Oracle Corporation et al v. SAP AG et al

Filing 865

Declaration of Elaine Wallace in Support of 851 Memorandum in Opposition, Declaration of Elaine Wallace in Support of Defendants' Opposition to Plaintiffs' Motion No. 1 to Exclude Expert Testimony of Stephen K. Clarke [AMENDED] filed bySAP AG, SAP America Inc, Tomorrownow Inc. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13, # 14 Exhibit 14, # 15 Exhibit 15, # 16 Exhibit 16, # 17 Exhibit 17, # 18 Exhibit 18, # 19 Exhibit 19, # 20 Exhibit 20, # 21 Exhibit 21, # 22 Exhibit 22, # 23 Exhibit 23, # 24 Exhibit 24, # 25 Exhibit 25, # 26 Exhibit 26, # 27 Exhibit 27, # 28 Exhibit 28, # 29 Exhibit 29, # 30 Exhibit 30, # 31 Exhibit 31, # 32 Exhibit 32, # 33 Exhibit 33, # 34 Exhibit 34, # 35 Exhibit 35, # 36 Exhibit 36)(Related document(s) 851 ) (McDonell, Jason) (Filed on 9/10/2010)

Oracle Corporation et al v. SAP AG et al

Doc. 865 Att. 3

EXHIBIT 3

Dockets.Justia.com

STEPHEN CLARKE June 9, 2010 HIGHLY CONFIDENTIAL - ATTORNEYS' EYES ONLY
Page 324
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA OAKLAND DIVISION ORACLE CORPORATION, a Delaware corporation, ORACLE USA, INC., a Colorado corporation, and ORACLE INTERNATIONAL CORPORATION, a California corporation, ) ) ) ) ) ) ) ) Plaintiffs, ) ) vs. ) No. 07-CV-1658 (PJH) ) SAP AG, a German ) corporation, SAP AMERICA, ) INC., a Delaware ) corporation, TOMORROWNOW, ) INC., a Texas corporation, ) and DOES 1-50, inclusive, ) ) Defendants. ) ________________________________)

VIDEOTAPED DEPOSITION OF STEPHEN CLARKE _________________________________ VOLUME 2; PAGES 324 - 651 WEDNESDAY, JUNE 9, 2010

HIGHLY

CONFIDENTIAL - ATTORNEYS' EYES ONLY

REPORTED BY:

HOLLY THUMAN, CSR No. 6834, RMR, CRR (1-427119)

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MR. PICKETT:

Q.

So you're making a

change in TomorrowNow's conduct from the real world to the "but for" world. MR. McDONELL: incomplete. THE WITNESS: I'm doing what's necessary Correct? Vague and ambiguous,

to value the actual use that we're trying to quantify. MR. PICKETT: A. And that -Q. Under that --

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Q. A.

Sorry. That is different from what happened in But of course, in the actual So it's inappropriate

the actual world.

world, there was no license.

to say, well, there can't be any differences between the actual world and the hypothetical world. Of course, there's a big difference. There's a license in place in the hypothetical world.

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MR. PICKETT:

Q.

Does the fact that the

parties may not agree to a license in the real world impact any of the actual estimates of reasonable royalties? MR. McDONELL: for a legal conclusion. THE WITNESS: I think it influenced me in Because of the Vague and ambiguous, calls

my development of the royalties.

situation with Oracle, I felt that I needed to go to the maximum royalty rate that I could still say was reasonable. So in both cases, for the SAP

royalty and the TomorrowNow royalty, I've gone to the maximum. And it's important to remember throughout this conversation, yesterday and today, we focused on a January 2005 negotiation date. But let's not

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forget that I have two calculations.

There's a

period before 2005, which I think would have a significantly lower royalty rate in the real world, but I've not assumed that in this "but for" world. I've applied the same royalty rate throughout. But I think that is a very meaningful metric in a way where -- when we get to January '05, on the second negotiation, we are only talking about the difference. It's another delta, if you

like, where we had a royalty rate before, now we have to come up with a royalty rate that is applicable after this date. And that's when I brought in the SAP component of the royalty. What TomorrowNow was doing was essentially the same before and after, so I left that royalty rate the same. But we have ignored that first --

to date, we've ignored that first negotiation. MR. PICKETT: Q. When you just testified

you felt you needed to go to the maximum royalty rate, did you mean the selling point maximum royalty rate? MR. McDONELL: THE WITNESS: Vague and ambiguous. Well, the selling point

maximum is the result of a selling price plus a

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royalty. the same.

And so they're related, but they're not

What -- if you remember, on my royalty rate, I've said that the royalty rate will be 50 percent of TomorrowNow's revenue. That is an 50 percent

absolutely astronomical rate to apply.

of revenues, I've really never come across that before. It would -- if you then apply that royalty

to the pricing, it would push TomorrowNow's pricing to 75 percent of Oracle's rate. I've assumed no elasticity of demand in that period. And if there's no elasticity, we can I think

apply it to the same number of customers. that's the right thing to do.

But there must come

a point at which that royalty rate becomes so high, you can't any longer keep a straight face and say, this wouldn't have affected sales, because of course, it would. So you've got this continuum on the TomorrowNow side of the equation, and you've got the addition of SAP in January of '05. MR. PICKETT: break. This is a good point for a

Why don't we do that. THE WITNESS: Sure. Going off the record,

THE VIDEO OPERATOR:

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the time now is 10:08. (Recess from 10:08 a.m. to 10:26 a.m.) THE VIDEO OPERATOR: Tape is rolling. The

time now is 10:27, and we are back on the videotape record. Please proceed. MR. PICKETT: Q. Mr. Clarke, I want to go

back to the -- I think what we coined the selling price maximum for TomorrowNow of 75 percent of Oracle. A. Q. Yes. What's the basis for your conclusion that

the maximum is 75 percent? A. judgment. To a very large extent, that's my I think that's the most it would be And so,

without there being some falloff in sales.

you know, I recognize that there was a time when customers took TomorrowNow's service and retained their Oracle service. paying twice. But I didn't -- I -- in terms of the reasonable component of reasonable royalty, I think the number of customers that were prepared to pay twice was very low, so I don't think you can assume that there would be no effect on sales once you got past 75 percent of the pricing. So they were effectively

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So that's my assumption.

That if we're

going to apply that to these customers, then that's the most to you could have charged and still had those customers. Q. A. What data is your judgment based upon? Based upon years of experience, looking at

pricing models and customer behavior, teaching economics, micro and macro, about what drives behavior, looking at demand curves, the relationship between price and the quantity demanded. Many years and many products, many companies. So that's my -- there's a judgment.

There's no hard data, there's no table you can go and look that up in. judgment. Q. Are there any specific facts you can cite Somebody has to make that

in support of that judgment? A. Well, I think that the totality of my

report, which talks about the factors that I think are relevant to the hypothetical negotiation, gives good background as to what this market is all about, what drives customers to do what they do. So there's a lot of supporting information in here for looking at customers, looking at the

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market, looking at pricing.

As I say, there's no

specific table that says, well, if the price was 76 percent, it will be zero or 99 percent. That's my

assumption for the purposes of doing the reasonable royalty rate calculation. Q. A. Q. Anything else? No. I don't believe so.

When and where did you teach micro

economics? A. At Arizona State University, from about Maybe -4.

2001 to I think 2005, maybe. Q.

I hadn't covered that before. Did you teach any other courses in

economics? A. Q. No. Econ 502.

Now, the 75 percent maximum selling price

is the reason you settled on a 50 percent royalty right. Right? MR. McDONELL: and answered. THE WITNESS: around to look at it. I think that's the right way Yes, I -- I was trying to Vague and ambiguous. Asked

compute the maximum royalty rate that I thought could still be reasonable and would be applicable to the customers that we -- actually are at issue

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in the case. So I think that was the way around that I did that. MR. PICKETT: Q. It's not based on the

benchmark of some other 50 percent royalty rate, is it? MR. McDONELL: and answered. THE WITNESS: No. I've never seen a Vague and ambiguous. Asked

royalty rate at 50 percent of revenue in any other case. MR. PICKETT: Q. Was there any other

quantitative metric other than the maximum selling price that points to a 50 percent royalty rate as reasonable? MR. McDONELL: Vague and ambiguous, overly

broad, asked and answered. THE WITNESS: No. I think that what I

have done is compute the maximum royalty that could possibly be construed as being rational and reasonable.

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25

Q.

And you're -- you're aware that SAP

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offered TomorrowNow service as a loss leader? MR. McDONELL: Misstates the testimony.

Assumes facts not in evidence. THE WITNESS: I think the reality is that

SAP allowed customers to get support from TomorrowNow and not charge them anything. It's I So

got -- that's got loss leader qualities to it. don't know that they ever defined it that way. we should be careful about what we're saying SAP thought and did. But certainly, if you look at the zero

cost deals, the zero dollar deals, they were acting as a loss leader at that point.

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Q.

Turning back to your report and moving on

to page 205, in this section, you're describing how you calculated the SAP royalty. MR. McDONELL: itself. THE WITNESS: MR. PICKETT: Yes. Q. And if I turn to the top Is that correct?

The document speaks for

of 205, I want to point you to two sentences here. The first sentence says: The approach in this case

yields a royalty of zero because SAP made no additional margin on any sales made as a result of the alleged actions. Therefore, the royalty rate

would be zero under the analytical approach. And then you say: The reasonable royalty

for SAP would be half of the profits on any sales it made that it would not have made absent the

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alleged allegations. Is the last sentence there, is that different than the first two sentences? to understand the distinction. I'm trying

Or is it just that

half of the profits means half of zero, because they made no profits? A. Q. A. Let me explain the analytical approach. Sure. Going back to Mr. Parr, he has this

analytical approach in his book that says, if you have a patent -- remember, we're back in the patent world now, so I'm going to use a product as opposed to a piece of software. But if you have a patent that you incorporate into your product lineup, and your normal margin, let's say, is 50 percent of your selling price, but by including the patent, you can push that margin up to, say, 80 percent, that you should disgorge that extra 30 percent of margin. So you don't -- you make your normal margin, but you don't make any extra margin. the patent holder. And that seems to me to be an appropriate way to come up with what should be disgorged. called the analytical approach. It's That belongs to

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So because that is couched in terms of margin, and there will be no additional margin on the SAP sales, you really can't apply the analytical approach in that manner. What I've done is, I've sort of applied it in a sense that I'm trying to use an analytical approach in saying, well, let's take the total profit, and let's divide that up 50/50 between the parties. So it's an analytical approach, but And I

applied to a slightly different metric.

think it would come out to be higher than the analytical approach, which I've shown you is zero, because there's no extra margin. I think that's an appropriate approach. Q. A. What's the basis for the 50/50 split? That's my judgment that it is an

appropriate and very high royalty that will be paid on sales that SAP almost certainly would have made anyway. And the royalty needs to reflect that the

reality is that customers don't migrate their ERP systems to save a few thousand dollars on support, as the data show. And SAP wouldn't be wanting to

pay royalties on sales it would have made anyway. Those wouldn't be part of the equation. So it's a -- it's got some elements of

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judgment, but I think it's a fair royalty, and as high as you could make it and still say it would be fair to both sides. Q. And that's based on your experience that

you've described? A. Well, I described a lot more than my I described the contents of my report

experience.

and a lot of what's in these binders back here lead me to that conclusion. Q. Do you have any quantitative analysis that

demonstrates 50 percent is the right royalty for SAP? MR. McDONELL: incomplete. THE WITNESS: There isn't a table that you Vague and ambiguous,

can go to that would look -- you could look that up in. MR. PICKETT: Q. Do you have any specific

facts on which you rely to conclude that 50 percent is the appropriate royalty? MR. McDONELL: Overly broad, vague and

ambiguous, object to the form. THE WITNESS: I -- the specific facts are

embodied in these binders that are behind me, of which there are probably 35, and my report. So

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there are an enormous quantity of facts that I've considered in the course of this case, and taking all of those facts, as well as the Georgia-Pacific analysis and bringing all of that together, at the end of the day, what's reasonable is a bit of a judgment call. And I've done my best to synthesize

everything I know and come up with something I think is reasonable at the end of the day. MR. PICKETT: Q. Can you point me to any

specific facts that support a 50 percent royalty rather than a a 40 or 60 percent royalty? MR. McDONELL: objections. THE WITNESS: I don't think there's a Asked and answered, same

particular fact that I could point to that would say, it should be 40 percent or it should be 60 percent. I think my opinion is based upon the

highest rate it could be and still be reasonable to the parties at the negotiating table.

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MR. PICKETT: to the -- a new topic.

Q.

All right.

Let's turn

The royalty on the database software. if you like, I can refer you to page 205 of your report. A. I was heading right there.

And

It's where we

started this morning. Q. And it's your opinion that the royalty for

the use of Oracle's database would be based on market price?

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A. Q.

I believe so. The market price that you refer to is the

price paid to obtain an end-user full-use Oracle Database license from Oracle. MR. McDONELL: Correct?

Vague and ambiguous.

I would encourage you to take your time to read your report, if you need to. THE WITNESS: question? Could you just repeat that

I wasn't clear about it. MR. PICKETT: Q. The market price that

you use is the price that was paid to obtain an end-user full-use Oracle Database license from Oracle. MR. McDONELL: THE WITNESS: Same objection. I actually used two

different prices in doing my analysis, but they were -- they were for licenses that were end-user licenses. MR. PICKETT: Q. Let me mark as

Exhibit -- or let me show you what's been marked as Exhibit 3210, an Oracle License and Services Agreement, Bates numbers ORCL00670717 through -726. (Deposition Exhibit 3210 was marked for identification.) THE WITNESS: Thank you.

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MR. PICKETT:

Q.

Is this the type of

full-use database license that you have referenced when you set a market price? MR. McDONELL: ambiguous. Overly broad. Vague and

Lack of foundation. Yes. I think this is -- if

THE WITNESS:

it's not the actual agreement that I looked at, it's very similar to it.

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Q.

Is it your opinion that the Oracle License

and Services Agreement would have allowed SAP and TomorrowNow to use the Oracle Databases in the infringing manner alleged in the lawsuit? MR. McDONELL: Vague and ambiguous, calls Object to

for a legal conclusion, overly broad. the form of the question. THE WITNESS:

The allegations, as I recall

them, don't include an allegation that the database itself was used inappropriately. I understand that

your position is that the alleged actions indicate TomorrowNow did some things with Oracle's other software that it felt were inappropriate, but the -- the use of the database itself was essentially internal to TomorrowNow.

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MR. PICKETT:

Q.

Did you apply any

methodology to lost profits that was utilized in some authoritative text? MR. McDONELL: to the form. THE WITNESS: I calculated lost profits by Vague and ambiguous, object

looking at the losses Oracle made for the customers that they lost as a result of the alleged actions and applied mathematical techniques. Now there are numerous treatises and analyses, books, that teach how to do that, the math portion of that. I'm not aware of there being

any definitive treatise on how you would calculate the difference between the "but for" and the actual other than doing the math. And I think as a

general proposition, the development of the art of

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explaining how you do a lost profits calculation is such that it has to be very specific, and therefore the descriptions you might find in what would be -would tend to be very general, because they can't apply themselves to the specific facts of a specific case. MR. PICKETT: pools. A. Q. A. Q. Correct? I did. Customer-specific exclusion pools. Yes. And are you familiar with any published -Right? Q. You created exclusion

any publication that recommends the use of exclusion pools in connection with a lost profits analysis? MR. McDONELL: ambiguous. THE WITNESS: I think the -- I wouldn't Incomplete, vague and

expect to find a treatise that used the term "exclusion pools." I think there are numerous

cases and numerous textbooks, even some that you've referenced in the last couple of days, that talk very clearly about the need to identify the causation that results in a loss arising because of the alleged actions. There are any number of

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those, some of which you've referenced. So that process, establishing the economic causation for your analysis, is well established. Whether there's one other that said, well, let's take a look at that causation on a customer-by-customer basis, and then for ease of discussion, let's pool those, let's group them in some coherent manner that we can describe that will save us doing this 358 times, I don't think I've seen something on that. But the methodology flows from the requirement to do a proper analysis of causation. MR. PICKETT: Q. Have you seen any

methodology that groups causation into categories and then concludes that I find causation based on whether Group A is listed or Group B plus 1 of C? Anything along those lines, your use of exclusion pools? MR. McDONELL: incomplete hypothetical. THE WITNESS: No. Asked and answered, Object to the form. For all the reasons I think the precise

that I just described to you.

manner of doing an appropriate causation analysis, the methodology that you would adopt, has to be tailored to the facts of the case. And the pools

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in this case, they are convenient ways of thinking about a common thread that runs through a number of customers. And they could all have been handled

one customer at a time, but that would have been a much clumsier, much more time-consuming, a much more paper-intensive approach than we have here. MR. PICKETT: Q. Why did you decide to

use an exclusion pool formula rather than an individual analysis? MR. McDONELL: THE WITNESS: that. Didn't I? Asked and answered. I think I just told you

I didn't? Q. Go ahead, please.

MR. PICKETT: A.

Let me tell you again. MR. McDONELL: It also misstates the --

also assumes facts not in evidence. THE WITNESS: First of all, the causation

analysis itself is done on a customer-by-customer basis. The -- I am going to use an example. Take

the parent mandate pool.

I have certain customers

that I have analyzed that show that the reason they terminated at Oracle and perhaps went to SAP, but certainly went to TomorrowNow, was the result of an acquisition. So the new parent says, we are an SAP

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shop, you need to comply with our accounting mechanisms and our HR mechanisms, so you have to become an SAP shop too. Clearly, in that case, that customer didn't leave Oracle as a result of the alleged actions. They left as a result of this mandate

from the parent. I did that analysis on a customer-by-customer basis for the purpose of presenting that so that we could talk about it, hopefully -- this was certainly my intent -- in a -- in an efficient, coherent way, not one customer at a time. But if you -- if we can make

the argument to you that it is appropriate to exclude those customers for causation reasons, for your inability to say it was the alleged actions that caused the loss to Oracle, then -- I don't know how many there are in that group, let's say there are 10 in there -MR. PICKETT: go ahead. A. It doesn't matter. I'm just using it as Q. I think there's one, but

an example. If there were 10 in there and we established the principle that that was an

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acceptable and appropriate thing for me to do, we could talk about the pool, you could agree to the principle, and we wouldn't have to spend any more time looking at them.

TEXT REMOVED - NOT RELEVANT TO MOTION

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