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1 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA 2 BEFORE THE HONORABLE WILLIAM H. ORRICK, JUDGE
AMERICAN BOOKSELLERS ) 3 ASSOCIATION, INC., ET AL., )
4 ) 5 PLAINTIFFS, )
6 ) 7 VS. ) NO. C 98-1059 WHO
8 ) 9 BARNES & NOBLE, INC., )
10 ET AL., ) 11 )
12 DEFENDANTS. ) 13 ____________________________)
14 SAN FRANCISCO, CALIFORNIA 15 TUESDAY, APRIL 17, 2001
16 TRANSCRIPT OF COURT TRIAL -VOL. 6 17 APPEARANCES:
18 FOR PLAINTIFFS: FARELLA, BRAUN & MARTEL LLP 19 235 MONTGOMERY STREET, 30TH FLOOR
20 SAN FRANCISCO, CALIFORNIA 94104 21 BY: DOUGLAS R. YOUNG
22 (APPEARANCES CONTINUED ON FOLLOWING PAGE.) 23 REPORTED BY: LEO T. MANKIEWICZ, CSR 5297 RMR, CRR
24 RAYNEE H. MERCADO, CSR 8258 RMR, CRR 25 OFFICIAL REPORTERS
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1 APPEARANCES: (CONTINUED) FOR PLAINTIFFS: JENNER & BLOCK 2 601 13TH STREET N. W.
3 WASHINGTON, D. C. 20005 4 BY: DAVID W. DEBRUIN
5 BRUCE V. SPIVA 6 DANIEL MACH
7 JANIS KESTENBAUM 8 WILLIAM HOHENGARTEN
9 FOR DEFENDANTS: O'MELVENY & MYERS LLP 10 (BARNES & NOBLE) 1999 AVENUE OF THE STARS, 7TH FLOOR
11 LOS ANGELES, CALIFORNIA 90067-6035 12 BY: DANIEL M. PETROCELLI
13 DAVID R. GARCIA 14 ALAN RADER
15 JANE LIPPMAN 16 MATTHEW KLINE
17 FOR DEFENDANTS: SKJERVEN, MORRILL, MAC PHERSON 18 (BORDERS GROUP)
19 THREE EMBARCADERO CENTER, 28TH FLOOR 20 SAN FRANCISCO, CALIFORNIA 94111
21 BY: REGINALD D. STEER 22 ANDREW D. MASTIN
23 RICHARD J. NELSON 24 JAMES HEIDEMAN
25 DIANNE SWEENEY page 3

1 THE COURT: MR. DEBRUIN, CALL YOUR NEXT WITNESS. 2 (PAUSE IN THE PROCEEDINGS.)
3 THE COURT: WE STILL HAVE MISS KESTENBAUM. 4 MS. KESTENBAUM: YES, YOUR HONOR. PLAINTIFFS CALL
5 JOHN EVANS. 6 THE COURT: ALL RIGHT. YOU'RE STILL UNDER OATH,
7 MR. EVANS. 8 DIRECT EXAMINATION (RESUMED)
9 BY MS. KESTENBAUM: 10 Q. GOOD MORNING, MR. EVANS.
11 A. GOOD MORNING. 12 Q. YESTERDAY WE WERE TALKING ABOUT THE TERMS OF SALE THAT
13 LEMURIA GETS FROM PUBLISHERS AND WHOLESALERS, AND I WANTED TO 14 CONTINUE WITH THAT TOPIC FOR A LITTLE BIT MORE.
15 LET ME ASK YOU, DOES LEMURIA --DO YOU TRY TO GET THE 16 BEST TERMS AVAILABLE FOR LEMURIA?
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17 A. YES, I DO. 18 Q. OKAY. AND HOW DO YOU DO THAT?
19 A. WELL, MY SALESMAN WILL CALL ME, AND I WILL ASK HIM IF THERE 20 IS ANY STOCK OFFERS OR ANY PUBLISHER-ANNOUNCED STOCK OFFERS THAT
21 ARE AVAILABLE FOR ME AT THAT TIME. I WILL ALSO ASK HIM IF THEY 22 HAVE ANY CHANGES IN THEIR POLICIES DIFFERENT FROM THE RED BOOK.
23 AND I WILL TRY TO MAKE SUGGESTIONS AS TO BUSINESS CHANGES IN THE 24
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1 POLICIES THAT MIGHT HELP ME BUY MORE BOOKS. 2 Q. OKAY. WHEN YOU SAY "MAKE SUGGESTIONS," ARE YOU SAYING THAT
3 YOU EXPRESS DISSATISFACTION WITH VENDOR'S CURRENT TERMS? 4 A. YES, I MIGHT SAY I WOULD LIKE FREE FREIGHT, MIGHT HELP ME
5 BUY MORE BOOKS. OR IF YOU HAVE A BACK STOCK OFFER, I MIGHT 6 COULD GIVE YOU A BACK STOCK STOCK OFFER AT THAT TIME.
7 Q. AND IS THAT SOMETHING THAT YOU DO JUST ON OCCASION, OR DOES 8 THAT FREQUENTLY COME UP?
9 A. NO, I TRY TO --A LOT OF TIMES, THE SALESPERSON FROM COMPANY 10 WILL COME IN AND SAY WE HAVE A STOCK OFFER, BUT IF HE DOESN'T
11 VOLUNTEER THAT INFORMATION, I WILL ASK THAT. USUALLY. 12 AT THE BEGINNING OF EVERY SALES CALL, I'LL SEE IF
13 THERE'S A CHANGE IN POLICY OR AN OFFER. 14 Q. OKAY. AND IN TERMS OF THE SUGGESTIONS AS TO CHANGES OF
15 BUSINESS TERMS THAT YOU MENTIONED, HAS A PUBLISHER EVER CHANGED 16 ITS TERMS IN RESPONSE TO ONE OF YOUR SUGGESTIONS?
17 A. NO, I DON'T THINK SO. I --I COULDN'T IMAGINE THAT THEY 18 WOULD CHANGE ANYTHING.
19 Q. OKAY. NOW, IN YOUR EXPERIENCE, ARE PUBLISHERS' TERMS 20 NEGOTIABLE?
21 A. NO. 22 Q. AND WHAT'S YOUR SENSE OF --CAN YOU EXPLAIN?
23 A. WELL, IF I'M --IF I AM MAKING SUGGESTIONS AND TRYING TO 24 INQUIRE AND I DON'T EVER GET ANY CHANGES FROM THE PUBLISHERS,
25 WHY WOULD I THINK THEY WOULD BE NEGOTIABLE? page 5

1 Q. NOW, MR. EVANS, WE TALKED YESTERDAY ABOUT THE FACT THAT YOU 2 HAVE BEEN, SINCE LEMURIA WAS OPENED IN 1975, THE STORE'S MAIN
3 BUYER, CORRECT? 4 A. THAT IS CORRECT.
5 Q. OKAY. AND THAT IN ADDITION TO THAT, THAT YOU ARE THE ONE 6 WHO PAYS THE BILLS?
7 A. THAT IS CORRECT. 8 Q. OKAY. AND SO YOU'VE TOLD THE COURT THAT YOU ARE FAMILIAR
9 WITH LEMURIA'S TERMS. 10 A. YES, I AM.
11 Q. OKAY. BUT I ASSUME THAT --WELL, CAN YOU TELL ME --CAN YOU 12 JUST GIVE ME AN ESTIMATE OF APPROXIMATELY HOW MANY PUBLISHERS
13 LEMURIA BUYS BOOKS FROM? 14 A. HUNDREDS.
15 Q. OKAY. SO I ASSUME THAT YOU COULDN'T OFF THE TOP OF YOUR 16 HEAD JUST REMEMBER ALL OF YOUR TERMS WITH ALL OF YOUR VENDORS?
17 A. NO. 18 Q. OKAY. BUT --BUT WITH RESPECT TO LEMURIA'S MOST SIGNIFICANT
19 VENDORS, FIRST OF ALL, IF YOU COULD JUST QUICKLY TELL ME IN 20 TERMS OF PUBLISHERS, WHO DO YOU PURCHASE FROM --THE MOST BOOKS
21 FROM? 22 A. AS FAR AS PUBLISHERS?
23 Q. YES. 24 A. PROBABLY RANDOM HOUSE, SIMON SCHUSTER, PENGUIN, HARPER.
25 Q. OKAY. page 6

1 A. LITTLE BROWN, TIME WARNER. 2 Q. OKAY. WELL, LET ME ASK YOU FOR THOSE PUBLISHERS WHICH
3 YOU'RE WORKING WITH MUCH MORE OFTEN. 4 CAN YOU TELL ME AT LEAST TODAY WHAT TERMS LEMURIA
5 RECEIVES FROM RANDOM HOUSE. AND WHEN I SAY "RANDOM HOUSE," I'M 6 INCLUDING IN THAT BANTAM DOUBLEDAY DELL.
7 A. YES, WE RECEIVE 46 ON TRADE BOOKS. WE RECEIVE 44 ON MASS 8 MARKETS AND 48 ON BANTAM CLASSICS. WE RECEIVE 50 PERCENT ON
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9 AUDIO, AUDIO BOOKS. 10 Q. OKAY. AND ONE OF THE LINES THAT THEY --THAT THEY SELL IS
11 FODOR'S, THE FODOR'S TRAVEL GUIDES, DOES LEMURIA PURCHASE THOSE? 12 A. YES, WE DO. I THINK WE GET 50 PERCENT.
13 Q. OKAY. 14 A. GET A LITTLE MORE.
15 Q. SORRY TO BE TESTING YOUR MEMORY, BUT LET'S MOVE ON TO LITTLE 16 BROWN AND WARNER BOOKS, WHICH ARE OBVIOUSLY BOTH OWNED BY TIME
17 WARNER TRADE PUBLISHING; IS THAT RIGHT? 18 A. YES.
19 Q. AND DO YOU --CAN YOU TELL THE COURT WHAT YOUR TERMS ARE 20 WITH LITTLE BROWN AND WARNER BOOKS?
21 A. YES, I THINK MY STANDARD TERMS ARE 46 PERCENT TRADE; AND 22 MASS MARKETS, 44; AND AUDIO BOOKS WAS, ONCE AGAIN, 50 PERCENT.
23 Q. OKAY. AND ON TRADE BOOKS, DO YOU GET FREE FREIGHT? 24 A. NO, I DON'T.
25 Q. OKAY. WHAT ABOUT --WHAT ABOUT --page 7

1 A. I DO ON MASS MARKET. 2 Q. YOU DO ON MASS MARKET?
3 A. I THINK. YES, I DO. 4 Q. OKAY. AND WHAT ABOUT THE AUDIO BOOKS?
5 A. I BELIEVE I GET FREE FREIGHT ON AUDIO. I BELIEVE IT'S A 6 DIVISION OF THE MASS MARKET.
7 Q. OKAY. TURNING TO SIMON & SCHUSTER, CAN YOU EXPLAIN WHAT 8 YOUR TERMS ARE WITH SIMON & SCHUSTER?
9 A. LET'S SEE. I BELIEVE I GET 46 AND FREE FREIGHT ON THE TRADE 10 BOOKS. 46 ON THE --44 ON THE MASS MARKET BOOKS AND THEN ONCE
11 AGAIN, I GET 50 ON AUDIO BOOKS. AND I GET FREE FREIGHT ON ALL 12 OF THEM.
13 Q. AND YOU ALSO MENTIONED HARPERCOLLINS, AND JUST TO BE CLEAR, 14 THAT TODAY INCLUDES WILLIAM MORROW AND AVON; ISN'T THAT RIGHT?
15 A. THAT'S CORRECT. 16 Q. AND CAN YOU TELL THE COURT WHAT YOUR TERMS ARE TODAY FROM
17 HARPERCOLLINS? 18 A. BELIEVE I CAN. THEY'RE 46 PERCENT FOR TRADE BOOKS.
19 44 PERCENT FOR MASS MARKET AND ONCE AGAIN, IT'S 50 PERCENT FOR 20 AUDIO.
21 Q. AND DID YOU --DID YOU SAY THAT YOU RECEIVE FREE FREIGHT 22 FROM HARPER?
23 A. YES, I DO. 24 Q. OKAY.
25 A. DO RECEIVE FREE FREIGHT. page 8

1 Q. IS THERE A FLOOR --DO YOU HAVE TO PURCHASE A MINIMUM DOLLAR 2 AMOUNT IN ORDER TO GET THAT?
3 A. YES, I BELIEVE YOU HAVE TO HAVE A $200 MINIMUM TO GO FOR 4 FREE FREIGHT, BUT WE TRY TO ALWAYS DO THAT TO GET OUR FREE
5 FREIGHT. SO IN MY MIND, IT'S --6 Q. AND DOES LEMURIA PLACE ITS ORDERS ELECTRONICALLY, IN OTHER
7 WORDS, BY EDI? 8 A. YES, WE DO. AS MUCH AS WE CAN.
9 Q. I'D LIKE TO TURN SPECIFICALLY TO YOUR TERMS WITH --WITH 10 INGRAM, THE WHOLESALER. AND FIRST OF ALL, CAN YOU TELL ME
11 WHAT --WHAT OTHER WHOLESALERS --WELL, FIRST OF ALL, DO YOU USE 12 INGRAM?
13 A. VERY MUCH, YES. 14 Q. OKAY. AND ARE THERE OTHER WHOLESALERS THAT YOU REGULARLY
15 USE? 16 A. BAKER & TAYLOR.
17 Q. AND WHICH IS --WHICH IS THE WHOLESALER THAT YOU RELY ON THE 18 MOST?
19 A. WE RELY ON INGRAM CONSIDERABLY MORE. 20 Q. OKAY.
21 A. CONSIDERABLY MOST. 22 Q. AND JUST TALKING ABOUT YOUR STANDARD INGRAM TERMS, CAN
23 YOU --CAN YOU JUST EXPLAIN WHAT THEY ARE? 24 A. YES, INGRAM TERMS ARE BY TITLE AND BY VOLUME. AND IF YOU'RE
25 ABLE TO ORDER ONE BOOK, YOU GET 40 PERCENT AND FIVE BOOKS, page 9
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1 41 PERCENT, TEN BOOKS, 42 PERCENT AND IF YOU ORDER A SPECIFIC 2 VOLUME, YOU CAN GET FREE FREIGHT.
3 CONSEQUENTIALLY (SIC) WITH YOUR INGRAM PURCHASES, YOU 4 HAVE AUDIO BOOKS, WHICH YOU GOT A HIGHER DISCOUNT. I BELIEVE
5 IT'S 45. AND WITH YOUR VENDOR OF RECORD BOOKS WITH INGRAM, YOU 6 CAN GET A 1 PERCENT EXTRA ON THAT, AND THERE ARE SOME OTHER
7 TIMES --OTHER ANNOUNCEMENTS THAT INGRAM MAKES DURING THE YEAR 8 TO GIVE YOU A OPPORTUNITY TO MAKE AN EXTRA DISCOUNT.
9 Q. OKAY. THESE OPPORTUNITIES, CAN YOU --CAN YOU GIVE US AN 10 EXAMPLE OF WHAT YOU'RE TALKING ABOUT?
11 A. OH, SURE. THEY'RE --THEY DIDN'T DO IT THIS LAST YEAR. I 12 CAN'T REMEMBER HOW MANY YEARS, BUT PREVIOUSLY, THEY WOULD
13 ANNOUNCE IF YOU WOULD DO ELECTRONIC ORDER BETWEEN THE TIMES OF 14 SATURDAY AFTERNOON AT 6: 00 O'CLOCK AND SUNDAY AFTERNOON AT 6: 00
15 O'CLOCK, YOU WOULD GET AN EXTRA DISCOUNT ON --WHICH I TRY TO 16 TAKE ADVANTAGE OF.
17 Q. OKAY. AND YOU MENTIONED BEFORE THAT WITH YOUR INGRAM TERMS, 18 INGRAM DOES IT BY TITLE. SO DOES THAT MEAN THAT IN ORDER TO
19 GET, FOR INSTANCE, THE 41 PERCENT DISCOUNT YOU MENTIONED FOR 20 PURCHASES OF, SAY, FIVE BOOKS, YOU ACTUALLY HAVE TO PURCHASE
21 FIVE OF THE SAME TITLE? 22 A. FIVE OF THE SAME TITLE, AND THEN ORDER OF MAYBE HUNDRED
23 FIFTY BOOKS. 24 Q. OKAY. YOU ALSO MENTIONED THE VOR PROGRAM. SO YOU
25 PARTICIPATE IN THE INGRAM VOR --page 10

1 A. YES, I DO. 2 Q. AND THAT'S --JUST FOR THE RECORD, THAT STANDS FOR VENDOR OF
3 RECORD? 4 A. YES, I THINK IT'S A --WOULD YOU LIKE ME TO EXPLAIN THAT.
5 Q. WELL, SURE. I MEAN, YOU MENTIONED THAT YOU GOT AN EXTRA 6 DISCOUNT FOR VOR?
7 A. RIGHT. 8 Q. FOR THE VENDOR OF RECORD.
9 DO YOU PARTICIPATE IN VOR FOR ALL OF PUBLISHERS THAT 10 YOU --
11 A. NO, JUST THE SMALL PUBLISHERS. THE PUBLISHERS THAT I BUY IN 12 THE --SMALL QUANTITY FROM OR --OR PUBLISHERS THAT I HAVEN'T
13 EVER ORDERED A BOOK FROM THAT IF I MIGHT, THAT INGRAM HAS IT IN 14 STOCK, I CAN BUY FROM THEM, GET AN EXTRA DISCOUNT.
15 THE REASON I DON'T DO IT WITH THE LARGER PUBLISHERS 16 IS THAT THE DISCOUNT IS SO MUCH LOWER THAN IF I BUY DIRECT THAT
17 I WOULD --AND IT'S A VERY SMALL PART OF MY INGRAM PURCHASES, 18 BUT I DO TAKE ADVANTAGE OF IT WHENEVER I CAN.
19 Q. ARE THERE ANY OTHER REASONS WHY YOU DO NOT USE THE VOR 20 PROGRAM FOR LARGER VENDORS OTHER THAN A DISCOUNT DIFFERENTIAL
21 THAT YOU JUST MENTIONED? 22 A. YES. MULTIPLE REASONS. MY --MY LARGER PUBLISHERS SEND ME
23 A SALES REP, WHICH PROVIDES ADVICE AND HELP AS FAR AS BEING ABLE 24 TO BUY THE RIGHT BOOKS FOR MY BOOKSTORE. BUYING BOOKS FROM THE
25 PUBLISHER ALSO GIVES ME A LARGER LEAD TIME IN THE NEW TITLES, page 11

1 AND I'M ABLE TO BUY MY NEW TITLES SOMETIMES AS MUCH AS FIVE 2 MONTHS IN ADVANCE OF THE ISSUE DATE. AND IF I WAS BUYING FROM
3 INGRAM, IT COULD BE AS LOW AS 60 DAYS. 4 Q. WHEN DID YOU START PARTICIPATING IN INGRAM'S VOR PROGRAM?
5 A. I WOULD HAVE TO ESTIMATE THAT. BUT I WOULD THINK FOUR YEARS 6 AGO, SOMETHING LIKE THAT. THEY APPROACHED ME.
7 Q. NOW, JUST TALKING ABOUT YOUR FIRST --LOOKING BACK TO YOUR 8 STANDARD INGRAM TERMS, MEANING YOUR NON-VOR TERMS, DO YOU GET
9 ANY KIND OF A CASH DISCOUNT? 10 A. YES, I DO.
11 Q. AND WHAT DO YOU HAVE TO DO TO OBTAIN THE CASH DISCOUNT? 12 A. YOUR INVOICE WITH WEEKLY WITH YOUR ORDERS, SO YOU GET YOUR
13 PACKING LIST AND YOU MATCH YOUR VOICES. AND AT THE END OF THE 14 MONTH, YOU GET A STATEMENT.
15 I TAKE THAT STATEMENT AND ANALYZE ON MY INVOICES, AND 16 I HAVE --IF THAT STATEMENT USUALLY COMES IN ABOUT THE 2ND OR
17 3RD OF THE MONTH --AND ON THAT STATEMENT, IF I CAN WRITE MY 18 CHECK AND HAVE IT POSTMARKED BY THE 10TH, I GET A 2 PERCENT CASH
19 DISCOUNT OFF MY PAYMENT.
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20 Q. IN YOUR EXPERIENCE, HOW STRICT IS INGRAM IN ENFORCING THAT 21 10TH OF MONTH OR TEN-DAY DEADLINE?
22 A. I'VE BEEN TRYING TO TAKE ADVANTAGE OF IT FOR 25 YEARS, AND I 23 THINK THAT THEY'RE REAL STRICT.
24 Q. AND WITH RESPECT TO THE VOR PROGRAM, ARE YOU OFFERED THE 25 SAME CASH DISCOUNT TERMS ON VOR?
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1 A. YES. 2 Q. OKAY.
3 A. YES. I THINK IT'S ON ALL INGRAM PURCHASES. 4 Q. OKAY. AND UNDER THE VOR PROGRAM, IS THERE ANY KIND OF AN
5 ANNUAL REBATE OR INCENTIVE THAT'S OFFERED TO YOU IF --FOR 6 INCREASES IN YOUR PURCHASES FROM INGRAM FROM ONE YEAR TO THE
7 NEXT? 8 A. NOT THAT I'M AWARE OF.
9 Q. OKAY. I WOULD LIKE TO ASK YOU ABOUT SOME OTHER INGRAM 10 PROGRAMS AND SEE IF YOU'RE FAMILIAR WITH THEM. FIRST OF ALL,
11 ARE YOU FAMILIAR WITH THE PROGRAM CALLED BACKLIST PLUS? 12 A. I DON'T THINK SO.
13 Q. AND WHAT ABOUT INGRAM'S VISITING AUTHOR PROGRAM? 14 A. YES, I AM FAMILIAR WITH THAT.
15 Q. OKAY. VERY BRIEFLY, COULD YOU EXPLAIN WHAT YOUR 16 UNDERSTANDING IS OF HOW IT WORKS.
17 A. YES, IF YOU'RE HAVING AN AUTHOR EVENT FROM INGRAM AND YOU --18 I CAN'T REMEMBER THE MINIMUM. IT MAY NOT BE BUT A TEN-BOOK
19 MINIMUM. YOU'RE ABLE TO BUY BOOKS AT AN INCREASED DISCOUNT OF 20 43 PERCENT. HOWEVER, YOU HAVE TO PAY FREIGHT. AND IF YOU'RE
21 BUYING THEM IN 43 AND YOU PAY FREIGHT, YOU HAVE A PERIOD OF TIME 22 WHERE YOU CAN RETURN THOSE BOOKS AND GET YOUR 43 PERCENT, BUT
23 YOU HAVE TO PAY FREIGHT TO YOUR STORE AND TO YOUR --BACK TO 24 INGRAM.
25 I'VE NEVER TAKEN ADVANTAGE OF IT BECAUSE I TRY TO page 13

1 AVOID NOT (SIC) PAYING FREIGHT TO INGRAM. 2 Q. OKAY.
3 A. IT'S TOO COSTLY FOR ME. 4 Q. OKAY. AND WHAT ABOUT AN INGRAM PROGRAM CALLED THE COMPUTER
5 BOOKS RECOMMENDED INVENTORY PROGRAM? 6 A. I DON'T KNOW ANYTHING ABOUT THAT, BUT I --THERE AGAIN, I
7 DON'T SELL VERY MANY COMPUTER BOOKS. 8 Q. OKAY. AND WHAT ABOUT A PROGRAM CALLED RECOMMENDED OPENING
9 STORE INVENTORY OR ROCould not acquire words on page 6 SI PROGRAM? 10 A. I HAVE HEARD ABOUT THAT. BEING IN MISSISSIPPI, THE WAY I
11 HEARD ABOUT IT, I THINK THEY MAYBE STARTED THAT 15 YEARS OR SO 12 AGO. AND THERE WERE SOME SMALL STORES TRYING TO OPEN AND --AT
13 THAT POINT IN TIME THERE IN SOME SMALL TOWNS. AND I HEARD ABOUT 14 IT AT THAT POINT IN TIME WITH SOME STORES EXPERIMENTING WITH IT.
15 Q. OKAY. 16 A. BUT I DON'T KNOW MUCH ABOUT IT OTHER THAN HEARSAY THAT WAY.
17 Q. OKAY. NOW, WHAT ABOUT SOMETHING CALLED THE RECOMMENDED 18 INVENTORY EXPANSION PROGRAM OR RISE?
19 A. NO, I DON'T KNOW MUCH ABOUT THAT, OR I DON'T RECALL EVER 20 HEARING ABOUT IT.
21 Q. OKAY. AND WHAT ABOUT SOMETHING CALLED SCHEDULED DELIVERY, 22 THE SCHEDULED DELIVERY PROGRAM?
23 A. NO. 24 Q. SO YOU'VE NEVER BEEN ADVISED BY YOUR REP --
25 A. IF I DO, I DON'T REMEMBER. page 14

1 Q. OKAY. 2 A. INGRAM --CAN I SAY --
3 Q. OF COURSE. 4 A. INGRAM'S --DOESN'T REALLY HAVE A SALES REP. THEY MORE HAVE
5 LIKE A CUSTOMER SERVICE PERSON THAT COMES AROUND MAYBE ONCE 6 EVERY YEAR OR TWO.
7 Q. OKAY. AND WHAT ABOUT A PROGRAM, AN INGRAM PROGRAM CALLED 8 SUMMARY BILLING?
9 A. I DON'T KNOW ANYTHING ABOUT THAT. 10 Q. OKAY. NOW, JUST AS A GENERAL MATTER WITH INGRAM, ARE THERE
11 ANY RESTRICTIONS ON HOW MANY OF THE BOOKS THAT YOU BUY FROM THEM
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4 A. WELL, BASICALLY OUR REQUEST TO THE PUBLISHER IS HOW WOULD 5 YOU LIKE US TO HANDLE THIS MISTAKE. AND THEY COULD VERY EASILY
6 SAY, WELL, SEND US THIS BOOK BACK AND WE WILL SEND YOU A 7 REPLACEMENT IMMEDIATELY. THEY CAN SAY --IF IT'S DAMAGED AND
8 YOU NEED IT IN A QUICK TIME FRAME. THEY COULD SAY, WE WILL BE 9 GLAD TO ISSUE YOU A CREDIT AND RESHIP THE BOOKS UNDER A SEPARATE
10 INVOICE. 11 THEY WOULD SAY, IF IT'S A VERY SMALL AMOUNT OF MONEY,
12 MAYBE UNDER $20, CUSTOMER SERVICE REP WOULD SAY, MY NAME IS 13 JOSHUA, AND THE DATE IS 4/ 17, AND WOULD YOU PLEASE TAKE THE
14 $6.96 DEDUCTION WHEN YOU PAY YOUR INVOICE ON YOUR STATEMENT 15 UNDER MY NAME AND UNDER THAT DATE.
16 AT THAT POINT IN TIME, THEY COULD ALSO GIVE ME AN 17 AUTHORIZATION NUMBER. SOME COMPANIES DO. SOME COMPANIES DON'T.
18 Q. HAS LEMURIA EVER TAKEN A CREDIT FOR A SHORTAGE IN BOOKS 19 WITHOUT RECEIVING PRIOR AUTHORIZATION TO DO SO?
20 A. NO. 21 Q. CAN YOU GIVE --TELL THE COURT APPROXIMATELY HOW MUCH --
22 WHAT THIS COST IS TO YOUR STORE OF THE WHOLE PROCESS THAT YOU'VE 23 DESCRIBED IN TERMS OF THE DETAIL RECEIVING AND THEN THE
24 FOLLOW-UP WITH THE PUBLISHERS? 25 A. I HAVE ONE FULL-TIME EMPLOYEE THAT'S IN THE RECEIVING AND
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1 PROCUREMENT --THE RECEIVING PART OF PROCUREMENT. HE ALSO HAS 2 AN ASSISTANT THAT HAS --THAT WORKS FULL-TIME, BUT APPROXIMATELY
3 HALF OF HIS DUTIES --HALF OF HIS TIME THAT HE SPENT WITH HIS 4 DUTIES ARE BACK THERE, IF NOT MORE.
5 Q. SO IN TERMS OF JUST LABOR --6 A. AN EMPLOYEE AND A HALF.
7 Q. IN TERMS OF LABOR HOURS, DO YOU HAVE AN APPROXIMATION AS TO 8 HOW MUCH TIME IS SPENT ON A WEEKLY BASIS, SAY, WORKING THROUGH
9 THESE SHORTAGES? 10 A. SIXTY.
11 Q. SIXTY. 12 OKAY. AND HAVE YOU EVER BEEN --HAVE YOU EVER BEEN
13 OFFERED BY A PUBLISHER, OTHER THAN THE HOLTZBRINCK COMPANY, ANY 14 TYPE OF AUTOMATIC ALLOWANCE OR DEDUCTION FOR AN ESTIMATED NUMBER
15 OF SHORTAGES? 16 A. REPEAT THAT, PLEASE.
17 Q. SURE. HAVE YOU EVER BEEN OFFERED AN AUTOMATIC ALLOWANCE OR 18 DEDUCTION FROM YOUR INVOICES FOR A PROJECTED OR ESTIMATED NUMBER
19 OF SHORTAGES? 20 A. NO.
21 Q. DO PUBLISHERS EVER ASK YOU FOR INFORMATION ABOUT HOW THEIR 22 BOOKS ARE SELLING AT LEMURIA?
23 A. YES. 24 Q. AND DO YOU PROVIDE IT WHEN THEY REQUEST IT?
25 A. GENERALLY, YES. page 19

1 Q. OKAY. AND HAVE YOU EVER BEEN OFFERED ANY KIND OF EXTRA 2 DISCOUNT OR DEDUCTION FOR THAT?
3 A. NO. 4 Q. HAVE YOU BEEN OFFERED FROM ANY PUBLISHERS ANY TYPE OF ANNUAL
5 INCENTIVE OR REBATE TO YOU FOR INCREASING YOUR PURCHASES FROM 6 THAT VENDOR FROM ONE YEAR TO THE NEXT?
7 A. NO. 8 Q. DO YOU ADVERTISE --DO YOU PLACE ADVERTISEMENTS IN
9 NEWSPAPERS OR OTHER --OTHER FORMS? 10 A. YES, I DO. I DO. NEWSPAPERS AND LOCAL MAGAZINES AND
11 NEWSLETTERS. 12 Q. AND DO YOU REQUEST COOPERATIVE ADVERTISING MONEY TO
13 REIMBURSE YOU FOR THOSE COSTS? 14 A. YES, I DO.
15 Q. AND HAVE YOU EVER --HAVE YOU EVER RECEIVED CO-OP 16 REIMBURSEMENT THAT EXCEEDED THE --YOUR OUT-OF-POCKET COSTS
17 IN --WITH RESPECT TO THE ADVERTISEMENT IN QUESTION? 18 A. NO.
19 Q. OKAY. WHAT ABOUT AUTHOR APPEARANCES? DO YOU EVER RECEIVE 20 CO-OP MONEY FOR AUTHOR --AUTHOR EVENTS?
21 A. YES, I DO. 22 Q. OKAY. AND THE SAME QUESTION, HAVE YOU EVER OBTAINED IN
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23 CO-OP REIMBURSEMENT AN AMOUNT THAT EXCEEDED YOUR OUT-OF-POCKET 24 Could not acquire words on page 9 Could not acquire words on page 10 Could not acquire words on page 11 EXPENSES?
25 A. NO, I HAVEN'T. page 20

1 Q. OKAY. AND HAVE YOU EVER GOTTEN CO-OP FOR UNDOCUMENTED COSTS 2 OR SORT OF UN --NON-TANGIBLE COSTS, LIKE LABOR COSTS?
3 A. NO. 4 Q. AND DO YOU ALSO HAVE TO SUBMIT PAPERWORK TO THE PUBLISHER IN
5 ORDER TO GET CO-OP REIMBURSEMENT? 6 A. YES, I CALL IT A CLAIM.
7 Q. AND HAVE YOU EVER GOTTEN CO-OP FROM A PUBLISHER FOR SOME 8 TYPE OF --SAY, AN ADVERTISEMENT WHICH DID NOT FEATURE THAT
9 PUBLISHER'S BOOKS? 10 A. NO. OR EITHER THE PUBLISHER'S NAME. THAT'S PART --WE TRY
11 AND ALWAYS FEATURE THE PUBLISHER AND THE BOOK. 12 Q. NOW, DO SALES REPS EVER COME DOWN AND MEET WITH YOU
13 PERSONALLY AT YOUR STORE? 14 A. YES.
15 Q. OKAY. AND CAN YOU JUST GENERALLY GIVE ME AN IDEA ABOUT HOW 16 OFTEN THAT HAPPENS.
17 A. IT DEPENDS ON THE PUBLISHER'S SALE SEASONS, BUT IT'S USUALLY 18 THREE, TWO, FOUR TIMES A YEAR.
19 Q. OKAY. 20 A. THREE I WOULD SAY WOULD BE THE GENERAL RULE.
21 Q. HAVE YOU EVER RECEIVED ANY KIND OF ALLOWANCE OR PAYMENT FROM 22 PUBLISHERS FOR MEETING WITH THEM?
23 A. NO. 24 Q. THE LAST THING I'D LIKE TO DO IS TO JUST GET A SENSE OF THE
25 PUBLISHERS AND WHOLESALERS --I GUESS WE'VE ALREADY TALKED ABOUT page 21

1 WHOLESALERS --BUT THE PUBLISHERS FROM WHOM LEMURIA PURCHASES 2 BOOKS.
3 AND THIS ACTUALLY --IF I COULD GET YOU TO TURN TO --4 BACK TO YOUR BINDER AND --YOUR HONOR, I BELIEVE THAT YOUR
5 BINDER IS OPEN TO EXHIBIT 2612. 6 THE COURT: THANK YOU.
7 THE WITNESS: (REVIEWING DOCUMENTS.) 8 (PAUSE IN THE PROCEEDINGS.)
9 MS. KESTENBAUM: LET ME SEE IF I CAN ASSIST YOU. DO 10 YOU HAVE IT?
11 THE WITNESS: YEAH. 12 MS. KESTENBAUM: NO, THAT'S NOT IT.
13 (PAUSE IN THE PROCEEDINGS.) 14 BY MS. KESTENBAUM:
15 Q. ALL RIGHT. I'M ACTUALLY GOING TO GIVE YOU, MR. EVANS, 2612, 16 WHICH FOR SOME REASON WE'RE NOT ABLE TO --(HANDING DOCUMENT).
17 AND IF I COULD GET YOU TO TAKE A LOOK AT THIS 18 EXHIBIT, WHICH, OF COURSE, IS A LIST OF --OF VENDORS. AND IF
19 YOU LOOK TO THE RIGHT COLUMN AT THE BOTTOM, THERE'S --THERE'S 20 THREE WHOLESALERS, AND I'D LIKE TO, FOR THE MOMENT, JUST PUT
21 THOSE ASIDE. 22 A. OKAY.
23 Q. SO LOOKING AT THE PUBLISHERS, CAN YOU TELL ME FOR EACH OF 24 THE YEARS BETWEEN 1994 AND THE PRESENT, HAVE YOU MADE DIRECT
25 PURCHASES FROM EACH OF THESE VENDORS? page 22

1 OR FROM WHICH OF THESE VENDORS HAVE YOU MADE DIRECT 2 PURCHASES EACH YEAR?
3 A. I HAVE NOT MADE DIRECT PURCHASES FROM ALL OF THEM. IT LOOKS 4 TO ME LIKE THE PUBLISHERS ON THE LEFT-HAND SIDE OF THIS PAGE ARE
5 ONES THAT I HAVE BOUGHT DIRECT FROM, AND THE PUBLISHERS --THE 6 SMALL AMOUNT ON THE RIGHT-HAND SIDE LOOK LIKE ONES THAT I HAVE
7 NOT. 8 Q. OKAY.
9 A. BOUGHT MOST OF THOSE BOOKS THROUGH THE WHOLESALERS. 10 Q. OKAY. AND SO JUST TO BE CLEAR, THE ONES ON THE LEFT-HAND
11 SIDE, IT'S YOUR TESTIMONY THAT YOU HAVE MADE DIRECT PURCHASES 12 FROM THOSE VENDORS?
13 A. YES. 14 Q. EVERY YEAR FROM 1994 TO THE PRESENT?
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11 Page 12 13
18 Q. RIGHT. WHICH WILL AFFECT DISCOUNT TERMS. 19 A. I'M CONFUSED BY --
20 Q. WELL, TYPICALLY, BUYING A BOOK ON A NON-RETURNABLE BASIS 21 WILL RESULT IN A HIGHER DISCOUNT; ISN'T THAT CORRECT?
22 A. IT IS A DIFFERENT TERM FROM A RETURNABLE BASIS. 23 Q. AND TYPICALLY HIGHER?
24 A. THAT IS A REWARD FOR BUYING IT NON-RETURNABLE. 25 Q. LET ME DIRECT YOUR ATTENTION TO TAB 3.
page 31
1 A. (REVIEWING DOCUMENT.) 2 Q. NOW, THERE'S NO INDICATION ON THIS PARTICULAR INVOICE THAT
3 THESE BOOKS WERE PURCHASED ON A NON-RETURNABLE BASIS. 4 A. (REVIEWING DOCUMENT.)
5 Q. IS THERE? 6 A. THERE IS TO ME.
7 Q. AND --AND HOW IS THAT? 8 A. 08050 IS THE PREFIX FOR HOLT, RINEHART, WINSTON. IN THAT
9 PERIOD OF TIME, I WAS BUYING HOLT, RINEHART, WINSTON BOOKS 10 NON-RETURNABLE.
11 Q. RIGHT. SO, IN FACT, THE INVOICE INDICATES --12 A. TO ME, IT DOES.
13 Q. --THAT THE BOOKS WERE PURCHASED ON A NON-RETURNABLE BASIS. 14 A. IT DOESN'T STATE THAT. BUT TO ME, IT DOES, BECAUSE I BOUGHT
15 THAT PUBLISHER'S NON-RETURNABLE DURING THAT TIME. 16 Q. NOW, LEMURIA RECEIVES FREE FREIGHT FROM AT LEAST SOME
17 PUBLISHERS; IS THAT CORRECT? 18 A. YES, SIR.
19 Q. AND THAT TYPICALLY DEPENDS ON SOME LEVEL OF VOLUME PURCHASE, 20 DOESN'T IT?
21 A. I'M --I'M NOT SURE I UNDERSTAND WHAT YOU'RE ASKING. 22 Q. WELL, WITH RESPECT TO WHETHER OR NOT FREE FREIGHT IS
23 PROVIDED FROM A FREE-FREIGHT PUBLISHER, THERE TENDS TO HAVE TO 24 BE A CERTAIN AMOUNT PURCHASED IN ORDER TO QUALIFY FOR FREE
25 FREIGHT; IS THAT CORRECT? page 32

1 A. GENERALLY, THERE'S A MINIMUM, YES --2 Q. YES.
3 A. --THAT YOU HAVE TO BUY. 4 Q. RIGHT. AND YOU HAVE TO EXCEED THAT MINIMUM?
5 A. OR BE AT THAT MINIMUM. 6 Q. RIGHT. AND THOSE PUBLISHER REQUIREMENTS FOR FREE FREIGHT
7 DIFFER FROM PUBLISHER TO PUBLISHER, DON'T THEY? 8 A. YES, SIR.
9 Q. ALL RIGHT. LEMURIA ALSO GOT FREIGHT PASS-THROUGH FOR A 10 WHILE, DIDN'T IT?
11 A. THERE'S --THERE WAS A PERIOD OF TIME WITH CERTAIN 12 PUBLISHERS EXPERIMENTED WITH THAT. I --THAT'S WHAT I CALL,
13 EXPERIMENT, YES, SIR. 14 Q. AND THERE HAVE BEEN OCCASIONS WHERE YOU HAVE QUESTIONED THE
15 AMOUNT OF FREIGHT CHARGES TO PUBLISHERS' REPRESENTATIVES, 16 HAVEN'T THERE?
17 A. I --I DON'T REALLY KNOW WHAT YOU MEAN BY THAT. I --I 18 WOULD DISCUSS THE FREIGHT POLICIES WITH THE PUBLISHERS AND --I
19 GUESS IF THEY --IF I THOUGHT THEY HAD OVERCHARGED ME, THEN I 20 WOULD DISCUSS THAT. I DON'T RECALL THE INSTANCE YOU MAY BE
21 TALKING ABOUT. 22 Q. NO, BUT ALSO INSTANCES IN WHICH YOU COMPLAINED THAT FREIGHT
23 WAS TOO HIGH. 24 A. UM, YES, MY FREIGHT HAS BEEN TOO HIGH. IN MISSISSIPPI,
25 IT'S --AT CERTAIN TIMES, IT TAKES MORE MILEAGE TO GET THE BOOKS page 33

1 FROM THE WAREHOUSE TO MY --TO MY STORE, AND IT TAKES MORE TIME. 2 Q. AND THAT HAS CAUSED YOU, ON OCCASION, TO HAVE TO BALANCE
3 WHETHER OR NOT YOU'RE GOING TO GO DIRECT OR THROUGH A WHOLESALE 4 DISTRIBUTOR THAT PROVIDED FREE FREIGHT TO DETERMINE WHICH ONE'S
5 MORE PROFITABLE? 6 A. I WOULD DEFINITELY THINK THAT'S A CRITERIA OF MY JUDGMENT.
7 Q. RIGHT. AND THAT'S FOR THE SAME BOOK TO DETERMINE WHETHER OR 8 NOT YOU BUY THAT SAME BOOK FROM THE WHOLESALER OR THE PUBLISHER?
9 A. YES, SIR.
12
12 Page 13 14
10 Q. AND FREIGHT WOULD BE ONE OF THE CRITERIA --11 A. FREIGHT WOULD DEFINITELY BE ONE OF THE CRITERIA THAT I WOULD
12 USE IN DECIDING WHETHER I WOULD BUY THE BOOK. 13 Q. SO THIS THE CIRCUMSTANCES WHEN YOU'RE PERFORMING THAT
14 CALCULATION IN YOUR MIND, THE WHOLESALER AND THE PUBLISHER ARE, 15 IN EFFECT, COMPETING WITH ONE ANOTHER TO SELL YOU THAT BOOK,
16 RIGHT? 17 A. I GUESS THEIR POLICIES WOULD BE.
18 Q. RIGHT. 19 NOW, AND THIS MAY BE IMPLICIT IN YOUR TESTIMONY SO
20 FAR, BUT LET'S MAKE IT EXPLICIT. EACH PUBLISHER TENDS TO GIVE 21 WHAT, IN EFFECT, IS A VOLUME DISCOUNT BY GIVING DIFFERENT
22 DISCOUNT PERCENTAGES DEPENDING UPON HOW MANY BOOKS YOU BUY; IS 23 THAT RIGHT?
24 A. THAT'S A LITTLE VAGUE. IF YOU WOULD EXPLAIN THAT MORE. 25 Q. WELL, YOU MENTIONED IN YOUR DIRECT TESTIMONY THAT THERE ARE
page 34
1 OCCASIONS WHERE YOU BUY ONE BOOK AND YOU HAVE ONE DISCOUNT 2 PERCENTAGE. YOU GET --YOU BUY FIVE BOOKS, FIVE COPIES OF THE
3 TITLE, YOU GET A DIFFERENT PERCENTAGE. YOU BUY TEN BOOKS, YOU 4 GET ANOTHER PERCENTAGE?
5 A. OKAY. 6 Q. THAT'S THE PRICING MECHANISM THAT ALL THE LARGE PUBLISHERS
7 USE; ISN'T THAT RIGHT? 8 A. IT'S THE TERMS --
9 Q. IT'S A TERM? 10 A. --THAT I MIGHT --
11 Q. RIGHT. 12 A. IT'S THE TERMS THAT I --THAT I MAKE MY PURCHASES ON.
13 Q. RIGHT. AND THE TERM ULTIMATELY REFLECTS THE PRICES THEY 14 CHARGE YOU FOR THE BOOK?
15 A. I THINK I SEE WHAT YOU'RE SAYING, BUT --16 (CONTINUED NEXT PAGE; NOTHING OMITTED.)
17 18
19 20
21 22
23 24
25 page 35

1 BY MR. GARCIA: 2 Q. LEMURIA HAS TAKEN ADVANTAGE OF SHARED MARKDOWNS, HASN'T IT?
3 A. OCCASIONALLY. 4 Q. COULD YOU DESCRIBE WHAT A SHARED MARKDOWN IS?
5 A. I THINK I CAN, SIMPLY. IT SEEMS TO ME THAT A PUBLISHER 6 WILL SOMETIMES SEE THAT THE BOOK IS NOT SELLING AS WELL AS THEY
7 EXPECTED TO SELL. SO THEY WILL STATE, FOR A PERIOD OF TIME, 8 POSSIBLY ONE MONTH, THAT FOR ALL THE BOOKS THAT YOU SELL DURING
9 THAT MONTH THEY WILL GIVE YOU A REBATE, OR A SHARED MARKDOWN; 10 THAT YOU CAN THEN SUBMIT A CLAIM OF THOSE SALES DURING THAT
11 TIME PERIOD TO THE PUBLISHER, AND THEY CAN THEN GIVE YOU AN 12 AUTHORIZED CREDIT THAT APPEARS ON YOUR STATEMENT, WHICH
13 VALIDATES THAT YOU SOLD THOSE BOOKS DURING THAT TIME PERIOD, 14 AND YOU SAY YOU SOLD 10 BOOKS DURING THAT TIME PERIOD, YOU
15 WOULD SUBMIT THAT GRAPH OR DOCUMENT OF SALES TO THE PUBLISHER. 16 I USUALLY DO IT WITH MY COMPUTER GRAPH, AND THEY SUBMIT THE
17 CREDIT BACK TO ME ON MY STATEMENT, AND I'M ABLE TO THEN DEDUCT 18 IT FROM MY NEXT STATEMENT.
19 Q. SHARED MARKDOWN AMOUNTS ARE NOT TYPICALLY IN THE REDBOOK, 20 ARE THEY?
21 A. THEY ARE AN INDUSTRY-WIDE ANNOUNCEMENT THAT I RECEIVE 22 GENERALLY THROUGH FAX.
23 Q. SO THEY'RE NOT IN THE REDBOOK. 24 A. I'VE NOT LOOKED SPECIFICALLY TO SEE, BUT I DO KNOW THAT
25 IT'S AN INDUSTRY ANNOUNCEMENT THAT I RECEIVE THROUGH FAX, FOR page 36

1 MOST CASES. 13
13 Page 14 15
2 Q. AND IF YOU RECEIVED IT BY FAX IN MOST CASES, IT WOULDN'T BE 3 IN THE REDBOOK, WOULD IT?
4 A. YOU KNOW, I HAVE SEEN IT IN PUBLISHERS WEEKLY ALSO, SO I 5 CAN'T SAY THAT --
6 Q. AND IF IT WAS IN PUBLISHERS WEEKLY, IT WOULDN'T BE IN THE 7 REDBOOK, WOULD IT?
8 A. I CAN'T SAY THAT. I HAVEN'T LOOKED AT THE REDBOOK WITH 9 THAT PARTICULARLY IN MIND.
10 Q. NOW, THERE ARE OCCASIONS WHEN LEMURIA DECIDES NOT TO USE A 11 SHARED MARKDOWN, BUT INSTEAD, TO CONTINUE THE PRICING POLICY
12 THAT YOU HAD ON THE BOOK, CORRECT? 13 A. I'M SORRY? WOULD YOU REPEAT THAT, PLEASE?
14 Q. LEMURIA HAS ALSO DECIDED NOT TO MARK DOWN BOOKS DESPITE THE 15 EXISTENCE OF AN APPLICABLE SHARED MARKDOWN, RIGHT?
16 A. THERE ARE SHARED MARKDOWN SITUATIONS THAT I COULD NOT TAKE 17 ADVANTAGE OF --
18 Q. RIGHT. 19 A. --THAT WERE PRESENTED TO ME.
20 Q. RIGHT, BECAUSE IN THOSE CASES, YOU THOUGHT YOU COULD ADD 21 VALUE TO THE BOOK BY NOT MARKING IT DOWN.
22 A. OR IN SOME CASES MY SALES WOULD BE SO INSIGNIFICANT IT 23 WOULD NOT BE OF VALUE TO DO THE PAPERWORK OR MAKE THE CLAIM OR
24 SPEND MY TIME TO DO THAT. 25 Q. SURE, BECAUSE IN YOUR CIRCUMSTANCES IT DIDN'T MAKE ANY
page 37
1 ECONOMIC SENSE, IS THAT RIGHT? 2 A. I WOULD SAY THAT IF I DID NOT MAKE A CLAIM FOR A SHARED
3 MARKDOWN, THAT IT WAS NOT TO MY ADVANTAGE. 4 Q. RIGHT, AND SO THE POLICY EXISTED, BUT YOU DECIDED NOT TO
5 USE IT, AS A MATTER OF YOUR BUSINESS MODEL? 6 A. I DID NOT ACKNOWLEDGE THAT ANNOUNCEMENT BY THE INDUSTRY.
7 Q. NOW, LET'S MOVE TO STOCK OFFERS. I BELIEVE YOU TESTIFIED 8 THAT SOME 10 TO 15 PERCENT OF YOUR PURCHASES, ON AN ANNUAL
9 BASIS, AS YOU ESTIMATE IT SITTING HERE TODAY, ARE MADE PURSUANT 10 TO STOCK OFFERS, IS THAT CORRECT?
11 A. I THINK THAT'S A FAIR ESTIMATE. 12 Q. DOES THAT 10 TO 15 PERCENT REFER TO TRANSACTIONS OR NUMBER
13 OF BOOKS? IN OTHER WORDS, 10 TO 15 PERCENT OF THE TRANSACTIONS 14 YOU DO ON AN ANNUAL BASIS ARE PURSUANT TO STOCK OFFERS, OR 10
15 TO 15 PERCENT OF THE BOOKS YOU BUY EACH YEAR ARE PURCHASED 16 PURSUANT TO STOCK OFFERS? WHAT DID YOU HAVE IN MIND?
17 A. WHAT'S THE DIFFERENCE BETWEEN BOOK AND TRANSACTION? I 18 THINK I'M CONFUSED BY "TRANSACTION."
19 Q. WELL, OBVIOUSLY, A PARTICULAR ORDER COULD RELATE TO A LOT 20 OF BOOKS, COULDN'T IT, SOME OF WHICH ARE SUBJECT TO A STOCK
21 OFFER, AND SOME OF WHICH AREN'T? 22 A. OKAY.
23 Q. RIGHT? AS OPPOSED TO PARTICULAR BOOKS, I'M TRYING TO 24 DETERMINE WHAT YOU HAD IN MIND WHEN YOU USED THE 10 TO
25 15 PERCENT FIGURE. ARE YOU TALKING ABOUT A VOLUME OF BOOKS OR page 38

1 A NUMBER OF TRANSACTIONS THAT YOU ENGAGE IN? 2 A. VOLUME OF BOOKS.
3 Q. OKAY. NOW, I'M GOING TO DIRECT YOUR ATTENTION, TO TRY TO 4 DO IT QUICKLY, TO A NUMBER OF STOCK OFFERS --WELL, ACTUALLY,
5 THEY'RE INVOICES, AND YOU'VE PREVIOUSLY TESTIFIED THAT IN A LOT 6 OF CASES YOU THINK THEY'RE STOCK OFFERS.
7 LET'S START WITH TAB 4, WHICH IS A MULTI-PAGE 8 INVOICE FROM PUTNAM, AND GO TO PAGE 4 OF THE ACTUAL EXHIBIT.
9 YOU WILL SEE THERE ARE DISCOUNTS OF 50 PERCENT REFLECTED THERE? 10 A. YES, SIR.
11 Q. AND ON THE NEXT PAGE OF THE EXHIBIT, A DISCOUNT OF 12 66 PERCENT?
13 A. YES, SIR. 14 Q. AND IF YOU KEEP ON GOING FOUR MORE PAGES, DISCOUNTS OF
15 75 PERCENT? 16 A. YES, SIR.
17 Q. ALL RIGHT. THOSE ARE DISCOUNTS ABOVE YOUR NORMAL TERMS 18 WITH THAT PUBLISHER, AREN'T THEY?
19 A. I DON'T KNOW WHAT YOU MEAN BY "NORMAL," BUT I HAVE AN 20 EXPLANATION FOR --
14
14 Page 15 16
21 Q. WELL, THE REGULAR TERMS. 22 A. NO, SIR.
23 Q. WELL, LET ME REFLECT --ACTUALLY, JUST BEHIND THE EXHIBIT 24 THERE IS AN EXCERPT FROM THE REDBOOK FOR THAT YEAR FROM PUTNAM.
25 COULD YOU REFER TO IT, AND REFER TO THE DISCOUNT SCHEDULE UNDER page 39

1 PUTNAM PUBLISHING. 2 A. YES, SIR.
3 Q. I DON'T BELIEVE YOU WILL FIND ANY OF THOSE DISCOUNT AMOUNTS 4 THERE THAT WE PREVIOUSLY REFERRED TO.
5 A. WOULD YOU LIKE ME TO EXPLAIN THEM? 6 Q. CERTAINLY.
7 A. ON PAGE 4, THIS 50 PERCENT IS A PUTNAM PROMOTIONAL TITLE. 8 IT IS AN AGATHA CHRISTIE BOOK, AND I BELIEVE IT'S JOHN SANFORD.
9 THEY'RE OMNIBOOKS, AND THEY'RE PRODUCED AS PROMOTIONAL BOOKS, 10 MUCH LIKE A SALE BOOK ITEM WHERE THEY'VE GONE AND TAKEN THREE
11 BOOKS AND PUT IT IN ONE, AND IT'S PART OF YOUR CATALOG AS A 12 PROMOTIONAL BOOK. AS IT APPEARS ON PAGE 5, I BELIEVE, IS
13 ACTUALLY 0448, IT'S A GROSSETT & DUNLAP BOOK --14 Q. LET ME STOP YOU. YOU SAID IT WAS A BOOK --THE PREVIOUS
15 PAGE WAS A PROMOTIONAL BOOK. 16 A. YES, SIR.
17 Q. IS THAT SOMETHING THAT'S NOT A STOCK OFFER? 18 A. IT IS A PROMOTIONAL TITLE FROM PUTNAM, AND IT'S THEIR
19 GENERAL TERMS ON WHICH YOU WOULD BUY THAT TITLE IN THEIR 20 CATALOG, AND IT IS LISTED THAT WAY IN THEIR CATALOG.
21 Q. RIGHT, BUT IT'S NOT A STOCK OFFER. 22 A. IN THAT PARTICULAR CASE, IT IS A PROMOTIONAL TITLE BY THE
23 TRADE TERM. 24 Q. RIGHT, AND THE PROMOTIONAL DISCOUNT AMOUNT IS LISTED IN THE
25 PUTNAM CATALOG. page 40

1 A. YES, IT IS. 2 Q. RIGHT. WHICH IS NOT THE REDBOOK.
3 A. BUT IT'S A GENERAL ANNOUNCEMENT TO THE TRADE, AND WHICH I 4 USED AS SOMETHING THAT I THINK IS A STANDARD DISCOUNT IN MY
5 INDUSTRY. 6 Q. RIGHT, IT'S A STANDARD DISCOUNT, AND YOU BELIEVE IT TO BE
7 GENERALLY AVAILABLE, BUT IT'S NOT IN THE REDBOOK. 8 A. NO, IT'S MY STANDARD TERM THAT I BUY FROM.
9 Q. THANK YOU. CONTINUE. I'M SORRY I INTERRUPTED YOU, SIR. 10 A. I BELIEVE ON PAGE 5, THIS INVOICE THAT SAYS 66 PERCENT, I
11 BELIEVE IT'S PAGE 5, THAT'S A GROSSETT & DUNLAP TITLE. I CAN 12 TELL BY THE ISBN OF 0448, IT'S PROBABLY EITHER A NANCY DREW OR
13 A HARDY BOYS. I BELIEVE PUTNAM WAS DISTRIBUTING GROSSETT & 14 DUNLAP DURING THIS TIME IN 1995. THEY HAVE A PROMOTIONAL STOCK
15 OFFER THAT WAS 66 PERCENT DISCOUNT AT THAT TIME, WHICH I WAS 16 ABLE TO TAKE ADVANTAGE OF.
17 Q. NOW, WAS THAT IN CATALOG? 18 A. EXCUSE ME?
19 Q. WAS THAT 66 PERCENT, THE PROMOTION THAT YOU REFERRED TO, 20 WAS THAT IN A CATALOG?
21 A. I BELIEVE IT WAS A SPECIAL ORDER FORM THAT THE SALESMAN 22 PRESENTED TO ME.
23 Q. OKAY. 24 A. I MAY HAVE HAD THE SAME PUTNAM SALES REP, BUT I MAY HAVE
25 HAD A DIFFERENT SALES REP FROM GROSSETT AT THAT TIME. page 41

1 Q. SURE. 2 A. I BELIEVE THAT YOU ASKED ME ABOUT --I DON'T KNOW WHICH
3 PAGE NUMBER IT IS, BUT IT'S --IT LOOKS LIKE AN INVOICE WITH 4 48 PERCENT.
5 Q. NO, IT WAS ACTUALLY 75 PERCENT. 6 A. OKAY, EXCUSE ME. THAT ALSO, IF YOU WILL NOTICE ON THIS
7 INVOICE, 0399, IS A PUTNAM ISBN, WHICH IS AT 44 PERCENT, AND 8 THEIR 0448 IS A GROSSETT ISBN, WHICH IS AT 75 PERCENT, WHICH IS
9 ALSO A GROSSETT & DUNLAP SEASONAL STOCK OFFER TERM. I BELIEVE 10 ALSO --
11 Q. WAS THAT IN THE GROSSETT & DUNLAP CATALOG? 12 A. I THINK IT WAS ON THE ORDER FORM. YOU HAD TO USE A SPECIAL
15
15 Page 16 17
13 ORDER FORM. 14 Q. WELL, A SPECIAL ORDER FORM, BUT HOW DID YOU FIND OUT ABOUT
15 IT? 16 A. THROUGH THE SALES REP. THE SALES REP BROUGHT IT TO ME.
17 WITH GROSSETT & DUNLAP YOU HAD TO BUY A CERTAIN AMOUNT OF 18 TITLES. AND THAT WOULD BE A PROMOTIONAL STOCK OFFER THAT I
19 WOULD TAKE ADVANTAGE OF. 20 Q. PLEASE DON'T ADOPT THE TERM "STOCK OFFER" FOR ME. USE IT
21 ONLY IF YOU THINK IT APPLIES. 22 A. I THINK IT APPLIES.
23 Q. LET'S GO TO TAB 5. ALL RIGHT, TAB 5 IS ANOTHER PUTNAM 24 INVOICE, WHICH IS REFLECTING 66 PERCENT DISCOUNT, AND ALSO SOME
25 50 PERCENT DISCOUNTS. page 42

1 A. YES, SIR. 2 Q. ALL RIGHT. NOW, THOSE 66 PERCENT DISCOUNTS THERE ARE NOT
3 REGULAR TERMS, ARE THEY? 4 A. NO, SIR. ONCE AGAIN, THAT'S YOUR GROSSETT & DUNLAP HARDY
5 BOY, NANCY DREW, JUVENILES STOCK, SEASONAL STOCK OFFER, THAT'S 6 0448, AND YOU CAN TELL THOSE BOOKS FROM THAT.
7 Q. RIGHT. WAS THAT IN THE GROSSETT & DUNLAP CATALOG? 8 A. NO, SIR. ONCE AGAIN, THERE WOULD BE AN ORDER FORM THAT WAS
9 PRESENTED TO ME BY THE PUTNAM OR GROSSETT REP, WHICHEVER IT WAS 10 THAT WAS CALLING ON ME.
11 Q. WELL, LET'S SKIP OVER SOME OF THESE. TAB 12, AND IN TAB 12 12 GO THREE PAGES IN. ON THE FOURTH PAGE YOU WILL SEE A HOUGHTON
13 MIFFLIN INVOICE --14 A. YES, SIR.
15 Q. --WITH AN INVOICE FOR A BOOK CALLED ROCKS AND MINERALS, 16 AND A DISCOUNT OF 46 PERCENT.
17 A. YES, SIR. 18 Q. THEN ON THE NEXT PAGE OF THE EXHIBIT YOU WILL SEE ANOTHER
19 HOUGHTON MIFFLIN INVOICE WITH ANOTHER INVOICE FOR ROCKS AND 20 MINERALS, THE SAME BOOK, AND A 50 PERCENT DISCOUNT?
21 A. YES, SIR. 22 Q. AND THEN LET'S GO ONE MORE PAGE, AND YOU'LL SEE YET A THIRD
23 HOUGHTON MIFFLIN INVOICE FOR, YET AGAIN, ROCKS AND MINERALS, 24 WITH A 47 PERCENT DISCOUNT.
25 A. YES, SIR, AND IT'S ALL THE SAME BOOK. page 43

1 Q. AND IT'S ALL FOR THE SAME BOOK. YOU'VE ANTICIPATED MY 2 QUESTION. HOW DOES THAT HAPPEN?
3 A. I THINK I HAVE AN EXPLANATION THAT WOULD BE CLEAR TO YOU 4 AND HELPFUL. IF YOU WILL NOTICE, THAT ALL THREE OF THESE
5 INVOICES ARE FROM THREE DIFFERENT PURCHASE ORDERS. THIS IS A 6 PETERSON FIELD GUIDE. PETERSON FIELD GUIDES ARE UPDATED ON AN
7 IRREGULAR BASIS. THIS IS A PETERSON FIELD GUIDE TO THE ROCKS 8 AND MINERALS.
9 IT LOOKS TO ME THAT IT WAS SOLD TO ME THREE TIMES BY 10 A SALES REP. I WOULD SAY THAT I CAN TELL THAT BECAUSE IT'S
11 THREE DIFFERENT PURCHASE ORDERS. ONE AT 46 FOR EXAMPLE, AND 12 FREIGHT CHARGED TO ME IS UNDER THE PURCHASE ORDER MOUNT BASS,
13 M-T-N-B-A-S-S. THE ONE THAT IS 50 PERCENT DISCOUNT AND FREE 14 FREIGHT IS SOLD TO ME UNDER THE ORDER OF J. G. BROWN --PURCHASE
15 ORDER, EXCUSE ME. THE ONE THAT IS 47 PERCENT AND FREE FREIGHT 16 IS SOLD TO ME UNDER THE PURCHASE ORDER OF SLEEPY.
17 I BELIEVE THAT HOUGHTON MIFFLIN HAD A POLICY CHANGE 18 DURING THE TIME PERIOD BETWEEN THE 46 AND --46 PERCENT
19 DISCOUNT AND FREIGHT CHARGE AND THE 47 AND FREE FREIGHT. I 20 BELIEVE THAT MY SALES REP SOLD ME THIS BOOK ON THREE SEPARATE
21 OCCASIONS, AND OCould not acquire words on page 17 Could not acquire words on page 18 Could not acquire words on page 19 Could not acquire words on page 21 N THE THIRD OCCASION, THE 50 PERCENT OFF, HE 22 SOLD ME THAT BOOK AS A BACK STOCK OFFER, BECAUSE THE BOOK WOULD
23 HAVE COME OUT DURING THAT TIME PERIOD AND I MYSELF HAD NOT 24 RECEIVED IT. CONSEQUENTIALLY, I THOUGHT MY ORDER HAD BEEN
25 LOST. page 44

1 SEASONALLY, WHEN THE SALES PERSONNEL FROM THE 2 COMPANY ISSUE YOU THE INVOICE, THEY DO NOT KNOW IF THE BOOK HAS
3 BEEN DELAYED OR NOT. CONSEQUENTIALLY, THE SALESMAN WILL SELL 4 ME THE BOOK AGAIN.
16
16 Page 17 18

17 Page 18 19

18 Page 19 20

19 Page 20 21
8 THE TERMS UNDER WHICH I HAD PURCHASED THOSE BOOKS. 9 Q. NOW, PRIOR TO TESTIFYING TODAY, HAVE YOU PREPARED ANY
10 ANALYSIS OF PURCHASE ORDERS OR INVOICES TO DETERMINE THE ACTUAL 11 PRICES OR DISCOUNTS RECEIVED BY LEMURIA FROM PARTICULAR
12 PUBLISHERS DURING ANY PARTICULAR PERIOD? 13 A. I'M SORRY, YOU'RE GOING TO HAVE TO ASK THAT QUESTION AGAIN.
14 Q. PRIOR TO YOUR TESTIMONY HERE TODAY, HAVE YOU ANALYZED YOUR 15 RECORDS TO DETERMINE THE ACTUAL PRICES OR ACTUAL DISCOUNTS THAT
16 YOU RECEIVED FROM A PUBLISHER DURING ANY SPECIFIC PERIOD OF 17 TIME?
18 A. I WOULD SAY THAT I'VE ANALYZED MY BUSINESS PRACTICES TO SEE 19 WHAT TERMS I HAVE HAD WITH THE PUBLISHER.
20 Q. RIGHT, BUT NOT ANALYZED ANY ACTUAL TRANSACTIONS. JUST THE 21 TERMS.
22 A. I THINK THE TERMS PROBABLY REPRESENT THE TRANSACTIONS. I 23 MEAN, I THINK --
24 Q. LET'S TURN TO INGRAM. YOU TESTIFIED THAT INGRAM IS AN 25 INTEGRAL PART OF YOUR BUSINESS.
page 53
1 A. IS A WHAT KIND OF...? 2 Q. IS AN INTEGRAL PART OF YOUR BUSINESS.
3 A. IT'S VERY IMPORTANT TO ME. 4 Q. HOW MANY BOOKS A WEEK DO YOU BUY FROM THEM?
5 A. I THINK, ON A GENERAL, FOUR TO FIVE HUNDRED. 6 Q. IS YOUR CREDIT GOOD?
7 A. I CERTAINLY HOPE SO. 8 Q. RIGHT. IF YOU BUY FOUR TO FIVE HUNDRED BOOKS A WEEK AND
9 YOUR CREDIT IS GOOD, YOU'RE ENTITLED TO THEIR SCHEDULED 10 DELIVERY PROGRAM. DID YOU KNOW THAT?
11 A. NO, SIR. 12 Q. WHICH WOULD GET YOU A 41 PERCENT ACROSS-THE-BOARD DISCOUNT
13 WITH NO MINIMUM TITLES PER PURCHASE, AS LONG AS YOU ORDER 14 ELECTRONICALLY. YOU ORDER ELECTRONICALLY, DON'T YOU?
15 A. YES, SIR. 16 Q. RIGHT, AND A 1 PERCENT VOLUME, YOU SAID, SOUNDS LIKE A GOOD
17 DEAL, DOESN'T IT? 18 A. I DON'T REALLY KNOW WHAT THE FULL DESCRIPTION OF THE PLAN
19 IS, SO IT'S VERY DIFFICULT FOR ME TO SAY IF IT'S A GOOD DEAL IF 20 I DON'T KNOW WHAT OTHER ALTERNATIVES ARE PRESENTED TO ME IN
21 THAT TIME. 22 Q. RIGHT, BUT YOU'RE GOING TO CHECK IT OUT WITH YOUR INGRAM
23 REPRESENTATIVE AFTER THE TRIAL, RIGHT? 24 A. I DON'T KNOW. I GUESS I MIGHT INQUIRE. I CAN'T SAY THAT
25 I'M --IT WOULD BE A PRIORITY OF MINE. page 54

1 Q. RIGHT. NOW, YOU DO ELECTRONIC PURCHASING AND YOU HAVE GOOD 2 CREDIT. SO YOU'RE ALSO ELIGIBLE FOR SOMETHING CALLED SUMMARY
3 BILLING FROM INGRAM. HAVE YOU EVER HEARD OF THAT? 4 A. I'VE HEARD OF IT, BUT --
5 Q. YOU HAVE HEARD OF IT. HAVE YOU EVER ASKED? 6 A. I HEARD IT YESTERDAY AT THIS TRIAL, I BELIEVE.
7 Q. ALL RIGHT. NOW, THAT GIVES YOU CASH DISCOUNT OF 25 DAYS, 8 END OF MONTH, AND A 1 PERCENT --ONE-TENTH OF 1 PERCENT
9 SHORTAGE ALLOWANCE ACROSS THE BOARD. SOUNDS LIKE A PRETTY GOOD 10 DEAL, DOESN'T IT?
11 A. I DON'T KNOW WHAT THE REST OF THE PROPOSITION FROM INGRAM 12 WOULD BE, BUT I'D LIKE TO HEAR IT OUT BEFORE I REFRAIN
13 JUDGMENT. 14 Q. LET'S REFER TO TRIAL EXHIBIT 7853, WHICH IS TAB 15. NOW,
15 THIS IS A MAP THAT WE PREPARED, DEFENDANTS PREPARED, WHICH IS 16 SIMILAR TO ONE OF THE MAPS THAT YOU'VE ALREADY SEEN PREPARED BY
17 YOUR COUNSEL, BUT IT INDICATES SOME MORE BOOKS IN THE 18 VICINITY --BOOKSTORES IN THE VICINITY OF YOUR BOOKSTORE, AND
19 SOME OTHER ENTITIES OR TYPES OF BUSINESSES THAT SELL BOOKS. 20 REFERRING TO THE MAP, ARE THE APPROXIMATE LOCATIONS
21 OF ALL OF THOSE OTHER BUSINESS ENTITIES CORRECT, AS FAR AS YOU 22 CAN TELL?
23 A. WHEN YOU SAY, "OTHER," I DON'T REALLY --24 Q. WELL, FOR EXAMPLE, THERE'S A RED STAR FOR LEMURIA BOOK SHOP
25 RIGHT IN THE MIDDLE. page 55
20
20 Page 21 22

21 Page 22 23
19 A. YES, SIR, I WOULD THINK THAT IT'S PROBABLY WITHIN MY 20 COMPETITIVE MINUTE.
21 Q. RIGHT, AND YOU COMPETE WITH THE WALMART'S AND THE COSTCO'S 22 AND THE GROCERY STORES AND THE DRUG STORES AND THE OTHER
23 NON-BOOK MASS MARKET RETAILERS TO THE EXTENT THAT THEY SELL 24 BOOKS, CORRECT?
25 A. YES, SIR, THEY DO SELL BOOKS. page 58

1 Q. RIGHT. AND IN FACT, YOU TESTIFIED AT YOUR DEPOSITION THAT 2 KROGER'S, AT LEAST, WHICH IS A SUPERMARKET, WAS SELLING A TITLE
3 FOR LESS THAN YOU COULD --SELLING IT AT RETAIL FOR LESS THAN 4 YOU COULD HAVE PURCHASED IT AT WHOLESALE.
5 A. I BELIEVE THAT TO BE CORRECT. 6 Q. RIGHT?
7 A. I THINK THE PERSON THAT WAS GIVING ME MY DEPOSITION QUOTED 8 TO ME THE PRICE THAT HE SAW IT THERE THE DAY BEFORE, AND I
9 BELIEVE THAT'S THE PRICE I WAS GOING ON. 10 Q. THAT'S RIGHT, BUT YOU SAID IF THAT WAS THE PRICE, THAT IT
11 WAS GOING TO BE LESS THAN YOU COULD BUY IT FOR? 12 A. OR VERY CLOSE.
13 Q. OR VERY CLOSE. 14 A. YES.
15 Q. YOU ALSO MENTIONED THAT SAM'S WHOLESALE --WERE YOU 16 REFERRING TO SAM'S CLUB, OR...?
17 A. PROBABLY. 18 Q. PROBABLY --SELLS JOHN GRISHAM BEST SELLERS AT RETAIL FOR
19 LESS THAN YOUR WHOLESALE PRICE. 20 A. OR VERY CLOSE TO IT.
21 Q. YOU ALSO COMPETE WITH AMAZON. COM, RIGHT? 22 A. TO WHAT EXTENT, IT'S HARD TO SAY, BUT I WOULD HAVE TO THINK
23 TO SOME EXTENT. 24 THE COURT: I THINK I'LL LET YOU THINK WHILE WE HAVE
25 A RECESS, UNTIL 10: 45. page 59

1 THE CLERK: ALL RISE. 2 (RECESS TAKEN AT 10: 30 A. M.)
3 (CONTINUED ON FOLLOWING PAGE. NOTHING OMITTED.) 4
5 6
7 8
9 10
11 12
13 14
15 16
17 18
19 20
21 22
23 24
25 page 60

1 (PROCEEDINGS RESUMED AT 10: 55 A. M.) 2 THE COURT: ALL RIGHT. FURTHER CROSS-EXAMINATION,
3 MR. GARCIA. 4 MR. GARCIA: THANK YOU, YOUR HONOR.
5 Q. MR. EVANS, THE EXISTENCE OF GREATER SIDELINES AT BARNES & 6 NOBLE, THINGS BESIDES SELLING BOOKS, CAUSED YOU TO LOSE BOOK
7 SALES TO BARNES & NOBLE, DIDN'T IT? 8 A. HOW WOULD YOU SUGGEST THAT?
9 Q. WELL, FOR EXAMPLE, THE FACT THAT THEY HAD A COFFEE SHOP YOU 10 ACKNOWLEDGED WAS GOING TO CAUSE YOU TO LOSE SALES?
22
22 Page 23 24
11 A. I THINK THAT COFFEE SHOP PROBABLY PRODUCED MORE TRAFFIC INTO 12 THEIR BOOKSTORE THAN THE BOOKS THEMSELVES CAN PRODUCE.
13 Q. RIGHT. AND THAT THAT WOULD RESULT IN PEOPLE BUYING MORE 14 BOOKS.
15 A. IT COULD RESULT INTO THAT. 16 Q. ALL RIGHT.
17 THERE HAVE BEEN CRIME PROBLEMS AROUND YOUR 18 BOOKSTORE'S LOCATION IN THE LAST FIVE YEARS, HAVEN'T THERE?
19 A. YES, THERE HAS. 20 Q. RIGHT. THERE HAVE BEEN MUGGINGS IN THE PARKING LOT?
21 A. ON OCCASION, I BELIEVE THAT THERE HAS. 22 Q. RIGHT. AND BREAK-INS?
23 A. YES, SIR. 24 Q. AND CARS GETTING BROKEN INTO IN THE PARKING LOT?
25 A. YES, SIR. page 61

1 Q. ALL RIGHT. AND THAT'S CAUSED YOU TO LOSE SALES, HASN'T IT? 2 A. I --I CAN'T REALLY PINPOINT THAT IT HAS.
3 Q. ALL RIGHT. 4 A. IF THE PERSON WAS COMING TO BUY FROM ME WAS BROKEN INTO IT,
5 I GUESS THEY DIDN'T MAKE IT TO MY STORE. 6 Q. IN RESPONSE TO BARNES & NOBLE OPENING ITS STORE, YOU PUT AN
7 INCREASING EMPHASIS ON MAKING FEWER MISTAKES, DIDN'T YOU? 8 A. YES, SIR.
9 Q. AND YOU ENLARGED YOUR INVENTORY AND YOU ENLARGED YOUR STORE 10 AND YOU ENLARGED YOUR STORE HOURS?
11 A. AND MY STAFF. 12 Q. ALL RIGHT. LET ME DIRECT YOUR ATTENTION TO PLAINTIFF'S
13 EXHIBIT 2614, WHICH IS IN THE WHITE BINDER. 14 A. YES, SIR.
15 Q. NOW, I BELIEVE YOU TESTIFIED THAT BARNES & NOBLE OPENED ITS 16 STORE IN APRIL OF 1997?
17 A. YES, SIR, I BELIEVE THAT TO BE CORRECT. 18 MS. KESTENBAUM: EXCUSE ME.
19 MR. GARCIA: YOUR HONOR (HANDING DOCUMENT). 20 THE COURT: FINE. THE BATTLE OF THE BINDERS.
21 (LAUGHTER) 22 MR. GARCIA: THANK YOU, YOUR HONOR.
23 THE COURT: THIS BINDER DOESN'T HAVE 2614. 24 MR. GARCIA: THAT'S THE PLAINTIFF'S BINDER, YOUR
25 HONOR. page 62

1 (LAUGHTER) 2 THE COURT: I MADE A NOTE OF THAT.
3 (LAUGHTER) 4 BY MR. GARCIA:
5 Q. ALL RIGHT. THIS IS A LIST OF LEMURIA'S SALES BY FISCAL 6 YEAR; IS THAT CORRECT?
7 A. YES, SIR. 8 Q. ALL RIGHT. AND YOU TESTIFIED THAT BARNES & NOBLE ENTERED
9 YOUR MARKET IN APRIL OF 1997; THAT CORRECT? 10 A. YES, SIR.
11 Q. ALL RIGHT. AND IN THE NEXT FULL FISCAL YEAR, YOUR SALES --12 THAT WOULD BE THE FISCAL YEAR ENDING AUGUST 31, 1998, YOUR SALES
13 WENT DOWN? THAT CORRECT? 14 A. YES, SIR. IT LOOKS LIKE APPROXIMATELY $160,000.
15 Q. RIGHT. AND IN THE NEXT FISCAL YEAR ENDING AUGUST 31, 1999, 16 YOUR NET SALES WENT UP FROM THE PREVIOUS FISCAL YEAR, CORRECT?
17 A. YES, SIR. 18 Q. AND THEY ARE APPROXIMATELY EQUAL TO THE SALES IN THE FISCAL
19 YEAR PRIOR TO THE FIRST FULL FISCAL YEAR THE BARNES & NOBLE IS 20 IN THE MARKET, CORRECT?
21 A. YES, SIR. I BELIEVE --22 Q. RIGHT. SO IT DIDN'T TAKE FOUR YEARS LIKE YOU SUGGESTED
23 YESTERDAY IN YOUR DIRECT FOR YOUR SALES TO BEGIN TO TREND UPWARD 24 AGAIN, DID IT?
25 A. TO BEGIN TO TREND, I --I MAY BE MADE --page 63

1 THE REPORTER: I'M SORRY, I DIDN'T HEAR YOU. "I MAY 2 BE MADE..." 23
23 Page 24 25
3 THE WITNESS: WOULD YOU ASK THAT QUESTION AGAIN, 4 PLEASE.
5 BY MR. GARCIA: 6 Q. SO IT DIDN'T TAKE FOUR YEARS LIKE YOU SUGGESTED YESTERDAY
7 FOR THE DOWNWARD TREND TO STOP, DID IT? 8 A. I --IT DID NOT TAKE FOUR YEARS FOR THE DOWNWARD TREND TO
9 BOTTOM. 10 MR. GARCIA: I HAVE NO FURTHER QUESTIONS, YOUR HONOR.
11 THE COURT: MR. STEER? 12 MS. PREOVOLOS: YOUR HONOR, I'D LIKE TO INTRODUCE MY
13 COLLEAGUE DIANNE SWEENEY, WHO'S GOING TO QUESTION THE WITNESS. 14 CROSS-EXAMINATION
15 MS. SWEENEY: MORNING, YOUR HONOR. 16 Q. GOOD MORNING, MR. EVANS. MY NAME IS DIANNE SWEENEY.
17 A. GOOD MORNING. 18 Q. GOOD MORNING. I REPRESENT THE BORDERS GROUP, WHICH INCLUDES
19 WALDENBOOKS. I HAVE A COUPLE OF FOLLOW-UP QUESTIONS. 20 YOU TESTIFIED EARLIER THIS MORNING THAT INGRAM
21 OFFERED YOU AN EXTRA DISCOUNT IF YOU PLACED ORDERS BETWEEN 22 6: 00 P. M. ON SATURDAY AND 6: 00 P. M. ON SUNDAY; IS THAT CORRECT?
23 A. THAT'S ROUGHLY THE HOURS. 24 Q. NOW, WAS THAT DISCOUNT REPORTED IN THE REDBOOK?
25 A. I --I COULDN'T RECALL EXACTLY. IT WAS AN ANNOUNCEMENT THAT page 64

1 I RECEIVED --PUBLIC ANNOUNCEMENT TO THE TRADE THAT I RECEIVED 2 FROM INGRAM.
3 Q. I SEE. SO IT'S NOT SOMETHING THAT YOU FOUND IN THE REDBOOK; 4 IS THAT CORRECT?
5 A. NO, SIR --NO, MA'AM, IT WAS SOMETHING THAT WAS MAILED TO 6 ME.
7 Q. OKAY. TO TAKE ADVANTAGE OF THAT DISCOUNT, YOU THEN HAD TO 8 PLACE YOUR ORDER BETWEEN 6: 00 P. M. ON SATURDAY AND 6: 00 P. M. ON
9 SUNDAY, ROUGHLY? 10 A. ROUGHLY. I CAN'T REMEMBER THE EXACT HOURS.
11 Q. DO YOU UNDERSTAND WHY INGRAM HAD THIS PROGRAM IN PLACE? 12 A. I COULD SPECULATE. BUT I DON'T --
13 Q. IS IT PERHAPS THAT INGRAM WANTS TO KEEP ITS ORDER IN BALANCE 14 THROUGHOUT THE WEEK SO THAT THEY'RE ENCOURAGING YOU AS A
15 COST-EFFICIENT MEASURE AT THAT TIME --16 MS. KESTENBAUM: OBJECTION, YOUR HONOR. THERE'S NO
17 FOUNDATION HERE THAT THE WITNESS KNOWS ANYTHING ABOUT INGRAM'S 18 INTERNAL COSTS OR REASONS FOR THIS DISCOUNT.
19 THE COURT: LAY A FOUNDATION. 20 BY MS. SWEENEY:
21 Q. IN YOUR EXPERIENCE, WOULD YOU BELIEVE THAT --STRIKE THAT. 22 ARE YOU AWARE OF WHETHER OR NOT CONTINUALLY PLACING
23 ORDERS --LET'S SEE. LET'S SEE. 24 IN YOUR EXPERIENCE, YOU PLACE ORDERS TO INGRAM
25 GENERALLY THROUGHOUT THE WEEK, MONDAY THROUGH FRIDAY, REGULAR page 65

1 BUSINESS HOURS? 2 A. GENERALLY MONDAY AND WEDNESDAY.
3 Q. AND SO BY PLACING THOSE HOURS (SIC) ON SATURDAY --BY 4 PLACING YOUR ORDERS ON SATURDAY AND SUNDAY, THEN YOU WOULD BE
5 PROVIDING INGRAM AN ORDER AT AN UNUSUAL TIME FOR INGRAM? 6 A. WE WOULD BASICALLY PUSH OUR MONDAY ORDER UP TO SUNDAY.
7 Q. OKAY. LET'S MOVE ON TO AN ISSUE ON CO-OP. YOU HAD 8 PREVIOUSLY TESTIFIED THAT YOU TOOK ADVANTAGE OF CO-OP FUNDS IN
9 ORDER TO SUPPORT AUTHOR EVENT; IS THAT CORRECT? 10 A. YES, THAT IS ONE WAY THAT I WOULD TAKE ADVANTAGE OF CO-OP
11 FUNDS. 12 Q. OKAY. FOR THOSE AUTHOR EVENTS, DID YOU EVER --WAS LEMURIA
13 EVER PROVIDED ADDITIONAL CO-OP FUNDS ABOVE THEIR ORDINARY CO-OP 14 POOL?
15 A. WELL, YOU USE YOUR CO-OP POOL PLUS YOUR AUTHOR EVENT MONEY 16 AND COMBINE THE TWO.
17 Q. OKAY. 18 A. BUT IT WOULD BE --IT WOULD BE HOW YOU WOULD HAVE THE TOTAL
19 DOLLARS THAT YOU WOULD SPEND FOR THAT AUTHOR EVENT. 20 Q. OKAY. SO THAT AUTHOR EVENT MONEY WAS ABOVE YOUR ORDINARY
21 CO-OP POOL; IS THAT CORRECT?
24
24 Page 25 26
22 A. I WOULD SAY IT WAS AN ADDITIONAL. 23 Q. "ADDITIONAL" MEANING ABOVE YOUR ORDINARY CO-OP POOL?
24 A. NO, I WOULD SAY ADDED TO MY CO-OP POOL. 25 Q. OKAY.
page 66
1 A. NOT ABOVE IT. 2 Q. IF WE COULD TURN TO PAGE 371 OF YOUR DEPOSITION.
3 A. (REVIEWING DOCUMENTS.) 4 Q. I'M JUST GOING TO READ IN PAGE 371, LINES 5 THROUGH 14.
5 THE COURT: WHAT LINE? 6 MS. SWEENEY: LINE 5 THROUGH 14, PAGE 371.
7 "Q. DO PUBLISHERS EVER PROVIDE LEMURIA WITH 8 ADDITIONAL CO-OP FUNDS ABOVE THEIR ORIGINAL --
9 ABOVE THAT OF THEIR ORDINARY CO-OP POOL TO 10 SUPPORT AN AUTHOR EVENT?
11 "A. AUTHOR APPEARANCE ALLOWANCE. 12 "Q. SURE. YES. DO YOU TRY AND TAKE
13 ADVANTAGE OF AUTHOR APPEARANCE ALLOWANCE? 14 "A. I TRY TO."
15 Q. MR. EVANS, ISN'T IT TRUE THAT THERE ISN'T A BORDERS IN THE 16 STATE OF MISSISSIPPI?
17 A. I DON'T BELIEVE THERE'S ONE AT THIS TIME. BUT THEY'VE 18 ANNOUNCED THAT THEY'RE GETTING READY TO BUILD ONE IN JACKSON.
19 Q. BUT AT THIS TIME, THERE IS NOT A BORDERS IN THE STATE? 20 A. AS FAR AS I KNOW, THERE'S NOT. THERE WILL BE SOON.
21 Q. YESTERDAY YOU TESTIFIED THAT THERE HAVE BEEN TWO WALDENS IN 22 JACKSON; IS THAT CORRECT?
23 A. THERE HAVE BEEN. I THINK THERE'S ONLY ONE NOW. 24 Q. OKAY. AND THOSE TWO WALDENS, ONE WAS LOCATED IN RIDGELAND,
25 AND ONE WAS LOCATED IN METRO CENTER; IS THAT CORRECT? page 67

1 A. YES, THE RIDGELAND --THERE'S A COUNTY LINE, RATHER THAN 2 CITY LIMITS, AND IT WAS ON THE OPPOSITE SIDE OF --OF --
3 THE RECould not acquire words on page 27 PORTER: I'M SORRY. "... ON THE OPPOSITE SIDE 4 OF..." AND THEN I DIDN'T HEAR.
5 THE WITNESS: THE ROAD THAT DIVIDES JACKSON AND 6 RIDGELAND, AND IT WAS ON THE RIDGELAND SIDE.
7 BY MS. SWEENEY: 8 Q. OKAY. IF WE COULD TURN TO DEFENDANT'S TAB 15, IT'S TRIAL
9 EXHIBIT 7853. THAT'S GOING TO BE IN THE BLACK BINDER THAT 10 MR. GARCIA USED WITH YOU.
11 THE COURT: WHAT TAB DID YOU SAY? 12 MS. SWEENEY: TAB 15. IT'S TRIAL EXHIBIT 7853.
13 Q. THAT SHOWS THE MAP OF THE BOOKSTORES THAT MR. GARCIA WAS 14 DISCUSSING WITH YOU.
15 A. (REVIEWING DOCUMENTS.) 16 Q. SHOULD BE TAB 15, THAT COLORED MAP.
17 A. 15. SORRY. I SEE 13. 18 Q. THAT'S FINE.
19 OKAY. IF YOU COULD HELP ME ESTABLISH WHERE THE TWO 20 DIFFERENT WALDENBOOKS WERE. I BELIEVE YOU SAID ONE WAS IN
21 RIDGELAND; IS THAT CORRECT? 22 A. THE B. DALTON THAT WAS IN --I MEAN, THE WALDEN, EXCUSE ME,
23 THAT WAS IN RIDGELAND, IS --WOULD HAVE BEEN IN THE SAME 24 SHOPPING MALL THAT THE SQUARE --THE B. DALTON THAT'S
25 REPRESENTED ON THIS MAP. THE B. DALTON AND WALDEN WERE IN THE page 68

1 SAME SHOPPING MALL, SO I GUESS IT WOULD BE APPROXIMATELY IN THIS 2 MAP WHERE THE B. DALTON IS.
3 Q. OKAY. AND SO THAT'S ON THE UPPER RIGHT-HAND CORNER ABOUT 4 TWO INCHES DOWN THE RIGHT-HAND SIDE?
5 A. YES, MA'AM. 6 Q. AND THE OTHER WALDENBOOKS, COULD YOU ADVISE ME WHERE THAT
7 LOCATION IS IN METRO CENTER? 8 A. METRO CENTER IS BASICALLY AT THE --WHERE THE 220 LOOP GOES
9 INTO THE I-220, AND IT'S BORDERED BY HIGHWAY 80 AND THE 220 10 LOOP, AND IT'S IN THE METRO CENTER MALL.
11 Q. CAN YOU TELL ME WHICH OF THOSE LOCATIONS IS CLOSER TO 12 LEMURIA?
13 A. YES, MA'AM. THE FIRST ONE.
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25 Page 26 27
14 Q. "FIRST ONE" MEANING THE RIDGELAND LOCATION? 15 A. YES, MA'AM.
16 Q. NOW, ISN'T IT TRUE THAT THAT LOCATION CLOSED IN JANUARY OF 17 1995?
18 A. I COULDN'T REMEMBER EXACTLY. BUT IT HAS CLOSED. 19 Q. AND IT'S BEEN CLOSED FOR SOME TIME?
20 A. YES. 21 Q. SO THEN WOULDN'T IT BE TRUE THAT AS OF THE TIME THAT THAT
22 WALDENS CLOSED --LET'S ASSUME IT WAS JANUARY OF 1995 --THAT 23 YOUR WALDENS COMPETITION IN JACKSON DECREASED. WOULD THAT BE
24 CORRECT? 25 A. (PAUSE.)
page 69
1 POSSIBLY. 2 Q. OKAY. WELL, IT IS TRUE, THOUGH, THAT PRIOR TO THE CLOSING
3 OF THE RIDGELAND LOCATION, THAT YOU WERE COMPETING WITH TWO 4 DIFFERENT WALDENS; IS THAT CORRECT?
5 A. THAT IS CORRECT. 6 Q. AND THEN AFTER THE CLOSING, YOU WERE ONLY COMPETING WITH ONE
7 WALDENS? 8 A. I WOULD DEFINITELY AGREE WITH THAT.
9 Q. OKAY. NOW, THE METRO CENTER WALDENS, YOU TESTIFIED THAT IS 10 20 --20 MINUTES AWAY FROM LEMURIA; IS THAT CORRECT?
11 A. I WOULD SAY THAT'S PRETTY CLOSE. 12 Q. IS THAT RIGHT?
13 DO YOU KNOW APPROXIMATELY HOW MANY MILES THAT IS? 14 A. NO. I DON'T. I THINK OF THINGS IN TIME. I THINK IN TIME.
15 Q. OH. 16 A. EXCUSE ME.
17 Q. NO, I UNDERSTAND. THANKS. 18 AND SO IT WOULD TAKE APPROXIMATELY 20 MINUTES. YOU'D
19 HAVE TO TAKE SOME MAJOR HIGHWAYS TO GET TO THE WALDENBOOKS; IS 20 THAT CORRECT?
21 A. NOT NECESSARILY IN THIS CASE. NORTHSIDE DRIVE, WHICH IS THE 22 MAIN --IT LOOKS TO ME CLOSE TO --YOU COULD CUT ACROSS THIS.
23 THERE'S A STREET, IT'S NOT ON THIS MAP. IT'S CALLED NORTHSIDE 24 DRIVE. THAT'S A MAJOR ARTERY BETWEEN I-55 AND 220, AND YOU
25 WOULDN'T HAVE TO GO UP HERE AND ALL THE WAY DOWN HERE. page 70

1 Q. LET'S LOOK AT IT THIS WAY: THE 20 MINUTES' DISTANCE THAT 2 YOU SAID BETWEEN THE TWO, THAT WAS HIGHWAY TIME; IS THAT
3 CORRECT? 4 A. NOT NECESSARILY.
5 Q. WOULD IT TAKE LONGER IF YOU TOOK THE ROAD THAT YOU JUST 6 MENTIONED?
7 A. I HAVEN'T TIMED IT. YOU CAN GO FASTER ON THAT ROAD. 8 Q. ON THE HIGHWAY?
9 A. YES. 10 Q. OKAY. DO YOU KNOW THE MANAGER OF THE REMAINING WALDENS
11 THAT'S THERE AT METRO CENTER? 12 A. NO, I DON'T.
13 Q. LET'S STEP BACK TO A COUPLE ISSUES THAT WERE COVERED 14 YESTERDAY ON THE GROWTH OF LEMURIA. YOU ORIGINALLY OPENED
15 LEMURIA IN 1975; IS THAT CORRECT? 16 A. YES, MA'AM.
17 Q. AND THEN IN 1977, YOU EXPANDED YOUR BUSINESS AND MOVED TO A 18 NEW LOCATION WHICH HAD GREATER SQUARE FOOTAGE; IS THAT CORRECT?
19 A. YES, MA'AM. 20 Q. AND THE NEW SQUARE FOOTAGE WAS 1,224 SQUARE FEET; IS THAT
21 CORRECT? 22 A. I BELIEVE THAT TO BE CORRECT.
23 Q. AND THEN THE REMAINING WALDENS THAT WE'VE TALKED ABOUT, THE 24 ONE THAT IS IN METRO CENTER, YOU TESTIFIED YESTERDAY THAT THAT
25 WALDENS OPENED IN 1978; IS THAT CORRECT? page 71

1 A. I --OR CLOSE TO IT. I BELIEVE THAT TO BE CORRECT. 2 Q. OKAY. AND SO THE WALDENS OPENED IN 1978. AND THEN, AGAIN,
3 IN 1987, YOU EXPANDED YOUR BUSINESS WHEN YOU MOVED INTO THE 4 BANNER HALL LOCATION?
5 A. YES, MA'AM. I MOVED ACROSS THE STREET.
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27 Page 28 29

28 Page 29 30

29 Page 30 31
9 MR. DE BRUIN: YOUR HONOR, I KNOW YOU ALSO DO NOT 10 WANT LENGTHY QUALIFYING TESTIMONY, HOWEVER, I BELIEVE THAT A
11 BRIEF EXAMINATION INTO DR. FRAZIER'S BACKGROUND WILL HELP 12 SUPPORT THE WEIGHT OF HIS TESTIMONY AND WILL BE USEFUL TO THE
13 COURT. 14 THE COURT: WELL, BEAR IN MIND I'VE HAD THE PRIVILEGE
15 OF HAVING HIS BACKGROUND --HIS REPORT, AND --WHICH IS RATHER 16 COMPLETE. SO BEYOND HIS DEGREES AND MAYBE A COUPLE
17 PUBLICATIONS, I'D LIKE TO GET INTO THE --18 MR. DE BRUIN: I'LL TRY TO PROCEED.
19 THE COURT: --GUTS OF HIS TESTIMONY. 20 MR. DE BRUIN: I'LL TRY TO PROCEED AS QUICKLY AS I
21 CAN. 22 Q. GOING DIRECTLY TO YOUR GRADUATE DEGREE, SIR, CAN YOU PLEASE
23 IDENTIFY THE GRADUATE DEGREES THAT YOU'VE OBTAINED. 24 A. AN MBA DEGREE FROM INDIANA UNIVERSITY IN BLOOMINGTON,
25 INDIANA, IN 1977, AND A DOCTORAL DEGREE --A DBA FROM INDIANA page 80

1 UNIVERSITY IN 1979. 2 Q. AND WHAT WAS YOUR DOCTORATE OBTAINED IN?
3 A. IN MARKETING WITH AN EMPHASIS ON PHYSICAL DISTRIBUTION. 4 Q. WHAT DID YOU DO AFTER YOU FINISHED YOUR DOCTORATE, SIR?
5 A. I WILL TOOK MY FIRST FACULTY POSITION AT THE UNIVERSITY OF 6 ILLINOIS IN CHAMPAIGN URBANA.
7 Q. WHAT IS YOUR CURRENT POSITION? 8 A. I'M THE RICHARD AND JARDA HURD PROFESSOR OF DISTRIBUTION
9 MANAGEMENT IN THE MARSHALL SCHOOL OF BUSINESS AT THE UNIVERSITY 10 OF SOUTHERN CALIFORNIA IN LOS ANGELES.
11 Q. CAN YOU EXPLAIN FOR THE COURT EXACTLY WHAT IS DISTRIBUTION 12 MANAGEMENT.
13 A. SURE. DISTRIBUTION MANAGEMENT ENTAILS HOW COMPANIES 14 ORGANIZE AND MANAGE RELATIONSHIPS WITH INTERMEDIARIES WHICH
15 INVOLVES HOW MANUFACTURERS, WHOLESALERS, RETAILERS BASICALLY 16 INTERACT AND WORK TOGETHER.
17 IT INVOLVES DECISIONS IN TERMS OF TRADE. IT INVOLVES 18 DEVELOPMENT OF MARKETING PROGRAMS. IT INVOLVES EFFORTS TO
19 EFFECTIVELY MANAGE WAREHOUSES AND PROCESS ORDERS AND CONTROL 20 COSTS SO AS TO EFFECTIVELY GET ORDERS AND PRODUCT WHERE THAT
21 PRODUCT IS NEEDED. 22 Q. HOW LONG HAVE YOU BEEN TEACHING IN THE FIELD OF DISTRIBUTION
23 MANAGEMENT? 24 A. AT LEAST 20 YEARS.
25 Q. HAVE YOU ALSO WRITTEN IN THE FIELD? page 81

1 A. YES. QUITE A LOT. 2 Q. VERY BRIEFLY, CAN YOU IDENTIFY THE TYPES OF RESEARCH AND
3 WRITING YOU'VE DONE. 4 A. I FOCUS ON DISTRIBUTION ISSUES PRIMARILY IN TERMS OF HOW IT
5 RELATES TO GENERAL MARKETING STRATEGY. AND I --I'VE BEEN NOTED 6 BY OTHERS AS BEING ONE OF THE TOP THREE CONTRIBUTORS OF ALL TIME
7 TO THE JOURNAL OF MARKETING, WHICH IS ONE OF OUR TOP JOURNALS 8 INITIATED IN THE 1930S.
9 Q. NOW, IN ADDITION TO YOUR WRITING, HAVE YOU DONE SPECIFIC 10 RESEARCH IN THE FIELD OF DISTRIBUTION MANAGEMENT?
11 A. YES, I HAVE. 12 Q. CAN YOU DESCRIBE WHAT THAT RESEARCH HAS EXPOSED YOU TO.
13 A. ONE OF THE ISSUES I'VE LOOKED AT QUITE EXTENSIVELY IS HOW A 14 FIRM'S POWER OR CLOUT INFLUENCES HOW OTHERS DEAL WITH IT.
15 I'VE EXAMINED HOW POWER IS USED BETWEEN FIRMS IN 16 CHANNELS OF DISTRIBUTION. I'VE EXAMINED ORDER FULFILLMENT
17 SYSTEMS, IN PARTICULAR HOW JUST-IN-TIME EXCHANGE RELATIONSHIPS 18 WORK BETWEEN CHANNEL MEMBERS IN TERMS OF PROCESSING ORDERS AND
19 DELIVERY OF GOODS. 20 I'VE LOOKED AT HOW CHANNELS ARE ORGANIZED AND
21 STRUCTURED. ACTUALLY A RATHER BROAD RANGE OF ISSUES. 22 Q. NOW, IN CONNECTION WITH YOUR RESEARCH, HAVE YOU HAD THE
23 OCCASION TO ACTUALLY VISIT WAREHOUSES AND WORK WITH WAREHOUSES? 24 A. WHAT I LIKE TO DO IS --I SIT BACK AND READ THE LITERATURE
25 AND TRY TO UNDERSTAND THE PROBLEM I'M CONFRONTING AND COME UP page 82
30
30 Page 31 32
1 WITH SOME ORIGINAL IDEAS. BUT THEN I ALSO GO TO CONTACTS THAT I 2 HAVE, BUSINESS PEOPLE, DISTRIBUTORS IN PARTICULAR AND TALK TO
3 THEM. IN THAT PROCESS I'VE BEEN OVER 20 WAREHOUSES JUST TRYING 4 TO UNDERSTAND HOW THEY WORK AND HOW IT WOULD AFFECT MY RESEARCH
5 STUDIES. 6 Q. APART FROM YOUR TEACHING AND RESEARCH, DO YOU HAVE ANY
7 DIRECT EMPLOYMENT OR CONSULTING EXPERIENCE IN WAREHOUSING OR 8 DISTRIBUTION?
9 A. IN PUTTING MYSELF THROUGH UNDERGRADUATE SCHOOL, I WORKED FOR 10 ABOUT A YEAR IN A WAREHOUSE WHERE I ACTUALLY WOULD RECEIVE
11 PRODUCT FROM THE PRODUCTION LINE PACKAGED. I WOULD PUT IT AWAY 12 IN THE WAREHOUSE.
13 I WOULD GET ORDERS FROM CUSTOMERS, WHOLESALERS OR 14 CONTRACTOR CUSTOMERS, AND I'D FILL THE ORDERS AND GO THROUGH THE
15 WAREHOUSE AND CHECK THE APPROPRIATE PRODUCT OR STOCK-KEEPING 16 UNIT PER CUSTOMER ORDER. BOX THEM, STAPLE BOXES, PUT PRODUCT
17 IN, PUT SOME STYROFOAM IN, SO THAT JOB ENTAILED THE ISSUES 18 REALLY WE'RE DISCUSSING IN THIS CASE IN PART.
19 I ALSO RUN A PROGRAM IN DISTRIBUTION MANAGEMENT AT 20 THE UNIVERSITY OF SOUTHERN CALIFORNIA SINCE APPROXIMATELY 1991
21 THAT IS SUPPORTED BY A GROUP OF DISTRIBUTORS WITH OVER 22 20 BILLION IN SALES, AND I'VE BEEN IN MOST OF THEIR WAREHOUSES
23 IN TERMS OF HELPING UNDERSTAND HOW THAT'S DONE SO I CAN TEACH 24 THE STUDENTS EFFECTIVELY IN THE CLASSROOM.
25 I ALSO HAVE HAD THE OPPORTUNITY TO CONSULT FOR AND page 83

1 ALSO PROVIDE EXPERT WITNESS TESTIMONY FOR A NUMBER OF COMPANIES 2 STARTING WITH GENERAL MOTORS IN 1977 THROUGH THE CURRENT TIME
3 WHERE COCA COLA, FOR EXAMPLE, HAS USED ME IN HELPING DESIGN THE 4 CHANNELS CHINA AND THROUGH THE COURSE OF THOSE ACTIVITIES, I'VE
5 BEEN IN AT LEAST 20 WAREHOUSES AS IT PERTAINS TO MY ASSIGNMENTS. 6 (CONTINUED NEXT PAGE; NOTHING OMITTED.)
7 8
9 10
11 12
13 14
15 16
17 18
19 20
21 22
23 24
25 page 84

1 BY MR. DEBRUIN: 2 Q. CAN YOU DESCRIBE, IN PARTICULAR, THE CONSULTING WORK YOU'VE
3 DONE WITH HONEYWELL? 4 A. I WAS THE HEAD OF HONEYWELL'S DISTRIBUTOR CONSULT FOR ITS
5 PERFECT CLIMATE DIVISION FOR A COUPLE OF --FOR TWO, THREE 6 YEARS IN THE MID-90'S.
7 ONE OF THE ISSUES THE DISTRIBUTORS BROUGHT BEFORE 8 HONEYWELL IS THAT THEY WERE NOT SATISFIED WITH THE SERVICE
9 LEVELS AND ORDER FILL RATES THAT HONEYWELL WAS PROVIDING THEM. 10 SO HONEYWELL UNDERTOOK A PROJECT TO ASCERTAIN THEIR COSTS OF
11 INVENTORYING PRODUCTS, OF RECEIVING PRODUCT INTO THE WAREHOUSE, 12 OF PICK-AND-PACK, COSTS ASSOCIATED WITH THEIR OPERATION; AND
13 THEY USED ME AS A GENERAL CONSULTANT TO SORT OF LOOK AT THEIR 14 RESULTS AND TRY TO ADVISE THEM IN TERMS OF HOW THEY COULD
15 ACTUALLY IMPROVE THEIR PERFORMANCE IN FILLING ORDERS TO THEIR 16 DISTRIBUTOR CUSTOMERS.
17 THE COURT: ALL RIGHT, I THINK THE WITNESS IS WELL 18 QUALIFIED TO DISCUSS THE AREA OF HIS EXPERTISE, AS IT BEARS ON
19 THE ISSUES IN THIS CASE. SO LET'S GET TO THAT.
31
31 Page 32 33
20 MR. DEBRUIN: I WAS RIGHT THERE. IN VIEW OF THAT 21 FINDING, I TENDER HIM AS AN EXPERT THAT THE FIELD OF
22 DISTRIBUTION MANAGEMENT, FOR THE RECORD. 23 THE COURT: YES.
24 BY MR. DEBRUIN: 25 Q. DR. FRAZIER, YOU JUST USED A PHRASE THAT I THINK WE'LL USE
page 85
1 FREQUENTLY DURING YOUR TESTIMONY, AND THAT WAS PICK-PACK. 2 A. RIGHT.
3 Q. CAN YOU PLEASE IDENTIFY FOR THE COURT EXACTLY WHAT YOU MEAN 4 BY "PICK-PACK"?
5 A. WHEN YOU HAVE A PURCHASE ORDER FROM A CUSTOMER THAT 6 INVOLVES ONE BOOK HERE AND ONE BOOK THERE, DIFFERENT TITLES,
7 YOU ACTUALLY HAVE TO HAVE A WAREHOUSE WORKER OPEN UP A BOX OF 8 STEPHEN KING, AND OPEN UP A BOX OF FRANK HERBERT, AND PICK FROM
9 EACH CARTON A BOOK OR TWO. YOU HAVE TO HAVE THEM TAKE A 10 CARDBOARD BOX, OPEN IT UP, HOLD IT TOGETHER, STAPLE THE BOTTOM,
11 TURN IT OVER, AND ACTUALLY THEN START PUTTING THESE ONESIES OR 12 TWOSIES INTO EACH BOX; SOMETIMES AN EXPENSIVE BOOK, WRAPPING
13 THEM PERHAPS TO MAKE SURE THEY AREN'T DAMAGED IN TRANSIT, AND 14 YOU OFTENTIMES WILL PUT WHAT IS CALLED DUNNAGE OR STYROFOAM
15 PARTICLES IN THERE, AGAIN, TO PROTECT THE BOOKS AND CUSHION IT, 16 AND THEN YOU HAVE TO FOLD THE FLAPS OVER, AND STAPLE CLOSE THE
17 CARTON. THAT BASIC PROCESS INVOLVES WHAT IS KNOWN AS 18 "PICK-AND-PACK."
19 Q. ALL RIGHT. NOW, DR. FRAZIER, YOU OBVIOUSLY WERE RETAINED 20 AS AN EXPERT BY PLAINTIFFS IN THIS CASE. WHAT WERE YOU ASKED
21 TO CONSIDER? 22 A. I WAS ASKED TO CONSIDER SEVEN ISSUES.
23 Q. CAN YOU BRIEFLY IDENTIFY THEM? 24 A. THE FIRST ISSUE IS WHETHER THE RDC DISCOUNTS PROVIDED
25 DEFENDANTS BY PUBLISHERS ARE COST-JUSTIFIED IN TERMS OF page 86

1 REPRESENTING ACTUAL PUBLISHER COST SAVINGS BY SERVING THE 2 DEFENDANTS THROUGH THE RETAIL DISTRIBUTION CENTERS. THAT'S
3 NUMBER ONE. 4 Q. OKAY, AND WERE THERE ANY FURTHER QUESTIONS RELATED TO THE
5 RDC DISCOUNTS? 6 A. WELL, THE SECOND ONE IS RELATED TO IT, AND THAT IS, WHAT
7 SHOULD DEFENDANTS' TOP MANAGEMENT --WHAT SHOULD THEY HAVE 8 KNOWN REGARDING HOW THE RDC DISCOUNTS AND THEIR LEVEL COMPARED
9 TO ACTUAL PUBLISHER COST SAVINGS AND SERVING THEM THROUGH THE 10 RDC'S.
11 Q. OKAY, SO THOSE TWO QUESTIONS RELATED TO THE RDC DISCOUNT. 12 WERE THERE ANY OTHER PARTS OF THE CASE THAT YOU ALSO CONSIDERED
13 AS PART OF YOUR EXPERT WORK? 14 A. THE THIRD ISSUE IS WHETHER OR NOT THE RETURN CENTER
15 DISCOUNTS THAT THE BORDERS ORGANIZATION HAS RECEIVED IS --HOW 16 THAT COMPARES TO ACTUAL PUBLISHER COST SAVINGS IN HAVING BOOKS
17 RETURNED THROUGH THE RETURN CENTER RATHER THAN FROM INDIVIDUAL 18 STORES.
19 Q. AND WAS THERE A SECOND RELATED QUESTION RELATING TO THE 20 BORDERS RETURNS CENTER?
21 A. NUMBER FOUR, WHAT SHOULD BORDERS' TOP MANAGEMENT --WHAT 22 SHOULD THEY HAVE KNOWN REGARDING THE COMPARISON OF THE RETURN
23 CENTER DISCOUNT AND ACTUAL PUBLISHER COST SAVINGS. 24 Q. ALL RIGHT. WAS THERE A THIRD MAJOR AREA OF YOUR WORK?
25 A. REPRESECould not acquire words on page 33 NTED BY THE FIFTH ISSUE, WHICH IS, ARE THE DISCOUNTS page 87

1 PROVIDED THE DEFENDANTS BY INGRAM ACTUALLY JUSTIFIED BASED ON 2 INGRAM COST SAVINGS AND SERVING THE DEFENDANTS.
3 Q. AND AGAIN, WAS THERE A QUESTION RELATED TO THE INGRAM 4 DISCOUNTS THAT ARE PROVIDED TO DEFENDANTS?
5 A. ISSUE NUMBER SIX, WHAT SHOULD TOP MANAGEMENT IN DEFENDANTS' 6 ORGANIZATIONS --WHAT SHOULD THEY HAVE KNOWN REGARDING WHETHER
7 THE VARIOUS DISCOUNTS PROVIDED TO THEM WERE REPRESENTED BY 8 ACTUAL INGRAM COST SAVINGS AND SERVING THEM.
9 Q. SO THOSE WERE THE THREE MAJOR AREAS YOU ARE LOOKED AT, RDC 10 DISCOUNTS, RETURN CENTER AND INGRAM. IS THERE A FINAL ISSUE
11 THAT YOU WERE ASKED TO CONSIDER IN THIS CASE?
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33 Page 34 35
4 BOOKS. 5 Q. NOW, DR. FRAZIER, DID YOU, IN FACT, SUBMIT EXPERT REPORTS
6 IN CONNECTION WITH THIS CASE? 7 A. I DID.
8 Q. AND HOW MANY REPORTS DID YOU SUBMIT? 9 A. TWO.
10 Q. SO AN OPENING AND A REBUTTAL REPORT? 11 A. THAT'S CORRECT.
12 Q. SINCE THE TIME THAT YOU PREPARED AND SUBMITTED THOSE 13 REPORTS, HAVE YOU DONE ANY ADDITIONAL WORK IN THIS CASE?
14 A. I'VE READ THE CHANDLER DEPOSITION, THE HEAD OF INGRAM, 15 WHOSE DEPOSITION WAS TAKEN RATHER RECENTLY; AND I DID GO OVER
16 MY EXPERT REPORTS AND THE MATERIAL REFERENCED IN THEM IN MAKING 17 SURE I WAS AWARE OF THE ISSUES SINCE MY DEPOSITION.
18 MR. DEBRUIN: ALL RIGHT. YOUR HONOR, I'M NOT SURE 19 IF IT WILL COME UP TODAY, BUT I JUST WANT TO CLARIFY FROM YOUR
20 HONOR'S PREVIOUS RULING THAT ANY TESTIMONY BY DR. FRAZIER 21 RELATING TO THE INGRAM ISSUES OR MR. CHANDLER'S DEPOSITION IS
22 SOMETHING THAT HE CAN DISCUSS IN CONNECTION WITH THIS CASE, 23 DESPITE ANY PROTECTIVE ORDERS THAT HAVE BEEN ENTERED FROM THE
24 COURT IN TENNESSEE. 25 THE COURT: WHAT DO YOU WANT THE COURT TO DO?
page 91
1 MR. DEBRUIN: THIS CAME UP, YOUR HONOR, PREVIOUSLY, 2 AND MAYBE IT WASN'T CLEAR TO THE COURT --
3 THE COURT: ABOUT THE PROTECTIVE ORDER? 4 MR. DEBRUIN: YES. I JUST WANT TO BE CLEAR THAT WE
5 CAN PROCEED. 6 THE COURT: AS FAR AS I'M CONCERNED, YOU CAN. PUT
7 ON THE BEST CASE YOU CAN. THAT'S YOUR JOB. 8 MR. DEBRUIN: I UNDERSTAND. JUST, I WANT TO BE
9 CLEAR, YOUR HONOR, ON THIS, JUST SO YOU UNDERSTAND WHAT WE'RE 10 ASKING. BECAUSE INGRAM IS A THIRD PARTY, WE HAD TO SUBPOENA
11 THEM OUT OF TENNESSEE --12 THE COURT: I UNDERSTAND THE PROBLEM.
13 MR. DEBRUIN: --AND THAT COURT ISSUED A PROTECTIVE 14 ORDER --
15 THE COURT: I UNDERSTAND THE PROBLEM. 16 MR. DEBRUIN: OKAY.
17 Q. DR. FRAZIER, LET ME MOVE DIRECTLY TO YOUR OPINION AS TO 18 WHETHER THE RETAIL DISTRIBUTION CENTER, OR RDC, DISCOUNTS THAT
19 THE DEFENDANTS RECEIVE ARE COST-JUSTIFIED. 20 BEFORE WE DISCUSS YOUR SPECIFIC OPINION, I THINK IT
21 MIGHT BE HELPFUL FOR YOU TO DESCRIBE BRIEFLY WHAT DISTRIBUTION 22 FACILITIES THE DEFENDANTS OPERATE THAT ARE AT ISSUE.
23 LET ME FOCUS FIRST ON THE BORDERS DEFENDANTS. CAN 24 YOU DESCRIBE THE DISTRIBUTION FACILITIES THAT ARE OPERATED BY
25 THE BORDERS DEFENDANTS? page 92

1 A. YES, AND WALDEN WAREHOUSE FACILITIES ARE DISTINCT AND 2 SOMEWHAT DIFFERENT THAN THE BORDERS FACILITIES.
3 Q. ALL RIGHT. SO JUST FOR THE RECORD, THE BORDERS GROUP HAS 4 TWO DIFFERENT DIVISIONS, ONE OF WHICH IS THE WALDENBOOKS
5 DIVISION AND THE OTHER IS THE BORDERS. WHY DON'T YOU DESCRIBE 6 FIRST THE WALDEN DISTRIBUTION FACILITIES, AS YOU UNDERSTAND
7 THEM. 8 A. WALDEN OPERATES AND RUNS TWO TRADITIONAL WAREHOUSE
9 OPERATIONS, ONE IN TENNESSEE, ONE IN CALIFORNIA, WHERE THE 10 WALDEN RDC'S WILL RECEIVE SHIPMENTS FROM PUBLISHERS, THEY WILL
11 RECEIVE THE BOOKS, PROCESS THEM AND PUT THEM INTO THE 12 WAREHOUSE, AND THEN OVER TIME THEY WILL MAKE DECISIONS ON WHEN
13 TO SEND WHAT BOOKS TO WHICH WALDEN BOOKSTORES THEMSELVES. 14 Q. SO DO I UNDERSTAND FROM YOUR TESTIMONY THAT ONE OF THE
15 FUNCTIONS THAT THE WALDEN DISTRIBUTION CENTERS PERFORM IS A 16 RECEIVING FUNCTION?
17 A. MOST DEFINITELY, YES. 18 Q. AND SECONDLY, YOU MENTIONED WAREHOUSE. IS THERE A
19 WAREHOUSING FUNCTION THAT IS PERFORMED BY THE WALDEN CENTERS? 20 A. RIGHT. IN MY DISTRIBUTION DISCIPLINE, A WAREHOUSING
21 FUNCTION MEANS THAT YOU ACTUALLY WILL TAKE OR RECEIVE PRODUCT 22 INTO THE WAREHOUSE AND PUT IT IN APPROPRIATE LOCATIONS FOR
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23 FILLING ORDERS LATER. 24 Q. WHAT EFFECT, IF ANY, DOES WALDEN'S PERFORMANCE OF THE
25 RECEIVING FUNCTION AT ITS DISTRIBUTION CENTER HAVE ON THE page 93

1 WALDEN STORES? 2 A. IT ACTUALLY TAKES A LOT OF COSTS OUT OF THE WALDEN STORE
3 OPERATIONS. I BELIEVE THAT'S A KEY HERE, BECAUSE TO THE EXTENT 4 THAT YOU REDUCE THE NUMBER OF SHIPMENTS BEING SENT TO
5 INDIVIDUAL RETAIL STORES, YOU TAKE THE BURDEN OFF THE STORE 6 MANAGER IN HAVING TO OPEN ALL THE CARTONS AND PROCESS ALL THE
7 ORDERS AND RECONCILE THEM. IT MEANS YOU NEED LESS INVENTORY TO 8 STORE BOOKS AT THE RETAIL STORES, AND YOU CAN MAXIMIZE THE
9 SHELF SPACE ON BOOKS THAT YOU ACTUALLY ARE TRYING TO SELL TO 10 CUSTOMERS WALKING IN YOUR STORE.
11 SO ACTUALLY, THERE'S TREMENDOUS EFFICIENCIES 12 AFFORDED AT THE STORE LEVEL BY HAVING WALDEN DO ITS WORK AT ITS
13 RETAIL DISTRIBUTION CENTERS. 14 Q. I WANT TO FOCUS PRIMARILY ON FUNCTIONS. WHAT STEPS ARE
15 INVOLVED IN THE RECEIVING FUNCTION? WHEN A COMPANY RECEIVES 16 BOOKS, AS AN ISSUE IN THIS CASE, WHAT STEPS ARE INVOLVED IN
17 RECEIVING? 18 A. WELL, AT THE WALDEN RDC'S, THEY WILL HAVE A SHIPMENT COME
19 IN FROM SIMON & SCHUSTER, ON A SEMI TRUCK, MAYBE FULL 20 TRUCKLOAD. THE BOOKS NEED TO BE UNLOADED. LIKELY THEY'RE ON
21 PALLETS. YOU NEED TO BREAK UP THE PALLETS, AND MOST LIKELY 22 THROUGH SCANNERS, YOU CHECK TO ENSURE THAT WHAT'S ON THE
23 SHIPPING LIST OR THE PURCHASE ORDERS IS ACTUALLY DELIVERED TO 24 YOU.
25 YOU THEN HAVE TO HAVE WORKERS TAKE THE CARTONS OFF page 94

1 THE PALLET BY FORKLIFT OR BY WHATEVER MEANS, AND TAKE THEM INTO 2 THE PHYSICAL WAREHOUSE AND PUT THEM IN APPROPRIATE LOCATIONS
3 THAT, BY DESIGN, OKAY, WE'RE GOING TO PUT SIMON & SCHUSTER 4 FRONT LIST HERE, WE'RE GOING TO PUT BACK LIST THERE, WE'RE
5 GOING TO PUT STEPHEN KING HERE. 6 SO THAT IS BASICALLY WHAT'S INVOLVED IN TERMS OF THE
7 RECEIVING FUNCTION OF AN RDC. 8 Q. AND IS THAT THE STAGE AT WHICH THE BOOKS ARE ENTERED INTO
9 THE COMPANY'S INVENTORY? 10 A. CORRECT.
11 Q. AND SO AS THOSE FUNCTIONS ARE PERFORMED AT THEIR 12 DISTRIBUTION CENTER, WILL THERE BE THE SAME FUNCTIONS PERFORMED
13 AT THE STORE LEVEL? 14 A. IT SIMPLIFIES IT AT THE STORE LEVEL. THE VARIETY OF
15 FUNCTIONS THAT THE STORE MANAGER NEEDS TO UNDERTAKE AS A RESULT 16 OF ALL THESE STEPS AT THE WALDEN RDC --IT'S LIKE A
17 TRANSFERRING OF WORK FROM THE STORE TO THE WALDEN RDC. 18 Q. AND DOES THE PERFORMANCE OF THE WAREHOUSING FUNCTION AT THE
19 DISTRIBUTION CENTER AFFECT THE AMOUNT OF STORAGE SPACE THAT IS 20 NEEDED AT THE STORE LEVEL?
21 A. MOST DEFINITELY. YOU NEED TO STORE LESS INVENTORY IN A 22 BOOK ROOM AT THE STORE LEVEL, AND YOU CAN MAXIMIZE THE SPACE
23 FOR ACTUALLY HAVING BOOKS ON DISPLAY FOR CONSUMERS TO PURCHASE. 24 Q. DID YOU BECOME FAMILIAR --
25 MR. NELSON: YOUR HONOR, I'D LIKE TO OBJECT AT THIS page 95

1 POINT. APPARENTLY THERE WAS A MOTION IN LIMINE THAT THE COURT 2 HAD GRANTED WHICH LIMITED THE EVIDENCE WITH REGARD TO BENEFITS
3 OF THE RDC'S AT THE STORE LEVEL. IT WAS RULED BY THIS COURT AS 4 BEING IRRELEVANT. I MOVE TO STRIKE THIS LINE OF QUESTIONING.
5 MR. DEBRUIN: YOUR HONOR, WHAT I'M TRYING TO ELICIT 6 IS INFORMATION RELATING TO THE COSTS, AND SIMPLY THE
7 TRANSFERENCE OF FUNCTION. 8 THE COURT: YOU KNOW WHICH NUMBER OF MY ORDER IT
9 WAS? 10 MR. NELSON: I DO NOT AT THIS POINT, YOUR HONOR.
11 SORRY. ACTUALLY, I BELIEVE IT WAS --WAS IT NUMBER 7? 12 MR. RADER: NUMBER 7, YOUR HONOR, DEFENDANTS' MOTION
13 IN LIMINE NUMBER 7. 14 THE COURT: MY RULING NUMBER 7, IN THE ORDER WHICH
35
35 Page 36 37
15 WAS FILED APRIL 5TH, READS, 16 "THE PLAINTIFFS' MOTION IN LIMINE TO BAR EVIDENCE
17 RELATING TO THE PLAINTIFFS' CREDIT TERMS IS GRANTED. 18 AS THE COURT HAS ALREADY GRANTED SUMMARY JUDGMENT
19 FOR THE DEFENDANTS ON THE ISSUE OF WHETHER THEY 20 RECEIVE DISCRIMINATORY CREDIT TERMS FROM EITHER
21 PARTY, THERE IS NO NEED FOR EITHER PARTY TO PRESENT 22 TESTIMONY ABOUT CREDIT TERMS."
23 THAT DOESN'T SEEM TO APPLY HERE. 24 MR. NELSON: YOUR HONOR, I BELIEVE I CALLED THE
25 COURT'S ATTENTION TO THE COURT'S ORDER AT PAGE 6. page 96

1 THE COURT: WHICH NUMBER? 2 MR. NELSON: MY UNDERSTANDING WAS, IT WAS IN MOTION
3 IN LIMINE NUMBER 7, BUT THAT'S THE COURT'S ORDER AT PAGE 6. 4 MR. PETROCELLI: IT'S DEFENDANTS'.
5 THE COURT: ON PAGE 6, MY ORDERS ARE 16 AND 17, 6 NEITHER OF WHICH APPLY HERE. MAYBE YOU CAN LOOK THAT UP AND
7 CALL IT TO MY ATTENTION AT THE NEXT RECESS. YOU MAY PROCEED. 8 BY MR. DEBRUIN:
9 Q. DR. FRAZIER, IN THE COURSE OF YOUR WORK, DID YOU LEARN WHAT 10 QUANTITIES OR TYPES OF SHIPMENTS WALDEN RECEIVES AT ITS RDC'S
11 OF BOOKS? HOW DID THEY TAKE BOOKS INTO THEIR RDC? 12 A. THE WALDEN RDC'S.
13 Q. THE WALDEN RDC'S. 14 A. WELL, THEY WILL GET SHIPMENTS DIRECT FROM PUBLISHERS, AND
15 THEY WILL, YOU KNOW, TAKE --I THINK I'VE DESCRIBED --16 Q. HOW ARE THE CARTONS PACKED FOR THE WALDEN RDC?
17 A. OH, I UNDERSTAND. THE WALDEN RDC'S ONLY ORDER IN CARTON 18 LOTS. SO IN PROCESSING ORDERS BY PUBLISHERS FOR WALDEN RDC'S,
19 THERE WOULD BE NO PICK-AND-PACK ASSOCIATED WITH RDC ORDERS. 20 THAT'S AN IMPORTANT POINT.
21 Q. AND JUST FOR THE RECORD, CAN YOU DEFINE WHAT YOU MEAN BY 22 CARTON LOTS?
23 A. RIGHT. IF WALDEN WOULD ORDER --LET'S SAY IF THERE WERE 20 24 TITLES IN A CARTON. THEY MIGHT ORDER 60 TITLES, OR THREE
25 CARTONS. YOU'D NEVER --THEY'D NEVER ORDER, ON A P. O., A SPLIT page 97

1 CARTON WHERE SOMEBODY WOULD HAVE --AT THE PUBLISHER WAREHOUSE 2 WOULD HAVE TO OPEN UP A CARTON AND PUT PARTIALS INTO A BOX AND
3 THEN PUT OTHER BOOKS IN AND SEND IT TO A WALDEN RDC. A WALDEN 4 RDC GETS ALL CARTON LOT BOOKS.
5 Q. DR. FRAZIER, DO THE WALDEN STORES, THE ACTUAL RETAIL 6 STORES, RECEIVE ALL OF THEIR BOOKS THROUGH THE TWO DISTRIBUTION
7 CENTERS? 8 A. NO.
9 Q. HOW ELSE DO THEY RECEIVE BOOKS? 10 A. THE INDIVIDUAL WALDEN BOOKSTORES RECEIVE A CONSIDERABLE
11 NUMBER OF BOOKS DIRECTLY FROM PUBLISHERS, STILL, ON A DROP SHIP 12 BASIS. THEY ALSO RECEIVE BOOKS THROUGH WHOLESALERS, LIKE
13 INGRAM. 14 Q. AND DO THEY RECEIVE, THOSE STORES --DO THOSE STORES
15 RECEIVE FROM INGRAM ALSO ON A DROP SHIP BASIS? 16 A. INGRAM DEALS WITH THEM ON A DROP SHIP BASIS, YES.
17 Q. SO DO I UNDERSTAND CORRECTLY THAT A GIVEN PUBLISHER WOULD 18 BOTH SHIP BOOKS TO THE WALDEN RDC BUT ALSO SHIP BOOKS TO
19 INDIVIDUAL WALDEN STORES? 20 A. YES, THAT HAPPENS REGULARLY.
21 Q. ALL RIGHT. LET ME SWITCH TO THE BORDERS DISTRIBUTION 22 FACILITIES. CAN YOU DESCRIBE FOR THE COURT THE DISTRIBUTION
23 FACILITIES THAT THE BORDERS PARENT, THE BORDERS GROUP, THE 24 BORDERS STORES THEMSELVES OPERATE?
25 A. IT'S MY UNDERSTANDING THAT BORDERS HAS FOUR FACILITIES, page 98

1 PRIMARILY DEDICATED TO BOOKS, AND THESE FACILITIES ARE NOT 2 TRADITIONAL WAREHOUSES, AS I'VE JUST DESCRIBED HOW WALDEN
3 CONDUCTS ITS BUSINESS. 4 THE BORDERS FACILITIES ARE CALLED FLOW-THROUGH
5 FACILITIES, WHERE A TRUCK FROM SIMON & SCHUSTER WOULD PULL IN 6 TO THE BORDERS FACILITY, ONE OF THE FOUR, IT WOULD BE UNLOADED,
36
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7 AND PROCESSING WOULD BE DONE RIGHT THERE. YOU'D PUT A SPECIAL 8 BINC, B-I-N-C, I BELIEVE, STICKER ON IT, YOU'D --THE WORKERS
9 AT THE FLOW-THROUGH FACILITIES WOULD START PROCESSING ORDERS 10 RIGHT THEN AND THERE FOR SHIPMENT ON OTHER TRUCKS TO THE
11 INDIVIDUAL BORDERS STORE. 12 AND VERY LITTLE OF THE BOOK --OF THE BOOKS SENT TO
13 BORDERS FLOW-THROUGH FACILITIES ARE ACTUALLY RECEIVED AND PUT 14 INTO INVENTORY IN A PHYSICAL BUILDING. THAT IS NOT A MAIN PART
15 OF THE FLOW-THROUGH FACILITY THAT BORDERS OPERATES. 16 Q. NOW, IN YOUR ANSWER YOU REFERENCED CULLED A BINC, B-I-N-C,
17 STICKER. DO YOU KNOW WHAT THAT IS? 18 A. IT'S A STICKER THAT, FOR SALES AND INVENTORY CONTROL
19 PURPOSES AND PERHAPS OTHER PURPOSES, ARE PUT ON BOOKS IN THE 20 BORDERS OPERATION.
21 Q. SO IT'S NOT A PARTICULAR --IS THAT A PARTICULAR BORDERS 22 FUNCTION OR IS THAT SOMETHING --
23 A. I THINK THAT --OTHERS WILL PUT VARIOUS LABELS ON BOOKS, 24 BUT I THINK THE BORDERS BINC IS DIFFERENT IN SOME SENSE.
25 Q. ALL RIGHT. NOW, WHAT QUANTITIES OR TYPES OF SHIPMENTS DOES page 99

1 BORDERS RECEIVE AT ITS RDC'S? 2 A. BECAUSE THEY DO NOT ACTUALLY RECEIVE AND STORE A LOT OF
3 INVENTORY, THAT --AND THE FACT OF HOW THEY OPERATE THE 4 FLOW-THROUGH FACILITIES THAT I JUST DESCRIBED, THEY WILL ORDER
5 QUITE A SIZEABLE NUMBER OF BOOKS IN NON-CARTON LOT QUANTITIES, 6 WHICH MEANS THAT, FOR EXAMPLE, ON A CERTAIN TITLE THEY MIGHT
7 HAVE AN ORDER FOR 23 BOOKS, AND IF THERE WERE 20 IN ONE CARTON, 8 THE WORKER WOULD PULL ONE CARTON DOWN. THERE'S NO
9 PICK-AND-PACK ASSOCIATED WITH THAT. BUT THE OTHER --THE OTHER 10 THREE BOOKS, THEY'D HAVE TO STAPLE A BOX, THEY'D HAVE TO OPEN
11 UP ONE OF THE CARTONS, THEY'D HAVE TO TAKE THREE BOOKS OUT, PUT 12 IT IN THE CARTON, AND THEN START PUTTING SOME OTHER NON-CARTON
13 LOT ORDERS IN THAT CARTON, AS WELL. 14 SO THERE'S CONSIDERABLY MORE PICK-AND-PACK EXPENSE
15 THAT THE PUBLISHERS INCUR IN SERVING BORDERS THROUGH ITS FOUR 16 FLOW-THROUGH FACILITIES.
17 Q. I WAS GOING TO ASK YOU, WHEN YOU SAY A WORKER WOULD HAVE TO 18 PULL BOOKS, ARE YOU REFERRING TO A WORKER AT THE BORDERS
19 FACILITY OR AT THE PUBLISHER'S? 20 A. PUBLISHER'S FACILITIES, I'M SORRY.
21 Q. OKAY. NOW, IN ADDITION TO RECEIVING BOOKS THROUGH ITS 22 DISTRIBUTION FACILITIES, ARE THERE OTHER WAYS IN WHICH THE
23 BORDERS STORES RECEIVE BOOKS? 24 A. IT'S MY UNDERSTANDING THEY RECEIVE A VERY SMALL NUMBER OF
25 DROP SHIPMENTS FROM PUBLISHERS, AND THAT THEY DO RECEIVE BOOKS page 100

1 FROM WHOLESALERS LIKE INGRAM, FOR EXAMPLE. 2 Q. AND THOSE ARE ALSO RECEIVED DIRECTLY TO THE STORES?
3 A. YES, DROP SHIP. 4 Q. ARE YOU FAMILIAR WITH ANY OTHER DISTRIBUTION FACILITIES
5 OPERATED BY THE BORDERS DEFENDANTS? 6 A. THEY HAVE WHAT IS CALLED A FULFILLMENT CENTER IN NEW
7 JERSEY. 8 Q. AND CAN YOU DESCRIBE WHAT THE BORDERS FULFILLMENT CENTER
9 IS? 10 A. THIS IS A FACILITY THAT CARRIES MANY, MANY TITLES OF BOOKS,
11 BUT VERY FEW OF EACH TITLE, TWOSIES, THREESIES, SOMETHING LIKE 12 THAT, AND IT'S A FACILITY USED TO GET INTERNET ORDERS TO
13 CUSTOMERS, BUT IMPORTANTLY, IT'S ALSO USED WHEN A CUSTOMER MAY 14 GO INTO A WALDEN BOOKSTORE AND THEY DON'T FIND THE WILLIE MAYS
15 BOOK THAT THEY WANTED, THEY CAN SPECIAL ORDER IT, AND THAT 16 ORDER WOULD BE PROCESSED AT THE FULFILLMENT CENTER OF BORDERS,
17 SENT TO THE INDIVIDUAL STORE, AND THE CUSTOMER WOULD BE 18 NOTIFIED, AND THEY WOULD COME IN AND PICK UP THEIR WILLIE MAYS
19 AUTOBIOGRAPHY. SO THAT'S MY UNDERSTANDING OF THE PURPOSE FOR 20 THE FULFILLMENT CENTER.
21 Q. NOW, JUST FOR THE RECORD, DO YOU RECALL WHERE THE BORDERS 22 FULFILLMENT CENTER PHYSICALLY IS LOCATED?
23 A. LET'S SEE. I REMEMBER WHERE BARNES & NOBLE'S IS, BUT.... 24 I'M GOING TO SAY TENNESSEE, BUT I'M NOT CERTAIN OF THAT ANSWER.
25 Q. ALL RIGHT. WHAT QUANTITIES OR TYPES OF SHIPMENTS OF BOOKS
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page 101
1 DOES BORDERS RECEIVE AT ITS FULFILLMENT CENTER? 2 A. IT WOULD RECEIVE NON-CARTON LOTS, JUST INITIALLY BUILDING
3 UP INVENTORY THEY MAY HAVE HAD TWO, THREE OF A TITLE, BUT THEN 4 TO, OVER TIME, AS --IN TERMS OF REORDERS, THEY WOULD LIKELY
5 GET BOOKS SENT ONE PER TITLE. SO IT'S VERY SMALL QUANTITIES OF 6 INDIVIDUAL TITLES.
7 Q. IS IT YOUR UNDERSTANDING THAT THE FULFILLMENT CENTER IS 8 USED ONLY TO FILL EITHER INTERNET OR SPECIAL ORDER ORDERS?
9 A. THAT'S MY UNDERSTANDING. 10 Q. DO YOU KNOW HOW MANY DIFFERENT TITLES OF BOOKS ARE HELD BY
11 BORDERS AT ITS FULFILLMENT CENTER? 12 A. MANY. I DON'T HAVE A PRECISE NUMBER, BUT COMPARED TO A
13 HUNDRED TO A HUNDRED AND FIFTY THOUSAND TITLES IN A BORDERS 14 SUPERSTORE, I MEAN, THESE TITLES WOULD TOTAL OVER A MILLION,
15 MOST LIKELY. 16 Q. CAN YOU DESCRIBE FOR THE COURT THE DISTRIBUTION FACILITIES
17 THAT ARE OPERATED BY BARNES & NOBLE? 18 A. BARNES & NOBLE, OVER TIME, HAS PRIMARILY RELIED ON ONE
19 TRADITIONAL WAREHOUSE IN NEW JERSEY, AND IT IS SIMILAR IN 20 OPERATION TO THE TRADITIONAL WAREHOUSES THAT I DESCRIBED, THE
21 TWO THAT WALDEN OPERATES. 22 Q. SO THE LARGE BARNES & NOBLE DISTRIBUTION FACILITY BOTH
23 RECEIVES BOOKS AND ALSO HAS A WAREHOUSING FUNCTION? 24 A. CORRECT.
25 Q. AND HOW ARE BOOKS RECEIVED BY BARNES & NOBLE AT ITS page 102

1 DISTRIBUTION FACILITIES? 2 A. THEY ARE RECEIVED IN CARTON LOTS, JUST AS WALDEN.
3 Q. NOW, DO THE BARNES & NOBLE STORES RECEIVE BOOKS OTHER THAN 4 THROUGH THE BARNES & NOBLE DISTRIBUTION CENTER?
5 A. YES. BARNES & NOBLE, OVER TIME, HAS RECEIVED SIGNIFICANTLY 6 MORE BOOKS DROP-SHIPPED THAN WALDENBOOKS. IN '97, I THINK,
7 ONLY 47 PERCENT OF THE BOOKS SOLD BY BARNES & NOBLE ACTUALLY 8 WENT THROUGH THE RDC. SO A SIZEABLE NUMBER OF PUBLISHERS
9 DROP-SHIP BOOKS TO BARNES & NOBLE, AND THEN, OF COURSE, BARNES 10 & NOBLE CAN, AT THE INDIVIDUAL STORES, CAN RECEIVE BOOKS FROM
11 WHOLESALERS LIKE INGRAM, AS WELL. 12 Q. SO AGAIN, AS IN THE CASE WITH WALDEN, THE BARNES & NOBLE
13 RETAIL STORES RECEIVES BOOKS DIRECTLY FROM PUBLISHERS JUST AS 14 THE RETAIL DISTRIBUTION CENTER IS ALSO RECEIVING BOOKS FROM
15 THOSE SAME PUBLISHERS? 16 A. SURE.
17 Q. SO THE PUBLISHER IS SENDING BOTH PLACES. 18 A. IN LARGE AMOUNTS, YEAH.
19 Q. ARE YOU FAMILIAR WITH BARNES & NOBLE'S EXTENDED TITLE BASE 20 FACILITY?
21 A. YES. 22 Q. CAN YOU DESCRIBE THAT, PLEASE?
23 A. IT'S SIMILAR TO THE FULFILLMENT CENTER IN THE BORDERS 24 GROUP. IT'S A FACILITY --I KNOW WHERE THIS IS --LOCATED
25 CLOSE TO THE TRADITIONAL WAREHOUSE IN NEW JERSEY THAT BARNES & page 103

1 NOBLE OPERATES, AND AGAIN, THIS IS DESIGNED TO FACILITATE 2 INTERNET ORDERS FROM BARNESANDNOBLE. COM, AND ALSO SPECIAL
3 ORDERS FROM INDIVIDUAL STORES. 4 Q. WHAT QUANTITIES OR TYPES OF SHIPMENTS OF BOOKS DOES BARNES
5 & NOBLE RECEIVE AT ITS EXTENDED TITLE BASE FACILITY? 6 A. MANY, MANY, TITLES, VERY FEW COPIES OF EACH. IN INITIALLY
7 SETTING UP THE EXTENDED TITLE BASE FACILITY, THEY LIKELY HAD 8 ORDERS OF TWO, THREE, FOUR PER TITLE, AND IN REPLENISHING THOSE
9 TITLES OVER TIME, LIKELY, IN MOST CASES, AN ORDER OF ONE PER 10 TITLE.
11 Q. SO DOES THE EXTENDED TITLE BASE FACILITY FOR BARNES & NOBLE 12 OBTAIN BOOKS IN CARTON QUANTITIES OR NOT IN CARTON QUANTITIES?
13 A. NON-CARTON QUANTITIES. 14 Q. DR. FRAZIER, DID YOU FORM AN OPINION AS TO WHETHER THE
15 RETAIL DISTRIBUTION CENTER DISCOUNTS THAT DEFENDANTS HAVE 16 RECEIVED ARE GREATER THAN OR LESS THAN ANY COST SAVINGS
17 REALIZED BY PUBLISHERS FROM SHIPPING TO THOSE RDC'S?
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18 A. YES. 19 Q. AND WHAT IS YOUR OPINION? JUST, FIRST OF ALL, STATING IT
20 OVERALL, AND THEN WE'LL EXPLORE THE BASIS FOR THAT OPINION. 21 A. THE RDC DISCOUNTS RECEIVED BY DEFENDANTS ARE SIGNIFICANTLY
22 GREATER THAN ANY PUBLISHER COST SAVINGS FROM SERVING THE 23 DEFENDANTS THROUGH THE RETAIL DISTRIBUTION CENTERS.
24 Q. IN GENERAL, CAN YOU DESCRIBE FOR THE COURT THE METHODOLOGY 25 THAT YOU USED TO FORM THAT OPINION, JUST THE BASIC STEPS OF
page 104
1 YOUR ANALYSIS? 2 A. MY ANALYSIS IN THIS AREA INVOLVED THREE STEPS, THE FIRST OF
3 WHICH WAS TO IDENTIFY THE RDC DISCOUNTS IN QUESTION, AND WHAT 4 THEY ENTAILED.
5 Q. AND WHAT WAS THE SECOND STEP? 6 A. THE SECOND STEP WAS TO IDENTIFY POTENTIAL OR MAXIMUM
7 POSSIBLE PUBLISHER COST SAVINGS FROM SERVING THE DEFENDANT 8 ORGANIZATIONS THROUGH THE RDC'S RATHER THAN THROUGH A DROP
9 SHIPMENT METHODOLOGY. 10 Q. AND YOU MENTIONED THERE WERE THREE STEPS. WHAT, THEN, WAS
11 THE LAST STEP? 12 A. THE LAST STEP IS SIMPLY COMPARING STEPS TWO AND ONE,
13 EARLIER STEPS, WHAT ARE PUBLISHER COST SAVINGS, HOW DO THEY 14 COMPARE TO THE LEVEL OF THE RDC DISCOUNTS AFFORDED DEFENDANTS.
15 Q. ALL RIGHT, LET'S BEGIN WITH THE FIRST STEP AND SEE IF WE 16 CAN DO THIS QUICKLY.
17 DO YOU UNDERSTAND THAT THE DEFENDANTS, IN FACT, 18 RECEIVE ADDITIONAL DISCOUNTS ON PURCHASES THAT ARE SHIPPED TO
19 THEIR RDC'S? 20 A. THAT IS MY UNDERSTANDING.
21 Q. AND FROM --WHAT IS THE BASIS FOR THAT UNDERSTANDING? 22 A. IN PART, I LOOKED AT THE ABA BOOK BUYER'S HANDBOOK, BUT I
23 ALSO RELIED ON A VARIETY OF TESTIMONY OF PEOPLE IN THE CASE, 24 AND THEIR DEPOSITIONS, AND VARIOUS RECORDS THAT I EXAMINED.
25 Q. IN OTHER WORDS, YOU RELIED ON TESTIMONY BY THE DEFENDANTS page 105

1 ON THE DISCOUNTS THEY HAD RECEIVED? 2 A. CORRECT.
3 Q. IN YOUR REVIEW OF DOCUMENTS, INCLUDING PUBLISHERS' STATED 4 TERMS AS SET FORTH IN THE ABA REDBOOK, DID YOU FIND EVIDENCE OF
5 DIFFERENCES IN TERMS FOR SHIPMENTS TO RETAIL DISTRIBUTION 6 CENTERS AND SHIPMENTS DIRECTLY TO RETAIL STORES?
7 A. YES. 8 Q. CAN YOU DESCRIBE FOR THE COURT THE AMOUNT OF DIFFERENCE
9 THAT YOU MOST TYPICALLY FOUND INVOLVED IN RDC SHIPMENTS? 10 A. THE BASE OR TYPICAL OR STANDARD RDC DISCOUNTS TENDED TO BE
11 2 PERCENT RDC'S DISCOUNT FOR HARDCOVER AND TRADE PAPERBACK 12 BOOKS, AND 4 PERCENT RDC DISCOUNT FOR MASS MARKET BOOKS.
13 BUT IT'S IMPORTANT FOR ME TO ALSO ADD THAT THERE ARE 14 A VARIETY OF OTHER CONCERNS THAT WE NEED TO CONSIDER,
15 ESPECIALLY THE FACT THAT THERE'S FREIGHT OUT ALLOWANCE INVOLVED 16 IN MANY SHIPMENTS, AND THERE'S SPECIAL INCENTIVES THAT BARNES &
17 NOBLE RECEIVES, THERE'S CHARGE BACK PENALTIES THAT BORDERS 18 RECEIVES.
19 SO THE STANDARD TEND TO BE 2 AND 4, 2 FOR THE TRADE 20 BOOKS AND 4 FOR MASS MARKET, BUT OFTENTIMES WHEN FREIGHT'S
21 INVOLVED, THOSE GO UP TO 3 PERCENT TO 5 PERCENT, AND THEN YOU 22 CAN ADD ON OTHER INCENTIVES FOR PENALTIES, AS WELL. SO IN
23 ACTUALITY, THE 2 AND 4 ARE SORT OF STANDARD, BUT THEY CAN BE 24 SIGNIFICANTLY GREATER THAN THAT, AS WELL.
25 Q. NOW, WHEN YOU SAY THAT THEY CAN BE SIGNIFICANTLY GREATER, page 106

1 IS IT YOUR TESTIMONY THAT YOU'VE SEEN INSTANCES WHERE, IN FACT, 2 THE RDC DISCOUNTS THAT THE DEFENDANTS HAVE RECEIVED HAVE BEEN
3 GREATER THAN WHAT YOU'VE DESCRIBED AS THE BASE OR TYPICAL 4 DISCOUNT?
5 A. YES, BASED ON EVIDENCE IN THE CASE, YES. 6 Q. ALL RIGHT. LET'S START FIRST, AND JUST EXPLORE AN EXAMPLE
7 OF WHAT YOU'VE DESCRIBED AS THE BASE OR TYPICAL DISCOUNT. 8 YOUR HONOR, IF YOU CAN LOOK TO THE BINDER.
9 FIRST TURN TO TAB 2, PLEASE.
39
39 Page 40 41
10 A. ALL RIGHT. I'M FIGHTING BIFOCALS, SO FORGIVE ME. I HAVE 11 IT.
12 Q. CAN YOU IDENTIFY FOR THE RECORD --DO YOU RECOGNIZE WHAT 13 TAB 2 IS AN EXCERPT OF?
14 A. IT'S AN EXCERPT FROM THE ABA BOOK BUYER'S HANDBOOK, 1999, 15 AND IT INVOLVES SIMON & SCHUSTER'S TRADE TERMS.
16 Q. CAN YOU SHOW FOR THE COURT AND EXPLAIN WHAT THESE TERMS 17 PROVIDE IN TERMS OF THE DIFFERENTIAL FOR AN RDC DISCOUNT?
18 A. WELL, IF WE FOCUS ON THE DISCOUNT SCHEDULE, WHICH IS IN THE 19 TOP RIGHT-HAND PORTION, ON THIS PAGE, 689 --
20 Q. LET ME JUST IDENTIFY FOR THE RECORD, YOU'RE REFERRING TO 21 PAGE 689 AT THE TOP RIGHT-HAND CORNER?
22 A. AND 776 AT THE BOTTOM. 23 Q. LET'S JUST USE ONE FOR CONSISTENCY. WHY DON'T WE USE THE
24 PAGE AT THE BOTTOM. 25 A. OKAY, 776.
page 107
1 Q. WHICH WOULD BE PAGE 776 OF EXHIBIT NUMBER 6. OKAY. 2 A. AND WE CAN SEE, FOR EXAMPLE, THAT EDI ORDERS, ANY QUANTITY,
3 THERE'S A 46 PERCENT DISCOUNT, AND --4 Q. FOR WHAT TYPE OF BOOK IS THAT ON THE DISCOUNT SCHEDULE?
5 A. THAT'S AN ELECTRONIC ORDER FROM A CUSTOMER. 6 Q. AND DOES THIS DISCOUNT SCHEDULE APPLY TO.... YOU
7 PREVIOUSLY IDENTIFIED IN TESTIMONY TRADE BOOKS AND MASS MARKET 8 BOOKS. DO YOU KNOW WHICH...?
9 A. THIS IS TRADE. HARD COVER TRADE PAPERBACK. 10 Q. AND HOW DO YOU KNOW THAT, DR. FRAZIER?
11 A. BECAUSE I THINK SIMON & SCHUSTER TRADE ONLY INVOLVES THOSE 12 TYPES OF BOOKS.
13 Q. ON THE DISCOUNT SCHEDULE ITSELF, DO YOU SEE, IS THERE ANY 14 REFERENCE AT THE TOP OF THE DISCOUNT SCHEDULE TO THE TYPE OF
15 BOOK? YOU MAY NEED YOUR MAGNIFYING GLASS. I'M AFRAID I DON'T 16 KNOW IF THERE'S STILL ONE UP THERE.
17 A. IT SAYS, "TRADE." 18 Q. SO THE BASIC TRADE DISCOUNT FROM SIMON & SCHUSTER ON ANY
19 QUANTITY, IF YOU'RE ORDERING ELECTRONICALLY, IS 46 PERCENT? 20 A. CORRECT.
21 Q. AND DOES SIMON & SCHUSTER, AS PART OF ITS PUBLISHED TERMS, 22 PROVIDE AN RDC DISCOUNT?
23 A. YES. IF YOU GO DOWN, RIGHT BELOW THE DISCOUNT SCHEDULE, 24 SORT OF IN THE MIDDLE OF THE RIGHT-HAND COLUMN OF PAGE 776, YOU
25 SEE A "RETAIL DISTRIBUTION CENTER PLAN" IN BOLD, AND IT READS, page 108

1 "A 48 PERCENT DISCOUNT PLUS FREE FREIGHT FOR CARTON QUANTITIES 2 SHIPPED TO RETAIL DISTRIBUTION CENTER."
3 Q. ALL RIGHT, AND IS THIS AN EXAMPLE OF AN INSTANCE WHERE THE 4 PUBLISHER'S PUBLISHED RDC TERMS PROVIDE FOR AN ADDITIONAL
5 2 PERCENT DISCOUNT ON TRADE BOOKS? 6 A. THAT'S CORRECT.
7 Q. LET'S LOOK AT TAB NUMBER 3, WHICH IS ALSO AN EXCERPT FROM 8 PLAINTIFFS' EXHIBIT 6. CAN YOU IDENTIFY THIS FOR THE RECORD?
9 A. THIS IS A PAGE FOR POCKET BOOKS, A DIVISION OF SIMON & 10 SCHUSTER FROM THE ABA BOOK BUYER'S HANDBOOK, 1999.
11 Q. AND DO YOU KNOW WHAT KIND OF BOOKS POCKET BOOKS, THAT 12 DIVISION OF SIMON & SCHUSTER, SELLS?
13 A. I THINK IT DOES PRIMARILY MASS MARKET, BUT IT DOES SAY, 14 RIGHT BELOW THE WEB ADDRESS, "PUBLISHER OF MASS MARKET,
15 HARDCOVER AND TRADE PAPERBACKS." SO APPARENTLY, ALL THE 16 CATEGORIES OF --OF BOOKS THAT WE'RE TALKING ABOUT IN THIS
17 CASE. 18 Q. DOES THIS EXCERPT FROM THE BOOK BUYER'S HANDBOOK ALSO SET
19 FORTH A DISCOUNT SCHEDULE FOR POCKET BOOKS? 20 A. YES. IN THE UPPER LEFT-HAND CORNER OF PAGE 686.
21 Q. OKAY. I'M SORRY, JUST FOR THE RECORD, THE 686 IS THE LOWER 22 RIGHT-HAND PAGE NUMBER?
23 A. THAT'S CORRECT. 24 Q. WE HAVE SOMEWHAT COMPETING PAGE NUMBERS, EXHIBIT PAGE
25 NUMBERS AND THE BOOK PAGE NUMBERS. WHAT IS THE DISCOUNT page 109

1 SCHEDULE FOR POCKET BOOKS THAT IS SHOWN ON EXHIBIT PAGE 686? 40
40 Page 41 42
2 A. WELL, FIRST WE HAVE THE MASS MARKET CATEGORY, AND WE CAN 3 SEE HERE THAT ANY QUANTITY IS 44 PERCENT.
4 Q. SO THE BASIC DROP SHIP DISCOUNT IS 44 PERCENT? 5 A. 44 PERCENT FOR MASS MARKET. AND THEN WE CAN SEE RIGHT
6 BELOW THERE THAT THEY'RE TALKING ABOUT HARD COVER AND TRADE 7 PAPERBACK, AND ANY QUANTITY, THAT IS 46 PERCENT.
8 Q. SO THE POCKETS STANDARD NON-RDC DISCOUNTS ARE 44 PERCENT 9 FOR MASS MARKET AND 46 PERCENT FOR TRADE?
10 A. THAT'S CORRECT. 11 Q. AND AGAIN, DOES THIS SCHEDULE SHOW A PUBLISHED DIFFERENTIAL
12 FOR SHIPMENTS TO A RETAIL DISTRIBUTION CENTER? 13 A. RIGHT. IF WE GO A LITTLE BIT BELOW THE DISCOUNT SCHEDULE,
14 IN BOLD IT HAS "RETAIL DISTRIBUTION CENTER PLAN" ON THE 15 LEFT-HAND COLUMN, AND IT READS, "48 PERCENT DISCOUNT PLUS FREE
16 FREIGHT FOR CARTON QUANTITIES SHIPPED TO A RETAIL DISTRIBUTION 17 CENTER."
18 SO THE COMPARISON IS, FOR MASS MARKET, THAT 19 44 PERCENT COMPARED TO THE 48 PERCENT, OR A 4 PERCENT RDC
20 DISCOUNT FOR MASS MARKET; AND FOR HARDCOVER AND TRADE 21 PAPERBACK, IT'S A COMPARISON OF THE 46 PERCENT DISCOUNT
22 COMPARED TO THE 48 PERCENT RDC DISCOUNT, OR THE GAP OF 23 2 PERCENT.
24 Q. SO AGAIN, THIS IS AN EXAMPLE OF WHAT YOU'VE DESCRIBED AS 25 THE BASIC TYPICAL DIFFERENTIAL OF A 2 PERCENT DIFFERENTIAL ON
page 110
1 TRADE BOOKS AND A 4 PERCENT DIFFERENTIAL ON MASS MARKET BOOKS? 2 A. CORRECT.
3 Q. DO YOU KNOW WHETHER ALL PUBLISHERS, AS PART OF THEIR 4 PUBLISHED TERMS, PROVIDE A DISCOUNT DIFFERENTIAL THAT IS
5 2 PERCENT FOR TRADE BOOKS AND 4 PERCENT FOR MASS MARKET BOOKS? 6 A. NOT ALWAYS.
7 Q. ARE YOU AWARE OF ANY PUBLISHERS THAT PROVIDE A DIFFERENT 8 DIFFERENTIAL?
9 A. AS I INDICATED IN MY ORIGINAL EXPERT REPORT, I BELIEVE 10 LITTLE, BROWN IS A PUBLISHER THAT ONLY PROVIDES A 1 PERCENT RDC
11 DISCOUNT. 12 Q. LET'S TURN TO TAB 4, IF YOU WOULD, WHICH AGAIN IS AN
13 EXCERPT FROM PLAINTIFFS' EXHIBIT 6. CAN YOU IDENTIFY THIS FOR 14 THE RECORD?
15 A. THIS IS FROM THE ABA BOOK BUYER'S HANDBOOK 1999, PAGE 533 16 IN THE LOWER RIGHT-HAND CORNER OF THE PAGE, AND IT TALKS ABOUT
17 THE TERMS OF LITTLE, BROWN & COMPANY. 18 Q. AND WHAT CAN I HAVE AN RDC DISCOUNT DOES THIS SET FORTH FOR
19 LITTLE, BROWN & COMPANY? 20 A. THEY HAVE MASS MARKET 44 PERCENT, FOR EXAMPLE, TRADE PAPER
21 46 PERCENT. DEPENDING UPON QUANTITIES, MAYBE SLIGHTLY HIGHER 22 DISCOUNTS.
23 Q. SO YOU'RE AT THE LOWER RIGHT-HAND? 24 A. YES, I WAS LOOKING AT THE LOWER RIGHT-HAND COLUMN OF 533,
25 PAGE 533. page 111

1 Q. NOW, DOES LITTLE, BROWN ALSO HAVE CLOTH AND TRADE PAPER 2 BOOKS ON THIS SCHEDULE?
3 A. YES. 4 Q. LET ME JUST ASK YOU TO TURN TO THE NEXT PAGE. WHAT DOES
5 LITTLE, BROWN PROVIDE AS THEIR RDC DISCOUNT DIFFERENTIAL? 6 A. ON THE MIDDLE OF THE LEFT-HAND COLUMN OF THE NEXT PAGE,
7 PAGE 534, IN BOLD, "RETAIL DISTRIBUTION CENTER PLAN," IT SAYS, 8 "CUSTOMERS MEETING REQUIREMENTS FOR RETAIL DISTRIBUTION CENTERS
9 MAY EARN AN ADDITIONAL 1 PERCENT DISCOUNT." 10 Q. SO IN THIS CASE, THE PUBLISHED DIFFERENTIAL FOR ALL BOOKS
11 IS SIMPLY 1 PERCENT? 12 A. THAT'S CORRECT.
13 Q. ARE YOU AWARE OF ANY OTHER EXAMPLES OF PUBLISHERS WHO 14 PROVIDE A DISCOUNT DIFFERENTIAL ON RDC SHIPMENTS OF ONLY
15 1 PERCENT? 16 A. I BELIEVE WARNER BOOKS IS SIMILAR.
17 Q. ALL RIGHT, LET'S LOOK AT THAT AS ONE LAST EXAMPLE. LOOK AT 18 TAB 5, PLEASE. AGAIN, THIS IS AN EXCERPT OF PLAINTIFFS'
19 EXHIBIT 6. CAN YOU IDENTIFY THIS FOR THE RECORD? 20 A. THIS IS FROM THE ABA BOOK BUYER'S HANDBOOK 1999, ON PAGE
41
41 Page 42 43
21 892, THE TERMS FOR WARNER BOOKS. 22 Q. AND WHAT TERMS DOES WARNER BOOKS PROVIDE FOR SHIPMENTS TO A
23 RETAIL DISTRIBUTION CENTER? 24 A. IF YOU TURN TO THE NEXT PAGE, IN THE LEFT-HAND COLUMN NEAR
25 THE TOP, IT HAS, "RETAIL DISTRIBUTION CENTER PLAN. CUSTOMERS page 112

1 MEETING REQUIREMENTS FOR RETAIL DISTRIBUTION CENTERS MAY EARN 2 AN ADDITIONAL 1 PERCENT."
3 Q. NOW, YOU SAID THAT THE FIRST STEP IN FORMING YOUR OPINION 4 AS TO WHETHER THE RDC DISCOUNTS WERE COST-JUSTIFIED WAS TO
5 UNDERSTAND WHAT THE DIFFERENTIAL WAS, AND I BELIEVE YOU 6 TESTIFIED EARLIER THAT IN ADDITION TO THESE BASE OR TYPICAL
7 DISCOUNTS, THERE WERE OTHER CASES WHERE THE DEFENDANTS RECEIVED 8 MORE THAN THE TYPICAL 2 PERCENT TRADE OR 4 PERCENT MASS MARKET.
9 A. THAT'S CORRECT. 10 Q. CAN YOU DESCRIBE BRIEFLY, AGAIN, WHAT ADDITIONAL DISCOUNTS
11 YOU FOUND EVIDENCE OF? 12 A. WELL, IMPORTANT TO ME IS THAT FOR THE DEFENDANTS, MANY FREE
13 FREIGHT PUBLISHERS PAY A 1 PERCENT PRICE DISCOUNT TO COVER 14 EXPENSES INCURRED FROM --BY THE DEFENDANTS IN SHIPPING BOOKS
15 FROM THEIR RETAIL DISTRIBUTION CENTERS TO THE INDIVIDUAL 16 STORES.
17 Q. AND SO WHAT EFFECT DOES THAT HAVE ON THE DIFFERENTIAL 18 BETWEEN THE AMOUNTS THAT THE DEFENDANTS ARE PAYING ON RDC
19 SHIPMENTS AND THE PUBLISHERS' NON-RDC TERMS? 20 A. YOU HAVE TO CONSIDER EACH AND ALL COMPONENTS IN TERMS OF
21 PRICE DISCOUNTING THAT THE DEFENDANTS RECEIVE, AND EFFECTIVELY 22 THAT INCREASES THE TRADE --THE HARDCOVER AND TRADE PAPERBACK
23 RDC DISCOUNT TO 3 PERCENT, AND THE MASS MARKET DISCOUNT TO 24 5 PERCENT, IN THOSE CASES.
25 Q. ARE THOSE ADDITIONAL DISCOUNTS OR PAYMENTS THAT THE page 113

1 DEFENDANTS HAVE RECEIVED RELEVANT TO YOUR ANALYSIS? 2 A. OH, MOST DEFINITELY.
3 Q. AND WHY IS THAT? 4 A. AGAIN, AS A DISTRIBUTION EXPERT AND ASKED TO EXAMINE WHAT'S
5 INVOLVED IN RDC DISCOUNTS AND WHETHER PUBLISHER COST SAVINGS 6 ARE EQUIVALENT TO OR LESS OR GREATER THAN THOSE DISCOUNTS, I
7 CERTAINLY HAVE TO TAKE FREIGHT ALLOWANCES INTO ACCOUNT IN 8 JUDGING WHAT THE LEVEL OF THE ACTUAL DISCOUNTS ARE.
9 Q. DID BOTH BARNES & NOBLE AND BORDERS RECEIVE ADDITIONAL 10 DISCOUNTS IN THE FORM OF WHAT YOU'VE DESCRIBED AS FREIGHT
11 ALLOWANCES FROM PUBLISHERS? 12 A. MR. VENTRONE IN THE BARNES & NOBLE ORGANIZATION TESTIFIED,
13 FOR EXAMPLE, THAT MOST FREE FREIGHT PUBLISHERS PAY THE 14 1 PERCENT FREIGHT OUT ALLOWANCE TO BARNES & NOBLE, AND I
15 BELIEVE A MR. HOPKINS IN THE BORDERS ORGANIZATION TESTIFIED 16 THAT TWO OF THE LARGEST FREE FREIGHT PUBLISHERS, SIMON &
17 SCHUSTER AND HARPER COLLINS, ALSO PAY THE 1 PERCENT FREIGHT OUT 18 ALLOWANCE TO THE BORDERS ORGANIZATION.
19 Q. ALL RIGHT. NOW, FINALLY YOU TESTIFIED, I BELIEVE, THAT IN 20 ADDITION TO FREIGHT ALLOWANCES YOU FOUND EVIDENCE OF OTHER
21 TERMS THAT AFFECTED THE DIFFERENTIAL BETWEEN RDC SHIPMENTS AND 22 NON-RDC SHIPMENTS.
23 A. THE RECORD IS QUITE CLEAR THAT BARNES & NOBLE AT TIMES HAS 24 RECEIVED SPECIAL INCENTIVES OR REBATES THAT CAN TOTAL SEVERAL
25 PERCENT, AND THE RECORD'S QUITE CLEAR THAT THE BORDERS page 114

1 ORGANIZATION HAS OVER TIME RECEIVED SIZEABLE PENALTIES FOR 2 PUBLISHERS VIOLATING COMPLIANCE STANDARDS AND FULFILLING ORDERS
3 THROUGH THEIR RDC'S. THOSE ARE JUST A COUPLE EXAMPLES. 4 Q. WHEN YOU SAY, SIZEABLE PENALTIES THAT THE BORDERS GROUP HAS
5 RECEIVED, CAN YOU DEFINE WHAT YOU MEAN BY "SIZEABLE"? 6 A. SEVERAL MILLION.
7 Q. NOW, DID YOU ATTEMPT TO QUANTIFY THE TOTAL AMOUNT OF THE 8 DIFFERENTIAL THAT THE DEFENDANTS RECEIVED FROM EACH PARTICULAR
9 PUBLISHER? 10 A. I FELT THAT THAT WAS NOT NECESSARY, BECAUSE I USED THE
11 STANDARD 2 PERCENT RDC DISCOUNT FOR HARDCOVER AND TRADE 12 PAPERBACK AND THE 4 PERCENT RDC DISCOUNT FOR MASS MARKET, AND
42
42 Page 43 44
13 JUST PUBLISHERS' COST SAVINGS FOR FREIGHT ON BOARD PUBLISHERS 14 WHO DON'T PAY FREIGHT AND FREE FREIGHT PUBLISHERS WHO DON'T PAY
15 THE FREIGHT ALLOWANCE. SO I USED THOSE STANDARD DISCOUNT 16 LEVELS.
17 NOW, IF THOSE STANDARD DISCOUNT LEVELS FOR THOSE 18 TYPE OF COMPANIES ARE NOT --NOT EQUAL TO THEIR COST SAVINGS,
19 ANYTHING ABOVE THOSE WOULD NOT BE JUSTIFIED, EITHER. SO I 20 DIDN'T QUANTIFY, LIKE, SPECIAL INCENTIVES OR I DIDN'T TAKE
21 COMPLIANCE PENALTIES INTO ACCOUNT. 22 IMPORTANTLY, HOWEVER, FOR FREE FREIGHT PUBLISHERS
23 THAT ARE PAYING THIS 1 PERCENT FREIGHT ALLOWANCE, THEN THE 24 COMPARISON IS NOT 2-4, 3-5. SO I DID TAKE THE FREIGHT
25 ALLOWANCE INTO ACCOUNT. page 115

1 Q. DID YOU FORM AN OPINION AS TO WHETHER THE BASE 2 PERCENT 2 TRADE DIFFERENTIAL OR 4 PERCENT MASS MARKET DIFFERENTIAL,
3 WHETHER THOSE DIFFERENTIALS WERE GREATER THAN OR LESS THAN 4 PUBLISHER COST SAVINGS?
5 A. I HAVE A DEFINITE OPINION ON THAT, YES. 6 Q. WHAT WAS THAT OPINION, EVEN AS TO THE BASE 2 PERCENT TRADE,
7 4 PERCENT MASS MARKET? 8 A. THE RDC DISCOUNTS THAT THE DEFENDANTS HAVE BEEN RECEIVING
9 FOR QUITE A LONG TIME ARE MUCH GREATER THAN PUBLISHER COST 10 SAVINGS ASSOCIATED WITH SERVING THE DEFENDANTS THROUGH THEIR
11 RDC'S. 12 Q. HOW DID YOU GO ABOUT IDENTIFYING WHAT THE PUBLISHER COST
13 SAVINGS WERE IN PROVIDING SHIPMENTS TO AN RDC AS OPPOSED TO 14 SHIPMENTS DIRECTLY TO RETAIL STORES?
15 A. I TOOK BASICALLY TWO STEPS IN THAT ENDEAVOR. THE FIRST 16 STEP WAS THAT I CONSIDERED PHYSICAL ASSETS AND WORK FUNCTIONS,
17 OR WORK --JOB FUNCTIONS THAT WOULD HAVE BEEN AFFECTED BY THE 18 DIFFERENT METHODS OF, ONE, GOING TO RDC VERSUS FULFILLING
19 ORDERS TO INDIVIDUAL STORES; AND I JUDGED WHICH ACTIVITIES, 20 WHICH FUNCTIONS WOULD HAVE BEEN AFFECTED BASED UPON SERVING THE
21 DEFENDANT ORGANIZATION ONE WAY OR THE OTHER. THAT WAS THE 22 FIRST STEP.
23 Q. AND WHAT WAS THE SECOND STEP, THEN, OF YOUR ANALYSIS? 24 A. ONCE I IDENTIFIED SPECIFIC FUNCTIONS OR WORK OR ACTIVITY
25 THAT WOULD BE AFFECTED BY SERVING OR FULFILLING ORDERS TO page 116

1 DEFENDANTS' RDC VERSUS DROP-SHIPPED, I ATTACHED COSTS TO THOSE 2 PARTICULAR FUNCTIONS WHICH REPRESENTS, IN MY MIND, MAXIMUM
3 POTENTIAL COST SAVINGS THAT PUBLISHERS WOULD HAVE ATTAINED BY 4 GOING THROUGH RDC'S RATHER THAN DROP SHIP.
5 Q. OKAY, SO LET ME FOCUS ON THE FIRST STEP, WHICH WAS SIMPLY 6 IDENTIFYING THE FUNCTIONS THAT ARE INVOLVED IN A PUBLISHER
7 SHIPPING OF BOOKS TO A CUSTOMER. 8 HOW DID YOU GO ABOUT IDENTIFYING THOSE FUNCTIONS,
9 AND WHAT DID YOU DRAW UPON IDENTIFYING THOSE FUNCTIONS? 10 A. WELL, I'VE BEEN TEACHING DISTRIBUTION AND DEALING WITH
11 THESE FUNCTIONS FOR OVER 20 YEARS, SO PARTLY IT'S BASED UPON MY 12 EXPERIENCE. IT'S ALSO BASED UPON TESTIMONY AND EVIDENCE IN
13 THIS CASE, IN TERMS OF WHAT ARE THE FUNCTIONS IN RECEIVING 14 PRODUCT INTO A WAREHOUSE, HOW DO YOU PROCESS ORDERS, HOW DO YOU
15 RECEIVE ORDERS IN FOR CUSTOMERS, HOW DO YOU FILL THOSE ORDERS, 16 HOW DO YOU SHIP THEM TO INDIVIDUAL CUSTOMERS; JUST BASED UPON
17 THE RECORD IN THIS CASE, AND MY GENERAL EXPERTISE AS A 18 DISTRIBUTION MANAGEMENT EXPERT.
19 (CONTINUED ON FOLLOWING PAGE. NOTHING OMITTED.) 20
21 22
23 24
25 page 117

1 BY MR. DE BRUIN: 2 Q. LET ME ASK YOU TO TURN TO TAB 10, WHICH IS PLAINTIFF'S
3 EXHIBIT 2573. 4 DR. FRAZIER, DO YOU RECOGNIZE THIS DOCUMENT?
43
43 Page 44 45
5 A. YES. 6 Q. WHAT IS IT?
7 A. IT IS A --A GENERAL OVERVIEW FOR ANY SUPPLIER'S WAREHOUSE, 8 WHETHER A MANUFACTURER OF POWER DRILLS OR CARS OR BOOKS, WHAT
9 WORK ACTIVITIES OR FUNCTIONS ARE ASSOCIATED WITH OPERATING A 10 TRADITIONAL WAREHOUSE.
11 Q. NOW, JUST FOR THE RECORD, THESE FUNCTIONS THAT YOU'VE LISTED 12 HERE ARE FOR THE FUNCTIONS PERFORMED BY WHICH PLAYER IN THE
13 DISTRIBUTION SYSTEM? WHICH --14 A. WELL, FOR THIS PARTICULAR ANALYSIS, IT WAS FOCUSED ON THE
15 PUBLISHER AND WHAT PUBLISHERS WOULD BE DOING IN THEIR OWN 16 WAREHOUSES, AND DOWN THE ROAD, WHICH OF THESE WORK ACTIVITIES
17 WOULD HAVE BEEN AFFECTED BY SERVING THE DEFENDANTS THROUGH THEIR 18 RDC'S RATHER THAN DROP-SHIPPING ORDERS TO INDIVIDUAL STORES.
19 Q. ALL RIGHT. CAN YOU DESCRIBE BRIEFLY THE VARIOUS FUNCTIONS 20 THAT, BASED ON YOUR EXPERTISE, ARE INVOLVED IN A WAREHOUSE
21 OPERATION THAT A PUBLISHER WOULD OPERATE IN FILLING ORDERS FOR 22 CUSTOMERS?
23 A. WELL, THE PUBLISHER WOULD EITHER IN ITS OWN PRODUCTION 24 FACILITIES OR IF THEY OUTSOURCE THE PRODUCTION OF BOOKS TO A
25 THIRD PARTY, ONCE THE BOOKS ARE PRODUCED, THEY'D BE DIRECTED TO page 118

1 THE WAREHOUSE. 2 AND SO AT THE WAREHOUSE, YOU'D HAVE TO RECEIVE THE
3 FINISHED PRODUCT OR THE BOOKS FROM THE FACTORY, THE BINDERY. 4 AND THAT WOULD MEAN UNLOADING THE TRUCK. IT WOULD MEAN
5 PROCESSING AND RECONCILING THE FACT --WHAT DID WE RECEIVE, AND 6 LET'S ADJUST OUR INVENTORY LEVELS TO ACCOUNT FOR THE SHIPMENT
7 WE'VE JUST RECEIVED. 8 IT WOULD MEAN HAVING SOMEONE PUT AWAY THE PRODUCT IN
9 THE WAREHOUSE IN CERTAIN SHELVES OR BIN LOCATIONS. 10 Q. AND THOSE ARE THE --THOSE ARE THE FIRST TWO ITEMS ON YOUR
11 LIST, RECEIVING PRODUCT FROM FACTORY AND SHELVING PRODUCT IN THE 12 WAREHOUSE?
13 A. EXACTLY. AND I MEAN, YOU COULD BREAK THAT UP ON OTHER WORK 14 ACTIVITIES MORE MICRO THAN WHAT I HAVE, BUT THAT'S BASICALLY
15 WHAT I DESCRIBED. 16 Q. AND WHAT ARE THE FUNCTIONS THAT ARE PERFORMED AT THE
17 PUBLISHER'S WAREHOUSE? 18 A. WELL, SO ONCE THOSE FUNCTIONS ARE DONE APPROPRIATELY, YOU'RE
19 READY NOW TO FILL ORDERS FROM A BARNES & NOBLE OR LITTLE 20 PROFESSOR OR INGRAM OR WHOEVER THE CUSTOMER IS. SO ORDER ENTRY
21 SIMPLY MEANS YOU'RE TAKING ORDERS IN FROM YOUR RETAIL CUSTOMERS. 22 AND YOU OFTENTIMES WILL SCREEN ORDERS TO ENSURE THAT,
23 OH, I BETTER NOT PROCESS THIS ORDER FROM THAT CUSTOMER BECAUSE 24 THEY HAVEN'T PAID THEIR BILLS THE LAST TWO MONTHS, SO YOU MAY
25 PUT A CREDIT HOLD ON A CERTAIN ORDER AND UNTIL THAT GETS page 119

1 RESOLVED, NOT PROCESS IT ANY FURTHER. 2 ONCE IT PASSES SCREENING, YOU MAY PRIORITIZE AND SAY,
3 OKAY, THIS CUSTOMER WANTS SPECIAL DELIVERY OR THIS CUSTOMER'S 4 MORE IMPORTANT THAN OTHERS SO I'M GOING TO PUT THAT ORDER TO THE
5 TOP OF THE QUEUE, BUT THERE'S SOME SCREENING PRIORITIZING 6 PROCESS DONE IN MOST WAREHOUSES.
7 THE COURT: I THINK WE'LL TAKE THE SECOND BREAK TILL 8 12: 40.
9 MR. DE BRUIN: THANK YOU. 10 THE CLERK: ALL RISE.
11 (RECESS TAKEN AT 12: 20 P. M.) 12 (PROCEEDINGS RESUMED AT 12: 47 P. M.)
13 THE COURT: MR. NELSON, WITH RESPECT TO THE QUESTION 14 CONCERNING MY RULING ABOUT THE VALUE OR BENEFITS THAT HAD TO DO
15 WITH PARAGRAPH 16 OF THE ORDER, AND IT'S REALLY IN RESPONSE TO A 16 LEGAL ARGUMENT, WHICH WE'LL DEAL WITH WHEN WE GET DOWN --MAYBE
17 POST-TRIAL, BUT FOR --SO FAR AS HIS TESTIMONY WENT THIS MORNING 18 AS TO WHAT HAPPENS IN THE WAREHOUSE AND HOW IT WORKS, I FOUND IT
19 VERY HELPFUL. AND THE OBJECTION IS OVERRULED WITH RESPECT TO 20 WHAT WE DID THIS MORNING. BUT I HAVEN'T REVOKED MY NUMBER.
21 MR. NELSON: THANK YOU, YOUR HONOR. 22 THE COURT: WE'LL DEAL WITH THAT LATER.
23 MR. NELSON: THANK YOU, YOUR HONOR.
44
44 Page 45 46
24 BY MR. DE BRUIN: 25 Q. DR. FRAZIER, BEFORE WE TOOK A BRIEF RECESS YOU WERE LOOKING
page 120
1 AT THE EXHIBIT AT TAB 10, PLAINTIFF'S EXHIBIT 2573, AND YOU WERE 2 JUST TRYING TO WALK THROUGH --AND I WANT TO TRY TO DO IT FAIRLY
3 QUICKLY --BUT THE BASIC STEPS OR THE FUNCTIONS THAT ARE 4 PERFORMED IN THE PUBLISHER WAREHOUSE.
5 I BELIEVE YOU HAD GOTTEN THROUGH THE FUNCTION OF 6 SCREENING AND PRIORITIZING ORDERS. CAN YOU CONTINUE JUST
7 DESCRIBING THE FUNCTIONS THAT ARE PERFORMED. 8 A. SURE. SO ONCE AN ORDER HAS SURVIVED THE SCREENING PROCESS
9 AND IT'S BEEN PRIORITIZED, THEN IT'S TRANSMITTED IN SOME FASHION 10 TO THE WAREHOUSE. IT COULD BE --MOST COMMONLY NOW IT'S
11 ELECTRONIC TRANSMISSION BY COMPUTER. BUT IT COULD BE SIMPLY ONE 12 PERSON HANDING ORDER TO SOMEONE ELSE, A WAREHOUSE WORKER.
13 THE WAREHOUSE WORKERS THEN IN --ONCE RECEIVING THE 14 ORDERS, WILL START PULLING CARTONS FOR ORDER FULFILLMENT. AND
15 THAT'S TRUE WHETHER IT'S A FULL CARTON ORDER OR WHETHER IT'S A 16 NON-CARTON ORDER.
17 IMPORTANTLY, FOR ORDERS THAT DO NOT COME IN FULL 18 CARTONS, AS WE TALKED ABOUT BEFORE, THEN THERE'S A LOT OF LABOR
19 ASSOCIATED WITH WAREHOUSE WORKERS PICKING AND PACKING THE 20 NON-CARTON ORDERS OR --THAT'S SOMETIMES CALLED LOOSE PICK AS
21 WELL. FOR FULL CARTON ORDERS, THAT ISN'T REALLY INVOLVED TO ANY 22 EXTENT WHATSOEVER.
23 YOU HAVE TO LABEL THE ORDER WHETHER IT'S A LARGE --24 CARTON --CARTON ORDER OR A NON-CARTON ORDER. YOU MUST --TO
25 THE RDC'S INVOLVING A LOT OF BOOKS AND A LOT OF CARTONS, YOU page 121

1 HAVE TO PALLETIZE THOSE BOXES. MOST OFTEN, YOU'LL SHRINK-WRAP 2 THE WHOLE PALLET TO MAKE SURE IT'S PROTECTED PROPERLY.
3 ACTUALLY EVEN FOR SOME DROP SHIPMENTS TO INDIVIDUAL 4 STORES, YOU MIGHT HAVE AT PUBLISHER WAREHOUSE, INDIVIDUAL STORE
5 ORDERS PALLETIZED AND SHRINK-WRAPPED, AND THEN A FREIGHT 6 CONSOLIDATOR WILL TAKE IT TO --PERHAPS FROM NEW JERSEY WHERE
7 THE PUBLISHER'S WAREHOUSE IS TO A PLACE IN CALIFORNIA, ANOTHER 8 FREIGHT FACILITY, WHERE THEY'LL BREAK OPEN THE PALLET AND THEN
9 PUT IT ON --THE DROP SHIPMENTS ON INDIVIDUAL TRUCKS TO 10 INDIVIDUAL STORES.
11 THAT JUST SAVES OF FREIGHT COSTS IF YOU DO IT THAT 12 WAY, SO THAT COULD EVEN BE INVOLVED IN DROP-SHIP ORDERS AS WELL.
13 ONCE THAT'S DONE, YOU HAVE TO MOVE THE ORDER ONTO THE 14 LOADING DOCK. YOU LOAD THE ORDER FOR TRANSPORT TO THE CUSTOMER,
15 TYPICALLY IN TRUCKS. THIS --16 THE NEXT ONE, SPECIAL HANDLING AND QUALITY CONTROL,
17 THE --THE DEFENDANTS HAVE ESTABLISHED RATHER EXTENSIVE VENDOR 18 COMPLIANCE STANDARDS.
19 WALDENS' COMPLIANCE STANDARDS TOTAL OVER FIVE PAGES. 20 I BELIEVE BARNES & NOBLE, TYPICALLY THEY ARE AT LEAST 11
21 GUIDELINES OR CONDITIONS THAT THEY ASK THE WAREHOUSE PERSONNEL 22 AND THE PUBLISHER WAREHOUSE TO MEET. AND SO THAT INVOLVES A LOT
23 OF THE SPECIAL HANDLING AND QUALITY CONTROL THAT IS UNIQUE TO 24 THE DEFENDANTS' RDC ORDERS COMPARED TO REGULAR PROCESSING OF
25 ORDERS. page 122

1 FREIGHT IS A BIG ONE. THE --THE CHARGES ASSOCIATED 2 WITH FREIGHT, AND THAT'S ESPECIALLY IMPORTANT FOR A FREE FREIGHT
3 PUBLISHERS. SOME PUBLISHERS ARE CALLED F. O. B. OR FREIGHT ON 4 BOARD WHERE IT'S UP TO THE RETAIL CUSTOMER TO PAY FREIGHT FROM
5 THE PUBLISHER --PUBLISHER WAREHOUSE TO WHATEVER. OBVIOUSLY, 6 FREIGHT'S NOT IMPORTANT FOR THEM. BUT FOR FREE PUBLISHERS, IT
7 IS IMPORTANT. 8 BILLING AND INVOICING IS BASICALLY AS IT IS DESCRIBED
9 THERE IN TERMS OF THE INVOICE AND THE BILLING PROCESS. 10 THEN FINALLY WAREHOUSE ADMINISTRATION INVOLVES THE
11 OTHER MANAGERS AND THE COMPUTER OPERATORS AND EVERYONE ELSE 12 INVOLVED IN MAKING SURE THAT THE WAREHOUSE OPERATION RUNS
13 SMOOTHLY AND EFFECTIVELY FOR CUSTOMERS. SO THAT'S JUST A BRIEF 14 OVERVIEW OF THESE ORDER FULFILLMENT PROCESS, IF YOU WILL.
15 Q. AND, AGAIN, YOU PREPARED THIS LIST OF FUNCTIONS BASED ON
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16 YOUR GENERAL KNOWLEDGE OF HOW WAREHOUSES OPERATE ACROSS MANY 17 DIFFERENT INDUSTRIES?
18 A. YES, PRIMARILY. IT'S MY UNIQUE LIST. YOU'LL SEE DIFFERENT 19 PEOPLE WITH DIFFERENT LISTS, BUT THIS, I THINK, CHARACTERIZES IT
20 RATHER WELL. 21 Q. NOW, STEPPING BACK FROM THIS LIST FOR A MOMENT, CAN YOU
22 DESCRIBE WHAT ARE THE RELEVANT DIFFERENCES BETWEEN AN RDC 23 SHIPMENT AND A INDIVIDUAL DROP SHIPMENT TO A PARTICULAR STORE?
24 A. SURE. 25 BEFORE RDC'S, THE DEFENDANTS WERE CONSOLIDATING
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1 ORDERS ACROSS STORES. SO EVEN BEFORE RDC'S, YOU KNOW, THIS ONE 2 BARNES & NOBLE STORE IN SANTA MONICA WASN'T SENDING AN ORDER
3 DIRECTLY TO THE PUBLISHER. THEY WERE CONSOLIDATING ORDERS AS 4 MR. CUMELLO IN HIS DEPOSITION FORMERLY --AND NOW I'M TALKING
5 ABOUT THE WALDENBOOKS SIDE --BUT MR. CUMELLO TESTIFIED TO THAT 6 IN HIS DEPOSITION.
7 HE WAS HEAD OF WALDENBOOKS FOR A TIME, SO GIVEN THAT 8 AND GIVEN, YOU KNOW, YOU JUST THINK OF HOW THE PROCESS WORKS.
9 THE REAL BIG DIFFERENCE IS FOR AN ORDER GOING TO AN RDC, IT'S 10 GOING TO BE A REAL LARGE ORDER TYPICALLY INVOLVING, AT LEAST FOR
11 THE BARNES & NOBLE WAREHOUSE FACILITIES AND THE WALDENBOOK 12 WAREHOUSE FACILITIES, CARTON ORDERS.
13 AND SO FOR THOSE RDC ORDERS, THIS PICK-AND-PACK 14 ORDER, FULL CARTON VERSUS LOOSE PICK AND ASSOCIATED CARTONS AND
15 STYROFOAM, YOU SAVE MOST OF THOSE EXPENSES ON RDC ORDERS. 16 THAT'S WHY I'VE GOT THAT HIGHLIGHTED IN RED. I'M NOT SURE I
17 PICKED THE RIGHT COLOR, BUT --18 AND THEN THE OTHER THING IS --THE IMPORTANT
19 DIFFERENCE IS ONCE THE ORDER'S READY TO BE SENT, RATHER THAN 20 DROP-SHIPPING TO A THOUSAND STORES IN THE BARNES & NOBLE
21 NETWORK, YOU'RE TAKING THAT SHIPMENT AND YOU'RE SENDING IT TO 22 ONE RETAIL DISTRIBUTION CENTER, AND SO THOSE ARE THE PRIMARY
23 DIFFERENCES ON RDC ORDERS. 24 Q. OKAY. NOW, YOU'RE RUNNING A LITTLE BIT AHEAD OF ME.
25 A. OKAY. SORRY. page 124

1 Q. LET ME JUST CLARIFY FOR THE RECORD. SO THE DIFFERENCE, IF I 2 UNDERSTAND YOUR TESTIMONY, IN THE ORDERS IS THE SIZE OF THE
3 ORDER IS AFFECTED, AND YOU MENTIONED THAT IN AN RDC ORDER, 4 TYPICALLY IT'S GOING TO BE IN CARTONS?
5 A. THAT'S CORRECT. THOSE ARE CRITICAL DIFFERENCES. 6 Q. NOW, HOW DID THOSE DIFFERENCES THAT YOU'VE DESCRIBED AFFECT
7 WHAT THE PUBLISHER DOES AT THE PUBLISHER'S WAREHOUSE? 8 A. WELL, THIS IS WHAT I REALLY HAD TO FOCUS ON WHEN I WAS
9 LOOKING AT THESE FUNCTIONS. AND I SPENT A LOT OF TIME DOING 10 THAT. I HAD TO ASCERTAIN BASED UPON COMPARING THIS RDC
11 METHODOLOGY OF FULFILLING THESE CONSOLIDATED ORDERS THROUGH THE 12 WAREHOUSE AND TO THE RDC AS OPPOSED TO DOING THAT SAME PROCESS
13 IN TERMS OF DROP SHIPMENTS. 14 I WENT THROUGH ALL OF THESE FUNCTIONS LISTED IN
15 EXHIBIT 10 AND CAREFULLY EXAMINED, BASED UPON MY EXPERIENCE, 16 WHICH OF THESE FUNCTIONS WOULD HAVE BEEN AFFECTED BY THOSE
17 DIFFERENT METHODOLOGIES. 18 Q. AND WHICH FUNCTIONS DID YOU CONCLUDE WOULD BE AFFECTED BY
19 RDC ORDERS BEING MADE IN CARTON QUANTITIES? 20 A. THE FUNCTIONS INVOLVED ARE HIGHLIGHTED IN RED IN THIS
21 EXHIBIT. IT'S PICK AND PACK; ORDER EXPENSES, WHICH INVOLVES 22 VARIABLE LABOR AS WELL AS SHIPPING SUPPLIES; AND IT'S FREIGHT.
23 THOSE ARE THE --THE TWO FUNCTIONS. 24 Q. WHAT ABOUT THE OTHER FUNCTIONS? WHY DID YOU CONCLUDE THAT
25 THOSE WERE NOT AFFECTED? page 125

1 A. BECAUSE THE EXISTENCE OF RDC'S DOES NOT CHANGE THE FACT THAT 2 PUBLISHERS STILL ARE GOING TO OPERATE A WAREHOUSE. AND THAT
3 THEY'RE GOING TO HAVE TO RECEIVE PRODUCT FROM THE BINDERY AND 4 THEY'RE GOING TO HAVE TO SHELVE THE PRODUCT OR TAKE IT INTO THE
5 THEIR WAREHOUSE FOR FURTHER PROCESSING. 6 THE EXISTENCE OF RDC'S DOES NOT CHANGE ORDER ENTRY
7 BECAUSE THE DEFENDANTS WERE CONSOLIDATING ORDERS PRE-RDC. AND,
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8 OF COURSE YOU WOULDN'T TIE CONSOLIDATION OF ORDERS TO JUST THE 9 MERE EXISTENCE OF AN RDC.
10 THE SCREENING AND PRIORITIZING ORDERS, TRANSMITTING 11 ORDERS, THOSE AREN'T CHANGED BECAUSE OF THE WAY CONSOLIDATED
12 ORDERS WERE BEING SENT TO PUBLISHERS BEFORE. 13 PULLING CARTONS FOR ORDER FULFILLMENT, WHETHER IT'S A
14 SMALL ORDER FROM A STORE OR A LARGE ORDER FOR AN RDC, YOU'RE 15 STILL GOING TO HAVE TO CARRY OUT THAT PROCESS OF GETTING THE
16 APPROPRIATE CARTONS TO THE APPROPRIATE STAGING AREAS FOR 17 ACTUALLY FILLING THE ORDER.
18 PICKING AND PACKING THE ORDER, THAT'S --THAT'S 19 REALLY AFFECTED BY THIS, AS I'VE SUGGESTED.
20 LABELING ORDER, YOU'RE GOING TO HAVE TO LABEL ORDERS 21 DROP SHIP; YOU'RE GOING TO HAVE TO LABEL INDIVIDUAL CARTONS ON
22 LARGE ORDERS TO RDC'S AS WELL. YOU ALSO HAVE TO HAVE 23 DOCUMENTATION LABELING ASSOCIATED WITH EACH PALLET.
24 WRAPPING AND PALLETIZING ORDERS, I MEAN, THAT EXPENSE 25 ACTUALLY MAY INCREASE WITH LARGE RDC ORDERS COMPARED TO THE WAY
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1 THEY TRADITIONALLY HANDLED DROP SHIPMENTS. SO YOU AREN'T GOING 2 TO SEE LOWERED COSTS THERE, IN MY JUDGMENT.
3 MOVING ORDER TO LOADING DOCK, LOAD ORDER, I JUST 4 DON'T SEE HOW THOSE WOULD BE AFFECTED.
5 BILLING AND INVOICING, AGAIN, I DON'T BELIEVE THE 6 EXISTENCE OF AN RDC CHANGES THAT WHATSOEVER. YOU CAN HANDLE
7 BILLING AND INVOICING ELECTRONICALLY AND IN AGGREGATE WITH OR 8 WITHOUT RDC'S.
9 WAREHOUSE ADMINISTRATION'S NOT GOING TO CHANGE. 10 AND, AGAIN, MAYBE I'M GOING TOO FAR, BUT --WELL,
11 I'LL STOP THERE. 12 Q. ONE OF THESE ITEMS YOU'VE PUT IN BLUE INK, THE SPECIAL
13 HANDLING QUALITY CONTROL VENDOR COMPLIANCE STANDARD. WHY DID 14 YOU PUT THAT IN BLUE?
15 A. I PUT IT IN BLUE BECAUSE I THINK THAT'S GOING TO HAVE 16 SIGNIFICANT IMPACT ON INCREASING PUBLISHER COSTS OF FULFILLING
17 RDC ORDERS, BUT I DID NOT TRY TO QUANTIFY IT. SO MY ESTIMATES 18 ARE GENEROUS, I BELIEVE, IN TERMS OF MAXIMUM POSSIBLE COST
19 SAVINGS FOR PUBLISHERS BASED UPON PICK AND PACK AND SHIPPING 20 SUPPLY SAVINGS AND FREIGHT SAVINGS BECAUSE I DID NOT ADJUST THEM
21 DOWNWARD BY THE COSTS ASSOCIATED WITH THIS SPECIAL COMPLIANCE 22 HANDLING THAT PUBLISHERS HAVE TO TRY TO MEET FOR THE DEFENDANTS.
23 Q. DO YOU KNOW FROM YOUR REVIEW OF INFORMATION IN THIS CASE THE 24 CONSEQUENCE THAT HAS BEEN IMPOSED ON PUBLISHERS BY THE
25 DEFENDANTS IF THEY FAIL TO COMPLY WITH THE DEFENDANTS' OWN page 127

1 QUALITY CONTROL STANDARDS? 2 A. ESPECIALLY BORDERS HAS BEEN RATHER AGGRESSIVE IN CHARGING
3 BACK PENALTIES TO PUBLISHERS WHO FAIL TO FOLLOW STEP BY STEP THE 4 COMPLIANCE STANDARDS THAT BORDERS HAS ESTABLISHED FOR THE
5 FULFILLMENT OF ORDERS INTO THEIR RDC'S. 6 Q. DO YOU RECALL THE --THE APPROXIMATE AMOUNT OF THE ORDER OF
7 MAGNITUDE IN ANY GIVEN YEAR THAT BORDERS CHARGED FOR THESE 8 FAILURE TO COMPLY WITH THEIR QUALITY CONTROL STANDARDS?
9 A. I BELIEVE I --I NOTICED IN ONE YEAR THAT CHARGEBACKS FROM 10 PUBLISHERS ON PENALTIES ASSOCIATED WITH NOT MEETING THESE
11 COMPLIANCE STANDARDS TOTALED AROUND THREE AND A HALF MILLION 12 DOLLARS.
13 Q. NOW, HAVE YOU SEEN ANY EVIDENCE OR BASED ON YOUR EXPERIENCE 14 IN WAREHOUSING IN GENERAL OF COMPARABLE PENALTIES THAT WOULD BE
15 ASSOCIATED WITH ORDERS FILLED ON A DROP-SHIP BASIS? 16 A. I HAVE NOT SEEN COMPARABLE PENALTIES THAT WOULD BE CHARGED
17 AGAINST DROP-SHIP ORDERS, NO. 18 Q. AND IN ASSESSING THE NET IMPACT ON PUBLISHERS, IN TERMS OF
19 COST SAVINGS --AND JUST TO BE CLEAR, DID YOU MAKE ANY 20 ADJUSTMENT FOR THE POTENTIAL INCREASED COSTS ASSOCIATED WITH THE
21 ITEM HERE MARKED IN BLUE? 22 A. I DID NOT.
23 Q. OKAY. NOW, YOUR LIST OF FUNCTIONS HERE IN TAB 10 IS A 24 NUMBER OF WORK ITEMS ASSOCIATED WITH FILLING ORDERS. BESIDES
25 THE TASKS THAT ARE IDENTIFIED HERE, HOW ARE OTHER ASPECTS OF A page 128
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1 PUBLISHER'S BUSINESS AFFECTED, IF AT ALL, BY THE EXISTENCE OF 2 RDC ORDERS?
3 A. WELL, YOU HAVE TO CONSIDER THAT ALL OF THE --THIS WORK IS 4 CONDUCTED IN A WAREHOUSE FACILITY. AND YOU HAVE TO CONSIDER
5 THAT ALL OF THIS WORK INVOLVES BOOK INVENTORY STORED IN THAT 6 PARTICULAR WAREHOUSE. AND YOU HAVE TO CONSIDER EQUIPMENT AND --
7 LIKE FORKLIFTS AND CONVEYER SYSTEMS THAT ARE PART OF THE 8 WAREHOUSE FACILITY.
9 SO THIS JUST ENTAILS THE WORK FUNCTIONS. YOU HAVE 10 PHYSICAL ASSETS INVOLVED WHEREIN THIS WORK IS EITHER CONDUCTED
11 OR WITH THE BOOKS THEMSELVES, ACTUALLY WHAT IS BEING HANDLED 12 BASED UPON THIS PROCESS.
13 Q. IN YOUR OPINION AS AN EXPERT, DOES THE EXISTENCE OF RDC 14 ORDERS HAVE ANY IMPACT ON THE PUBLISHER'S ACTUAL WAREHOUSE
15 FACILITIES? 16 A. NO, IT DOES NOT.
17 Q. AND WHY IS THAT? 18 A. YOU --I THINK PERHAPS THE KEY IN ANSWERING THIS FROM MY
19 PERSPECTIVE AS A DISTRIBUTION EXPERT IS THAT YOU'VE GOT WHAT I 20 CALL HETEROGENEITY OF ORDER FULFILLMENT METHODS THAT PUBLISHERS
21 HAVE TO ADOPT TO AND REACT TO. 22 AND WHAT DO I MEAN BY THAT? WELL, IF THE ONLY WAY
23 PUBLISHERS SERVED THE DEFENDANTS WERE THROUGH RDC ORDERS AND 24 THEY HAD NO OTHER CUSTOMERS, YOU COULD REALLY AFFECT A CHANGE IN
25 YOUR PHYSICAL ASSETS, THE WAREHOUSE, OR NUMBER OF WAREHOUSE page 129

1 WORKERS, OR INVENTORY. BUT THAT'S NOT WHAT WE HAVE HERE. 2 YOU HAVE MIXED MODES OF FULFILLMENT EVEN IN THE
3 DEFENDANTS' ORGANIZATIONS. BARNES & NOBLE IN TYPICAL YEARS, 4 RECEIVED OVER HALF OF THEIR PRODUCTS FROM PUBLISHERS STILL
5 DROP-SHIPPED, NOT THROUGH RDC'S. 6 WALDENBOOKS STILL RECEIVED 20 PERCENT OR MORE OF ITS
7 ORDERS FROM PUBLISHERS DROP-SHIPPED TO INDIVIDUAL STORES, NOT 8 THROUGH RDC'S.
9 Q. AND SO WHAT'S THE CONNECTION BETWEEN THAT FACT AND THIS 10 QUESTION ABOUT THE --WHAT FACILITIES THE PUBLISHER HAS TO
11 MAINTAIN? 12 A. WELL, THE POINT IS, IS THAT BECAUSE THE PUBLISHERS STILL
13 NEED TO OPERATED A WAREHOUSE, AND BECAUSE THE PUBLISHERS ARE 14 DEALING WITH THE DEFENDANTS IN MULTIPLE WAYS, AND, IMPORTANTLY,
15 BECAUSE THE PUBLISHERS ARE DEALING WITH THOUSANDS OF OTHER 16 CUSTOMERS FROM INDEPENDENT BOOKSTORES, WHOLESALERS LIKE INGRAM,
17 BAKER & TAYLOR, LARGE DISCOUNT COMPANIES LIKE WAL-MART, 18 WAREHOUSE CLUBS LIKE COSTCO, MAIL ORDER COMPANIES, DOT COM
19 COMPANIES LIKE AMAZON. COM, RETAIL DRUGSTORE CHAINS --THERE'S A 20 MYRIAD OF DIFFERENT CUSTOMERS WITH DIFFERENT DEMANDS AND
21 ORDERING PATTERNS THRUST ON EACH PUBLISHER. 22 AND SO IN THE GRAND SCHEME OF THINGS, TAKING A
23 BIG-PICTURE LOOK, YOU CANNOT REALLY CHANGE THE WAREHOUSE 24 FACILITIES THAT MUCH, NOT --NOT BASED ON RDC'S, AT LEAST.
25 YOU CANNOT CHANGE YOUR SYSTEMS. YOU CANNOT CHANGE page 130

1 INVENTORY LEVELS BECAUSE YOU'RE DEALING WITH A COMPLEX ARRAY OF 2 DIFFERENT CUSTOMERS AND EACH ONE'S IMPORTANT TO THE CUSTOMER,
3 AND YOU HAVE TO TRY TO SERVE EACH ONE AS WELL YOU CAN. 4 Q. DID YOU PREPARE SOME DEMONSTRATIVE EXHIBITS TO DEPICT
5 VISUALLY THE HETEROGENEITY POINT THAT YOU'VE MADE TO THE COURT? 6 A. I DID NOT --I DON'T THINK I DID IT VERY WELL, BUT I TRIED.
7 Q. WELL, LET'S LOOK AT A COUPLE EXHIBITS. TURN FIRST TO TAB 8 11, THE NEXT EXHIBIT IN YOUR BINDER, WHICH IS PLAINTIFF'S
9 DEMONSTRATIVE EXHIBIT 2563. 10 CAN YOU DESCRIBE WHAT IS DEPICTED IN THIS EXHIBIT?
11 A. THIS IS --12 AND, YOUR HONOR, SORRY. I DIDN'T CATCH THE
13 MISSPELLING OF "FULFILLMENT." I APOLOGIZE FOR THAT. 14 THIS DEPICTS THE TRADITIONAL DROP-SHIP METHODOLOGY OF
15 PUBLISHERS SERVING DEFENDANTS' ORGANIZATIONS OR OTHER RETAILERS. 16 Q. AND CAN YOU TRACE ON THIS CHART HOW BOOKS FLOW FROM
17 BEGINNING TO END. 18 A. WELL, YOU STILL HAVE EITHER A BINDERY THAT PRODUCES THE
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19 BOOKS. IT COULD BE AN INDEPENDENT --INDEPENDENT MANUFACTURING 20 OPERATION THAT A PUBLISHER OUTSOURCES, OR IT COULD BE A
21 PRODUCTION FACILITY OPERATED BY A PUBLISHER, BUT ONCE THE BOOKS 22 ARE PRODUCED, YOU HAVE TO HAVE A PUBLISHER'S WAREHOUSE RECEIVE
23 THEM. 24 AND THEN ONCE YOU PUT THEM INTO THE WAREHOUSE, YOU'RE
25 READY TO START FULFILLING ORDERS. page 131

1 AND THE ORDERS FROM THE DEFENDANTS' STORES WOULD THEN 2 COME IN CONSOLIDATED, AND THE PUBLISHER WAREHOUSE OPERATIONS
3 WOULD FULFILL THEM. AND THEY'D BE SENT TO DROP SHIPMENT TO THE 4 INDIVIDUAL STORES.
5 Q. ALL RIGHT. IS --LOOK AT EXHIBIT 12, AND PLEASE EXPLAIN HOW 6 THAT EXHIBIT DIFFERS FROM EXHIBIT 11. I'M SORRY, THAT'S THE
7 EXHIBIT AT TAB 11. 8 THE EXHIBIT AT TAB 12 IS EXHIBIT NUMBER 2563.
9 A. OKAY. THIS TRIES TO PINPOINT A PRIMARY DIFFERENCE BETWEEN 10 FULFILLING ORDERS DROP SHIP VERSUS FULFILL ORDERS THROUGH THE
11 RETAILERS' RDC. 12 Q. AND, AGAIN, EXPLAIN HOW THE BOOKS FLOW THROUGH THIS EXHIBIT
13 2562. 14 A. WELL, THERE'S NO CHANGE IN HOW THE WAY THE PUBLISHER'S
15 WAREHOUSE RECEIVES BOOKS. AND THEY'LL GET THE CONSOLIDATED 16 ORDER. BUT THE BIG CHANGE HERE, AT LEAST FOR BARNES & NOBLE AND
17 FOR WALDENBOOKS, IS THAT THE ORDERS WILL BE IN CARTON LOTS, 18 WHICH MINIMIZES PICK/ PACK IN THE PUBLISHER'S WAREHOUSE.
19 AND THEN THERE'LL BE --INSTEAD OF PAYING FREIGHT OUT 20 TO INDIVIDUAL STORES, SOME FREE-FREIGHT PUBLISHERS WOULD ONLY
21 INCUR A LOWER FREIGHT COST BY SENDING A LARGER ORDER TO A RDC, A 22 SINGLE RDC.
23 Q. AND THAT'S REPRESENTED BY THE THICKER BAR GOING FROM THE 24 PUBLISHER'S WAREHOUSE TO THE RETAILER'S RDC?
25 A. EXACTLY. AND IN SOME SENSE, THE RETAILER --THE PUBLISHER page 132

1 IS TRANSFERRING WORK THAT IT TRADITIONALLY DID AT ITS OWN 2 WAREHOUSE, AND THAT WORK IS THEN BEING CONDUCTED IN THE
3 RETAILER'S RDC, THE PICK AND PACK AND SOME OF THE FREIGHT 4 ISSUES.
5 Q. OKAY. LASTLY LET ME ASK YOU TO LOOK AT THE DOCUMENT BEHIND 6 TAB 13, WHICH IS EXHIBIT 2561. AND CAN YOU EXPLAIN WHAT IS
7 DEPICTED ON THIS DEMONSTRATIVE EXHIBIT? 8 A. THE REASON I SUGGESTED I DIDN'T DO A VERY GOOD JOB OF THIS,
9 'CAUSE I DON'T THINK THIS IS VERY GOOD AT ALL IN COMMUNICATING 10 THE COMPLEXITY OF THIS MIXED MODE ORDER FULFILLMENT.
11 Q. FIRST --LET'S FIRST START WITH THIS EXHIBIT AND EXPLAIN 12 WHAT'S HERE, AND THEN IF THERE'S ANYTHING THAT YOU WOULD STILL
13 ADD TO THIS, LET'S GO THERE NEXT. 14 A. AS I'VE INDICATED BEFORE, THE DEFENDANT ORGANIZATIONS
15 RECEIVE ORDERS THROUGH THE RDC, WHICH I'VE DESCRIBED BEFORE, BUT 16 ALSO AS I'VE INDICATED BEFORE, BARNES & NOBLE ALSO RECEIVES A
17 SIZABLE NUMBER OF ORDERS DROP-SHIPPED, AS DOES WALDENBOOKS. 18 ONLY BORDERS REALLY PRIMARILY TAKES MOST OF ITS
19 PUBLISHER ORDERS THROUGH ITS PUBLISHER ORDERS THROUGH ITS FOUR 20 FLOW-THROUGH CENTERS. SO IT'S MIXED MODES OF ORDER FULFILLMENT,
21 COMPLEXITY, CROSS-ORDERS --AND THEN WITHIN BORDERS, BECAUSE 22 THEY ORDER IN CARTON AND NON-CARTON LOTS, THERE'S MIXED MODES OF
23 FULFILLMENT WITHIN ORDERS AS WELL FOR BORDERS. 24 Q. SO JUST FOR THE RECORD, ON THIS EXHIBIT, DO THE RED ITEMS
25 ALL RELATE TO THE DEFENDANTS? page 133

1 A. I THINK YOU NEED --WELL, IN PART, IT MIGHT SUGGEST THAT, 2 BUT WHAT I WAS TRYING TO INDICATE IS THIS PUBLISHER WAREHOUSE
3 MUST DEAL WITH ALL THESE OTHER ENTITIES AS WELL THE INDEPENDENT 4 BOOKSTORES.
5 Q. I UNDERSTAND THAT. I'M JUST TRYING TO GET A CLEAR STATEMENT 6 ON THE RECORD ABOUT THIS CHART.
7 YOU HAVE THE RED STORES CONNECTED TO THE RETAILER'S 8 RDC?
9 A. RIGHT. 10 Q. SO BY THAT YOU'RE LOOKING ONLY AT THE STORES THAT ARE BEING
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11 SERVED BY THE RDC AS WELL AS THAT ARE BEING SERVED BY THE 12 PUBLISHER?
13 A. THAT'S CORRECT. 14 Q. AND NOW IF I UNDERSTAND YOU CORRECTLY, YOU'RE SAYING THAT
15 THERE ARE THINGS MISSING YET ON THIS CHART? 16 A. YEAH, THE COMPLEXITY OF THE FULFILLING ORDERS IS BASED ON
17 PUBLISHER WAREHOUSE OPERATIONS IS EXTREME. IT'S BEEN INCREASING 18 OVER THE '90S AS DIFFERENT CHANNELS HAVE BECOME MORE IMPORTANT,
19 AND THIS --THIS JUST DOESN'T, I THINK, VERY WELL ILLUSTRATE 20 THAT COMPLEXITY.
21 Q. WHAT WOULD YOU ADD TO THIS CHART TO TRY TO MAKE IT AS 22 COMPLETE AS POSSIBLE.
23 A. I'D ADD GREEN BOXES FOR THE INDEPENDENT BOOKSELLERS. I'D 24 ADD PURPLE BOXES FOR WAL-MART. I'D ADD ORANGE BOXES FOR RETAIL
25 DRUG CHAINS OR SUPERMARKETS. page 134

1 IT'S JUST SO MANY DIFFERENT CHANNEL FORMATS, SO MANY 2 DIFFERENT CHANNEL CUSTOMERS ARE INVOLVED, INCLUDING WHOLESALERS
3 LIKE INGRAM, THAT A PUBLISHER WAREHOUSE NEEDS TO TRY TO FULFILL 4 PROPERLY.
5 Q. NOW, IF YOU WERE TO HAVE THOSE GREEN BOXES AND ORANGE BOXES 6 AND PURPLE BOXES AND THEY WERE ALL RECEIVING BOOKS, THE ARROW
7 WOULD COME TO THEM. WHERE WOULD THE ARROW CONNECT TO IN EVERY 8 CASE?
9 A. TO THE PUBLISHER'S WAREHOUSE. 10 Q. SO WHAT, THEN, IS THE EFFECT OF THE EXISTENCE OF THE
11 RETAILER'S RDC, THE RED --THE BIG RED BOX HERE? WHAT IS THE 12 EFFECT THAT THAT HAS ON WHETHER OR NOT THE PUBLISHER STILL HAS
13 TO MAINTAIN ITS --THE BIG PUBLISHER WAREHOUSE? 14 A. WELL, IT HAS NO EFFECT.
15 Q. NOW, YOU ALSO TESTIFIED EARLIER BESIDE FACILITIES, YOU MADE 16 A COMMENTS ABOUT INVENTORY. WHAT EFFECT DOES THE DEFENDANT'S
17 RDC'S HAVE, IF ANY, ON THE AMOUNT OF INVENTORY THAT A PUBLISHER 18 HAS TO MAINTAIN IN ITS WAREHOUSE?
19 A. I DON'T BELIEVE THE INVENTORY LEVELS MAINTAINED BY 20 PUBLISHERS ARE GOING TO BE AFFECTED BY THE EXISTENCE OF RDC'S.
21 IF ANYTHING, PERHAPS THE EXISTENCE OF RDC'S WOULD INCREASE THE 22 NEED FOR PUBLISHERS TO HAVE MORE INVENTORY IN THEIR WAREHOUSES.
23 I DON'T SEE ANY INDICATION THAT PUBLISHERS' INVENTORY WOULD BE 24 REDUCED BASED UPON THE EXISTENCE OF RDC'S.
25 Q. LET ME ASK YOU --ON THIS --LOOKING AT THIS CHART, 2561, page 135

1 ARE THERE EVER INSTANCES, TO YOUR KNOWLEDGE, WHERE PRODUCT WOULD 2 FLOW DIRECTLY FROM THE BINDERY TO ONE OF THE DEFENDANTS' RDC'S?
3 A. I BELIEVE THAT HAPPENS IN VERY SMALL AMOUNTS. BUT YES, I 4 HAVE READ ABOUT THAT.
5 Q. HOW SIGNIFICANTLY, BASED ON YOUR UNDERSTANDING, IS IT THAT 6 SHIPMENTS MOVE DIRECTLY FROM THE BINDERY TO THE RDC?
7 A. IT'S MY UNDERSTANDING THAT VERY, VERY LOW. IT WOULD ONLY 8 INVOLVE VERY HOT OR POTENTIALLY BIG-SELLING FRONT LIST BOOKS.
9 BUT I UNDERSTAND THAT PRACTICE IS NOT USED VERY OFTEN, IF AT 10 ALL.
11 Q. AND WHAT IS THAT UNDERSTANDING BASED ON? 12 A. SIMPLY EVIDENCE, READING ABOUT THIS PRACTICE IN TERMS OF
13 VARIOUS TESTIMONY. 14 Q. SO THE --YOU BASE THAT OPINION ON THE TESTIMONY YOU'VE READ
15 IN THIS CASE? 16 A. YES.
17 Q. BASED ON YOUR GENERAL EXPERTISE IN DISTRIBUTION SYSTEMS, CAN 18 YOU EXPLAIN WHY BOOKS ARE NOT SHIPPED DIRECT FROM THE BINDERY TO
19 THE DEFENDANTS RDC'S MORE OFTEN? 20 A. BECAUSE THE BINDERY OPERATIONS ARE FOCUSED ON PRODUCING THE
21 BOOKS AND MEETING CERTAIN QUALITY STANDARDS REGARDING THE BOOK 22 QUALITY ITSELF.
23 THEY DO NOT HAVE FUNCTIONS, NOR DO THEY HAVE 24 EXPERTISE, IN FACILITATING --FULFILLING ORDERS AND FACILITATING
25 SHIPMENTS TO INDIVIDUAL RETAIL CUSTOMERS. page 136

1 Q. ALL RIGHT. I'D LIKE TO GO BACK TO EXHIBIT 10. 2 IF I UNDERSTAND CORRECTLY, YOU IDENTIFIED TWO 50
50 Page 51 52
3 FUNCTIONS, THE PICK/ PACK FUNCTION, AND FOR FREE-FREIGHT 4 PUBLISHERS, THE FREIGHT FUNCTION THAT ARE AFFECTED BY RDC
5 SHIPMENTS? 6 A. YES.
7 Q. I'D LIKE TO NOW ASK YOU SOME QUESTIONS ABOUT HOW YOU WENT 8 ABOUT QUANTIFYING THE POTENTIAL OF THE SAVINGS TO PUBLISHERS
9 ASSOCIATED WITH EACH OF THESE FUNCTIONS. 10 A. SURE.
11 Q. FIRST OF ALL, BEFORE WE --FOCUSING ON THE PICK/ PACK 12 FUNCTION, IS IT --ARE THERE ALWAYS PICK/ PACK SAVINGS ON ORDERS
13 GOING TO THE RDC? 14 A. TO THE EXTENT THEY'RE FULL CARTON ORDERS, YES. TO THE
15 EXTENT BORDERS ORDERS A --NON-CARTON LOTS, THERE'D BE FEWER 16 SAVINGS TO BORDERS.
17 Q. ALL RIGHT. SO WHEN THERE ARE SHIPMENTS TO THE RDC'S IN 18 CARTON LOTS, HOW DID YOU GO ABOUT ESTIMATING THE AMOUNT OF
19 PUBLISHER COST SAVINGS ASSOCIATED WITH THAT FUNCTION THAT IS NOW 20 TRANSFERRED FROM THEIR WAREHOUSE TO THE DEFENDANT'S WAREHOUSES?
21 A. WELL, I BASICALLY USED DEFENDANTS COST DATA IN TERMS OF 22 THEIR RDC OPERATIONS TO MAKE A DETERMINATION OF MAXIMUM POSSIBLE
23 COST SAVINGS THAT PUBLISHERS WOULD INCUR BASED ON REDUCING THE 24 LEVEL OF PICK/ PACK NECESSARY IN SERVING LARGE RDC ORDERS.
25 Q. CAN YOU EXPLAIN FOR THE COURT WHY DID YOU USE DEFENDANTS' page 137

1 DATA ASSOCIATED WITH THEIR PERFORMANCE OF THIS PICK/ PACK 2 FUNCTION AT THEIR WAREHOUSE RATHER THAN PUBLISHER DATA?
3 A. THE SECOND ISSUE I WAS ASKED TO ADDRESS IS WHAT SHOULD 4 DEFENDANTS' MANAGEMENT --WHAT SHOULD THEY HAVE KNOWN REGARDING
5 HOW RDC DISCOUNTS COMPARED TO PUBLISHER COST SAVINGS, AND SO 6 THEIR KNOWLEDGE WAS IMPORTANT TO ME.
7 THEY WOULD HAVE HAD KNOWLEDGE OF THEIR OWN COSTS OF 8 OPERATING THEIR OWN WAREHOUSE FACILITIES, SO THAT WAS ONE REASON
9 WHY I DECIDED TO USE THE DEFENDANTS' COST DATA IN DETERMINING 10 THE POTENTIAL PUBLISHER SAVINGS.
11 Q. WERE THERE ANY OTHER REASONS? 12 A. THE SECOND REASON IS VERY IMPORTANT, AND THAT IS THERE'S
13 CLEAR TESTIMONY FROM CERTAIN PEOPLE IN THE DEFENDANTS' 14 ORGANIZATIONS --ONE EXAMPLE, MR. CUMELLO, WHO WAS PRESIDENT OF
15 WALDENBOOKS FOR A TIME; TESTIMONY BY MS. ERCOLANO, A TOP 16 EXECUTIVE IN BARNES & NOBLE --THAT THEY FELT THAT THE COST THAT
17 THEY INCUR IN OPERATING THE RETAIL DISTRIBUTION CENTERS WOULD 18 MIRROR OR PARALLEL THE COST OF OPERATING THE PUBLISHERS'
19 WAREHOUSES. 20 AND I COULD HAVE JUST AS WELL PUT RETAILER RDC ORDER
21 FULFILLMENT ON THIS EXHIBIT TAB, BECAUSE THESE ACTIVITIES HAVE 22 TO BE PERFORMED IN RETAIL RDC'S AS WELL. SO I FELT THAT BASED
23 ON DEFENDANTS' KNOWLEDGE ON HOW THE DISCOUNT LEVELS COMPARED TO 24 COST SAVINGS, AND BASED ON THE FACT THAT KNOWLEDGEABLE PEOPLE IN
25 THE DEFENDANTS' ORGANIZATIONS FELT THAT THEIR COST DATA WOULD page 138

1 MIRROR THOSE OF THE PUBLISHER, I THEREFORE EMBRACED THE 2 DEFENDANTS' COST DATA IN MY ANALYSIS.
3 Q. LET ME ASK YOU THIS QUESTION: WITH RESPECT TO RDC ORDERS, 4 HOW DOES THE DEFENDANTS' PERFORMANCE OF THE PICK/ PACK FUNCTION
5 COMPARE TO THE PUBLISHER'S PERFORMANCE OF THE PICK/ PACK 6 FUNCTION?
7 A. THE BASIC WORK IS THE SAME. I MEAN, YOU'RE FULFILLING 8 ORDERS FOR DROP SHIPMENT TO INDIVIDUAL STORES. AND YOU HAVE TO
9 BREAK OPEN CARTONS OF VARIOUS TITLES. YOU HAVE TO STAPLE A BOX 10 TOGETHER, START PUTTING ONESIES, TWOSIES IN THE BOX. I MEAN,
11 THE WORK ACTIVITY IN BOTH IS PARALLEL. 12 Q. AM I CORRECT IN YOUR EARLIER DESCRIPTION OF THE DEFENDANTS'
13 OPERATIONS, THAT WHAT IS HAPPENING AT THEIR RDC'S IS THAT LARGE 14 SHIPMENTS THAT HAVE COME IN ARE BROKEN DOWN INTO SMALLER
15 SHIPMENTS THAT THEN GO OUT TO THE INDIVIDUAL DEFENDANTS' STORES? 16 A. WHAT --YEAH. BUT REMEMBER, WALDENBOOKS AND BARNES & NOBLE
17 RECEIVE AND PUT AWAY THE BOOKS THAT THEY RECEIVE FROM PUBLISHERS 18 JUST LIKE PUBLISHERS RECEIVE AND PUT AWAY THE BOOKS THEY RECEIVE
19 FROM BINDERIES. 20 IT'S SLIGHTLY --IT'S DIFFERENT IN THE BORDERS
21 FLOW-THROUGH FACILITIES. BUT STILL PICK/ PACK ACTIVITY HAS TO BE
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51 Page 52 53
22 DONE THERE AS WELL. 23 Q. AND THAT IS PICKING AND PACKING SHIPMENTS THAT ARE GOING TO
24 GO TO A SINGLE DEFENDANT'S STORE LOCATION? 25 A. EXACTLY.
page 139
1 Q. ALL RIGHT. HOW DID YOU IDENTIFY THE COSTS THAT THE 2 DEFENDANTS INCURRED IN PICKING AND PACKING INDIVIDUAL SHIPMENTS
3 GOING TO THEIR INDIVIDUAL STORES? 4 A. I LOOKED AT VARIOUS FINANCIAL STATEMENTS OR VARIABLE COST
5 SUMMARIES PROVIDED BY THE DEFENDANT ORGANIZATIONS IN THE CASE. 6 Q. LET ME FIRST ASK YOU TO TURN TO TAB 15, WHICH IS PLAINTIFF'S
7 EXHIBIT 1969. AND IN PARTICULAR --WELL, THERE'S SEVERAL 8 EXHIBITS THAT ARE --LET ME TRY TO BE CLEAR FOR THE RECORD.
9 PLAINTIFF'S EXHIBIT 1969 IS SEVERAL PAGES, EACH OF 10 WHICH IS LABELED AN EXHIBIT NUMBER, EXHIBIT 7, EXHIBIT 8,
11 EXHIBIT 9 REVISED. CAN YOU IDENTIFY WHAT THESE PAGES ARE? 12 A. SURE. EXHIBIT 7 PROVIDES --
13 Q. JUST IN GENERAL --GIVE ME THE BIG PICTURE. WHAT ARE THESE? 14 A. OH, ALL THESE EXHIBITS?
15 Q. WHAT ARE THESE? 16 A. THESE EXHIBITS INVOLVE MY ESTIMATION OF PUBLISHER COST
17 SAVINGS BASED ON FULFILLING ORDERS THROUGH RDC'S AS OPPOSED TO 18 DROP SHIPMENTS, BASED ON PICK/ PACK, BASED ON SHIPPING SUPPLIES,
19 AND ALSO EVENTUALLY BASED ON FREIGHT SAVINGS. 20 Q. SO THESE ARE EXHIBITS THAT YOU PREPARED?
21 A. RIGHT. 22 Q. LET ME --YOU'VE IDENTIFIED TWO THINGS. YOU SAID BASED ON
23 PICK/ PACK AND BASED ON SUPPLIES. CAN YOU DESCRIBE FOR THE 24 COURT, ARE THERE MULTIPLE COMPONENTS OF PICK/ PACK FUNCTION?
25 A. YES. ORIGINALLY IN MY FIRST REPORT, I ONLY LOOKED AT THE page 140

1 ACTUAL VARIABLE LABOR EXPENSE ITSELF ASSOCIATED WITH PICK AND 2 PACK, MEANING WHAT DID IT COST TO BASICALLY HAVE WAREHOUSE
3 PEOPLE GO THROUGH ALL THIS PICK AND PACK ACTIVITIES. 4 BUT A COUPLE OF DEFENDANTS' EXPERTS CRITICIZED MY
5 ANALYSIS AND SAID THAT YOU SHOULD ALSO LOOK AT NON-PRODUCTIVE 6 LABOR, AND THAT MEANS THAT, WELL, IF YOU'RE ABLE TO REDUCE
7 PICK-AND-PACK ACTIVITIES, THE DOWN TIME OF HAVING WAREHOUSE 8 WORKERS STANDING AROUND AND REALLY NOT DOING ANYTHING BUT
9 SHOOTING THE BREEZE WOULD BE REDUCED. AND ALSO PERHAPS EMPLOYEE 10 BENEFITS OR PAYROLL TAXES OR VACATION TIME WOULD BE REDUCED AS
11 WELL BASED UPON REDUCING THE VARIABLE PICK/ PACK EXPENSE. 12 I FELT THEIR CRITICISMS WERE REASONABLE, AND
13 THEREFORE IN MY SECOND REPORT, I HAVE --I'VE TAKEN INTO ACCOUNT 14 COST SAVINGS BASED UPON NON-PRODUCTIVE LABOR AS WELL.
15 (CONTINUED NEXT PAGE; NOTHING OMITTED.) 16
17 18
19 20
21 22
23 24
25 page 141

1 BY MR. DEBRUIN: 2 Q. NOW, BOTH OF THESE YOU'VE DESCRIBED, THE PRODUCTIVE LABOR
3 AND THE POTENTIAL NON-PRODUCTIVE LABOR, THEY'RE OBVIOUSLY LABOR 4 EXPENSES. IN ADDITION TO LABOR, IS THERE ANY OTHER COSTS
5 ASSOCIATED WITH THE PICK-PACK FUNCTION? 6 A. SHIPPING SUPPLIES, THE NUMBER OF CARTONS YOU USE UP IN
7 FULFILLING ORDERS FOR NON-CARTON ORDERS, AND IN --CERTAINLY 8 THE DUNNAGE OR STYROFOAM OR SPECIAL PACKAGING MATERIALS YOU PUT
9 IN THOSE BOXES TO PROTECT THE BOOKS IN SHIPMENT. 10 Q. ALL RIGHT, LET ME ASK YOU TO LOOK AT EXHIBIT NUMBER 8 OF
11 YOUR EXHIBITS, WHICH ARE LABELED TRIAL EXHIBIT 1969 BEHIND TAB 12 15. CAN YOU IDENTIFY WHAT YOU SET FORTH ON YOUR EXHIBIT
13 NUMBER 8?
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52 Page 53 54
14 A. RIGHT. THIS INVOLVES ONLY ESTIMATES OF MAXIMUM POSSIBLE 15 PUBLISHER COST SAVINGS BASED ON BARNES & NOBLE DISTRIBUTION
16 DATA FOR THREE YEARS, 1997, 1998 AND 1999, AND AS WE SEE IN 17 EXHIBIT 8, I HAVE AN ESTIMATE OF PUBLISHER COST SAVINGS BASED
18 ON VARIABLE PICK-PACK LABOR COST PER BOOK, WHICH ALSO INCLUDES 19 NON-PRODUCTIVE LABOR COST.
20 I ALSO, BASED UPON HAVING DATA ON SHIPPING SUPPLY 21 COSTS FOR BARNES & NOBLE FOR THREE YEARS, AND THE NUMBER OF
22 BOOKS NET THAT WERE PROCESSED THROUGH THE BARNES & NOBLE 23 DISTRIBUTION, I WAS ABLE TO ESTIMATE SHIPPING SUPPLY COSTS PER
24 BOOK, AND THEREFORE, THE BOTTOM ENTRY IN EXHIBIT 8 IS THE TOTAL 25 OF PICK-PACK AND SHIPPING SUPPLIES COSTS PER BOOK THAT I
page 142
1 ESTIMATE, AND I CHARACTERIZE IT AS MAXIMUM POSSIBLE PUBLISHER 2 COST SAVINGS BASED ON DEALING THROUGH RDC'S AND SAVING ON THESE
3 PARTICULAR FUNCTIONS. 4 Q. NOW, WHERE DID THE INFORMATION IN THIS CHART COME FROM?
5 A. VARIOUS BARNES & NOBLE FINANCIAL SUMMARIES, OR COST 6 SUMMARIES.
7 Q. ALL RIGHT, I'D LIKE TO TAKE A MOMENT AND JUST WALK THROUGH 8 THOSE, SO YOU CAN SHOW THE COURT HOW YOU OBTAINED THE
9 INFORMATION. LET'S LOOK AT TAB NUMBER 18, TRIAL EXHIBIT 917. 10 IS THIS ONE OF THE DOCUMENTS THAT YOU RECEIVED AND REVIEWED IN
11 CONNECTION WITH YOUR WORK? 12 A. YES.
13 Q. THE DOCUMENT BEHIND TAB 18, CAN YOU IDENTIFY FOR THE RECORD 14 WHAT THIS DOCUMENT IS?
15 A. BEHIND TAB 18, IT'S THE --FOR BARNES & NOBLE, 16 DISTRIBUTION, THE MONTHLY FINANCIAL SUMMARY FOR JANUARY OF
17 2000, WHICH BASICALLY I UNDERSTAND IT TO MEAN THIS IS THE 18 FISCAL YEAR 1999, WHICH ENDS IN JANUARY 2000.
19 Q. SO THIS WAS A FINANCIAL DOCUMENT THAT WAS PRODUCED BY 20 BARNES & NOBLE?
21 A. CORRECT. 22 Q. AND DOES IT INCLUDE BOTH MONTHLY AND YEAR-TO-DATE
23 INFORMATION? 24 A. THAT'S CORRECT.
25 Q. SO IF I UNDERSTAND CORRECTLY, YOUR UNDERSTANDING IS THAT page 143

1 THE YEAR-TO-DATE INFORMATION AS OF JANUARY 2000 WOULD INCLUDE 2 THE YEAR-TO-DATE AS OF THE END OF BARNES & NOBLE'S FISCAL YEAR
3 1999? 4 A. THAT'S MY UNDERSTANDING.
5 Q. NOW, DR. FRAZIER, AND JUST FOR THE RECORD, I WILL STATE 6 THAT THESE PAGES ARE ONLY AN EXCERPT OF THE ENTIRE FINANCIAL
7 DOCUMENT. IS THAT CORRECT? 8 A. CORRECT.
9 Q. AND I'VE SELECTED THESE PAGES SO YOU CAN ILLUSTRATE TO THE 10 COURT WHERE YOU OBTAINED THE DATA THAT YOU THEN COMBINE ON
11 EXHIBIT NUMBER 8, OR I'M SORRY, THE DOCUMENT --YOUR EXHIBIT 8 12 FROM YOUR EXPERT REPORT, WHICH WE LOOKED AT BEHIND TAB 15.
13 A. RIGHT. 14 Q. CAN YOU IDENTIFY IN THIS FINANCIAL REPORT OF BARNES & NOBLE
15 BEHIND TAB 18 WHERE YOU OBTAINED INFORMATION ON THE COSTS THAT 16 BARNES & NOBLE INCURRED IN PERFORMING THE PICK-PACK LABOR
17 FUNCTION AT ITS RDC'S? 18 A. IF WE TURN TO PAGE 26 OF EXHIBIT 18, THIS LAYS OUT FOR
19 BARNES & NOBLE DISTRIBUTION VARIABLE LABOR COSTS FOR THE YEAR 20 1999 IN CENTS PER UNIT, AND IF WE LOOK AT LINE NUMBER 1 IN --
21 AT THE VERY TOP OF THIS TABLE, IT PROVIDES AN ACTUAL 22 PICK-AND-PACK COST OF .043 CENTS ON A UNIT BASIS INCURRED BY
23 BARNES & NOBLE DISTRIBUTION IN 1999. THAT FORMS THE LARGEST 24 PORTION OF MY ESTIMATE OF THE PICK-PACK SAVINGS TO PUBLISHERS
25 FOR 1999 IN EXHIBIT 8. page 144

1 Q. I SHOULD CLARIFY, JUST FOR THE RECORD, THAT THE COVER PAGE 2 OF THIS FINANCIAL REPORT IN TAB 18 SAYS, "BARNES & NOBLE
3 DISTRIBUTION." DO YOU UNDERSTAND THESE TO BE THE COSTS THAT 4 ARE REPORTED BY THE DISTRIBUTION DIVISION OF BARNES & NOBLE?
5 A. THAT'S CORRECT.
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6 Q. AND IS THAT THE DIVISION THAT OPERATES ITS RDC'S? 7 A. CORRECT, OR RDC, YES.
8 Q. NOW, THIS DOCUMENT IDENTIFIES A PICK-PACK COST OF 4.3 CENTS 9 PER UNIT. IS THAT THE FIGURE THAT YOU USED, THEN, ON YOUR
10 EXHIBIT NUMBER 8 TO YOUR EXPERT REPORT? 11 A. WELL, IT WOULD HAVE BEEN IF THIS IS IN MY ORIGINAL REPORT,
12 BUT I ALSO ADDED TO THIS AN ESTIMATE OF SAVINGS ON 13 NON-PRODUCTIVE LABOR, AS I DESCRIBED BEFORE.
14 SO IN EXHIBIT 8, FOR 1999, I HAVE VARIABLE PICK-PACK 15 LABOR COST PER BOOK OF 5.77 CENTS. OF THAT AMOUNT, 5.77 CENTS,
16 4.3 CENTS WOULD BE THIS ESTIMATE OF ACTUAL VARIABLE 17 PICK-AND-PACK LABOR EXPENSE, AND THE REMAINDER WOULD BE AN
18 ESTIMATE OF NON-PRODUCTIVE LABOR SAVINGS BASED UPON ALL OUR 19 PICK-PACK ACTIVITY.
20 Q. SO FROM THE DOCUMENT YOU FOUND A REPORT OF THE PICK-PACK 21 COSTS OF 4.3 CENTS. YOU ULTIMATELY USED IN YOUR CHART A FIGURE
22 OF 5.77 CENTS. AND THE DIFFERENCE IS WHAT, AGAIN? 23 A. NON-PRODUCTIVE LABOR COST SAVINGS.
24 Q. AND HOW DID YOU ESTIMATE THE AMOUNT OF NON-PRODUCTIVE LABOR 25 COST THAT YOU WOULD ASSOCIATE WITH THE PICK-PACK COSTS, JUST IF
page 145
1 YOU CAN BRIEFLY DESCRIBE THAT? 2 A. WELL, IF WE STILL STAY ON PAGE 26 --
3 Q. AND THIS IS THE DOCUMENT BEHIND TAB 18? 4 A. YEAH, EXACTLY, I'M SORRY, PAGE 26 BEHIND TAB 18. ITEM
5 NUMBER 16 IN BARNES & NOBLE DISTRIBUTION VARIABLE LABOR COSTS 6 IS AN ENTRY FOR NON-PRODUCTIVE LABOR OF .008. ALSO, IN LINE 18
7 THEY'VE GOT MISCELLANEOUS ALLOCATION OF LABOR OF .003. 8 I ADDED THOSE TWO TOGETHER, AND THEN TOOK AS A
9 PERCENTAGE OF TOTAL VARIABLE LABOR WHAT PICK-AND-PACK ENTAILED, 10 AND THEN MULTIPLIED THE TWO TOGETHER TO GET THE LIKELY SAVINGS
11 FROM HAVING WAREHOUSE WORKERS JUST STANDING AROUND NOT BEING 12 PRODUCTIVE BASED UPON LOWERED PICK-PACK.
13 Q. SO YOU DID NOT ALLOCATE ALL OF THE NON-PRODUCTIVE LABOR 14 REPORTED HERE TO PICK-PACK?
15 A. NO, BECAUSE SOME OF THIS WOULD BE RELATED TO SOME OF THESE 16 OTHER FUNCTIONS, LIKE THE RECEIVING FUNCTION, FOR EXAMPLE, IN
17 LINE NUMBER 3 THAT WE'VE DESCRIBED BEFORE. 18 Q. SO THERE WOULD BE TIME WHEN THE PEOPLE WHO RECEIVE BOOKS
19 WOULD BE IDLE BECAUSE THERE'S NO BOOKS THAT HAVE COME IN? 20 A. RIGHT, AND THAT ISN'T AFFECTED BY RDC FULFILLMENT.
21 Q. SO YOU TOOK A PROPORTION OF THE NON-PRODUCTIVE LABOR AND 22 ALLOCATED IT TO PICK-PACK, IS THAT RIGHT?
23 A. RIGHT, BUT THAT ISN'T ALL, BECAUSE --THAT'S ONE PART OF 24 THE ESTIMATE OF NON-PRODUCTIVE LABOR. THEN, IF WE GO TO THE
25 PREVIOUS PAGE, IT'S ACTUALLY LABELED 9, PAGE 9, IN TAB 18, THIS page 146

1 IS THE BARNES & NOBLE DISTRIBUTION INCOME STATEMENT, AND IT 2 BASICALLY HAS PAYROLL AT THE UPPER LEFT, AND SO --AND THEN IT
3 GIVES BONUS AND BENEFITS AND PAYROLL TAXES. 4 WELL, BONUS, BENEFITS, PAYROLL TAXES, IN ADDITION TO
5 THIS DOWNTIME OR NON-PRODUCTIVE TIME ITSELF THAT I'VE ALREADY 6 TAKEN INTO ACCOUNT, I'VE GOT TO MAKE AN ADJUSTMENT HERE AS
7 WELL. 8 SO WHAT I DID WAS, I HAD TO ASK MYSELF WHAT
9 PERCENTAGE OF BONUS, BENEFITS, PAYROLL APPLIED ITSELF JUST TO 10 WAREHOUSE LABOR IN GENERAL, BECAUSE YOU HAVE ADMINISTRATION AND
11 OTHER PEOPLE WITH BONUSES, BENEFITS, PAYROLL TAXES, TOO. 12 SO WHAT I DID IS I TOOK THE SALARY FOR OFFICE TEMPS
13 ON LINE 21, AND I ADDED LINE 22 AND I ADDED LINE 23, AND I 14 TOTALED THAT, WHICH GIVES YOU PAYROLL ASSOCIATED WITH THE
15 OPERATION OF BARNES & NOBLE DISTRIBUTION CENTER IN GENERAL. 16 AND THEN NEXT, I DIVIDED THE WAREHOUSE LABOR, THE 10,000,190,
17 BY THE TOTAL, TO COME OUT WITH A PERCENTAGE OF PAYROLL 18 DEDICATED TO THE WAREHOUSE.
19 THEN WHAT I DID IS I ADDED BONUS OF 326,000, 20 BENEFITS OF 757,900, AND PAYROLL TAXES OF 1.176 MILLION
21 TOGETHER, AND MULTIPLIED THAT TIMES THIS PERCENTAGE, WHICH WAS 22 DEVOTED JUST TO WAREHOUSE WORKERS.
23 AND I KNOW THIS IS KIND OF TEDIOUS --SORRY, YOUR 24 HONOR --BUT THEN I HAD TO MULTIPLY THE PERCENTAGE OF PICK-PACK
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54 Page 55 56
25 LABOR OUT OF THE TOTAL, TIMES THAT AMOUNT, TO GIVE ME BONUS, page 147
1 BENEFITS, PAYROLL TAXES SAVED BASED ON REDUCING PICK-AND-PACK. 2 SO ADDING THOSE TWO TOGETHER, THAT'S THE DIFFERENCE
3 BETWEEN THE .043 CENTS IN TAB 18 FOR PICK-PACK LABOR AND THE 4 5.77 CENTS IN EXHIBIT 8 FOR 1999. IT'S A NON-PRODUCTIVE LABOR
5 ADJUSTMENT. 6 Q. JUST FOR THE RECORD, THE NUMBERS YOU'RE GIVING US ARE FROM
7 THE YEAR-TO-DATE ACTUAL COLUMN? 8 A. RIGHT, YES.
9 Q. ALL RIGHT, SO ONCE YOU HAD MADE AN ADJUSTMENT TO THE 10 PICK-PACK FIGURE SO AS TO INCLUDE AN AMOUNT OF NON-PRODUCTIVE
11 LABOR, YOU THEN TRANSFERRED THAT TO YOUR EXHIBIT NUMBER 8? 12 A. RIGHT, AND I FOLLOWED A SIMILAR APPROACH FOR '97 AND '98,
13 AS WELL. 14 Q. ALL RIGHT. KEEPING FOCUSED ON 1999, THE NEXT ITEM ON YOUR
15 EXHIBIT 8, WHICH IS BEHIND TAB 15, IS "SHIPPING SUPPLIES COST." 16 A. RIGHT.
17 Q. AND THERE'S A FIGURE FOR 1999 OF 2,070,700. 18 A. CORRECT.
19 Q. WHERE DID YOU GET THAT FIGURE FROM? 20 A. IF WE GO TO TAB 18, AND WE GO TO PAGE 9, WHICH IS BARNES &
21 NOBLE DISTRIBUTION INCOME STATEMENT IN MILLIONS --IN THOUSANDS 22 OF DOLLARS, 1999, TRADED IN FOR JANUARY, IS WHAT IT IS IT SAYS,
23 AND THEN YOU GO TO WAREHOUSE EXPENSE NEAR THE BOTTOM, LINE 43 24 IS SHIPPING SUPPLIES, AND IF YOU GO OVER TO YEAR-TO-DATE
25 ACTUAL, IT'S 2,070,700, AND THAT'S THE FIGURE THAT YOU FIND IN page 148

1 THAT SECOND COLUMN IN THE FAR RIGHT PORTION OF EXHIBIT 8. 2 Q. AND THAT'S A TOTAL DOLLAR FIGURE?
3 A. OF SHIPPING SUPPLY EXPENSE, YES. 4 Q. AND THEN DID YOU CONVERT THAT TOTAL DOLLAR FIGURE INTO A
5 PER BOOK AMOUNT? 6 A. YES, BECAUSE WE HAVE IN TAB 18, PAGE 8, JUST THE PRIOR PAGE
7 FROM WHERE I WAS BEFORE, BARNES & NOBLE DISTRIBUTION INCOME 8 STATEMENT, IF YOU GO DOWN TO LINE 12, IT HAS "NET UNITS SOLD,"
9 WHICH IS 100,247,900, AND THAT ENTAILS THE THIRD ENTRY IN THE 10 FAR RIGHT COLUMN FOR 1999 OF BOOKS SOLD NET THROUGH THE
11 DISTRIBUTION CENTER. 12 Q. ALL RIGHT. SO IF I UNDERSTAND YOUR CHART CORRECTLY, THEN,
13 YOU, DRAWING ON THESE DOCUMENTS, CONCLUDED THAT THE SHIPPING 14 SUPPLIES COST PER BOOK, IN YOUR EXHIBIT 8 BEHIND TAB 15, WAS
15 2.07 CENTS PER BOOK. 16 A. WHICH IS SIMPLY DIVIDING 2,070,700 BY THE NUMBER OF UNITS,
17 OR 100,247,900. 18 Q. AND THEN WHAT'S THE LAST LINE ON YOUR CHART, TOTAL
19 PICK-PACK AND SHIPPING SUPPLIES COST PER BOOK? 20 A. THAT SIMPLY DEPICTS SAVINGS AND PICK-AND-PACK, INCLUDING
21 NON-PRODUCTIVE LABOR AND SHIPPING SUPPLIES, THE TOTAL COST 22 SAVINGS PER UNIT BASED ON THOSE FUNCTIONS.
23 Q. AND ONCE YOU HAD A UNIT COST PER BOOK OF 7.84 CENTS PER 24 BOOK, WHAT DID YOU DO NEXT WITH THAT FIGURE?
25 A. WELL, THE PRACTICE IS TO APPLY RDC DISCOUNTS TO THE RETAIL page 149

1 SELLING PRICE OF BOOKS. SO I HAD TO ADJUST THE PER UNIT COST 2 TO A SELLING PRICE OF BOOKS IN ORDER TO GET A PERCENTAGE
3 DISCOUNT THAT I COULD COMPARE TO THE RDC DISCOUNT. 4 Q. ALL RIGHT. NOW, IF YOU TURN TO THE VERY NEXT PAGE BEHIND
5 TAB 15, YOUR EXHIBIT NUMBER 9 --6 A. YES.
7 Q. --IF WE CONTINUE WITH THE BARNES & NOBLE 1999, CAN YOU --8 IS THE FIGURE IN YOUR EXHIBIT 9, BARNES & NOBLE 1999, MAXIMUM
9 COST SAVINGS PER BOOK, 0.0784 DOLLARS, IS THAT THE SAME FIGURE 10 YOU CARRY OVER FROM EXHIBIT 8?
11 A. THAT'S CORRECT. 12 Q. AND THEN WHAT DID YOU DO WITH THAT FIGURE IN ORDER TO
13 CONVERT THE UNIT COST PER BOOK INTO AN ACTUAL PERCENTAGE OF THE 14 RETAIL PRICE OF THE BOOK?
15 A. I FOLLOWED TWO DIFFERENT METHODS. THE INFORMATION IN 16 BARNES & NOBLE DISTRIBUTION INVOLVED HARDCOVER, TRADE PAPERBACK
55
55 Page 56 57
17 AND MASS MARKET BOOKS ALL LUMPED TOGETHER, AND I HAD 18 INFORMATION ON CERTAIN OF THE AVERAGE DISCOUNTS OFF OF THE
19 RETAIL PRICE WITHIN THE BARNES & NOBLE SYSTEM ITSELF. 20 SO I ESTIMATED FOR EACH OF THREE YEARS THE AVERAGE
21 SUGGESTED PRICES, OR THE RETAIL PRICES, IN BARNES & NOBLE, AND 22 IT SORT OF REPRESENTS A BLENDING ACROSS ALL THESE CATEGORIES.
23 Q. ALL RIGHT, LET'S JUST CONTINUE TO FOCUS ON 1999. THE 24 BLENDED AVERAGE SUGGESTED RETAIL PRICE THAT YOU HAVE FOR 1999,
25 THE BLENDED IS $14.20? page 150

1 A. CORRECT. 2 Q. TELL ME AGAIN, WHERE DID THAT FIGURE COME FROM?
3 A. WELL, THERE WAS CERTAIN INFORMATION THAT GAVE, BASED ON 4 BARNES & NOBLE, THE VARIOUS CATEGORIES OF BOOKS, A PROFIT
5 MARKUP PERCENTAGE. THERE'S AN INTERNAL SELLING PRICE FROM 6 BARNES & NOBLE DISTRIBUTION TO THE BARNES & NOBLE STORES, AND
7 ONE DOCUMENT LAID OUT THE PROFIT MARKUP INVOLVED. 8 Q. ALL RIGHT.
9 A. SO I JUST TOOK WEIGHTED AVERAGES OF THAT TO COME UP WITH AN 10 ESTIMATE OF THE DISCOUNT PERCENTAGE, AND THEN BASED UPON --
11 WE'D HAVE TO GO BACKWARDS, IT'S 2 AND 3 IN MY ORIGINAL 12 REPORT --FOR ME TO PRECISELY DESCRIBE THAT.
13 Q. I DON'T WANT TO GO THROUGH THE DETAILS, BUT THIS $14.20 14 FIGURE, YOU'RE SAYING YOU DERIVED THAT FROM BARNES & NOBLE'S
15 DOCUMENTS? 16 A. YES.
17 Q. NOW, THE NON-BLENDED RETAIL PRICES FOR HARDCOVER, TRADE 18 PAPER, $18, MASS MARKET, $6, WHERE DID THOSE FIGURES COME FROM?
19 A. I WASN'T COMPLETELY HAPPY WITH THE BLENDED METHOD, AND SO 20 BASED UPON VARIOUS REPORTS FROM PUBLISHERS, SUCH AS ON RETURNS
21 CENTER ANALYSES, OR BASED UPON TESTIMONY BY MR. RIGGIO, THE 22 HEAD OF BARNES & NOBLE --I'M SORRY IF I DIDN'T PRONOUNCE THAT
23 RIGHT --IT SEEMED LIKE THERE WAS A RANGE OF PRICES PROVIDED 24 RANGING FROM MAYBE $17 TO $21 OR ABOVE FOR THE AVERAGE PRICE
25 FOR A HARDCOVER OR TRADE PAPERBACK. page 151

1 SO THAT'S THE $18 ESTIMATE HERE, IN EXHIBIT 9, IS 2 BASED ON THAT. AND SIMILARLY, BASED UPON VARIOUS TESTIMONY OR
3 EVIDENCE BY CALLING ON OTHERS, IT SEEMED LIKE A VERY 4 CONSERVATIVE ESTIMATE OF THE AVERAGE SELLING PRICE FOR A MASS
5 MARKET BOOK TO BE $6. 6 AND SO I ACTUALLY USE THE BLENDED METHODOLOGY AS
7 WELL AS TRYING TO SEPARATE OUT THE CATEGORIES IN TERMS OF THIS 8 EXHIBIT.
9 Q. ALL RIGHT, IF WE CAN THEN GO TO THE BOTTOM LINE, AND 10 LOOKING AT THE INDIVIDUAL CATEGORIES, IN TERMS OF THE PICK-PACK
11 FUNCTION, INCLUDING BOTH LABOR AND SUPPLIES, WHAT DID YOU 12 CONCLUDE WAS THE COST, ON A PERCENTAGE BASIS, THAT IS INVOLVED
13 IN THAT FUNCTION, USING BARNES & NOBLE'S FINANCIAL DATA FOR 14 1999?
15 A. WELL, YOU CAN SEE THAT YOU GET A RATHER CONSISTENT 16 ESTIMATE, BASED ON THE BLENDED PRICE, OF .55 PERCENT COST
17 SAVINGS. 18 Q. BUT LET'S FOCUS ON THE PARTICULAR CATEGORIES.
19 A. OKAY. 20 Q. THE TRADE CATEGORY, TRADE --HARDCOVER TRADE PAPER
21 CATEGORY, WHAT ARE THE AMOUNT OF PICK-PACK SAVINGS EXPRESSED AS 22 A PERCENTAGE?
23 A. FOR BARNES & NOBLE IT RANGES FROM .37 PERCENT TO 24 .44 PERCENT.
25 Q. OKAY, SO FOCUSING JUST ON 1999, THE YEAR WE'VE BEEN USING. page 152

1 A. .44 PERCENT IS MY ESTIMATE OF MAXIMUM POSSIBLE COST SAVINGS 2 BASED UPON SAVINGS AND SERVING RDC'S.
3 Q. OKAY, SO TO PUT THIS IN THE CONTEXT OF YOUR TESTIMONY TODAY 4 AS A WHOLE, YOU TESTIFIED EARLIER THAT THE RDC DIFFERENTIALS
5 THAT YOU'VE SEEN FOR MANY PUBLISHERS ON TRADE BOOKS WAS 6 2 PERCENT?
7 A. CORRECT. 8 Q. 2 PERCENT DIFFERENCE ON TRADE BOOKS.
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56 Page 57 58
9 A. CORRECT. 10 Q. WHAT WAS YOUR OPINION OF THE ACTUAL AMOUNT OF COST SAVINGS
11 ASSOCIATED WITH THE TRANSFERENCE OF THE PICK-PACK FUNCTION FROM 12 PUBLISHERS TO BARNES & NOBLE ON TRADE BOOKS?
13 A. WELL, OBVIOUSLY, THE 2 PERCENT RDC DISCOUNT IS MUCH, MUCH 14 ABOVE ACTUAL COST SAVINGS BASED ON PICK-AND-PACK AND SHIPPING
15 SUPPLIES. IT'S FOUR OR FIVE TIMES GREATER THAN COST SAVINGS. 16 Q. I JUST WANT TO MAKE SURE THAT I UNDERSTAND. SO THE TRADE
17 COVER SAVINGS THAT YOU ESTIMATED FOR THE PICK-PACK FUNCTION WAS 18 .44 PERCENT, SO A LITTLE LESS THAN A HALF OF A PERCENT?
19 A. RIGHT. 20 Q. AS COMPARED TO THE 2 PERCENT DIFFERENTIAL FOR TRADE BOOKS
21 AS A WHOLE? 22 A. THAT IS CORRECT.
23 Q. AND HOW ABOUT FOR MASS MARKET BOOKS --24 A. HERE WE HAVE TO CONSIDER THAT THE TYPICAL OR STANDARD RDC
25 DISCOUNTS IS 4 PERCENT, IN MY ESTIMATE OF, PUBLISHER --page 153

1 THE REPORTER: I'M SORRY, COULD YOU --2 THE WITNESS: WOULD IT BE ALL RIGHT IF I STARTED
3 OVER AGAIN? 4 THE REPORTER: SURE.
5 THE WITNESS: FOR MASS MARKET CATEGORY BOOKS, IN 6 1999, MY ESTIMATE OF MAXIMUM POSSIBLE COST SAVINGS TO
7 PUBLISHERS, BASED UPON THE PICK-AND-PACK AND SHIPPING SUPPLY 8 EXPENSES, IS 1.31 PERCENT; AND WE HAVE TO COMPARE THAT TO THE
9 4 PERCENT RDC DISCOUNT THAT'S STANDARD FOR MASS MARKET BOOKS. 10 BY MR. DEBRUIN:
11 Q. NOW, AGAIN, IF WE'RE DEALING WITH A PUBLISHER THAT IS NOT A 12 FREE FREIGHT PUBLISHER, AN F. O. B. PUBLISHER, ARE THERE ANY
13 FUNCTIONS OTHER THAN THE PICK-PACK FUNCTION, BOTH THE LABOR AND 14 THE SUPPLIES, THAT YOU BELIEVE THE PUBLISHER SAVES BY SHIPPING
15 BOOKS TO AN RDC? 16 A. NO.
17 Q. SO FOR A NON-FREE FREIGHT PUBLISHER, ARE THE AMOUNTS THAT 18 YOU'VE IDENTIFIED HERE --AND AGAIN, I'M JUST FOCUSED ON BARNES
19 & NOBLE FOR 1999 --IS THIS YOUR OPINION OF THE TOTAL AMOUNT OF 20 COST SAVINGS A NON-FREE FREIGHT PUBLISHER WOULD SAVE BY REASON
21 OF SHIPPING BOOKS TO AN RDC AND TRANSFERRING THAT PICK-PACK 22 FUNCTION FROM ITS OWN WAREHOUSE TO THE DEFENDANTS' WAREHOUSE?
23 A. THIS IS AS GOOD AS IT GETS. 24 Q. SO THE ROUGH COMPARISONS ARE, JUST SO THAT WE'RE CLEAR, ON
25 TRADE BOOKS IT'S ABOUT A HALF OF 1 PERCENT COMPARED TO A page 154

1 DIFFERENTIAL OF 2 PERCENT; FOR MASS MARKET BOOKS, A SAVINGS OF 2 1.3 PERCENT AS OPPOSED TO A DIFFERENTIAL OF ABOUT 4 PERCENT.
3 A. CORRECT. 4 Q. NOW, I DON'T WANT TO GO THROUGH IT TODAY IN THE SAME
5 DETAIL, BUT DID YOU DO A SIMILAR ANALYSIS LOOKING AT WALDEN'S 6 DATA?
7 A. IT'S SIMILAR. ORIGINALLY I HAD INFORMATION IN 1997 FOR THE 8 WALDEN WAREHOUSE IN CALIFORNIA, AND SO I DID AN ESTIMATE, AND
9 THERE IS SIMPLY ONE PAGE OF THE COST SUMMARY THAT GAVE THE 10 PICK-AND-PACK EXPENSE AND THE SHIPPING SUPPLY EXPENSE, AND I
11 UTILIZED THOSE. 12 I MIGHT ADD, I MADE ONE ADJUSTMENT THAT, BASED UPON
13 THE INFORMATION THAT I HAD FROM WALDEN, THE SHIPPING SUPPLY 14 UNIT COST SEEMED VERY, VERY LOW TO ME, BASED UPON THEIR DATA.
15 IT MAY NOT HAVE REALLY BEEN ACTUAL SHIPPING SUPPLIES USED IN 16 FULFILLING NON-CARTON LOT ORDERS. IT MAY HAVE BEEN SUPPLIES
17 YOU USED UP BY THE WAREHOUSE LABORERS IN SOME FASHION, BUT IT 18 IS .0089 CENTS. SO INSTEAD OF USING THAT, I USED THE BARNES &
19 NOBLE ESTIMATE OF SHIPPING SUPPLY SAVINGS OF OVER 2 CENTS TO 20 COME UP WITH MY ESTIMATE OF COST SAVINGS.
21 THEN, BASED UPON A SPREADSHEET THAT A MR. COX HAD IN 22 HIS WORK FOR THE DEFENDANTS, IT PROVIDED A BUNCH OF DATA FOR
23 THE WALDEN TENNESSEE WAREHOUSE IN 1997. SO IN MY REBUTTAL 24 REPORT, I USED INFORMATION IN THAT, AND ALSO ADJUSTED IT BASED
25 UPON NON-PRODUCTIVE LABOR COST SAVINGS, TOO. BUT THE TWO page 155
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1 RESULTS ARE PRETTY SIMILAR. 2 Q. AND JUST FOR THE RECORD, DOCTOR, COX, WAS HE AN EXPERT
3 EMPLOYED BY BORDERS? 4 A. I BELIEVE SO.
5 Q. AND SO YOU USED SOME DATA --HE HAD MORE EXTENSIVE DATA 6 FROM A WALDEN FACILITY IN TENNESSEE?
7 A. IT LOOKED MORE COMPLETE THAN WHAT I HAD FOR CALIFORNIA, 8 YES.
9 Q. AND SO YOU THEN USED THAT DATA. 10 A. YES.
11 Q. NOW AGAIN, JUST TO JUMP TO THE BOTTOM LINE, USING THE 12 WALDEN DATA FOR 1997, WHAT WAS SUGGESTED TO YOU AS THE MAXIMUM
13 AMOUNT OF PUBLISHER COST SAVINGS ON TRADE BOOKS RESULTING FROM 14 THEIR PERFORMANCE OF THE PICK-PACK FUNCTION?
15 A. MY ESTIMATE IS .33 PERCENT. 16 Q. SO IT'S SLIGHTLY LOWER THAN YOUR ESTIMATE USING BARNES &
17 NOBLE'S DATA? 18 A. YES.
19 Q. BUT AGAIN, HOW DOES THAT ESTIMATE COMPARE TO THE BASIC 20 TRADE DIFFERENTIAL THAT WE'VE TALKED ABOUT?
21 A. IT WOULD BE EITHER 2 PERCENT TYPICAL RDC DISCOUNT FOR 22 HARDCOVER AND TRADE PAPERBACK COMPARED TO THE .33 PERCENT.
23 Q. AND USING THE WALDEN DATA, WHAT WAS YOUR ESTIMATE OF COST 24 SAVINGS TO PUBLISHERS FOR MASS MARKET BOOKS?
25 A. .99 PERCENT. page 156

1 Q. AND AGAIN, WE'RE JUST LOOKING AT THE PICK-PACK FUNCTION, 2 NOT YET LOOKING AT FREIGHT.
3 A. EXACTLY. 4 Q. NOW, IN, FINALLY, PERFORMING THIS ANALYSIS FOR BORDERS, DID
5 YOU MAKE ANY --HOW DID YOU GO ABOUT CONDUCTING THIS ANALYSIS 6 LOOKING AT BORDERS DATA?
7 A. WELL, FOR BORDERS, I DID NOT HAVE FINANCIAL INFORMATION ON 8 THEIR DISTRIBUTION CENTER OPERATIONS LIKE I DID FOR BARNES &
9 NOBLE AND WALDEN. AND ALSO, BECAUSE THE FLOW-THROUGH CENTERS 10 THAT BORDERS USES OPERATE DIFFERENT THAN TRADITIONAL WAREHOUSES
11 AND THAT OTHER OF ITS ORGANIZATIONS, AS WELL, OPERATE 12 DIFFERENTLY THAN PUBLISHER WAREHOUSES, I DECIDED TO RELY ON
13 WALDEN DISTRIBUTION COST CENTER DATA AND EMBRACE IT FOR 14 BORDERS, WITH ONE ADJUSTMENT.
15 Q. AND WHAT WAS THAT ADJUSTMENT THAT YOU MADE? 16 A. AS I DISCUSSED BEFORE, BARNES & NOBLE GETS THEIR RDC ORDERS
17 IN CARTON ORDERS, AND SO DOES WALDEN BOOKS. A SIZEABLE AMOUNT 18 OF ORDERS BORDERS RECEIVES THROUGH ITS FOUR FLOW-THROUGH
19 CENTERS ARE NON-CARTON LOT QUANTITIES, AND THERE'S BEEN A LOT 20 OF EVIDENCE TO SUGGEST OBVIOUSLY THAT COSTS MORE, AND SO THERE
21 WOULD BE LESS PICK-AND-PACK SAVINGS FOR PUBLISHERS AS A RESULT, 22 AND --
23 Q. WHEN YOU SAY --SORRY TO CUT YOU OFF, BUT JUST TO KEEP THE 24 RECORD CLEAR, YOU SAID THERE'S A SIZEABLE AMOUNT OF ORDERS THAT
25 BORDERS RECEIVES THAT ARE NOT IN CARTON QUANTITIES. DID YOU page 157

1 HAVE ANY EVIDENCE OF THE APPROXIMATE AMOUNT OF ORDERS THAT 2 BORDERS RECEIVES THAT ARE NOT IN CARTON QUANTITIES?
3 A. YES, IN PARTICULAR, ROBIN WAGNER IS THE V. P. OF 4 INTERNATIONAL MERCHANDISING IN THE BORDERS ORGANIZATION, AND
5 SHE INDICATED THAT WHILE CERTAIN PUBLISHERS MAY HAVE ESTIMATED 6 THIS TO BE GREATER, A 30 PERCENT ESTIMATE OF THE AMOUNT OF
7 ORDERS IN NON-CARTON QUANTITIES IN THE BORDERS SYSTEM IS MORE 8 IN THE BALLPARK.
9 Q. NOW, WITH RESPECT TO ORDERS FROM A PUBLISHER THAT ARE NOT 10 IN CARTON QUANTITIES, IS THERE ANY TRANSFERENCE OF COSTS OR ANY
11 COSTS SAVINGS TO PUBLISHERS IN PACKING THOSE ORDERS GOING TO A 12 BORDERS RDC?
13 A. THERE WOULD BE SOME, BUT BECAUSE IF YOU ACCEPT THE 14 30 PERCENT, THAT MEANS 70 PERCENT OF THE ORDERS RECEIVED AT
15 BORDERS FACILITIES ARE IN CARTON LOT ORDERS, BUT THERE WOULD BE 16 LESS PICK-AND-PACK SAVINGS FOR A PUBLISHER IN DEALING WITH
17 BORDERS THAN THERE WOULD BE IN DEALING WITH WALDEN. 18 Q. SO HOW DID YOU GO ABOUT PREPARING AN ESTIMATE OF THE COST
19 SAVINGS TO PUBLISHERS WHO ARE DEALING WITH BORDERS?
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20 A. I TOOK A SIMPLE APPROACH. I JUST TOOK THE COST SAVINGS 21 ASSOCIATED WITH PICK-AND-PACK FOR WALDEN AND REDUCED IT BY
22 30 PERCENT, AND USED THOSE FIGURES FOR BORDERS. 23 Q. AND IS THAT ALSO SET FORTH IN EXHIBIT 9?
24 A. THAT'S CORRECT. 25 Q. SO AGAIN, JUST GOING TO THE CONCLUSIONS, WHAT DID YOU
page 158
1 CONCLUDE, BASED ON YOUR ANALYSIS, AS AN APPROXIMATE ESTIMATE OF 2 THE AMOUNT OF PUBLISHER COST SAVINGS RESULTING FROM SHIPPING TO
3 BORDERS RDC'S, LOOKING FIRST AT TRADE BOOKS? 4 A. IT'S .23 PERCENT.
5 Q. AND WHAT WAS YOUR ESTIMATE OF THE PUBLISHER COST SAVINGS IN 6 SHIPPING MASS MARKET BOOKS TO BORDERS?
7 A. .7 PERCENT. 8 Q. AND THIS, AGAIN, IS JUST FOCUSED ON THE PICK-PACK FUNCTION.
9 A. RIGHT. 10 Q. NOW, YOU'VE TESTIFIED REGARDING YOUR LIST OF FUNCTIONS
11 THAT, FOR FREE FREIGHT PUBLISHERS, THERE ARE ADDITIONAL 12 SAVINGS, IS THAT CORRECT?
13 A. ESPECIALLY IF THEY DON'T PAY A FREIGHT ALLOWANCE, OR IF 14 THEY DON'T PAY A FREIGHT ALLOWANCE, I GUESS I SHOULD SAY.
15 Q. CAN YOU DESCRIBE BRIEFLY HOW YOU WENT ABOUT TRYING TO --16 DID YOU ATTEMPT TO ESTIMATE THE AMOUNT OF FREIGHT SAVINGS THAT
17 A FREE FREIGHT PUBLISHER WOULD SAVE BY SHIPPING TO A 18 DISTRIBUTION CENTER AS OPPOSED TO A STORE?
19 A. YES, I DID. 20 Q. CAN YOU FIRST DESCRIBE FOR THE RECORD, FOR THE COURT, WHY
21 ARE THERE FREIGHT SAVINGS WHEN YOU'RE SHIPPING TO AN RDC AS 22 OPPOSED TO SHIPPING TO INDIVIDUAL STORES?
23 A. WELL, IF YOU GET AN ORDER FOR A THOUSAND BOOKS FROM --AND 24 IT COVERS 200 STORES, INSTEAD OF HAVING TO DIRECT 200 ORDERS TO
25 THE INDIVIDUAL STORES, YOU JUST TAKE THE WHOLE SHIPMENT OF A page 159

1 THOUSAND AND SHIP IT TO ONE LOCATION, THE RDC, AND SO THERE ARE 2 SIGNIFICANT COST SAVINGS IN FREIGHT ASSOCIATED WITH THAT FOR A
3 FREE FREIGHT PUBLISHER, POTENTIALLY. 4 Q. AND HOW DID YOU GO ABOUT TRYING TO ESTIMATE THE EXACT
5 AMOUNT OF THOSE FREIGHT SAVINGS FOR A FREE FREIGHT PUBLISHER? 6 A. I DID IT SEPARATELY FOR EACH ORGANIZATION. FIRST, FOR
7 BARNES & NOBLE, MR. LICHTENSTEIN IS A VICE PRESIDENT IN THE 8 BARNES & NOBLE ORGANIZATION, AND HE TESTIFIED THAT IT COSTS
9 PUBLISHERS ROUGHLY 3 TO 4 CENTS PER POUND TO SHIP PRODUCTS INTO 10 THE RDC; AND THEN HE ALSO TESTIFIED THAT IT COSTS BARNES &
11 NOBLE ROUGHLY 18 CENTS PER POUND TO SHIP THEIR BOOKS TO 12 INDIVIDUAL STORES, AND OBVIOUSLY, YOU'RE SHIPPING SMALLER
13 QUANTITIES, AND THE HIGHER THE NUMBER OF POUNDS IN A SHIPMENT, 14 THE LOWER THE FREIGHT COST PER UNIT.
15 Q. AND LET ME JUST STOP YOU THERE. IS THAT TYPICAL IN 16 DISTRIBUTION, GENERALLY, THAT LARGER SHIPMENTS ARE --HAVE
17 LOWER FREIGHT COSTS PER POUND THAN SMALLER SHIPMENTS? 18 A. THAT'S GOSPEL, YEAH.
19 Q. OKAY. AND JUST TO FIX THESE NUMBERS, THE COST OF SHIPPING 20 INTO THE RDC, THE LARGER SHIPMENTS, WHAT WAS YOUR EVIDENCE THAT
21 YOU RELIED ON IN TERMS OF THE COST PER POUND FOR THOSE 22 SHIPMENTS?
23 A. THERE MAY HAVE BEEN OTHERS, BUT I LARGELY RELIED ON 24 TESTIMONY BY MR. LICHTENSTEIN OF BARNES & NOBLE THAT THAT WOULD
25 COST BETWEEN 3 AND 4 CENTS PER POUND. page 160

1 Q. OKAY. AND HOW DID THAT COMPARE TO COSTS FOR SHIPMENTS 2 RIGHT TO STORES?
3 A. WELL, AS I WAS BEGINNING TO SAY, THERE --MR. LICHTENSTEIN 4 INDICATED THAT ROUGHLY IT COST 18 CENTS PER POUND TO SEND
5 SHIPMENTS FROM THE RDC TO THE INDIVIDUAL STORES. 6 Q. THOSE ARE SHIPMENTS FROM BARNES & NOBLE'S RDC TO BARNES &
7 NOBLE STORES? 8 A. RIGHT. SO I DIDN'T --I LOOKED AT THAT, BUT I WANTED TO
9 LOOK AT MORE THAN JUST THAT. SO THERE WAS OTHER EVIDENCE THAT 10 THE COST THAT PUBLISHERS INCURRED PER POUND OF SENDING ORDERS
11 FROM THEIR WAREHOUSE TO THE INDIVIDUAL STORES, I THINK THE
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12 RANGE WAS 18 CENTS TO ALMOST 21 CENTS. 13 AND SO BEING, AGAIN, WANTING TO BE GENEROUS, I
14 GUESS, I TOOK THE ESTIMATE OF PUBLISHER COST PER POUND, DROP 15 SHIPPING, TO BE ABOUT .2093, AND THEN I TOOK THE MEDIAN OF
16 MR. LICHTENSTEIN'S ESTIMATE OF 3 AND 4 CENTS TO SHIP TO THE 17 RDC, AND SO IT'S LIKE .2093 MINUS 3.5 CENTS, AND IT COMES OUT
18 ROUGHLY A SAVINGS OF 17.4 CENTS PER POUND. 19 Q. WHERE DID YOU SEE THE EVIDENCE OF SHIPPING COSTS OF .2093?
20 A. I'D HAVE TO --I CAN'T REMEMBER SPECIFICALLY, BUT IT WAS 21 EVIDENCE REGARDING --EITHER TESTIMONY OR RECORDS REGARDING
22 WHAT IT COSTS PUBLISHERS TO DROP-SHIP ORDERS PER POUND FROM 23 THEIR WAREHOUSE TO INDIVIDUAL STORES.
24 Q. WAS THAT THE HIGHEST FIGURE YOU HAD SEEN IN TERMS OF 25 PUBLISHER COSTS IN SHIPPING FROM PUBLISHER WAREHOUSE DIRECTLY
page 161
1 TO STORES? 2 A. THAT'S CORRECT.
3 Q. AND SO YOU USED THAT HIGHEST FIGURE YOU HAD SEEN OF .2093, 4 AND COMPARED IT TO THE COSTS FOR SHIPPING FROM THE PUBLISHER TO
5 THE RDC. 6 A. RIGHT.
7 Q. AND AGAIN, WHAT WAS THE DIFFERENCE, THEN, BETWEEN THOSE TWO 8 FIGURES, ABOUT?
9 A. IT WAS ROUGHLY 17 AND-A-HALF CENTS, RIGHT AROUND THERE, PER 10 POUND.
11 Q. NOW, DOES THAT SAVINGS PER POUND APPLY TO BOTH TRADE BOOKS, 12 MASS MARKET BOOKS? DOES IT MATTER WHAT KIND OF BOOKS YOU'RE
13 DEALING WITH WHEN YOU'RE TALKING ABOUT FREIGHT? 14 A. YES, BECAUSE WEIGHT VARIES ACROSS CATEGORIES. YOU HAVE TO
15 MAKE AN ADJUSTMENT BASED UPON THE WEIGHT OF THE TYPICAL BOOK. 16 Q. OKAY, SO IT MATTERS WHEN YOU'RE LOOKING AT THE UNIT --THE
17 ALLOCATION OF THAT TO A PARTICULAR UNIT. 18 HOW ABOUT JUST SHIPPING A POUND OF TRADE BOOKS AND
19 SHIPPING A POUND OF MASS MARKET BOOKS, OR A HUNDRED POUNDS? 20 DOES IT MATTER WHAT THE BOOKS ARE IN TERMS OF WHAT THE PER
21 POUNDAGE SHIPPING COST IS? 22 A. NOT PER POUND. THE CUBE MIGHT AFFECT IT, THE SIZE OF THE
23 BOXES, BUT NOT PER POUND. 24 Q. DID YOU, THEN, AFTER YOU DERIVED YOUR ESTIMATE OF THE
25 AMOUNT OF SAVINGS PER POUND, DID YOU TRANSLATE THAT INTO A UNIT page 162

1 COST BASIS? 2 A. RIGHT. THERE IS --I READ SOME STUDIES THAT SUGGESTED --
3 OR SOME TESTIMONY THAT SUGGESTED THAT THE AVERAGE PRICE (SIC) 4 OF A HARDCOVER AND TRADE PAPERBACK BOOK WOULD HAVE BEEN AROUND
5 1.17 POUNDS, AND I ALSO LOOKED AT EVIDENCE THAT SUGGESTED THAT 6 THE AVERAGE WEIGHT OF A MASS MARKET BOOK WOULD HAVE WENT --
7 BEEN AROUND .52 POUNDS. 8 SO I EMBRACED THOSE ESTIMATES AND SIMPLY TOOK THE
9 SAVINGS PER POUND TIMES THE WEIGHT, TO COME UP WITH A PER UNIT 10 COST SAVINGS, BASED ON FREIGHT, FOR THE TWO CATEGORIES OF
11 BOOKS. 12 Q. OKAY. SO YOU HAD AN ESTIMATE OF THE DIFFERENTIAL, YOU HAD
13 INFORMATION ABOUT HOW MUCH DIFFERENT KINDS OF BOOKS WEIGH, AND 14 THEN YOU COMPUTED SEPARATE PER UNIT FREIGHT SAVINGS FOR TRADE
15 BOOKS AND MASS MARKET BOOKS. 16 A. THAT'S CORRECT.
17 Q. AND THEN FOR FREE FREIGHT PUBLISHERS, WHAT DID YOU DO WITH 18 THAT DATA, WITH THE PREVIOUS DATA YOU HAD CALCULATED FOR THE
19 PICK-AND-PACK SAVINGS? 20 A. I ADDED THAT TOGETHER TO GET THE PER UNIT COST SAVINGS FOR
21 PICK-AND-PACK SHIPPING SUPPLIES AND FREIGHT, AND THEN I --22 Q. LET ME ASK YOU TO LOOK AT EXHIBIT NUMBER 10 OF TRIAL
23 EXHIBIT 1969, WHICH IS BEHIND TAB 15. 24 A. YES.
25 Q. CAN YOU IDENTIFY FOR THE COURT WHAT IS SET FORTH ON YOUR page 163

1 EXHIBIT NUMBER 10? 2 A. THIS PROVIDES THE MAXIMUM POTENTIAL FULFILLMENT
3 DISTRIBUTION AND FREIGHT COST SAVINGS TO PUBLISHERS FROM USING
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4 RDC'S, AND THIS IS MOST RELEVANT, AGAIN, FOR FREE FREIGHT 5 PUBLISHERS WHO ARE NOT PAYING ANY FREIGHT ALLOWANCE.
6 Q. SO THIS CHART SETS FORTH THE COMBINATION, IF I UNDERSTAND 7 YOUR ANSWER, OF THE PICK-PACK SAVINGS THAT YOU'VE PREVIOUSLY
8 DESCRIBED, THE FREIGHT SAVINGS THAT YOU'VE JUST DESCRIBED 9 BRIEFLY, AND THEN COMBINE THEM TOGETHER TO SET FORTH THE
10 MAXIMUM COST SAVINGS PER BOOK FOR BOTH TRADE BOOKS AND MASS 11 MARKET BOOKS.
12 A. THAT'S CORRECT. 13 Q. AND AGAIN, YOU DID THIS SEPARATELY USING THE DATA FOR EACH
14 OF THE DEFENDANTS, OR FOR BARNES & NOBLE, WALDEN AND BORDERS? 15 A. CORRECT.
16 Q. NOW, FOR BARNES & NOBLE, YOU JUST DESCRIBED THE FREIGHT 17 SAVINGS AND HOW YOU CONVERTED THOSE FREIGHT SAVINGS INTO A UNIT
18 COST. WHAT WERE THE MAXIMUM COST SAVINGS PER BOOK THAT YOU 19 FOUND USING THE BARNES & NOBLE DATA?
20 A. FOR HARDCOVER AND TRADE PAPERBACK, IT'S 1.57 PERCENT. 21 FOR --AND THIS IS IN THE FAR RIGHT-HAND COLUMN OF EXHIBIT 10.
22 AND FOR MASS MARKET FOR BARNES & NOBLE IT'S 2.82 PERCENT. 23 Q. ALL RIGHT, AND THAT'S USING THE AVERAGE SUGGESTED RETAIL
24 PRICES THAT YOU IDENTIFIED PREVIOUSLY? 25 A. CORRECT.
page 164
1 Q. SO AGAIN, FOR NOW A FREE FREIGHT PUBLISHER, HOW DID THE 2 TOTAL SAVINGS, INCLUDING BOTH PICK-AND-PACK SAVINGS AND FREIGHT
3 SAVINGS, COMPARE FOR TRADE BOOKS TO THE DIFFERENTIALS THAT YOU 4 IDENTIFIED AT THE BEGINNING THAT EXIST FOR RDC DISCOUNTS FOR
5 TRADE BOOKS? 6 A. WELL, LET'S TAKE TWO SCENARIOS. FOR A FREE FREIGHT
7 PUBLISHER WHO IS NOT PAYING ANY FREIGHT OUT ALLOWANCE, YOU'D 8 COMPARE 1.57 TO 2 PERCENT.
9 IF, ON THE OTHER HAND, YOU HAVE A FREE FREIGHT 10 PUBLISHER PAYING 1.1 PERCENT FREIGHT ALLOWANCE, WHICH IS
11 TYPICAL IN A BARNES & NOBLE ORGANIZATION, YOU'D ACTUALLY 12 COMPARE THE 1.57 PERCENT TO 3 PERCENT, AND THAT ALSO OCCURS IN
13 BORDERS FOR SIMON & SCHUSTER AND HARPER-COLLINS, TWO OF THE 14 LARGEST FREE FREIGHT PUBLISHERS, AND THERE COULD BE OTHERS,
15 TOO. 16 Q. ALL RIGHT, SO YOUR CONCLUSION IS THAT THE SAVINGS FOR A
17 FREE FREIGHT PUBLISHER ARE LESS ON TRADE BOOKS EVEN THAN THE 18 2 PERCENT, --
19 A. CORRECT. 20 Q. --CERTAINLY LESS IF THE DEFENDANTS ARE GETTING AN
21 ADDITIONAL FREIGHT ALLOWANCE, TAKING IT TO 3 PERCENT. 22 A. EXACTLY.
23 Q. HOW ABOUT MASS MARKET BOOKS? 24 A. AND THE BOTTOM LINE HERE IS 2.82 PERCENT, AND SO IF YOU
25 HAVE A FREE FREIGHT PUBLISHER NOT PAYING A FREIGHT ALLOWANCE, page 165

1 IT WOULD BE 2.82 PERCENT COMPARED TO 4 PERCENT, WHICH IS STILL 2 QUITE A BIT UNDER. IF IT'S A FREE FREIGHT PUBLISHER PAYING A
3 FREIGHT OUT ALLOWANCE, IT WOULD BE THE 2.82 PERCENT COMPARED TO 4 5 PERCENT.
5 Q. NOW, CAN YOU DESCRIBE BRIEFLY THE EXERCISE YOU WENT THROUGH 6 FOR FREIGHT FOR THE BORDERS DEFENDANTS? WAS IT THE SAME
7 EXERCISE? 8 A. THERE WAS TESTIMONY BY A WALDEN EMPLOYEE ON FREIGHT --I'M
9 TRYING TO REMEMBER WHO IT WAS. I'M SORRY, BUT MY MEMORY IS 10 FAILING ME HERE. BUT HE TESTIFIED THAT TYPICALLY IT COSTS
11 PUBLISHERS ABOUT 7 AND-A-HALF PERCENT --7 AND-A-HALF CENTS PER 12 POUND TO GET BOOKS INTO THE BORDERS RDC'S, AND HE TESTIFIED
13 THAT IT COSTS PUBLISHERS AROUND 25 CENTS TO SHIP FROM THEIR 14 WAREHOUSES TO THE INDIVIDUAL STORES.
15 AND SO I BASICALLY TOOK THOSE NUMBERS, AND AGAIN, 16 IT'S INTERESTING THAT YOU'RE STILL RIGHT AROUND THE COST
17 SAVINGS OF 17 AND-A-HALF CENTS OR SO, AND SO THAT'S THE 18 APPROACH I TOOK WITHIN THE BORDERS ORGANIZATION.
19 Q. SO FOR SOME REASON, BORDERS' ESTIMATES OF THE COSTS OF 20 FREIGHT BEING MOVED INTO THEIR RDC WAS HIGHER THAN THE COSTS
21 FOR BARNES & NOBLE BRINGING BOOKS INTO THEIR RDC. 22 A. THAT MAKES SENSE, BECAUSE AS MR. PFEFFER, NORMALLY --HEAD
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23 OF INGRAM AND WITH A LOT OF EXPERIENCE, HE TESTIFIED TYPICALLY 24 PUBLISHERS HAVE A SINGLE WAREHOUSE IN THE NORTHEAST, AND BARNES
25 & NOBLE, AS MOST --FOR MOST OF THIS TIME, HAD A SINGLE page 166

1 WAREHOUSE IN NEW JERSEY; WHEREAS WALDEN AND BORDERS HAVE THEIR 2 DISTRIBUTION CENTERS IN ANOTHER AREA OF THE COUNTRY. SO IT
3 DOESN'T SURPRISE ME THAT THE FREIGHT IN COST FOR BORDERS WOULD 4 BE LOWER THAN THE FREIGHT IN COST INTO THE RDC FOR --DID I SAY
5 THAT RIGHT? THE FREIGHT IN COST FOR BARNES & NOBLE WOULD BE 6 LOWER THAN THE FREIGHT IN COST FOR THE BORDERS ORGANIZATION.
7 Q. BUT THEN YOU ALSO FOUND EVIDENCE THAT THE COST OF SHIPPING 8 FROM THE BORDERS WAREHOUSES TO THEIR STORES WAS ALSO SLIGHTLY
9 HIGHER. 10 A. YEAH, THAT I --I REALLY CAN'T EXPLAIN.
11 Q. BUT IN ANY EVENT, THE DIFFERENTIAL FREIGHT SAVINGS WAS 12 APPROXIMATELY THE SAME, 17 AND-A-HALF CENTS?
13 A. CORRECT. 14 Q. AND THEN DID YOU ADD THAT FOR THE BORDERS DEFENDANTS TO THE
15 PICK-PACK SAVINGS YOU HAD PREVIOUSLY FOUND? 16 A. YES.
17 Q. ON THIS EXHIBIT 10? 18 A. YES.
19 Q. AND JUST TO STATE YOUR CONCLUSIONS, WHAT, THEN, WAS YOUR 20 ESTIMATE OF THE MAXIMUM PUBLISHER COST SAVINGS FOR FREE FREIGHT
21 PUBLISHERS FOR TRADE BOOKS SHIPPED TO THE WALDEN RDC? 22 A. IT WOULD BE 1.47 PERCENT COMPARED TO 2 PERCENT FOR FREE
23 FREIGHT PUBLISHERS NOT PAYING A FREIGHT OUT ALLOWANCE, AND 24 1.47 PERCENT COMPARED TO 3 PERCENT FOR THOSE FREE FREIGHT
25 PUBLISHERS PAYING A 1 PERCENT FREIGHT OUT ALLOWANCE. page 167

1 Q. AND WHAT WAS YOUR CONCLUSION ON MASS MARKET BOOKS SHIPPED 2 TO THE WALDEN DISTRIBUTION CENTERS? WHAT WAS THE MAXIMUM
3 SAVINGS YOU FOUND? 4 A. 2.51 PERCENT COMPARED EITHER TO 4 OR 5 PERCENT.
5 Q. AND HOW ABOUT FOR BORDERS, JUST AGAIN, TO GO TO THE BOTTOM 6 LINE, WHAT WAS YOUR CONCLUSION AS TO THE MAXIMUM COST SAVINGS
7 ON TRADE BOOKS? 8 A. 1.37 PERCENT, COMPARED EITHER TO 2 OR 3 PERCENT.
9 Q. AND FOR MASS MARKET BOOKS? 10 A. 2.21 PERCENT, COMPARED EITHER TO 4 OR 5 PERCENT.
11 THE COURT: SOUNDS LIKE A GOOD STOPPING PLACE. 12 WE'LL RECESS TILL 9: 00 O'CLOCK TOMORROW MORNING.
13 THE CLERK: ALL RISE. 14 (PROCEEDINGS CONCLUDED FOR THE DAY AT 2: 00 P. M.)
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