Oracle Corporation et al v. SAP AG et al

Filing 888

Reply In Support re 781 MOTION No. 1: To Exclude Testimony of Defendants' Expert Stephen Clarke filed by Oracle International Corporation, Oracle USA Inc., Siebel Systems, Inc.. (House, Holly) (Filed on 9/16/2010) Modified on 9/17/2010 (vlk, COURT STAFF).

Oracle Corporation et al v. SAP AG et al

Doc. 888

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BINGHAM MCCUTCHEN LLP DONN P. PICKETT (SBN 72257) GEOFFREY M. HOWARD (SBN 157468) HOLLY A. HOUSE (SBN 136045) ZACHARY J. ALINDER (SBN 209009) BREE HANN (SBN 215695) Three Embarcadero Center San Francisco, CA 94111-4067 Telephone: [phone] Facsimile: 415.393.2286 [e-mail] [e-mail] [e-mail] [e-mail] [e-mail] BOIES, SCHILLER & FLEXNER LLP DAVID BOIES (Admitted Pro Hac Vice) 333 Main Street Armonk, NY 10504 Telephone: [phone] Facsimile: 914.749.8300 [e-mail] STEVEN C. HOLTZMAN (SBN 144177) FRED NORTON (SBN 224725) 1999 Harrison St., Suite 900 Oakland, CA 94612 Telephone: [phone] Facsimile: 510.874.1460 [e-mail] [e-mail] DORIAN DALEY (SBN 129049) JENNIFER GLOSS (SBN 154227) 500 Oracle Parkway, M/S 5op7 Redwood City, CA 94070 Telephone: [phone] Facsimile: 650.506.7114 [e-mail] [e-mail] Attorneys for Plaintiffs Oracle USA, Inc., et al. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA OAKLAND DIVISION ORACLE USA, INC., et al., No. 07-CV-01658 PJH (EDL) REPLY MEMORANDUM IN SUPPORT OF Plaintiffs, ORACLE'S MOTION NO. 1: TO EXCLUDE v. TESTIMONY OF DEFENDANTS' EXPERT SAP AG, et al, Defendants. STEPHEN CLARKE Date: Time: Place: Judge: September 30, 2010 2:30 p.m. Courtroom 3 Hon. Phyllis J. Hamilton
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Dockets.Justia.com

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TABLE OF CONTENTS Page INTRODUCTION ............................................................................................................. 1 CLARKE'S ROYALTY RATE APPROACH SHOULD BE PRECLUDED .................. 2 CLARKE'S DATABASE FMV LICENSE BASES ARE PREMISED ON IMPROPER LEGAL OPINIONS AND UNRELIABLE METHODOLOGY .................. 8 CLARKE'S LOST PROFITS AND INFRINGERS' PROFITS CAUSATION METHODOLOGY IS UNSCIENTIFIC AND UNRELIABLE ...................................... 11 CLARKE'S THIRD PARTY MARKET SURVEY IS BEYOND CLARKE'S EXPERTISE, UNRELIABLE AND NOT REBUTTAL................................................. 12 CLARKE'S UNRELIABLE REGRESSION ANALYSES SHOULD BE EXCLUDED .................................................................................................................... 13 CLARKE SHOULD BE PRECLUDED FROM OFFERING LEGAL OPINIONS ....... 14 CLARKE'S RELIANCE ON LATE PRODUCED CUSTOMER DECLARATIONS IS BARRED BY RULE 37 .............................................................. 15

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TABLE OF AUTHORITIES Page

Abuan v. Gen. Elec., 3 F.3d 329 (9th Cir. 1993).................................................................................................. 7, 10 Bowling v. Hasbro, Inc., No. 05-229S, 2008 WL 717741 (D.R.I. Mar. 17, 2008)...................................................... 4, 6 Burnham v. United States, No. 07-8017, 2009 WL 2169191 (D. Ariz. Jul. 20, 2009) ....................................................... 8 Capitol Justice LLC v. Wachovia Bank, N.A., No. 07-2095, 2009 U.S. Dist. LEXIS 126573 (D.D.C. Dec. 8, 2009)................................... 15 Daubert v. Merrell Dow Pharm., Inc., 43 F.3d 1311 (9th Cir. 1995).......................................................................................... 3, 7, 12 Energy Oils, Inc. v. Mont. Power Co., 626 F.2d 731 (9th Cir. 1980).................................................................................................. 10 Gen. Elec. Co. v. Joiner, 522 U.S. 136 (1997) ................................................................................................................. 4 Georgia-Pacific Corp. v. United States Plywood Corp. 318 F. Supp. 1116 (S.D.N.Y. 1970)..................................................................................... 4, 5 Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075 (Fed. Cir. 1983).......................................................................................... 3, 11 In re W. Asbestos Co., 416 B.R. 670 (N.D.Cal. 2009) ................................................................................................. 7 Indus. Automation Supply, LLC v. United Rentals Highway Techs., No. 3:04-cv-99, 2006 WL 5219390 (D.N.D. Feb. 8, 2006)................................................... 13 Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371 (Fed. Cir. 2001)................................................................................................ 4 Kilgore v. Carson Pirie Holdings, Inc., No. 05-6035, 2006 WL 3253490 (6th Cir. Nov. 8, 2006) ..................................................... 13 Linkco, Inc. v. Fujitsu Ltd., 232 F. Supp. 2d 182 (S.D.N.Y. 2002)...................................................................................... 3 ii
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TABLE OF AUTHORITIES (continued)

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Matrix Motor Co. v. Toyota Jidosha Kabushiki Kaisha, 290 F. Supp. 2d 1083 (C.D. Cal. 2003) ................................................................................. 13 Monsanto Co. v. McFarling, 488 F.3d 973 (Fed. Cir. 2007).................................................................................................. 8 Nuveen Quality Income Mun. Fund Inc. v. Prudential Equity Group, LLC, 262 Fed. Appx. 822 (9th Cir. 2008) ................................................................................... 9, 11 Perry v. Schwarzenegger, 2010 WL 3025614 (N.D. Cal. Aug. 4, 2010)......................................................................... 13 Powell v. Carey Int'l, Inc., No. 05-21395, 2007 WL 1068487 (S.D. Fla. Apr. 9, 2007) .................................................... 7 Radio Steel & Mfg. Co. v. MTD Products, Inc., 788 F.2d 1554 (Fed. Cir. 1986)................................................................................................ 5 Radobencko v. Automated Equip. Corp., 520 F.2d 540 (9th Cir.1975)..................................................................................................... 9 Rambus, Inc. v. Hynix Semiconductor, Inc., 254 F.R.D. 597 (N.D. Cal. 2008) ........................................................................................... 13 Regents of Univ. of Cal. v. Monsanto Co., No. C04-0634, 2006 WL 5359055 (N.D. Cal. Feb. 7, 2006) (PJH) ...................................... 15 Robinson v. G.D. Searle & Co., 286 F. Supp. 2d 1216 (N.D. Cal. 2003) ................................................................................... 9 Semerdjian v. McDougal Littell, 641 F. Supp. 2d 233 (S.D.N.Y. 2009).................................................................................... 13 Snellman v. Ricoh Co., Ltd., 862 F.2d 283 (Fed. Cir. 1989).................................................................................................. 5 United Slates v. 14.3 Acres of Land, No. 07CV886 2008 U.S. Dist. LEXIS 66667 (S.D. Cal. Aug. 29, 2008) .............................. 15 United States v. Chang, 207 F.3d 1169 (9th Cir. 2000).................................................................................................. 7 Varni Bros. Corp. v. Archer Daniels Midland Co., 191 F.3d 1090 (9th Cir. 1999).................................................................................................. 4

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TABLE OF AUTHORITIES (continued)

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Wall Data, Inc. v. L. A. County Sheriff's Dept., 447 F.3d 769 (9th Cir. 2006)................................................................................................ 6, 7 RULES Fed. R. Civ. P. 26 ......................................................................................................................... 15 Fed. R. Civ. P. 37 ......................................................................................................................... 15

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I.

INTRODUCTION SAP has now stipulated to "all liability on all claims," including the extensive infringing

use of Oracle's PeopleSoft, J.D. Edwards, Siebel and database program copyrights as Oracle alleged. Dkt. 866. Yet, SAP seeks to avoid fully compensating Oracle for that infringement by proffering unsound and inadmissible damages approaches through its expert, Stephen Clarke. In its Opposition ("Opp."), SAP does not refute the fundamental flaws in Clarke's methodologies and inputs. Instead, SAP confirms that over and over, and in core respects, Clarke ignores the facts and the law and substitutes his own views of what they should be, claims expertise where he has none, and makes up unreliable and result-driven damages approaches. Clarke's PeopleSoft/Siebel Random Royalty Rates and Artificial Caps. Clarke values use of the PeopleSoft and Siebel copyrights at 50% of SAP TN's actual support revenues and 50% of the profits on SAP sales to just two customers. This arbitrary formula has no basis in any cognizable methodology. Clarke's royalty rates and caps flatly ignore SAP's expectations and plans to use SAP TN's discount support pricing to drive SAP applications sales, and are pure ipse dixit, untethered to any record evidence and improper under all applicable law. Clarke then exacerbates these errors by assuming a scope of use that is narrower than Oracle alleged and SAP has conceded. This analysis also is admittedly "affirmative" and late. Clarke's Improper Database Use Valuation. Clarke's valuation of SAP TN's infringing use of Oracle's database software is based only on Clarke's interpretation of what the terms of Oracle's standard license allow. His opinion has no basis in fact, as he ignores the undisputed record evidence that Oracle has never used that standard license to permit a competitor to support multiple customers, as SAP TN did. Further, Clarke's counter-factual "do-over," pretending that SAP reconfigured its servers to get a cheaper license, is impermissible under the law, which mandates a valuation based on how SAP TN's used Oracle's database software. Clarke's Unprecedented Customer Exclusion Formulae. Clarke's "automatic exclusion criteria" and "A or B plus at least one of Cs" formula for excluding customers from Oracle's lost profits and SAP's infringer's profits damages and the SAP royalty base is admittedly invented for this case by Clarke. Clarke's fundamental assumptions for exclusion are rejected by SAP's 1
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proffered industry expert, Brian Sommer, and its application yields demonstrably unreliable results. If SAP has evidence that a SAP TN customer would have left Oracle anyway, that evidence ­ not the unreliable end product of Clarke's unreliable exclusion methodology ­ should be submitted at trial. Clarke's Third Party Providers "Market Study." Nothing in Clarke's background equips him to assess whether support offerings of other companies were technically comparable to SAP TN's support at any relevant time. Moreover, Clarke's "study" relies on nothing more than untested sales puffery on company websites. The jury should consider any admissible evidence of alternative offerings and reach its own conclusions; it should not be misled by the gloss of purported "expertise" that would arise if the product of Clarke's casual web-browsing is allowed. Clarke's Flawed Regression Analyses. As Oracle's statistical expert, Dr. Levy, showed in his opening declaration (and confirms in his accompanying reply declaration), Clarke's profit margin conclusions are founded on fundamentally erroneous regression analyses, betraying Clarke's lack of expertise in statistics. Clarke's Legal Opinions. SAP cannot refute that Clarke repeatedly testifies as to his own interpretation of contracts, case law and this Court's orders. His legal opinions are improper ­ doubly so when they contradict the law. The Court should preclude any such testimony. Clarke's Reliance on Late Customer Declarations. Clarke's post-report changes to his lost profits and infringer's profits calculations ,and SAP's royalty calculation based on postreport declarations, flout the case schedule and leave Oracle no meaningful way to investigate this new "evidence." SAP does not even try to justify the delay. Clarke's reliance on lateproduced declarations should be precluded. II. CLARKE'S ROYALTY RATE APPROACH SHOULD BE PRECLUDED Clarke's affirmative opinion is that a 50% royalty on SAP TN's insubstantial actual revenues and 50% of SAP's actual profits on SAP application sales to only two customers fairly compensates Oracle for SAP's massive infringing use of Oracle's PeopleSoft and Siebel copyrights. He simply backs into the desired result without regard for the facts established in the record, including what the law requires be the focus: SAP's and Oracle's stated goals and 2 Case No. 07-CV-01658 PJH (EDL)
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expectations at the times the PeopleSoft and the Siebel hypothetical licenses would have been negotiated. Instead, Clarke relies on his own professed "judgment" ­ precisely what Daubert forbids. Clarke's Royalty Rate Approach Has No Basis Beyond Clarke and Ignores the Determinative Contemporaneous Party Expectations. SAP admits, as it must, that "the proper form of royalty is dependent upon what would have been the most likely agreement during the hypothetical negotiation." Opp. 8:24-25 (quoting Linkco, Inc. v. Fujitsu Ltd., 232 F. Supp. 2d 182, 188 (S.D.N.Y. 2002)); accord Oracle's Initial Motion to Exclude Clarke ("Mo.") 8 n.5 (quoting, e.g., Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1081 (Fed. Cir. 1983) ("The issue of the infringer's profit is to be determined not on a basis of a hindsight evaluation of what actually happened, but on the basis of what the parties to the hypothetical negotiation would have considered at the time of the negotiation"). What would have been "most likely" depends on facts that existed at the time of the negotiation. SAP does not even address that Clarke disregards those determinative facts and cannot change that the royalty he invents has no factual basis whatsoever. As Oracle has established, Clarke admits his 50% rates are based only on his "judgment," not "quantitative analysis" or "specific facts," and admits he assumes SAP TN's support would be priced differently in the but-for world, contrary to what the law requires. Mo. III.A.1. SAP's Opposition does not refute any of this. SAP can point to nothing in Clarke's analysis linking any record evidence to his selection of a 50% royalty rate on SAP TN's actual revenues and a 50% royalty rate on SAP's profits on applications sales. See Opp. III.B.1. Clarke has no benchmark or existing license that supports this arbitrary approach; no party endorsed any such model at the time, and he cannot cite or rely on even post-litigation testimony or interviews that show his proposed license model would ever be considered, let alone agreed to.1 In contrast, the
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See Dkt. 783 (House Decl. ISO Mo. No. 1 to Exclude Clarke ("House Opening Decl.")), Ex. A (Clarke Report) at 202-205 (citing no case facts, only Clarke's bare assumptions); Mo. 5:19-21 & n.3; Declaration of Holly House ISO Reply ("House Reply Decl."), Ex. A (Clarke Depo.) at 116:14-19 ("Q: In considering what a willing buyer would pay for the license of what was stolen, did you talk with any SAP personnel? A: In terms of the value of use? Q: Yes. A: No."). 3 Case No. 07-CV-01658 PJH (EDL)
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contemporaneous party evidence Oracle's expert relies on reflects the parties' significant financial and strategic expectations for the relevant subject IP. Mo. III.A.2; see also Dkt. 846 (Opp. to Mo. to Exclude Meyer) at 3-5, 12. Plucking a number out of the air is not science. Clarke's results-driven opinion offered in disregard of the legal standard and the parties' expectations at the time2 cannot assist the jury. Compare Bowling v. Hasbro, Inc., 2008 WL 717741, at *4-7 (D.R.I.) (condemning "superficial and results-oriented" royalty rate analysis that "begins and ends with [the expert's] reliance on and reference to his own expertise" and did not "apply available information and data"; "mere reference to the Georgia-Pacific factors, cannot change the sow's ear of rank speculation into a silk purse of reliable expert opinion.");3 see also Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997) ("nothing in either Daubert or the Federal Rules of Evidence requires a district court to admit opinion evidence that is connected to existing data only by the ipse dixit of the expert"); Varni Bros. Corp. v. Archer Daniels Midland Co., 191 F.3d 1090, 1102 (9th Cir. 1999) ("[A]ny (Footnote Continued from Previous Page.) SAP's claim that "the highest royalty rate that would allow TN the possibility of making a profit is 25% of Oracle's support fees," Opp. 5:3-6, is also not supported by any record evidence. House Opening Decl., Ex. A (Clarke Report) pp. 202-205. 2 As confirmed by the above cases, a proper FMV analysis must be based on the parties' expectations at the time of the hypothetical negotiation. See also Mo. 8:6-9 & n.5 (citing, in part, the "rule that recognizes sales expectations at the time when infringement began as a basis for a royalty base as opposed to after-the-fact counting of actual sales" (quoting Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371, 1384-85 (Fed. Cir. 2001))). But Clarke focuses only on Defendants' after-the-fact sales and utterly fails to consider the parties' contemporaneous expectations of the value of the subject IP and how SAP TN's low cost support offer would drive SAP applications sales and otherwise hurt Oracle. It is his utter disregard for and opining against the use of this legally determinative contemporaneous party evidence (Mo. 8, n.4) that makes his valuation improper, not the selection of a running royalty per se. 3 SAP attempts to distinguish Bowling by pointing to the length of Clarke's Georgia-Pacific discussion. Opp. 7:4-19. But the issue is not the length of the report, it is Clarke's failure to link his conclusions to case facts. SAP then claims Clarke's unilateral decision to cap Oracle's FMV of use damages by using SAP TN's actual revenues as a ceiling is not "results-oriented" as was the expert's in Bowling but instead is "the maximum his client could pay." Opp. 7:16-17. There is no evidentiary support for this either; indeed Clarke's approach is flatly contradicted by SAP's funding of SAP TN as a loss leader throughout its existence and SAP's funding of SAP TN's damages in this case. Mo. 9:3-5 & n.6. Finally, SAP professes Oracle didn't say how Clarke backpedaled (another indicia of unreliability of the Bowling expert). Opp. 7:17-19. But Oracle clearly explained Clarke's rejection of his report's limited scope of use "delta" at deposition. Mo. 10:7-10. Clarke's royalty approach is indistinguishable from the unreliable, ungrounded and results-oriented royalty approach rejected in Bowling and should suffer the same fate. 4 Case No. 07-CV-01658 PJH (EDL)
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inference founded upon [a] factual assertion [unsupported by the record] ­ even one drawn by an economic expert ­ is necessarily unreasonable"). SAP's Claim That SAP TN Must Actually Make a Profit Is Wrong. SAP itself projected almost one billion dollars in additional revenues in the first three years of its ownership of SAP TN, by using SAP TN as a low cost support provider to help migrate Oracle customers to SAP. Dkt. 846 (Opp. to Mo. to Exclude Meyer) at 14:5-18. Clarke, however, ignores these (and other) actual, contemporaneous party projections and statements of expected benefits in calculating the value of a license. SAP appears to defend Clarke's approach by arguing that a royalty would be reasonable only if it allowed SAP TN to make a profit. Opp. 4:11-18. That is not the law. Mo. 8 n.5 (citing Radio Steel & Mfg. Co. v. MTD Products, Inc., 788 F.2d 1554, 1557 (Fed. Cir. 1986) ("The determination of a reasonable royalty . . . is not based on the infringer's profit, but on the royalty to which a willing licensor and a willing licensee would have agreed at the time the infringement began"); Snellman v. Ricoh Co., Ltd., 862 F.2d 283, 289-90 (Fed. Cir. 1989) (upholding recovery based on infringer's expected sales though expectations far exceeded actual sales)). Copyright damages are not means-tested for low-income infringers. And even if they were, SAP TN would be disqualified by the subsidies it received from SAP. SAP ignores these cases and ignores that the court in Georgia-Pacific held that the FMV must be based on the infringer's expected profits at the time of the negotiation ­ "a different question from the amount of infringing profits that GP actually did make" ­ and viewed the infringer's expectations of "substantial additional profits from collateral sales" as "a significant factor to be considered by the Court in determining the reasonable royalty because it has the logical tendency, as a matter of simple economics, to increase the amount of the reasonable royalty." 318 F. Supp. 1116, 1131-32 (S.D.N.Y. 1970).4 Clarke's focus on SAP TN's actual

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Contrary to SAP's intimation (Opp. 6:4-9), Georgia-Pacific does not endorse Clarke's factual do-over of SAP's express plan to continue SAP TN's low cost support model to drive SAP sales at the time of the hypothetical negotiation. The paragraph SAP cites provides the general overview of the hypothetical negotiation approach and, indeed, in a part SAP omits, reaffirms that Clarke should have looked at "the anticipated amount of net profits that the prospective licensee reasonably thinks he will make." 318 F. Supp. at 121. No authority allows Clarke to pretend SAP would change its contemporaneous business plans for SAP TN. 5 Case No. 07-CV-01658 PJH (EDL)
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profits alone, rather than SAP's profits and expectations, is an impermissible results-driven approach, contrary to the law, that ignores the record facts and should be excluded. Bowling, 2008 WL 717741 at *4-7. SAP Cannot Dispute Clarke Valued A Narrower Use than Oracle Alleged and Defendants Have Now Conceded Based on His Own Inexpert Analysis. SAP cannot deny that, contrary to the now-conceded scope of infringement, Clarke testified that in valuing the "Subject IP" he did not accept Oracle's allegations, but rather assumed "certain intellectual property owned by Oracle was not used." House Reply Decl., Ex. A (Clarke Depo.) at 124:1-127:23. SAP also does not dispute that Clarke's royalty values only some (what Clarke calls the "delta") of the conceded infringing activity and further values use only insofar as SAP TN received support revenue from customers. Opp. 12:16-19. Nor does SAP dispute that Clarke's "delta" is far less activity than the broad copying and use Oracle alleged and Meyer quantifies (e.g., SAP TN used the vast materials it copied to create a master library which allowed Defendants to globally market SAP TN's comprehensive support capabilities and attack Oracle across the vulnerable acquired customer bases; inflicting pain on Oracle with SAP TN was SAP's goal regardless of revenues earned). Mo. 9:17-10:10 & n.7, n.8; Dkt. 847, Ex. A (Meyer Report) ¶ 61. Instead SAP argues "Plaintiffs do not explain how a royalty based on customer revenues would fail to compensate" for that broader infringement. Opp. 10:19-20. In fact, Meyer explains in detail and provides the extensive factual support showing why the expected value of the benefits to SAP and harm to Oracle from SAP's infringing use would not be capped by SAP TN's actual customer revenues. See, e.g., Dkt. 847 (Jindal Decl. ISO Opp. to Exclude Meyer), Ex. A (Meyer Report) ¶¶ 232-233; Ex. B (Meyer Depo.) 460:13-461:24; House Reply Decl, Ex. B (Meyer Depo.) at 561:17-563:18, 564:18-565:6; see also Dkt. 846 (Oracle's Opp. to Mo. to Exclude Meyer) at 6:22-7:6 (ability to use Oracle IP to compete for all 9920 customers). Moreover, it is SAP's burden to show that its expert will not mislead the jury by quantifying less than what the law requires, namely the value to Defendants of all infringing copies.5 Mo. 4:2-8; Abuan v. Gen. See, e.g., Wall Data, Inc. v. L.A. County Sheriff's Dept., 447 F.3d 769, 775 n.3, 786-87 (9th Cir. 2006) upholding damages award based on infringing software copies where evidence showed 6 Case No. 07-CV-01658 PJH (EDL)
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Elec., 3 F.3d 329, 332 (9th Cir. 1993) (affirming preclusion of testimony that did not "comply with relevant legal standard"). Clarke's royalty rate calculations necessarily quantify the value of only some of the copying, not all, and for that reason also are unreliable and inadmissible. Powell v. Carey Int'l, Inc., 2007 WL 1068487, at *3 (S.D. Fla.) ("[B]ecause the premise of [expert's] opinion [was] fundamentally flawed and directly contrary to the law of the case, his report and testimony would not aid a trier of fact . . . .").6 Clarke's valuation of use is also defective because his narrow "delta," defining the scope and duration of SAP TN's infringement, is, in part, the result of his "own analysis," including his legal interpretation of customer contracts. Mo. 11:5-7, n.9. SAP does not deny this; indeed, it confirms it. Opp. 11:24-26 (Clarke's "analysis related to the infringement start and end dates, its geographic scope, and how TN's support services compared to the services of other third party support providers"). Clarke, an accountant with no claimed expertise in either technical infringement or the third party support market (Mo. 11 n.10; 19:15-16 & n.29), is doubly unqualified to present any such testimony. United States v. Chang, 207 F.3d 1169, 1172-73 (9th Cir. 2000). And he cannot offer opinions based on his legal interpretation of contract terms. In re W. Asbestos Co., 416 B.R. 670, 704 (N.D.Cal. 2009) (PJH). Finally, Clarke's opinion is based on a scope of use that is refuted by SAP's concession of "all liability on all claims." Dkt 866 ¶ 1. SAP has conceded far more infringing use than Clarke purported to value, and there is no way to translate Clarke's truncated analysis into a damages number that corresponds to the conceded liability.7 The combination of these scope of use (Footnote Continued from Previous Page.) some copies of the valued "software would remain installed, but unused" in defendant's workstations). SAP implies the court in Wall Data may not have allowed valuation of unused copies. Opp. 11:14-17. But the court explained the copies that formed the starting pool for damages included "installed, but unused" software copies and the ranges of potential infringing copies were the result of the number of licensed copies, not how many copies were used or unused. Id. at 775 n.3, 786-87. 6 Clarke's demonstrable expansion of his scope of use at deposition (Mo. 10:7-10) further renders his opinion unreliable. Compare Daubert v. Merrell Dow Pharm., Inc., 43 F.3d 1311, 1319 (9th Cir. 1995) ("Any such tailoring of the experts' conclusions would, at this stage of the proceedings, fatally undermine any attempt to show that these findings were `derived by the scientific method.' Plaintiffs' experts must, therefore, stand by the conclusions they originally proffered, rendering their testimony inadmissible under the second prong of Fed. R. Evid. 702.") 7 Clarke's ability to rely on SAP expert Garmus as further support for the narrow scope of 7 Case No. 07-CV-01658 PJH (EDL)
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problems mandate exclusion of Clarke's royalty opinions and calculations. Clarke's "Georgia-Pacific" Analysis Is Not "Rebuttal." SAP cannot escape Clarke's concession at deposition of what is apparent in his report: his Georgia-Pacific analysis yielding his royalty rates calculations is an "affirmative" opinion separate and apart from his rebuttal of Meyer's FMV analysis. Mo. 12:1-7 & n.12. Clarke admittedly had been working on it since he was hired by SAP in December 2007. Mo. 12:10-13. Because those opinions do not respond to Meyer's analysis, SAP does not and cannot offer an excuse for not providing them when affirmative opinions were due in November 2009. The unjustifiable untimeliness of Clarke's royalty rate analysis is further cause for preclusion. See, e.g., Burnham v. United States, 2009 WL 2169191, at*5-7 (D. Ariz.) (precluding as "rebuttal" opinions based on long known case evidence where expert deadlines provided ample time to produce an initial expert report). III. CLARKE'S DATABASE FMV LICENSE BASES ARE PREMISED ON IMPROPER LEGAL OPINIONS AND UNRELIABLE METHODOLOGY Clarke's First FMV License Is Based On Erroneous License Interpretation: SAP does not dispute that Clarke's first proposed $1.9M license fee for SAP TN's infringing use of Oracle's database software is based on Oracle's standard customer License and Services Agreement ("OLSA") for an Enterprise Edition database and related price lists; SAP also does not dispute that Clarke presupposes those provide an "established royalty" so pricing based on a single license would allow SAP TN's infringing use. Mo. 15:14-20. But "established royalties" exist only where the owner "has consistently licensed others to engage in conduct comparable to the defendant's." Mo. 16:1-5 (quoting Monsanto Co. v. McFarling, 488 F.3d 973, 979 (Fed. Cir. 2007)). Oracle has never used its OLSA to license conduct comparable to SAP's, and the OLSA does not permit conduct comparable to SAP's. The OLSA provides, in relevant part, that: "Upon payment for services, you will have a perpetual, nonexclusive, non-assignable, royalty free license to use for your internal business operations anything developed by Oracle . . . ." Dkt. 865 (Wallace Decl.), Ex. 21 at 1(emphasis supplied). But SAP TN admitted it used Oracle's database software to support other customers, not to run its own administrative or other internal (Footnote Continued from Previous Page.) infringing use he valued disappears if Garmus' analysis is precluded. Mo. 11 n.11; Dkt. 767. 8 Case No. 07-CV-01658 PJH (EDL)
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business operations. Mo. 15:19-21 (citing Thomas 30(b)(6) testimony). In his report and deposition, Clarke ignored his client's testimony as well as the undisputed record evidence from Richard Allison (Oracle's 30(b)(6) witness on license terms) that Oracle's OLSA would not have allowed SAP TN to support other customers and that Oracle has never licensed a competitor to do that.8 Ignoring the undisputed record evidence alone merits preclusion of this Clarke opinion. See, e.g., Nuveen Quality Income Mun. Fund Inc. v. Prudential Equity Group, LLC, 262 Fed. Appx. 822, 824-25 (9th Cir. 2008) ("An expert opinion is properly excluded where it relies on an assumption that is unsupported by the evidence in the record and is not sufficiently founded upon the facts."); Robinson v. G.D. Searle & Co., 286 F. Supp. 2d 1216, 1221 (N.D. Cal. 2003) (expert's testimony inadmissible when based on factual premise directly contradicted by evidence on the record).9 The preclusion of this opinion is further mandated because, as SAP admits (Opp. 21:3-5), Clarke not only disregards the evidence, he substitutes his own unqualified, inexpert legal interpretation of the OLSA that relies on an irrelevant comparison of the OLSA with a Microsoft Excel license he happened to have. Mo. 16:8-15 & nn. 16-19. It is undisputed that an expert may not interpret contract terms. Mo. 16:16-20 (citing cases). SAP instead argues that the See House Reply Decl. Ex. D (Allison Depo.) at 45:12-55:12; 60:15-62:25; 147:17-149:25; 229:17-231:22 (OLSA covers standard database licensing; OLSA's "internal business" provision does not cover "the business of hosting software or actually running software and services for third parties"; Oracle has never agreed to license "that allowed someone to create a master library of Oracle software in order to support additional customers," or "that would allow a customer or third-party support provider to use software for which one customer is licensed to create support materials for other customers" or "make a copy of one customer's software to create a generic software environment for use to provide support to other customers" and Allison "absolutely" would have to agree to any approval for such exceptions to Oracle's standard licensing terms). Allison is Oracle's Senior Vice President, Global Practices and Risk Management and has extensive experience assessing and applying what Oracle's licenses do and do not allow end users to do. Id., Ex. D at 7:11-18;, 21:2-13, 29:7-19, 30:13-16, 31:4-16, 31:23-32:7, 33:11-23; see also id., Ex. D at 16:22-17:18, 18:8-19:7; Ex. E (Defs.' 30(b)(6) Depo. Notice). 9 Through the new declarations of John Baugh and William R. Thomas (Dkts. 855, 856), SAP tries to create an issue of fact as to whether an OLSA would have cured SAP TN's infringement. Neither declaration can or does establish that Oracle ever licensed a competitor to use its database to support customers as SAP TN did. Moreover, Clarke obviously did not rely on these after-thefact declarations and he cannot now expand his opinion to include them. See Section VIII below. Finally, even if the declarations did create a dispute of fact (which they don't), late-secured contrary declarations cannot save Clarke's flawed opinion. Cf. Radobencko v. Automated Equip. Corp., 520 F.2d 540, 544 (9th Cir.1975) (party cannot defeat summary judgment with after-the fact contradictory declarations). 9 Case No. 07-CV-01658 PJH (EDL)
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interpretation of the OLSA should be governed by the Second Circuit's interpretation of a wholly unrelated statutory provision. Opp. 20:25-21:3. This obviously is not the relevant inquiry. Rather, if there is any contractual ambiguity, Oracle's historical licensing practices govern whether the OLSA "internal use" provision would allow SAP TN's use. Energy Oils, Inc. v. Mont. Power Co., 626 F.2d 731, 737 (9th Cir. 1980) (allowing evidence of custom and usage to resolve contract ambiguity). The only evidence on that is Allison's testimony, which Clarke ignores. Because Clarke has no proper basis for opining a single standard OLSA would suffice to cover SAP TN's use of Oracle's database software to support multiple customers, his opinion should be excluded as based on the wrong legal standard. Abuan, 3 F.3d at 332. Clarke's Second FMV License Opinion Is Contrary to the Facts. SAP does not dispute that Clarke's second proposed license fee for SAP TN's infringing use of Oracle's database software pretends that SAP TN reconfigured its servers to get a cheaper license, and assumes that this invented reconfiguration would be covered by Oracle's less expensive Standard Edition license. Mo. 17:6-10 & n.20. Instead, relying on incomplete snippets of Meyer's Report, SAP claims Meyer opened the door to made-up server counts. Opp. 22:1-17 & n.26. In fact, though Meyer learned from Allison that, in a hypothetical negotiation, Oracle would have "priced the license based on [SAP TN's] largest server configuration," Meyer nonetheless used a smaller and cheaper measure based on how SAP TN used Oracle's database software, basing his calculation on the actual SAP TN server with the majority of SAP TN local environments running on it.10 Unlike Clarke, Meyer did not assume that SAP TN would have done anything differently (other than the necessary assumption that SAP would have paid license fees for Oracle database programs, instead of stealing them). Clarke, on the other hand, admittedly priced his license as if SAP TN had changed its actual hardware by buying only single-processer servers for its copies of

Dkt. 847 (Jindal Decl. ISO Opp. to Mo. to Exclude Meyer), Ex. A (Meyer Report) pp. 165-166 ("The server with the majority of TomorrowNow local environments running on Oracle database was purchased in January 2005 and was a 4 processor Unix server with dual-cores, or effectively 8 processors, based upon which Oracle would price a license for 6 processors (Oracle applies a .75 processor factor to Unix processors, so 8 * .75 = 6 processors priced in the license)."; "Therefore, I have assumed that Oracle would require SAP to purchase no less than a license that covered each customer accessing Oracle database priced at 6 processers per license.") 10 Case No. 07-CV-01658 PJH (EDL)
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Oracle's database program, even though it did not. Mo. 17 n.20; Opp. 22:9-11. Clarke must value SAP TN's actual infringing use, not what SAP now wishes it might have done. Hanson, 718 F.2d at 1081-82 (rejecting argument that defendant "could have avoided infringement, and paying royalties therefore, by purchasing non-infringing machines" because defendant "chose . . . to purchase and use [] infringing machines. Having followed that course, it cannot invalidate an otherwise reasonable royalty on the claim that by hindsight it would have been better off if it had purchased the non-infringing [] machines."). Clarke's results-driven alternative database license fee is contrary to the law because it is contrary to the facts and therefore must be excluded. Nuveen, 262 Fed. Appx. at 824-25. IV. CLARKE'S LOST PROFITS AND INFRINGERS' PROFITS CAUSATION METHODOLOGY IS UNSCIENTIFIC AND UNRELIABLE SAP does not dispute that Clarke's "A or B plus at least one of Cs" and "automatic" customer exclusion methodologies for lost and infringer's profits damages were invented for this case, that Clarke has no relevant ERP industry experience to support them, or that the jury will be misled to believe that Clarke's method properly excludes customers. Mo. 17:25-18:3, 19:1520:1. SAP claims Oracle's disputes are with Clarke's conclusions, not his method. Opp. 13:2-3, 14:6-7. Not so. Oracle complains about the unreliability of an accountant with no ERP expertise telling the jury that almost half of SAP TN's support customers and all but two of SAP's applications customers would have left Oracle no matter what,11 based on his inexpert categorizing of customers and application of a made-up formula when case evidence ­ and SAP's purported industry expert ­ confirms the exclusion criteria are untrustworthy. Mo. 19:15-19 & n.29 (Clarke lacks industry experience to judge what motivates ERP support customer); 18:3-5 & n.23 (SAP expert Sommer confirms nonsensical to assume customer would leave just because evaluated another third party support vendor or self-support); 19:2-8 (method presumes customers who actually stayed with Oracle would have left); 19 n.28 (method unreliable because admittedly things "slipped through the cracks"); 18:6-14 (method unreliable in excluding House Reply Decl., Ex. A (Clarke Depo.) at 682:5-10 ("Q: As a result of the exclusion analysis, the causation analysis, you ultimately calculated lost profits . . . as 179 of the 358 customers at issue. Does that sound about right? A: That sounds about right."); at 908:22909:16 (only two SAP/SAP TN overlapping customers left in infringer's profits damages). 11 Case No. 07-CV-01658 PJH (EDL)
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customers based on facially flawed analysis by SAP expert, Stephen Gray (an attack SAP ignores in its Opposition)). Clarke's assignment of customers to exclusion pools and application of his novel formulae is not just a "logical method" of summarizing evidence for the jury (Opp. 13:6-7); it is an unscientific method for excluding customers from damages. The purported "practicality" of using Clarke's flawed exclusion pools methodology (Opp. 13:14-15) cannot trump its unreliability. See Daubert v. Merrell Dow Pharm., 43 F.3d 1311, 1317-19 (9th Cir. 1995) (excluding causation testimony where court was "presented with only the experts' qualifications, their conclusions and their assurances of reliability. Under Daubert, that's not enough."). V. CLARKE'S THIRD PARTY MARKET SURVEY IS BEYOND CLARKE'S EXPERTISE, UNRELIABLE AND NOT REBUTTAL Contrary to SAP's assertions, Clarke did not perform a "detailed, 50 page analysis of the third party support market." Opp. 15:18-19. Clarke, admittedly not an expert on ERP software or support, performed a "study" by reading "what [vendors] say about themselves" on the Internet, and on that basis concluded that competition for third-party software support was so "vibrant" that many of SAP TN's customers would have left Oracle for another vendor. Mo. 20:3-21:5. Clarke conceded that such marketing materials require "healthy skepticism," but failed to apply any; indeed, he did nothing to verify with any of the purported alternative support providers what support they really provided, on what products or for any specific period of time. Compare Mo. 21:6-16 with Opp. 16:13-22 (no claim of vendor verification). As confirmed by another SAP expert, this is a recipe for unreliability. House Reply Decl., Ex. C (Garmus Depo.) 119:12-16 (his firm "advertised that we could do practically anything, you know, including fly you to the moon, but that doesn't mean that we had a spaceship on hand"); 139:14-17 ("most software companies advertise they can provide support for doing things that they currently don't have the capabilities for"). SAP does not deny that Clarke relies on advertising materials, but baldly claims that Clarke's accounting or valuation expertise somehow allows him to identify puffery in ERP software and support marketing. Opp. 16:20-22. That is nonsense.12 And even if That Clarke is an economist, damages expert and CPA who has valued numerous unrelated businesses (Opp. 14:21-15:4) doesn't qualify him to be able to discern whether the claims of any 12 Case No. 07-CV-01658 PJH (EDL)
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Clarke had the industry knowledge to test vendor claims (which he admittedly doesn't), he failed to do so, making his conclusions unreliable. Kilgore v. Carson Pirie Holdings, Inc., 2006 WL 3253490, at *4 (6th Cir.) (internet article unreliable basis for methodology where expert did not know on what research or methodology the article was based and conducted no independent research); Matrix Motor Co. v. Toyota Jidosha Kabushiki Kaisha, 290 F. Supp. 2d 1083, 1086 (C.D. Cal. 2003) (expert reports "irrelevant" where they "merely recite hearsay statements, often verbatim, culled from a variety of Internet websites").13 SAP argues that Clarke also relied on materials besides vendor websites to reach his "vibrant" third party market conclusion (Opp. 15:18-16:3), but this was the exception not the rule. See, e.g., House Initial Decl., Ex. A (Clarke Report) at 149-50 (Citagus). Also, without technical knowledge or confirmation, his "study" was still no more than a layman's "recitation of text in evidence [which] does not assist [] in understanding the evidence because reading, as much as hearing, `is within the ability and experience of the trier of fact.'" Perry v. Schwarzenegger, 2010 WL 3025614, at *22 (N.D. Cal.). The jury can assess any admissible evidence Clarke read and reach their own conclusions. To avoid misleading the jury, Clarke's unreliable opinions on ERP support vendor comparability and ERP customer preferences must be precluded. Rambus, Inc. v. Hynix Semiconductor, Inc., 254 F.R.D. 597, 603-05 (N.D. Cal. 2008). VI. CLARKE'S UNRELIABLE REGRESSION ANALYSES SHOULD BE EXCLUDED Clarke purports to present a regression analysis to estimate Oracle's profit margins, a key

(Footnote Continued from Previous Page.) ERP support vendor make that vendor's support comparable to SAP TN's or Oracle's at any relevant time or place or whether any SAP TN customer would have selected that vendor over Oracle. That takes specialized ERP industry knowledge plus follow up. Clarke admittedly has no such knowledge and did no follow up. Mo. 19:15-19 & n.29; 21:6-16. SAP's only cite in support, Indus. Automation Supply, LLC v. United Rentals Highway Techs., 2006 WL 5219390, at *1-2 (D.N.D.), is inapposite, allowing an opinion by a business valuation expert on pricing in the market, not the underlying market, which was "related to, although not conterminous with, [his] expertise." Clarke's testimony on technical ERP support equivalencies and ERP customer motivators is not remotely related to his accounting or business valuation expertise. 13 Semerdjian v. McDougal Littell, 641 F. Supp. 2d 233, 242-43 (S.D.N.Y. 2009), is inapposite. The expert did not stop at website claims; he looked at specific relevant licenses of the same scope at issue in the case and talked to persons in the industry who handled licensing of similar copyrights; Clarke did no comparable testing of third party vendors' actual abilities or SAP TN's customers' willingness to substitute any support vendor other than SAP TN for Oracle support. 13 Case No. 07-CV-01658 PJH (EDL)
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foundation for his lost profits opinion. As Oracle showed through the Opening Declaration of Dr. Daniel Levy, Clarke makes fundamental errors in the design and application of his statistical models that no expert would make, but that serve his apparent goal to drive damages down. Mo. VIII. Dr. Levy concluded: "[t]he depth of the errors in Mr. Clarke's calculations goes far beyond creating numbers that are biased, or flawed or ones that could have been estimated much better. The numbers Mr. Clarke calculates are completely useless for his purposes because they simply do not measure how costs change with revenues." Levy Opening Decl. ¶ 32. SAP tries to rebut Levy's criticisms through a new declaration from Clarke (which Oracle objects to and moves to strike), but he only confirms his errors. Clarke mistakenly asserts Levy used the Chart Tool in Microsoft Excel to do his calculations (Opp. 24:11-16), but Levy used the LINEST function, which is the same function in the Analysis ToolPak function used by Clarke. Levy Reply Decl. ¶ 14. Levy replicated Clarke's results with the function. Id. Levy also makes none of the "fundamental errors" Clarke asserts (Opp. 24:17-23). Id. ¶¶ 4-10, 11-31. Clarke's criticisms of Levy are a sideshow to distract from Clarke's inability to address the fundamental issues with his analyses Levy exposed: that Clarke constructed his regression in a way that it cannot measure the relationship he was interested in, that his regression is not anchored in reality because it measures an identical cost/revenue relationship in a broad range of cases where that relationship is dramatically different, and that it measures a different cost/revenue relationship for sets of data where that relationship is literally identical. Id. ¶¶ 4-10. Clarke's misleading and useless regression analyses must be stricken and his reliance on them for reduced profits margins precluded. VII. CLARKE SHOULD BE PRECLUDED FROM OFFERING LEGAL OPINIONS Instructing the jury is for the Court, not an expert. Clarke, "not a lawyer," exacerbates the problem by offering legal conclusions that are contrary to the law stated by the Ninth Circuit and this Court. Mo. IV. SAP cannot deny that Clarke proffers his own, incorrect, interpretations of the law on copyrights and the law of the case in criticizing Meyer's damages approach and inputs and in justifying his own. Id. Rather SAP asserts ­ without support ­ that Clarke's opinions are "economic opinion[s]" or "based on the professional standards applicable to damages experts." 14
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Opp. 25:3-8. But on their face, Clarke's numerous cited statements and analyses intend to tell the jury what the law is or means. Mo. 8 n.4, 14:1-15 & n.14.14 "Where an expert proposes to testify [] to legal issues that may contradict the law to be presented to the trier of fact, such testimony cannot purport to aid the trier of fact." Regents of Univ. of Cal. v. Monsanto Co., 2006 WL 5359055, at *1 (N.D. Cal.) (PJH). Clarke cannot offer his legal opinions at trial; VIII. CLARKE'S RELIANCE ON LATE PRODUCED CUSTOMER DECLARATIONS IS BARRED BY RULE 37 SAP contradicts itself in seeking to rely on customer declarations secured five, six and eight months after the December 2009 close of fact discovery. SAP successfully precluded Oracle's use of evidence produced in April 2009 based on untimely disclosure. Dkt. 482. When Meyer supplemented his initial report to rely on customer declarations obtained before the close of fact discovery, SAP counsel asserted: "Certainly the customer declarations you reference do not provide a basis for supplementation since there was nothing to prevent Oracle from obtaining them before November 16 and including them in Mr. Meyer's initial report." Dkt. 853 (Wallace Decl.), Ex. 11 at 2.15 Fed. R. Civ. P. 26(a)(2)(b) required Clarke's March 26, 2010 report to provide all his opinions and all bases for them. Yet SAP now argues it had until August 5, 2010 to spring new evidence on Oracle that Clarke can use to change his damages calculations. Opp. 17:5-12. Not only is this unfair, it is incorrect.16 Moreover, SAP ignores its obligation to show its untimely disclosure "was substantially justified or is harmless." Fed. R. Civ. P. 37(c)(1). SAP does not even attempt to justify its delay in securing the five declarations. Opp. 19 n.23. Given when it got them, Oracle had no meaningful opportunity to test the declarations. Under Rule 37 and the case standards for disclosure, Clarke should be barred from referring or relying on the late declarations. SAP's contention that Meyer does the same (Opp. 25:17-19) fails upon examination: Meyer takes as starting assumptions certain quoted legal holdings provided by counsel; he does not himself interpret the law. Dkt. 800 (Wallace Decl.), Ex. 22 (Meyer Report) ¶¶ 91-94, 157-158. 15 SAP implies Oracle disagreed with SAP's (now reversed) position. Opp. 17 n.20. But Oracle's counsel rejected SAP's argument only insofar as supplementation of Meyer's report was required for material produced before the fact discovery cut-off or produced as a result of outstanding motions to compel. Id. at 1. The late-produced customer declarations Clarke relies on fall within neither exception. 16 SAP's authorities are distinguishable. The expert in Capitol Justice LLC v. Wachovia Bank, N.A., 2009 U.S. Dist. LEXIS 126573, at *6 (D.D.C.) "made corrections to provide a more correct and complete report," not to add new evidence. He also was available for a second deposition, and there was time for the opposing party to file a rebuttal report. Id. at *4. The supplementation in United Slates v. 14.3 Acres of Land, 2008 U.S. Dist. LEXIS 66667 (S.D. Cal.) occurred during discovery, where both parties could seek additional facts and or rebuttal information. 15 Case No. 07-CV-01658 PJH (EDL)
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Case No. 07-CV-01658 PJH (EDL)

DATED: September 16, 2010

Bingham McCutchen LLP By: /s/ Holly A. House Holly A. House Attorneys for Plaintiffs Oracle USA, Inc., et al.

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