4869 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 XVIII 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 8:30 a.m., 14 December 14, 2006, in Room 302 of the Polk 15 County 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 4870 1 A P P E A R A N C E S 2 Plaintiffs by: ROXANNE BARTON CONLIN 3 Attorney at Law Roxanne Conlin & Associates, PC 4 Suite 600 319 Seventh Street 5 Des Moines, IA 50309 (515) 283-1111 6 RICHARD M. HAGSTROM 7 MICHAEL R. CASHMAN Attorneys at Law 8 Zelle, Hofmann, Voelbel, Mason & Gette, LLP 9 500 Washington Avenue South Suite 4000 10 Minneapolis, MN 55415 (612) 339-2020 11 ROBERT J. GRALEWSKI, JR. 12 Attorney at Law Gergosian & Gralewski 13 550 West C Street Suite 1600 14 San Diego, CA 92101 (619) 230-0104 15 KENT WILLIAMS 16 Attorney at Law Williams Law Firm 17 1632 Homestead Trail Long Lake, MN 55356 18 (612) 940-4452 19 20 21 22 23 24 25 4871 1 Defendant by: DAVID B. TULCHIN 2 STEVEN L. HOLLEY SHARON L. NELLES 3 JOSEPH E. NEUHAUS JEFFREY C. CHAPMAN 4 Attorneys at Law Sullivan & Cromwell, LLP 5 125 Broad Street New York, NY 10004-2498 6 (212) 558-3749 7 ROBERT A. ROSENFELD KIT A. PIERSON 8 Attorneys at Law Heller Ehrman, LLP 9 333 Bush Street San Francisco, CA 94104 10 (415) 772-6000 11 STEPHEN A. TUGGY HEIDI B. BRADLEY 12 Attorneys at Law Heller Ehrman, LLP 13 333 South Hope Street Suite 3900 14 Los Angeles, CA 90071-3043 (213) 689-0200 15 BRENT B. GREEN 16 Attorney at Law Duncan, Green, Brown & 17 Langeness, PC Suite 380 18 400 Locust Street Des Moines, IA 50309 19 (515) 288-6440 20 21 22 23 24 25 4872 1 RICHARD J. WALLIS STEVEN J. AESCHBACHER 2 Attorneys at Law Microsoft Corporation 3 One Microsoft Way Redmond, CA 98052 4 (425) 882-8080 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4873 1 (The following record was made out of 2 the presence of the jury at 8:27 a.m.) 3 THE COURT: This is a proposed answer 4 to that juror question. Take a look at it. If 5 I need to change it, I'll change it. 6 MR. GRALEWSKI: Your Honor, while we 7 are reviewing that, both parties had e-mailed 8 you last night with respect to the Sculley 9 rulings that you issued regarding 10 clarification. 11 Did Your Honor have a chance to review 12 those? 13 THE COURT: No. I sent an amended 14 order. Did you see it? 15 MR. GRALEWSKI: Yes. The amended 16 order came very soon after the first order? 17 THE COURT: Yeah. 18 MR. GRALEWSKI: Yes. Mr. Tuggy 19 responded. There was a fourth block of 20 testimony -- 21 THE COURT: I missed the fourth block. 22 MR. GRALEWSKI: -- that you had not 23 issued a ruling on. And Mr. Tuggy had 24 requested a ruling. 25 THE COURT: Okay. 4874 1 MR. GRALEWSKI: And I can forward the 2 string again to you, but they should actually 3 be in your in box if you wanted to review it. 4 THE COURT: Let me grab it off my 5 desk. 6 I got 134 to 135. 161, 163. Right? 7 MR. GRALEWSKI: Yes. 8 THE COURT: 181 and 182? 9 MR. GRALEWSKI: Yes. And there was an 10 additional section of 98, 14 to 99, 15 that we 11 had discussed and Mr. Tuggy had requested 12 ruling on. 13 THE COURT: Okay. Was that the 14 Exhibit A? 15 MR. GRALEWSKI: Yes, it was, Your 16 Honor. 17 And then there was a follow-up e-mail 18 from me requesting a further clarification, 19 which you can look at in your e-mail or I can 20 discuss with you. 21 We don't intend to reargue. 22 THE COURT: All right. 23 MR. TULCHIN: Right. 24 THE COURT: Okay. I have 98 through 25 99. 4875 1 MR. GRALEWSKI: Yes, Your Honor. 2 98, 14, through 99, 15. 3 THE COURT: 14 through 15, okay. 4 MR. NEUHAUS: Wait. 97. 5 MR. TULCHIN: Please. 6 THE COURT: Was it 98? 7 MR. GRALEWSKI: 98, 14, Your Honor, 8 through 99, 15. 9 THE COURT: Okay. 10 MR. GRALEWSKI: And the Plaintiffs' 11 clarification was, Your Honor, in your order 12 you had said that Mr. Sculley could testify as 13 to pricing only, and in the context of the time 14 period he was employed at Apple, and we don't 15 intend to reargue that standard. That's the 16 standard that the Court has adopted. 17 Our request for clarification was both 18 answers that you had admitted on their face 19 suggests that he's talking about a period of 20 time that may include the time when he was at 21 Apple, but also may include a time subsequent 22 to that, indeed up until the present. 23 So we ask that Mr. Tulchin be 24 instructed to tell the jury if he decides to 25 play those two chunks that the testimony can 4876 1 only be taken to apply to the period '83 to 2 '93, which was when he was at Apple and seems 3 consistent with the standard you've set. 4 THE COURT: I'm going to allow 98 5 through 99. That's fine. 6 It appears to me that looking at 98 7 and 99 that I don't think that has to be 8 restricted to the 1993 time period because I 9 think he's testifying from the standpoint of 10 how he perceived Mr. Gates as a marketer. So 11 I'll allow that. That's fine. 12 What was the other one? Was there 13 another clarification? 14 MR. GRALEWSKI: Oh, the 181 through 15 182, Your Honor. That was my question. It was 16 a follow-up question. 17 I had asked one question before where 18 I had talked about I believe -- it was on my 19 computer. I'll see how fast it will power back 20 up. 21 MS. CONLIN: While we are waiting, 22 Your Honor, this seemed just a bit harsh. I 23 wonder if the Court could add something like 24 that does not mean that there was anything 25 wrong with the question or with asking it. 4877 1 THE COURT: Defendant? Any response? 2 MR. TULCHIN: To which section of the 3 Plaintiffs' arguments, Your Honor? Is this -- 4 THE COURT: Oh, this juror question. 5 MR. GREEN: The juror question. 6 MR. TULCHIN: I think it's fine as 7 drafted. I wouldn't add anything to it. 8 THE COURT: I'm going to keep it as it 9 is. 10 Would you make a copy of this and then 11 attach a copy? Just give her a copy and then 12 the original should be stapled to this and 13 filed with the clerk. 14 MR. GRALEWSKI: Your Honor, the 15 question, back to Sculley, that was followed up 16 on talked about the large install base that 17 Microsoft currently has. 18 And so, as we point out, we think that 19 the question is sort of couched at least up 20 until 2002, and Plaintiffs don't have anything 21 to say on this. Your Honor's ruling will be 22 okay. 23 THE COURT: I'll allow it. 24 MR. GRALEWSKI: All right. Thank you, 25 Your Honor. 4878 1 THE COURT: Mr. Tulchin can talk about 2 it. 3 MR. GRALEWSKI: Thank you. 4 THE COURT: Anything else before we 5 bring the jury? 6 Oh, the Court's ruling on the 7 limitation in Defendant's opening statement, 8 which was brought up yesterday. 9 There was some argument in regard to 10 whether or not the Defendant has violated the 11 Court's ruling on the motion in limine 12 regarding other acts by competitors. 13 The Court finds at this time the 14 objection of the Plaintiffs is overruled as to 15 limitation of the Defendant's opening 16 statement. 17 The Court stands by its previous order 18 that limits the presentation of evidence of 19 other conduct by competitors as stated in that 20 order. 21 The Court understands that the purpose 22 of the proposed evidence by the Defendant is to 23 show the general business practices of others 24 in the same field of business as the Defendant. 25 The alleged acts or conduct by 4879 1 Defendant's competitors discussed at opening 2 statement must be ordinary business practices 3 and must not be conduct that is illegal or 4 unlawful. 5 The Court will decide the 6 admissibility of acts or conduct of the 7 Defendant's competitors as previously ordered 8 on an issue-by-issue basis as the evidence is 9 proffered. 10 The Court also may instruct the jury 11 at the conclusion of the case something to the 12 effect that you are instructed if you find that 13 Microsoft engaged in anticompetitive conduct, 14 you cannot excuse such conduct by any showing 15 that Microsoft's competitors engaged in like or 16 similar conduct. 17 Conduct or acts by other competitors 18 of Microsoft is not a defense to nor a 19 justification of any unlawful conduct by 20 Microsoft. 21 Anything else on that issue? 22 MR. HOLLEY: No, Your Honor. 23 MR. HAGSTROM: No, Your Honor. 24 THE COURT: Okay. We're ready. 25 (The following record was made in the 4880 1 presence of the jury at 8:36 a.m.) 2 THE CLERK: All rise. 3 THE COURT: Everyone else may be 4 seated. 5 Good morning, ladies and gentlemen. 6 You may continue, sir. 7 MR. TULCHIN: Good morning, ladies and 8 gentlemen. 9 It's Thursday. We're making progress. 10 Yesterday at 2:30 I was telling you a 11 little bit about improvements in successive 12 versions of software, and I do want to return 13 to that subject soon. 14 But we're all human, certainly I am, 15 and I made an error yesterday that I now want 16 to correct. 17 And I also want to go back and tell 18 you about two additional slides. There were no 19 errors in them, but I want to give you a little 20 more information that I could have given you 21 yesterday and omitted to do. 22 So, first, I want to tell you about my 23 mistake. It's slide 87. 24 We were talking about research and 25 development, and I told you that the R and D 4881 1 investments of the other top ten software 2 companies were in the aggregate, not an 3 average. That was wrong. That's the average 4 of the other companies. 5 So this really compares Microsoft to 6 the average of the other -- in the top ten 7 software fields. 8 That was my error yesterday. 9 Now, I want to go on and -- I hope I 10 made no other errors. That's the only one I 11 know of. 12 I want to go on and point out a couple 13 of other things that, as I say, I sort of went 14 too fast and went by yesterday. 15 You know that we were -- at a couple 16 of points we talked about prices and compared 17 that to market share. 18 And when we were talking about 19 operating systems, I had not put up on the 20 screen for you the market share that Microsoft 21 had in the operating system market. 22 And I'm going to give this to you in a 23 moment for the class period. 24 I first want to remind you that the 25 Plaintiffs' expert, Professor Noll, has said 4882 1 that way back in the mid to late '80s, '86, 2 '87, he said he didn't do any analysis in the 3 period prior to '86. But even way back then, 4 Microsoft had monopoly power in operating 5 systems. 6 And as far as Professor Noll was 7 concerned, he said he made no claim that 8 Microsoft's monopoly power was acquired as a 9 result of anything anticompetitive. 10 As far as the Plaintiffs' expert is 11 concerned, Microsoft had that monopoly power 12 lawfully. Of course, we agree. 13 So in operating systems, unlike the 14 applications fields, Microsoft has long had 15 monopoly power. 16 But let's go back to the operating 17 systems. Here's the class period. And our 18 data -- this data actually comes from Professor 19 Noll, the Plaintiffs' expert. 20 And for this purpose, at least for the 21 moment, we are content to rely on that. And 22 you'll see that throughout the period in 23 question, Microsoft's share has been above 80 24 percent and rising to above 90 percent 25 beginning around '96 after Windows 95 comes 4883 1 out. 2 So, if we put the market share 3 together with prices, just to do the same sort 4 of thing we did with the slides in the 5 applications markets, you can compare the 6 consumer version through the OEM channel and 7 then on the professional version. 8 The market share was high throughout 9 this period and before that period, and prices 10 -- even as market share went up, the prices 11 stayed about flat or even went down a little 12 bit. 13 And maybe, Chris, we could go back to 14 the consumer version through the OEM channel 15 just in case I may have gone a little bit too 16 fast. 17 The market shares have always been 18 high -- that's the right scale -- going back 19 into the '80s. Really starting with the IBM 20 contract for MS-DOS to go on to the first IBM 21 PC. 22 And as market share has gone up in the 23 class period, the prices have stayed about the 24 same. 25 Okay. And then there was one other 4884 1 chart that I showed you yesterday that I wanted 2 to provide a little bit more information about 3 than what I showed you yesterday. 4 And we talked about the IBM company 5 and IBM PCs, and I was making the point to you 6 yesterday that, of course, IBM could put any 7 operating system it wanted to on its own PCs. 8 And the Plaintiffs haven't made any allegation 9 that Microsoft did anything to prevent that. 10 And we looked at the extent to which 11 Microsoft actually put OS/2, its own operating 12 system, on PCs. That's sort of that purplish 13 line. 14 I wanted to add one other piece of 15 information to that. 16 The blue, all this blue is Windows. 17 So to this extent, the IBM PC company has 18 installed Windows on its PCs. 19 There's some other operating systems 20 that are still gray that aren't included there, 21 but you can see even in '94, '95, '96 when IBM 22 was using OS/2 on its own machines, it was 23 using Windows even more. It was choosing 24 Windows. 25 And as you recall, and as I said to 4885 1 you yesterday, we believe that the evidence 2 will show that IBM, like other OEMs, chose 3 Windows because IBM believed it was the best 4 thing for it. That's what consumers, that's 5 what customers wanted. 6 Okay. So with my apologies for sort 7 of jumping around -- I went back to these three 8 points from yesterday -- I will pick up with 9 where we left off talking a little bit about 10 improvements in Microsoft software. 11 And at the end of the day yesterday, 12 we were talking about source code and lines of 13 code. 14 Windows XP, which was released in 15 2001, had actually about 45 million lines of 16 code, source code. And, as you probably know, 17 it supports literally thousands and thousands 18 of applications that can run on it, new 19 applications. 20 And we talked about backward 21 compatibility, applications and devices that 22 came out long before. 23 So if you have a game that you 24 purchased, some sort of computer game and you 25 purchased it in the mid-'90s, let's say, and 4886 1 you acquired Windows XP in 2001 or 2002, that 2 software was written to be able to run 3 applications that had come out years before. 4 And, obviously, there is a great 5 effort and expense in R and D necessary to 6 continue to improve the software. 7 And I want to talk to you a little bit 8 about specific improvements. I'm going to try 9 not to get into too much detail. 10 There will be more evidence about this 11 at the trial, but we don't want to throw too 12 much information at you in the opening 13 statement. 14 But if we go back to Windows 3.0 -- 15 you all know by now that was released in May of 16 '90. That was the first release of Windows 17 that had lots of success in the market. 18 Of course, you know, it had the GUI. 19 It had something called file manager, which 20 allowed a user to move, copy, delete, rename, 21 and organize your files and directories in the 22 GUI. And this was an improvement in the way 23 that users could use computers efficiently. 24 It had this breakthrough in memory 25 management that we've talked about, protected 4887 1 mode. And memory was a very important problem 2 going back to around 1990 because of 3 limitations in the hardware at the time. 4 Windows 3.0 had something called 5 program manager, which was sort of a control 6 center, allowing a user to launch applications 7 and manage applications together. 8 By the time we get to Windows 95, 9 which was released in August '95, you'll see 10 that Windows 95 added a number of important 11 features. 12 And the chart that we're looking at is 13 a partial list, just a partial list, of new 14 features that are added to the software with 15 each major new version. 16 There's much more than this. We used 17 one piece of paper and named those that we 18 thought you should know about at least now. 19 Windows 95 had something that many of 20 you probably take for granted now, 11 years 21 later, drag and drop functionality, which 22 allows you really to use your mouse to click on 23 an icon and drag something from one spot, one 24 location into another, into another file or 25 another program, and just drop it in the place 4888 1 that you want it. 2 That's a great and efficient tool, 3 particularly in businesses, because you don't 4 have to have someone retype everything and then 5 check the spelling and proofread and make sure 6 it's right. You just take it from one spot, 7 drag and drop it to another. 8 Windows 95 -- by the way, I should say 9 these were innovations, improvements that 10 Microsoft made in its software. 11 And as you can tell from this chart, 12 and as the evidence will show you at the trial, 13 even with a high market share, and in the 14 operating system market, Microsoft share has 15 always been high -- Microsoft has not stopped 16 working on its programs, its software. 17 Microsoft has worked hard with each version to 18 improve it. 19 Windows 95 had OLE. We talked about 20 that a little bit. Again, that means object 21 linking and embedding. You can have a memo 22 written in, let's say, Word, your word 23 processing program, and OLE allows you to link 24 and embed it into a chart like Excel. 25 So you can work collaboratively with 4889 1 other people and sort of farm out something to 2 another person, have that other person work on 3 it, and then bring it back into your document. 4 There was an Internet browser for the 5 first time on Windows 95, and I know you've 6 heard about that and know about it. 7 There was also an improved graphical 8 user interface. The same principles were 9 utilized as Microsoft had done with Windows 10 3.0, but the look was better and the user 11 interface was more efficient. 12 There was also a start button for the 13 first time with the menus and task bars that 14 the start button has that allows people to 15 better manage the work they're doing. 16 This is particularly useful in an 17 office environment. 18 And, of course, the business world is 19 an important market for software. 20 There was also something called 21 support for long file names. You used to have 22 a situation where if you had a file and 23 documents, you were limited to eight characters 24 plus a three-character suffix in what you 25 called it. 4890 1 The long file names support allowed 2 you to go out to 200. 3 And then plug and play, which really 4 means just what it says. This made it easier 5 to add new peripherals, printers, mouses, 6 keyboards, to the computer without having to do 7 a setup or configuration. You just plugged it 8 in and it played. 9 Windows 98 had more. It had active 10 desktop, which is part of the Internet browser 11 functionality in Windows. And it allows web 12 pages to be turned into items on your computer, 13 on your screen, that are updated automatically. 14 So you don't have to open your web 15 browser each time. If there are web pages you 16 want to look at every day, say, some website 17 with news or some people use it to check sports 18 scores or whatever else, you can put them on 19 your desktop and just go to them instantly, the 20 active desktop. 21 There were other features. I'm going 22 to go more quickly through some of these. 23 Web-based help features in Windows 98. 24 Automatic updates, which the updates 25 allowed you to have Windows automatically 4891 1 update itself, downloading updates to the 2 operating system from Microsoft so you have new 3 improvements coming automatically. 4 And Windows XP in 2001 had all the 5 features of the prior systems, but, of course, 6 added more. It had system file protection, 7 something called movie maker that allows you to 8 create titles, put in an audio track and 9 narrate a movie. 10 There was an Internet connection 11 firewall which protects your computer from 12 outside requests for data unless you authorize 13 those requests. And that was an effort to try 14 to help stop worms and viruses. 15 And a data CD burner. Also support 16 for digital audio devices. 17 And with Word, similarly -- again, I'm 18 not going to go through all of these. But Word 19 in each successive version had more and more 20 features. 21 Some of the features are used by 22 relatively small numbers of people. Some of 23 them are used by many, many people. 24 But as you can see, as time goes on, 25 and importantly as the price is dropping, 4892 1 Microsoft is giving you more and more features. 2 More and more functionality. More utility in 3 your software. 4 And in a case about an overcharge, of 5 course, Microsoft believes that it's important 6 for you to keep in mind not just the price you 7 pay, but what you're getting for what you pay. 8 It's as if the price of a car has gone 9 down year after year and you've gone from 10 Hyundai or a Chevrolet to a Lexus. 11 As more and more features are added 12 that Lexus is costing you less than the, let's 13 say, simple Chevrolet did years and years 14 earlier. 15 In Word, for example, these features 16 have been added consistently to every version, 17 and, of course, the features of earlier 18 versions remain in the later versions. 19 And same thing for Excel. 20 I'm going a little quick here just 21 because there will be evidence at the trial, we 22 will have witnesses on these subjects. 23 Some of this, particularly the names 24 of these features, won't be perhaps terribly 25 easy to remember, but we'll give you a 4893 1 presentation about this when we get to the 2 trial that is somewhat more detailed. 3 And, again, with Excel, you can see 4 that Microsoft over time has added a number of 5 significant features. 6 There are more than just these on our 7 chart, but these are some of the significant 8 ones. And it includes much of the 9 functionality that we've talked about earlier. 10 And I'll just show you one more for 11 Office. 12 As you know, Microsoft Office, which 13 is a suite, meaning it's a number of different 14 products integrated together, Microsoft Office, 15 we think, has been improved dramatically over 16 the years with many new features added. 17 You can see the first release of 18 Office in 1990, and as time went on, many of 19 these features are added. 20 And I think the important thing to 21 note in connection with this is that features 22 are being added without additional charge. 23 It's not like, let's say, buying a car 24 where there's a sticker price and then there's 25 a price for options. You know, somebody says 4894 1 if you want the fancy CD player put in your 2 car, it's an extra, I don't know what it is, 3 $500, or whatever. 4 There are no additional prices. These 5 features are added and the price is just for 6 the package. 7 And as you see, as time went on, 8 something in Office as important as spell check 9 in 1994 is added with no additional charge. 10 Some of us may remember -- it goes 11 back a ways -- but if you go back, for 12 instance, to the 1980s, if you wanted a spell 13 checker, there were programs out there written 14 by software companies that you could buy that 15 would allow you to check spelling. 16 Of course, they cost money. They cost 17 a significant amount of money. 18 And in thinking about bundling and 19 integration, Microsoft, sure, is bundling. 20 It's putting spell checker into Office. 21 As you can see in Office 4.X, the 22 fourth series, beginning in 1994. And we think 23 it's a benefit to consumers, there is no extra 24 charge. You are getting something you have to 25 pay for on the outside world from Microsoft for 4895 1 no additional charge. 2 And you can see many of the other 3 features that get added over the years. By the 4 time we get to Office 2003, we have these many, 5 many important features that users can use. 6 So the story of improvements in the 7 product should not be forgotten when we're 8 talking about price. Because it's not just the 9 money you spend, it's what you get for the 10 software that you buy. 11 And I want to touch on another point 12 that I've emphasized in the past couple of 13 days, which is causation. We think it's such 14 an important point in this case. 15 And you can ask the question in each 16 of the markets sort of this way. Why is it 17 that Microsoft products turned out to be as 18 successful and popular as they are? 19 The Plaintiffs gave you reasons that 20 they'd like you to accept as the reasons for 21 the popularity of that software. 22 Of course, our evidence will be that 23 Microsoft software is popular for the reasons 24 that I've pointed out to you over the past few 25 days. 4896 1 Good products at a low price that 2 consumers want to use. 3 And in connection with that, you'll 4 remember that the Plaintiffs talked about some 5 trade press, some what they called influential 6 trade press. 7 And I want to show you some of that, 8 and I want to tell you, first, that the 9 articles that we're going to give you now that 10 we ask you to look at now, are not to be 11 considered for the literal truth of what they 12 say. 13 They're to be considered for the point 14 that you'll hear from Professor Murphy, and 15 perhaps others, that reviews in the trade press 16 can influence the decisions of the public about 17 what software to use. That is sort of like a 18 review of a movie. 19 I forget what Siskell and Ebert is now 20 called because one of them passed away, but a 21 movie review can move the market, can be 22 influential in terms of what people go to see. 23 And reviews in the trade press, you 24 will hear evidence, can be influential. And 25 when we're thinking about causation, why did so 4897 1 many people choose Microsoft software? 2 We think these are certainly relevant. 3 So let's look at the first one, DX 4 3558. 5 This is from PC World. It's about 6 Excel 3.0. And it's from February 1991. 7 And you'll see this product review. 8 Again, 1991, an important time according to the 9 Plaintiffs, where the market was moving from 10 Lotus to Excel. 11 And this review says, Microsoft Excel 12 for Windows 3.0 is a cornucopia of timely 13 additions and canny improvements that vastly 14 enhance spreadsheet appearance and handling. 15 It focuses on giving ordinary users 16 easy access to often-used features, and, in 17 this, it is nothing short of spectacular. 18 This is consistent with what I spoke 19 to you about, I believe, yesterday, about 20 making things easier for consumers. 21 Let's look at the next one. This is 22 Defendant's Exhibit 2912. And it's from the 23 same publication, I believe, PC World, from May 24 of 1992. 25 This one pertains to Windows, Windows 4898 1 3.1. 2 And you may remember that 3.0 was the 3 version in 1990. 3.1 was a new version of 4 that. 5 And here's what PC World says in May 6 of '92. 7 We want more. We want breakthroughs, 8 not incremental improvements. Surprise. 9 Windows 3.1 delivers the goods three ways. 10 And then there's Defendant's Exhibit 11 3389. We're now moving to May of '94. PC 12 World. 13 And this pertains, again, to Excel. 14 We looked at Excel 5.0 in our February 15 '94 spreadsheet review, where it tied with 16 Borland's Quattro Pro 5.0 for Windows for Best 17 Buy honors. The program has nearly every 18 feature one would expect in a spreadsheet, yet 19 it is remarkably easy to learn. 20 Same kind of thing that you've heard 21 before. 22 Let's look at Defendant's Exhibit 23 2953. This is from PC Magazine, and we are now 24 in January of 1995. 25 And this pertains to Word 6.0. 4899 1 Here's the review. In a word -- so to 2 speak -- Microsoft Word 6.0 for Windows 3 automates writing and text formatting better 4 than any other word processor. Its balance of 5 raw power and precise detail is unmatched. 6 We won't go through every product 7 review that ever came out. You will hear 8 testimony about product reviews, in part from 9 Professor Murphy. 10 But let's go to January of 1996. This 11 is Defendant's Exhibit 2914. 12 From PC Magazine. And these reviews, 13 of course, will be documents. I'm picking out 14 the pieces we think are particularly worthy of 15 your attention now. 16 Far from a pale remake of other's 17 technology, though, Windows 95 adds substance 18 and gloss to the core features. The result 19 squarely matches the mainstream market's needs. 20 Again, these product reviews, I think, 21 are consistent with the sort of thing that I 22 spoke to you about in the last two days. 23 And I'll show you one more now. It's 24 Defendant's Exhibit 3573. 25 And this is about Office and the 4900 1 version of Office that came out in 1997 called 2 Office 97. 3 From February of 1997, PC World. 4 Office 97 really is full of useful new 5 stuff, more so than Office 95, which was itself 6 a PC World Best Buy. 7 In fact, Office 97 introduces so many 8 features that it's tough to say which are the 9 most important. 10 You will hear testimony from Kevin 11 Murphy, our expert economist, about these 12 product reviews. 13 And I want to point out to you now, 14 testimony from three people in the industry 15 along the same lines. 16 First, there's testimony from a man 17 named John Sculley who from 1983 to 1993 was 18 the chief executive officer of Apple Computer 19 for ten years. 20 And, of course, as you'll remember, 21 Apple wrote applications to its own Macintosh 22 operating system, as did Microsoft. 23 Microsoft's were more popular even 24 than Apple's, though Apple had the advantages 25 of knowing what its own operating system had in 4901 1 it. Knowing every wrinkle and in and out. 2 John Sculley will testify, by 3 deposition, that Microsoft, quote, made very, 4 very good applications, unquote. 5 And when he was asked about Microsoft 6 Office, he said that Office was, quote, one of 7 the smartest, best-managed business innovations 8 that went on in the high tech industry, 9 unquote. 10 That's from the guy who was the boss 11 at Apple. 12 You saw a videotape of Steve Crummey 13 yesterday of Lotus, another competitor in the 14 applications field. 15 And I think you'll remember Mr. 16 Crummey saying that when Excel was released in 17 1985 -- 1985 now, '85 for the Mac, it was 18 awesome visually, and by the late '80s he said 19 Excel was a very good product. 20 And Pete Peterson of WordPerfect, you 21 saw him on videotape yesterday. 22 He also said that when he saw the 23 Microsoft Excel application come out, it was 24 devastating for us. And he said it got rave 25 reviews and everybody loved it. 4902 1 So we have testimony from these 2 important competitors, Apple, WordPerfect, and 3 Lotus that are to the same effect exactly what 4 we've been talking about now for two days. 5 Microsoft's success in all these 6 markets was attributable, we think the evidence 7 will establish for you, attributable to its 8 really good products and products that were 9 sold at a low price. 10 All right. I want to show you some 11 more documents that pertain to that very point. 12 First is Defendant's Exhibit 6511. 13 And this was a report that summarizes 14 the results of a Windows user profile study 15 conducted by Field Research Corporation. 16 You see it there. Microsoft 17 commissioned this outside company to conduct a 18 Windows user profile study. 19 The interviews were conducted in March 20 and April of 1991. 21 And this document has lots of useful 22 information in it. 23 Let's look at the next slide. 24 What the company that did this study 25 found -- and here we have this one excerpt, as 4903 1 an additional indicator of customer 2 satisfaction, most Windows users appear very 3 likely to recommend Windows 3.0 to others. 4 Roughly three-quarters (76 percent) report a 5 score of 8, 9 or 10 on a 10-point scale, and 6 the average (mean) score across all respondents 7 is quite high (8.2). 8 And Defendant's Exhibit 6511 goes on, 9 for instance, to talk about the ratings of 10 those who have used Windows -- this is Windows 11 3.0 -- for six months or more. 12 And in that case people who had been 13 using it for a period of time, 84 percent, 14 reported a score of 8, 9, or 10. That's, 15 again, out of a scale of 10. 16 People liked the products because they 17 were great products. 18 And let's look at Defendant's Exhibit 19 6506. 20 This is about Word. And it's a 21 Microsoft document, a Word upgrade research 22 presentation. It was created, as you can see, 23 in April 1992. 24 And it's a study that was conducted 25 based on 800 telephone interviews with people 4904 1 who had registered as owners of Microsoft Word 2 as you can see in March and April 1992. 3 The question was asked, overall, how 4 satisfied are you with the new version of 5 Microsoft Word? 6 Again, just to remind you, we are 7 talking about 1992. 8 Again, at this critical period, 9 according to the Plaintiffs, and when the 10 market had been moving, was moving quickly from 11 the character-based world to the graphical 12 world. 13 And you'll see that Word for Windows, 14 what's called WinWord here has the following 15 responses. 65 percent of those interviewed say 16 very satisfied, 28 percent somewhat satisfied. 17 And I think it's quite remarkable, only 7 18 percent said they were somewhat or very 19 dissatisfied. 20 On Word written for the Macintosh, the 21 Apple system, the results are about the same. 22 Again, over 90 percent, here 95 23 percent are very or somewhat satisfied. Just 5 24 percent saying they're dissatisfied. 25 And similar type question to try to 4905 1 probe further about what people think of 2 Microsoft's products. 3 As you know, Microsoft was working 4 with customers all the time to try to make the 5 products easier to use, with more features, 6 products that people liked and wanted to use. 7 And so the question was asked how 8 likely are you to recommend the new version of 9 Microsoft Word to a friend or coworker? 10 And you see, again, very high, 11 positive responses. 12 In the unlikely category, it's 8 13 percent for Word on Windows and 9 percent for 14 Word on Mac. 15 Over 90 percent of the people 16 interviewed said they were likely, very likely 17 or somewhat likely to recommend Word. 18 So when you see market shares of 90 19 percent, you can see that this pretty much 20 matches what people are saying at the time 21 about what they think of the product. 22 And let's look further into this 23 document. Again, it's Defendant's Exhibit 24 6506. 25 Here's a summary concerning those who 4906 1 have upgraded. 2 Product satisfaction is high. Over 9 3 out of 10 are very/somewhat satisfied with 4 Microsoft Word. 5 About 9 out of 10 also said they would 6 recommend. 7 So I think the point we're making is 8 quite clear from this document. 9 I want to look at one more of these 10 surveys. It's Defendant's Exhibit 6510. 11 And this is now from 1994. It's 12 called customer satisfaction, 1994 end user 13 customer satisfaction. 14 This is a Microsoft document. The 15 copy that was produced from the Microsoft files 16 has a little -- on some pages some handwritten 17 scribbling, but the point in the document -- if 18 we go to the next page. 19 Conclusions. This document will be in 20 evidence ultimately. You can look through the 21 whole thing. 22 Brand loyalty. Microsoft has a much 23 stronger competitive company SCI. And SCI 24 stands for secured customer index. A measure 25 of brand loyalty position with the broader 4907 1 market. Over 10 points ahead of Novell and 2 Lotus. 3 Broad product line gives us tremendous 4 edge. 5 And let me just stop there. 6 As you know, some software companies 7 made products that did well in one little 8 market, let's say, spreadsheets or word 9 processors. 10 Microsoft had a broad product line 11 that went through all these important markets. 12 Operating systems, word processing, 13 spreadsheet, and suites, office suites. 14 And, then, the document says Novell 15 and Lotus have lower satisfaction with the 16 broader audience. 17 So there will be lots of evidence at 18 trial about why Microsoft products have a high 19 market share, and we think the evidence will be 20 that they have a high market share because 21 that's what people want. 22 Now, I'm switching gears and going to 23 a different subject. 24 I want to talk -- and I did refer to 25 this earlier, but I want to talk in a little 4908 1 more detail about the government case. You've 2 heard a lot about that. 3 And let's first look at Preliminary 4 Instruction Number 31 from the Court. 5 And as you know, I think you'll recall 6 this, the Court told you that he was going to 7 read some of the conclusions of law and 8 findings of fact from the government case that 9 you must accept as true. 10 The conduct at issue in the government 11 case was in the period July 15th, '95, through 12 June 24th, 1999. 13 And the conclusions and findings only 14 applied to the market for Intel-compatible PC 15 operating systems. 16 So I just want to stop there. 17 As you know, these conclusions and 18 findings do not apply to the other markets at 19 issue in this case. 20 And then Judge Rosenberg went on to 21 say, the government case addressed Microsoft's 22 conduct in the PC operating systems market 23 only. 24 I think that's important to keep in 25 mind when thinking about the government case to 4909 1 make the distinction between the markets and 2 what the government case pertains to. 3 And then I remind you, of course, as 4 you also know, the fact that Microsoft was 5 found by the courts in the government case to 6 have committed anticompetitive acts does not 7 mean that there's no work for you to do. 8 It does not mean that the Plaintiffs 9 in this case are entitled to any damages in any 10 market, even in the operating system market. 11 As I think you know by now, to obtain 12 damages, the Plaintiffs must be able to prove 13 to you by a preponderance of evidence that the 14 anticompetitive conduct caused harm to them. 15 Caused harm to them. Resulted in a world that 16 was so different from the real world that 17 prices would have been lower. 18 And then, of course, they have to 19 prove harm to them as a result of what they say 20 are these increased security vulnerabilities. 21 Vulnerabilities allegedly caused by 22 anticompetitive conduct. That's what they must 23 prove. 24 And the Court, of course you know, 25 read you a very long list of findings. There 4910 1 were a total of 146 of them. They pertain 2 principally to the web browser made by Netscape 3 called Navigator and the Java programming 4 language that was developed by Sun 5 Microsystems. 6 As you know, neither of those was an 7 operating system. They were both what has been 8 called middleware. They ran on top of an 9 operating system. 10 And I want to draw your attention, if 11 I could, to the conclusions of law which appear 12 in your notebook beginning at the page marked 13 0, which comes after page 40, when the Court 14 begins discussing conclusions of law. The page 15 is marked 0 and then goes 1, 2, et cetera. 16 And on page 0 the Court says, 17 Microsoft maintained monopoly power in the 18 operating systems market by the following 19 anticompetitive conduct, i.e., conduct which 20 caused harm to the competitive process and, 21 thereby, harm to consumers. 22 And then there's a list of 12, 12 23 conclusions, that the Court has said are 24 binding here. 25 The findings of fact in the government 4911 1 case that you have in your notebook are 2 findings that support these 12 conclusions from 3 the government case. 4 And I want to go through at least some 5 of them so that you as the jury understand a 6 little bit more about that case. 7 Here's page 0 from the Court's 8 instructions, conclusions of law. Again, the 9 12 conclusions that you'll see on page 0, 1, 10 and going to page 2 are the conclusions that 11 come out of the government case. Conclusions 12 of law. 13 And the first one is, preventing OEMs 14 from removing visible means of user access to 15 IE, (i.e., desktop, icons, folders, and start 16 menu entries). 17 And this refers to contractual 18 restrictions between Microsoft and OEMs which 19 for a time prevented OEMs from taking off, for 20 instance, an icon, the Internet Explorer icon. 21 Now, I think you know, because I 22 mentioned it maybe Monday afternoon or Tuesday 23 morning, that the government case concluded 24 with a final judgment. 25 And the final judgment in the 4912 1 government case was entered by the Court on 2 November 12, 2002. That's the federal court in 3 Washington, D.C. 4 The final judgment contains -- it's 5 the judgment of the Court -- 6 MR. HAGSTROM: Objection, Your Honor. 7 THE COURT: Sustained. 8 MR. TULCHIN: May I show, Your Honor, 9 the portion of the final judgment that pertains 10 to Conclusion Number 1? 11 MR. HAGSTROM: Objection, Your Honor. 12 THE COURT: Sustained. 13 MR. TULCHIN: All right. 14 I wonder, Your Honor, if we could take 15 our morning recess? 16 THE COURT: We may. 17 MR. TULCHIN: Thank you. 18 THE COURT: Ladies and gentlemen, we 19 will take a recess at this time for 15 minutes. 20 Remember the admonition previously 21 given. Leave your notebooks here. 22 (The following record was made out of 23 the presence of the jury at 9:26 a.m.) 24 THE COURT: You may be seated. 25 The record will reflect we are outside 4913 1 the presence of the jury. 2 Mr. Tulchin? 3 MR. TULCHIN: Yes, Your Honor. 4 The Court ruled on November 20th. 5 Your Honor stated that the Court has no problem 6 with Microsoft referring to the final judgment, 7 the consent decree, during opening statement. 8 What you said was you have no problem 9 doing that as long as the references are 10 accurate and as long as we do not suggest that 11 any damages were paid out in that case, which, 12 of course, I haven't suggested. And I've tried 13 to be careful to tell the jury that damages 14 were not at issue there. 15 There was also a sidebar on December 16 11th, that is on Monday, during my opening 17 statement, and the Court said then that it was 18 going to allow you, that's referring to me, to 19 go into it providing that you are going to link 20 it up to your evidence, which is what I intend 21 to do, Your Honor. 22 You said then, I don't want any 23 suggestion that the 2002 consent decree 24 eliminated any damage issue whatsoever. 25 And then after the jury was dismissed 4914 1 on Monday, Ms. Conlin asked again that 2 Microsoft be precluded from referring to the 3 2002 judgment, and the Court said as follows. 4 The Court stands by the ruling. It 5 allowed Mr. Tulchin to make a reference, I 6 guess, with the good faith belief that he's 7 going to be able to show to the Court it's 8 admissible at some point during the trial. 9 So -- but the Court's ruling does 10 stand. And that will be how we decide it when 11 you come to presenting any such evidence. You 12 will go through the Court first outside the 13 presence of the jury. 14 Again, Your Honor, we think this is 15 important because the Plaintiffs keep asking 16 the jury to hold Microsoft accountable for the 17 conduct found anticompetitive. 18 There is a hotly contested issue as to 19 whether that conduct caused actual injury to 20 the Plaintiffs in this case. 21 But we've already asked, and the 22 Court, I understood, had already ruled, that we 23 could refer to this document. 24 There was no objection to it, by the 25 way, during the evidentiary process. It's in 4915 1 evidence under the ground rules we've been 2 operating under. 3 And it seems clear to us that the jury 4 is entitled to know the truth; that the 5 government case ended with a judgment. 6 What I was about to do was link up the 7 Court's Conclusion Number 1, that you read to 8 the jury, with a provision in the final 9 judgment that corresponds to that, removing 10 icons for Internet Explorer, because the final 11 judgment prohibits Microsoft from entering into 12 contracts with OEMs that would prevent OEMs 13 from removing the icon. 14 They can remove the icon. And that's 15 been true now ever since the final judgment was 16 entered. Indeed, it was true since December 17 15th, 2001, because Microsoft, as the Court 18 knows, by agreement stipulated to the final 19 judgment with the Department of Justice and 20 began complying with it in December '01, five 21 years ago. 22 And then there was that process in the 23 district court in DC to seek approval of the 24 stipulated consent decree between the 25 Department of Justice and Microsoft. 4916 1 Judge Kollar-Kottely -- there was an 2 objection from some of the states -- held a 3 long trial on those objections to see what 4 remedies would be imposed. 5 And the ultimate consent decree, which 6 is the only one I intend to use that was 7 entered, was almost identical to the one that 8 Microsoft and the Department of Justice had 9 agreed to almost a year earlier. 10 So, again, Your Honor, we understood 11 the Court had ruled on this. And we also think 12 it's highly important for the Jury to 13 understand that the government case had an 14 ending and contained restrictions on what 15 Microsoft can do going forward. 16 THE COURT: Okay. What's the basis of 17 your objection then? 18 MR. HAGSTROM: Your Honor, when we've 19 discussed this previously, number one, when it 20 came up during voir dire, the point at that 21 time was a representation that Mr. Tulchin 22 wanted them to just know it was there. 23 Then the concern was whether or not he 24 can link it up to some connection for juror 25 qualification. 4917 1 When we raised this again, whenever it 2 was in the past few days, we again objected to 3 bringing up the 2002 judgment. 4 Your Honor has been following 5 Microsoft's wishes and identifying for the jury 6 that the conduct is for the period '95 through 7 '99. 8 The only reason Microsoft wants to 9 bring this up now is to suggest that the 10 conduct has ceased or there's been some 11 modification. 12 And, in fact, within the last week, 13 Judge Kollar-Kottely has had a hearing and 14 written an order stating the judgment is not 15 working. 16 So are we going to get into an entire 17 process of what has happened with, number one, 18 the extension of the judgment, the compliance 19 period by two years, the recent hearing about 20 her conclusions that it's not working? 21 You know, we are going to go down a 22 very long road here. 23 It's entirely irrelevant. The 24 relevant questions for purposes of this lawsuit 25 is whether Microsoft had ceased its conduct at 4918 1 any point in time. 2 It can put on evidence of that effect 3 if it's true. We will put on evidence that the 4 conduct continues. 5 We don't need a judgment getting into 6 evidence that will ultimately confuse the jury 7 and prejudice the Plaintiffs. It's a confusing 8 fact. 9 There's heated debate as to whether or 10 not that judgment has resolved any of the 11 issues with regard to the lack of competition 12 in the marketplace. 13 It's going to be a separate trial unto 14 itself if we start down that path. 15 MR. TULCHIN: Your Honor, if I may. 16 THE COURT: Sure. 17 MR. TULCHIN: First, as I think 18 Mr. Hagstrom knows, Judge Kollar-Kottely's 19 statement pertained to server-to-server 20 protocols. Her statement did not pertain in 21 any way to any conduct in the operating system 22 market. 23 This had to do with something entirely 24 different. Server-to-server protocols. 25 And this is the third time that the 4919 1 Plaintiffs have objected. 2 The first time it's at page 1033 of 3 the transcript from November 20th. The Court 4 said, quote, I have no problem with opening 5 statement, unquote. 6 Then, at page 4149 of the transcript, 7 we had the same objections, and the Court said, 8 quote, I'm going to allow you to go into it 9 providing that you are going to link it up in 10 your evidence. 11 So this is a third shot that the 12 Plaintiffs make. It seemed to me that their 13 effort to shut this down in front of the jury 14 after I relied on the Court's statements that I 15 could do this is just a way of, again, trying 16 to disrupt Microsoft's opening statement. 17 And the last thing, Your Honor, is 18 that Mr. Hagstrom in his comment a moment ago 19 referred to this final judgment as a fact. It 20 is a fact. This is the truth. There was such 21 a judgment. 22 We are not moving for summary judgment 23 based on it. We haven't said that this ends 24 the inquiry as to Microsoft's conduct post the 25 judgment. 4920 1 But we think the jury is entitled to 2 the truth about how the government case ended. 3 Otherwise, there's almost certainly to 4 be enduring speculation on their part about 5 what the consequences were. 6 THE COURT: What do you intend to show 7 specifically about the judgment? The order 8 that was actually issued by the Court? 9 MR. TULCHIN: Yes. The final judgment 10 that was entered by the Court, which they've 11 never objected to. 12 We had an evidentiary process. We 13 designated that as our exhibit. 14 It's my understanding -- and I believe 15 this is correct -- that there was never any 16 objection to that. 17 So under our process, that is, you 18 know, in evidence. 19 But I don't intend, Your Honor, to get 20 into every little detail of the final judgment. 21 I did intend to match up the first few 22 conclusions of law that the Court read to 23 provisions in that judgment to show the jury 24 that Microsoft has been forbidden from 25 continuing that conduct. 4921 1 I mean, that's a fact, Your Honor, 2 that may help the Plaintiffs. It shows that 3 for the period in question, the Courts, you 4 know, shut down something that Microsoft did. 5 But, certainly the jury shouldn't be 6 allowed to believe or speculate that 7 Microsoft's conduct has continued -- the 8 conduct at issue in the government case has 9 continued past the date of the final judgment. 10 If an award by the jury were made on 11 the ground that it believed that Microsoft was 12 continuing to engage in what the Courts found 13 to be anticompetitive conduct throughout the 14 class period, well, that would be based on a 15 complete untruth. 16 THE COURT: Let me get this straight. 17 You are going to introduce it to show that 18 Microsoft has engaged in no further 19 anticompetitive conduct after that? 20 MR. TULCHIN: No. That Microsoft has 21 complied with the final judgment. It's been 22 forbidden from, for instance -- 23 THE COURT: That's not -- that's 24 different. That's a different issue. 25 MR. TULCHIN: Well, Your Honor, aren't 4922 1 we entitled to put in evidence to the jury that 2 we've complied with this judgment? 3 I mean, the Plaintiffs can dispute 4 that. If they have evidence that we haven't, 5 let's hear it. 6 But certainly Microsoft can put in 7 evidence that these practices ceased. 8 Is the jury to be allowed to believe 9 that, for instance, the prohibition on removing 10 an icon or the prohibition on the size of a 11 Navigator icon, which are part of the 12 conclusions, that those prohibitions, 13 contractual prohibitions with OEMs continue 14 past the relevant date? 15 If the jury is allowed to believe 16 that, then we've headed down a road where for 17 the last four years of the class period the 18 jury apparently will be permitted to believe 19 that Microsoft's conduct includes unlawful acts 20 in accordance with the government case decision 21 when, in fact, it has not. That conduct has 22 ceased. 23 We have witnesses from Microsoft who 24 can, and we intend will, testify to exactly 25 that. 4923 1 The Court ordered us to do X, and we 2 have complied with that order. 3 MR. HAGSTROM: Your Honor, they can 4 bring in witnesses to say that their conduct 5 has ceased in certain types of conduct. They 6 should not be allowed to come in and say we 7 have complied with a judgment. 8 With regard to the Defendant's 9 exhibits, the exhibit number, I asked for the 10 number. I've not been provided that. We do 11 not believe that that is admitted into 12 evidence. We've objected to it. 13 We believe the motion in limine of 14 November 9th concerning settlements or offers 15 of settlements relates to this issue. 16 Not only settlements of other class 17 actions and competitor suits, but it refers to 18 the 1995 consent judgment and this particular 19 judgment. 20 The issue of whether or not Microsoft 21 removed icons in compliance with -- or, in 22 other words, to cease doing something with 23 regard to icons preventing their removal, 24 again, they can put on a witness and say we've 25 stopped doing that. 4924 1 We don't need to get into a judgment 2 and say, look, we've complied with the judgment 3 of 2002. We settled with the Department of 4 Justice. 5 What Microsoft is trying to do is to 6 basically direct the jury that its conduct has 7 terminated. It's trying to imply that you need 8 not consider damages because the conduct has 9 already been resolved. 10 Microsoft can put on evidence of when 11 it ceased doing certain types of things, but it 12 should not be allowed to put in evidence of any 13 resolution, settlement, or things of that 14 nature. 15 It's prejudicial. It's confusing. 16 THE COURT: Okay. 17 MR. TULCHIN: Your Honor, this is the 18 third time. The Court permitted me to do this, 19 and it seems terribly unfair after I was told 20 twice that I could refer to this in opening 21 statement, for the Plaintiffs to seek to shut 22 this down in a way to embarrass me in front of 23 the jury when the Court has ruled twice exactly 24 on this argument. 25 The motion in limine, Your Honor -- 4925 1 our motion, we specifically said in it, and it 2 was our motion the Court was deciding, 3 Microsoft does not seek by this motion to 4 exclude references to Microsoft's compliance 5 with the consent decree by which the action 6 brought by the United States Department of 7 Justice in certain states was settled. 8 So we excluded that from the scope of 9 our motion. When the Court ruled, it said 10 we'll decide this on an issue-by-issue basis. 11 And we did. 12 On November 9th, I quoted the 13 transcript. The Plaintiffs made the same 14 argument. The Court said -- let me get the 15 exact words -- I have no problem with opening 16 statement. 17 So here we are in opening statement. 18 This is a part of the Plaintiffs' 19 continued effort, Your Honor, to relitigate 20 every issue that the Court has decided so that 21 the ground rules are constantly shifting. 22 THE COURT: Okay. Anything else? 23 MR. HAGSTROM: Your Honor, the issue 24 was with regard to referring to the judgment, 25 not discussing its terms. 4926 1 And that is the distinction. We 2 objected to not only referring, but discussing 3 the terms. Your Honor ruled that he could 4 refer to it. But here he is now trying to get 5 into the terms of the judgment, and that has 6 not been previously ruled upon. 7 I think Your Honor made clear at the 8 sidebar that that was not going to be allowed. 9 I don't have that transcript in front of me, 10 and it would be erroneous from our perspective. 11 I think it's error, it's prejudicial, 12 it's confusing for the jury to allow him now to 13 get into the terms of the judgment itself. 14 Thank you. 15 THE COURT: Anything else? 16 MR. TULCHIN: Not for me, Your Honor. 17 THE COURT: Okay. Take ten minutes 18 and I'll rule on it. 19 MS. CONLIN: Your Honor, before we 20 break, we would like to know the number of the 21 exhibit that Mr. Tulchin -- 22 MR. TULCHIN: I already said it, Your 23 Honor, but I'll be happy to say it again. 24 I said it to the jury. 25 6729. 4927 1 MS. CONLIN: Thank you. 2 (Recess was taken from 9:43 a.m. to 3 9:53 a.m.) 4 (The following record was made out of 5 the presence of the jury.) 6 THE COURT: The Court has reviewed the 7 objection and the arguments of counsel. 8 The Court at this time is going to 9 allow the Defendant to state what the judgment 10 was. The Defendant will also be able to state 11 and present evidence as to what the Defendant 12 did after the judgment. 13 However, at no time can the Defendant 14 state that the Defendant's actions after the 15 judgment by the government were done in 16 compliance with a judgment or that there's a 17 conclusionary statement that the Defendant has 18 complied with the judgment. 19 That is a legal conclusion, which only 20 the Court could consider and determine. 21 Anything else? 22 MS. CONLIN: Your Honor, a couple of 23 things. 24 We do not have in our data base 6729, 25 the exhibit to which the Defendant is referring 4928 1 is not a part of the database. 2 Mr. Tulchin has represented that we 3 had no objections to that, and we've not even 4 had an opportunity to propound an objection 5 given the fact that it has only been provided 6 as an exhibit within the last recent time 7 apparently. 8 And with respect to the Court's 9 ruling, our approach to the motions in limine, 10 Your Honor, has been if the Court has ruled, 11 then I will not in my opening mention the 12 subject matter. 13 As a result, I did not, though I 14 wished to do so, mention the 1995 consent 15 decree. 16 We read the Court's ruling and 17 believed that we were not permitted to do that. 18 Given the fact that the Court is 19 permitting Mr. Tulchin to refer to the consent 20 decree that he likes, I would ask the Court to 21 consider permitting me to reopen my opening 22 statement for the sole purpose of referring to 23 and calling the jury's attention to the 1995 24 consent decree. 25 THE COURT: Okay. 4929 1 That's denied. 2 Anything else? 3 MR. TULCHIN: No, Your Honor. 4 THE COURT: Okay. 5 MS. CONLIN: Well, Your Honor, we've 6 got an exhibit that he's about to refer to that 7 is not a part of our database to which we have, 8 of course, strong objection. And so I would 9 like consideration of that question as well. 10 THE COURT: Okay. Where's the 11 exhibit? Let's see it. 12 MR. TULCHIN: Yes, Your Honor. 13 It's the final judgment in the 14 government case. 15 THE COURT: Let's see it. Do you have 16 it on the screen or something? 17 MR. TULCHIN: I have a hard copy here, 18 Your Honor. 19 THE COURT: Oh, okay. 20 MR. TULCHIN: Somewhere. I had it in 21 my hands a few moments ago. I literally had it 22 in my hands. Here it is. 23 THE COURT: Thank you. 24 MS. CONLIN: When the Court is ready, 25 I'd like to make a formal objection on the 4930 1 record. 2 THE COURT: Okay. 3 MR. TULCHIN: Your Honor, I don't know 4 if that copy had my handwriting on it. I don't 5 know, I may have made notes on it. If so, I'm 6 sure the Court can ignore those. I just -- I 7 don't know. It was sort of a working copy. 8 THE COURT: I didn't see any. Looked 9 pretty blank. 10 MR. TULCHIN: Okay. 11 THE COURT: I didn't notice any. I'm 12 just making one copy for me. 13 MR. TULCHIN: You can actually -- 14 Carrie doesn't even have to make a copy. You 15 can keep that one. We have others. 16 THE COURT: Recess till 10:30. I want 17 to look at this in more detail. 18 Tell the jury. 19 (A recess was taken from 10:07 a.m. 20 to 10:33 a.m.) 21 THE COURT: I looked over the 22 judgment. Some portions I don't believe shall 23 be shown to the jury. 24 The third paragraph, first page -- 25 MS. CONLIN: Your Honor, I hesitate to 4931 1 interrupt, but may I make my record before the 2 Court? 3 THE COURT: Oh, sure. 4 MS. CONLIN: Thank you, Your Honor. 5 The Plaintiffs object to any use of 6 Exhibit 6729 for the following reasons. 7 In its order on the motion in limine 8 brought by the Defendant, the Court ruled as 9 follows. 10 No evidence of an office compromising 11 disputed claim in this case, acceptance of such 12 an offer or a completed settlement is 13 admissible, quoting from the Court's order. 14 We believe that any use whatsoever of 15 6729 or reference to the settlement of the 16 government case violates Iowa Rule of Evidence 17 5.408 precluding settlements. 18 It also violates 401 because it is not 19 relevant, and 403 because it is highly 20 prejudicial, unfairly prejudicial, and the 21 prejudicial effect of the use of 6729 outweighs 22 any evidentiary value. 23 We object to the use or publishing of 24 the document itself. 25 Your Honor, you have been misled by 4932 1 the Defendant with respect to what is going on 2 in the proceedings currently with respect to 3 the settlement decree. 4 Mr. Tulchin told you that it had to do 5 with server-to-server protocols. In fact, it 6 also has to do with client-to-server protocols, 7 and the failure to document such protocols so 8 ISVs could -- ISV applications could 9 communicate with Windows products. 10 I'm going to hand to the Court just a 11 -- this is a report, a trade press report. So 12 we would ask permission to supplement the 13 record further with respect to this matter, 14 Your Honor. 15 But what this says, among other 16 things, is that there have been numerous delays 17 and complaints about the quality of Microsoft's 18 documentation. 19 And the article I identified, in 20 addition, there were 943 identified problems 21 with the current technical documentation, up 22 from 835 problems identified as of 30 23 September. 24 Further, Your Honor, the Plaintiffs 25 sought discovery on Microsoft's compliance with 4933 1 this consent decree back in 2004. 2 Microsoft vigorously objected and 3 prevailed. As we sit here today, and despite a 4 timely request for production, we are deprived 5 of the materials necessary to respond to 6 Microsoft's assertions which are false, that it 7 is in compliance with the Court decision. 8 It is not in compliance, and 9 Plaintiffs, however, do not have access to the 10 confidential documentation which is at issue. 11 The Court has ruled that at no -- just 12 moments ago, Your Honor, at no time can the 13 Defendant state that the Defendant's actions 14 after the judgment by the government were done 15 in compliance. 16 We see as a problem in that respect, 17 Your Honor, that Microsoft will say that it 18 complied before the judgment. 19 As the Court has heard Mr. Tulchin say 20 already, Microsoft voluntarily complied 21 beginning in December of 2001, and the consent 22 decree was not entered until almost a year 23 later. 24 Plaintiffs cite in support of their 25 contentions United States versus Microsoft 147 4934 1 F. 3rd 935 at page 950, note 14, that note 2 supports our contention that the question of 3 compliance with the decree is completely 4 separate from compliance with the law. 5 The footnote in total says as follows. 6 Quote, The antitrust question is, of course, 7 distinct. The parties agree that the consent 8 decree does not bar a challenge under the 9 Sherman Act, end quote. 10 Microsoft cannot be permitted to cloak 11 the consent decree in an aura of immunity from 12 the damages sought by Plaintiffs. That is what 13 it seeks to do. That is the only purpose for 14 which it offers this material. 15 And it is an improper purpose, and the 16 jury should be -- if the Court permits the use 17 of this document and reference to the consent 18 decree, the Plaintiffs respectfully request 19 that the jury be carefully instructed as to the 20 use to which they may put any of this 21 information. 22 THE COURT: Okay. Thank you very 23 much. 24 Mr. Tulchin? 25 MR. TULCHIN: Your Honor, yes. 4935 1 A few things, if I may. 2 I disagree quite vehemently with 3 everything Ms. Conlin said. 4 First, you have not been misled. That 5 is untrue. 6 Apparently, for the purpose of 7 disrupting Microsoft's opening statement and 8 causing a delay, which will permit the jurors 9 to speculate that Microsoft has done something 10 improper, the Plaintiffs now want to litigate 11 in full what's going on in the District of 12 Columbia District Court. 13 We are happy to provide further 14 information to the Court about that, but there 15 hasn't been any misleading. 16 Secondly, Your Honor, Ms. Conlin's 17 arguments could have been made the first time 18 the Plaintiffs raised this issue, when they 19 lost. And the Court said I will permit you to 20 refer to this in your opening statement. 21 They could have been made the second 22 time they litigated this issue, when they lost, 23 but, like everything else in this case, we're 24 back to a third trial. 25 Your Honor, no one has argued to the 4936 1 jury that the final judgment provides Microsoft 2 with immunity in this case. 3 And for Ms. Conlin to say that is, of 4 course, not correct. 5 We haven't argued that it provides 6 immunity. If we thought it did, we would have 7 asked the Court for summary judgment, for 8 judgment with respect to the period after entry 9 of this final judgment. 10 The Plaintiffs can submit their 11 evidence about Microsoft's conduct. And the 12 jury is entitled to know the truth about what 13 actually happened in the government case. 14 Thirdly, Your Honor, this problem, to 15 the extent that it's a problem -- and it's 16 not -- but if there's a problem, it's a problem 17 of the Plaintiffs' own making. 18 They move for summary judgment in 19 2004. Sorry, not for summary judgment, for 20 collateral estoppel. We opposed. We 21 litigated. We went to the Supreme Court. We 22 came back. 23 They moved again. And by seeking 24 collateral estoppel on the 146 findings that 25 the Court granted, and, of course, we opposed 4937 1 that, but by seeking collateral estoppel and 2 asking the Court to provide this kind of 3 detailed information about the government case, 4 the Plaintiffs make it necessary -- indeed I 5 think justice requires -- that the jury 6 understand that the government case concluded 7 with this final judgment for all the reasons 8 we've talked about now on three occasions. 9 It's, again, an effort for the 10 Plaintiffs to keep the jury from learning the 11 truth. 12 Thank you, Your Honor. 13 THE COURT: What's the relevance of 14 the judgment? 15 MR. TULCHIN: The relevance is, Your 16 Honor, is that the Court has instructed the 17 jury about 12 conclusions of law and 146 18 findings and said that everyone is bound and 19 that the jury must understand that Microsoft's 20 conduct was anticompetitive in this time frame. 21 We are entitled to inform the jury 22 that the conduct stopped, that a final judgment 23 was entered prohibiting Microsoft from doing 24 the acts that were the subject of the 25 government case. 4938 1 And, of course, we are entitled to 2 defend ourselves from the allegation that 3 unlawful conduct has existed in the period 4 since the government case. 5 The Court may remember, Your Honor, 6 that in Minnesota, for instance, the class 7 period was November -- sorry -- May 18th, 1994, 8 as it is here, until December 15th, 2001. 9 Judge Peterson in Minnesota cut the 10 class period off as of the date that Microsoft 11 began complying with this final judgment. 12 Here the Plaintiffs argue that they 13 wanted a class period through June 30th, 2006, 14 which allows them to seek -- and we've 15 calculated this, Your Honor -- it's about half 16 the total damages in the case apply to that 17 more recent period, the period subsequent to 18 the period in the Minnesota case. 19 It's almost half. 20 So half the damages they seek is on 21 account of purchases of software made in this 22 period from December 15th, 2001, through June 23 30th, 2006. 24 And even if you start in November of 25 2002, a substantial portion of their damages, 4939 1 something, I think, around 40 percent for that 2 period, is on account of this period since the 3 final judgment. 4 Now, of course, they can argue that 5 the class suffered damages in that period. 6 We should be permitted to submit 7 evidence to the jury that the conduct at issue 8 in the government case was prohibited beginning 9 November 12th, I believe the date is, 2002. A 10 judgment of the court was then entered. 11 This is simply the truth about the end 12 of the case as to which they have the benefit 13 of collateral estoppel. 14 THE COURT: But in order to show that 15 Microsoft has done none of -- no further acts 16 that are anticompetitive, you don't need a 17 decree from the Court to show what you did. 18 MR. TULCHIN: Well, we intend to 19 submit evidence of what the company has done, 20 Your Honor. 21 THE COURT: What's the decree offer? 22 MR. TULCHIN: The decree is simply the 23 truth of how the government case ended. 24 The jury is certainly entitled to 25 understand that there were consequences from 4940 1 the government case. It's not just that they 2 were conclusions of law. There was an end to 3 the case with a decree forbidding the same acts 4 from occurring again. 5 THE COURT: The problem is, though, is 6 maybe the jury will be prejudiced that those 7 consequences that you paid and the case has 8 already been determined. It's over. 9 MR. TULCHIN: But the Plaintiffs have 10 asked for the jury to conclude exactly the 11 opposite, which is untrue. 12 The Plaintiffs have asked the jury to 13 conclude that Microsoft has never been held 14 accountable. 15 They did it in voir dire and they did 16 it in their opening statement. They've asked 17 the jury in this case to punish Microsoft for 18 its anticompetitive conduct in the government 19 case. 20 Well, I'm not sure that's appropriate 21 at all, but to the extent the conduct in the 22 government case legitimately gives rise to 23 damages, that's what we're here for. 24 But they put at issue this concept 25 that Microsoft should be punished. 4941 1 All we're trying to do is to give the 2 jury the truth about the final judgment, the 3 end of the conclusion to the government case. 4 We have not argued, Your Honor, in 5 opening statement or otherwise, that the final 6 judgment ends the inquiry. 7 Plaintiffs have no evidence of any 8 substantial sort about conduct in the more 9 recent period. And so they ask the jury to sit 10 here in Des Moines to punish Microsoft for 11 conduct that the Court in Washington, D.C., has 12 been concerned with and entered a judgment 13 about. 14 We're not going to tell the jury that 15 that's the end of the inquiry; that they can't 16 think about damages. We're not going to tell 17 them that this gives us immunity from damages. 18 We just want to tell them the truth, 19 that this is what happened in Washington. This 20 is how it ended. 21 And in the context of the Plaintiffs 22 appealing to the jury's emotions, hold them 23 accountable. Can't you hold them accountable 24 for this unlawful conduct? It's been repeated 25 and repeated in voir dire and in opening. 4942 1 They certainly should be entitled to 2 the truth of what actually occurred in that 3 other case. 4 THE COURT: In the government case, 5 Microsoft is held accountable by way of a 6 decree, and this is in regard to damages? 7 MR. TULCHIN: That's correct, Your 8 Honor. 9 THE COURT: Would it lead the jury to 10 confusion, as I stated, that it's already been 11 solved and there's no reason to go there? 12 MR. TULCHIN: There is no confusion. 13 The Court has already instructed the jury that 14 they must accept that this conduct took place. 15 And, of course, that they can consider it in 16 considering the issues of causation and 17 damages. 18 We have not argued the reverse 19 proposition; that somehow this consent decree 20 makes their inquiry moot. Not at all. 21 But how can it be after the Plaintiffs 22 appeal to the jury to hold Microsoft 23 accountable for the conduct set forth in the 24 146 findings that Microsoft is prevented from 25 telling them here's the judgment of the Court? 4943 1 And that's all. 2 Here's the conduct in Conclusion 3 Number 1 that the Court has read to the jury, 4 and here's the judgment. Microsoft may not do 5 this again. 6 Now, if they have evidence that 7 Microsoft has done it again, let them submit 8 it. There is none. 9 But that's a different issue. I'm not 10 intending in my opening to tell the jury that 11 somehow because this judgment exists that the 12 Plaintiffs can't submit such evidence or the 13 jury shouldn't consider the Plaintiffs' 14 evidence. Not at all. 15 MS. CONLIN: Your Honor, it is safe 16 for Mr. Tulchin to say if they have evidence of 17 noncompliance, let them submit it given the 18 fact that he knows full well that we have been 19 deprived of the opportunity to have that 20 evidence, which we couldn't have submitted. 21 This is, Your Honor, ultimately, and 22 finally, the Defendant's attempt to impose 23 defensive collateral estoppel. 24 Mr. Tulchin said just moments ago, and 25 I quote, he wishes to offer that consent decree 4944 1 to, quote, show that the conduct stopped. 2 That purpose could not be more 3 improper. It doesn't show that the conduct 4 stopped, you know, to start with. 5 The Court has already instructed the 6 jury that the collateral estoppel is effective 7 as to conduct from '95 to '99. 8 The Court has already instructed the 9 jury about what they can use the findings of 10 facts for. 11 Microsoft has already been permitted 12 to tell the jury that there was a consent 13 decree. 14 To go any further is a manifest 15 violation of the Plaintiffs' rights. 16 Mr. Tulchin seems to misunderstand the 17 entire purpose of the civil justice system, 18 which is, in fact, to hold those who commit 19 wrongs accountable in damages to those that 20 they harm. That is the underlying rule that 21 applies to all civil cases. 22 Never have the Plaintiffs said that 23 Microsoft should be punished. In fact, when a 24 juror said that, that was immediately 25 corrected. 4945 1 We do not seek to punish Microsoft. 2 We seek compensation for the citizens of Iowa 3 who have been harmed by the wrongful conduct. 4 The consent decree is highly prejudicial to the 5 Plaintiffs and puts us in a position where we 6 cannot respond to it because we do not have the 7 materials. 8 And, finally, Your Honor, Microsoft 9 filed a motion on November 20th seeking 10 permission to refer to the 2002 consent decree. 11 We filed our resistance on 11-30. 12 They filed their reply on 12-4, but 13 they never sought a hearing on that matter 14 before coming to court and utilizing this 15 consent decree in a way that is clearly 16 improper. We have -- 17 MR. TULCHIN: As our brief said on 18 December 4th, Your Honor, the Court had already 19 ruled in our favor by the time we did that. We 20 didn't need to seek a hearing. 21 MS. CONLIN: We had no opportunity for 22 argument, Your Honor, and that's why I'm taking 23 this opportunity now. 24 I apologize to the Court for taking 25 the time to do this, but I want the record to 4946 1 be clear the Plaintiffs' position with respect 2 to this issue. 3 MR. TULCHIN: The Plaintiffs have 4 already successfully managed to stop my opening 5 statement now for almost an hour and a half on 6 an issue that they have twice lost previously. 7 The test here is relevance. The 8 consent decree is relevant in connection with 9 the arguments they've made, and as a result of 10 the fact that they sought and obtained 11 collateral estoppel. 12 MS. CONLIN: Your Honor, and this 13 decree now is being offered for the truth. 14 It's hearsay besides being everything else that 15 we have said. They now seek to offer the 16 consent decree for the truth of the matter 17 asserted. 18 THE COURT: Anything else? 19 MS. CONLIN: No, Your Honor, not from 20 us. 21 THE COURT: I'm going to allow partial 22 use of it. 23 Page 1, except the third paragraph, 24 may be used. 25 Page 2, 3, 4, 5, 6, and page 7, except 4947 1 for paragraph J and below may be used. 2 Page 8 cannot be used. Neither can 3 page 9, 10, 11, 12, 13, 14, 15, 16, 17, and 18 4 cannot be shown to the jury. 5 In addition, the Court intends to give 6 an instruction to the jury at the close of the 7 case regarding the import of this instruction. 8 And, again, the Defendant cannot state 9 to the jury that they have complied with a 10 court ordered decree before or after the decree 11 was entered to show that's a legal conclusion. 12 Only a court can decide whether or not 13 they have complied with its decree and this 14 order. 15 Anything else? 16 MS. CONLIN: Your Honor, we ask -- 17 MR. TULCHIN: Just a question, Your 18 Honor. 19 THE COURT: Yeah. 20 MR. TULCHIN: Will the Plaintiffs be 21 permitted through their experts to say that 22 Microsoft has not complied and, if they do, can 23 we say that we have? 24 THE COURT: You can say what you did 25 after the decree was entered. You can't say if 4948 1 you complied or not. 2 And they may say what you did after 3 the decree was entered and they can't say 4 whether it was complied or not. 5 MR. TULCHIN: So the Plaintiffs' 6 experts can say what we did, which I think is 7 perfectly fair, but the Plaintiffs' experts 8 will not be permitted to make the legal 9 conclusion of whether what we did was 10 compliance; is that correct? 11 THE COURT: Correct. And neither can 12 you. 13 MR. TULCHIN: Yes. Thank you, Your 14 Honor. 15 MS. CONLIN: Your Honor, we would ask 16 that the jury be instructed immediately that 17 this is not offered and can't be offered to 18 show that the conduct stopped. 19 That is what Mr. Tulchin just said he 20 wanted to do, and we ask that the jury be 21 immediately instructed that that is not so. 22 MR. TULCHIN: That's not what I said. 23 MS. CONLIN: That's what the 24 transcript says you said. 25 THE COURT: Okay. Granted. 4949 1 MS. CONLIN: Your Honor, we also ask 2 the Court, I will do this formally, but we are 3 going to ask this Court to compel the Defendant 4 to produce all of the evidence, all of the 5 materials produced in connection with its 6 alleged compliance with the decree. But we'll 7 do that formally, Your Honor. 8 THE COURT: Okay. How do you want to 9 proceed with the jury? Do you want to let them 10 go to lunch or do you want to -- 11 MR. HAGSTROM: I think so, Your Honor. 12 They are used to this schedule. 13 THE COURT: Defense? 14 MR. TULCHIN: I suppose so, Your 15 Honor, although -- well, I suppose so, Your 16 Honor. 17 It seems unfortunate that an hour and 18 a half of my time was taken this way. And I 19 hope the jury is not led to believe that this 20 was somehow through some fault of my own after 21 the Court had expressly given me permission to 22 refer to this document in my opening. 23 THE COURT: I'll tell them what 24 happened as far as the Court changed its mind 25 and let you do. That way the burden is on me, 4950 1 not you. 2 MR. TULCHIN: Thank you, Your Honor. 3 THE COURT: Ask the jurors, see if 4 they want to go from 11 to 12 for lunch or if 5 they want to wait until 12. 6 MS. CONLIN: Just for the record, Your 7 Honor, I can remember one time during my 8 opening statement when we started at 10:30 as 9 well as a result of numerous arguments. 10 Mr. Tulchin's whining is a little 11 disconcerting under the circumstances. 12 THE CLERK: 11:00 to 12:00. 13 THE COURT: They want to go now? 14 Okay. Recess to -- 15 THE CLERK: Do you want them back here 16 at 12:00? 17 THE COURT: Yeah, 12:00. 18 MR. HAGSTROM: Your Honor, there were 19 some motions we were going to argue. 20 THE COURT: Right. Let's see, do you 21 want to do those motions? 22 MR. WILLIAMS: I'm sorry, Your Honor? 23 THE COURT: Did you have some evidence 24 matters? 25 MR. WILLIAMS: Yes, I did, Your Honor. 4951 1 THE COURT: Let's do those. 2 MS. CONLIN: And, Your Honor, just for 3 scheduling purposes, I have another record that 4 I'd like to make at the close of business 5 today. 6 THE COURT: Okay. 7 MS. NELLES: Your Honor, could we have 8 two minutes? I need to use the ladies room 9 before we do these arguments. 10 THE COURT: Oh, sure, go ahead. 11 MS. NELLES: Thank you, Your Honor. 12 THE COURT: Okay. Which issues are we 13 taking up now? 14 MR. WILLIAMS: Good morning, Your 15 Honor. The first issue we'd like to take up is 16 Plaintiffs' motion for a corrective instruction 17 regarding testimony from absent class members. 18 If I could hand that up to Your Honor. 19 THE COURT: Yes. Thank you. 20 MR. WILLIAMS: Thank you. 21 THE COURT: Defendant's got a copy of 22 this? 23 MR. WILLIAMS: Yes, Your Honor. They 24 were served with all the motions we are talking 25 about today yesterday. 4952 1 THE COURT: Okay. Proceed. 2 MR. WILLIAMS: Thank you, Your Honor. 3 In his opening remarks, Mr. Tulchin 4 asked the jury to ascribe some significance to 5 the number of class members who Plaintiffs 6 intend to call as witnesses. And we have 7 recounted that language here, Your Honor. 8 He said that Plaintiffs say there are 9 hundreds of thousands of people in Iowa who are 10 members of the class; that there were somewhere 11 around 7.5 million licenses at issue, and then 12 he said, and we ask you to keep track during 13 the trial of how many of those class members 14 come into this courtroom and tell you that they 15 were hurt, they were injured by anything that 16 Microsoft has done. 17 Your Honor, this statement to the jury 18 was obviously intended to create the impression 19 that if we don't have scores of class members 20 trooping into court and testifying about how 21 they were hurt, that they were not, or that 22 they somehow for some reason don't care about 23 this lawsuit, don't want compensation or don't 24 think that Microsoft did anything wrong. 25 Your Honor, this would give a 4953 1 misleading impression to the jury, and it 2 violates and contradicts your preliminary 3 Instruction Number 2, which we have appended to 4 our motion. 5 And that order or that instruction 6 says, Iowa law allows class actions when there 7 are too many parties alleging the same 8 violation of the law for the courts to be able 9 to manage separate lawsuits for each of them. 10 Class actions allow courts and juries 11 to decide a common dispute between numerous 12 parties in an efficient manner. 13 Now, as we all know, as Microsoft is 14 certainly aware, since they contested the issue 15 many, many times, this is a class action. It's 16 a certified class. It has withstood appeals. 17 There's no question about that. 18 This Court, as well as the Iowa 19 Supreme Court, has determined that a class 20 action is appropriate, and it's appropriate for 21 this Court to utilize those efficiencies. 22 What that means is, we don't have to 23 have scores of people come in and testify about 24 how they were hurt. We get to do that in a 25 representative capacity. That's the whole 4954 1 point of a class action. 2 But, Your Honor, with his remarks, Mr. 3 Tulchin wants to penalize us for utilizing 4 those efficiencies and the efficiencies to 5 which we are entitled. 6 So, Your Honor, we ask for a 7 corrective instruction on this set forth in our 8 motion, and that instruction would be as 9 follows. 10 One of the purposes of class actions, 11 as I previously instructed you, is to allow 12 courts and juries to decide a common dispute 13 between numerous parties in an efficient 14 manner. There is nothing improper in having 15 only the named Plaintiffs testify on behalf of 16 class members. Indeed, that is consistent with 17 the purpose of a class action. 18 Therefore, the jury is to ascribe no 19 significance to the number of class members who 20 appear as witnesses. 21 THE COURT: Response? 22 MS. NELLES: I'll take this one, Your 23 Honor. 24 I'm going to do this quickly in the 25 hope that we'll be able to get through all four 4955 1 of these motions that Plaintiffs gave -- handed 2 to us yesterday afternoon before we need time 3 to resume. 4 The Court's instruction to the jury 5 reads, and Mr. Williams' brief here, Iowa law 6 allows class actions when there are too many 7 parties alleging the same violation of the law 8 for the courts to be able to manage separate 9 lawsuits for each of them. 10 Class actions allow courts and juries 11 to decide a common dispute between numerous 12 parties in an efficient manner. 13 Microsoft never suggested to the jury 14 that it was improper for only class 15 representatives to testify. 16 Microsoft did not comment on class 17 actions generally or their nature and purpose. 18 There is nothing in the challenged statement 19 that suggests that Plaintiffs don't have the 20 right to bring this action as a class action or 21 take advantage of the efficiencies gained from 22 doing so. 23 There's nothing in this statement at 24 all that contradicts a thing about this Court's 25 instruction. 4956 1 This is what's going on here, Your 2 Honor. Plaintiffs have made a strategic 3 decision not to have real people come and 4 testify about prices at this trial. And that's 5 their choice. And that is absolutely their 6 right. But it is their choice. 7 There is nothing that prevents them 8 from having class representatives or absent 9 class members who they are free to contact come 10 and talk about prices. 11 They had real people come and talk 12 about prices in Minnesota. And, apparently, 13 they think that hurt them. 14 So they've made a tactical decision 15 simply to do this with their experts. And what 16 they are asking -- and they talked about it ad 17 nauseam during voir dire. I'm sorry, I'll wait 18 for Mr. Hagstrom to finish so I can continue. 19 Thank you. 20 They, obviously, got a little nervous 21 about this. We spent a great deal of time 22 during voir dire talking about that people 23 weren't going to be here, weren't going to be 24 here. 25 Apparently, they continue to be 4957 1 nervous. And what they are asking Your Honor 2 to do is give an instruction to bolster their 3 strategic decision. 4 They are asking Your Honor to tell the 5 jurors that their strategic decision not to 6 call absent class members as witnesses somehow 7 should be given credence and somehow should be 8 seen as a requirement or because of the theory 9 of how class actions operate. 10 One has nothing to do with the other. 11 The instruction would suggest only that having 12 class representatives testify is somehow 13 inherent to class actions or how they normally 14 proceed. It's simply not true. 15 Thank you. 16 MR. WILLIAMS: Your Honor, I have a 17 couple of points. 18 First of all, Ms. Nelles referred to 19 Mr. Hagstrom making a comment to me during her 20 argument, and we apologize if that disrupted 21 her train of thought, but Mr. Hagstrom informed 22 me that, as a matter of fact, it was only class 23 members who testified at the trial in Minnesota 24 as class members, as class representatives, 25 excuse me. 4958 1 Class representatives testified as 2 class members in the Minnesota case. 3 But, more importantly, Your Honor, I 4 heard the accusation from Ms. Nelles several 5 times in her response to my comments that we 6 are making a strategic decision not to call 7 live people as witnesses. 8 First of all, that's not true and she 9 knows it's not true. 10 But, secondly, and, more importantly, 11 Your Honor, she appears to have forgotten the 12 fact that Your Honor issued an order 13 prohibiting us from contacting absent class 14 members. 15 So I don't see anything strategic 16 about it. We weren't allowed to contact. We 17 can't bring them in. 18 And the reason, as I understand your 19 Court's order, was for precisely the same 20 reason that I'm advocating that Mr. Tulchin's 21 comments were improper, and the reason why we 22 have these efficiencies that we can use. 23 And, finally, Your Honor, she said 24 that they did not question the nature of class 25 actions, that there's basically nothing wrong 4959 1 with Mr. Tulchin's comments. 2 I'll again refer you to the language 3 that he used. He said, and we ask you, 4 speaking to the jury, and we ask you to keep 5 track during the trial of how many of those 6 class members come into this courtroom and tell 7 you they were hurt. 8 Now, why would he be asking jurors to 9 keep track of that if he didn't want them to 10 ascribe some significance to it? 11 So, Your Honor, again, we ask for the 12 corrective instruction that we have set forth 13 in our motion. 14 THE COURT: Anything else on it? 15 MR. WILLIAMS: Not from Plaintiffs, 16 Your Honor. 17 MS. NELLES: Very briefly, Your Honor. 18 You know, Microsoft asked the jury to 19 keep track of how many people these Plaintiffs 20 bring in the courtroom and tell you they were 21 hurt, they were injured by anything that 22 Microsoft has done. 23 The point was not to keep track of how 24 many class members testified, but to keep track 25 of whether any class member or other nonexpert 4960 1 testifies that he or she was injured by 2 Microsoft. 3 In their opening, Plaintiffs outlined 4 ad nauseam the defenses they believe Microsoft 5 will raise. They went through them point by 6 point to shoot them down. Microsoft is doing 7 the same thing, anticipating that Plaintiffs 8 have made a strategic choice not to present any 9 nonexpert evidence of harm to class members and 10 explaining that problem. 11 The problem -- that position, 12 Microsoft is entitled to do that. And there is 13 nothing that Mr. Tulchin said, there is nothing 14 that Microsoft said that in any way conflicts 15 with the instruction Your Honor gave. 16 They simply want what they call a 17 curative instruction. It's not to cure here 18 because there's nothing in conflict. They are 19 asking the Court to bolster their strategic 20 decision. 21 Thank you. 22 THE COURT: Anything else? 23 MR. WILLIAMS: Not from Plaintiffs, 24 Your Honor. 25 THE COURT: Okay. The Court finds 4961 1 that the statement does seem to imply that 2 class members have to come in and testify. 3 So I'm going to give a limited 4 instruction that you are instructed it is not 5 necessary that all members or any particular 6 number of class members must testify in a 7 class-action suit. 8 MS. NELLES: That's fine, Your Honor. 9 I simply going to raise that Ms. Conlin argued 10 vociferously when we raised one, just one 11 request for a curative instruction that these 12 not be done in the middle of her argument, Your 13 Honor. 14 In fact, gave no curative instruction 15 at all when that was requested and allowed her 16 to correct. If we're not going to be allowed 17 to correct, I would ask that the Court, as we 18 go through all of these, give us the same 19 courtesy and let's do this at the close of 20 openings and before the start of evidence. 21 MR. WILLIAMS: Your Honor, if I could 22 respond to that. 23 If I'm thinking about what Ms. Nelles 24 is thinking about, Your Honor didn't find that 25 there was anything to correct. 4962 1 In that episode, Ms. Conlin went out 2 of her own accord, without being required to do 3 so, and made that correction herself. 4 Your Honor, Mr. Tulchin knew exactly 5 what he was doing. We served this motion on 6 them yesterday. 7 If he was going to self-correct, as 8 Ms. Nelles is now offering, after Your Honor 9 has ruled, he could have done it this morning. 10 He could have done it yesterday. 11 It's simply improper now after Your 12 Honor has ruled to say, oh, okay, well, since 13 you say it needs to be fixed, let's do it. 14 Your Honor, it needs to come from you 15 in order to have it be imbued with the 16 significance that it deserves. So we ask that 17 you stand by your ruling as you've made it. 18 THE COURT: Anything else? 19 MR. WILLIAMS: No, Your Honor. 20 THE COURT: Next issue. 21 MR. WILLIAMS: Next, Your Honor, is 22 the issue of the dates of depositions which was 23 commented on by Mr. Tulchin. 24 If I could approach? 25 THE COURT: Yes. 4963 1 MR. WILLIAMS: Your Honor, this 2 relates to some comments that Mr. Tulchin made 3 on December 12th. We have the language 4 recounted here. 5 He told the jury or mentioned to the 6 jury or asked the jury to take note of the fact 7 that many of the videotaped depositions that 8 will be submitted to the jury were taken years 9 and years ago. 10 And then he said, as a result, these 11 witnesses by definition could not be testifying 12 in support of a claim for overcharge because 13 the government case involved no such claim. 14 And then he went through and recounted 15 some of the dates. He noted one that went back 16 to 1993 were, I believe, the words that he 17 used. 18 And, Your Honor, we believe that this 19 violates your Preliminary Instruction 19 which 20 we have set forth again for the record, which 21 states when you are shown a videotape 22 deposition or when a deposition or prior 23 testimony is read to you, give the evidence the 24 same importance as you would if a person was 25 present and use the same factors as you would 4964 1 in judging any evidence. 2 Now, Mr. Tulchin attempted to justify 3 his apparent contradiction of that preliminary 4 instruction by saying that it had something to 5 do with whether class members were harmed. 6 Your Honor, this is improper for a 7 couple of reasons. 8 First of all, if they are trying to 9 somehow capitalize upon the delay between the 10 taking of those depositions and the trial in 11 this case, it's improper, unfair, and 12 prejudicial. 13 Your Honor, as you know, this case was 14 originally brought in the year 2000, much 15 closer in time to the depositions, obviously, 16 than now. 17 And much of the delay in this case -- 18 in fact, we would submit most of the delay -- 19 was attributable to Microsoft's conduct with 20 their countless appeals which ended up being 21 meritless, with their diversion of this case to 22 federal court years after it had been filed in 23 state court, and on and on. 24 There are multiple bites at the apple, 25 and the certification issue has tied this case 4965 1 up. And that's why the years and years that 2 Mr. Tulchin has referred to have elapsed since 3 the taking of the deposition. 4 Moreover, Your Honor, as I understand 5 it, and as I'm informed by my cocounsel, this 6 case was coordinated with the NBL proceedings. 7 And, at Microsoft's insistence, we relied upon 8 videotape depositions and we were not allowed 9 in some instances, but we requested it, to 10 redepose witnesses who had already been 11 deposed. 12 I'm informed that there was a 13 Mr. Letwin that we asked to redepose and 14 Microsoft opposed that and, because of that, it 15 did not happen. 16 So, again, Your Honor, we ask for a 17 limiting instruction or a corrective 18 instruction. And this one goes specifically to 19 the date of the deposition testimony. 20 It's not set forth in your Preliminary 21 Instruction Number 19 as it exists, Your Honor, 22 because, frankly, we couldn't conceive of 23 Microsoft making an issue of it given the 24 record in this case. 25 And that limiting instruction is set 4966 1 forth in paragraph 5 of our motion. And it 2 reads, you are not to give any more or less 3 weight to the testimony simply because of when 4 the testimony was given. 5 THE COURT: Response? 6 MS. NELLES: I'll take this one, too, 7 Your Honor. 8 First of all, I really don't 9 understand what Mr. Williams is talking about 10 in terms of delay since every single one of the 11 depositions Mr. Tulchin referred to was not 12 taken in this case, but before this case was 13 filed. So how we could have delayed in this 14 case is beyond me. 15 Your Honor, the depositions are what 16 they are and they were taken when they were 17 taken. 18 And I believe as we discussed, 19 Ms. Conlin and I with you in one of our court 20 conferences prior to this case even beginning, 21 before any deposition testimony is going to be 22 shown, we're going to display for the jury the 23 name, the affiliation, and the date of the 24 deposition. The dates of the depositions are 25 on the transcript. 4967 1 Mr. Tulchin said, I noted yesterday, 2 that many, many of the depositions you will see 3 by videotape from the Plaintiffs were taken 4 years and years ago. That's true. 5 And that, as a result, these 6 witnesses, by definition, could not be 7 testifying in support of a claim for an 8 overcharge because the government case involved 9 no such claim. 10 That is also true. They could not be 11 testifying then. 12 What Mr. Tulchin was doing was not 13 saying you cannot look at these depositions and 14 give them credence or that you should discount 15 them sometime because they are taken many years 16 ago. 17 What Mr. Tulchin was clearly stating, 18 and which Your Honor has endorsed, I believe, 19 is that you must look at the time period at 20 issue in the deposition when considering those 21 depositions. 22 In fact, I am looking at the e-mail 23 that Plaintiffs sent Your Honor at 9:43 p.m. 24 last night, which says Mr. Tulchin should be 25 instructed to tell the jury that the testimony 4968 1 can only be taken to apply to the period 1983 2 through 1993. 3 This was in relationship with the 4 Sculley materials. 5 I mean, apparently we have to tell the 6 jury when the depositions were taken. It helps 7 them. And we can't refer to it when they think 8 it hurts them. 9 I don't think what we're looking for 10 here is a curative instruction, but I would 11 make a suggestion to Your Honor, that perhaps, 12 before evidence begins, the Court should 13 instruct the jury that the jury -- that each 14 time a video is played, the Court should 15 instruct the jury that testimony can only be 16 taken to apply to the period prior to the date 17 of the deposition itself. It's absolutely 18 true. It has to be. 19 And I think with all this confusion 20 and all these different positions Plaintiffs 21 are taking, perhaps that is something that 22 should be made clear to the jury. 23 Thank you. 24 MR. WILLIAMS: Your Honor, if I could 25 respond. 4969 1 In fact, I believe Ms. Nelles 2 misapprehends the point that we are making. 3 First of all, she seemed to think that 4 I was arguing that Microsoft somehow delayed 5 the taking of depositions. That is not our 6 position. 7 They delayed the course of these 8 proceedings. And it's because of their conduct 9 that years and years have gone by between the 10 taking of those depositions and the date of 11 this trial. 12 Secondly, with respect to telling the 13 jury the dates, we have no objection to that. 14 Obviously, the jury needs to know the dates of 15 the deposition. 16 What we object to is Mr. Tulchin 17 telling the jury that they should ascribe some 18 significance to it. 19 And Ms. Nelles' implication that this 20 was all innocent simply doesn't comport with 21 the record, Your Honor. 22 Mr. Tulchin said, I noted yesterday, 23 that many, many of the depositions that you 24 will see by videotape from the Plaintiffs were 25 taken years and years ago. 4970 1 Now, why would he use that language, 2 Your Honor, if, as Ms. Nelles seems to be 3 arguing, all he wanted to do was to inform the 4 jury of the dates of the deposition? 5 This is, obviously, rhetoric and it's 6 obvious what its intent is. It's to have the 7 jury blame us, blame the Plaintiffs for the 8 fact that the depositions that they sought to 9 limit us to were taken years and years ago, 10 when they're the ones to blame for that. 11 So, Your Honor, that's why we ask for 12 this instruction. It's a simple instruction. 13 We believe it's a fair one and it's 14 even-handed. 15 I haven't seen or heard of Ms. Nelles 16 object to the language of the instruction and 17 we believe it's definitely called for. 18 It's limited in its scope. It goes 19 right to the issue and it's correct because, in 20 fact, the jury should not give any weight in 21 listening to deposition testimony to the date 22 that the testimony was given. 23 Simply that, Your Honor. 24 THE COURT: Anything else on this one? 25 MS. NELLES: Well, I guess for the 4971 1 record, I object to the language, Your Honor. 2 We object to the language, Your Honor. 3 What Mr. Tulchin plainly was telling 4 the jury -- and I state again -- every single 5 thing he said was absolutely true. 6 It is a fact, and he was entitled to 7 say it in his opening. But he was informing 8 the jury that testimony goes to -- must be 9 taken in context in the period it was played. 10 Now, I will just reiterate that I 11 think the concern raised by Mr. Williams -- and 12 I think it's our concern as well -- and I think 13 that the appropriate response to this is that 14 the Court should instruct the jury each time a 15 video is played that the testimony can only be 16 taken to apply to the period prior -- to the 17 date of the deposition itself. 18 And we shouldn't countenance the 19 Plaintiffs repeated attempts to get the Court 20 to bolster what it considers weaknesses in its 21 case. 22 That's it. Thank you. 23 THE COURT: Anything else? 24 MR. WILLIAMS: No, Your Honor. 25 THE COURT: The Court finds that it 4972 1 will give some type of instruction prior to the 2 presenting of evidence regarding these 3 depositions because of the time that they were 4 taken. 5 I'll do some appropriate instruction, 6 give it to the parties for them to look at, and 7 they can make their comments and objections and 8 then I'll decide what type of instruction to 9 give regarding depositions. 10 MR. WILLIAMS: Thank you, Your Honor. 11 MS. NELLES: Thank you, Your Honor. 12 THE COURT: Number 3? 13 MR. WILLIAMS: Next issue, Your Honor, 14 is Plaintiffs' motion for a corrective 15 instruction and an order precluding Microsoft 16 from referring to or using prior testimony of 17 witnesses, which it did not designate. 18 If I may approach. 19 THE COURT: Sure. 20 MR. WILLIAMS: Thank you. 21 Your Honor, this is a relatively 22 simple motion, even though it seems to have the 23 most number of pages. I believe that's mainly 24 because of the appendix that's attached. 25 On December 12th Mr. Tulchin argued at 4973 1 length to the jury about the actions of a Lee 2 Riesweig. And he stated to the jury we have a 3 deposition from Mr. Riesweig himself. 4 And the attachments to or the 5 attachment to the motion recounts the 6 statements that Mr. Tulchin made to the jury in 7 that regard. 8 I don't want to go through them all, 9 Your Honor, but you can see it goes on and on. 10 The fact is, Your Honor, neither party 11 has designated the testimony of Mr. Riesweig. 12 We object to Mr. Tulchin trying to 13 bolster his comments to the jury by implying 14 that he has evidence which they have not 15 designated and have no intention of presenting 16 at the trial. 17 So, therefore, we ask that you 18 admonish Mr. Tulchin to stop making such 19 comments, stop referring to evidence that they 20 have no intention of putting on. 21 And, also, we request a corrective 22 instruction to the effect that the deposition 23 testimony of Mr. Riesweig will not be presented 24 as evidence in this action and that the jury 25 should disregard Microsoft's statements. 4974 1 THE COURT: Response? 2 MS. NELLES: Yeah. I'm having a hard 3 time understanding this one, Your Honor. 4 All Mr. Tulchin said was we have a 5 deposition from Mr. Riesweig himself. That is 6 actually quite true. 7 And Microsoft didn't, in fact, 8 actually use this deposition in the opening 9 statement. 10 It simply -- at all. And indeed it 11 also noted that it was going to rely on the 12 live testimony of Kevin Murphy for the evidence 13 of IBM's campaign against Windows. 14 THE COURT: Was this deposition 15 designated? 16 MS. NELLES: But as I'm getting to the 17 final point here, Your Honor, what I really do 18 not understand, how it makes sense for 19 Plaintiffs to say that Microsoft has not yet 20 designated specific parts of the deposition, 21 thus that the deposition does not exist and we 22 somehow misled the jury because Microsoft can 23 still designate this deposition. 24 The agreement, which apparently is no 25 longer worth the paper it is written for, says 4975 1 that each party may also designate up to 4,000 2 additional lines of prior testimony. 3 We can still designate it. We have 4 the testimony. We believe we can still get it 5 into evidence. 6 And, anyway -- and if we are wrong and 7 if for some reason they object and they say 8 it's late or untimely or the paper or -- you 9 know, the agreement isn't worth the paper it's 10 written on, well, I'm still having a hard time 11 understanding where the prejudice is to 12 Plaintiffs. 13 Indeed, if they decide to try to keep 14 us from designating the deposition, then they 15 get to stand up in closing just like in every 16 other trial and say Plaintiffs said -- 17 Defendant Microsoft said they had a deposition. 18 Where's that deposition? 19 Just like we'll do with all the 20 evidence they said they're going to get in and 21 perhaps will not. 22 Again, this is worthy of a curative 23 instruction, Your Honor. I really -- I, 24 frankly, don't understand. 25 THE COURT: Do you intend to designate 4976 1 this witness? 2 MS. NELLES: Indeed. 3 THE COURT: Okay. And there is a time 4 limit on that? 5 MS. NELLES: 48 hours before you 6 attempt to introduce it into evidence. 7 THE COURT: Okay. 8 MR. CASHMAN: Your Honor, I think the 9 agreement was that the designation of 10 additional testimony had to be done in advance 11 so that we'd have a chance to object to it. 12 I think the issue here is that we had 13 no notice that Microsoft intended to use that 14 in opening statement. 15 MS. NELLES: We didn't use it, Your 16 Honor. We simply referred to it. 17 THE COURT: Okay. 18 MR. WILLIAMS: Just one point, Your 19 Honor. 20 As I understand it, the designations 21 were due on April 21st of this year. 22 Now, all along Microsoft, certainly as 23 of the time of Mr. Tulchin's opening, has been 24 intending to designate this testimony. I get a 25 sense that there's a game being played here. 4977 1 If they intend to designate it, why am 2 I hearing about it for the first time today 3 after Mr. Tulchin has referred to it? 4 For that matter, Your Honor, they got 5 my motion yesterday. If they said, oh, this is 6 just an oversight, we intend to designate this 7 testimony, we're going to use the 4,000 line 8 agreement to do that, they could have told me 9 that, Your Honor, and I wouldn't have argued 10 this motion. 11 This is just more game playing, Your 12 Honor, and, you know, I'm sorry, but it's 13 starting to wear a little bit thin. 14 MS. NELLES: Your Honor, I was handed 15 four of these motions yesterday afternoon. As 16 you remember, we were standing -- we were here 17 very late in the evening. 18 We are trying to get ready for Mr. 19 Tulchin's opening. I am being absolutely 20 honest with this Court when I tell you I did 21 not read them until this morning. 22 That said, we are the Defendant. We 23 respond in response to Ms. Conlin's opening 24 statement. We made this response about the 25 fact and this says nothing more than that we 4978 1 have a deposition, a true factual situation. 2 We also referred on the live testimony 3 of Kevin Murphy, and we have other witnesses 4 who can testify about this. 5 The fact that we simply didn't 6 designate it yet -- we are still entitled to 7 designate it, Your Honor -- is just silliness. 8 Thank you. 9 MR. WILLIAMS: Well, we agree on that, 10 Your Honor, it is silly, but I think for 11 different reasons. 12 THE COURT: Okay. Anything else on 13 this? 14 MS. NELLES: No, Your Honor. 15 MR. WILLIAMS: No, Your Honor. 16 THE COURT: The motion is denied. 17 Next one. 18 MR. WILLIAMS: Next one, Your Honor, 19 is Plaintiffs' motion for an order precluding 20 Microsoft from arguing that consumers were not 21 harmed in the relative market because Microsoft 22 gave away products in other distinct markets. 23 If I could approach? 24 THE COURT: Yes. Thank you. 25 MR. WILLIAMS: Your Honor, this 4979 1 relates to an issue that, again, came up on 2 December 12th when Mr. Tulchin argued at length 3 to the jury that because Microsoft did not 4 charge for the Internet Explorer browser, 5 consumers could not have been harmed or 6 overcharged for Microsoft's Windows operating 7 system. 8 In other words, he wants the jury to 9 take that into account, take into account that 10 Microsoft gave Internet Explorer away for free 11 in deciding whether consumers were overcharged 12 for Windows. 13 Now, as Microsoft has gone to great 14 lengths to argue -- and they've argued this 15 point for years -- these are two different 16 products. And the fact that Microsoft is 17 giving away one product has nothing to do 18 whatsoever with the notion that Microsoft 19 charged a supra competitive price for another 20 product. One has nothing to do with the other. 21 This is a very important point that we 22 need the jury to understand, Your Honor, and 23 they are seeking to undermine that. 24 They know that what they are saying is 25 not true. They know that it's misleading. 4980 1 THE COURT: Response? 2 MR. HOLLEY: Yes, Your Honor. 3 Mr. Williams fundamentally 4 misunderstands what happened in the case 5 entitled United States against Microsoft, and 6 he does not understand what the Court's 7 conclusions of law are in this case. 8 There is no binding finding in this 9 case that the inclusion of Internet Explorer in 10 Windows was illegal. 11 The inclusion itself has never been 12 found to be illegal. 13 The manner -- two aspects of the 14 manner in which Microsoft included web-browsing 15 functionality in Windows has been found to be 16 anticompetitive. And I refer to the Court's 17 Conclusions of Law Numbers 5 and 6. 18 Number 5 says excluding IE from the 19 add/removes program utility in Windows. 20 Number 6 says commingling code 21 relating to browsing and other code in the same 22 files in Windows. 23 Nowhere in the conclusions of law does 24 it say that adding web-browsing functionality 25 to Windows was illegal. 4981 1 And the reason why, Your Honor, is 2 because there's no finding in U.S. v. Microsoft 3 that that was illegal. 4 The tying claim was reversed and 5 remanded and abandoned by the United States 6 Government and the State of Iowa because they 7 knew that they could never prove it under the 8 standard articulated by the DC Circuit. 9 It is correct, Your Honor, that the 10 Court of Appeals found that two aspects of the 11 manner in which IE was integrated into Windows 12 constituted a Section 2 violation. 13 And Your Honor has picked those up. 14 One is Number 5, excluding IE from the 15 add/remove programs utility in Windows. 16 And, Number 6, commingling code 17 relating to browsing with other code in the 18 same files of the operating system. 19 And the proof of this point, Your 20 Honor, is that the Justice Department sought to 21 say that Microsoft's use of Internet Explorer 22 for other features of the operating system was 23 also an act of monopolization, and they lost. 24 And I'm just -- I apologize for the 25 length of this excerpt, but at 253 F. 3rd page 4982 1 67, this is what the DC Circuit said. 2 As for the other challenged act that 3 Microsoft took in integrating IE into Windows 4 -- causing Windows to override the users' 5 choice of a default browser in certain 6 circumstances -- Microsoft argues that it has 7 valid technical reasons. 8 Specifically, Microsoft claims that it 9 was necessary to design Windows to override the 10 users' preferences when he or she evokes one 11 out of -- excuse me. He or she invokes one of 12 a few out of merely 30 means of accessing the 13 Internet. 14 And then there's a citation to 15 Microsoft's opening brief in the DC Circuit. 16 According to Microsoft, quote, the 17 Windows 98 help system and Windows update 18 feature depend on Active X controls not 19 supported by Navigator, and the now 20 discontinued channel bar utilized Microsoft's 21 channel deposition format which Navigator also 22 did not support. 23 Lastly, Windows 98 does not invoke 24 Navigator if the user access is the entity 25 through the my computer or Windows Explorer 4983 1 because doing so would defeat one of the 2 purposes of those features -- enabling users to 3 move seamlessly from local storage devices to 4 the web in the same browsing window. 5 And that's the end of the quotation 6 from our brief. 7 And then the DC Circuit goes on, the 8 Plaintiff bears the burden not only of refuting 9 a proper justification, but also of 10 demonstrating that the anticompetitive effect 11 of the challenged action outweighs it. 12 In the district court Plaintiffs 13 appear to have done neither, let alone both. 14 In any event, upon appeal, Plaintiffs 15 offer no rebuttal whatsoever. Accordingly, 16 Microsoft may not be held liable for this 17 aspect of its product design. 18 The DC Circuit held that the 19 integration of web-browsing functionality 20 called Internet Explorer into Windows was not a 21 violation of Section 2 of the Sherman Act. 22 The Plaintiffs in this case are 23 seeking to reverse that finding, mislead this 24 jury into believing that somehow it is a 25 binding finding that adding web-browsing 4984 1 functionality to Windows was illegal. 2 There is no such finding. 3 Now, what Mr. Tulchin did was refer to 4 a binding finding of Fact Number 376, which 5 points out that Microsoft included IE in 6 Windows at no extra charge. That is a fact. 7 Now, they can argue that that addition 8 of Internet Explorer to Windows constituted a 9 tying arrangement, something that the DC 10 Circuit reversed. 11 They're free to argue that. There's 12 no collateral estoppel against them on that. 13 But they don't have collateral estoppel in the 14 opposite direction. 15 And we are free to argue, Your Honor, 16 that adding features to Windows as important as 17 the ability to browse the web without 18 increasing the price is relevant to the 19 question of whether or not consumers were 20 overcharged. 21 There is an inherent contradiction 22 between the theory of liability in the 23 government case and the theory of liability in 24 this case. And the Plaintiffs should be 25 burdened with that fundamental diametric, 4985 1 diametrically opposed situation. 2 The argument in the government case 3 was that Microsoft had done something wrong by 4 adding functionality to Windows at no extra 5 charge, that more and more and more features 6 were being added to Windows and no one was 7 being charged any more for that. And that was 8 said to have some exclusionary impact on 9 competitors. 10 The argument in this case is that 11 Microsoft charged too much for its products. 12 Yes, indeed, those two concepts don't 13 sit very well together. But it should not be 14 open to the Defendant to pretend that the DC 15 Circuit decision supports their view. 16 So what Mr. Tulchin said is absolutely 17 correct. The notion underlying the Plaintiffs' 18 motion is fundamentally incorrect, and it would 19 be very misleading for the jury to be left with 20 the impression that there is a binding 21 conclusion of law that the free addition of 22 web-browsing functionality to Windows has ever 23 been found unlawful by any court in the United 24 States of America. 25 That has never happened, Your Honor. 4986 1 THE COURT: Counsel? 2 MR. WILLIAMS: Thank you, Your Honor. 3 I know Mr. Holley, very intelligent 4 lawyer, likes to come in here and display his 5 knowledge about the government proceedings. 6 And he is very knowledgeable about 7 that, but, unfortunately, I don't think he read 8 my motion closely enough because he doesn't 9 really seem to understand what it is that we're 10 arguing, the point that we're making. 11 The point that we're making, Your 12 Honor, really can't be borne out any more 13 clearly than the remarks of Mr. Tulchin 14 himself. 15 I didn't feel it was necessary to do 16 this, but I guess it is. I'd like to refer 17 Your Honor to the transcript that we attached 18 to our motion. 19 It's page 4355, line 24. 20 These are Mr. Tulchin's remarks. So 21 Windows is being sold now with Internet 22 Explorer in it, and the price didn't go up. 23 There was no additional charge. You 24 are getting Internet Explorer for free. 25 And in a case about overcharging 4987 1 consumers, we think that will be important to 2 you. 3 Now, why would Mr. Tulchin think that 4 would be important to jurors? Because he is 5 trying to create the impression among the 6 jurors to mislead them on the standard that 7 Microsoft gets some sort of an offset because, 8 even if they overcharged on Windows, the offset 9 is, well, we gave away Explorer for free, and 10 that somehow jurors are to run this calculus in 11 their minds in deciding whether -- which has 12 been their theme throughout and which you are 13 going to hear about more from us the notion 14 that the price of Windows was somehow 15 reasonable or fair. 16 That's the issue, Your Honor. All 17 this other stuff that Mr. Holley was talking 18 about about it hasn't been found illegal and so 19 on and so forth. Your Honor, it was very 20 interesting. 21 I listened raptly, Your Honor. I 22 don't think it's put at issue by our motion. 23 Our motion is very specific. And 24 that's what needs to be addressed, Your Honor. 25 MR. HOLLEY: Your Honor, I apologize 4988 1 because we're eating up the lunch hour, but I'm 2 looking at Mr. Williams' brief filed yesterday 3 afternoon. I didn't make this up. 4 It says in paragraph 3, moreover, 5 Microsoft is seeking to undermine the 6 conclusive determination in this case that its 7 bolting of Internet Explorer to Windows was 8 anticompetitive. 9 That is a statement which is false. 10 And I point back, Your Honor, to 11 Finding of Fact 376, which does have preclusive 12 effect. 13 And what Judge Jackson wrote -- and 14 this is a fact that the jury must accept -- 15 including Internet Explorer with Windows at no 16 additional charge. That happened. And that -- 17 we're not -- that is a fact in this case. 18 Microsoft included Internet Explorer 19 with Windows at no additional charge. 20 The Plaintiffs are free to argue about 21 what conclusions the jury ought or ought not to 22 take from that fact, but there can be no doubt 23 that in Windows 95, Windows 98, Windows 24 Millenium Edition, Windows XP, and soon in 25 Windows Vista, some thing, some functionality 4989 1 called Internet Explorer is included in the 2 product and there is no separate charge. 3 Now, I know they don't like the 4 implications of that, but that doesn't give 5 them a basis to object to our ability to refer 6 to the facts, Your Honor. 7 MR. WILLIAMS: Relevant facts, Your 8 Honor. And the facts that Mr. Tulchin is 9 referring to are not relevant. They are not 10 relevant to the proposition that he's putting 11 forth to the jury, which is that they should 12 somehow take that into account in deciding 13 whether consumers were overcharged. 14 Say it again. The fact that Internet 15 Explorer was given away for free has nothing to 16 do, nothing to do with whether the price of 17 Windows was supra competitive. They know this. 18 They know what the law is. They are trying to 19 obfuscate the issue. 20 That was the reason for the lengthy 21 argument we got from Mr. Holley. He was trying 22 to avoid the issue. 23 And the reference that we made to the 24 fact that they are trying to bolster findings 25 that indicate that consumers were harmed by the 4990 1 bundling, you know, Your Honor, really it's -- 2 at the same time, somehow chastising us for 3 taking up the Court's time. Your Honor, it's 4 really beyond the pale now. 5 We had a simple motion. We all know 6 what he said. We believe that what he said was 7 misleading and needs to be corrected. 8 I'll stand on that. 9 THE COURT: Anything else? 10 MR. HOLLEY: Just briefly, Your Honor. 11 The question of an overcharge must 12 take into account what it is that you're 13 pricing. 14 If you're buying a Yugo and it costs 15 $5,000, that may be an overcharge. If you're 16 getting a Mercedes E55 and you can get one for 17 $5,000, you are getting the best deal in the 18 world. 19 We can't divorce what it is that 20 consumers got for the amount that they paid in 21 trying to figure out what is an overcharge. 22 And we must be entitled, Your Honor, 23 to put on evidence that more and more and more 24 features that software developers, computer 25 manufacturers, and users love got added to 4991 1 Windows in determining whether the price that 2 was paid for that product was or was not an 3 overcharge. 4 But, Your Honor, I don't want to 5 prolong this matter. 6 THE COURT: All right. 7 MR. WILLIAMS: Your Honor, that is 8 just a complete misstatement of the standard. 9 And I can't believe it. Mr. Holley just made 10 it to Your Honor. That is not the standard. I 11 believe Mr. Holley knows that. 12 The issue is not how many features 13 were added. Using his Yugo example, $5,000 may 14 be a competitive price. $500,000 may be a 15 competitive price. 16 The only way to know that, Your Honor, 17 is to compare the price that was charged in the 18 real world with the price that would have been 19 charged absent the alleged anticompetitive 20 conduct. 21 It has nothing to do with whether if 22 things were given away for free, whether they 23 got a free battery or a free transmission or 24 other features added to it. 25 This point was made at length by 4992 1 Mr. Gralewski yesterday. I don't want to 2 belabor it. I believe Your Honor understands 3 it and I believe Your Honor understands the 4 point of our motion. 5 THE COURT: Very well. I'm going to 6 deny the curative instruction at this time. 7 However, it can be addressed and will be 8 addressed in the final instructions to the jury 9 when the Court gives the law to apply. 10 Anything else? 11 MR. HOLLEY: No, Your Honor. 12 MR. WILLIAMS: Thank you, Your Honor. 13 THE COURT: Mr. Hagstrom? 14 MR. HAGSTROM: Your Honor, I hesitate 15 to bring this up at this point since it's so 16 late, but it's actually sort of an offshoot off 17 of the prior discussion. 18 And a number of times Mr. Tulchin has 19 used the word value, and I think we've 20 discussed that previously. Your Honor has said 21 that the case is not about value; it's about 22 cost. 23 And we discussed with Mr. Gralewski 24 or, I should say, Mr. Gralewski discussed 25 yesterday the Trenton Potteries case. There's 4993 1 a whole line of cases discussing this type of 2 issue, and whether or not a particular product 3 has quote-unquote value, whether it has certain 4 features is not the issue. 5 The issue is, for purposes of this 6 case, what was paid and what should have been 7 paid absent the anticompetitive conduct. 8 So the whole issue of value, that 9 seems to be permeating Mr. Tulchin's opening is 10 inappropriate. 11 MR. HOLLEY: Your Honor, that could 12 not be further from the truth. 13 In a price fixing case, for example, 14 the vitamin price fixing case, when two 15 companies get together in a smoke-filled room 16 and fix the price of bulk vitamins, it is no 17 defense to that per se violation of the Sherman 18 Act to say, hey, the price of bulk vitamins was 19 reasonable; you know, don't blame us for that. 20 Yes, we fixed prices. Yes, that's a 21 per se violation of the Sherman Act, but the 22 price is reasonable. I agree with that. That 23 is a correct statement of the law. 24 But, in a Sherman Section 2 case, when 25 the question is whether anticompetitive conduct 4994 1 led to an overcharge, it has to be in the 2 context of what was the value of the product 3 that the person was buying. You can't divorce 4 -- there are two sides of the same coin. 5 A dollar for something may be an 6 overcharge. A dollar for something times ten 7 is not. 8 And the reason why the Plaintiffs seek 9 to exclude this evidence is because of the -- 10 they don't want the jury to focus on how much 11 better all these products continue to get. 12 But that's something that the jury 13 ought to be able to consider. 14 One of the things that the Court asked 15 the jury to decide, and we're back to our -- 16 you know, my favorite instruction, Number 13, 17 was, you know, what is sort of -- was it 13 or 18 -- no, 8. I'm sorry, Your Honor. It's 8. 19 One of the things that the jury has to 20 look at is how does Microsoft's behavior 21 comport to the behavior of other companies in 22 the business. And that all has to do with this 23 price value comparison. 24 I don't -- I think that -- I don't 25 mean to ascribe bad motives to anyone. I think 4995 1 we do that far too much. 2 But the cases that the Plaintiffs are 3 citing are inapposite, Your Honor. They relate 4 to a reasonableness defense to an overt price 5 fixing case. This is not a price fixing case. 6 In this case, the evidence that we 7 propose to put on could not be more relevant, 8 Your Honor. 9 And, beyond that, once again, we are 10 going round and round and round. 11 We have lost some motions in this case 12 that we were unhappy about. They have lost 13 some motions. But you can't just keep 14 relitigating the same questions over and over 15 and over again. 16 Thank you, Your Honor. 17 MR. HAGSTROM: We didn't lose this 18 one. Transcript 3213 and 3214, Your Honor, 19 said it's the cost, not the value. 20 And, I mean, to use the car example, 21 if you get a $100,000 BMW, if there is some 22 overcharge associated with that, it doesn't 23 matter that the automobile maybe even has 24 automatic pilot on it, can stop itself 25 automatically to avoid an accident. You know, 4996 1 the most advanced features in the world. 2 If there's an overcharge, it's an 3 overcharge, regardless of the features. The 4 features are not to, you know, excuse the 5 anticompetitive conduct, which is exactly the 6 argument that Microsoft is making, and that is 7 argument. It's misleading. It is irrelevant. 8 And, for that reason, Microsoft should 9 be precluded from continually making that type 10 of argument. 11 Thank you. 12 MR. HOLLEY: Your Honor, I'll just 13 note briefly that Mr. Hagstrom did not respond 14 to my point about the difference between a 15 price fixing case and the Section 2 16 monopolization case, and there's a good reason 17 why. 18 I have nothing to say further, Your 19 Honor. 20 MR. HAGSTROM: Murphy Photo versus 21 Eastman Kodak is a Section 2 case. 22 MR. HOLLEY: And what proposition do 23 you derive from that, sir? 24 MR. HAGSTROM: 603 F. 2nd 263 at 272. 25 It says it's not a defense to liability under 4997 1 Section 2 that monopoly power has not been used 2 to charge more than competitive price or 3 extract greater than a reasonable profit. 4 It's the same type of concept. 5 In other words, whatever the 6 quote-unquote value of the product is 7 irrelevant. It's the cost as compared to what 8 it should be absent the anticompetitive 9 conduct. 10 MR. HOLLEY: Your Honor, this -- that 11 is too much. 12 The issue in Eastman Kodak against 13 Image Technical Services was whether or not the 14 refusal to sell spare parts to after-market 15 service companies constituted an act of 16 monopolization. 17 There was no allegation in that case 18 that anyone overcharged anyone. 19 And the point being made by the Court 20 was you can have monopoly power and exercise it 21 through other methods than overcharges. 22 But that case does not stand for the 23 proposition that we can't put on evidence of 24 the value of Microsoft's products. That's very 25 misleading. 4998 1 MR. HAGSTROM: Again, the value of the 2 product is irrelevant. What's relevant is what 3 was the price and what would it be absent 4 anticompetitive conduct. I think it's a very 5 simple proposition. 6 Thank you. 7 THE COURT: Mr. Holley, isn't that the 8 proposition? Isn't it overcharge? 9 MR. HOLLEY: Is what the proposition, 10 Your Honor? 11 THE COURT: The cost versus -- what it 12 should have been absent anticompetitive 13 competition? 14 MR. HOLLEY: But the only way -- 15 THE COURT: Even -- I mean, someone 16 could argue that there's as much 17 anticompetitive as they want, but, to me, the 18 value is tremendous and I'll pay whatever no 19 matter what you want to charge me. 20 MR. HOLLEY: But the only way to 21 construct one of these but-for worlds is to 22 take into account, you know, what would have 23 happened if these things had not occurred. 24 And you have to think in creating 25 these constructs -- and we'll, obviously, have 4999 1 a lot of criticism of their constructs -- but, 2 in doing that, you have to take into account 3 not only the price that was charged, but what 4 somebody was getting for the price that they 5 paid. That's just part of commerce. 6 I don't understand how you can divorce 7 those two ideas. 8 Obviously, the ultimate question in 9 the case is was there an overcharge. 10 But they're seeking to prevent us on 11 grounds of relevance, I guess, from putting on 12 any evidence of what value the products offer 13 the consumers. 14 That seems like a strangely cabined-in 15 notion of what consumers are getting. 16 You have to know what the consumer is 17 getting to make a determination about whether 18 the price was too high. 19 THE COURT: Let me just throw the car 20 back at you. You got the Yugo for 5,000 and 21 the Mercedes, let's say, for 100,000. 22 MR. HOLLEY: Right. 23 THE COURT: Let's say that the cost of 24 actually making the Mercedes and a reasonable 25 profit is $5,000 and the mere reason they 5000 1 charge 100,000 is because it says Mercedes on 2 the side. 3 MR. HOLLEY: Well, in that particular 4 -- 5 THE COURT: And there was 6 anticompetitive conduct. 7 MR. HOLLEY: Okay. Well, we'd have to 8 desegregate those two things, right, because 9 there's nothing wrong with having a very 10 powerful brand. So if 90 -- you know, 90 11 percent of that difference -- 12 THE COURT: I threw in the 13 anticompetitive conduct comment. I knew where 14 you were going. 15 MR. HOLLEY: Your Honor, I think that 16 -- I mean, and this is a very important point. 17 I agree with Mr. Hagstrom on this, and 18 I -- I really do believe that we shouldn't keep 19 the jury waiting about this. 20 THE COURT: All right. 21 MR. HOLLEY: And if Your Honor would 22 like further briefing on this, maybe that's the 23 way to go. 24 I'm really -- I'm feeling very bad 25 about the fact that we haven't had an opening 5001 1 statement since 9:30 this morning. 2 THE COURT: Okay. All right. We'll 3 talk about it later. 4 At this time I'm going to deny the 5 motion. 6 You want further briefing on it, I'll 7 accept it. 8 MR. WILLIAMS: Thank you, Your Honor. 9 MR. HOLLEY: Thank you, Your Honor. 10 THE COURT: I do want five minutes for 11 myself. Is that all right? 12 And I think Sandy needs some time. 13 (A recess was taken from 11:58 a.m. 14 to 12:08 p.m.) 15 (The following record was made out 16 of the presence of the jury at 12:08 17 p.m.) 18 MS. CONLIN: Your Honor, it's my 19 understanding that you are going to instruct 20 the jury? 21 THE COURT: Yes. 22 MS. CONLIN: Maybe Mr. Tulchin would 23 want to be seated for that purpose. 24 THE COURT: That's all right. He can 25 stand if he wants. 5002 1 (The following record was made in the 2 presence of the jury at 12:10 p.m.) 3 THE CLERK: All rise. 4 THE COURT: You may be seated. 5 Members of the jury, I apologize 6 greatly for the delay. Some issues came up 7 which I had to take care of. So blame me. 8 I also made an error and am going to 9 allow Mr. Tulchin to talk about a prior court 10 order or decree in the government case. 11 However, I need to give you two 12 instructions. 13 The first instruction that I'm going 14 to give you is you are instructed that any 15 reference to a consent decree, final judgment, 16 or court order in the government case is not to 17 be taken as conclusive that any alleged 18 anticompetitive conduct by Microsoft stopped 19 after that time or before that time. 20 It is only offered to show what the 21 Court did in that case. 22 In addition, you are instructed that 23 it is not necessary that all class members or 24 any particular number of class members must 25 testify in a class action such as this. 5003 1 With that, you may continue. 2 MR. TULCHIN: Thank you, Your Honor. 3 Ladies and gentlemen, some hours ago 4 we were talking about the final judgment in the 5 government case. 6 And, of course, there will be evidence 7 about conduct in the period after entry of that 8 final judgment by the Court in that case. 9 We were talking at the time about 10 Conclusion Number 1 in Judge Rosenberg's 11 conclusions to you, which was a conclusion from 12 the government case about preventing OEMs from 13 removing visible means of user access to 14 Internet Explorer. 15 And the final judgment in the 16 government case, which was entered by the Court 17 in November 2002 had a provision on this topic. 18 And with apologies for the legal 19 language, and there's a lot of it and it's a 20 little dense, but Section 3(H)(1) of the final 21 judgment has a provision which deals exactly 22 with this point, prohibiting, that is, ordering 23 Microsoft no longer to have contracts which 24 should prevent OEMs from removing the visible 25 means of access to IEs -- sorry, to Internet 5004 1 Explorer. 2 And could we highlight that language? 3 Okay. It talks about Microsoft shall 4 allow end users, and then it says on the second 5 line and OEMs, to, on the third line, enable or 6 remove access to each Microsoft middleware 7 product, et cetera. 8 And one of those is defined as 9 Internet Explorer. 10 And, again, the language can be a 11 little bit dense, but Conclusion Number 1 is 12 dealt with in the final judgment in this 13 section. 14 And then Conclusion Number 2 in Judge 15 Rosenberg's conclusions to you was that about 16 prohibiting OEMs from modifying the initial 17 boot sequence of Windows. And the initial boot 18 sequence is the first time you plug your 19 computer in and you turn it on and it boots up 20 and you get the operating system on your 21 screen. 22 And Microsoft was found to have acted 23 in an anticompetitive way by prohibiting OEMs 24 from changing that initial boot sequence. 25 In the government case, the final 5005 1 judgment, which is Exhibit 6729, Defendant's 2 Exhibit 6729, has a provision on this subject 3 as well. 4 It says, Microsoft shall not restrict 5 by agreement any OEM licensee from exercising 6 any of the following options or alternatives 7 presenting in the initial boot sequence its own 8 IAP, Internet access provider, offer, et 9 cetera. 10 And then to go to a third of the 11 Court's conclusions, prohibiting OEMs from 12 adding to the Windows desktop icons or folders 13 different in size or shape from those supplied 14 by Microsoft. 15 So, for example, when you look at the 16 screen, you know that there are icons on the 17 screen when you're looking at it. One of them 18 may be an icon for Internet Explorer. 19 The conclusion from the government 20 case was that it was anticompetitive for 21 Microsoft to prohibit OEMs by contract from 22 putting on, let's say, a Netscape Navigator 23 icon that was bigger than the icon for Internet 24 Explorer, different in size or shape. 25 And, again, the government case has a 5006 1 provision in the final judgment on this. It's 2 Section 3(C)(2) of the final judgment. 3 And it says that Microsoft shall not 4 restrict by agreement any OEM from exercising 5 any of the following options or alternatives; 6 installing and displaying icons and then it 7 goes on, that enable or remove access to each 8 Microsoft -- I'm sorry, I'm looking at the 9 wrong one. 10 Do we have the right slide up? We do. 11 I'm sorry, it's my fault. The confusion is all 12 mine. I apologize. 13 From distributing or promoting 14 non-Microsoft middleware by installing and 15 displaying on the desktop shortcuts of any 16 shape or size. 17 Okay. So now the next one from the 18 conclusions, the next one here is prohibiting 19 OEMs from using the active desktop feature of 20 Windows to promote third-party brands, the 21 brands of other companies. 22 That's the conclusions you have. And, 23 again, the final judgment contains a provision 24 on that. 25 This is Section 3(C)(2) on page 3. 5007 1 Microsoft shall not restrict any OEM from 2 exercising that option, distributing or 3 promoting non-Microsoft middleware by 4 installing and displaying on the desktop 5 shortcuts of any size or shape. 6 And then it goes on to say, So long as 7 those shortcuts do not impair the 8 functionality. 9 And then lastly among the examples -- 10 I won't go through them all -- but the next one 11 is Number 5 in the Court's conclusions here 12 that excluding IE, Internet Explorer, from 13 add/remove programs utility in Windows. 14 And there's this add/remove program. 15 And at one point it wasn't open to an OEM to 16 allow the removal of IE from the add/remove 17 programs utility. The final judgment deals 18 with this in Section 3(H)(1). 19 And, again, this language is a little 20 bit dense, but it prohibits Microsoft -- it 21 actually says affirmatively Microsoft shall 22 allow end users this mechanism of removing 23 access to each Microsoft middleware product. 24 And you can see that around the third, 25 fourth line. 5008 1 Allow end users to remove access to 2 each Microsoft middleware product, or 3 non-Microsoft middleware product in the 4 paragraph with the number 1. 5 So those are the first five of the 6 conclusions. 7 The final judgment in the government 8 case was directed to the conclusions that the 9 Court has given you about which the findings of 10 facts are concerned as well. 11 And I want to go back and talk a 12 little bit, just very briefly, about a theory 13 that Professor Mackie-Mason, the Plaintiffs' 14 expert, says that he will offer at the trial 15 concerning middleware technology like Java and 16 Netscape Navigator. 17 And the theory that Professor 18 Mackie-Mason apparently will offer you when he 19 testifies here is that a middleware technology, 20 such as Java-exposed APIs and that perhaps 21 applications developers could have written 22 their applications for the APIs exposed by 23 Java, the middleware Java, instead of APIs 24 exposed by Windows. 25 Professor Mackie-Mason will go on to 5009 1 say that if applications developers, ISVs, had, 2 in fact, written their programs for APIs, such 3 as Java, the applications barrier to entry that 4 we talked about, which is, as you know, the 5 number of applications written by independent 6 software companies already for Windows, that 7 perhaps the applications barrier would be 8 weakened once applications developers started, 9 if they did start, to write applications to 10 middleware such as Java or Netscape. 11 And Professor Mackie-Mason's theory is 12 that if that had occurred and the applications 13 barrier had been weakened, that existing 14 operating systems like the Be operating system 15 and Linux would have met with greater success, 16 and also that perhaps new operating systems, 17 other software companies, would have come into 18 the market with additional operating systems. 19 His theory is that if those things had 20 all happened, then the state of competition in 21 the operating system market might have changed 22 significantly and prices might have been lower. 23 And in that connection, I just want to 24 point you back to Finding of Fact 411 on page 25 77 of the findings as you have them. 5010 1 And, again, this is written in 1999. 2 And so it's not necessarily to be taken for a 3 different time period, but the Court then found 4 there is insufficient evidence to find that, 5 absent Microsoft's actions, Navigator and Java 6 already would have ignited competition, genuine 7 competition, in the market for Intel-compatible 8 PC operating systems. 9 So when Professor Mackie-Mason is 10 here, we think it will be a subject that will 11 be explored with him that you are bound to 12 accept his finding that there is insufficient 13 evidence to find that Navigator and Java would 14 have ignited genuine competition. 15 Okay. There will also be evidence at 16 trial from Microsoft witnesses about its 17 conduct in the period since the entry of the 18 final judgment. 19 Microsoft will have witnesses who will 20 testify about Microsoft's practices, its 21 business practices, how they have changed, and 22 Microsoft's conduct in this substantial period, 23 the last four years, that, of course, are part 24 of the class period in this case. 25 The Plaintiffs are seeking damages for 5011 1 purchases of software made by class members 2 from, as you know, May of 1994, all the way 3 through June 30th of this year, June 30th of 4 2006. 5 And, in fact, according to Professor 6 Netz, the Plaintiffs' expert on damages, a 7 substantial portion of the damages that they 8 seek -- we think it's something around 40 9 percent -- pertain to purchases made since 10 November 2002, since the date the final 11 judgment in the government case was entered. 12 As you also know, the conduct in the 13 government case pertained to the period from 14 July of 1995 until June 24th, 1999. 15 And I want to turn -- as I say, 16 Microsoft witnesses will testify about the 17 company's conduct in this period, as well as 18 other periods, all of which are relevant to the 19 case. 20 But I want to turn to the question of 21 what allegations, what accusations have been 22 made by the Plaintiffs about conduct in this 23 later period, the last, let's say, four years. 24 And as I understood the opening 25 statement of Plaintiffs, they say, at least so 5012 1 far, that Microsoft's conduct in that period 2 with respect to RealNetworks was 3 anticompetitive. 4 They say that it was anticompetitive 5 for Microsoft to have integrated into Windows 6 the Windows Media Player that allows end users 7 to watch movies and listen to music either on 8 data stored on a CD or DVD or streamed from the 9 Internet. 10 We think the evidence will show that 11 other operating system companies, like Apple, 12 Be, RedHat, Linux, SuSE Linux, and Sun 13 Microsystems have offered the same 14 functionality, the same ability to watch movies 15 and listen to music on their operating systems 16 and that this is pro-competitive. 17 It's also relevant and should be 18 important for the jury that Microsoft has not 19 charged separately for this streaming media 20 functionality. 21 The Windows Media Player was added to 22 Windows without any extra charge to consumers. 23 And the Plaintiffs' theory seemed to 24 be, if I understood it correctly, that the 25 RealNetworks media player called Real Player, 5013 1 had the ability to weaken Microsoft's position 2 in the operating system market, again, because 3 RealNetworks media player exposed some of its 4 own APIs. 5 The evidence will be that Real Player 6 was simply not a viable substitute for any 7 fully functional operating system, certainly 8 not one like Windows. 9 And, again, Professor Murphy, among 10 others, will testify on that subject. 11 RealNetworks' own complaint with 12 Microsoft was that Microsoft wouldn't allow 13 OEMs to put Real's icon on the desktop or start 14 menu. Not this theory about APIs. 15 But, even so, the evidence will be 16 that RealNetworks had no trouble distributing 17 its media player, the Real Player, into the 18 hands of consumers. There wasn't any 19 difficulty in getting that out into the 20 marketplace. 21 There was no chokehold or other 22 impediment for Real Player to get wide 23 distribution of its product. 24 Steven Banfield of Real, who was a 25 vice president, testified in October 2002, that 5014 1 85 percent of all the streaming media content 2 was coded in the RealNetworks format. 3 Plaintiffs' Exhibit 6901, which is a 4 Microsoft document concerning RealNetworks, 5 reveals that as of 2000, the year 2000, 6 RealNetworks had 165 million registered unique 7 users of its Real Player media player. 8 By 2002, that had gone from 165 9 million to 250 million unique registered users 10 of its software. 11 And I want to talk about a memorandum 12 that the Plaintiffs brought to your attention 13 written by Anthony Bay to Bill Gates in 1999. 14 And you will remember the Plaintiffs 15 said that Mr. Bay -- in that memorandum dealing 16 with streaming media, they said Mr. Bay does 17 not recommend that Microsoft compete by 18 improving its streaming product. 19 That was on December 8th. 20 According to Plaintiffs, Microsoft 21 came up with an anticompetitive strategy to 22 compete against Real. 23 That document which is Plaintiffs' 24 Exhibit 6523, in fact, shows Microsoft 25 contemplating competition on the merits with 5015 1 RealNetworks. 2 Microsoft thought it could outcompete 3 RealNetworks because it could offer streaming 4 media built into a website. RealNetworks 5 required users to launch a separate player to 6 access streaming media. 7 And over time, our evidence will be 8 that media player becomes a feature in the 9 browser in the same way that other 10 functionality does. 11 So here's Microsoft in this memo by 12 Mr. Bay saying, we say that our goal is to 13 provide the best technical/capabilities for 14 streaming just as we do with web platform (IE 15 and IIS). 16 And then he goes on to talk about the 17 media player becoming a feature of the browser 18 over time. 19 This is, we think you'll agree, all 20 about competition on the merits, making a 21 better media player and making it easier for 22 consumers to use. 23 Linux was the other thing that the 24 Plaintiffs pointed to in connection with claims 25 that anything has been done wrong in the last 5016 1 several years. 2 And what the Plaintiffs said about 3 Linux -- and let me just stop. 4 You will remember we looked at 5 Professor Noll's charts that I showed you which 6 had, I think, something like six different 7 companies that are selling the Linux operating 8 system in recent years, including presently. 9 And you will remember that we talked 10 about Dell computer, now the number one OEM in 11 the world, preinstalling Linux on some Dell 12 models in the years 1999 to 2001. 13 Dell put Linux on it just the way they 14 put Windows on many of their computers. 15 Dell, of course, stopped doing that, 16 and, when they did, they said it was for lack 17 of demand. 18 But the allegation, as I understood 19 it, with respect to Linux had to do with 20 Microsoft's desire not to have OEMs ship 21 computers that are naked machines. 22 And, of course, what that means in 23 this context is computers that have no 24 operating system on them at all. 25 The evidence will show that this naked 5017 1 machines policy was a function of the fact that 2 there is a tremendous amount of piracy out 3 there, much of it in other countries, but 4 plenty of it here in our country as well. 5 So Microsoft's business justification 6 for trying to reduce the number of naked 7 machines that are being shipped was to try to 8 cut down on piracy. 9 You might call it stealing. People 10 who are taking a copy of Windows and putting it 11 on another machine, a naked machine, without 12 paying anything to anybody for it. 13 It's sort of like a bootleg copy of a 14 movie or a CD that contains a record album. 15 The naked machines and piracy issue is 16 one that is potentially very, very costly to 17 computer makers in the United States, including 18 Microsoft. It's been of great concern to 19 Microsoft. 20 And the policy here of trying to 21 reduce the number of naked machines did not 22 prevent OEMs from preinstalling Linux, or any 23 other operating system they wanted to. 24 It was Microsoft's desire that those 25 OEMs put some operating system on their 5018 1 machine. Of course, in business competition, 2 Microsoft wanted it to be Windows. 3 But the naked machine policy had to do 4 entirely with this issue of piracy. 5 One other point about the recent time. 6 I don't recall the Plaintiffs pointing to any 7 other conduct that Microsoft engaged in that 8 they say was anticompetitive except the EDGI 9 program. 10 And you will remember they showed you 11 some documents about Microsoft in Malaysia, and 12 a letter from Bill Gates saying that a 13 contribution of a million dollars would be made 14 to try to get computers into schools in a poor 15 third-world country like Malaysia. 16 We don't think there's anything 17 anticompetitive or anything wrong with that 18 conduct at all. 19 And one other thing to point out. 20 That in 2005, so just last year, Apple Computer 21 began selling Macintosh computers using Intel 22 processors. 23 Professor Noll, the Plaintiffs' 24 expert, will testify, we believe, that this 25 means that Apple is now in this market of 5019 1 Intel-compatible PC operating systems, that 2 there is a new company that has entered. And 3 Apple, of course, uses its own Mac operating 4 system. 5 You know from Professor Noll's chart, 6 that in the applications business, Lotus is 7 still competing with 1-2-3, WordPerfect, which 8 is now owned by Corel, who is still there as 9 well, and other applications are out in the 10 market, including suites competing with 11 Microsoft and seeking to gain as much business 12 as they can. 13 And one other thing in the class 14 period. You've heard, no doubt, a little bit 15 about Google, a company that was started only 16 in 1998. Originally as a private company, more 17 recently has gone public. 18 It started as a search engine and has 19 been quite successful and has a huge 20 capitalization, a huge market value on the 21 stock market. 22 Within the class period, Google 23 started offering Google spreadsheets to the 24 market, a new spreadsheet program, a new entry 25 in the spreadsheet market. 5020 1 So, in recent years, although the 2 Plaintiffs seek damages for what they say are 3 overcharges in the recent years, we think there 4 are signs of healthy competition, continued 5 healthy competition. 6 And we think that the nature of these 7 software markets is such that if Microsoft 8 stops competing hard, if Microsoft stops 9 improving its products, if Microsoft stops 10 adding functionality and giving people what 11 they want at a good price, that these high 12 market shares could change at any time. 13 It's the nature of competition in 14 these software markets. 15 And I want now to turn to a related 16 subject, but a different subject, which is -- 17 and we've talked about this in some -- to some 18 degree before. 19 Whoops, sorry. 20 And that is the Plaintiffs' experts 21 theory that in the absence of the conduct 22 alleged here, the worlds in these markets would 23 look quite different. 24 As the Plaintiffs explained to you, 25 the but-for world, but for this conduct that 5021 1 they've presented to you. 2 The world, according to their experts, 3 would be better, better for consumers, and 4 prices would be lower. 5 And they hypothesize a world, as we've 6 talked about, a world in which there would be 7 four or five or as many as seven operating 8 systems with more or less about the same share 9 of the market. 10 Their model starts from the 11 proposition that the actual markets at issue 12 here would look very, very different today than 13 they really do. 14 And the question I pose at the moment 15 for your consideration throughout the trial is 16 whether a world of four or five or seven 17 competitors would be better. 18 We also pose the question of whether 19 that world ever would have existed or whether 20 it's realistic to come up with this hypothesis 21 that in the absence of this conduct the world 22 would be that different; that there would be 23 four or five operating system companies, each 24 of which would have, let's say, 20 or 25 25 percent of the market. 5022 1 That theory is based on models. It's 2 based on what we contend are unrealistic models 3 and hypotheses. 4 These are imaginary worlds that don't 5 exist, and as we'll come to in a moment, have 6 never existed in these markets, whether it's 7 before the conduct at issue or at any other 8 time. 9 We haven't spoken yet about Professor 10 Stewart Madnick, M-a-d-n-i-c-k. 11 Professor Madnick is one of our 12 experts. He's a professor of information 13 technology at MIT, Massachusetts Institute Of 14 Technology. And he will be here to testify 15 about how the world actually was different 16 before Microsoft and Microsoft's operating 17 system gained a high market share. 18 He will analyze the but-for world that 19 the Plaintiffs' expert hypothesize and will 20 tell you why it's not reasonable or realistic 21 to come up with the hypotheses that they use 22 and that they depend on in calculating damages. 23 First, in that connection, we will 24 submit evidence to you of the value of having a 25 standard platform such as Windows, the value of 5023 1 a standard. 2 Fundamentally, what a standard does is 3 to provide a common platform that runs across 4 competing brands of computers and software 5 applications and that permits both computers, 6 the hardware, and software applications to run 7 more efficiently on the standard. 8 And if you go back to the late '70s 9 and into the first couple of years of the 10 1980s, again, most computers were large 11 mainframe computers. 12 There was IBM and there were companies 13 like Burroughs and Sperry-Rand in the computer 14 world. 15 There wasn't a common software 16 standard that was used. Each of those hardware 17 companies that made mainframe computers had 18 their own proprietary software and all their 19 own proprietary tools and peripherals like 20 printers and tape drives, et cetera. 21 So there was very little 22 interoperability across these mainframe 23 computers. 24 If you chose IBM, you got everything 25 from IBM. If you chose Burroughs, you got 5024 1 everything from Burroughs. 2 Sorry about the delay. This is 104. 3 There we go. 4 Pre-PC computer industry. 5 And here's an example. If you had an 6 IBM computer, you really had no choice but to 7 get everything else from IBM as well, the 8 operating system, applications, tools, et 9 cetera. 10 If you had a Unisys or Digital or ICL 11 computer, same thing. Because there just 12 wasn't the kind of interoperability where 13 peripherals made by one company would plug into 14 the computer or operating system of the other. 15 These were sort of like separate 16 islands. And you went, for all purposes, with 17 one company or another. 18 When the PC world first got started -- 19 PC is like the Tandy, the Tandy TRS 80, the 20 Commodore, the Atari -- this is in the very 21 early 1980s -- also each ran their own distinct 22 operating systems. They had their own 23 software. 24 So software written for a Tandy 25 computer, an application, let's say, would not 5025 1 run on a Commodore computer. And users could 2 not share information easily if they had 3 different brands of computers. 4 And this kind of fragmentation of the 5 computer market and the PC market was reversed 6 when MS-DOS, and later Windows, became 7 commercially successful and became the 8 standard. 9 Now, I just want to stop here for a 10 second, and if I could sort of drop a footnote. 11 The benefits of standardization, the 12 benefits of having one operating system that a 13 lot of different PCs and applications can call 14 on and use, those benefits are very important 15 benefits. 16 They don't depend on Microsoft 17 software being the standard. It could be -- it 18 could have been software made by some other 19 company. 20 The benefits of standardization are 21 not benefits that Microsoft provides separate 22 from the fact that Microsoft software became 23 the standard on the merits as a result of 24 legitimate competition, and perhaps, in part, 25 as a matter of luck. 5026 1 IBM went first to DRI, and Gary 2 Kildall did not make the deal, and second to 3 Bill Gates, and Bill did. 4 But whether it's luck or skill or good 5 business decisions or great products, the 6 benefits of a standard don't necessarily depend 7 on which company provides the standard. 8 The benefits of standardization are 9 there as long as there is a standard. 10 And in some hypothetical world, it 11 might not have been Microsoft. It might have 12 been Company A. 13 But, of course, having a standard made 14 by Company A is a very, very different world 15 than the but-for world that the Plaintiffs' 16 experts offer you. 17 They hypothesize a world where there 18 is no standard. Where there are four or five 19 different operating system companies, all 20 splitting the market. 21 When we go back -- let's put up that 22 last slide again. 23 When we go back to this fragmented 24 world where different operating systems may run 25 on different PC brands, different computers, 5027 1 and it might be much harder for information to 2 be exchanged and for devices work on each kind 3 of operating system. 4 In this connection, I remind you 5 again -- sorry, one last time, I guess -- that 6 Professor Noll has testified that Microsoft's 7 monopoly in operating systems was not acquired 8 unlawfully. 9 So, a standard, in this case Windows, 10 ensures hardware compatibility. You can buy 11 computers from Dell or Compaq or Gateway and 12 IBM, and the same operating system will work 13 with it. 14 You know that your computer will be 15 compatible with peripheral devices, such as 16 printers and keyboards and now digital cameras. 17 And a standard, in this case Windows, 18 also ensures software compatibility because 19 applications developers, the ISVs who write 20 applications, can write for a single platform. 21 As we talked about, Microsoft 22 encouraged ISVs to write to Windows, legitimate 23 competition with other operating systems. 24 And the evidence will be that having a 25 standard, a standard platform, in this case 5028 1 called Windows, causes the cost for ISVs to 2 drop. 3 The ISVs themselves, as the Plaintiffs 4 told you, can take advantage by calling on APIs 5 in the operating system, can take advantage of 6 this functionality that the operating system 7 gives them. 8 In the but-for world that the 9 Plaintiffs hypothesize, an applications 10 developer might have to write his applications, 11 his or her applications, to four or five 12 different operating systems. 13 Having a standard, whether it's a 14 standard that comes from Microsoft or some 15 other standard allows ISVs to write 16 applications once. 17 So it's much less expensive than 18 writing it four or five times and hiring that 19 many additional programmers. 20 In addition, we think the evidence 21 will show that if we had this kind of 22 fragmentation of four or five different 23 operating systems, it would be more expensive 24 as well for hardware makers, and those who make 25 peripheral devices, because, for example, if 5029 1 you make a printer, your Hewlett-Packard, 2 you've got to make sure that that printer, if 3 you're coming out with a new one, is going to 4 work with Windows. 5 You've got to make it compatible. 6 If there are four or five different 7 operating systems, each with a strong position 8 in the market, 20 or 25 percent, 9 Hewlett-Packard has to develop different 10 printers that work with those different 11 operating systems, and it has to test them 12 against each of those platforms. 13 The same would be true for companies 14 making cameras and scanners. And we give an 15 example here of the Adobe Photoshop. 16 You will hear evidence from OEM 17 witnesses that one of the reasons they don't 18 necessarily like to sell computers with two 19 operating systems, that is, having two 20 operating systems on different versions of 21 their computers is that it increases their 22 costs. They have to do two rounds of testing 23 with two different operating systems. 24 It also increases their support costs 25 because they get telephone calls from customers 5030 1 asking questions. And they have to have their 2 employees trained to answer questions about two 3 operating systems or three or four or five as 4 opposed to having a standard. 5 All of this, of course, is given to 6 you today in my opening statement in a 7 shorthand version. 8 But the point I think all of you 9 understand is that we believe there is value in 10 the market to other companies and to the market 11 as a whole of having a standard operating 12 system around which people can create good 13 hardware and good software and all plug it into 14 the same standard. 15 Again, it did not have to be Windows. 16 But the hypothesis of a world where there is no 17 standard, where there are four or five 18 different operating systems, and there is the 19 fragmentation that used to exist with 20 mainframes, that is a world that we think is 21 unlikely to exist in these markets because of 22 network effects and efficiencies and experience 23 effects. 24 There is likely to be a standard 25 around which most people build their hardware 5031 1 and software. 2 And the point of all this, of course, 3 is that the but-for world that the Plaintiffs' 4 experts use is a world that our witnesses will 5 tell you was very, very unlikely ever to exist 6 in these markets. 7 In the same vein, we're on the same 8 point of the but-for world. 9 There is actually evidence out there 10 that is quite relevant to your consideration of 11 whether this model and hypothesis that the 12 Plaintiffs' experts will offer is a realistic 13 and reasonable one. 14 We can look in the applications 15 markets that are at issue in this very case. 16 As you know, during the late 1980s, 17 Lotus 1-2-3 was dominant in the spreadsheet 18 business. There weren't four, five, six, seven 19 companies each with 15 or 20 percent of the 20 market. 21 When the change came in the early 22 '90s, Lotus fell way back and Microsoft Excel 23 became the dominant spreadsheet. 24 And to a somewhat less extent, but, 25 similarly, WordPerfect was number one in word 5032 1 processing. 2 And let's just look at the next slide. 3 This is just what I was referring to. 4 In spreadsheets, in the late '80s, up until 5 1990, you'll see that Lotus had close to 70 6 percent of the market. 7 By 1994, Microsoft Excel was up to 70 8 percent. 9 And there is not evidence that in any 10 sustained period of time, in any of these 11 markets, the Plaintiffs' hypothesis has ever 12 prevailed, that there has been a state of 13 competition which amounts to some fragmentation 14 where lots of companies have relatively small 15 shares of the market. 16 And let me show you the same sort of 17 comparison in -- oh, sorry. No. You're right 18 and I'm wrong, Chris. 19 Chris has got this down better than I 20 do. Thank you. 21 Before we get to word processors, 22 before we do, what, of course, I wanted to show 23 you, and almost went too fast and skipped by, 24 but what I wanted to show you was that when 25 Lotus had its high market shares in '88, '89, 5033 1 and '90 -- you remember from the prior slide 2 Lotus had about 70 percent of the spreadsheet 3 business -- the Lotus average price was in the 4 high 200s, as much as $300 for one copy of the 5 Lotus 1-2-3. It's not an Office Suite. It's 6 just the spreadsheet. 7 So when Lotus was dominant, the price 8 was in the high 200s, as high as 300 in the 9 years in question. 10 In '94, '95, and '96, when Microsoft 11 Excel had high market shares, the evidence will 12 show you that the price was just under 100 and 13 falling, consistent with what we looked at on 14 the other graphs about the price of Microsoft 15 applications over time. 16 So contrary to the hypothetical world, 17 the but-for world that the Plaintiffs' experts 18 presupposed, we think the real world evidence 19 of what these markets are like is that usually 20 one company has a high market share. 21 And in this case we know that when 22 that company has been Microsoft, the prices 23 have been lower. 24 When it was Lotus 1-2-3, the prices 25 were significantly higher. 5034 1 So, now, let's look at word 2 processing. 3 Here, similar to the Lotus chart, we 4 have market shares for WordPerfect in the late 5 '80s, and it's above 30 percent, and then as 6 much as around 45 percent. 7 And then in the mid-'90s, when Word 8 becomes the most popular, its market share goes 9 from just above 60 to above 80 percent. 10 Again, we don't see any sustained 11 period of time where there are four, five, six 12 companies dividing the markets about equally. 13 And then let's look at prices. 14 WordPerfect on average, for one copy 15 of its word processing program, sold at prices 16 from 136, and then going up to 197 in 1990. 17 When Microsoft Word first became 18 really dominant with high market shares, its 19 prices were just over 100 and falling down to 20 $64 in 1996. 21 These charts, of course, are 22 consistent with the testimony you heard from 23 Eileen Rudden. You remember that yesterday? 24 Ms. Rudden of Lotus. She said that 25 one of Microsoft's key weapons in the 5035 1 competitive battle between the two companies 2 was bringing prices down. That was her 3 testimony from yesterday. 4 And it's consistent with what you 5 heard from Pete Peterson of WordPerfect. 6 You remember Mr. Peterson on the 7 videotape saying that when he first saw Office, 8 he was scared to death because of the price at 9 which Microsoft's Office was being offered. 10 Now, I'm switching gears, but just a 11 little bit. 12 Because in thinking about the but-for 13 world and thinking about causation -- and let's 14 just pause here and look again at Preliminary 15 Instruction Number 11, harm to Plaintiffs. 16 For each of their claims, Plaintiffs 17 must establish that Microsoft's illegal conduct 18 harmed them. 19 There we go. Instruction Number 11. 20 And we've talked about causation in 21 the past. 22 And I want to talk for just a moment 23 about profit, and, really, profit margin. 24 And I'm going to start with operating 25 systems. 5036 1 Microsoft's high market share in the 2 late '80s was not gained unlawfully, even 3 according to Plaintiffs' experts. 4 And let's look a little bit at profit 5 margin. 6 The Plaintiffs say, of course, that by 7 the mid-'90s, '94, '95, '96 -- I must have 8 taken this in a different order than you had 9 it. 10 My apologies. 11 There we go. That's the one I was 12 looking at. Thank you, guys. 13 Microsoft's operating systems profit 14 margins. 15 And if you're thinking about 16 causation, did anything cause any harm. We've 17 talked about prices and the fact that over 18 time, Microsoft's prices in operating systems 19 have stayed about the same as consumers have 20 gotten more and more, more and more 21 functionality and features. 22 And Professor Noll himself has said 23 that each version of Windows was an improvement 24 on the prior version. 25 And, yes, profit margins in software 5037 1 can be high because of economies of scale, 2 first copy costs. 3 All the cost basically is in the R and 4 D, in making it, and after that, distribution 5 costs you very, very little. 6 So if you sell a lot, your profit 7 margins can be high. 8 But here's a contrast between 1986 -- 9 no one says Microsoft was doing anything wrong 10 in '86 and you see that's the blue line, 11 Microsoft's profit margin -- and compare it to 12 1994. It's hardly any different. 13 In fact, if you compare 1987 to '95, 14 Microsoft's profit margin for operating systems 15 -- this is for operating systems -- was higher 16 in 1987 than 1995. 17 So in thinking about causation, did 18 any anticompetitive conduct cause any harm? 19 We think it's relevant for you to 20 consider evidence that Microsoft's profit 21 margin was about the same in the late '80s -- 22 this is in the operating system business -- as 23 compared to the middle '90s. 24 The facts will show that prior to 25 these allegations of anticompetitive conduct, 5038 1 Microsoft was making profit. Its business was 2 successful. It was selling lots of operating 3 system software. 4 And then -- I think we're now ready 5 for the next one. 6 We talked about the Mac. And you 7 remember I made the point to you a few days ago 8 that we will have evidence in this case about 9 Microsoft's success on the Macintosh platform. 10 The Plaintiffs have made the 11 allegations -- they've made the claim that some 12 of Microsoft's success in applications can be 13 attributed to advantages that Microsoft has 14 because it owns the operating system as well. 15 And they talked about undocumented 16 APIs and access to the source code and these 17 advantages which they claim to be wrongful. 18 We've talked about whether they're 19 wrongful or not. We've talked about taking 20 advantage of your own property rather than 21 sharing it with competitors. 22 But, for this purpose, I wanted to 23 show you how Microsoft does on the Mac. 24 If Microsoft has no advantages on the 25 Mac, it's competing fair and square with other 5039 1 applications developers. In fact, Apple, with 2 the Claris software, has the advantages, and 3 yet we know Microsoft has been hugely 4 successful with its software written for the 5 Mac, including Office for the Mac. 6 And here it is. Profit margins. 7 Office to the Mac versus Office for Windows. 8 Now, their numbers are somewhat 9 divergent. But the point here, again -- they 10 cover the same years. Cover the same years, 11 '98, '99, and 2000. 12 By the way, we couldn't get any data 13 for the time after 2000 because Microsoft 14 stopped accounting for profits in this manner 15 by product. 16 The accounting was done very 17 differently. 18 But for these years when the 19 accounting was apples to apples, you can see 20 that Microsoft, without any advantages on the 21 Mac, is making high profit margins there too. 22 All goes back to the point when we 23 talk about causation. Why is Microsoft 24 software so successful? 25 Is it because of any wrongdoing, any 5040 1 anticompetitive conduct, or is it for the 2 reasons we've discussed; great business 3 decisions, high quality software, low prices? 4 Okay. I now am going to a different 5 subject, and that is damages. 6 When a defendant talks about damages, 7 of course, the danger is that members of the 8 jury will think that the defendant thinks that 9 -- Microsoft thinks that you'll get to the 10 issue of damages at all. 11 If there's no liability; if, for 12 example, there's no causation and you find that 13 nothing Microsoft did caused harm to the 14 Plaintiffs in this case, then you'll never 15 reach the question of damages. 16 But I want to preview our evidence on 17 damages giving you the sense that we don't 18 think damages will be a subject you will ever 19 need to reach. 20 And in thinking about damages, you 21 will remember that the Plaintiffs relied and 22 referred several times to a document where Bill 23 Gates said that he thought prices would be 30 24 or 40 percent higher if DRI had not cloned, had 25 not cloned MS-DOS. 5041 1 And it's an interesting thing to point 2 to, but let's look at what actually happened. 3 Let's look at the facts, the prices of MS-DOS 4 when DR-DOS was in the market and when DR-DOS 5 was not. 6 Let's look at the prices because what 7 Mr. Gates said might lead someone to conclude 8 that what Microsoft did was raise prices as 9 soon as DR-DOS went out of business, when 10 Novell shut it down. 11 The average price for MS-DOS -- now, 12 this is not including Windows, remember. 13 But when DR-DOS in '86 to '89 was out, 14 it was 14.77. When DR-DOS in '90 to '93 was 15 out, Microsoft charged 17.06. 16 And then after Novell shut down DR-DOS 17 in the mid-'90s, Microsoft's price for MS-DOS 18 actually went down. 19 This is from Professor Murphy's 20 report. 21 So, DR-DOS 5.0, you will remember, 22 according to the Plaintiffs, when that came in 23 in 1990, that's when the real competition began 24 even after Novell shut it down. Remember, they 25 had no GUI. Microsoft's prices for MS-DOS did 5042 1 not go up. 2 And now I want to spend some time 3 talking about the calculation of damages 4 performed by Professor Janet Netz, the 5 Plaintiffs' damages expert. 6 And we agree with the Plaintiffs in 7 one respect. In antitrust cases, damages are 8 sometimes measured using benchmarks or yard 9 sticks. 10 Professor Hubbard, Glen Hubbard from 11 Columbia, whose name you've heard, will testify 12 about the proper way to use benchmarks and also 13 improper ways of using benchmarks. 14 Of course, the important thing about a 15 benchmark or a yardstick, when you're comparing 16 two things, the important thing is what they 17 measure. 18 And a proper benchmark, Professor 19 Hubbard will testify, should measure damages by 20 measuring only the effect of the alleged 21 wrongful conduct. That is, only the effect of 22 what the Plaintiffs allege Microsoft did wrong 23 and not the effects of lawful differences. 24 That is, there may be differences between two 25 products. 5043 1 If the Plaintiffs allege, let's say, 2 that there was something wrong with the way 3 Microsoft competed against DRI in 1990 or in 4 1991 -- and we've covered that -- and we think 5 that the evidence will be that Microsoft did 6 nothing wrong, but if the Plaintiffs allege 7 that, in order to use a proper benchmark one 8 has to measure the effect of that alleged 9 wrongful conduct. 10 And if there are legitimate other 11 differences between Microsoft software and 12 whatever you're comparing it to, those 13 differences have to be excluded in measuring 14 damages. 15 You just have to do a sensible 16 realistic comparison. You have to compare 17 apples to apples. 18 And these damage calculations can be a 19 little bit complicated. They can be difficult. 20 But we think you will understand the 21 criticisms that we will make of Professor 22 Netz's methods of measuring damages. 23 We think you will understand that as 24 Professor Hubbard will testify, the more things 25 that you use in your benchmark that are very 5044 1 different from what you're comparing it to, 2 Microsoft's product, the more things that are 3 very different, the more you are engaging in 4 speculation, the more your comparison is 5 invalid. 6 And I know you remember the Court's 7 instructions, Preliminary Instruction 15. 8 You are permitted to make just and 9 reasonable estimates in calculating damages, 10 but you may not award damages based on 11 speculation or guesswork. 12 So Professor Netz will be asked 13 questions about her methodologies and her 14 calculations. 15 I want to just preview a little bit of 16 this. I hope that I don't bore you too much 17 this afternoon with this. I think I can make 18 it fairly interesting and explainable, or at 19 least I hope it will be modestly interesting. 20 Professor Netz uses what she calls a 21 profit margin method and a rate of return 22 method. 23 And, in essence, what she's saying is 24 that Microsoft's profits, using this profit 25 margin method, should be the same as the 5045 1 average software company. 2 She's saying that had Microsoft not 3 engaged in the allegedly unlawful conduct, she 4 assumes that the Plaintiffs can prove to you 5 that all this conduct was anticompetitive, had 6 Microsoft not done that Microsoft's profits 7 would be the profits of the average software 8 company. 9 Now, in her benchmark, to get the 10 average profits, interestingly, she excludes a 11 number of the largest software companies. 12 So Microsoft, of course, is being 13 compared to a benchmark of many other 14 companies. And she excludes IBM and SAP and 15 Hewlett-Packard and seven of the top ten. 16 And in her benchmark she uses, I 17 believe, 290 companies, a total of 290, after 18 excluding some of the large ones, to get to 290 19 software companies, she includes many, many 20 very small companies. 21 Certainly very small when compared to 22 the size of Microsoft. 23 Now, again, if you go back to 24 economies of scale, to first copy costs, you'll 25 remember that in software, because almost all 5046 1 the cost is upfront, the more you sell, the 2 more popular your products are, the more money 3 you can make. 4 It's similar to a CD. Here's Faith 5 Hill again. I'm still holding on to her. 6 Fireflies. 7 And the cost of making that album is 8 really pretty much upfront. 9 Now, in this business, the record 10 business, there are distribution costs too. 11 And, of course, besides the disk itself, 12 there's some paper and plastic. And you've got 13 to get it out into the stores. 14 In the software business, really, the 15 distribution costs are less. 16 But let's go back to Professor Netz. 17 She's comparing a company the size of 18 Microsoft with the popularity of its software, 19 with companies that have sales that are much, 20 much, much less. 21 To get 290 companies, she goes down to 22 companies with sales of a million dollars or 23 maybe a little bit more, when Microsoft, of 24 course, is in the billions. 25 That's a benchmark that our experts 5047 1 will testify is not an apple to apple 2 comparison. Far from it. That's a benchmark 3 that our experts will testify is very, very 4 flawed. 5 Now, one other thing. Professor Netz 6 will compare Microsoft's profits and its rate 7 of return for the products at issue, its most 8 successful products, Windows, Office, Excel, 9 and Word, and compare those profits to the 10 profits of other firms. 11 She's not taking the profitability of 12 Microsoft. Just these very, very successful 13 products. And the more volume you have, the 14 more your profit is. And she's comparing that 15 not to successful products of other firms, 16 other software companies, but to the companies 17 as a whole. 18 And, again, our experts will testify 19 that in an antitrust case, if you want a valid 20 measure of damages, that is a flawed 21 comparison. 22 THE COURT: Mr. Tulchin, is this a 23 good time for a break? 24 MR. TULCHIN: It is, Your Honor. 25 Perfect. 5048 1 THE COURT: Okay. Let's take about a 2 10-minute recess. 3 Remember the admonition previously 4 given. Leave your notebooks on your chair. 5 (The following record was made out of 6 the presence of the jury at 1:20 p.m.) 7 MS. CONLIN: Your Honor, I'm very 8 sorry to do that. 9 THE COURT: Okay. Be seated. 10 MS. CONLIN: The Court will recall 11 that on the second day of my opening statement, 12 Microsoft argued extensively that my use of the 13 word unfair was inappropriate. 14 This is at least the third or fourth 15 time where Mr. Tulchin has insisted that 16 Microsoft's conduct was fair. 17 If I can't say that Microsoft's 18 conduct was unfair because of all of the 19 reasons urged by the Defendant that I will not 20 go into -- the Court granted their motion to 21 preclude me from using the word unfair. 22 And it seems quite appropriate that 23 Mr. Tulchin be ordered to stop using the word 24 fair for exactly the same reasons. 25 And that's what I wish the Court would 5049 1 do. 2 THE COURT: Okay. 3 MR. TULCHIN: I don't recall using the 4 word fair when it comes to conduct. If I did, 5 perhaps I did, Your Honor. I don't recall 6 doing it. 7 MS. CONLIN: Fair and square he said. 8 And I did not say fair and square because I was 9 afraid the Court would admonish me because you 10 told me not to use that word, so I didn't. 11 MR. HOLLEY: Your Honor, it's one 12 thing for Ms. Conlin to say that unfair conduct 13 is anticompetitive. 14 And the Court properly admonished her 15 not to do that, because, of course, as the 16 Court's preliminary jury instructions made 17 quite clear, many things that are unfair, 18 elbows out, don't constitute anticompetitive 19 conduct. But the converse is not true. 20 You can say that fair competition is 21 perfectly consistent with competition on the 22 merits and what makes business sense, as 23 Instruction Number 8 says, apart from its 24 exclusionary effect, if any, on competitors. 25 So the parallelism that Ms. Conlin is 5050 1 seeking to draw here simply doesn't work. 2 MS. CONLIN: Well, of course, it does. 3 I'm not going to belabor the point. 4 I'm sure that the Court can see that, 5 in fact, if the conduct at issue is fair and 6 square, that means that it is legal. He's 7 saying -- he's using the word fair as synonym 8 for legal. 9 Microsoft complained to the heavens 10 when I used the word unfair as synonym for 11 illegal, and I stopped doing it. 12 MR. HOLLEY: Your Honor, with respect, 13 they're not the same. 14 Ms. Conlin was seeking to equate the 15 notion of aggressive competition which she 16 characterized as unfair as anticompetitive. 17 That comparison is not correct. 18 But in determining what is consistent 19 with competition on the merits and what is an 20 ordinary business practice, as the Eighth 21 Circuit said in the Trace X Chemical case, it's 22 perfectly all right to say that what you did 23 was fair in relation to what your competitors 24 were doing. 25 I don't see that the two concepts are 5051 1 connected at all. 2 THE COURT: The point is well taken. 3 The Defendant will refer to any 4 conduct that you want to say that is not 5 unlawful or illegal using those terms. I think 6 you can use was fair and legal or fair and 7 lawful competition, but you've got to have 8 lawful or legal in there because I'm holding 9 Plaintiffs to the same standard. 10 MR. HOLLEY: Thank you, Your Honor. 11 MS. CONLIN: Thank you, Your Honor. 12 (A recess was taken from 1:24 p.m. 13 to 1:36 p.m.) 14 MR. TULCHIN: Thank you, Your Honor. 15 We're talking about Professor Netz's 16 methods and what we think our evidence will be 17 about their validity. 18 And I just mentioned to you, I think, 19 before the break that Professor Netz compares 20 the profits of Microsoft's most successful 21 products with the profits of other firms as a 22 whole. 23 Again, in a business like software -- 24 in a business, for instance, like movies where 25 you have the first-copy cost being most of your 5052 1 cost, if you are very successful, you can make 2 lots of money. 3 And I want to show you now a slide 4 which gives you some information about 5 Microsoft profits. This is profit margins. 6 When it comes to the product at issue, 7 what we call at-issue products, you know what 8 they are, Word and Excel and Office and 9 Windows, for four years, and compare that to 10 the profit margin for a different Microsoft 11 product called Project. 12 There are no claims in this case that 13 Microsoft did anything wrong when it comes to 14 Project. And there are no claims for damages 15 on account of sales of Project. 16 And the only point here, again, the 17 exact numbers we don't contend are significant 18 or particularly informative, the fact numbers, 19 but the point is that you can make high profit 20 margins in the software business. 21 Of course, if your products are not 22 successful and if they don't sell, you can lose 23 lots of money as well because of the investment 24 in R and D to build the first copy of that 25 product. 5053 1 And, again, in '98 you'll see that for 2 Project, the profit margin was 77 percent, 3 almost as much as for Windows and Word and 4 Excel and Office, the very successful, really, 5 the best selling software there is out there. 6 And the numbers are a little bit 7 different for other years, but not all that far 8 off. 9 Okay. Now, Professor Netz also uses 10 what she calls the price premium method. 11 And what she's doing in this method to 12 measure damages is to compare a premium that 13 Microsoft has in one field, let's say, compare 14 the price of Windows to the price of competing 15 operating systems. 16 And I just want to stop there and say, 17 you know, that Linux can be acquired for 18 nothing, free by downloading it on the 19 Internet. 20 So you can buy Microsoft Windows. You 21 could get a computer with Windows preinstalled. 22 You can actually get a competing operating 23 system for nothing if you want to download it. 24 But to go back to the price premium 25 method, it's comparing the premium, the cost of 5054 1 Microsoft's products, versus a lower cost for 2 some competing product, with the premium that 3 Microsoft may have in a different market. 4 And let me just give you an analogy 5 for a minute. 6 This is what we're talking about if 7 you were thinking about automobiles. 8 You know that Chrysler came out years 9 ago with the first really successful minivan. 10 My wife's had two of them over the years. I 11 know all about them. 12 And Chrysler sells minivans, and it 13 also sells sedans, regular cars. 14 In the minivan market, Chrysler sells 15 minivans for a premium, a Chrysler Town and 16 Country minivan as compared, let's say, to a 17 Ford that an economist would say is comparable. 18 The Chrysler costs a little bit more. There's 19 a positive premium. 20 Now, in sedans, Chrysler actually has 21 a negative premium. A Chrysler sedan that's 22 comparable to, let's say, a General Motors or 23 Toyota sedan, goes for less money. 24 And that may have something to do with 25 brand loyalty. It may have something to do 5055 1 with quality. It may have something to do with 2 reputation. 3 I'm not proposing to be an expert in 4 the automobile business. 5 But it could well be that because 6 Chrysler was the first to market, going back to 7 Lee Iacocca, a really successful minivan, its 8 reputation endures and the premium remains. 9 It may be that their products just 10 remain better than the competition in the 11 minivan field. 12 And what Professor Netz is doing is 13 equivalent to looking at Chrysler and saying, 14 okay, they have a profit in minivans, a premium 15 I should say. 16 They charge for their minivans more 17 than the competition, and a negative premium in 18 sedans and computing that difference and saying 19 that's the damages. That must be attributable 20 to some wrongful conduct. 21 If you assume that the anticompetitive 22 conduct took place here, she says the 23 difference in that premium is a measure of 24 damages. 25 Well, we think and our experts will 5056 1 tell you that that's an invalid and 2 inappropriate method of calculating damages at 3 all. 4 You just have to get the comparisons 5 right and use a valid comparison if you're 6 trying to measure the effect of the alleged 7 unlawful conduct. 8 Even assuming that it all took place, 9 the comparisons have to be valid. 10 There are many other industries where 11 the same company might have a positive premium 12 with one product in one market and a very much 13 lower or negative premium with another product 14 in another. 15 That difference is not necessarily 16 attributable to any wrongful conduct. 17 And Professor Netz attributes the 18 entire difference here between Microsoft's 19 at-issue products, Windows, and Word and Excel 20 and Office, and other Microsoft products, she 21 attributes the entire premium difference to 22 unlawful conduct. 23 Let's look at the next slide. This is 24 on this subject. 25 In using the price premium method, 5057 1 Professor Netz also uses just a very -- again, 2 we were talking about slivers of data 3 yesterday. 4 And Professor Netz in calculating the 5 price premium uses just a little sliver of the 6 data of prices that Microsoft sells its 7 software at. 8 You won't be surprised to hear that 9 when Professor Netz calculates this premium, 10 she uses the highest prices. 11 What she does is she takes retail 12 data, ignores sales through the OEM channel, 13 through PC makers, and she ignores volume 14 license sales. 15 And many times Microsoft in selling to 16 a business, for instance, will sell on a volume 17 basis. 18 And as you're familiar with in many 19 other business fields, very often if you buy in 20 volume, your price per unit will be lower than 21 it would be if you buy one copy. 22 The data that Professor Netz uses, in 23 the case of operating systems, we think the 24 evidence will show you she's taking about one 25 and a half percent of the relevant data when 5058 1 using her price premium method and about 6 2 percent when looking at Office. 3 If you do these comparisons, if you 4 use these benchmarks and try to calculate 5 damages, you got to do it apples to apples. 6 You got to use the right data. 7 Otherwise you're getting faulty 8 information in, and so, of course, you're 9 getting faulty information out. And the 10 information out is her calculations. 11 The evidence from our experts will be 12 that if you want to calculate damages, you have 13 to do it right. 14 And let's look at another Microsoft 15 product, Publisher. 16 Here's a slide which demonstrates to 17 you that when Professor Netz is doing some of 18 his comparisons -- and this comes from Glen 19 Hubbard, our economist who will testify -- the 20 contested products or at-issue products has, 21 she says, a profit margin of 73 percent. 22 You'll see that other Microsoft 23 products -- I showed you before Project, but 24 Microsoft also has a product, a software 25 product called Publisher. And in those fields 5059 1 where Microsoft is not alleged to have engaged 2 in any wrongful conduct in this case, Microsoft 3 makes profit margins of 63 percent and 51 4 percent. 5 But in doing her comparison, when she 6 takes these benchmark firms, all these other 7 software firms, their average profit margin is 8 17 percent, much lower. 9 Again, the comparisons need to be 10 apples to apples. 11 Okay. According to Doctor Netz, in 12 the but-for world, the world that she 13 hypothesized would have existed in the absence 14 of anticompetitive conduct, according to Doctor 15 Netz's calculations, Microsoft in this but-for 16 hypothetical world should have lost money, lost 17 money, made no profit, lost money in 2002 when 18 it comes to Windows, Office, Excel, and Word. 19 So according to Doctor Netz -- and 20 we're showing you first just the year 2002. 21 This is what Doctor Netz says. 22 The Microsoft products that are the 23 most popular software products in the world and 24 have an actual profit margin in that year of 25 74.8 percent, should have lost 1 .8 percent. 5060 1 Again, because the Plaintiffs' experts 2 construct this world, a world that we don't 3 think would ever have existed, using the type 4 of comparisons I've talked about and a 5 construct of a number of different firms, each 6 with relatively low market share. 7 And what we're showing you with the 8 red bars, as a company, the whole firm in 2002, 9 Microsoft's profit margin was 32.1 percent. 10 And let me just pause here. 11 As you may know or may expect, 12 Microsoft sells other software besides the 13 software we've been talking about. Microsoft 14 also sells, for example, a popular game. 15 But in other aspects of its business, 16 there are products that Microsoft sells that 17 are not terribly successful and some products 18 where it loses money. 19 But overall as a firm in 2002, the 20 actual profit margin was about 32 percent. 21 And Professor Netz, if you use her 22 calculations and her methods, she would say 23 that in this hypothetical but-for world, 24 Microsoft should have lost money with a 25 negative profit rate of 25 percent. 5061 1 Now, given what you know about the 2 history of Microsoft, the quality of its 3 products and its success as a business, we 4 think this kind of calculation is unrealistic. 5 It's wrong. It comes from faulty data, faulty 6 methodology. 7 And if your methods are faulty going 8 in, you're going to get results like this that 9 are not realistic and not reasonable. 10 And just in case you think we picked 11 2002 for some reason as some special year, you 12 can look at the same data for this period. 13 It's pretty much the class period. It 14 doesn't include -- there was no data yet for 15 2006. We're still in it. 16 But if you take the data for the 17 entire period, according to Professor Netz, 18 Microsoft's, let's say, flagship products like 19 Windows should have had a profit margin of 12 20 percent. 21 And as a whole, Bill Gates' company, 22 Microsoft Corporation, should have lost money 23 for that 12-year period, '94 through the end of 24 2005. 25 And, of course, I remind you again 5062 1 that when Professor Netz calculates this 2 so-called overcharge, what the Plaintiffs claim 3 to be their damages, she comes up using her 4 methods, using her data, using what our experts 5 will say are faulty benchmarks and faulty 6 comparisons, she comes up with a damage number 7 for each copy of Windows of $42.49. 8 $42.49 as damages. 9 In a situation where you acquired 10 Windows for $50, the notion that all that 11 technology -- and you remember the findings of 12 fact. Software doesn't expire. It lasts 13 forever. 14 And that everything you are getting in 15 Windows should cost you seven and a half 16 dollars, that notion we think will be shown to 17 be incorrect. 18 There's one subject that I've touched 19 on -- and I'm shifting gears now and going to a 20 new subject. 21 We've touched on -- we've talked about 22 it just briefly, but I want to come back to it 23 in a little more detail than we have before. 24 As you know, there's a second claim in 25 this case, a claim for damages on account of 5063 1 supposed security vulnerabilities. 2 And the same standards apply. 3 Plaintiffs must prove to you that Microsoft 4 engaged in anticompetitive conduct using the 5 instructions and the standards that you receive 6 from the Court. 7 Anticompetitive conduct, and that that 8 anticompetitive conduct resulted in actual harm 9 to the Plaintiffs, here harm in the form of 10 increased security vulnerabilities. 11 And then the Plaintiffs, if they show 12 you that much, would also have to prove to you 13 by a preponderance of the evidence their 14 damages. And, again, speculation cannot be a 15 basis for your determination of any damages. 16 As you may know, as the Plaintiffs, I 17 believe, indicated in their opening statement, 18 the security vulnerabilities that they talk 19 about refer to viruses, viruses that often are 20 sent through the Internet and may come and 21 infect your computer. 22 And, of course, there's no claim in 23 this case -- the Plaintiffs haven't made any, 24 there won't be any -- that these viruses are 25 sent to computers by Microsoft. 5064 1 On the contrary, everyone will 2 acknowledge that viruses are sent by, I guess 3 you would say, malicious and maybe criminal 4 people. 5 I know in some cases they have been, 6 let's say, teenagers or young men. 7 And the viruses are sent by hackers 8 who maybe are good with computers and can 9 figure out how to do these things, but 10 obviously cause harm to members of the class 11 here and to your computers. 12 But the question of whether Microsoft 13 should pay for the harm done by hackers we 14 think is a very, very different question. 15 We will have as an expert on the issue 16 of viruses and this claim for security 17 vulnerabilities, a professor at the University 18 of California San Diego. 19 He gets to enjoy all that nice weather 20 they have out there. 21 He's a professor of computer science, 22 and his name is Steven Savage. And he will 23 tell you a little bit about software code and 24 how it's inherently fragile. 25 We talked a little bit about the fact 5065 1 that operating systems, for example, contain 2 millions -- by now with Windows XP, tens of 3 millions of lines of code. And a mistake in 4 one line, even a very small mistake, even a 5 typographical error, can give rise to 6 vulnerabilities that really clever hackers can 7 figure out how to exploit. 8 Now, these vulnerabilities, Professor 9 Savage will tell you, may be extremely hard to 10 detect until after a hacker sends out a virus 11 that exploits them. 12 In other words, the software code may 13 not be perfect. There may be some little error 14 somewhere, but there's no way really to pick 15 that up until a hacker sends out a virus, 16 exploits that defect, and manages to get into 17 your software on your computer. 18 Professor Savage will testify on the 19 subject of whether there's something about 20 Windows or Internet Explorer that is more 21 vulnerable, makes those products more 22 vulnerable than other products made by other 23 manufacturers. 24 The Plaintiffs have said to you that 25 they will show evidence that Microsoft has sent 5066 1 out more than 100 security bulletins. I think 2 they said 113 during the class period. 3 These are what we call patches. 4 Security bulletins issued by Microsoft. They 5 announce that there's some fix. And they've 6 been sent out, I think, between 1998 and 2006. 7 Professor Savage will tell you about 8 these security bulletins. 9 For example, Professor Savage will 10 tell you that Microsoft releases a large number 11 of them, and has released a large number, 12 partly because there's so many people trying to 13 hack into Windows, and partly because Microsoft 14 has tried to be very, very responsive to the 15 needs of end users. 16 In other words, Microsoft doesn't wait 17 two or three months to collect a number of 18 different problems and then to send out one 19 patch or one security bulletin every few 20 months. 21 As soon as Microsoft learns of a 22 problem and is able to detect how to fix it, 23 Microsoft sends out as promptly as is feasible 24 new security bulletins so that end users can 25 deal with these viruses. 5067 1 Professor Savage also looked at the 2 question of whether or not over the past 3 several years there have been more 4 vulnerabilities in Internet Explorer, the 5 Microsoft browser, as compared to a browser 6 called Mozilla Firefox. 7 And I think the evidence will be that 8 the Firefox browser is the successor to 9 Navigator. 10 Professor Savage found that Firefox 11 had 166 reported vulnerabilities. And, in the 12 same period, Internet Explorer had 150. 13 And, again, I think even that number 14 may be somewhat misleading because Professor 15 Savage will offer his view to you that many 16 more people are trying to hack into Windows or 17 Internet Explorer than are doing so with other 18 products that have fewer users. 19 The hackers seem to get more sort of 20 perverse pleasure out of disrupting computer 21 users. The more they can disrupt, the better. 22 And we're better to go if you want to be a 23 little bit of a pain in the neck, then, to 24 Internet Explorer and Windows. 25 You will also hear evidence of how 5068 1 hard Microsoft has worked over the years to try 2 to make its software more secure. 3 And besides all these patches that 4 Microsoft sends out, Microsoft has made large 5 investments to train people who write code to 6 be aware of security issues so that the code 7 that they write is less vulnerable than it 8 otherwise would be, and to do everything they 9 can to create the most secure code that they 10 can create. 11 And the question I ask of you in an 12 antitrust case where the Plaintiffs allege 13 anticompetitive conduct is where the link will 14 be between that conduct and the injury caused 15 by viruses that are sent out to hackers. 16 That is, this is not a case where 17 Plaintiffs seek damages for the cost involved 18 or their time in dealing with viruses alleging 19 that Microsoft somehow was negligent or made 20 errors. 21 The claim is that the damages for 22 these security vulnerabilities arise because of 23 the same anticompetitive conduct, or at least 24 part of that same conduct that's at issue in 25 the overcharge part of the case. 5069 1 And if I got it correctly, I think 2 that the Plaintiffs' primary theory is related 3 again to something I mentioned when talking 4 about improvements in software, and that was 5 Active X. 6 And I think what the Plaintiffs were 7 saying in their opening statement is that there 8 was no good business reason to add Active X 9 into Internet Explorer, the Microsoft browser, 10 and that this was somehow part of bundling or 11 commingling of the browser and Windows. 12 Professor Savage, our expert from San 13 Diego, will explain to you that adding Active X 14 to Internet Explorer, which Microsoft did do, 15 allowed the browser to take advantage of a 16 wider range of operating system functionality. 17 In other words, there was a good 18 business reason for adding Active X to -- 19 adding the Active X controls, I think is the 20 way a computer person would say it, to IE. 21 And this gave IE the ability to open a 22 movie clip or a PDF document or access things 23 like a Google tool bar or a Yahoo tool bar. 24 That Active X technology was of 25 benefit to consumers. That's why Microsoft 5070 1 added it to Internet Explorer. 2 And I think the claim is that, well, 3 if Microsoft wanted to add Active X to Internet 4 Explorer, it could have done so, but it should 5 have done so using some safer technologies, 6 that is more secure technologies that were less 7 vulnerable to viruses. 8 We think the evidence here will be 9 that Microsoft had good business reasons for 10 adding Active X, that it was of benefit to 11 consumers, and, furthermore, that there isn't 12 any causal link between any anticompetitive 13 conduct and some increased security 14 vulnerability. 15 Again, the Plaintiffs have to show 16 causation; that some anticompetitive conduct 17 caused Microsoft's software to be more 18 vulnerable to viruses than it otherwise would 19 have been. 20 We will also have a witness -- a man 21 with a long last name, I hope I pronounce it 22 properly -- George Stathakopoulos. He's a 23 Microsoft employee. He's in charge of product 24 security. 25 And beginning in 1995 was made the 5071 1 security manager for Internet Explorer. 2 Also Steve Lipner of Microsoft, we 3 plan to have him. Again, he works at 4 Microsoft, and much of what he does revolves 5 around trying to improve the security of 6 Microsoft software. 7 Bugs are going to be unavoidable, I 8 should say, unavoidable, in all large software 9 products, products that have millions of lines 10 of code. 11 They're going to be unavoidable. They 12 are going to be difficult or impossible to 13 detect until a hacker actually exploits any of 14 these vulnerabilities. 15 And clever people -- and many of these 16 hackers are clever, clever people -- will find 17 a way to hack into Internet Explorer or through 18 Internet Explorer into Windows. 19 This is not a function of anything 20 that Microsoft did that's anticompetitive. 21 Again, IE isn't the only browser 22 that's had vulnerabilities. Firefox, as I told 23 you, has had more reported vulnerabilities than 24 IE in the last couple of years. 25 And on the subject of security 5072 1 vulnerabilities, again, we think that the 2 damages that the Plaintiffs seek -- they said 3 it would be in the tens of millions of dollars. 4 And their expert on this subject, I 5 believe, has calculated damages of $49 million 6 that the Plaintiffs are asking for on account 7 of what they say is on average the three 8 minutes that everybody spends installing a 9 Microsoft patch. 10 It sounds to Microsoft -- and we 11 believe the evidence will show you -- that what 12 the Plaintiffs are seeking is damages, a money 13 award from this jury, for something that 14 Microsoft didn't do wrong, but for something 15 that Microsoft has tried to fix. 16 The patches that Microsoft has sent 17 out, those 113, come to everyone for nothing. 18 Microsoft hasn't done the hacking, but 19 Microsoft is sure trying to help people find 20 the patches that will help computer users 21 recover from the hacking and avoid future 22 hacking exploiting those same vulnerabilities 23 in the future. 24 I also will say here just in 25 connection with this request for $49 million, 5073 1 that there is this assumption that everyone 2 spends three minutes installing the patch and 3 that during that three minutes that the patch 4 takes to load, you can't do anything else. You 5 know, that you're sort of stuck in your 6 computer and you can't wander around and look 7 at something else or do whatever you want; that 8 somehow you should be paid for your three 9 minutes of time while the patch installs based 10 on the hourly rate on average of Iowa workers. 11 It's also the case that the Plaintiffs 12 contend that everyone should be paid for their 13 three minutes of time to install a patch, even 14 students, retired people, people who are not in 15 the workforce at this same hourly rate. 16 So we think this claim is indicative, 17 if you will, of some of the rest of what the 18 Plaintiffs have offered in this case; that 19 there is not a link, a causal link, and that 20 asking for $49 million in a situation where 21 Microsoft has only tried to be helpful by 22 sending out patches as soon as it can without 23 charge, to help consumers, is somewhat 24 misguided. 25 Your Honor, if I could, I don't know 5074 1 if you would object to sending the jury home a 2 few minutes early, but I have a little bit more 3 that I think would go together tomorrow better. 4 And I know I can finish in about an hour. 5 THE COURT: Okay. 6 Ladies and gentlemen of the jury, 7 we'll send you home about 15 minutes early. 8 Remember the admonition previously 9 given. 10 See you tomorrow morning at 8:30. 11 Leave your notebooks here. 12 (The following record was made out of 13 the presence of the jury at 2:11 p.m.) 14 THE COURT: Okay. 15 Tomorrow? 16 MS. CONLIN: Your Honor, I have a 17 brief record to make. 18 THE COURT: Okay. Go ahead. 19 Be seated. 20 MS. CONLIN: Thank you, Your Honor. 21 THE COURT: Go ahead. I'm sorry. 22 MS. CONLIN: Thank you, Your Honor. 23 I want to say that I'm simply making a 24 record. I'm not arguing this at all. 25 THE COURT: Okay. 5075 1 MS. CONLIN: With respect to the 2 Court's order of November 28th, as the Court is 3 aware, it has not been my area of 4 responsibility to deal with the experts, but I 5 am uncertain of the clarity of the record with 6 respect to that order. 7 We are not seeking to be excused from 8 compliance. We are working feverishly around 9 the clock to comply. 10 However, I do seek to make a complete 11 record as to our concerns about the Court's 12 order and our reasons for those concerns. 13 Iowa Rule of Civil Procedure 1.508 14 brings two issues with respect to the Court's 15 order. 16 That rule of civil procedure sets 17 forth the manner by which materials can be 18 discovered and it also sets forth what may be 19 discovered. 20 The manner of discovery described in 21 1.508 is either interrogatories or requests for 22 production of documents. 23 In this case, the Defendant has 24 propounded neither. No interrogatory was ever 25 propounded by the Defendant Microsoft 5076 1 concerning experts, and no request for 2 production of documents was ever made by the 3 Defendant Microsoft with respect to experts. 4 Of course, as the Court is well aware, 5 there is simply no requirement under the Iowa 6 Rules of Civil Procedure for a report of any 7 kind. 8 Upon our discovery of the Defendant's 9 failure to properly propound discovery 10 concerning experts, we decided not to make it 11 an issue and to go forward anyway under and 12 pursuant to the pretrial order. 13 Nonetheless, it is worth noting that 14 the Defendant has not complied with the Iowa 15 Rules of Civil Procedure and that any discovery 16 made is by the Plaintiffs at least entirely 17 voluntarily -- voluntary, or was entirely 18 voluntary, and that unlike the Defendant, the 19 Plaintiffs did propound proper interrogatories 20 with respect to experts. 21 On the second issue, the information 22 available to opposing parties in Iowa is 23 explicitly and specifically limited. 24 All that can be discovered -- and the 25 only documents that can be discovered are those 5077 1 with respect to one, the mental impressions and 2 opinions held by the expert and, two, facts 3 known by the expert. 4 And under and pursuant to Iowa Rule of 5 Civil Procedure 1.508, both of those must 6 relate to or form the basis of the mental 7 impressions and opinions held by the expert. 8 The Court is aware of the agreement 9 between the parties, which like all others, is 10 first taken advantage of by the Defendant and 11 then declared by them to be inoperable when it 12 is time for the Plaintiffs to take advantage of 13 that. 14 That agreement from the standpoint of 15 the Plaintiffs was intended to narrow, not 16 broaden, the Iowa Rule of Civil Procedure 17 governing discovery with respect to experts. 18 But there is no authority in the law 19 or the rules for the Court to order the 20 production of materials rejected or not used in 21 preparing the experts' opinions and/or reports. 22 There is not one piece of information 23 that can be ordered to be produced to one's 24 opponent unless it, quote, relates to or forms 25 the basis of mental impressions or opinions 5078 1 formed by the expert. 2 The Court's order of November 28, 3 2006, requires the production of material which 4 does not relate to or form the basis of the 5 mental impressions and opinions held by the 6 expert. 7 The Court's order states, Plaintiffs 8 shall produce to the Defendant the withheld 9 expert discovery material that the Plaintiffs' 10 experts saw, read, looked at, or reviewed, 11 whether it was used to prepare their expert 12 opinions or reports or not. 13 The intent of the Court's order was to 14 provide the Defendant not only material used in 15 preparing the experts' opinions or reports, the 16 material that was looked at, read, or reviewed 17 by the experts but then was rejected or not 18 used in preparing the experts' opinions or 19 reports, end quote. 20 Unless the Court means for us to 21 interpret the Court's ruling to apply only to 22 material which relates to or forms the basis of 23 the experts' opinions, the order exceeds the 24 Court's authority under the law. 25 We are, of course, Your Honor, afraid 5079 1 to interpret the Court's order at all because 2 we don't want to suffer the disastrous 3 consequences sought by Microsoft. 4 So we are complying strictly with the 5 words of the order and have not interpreted it 6 in accordance with the rule. 7 In summary, the Court's order of 8 November 28, 2006, exceeds its authority and 9 contravenes Iowa Rule of Civil Procedure 10 1.508(1)(a) and 1.058(1)(b)(2) both because 11 Microsoft never filed the required 12 interrogatories and requests for production and 13 because the material reviewed and objected by 14 the expert neither relates to nor forms the 15 basis of his or her mental impressions or 16 opinions. 17 That concludes the record that I wish 18 to make, Your Honor. 19 THE COURT: Thank you very much. 20 MR. TULCHIN: Just one quick comment, 21 if I may, Your Honor. I'll be brief. 22 THE COURT: All right. 23 MR. TULCHIN: On a personal level, I 24 am completely appalled that on December 14th 25 Ms. Conlin would tell the Court that he had no 5080 1 authority to issue its orders of August 21st, 2 November 28th, and December, I believe, 11th or 3 12th. 4 This is yet another example of the 5 Plaintiffs trying to relitigate everything. 6 None of these arguments were ever made 7 before. And this defiant attitude towards 8 court orders and the contention that the Court 9 had no authority to issue them made for the 10 first time after three orders in succession 11 were made on the same subject, and after the 12 Plaintiffs signed their name to an agreement in 13 March which they have ever since been trying 14 hard not to comply with, it's just appalling. 15 Nothing else, Your Honor. 16 MS. CONLIN: So the record is clear, 17 Your Honor, we only refer to the Court's order 18 of November 28th, not the order of August. 19 THE COURT: Anything else? 20 MS. CONLIN: No, Your Honor. 21 THE COURT: The Court will take it 22 under consideration. 23 MS. CONLIN: Thank you, Your Honor. 24 (Proceedings adjourned at 2:21 p.m.) 25 5081 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 14th 19 day of December, 2006. 20 21 22 ______________________________ Certified Shorthand Reporter(s) 23 24 25