Oracle Corporation et al v. SAP AG et al

Filing 989

Offer of Proof Regarding Damages Evidence by Oracle International Corporation, Oracle USA Inc., Siebel Systems, Inc. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E)(Alinder, Zachary) (Filed on 11/15/2010) Modified on 11/16/2010 (kc, COURT STAFF).

Oracle Corporation et al v. SAP AG et al

Doc. 989

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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: [phone] [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: [phone] [e-mail] STEVEN C. HOLTZMAN (SBN 144177) FRED NORTON (SBN 224725) 1999 Harrison St., Suite 900 Oakland, CA 94612 Telephone: [phone] Facsimile: [phone] [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: [phone] [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., CASE NO. 07-CV-01658 PJH (EDL) v. Plaintiffs, OFFER OF PROOF REGARDING ORACLE'S UP-SELL AND CROSSSELL EXPECTATIONS AND IMPACT ON DAMAGES ANALYSIS

SAP AG, et al., Defendants.

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Case No. 07-CV-01658 PJH (EDL)

OFFER OF PROOF REGARDING ORACLE'S UP-SELL AND CROSS-SELL EXPECTATIONS AND IMPACT ON DAMAGES ANALYSIS
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Plaintiffs submit this Offer of Proof to identify the testimony and documentary evidence concerning Oracle's contemporaneous projections of up-sell and cross-sell revenue opportunities that Oracle would present, if permitted, to prove Oracle's expectations as a willing seller in the fair market value of use damages analysis. If Oracle were permitted to present this evidence, its damages expert, Paul Meyer, would opine that Oracle's copyright damages are at least $2.156 billion; without that evidence, his opinion is that damages are at least $1.656 billion ­ a difference of $500 million. In addition, if Oracle were permitted to present this evidence, Mr. Meyer would be able to present additional analyses that support and corroborate his expert opinion on damages. If permitted, Oracle's President, Safra Catz, and Mr. Meyer would testify about the information contained in Plaintiffs' Trial Exhibit 0615, admitted into evidence for Oracle's maintenance revenue projections in connection with the PeopleSoft acquisition (relevant excerpts of which are attached as Exhibit A), other exhibits related to Oracle's contemporaneous goingforward expectations for its PeopleSoft and Siebel acquisitions admitted into evidence on November 8, 2010 (collectively, the "Valuation Exhibits"),1 and other documents produced in the case and referenced in Mr. Meyer's expert report (relevant excerpts of which are attached as Exhibit C). Without dispute, Oracle produced the Valuation Exhibits in February 2009, prior to Defendants' depositions of Oracle's key executives knowledgeable about the projections reflected in the Valuation Exhibits, before Defendants filed their lost profits evidence sanctions motion, and long before the close of fact discovery on December 4, 2009.2 There also is no dispute that Defendants never sought any relief from Judge Laporte for any failure by Oracle to

See, e.g., Plaintiffs' Exhibit 658 (referencing Oracle's contemporaneous up-sell and cross-sell projections at the time of the Siebel acquisition). "PeopleSoft" in this Offer of Proof refers to both PeopleSoft and J.D. Edwards. As the Court knows, PeopleSoft acquired J.D. Edwards prior to Oracle's acquisition of PeopleSoft.

Ms. Catz was deposed on March 27, 2009. Oracle President Charles Phillips was deposed on April 17, 2009. Oracle CEO Larry Ellison was deposed on May 5, 2009. Several of these documents were discussed and marked at these depositions including Plaintiffs' Trial Exhibits 0013 and 0658. Defendants filed their sanctions motion on July 14, 2009.
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produce these Valuation Exhibits, nor could there be any claim that there was any such failure. On November 8, 2010, the Court ruled that evidence of Oracle's projected up-sell and cross-sell opportunities is "close enough" to the evidence of actual, after-the-fact lost up-sell and cross-sell profits that had been "denied all along." 11/8/10 Trial Transcript at 826:14-21. Oracle respectfully submits that the Court's November 8 ruling is erroneous as a matter of law, for the reasons stated in Oracle's written submission (Dkt. 977) and the facts noted by the Court on November 8: Judge Laporte's order doesn't address it. No order that I've issued addresses this. As far as I'm concerned, this is [an] entirely new issue. It is not barred by the prior discovery order. It couldn't conceivably be barred when I didn't even know it was an issue at the time that I adopted the sanctions order. So the question is whether or not irrespective of the sanction order, whether or not the evidence should come in. And the only question here is whether or not it was produced in discovery, the difficulty for SAP at this point is that you didn't raise the motion. You all raised motions on all manner of evidentiary issues. I cannot imagine that this is not something that you were aware of. 11/8/10 Trial Transcript at 817:15-818:3. I. SAFRA CATZ'S TESTIMONY Ms. Catz has testified she was Oracle's President at the time Oracle acquired both PeopleSoft and Siebel. 11/8/10 Trial Transcript at 838:5-8. She has personal knowledge of the Valuation Exhibits, the projections reflected in them, and how the projections were used by Oracle's executives and Board of Directors to value the PeopleSoft and Siebel acquisitions. If permitted, Ms. Catz would explain to the jury Oracle's contemporaneous upsell and cross-sell revenue projections for PeopleSoft found in the Valuation Exhibits and other contemporaneous Oracle and third party documents, including the bases for those projections; that those projections factored into Oracle's valuation of the PeopleSoft acquisition in December 2004; and that Oracle's projections, accounting valuations and related financial information would have been important factors in assessing the fair market value of a license for Oracle's acquired PeopleSoft intellectual property in January 2005, the time of the hypothetical license with SAP. Ms. Catz would also testify that the going-forward assumptions in these projections
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were predicated on her and Mr. Ellison's expectations based upon their considerable experience in the industry. In addition, if permitted, Ms. Catz would testify that, because of the expected impact on Oracle's future up-sell and cross-sell revenue, Oracle would have demanded additional billions of dollars in compensation from SAP for the right to use PeopleSoft intellectual property, for which Oracle had just paid for exclusive use in its $11.1 billion acquisition. Ms. Catz would similarly explain to the jury Oracle's contemporaneous up-sell and cross-sell revenue projections for Siebel found in the Valuation Exhibits and other contemporaneous Oracle and third party documents, including the bases for those projections; that those projections factored into Oracle's valuation of the Siebel acquisition in January 2006; and that Oracle's projections, accounting valuations and related financial information would have been important factors in assessing the fair market value of a license for Oracle's acquired Siebel intellectual property in September 2006, the time of the hypothetical license with SAP. Ms. Catz would also testify that the going-forward assumptions in these projections were predicated on her and Mr. Ellison's expectations based upon their considerable experience in the industry. Ms. Catz also would testify that Oracle's contemporaneous cross-sell and up-sell expectations would have required payment by SAP of far more than the one hundred million dollars that Oracle's damages expert has opined is the minimum fair value for the right to use Siebel intellectual property. II. PAUL MEYER'S TESTIMONY Mr. Meyer is Oracle's damages expert, and spent years analyzing Oracle's and Defendants' financial information and company records, discovery responses and testimony to calculate the damages Oracle suffered due to Defendants' infringement of Oracle's software. Consistent with the Court's prior ruling that "Oracle should be permitted to present evidence regarding the fair market value of the copyrights that SAP allegedly infringed, including expert testimony based on established valuation methodology," Dkt. 628 (Partial SJ Order) at 5:5-7, Mr. Meyer used three established valuation methods to estimate the amount of Oracle's damages as
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described at length in his February 23, 2010 damages report (relevant excerpts of which are attached as Exhibit C). These methods are the hypothetical license negotiation, the income approach, and the market approach. The results of each of these valuation methods are affected significantly by the evidence of Oracle's contemporaneous up-sell and cross-sell projections for PeopleSoft and Siebel. Mr. Meyer was deposed by Defendants, for three full days in May 2010, about these three methods and the evidentiary bases for his opinions. Furthermore, on September 23, 2009 and in connection with Oracle's Opposition to Defendants' first Motion for Partial Summary Judgment trying to bar Oracle's right to seek fair market license fees as damages, Mr. Meyer disclosed a detailed list of all of the documents he intended to rely on, including the Valuation Exhibits. See Dkt. 540 (Meyer Dec. in Support of Oracle's Opposition To Defendants' Motion for Partial Summary Judgment) (attached as Exhibit E). Hypothetical License Negotiations In light of the Court's ruling on November 8, 2010, Mr. Meyer was obliged to exclude Oracle's up-sell and cross-sell projections from his trial testimony and presentation. At trial, with Oracle's up-sell and cross-sell projections excluded from his testimony, he used the hypothetical license negotiation method to calculate values associated with Oracle's future maintenance revenue stream only (not expected up-sell and cross-sell opportunities) of at least $1.5 billion and $100 million for fair market value licenses to the infringed PeopleSoft and Siebel software, respectively. If permitted, Mr. Meyer would testify, as he stated in his expert report at ¶¶ 232, 234-237, 241 (relevant excerpts of which are attached as Exhibit C) that Oracle's contemporaneous up-sell and cross-sell projections for PeopleSoft, from December 2004, represent at least $500 million in additional value that Oracle and SAP would have reasonably agreed to in fair market value PeopleSoft and Siebel license negotiations. He would state that these projections are key evidence of the state of mind and reasonable goals and expectations of Oracle at the time, and that Oracle would have required compensation from SAP for Oracle's lower up-sell and cross-sell expectations that would have resulted if Oracle gave a license to
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SAP to use PeopleSoft (or Siebel) intellectual property to compete for this same projected Case No. 07-CV-01658 PJH (EDL) 4
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revenue. In addition to demonstratives he has already used at trial, Mr. Meyer would testify, if permitted, to the analyses summarized in nine demonstratives, attached at Exhibit B, that illustrate this additional value and how it would factor into a hypothetical negotiation between the parties for Oracle's acquired intellectual property. These demonstratives rely directly on the Valuation Exhibits and flow directly from his long-disclosed valuation approaches and evidence, about which Defendants took extensive discovery. For instance, Mr. Meyer would have presented and testified about a summary demonstrative regarding the financial impact Oracle would have expected from licensing the infringed PeopleSoft software to SAP. Exhibit B at 1. This slide shows that one input in calculating this impact is an assumption that 13 to 14% of the newly-acquired PeopleSoft customer base would have purchased new licenses from Oracle after the acquisition. Id. This assumption by Mr. Meyer is drawn directly from Valuation Exhibits, specifically the "Existing Customer Purchases % BOP Customer Base" projections for "License Revenue Buildup" in Trial Exhibit 0615. Exhibit A. The same summary demonstrative relies on Oracle's contemporaneous projected revenue from license sales following the acquisition of PeopleSoft, specifically $130,000 per year for existing customers new license sales and $300,000 per year for incremental new customer license sales. Exhibit B at 1 & Exhibit A.3 If permitted, Mr. Meyer would similarly rely on other information contained in the Valuation Exhibits to testify based on the other demonstratives in Exhibit B , both for the PeopleSoft and Siebel4 fair market value license negotiations. As illustrated by Mr. Meyer's final slide in Exhibit B, accounting for the value Oracle would have associated with its

The color-coded circles on Exhibit A and Exhibit B show how Oracle's projections in the Valuation Exhibits correspond to Mr. Meyer's assumptions in his opinions and trial presentation. Similar evidence relates to the Siebel acquisition and related hypothetical negotiation. See e.g., Exhibit B at 6-8. For a detailed discussion of Mr. Meyer's opinions regarding the fair market value of the Siebel products, including Oracle's contemporaneous up-sell and cross-sell projections, see Meyer Report at ¶¶ 306, 337, 341-342, 344-345, 350, attached as Exhibit C.
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contemporaneous up-sell and cross-sell projections results in a fair market value license for the PeopleSoft and Siebel software of at least $2.1 billion, a difference of approximately $500 million from the partial analysis Mr. Meyer was permitted to present. Income Approach During his testimony, Mr. Meyer also measured the damages Oracle suffered from Defendants' infringement using the income approach, which is based on SAP's expected gains and Oracle's expected losses under the hypothetical licenses. Because Mr. Meyer was precluded from relying on Oracle evidence of contemporaneous expected up-sell and cross-sell opportunities, he was able to measure only Oracle's expected maintenance losses due to the infringement of PeopleSoft software ($1.36 billion to $2.46 billion), which resulted in his opinion that the fair market value license would be at least $1.5 billion. If allowed to also testify based on Oracle's contemporaneous, and long-ago produced up-sell and cross-sell projections, Mr. Meyer would testify, similar to his testimony at his deposition at 437:7-448:19 and 462:23-475:23 (relevant excerpts of which are attached as Exhibit D), and as he stated in his expert report at ¶¶ 128-131 (Exhibit C), that the income approach yields an estimate of Oracle's expected losses of $2.0 billion to $3.8 billion, which would result in a fair market value license for the PeopleSoft software of at least $2 billion. For the Siebel software at issue in this case, Mr. Meyer was able to testify only that Oracle's expected losses of maintenance revenues were $164 million. If permitted, Meyer would testify, consistent with deposition testimony at 503:11-504:10 (Exhibit D), and as he stated in his report at ¶¶ 275-278 (Exhibit C), that if Oracle's contemporaneous up-sell and cross-sell projections for Siebel were considered, this number would increase to $232 million. Had Mr. Meyer been permitted to testify regarding his detailed income approach, that testimony would have served to support the conclusions of his fair market value license analysis. Market Approach Mr. Meyer also measured Oracle's damages using a third method, the Market Approach, that measures the value of the hypothetical license by measuring the value of the related intangible assets Oracle acquired in the PeopleSoft and Siebel acquisitions. A/73558059.11/2021039-0000324170 Case No. 07-CV-01658 PJH (EDL) 6
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As he stated in his expert report at ¶¶ 113-123 (Exhibit C), and in his deposition at 151:15-153:9, 204:15-213:9, and 225:15-229:8 (Exhibit D), if permitted, Mr. Meyer would testify at trial that the related intangible assets (including, primarily, PeopleSoft's customer relationships and associated future sales to them) obtained as part of the PeopleSoft acquisition were contemporaneously valued by a third party, Standard & Poor's. However, excluding the anticipated up-sell and cross-sell revenues reduces the value of the relevant intangible assets significantly. If Mr. Meyer were permitted to testify about the value of the intangible assets, he would state that when coupled with the expectation that Oracle would have lost 20% to 30% of its PeopleSoft customers under the hypothetical license, the market approach would support the conclusion that any license for the PeopleSoft software would have been valued at no less than $2 billion. See Plaintiffs' Trial Exhibits 1008 and 13. For the Siebel acquisition, if permitted, Mr. Meyer would testify consistent with his deposition testimony at 414:6-418:21 (Exhibit D), and as he stated in his report at ¶¶ 265-274 (Exhibit C), that the related intangible assets (including, primarily, Siebel's customer relationships and associated future sales to them) were contemporaneously valued by a third party, Duff & Phelps, and that excluding the anticipated up-sell and cross-sell revenues would significantly reduce the value of the relevant intangible assets. If permitted to testify about the value of the intangible assets, Mr. Meyer would state that when coupled with the expectation that Oracle would have lost 5% of its Siebel customers under the hypothetical license, the market approach would further support and cement his conclusion that any license for the Siebel software would have been valued at no less than $100 million. See Plaintiffs' Trial Exhibits 1003 and 658. Because the expected up-sell and cross-sell opportunities constitute a significant portion of the related intangible assets obtained in the PeopleSoft and Siebel acquisitions, it made little sense to offer this valuation methodology at trial given the Court's exclusion of these topics. Had Mr. Meyer been permitted to testify regarding his detailed market approach, that testimony would have served to support the conclusions of his fair market value license and income approach analyses.
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DATED: November 12, 2010

BINGHAM McCUTCHEN LLP

By:

/s/ Geoffrey M. Howard Geoffrey M. Howard Attorneys for Plaintiffs Oracle USA, Inc., Oracle International Corp., and Siebel Systems, Inc.

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