on a very limited 21 basis and ships the Windows CE in the model it 22 ships in the United States. 23 On January 29, 1999, Microsoft reviews 24 its Windows 98 strategy. 25 Carl Stork does the presentation and 3733 1 includes a discussion of Be guided by this 2 slide. 3 This is Plaintiffs' Exhibit 9140. 4 Here are the slides that I presented 5 today. This goes to Chris Jones and David Cole 6 and others. 7 Threat potential, BeOS, what we know. 8 Intel encouraging and supporting Be to fill 9 imaging hole we are leaving. 10 We believe that is an admission by 11 Microsoft that it has no comparable product to 12 Be. 13 Hitachi now offering BeOS imaging 14 system in Japanese retail outlets. 15 That's the Prius that I told you about 16 with the floppy diskette. 17 Compaq, HP, Gateway also considering 18 BeOS played off each other. 19 Whatever Be is showing it is 20 compelling to our OEMs. 21 Be doesn't yet have 1394 digital video 22 support. 23 Let's move to Fujitsu. 24 It evaluates Be on the merits; wants 25 to use it. This is a major OEM. 3734 1 It intends to use Be only in Europe 2 and on one small line of computers. But it is 3 a foothold for Be that has so far alluded it, 4 and so it's encouraging. 5 In March of 1999, Fujitsu agrees to 6 ship the Be operating system on its silver line 7 computers. This is a high-end slick machine, 8 got an aluminum case. You'll see the picture. 9 It is well-received at demonstrations done 10 throughout Europe. 11 And both companies know -- this is a 12 new idea -- it will take some time for the 13 computer to find -- this new operating system 14 to find its market. 15 Frank Arnold is the VP of silver line 16 for Fujitsu, and he gets a visit from Ms. 17 Natalie Aires of Microsoft who explains to him 18 that Fujitsu cannot do what it promised Be that 19 it will do. 20 He will tell you by deposition that 21 Ms. Aires expresses great disappointment with 22 Fujitsu for its disloyalty and tells Mr. Arnold 23 Microsoft does not consider Fujitsu a good 24 partner as long as it is shipping even on a 25 floppy disk the Be operating system. 3735 1 Microsoft suggests the possibility 2 that they will deny Fujitsu those valuable 3 marketing development funds. 4 Be and Fujitsu struggle to find some 5 way to work together, some way to let consumers 6 choose this operating system if they want to. 7 Fujitsu tells Jean Calmon, Be's 8 representative in Europe, who tells his 9 headquarters on July 13, 1999. 10 This is Plaintiffs' Exhibit 6669. 11 The rules concerning the 12 preinstallation of BeOS couldn't be accepted. 13 It is planted to install BeOS and Windows on 14 different partitions on the hard drive as they 15 are different systems. 16 Doctor Hein, who is a Fujitsu 17 technical person. Doctor Hein doesn't see a 18 possibility to switch between the two systems 19 without rebooting the PC. Therefore, we are 20 not able to fulfill point 4, Roman numeral III 21 of the letter of agreement. 22 According to our contracts with 23 Microsoft, the boot manager has to be installed 24 in such a way that after a certain time, 25 Windows 98 is booted automatically if the BeOS 3736 1 has not been chosen, referring to paragraph 4, 2 Roman numeral IV of the contract. 3 Be's response still in 6609, there are 4 several options to boot BeOS as Doctor Hein 5 knows. 6 In paragraph 41, the user has the 7 option to choose the system he wants to boot 8 during the boot process. 9 Windows consequently can be the 10 default system and boot automatically if there 11 is no user intervention within a specified 12 period of time. 13 Computer turns on, user make a 14 decision which to use, but if the user doesn't 15 choose Be, it boots automatically into Windows. 16 Paragraph 42. Receiving equal 17 placement means both systems are installed on 18 the disk in two separate partitions and both of 19 them -- we think this is are -- both of them 20 are listed at the time of boot on the screen 21 giving user the choice of the one he wants to 22 use, but Windows can be the default operating 23 system. 24 43. Be has also a small Windows 25 application called the BeOS launcher, which 3737 1 allows a user using Windows at any time, to 2 stop using it and launch BeOS from the Windows 3 screen without rebooting. 4 Once the user is using BeOS, he cannot 5 relaunch Windows without rebooting anyway. 6 We don't see the problem for Fujitsu 7 to preinstall and deliver this nice-to-use 8 little application which in any case is on the 9 BeOS CD. 10 If Fujitsu decides not to preinstall 11 the BeOS launcher app in any case, user will be 12 able to install it from the CD and use it. 13 There is a contract -- the contract is 14 dated July 26, 1999. 15 It is Plaintiffs' Exhibit 6697. 16 I have for the most part tried to 17 avoid reading directly to you from contracts 18 because they're very dense, they're written in 19 language that is difficult to understand, but I 20 thought you would want to see this. 21 This is a contract between Fujitsu and 22 Be, and it says Fujitsu agreed to preinstall 23 and run BeOS on the silver line computers in 24 such a manner so that, one, the user has the 25 option to launch BeOS during the boot process 3738 1 provided that such launch program is not based 2 on Microsoft files. 3 Two, BeOS receives equal placement 4 with Microsoft Windows and any other operating 5 system. 6 Three, BeOS application launcher is 7 delivered separately. 8 And, four, the Be supplied boot 9 manager is installed and run on the silver line 10 computer's hard drive. 11 In order to ensure equal placement, 12 Fujitsu agrees that the machine will not use a 13 no operation boot into Microsoft Windows. 14 Microsoft prevents Be from reaching 15 the consumer in the convenient way that Be 16 designs. 17 As with Hitachi, the end user has to 18 load the BeOS from a floppy disk. There is no 19 icon on the desktop and no easy way to use the 20 product. 21 And as would be expected, the silver 22 line doesn't do very well. 23 Shortly after Fujitsu begins shipping 24 the silver line, it merges with Siemens, and 25 Microsoft contracts have to be negotiated. 3739 1 Mr. Arnold, Mr. Frank Arnold, leaves 2 in the merger period, and Fujitsu abandons the 3 BeOS. 4 Here is Exhibit 6697 dated December 5 23, 1999. 6 This is from Be, Jean Calmon to 7 Fujitsu. 8 As you know, we had signed a letter of 9 intent on July 26 which was stipulating that 10 Fujitsu could get BeOS licenses for free until 11 December 31st, provided Fujitsu had signed a 12 final license agreement with Be, Inc. 13 The latest never happened. 14 After the visit I had on November 13, 15 to Gunther Mass and Klaus Elias, I understood 16 that due to reorganization, and new strategies, 17 Fujitsu Siemens does not wish to bundle BeOS 18 operating system with their product for the 19 moment anymore. We consequently will not 20 deliver any more CDs to Fujitsu Siemens until a 21 new arrangement is made. 22 There is no new arrangement. Fujitsu 23 enters into a new contract with Microsoft on 24 January 1, 2000. 25 I want you to hear what Frank Arnold, 3740 1 the Fujitsu guy, says about the interaction 2 between Microsoft and Fujitsu. 3 Unfortunately, we do not have a 4 videotape of Mr. Arnold's deposition, and 5 English is not Mr. Arnold's first language. 6 So I'm going to read to you directly 7 from the transcript, and he does very well, but 8 I would have liked for you to have seen the 9 video. 10 Question: Now, when Fujitsu finally 11 assembled and delivered the silver line 12 computers, were they in fact configured with a 13 Be supplied boot manager on the hard drive? 14 Answer: No. We delivered the system 15 in a way that we made the preinstallation with 16 Microsoft OS. We also made a preinstallation 17 with BeOS, but in order to make Be ready to 18 run, we need to deliver a separate disk for the 19 floppy boot that the end use -- user, needs to 20 install this option by itself, by himself. 21 Question: Let me ask you, do you know 22 in fact that the computers as delivered were 23 configured in this way? 24 Answer: Yes. 25 Question: With the floppy boot? 3741 1 Answer: Yes. 2 Question: Do you know why that change 3 was made after the letter of intent was signed 4 specifying that the boot manager should be 5 configured this in this way? 6 Answer: Fujitsu needs to document how 7 the computers are configured to Microsoft. We 8 need to provide hard disks, and also we need to 9 advise the naming of all our computers. 10 And in order to fulfill all Microsoft 11 requirements in terms of contracts, we found 12 out that there is no way to use Be in a way as 13 we expected before, that we are pressed to 14 provide an additional disk when the meaning is 15 the end user needs to install the boot manager 16 by itself. 17 Question: Did somebody from Microsoft 18 tell you that installing the Be boot manager 19 would be in violation of your license? 20 Answer: Yes. 21 Question: Who was that? 22 Answer: This was in responsibility 23 Natalie Aires. 24 In the discussion also, OEM 25 application engineer, Mr. Uwer Wurtzberger, was 3742 1 involved in this discussion, and he had all the 2 informations concerning how Fujitsu like to run 3 the silver line machine and how to configure 4 the silver line machine, so that he reports -- 5 reported all information to the Microsoft 6 responsible people. 7 Question: So just to be clear, 8 Natalie Aires told you that you couldn't 9 configure the silver line computer in manner 10 described in the letter of intent with Be 11 Incorporated; is that correct? 12 Answer: She told us that there is a 13 disadvantage if we configure Fujitsu systems in 14 a way which is not according to the Microsoft 15 contract. 16 Question: What was that disadvantage? 17 Answer: The disadvantages from the 18 contract, you need to fulfill many, let's say, 19 requirements, and if you fulfill the 20 requirements, you will get some kickback at the 21 end of the year for every sold item with 22 Microsoft installed OS. 23 If you do not fulfill some mentioned 24 points from this contract, you will not get the 25 total amount of the possible amount. 3743 1 Question: Those kickbacks that you 2 referred to, are those what were referred to as 3 market development funds? 4 Answer: Yes. 5 Question: Did Fujitsu decide to ship 6 the silver line computer with BeOS in floppy 7 boot configuration in order not to lose its 8 market development funds? 9 Answer: Yes. 10 Question: Are market development 11 funds important to Fujitsu? 12 Answer: Yes. 13 Question: Why is that? 14 Answer: You can recognize if you sell 15 more than one million PCs for the market, and 16 that we have sold approximately 1.6, 1.7 17 million Microsoft-based machines to the market. 18 If you can't, one, two, or three 19 dollars for each machine which we lose at the 20 end of the year, we are talking about, big 21 amount of money. 22 And for sure, Be in the time was a 23 newcomer without any brand recognition, without 24 any market position, and there is no return of 25 investment in the very beginning for Fujitsu 3744 1 which can cover the missing money out of the 2 MDF contract from Microsoft. 3 Question: What did you understand the 4 effect would be on your market development 5 funds for all computers that you shipped if you 6 shipped a small number of computers that did 7 not conform to Microsoft requirements? 8 Answer: From our understanding, the 9 risk was, if we not respect the Microsoft 10 contracts, we have the disadvantage to lose 11 some points out of the marketing development 12 fund with Microsoft which will count to all 13 delivered Microsoft-based machines. 14 Question: And was it your 15 understanding that shipping the silver line 16 with the Be boot manager preinstalled would -- 17 could have that result? 18 Answer: Yes. 19 Question: And was it your 20 understanding that shipping the silver line 21 computer with the BeOS launcher application 22 preinstalled could also have that result? 23 Answer: Yes. 24 Question: Is that the reason that you 25 didn't do either of those things? 3745 1 Answer: Yes. 2 Be struggles on for the next year, but 3 even with the strong support of its partner 4 Intel, and just as with DR-DOS and OS/2, it 5 cannot break the lock that Microsoft has on the 6 OEMs. 7 In 2001 Be dissolves. 8 Microsoft will probably tell you it 9 really wasn't a very good product, the FUD 10 tactic. 11 Microsoft also found a Be document 12 that it showed to Mr. Arnold, and you will also 13 see it. 14 It's from a guy who -- he says Be is 15 terrible, and we're not doing a very good job 16 and so on, but the guy who writes it, the whole 17 document, he says he doesn't -- he's not an 18 expert in the area. 19 And the context of the document is 20 that he's not very happy with his supervisor. 21 Microsoft also says that nobody bought 22 the Be operating system. Well, people who buy 23 it, of course, are the OEMs, and they're locked 24 into the contracts, but even the consumers who 25 would be interested in it, they cannot use it 3746 1 in the way that it's designed to be used. 2 There's no boot manager; there's no boot 3 launcher. 4 They don't -- they might not even know 5 they've got Be on their computer, and the 6 evidence will show that Microsoft coerces the 7 two OEMs who did try to give consumers a choice 8 of using this media OS, Fujitsu and Hitachi, 9 into changing their plans, and others who 10 expressed interest are also prevented from 11 following through. 12 Microsoft may also claim that really 13 the contracts did not prevent the OEMs from 14 using the BeOS. You will see the contract. 15 Mr. Arnold will tell you what Microsoft said to 16 him. 17 You have seen some of Microsoft's own 18 internal documents on their high level of 19 concern about the Be operating system. 20 Again, the evidence will be that if it 21 was a bad product, it would have failed in a 22 competitive marketplace. 23 It failed not because it was a bad 24 product, but because Microsoft used its 25 monopoly power to crush it. 3747 1 So again, the evidence will be that a 2 product that some consumers would have chosen 3 is gone from the marketplace. 4 A product that offered unique 5 capabilities still not present, still not 6 present on Windows, never really had a chance. 7 And the evidence will be that consumers are 8 deprived of choice and innovation because 9 Microsoft breaks Iowa's Competition Law. 10 MS. CONLIN: Would this be a good 11 time, Your Honor? Two stories down. 12 THE COURT: We'll take a recess for 13 approximately ten minutes, till 10:25. 14 Remember the admonition previously 15 given. Leave your notebooks here, and we'll 16 see you in about ten minutes. 17 (A recess was taken from 10:13 a.m. to 18 10:29 a.m.) 19 THE CLERK: All rise. 20 THE COURT: You may continue, ma'am. 21 MS. CONLIN: Thank you, Your Honor. 22 Linux, this is Linux. 23 This is an operating system that is -- 24 that runs on both the desktop and on the 25 server, and it's one of the most prominent 3748 1 examples of something called open-source 2 software. 3 Unlike proprietary software systems, 4 like Windows and Apple, its underlying source 5 code is available for anybody to use, get it 6 off the Internet. You can use it. You can 7 modify it and you can redistribute it. 8 Initially it was developed and used 9 primarily by individual computer enthusiasts on 10 personal computers. 11 It has now gained some support in 12 corporations. It's been ported -- you remember 13 ported, moved to different computer platforms, 14 ranging from super computers to embedded, tiny 15 little embedded systems in tiny little devices. 16 Judge Rosenberg has already talked to 17 you briefly about the Linux system. 18 Here is Finding 50, and I promise you 19 I skipped this yesterday because I knew I was 20 going to read it to you today. 21 Although Linux has between 10 and 15 22 million users, and again remember this is 1999, 23 the majority of them use the operating system 24 to run servers, not PCs. 25 Several ISVs have announced their 3749 1 plans -- I'm sorry, several ISVs have announced 2 their development of or plans to develop Linux 3 versions of their applications. 4 To date, though, legions of ISVs have 5 not followed the lead of these first movers. 6 Similarly, consumers have by and large 7 shown little inclination to abandon Windows 8 with its reliable developer support, in favor 9 of an operating system whose future in the PC 10 realm is unclear. 11 By itself, Linux's open source 12 development model shows no signs of liberating 13 that operating system from the cycle of 14 consumer preferences and developer incentives 15 that, when fueled by Windows' enormous 16 reservoir of applications, prevents 17 non-Microsoft operating systems from competing. 18 Even today in 2006, nearly 2007, Linux 19 has a long way to go before it will imperil the 20 applications barrier to entry that protects the 21 Microsoft operating system monopoly. 22 Going back now to as early as 1998, 23 Microsoft starts to realize that Linux might 24 pose a possible threat, and Vinod Valloppillil, 25 who is a program manager at Microsoft, is asked 3750 1 by Mr. Allchin, Jim Allchin, to analyze 2 potential strategies for combatting open-source 3 software, and specifically Linux. 4 His memos are leaked to the press in 5 April -- I beg your pardon -- in October of 6 1998 and become known as the Halloween 7 documents. 8 In the document entitled Linux OS 9 competitive analysis, the next Java VM, virtual 10 machine. 11 This is Plaintiffs' Exhibit 6464. I'm 12 not going to read to you from it, I'm going to 13 tell you what it concludes. 14 What it concludes is, in general, 15 Linux is good on the server, not so good on the 16 desktop. At least not yet. 17 And the evidence will be that 18 Microsoft uses its influence in the OEM 19 channel, the computer manufacture channel, to 20 make sure that end users have a difficult time 21 buying PCs with Linux preinstalled. 22 I talked a little bit in the Be story 23 about the MDAs, which also come into play in 24 terms of Linux. 25 These discounts are not calculated 3751 1 based on volume. They are based on the degree 2 to which an OEM commits to selling Microsoft 3 products. 4 So an OEM must sell most of its 5 machines with a Microsoft operating system 6 preinstalled in order to obtain the lowest 7 price. 8 Professor Noll of Stanford will talk 9 to you about how these MDAs filled the void 10 left by eliminating the per processor licenses. 11 They are -- these MDAs are in effect 12 through 2002, about four years after Microsoft 13 starts keeping an eye on Linux. 14 Even OEMs as big as Dell computer 15 participate in this MDA program. 16 Here is -- Exhibit 9944, Exhibit 9944, 17 is a training deck that Dell uses with its own 18 folks and they send it to Microsoft. 19 This is dated March 1, 2001, and it 20 talks about the MDAs; and the question, why 21 does Dell do this? They, Microsoft, offer this 22 to every OEM, so if we don't comply, our 23 competitors could have a better priced product 24 than Dell. Our miss last year increased our 25 price box -- our price per box by $2 this year. 3752 1 In 2002 Microsoft replaces MDAs with 2 MDPs. The current version of the MDP is 3 adopted in 2003. And the MDP, according to 4 Professor Noll, retains one of the 5 anticompetitive features of the MDA. 6 And that is because these agreements 7 are vaguely worded; Microsoft has the sole 8 power to determine whether or not a particular 9 OEM qualifies for a particular discount. 10 Red Hat is one of the largest vendors 11 of Linux. Red Hat's business is built around 12 this free operating system, and the majority of 13 its revenues comes from selling support and 14 development services, not the licensing of the 15 Red Hat Linux OS. 16 Red Hat is increasingly popular on the 17 servers the back end, but Red Hat also wants 18 OEMs to offer Red Hat Linux preinstalled on 19 PCs. 20 Recall the finding from the government 21 case about how Microsoft threatens the IBM PC 22 company because IBM also sells OS/2. We went 23 through that yesterday. 24 And IBM and Gateway are not seen as 25 cooperative OEMs. Remember, also, they pay 3753 1 more for Windows licenses than more compliant 2 OEMs like Compaq. 3 Message to the industry is clear, see 4 what happens to those who do not cooperate with 5 Microsoft. 6 Michael Tiemann is the chief 7 technology officer of Red Hat. We expect that 8 Mr. Tiemann will talk to you about his 9 experience trying to convince OEMs to 10 preinstall Red Hat, Linux on the desktop. 11 In February of 2000 Mr. Tiemann just 12 becomes the CEO at Red Hat, and he goes on the 13 road to introduce himself to the major OEMs, 14 Dell, Compaq, HP, Gateway. 15 OEMs are enthusiastic about the 16 opportunities that Linux offers on the servers, 17 but Mr. Tiemann will tell you, however, that as 18 soon as he raises the subject of Linux on the 19 desktop, he has colorfully said it was like a 20 skunk walked into the room. 21 We expect also that Michael Robertson, 22 founder and former CEO of a company called 23 Linspire, will come and talk to you. 24 Linspire also offers a version of 25 Linux. This one gears more directly to the 3754 1 consumer. And he, too, will talk to you about 2 his experience going out and visiting with OEMs 3 and what they say, what they do when he 4 suggests that they should preload Linux on the 5 desktop. 6 The evidence will prove that Microsoft 7 has so distorted the markets that any potential 8 threat from Linux is blunted. 9 This brings us to the present. 10 We will prove Microsoft still has 11 monopoly power in the operating system market. 12 Microsoft is still charging monopoly prices, 13 and class members do not have the benefit that 14 competitive markets bring, including greater 15 variety, better quality. 16 There is one more aspect of the Linux 17 story. It's an example that shows what happens 18 when Microsoft faces competition. 19 It is forced to compete on price. You 20 saw this back when DRI and OS/2 were present 21 even in small numbers in the market. 22 Recently, as Linux emerges as a 23 competitive threat to Microsoft, it has been in 24 very limited areas. Mostly in developing 25 countries where governments have decided to 3755 1 make technology purchases. 2 On May 13 Richard Fade writes to Bill 3 Gates and Steve Ballmer. This is Plaintiffs' 4 Exhibit 7118. 5 Mr. Fade says, there have been several 6 situations we have been working in the past 7 three months. 8 Schools and government bids -- where 9 the organization letting the bid would be happy 10 using Windows, but is asking for naked systems 11 or Linux as a means to cut costs. 12 Naked systems in this context means a 13 computer hardware shipped without an operating 14 system. 15 In response, Orlando Ayala, Microsoft 16 executive, comments on this topic on May 13. 17 Also in Plaintiffs' Exhibit 7118. 18 By the way, it is also important to 19 say that the operating system is not the only 20 problem. We also have huge pressure in the 21 Office front. 22 Again you see the tie. 23 This is the case in the Middle East, 24 South America, $200,000 bid underway in 25 Colombia, SEA, Southeast Asia, and China. 3756 1 An E-mail from Viniay Kumar on May 31 2 outlines the situation in Malaysia. 3 This is Plaintiffs' Exhibit 8501. 4 And please remember what we talked 5 about in the beginning. The market for 6 operating systems is worldwide. So Malaysia, 7 you may find has impact in Iowa. 8 Malaysia situation. Until about six 9 months ago, there was not much of a Linux 10 threat in Malaysia. 11 In December 2001, the PM, prime 12 minister, made a suggestion at the cabinet 13 meeting that the Malaysian government should 14 evaluate Linux and open source as an 15 alternative platform. 16 It seemed that PM had been influenced 17 by very strong Linux supporters that Microsoft 18 has too much technology monopoly in the 19 government IT. 20 With the remarks by PM, it created a 21 ripple effect across the government. 22 Government and school projects started 23 considering Linux as a viable option to Windows 24 on the desktop. 25 Government saw a savings of around 10 3757 1 million from Windows by going to Linux. 2 In the school lab project, around 3 160,000 desktops and another 7 million or so 4 from Office by going to Star Office 5.2. 5 Star Office is a free Office 6 productivity suite. 7 The government in Malaysia is looking 8 at Linux and an Office Suite because Windows 9 and Microsoft Office are too expensive. 10 When it learns that the government is 11 considering -- what the government is 12 considering, Microsoft Malaysia escalates the 13 issue all the way to Bill Gates. 14 This is again in Plaintiffs' 8501. 15 Microsoft Malaysia finally raise the 16 issue to Bill G. about three weeks ago, as he 17 and the prime minister of Malaysia have a good 18 relationship, and Bill G. sits on some 19 technology advisory boards from the government. 20 Bill G. made a call to the prime 21 minister and verbally offered the following: 22 Free Windows for school, around 160,000 23 desktops, more affordable applications for 24 e-gov project with reduced licensing from $260 25 per desktop per year to $160. 3758 1 This did have an impact and Malaysian 2 government is looking at Microsoft favorably. 3 Microsoft Malaysia is working on putting 4 together a proposal for the schools and the 5 government. 6 The school lab decision will be made 7 this month, so it is critical that Microsoft 8 proposal gets submitted in the next week to ten 9 days. 10 During late May, while the Malaysia 11 situation is escalating, Microsoft executives, 12 Microsoft employees develop a program called 13 EDGI, education government incentive, that 14 would deal with situations like Malaysia. 15 Microsoft's goal is to develop a 16 program to use to fight low-cost or no-cost 17 competitors in these developing areas and to 18 keep Windows preinstalled and to stop the 19 shipping of naked machines. 20 Kris Mukerjee, who is general manager 21 of worldwide sales solutions, describes the 22 motivations Microsoft has for creating the EDGI 23 program. 24 8501. This is a big exhibit. 25 Each group was in agreement with the 3759 1 following: 2 One, do not want OEM shipping naked 3 PCs. 4 Two, do not want our Office pricing 5 deeply discounted in education government. 6 Three, do not want to lose to Linux or 7 Star Office. 8 In order to achieve these goals, we 9 came up with the EDGI proposal, which is an 10 opportunity to fund other offerings without 11 eroding our product pricing. 12 The evidence will show that Microsoft 13 will compete in price -- on price in those 14 limited areas where Linux is a threat, but it 15 will also maintain its monopoly pricing where 16 Linux is not. 17 In early June, the Malaysian prime 18 minister is preparing to choose between Linux 19 and Windows. 20 Shirley Teo, who works in Microsoft's 21 Malaysian office, in an E-mail to Bill Gates 22 and Christine Turner, who was then, and may 23 still be, Mr. Gates's personal assistant, 24 outlines a political situation. 25 This is exhibit -- this is July 5, 3760 1 2002, Exhibit 7134. 2 I have been advised that the prime 3 minister, PM, likely will make a decision on 4 Tuesday, U.S. time, at the cabinet on Linux if 5 the letter fax or phone call from Bill G. 6 reaches PM by Monday Redmond time. 7 If all happens, we would be able to 8 neutralize Linux threat in the government once 9 and for all in Malaysia. 10 Attached is a letter I have drafted 11 for Bill to fax to the PM of Malaysia. This is 12 a follow-up from the last phone conversation. 13 We have gotten approval from EDGI, 14 education and government incentive program, to 15 provide 2 million funding donation to education 16 in Malaysia to compete against Linux 17 penetration. 18 One million will be used as cash 19 donation to help build community schools in 20 rural areas. The other one million will be 21 used as part of teacher certification and 22 software donations. 23 The attached letter by Bill Gates 24 dated July 8, 2002, states the following: 25 Again, it's a long letter. You will 3761 1 have all of it. 2 Decision for the government on Linux 3 and open-source software. 4 7134. I am anxious to know about the 5 decision on the evaluation of Linux for 6 government deployment in academic and 7 e-government projects. 8 Two, education donation. I am 9 impressed with the school ICT laboratory 10 project that your government has started. To 11 add to my support to this education programs, I 12 would like to offer a donation of U.S. one 13 million to help with the building of rural 14 community schools in Malaysia. This will 15 supplement our current donations to the 16 orphanages, homes made through Microsoft 17 Foundation that has thus far dispensed about 18 U.S. 600,000 in the last three years. 19 Four, ministry of education, free 20 software upgrade. To enable all schools under 21 MOE, ministry of education, to leverage the 22 latest version of Microsoft desktop products; 23 I'd like to extend the current Microsoft 24 academic select agreement to MOE to include 25 free upgrades for all Windows and Office to the 3762 1 latest version over the next 24 months. 2 Five, government software pricing. In 3 support of the e-government deployment this 4 year, I'd like to offer a special government 5 price reduction of 37 percent on government 6 list price for Microsoft desktop applications. 7 In December 2001, the ministry of 8 finance appointed a local partner to supply 9 Microsoft desktop applications, Microsoft 10 Windows upgrade, plus Microsoft Office, plus 11 client access license to all federal government 12 agencies at U.S. $780 per desktop, inclusive of 13 three year versions upgrade. The price will be 14 effective for all government procurement until 15 December 2004. 16 Yours sincerely, Bill Gates. 17 After he reviews the letter, he says 18 we should send this on Monday. It looks fine 19 to me. 20 On July 16, a week or so later, 21 Orlando Ayala writes to general managers. 22 Mr. Ayala has responsibility for the world in 23 terms of these projects. And he outlines this 24 new education and government incentives 25 program. 3763 1 This is Plaintiffs' Exhibit 8562. 2 He says, effective immediately, we are 3 significantly enhancing empowerment by the GM, 4 general manager, to provide services and, where 5 necessary, even dollars back to the customer to 6 offset the cost of buying new OEM PCs with 7 legal Windows preinstalled -- meaning not 8 pirated -- legal Windows preinstalled instead 9 of naked PCs with Linux and/or other 10 low-cost/no-cost software. 11 In order to compete more effectively 12 against Linux and other providers on these 13 deals, we can now leverage the education and 14 government incentive, EDGI, program, to help 15 tip the scales to Microsoft in the deal. 16 After engaging the regional team, the 17 region may use funds to provide services and/or 18 rebates to the customer with the following 19 limitations. 20 Not to exceed the estimated Windows 21 royalties recognized by Microsoft from the OEM 22 selling the PC to the customer -- 23 Let me stop for a moment. 24 You know, the OEMs sell Windows. Then 25 the OEMs pay the royalty to Microsoft. 3764 1 Under the EDGI program, Microsoft can 2 give back through this EDGI program, according 3 to this exhibit, up to the total amount that 4 the OEM is paying in royalties to Microsoft. 5 While this program is available for 6 both developed and developing countries, 7 initial focus is being given to those areas 8 where economic conditions often dictate 9 low-cost/no-cost software as the only solution. 10 This would include LATAM, Latin 11 America, Africa, Middle East, South Asia, 12 including India and PRC, Peoples Republic of 13 China. 14 Ideally, this will still result in a 15 net positive on the executive P and L, profit 16 and loss, as the OEM revenues would not have 17 been realized if the deals had been lost. 18 It is essential, therefore, that we 19 use this only in deals we would lose otherwise. 20 Bottom line, do our best to show the 21 great value of our software to these customers 22 and ensure we get -- I'm sure that's paid for 23 it. Under no circumstances lose against Linux 24 before ensuring we have used this program 25 actively and in a smart way. 3765 1 One key element of the program is to 2 sink the EDGI bids with Microsoft's 3 philanthropic or community affairs efforts. 4 And Plaintiffs' Exhibit 7140. 5 It says, it is critical, therefore, 6 that the GM ensure that long-range community 7 affairs approaches are synchronized with the 8 business needs in the sub. 9 So EDGI has the added benefit to the 10 outside world as appearing to be based on 11 Microsoft generosity, but in fact the program 12 is intended only for use where Linux is a 13 threat. 14 Microsoft executives have in fact 15 insisted that this program and its successor 16 program called Partners in Learning are 17 charitable and intended to benefit developing 18 countries, but that is not what the evidence 19 will show from Microsoft's own documents that 20 create and outline the program. 21 In Exhibit 9685, David Driftmeier, who 22 is director of international operations for 23 Microsoft's education solutions groups, sends 24 the outline of the program out to the field and 25 states, shortly before MGB, Microsoft global 3766 1 briefing, Orlando sent a mail to the GMs to let 2 them know about an exciting new program to 3 equip the field with a new tool to ensure that 4 we never lose to Linux. The education and 5 government incentive, EDGI program. 6 We now need to make sure our people in 7 the field understand how and when to leverage 8 this program. 9 Please use the attachments included in 10 the original Orlando E-mail and the info below. 11 What is EDGI? 12 Do you have that? Oh, it's right 13 there. 14 What is EDGI? EDGI, pronounced EDGI, 15 is both a process for responding to large 16 competitive threats and a source of funding to 17 level the playing field between Windows and 18 Linux when a deal involves the purchase of new 19 PCs. 20 What is EDGI? There is no mention of 21 any charitable purchase. This is about beating 22 Linux. And it is not even limited to 23 developing countries, and squarely, directly, 24 and only for defeating competitors in the guise 25 of benevolence. 3767 1 Here's the one I was thinking of. 2 EDGI definition. What EDGI is. 3 A tool that supports the Microsoft 4 strategy for winning against low-cost/no-cost 5 competitors in the government and government 6 driven education space. 7 I'm not going to read the whole thing 8 to you. 9 Again, you will not see any mention of 10 any purpose other than beating Linux and 11 low-cost/no-cost software. 12 There is another feature of this that 13 bears mentioning. 14 There is a diagram that I'm about to 15 show you that portrays ways to approach this 16 sales process. 17 And it says, below is a flow chart of 18 the competitive selling process in the 19 education vertical using the empowerment 20 guidelines and this process. The give list 21 represents customer offerings that Microsoft 22 can bring to the table in closing a deal. 23 This is Plaintiffs' Exhibit 7263. 24 Do you see right as a part of the flow 25 chart, as a part of the process for using EDGI, 3768 1 the first mention there is fear, uncertainty, 2 and doubt? Fear, uncertainty, and doubt is a 3 part of Microsoft's effort to defeat Linux. 4 Written right down. 5 Plaintiffs' exhibit -- I may have told 6 you the wrong number for that. 7 That is 9685. Because seven -- EDGI 8 is not always well-received. 9 Plaintiffs' Exhibit 7263 dated 10 December 22, 2003, is an E-mail from Peter 11 Moore. 12 Mr. Moore oversaw Pacific and Greater 13 China. He writes, Subject Re: Vietnam, Bill 14 G. inquiry. 15 There are ongoing discussions with the 16 Vietnamese communist party regarding the 17 software they use to run the party offices. 18 The VCP effectively oversees the government and 19 has veto on all legislation and policy. 20 They have an issue with the price of 21 Windows licenses at U.S. 68 distributor price 22 plus channel margins. 23 We also face the challenge of Windows 24 98 being the last Windows product we have 25 localized, meaning, you know, written in 3769 1 Vietnamese. 2 The last Windows product we have 3 localized, and Windows 98 reaching end of life. 4 We tried to use EDGI to offset the 5 price of getting legal. However, it was seen 6 as a bribe. So I have offered 40,000 of 7 government program funding to cover training 8 and implementation costs. 9 So with EDGI, you will see that 10 Microsoft does compete on price when it is 11 faced with a competitive threat. 12 Mr. Hagstrom will preview for you how 13 Iowa consumers would have seen more benefits, 14 the benefits of competition like competition on 15 price, competition on quality, competition on 16 features if Microsoft had not violated the Iowa 17 Competition Law. 18 I want to talk with you briefly about 19 a concept called spoliation. 20 THE COURT: Before you do that, we 21 better take a break. 22 Ladies and Gentlemen of the jury, 23 remember the admonition previously given to 24 you. 25 At this time we'll take a recess until 3770 1 noon. Leave your notebooks here. Thank you 2 very much. 3 All rise. 4 (A recess was taken from 10:59 a.m. 5 to 12:03 p.m.) 6 THE COURT: Everyone else may be 7 seated. Thank you. 8 Ms. Conlin. 9 MS. CONLIN: Thank you, Your Honor. 10 So close. 11 The last thing I want to talk with you 12 about briefly is a thing called spoliation, 13 s-p-o-l-i-a-t-i-o-n. 14 I pronounced it wrong for many, many 15 years, but now I know how to pronounce it and I 16 know what it is. 17 Once a company is sued or thinks it 18 might get sued, if there's a reasonable 19 likelihood that it's going to get sued, it 20 needs to stop destroying documents and keep 21 ones that are relevant to the lawsuit. 22 You can see how this makes sense. If 23 there wasn't such a rule, parties would have an 24 incentive to destroy or lose evidence that 25 could hurt them at a trial. 3771 1 The rule about preserving documents is 2 so that all the documents necessary to a full 3 and fair trial are available to both sides. 4 E-mails are documents. Like a memo, a 5 report, a fax, a telegram, even a handwritten 6 document. E-mails are documents. 7 The fact that E-mails are stored 8 electronically does not make them somehow less 9 than a -- less a document than -- I wonder what 10 this is? 11 Just a little distracting here. I'm 12 thinking the CIA. 13 It also is important to understand 14 that it's okay for companies to destroy 15 documents in the ordinary course of their 16 business. 17 There's just not enough storage space, 18 obviously, if -- for companies that create 19 millions and millions and millions of 20 documents. They cannot save and store 21 everything. 22 And many documents are trivial. They 23 don't matter. There's no reason to store or to 24 save them or to store them. 25 But spoliation is destroying evidence 3772 1 when a party knows, or should know, that the 2 evidence should be preserved because of a 3 lawsuit, one that's already started, or one 4 they think is likely coming. 5 Millions of documents have been 6 produced in this case -- you know that -- 7 through a process called discovery. 8 Discovery -- Judge Rosenberg told you 9 about interrogatories and requests for 10 production of documents. 11 Discovery is the process by which each 12 side gathers information from the other asking 13 for documents like contracts, memos and 14 E-mails. 15 Only on the subjects that are 16 important to that particular lawsuit. 17 Each party is required, then, to 18 search their files and to voluntarily give 19 those documents to the other side. 20 The millions of pages of documents 21 that we have from Microsoft obviously sounds 22 like a lot, and it is a lot, but when you 23 consider a company like Microsoft, sends 24 millions of E-mails perhaps a day, it's not so 25 much. 3773 1 And we also have hundreds and 2 hundreds, maybe thousands of duplicates of the 3 very same document. And the 10,000 or so 4 documents that we will show you during the 5 trial are documents that we think are relevant, 6 helpful, representative. But we noticed 7 problems. 8 For some important topics and for some 9 important people and for some important events, 10 there are few, if any, E-mails. 11 For many of these important topics and 12 events, there should be many documents, and 13 there are not. 14 For some key people at Microsoft 15 deeply involved in various things that are of 16 importance, there are very few documents. 17 We will prove that executives at the 18 highest level of Microsoft intentionally 19 destroyed evidence relevant to the claims in 20 this case. 21 Microsoft erased the computer files of 22 employees whose conduct matters to this case 23 and developed corporate policies to assure that 24 some harmful documents were simply not 25 preserved at all. 3774 1 All of the documents that were 2 produced, or should have been produced, in the 3 government cases and in some other cases such 4 as the DRI and Netscape, Sun, they were also 5 supposed to be given to us in this case. The 6 conduct at issue in those cases is at issue in 7 this case. 8 So if Microsoft destroyed documents 9 during those cases, they destroyed documents 10 which should have been produced to us in this 11 case. 12 Also, we will prove that Microsoft 13 ordered -- Microsoft ordered people to get rid 14 of documents, deleted internal mails, adopted 15 corporate policies, to make sure that at least 16 some harmful evidence was eliminated. 17 Employees at Microsoft are alerted to 18 investigations and pending lawsuits. 19 Take a man named James Plamondon. I 20 believe I am not pronouncing his name right. 21 But it's Plamondon, P-l-a-m-o-n-d-o-n. 22 He was a Microsoft technical 23 evangelist. That is a term that you've heard. 24 He's the guy who goes out to 25 independent software vendors to spread the word 3775 1 about Microsoft and explain how its technology 2 works and then sell them on the benefits of the 3 products. 4 Mr. Plamondon gives a speech to 5 assembled other evangelists about what he calls 6 power evangelism. 7 During his lecture he warns other 8 Microsoft evangelists of the consequences of 9 using E-mail. 10 He tells them, use the phone, E-mail, 11 faxes, whatever widely. 12 People tend to get stuck in an E-mail 13 rut here, and they only deal with other people 14 by E-mail, and that's a big mistake. 15 Telephone; when you just call somebody 16 on the phone, they tell you stuff they would 17 never write down in an E-mail. E-mail is 18 discoverable. The Justice Department, whoever, 19 can say, send me every E-mail that you've ever 20 written on this topic, right? It just gets 21 pulled off the backup server and the guy who 22 wrote it has no clue. 23 E-mail is just like, you might as well 24 send a stamped self-addressed copy to the 25 justice department every time you send E-mail. 3776 1 Chris Phillips is a business 2 development manager at Microsoft. He begins 3 working at Microsoft in 1994. 4 He meets with his counterpart at 5 Apple, Tim Schaaff, in October of 1997 to 6 discuss the progress of licensing certain video 7 technologies and how Microsoft and Apple might 8 agree not to compete in the area of multimedia 9 software. 10 At the end of the meeting the 11 discussion turns toward how Microsoft views the 12 issue of saving E-mails. 13 Mr. Schaaff gives the following 14 account of the meeting with Chris Phillips. 15 I'm sorry that I don't have the video 16 for you. I'm going to be reading this one. 17 Question: Did Mr. Philips say 18 anything else in this conversation? 19 Answer: He indicated -- he -- at the 20 end of the meeting we had a more informal 21 conversation about what was going on at 22 Microsoft relative to the lawsuit that I had -- 23 that had just recently been filed, I believe 24 relating to Java, and I was -- 25 Question: Sun's lawsuit? 3777 1 Answer: Sun's lawsuit against 2 Microsoft. 3 And I was just inquiring what the mood 4 at Microsoft was and how people inside of 5 Microsoft viewed this lawsuit. And his 6 response to that was interesting. 7 I mentioned it in this previous 8 deposition as well. He indicated that there 9 was a point of view inside of Microsoft fairly 10 widely held that these kinds of investigations 11 generally did not threaten Microsoft terribly. 12 There was a sense that the pace at 13 which the investigations proceeded relative to 14 the pace at which technology moves ahead were 15 so -- there was such a discrepancy between the 16 two of them that by the time the Department of 17 Justice or other, you know, kinds of governing 18 bodies that might have a stake in what occurs 19 here -- by the time they were able to figure 20 out what was really going on, that it didn't 21 matter if they understood the whole picture 22 because Microsoft would -- it wouldn't matter 23 anymore. 24 Effectively, whatever the issue was 25 that was at stake, however it ended up being 3778 1 resolved, the technology would have moved ahead 2 and it would sort of be moot. 3 So I recall this mainly because I was 4 sort of surprised at the open expression of 5 this kind of cynicism about the process and 6 arrogance that Microsoft would be able to -- 7 could get away with these things, and they were 8 able to assume that everyone else would not 9 move fast enough to ever be able to stop them. 10 And by the time the facts actually came out, it 11 wouldn't matter. 12 Question: Did he say anything else in 13 that part of the conversation? 14 Answer: Well, the other interesting 15 thing that he, Chris Phillips, stated at that 16 time was -- and I don't recall exactly how this 17 particular point came up, but he indicated that 18 part of what made -- part of what made it 19 difficult for people to track what Microsoft's 20 thinking was on particular topics was that 21 there was an understanding that you don't -- 22 you don't necessarily save all your E-mails. 23 He was talking about himself. And my 24 understanding was that that was a view that was 25 held more broadly within the company. 3779 1 And the point of view was that you 2 don't save all your E-mails because those 3 create a paper trail that can be used against 4 you in many of these cases, and that that was a 5 lesson he had learned early on in his time at 6 Microsoft. 7 Documents are deleted off Microsoft 8 computers during the government investigations, 9 the DOJ cases and other cases, and it's 10 happening at the highest levels of Microsoft. 11 We will prove that it was done by 12 senior Microsoft executives like Jeff Raikes, 13 he is the vice president of office systems and 14 involved with the management of word 15 processing, spreadsheets, and other 16 technologies. 17 On an E-mail he sends to Bill Gates, 18 and this is Plaintiffs' Exhibit 9437, this is 19 November of 1990, please delete after reading 20 so it is not on any E-mail backup. 21 Joachim Kempin is vice president of 22 the OEM group at Microsoft. You remember him. 23 On an E-mail he sends to Bill Gates, 24 he writes -- and this is Plaintiffs' Exhibit 25 2197 -- don't keep this mail. Don't forward 3780 1 it. Delete it. 2 And the man in charge, Bill Gates -- 3 this is Plaintiffs' Exhibit 496, I rate the 4 chance of Jack suing us to get more on -- to 5 get more -- suing us to get more as 80 percent. 6 Don't save this mail because of that, but that 7 is my feeling. This is Gates to Mike Maples. 8 MR. TULCHIN: Object to this, Your 9 Honor. 10 There's no showing that any of this 11 comes at a time when it's relevant to any 12 pending or threatened litigation. 13 THE COURT: Overruled. 14 Continue. 15 MS. CONLIN: Thank you, Your Honor. 16 Besides Chris Phillips, other 17 Microsoft executives also delete all of their 18 mail, like Eric Engstrom, who started at 19 Microsoft in 1991 as an evangelist, like 20 Plamondon. You may remember him from the DOJ 21 government case. 22 Mr. Engstrom says that he regularly 23 deletes all his E-mails from the previous two 24 months. 25 In 1998, Mr. Engstrom testifies as 3781 1 follows. 2 (Whereupon, the following video was 3 played to the jury.) 4 Question: What -- do you retain your 5 -- what's your policy with regard to E-mail 6 retention? 7 Answer: I tend to remove E-mail off 8 my machine after approximately two months. 9 Question: And do you go through and 10 delete them one by one or do you have an 11 automatic delete? 12 Answer: What I do is every month I go 13 mark all the ones from the last month and just 14 whack them. 15 (Whereupon, playing of video was 16 concluded.) 17 MS. CONLIN: He confirms his E-mail 18 practices again in 1999. During the government 19 trial he testifies, quote, what I do is I 20 delete mail that is two months old on a regular 21 basis. As a routine basis, I delete all mail, 22 you know, two months old. 23 But five years after leaving 24 Microsoft, when Mr. Engstrom has his own 25 company, financed in part by Microsoft, and 3782 1 when Microsoft's document retention practices 2 are under scrutiny he testified quite 3 differently. 4 (Whereupon the following video was 5 played to the jury.) 6 Answer: It was not my policy to mass 7 delete my E-mails. There was only one time 8 that my E-mails have any break in them at all, 9 and that was literally because of a hardware 10 failure, but I tend to keep most of my E-mail 11 because it is on the whole a very useful source 12 of information to conduct the business. 13 (Whereupon playing of video 14 concluded.) 15 MS. CONLIN: Engstrom was the general 16 manager of the Windows client and collaboration 17 division from 1997 until he left in 1999, and 18 his conduct during 1997 proves to be key to the 19 government's case and to the claims in this 20 case. 21 He had interaction with Intel and 22 RealNetworks, among others, and we are missing 23 most of Mr. Engstrom's E-mail. We have some. 24 MR. TULCHIN: Objection, Your Honor. 25 There's just no evidentiary basis for 3783 1 that. 2 THE COURT: Opening arguments, it's 3 not evidence. Overruled. 4 MS. CONLIN: We are missing most of 5 Mr. Engstrom's E-mails. 6 We have some E-mail that Mr. Engstrom 7 sent to others that came -- that we got from 8 the others, but not from Mr. Engstrom. 9 Steve Ballmer, Microsoft's CEO, 10 deletes both incoming and outgoing E-mail. 11 Several months after Microsoft filed a 12 trademark lawsuit, Microsoft filed a lawsuit 13 against the manufacturer of a competing 14 operating system called Lindows. 15 Mr. Ballmer engages in an E-mail 16 discussion with Bill Gates about the Lindows 17 operating system and also receives an E-mail 18 from Mr. Allchin about the competing product of 19 all the E-mails he has sent and received. 20 He has a total of about 35 left on his 21 computer on the date of his deposition in this 22 Lindows case, but none of them are about 23 Lindows. 24 Ballmer practices this -- passes this 25 practice on to a man named John Ludwig and 3784 1 others. 2 Ludwig is a corporate vice president 3 who Ballmer hires back in 1988. 4 Ludwig says soon after he starts 5 Ballmer advises him not to save E-mails, and 6 Ludwig adopts that practice. 7 You will see that E-mails are 8 deliberately and permanently erased from Bill 9 Gates' computer. Deleting E-mails is quite 10 literally in the job description of Mr. Gates' 11 technical assistant. 12 This is Plaintiffs' Exhibit 7361. 13 This is the job description for Bill 14 Gates' technical assistant, and it says, it is 15 a corporate policy not to make a permanent 16 record of Bill's works. 17 This task of making sure there is no 18 permanent record of Mr. Gates' work is left to 19 this technical assistant. The job duties of 20 the technical assistant require him to delete 21 E-mail files from Mr. Gates' computer weekly. 22 In part, the technical assistant does 23 this by deleting Mr. Gates' E-mails that is -- 24 E-mail older than two months. 25 You can see routine tasks -- 3785 1 Can you put that up, please, Darin? 2 Routine tasks for Bill's technical 3 assistant. Any mail in Bill's in-box folder 4 that is older than two months is deleted, 5 except for those items that are red-flagged. 6 Any mail in Bill's sent items folder 7 that is more than three weeks old is deleted on 8 both the local store and the server. 9 Any mail that is in Bill's deleted 10 items folder is deleted permanently. 11 And again that is 7361. 12 There is an exception to this policy 13 for when Mr. Gates is under document retention 14 for litigation, that means when he has been 15 notified by the legal department that he's 16 supposed to save documents for a particular 17 case and for a particular -- and of a 18 particular type, but we will prove that 19 frequently people who should be saving their 20 documents are not told to do so. Sometimes 21 never told to do so. And sometimes not told to 22 do so for months, or even years, after 23 litigation begins. 24 So whatever practices they have about 25 deleting E-mail, every three weeks or every two 3786 1 months, like Mr. Engstrom is whacking it, just 2 go right on doing it after litigation has 3 begun, and they're supposed to be saving E-mail 4 related to that litigation. 5 The server is where electronic 6 documents are stored and can be shared among 7 multiple users and where employees can save 8 their files, including at some points E-mail 9 files. 10 Employees use space on one or more 11 servers, and those servers are backed up every 12 day. They're backed up so that in case a crash 13 occurs or some catastrophic event occurs, those 14 materials can be retrieved and replaced. 15 They are a snapshot of the contents on 16 the server. So when an employee saves a 17 presentation, a document or an E-mail to the 18 corporate server, it is possible to get it 19 back. 20 In December of 1996, Mr. Gates' 21 technical assistant asks Microsoft ITG, 22 information technology group, to retrieve and 23 print out several backup tapes of Mr. Gates' 24 files, and that is done. 25 In the process, ITG discovers that 3787 1 there are E-mail files from 1996 on the tape -- 2 on the backup tape despite a Microsoft policy 3 that you will see that says don't put your 4 E-mails on the server subject to backup. 5 What happens is ITG makes the tapes 6 with the E-mails on them available to 7 Mr. Gates' technical assistant who returns them 8 several weeks later. 9 At the time that the tapes are 10 restored and have Mr. Gates' E-mails on them, 11 DRI, called Caldera, has filed its lawsuit 12 against Mr. Gates, and Mr. Gates is under 13 document retention for that case. 14 Just months later, Microsoft is also 15 involved with litigation with Sun, that you've 16 heard Mr. Schaaff talk about, and as part of 17 that discovery process, Sun asks Microsoft to 18 produce documents from the top three officers, 19 Mr. Gates, Mr. Allchin, and Brad Silverberg. 20 I should restate that. From three top 21 officers, Gates, Allchin, and Silverberg. 22 Microsoft produces less than one 23 banker's box full of documents, and so Sun goes 24 to Court and asks the Court to make Microsoft 25 search these backup tapes, these tapes that are 3788 1 made from the server that are backup tapes. 2 So Microsoft is -- the Court says 3 you've got to do that. 4 Microsoft searches the backup tapes 5 for responsive documents, including E-mails 6 from Mr. Gates, Mr. Silverberg, and 7 Mr. Allchin. 8 Microsoft ITG finds, restores the 9 backup tapes to recover those E-mails. 10 Included within that court order are 11 the very same tapes that have been made 12 available to Mr. Gates' technical assistant 13 some months before, but now there are no 14 E-mails on them. They are gone. 15 Mr. Gates' E-mail files are missing. 16 Where they should have been, there are empty 17 folders. 18 Microsoft's representative, Mark 19 Johnson, testifies in a 30(b)(6) deposition -- 20 that's a deposition where the corporation 21 designates someone to testify on its behalf. 22 He's the guy who has done the 23 restoration, and he's also the guy that makes 24 available these tapes before that to Mr. Gates' 25 technical assistants. And here is his 3789 1 deposition. 2 I start a little bit earlier, Darin. 3 Question: You said that you 4 identified two files from the server that were 5 backed up and that backup was in the 6 September-October '96 time frame. Those were 7 PST files that had nothing in them, right? 8 And he nods his head. 9 Question: How did you learn that 10 these files were backed up? What led you to 11 these two particular files? 12 Answer: That was a phone call I 13 received from Mr. Gates' technical assistant 14 requesting to look at the catalogs. 15 Question: Back at the time when he 16 asked for this catalog and you delivered to him 17 the catalog for some time frame in '96, did he 18 at that time ask you to restore any files? 19 Answer: Yeah. 20 Question: Okay. What files did he 21 ask you to restore? 22 Answer: The entire contents of the 23 tape. 24 Question: Were you able to do that? 25 Answer: Yes. 3790 1 Question: What did you do with the 2 data? 3 Answer: I granted him access to it, 4 and that was it. 5 Question: So at the time, he didn't 6 select any particular files listed in the 7 catalog for you to restore? He asked you to 8 restore everything? 9 Answer: Correct. 10 So in December of 1996, the Gates 11 E-mails are on the backup tape. 12 Then. 13 Question: Now, when you just did the 14 restore recently of the two particular files, 15 those two files that you attempted to restore 16 recently were within the time frame that you 17 had previously restored; is that correct? 18 Answer: Correct. 19 Question: And when you tried to 20 restore those two files, did your program 21 generate an error message? 22 Answer: Yeah. 23 Question: Are you certain that that 24 meant that the files, that the data didn't 25 exist? 3791 1 Answer: Yeah, yeah. 2 Question: Subsequently when you went 3 to look at the tape, the data from those two 4 files wasn't there anymore? 5 Answer: When we were requested by 6 counsel to restore those files recently, it was 7 then when we got these errors that I recalled 8 what had taken place. 9 Question: Do you believe those two 10 files were erased by Mr. Gates' technical 11 assistant? 12 Answer: It's only an assumption. 13 Question: Would that be your 14 conclusion? 15 Answer: Probably. 16 In June of 1996, Microsoft's chief 17 counsel, Mr. Neukom, sends an E-mail out to 18 Microsoft employees about document preservation 19 efforts. And after that, the ITG becomes OTG, 20 operations and technology group, and the backup 21 policy changes. 22 It says -- and this is Plaintiffs' 23 Exhibit 5822. 24 ITG policies. And what it says is, 25 due to legal issues, mail files cannot be 3792 1 stored on any corporate servers that are backed 2 up to tape. 3 In other words, these are -- these PST 4 files, which are the files -- that's the 5 extension for E-mail, they cannot be put on 6 servers that are backed up to tape. They 7 cannot be placed where the backup system will 8 pick them up and back them up. 9 Helen Sanders is the corporate records 10 manager at Microsoft who oversees the storage 11 and retention of documents. 12 She testifies that when she starts in 13 1992, there is a hold on destruction of 14 documents. That hold is lifted in 1998. 15 Despite ongoing litigation, including 16 the Department of Justice antitrust lawsuit and 17 related lawsuits, Microsoft begins destroying 18 years of -- years of documents. 19 Microsoft is fully aware the year 20 before -- and we will prove this -- the year 21 before Microsoft is under investigation by the 22 Department of Justice is fully aware of that, 23 and that is in 1998 that this corporate hold is 24 lifted, and years and years worth of documents 25 begin being destroyed. 3793 1 I'm moving from one year to another 2 and one case to another. 3 We have -- there will be a great deal 4 of evidence with respect to this subject 5 matter, but I'm only giving you a few examples 6 at this time. 7 One of which is an E-mail from Jim 8 Allchin, whose name you've often heard. 9 The government case findings of fact 10 which have been read to you were filed in 11 November of 1999, but the case continues for 12 several more years. 13 There are several other cases pending 14 against Microsoft, and this ongoing litigation 15 requires of Microsoft that they preserve 16 relevant information. 17 Top Microsoft executives Brian 18 Valentine and Jim Allchin in January of 2000 19 issue the following order to employees to 20 delete all E-mail from their computers after 30 21 days. 22 This is Plaintiffs' Exhibit 6704, 23 January 22, 2000, from Brian Valentine, senior 24 vice president Windows division. 25 But we should really be using wise 3794 1 E-mail retention practices of keeping nothing 2 older than 30 days of old E-mail. I mean this. 3 Purge every 30 days. 4 He says, I personally only keep 15 5 days. And then he sends them out a property 6 page so they know that. Get rid of it. Don't 7 store it in PSTs. Don't keep it around. Just 8 get rid of it. And he tells them how to do 9 that automatically. 10 This directive is issued weeks after 11 the finding of fact in the government case 12 which refer to so many E-mails in support of 13 anticompetitive acts by Microsoft. 14 Valentine's order requires employees 15 to get rid of all E-mail after 30 days no 16 matter where it is. And it is unequivocal. 17 Mr. Allchin, who is group vice 18 president platforms product group, approves of 19 Mr. Valentine's order and sends another 20 follow-up E-mail on January 23, 2000. This is 21 Plaintiffs' Exhibit also 6704. 22 He says, being even more hard core, 23 this is not something you get to decide. This 24 is company policy. Do not think this is 25 something that only applies to a few people. 3795 1 Do not think it will be okay if I do this, it 2 hasn't caused any problems so far. Do not 3 archive your mail. Do not be foolish. 30 4 days. 5 There are, we think, thousands of 6 employees in the Windows division, and they are 7 ordered, company policy ordered, to delete 8 E-mail after 30 days at a time when Microsoft 9 is litigating many cases involving antitrust 10 violations. 11 Apparently Mr. Allchin gets a lot of 12 questions about this policy. He consults with 13 Microsoft's attorney, Tom Burt, and others, and 14 five days later, Mr. Allchin sends out another 15 E-mail, this time to the entire platform 16 products group. 17 It is Plaintiffs Exhibit 7418. 18 He says, I've contacted legal and HR. 19 To the best of your ability, I would 20 like us to follow the general rule of around 30 21 days for E-mail. I want you to think about 22 this issue at least once a month and delete 23 items that are no longer needed, including all 24 your general E-mail. Don't just blindly 25 archive E-mail. 3796 1 And Mr. Allchin adds that the 30-day 2 policy is overridden if legal gives individuals 3 specific instructions to retain certain 4 documents. Like the retention notices I talked 5 about. 6 But again, we will prove that many 7 employees just don't get retention notices, 8 even though Microsoft is aware that they have 9 relevant information or get them long, long 10 after litigation is started. 11 Just days after this Iowa class 12 members filed this lawsuit, February 18, 2000, 13 and it is important that Microsoft employees 14 receive notices promptly, not just because 15 everyone in the Windows division has received 16 this Allchin -- these Allchin E-mails, but 17 because employees throughout Microsoft are 18 still getting rid of E-mail. 19 Employees like Jeff Bogdan. This is 20 Exhibit 2674. 21 He says, end brain dump. With that 22 said, delete this mail. This is in '97. 23 Here is Exhibit 6678. 24 Let me see the date on that. 25 That's 2000, June 14, 2000. This is 3797 1 from Dave Fester, general manager of the 2 digital media division. 3 He writes, no more replies on this 4 alias. We need to keep all of this off the 5 airwaves. 6 Two years after Iowa class members 7 filed this lawsuit against Microsoft, and while 8 Microsoft is under a document preservation 9 order from the multidistrict litigation, the 10 backup operations manager in the OTG, 11 operations and technology group, is a guy named 12 Doug Brown. 13 He posts the following policy not to 14 save E-mails to servers that are backed up to 15 tape on the company website. 16 This is Plaintiffs' Exhibit 7416. 17 And once again, he says, due to legal 18 issues, mail files, PSTs, cannot be stored on 19 any -- on any corporate servers that are backed 20 up to tape. This applies to all servers in the 21 data center. 22 You'll hear a lot more about Mr. Brown 23 and what he does and says in the course of the 24 evidence, but one of the things that he does is 25 he tells a guy named Calvin Keaton, who is a 3798 1 Tier 2 backup operations manager, that 2 Mr. Brown is in favor of activating a computer 3 program to automatically delete E-mails -- I 4 beg your pardon -- automatically exclude 5 E-mails from servers. 6 This is 9284. This is dated March 25, 7 2003. From Mr. Brown to Mr. Keaton and others. 8 Hi, Calvin, it was my understanding 9 that PST was supposed to be excluded on all NSE 10 machines -- all NSE masters worldwide. 11 If it is not set that way in Puget 12 Sound, then I'm in favor of implementing this 13 today, March 25, 2003, to which Mr. Keaton 14 replies, also 9284, we'll make the change. 15 Mark Johnson, the ITG technician that 16 I talked about earlier who discovered the 17 missing Gates E-mails is being copied on these 18 E-mails between Mr. Brown and Mr. Keaton and he 19 reviews them -- he reviews for Mr. Keaton and 20 Mr. Brown Microsoft's practice of excluding 21 E-mails automatically from backup and advises 22 that the practice is not to protect data. 23 The practice of eliminating E-mails 24 from backup, according to Mr. Johnson, is to 25 reduce the amount of damaging evidence that can 3799 1 be used against Microsoft in litigation. 2 This is Plaintiffs' Exhibit 9284. 3 This is in 2003. 4 Make that a little bigger, if you can. 5 He says -- this is Mr. Brown 6 speaking -- the drive behind not backing up 7 PSTs and MMFs -- an earlier extension for 8 E-mails -- the drive behind not backing up PSTs 9 and MMFs before that is aimed at reducing, 10 eliminating the possibility of damaging 11 evidence that could be used against Microsoft 12 in litigation and not to protect users' data in 13 my opinion. 14 Brown -- remember, they're talking 15 about activating an automatic exclusion. 16 Brown brings the matter to the 17 attention of his boss, Sunjeev Pandey, and gets 18 approval to activate the program. 19 And later that day, on March 25 2003, 20 Doug Brown tells Calvin Keaton to activate the 21 program to automatically exclude E-mails from 22 backup. 23 He tells him in Plaintiffs' Exhibit 24 9284, please move forward with this. 25 And it's done. All of the E-mails on 3800 1 servers are now excluded from the backup tapes. 2 The switch is flipped during this case and many 3 others. 4 This is, as I said, a very brief 5 sample of Microsoft's activities concerning 6 spoliation. Evidence destruction. 7 We will prove that despite the 8 requirement that companies preserve all 9 relevant documents, and despite repeated 10 requests from opponents, and despite Court 11 orders, Microsoft continues to destroy the 12 documents that it has an obligation to keep. 13 Microsoft may say about its document 14 destruction that Plaintiffs have virtually all 15 Microsoft documents because it's produced such 16 a massive number of pages. But sheer volume is 17 not; important content is. 18 The question is, did they destroy some 19 documents that are important for us here? 20 Most of the trial exhibits that you 21 will see are E-mails. 22 They are trial exhibits because 23 they're candid. They document Microsoft's 24 expressions of opinion about strategies, 25 intent, actions, and it is that candid material 3801 1 that Microsoft deletes. Or fails to back up. 2 Microsoft will tell you that its 3 employees could keep E-mail in lots of 4 different places, and we will prove to you that 5 every single place where employees could have 6 kept their E-mail is affected by Microsoft's 7 policies. 8 Microsoft will tell you there's 9 nothing wrong with policies to erase data that 10 it has no obligation to keep, and they will 11 probably tell you that no employees were 12 improperly deleted, and that when Microsoft 13 learned of actual or threatened litigation, it 14 retains the information that it reasonably 15 believes is likely to be relevant. 16 We will prove that is simply not true. 17 We will give you the names of people 18 who are involved in particular litigation, and 19 we will show you that they were either never 20 placed under litigation retention or not placed 21 under litigation retention for the cases in 22 which they were involved. 23 We do have a robust evidentiary 24 record, and we have some E-mails from these 25 people. Not from their files, but from the 3802 1 files of people to whom they sent them. 2 Microsoft may tell you that we can't 3 prove that any E-mails relevant to this case 4 were actually destroyed. 5 What we can tell you usually is whose 6 E-mails were deleted, and sometimes when and 7 what activities those individuals were involved 8 in, but because the E-mails were destroyed, of 9 course, we cannot say for sure what was in 10 those E-mails. 11 We don't have them. That's the point. 12 We should have them. Microsoft had them. 13 Microsoft deleted them to avoid producing them 14 in Court, we believe the evidence will show, 15 and Mr. Johnson says that directly. 16 The drive behind not backing up PSTs 17 and MMFs before that is aimed at reducing, 18 eliminating the possibility of damaging 19 evidence that could be used against Microsoft 20 in litigation and not to protect the users' 21 data in my opinion. 22 We will prove that Microsoft's 23 evidence -- that Microsoft intentionally 24 destroyed E-mails or failed to save E-mails to 25 prevent opponents from having access to those 3803 1 documents. 2 Almost done. 3 I'm going to do a little conclusion. 4 There were people who thought I should 5 gather up some of the clips from the videos and 6 show them to you again. You will be happy to 7 know I overruled that. 8 I know I appreciate so much your 9 attention and your patience. 10 Microsoft on the -- the evidence will 11 be that Microsoft unlawfully monopolized the 12 market for personal computer operating systems, 13 for spreadsheets, and for word processing. 14 Microsoft's abuse of its monopoly 15 power caused harm to Iowa citizens. 16 Microsoft used its unlawful monopoly 17 to raise prices, and Microsoft increased the 18 risks of viruses and worms to stop competition, 19 and consumers had to spend time downloading 20 patches and doing other things to protect their 21 system. 22 The Court has required of you that you 23 accept, and it has already been proven, that 24 Microsoft illegally monopolized the operating 25 system market from mid-1995 to mid-1999 by 3804 1 eliminating the middleware technology such as 2 Netscape Navigator and the Java class 3 libraries. 4 And I have told you and shown you what 5 Microsoft did to some more of its competitors. 6 It used the same tactics against DRI, GO, OS/2, 7 against RealNetworks, the creator of streaming 8 media against Lotus, once a leading developer 9 of spreadsheet software; WordPerfect, once a 10 leading developer of word processing software. 11 It used the tactics against Be, who 12 developed an operating system to enhance video 13 and audio technologies, and it is using those 14 tactics against Linux, an operating system 15 developed by people all over the world and 16 offered over the Internet for free. 17 And it used those tactics against 18 others. We will offer you proof. I have not 19 covered those in my opening, but we will be 20 presenting evidence about those things. 21 One of the reasons for showing you so 22 many documents is -- and these are mostly 23 internal Microsoft documents that deal with 24 Microsoft's various illegal activities -- is 25 because Microsoft may be able to come up with 3805 1 some reasons for some of those excuses, 2 explanations, for a few of them, and they're 3 sure to tell you about those few, but we 4 believe that this shows, and that the evidence 5 will show, a continuing pattern and practice of 6 anticompetitive conduct that spans decades and 7 many products, many companies. 8 The evidence will show that illegal 9 activity is a part of Microsoft's corporate 10 culture, not just condoned, but encouraged at 11 the highest levels. 12 We believe the evidence will be that 13 Microsoft does business by breaking the law. 14 It has leveraged the initial operating 15 system monopoly that it got back in 1981 when 16 IBM selected MS-DOS as its operating system. 17 It has leveraged that initial monopoly into new 18 monopolies in word processing and spreadsheets 19 and office productivity suites. 20 It has distorted the software market 21 and eliminated any new creative product that 22 threatens its dominance. 23 Again, I thank you for your patience 24 when I began. I did not set out to break the 25 world's record for opening statements. 3806 1 I hope that you will find the 2 information that I provided useful to you as we 3 go through the evidence. 4 As I mentioned, we will try to present 5 the evidence kind of in -- you know, in the 6 same way that I have done the opening 7 statement, but that will not work out. 8 As you have learned, sometimes things 9 are unpredictable in a lawsuit, and you know 10 people can come when they can come and so on, 11 but I hope that this road map, this view will 12 help you to sort all that out; and again, I 13 thank you, thank you very much for your 14 patience. 15 THE COURT: Mr. Hagstrom? 16 MR. HAGSTROM: Thank you, Your Honor. 17 There is a huge value to a monopoly, 18 and we have the position and skills that it 19 makes sense for us to shoot for. 20 These are not my words, but the words 21 of Nathan Myhrvold, an individual that you've 22 heard about already. 23 Microsoft violated the Iowa 24 Competition Law, and Judge Rosenberg told you 25 about how Microsoft violated the law, and 3807 1 Ms. Conlin described additional ways that 2 Microsoft violated the law. 3 And the evidence in this case will 4 show that Microsoft's illegal conduct has 5 adversely affected each of the relevant markets 6 in this lawsuit for the entire time frame of 7 the class period, which is May 18, 1994, 8 through June 30, 2006. 9 Now, why would Microsoft do these 10 things? Why would it engage in anticompetitive 11 activity? Why would Microsoft break the law? 12 To make money, lots of money, lots of money, 13 more money than it would have made had it not 14 broken the law. 15 Huge value to a monopoly. That's 16 huge, not just big, not just large, but huge. 17 And value, value means money. 18 To Microsoft, there is a huge value to 19 a monopoly. It's good for Microsoft. 20 Microsoft made more money than it would have 21 made had it not engaged in the anticompetitive 22 conduct. 23 While that's good for Microsoft, it's 24 not so good for Iowa class members. 25 Microsoft knew there was huge value to 3808 1 a monopoly. It did not want to risk competing 2 on the merits. Instead, it broke the law and 3 unfairly engaged in exclusionary conduct to 4 exclude the competition. 5 MR. TULCHIN: Your Honor, again I 6 object. 7 There is nothing anticompetitive about 8 unfair competition as we've talked about. 9 I think counsel should stick to the 10 Court's instruction on the law. 11 THE COURT: Sustained. 12 MR. HAGSTROM: This is why we are 13 here, because Iowa -- because Microsoft has 14 broken the law. 15 Microsoft's conduct eliminated the 16 competition. It eliminated choice, and without 17 choice, class members paid more. 18 How much more? Based upon three 19 methods used by one of our economic experts, 20 the average of those three methods shows $329 21 million more. That's $329 million more for 22 Microsoft operating systems, word processing 23 spreadsheet, and Office Suite products. 24 And, of course, the question is where 25 did that money come from? Came from Iowa class 3809 1 members, individuals, businesses, large and 2 small. 3 Because Microsoft could not have 4 charged as much for that software had it not 5 broken the law, that illegal overcharge 6 rightfully belongs to the Iowa class members. 7 Additionally, Microsoft's illegal 8 conduct caused Iowa consumers additional harm. 9 Microsoft's anticompetitive conduct 10 caused Iowa class members to suffer additional 11 damages in the form of increased security 12 vulnerabilities. 13 In order to destroy the competitive 14 threat from Netscape, at that time the industry 15 leader in browsing, Microsoft illegally bolted 16 Internet Explorer to the operating system, and 17 that was established in the government case. 18 Microsoft's illegal actions against 19 Netscape made for the purpose of protecting its 20 monopolies made Windows less secure. 21 Iowa class members suffered tens of 22 millions of dollars as a result of that 23 increased security vulnerabilities. 24 Good afternoon. 25 My name is Rick Hagstrom. I'm from 3810 1 Minneapolis, Minnesota. I'm with a law firm 2 called Zelle, Hofmann. 3 I live with my family in a suburb of 4 St. Paul, Minnesota, and I have the honor and 5 privilege of being here, along with Ms. Conlin 6 and a number of other attorneys and paralegals, 7 to represent the interests of the Iowa class 8 members. 9 Now, Ms. Conlin spent several days 10 telling you about Microsoft's anticompetitive 11 conduct, both that that was at issue in the 12 government case and the additional 13 anticompetitive conduct. 14 My job today is to tell you about how 15 Microsoft's illegal conduct caused two forms of 16 harm to Iowa class members. 17 First, Iowa consumers suffered damages 18 in excess of $329 million from illegal 19 overcharges. 20 Additionally, Iowa consumers suffered 21 damages from increased security very well in 22 her abilities. 23 Now, Judge Rosenberg told you about 24 the purpose of the Iowa antitrust law, the Iowa 25 Competition Law. 3811 1 And part of that purpose is to 2 preserve and advance our system of free 3 enterprise by encouraging free and open 4 competition in the marketplace. 5 The central premise of that purpose is 6 that competition is a good thing. 7 These laws, the antitrust laws, the 8 Iowa competition laws, are designed to help 9 ensure that companies compete on the merits and 10 that they do not engage in anticompetitive 11 conduct. 12 They're also designed to control 13 illegal conduct that may result in 14 monopolization. 15 While a monopoly may be good for 16 Microsoft, it's not so good for Iowa consumers 17 as a result of the conduct here. 18 The Iowa Competition Law, as you can 19 see from the instruction, presumes the 20 competition in a free market -- that's a free 21 market that's free of illegal conduct -- will 22 result in better goods and services, including 23 better quality, service, safety, and 24 durability, all at lower prices. 25 You will hear from Plaintiffs' expert 3812 1 witnesses that competition has a direct effect 2 on prices. 3 I can use a pen, so to speak, to kind 4 of show the relationship. 5 Let's say pricing is on this side, 6 competition is on this side. 7 As competition goes up, prices 8 generally will fall. As competition decreases, 9 prices will generally rise. 10 Individual consumers, ordinary people, 11 small businesses, and others on their own have 12 no power in -- with regard to a monopolist that 13 may be overcharging those individuals and 14 businesses. 15 In a free market competition, that's 16 supposed to keep monopolists in check because 17 there's competition. 18 In a free market, if the -- if a 19 company overcharges, there's another company 20 there to offer better products at cheaper 21 prices. 22 So when a company breaks the law, it 23 distorts competition. 24 When there's illegal anticompetitive 25 conduct in the market and a company can get 3813 1 away with charging prices that are too high, 2 that results from not normal competition. 3 Now, if a company has little or no 4 competition, it does not have the same 5 incentives to bring its products to marketplace 6 very quickly. 7 Here's an example. 8 Let's take a look at Plaintiff's 9 Exhibit 7264. 10 Almost three years ago, on January 7, 11 2004, Jim Allchin, the senior executive at 12 Microsoft, sent an E-mail to Microsoft's top 13 two executives, Bill Gates and Steve Ballmer, 14 and the subject was losing our way. 15 Mr. Allchin says, I'm not sure how the 16 company lost sight of what matters to our 17 customers, both business and home, the most, 18 but in my view we lost our way. I think our 19 teams lost sight of what bug-free means, what 20 resilience means, what full scenarios mean, 21 what security means, what performance means, 22 how important current applications are, and 23 really understanding what the most important 24 problems our customers face are. I see lots of 25 random features and some great vision, but that 3814 1 does not translate into great products. 2 He goes on to say, I would buy a Mac 3 today if I was not working at Microsoft. 4 He concludes with this. LH -- and 5 that's Longhorn, code name Longhorn for 6 Microsoft's Vista product -- is a pig, and I 7 don't see any solution to this problem. 8 How is it that Microsoft has these 9 types of problems and doesn't either lose 10 market share or is not forced to lower prices 11 on an aging product? 12 Ask how it happens where a senior 13 executive would buy a Mac if he hasn't worked 14 at Microsoft? How does it happen that a 15 company loses its way? 16 It's called monopoly, illegal 17 monopoly. 18 Because Microsoft has acted illegally, 19 because it's monopolized the operating system 20 market, word processing market, spreadsheet 21 market, and Office, because Microsoft has 22 engaged in unreasonable restraints of trade, 23 consumers no longer have a competitive market 24 to protect them. 25 The effects of Microsoft's illegal 3815 1 conduct are still felt today and will continue 2 into the future, and that's where the Iowa 3 Competition Law steps in. 4 Because the free market has been 5 broken by Microsoft, the Iowa Competition Law 6 provides a remedy. 7 The Iowa class members can recover 8 their actual damages resulting from Microsoft's 9 illegal conduct. 10 Now, this case is about whether 11 Microsoft charged more for Windows, Word, 12 Office, Excel, the monopolized products, than 13 it would have charged in a competitive market. 14 We believe that Microsoft may say that 15 it has apologized for its illegal conduct, but 16 a true apology is just -- is more than just 17 empty words. 18 It involves action. It means you stop 19 doing what you are apologizing for, and a true 20 apology also means you take responsibility for 21 what you have done in the past, including any 22 injury that you have caused. 23 But Microsoft's apology, if it makes 24 one, will be a hollow one because we believe 25 that Microsoft will give you excuses. 3816 1 The basic excuse will be no harm, no 2 foul. 3 Microsoft will suggest that while we 4 engaged in anticompetitive conduct that was 5 found illegal in the government case, we didn't 6 cause any harm to Iowa class members. 7 And even if there is some harm, it's 8 too complicated to tell or determine how much 9 harm. It's too complicated to compute those 10 damages. And so in the end, you're entitled to 11 nothing, no harm, no foul. 12 But one of the things we know and on 13 which we depend, and we heard through voir 14 dire, each of you indicated that you're 15 committed to this case, you will listen 16 carefully and work hard in rendering a verdict, 17 and that's all we're going to ask of you. 18 When Microsoft suggests that holding 19 Microsoft accountable for its conduct and they 20 say it's too complicated, remember the 21 instruction that Judge Rosenberg gave you about 22 the standard for measuring damages. 23 And the reason for that. 24 A Defendant's violation of the Iowa 25 Competition Law often creates a situation in 3817 1 which it is hard to determine the exact amount 2 of damages that Plaintiffs have suffered. 3 You are permitted to make just and 4 reasonable estimates in calculating damages. 5 You may not award damages based on 6 speculation or guesswork. 7 The rights of Plaintiffs to be fairly 8 compensated should not be affected by any 9 difficulty you may have in determining the 10 exact amount of the damages so long as there is 11 a reasonable basis in the evidence for your 12 award. 13 I'm going to talk to you now about 14 what you'll hear concerning the economics of 15 Microsoft's business. 16 And these are some tools that you'll 17 be able to understand how Microsoft's conduct 18 has harmed competition and how it's harmed Iowa 19 consumers. 20 Now, I'm not an economist. I'm a 21 lawyer, and Ms. Conlin is a lawyer, and I think 22 you heard her say a couple of times she's not 23 an economist. And she's relying upon me to do 24 some of the economics, but again I'm not an 25 economist, and this bunch of lawyers sitting 3818 1 over here at the Microsoft table, both lawyers 2 from firms and from in-house at -- inside at 3 Microsoft, they aren't economists either, so 4 both sides are bringing economists here to talk 5 to you about the economics of this case. 6 So we hired economists to help us, and 7 you understand and apply the economics -- 8 economic principles to this case. 9 Once you hear from them, I think you 10 will agree that a lot of the economics is 11 really common sense. 12 These economists will help -- with the 13 help of the technical and industry experts 14 looked at the evidence, and they determined 15 what's relevant and what is not, and they 16 helped us determine how consumers were harmed 17 and by how much. 18 And you'll hear the names of several 19 of our experts, our economic experts; Professor 20 Noll, Professor Mackie-Mason, Doctor Netz, 21 Doctor Warren Boulton, Professor Gowrisankar, 22 and Professor Stiglitz. 23 Now, Professor Noll is a well-known 24 antitrust economics expert from Stanford 25 University. 3819 1 Professor Noll will be here to talk 2 about the anticompetitive conduct of Microsoft 3 and the anticompetitive effects of that 4 conduct. 5 Professor Jeffrey Mackie-Mason is a 6 professor at the University of Michigan. 7 He will be here to talk to you about 8 how Microsoft's anticompetitive conduct caused 9 damages to Iowa class members. 10 And Doctor Janet Netz is an economist 11 who has done lots of work in preparing damages 12 studies, and she and Professor Mackie-Mason are 13 married. 14 She and her staff spent hundreds of 15 hours studying the data to calculate the 16 damages that they will present to you here 17 during the course of the trial. 18 Next is Doctor Frederick Warren 19 Boulton. 20 He's an economist from Washington, 21 D.C., and he was one of the economists for the 22 states in the government case against 23 Microsoft, including the state of Iowa, and he 24 will be talking to you about, among other 25 things, the economic purposes of the antitrust 3820 1 laws and the link between Microsoft's conduct 2 and the increased security vulnerability 3 damages to Iowa class members. 4 Next is Professor Gautam Gowrisankar. 5 And he's from Washington University in 6 St. Louis. He's an economist who has 7 calculated the damages to Iowa class members as 8 a result of the increased security very well in 9 her abilities. 10 And the last economist, but not least, 11 is Professor Joseph Stiglitz. 12 He's an economist and professor at 13 Columbia University in New York City, and he 14 will come here and talk to you about general 15 economic principles, and he will tell you why 16 excuses offered by Microsoft and its economists 17 are simply wrong. 18 Professor Stiglitz has received the 19 Nobel Prize for his work in economics. 20 Because some of our -- of the 21 information our experts will tell you about can 22 be technical, we thought it might help to 23 explain a little bit about antitrust and the 24 economics of the software industry at this 25 point. 3821 1 And what I'd like to do now is give 2 you a little bit of a preview, but always keep 3 in mind the basic premise that competition is 4 good for consumers and class members. 5 So no matter how much Microsoft tries 6 to confuse the issues, and it will, or tries to 7 convince you that its illegal conduct was no 8 harm, no foul, which it will, just use your 9 common sense and think about the economic 10 principles and the basic principle, competition 11 is good for consumers. 12 One of the key terms we use in talking 13 about antitrust economics is the relevant 14 product market. 15 As Judge Rosenberg told you, one of 16 the first steps in proving monopolization is to 17 determine whether Microsoft had monopoly power 18 in the relevant product market. 19 And in Instruction No. 7, the relevant 20 market consists of all of the products that are 21 reasonable substitutes for one another. That 22 is, products that compete with each other. 23 So the question is whether products 24 are reasonable substitutes for one another. 25 And remember for the period leading up 3822 1 to and during the conduct at the issue -- at 2 issue in the government lawsuit, there's no 3 dispute that one of the relevant product 4 markets is the Intel-compatible PC operating 5 system market. 6 That's the market that includes the 7 vast majority of personal computers. It does 8 not include the Apple series of computers 9 because the Apple is based upon a different 10 type of chip technology. 11 Now, for the period after the 12 government lawsuit through the end of the class 13 period, Professor Noll will tell you that the 14 relevant product market has not changed. 15 We do not believe that Microsoft will 16 dispute that. 17 Now, Professor Noll will also tell you 18 that word processing software is a separate 19 relevant product market, as is the spreadsheet 20 software market, and the dominant Microsoft 21 products in each of these two product markets 22 are Word and Excel. 23 Microsoft Office is the Office suite 24 that includes both of those products. Because 25 Office includes both of those products, they 3823 1 are -- it is also at issue in this lawsuit. 2 So once you've determined the relevant 3 product markets, as Judge Rosenberg has 4 instructed you, the next issue is to determine 5 Microsoft's monopoly power or market share 6 within those product markets. 7 In a monopoly, a single firm controls 8 the dominant share of the supply of a good or 9 service for a significant period of time which 10 enables the firm to control prices or exclude 11 competition. 12 Judge Rosenberg instructed you that -- 13 in Finding of Fact 33 establishes that 14 Microsoft had monopoly power in the operating 15 systems market. 16 Now, as you know, all of the findings 17 that he read you are in your notebooks, and 18 Microsoft is bound by those findings, and you 19 are bound to follow them. 20 Now, Finding 33, Microsoft enjoys so 21 much power in the market for Intel-compatible 22 PC operating systems that if it wished to 23 exercise this power solely in terms of price, 24 it could charge a price for Windows 25 substantially above that which could be charged 3824 1 in a competitive market. 2 Moreover, it could do so for a 3 significant period of time without losing an 4 unacceptable amount of business to competitors. 5 In other words, Microsoft enjoys 6 monopoly power in the relevant market. 7 And Judge Rosenberg instructed you 8 that you are to accept that Microsoft has had 9 monopoly power in the operating systems market 10 from the beginning of the class period until 11 June 24, 1999. 12 Now, some of you may think that to be 13 a monopolist, you have to control 100 percent 14 of the market. That's not correct. 15 Let's take a look at Instruction 16 No. 7. 17 A company that has 50 to 70 percent of 18 a relevant market may have monopoly power if 19 there are enough entry barriers. 20 Entry barriers are factors that 21 prevent new companies from timely responding to 22 an increase in price above the competitive 23 level. 24 A market share over 70 percent is 25 usually strong evidence of monopoly power. 3825 1 Now, Professor Noll will tell you that 2 Microsoft to this day continues to have well 3 over 90 percent of the operating systems 4 market. 5 And as for the applications market, 6 Microsoft has and had monopoly power in each of 7 those markets as well. 8 Microsoft's market share in those 9 markets is currently in excess of 90 percent, 10 and also in each of their market -- each of 11 these markets, there has been and continues to 12 be significant entry barriers. 13 And these entry barriers which 14 Ms. Conlin talked about briefly, basically you 15 can think of them as walls around these markets 16 that makes it very difficult for new 17 competition to come into the market, and the 18 conduct that Microsoft has engaged in over the 19 last many years has further fortified these 20 entry barriers, as Professor Noll will talk to 21 you about, so that it is increasingly difficult 22 for competition to come in. 23 And if competition can't come in, 24 monopoly prices can continue to be charged even 25 through today. 3826 1 Now, Microsoft may argue that there is 2 choice for these products, that there is 3 competition because Windows is not the only 4 operating system for instance. May say the 5 same thing for word processing or spreadsheet 6 or Office Suite. 7 Now, Professor Noll put together sort 8 of a history of some of the other operating 9 systems and GUIs, word processors, spreadsheets 10 and browsers, you know, going back to the 11 1980s. 12 You've heard about some of these 13 products, like OS/2, DR-DOS, WordPerfect, Lotus 14 from Ms. Conlin and how Microsoft unlawfully 15 excluded them from the particular relevant 16 markets. 17 But these companies, other than in the 18 early days when WordPerfect, for instance, in 19 the late 1980s, early 1990s, was the dominant 20 word processing software before Microsoft 21 engaged in its illegal conduct, as was Lotus 22 1-2-3 and spreadsheet, since the early '90s, 23 Microsoft has had the high dominant share in 24 each of these markets. 25 So although there's been these other 3827 1 products out there, they really have not 2 provided any choice to consumers. 3 So when Microsoft has 90 to 95 percent 4 of the market, you think about it sort of in 5 the inverse, that some of these products are 6 out there making up 5 to 10 percent of the 7 market, but the problem is, as Ms. Conlin has 8 discussed with you, some of them can't get the 9 inputs, they can't get the technical 10 information to work well with Windows, for 11 instance, or based upon chokehold on 12 distribution channels, such as the OEM channel, 13 they can't get the outputs. 14 In other words, they can't get their 15 products into a proper stream to sell those 16 products. 17 So if you can't get the information, 18 you may not be able to develop your product 19 properly, or if you've got a great product, but 20 there's a chokehold on the distribution of that 21 product, how are you going to adequately 22 compete? 23 And so that was part of Microsoft's 24 strategy, control the inputs. For instance, 25 control the APIs and control the outputs, shut 3828 1 done distribution channels. Have them -- have 2 the OEMs locked up contractually. 3 Now, there's another aspect of the 4 relevant market, and that's the geographic 5 area. 6 While Microsoft sells its products 7 worldwide, the Iowa Competition Law is 8 generally concerned with harm affecting only 9 Iowa. 10 Now, there will be no question but 11 that Microsoft had and has monopoly power in 12 each of the relevant product markets in the 13 state of Iowa. 14 There were no reasonable substitutes 15 for these products in the state of Iowa, so 16 Professor Noll will tell you Microsoft had 17 monopoly power in each of these products in 18 issue in the state of Iowa. 19 Your Honor, usually we take a break 20 about now. Did you want to do that? I was 21 just going to shift to a subject. 22 THE COURT: Sure. We'll take a 23 ten-minute recess. 24 Remember the admonition previously 25 given. Leave your notebooks here. 3829 1 All rise. 2 (A recess was taken from 1:18 p.m. 3 to 1:42 p.m.) 4 THE COURT: We had a little extra 5 longer recess. That's my fault totally. I had 6 to talk to another Judge about another matter. 7 He came down to talk to me, and it took ten 8 minutes longer than I expected. So it's my 9 fault. 10 [Juror Name]: Thank you. 11 THE COURT: You're welcome. 12 MR. HAGSTROM: As I mentioned, 13 Microsoft did not want competition on the 14 merits. 15 Competition on the merits is 16 rough-and-tumble competition. 17 There will be winners and losers, but 18 that's the free market at work. 19 But don't confuse rough-and-tumble 20 competition with illegal anticompetitive acts 21 and unreasonable restraints of trade of the 22 type that Microsoft engaged in in the past many 23 years. 24 Now, the conduct that Judge Rosenberg 25 told you about from the government case, and 3830 1 the additional conduct that Ms. Conlin has 2 talked to you about, and, of course, that 3 you'll see in the evidence during the course of 4 this trial is different than rough-and-tumble 5 competition. 6 It was illegal competition. 7 It's conduct that does not benefit 8 consumers. It was not competition on the 9 merits. And you've seen some examples of that, 10 and you're going to see plenty more during the 11 course of this trial. 12 Let me touch on Judge Rosenberg's 13 instruction on unreasonable restraints of 14 trade. 15 It's got a title contract combination 16 or conspiracy. 17 Now we've talked a lot about 18 monopolization, and we've explained a little 19 bit about relevant product market, relevant 20 geographic market, monopoly power, and so 21 forth. 22 Well, there's another type of 23 violation under the antitrust laws, and it's 24 called a contract combination or conspiracy in 25 restraint of trade. 3831 1 And under this instruction and under 2 the law, basically when two or more entities 3 get together and enter into either a 4 conspiracy, a combination, or a contract that 5 unreasonably restrains trade; in other words, 6 the result of the combination has an 7 anticompetitive effect, and those 8 anticompetitive effects outweigh any 9 pro-competitive benefits, you can have a 10 violation of the antitrust laws. 11 So as I mentioned, and in the title of 12 this instruction, contract, combination, or 13 conspiracy, any type of those three types of 14 conduct can be a violation. 15 Now, you've heard about in the 16 findings of fact various types of contracts. 17 You've heard about the first wave 18 agreements. You heard about Microsoft's 19 contracts with different Internet providers, 20 and so forth, and the exclusionary effects of 21 those types of contracts. 22 You've also heard about the per 23 processor licenses, the per system license 24 contracts with the OEMs, the MDAs. Those are 25 also exclusionary types of contracts, and 3832 1 Professor Noll will be talking about those, and 2 perhaps some others. 3 So those types of arrangements we 4 contend violate the contract, combination, or 5 conspiracy provision of the Iowa Competition 6 Law. 7 Let me just briefly recap some of the 8 exclusionary illegal conduct that Ms. Conlin 9 talked about, as well as the conduct 10 established in the government case. 11 And you may recall she put up these 12 icons. I just mentioned the exclusionary 13 contract terms. 14 And, of course, those are relevant not 15 only for purpose of monopolization, but also 16 for purposes of the contract, combination, or 17 conspiracy and unreasonable restraint of trade 18 cause of action. 19 The tying and bundling, we've heard 20 about that. 21 Buying out the competition. 22 Dishonoring contracts. Vaporware. FUD; fear, 23 uncertainty, and doubt. The beta blacklist. 24 Technical sabotage. Undocumented APIs. The 25 DOS Windows merge. In other words, another 3833 1 form of tying or bundling. The two separate 2 products. Remember, there was the MS-DOS and 3 then the Windows GUI. Combined that to be able 4 to exclude DR-DOS from the marketplace. 5 Dividing the market. Deception and 6 misinformation. Technical espionage. Unequal 7 treatment. Threats and intimidation. 8 So these were all types of conduct 9 that Ms. Conlin gave you a preview of, and you 10 will be hearing more and more about them during 11 the course of the trial. 12 And as I mentioned a few minutes ago, 13 the inputs and outputs, and Ms. Conlin also 14 talked to you again about that; and again, you 15 can generally divide these types of tactics 16 into controlling the inputs; in other words, 17 where it makes it difficult for the competitor 18 to compete with its product, and controlling 19 the output. Again, to shut down being able to 20 compete in the distribution channels 21 themselves. 22 Before moving on to describe in more 23 detail some of the evidence you will hear on 24 the effects of Microsoft's conduct on the 25 market and on Iowa consumers, I want to briefly 3834 1 address one more issue, and that's the 2 continuing effects of this conduct. 3 In other words, Microsoft's past 4 conduct still has adverse effects today. 5 You might have wondered, you know, 6 hearing about evidence going back into the 7 1980s. 8 Well, that seems like a long time ago. 9 And, of course, conduct into the early '90s and 10 through the '90s, and there's additional 11 conduct you'll hear about in this decade, in 12 this millennium, but the importance of going 13 back in time and looking at conduct that is, 14 you know, admittedly quite a number of years 15 ago, goes back to the entry barriers and 16 excluding competition because back -- you have 17 to think back in the 1990s or -- you know, late 18 '80s, early '90s, when DR-DOS was around, OS/2. 19 I mean, there was far heavier competition, for 20 instance, in the operating systems market. 21 And, of course, you'll hear 22 information from some of the experts and other 23 witnesses. Microsoft was a far different 24 company then. 25 It was a smaller company, and it -- 3835 1 and you've seen from some of the documents, and 2 I'll show you a few here today, or maybe it 3 will be Monday, but Microsoft was concerned, 4 very concerned with competition from DR-DOS, 5 from OS/2. 6 So you have to kind of take yourselves 7 back in time as you listen through to evidence 8 to get a mindset of what was going on, you 9 know, ten, 15 years ago and think about the 10 competitive conditions in the marketplace at 11 that time and think about how they've changed 12 as a result of Microsoft's illegal conduct over 13 that course of many years. 14 And as a result of that exclusionary 15 conduct, a number of years ago, as I mentioned, 16 it created -- you know, eliminated competition, 17 and that illegal conduct kept reinforcing the 18 entry barriers, and those entry barriers were 19 strengthened by the fact of eliminating the 20 competition. 21 And you'll hear from the economists 22 today that because of those entry barriers 23 created through the illegal conduct, Microsoft 24 is able to continue to charge excess prices, 25 monopoly prices, prices that are higher than 3836 1 they would have been able to charge had they 2 not engaged in the illegal conduct. 3 And you can think about an example. 4 You know, over the course of time, if you're 5 out in the middle of a calm lake, perhaps 6 you're out fishing or something, you're just 7 out there on a nice summer morning, lake is 8 like glass. And what happens if you happen to 9 have a big rock and you throw it in the water? 10 You get ripples, and you see those ripples just 11 keep going on and on and on, till they finally 12 hit the shore. 13 And that's kind of like, you know, 14 there was an incident in time dropping that 15 rock in the water. That's the conduct. But 16 there's ripple effects. 17 There's continuing effects, you know, 18 on and on and on, and that ultimately is what 19 has happened as a result of Microsoft's illegal 20 conduct. 21 Now, let's take a look at Finding of 22 Fact 412. 23 And I won't read the whole thing to 24 you, but let's look at the highlighted portion. 25 Microsoft's past success in hurting 3837 1 such companies -- and the such companies 2 referred to here are IBM, Netscape, Compaq, 3 Intel and others, and you've heard about what 4 conduct this finding is referring to based upon 5 what Ms. Conlin told you and Judge Rosenberg 6 instructed you -- Microsoft's past success in 7 hurting such companies and stifling innovation 8 deters investment in technologies and business 9 that exhibit the potential to threaten 10 Microsoft. 11 One thing that Professor Noll will 12 talk to you about is the -- what's called the 13 chain store paradox. 14 By engaging in massive overreaction to 15 a competitive threat or a perceived competitive 16 threat -- I mean, you've heard some examples 17 already, Be, GO, et cetera. 18 By engaging in this massive 19 overreaction, what this finding is talking 20 about, and Professor Noll will talk to you 21 about, is that Microsoft teaches or conditions 22 would-be competitors, potential competitors, 23 that if they're thinking about bringing a 24 product to market that may compete with 25 Microsoft's current products or an area where 3838 1 Microsoft may be interested in, they better 2 think again because the harm that they will 3 suffer as a result from trying to compete far 4 outweighs any potential profits they might 5 obtain. 6 And that's what this finding is 7 talking about, and that's what Professor Noll 8 will talk to you about as well. 9 Now, with that introduction, let's 10 talk a little bit about causation and damages. 11 Ms. Conlin generally talked to you 12 about the liability. Then there's causation 13 and damages. And causation is the connection 14 between Microsoft's illegal conduct and higher 15 prices for Iowa consumers. 16 So that's the link or connection. 17 Because of Microsoft's illegal 18 conduct, consumers paid higher prices than they 19 would have paid in a competitive world. And 20 these damages that we're talking about are 21 called overcharge damages. 22 Now, the Plaintiffs also suffered 23 additional security vulnerability damages as a 24 direct result of the conduct as well. 25 Then once you decide that Microsoft 3839 1 did cause harm to Iowa class members, once you 2 find that connection, then the next question is 3 going to be by how much? How much have 4 consumers been overcharged? How much have the 5 increased security vulnerabilities cost Iowa 6 class members? 7 So this second step is called 8 measurement of damages. 9 Now, to calculate the illegal 10 overcharge, it's basically the formula as 11 follows: The amount that Iowa consumers 12 actually paid for the products minus the amount 13 they would have paid in a competitive market 14 that equals the overcharge. 15 Now, remember when Ms. Conlin told you 16 that Iowa consumers in this action would be 17 seeking hundreds of millions of dollars and 18 asked whether each of you could write such a 19 number on the verdict form, and each of you 20 said that you could sign such a verdict form if 21 the evidence showed that the class members were 22 entitled to such a verdict. 23 Doctor Netz, who will be here, and you 24 saw her picture on the screen a few minutes 25 ago, she's used three recognized methods of 3840 1 calculating damages, and these three methods 2 are the rate of return method, the profit 3 margin method, and the price premium method. 4 And I'll talk a little bit later about 5 each of these methods, and I'll walk you 6 through kind of an overview or preview of each 7 of these methods, but, of course, when she's 8 here on the witness stand, she's going to -- 9 she will describe in detail what she did, how 10 she did her calculations. 11 But under these three damages 12 methodologies, rate of return method, $325 13 million; profit margin method, $326 million; 14 price premium method, $337. 15 Let me just say, these numbers are 16 rounded off, you know, just for purposes of 17 this demonstrative. 18 And the average of all of these three 19 is approximately $329 million. 20 Now, the reason each of these numbers 21 are not exactly the same comes from the fact 22 that you know each are a check and a balance. 23 I want to point you to Instruction 24 No. 15, which says, a Defendant's violation of 25 the Iowa Competition Law often creates a 3841 1 situation in which it is hard to determine the 2 exact amount of damages that Plaintiffs have 3 suffered. 4 So the Plaintiffs' economists gathered 5 information about Microsoft financial data, 6 other market data, and make comparisons with 7 other companies and analyze that data and use 8 these three types of methods to come up with 9 the damages calculations. 10 So that's why Judge Rosenberg 11 instructed you earlier that you are permitted 12 to make just and reasonable estimates in 13 calculating damages. 14 You may not award damages based on 15 speculation or guesswork. But the rights of 16 Plaintiffs be fairly compensated should not be 17 affected by any difficulty you may have in 18 determining the exact amount of the damages so 19 long as there is a reasonable basis in the 20 evidence for your award. 21 Again, these three methods that she 22 uses are well-recognized. 23 Now, let me turn next to Instruction 24 No. 14 in which Judge Rosenberg told you about 25 injury and causation. 3842 1 I won't go through and read each of 2 these paragraphs, but I'd like you to note 3 basically three things. 4 In the second paragraph, Plaintiffs do 5 not have to prove the exact dollar value of 6 their injury. 7 In other words, there's no requirement 8 that Plaintiffs prove, you know, to the dollar 9 exactly what the damages were, and that's -- 10 that was because, as explained in the 11 instruction that I just showed you, because 12 there's uncertainty in the marketplace. 13 As part of determining the overcharge 14 damages, we look at what the actual prices 15 were, and then we have to determine what the 16 prices would have been but for the 17 anticompetitive conduct. 18 So we have a changed marketplace, and 19 the economists have to determine what those 20 prices would have been absent the illegal 21 conduct. 22 Now, the second thing I want to point 23 out is that the standard is that Plaintiffs 24 must prove that they suffered some injury from 25 the Iowa Competition Law and they don't have to 3843 1 prove that it was the only cause of their 2 injury. 3 And the third thing is that it just 4 simply must be a material cause. 5 And then once you decide that there 6 has been some injury as a result and that these 7 anticompetitive acts were a material cause of 8 that injury, then you will determine the amount 9 of damages, and as the instruction indicated, 10 calculation of those damages is a just and 11 reasonable estimate. 12 Now, let's take a look at Finding of 13 Fact No. 409 from the government case. 14 Let's focus in on the highlighted 15 text. 16 Microsoft also engaged in a concerted 17 series of actions designed to protect the 18 applications barrier to entry, and, hence, its 19 monopoly power from a variety of middleware 20 threats, including Netscape's web browser and 21 Sun's implementation of Java. 22 Many of these actions have harmed 23 consumers in ways that are immediate and easily 24 discernible. 25 They have also caused less direct, 3844 1 but, nevertheless, serious and far-reaching 2 consumer harm by distorting competition. 3 You can see here that the federal 4 court found that Microsoft caused harm to 5 consumers by engaging in anticompetitive 6 conduct. 7 Now, let's look at fact 411. 8 Many of the tactics that Microsoft has 9 employed have also harmed consumers indirectly 10 by unjustifiably distorting competition. That 11 competition would have conduced to consumer 12 choice and nurtured innovation. 13 It is clear, however, that Microsoft 14 has retarded, and perhaps altogether 15 extinguished, the process by which these two 16 middleware technologies could have facilitated 17 the introduction of competition into an 18 important market. 19 Let me just focus also on one sentence 20 there that isn't highlighted. The next to the 21 last sentence. 22 There's insufficient evidence to find 23 that absent Microsoft's actions, Navigator and 24 Java already would have ignited genuine 25 competition in the market for Intel-compatible 3845 1 PC operating systems. 2 That's an argument that Microsoft is 3 likely to make. 4 MR. TULCHIN: Objection, Your Honor. 5 This is a finding that the jury must 6 accept like the others. It's not an argument. 7 THE COURT: Sustained. 8 MR. HAGSTROM: Based upon the finding, 9 Professor Noll will come here to talk with you 10 about the effects of this conduct. 11 And Professor Noll will tell you that 12 as a result of the conduct in the government 13 action, as well as the other illegal conduct 14 that you've heard about, Microsoft has caused 15 whether they're new competitors or existing 16 competitors to be excluded from the 17 marketplace. 18 And whether they're a new competitor 19 or an existing competitor, the fact of the 20 exclusionary conduct has eliminated competition 21 causing Microsoft to be able to charge monopoly 22 prices. 23 Now, as I mentioned, one of the 24 arguments that you can expect to hear from 25 Microsoft's experts is that even though there 3846 1 is the findings regarding illegal conduct from 2 the government action, that there is no harm as 3 a result of that conduct. 4 You will hear from our experts that, 5 in fact, there was harm, and that harm came in 6 the form of overcharges and increased damages 7 as a result of security vulnerabilities. 8 Now, in addition to these findings, 9 our expert, Professor Mackie-Mason, reviewed 10 the facts of the case, reviewed findings from 11 the government case, and he will tell you that 12 as a result on Microsoft's attack on 13 competitors, and on the competitive process, 14 that Microsoft was able to and did charge 15 monopoly prices. 16 And he will tell you that if Microsoft 17 had faced competition, that it would have 18 changed the marketplace and lower prices would 19 have existed. 20 Now, antitrust economists, like 21 Professor Mackie-Mason, generally look at some 22 or all of the following factors to figure out 23 if a company is using its monopoly power to 24 charge monopoly prices. 25 One is did the company charge more 3847 1 than necessary to make a competitive profit on 2 the product in question? 3 Another factor, was the company's 4 pricing of new products determined almost 5 exclusively by the pricing of its existing 6 products? 7 Did the prices of the products in 8 question exceed prices charged for similar 9 products? 10 Did the company keep prices for 11 obsolete products high? 12 Did the company make products for the 13 monopolized products that exceeded competitive 14 profits? 15 Did the company engage in punitive 16 price discrimination? 17 Did the company compete on price when 18 it sold products that faced effective 19 competition? 20 Now, Professor Mackie-Mason is an 21 acknowledged expert in addressing factors such 22 as this, and he will identify that shows the 23 answer to each of these questions is yes as it 24 pertains to Microsoft. 25 Besides studying antitrust economics 3848 1 for many years, he's had the opportunity to 2 give testimony before such groups as the 3 Federal Trade Commission, Department of 4 Justice, provide advice to them, and he's 5 provided economic advice both here in the 6 United States and overseas. 7 Now, let's go through these factors 8 individually. 9 Did Microsoft charge more than 10 necessary to make a competitive profit on the 11 products in question? 12 Now, Microsoft knew it controlled the 13 operating systems, word processing, 14 spreadsheet, and Office Suite markets. 15 Microsoft knew it could charge 16 monopoly prices, and it did so. 17 Now, let's take a look back at finding 18 number 33. 19 Microsoft could charge a price for 20 Windows substantially above that which could be 21 charged in a competitive market. And it could 22 do so for a significant period of time without 23 losing an unacceptable amount of business to 24 competitors. 25 As you will hear from our experts, not 3849 1 only could Microsoft charge prices 2 substantially above competitive levels, but it 3 did do so. 4 Let's just look at one example with 5 regard to the Windows 98 upgrade. 6 This was the upgrade that those 7 consumers that had the Windows 95 already would 8 purchase the Windows 98 upgrade. 9 Now, there was a document titled 10 Windows 98 launch plan, and Professor 11 Mackie-Mason reviewed this document and 12 analyzed what Microsoft was saying in it. 13 First, when Microsoft was releasing 14 Windows 98, Microsoft considered charging a 15 monopoly price of $49, but Microsoft concluded 16 that this would have been a highly profitable 17 price, and indeed Professor Mackie-Mason will 18 tell you that at that price, it would have had 19 a profit margin of approximately 58 percent. 20 But that wasn't enough. Instead, 21 Microsoft charged an actual price, and this is 22 a street price, I should say, of $89 per copy. 23 Now, if Microsoft -- Professor 24 Mackie-Mason will tell you now if Microsoft 25 actually had to compete with regard to this 3850 1 product, this upgrade, it would have gone with 2 something like the much more lower $49 price. 3 But if it was in fact facing 4 competition, it probably would have been even 5 lower than the $49. But instead, Microsoft was 6 able to charge the -- almost double the $49 7 price. 8 So the question is, did Microsoft 9 charge more than necessary to make a 10 competitive profit on the products in question? 11 Professor Mackie-Mason will tell you 12 that based upon this example and others, the 13 answer is yes. 14 Let's take a look at the next factor. 15 Was Microsoft's pricing of new 16 products determined almost exclusively by the 17 prices of its existing products? 18 The evidence will be very clear that 19 Microsoft did not consider competitors' 20 operating systems and applications software 21 product prices when it set the prices for its 22 own products. Why? Because as a monopolist, 23 Microsoft simply didn't need to do that. 24 During the class period, as we've 25 discussed, it had almost no competition, and, 3851 1 of course, Microsoft liked it that way. 2 Now, let me show you what a top 3 Microsoft executive wrote in December of 1996. 4 We won. Microsoft Office is the 5 dominant desktop -- 6 MS. CONLIN: That's a whole new sound. 7 MR. HAGSTROM: Additional sound 8 effects. 9 THE COURT: Try it again. 10 MS. CONLIN: Is it coming out of 11 there, Your Honor? 12 THE COURT: It's coming out of all the 13 speakers. Go ahead. 14 MR. HAGSTROM: We won. Microsoft 15 Office is the dominant desktop productivity 16 suite. We have come from single-digit market 17 share to over 85 percent share. Our biggest 18 competition is, in fact, ourselves. 19 By the time this class period began in 20 1994, Microsoft didn't care what anybody else's 21 prices were. 22 Let's take a look at a memo from Steve 23 Sinofsky, a senior manager at Microsoft, 24 talking about Microsoft Office Suite 9, which 25 is Plaintiffs' Exhibit 3083. 3852 1 Mr. Sinofsky says, our primary 2 competitor is Office 4x and, hopefully, Office 3 97. 4 And, of course, these are Microsoft 5 products that he's comparing prices to as its 6 own competition. 7 So again, Microsoft was simply 8 competing with itself. 9 Microsoft did not care about others' 10 product prices because it didn't have to. Why? 11 Because of its monopoly power. 12 Professor Mackie-Mason will tell you 13 that this is indeed another factor indicative 14 of monopoly pricing. 15 What does this mean for Iowa 16 purchasers of Microsoft products? 17 This evidence, of course, and of 18 course much more, will show that Iowa class 19 members paid overcharges on the products at 20 issue. 21 And much more than they would have 22 paid in a competitive market. 23 So, was Microsoft's pricing of new 24 products determined almost exclusively by the 25 price of its old existing products? Professor 3853 1 Mackie-Mason and the evidence will tell you, 2 the answer is yes. 3 Let's take a look at the next factor. 4 Did the prices Microsoft charged for the 5 monopolized products exceed prices charged by 6 others for similar products? 7 With this fact, we compare the prices 8 of Microsoft's operating systems and 9 applications software to other products. 10 By similar products, keep in mind, as 11 I mentioned before, that while Microsoft 12 controlled 90 to 95 percent of these markets, 13 there was some other products out there. 14 But minimal market share. 15 And you can recall that chart I showed 16 you earlier with the listing of different 17 products. 18 Now, Professor Mackie-Mason will 19 testify that the evidence is that the Microsoft 20 operating systems prices have been about 21 constant or have even gone up during the time 22 period of the class period, while prices for 23 comparable products have been declining. 24 And in the applications market, 25 Microsoft's prices have been declining slightly 3854 1 over the class period, but competing 2 applications products have been declining more 3 rapidly. 4 Take a look at this first chart 5 prepared by Professor Mackie-Mason. 6 This is called a Fisher Price index. 7 And no, that's not the toy company, but this is 8 what it's called. 9 And Professor Mackie-Mason will 10 explain more about this particular price trend, 11 but a Fisher Price index keeps track, then, of 12 changes in prices over time. 13 And you can see the beginning of the 14 class period indicated here, 5-18-94. 15 And this price trend illustrates that 16 the prices on the Microsoft operating systems 17 increased by about 14 percent over the class 18 period, and you can see it's slightly rising. 19 And then you can also see with regard 20 to the price trend for the competitive 21 products, Professor Mackie-Mason will tell you 22 that that's a price decline of approximately 99 23 percent. 24 So we can see how Microsoft and the 25 operating systems market was able to maintain 3855 1 those prices over the course of the class 2 period while competing products' prices were 3 falling and falling dramatically. 4 But I'd like to also point out that 5 even if Microsoft's products were, in fact, 6 trending lower, that still is indicative of an 7 overcharge. 8 They do not have to be rising, as 9 Professor Mackie-Mason will tell you. They 10 don't have to be rising to indicate monopoly 11 pricing. Because, kkeep in mind, the key is 12 whether or not the prices are higher than they 13 would have been in a competitive market. 14 And in a truly competitive market, he 15 will tell you that the prices of the Microsoft 16 operating systems, if in fact there was strong 17 competition, would be matching fairly closely 18 with the competitive product prices. 19 MR. TULCHIN: Your Honor, I object. 20 This continues to misstate the law and 21 also the Court's instruction on damages. 22 Merely charging a price higher in the 23 absence of illegal conduct is not an 24 overcharge, and the Court so instructed the 25 jury about damages in Instruction 15. 3856 1 THE COURT: Sustained. That is the 2 law. 3 MR. HAGSTROM: Well, Professor 4 Mackie-Mason is going to tell you about the 5 facts that the anticompetitive conduct caused 6 Microsoft to be able to charge prices higher 7 than they would have been in a competitive 8 market. 9 And as I indicated, he will also tell 10 you that even if the price trend was declining, 11 if those prices are higher than they would have 12 been in the competitive market, that is an 13 indication, evidence of monopoly pricing as a 14 result of the unlawful illegal conduct. 15 Remember that, as I mentioned in 16 Finding of Fact 33, that's already established. 17 Microsoft had the power to charge a price for 18 Windows substantially above that which could be 19 charged in a competitive market. 20 And you can see in this example here 21 is the price trends. Professor Mackie-Mason 22 will tell you that that is evidence that not 23 only could Microsoft charge excessive prices, 24 prices above the competitive level, but it did. 25 Let's take a look at the applications 3857 1 market, and Professor Mackie-Mason will tell 2 you it's the same story. 3 As I mentioned, Microsoft's prices for 4 its applications -- and I should mention that 5 these are the applications products grouped 6 together both from Microsoft and the 7 competition. 8 You can see that both are trending 9 lower, but the competition is trending lower 10 faster. 11 And Professor Mackie-Mason will tell 12 you again that this is an indication of 13 monopoly pricing with regard to the 14 applications. 15 Now, I should also mention that these 16 two charts are price indices, are based upon 17 prices in the finished goods channel so -- at 18 the retail level. They are not including 19 prices at the wholesale level. 20 Now, Professor Mackie-Mason will also 21 tell you that because the two channels, the 22 finished goods channel and the OEM channel, are 23 highly competitive, using the finished goods 24 channel prices is -- you will expect to find a 25 trend similar in the OEM channel similar to the 3858 1 finished goods channel. 2 Now, we suspect that Microsoft and its 3 experts may say that the prices, because the 4 prices were falling with regard to 5 applications, this was not monopoly pricing. 6 Microsoft is not telling the whole 7 story because as Professor Mackie-Mason will 8 explain, the question is, and the real issue 9 is, how much less would Iowa consumers have 10 paid for these products in a world where 11 Microsoft did not act illegally? 12 So how much further would Microsoft 13 product prices have dropped in a world where 14 competition was allowed to exist? 15 Darin, can I have 104? 16 So on this chart, you can see the 17 applications have decreased over time, but the 18 competitors' applications products have 19 decreased faster. 20 Now, Microsoft may show you other 21 price trend diagrams. And one thing I want to 22 mention, this diagram, and the previous diagram 23 -- have you got that, Darin? 24 As I mentioned, these are based upon 25 prices of consistently the same products over 3859 1 the course of time to put together these price 2 trends. 3 These are not trends based upon, for 4 instance, revenues per license. 5 Keep in mind that a revenue per 6 license type of diagram may pull together all 7 sorts of different products. Okay? 8 In other words, if there's a revenue 9 per license that mixes upgrades and full 10 versions of products, you're not getting a true 11 picture of what the price trend is for just 12 upgrades or just full versions. 13 So keep in mind the difference between 14 a trend that focuses on retail prices versus 15 something like a revenue per license trend 16 line. 17 So our experts who have used widely 18 accepted economic principles consistently found 19 that the Microsoft products remained higher 20 than for similar competing products. 21 So with this factor, did the prices 22 Microsoft charge for the monopolized products 23 exceed the prices charged by others for similar 24 products? Professor Mackie-Mason and the 25 evidence will tell you that the answer is yes. 3860 1 Your Honor, I'm going to a different 2 factor that's probably going to take ten to 15 3 minutes. Do you want me to continue on or do 4 you want me to pause? 5 THE COURT: Why don't you pause now. 6 Members of the jury, we will take our 7 recess for the weekend. 8 Remember the admonition previously 9 given. 10 We'll lock up your notebooks as usual, 11 and we'll see you on Monday morning, 8:30 a.m. 12 You are excused. 13 All rise. 14 (The following record was made out of 15 the presence of the jury at 2:24 p.m.) 16 THE COURT: You may be seated. 17 MR. TULCHIN: Before we do that, Your 18 Honor, could I just make one point for the 19 record? 20 And I know the Court knows this, but I 21 want the record to be clear. 22 Microsoft, of course, objected before, 23 and continues to object, to the portion of 24 Ms. Conlin's opening that dealt with 25 spoliation. 3861 1 We feel strongly that she has 2 attempted to inject the equivalent of some 3 measure of poison into the jury's mind. That 4 no sufficient showing was made to justify that 5 here; and indeed, almost everything to which 6 she referred pertained to old conduct in other 7 cases and in many cases where there was no 8 retention obligation to begin with. 9 So I just wanted the record clear on 10 that for whatever purpose that might have. 11 THE COURT: Thank you, sir. 12 Anything else on that? 13 MS. CONLIN: I have nothing, Your 14 Honor. 15 I can connect it up or I wouldn't have 16 said it, and the Court may have noticed that I 17 did not play Ms. Reichel. Based on what the 18 Court said, I did not want to take any risk. 19 THE COURT: Very well. 20 The Court has also considered the 21 issue of spoliation. I've entered a written 22 order at this time. 23 Prior to any introduction of evidence 24 regarding spoliation, the party asserting it 25 shall make an offer of proof to the Court 3862 1 outside the presence of the jury to determine 2 if any threshold fact as set out by State v. 3 Hartsfield have been established by substantial 4 evidence. 5 MR. HOLLEY: Your Honor, there are 6 three other matters that I'd like to address 7 before we launch into evidence. 8 Microsoft now makes an emergency 9 motion for an order to show cause why the 10 Plaintiffs should not be sanctioned for failing 11 to comply with the Court's order on the 12 production of expert materials. 13 This is the matter that we discussed 14 briefly yesterday, Your Honor. 15 There's no need for Plaintiffs to file 16 a responsive brief. Your Honor asked us 17 yesterday to make a motion, and we have. There 18 is absolutely -- 19 THE COURT: I didn't ask you to make 20 any motion. 21 MR. HOLLEY: You said if we wanted 22 relief, Your Honor, we should file a motion. 23 We've done that and -- 24 THE COURT: I think I indicated what 25 your methodology is. I did not tell you. 3863 1 MR. HOLLEY: We accepted the 2 invitation. 3 THE COURT: I did not tell you to file 4 a motion. 5 MR. HOLLEY: Fair point. 6 You said if we wanted relief, we 7 should file a motion. We've now done that. 8 The basic point of these papers, Your 9 Honor, is that for months now, the Plaintiffs 10 have been required to provide us with documents 11 that their experts reviewed or relied upon. 12 And there's simply no excuse why that 13 has not been done. 14 In a world of E-mail and long-distance 15 telephone communications, this should have been 16 done months and months and months ago, and the 17 idea that they now say that they can't do it 18 until weeks from now is simply inexcusable. 19 And this is explained in detail in 20 these papers, but I think the Court knows 21 having ordered them to do it twice what the 22 issues are, and nobody yesterday on the other 23 side of the aisle offered any excuse for why it 24 hasn't been done. 25 THE COURT: Take it up Monday morning 3864 1 at 8. 2 MR. HOLLEY: Okay, Your Honor. 3 And then second and thirdly, I'd like 4 to provide the Court with our opposition to 5 Plaintiffs' motion to preclude us from 6 referring to their apparent loss or destruction 7 of written agreements with witnesses. 8 This is a matter of some urgency, Your 9 Honor, because we intend to refer to this in 10 opening argument, as Ms. Conlin referred to 11 spoliation in her opening argument. 12 And finally, consistent with the 13 repeated misstatements this afternoon about 14 what the law is on monopoly pricing, Microsoft 15 has a motion for permission to refer to Finding 16 of Fact 65, which is not collaterally estopped, 17 but which makes clear that there is no finding 18 in the government case that Microsoft ever 19 imposed a monopoly price for any product. 20 And again, Your Honor, this is a 21 matter of some urgency because it relates 22 directly to what Mr. Tulchin will be able to 23 say in his opening statement, so we would ask 24 that this motion be resolved as soon as 25 possible. 3865 1 THE COURT: Do you have a copy of 65? 2 MR. HOLLEY: It is quoted, Your Honor, 3 at the third -- the top of the third page of 4 the brief which I just handed to the Court, and 5 I'll get you a complete copy of the finding. 6 THE COURT: Okay. All these three 7 will be taken up at eight o'clock Monday 8 morning. 9 MR. HOLLEY: Thank you, Your Honor. 10 MR. TULCHIN: Thank you, Your Honor. 11 THE CLERK: Do you want to deal with 12 my three issues now? 13 THE COURT: Oh, yeah, hang on. She's 14 got three things. 15 (An off-the-record discussion was 16 held.) 17 MR. NEUHAUS: Your Honor, if I could 18 just make a couple of comments on the cases 19 that he was citing this morning. I was just 20 talking about -- I was just talking about the 21 Morrill case, and I wondered if I could add a 22 comment on that. 23 THE COURT: I got it. 24 MR. NEUHAUS: He gave you the Morrill 25 case, and I said it was a case in which the 3866 1 evidence was cited for the truth and not for a 2 notice purpose, and I just wanted to mention, 3 because I neglected to do so, it was a 4 negligence case regarding the use of a 5 weight-lifting machine, and a magazine was 6 offered to show that the use was appropriate. 7 The reason we know that was -- the 8 reason we know and the reason the Court knew 9 that that magazine was offered not for notice 10 to the Defendant in that situation, but for the 11 truth was because the accident occurred in 12 September of 2001, and the article was 13 published in July of 2004. 14 So that article has nothing to do with 15 what we're talking about on either of the 16 prongs of this motion, product reviews or the 17 head fake. 18 Mr. Cashman referred at the very end 19 of his remarks to a case involving a doctor and 20 the standard of care, and he said that this 21 rebutted the cases that I was relying on for -- 22 I'm handing you a case -- for the proposition 23 that news articles and magazine articles can be 24 offered to show what a person in the community 25 would have been or should have been aware of. 3867 1 He called those the standard of care 2 cases, and he's confusing two things. 3 The case he was talking about, I 4 believe, is Arnold v. Lee, because it matches 5 the description. It is a doctor case involving 6 a package insert from the Court of Appeals in 7 which the Court of Appeals did mention that 8 Iowa cases had not accepted the use of 9 newspaper articles to prove the standard of 10 care. 11 But the Court -- and if you look at 12 the highlighting on page 7 of what I've just 13 given you, it's Arnold v. Lee, 720 N.W. 2d 194. 14 And on page 7 where I've highlighted, 15 the Court expressing distinguished between the 16 standard of care; that is, proving that the 17 doctor was held to a particular standard of 18 care as a medical -- as a matter of medical 19 knowledge and notice to the doctor of facts, 20 which is what we offer this for. 21 And on page 7, the Court says, we have 22 no established rule for accepting hearsay for 23 the nonhearsay purpose of establishing standard 24 of care. 25 Many seem to equate notice of risk 3868 1 with standard of care. The first has been 2 accepted in Iowa. The second apparently has 3 not. 4 And for the first they cite McElroy, 5 which is a notice case, which the parties have 6 mentioned at length in their brief. 7 And once again, lest there be any 8 doubt what was going on in Arnold v. Lee was a 9 package insert, and on page 4 of the printout I 10 have given you, the Court points out that 11 indeed it was not established this insert was 12 even in existence at the time of the surgery. 13 So once again it was simply offered to 14 try to show that the doctor was supposed to 15 have proven the standard of medical care that 16 doctors should be given, like a treatise might 17 be offered, and has nothing to do -- neither of 18 these cases have nothing -- have anything to do 19 with the proposition that newspaper articles 20 can be offered to show that a participant in 21 the market or in the community should have 22 been, or would have been, on notice of facts, 23 which is what we offer these for with respect 24 to the head fake theory. 25 THE COURT: Okay. 3869 1 MR. NEUHAUS: Thank you. 2 THE COURT: Thank you. 3 MR. CASHMAN: Your Honor, Michael 4 Cashman for the Plaintiffs. 5 THE COURT: Yes, sir. 6 MR. CASHMAN: I thank Mr. Neuhaus for 7 bringing Arnold v. Lee to the attention of the 8 Court because I was intending to do that with 9 my opening comments. 10 I was trying to recall the name of the 11 case earlier this morning, and I think I 12 referred to it as the McCoy case, but in fact 13 it's Arnold v. Lee, so let me just correct the 14 record on that. 15 And the important -- I mean, the 16 Arnold v. Lee case has a couple of important 17 points, but most importantly, in relation to 18 this morning's discussion, it establishes, I 19 submit, that the reliance which Microsoft has 20 placed on the Associated Randall case and the 21 Coyne case, two out-of-Iowa jurisdiction cases, 22 that those cases are inappropriately cited 23 here, inapplicable because Arnold v. Lee says 24 notice evidence is not admissible as nonhearsay 25 even to establish standard of care. 3870 1 And you'll recall when we talked first 2 about trade press, that I distinguished the 3 Associated Randall case and the Coyne case 4 because they are indeed standard of care cases. 5 So that's really all we have to say 6 about Arnold v. Lee. 7 THE COURT: In that case, question to 8 both of you. They didn't accept it in any 9 event; is that right? 10 MR. CASHMAN: That's correct. 11 MR. NEUHAUS: It wasn't offered for 12 notice because -- 13 THE COURT: Yeah, it was just offered 14 for standard of care. 15 MR. NEUHAUS: For standard of care, 16 and that's an impermissible purpose under Iowa 17 law. 18 THE COURT: I just wanted to make 19 sure. 20 MR. CASHMAN: The next point is this 21 morning I mentioned the fact about establishing 22 that PC Magazine and PC World have minimal 23 distribution in Iowa, and what I've just handed 24 up to the Court is the basis for my statements 25 on that point this morning. 3871 1 And I -- this exhibit -- or this 2 material which I've just handed up shows, 3 obviously, the assumptions that are made here, 4 but the second point is how I arrived at the 5 determination that Iowa is about 1 percent of 6 the population of the United States as a whole 7 in 1990, and for that I've attached the U.S. 8 census figures for the United States in 1990 9 and the United States -- the U.S. census 10 figures for Iowa in 1990. 11 And that shows, as I've indicated on 12 page 1 of this proffer, that Iowa had a 1.1 13 percent of the total U.S. population in 1990. 14 The next section of the first page 15 goes to my statements this morning that, as 16 I've stated here, just a tiny fraction of 17 Iowans received either PC Magazine or PC World. 18 And so paragraph one under that third 19 category, I use the one million copies per 20 month alleged by Mr. Machrone in his deposition 21 testimony as the basis for making these 22 calculations, which would mean that 11,000 23 copies, arguably, of either one of those 24 publications would have been circulated in Iowa 25 in 1990. And that's assuming, I'm going to 3872 1 emphasize for the sake of the record, that 2 there's no foundation for what Mr. Machrone 3 stated in his deposition, but just for the sake 4 of this illustration, I used those allegations. 5 And as you can see, the math shows 6 that even if that were true, four-tenths of 7 1 percent of Iowans would have received the PC 8 Magazine or PC World, then, in 1990. 9 Then in item three I point out that 10 the Comes notice plan, which is already on file 11 with the Court, shows that the actual -- I 12 guess they call it the estimated circulation of 13 PC Magazine in 2006 is 8,533 copies. 14 And I attached the relevant portion of 15 the notice plan indicating that figure. 16 So if you were to use those 2000 17 figures, the distribution of PC Magazine is 18 barely above nil as indicated in item four. 19 Now, also in the Comes notice plan, 20 and I've attached this, there's an assumption 21 that 5.3 people read each monthly edition of 22 the PC Magazine, or they were talking about PC 23 Magazine. 24 So just to be conservative, I ran the 25 calculation on that, and still even using those 3873 1 figures, the total readership of PC Magazine in 2 1990, using 2006 figures, which I submit are 3 likely quite a bit higher, but even then, the 4 total readership in the state of Iowa would 5 have been 1.6 percent. 6 So the conclusions which I think are 7 obvious from this simple data is that neither 8 one of those publications were of general 9 circulation. 10 Secondly, although as we've explained 11 before, although not the test under Fanning, 12 neither PC Magazine nor PC World can be fairly 13 characterized as being widely read. 14 And I don't have it written down here, 15 but the evidence that I submitted this morning 16 I think also underscores the fact that you 17 can't characterize these publications as 18 authoritative either, contrary to Microsoft's 19 claims. 20 So as we state in item three, given 21 the general lack -- the lack of general 22 circulation, the de minimis readership of PC 23 Magazine and PC World and the corresponding 24 lack of any proof on the readership for 25 specific articles in those publications or any 3874 1 of the articles that are at issue here, there's 2 no viable grounds for deeming the contents of 3 any specific articles in those publications as 4 general knowledge amongst Iowans in 1990 or 5 today, for that matter. 6 So I think that really highlights the 7 fundamental absence of foundation that's 8 required under the Fanning case. 9 Now, Plaintiffs would like to turn to 10 the individual product review articles. 11 THE COURT: Okay. 12 MR. CASHMAN: And with our brief, we 13 submitted as Exhibit C these individual 14 descriptions of what was going on with these 15 product reviews, and I just handed the copy of 16 the pertinent pages for the product reviews up 17 to the Court for ease of reference. 18 And you may want to -- the Court may 19 wish to use the package that I handed up 20 yesterday with the gold page on the front. 21 THE COURT: Sure. Got it right here. 22 1075. 23 MR. CASHMAN: 1075 is the first of 24 these product reviews. 25 And this is published by PC Magazine 3875 1 online. 2 So no proof at all from Microsoft 3 about online circulation in the state of Iowa, 4 or anywhere, for that matter. 5 The article is IE, Internet Explorer 6 versus Communicator, and is the editor's 7 choice. 8 And there's no author identified so we 9 don't know whose opinion this is, other than 10 quote-unquote the editor, so it's immediately 11 unreliable. 12 Microsoft does not identify what it 13 wishes to use from this document. 14 I have a comment here on this article. 15 Presumably, they want to show that it's -- just 16 that it's editor's choice, and they allege that 17 the purpose of this exhibit is effect on the 18 consumer. 19 Well, not only have they failed to 20 show any circulation under Fanning, they failed 21 to show any effect. 22 They failed, as I've indicated before, 23 to show that anybody read this. They've failed 24 to show that anybody in Iowa read this. 25 They've failed to show that there's 3876 1 any causal connection that anybody did 2 something because of this, and indeed I 3 supplied evidence this morning showing that 4 there is no connection between alleged product 5 reviews, positive product reviews, even the 6 cherry-picked ones that Microsoft has 7 proffered, and sales. There's no proof of that 8 connection. 9 And I demonstrated yesterday that 10 Microsoft's expert doesn't say that's what he's 11 going to testify about. I pointed out that 12 Microsoft has failed to provide a market survey 13 to make that connection. 14 So for all those initial reasons, this 15 fails. 16 Then, furthermore, to make this 17 exhibit relevant, the out-of-court statements 18 contained in this exhibit would have to be 19 believed as true to make it relevant, which 20 makes it hearsay, inadmissible hearsay. 21 Now, in this regard, I think it would 22 be instructive for the Court to note from 23 Microsoft's brief that in their Section 3 of 24 their brief, they make no connection between 25 any individual review, to any individual 3877 1 reader, or any causal link. Nothing. 2 Instead, the pertinent parts of their 3 brief, they start out by saying, the product 4 reviews that Microsoft seeks to offer appeared 5 in publications that reached millions of 6 consumers and likely influenced purchasing 7 decisions. 8 That's on page 11 of their brief, Your 9 Honor. 10 And based on the exercise that we just 11 went through, we know it's false, the statement 12 that these publications reached millions of 13 consumers, and because it didn't happen, PC 14 World and PC Magazine, by virtue of their own 15 alleged evidence, had a maximum circulation of 16 a million people. Maximum. 17 But we already know from the evidence 18 I've supplied the Court that what happened in 19 Iowa is dramatically less than that. 20 We've also established that they 21 haven't provided any foundation for the 22 statement likely to influence purchasing 23 decisions. 24 But then if you move on to page 13 of 25 their brief, this is Microsoft's attempt to 3878 1 rebut the Gacke issue. 2 And Microsoft seeks incorrectly to 3 narrow Gacke to the proposition that it applies 4 only if somebody is acting reasonably. 5 I believe I handed a copy of Gacke up 6 to the Court this morning. 7 THE COURT: I have it. 8 MR. CASHMAN: And that is not what 9 Gacke stands for. 10 So what's happening here in 11 Microsoft's brief is they're trying to narrow 12 Gacke. 13 But even if you were to accept their 14 interpretation of Gacke, the evidence would 15 have to be -- the evidence such as Exhibit 1075 16 would have to be believed as true to make it 17 relevant because if somebody read the product 18 review, even though we don't have proof that 19 anybody read it, but if somebody read the 20 product review, they would have to make a 21 decision to purchase based on that product 22 review. 23 Again, we have no evidence that 24 anybody made a decision to purchase based on 25 that product review. But if they did make a 3879 1 decision to purchase, it wouldn't make any 2 difference whether it's reasonable or 3 unreasonable. 4 The point is, that even under their 5 attempt to distinguish Gacke, whether the 6 conduct is -- the action based on the 7 information you have is reasonable or 8 unreasonable, it would still have to be 9 believed as true. 10 And even though that's an improper 11 statement of the Gacke test, it shows, I think 12 it highlights, that the information in a 13 product review would indeed have to be believed 14 as true to cause a purchaser to make a decision 15 to purchase based on that product review. 16 If, on the other hand, if the 17 purchaser decided -- read the product review 18 and said I'm not going to purchase that 19 product, I'm going to purchase something else, 20 the product review is irrelevant, wholly 21 irrelevant, and it shouldn't be admitted under 22 any circumstances then. 23 So clearly the article, or I should 24 say the IE versus Communicator editor's choice 25 article in DX 1075 is -- not only do they fail 3880 1 the actual notice test, not only does Microsoft 2 fail the causation test, not only have they 3 failed to provide any of the basic foundation 4 that we've discussed before, but it's also 5 clearly inadmissible hearsay under the test 6 laid out in Gacke as supplemented in the 7 McElroy case and as explained in the Morrill 8 case. 9 All of those cases say, a very simple 10 test, if the information to be relevant to the 11 case has to be believed as true, it's hearsay. 12 And also, in those cases, Gacke and 13 Morrill in particular, but also as explained in 14 the Arnold v. Lee case, if evidence like this, 15 Exhibit 1075, were to be admitted when it is 16 either irrelevant or is hearsay, that it would 17 be prejudicial and misleading and confusing. 18 And we've discussed in global the 19 Plaintiffs' objections on those grounds because 20 here it's pretty clear that Microsoft wants the 21 jury to believe these articles as being true 22 and wants the jury to believe that these 23 articles are written by experts and that these 24 people's opinions should be taken as true and 25 trusted. 3881 1 And for all of those reasons, the 2 exhibit should be rejected for any use during 3 opening statement. 4 I note at the page 14 of Microsoft's 5 brief, they really get to the nub of what they 6 -- of their contention, and they say, simply by 7 creating a buzz about a product, positive or 8 negative, they affect the product's success. 9 This is entirely permissible under the 10 Iowa Supreme Court's decision in Fanning. 11 So their test is if it creates buzz, 12 and that does not satisfy -- it does not 13 satisfy Fanning. It does not satisfy Gacke. 14 Plaintiffs submit that DX 1075, and 15 really all these product reviews, should be 16 rejected for those reasons. 17 THE COURT: Do you want to go by each 18 one? It might be easier. 19 MR. NEUHAUS: Sure. 20 He started back with the Iowa 21 circulation. 22 It's irrelevant for all the reasons 23 I've already said. It's -- they've pled a 24 worldwide market. They have pled that apps 25 developers, applications developers, not in 3882 1 Iowa, but elsewhere, were misled. So it 2 doesn't matter whether -- what percentage of 3 Iowans read these magazines. 4 But using his tests for a moment, if 5 you look at the document that he handed out, 6 the materials regarding Comes and the notice in 7 Comes, if you look one above PC Magazine, 8 you'll see Newsweek, which has a circulation in 9 Iowa of 32,000. 10 So using Mr. Cashman's math, if PC 11 Magazine had reached one -- no. .003 of 12 Iowans, less than one-tenth of 1 percent he 13 says, then Newsweek reached, I guess, 1.2 14 percent of Iowans. And I don't think anybody 15 would doubt that Newsweek is a widely 16 circulated publication. 17 And as he did point out, the -- each 18 of these publications is in any case read by 19 multiple readers. 20 So I don't think that that is the 21 appropriate way to ask the question. 22 The question on this motion is -- he 23 then went on and said we had not proven that PC 24 Magazine online, we have offered no proof of 25 circulation for that -- for the online version. 3883 1 The question on this motion is whether 2 we have a good faith basis for believing that 3 we will be able to establish to the Court that 4 PC Magazine is widely read or generally 5 circulated in the language of Fanning, as I 6 recall it. 7 And witnesses will testify, and have 8 testified, that PC Magazine is widely read, is 9 viewed by people marketing PC computers and 10 software as a key magazine in which to get 11 positive reviews. 12 This is on the reviews part of it, and 13 that editor's choice is a very important thing 14 and affects sales. 15 And we have offered a systematic study 16 by Kevin Murphy that he will testify to it, to 17 the correlation between reviews of this kind, 18 including in PC Magazine, and sales. 19 So we have established a good faith 20 basis, and there's absolutely no doubt that we 21 can show that the editor's choice -- the 22 editor's choice awards each year are published 23 in the magazine. It's kind of a technical 24 argument at a stage when we're not held to that 25 standard. 3884 1 He says that -- this was on apropos of 2 how many consumers these reached. 3 And if you take the 1.1 million figure 4 for PC Week or PC Magazine times the readers 5 per magazine, you're going to get 5.3 million 6 readers. 7 But again the point is that it's 8 certainly widely enough circulated to have an 9 effect on sales, and we can establish that 10 through the testimony of competent witnesses 11 whose job it is to worry about the effect on 12 sales of reviews. 13 The question in Gacke, like in Morrill 14 and Arnold, was whether the questionnaires that 15 were produced in discovery to the operator of 16 the animal processing facility created a legal 17 obligation to abate. 18 It wasn't a question of whether 19 anybody was tricked into believing something as 20 to what that question, which is the head fake 21 question, there is -- if the relevant question 22 is what information would have been available 23 to the -- the party at that time, what should 24 the actor in that case the -- in this case the 25 ISVs, what should they have been aware of. 3885 1 And as for the prejudice of this 2 article on the editor's choice award, I come 3 back again to the point that Ms. Conlin is 4 offering the trade press, and her entire 5 freeze-the-market theory is based on this broad 6 theory of freeze the market. 7 And we have to be able to show what 8 the market knew about on the question which is 9 relevant for this of product reviews. 10 She offers the Z-NIX article to show 11 the reaction of Microsoft, and she quotes it to 12 the jury and will offer to the jury, presumably 13 if she has a good faith basis for getting it 14 in, she presumably will offer it for that 15 purpose, the sentences that say that Z-NIX has 16 done compatibility testing with DR-DOS and 17 Windows and has found them to be completely 18 compatible, that is prejudicial, of course, to 19 Microsoft. 20 It was offered to show Brad 21 Silverberg's reaction. 22 We are offering all of these product 23 reviews for the point that they do influence 24 sales. 25 The language that is used in these -- 3886 1 the fact of the awards and the language that's 2 used affect sales. A positive review does 3 affect sales, and that is a relevant fact. 4 Thank you, Your Honor. 5 THE COURT: Thank you. 6 Mr. Cashman, anything else on this 7 one? 8 MR. CASHMAN: Just a couple of points. 9 Mr. Neuhaus keeps mixing apples and 10 oranges by mixing the head fake articles with 11 product reviews, and on the majority of his 12 comments he referred to applications 13 developers. 14 This doesn't have anything to do with 15 applications developers. We're talking about 16 Iowa consumers. 17 Second of all, trying to bolster the 18 circulation of PC Magazine by referring to 19 Newsweek actually underscores the very reason 20 why in Iowa, and everywhere else, magazine 21 articles and newspaper articles and such are 22 not admissible because they're not reliable for 23 a lot of -- for a whole host of reasons. We 24 won't go over all of them again. 25 Third, Mr. Neuhaus tries to articulate 3887 1 a good faith basis standard when that's not the 2 standard. 3 Obviously, the Court isn't going to 4 let in inadmissible hearsay and is not going to 5 let in irrelevant material that runs a 6 substantial risk of prejudicing the Plaintiffs, 7 and certainly when it substantially outweighs 8 any probative value when Microsoft again and 9 again and again fails to provide the basic 10 foundation of actual notice, a causal link to 11 conduct by anybody. 12 Next, Mr. Neuhaus keeps saying well, 13 our expert will say something. 14 And again, I'm not going to belabor 15 the point because the record is clear, as I 16 pointed out yesterday, that Mr. Murphy doesn't 17 make that statement. 18 All he does is say I've got different 19 kinds of information. He doesn't say he's done 20 a study and that there is a -- is some kind of 21 causal connection, because he didn't do that. 22 And furthermore, that reference to 23 Mr. Murphy underscores in two additional ways 24 why this shouldn't be used on opening 25 statement. 3888 1 First of all, I think if you read the 2 Gacke case and read the Arnold v. Lee case, 3 there's going to be some dispute about the 4 extent to which the reliance on this stuff -- I 5 mean, that's going to be a question, and it's 6 -- I think that's one of the issues discussed 7 in the Arnold v. Lee case about the extent to 8 which that hearsay or alleged nonhearsay could 9 be considered by the expert who testified in 10 that case. 11 So that's an issue to fight later, but 12 it underscores why it's an expert issue to be 13 handled later and why it's not appropriate for 14 Microsoft to be putting this stuff in front of 15 the jury right now. 16 And lastly, the continued attempts to 17 confuse the issue by the comments by Ms. Conlin 18 in opening the Z-NIX article, the Brad 19 Silverberg article. We went over that. 20 And I went back and checked again, and 21 there's no objection by Microsoft to the use of 22 that document, and you may recall that when 23 Mr. Tuggy and I stood up in court clearing a 24 few exhibits in advance of opening, Microsoft 25 didn't have an objection to us using that 3889 1 document. 2 And the reason was, as I explained on 3 the record at the time, is that it was clearly 4 for notice. It was a reaction. It was 5 spontaneous and contemporaneous by Mr. 6 Silverberg to information that he received. 7 And as far as the other exhibit which 8 Mr. Neuhaus used this morning, again, that is 9 -- there's a debate apparently about whether 10 the portion that was referenced by Ms. Conlin 11 is a press release or an admission or something 12 else by Microsoft; but most importantly, it 13 would still satisfy the criteria of -- there 14 was actual notice in that exhibit. 15 Looking at the top line in that 16 exhibit, there's -- it's from Colleen Lacter to 17 Claire Lematta, and she says, this is a result 18 of the letter that went out objectively 19 discussing MS-DOS mistakes we made in customer 20 feedback. The letter was signed by Brad Chase. 21 It was sent via regular mail. 22 And she is reacting to information 23 that is provided in this E-mail. 24 So, in other words, Your Honor, this 25 is not a display of what the parties have 3890 1 referred to from time to time as naked trade 2 press. 3 Everything that Microsoft is 4 proffering here, including DX 1075, is naked 5 trade press. 6 This, and the Silverberg memo that we 7 looked at earlier, have actual notice. They 8 have action in response to that actual notice. 9 It's contemporaneous; it's spontaneous. 10 And where it doesn't matter what the 11 content is of the information. 12 So this, even if it were trade press, 13 is clearly within the proper use of the -- of 14 nontrade press -- pardon me -- nonhearsay uses. 15 So that doesn't change the fact that 16 as it relates to 1075, Microsoft is wrong on 17 the law. 18 They have provided no evidence that 19 anybody read this. They provided no causal 20 connection with any action. And because it has 21 to be believed as true to be -- to be relevant 22 at all to this case. 23 So for that reason, 1075 and all these 24 product reviews should be rejected. 25 Thank you. 3891 1 THE COURT: Thank you. 2 DX 2912? I assume you want to go in 3 order; is that right? 4 MR. CASHMAN: Yes. 5 2912 is an article in PC World from 6 May of 1992. 7 So the first issue that arises here is 8 there's not any -- no foundational evidence in 9 the record for PC World, as I described 10 yesterday. None. 11 The article here is called Windows 3.1 12 Delivers, and this is another cherry-picked 13 article by Microsoft, but it's got -- it's a 14 combination of three different articles and 15 enumerable, at least three different authors, 16 but you don't know the basis for their 17 comments, what they did, what their studies 18 encompassed. 19 Those were all the kind of reasons 20 that were explained in the evidence I supplied 21 this morning and in the cases that we cited in 22 our brief that highlight the foundational lack 23 of support for this kind of information. 24 Again, even though this is a lengthy 25 exhibit, Microsoft fails to identify any part 3892 1 of it that they want. So it's defective on 2 that grounds. 3 And then I won't repeat the argument 4 as it relates to all the fundamental problems 5 that exist with respect to all of these 6 articles. 7 This one simply does not satisfy the 8 requirements necessary for use even as a 9 nonhearsay article, and Plaintiffs request that 10 it not -- that Microsoft not be permitted to 11 display or discuss it during opening. 12 Thank you. 13 THE COURT: Mr. Neuhaus? 14 MR. NEUHAUS: Very briefly. 15 Fanning establishes the test for 16 influence on market price, first. 17 Second, there is evidence in the 18 record on PC World. Both Ms. Conlin, who 19 explicitly referred to PC World as influential, 20 as one of the influential publications that 21 froze the market, that alone, concession by our 22 opponents, should be enough. 23 And we have evidence cited in the 24 Footnote 3 on page 7 of our brief that 25 Mr. Machrone reported the circulation of PC 3893 1 World was nearly as large as PC Magazine, and 2 Robert Cone, a developer, a long participant in 3 the industry from Borland and elsewhere 4 reported on the fact that PC World is widely 5 read. 6 I also won't repeat all the arguments 7 that we've recounted up till now. I think that 8 they will not vary with respect to all the 9 product reviews. 10 THE COURT: Anything else on 39 -- 11 2912? 12 MR. CASHMAN: The reference to 13 Ms. Conlin's use of the word influential isn't 14 the issue. That's not the test. 15 The test is whether for foundational 16 purposes whether it's a publication of general 17 circulation. 18 The evidence we've supplied 19 establishes it is not, and Microsoft has 20 nothing to the contrary. 21 And furthermore, Microsoft doesn't 22 have anything to rebut this and therefore can't 23 dispute it. There's no evidence that it was -- 24 that this article was ever read by anybody; 25 that anybody ever did anything about it. 3894 1 And furthermore, again under Gacke, 2 the Gacke test, it's clearly hearsay. 3 So Plaintiffs again request that this 4 one not be permitted to be displayed or 5 discussed during opening statement. 6 THE COURT: Very well. 7 2914. 8 MR. CASHMAN: 2914 is -- this one's 9 from PC Magazine, January 1996. 10 And it's described as or titled The 11 Best of 1995, and the author is Jake Kerschner, 12 with many contributors. 13 Again we have all the fundamental 14 issues that we discussed in general and in 15 connection with some of the previous exhibits. 16 And all the same problems exist. 17 There's no foundation. There's no 18 proof of actual -- that anybody's ever read 19 this article. There's no proof that anybody 20 ever acted on this article. 21 And to make this article relevant, it 22 would have to be believed as true, and I think 23 that is clearly evidence from Microsoft's 24 comments wherein they say we want this to show 25 that it influenced sales in our favor. 3895 1 That's saying people had to read this 2 and believe that Microsoft products were better 3 or that they were somehow -- there was a reason 4 why they should buy more Microsoft products or 5 buy Microsoft products instead of other 6 products. 7 And that means they had to believe it. 8 They wouldn't be buying a Microsoft product if 9 they read this and didn't believe what was 10 being said. 11 So it would have to have been believed 12 as true to make it relevant, and therefore it's 13 inadmissible hearsay. 14 And that's the point again that was 15 made in Gacke and the Morrill case, which I 16 won't belabor. 17 Thank you. 18 THE COURT: Thank you, Mr. Neuhaus. 19 2914. 20 MR. NEUHAUS: 2914 is offered for the 21 proposition that receiving the best of '95 22 award, both Windows 95 Suites, Microsoft Office 23 and Microsoft Windows 95, received it. We 24 don't care about any of the other products that 25 are mentioned, only those two. 3896 1 That fact alone has an effect on 2 sales. We've established that, we believe, 3 with adequate competent testimony, both from 4 experts and from fact witnesses, and we will 5 have further such evidence at trial. 6 And that is what's required under 7 Fanning, and I repeat again that the relevant 8 -- Fanning is about as on point as you can get 9 in the sense that it dealt with precisely the 10 question of whether market values can be 11 affected by publication of bad news in that 12 case, about the land in question in that case. 13 That is, whether the pipelines that were going 14 to be across those lands were dangerous or not. 15 In that, you can say that the reader 16 has to believe that in order to not want to buy 17 the land. 18 That's precisely the situation we have 19 here. A consumer has to believe in that sense 20 that the reviewer at least believed that this 21 was a good product. It's not offered to prove 22 that the pipeline was dangerous, and it's not 23 offered to prove that, in fact, the product was 24 a good product. 25 It's only offered to prove the effect 3897 1 on readers of -- and on the market of this best 2 of '95 award, and it's a very commonsense 3 proposition that in what is, undoubtedly, the 4 one of the two or three premier computer 5 magazines when you get the best of award, 6 that's important and that -- that's 7 self-evident proposition that is important to 8 sale and affects sale is what we think we can 9 amply establish. 10 Thank you, Your Honor. 11 THE COURT: Thank you, Mr. Cashman. 12 MR. CASHMAN: It's an incredible 13 claim, I think, to say that it's self-evident 14 because we have 25 million pages of discovery 15 in this case and hundreds of depositions, and 16 Microsoft has been unable to produce any 17 evidence showing that anybody read this or that 18 anybody did anything about this article. 19 So it's anything but self-evident. 20 And Microsoft keeps getting wrapped 21 around the axle, I think, with respect to the 22 Fanning case. 23 The fundamental issue there is that 24 anhydrous ammonia installation is a 25 undisputable fact that it's dangerous and would 3898 1 have adverse impact on property values under 2 the test that the Iowa Supreme Court article 3 calculated in Fanning for evaluating property 4 values. 5 In contrast, all of these product 6 reviews, they are not indisputable facts, but 7 they're just opinion pieces, cherry-picked 8 opinion pieces, and so the case that we've 9 cited in our brief, and which we've supplied 10 all, are pretty clear about drawing that 11 distinction where you're talking about 12 opinions. 13 It's not only lacking in foundation, 14 but to believe an opinion then makes it 15 inadmissible hearsay. 16 And Mr. Neuhaus's comments that they 17 want to use this to show that Microsoft 18 products were the best and that it influenced 19 sales, although there's no proof of that, 20 certainly means that it would have to have been 21 believed by the phantom reader as true to make 22 this article relevant. 23 So it's hearsay, it's -- and all the 24 foundational issues have not been satisfied. 25 Plaintiffs submit that Microsoft 3899 1 should not be allowed to display or discuss 2 this during opening statement. 3 Thank you. 4 THE COURT: 2953. 5 MR. CASHMAN: 2953 is a January 10, 6 1995 article from PC Magazine called The Best 7 of 1994. This one is written by Robin Raskin, 8 and with many contributors that are -- I'm not 9 sure they're all identified, but they certainly 10 are not all identified with respect to which 11 opinion pieces they wrote. 12 Again, all of the same defects exist 13 here. 14 I want to underscore in connection 15 with this one and all of the prior exhibits 16 that we've talked about on product reviews that 17 you've heard Microsoft say one of its key 18 defenses in this case is going to be that its 19 products were better, and that's why people 20 purchased them, and that's what -- why 21 Microsoft has been successful. 22 So that is an overarching issues in 23 the case, one of the central issues in the 24 case, and at least for Microsoft. 25 And when you read Gacke, and when you 3900 1 read the Arthur -- the Arthur case, and when 2 you read Morrill, all those cases where they're 3 looking at the issue of whether it's hearsay or 4 not hearsay, they also go on to discuss the -- 5 in connection with the prejudice element, that 6 it's particularly necessary to keep out this 7 kind of evidence when it goes to a key issue in 8 the case. 9 And that's what would be the situation 10 with respect to all these product reviews. It 11 goes to a key issue from Microsoft. 12 And if it's permitted to be displayed 13 or used, that would be -- I think the Gacke 14 case and the Morrill case and others 15 essentially say that's prejudicial per se. 16 So for that reason, and for all the 17 other reasons discussed in connection with the 18 others, Plaintiffs submit that this article 19 should not be permitted to be displayed or 20 discussed during opening statement. 21 MR. NEUHAUS: This is another best of 22 award, Your Honor, again -- 23 THE COURT: What portions do you want 24 of this? 25 MR. NEUHAUS: Page 113. 3901 1 THE COURT: That's the one you want. 2 MR. NEUHAUS: 113 has again -- 3 THE COURT: I assume you don't want 4 146 at all? 5 MR. NEUHAUS: I don't know what 146 6 is. 7 THE COURT: It's the 8 thumbs-up/thumbs-down award. 9 MR. NEUHAUS: Let me see. They want 10 to offer the thumbs-down on 146, they can. 11 We're offering it for 113. 12 THE COURT: Okay. You want page 113? 13 MR. NEUHAUS: 113, which is Microsoft 14 Word for Windows and Microsoft Excel Both Win 15 PC Magazine's Best of '94. 16 For what it's worth, I don't think it 17 makes much difference, but you see the author 18 of those reviews there. 19 And again you had ample testimony that 20 these are carefully conducted tests, reviews of 21 these products, and are significant in the 22 market. 23 Special Master McCormick held that 24 these reviews are all widely read and were 25 properly offered for a not for truth purpose. 3902 1 Judge Peterson in Minnesota held that 2 we could refer to these reviews in opening on 3 the question of prejudice. 4 Mr. Tulchin will only be offering them 5 for the effect on the market. 6 He can say that in his opening an 7 instruction can be made if he doesn't or if the 8 Court views it as necessary. 9 And finally, our again, whether or not 10 the exhibits come in for their not for truth 11 purpose, our experts, I believe, will be 12 allowed to talk about the effect of positive 13 product reviews on the market, and Mr. -- and 14 Professor Murphy did do a systemic review. 15 He says so in the excerpt provided to 16 the Court of reviews and how they correlate 17 with increased sales. 18 It would be, in my mind, truly error 19 to exclude that, and if he can talk about that, 20 then Mr. Tulchin should be allowed to talk 21 about that fact in his opening. 22 THE COURT: Could I go back? I'm 23 sorry to do this. 24 I would need to go back to 2914 25 because there's different pages where they talk 3903 1 about Windows things, and there's no -- I don't 2 see a page number, but I'm looking at like page 3 -- just page 3 of the exhibit. Is that the 4 page you want and then the page following? 5 MR. NEUHAUS: It's actually only page 6 3. 7 THE COURT: Only page 3. 8 MR. NEUHAUS: This one here that says 9 operating systems and Windows 95 Suites. 10 THE COURT: Just those two? 11 MR. NEUHAUS: We don't care about the 12 flow charting stuff. It's just the reviews 13 relating to the particular products at issue. 14 THE COURT: Not the Windows 95 15 utilities? 16 MR. NEUHAUS: No, that's not a product 17 at issue. 18 THE COURT: Thank you. Just wanted to 19 make sure. 20 MR. NEUHAUS: Again, this is just what 21 we would want to use on opening, Your Honor. 22 MR. CASHMAN: Your Honor, Microsoft is 23 just plain incorrect when they say they've 24 proffered evidence that these are carefully 25 conducted tests. There's no such evidence in 3904 1 the record. And what you have here are just 2 opinions. 3 The cases which we've cited in our 4 brief are numerous, which highlight that when 5 you're talking about opinions, it's 6 particularly problematic, because then you're 7 depriving the Plaintiffs of the opportunity to 8 cross-examine these people about their 9 opinions, these alleged experts who have never 10 been qualified as experts. 11 We don't know what tests they ran. We 12 don't know what methodologies they ran. We 13 don't know who was involved, and we don't know 14 what kind of influence Microsoft asserted on 15 the authors. 16 Along the lines we saw in the evidence 17 submitted this morning, common practice by 18 Microsoft to influence -- try to influence 19 these publications, and it's just 20 inappropriate. 21 Plaintiffs submit it should not be 22 permitted for any purpose in opening statement. 23 Mr. Neuhaus keeps trying to hang his 24 hat on their expert Murphy, and the simple fact 25 is he doesn't say that he's run a test. He 3905 1 didn't run a survey that -- they do not have a 2 survey correlating trade press reviews with 3 sales. Doesn't exist. 4 Doesn't exist. 5 But if Microsoft really thinks that 6 Murphy is or should be permitted to testify 7 about trade press, that is exactly why it 8 should be reserved till later, and that's 9 exactly why, as I've stated before, Plaintiffs 10 did not ask for trade press to be precluded in 11 its entirety and limit it for this time to 12 opening statements. 13 Thank you. 14 THE COURT: Thank you, sir. 15 Mr. Neuhaus? 16 Wait a minute. I'm sorry. We're 17 going to the next one. Forgive me. 18 MR. NEUHAUS: I could keep talking. 19 THE COURT: 3389, I believe. I'm just 20 used to going back and forth. 21 MR. CASHMAN: I think that the 22 comments and our objections to it are along the 23 lines of what we discussed previously, and I 24 don't think there's any need to repeat them, 25 but again we do have a big article here, and 3906 1 Microsoft is not even bothered to identify what 2 part it wishes to use. 3 THE COURT: Mr. Neuhaus? 4 MR. NEUHAUS: I agree that we 5 shouldn't go back and forth on this. 6 In our -- in the brief the -- we did 7 identify the page. And, unfortunately, it's 8 page 126. It's barely readable in the copy 9 that he's given you. 10 THE COURT: 126? 11 MR. NEUHAUS: 126 is the -- 12 THE COURT: I've got it. 13 MR. NEUHAUS: Is the portion we want 14 to read or use, although I believe all of this 15 could be used. 16 It is, in fact, the discussion of 17 Microsoft Office 4 that we're interested in, 18 and if you want, if it's relevant to Your 19 Honor, I can give you a better copy that you 20 can read it because the one he's got -- 21 THE COURT: Do you have a better one? 22 MR. NEUHAUS: Yes, I do. It actually, 23 I think, copies from Plaintiffs' papers, but 24 there it is. 25 THE COURT: Thanks. 3907 1 MR. NEUHAUS: Again, Your Honor, 2 that's what we intend to use on opening. I 3 believe all of it would be admissible in the 4 end. 5 MR. CASHMAN: Well, Your Honor, this 6 one suffers from all the same defects, and even 7 more so the author isn't even identified here. 8 So it's just typical of everything 9 we've looked at where you don't know who is 10 reviewing it, what they're doing, what test 11 they've run, what methodologies. 12 Microsoft had the opportunity to 13 conduct plenty of discovery and then do an 14 expert survey if it wanted to use the trade 15 press for the purpose that they're asserting. 16 They chose not to do it. Instead, 17 they're trying to make a huge leap over the 18 fact that they just have no evidence by trying 19 to use this trade press. 20 When you look through these articles 21 and you see all the opinions, when they're 22 multiple products discussed in there, it really 23 underscores the fact that these just -- these 24 just are opinions. 25 When you looked at that prior exhibit 3908 1 and said what about this last page with the 2 thumbs-down, and that just shows that this 3 isn't like anhydrous ammonia where you're 4 talking about a fact that everybody knows is 5 dangerous, and it's going to have an adverse 6 effect on your property values. 7 Instead, you've got all these 8 opinions, and if these were to be permitted, as 9 I explained this morning, that opens the door 10 to all the negative opinions about Microsoft 11 and its products, too, and Plaintiffs believe 12 that this case is not about bad battling trade 13 press, battling opinions in the trade press. 14 So to the extent trade press product 15 reviews or any kind of trade press is relevant, 16 that's an expert issue. Let the experts -- 17 let's fight it out with the experts, but it's 18 certainly inappropriate for use in opening 19 statements. 20 Thank you. 21 THE COURT: Thank you, sir. 22 MR. NEUHAUS: Your Honor, I don't want 23 you to be misled by Mr. Cashman. 24 The authors are indicated on the 25 second page of the document. It shows their 3909 1 names. And then testing and research is done 2 by various names listed thereunder. 3 And if the experts are going to be 4 talking about this, they, undoubtedly will, 5 then there's no doubt we should be allowed to 6 refer to these in opening. 7 We also believe that the documents 8 themselves will come in under the Fanning test. 9 THE COURT: 3558. 10 MR. CASHMAN: I'm not going to repeat 11 my prior arguments, but they all apply with 12 equal force for this exhibit. 13 MR. NEUHAUS: Same here, Your Honor. 14 THE COURT: Ditto, ditto. 15 3573. 16 MR. CASHMAN: Same comments, Your 17 Honor. 18 I'll just for the record, all my 19 comments apply with equal force to this 20 exhibit. 21 THE COURT: Is there a particular page 22 on this one too? 23 MR. NEUHAUS: I don't think so, Your 24 Honor. This is all about the product at issue. 25 THE COURT: It's all about the same 3910 1 product. 2 MR. NEUHAUS: All about Office 97. 3 THE COURT: Any other comments on it, 4 sir? 5 MR. NEUHAUS: No, sir. 6 THE COURT: 3573, is that what we just 7 did? 8 MR. CASHMAN: I'm not going to make 9 any new comments with respect to this new 10 article, but all my comments apply with equal 11 force. 12 MR. NEUHAUS: That is, I believe, the 13 one we just did. 14 THE COURT: 3700. 15 MR. CASHMAN: Again, I'm not going to 16 reargue all the issues. 17 THE COURT: That does the trade press. 18 MR. NEUHAUS: That does the product 19 review. 20 THE COURT: Product reviews, sorry. 21 I'm getting mixed up myself. 22 MR. CASHMAN: Next, I have the other 23 portion of what was in Plaintiffs' Exhibit C to 24 the motion, the specific head fake articles. 25 THE COURT: First one is 252. 3911 1 MR. CASHMAN: This is the chart that 2 has the blue on the top with the attached 3 exhibits. 4 THE COURT: Is the highlighted portion 5 on here the -- portions what you're seeking, 6 Mr. Neuhaus, or did you just highlight those? 7 MR. CASHMAN: I do not think they are, 8 but in the -- what I just handed up as the part 9 of Plaintiffs' Exhibit C does quote the 10 language that they stated that they wanted to 11 use. 12 THE COURT: Okay. 13 MR. CASHMAN: And this group of 14 articles, the so-called head fake articles 15 applies to software developers only. 16 And again, we believe for all the 17 reasons that we discussed primarily yesterday 18 that the proof, the foundational proof is 19 deficient about whether actual notice of any of 20 these specific articles was provided to 21 decision-makers at any software development 22 company. 23 Microsoft supplied some testimony from 24 Pete Peterson and a couple of others, which 25 they contend supplies that foundation. It does 3912 1 not in Plaintiffs' view because they never made 2 the causal connection. There is no link in 3 that testimony. 4 As the Court will recall yesterday, I 5 pointed out that even when some of these 6 articles were displayed to the witnesses in 7 those cases -- in those deposition passages, 8 the examining attorney failed to ask whether 9 the witness had read the articles. 10 And so that makes them deficient from 11 a foundational point of view as indicated on 12 the chart. 13 Again, all these articles, head fake 14 articles, also suffer from the Gacke problem 15 because they would have to be believed as true 16 to be relevant. 17 And Microsoft will attempt to dispute 18 that, but simple fact is, that if these 19 articles are being proffered for the purpose as 20 Microsoft alleges, that Bill Gates or Microsoft 21 was telling developers to write for Windows, 22 that would have to be believed by the recipient 23 of the information to make them relevant. 24 If the person received the information 25 and said I'm going to ignore it, that makes the 3913 1 information irrelevant. 2 If the person read the information and 3 said I don't believe it because Gates told me 4 personally something different, or Microsoft 5 employees told me something different 6 personally, then it would be again irrelevant. 7 The only way that these alleged 8 statements are relevant is if the reader were 9 to believe them as being true. 10 And I think when you read the 11 testimony of the excerpts that Microsoft 12 attached to their brief, you'll see that these 13 people didn't -- what they were explaining 14 about is that they're getting a lot of 15 conflicting information from Microsoft. 16 In that transcript testimony that they 17 provided to you, none of them say Microsoft 18 never told us that we shouldn't -- that we 19 should write for Windows. They never say that 20 Microsoft was telling us only to write for 21 OS/2. 22 They acknowledge in the testimony that 23 Microsoft was saying yeah, write for OS/2, but 24 the issue is, this head fake issue is that the 25 developers were not getting a clear message 3914 1 from Microsoft about its commitment to OS/2. 2 And that's a different issue, and it's not 3 addressed by the language that Microsoft quotes 4 here. 5 So it's irrelevant, and that's in 6 multiple senses. 7 So for all these reasons, Plaintiffs 8 believe these articles are (a) foundationally 9 deficient, they're irrelevant because there's 10 no proof of actual notice. 11 There's no proof that anybody took 12 action one way or another after reading them. 13 And because to make them relevant, they'd have 14 to be believed as true, and therefore they're 15 inadmissible hearsay. All those issues mean 16 they shouldn't be permitted in opening 17 statement. 18 And then the same prejudicial issues 19 apply that we discussed before, and I won't 20 repeat those here. 21 THE COURT: Did you want to go through 22 individual ones? 23 MR. CASHMAN: I think that these we 24 can -- 25 THE COURT: As a group. 3915 1 MR. CASHMAN: It's okay to address 2 them in the global. 3 MR. NEUHAUS: That doesn't surprise me 4 that he would think that. 5 These articles are offered for the 6 purpose of showing that competing software 7 developers had available to them notice or 8 information about Microsoft's intentions with 9 respect to Windows and its -- and the success 10 of Windows at this critical time when their 11 experts say Microsoft was misleading developers 12 into development for OS/2. 13 Mr. Cashman said that well, the 14 problem is that the developers were getting 15 conflicting information, and the point is, we 16 have to be allowed to put in front of the jury 17 part of some of the information that they were 18 getting, and this is some of the information 19 they were getting. 20 As to the particular foundation for 21 this publication Infoworld, we have established 22 was widely read in the software industry, 23 particularly at WordPerfect and Lotus, we have 24 testimony from both, I believe, on that, and as 25 to this very -- and on the portion that we're 3916 1 using it is, of course, and there's no doubt 2 about this with respect to any of these 3 articles, the sections where Microsoft is 4 quoted as saying something to the ISV 5 community. 6 This is Infoworld, a publication that 7 is particularly aimed at the developers and to 8 the industry as a whole. 9 And the language, the only language in 10 which Mr. -- in which a Microsoft witness -- 11 Microsoft employee is quoted, I believe is 12 right there. 13 In any case, this is what we intend to 14 use it for in opening, is right there on page 2 15 in the left -- sorry, page 149, the second page 16 of the exhibit. 17 In the meantime, Windows sales are 18 going through the roof, and then the quote 19 begins, we're selling 50,000 copies of Windows 20 a month and it's gaining momentum said Bill 21 Gates, chairman of Microsoft, in a speech 22 before the Chicago Association of Microcomputer 23 Professionals last week. 24 Quote, it's incredible growth that 25 even I can't explain. 3917 1 That enthusiasm for Windows expressed 2 by Mr. Gates is what we're offering that for, 3 and contrary to what Mr. Cashman just said, we 4 do have Pete Peterson, the executive vice 5 president of WordPerfect, asked about this very 6 article, and he's asked on pages 154 -- this is 7 at Tab 13 of our papers. At 154 to 156 he's 8 asked about this, and he's asked -- this 9 exhibit is marked. 10 I've marked as Exhibit 15 a copy of 11 Infoworld dated November 14, 1988. 12 Sir, what was Infoworld again? One of 13 the leading -- sorry, sir, what was -- was 14 Infoworld again one of the leading trade 15 publications in the industry? 16 Answer: Yes. 17 Question: And was this one of the 18 publications that you regularly reviewed? 19 Answer: Yes. 20 And then he just -- if you look at the 21 -- did you understand that -- I'm sorry, I have 22 to find the place. 23 Question: Line 22 of page 155. 24 And then the article reports, in the 25 meantime, Windows sales are going through the 3918 1 roof. Quote, we're selling 50,000 copies of 2 Windows a month and it's gaining momentum. 3 It's gaining momentum, says Bill Gates, 4 chairman of Microsoft, and then he writes its 5 incredible growth that even I can't explain. 6 Question: Is that information that 7 you would have been aware of in November 1988? 8 Answer: Yes. 9 Question: And would others at 10 WordPerfect have been aware of it? 11 Answer: Yes. 12 So if this article and others like it 13 can't come in, I have to say that the standards 14 are not being applied fairly because we need -- 15 it is perfectly reasonable to place before the 16 jury some of the information that key ISV 17 developers were getting and the developer 18 community in general is getting about 19 Microsoft's intention and its enthusiasm for 20 Windows platform at this time 1988. 21 MR. CASHMAN: Well, Your Honor, on -- 22 if we'll discuss these one by one, I'm happy to 23 do it on 252. 24 The language that Microsoft wishes to 25 use simply, first of all, doesn't even really 3919 1 discuss the issue as they claim it does. I 2 think that's obvious from the quote itself. 3 Just to be saying we're selling 50,000 4 copies of Windows a month and it's gaining 5 momentum, even if you took their argument as -- 6 at face value, that they want to show that the 7 ISV community was being told to write for 8 Windows, that statement doesn't support that 9 contention. 10 So for that reason it's irrelevant. 11 Second of all, as I've explained 12 before, and the testimony that Mr. Neuhaus just 13 provided from Mr. Peterson underscores the 14 absence of relevance, because they never asked 15 Peterson if he read this magazine. They never 16 asked Peterson -- I mean, this particular 17 article. They didn't ask Peterson if he took 18 any action or failed to take any action on this 19 article. 20 They just asked him what was his 21 general knowledge. And if this information 22 that they read out of there was consistent with 23 his general knowledge, that's not appropriate 24 use of this -- of this article. 25 And again, to make it relevant, it 3920 1 would have to be believed as true anyway. 2 So it's hearsay. 3 Plaintiffs submit it should not be 4 permitted. 5 MR. NEUHAUS: I would propose, Your 6 Honor, that we try to do this in a group just 7 because I'm happy to go through them one by 8 one. I don't think the arguments are going to 9 change very much again -- 10 THE COURT: I'll do whatever you guys 11 want. 12 MR. NEUHAUS: I think I've said what I 13 need to say about this article. It's offered 14 -- I'll just -- 15 THE COURT: Did you want to go one by 16 one? 17 MR. NEUHAUS: Not really. I think we 18 can summarize what's going on with these 19 articles. 20 THE COURT: Okay. 21 MR. NEUHAUS: I think the picture is 22 clear, some of these articles -- all of these 23 articles are offered for the purpose of showing 24 the information available to developers. 25 We have particular testimony as to 3921 1 several of them. Some of -- this one and 381, 2 where a key developer says that he was -- he 3 would have been aware of -- that he read the 4 publication regularly and he would have been 5 aware of that very piece of information. 6 381, the relevant language is in the 7 article -- I talked about this earlier in this 8 argument. 9 Microsoft details broad applications 10 OS strategy, and that's the one that -- where 11 Bill Gates is quoted as saying anybody who's 12 not doing what we're doing is crazy. 13 It's offered for the nonhearsay 14 purpose of notice to the ISV community. 15 We have Mr. Peterson saying he would 16 have been aware of this, that he read it and -- 17 of the information in that article, that should 18 be enough to allow us to get it in when the 19 claim that we're rebutting is they were 20 deceived by Microsoft, by statements by 21 Microsoft that Microsoft was not -- was 22 recommending that ISVs develop for OS/2, not 23 for Windows; that ISV -- that Microsoft was not 24 committed to Windows, but rather to OS/2 in 25 precisely this period. 3922 1 MR. CASHMAN: Your Honor, first of 2 all, a point of clarification. 3 I think it's important to recall that 4 now we're not talking about the Fanning case so 5 much. We're talking that this put specific 6 people on notice. 7 And for that reason is why I 8 emphasized the lack of actual notice, lack of 9 actual action. 10 But if you listen to what Microsoft is 11 saying, it really is pretty silly, I submit, 12 because think about it in practical terms. 13 They're saying if they asked the Court 14 if you read -- if you read The Des Moines 15 Register regularly, yes, I do and -- well, 16 here, I'm going to show you an article -- I 17 mean, an edition of the Des Moines Register 18 from five or ten years ago. 19 You read The Des Moines Register 20 regularly? Yes, I did. 21 So is this information that you would 22 have been aware of -- I mean, the question is 23 -- it's kind of ridiculous because there's a 24 lot of information in the newspaper, and 25 certainly you can't be held to be on notice of 3923 1 every single article that's in that newspaper. 2 That's why they didn't ask those basic 3 fundamental questions of did you read this 4 article, did you do anything about receiving 5 the information in this article, did you 6 believe the information in this article was 7 correct. If you didn't believe it was correct, 8 why didn't you talk directly to Mr. Gates about 9 it. 10 All those kind of issues they skirted 11 over intentionally, so that this -- because 12 they knew that would preclude them from using 13 the evidence. 14 And now they're trying to mend that 15 gap by just saying, oh, it's widely read and, 16 therefore, we should be able to use it, but the 17 fact is they didn't lay the foundation. They 18 didn't establish its relevance, and it would 19 have to be believed as true. 20 Anyway, it's hearsay for all those 21 reasons. All of these articles should be 22 rejected for the purposes of opening statement. 23 If they think that they have an expert 24 that needs to testify on that -- on the head 25 fake -- so-called head fake issue, which I 3924 1 submit is not even really a fact issue probably 2 for the Jury about what Microsoft should or 3 should not have been saying, I mean, it's 4 really an expert issue. 5 So these articles should be vetted in 6 connection with the experts and it would be 7 improper to permit Microsoft to display them or 8 discuss them in the opening statement. 9 So Plaintiffs would request their 10 motion in that respect be granted. 11 MR. NEUHAUS: May I just respond? 12 THE COURT: Yes, you may. 13 MR. NEUHAUS: Mr. Cashman referred to 14 let's look at this practically. If someone is 15 in court and saying I was deceived, I didn't 16 know about something and you can show that in 17 widely read publications contrary information 18 was available to that person, if you had to get 19 that person to testify, yes, I saw that and, 20 yes, I reacted, you'd never be able to prove to 21 offer that evidence to the Jury. 22 That makes no sense. No person 23 claiming they were deceived would 24 acknowledge -- would forthrightly say, oh, yes, 25 I read that article. And that's why -- very 3925 1 similarly in the San Juan Star case that Puerto 2 Rico case involving the strikers where the 3 question was did the hotel have notice of how 4 the protest had turned violent. 5 You're not required to show that the 6 hotel guy actually read the article that's in 7 the San Juan Star several years after the event 8 when the trial occurs. 9 You are required only to show that the 10 magazine or the newspaper was generally 11 circulated in the community. And that's what 12 we've done here. 13 THE COURT: Anything else on these? 14 MR. CASHMAN: Your Honor, I did have 15 one comment, but I can't remember it so I'm 16 going to forego it. 17 MR. NEUHAUS: I think lack of memory 18 is a perfectly sound way to end this argument, 19 Your Honor. 20 MR. CASHMAN: Plaintiffs would request 21 that their motion be granted, Your Honor, on 22 all 13 of these articles for the reasons we 23 have discussed. 24 THE COURT: Thank you. 25 MR. NEUHAUS: Your Honor, we believe 3926 1 we should be able to refer to this stuff in 2 opening statements. That's what the motion 3 about. 4 On the head fake articles, they are 5 highly relevant to a claim, a central claim 6 that the Plaintiffs make on the applications 7 side of their case. 8 And on the product reviews, they are 9 certainly relevant to showings that the reasons 10 for the success of Microsoft's product in 11 answer to the theories that Plaintiffs are 12 advancing. 13 MR. CASHMAN: Well, for better or for 14 worse, Mr. Neuhaus just reminded me of what I 15 wanted to say, which is that they've -- the 16 fundamental -- one of the fundamental problems 17 with the argument that he's making is 18 Plaintiffs are not claiming misrepresentation 19 or deceit. 20 If you read the excerpts that they 21 provided themselves, and as I indicated in the 22 attachment from Professor Noll, the issue is 23 there was a lot of information out there and 24 Microsoft wasn't clarifying what its intentions 25 were about OS/2. 3927 1 There's no contention in Noll's report 2 and there's no contention anywhere that the 3 market was, quote, being deceived or being told 4 not to write for Windows. 5 So it's -- the way Microsoft tries to 6 get its way on this argument is by setting up 7 the strawman, but that's not the correct 8 situation. 9 What we've got here is Microsoft's 10 failure really to be forthcoming about its true 11 intentions or its commitment to OS/2. 12 So when you read through these 13 quotations in these five head fake articles, I 14 don't even think they pertain to what Mr. 15 Neuhaus suggests they do as I indicated in 16 connection with Defendant Exhibit 252, but, 17 beyond that, they all purport to say developed 18 for Windows and they don't address the issue. 19 So, for those reasons and anything 20 else I previously stated, again, Plaintiffs 21 request that their motion be granted. 22 And that is what I was going to say. 23 MR. NEUHAUS: Since you said it, I'm 24 going to offer the Noll report, the section on 25 the head fake, which clearly talks about 3928 1 deception. You know, you keep saying this and 2 it's just not so. 3 In the section I just gave you, pages 4 145 to 155 of the Noll report, you can read it 5 at your leisure, Your Honor, but I highlighted 6 a few sentences during this period on page 145. 7 During this period that's 1988 to 8 1991, Microsoft steadfastly maintained that 9 ISVs should write the next release of 10 applications for OS/2. That's what we're 11 talking about. 12 That is directly answered by Gates' 13 statement that ISVs who aren't would be crazy 14 not to do what Microsoft was doing, which was 15 developing for multiple platforms. 16 And there are other quotes here. And 17 there are others that I should have 18 highlighted. 19 Thank you, Your Honor. 20 MR. CASHMAN: There are other quotes 21 that Mr. Neuhaus could have highlighted which 22 would show that, as I stated, it's about 23 Microsoft's commitment to OS/2. 24 And I certainly agree with Mr. Neuhaus 25 that you should read through this because I 3929 1 think it will highlight that. 2 But, even more importantly, it 3 highlights what I've said all along that this 4 is an expert issue. 5 And the use of any of these articles, 6 trade press articles, in relation to head fake, 7 in particular, is for the experts. 8 And given everything that Plaintiffs 9 have established with respect to the problems 10 with these proffers, it should not be permitted 11 in opening statement. 12 Thank you. 13 THE COURT: Anything further? 14 MR. NEUHAUS: Eager for your ruling, 15 Your Honor. 16 THE COURT: You're what? 17 MR. NEUHAUS: I'm eager for your 18 ruling. 19 I'm done. 20 THE COURT: I will rule on it this 21 weekend. I will write it up. 22 Can I give it to you Monday morning, 23 is that soon enough? 24 MR. NEUHAUS: Yes, it is. 25 MR. CASHMAN: Thank you. 3930 1 THE COURT: If you're eager for it, 2 you can come over to the house for coffee and 3 rulings. 4 MR. NEUHAUS: Your Honor, thank you 5 for your patience. 6 THE COURT: You're very welcome. 7 Thank you for your excellent 8 presentations. 9 And I hope you all have a great 10 weekend. If you're going home, have a safe 11 trip. 12 (Proceedings adjourned at 4:15 p.m.) 13 14 15 16 17 18 19 20 21 22 23 24 25 3931 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 8th day of December, 2006. 20 21 22 ______________________________ Certified Shorthand Reporter(s) 23 24 25