Consolidated Opposition Of The United States To Defendant Northwest Airlines'Motions in Limine

In urging the Court to ignore Rule 801(d)(2) and instead apply Rule 32(a)(4) to the prior depositions of its own executives and directors, Northwest relies on Rule v. International Association of Bridge, Structural & Ornamental Ironworkers, 568 F.2d 558, 568-69 (8th Cir. 1978), an Eighth Circuit case decided prior to 1980.⁽¹²⁾ But in that case, the Court admitted all of the prior depositions against all defendant parties, finding that the depositions were admissions of a party opponent and that they also satisfied the requirements of Rule 32(a)(4), even though the parties in the prior action were not identical.⁽¹³⁾

In this case, the Government is not seeking to offer in evidence deposition testimony from other parties as an admission against Northwest; rather, the Government is seeking to use prior statements given under oath by Northwest's own high-ranking executives and board members. In both prior matters, Northwest executives had every interest in developing fully for the record the testimony that the government now wishes to use as admissions because that testimony was important to Northwest's position in those lawsuits. KLM's control and influence of Northwest was Northwest's key defense in a lawsuit by KLM challenging Northwest's decision to adopt a poison pill. And, in the antitrust litigation between Northwest and American Airlines, Northwest vigorously disputed American's characterization of Southwest Airlines' pricing practices and its competitive significance.

Finally, Northwest disingenuously suggests that live testimony is superior to the "stale" sworn testimony of its executives and board members while providing the court with deposition designations of literally hundreds of pages of Continental executives who will testify at trial, as well as other Continental employees who Northwest could have easily subpoenaed to testify. See Dep. Designations of Northwest Airlines, 9/15/00. The only consistency in Northwest's position is that it only wants this Court to hear testimony, stale or otherwise, that supports Northwest's litigation positions.

4. Evidence Regarding Entry Barriers Faced By Low Cost Carriers Is
   Crucial To A Proper Section 7 Analysis In This Case

Both the United States and Northwest have asserted that the issue of entry is relevant and material to this case. In the Pretrial Order, the United States' claims section states:

Now, Northwest proposes that the Court exclude evidence from six executives of non-major airlines "relating to barriers to entry and alleged predatory behavior" (Motion to Exclude at 2), characterizing this evidence as a "sideshow." Read broadly, Northwest seeks to exclude all evidence that barriers to entry will make new entry unlikely. Read more narrowly, it seeks to exclude evidence of the effect of its prior aggressive responses to entry on the likelihood of new entry, if those responses have been or could be characterized as predatory conduct. Under either reading of its motion, however, Northwest seeks to exclude relevant evidence that is clearly admissible under Federal Rules of Evidence 401, 402 and 403.

1. Evidence on the Entry Issue is Relevant under Rule 401

Rule 401 defines "relevant evidence" as "evidence having any tendency to make the existence of any fact that is consequential to the determination of the action more probable or less probable than it would be without the evidence." As noted by the Supreme Court, Rule 401 adopts a "liberal" standard of relevance. Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579, 587 (1993). In describing its relevance standard, the Sixth Circuit stated:

Douglass v. Eaton Corp., 956 F.2d 1339, 1343-44 (6^th Cir. 1992) (abuse of discretion to exclude fired employee's evidence of prior physical altercations).⁽¹⁴⁾

The Government will have no difficulty satisfying this relevance standard for the testimony that it will elicit from the Sun Country, Pro Air, Southwest, Frontier, Midwest Express, and JetBlue executives on its witness list. We anticipate that some of those witnesses will testify that establishing new hubs at existing Northwest or Continental hub airports or initiating new point-to-point services on Northwest/Continental hub-to-hub routes is not compatible with their business strategies. Some of their testimony will tend to prove that barriers to entry that are common in the airline industry make entry by non-major airlines difficult and rare; other testimony will tend to prove that Northwest's reputation for aggressively responding to new entrants makes new entry on its routes particularly unattractive to would-be entrants. All of the expected testimony will tend to make the existence of substantial barriers to entry on Northwest or Continental routes more probable and thereby tend to disprove Northwest's argument that new entry will cure any competitive harm from the transaction.

2. The Relevant Evidence on the Existence of Barriers to Entry is Admissible under Rules 402 and 403

Rule 402 provides that "all relevant evidence is admissible, except as otherwise provided by the Constitution of the United States, by Act of Congress, by these rules, or by other statutory authority." In order to exclude evidence on entry and barriers to entry, therefore, Northwest must find some exception to the liberal general rule favoring admission. Northwest appears to focus primarily on the prospect that other airlines may testify about its reputation for aggressively responding to entry (arguably to the point of engaging in unlawful predatory activities), and it contends that the prejudicial impact of this evidence would outweigh its probative value.

Northwest may be overly sensitive about its conduct. It is not the Government's intention to argue that any of its evidence proves that Northwest's responses to new entrants meet the standard for unlawful monopolization conduct. But we do expect, as noted above, that the airline executives may testify about their knowledge of Northwest's aggressive conduct in response to entry, their knowledge of law suits filed against Northwest accusing it of unlawful conduct, and ultimately, the effect Northwest's reputation has on their state of mind in making decisions about entry into Northwest's routes -- evidence highly probative to the issue of whether new entry is likely.

Although this reputation evidence may not be consistent with the public image Northwest would like to promote, it is not nearly as prejudicial as the negative reputation evidence that courts routinely allow juries to hear for the purpose of proving the state of mind of persons whose actions are affected by those reputations. For example, the Sixth Circuit ruled that the defendant's reputed membership in the Mafia was properly admitted to show the victim's fear of bodily harm in a Hobbs Act case (United States v. Russo, 708 F.2d 209 (6^th Cir. 1983). See also, United States v. Gigante, 729 F.2d 78 (2^nd Cir. 1984) (proper to admit evidence that the defendant was a reputed "capo" in the Genovese crime family in a loansharking case). Similarly, in an antitrust case, Forro Precision v. International Business Machines Corp., 673 F.2d 1045 (9^th Cir. 1982), the court of appeals ruled that the trial court properly admitted hearsay evidence relating to the plaintiff's alleged leaks of trade secrets, arrests, indictments and convictions for the purpose of showing IBM's state of mind when it induced the police to raid the plaintiff's business premises.⁽¹⁵⁾

In any event, unfair prejudice from otherwise relevant and admissible evidence is of little concern in bench trials.⁽¹⁶⁾ The trial judge can cure any conceivable hearsay or prejudice problems by keeping in mind the limited purpose for which the evidence is presented -- to prove that Northwest's reputation for aggressively responding to new entrants in the past makes it less likely that new entrants will enter Northwest's markets in the future.

Finally, the introduction of evidence on Northwest's reputation for aggressively responding to new entrants should not waste the Court's time -- the United States anticipates that all six airline executives' direct testimony combined will require less than a day of trial time -- nor should it create a contentious side show -- the Court can prevent such tactics.

Northwest can, if it chooses, avoid the presentation of evidence on barriers to entry. It can eliminate that issue and streamline the trial by signing a stipulation⁽¹⁷⁾ conceding that new entry is not likely to solve any competitive problems caused by Northwest's purchase of a voting majority of Continental's stock.

5. Evidence of Possible Collusion in the Airline Industry is Highly Probative
   in this Case and Should Not be Excluded

Defendant Northwest has moved for the Court to bar introduction of evidence relating to collusion in the airline industry, including evidence related to the Airline Tariff Publishing Co. case.⁽¹⁸⁾ The ease and likelihood of anticompetitive collusion or coordination among competitors in the relevant market(s) is always an issue in a section 7 case, and evidence of whether a particular market structure is conducive to collusion is clearly relevant and admissible in such cases.⁽¹⁹⁾ Therefore, the Court should deny defendant Northwest's motion to exclude in limine all evidence relating to collusion in the airline industry.

Defendant Northwest contends that evidence relating to collusion in the airline industry is inadmissible as irrelevant under Federal Rules of Evidence 401, 402, and 403. Northwest is mistaken. The likelihood of anticompetitive coordination among competitors in the relevant industry is a central factor in any case brought under section 7 of the Clayton Act, and evidence of the history of competition in that industry is routinely admitted. See, U. S. v. Standard Oil Co., 253 F.Supp. 196 (D.C.N.J. 1966) ( history of competition in the industry is an important factor in a section 7 analysis); U. S. v. Manufacturers Hanover Trust Co., 240 F.Supp. 867 (S.D.N.Y. 1965) (section 7 analysis is assessed within the structure and history of the whole relevant market); Kaplan & Sons, Inc. v. F. T. C., 347 F.2d 785 (D.C. Cir. 1965) (noting that the analysis involves many factors, including the "competitive history of one accused of violations, including evidence of past violations"). None of the cases cited by Northwest involved exclusion of prior collusion evidence as irrelevant in an antitrust case.

Northwest also claims that evidence of past collusion in the airline industry should be excluded under Federal Rule of Evidence 404(b). However, evidence of past acts is generally admissible when offered for any reason other than to "prove the character of a person in order to show action in conformity therewith." Fed. R. Evid. 404(b).⁽²⁰⁾ Hence, evidence of prior acts of collusion is commonly admitted as relevant in federal antitrust litigation for many purposes other than to prove conformity to the prior acts or propensity to engage in those acts.⁽²¹⁾ Thus, it is improper for Northwest to request that the Court exclude prior act evidence without regard to the nature of the evidence offered or what it is being offered to prove.⁽²²⁾ Because Northwest cannot presume that the government intends to use prior acts evidence only to prove a proclivity to collude, a motion in limine seeking blanket exclusion under Rule 404(b) is unwarranted. Finally, Northwest's reliance on Rule 403 is misplaced, since Rule 403 only excludes evidence that is "unfairly" prejudicial,⁽²³⁾ and in any event unfair prejudice from otherwise relevant and admissible evidence is of little concern in bench trials.⁽²⁴⁾

Northwest also argues that any evidence of past collusion in the airline industry that the Government might offer will inevitably be inadmissible hearsay under Federal Rules of Evidence 801 and 802. Northwest cannot presume that all potential evidence of past collusion in the airline industry will be hearsay, particularly if it comes in the testimony of Northwest, Continental or other industry witnesses at trial. (See NW Motion at 1.) Moreover, evidence relating to allegations of collusion in the airline industry may be admissible as nonhearsay where it is not offered for the truth of the allegation, or because it is an admission of a party opponent, or because it falls within an exception to the hearsay rule. See Fed. R. E. 801, 803, 804. It is premature for Northwest to make a blanket hearsay objection before Northwest knows the nature of the evidence and what it is being offered to prove.⁽²⁵⁾

6. Evidence By The Government's Expert Witnesses of the Consequences of
   Northwest's Ownership of Voting Control of Continental Should Not Be Excluded
1. Introduction

Northwest seeks to exclude all testimony of all three of the government's experts. It is predictable of course that Northwest disagrees with our experts. But that neither makes their testimony unreliable nor irrelevant. Northwest's motion is just the latest reflection of its overarching trial strategy -- to make this case about their defenses -- the governance and alliance agreements -- rather than the inescapable competitive consequences of Northwest's ownership of voting control over Continental and to make sure the Court hears only one side of the story. Northwest's motion should be denied.

In seeking to exclude the testimony, Northwest mischaracterizes the role of each of the government's experts and the nature of their anticipated testimony, while at the same time ignoring the proper focus and substance of their expert opinions. In addition, Northwest takes particular issues out of context and then misstates the government's experts' opinions on those issues. Finally, Northwest improperly asks this Court to issue a blanket exclusion order precluding any and all expert testimony by the government's expert witnesses.

The government's experts are, as their resumes demonstrate, skilled and accomplished professionals who have not only studied the record in this case, including the documents and deposition testimony produced by parties and non-parties alike, but have also gathered and considered the types of materials relied on by other experts in their disciplines that bear on the issues they address. Prof. Baker, a highly credentialed economist, analyzes the likely competitive effects of Northwest's acquisition and ownership of 51% voting control and a 14% equity interest in Continental. Prof. Rock, an expert in corporate governance, analyzes the complex governance agreements between Northwest and Continental and assesses their affect on Northwest's influence and control over Continental. And Prof. Oster, an expert on transportation and the airline industry, analyzes whether equity control or ownership is necessary for the alliance. The testimony of all three experts flow logically and clearly from the evidence, and all three experts drafted reports that set forth in extensive detail the bases for their opinions and the evidence supporting them. The opinions of the government's experts meet the Daubert criteria and will greatly assist the Court in conducting a proper analysis under Section 7 of the Clayton Act.

2. Argument

To qualify as an expert under Rule 702 of the Federal Rules of Evidence, a witness must meet three basic criteria:

1. the witness must establish his expertise by reference to "knowledge, skill, experience, training, or education." Fed. R. Evid. 702; Pride v. BIC Corp., 218 F.3d 566, 577 (6^th Cir. 2000);
2. the proffered expert's testimony must be "reliable;" in the sense that it is based on "scientific, technical or other specialized knowledge." Fed. R. Evid. 702; Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 591 (1993); and
3. the expert's testimony must assist the trier of facts in understanding and disposing of the issues relevant to the case; that is, the testimony must "fit" the facts of the case. Daubert, 509 U.S. at 592; Pride, 218 F. 3d at 578.

In applying these standards, the Court has considerable discretion "to avoid unnecessary 'reliability' proceedings in ordinary cases where the reliability of an expert's methods is properly taken for granted." Kuhmo Tire Co. v. Carmichael, 526 U.S. 137, 152 (1999).

Each of the government's expert witnesses clearly meets these criteria. Their testimony, based on the factual record and well-accepted analysis in their disciplines "employs ... the same level of intellectual rigor that characterizes the practice of an expert in the[ir] .... field" (Kuhmo 526 U.S. at 137). Their testimony will assist the Court in assessing key issues in the case -- the competitive effects of Northwest's acquisition and Northwest's alliance and governance defenses. The testimony of Professors Baker, Rock and Oster should be admitted.

3. Professor Jonathan Baker

The government's first expert is Professor Jonathan Baker. Prof. Baker is an economist specializing in antitrust issues who currently is a professor at The American University. Economists such as Prof. Baker routinely testify in antitrust cases, and their testimony is often cited by Courts in reaching their decision. See, Brooke Group, Ltd. v. Brown & Williamson Tobacco Corp, 509 U.S. 209 (1993); PSI Repair Servs., Inc. v. Honeywell, Inc., 104 F. 3d 811 (6^th Cir. 1997). See also Cincinnati Bell Telephone Co. v. FCC, 69 F. 3d 752 (6^th Cir. 1995) (the parties did not use an economist expert witness, and the court noted that it would have been helpful if they had).⁽²⁶⁾

Prof. Baker is particularly well qualified to assist the Court in this case. He was recently among a handful of industry experts who were asked to serve on a Congressionally commissioned panel analyzing competitive problems in the airline industry. Before that he was the head economist at the Federal Trade Commission ("FTC"). In that capacity he supervised a staff of more than 60 Ph.D. economists, and advised the FTC on a variety of antitrust matters, including questions pertaining to merger enforcement activities. Prior to serving at the FTC, Professor Baker worked on airline and other matters in the Clinton White House as a senior economist for the Council of Economic Advisers. Among other degrees, he has a Ph.D. in economics from Stanford and a J.D. from Harvard. He has previously examined competitive issues in numerous industries, including the domestic airline industry. His resume lists more than 40 published antitrust articles, working papers, and manuscripts. Thus, he is well qualified under Daubert-Kumho to testify on competition and pricing in airline markets.

Professor Baker's framework for his economic analysis is the same as that used by economic experts in antitrust cases, including defendants' own experts. He applies that framework to the fact of this case.⁽²⁷⁾ Indeed, his analysis is based on a painstaking review of the factual record in this case, a point made more than evident by Prof. Baker's initial report, which contains 114 endnotes citing to more than 100 separate evidentiary sources.⁽²⁸⁾

The first step in the analytical framework is referred to as "market definition." The Supreme Court requires trial courts to define the "relevant markets" in which to analyze whether a transaction lessens competition.⁽²⁹⁾ Through his expert opinions, Professor Baker will lay the groundwork for the Court to conclude that the relevant markets in this case are (1) scheduled airline service between pairs of cities and (2) scheduled airline service for business travelers between pairs of cities. Such markets would include airline service between Northwest's and Continental's hub cities ("hub-to-hub" markets).

The second step in the analytical framework is to measure and assess whether the relevant markets are "concentrated" (have very few competitors) and analyze the effect of the transaction on concentration.⁽³⁰⁾ Professor Baker's expert report demonstrates, and Professor Baker's trial testimony will confirm, that each of the nine hub-hub routes at issue in this case are currently dominated by Northwest and Continental. Professor Baker then explains in detail, with reference to defendants' own deposition testimony, documents, and historical incidents, how airlines set their prices and how the number of airlines present in a market affects the price level -- fares are higher when there are fewer airlines competing on a route.⁽³¹⁾ Professor Baker shows how Northwest's ownership of the controlling stock in Continental will likely result in increased prices in the dominated hub-to-hub markets.⁽³²⁾ He further explains how airlines set prices across their networks and how "systemwide" price increases do not occur unless all the major airlines, including both Northwest and Continental, raise their fares around the same time. Prof. Baker then demonstrates how Northwest's ownership of the stock in Continental will lead to both Northwest and Continental going along with systemwide increases more often, resulting in higher fares across all routes nationwide.⁽³³⁾ Finally, in his expert report Prof. Baker explains why the competitive harms he predicts will not be solved by the entry of new airlines.⁽³⁴⁾ He examines the historical record of entry by major airlines into "competitor's" hub-to-hub routes (almost none), the experience, costs, and likelihood of success of non-major airlines onto these routes (successful on only a very small scale, if at all) and the likelihood of new entry systemwide (virtually nil).

Northwest's motion does not even mention any of this testimony by Prof. Baker -- not his testimony on the appropriate economic framework, not his testimony on market definition, not his testimony on airline pricing, not his testimony explaining why fares are likely to increase, not his testimony on new entry. Nor does Northwest suggest it has any valid criticism of Prof. Baker's testimony with regard to the issues.⁽³⁵⁾ Rather, Northwest advances two isolated and unfounded attacks on Professor Baker.

First, Northwest contends that Prof. Baker relies on, but misinterprets Professor Rock's opinion. Northwest's Brief at 17. It is Northwest, however, that misinterprets or, perhaps intentionally, mischaracterizes the relationship between Professor Baker's and Rock's testimony.

As discussed above, Prof. Baker analyzed the likely competitive effects of Northwest's acquisition and ownership of 51% voting control and a 14% equity interest in Continental. Because of the existence of complex governance arrangements between Northwest and Continental, which Northwest proffers as a remedy to any competitive concerns, the United States retained Prof. Edward Rock, an expert in corporate governance, to analyze how this governance structure affects the nature of the relationship between Northwest and Continental. Prof. Rock was specifically asked to determine to what degree these agreements limited Northwest's ability to exercise control or influence over Continental by virtue of its stock ownership. Prof. Baker then reasonably relied on Prof. Rock's analysis in rendering his expert opinion.⁽³⁶⁾ Testimony of multiple expert witnesses in antitrust litigation, such as the use of separate experts to analyze efficiencies and competitive effects, is not uncommon. See, e.g., In re Brand Name Prescription Drugs Antitrust Litig., 186 F. 3d 781 (7^th Cir. 1999); F.C.C. v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997); Turner Broadcasting System, Inc. v. F.C.C., 520 U.S. 180 (1997); Exxon Corp. v. Governor of Maryland, 437 U.S. 117 (1978). The government is not aware of any cases in which a court has excluded expert testimony because it refers to other experts' testimony.

Second, Northwest argues that Prof. Baker has not identified any harm to date. But that criticism rests on a false premise -- that the government must prove that prices have already gone up, or that other competitive harm has already occurred. In the first place, the Clayton Act is an incipiency statute, concerned with the probable future effects of mergers.⁽³⁷⁾ And in any event, as the Supreme Court has recognized, a trial court should expect defendants to keep their noses clean and forebear from raising prices while an antitrust challenge is pending before the courts. "Postacquisition evidence tending to diminish the probability or impact of anticompetitive effects' in a § 7 case is 'extremely limited.' The need for such a limitation is obvious. 'If a demonstration that no anticompetitive effects had occurred at the time of trial or of judgment constituted a permissible defense to a § 7 divestiture suit, violators could stave off such actions merely by refraining from aggressive or anticompetitive behavior when such a suit was threatened or pending." United States v. General Dynamics Corp., 415 U.S. 486, 504-05 (1974). (citations omitted). This Supreme Court principle is especially appropriate here where Northwest documents confirm that they have discussed how business decisions will "play" before this Court.⁽³⁸⁾ Prof. Baker's testimony will help the Court answer the relevant question -- whether a substantial lessening of competition may occur in the future as a result of Northwest's control stock acquisition. FTC v. Proctor & Gamble Co., 386 U.S. 558, 577 (1967); California v. American Stores Co., 495 U.S. 271, 284 (1990).⁽³⁹⁾

Prof. Baker's testimony will assist the Court in deciding whether Northwest's continued holding of Continental's controlling stock in a competitor will likely lead to higher prices in violation of Section 7. It should be admitted.

4. Professor Edward Rock

The government's second expert, Professor Edward Rock, is a professor at the University of Pennsylvania Law School. He teaches a variety of classes involving corporate law, securities regulation, and corporate governance, and is co-director of a research institute that sponsors and organizes conferences on corporate governance and other issues. He graduated magna cum laude from the University of Pennsylvania Law School; received a B.A. degree with first class honors from Oxford; and graduated cum laude from Yale. Like Prof. Baker, Prof. Rock has amassed a substantial body of published articles, working papers, manuscripts, and invited presentations relating to corporate governance issues.

Professor Rock is qualified to render an expert opinion that goes to one of Northwest's two main defenses -- whether the corporate governance arrangements between Northwest and Continental preclude Northwest from influencing or controlling Continental. Professor Rock analyzes the numerous governance contracts at issue in detail, and examines the corporate structure and shareholder composition of both companies. In addition, Prof. Rock brings his comprehensive knowledge of general corporate law and governance to bear on the nature of the relationship established by the various governance arrangements. Prof. Rock can and will explain to the Court the various "real world" methods by which Northwest, if it so chooses, can influence Continental, notwithstanding the governance agreements. Prof. Rock's testimony will be invaluable to the Court in assessing the validity of Northwest's claim that the governance arrangements prevent or remedy all of the competitive harm identified by Prof. Baker -- prevent the harm by completely and forever insulating Continental from any influence by Northwest.

Professor Rock offers a number of opinions that Northwest does not appear to contest in its motion. First, Professor Rock explains the fundamental principles needed to understand corporate governance issues such as the powers of shareholders, the nature of fiduciary duties, the limited role of independent directors, and the controlling rights that come with a 51% or more voting interest in a company.⁽⁴⁰⁾ This information from our expert in the field will greatly help the Court understand the limits of the governance agreements. Second, Professor Rock explains why, after the governance agreements end, Northwest will have the unfettered ability to control Continental.⁽⁴¹⁾ Third, Professor Rock demonstrates that even as soon as the first governance contract ends in 2004, Northwest will be able to directly influence Continental's management if it is not happy with their performance.⁽⁴²⁾ Northwest's criticisms of Prof. Rock do not even address these aspects of his expert opinions, which comprise 30 pages of his 34 page report.⁽⁴³⁾

Northwest's attacks are focused almost entirely on the period of the initial governance agreement, during which Northwest's influence must be exercised more indirectly. Northwest complains that Prof. Rock cannot assign any probability of competitive harm or any probability to Northwest acting in certain ways to influence Continental. But, as noted above, Prof. Baker is testifying on competitive harm, not Prof. Rock. And Northwest completely ignores Prof. Rock's testimony that, starting in just 2004, Northwest will have the direct ability to control or influence Continental by voting 20% of its stock. Indeed, Northwest's criticisms suffer from a fundamental misunderstanding of his opinion. Prof. Rock's basic premise is that the mere threat of Northwest exercising its power to influence Continental will be enough to cause Continental's executives to act more cooperatively towards Northwest. Thus, while the "probability" of particular Northwest actions occurring in the next four years -- or even the next eight -- may be low, the probability that Northwest's ownership will have its natural intended consequences is high.

Northwest also complains that Prof. Rock disregards "behavioral restraints" such as fiduciary duty and the antitrust laws. But Prof Rock's report and deposition do not "disregard" them, rather he explains how Northwest can influence Continental consistent with various fiduciary duties and makes no assumption that such conduct would violate the antitrust laws. Northwest's real grievance is that Prof. Rock does not reach the same conclusion as Northwest's corporate governance witness, Prof. Fox, that fiduciary duties and the Sherman Act prohibition on agreements in restraint of trade will prevent any harm to consumers from one competitor owning control of another. Finally, while complaining that Prof. Rock "ignores" certain evidence it offers, Northwest itself ignores evidence from its own alliance with KLM (which it also is seeking to exclude from this Court's consideration), where Northwest was concerned that KLM's ownership of less than 20% of Northwest's stock could lead to control by KLM.

Northwest's motion is little more than a thinly disguised effort to argue its evidence and its theories. It provides no basis for excluding Prof. Rock's testimony

5. Professor Clinton Oster

Professor Clinton Oster, a professor at Indiana University, has focussed his academic work on transportation and the airline industry. He has authored four books and more than 100 articles on those subjects. He has served as President of the Transportation Research Forum and on six aviation study committees for the National Academy of Science. He earned a Ph.D. in economics from Harvard and degrees from Carnegie-Mellon and Princeton. His analysis and experience is highly valued by the Department of Transportation and the Federal Aviation Administration where he has served as a frequent consultant on airline matters. He has testified several times before Congress on various matters pertaining to the airline industry.

Given his unique qualifications, Prof. Oster was asked to analyze the validity of the second of Northwest's defenses — whether Northwest needs to hold the Continental stock in order for the two companies to have a successful alliance. After examining the nature of the Northwest/Continental alliance, the history of alliances in the industry, Northwest's and Continental's particular history with alliances, the types of contract terms used in alliances, the minimal investment needed to make this alliance work, and the large financial payout to making it work, Professor Oster concluded that Northwest does not need to continue holding the equity in order for Northwest and Continental to continue in their alliance. Northwest obviously does not want the Court to hear that directly relevant and probative evidence.

Prof. Oster explains a number of reasons why Northwest's holding of the control equity is not a necessary element of the alliance. He shows that the costs to Northwest and Continental of implementing the alliance are quite small compared to the additional profits the alliance generates for both parties. Indeed, Prof. Oster shows that the parties have already earned back more than they invested.⁽⁴⁴⁾ These large profits are the real "glue" in any commercial relationship. As long as the parties can make money, they will stay in the venture. The quick payoff period also means that this alliance is not a particularly risky investment.

Prof. Oster also analyzes Northwest's history with alliances. He examines in detail the Northwest/KLM experience where KLM at one time held an equity stake in Northwest, but later sold that stake off, only to see the alliance between them grow and prosper as never before. Prof. Oster emphasizes the statement by Northwest's own CEO in reference to that alliance: [REDACTED ] ⁽⁴⁵⁾

Prof. Oster did not stop there, but also analyzed Continental's alliance history. He found that Continental also owned a stake in an alliance partner, America West. Continental has reduced that holding over time to where it now owns an insignificant stake. Prof. Oster cites the deposition testimony of Continental's CEO, Gordon Bethune, that [REDACTED                                                    ]. He additionally quoted Mr. Bethune's deposition that [REDACTED ].⁽⁴⁶⁾

Finally, Prof. Oster continued beyond the alliance histories of Northwest and Continental to examine the underpinnings of more than 80 other alliances involving the major domestic airlines. He found that it is uncommon for alliance partners to hold equity in one other, especially controlling equity, concluding that other airline alliance partners resolve the various "stability" concerns that Northwest claims to have through traditional contracts. Prof. Oster thus will testify that the reasons Northwest gives for needing the equity can be achieved simply by extending the terms of the alliance agreement, by contractually limiting the ability of Continental to terminate the alliance agreement early, or by making the alliance agreement exclusive.⁽⁴⁷⁾

Northwest focuses its motion on Prof. Oster's examination of these other alliances, belittling his testimony by calling it a "head count." This pejorative attack, however, does not even address most of Prof. Oster's analysis. Nor does it negate the results of Prof. Oster's survey of airline alliances -- almost no alliances have equity; the percent of alliances with equity has been decreasing over time; and the biggest, most enduring alliances do not have equity. Prof. Oster's testimony should not be stricken simply because Northwest fears the logical conclusion the Court will draw from his analysis -- controlling equity is not necessary for the alliance.

6. Conclusion

Prof. Oster's analysis and his opinions are clearly based on record evidence and will assist the Court in evaluating one of the critical issues in this case. The Court should not countenance Northwest's efforts to keep that testimony out of the record, and should deny its motion.

7. Conclusion

For the aforementioned reasons, the Court should deny Northwest's sweeping set of motions to exclude evidence relating to alliances other than the one at issue; prior testimony by Northwest's directors and executives; evidence of barriers to entry in the airline industry; evidence of possible collusion in the airline industry; and evidence put forth by the government's expert witnesses.

DATED: October 17, 2000