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HIGHLY CONFIDENTIAL INFORMATION REDACTED 1 || Claude F. Scott, Esq. Pam Cole, Esq. (CA Bar No. 208286) 2 || U.S. DEPARTMENT OF JUSTICE, ANTITRUST DIVISION 450 Golden Gate Avenue, Rm, 10-0101 3 | San Francisco, CA 94103-3478 (415) 436-6660 4 || (415) 436-6683 (Fax) Auorneys for Plaintiff the United States of America Also filed on behalf of 10 Plaintiff States (see signature block) 6 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 SAN FRANCISCO DIVISION 10 a ) ) CASE NO. C 04-0807 VRW 11 | UNITED STATES OF AMERICA, etal, ) ) Filed: June 8, 2004 2 Plaintiffs, ) ) Hearing Date: June 10, 2004 at 2:00 PM 13 ) v. ) PLAINTIFFS’ MEMORANDUM IN 4 ) OPPOSITION TO DEFENDANT’S MOTION ) TO EXCLUDE TESTIMONY OF 15 || ORACLE CORPORATION ) PROFESSOR R. PRESTON MCAFEE ) 16 Defendant ) REDACTED VERSION ) wy eee) 18 INTRODUCTION 19 Plaintiffs will offer Professor Preston R. McAfee as a testifying expert on the proposed 20 | transaction’s likely competitive effects. Oracle has filed a “Daubert” motion to exclude the 21 | merger simulation set forth in Professor McAfee’s expert reports. The merger simulation 22 | supports and confirms the primary conclusions that Professor McAfee draws from an extensive 23 | series of case studies, statistical regressions, and other analyses; specifically, that Oracle's 24 | takeover of PeopleSoft will result in higher prices to customers of high-function FMS and HRM. 25 || The simulation is based directly on the manner in which Oracle competes, and it is drawn directly 26 || from Professor McAfee’s detailed study and analysis of numerous instances in which Oracle has 27 || engaged in head-to-head competition with PeopleSoft. Pls.’ Mem. in Opp’n to Def.’s, Public Version, C 04-0807 VRW-Page 1 HIGHLY CONFIDENTIAL INFORMATION REDACTED This fact-based analysis of the Oracle-PeopleSoft head-to-head competition ~ replete in Professor McAfe expert reports ~ is a primary basis for his expert opinions. Having analyzed this competition, through a study of Oracle’s internal records and other evidence from industry participants, Professor McA fee undertook a statistical regression analysis. The regression analysis used standard economic methods and practice, and it further confirmed and supported his expert opinions relating to competition between Oracle and PeopleSoft. Additionally, having already undertaken the statistical regression analysis, Professor McA fee turned to auction theory, as the realities of the markets make this the appropriate theory to use, to further confirm and support his expert opinions and conclusions. That Oracle has nonetheless moved to exclude any testimony by Professor McAfee on this merger simulation can be best explained by the fact that: (1) Oracle has misconstrued the basis for Professor McA ee’s opinion, although it was fully disclosed in his expert reports and testimony, (2) Oracle has misconstrued the applicability of auction theory in explaining firms’ competitive bidding behavior, and (3) Oracle has misconstrued Professor McA fee's objectives and his methods in employing a model to fit the facts of the industry in order to further confirm his expert opinions in this ease Alll of Professor McA fee’s expert work in this case is based on sufficient facts and data, is the product of reliable principles and methods, and is a result of the application of those principles and methods reliably to the facts of the case. Oracle's motion should be denied. ARGUMENT 1. Legal Standard Expert testimony that is both relevant and reliable is admissible evidence under Federal Rule of Evidence 702. See Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147 (1999) (expanding Daubert’s liberal application to non-scientific expert testimony); Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579. This requires that the testimony be (1) based on the special Pls.’ Mem. in Opp'n to Def.’s, Public Version, C 04-0807 VRW-Page 2 HIGHLY CONFIDENTIAL INFORMATION REDACTED knowledge of the expert and (2) helpful to the trier of fact.' If it satisfies these requirements, then the trier of fact must decide what weight to accord the expert's testimony. Kennedy v. Collagen Corp... 161 F.3d 1226, 1230-31 (9th Cir. 1998) (reversing exclusion of scientific medical testimony when court improperly ignored expert’s reliance on scientific journals and when expert's reasoning was based on reasoning and methodology “of the kind traditionally used by theumatologists.”). “The focus, of course, must be solely on principles and methodology, not on conclusions that they generate.” See Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 594-95 (1993); Elsayed Mukhtar v. California State Univ., 299 F.3d 1053, 1063 (9th Cir. 2002), As Oracle points out, courts have, in some instances, excluded expert testimony based on economic models, yet they have done so only where the model's assumptions deviate dramatically from critical real-world facts. See Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039 (8" Cir. 2000); Heary Bros. v. Lightning Protection Inst., 287 F. Supp. 24 1038, 1066, 1068 (D. Ariz. 2003) (finding that the economic expert's model was “useless to assist the jury” because of gross divergence between the assumptions in the model and the market facts). However, where the expert testimony and model are derived from the facts and data of the case, and based on. reliable principles and methods, there is no basis for exclusion under Daubert. Il. An Auction Theory Merger Model Is a Reliable Method By Which To Analyze the Competitive Effects of the Proposed Acquisition ‘Auction theory models are relied on by economists to explain the behavior of buyers or sellers in a wide variety of markets. An auction, as the term is commonly used in industrial organization economics, is “a mechanism to allocate resources among a group of bidders. An auction model includes three major parts: a description of the potential bidders (and sometimes the seller or sellers), the set of possible resource allocations (describing the number of goods of Daubert, $09 U.S. at 589-91: Expert testimony must be (1) based on sufficient facts and data, (2) the product of reliable principles and methods, and (3) the result of the application of those principles and methods iably tothe facts of the case. See FRE 702; Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 US. $79, 113 S.Ct. 2786, 125 L.Bd.2d 469 (1993); Kumho Tire Co. v, Carmichael, $26 U.S. 137, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999), Pls.” Mem. in Opp’n to Def.’s, Public Version, C 04-0807 VRW-Page 3