Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 1 of 93 1 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA 2 3 4 5 6 7 UNITED STATES OF AMERICA, : : Plaintiff, : : v. : : H&R BLOCK, INC., et al., : : Defendants. : ..............................: Civil Action No. 1:11-cv-00948 September 7, 2011 Afternoon Session Washington, D.C. 8 9 10 11 TRANSCRIPT OF PRELIMINARY INJUNCTION HEARING - DAY 2 BEFORE THE HONORABLE BERYL A. HOWELL UNITED STATES DISTRICT COURT JUDGE 12 13 APPEARANCES: 14 For the Government: 15 16 Mr. Joseph Wayland U.S. Department of Justice 950 Pennsylvania Avenue, NW Washington, D.C. 20530 (202) 514-1157 joseph.wayland@usdoj.gov 17 Mr. Lawrence E. Buterman U.S. Department of Justice 450 Fifth Street, NW Washington, D.C. 20530 (202) 532-4575 lawrence.buterman@usdoj.gov 18 19 20 21 22 23 24 For the Defendants: Mr. J. Robert Robertson Mr. Corey W. Roush Hogan Lovells 555 Thirteenth Street, NW Washington, D.C. 20004 (202) 637-5600 robby.robertson@hoganlovells.com 25 1 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 2 of 93 1 APPEARANCES (Continued): 2 Court Reporter: 3 4 Ms. Lisa Schwam, CSR, CRR, RMR Official Court Reporter Room 4702-A, U.S. Courthouse Washington, D.C. 20001 (202) 354-3238 LisaSchwam@aol.com 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Proceedings reported by machine shorthand, transcript produced by computer-aided transcription. 2 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 3 of 93 1 2 I N D E X WITNESS DIRECT CROSS REDIRECT RECROSS 3 4 ADAM NEWKIRK 5 By Mr. Buterman 6 By Mr. Robertson 4 47 42 7 8 LANCE DUNN 9 By Mr. Wayland 49 10 11 12 13 14 E X H I B I T S NUMBER MARKED FOR IDEN ADMITTED GOVERNMENT EXHIBITS: 15 Trial Exhibit 5 63 16 Trial Exhibit 6 72 17 18 19 20 21 22 23 24 25 3 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 4 of 93 1 P R O C E E D I N G S 2 THE COURT: Before we begin with Mr. Newkirk, I just 3 want to alert everybody that the leak that started in my jury 4 room apparently has spread to the reception area of the 5 courtroom, so just if everybody could please be careful when 6 they're walking in and out of the courtroom, that they don't 7 slip. It's the benefits of being in the old building. 8 Mr. Newkirk, please resume the stand. 9 MR. BUTERMAN: Please begin. With your permission, your Honor, I'd 10 like to just give Mr. Newkirk a number of the folders which are 11 the exhibits that we're going to be using to obviate the need 12 for me to request permission every time. 13 THE COURT: 14 those exhibits are? Have you shared with Mr. Robertson what 15 MR. BUTERMAN: Sure. 16 MR. ROBERTSON: Yes. 17 THE COURT: 18 MR. BUTERMAN: 19 THE COURT: 20 Are you ready to begin? Yes, your Honor. Let's proceed. DIRECT EXAMINATION (Resumed) 21 BY MR. BUTERMAN: 22 Q Good afternoon, Mr. Newkirk. 23 A Hi. 24 Q Mr. Newkirk, one of the folders that I handed to you is 25 labeled GX 217. 4 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 5 of 93 1 Do you see that? 2 A Yes. 3 Q Could you open up the folder and pull out the document 4 that's labeled GX 217. 5 Am I correct, Mr. Newkirk, that in the middle e-mail, you 6 were writing to Mr. Houseworth and attaching an updated digital 7 competitor file? 8 A Yes. 9 Q And Mr. Houseworth has a response to you presumably after he 10 looked at what was contained in that file? 11 A I don't see a response to me. 12 Q Oh, I'm sorry. 13 Now, the digital competitor file that you sent to 14 Mr. Houseworth, is that what's contained on the following 15 pages? 16 A Yes. 17 Q The digital competitor file is based on E-file share data, 18 is it not? 19 A Yes. 20 Q And that's how H&R Block's digital business was looking at 21 the digital market? 22 A Are you speaking about the competitors or about the E-file? 23 Q The competitors. 24 A I believe the IRS file comes to us with an indicator as to 25 whether it's an assisted return or digital return. It's provided by the IRS. 5 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 6 of 93 1 Q So these figures are digital preparers, correct? 2 A Yes. 3 Q And H&R Block relies upon the IRS E-file data for purposes 4 of analyzing the competitive landscape of digital? 5 A 6 it for. 7 Q 8 digital? 9 A He is right now. 10 Q If you'd look at the share figures that are listed at the 11 top of the document, do you see those? 12 A Yes. 13 Q And you see there's a figure of 62.2 percent for TurboTax, a 14 figure of 15.6 percent for H&R Block, a figure of 12.8 percent 15 for TaxACT? 16 Jason asked me for the file so I don't know what he wanted And Mr. Houseworth at this time is the head of H&R Block's Do you see those figures? 17 A Yes. 18 Q And those are the same figures that are contained in the pie 19 chart to the left, are they not? 20 12.8 percent for TaxACT, 62.2 percent for Intuit? 21 A Yes. 22 Q And if you look at the list of rankings down below, the 23 share numbers, is it true that after you get past No. 5, no 24 company has more than .5 percent of the digital market? 25 A 15.6 percent for H&R Block, No. 6 is .5 percent and it gets lower from there. 6 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 7 of 93 1 Q And in fact, if you look at the actual sum total of -- I'm 2 sorry; let me back up. 3 If you flip to the next page of the document, does that 4 indicate to you the number of returns that were filed using 5 each product? 6 A 7 received. 8 Q 9 than half of the people or the companies were authorized to file 10 Yes. This is actually even a summary of the data we And it's just an Excel format to get it like this. And looking at that, isn't it true that it looks like more returns did not file any returns? 11 I mean, there are lots of no numbers next to a bulk of the 12 companies; isn't that true? 13 A 14 probably had returns for other years. 15 their name. 16 Q 17 heard a lot of testimony about migration between assisted and 18 digital over recent years at H&R Block, correct? 19 A Correct. 20 Q Year over year, has the migration been relatively flat in 21 terms of the net -- to use the term of Mr. Bennett, "net-net"? 22 A 23 net-net number is pretty consistent. 24 Q 25 marketplace, correct? Well, this file has several years in it so those names They may have changed I don't know why they disappear from the list. Now, Mr. Newkirk, you've been in the courtroom and you've Between Block retail and Block digital, yes, I believe that And that's despite changes to the nature of the digital 7 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 8 of 93 1 A I'm not sure what that means, but my statement is still 2 that, yes, it's maintained. 3 Q 4 not, in an effort to convince H&R Block to market free more 5 prominently on the digital side? 6 A I was asked to provide an analysis of our free product. 7 Q Let me make sure I'm clear. 8 of a group of people who were promoting an idea to H&R Block 9 executives that H&R Block should be comfortable marketing free Well, let me ask you: You were involved in 2010, were you Were you or were you not part 10 aggressively? 11 A I'm not sure if I was a part of a particular group. 12 Q Okay. 13 Could you look at what's been marked as GX 812. Mr. Newkirk, do you recognize GX 812 as an e-mail from Laura 14 VanGoethem to several others, copying you and Heather Watts? 15 A 16 e-mail. 17 Q 18 Heather, Adam and I just met and feel comfortable with the 19 below"? 20 A Yes. 21 Q And the Adam that's being referred to there is you? 22 A I would assume so, yes. 23 Q And do you see that the proposal that's contained in this 24 e-mail is to communicate free across all media channels? 25 A I see it, although I don't particularly remember this exact You see at the top of the e-mail, it says, "Hey, guys, Yes. 8 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 9 of 93 1 Q 2 the last paragraph on the page, it says, "Simple enough until 3 the reality of our franchisees creep in." 4 And do you see that -- if you look at the -- if you look at Do you see that? 5 A Yes. 6 Q And the e-mail goes on to say, "We need to educate them on 7 the true risk (which is very low, see below) to their business." 8 Do you see that? 9 A Yes. 10 Q And then it goes on to say, "We believe we should educate 11 them now." 12 Do you see that? 13 A Yes. 14 Q And then the third bullet point there, it says, "DIYers are 15 different clients; they are unlikely to move across channels." 16 Do you see that? 17 A Yes, I do. 18 Q Now, H&R Block did ultimately decide to increase its free -- 19 how aggressively it was advertising its free digital product, 20 correct? 21 A I believe they were more aggressive in '10 than '09. 22 Q And despite becoming more aggressive in free, the 23 year-over-year migration from retail to digital was totally 24 unchanged, correct? 25 A It appears like the net number didn't change a lot. I think 9 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 10 of 93 1 that's all that's represented here. 2 Q 3 Okay. Let me have you look at GX 813. And do you see your e-mail to Mr. Houseworth and Mr. Hoffman 4 copying Mary Haring from September 16th, 2010? 5 A Yes. 6 Q And in the e-mail, you say, "You are correct regarding free 7 cannibalization. 8 retail as we launched free and subsequently became much more 9 aggressive in free last year. We have not seen increased migration from YOY" -- that's year over year? 10 A Yes. 11 Q "Year-over-year migration from retail to digital as a 12 percent of retail clients was totally unchanged last year, 13 2.2 percent. 14 also unchanged last year, 4.4 percent." 15 On the side note, digital-to-retail migration was Do you see that? 16 A Yes. 17 Q Okay. 18 H&R Block began more heavily promoting its free product in 19 digital, the year-over-year migration between digital and retail 20 did not change, correct? 21 A 22 definitely agree that the year-over-year migration didn't 23 change. 24 Q 25 see 2.2 percent and 4.4 percent. So just so we're clear, despite the fact that I'm not sure when they started marketing what, but I And by the way, when we're talking about these figures, I We're not talking about a lot 10 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 11 of 93 1 of customers anyway, are we? 2 The numbers are roughly a couple hundred thousand, 3 correct? 4 A I think it's around 300,000, yes. 5 Q Mr. Newkirk, do you know what the Ninja is? 6 A Yes. 7 Q Could you tell the Court what the Ninja is. 8 A It's a file that's primarily used to show forecast changes 9 so it has lots of information about the P&L, about average 10 revenue per unit. 11 Q 12 of -- or breakdowns of H&R Block's products and sales margins 13 and things of that sort? 14 A That's a pretty good description. 15 Q And its finances? 16 A Yes. In fact, it's a document that contains various analyses 17 MR. BUTERMAN: Okay. Your Honor, the Ninja is the 18 document that I think both sides believe is a confidential 19 document. 20 at this time, we would request that the courtroom be sealed so 21 that I could ask Mr. Newkirk some questions regarding the 22 numbers contained in the Ninja. 23 It contains confidential business information. THE COURT: Okay. And Will everybody in the spectator 24 seats, unless they are associated with one side or the other, 25 please leave. How long do you expect this to be? 11 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 12 of 93 1 2 3 MR. BUTERMAN: Not more than 10 or 15 minutes, your Honor. THE COURT: Then just for spectators, it's probably 4 going to be 10 or 15 minutes, and then we're going to probably 5 cover part of this on redirect initially. 6 MR. ROBERTSON: 7 THE COURT: Yes, your Honor. So I don't know how long it will be. 8 Between 20 to 30 minutes the courtroom will be closed, and this 9 portion of the record will be sealed. 10 MR. BUTERMAN: 11 THE COURT: 12 13 Thank you, your Honor. I'll invite everybody to leave who doesn't have to be here. MR. ROBERTSON: Make sure we're clear here, what 14 counsel is doing is he is going to do whatever is confidential, 15 and then I can go into my redirect. 16 17 18 19 THE COURT: That was my anticipation in the clustering. MR. ROBERTSON: That's what mine was too. (The following portions, pages 13-41, were designated as 20 confidental/attorneys' eyes only and sealed under a 21 separate transcript per order of the Court.) 22 23 24 25 12 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 13 of 93 1 2 THE COURT: Mr. Robertson, whenever you're prepared to proceed with your cross-examination. 3 MR. ROBERTSON: Yes, your Honor. I was just checking 4 to see where Mr. Dunn was so we weren't missing anyone in action 5 there because I think he goes next. 6 CROSS-EXAMINATION 7 BY MR. ROBERTSON: 8 Q 9 super confidential part of the record, and so that's where I'd Sir, now we can ask you some questions that are not in the 10 like to stay if you can bear with me, okay? 11 A Okay. 12 Q I don't think it's a secret. 13 executive at H&R Block? 14 A I wouldn't consider myself an executive. 15 Q And do you know what the term "C level manager" is at H&R 16 Block? 17 A Yes. 18 Q What's that? 19 A It means their manager starts with a "C" like CFO and CEO. 20 Q Have you ever provided any reporting to Mr. Cobb, the CEO 21 currently, that you know of? 22 A 23 Jason have been passed on. 24 Q But you don't know? 25 A I don't know. Not directly. Do you know whether you're an I would assume some of the things I give to 42 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 14 of 93 1 Q 2 decision-making authority at all in terms of pricing within 3 digital? 4 A No. 5 Q Anywhere in the company? 6 A No. 7 Q Do you have any decision-making authority at all in 8 marketing of the products? 9 A No. 10 Q Do you actually in your job or your job during the entire 11 time you've been there, actually been responsible for any aspect 12 of marketing? 13 A No. 14 Q And back in the fall of 2009, you mentioned the phrase 15 "decision support." 16 And counsel asked you about pricing. Do you have any What was decision support? 17 A My primary job was doing budgeting and forecasting for the 18 digital business. 19 assumptions given to me by management. 20 Q 21 this acquisition? 22 A No. 23 Q Back in 2009, did anybody ever tell you what the purpose of 24 the deal was? 25 A Okay. Predicting revenues and expenses based on the And did you have any decision-making role in terms of I don't believe so. 43 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 15 of 93 1 Q And do you know -- what part of the business, if you know, 2 did Mr. Schell work in? 3 A 4 business. 5 Q 6 the deal? 7 A I don't believe he was. 8 Q And how is it that he was your interim boss? 9 word "interim." He was primarily focused on the assisted side of the Okay. Do you know if he was a decisionmaker involved in You used the 10 A John Kill was my supervisor and for a time, I don't think 11 they knew exactly where I should be in the organization, so I 12 reported to Brian until they figured that out. 13 Q Okay. 14 A I reported to Dennis Armstrong, who was a director primarily 15 focused on the retail business. 16 Q 17 over on the digital side? 18 A 19 digital organization. 20 Q 21 were asked to work on the reporting back in 2009. 22 Do you know when about in September that was? And when did they finally figure that out? And then when did you finally start reporting to somebody Just very recently. I started reporting directly into the Now, sir, you mentioned that you first got involved in -- or 23 September. 24 A 25 I was asked to do anything until September. I might have first heard about it in August. You said I don't think 44 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 16 of 93 1 Q 2 you went on vacation for about a week? 3 A Yes. 4 Q And counsel showed you a model that you had been given to 5 put numbers in. 6 And you mentioned when you first asked to work on it, then Do you remember that, sir? 7 A Yes. 8 Q And after you did that, did you ever see that model again? 9 A No. When I returned from vacation, Tony Bowen had created a 10 new model that he asked me to update from there on forward. 11 Q And did you do that? 12 A I did. 13 Q And then did there come a point in time that you had any 14 understanding as to whether the deal was going to go forward 15 in 2009? 16 A 17 curiosity how it was going. 18 was dead. 19 Q Okay. 20 A I don't remember. 21 Q And do you know who Mr. Hoffman is, William Hoffman? 22 A Yes. 23 Q Who is he, sir? 24 A He is now a director in accounting, but most of the time 25 I've worked with him he's either been a manager -- he is a I would routinely follow up with Tony to ask out of And at some point, he said the deal And when about did that happen; do you remember? 45 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 17 of 93 1 manager in finance. 2 Q 3 you know? 4 A No, he didn't. 5 Q And counsel was asking you about going free at Block, and 6 you gave your views on that. 7 Did he have any authority to set prices over in digital, if Without going into the nitty-gritty numbers of that, can you 8 just explain to the Court why you believed it was a good thing 9 for Block. 10 A Well, it was based on the numbers, the amount of incremental 11 new client growth that I was seeing through that product. 12 Q And can you explain why that's good. 13 A Generally, more clients means more money. 14 Q And in that case, were you able to determine whether more 15 clients meant more money? 16 A 17 clients who start free. 18 Q 19 asked you to continue to write reports for the company relating 20 to TaxACT? 21 A Yes. 22 Q About when did that happen, sir? 23 A I believe it was around July. 24 Q Of what year? 25 A 2010, yes. We certainly make a huge percentage of our revenue from our Later in 2010, did there come a point in time when they 2010? 46 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 18 of 93 1 Q And at that time, did anybody tell you what the purpose of 2 the deal was? 3 A I don't know. 4 Q Did you ever have any role at all in making any decision 5 regarding this transaction? 6 A Decision making? 7 Q Yes, sir. 8 A Definitely not. 9 10 MR. ROBERTSON: Okay. Your Honor, may I have a quick moment? 11 THE COURT: 12 Yes, you may. (Brief pause.) 13 MR. ROBERTSON: 14 questions at this time. Your Honor, I don't have any more 15 THE COURT: 16 Mr. Buterman, any redirect? 17 MR. BUTERMAN: 18 THE COURT: 19 MR. BUTERMAN: 20 Sure. Yes, your Honor. May I proceed? Yes, please. Thank you. REDIRECT EXAMINATION 21 BY MR. BUTERMAN: 22 Q 23 TaxACT's prices, are you not? 24 A I've been asked that from time to time. 25 Q And isn't it a fact that except when asked to do so by the Mr. Newkirk, you're routinely asked to keep track of 47 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 19 of 93 1 lawyers in this investigation, you have not been asked to track 2 the pricing information for any firms other than Intuit and 3 TaxACT? 4 MR. ROBERTSON: 5 THE COURT: Objection; beyond the scope. I'll allow it. 6 question. 7 BY THE WITNESS: 8 A Me personally? 9 Q Yes, you. 10 A No, I don't recall. 11 MR. BUTERMAN: 12 THE COURT: 13 MR. ROBERTSON: 14 THE COURT: 15 You may answer the No further questions, your Honor. Would you like to question? No, your Honor. Mr. Newkirk, you're excused. (Witness exits the courtroom.) 16 THE COURT: I think before you call your next witness, 17 we'll take a short break to give my court reporter a chance to 18 rest her fingers before we get to the next witness, so we'll 19 take a ten-minute break. 20 (Recess was taken.) 21 THE COURT: 22 23 24 25 Is the government ready to call its next witness? MR. WAYLAND: We are, your Honor. We call Lance Dunn to the stand. (WHEREUPON, the witness was sworn.) 48 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 20 of 93 1 LANCE DUNN, 2 called as a witness herein, having been first duly sworn, was 3 examined and testified as follows: 4 MR. WAYLAND: 5 THE COURT: 6 May I proceed, your Honor? Yes, please. DIRECT EXAMINATION 7 BY MR. WAYLAND: 8 Q 9 for the opening yesterday? Good afternoon, Mr. Dunn. We've met before. You were here 10 A Yes. 11 Q All right. 12 you are. 13 Software? 14 A Yes. 15 Q And 2nd Story is the maker of TaxACT? 16 A Yes. 17 Q It was founded in 1998? 18 A Yes. 19 Q And prior to founding 2nd Story, you were employed by 20 Parsons Technology? 21 A Yes. 22 Q What was Parsons Technology? 23 A Parsons Technology was a provider of consumer software. 24 They sold direct to consumers. 25 75 products, mostly in financial and productivity. So you know who I am then. Let's find out who You're the president and cofounder of 2nd Story Had a catalog of approximately Although 49 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 21 of 93 1 they had some in the religious product line as well. 2 And Parsons, you know, was a direct-to-consumer tax -- or 3 software company including the tax software, but they were a 4 direct-to-consumer software company that sold through direct 5 mailing catalogs. 6 Q 7 "Personal Tax Edge"; is that correct? 8 A Yes, they did. 9 Q Did you work on that product? 10 A Yes, I did. 11 Q What's your training, background? 12 Are you a tax person? 13 A 14 Cedar Rapids, Iowa. 15 graduating. 16 Q 17 more the what you need to do and have somebody else convert it 18 into software? 19 A 20 I provided content for that product. 21 software development tools, I would say I actually did and do a 22 lot of programming. 23 Q You still do that? 24 A Not today. 25 Q At the time you worked there, was the Personal Tax Edge And they had a digital tax preparation product called Are you A programmer? I have a Bachelor of Arts in accounting from Coe College in And I passed the CPA shortly after Did you develop the software for the product or were you You know, it's really a gray line between programming and -Using third-generational 50 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 22 of 93 1 product in the market being sold? 2 A Yes. 3 Q Okay. 4 A You know, there were really only two other software products 5 in the market at the time, which was TurboTax and Block, 6 although, you know, we really competed with everybody even then, 7 with everything. And who was its closest competitor? 8 The tax market -- tax preparation market -- even back in '91 9 when I started at Parsons, you know, Parsons sent their mailings 10 out to as many people as possible. 11 Q In 1994, Intuit acquired Parsons, correct? 12 A Yes. 13 Q After acquiring Parsons, what did Intuit do with Personal 14 Tax Edge? 15 A 16 And then they discontinued the product and merged it in with 17 their pro series and TurboTax product lines. 18 Q 19 do? 20 A 21 software development overseeing the development efforts of 22 approximately 30 internally developed applications, as well as 23 20 externally licensed. 24 Q Did you leave Parsons eventually? 25 A Yes. They continued to run the product as is for about two years. And after Intuit discontinued the product, what did you I continued at Parsons Technology as vice president of Parsons went through a succession of owners. After 51 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 23 of 93 1 Intuit, it was owned by Broderbund. And four of us left Parsons 2 in February of 1998 to start 2nd Story Software. 3 Q 4 What was your business objective? 5 A 6 software which, you know, was a category that did not exist at 7 that time. 8 Q Well, you created a new category? 9 A We recreated it. And what was the purpose of starting 2nd Story Software? Our business objective was to make money selling value tax It was the niche that the Personal Tax 10 Edge product line filled when it existed. 11 Q 12 been discontinued then, you were starting a new niche in your 13 mind, right? 14 A 15 were, as much as what we were not, was as a result of our 16 Parsons experience. 17 differently than how we did them at Parsons. 18 a lot of efficiencies in how we did things there, we really felt 19 that we could do things even much more efficiently on our own 20 with 2nd Story. 21 and support the product in using the Internet as opposed to 22 telephone and direct mail pieces. 23 At the time you started -- since that product had already Yes. We were also, you know, utilizing -- a lot of what we And we absolutely set out to do things While we had seen In particular, with how we market, distribute And we created a development environment that was just far 24 more efficient utilizing rapid development and short feedback 25 loops. 52 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 24 of 93 1 Q When you started 2nd Story, what were the principal 2 competitors in the digital software product market? 3 A 4 provided software products at that time, TurboTax and Block's 5 TaxCut at that time. 6 Q 7 reasonable price, right? 8 A Absolutely. 9 Q And you've been pretty successful at that? 10 A I'm happy with the success that we've had. 11 Q And you attribute the success to your business model of 12 providing a high-quality product at a reasonable price? 13 A 14 driver of the value model that we employ at 2nd Story 15 Software. 16 Q 17 as a pioneer, correct? 18 A We have, yes. 19 Q Pioneer in providing free online tax preparation software 20 and electronic filing services, correct? 21 A 22 our experience with free products at Parsons. 23 product offering in 1998 was a free federal program, free to 24 prepare, free to print. 25 Q In digital software, there was only two other companies that You founded TaxACT to provide a high-quality product at a Yes. The high-quality product at a reasonable price is a And I think you frequently have described your TaxACT effort Yes. Even in 1998, we provided a free product drawing upon So our initial So your product model, essentially, was you'd be aggressive 53 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 25 of 93 1 in marketing free to attract people in the door and then upsell 2 them into your product that you were selling, right? 3 A 4 of as many people as possible. 5 at that time -- in 1998, the model was to provide a free federal 6 program that was free to prepare, free to print. At that time, it really was just to get our product in front But yeah, the plan was the model 7 If you wanted to E-file, there was an additional charge for 8 that and if you needed a state program, there was an additional 9 charge for that. In 1998, we had 23 state programs. Far from 10 complete. 11 Q 12 focused on free as being your tag line; getting people in the 13 door with the free provide and then provide them with a 14 high-quality, low-cost upgrade? 15 A 16 the beauty of it is it has universal appeal. 17 something for free. 18 Q 19 key milestones in its objective of having 70 percent of 20 individuals file tax returns electronically, right? 21 A 22 product and eventually giving away free E-filing, that I'm sure 23 has helped the IRS. 24 Q You have described your company as a maverick, right? 25 A We have. And over the years, as you developed your strategy, you Right. Free is an integral part of the value model. And Everybody likes You've been an industry leader in helping the IRS achieve Yes. By certainly over the years by giving away free I'm not sure that the context that I used it in is 54 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 26 of 93 1 the same that you are today, but we have used maverick in a 2 press release before. 3 Q 4 much further in this, Mr. Dunn, because I think it will help us 5 set the stage for the rest of the afternoon. 6 You have described -- you -- let me ask you before we get You have, in your mind, a distinction between a value and a 7 premium market, don't you? 8 A Yes. 9 Q And you think that you compete in the quote, "value market," 10 right? 11 A Yes, I do. 12 Q And some other people compete into the premium market? 13 A Yes. 14 software; that there's a value in premium distinction within tax 15 software, yes. 16 Q What about online? 17 A Same categories. 18 Q Okay. 19 online. 20 let me know, okay? 21 A Okay. 22 Q So we'll go to digital. 23 And at this point, you're speaking specifically of tax Let's use digital to refer to both software and If you think your answer requires a distinction, you And you believe there's a value market and a premium market, 24 right? 25 A Yes. 55 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 27 of 93 1 Q You quite firmly believe that? 2 A Yes. 3 Q And you compete in the value market, right? 4 A Yes. 5 Q I'm going to go to the board next to you, with the Court's 6 permission, and I'm going to do a little writing and then you 7 can help me out, okay? 8 MR. WAYLAND: 9 THE COURT: Your Honor, may I approach the board? Yes, please. 10 BY MR. WAYLAND: 11 Q 12 the left side I'm going to write the word "premium." 13 drawing a line down the middle. 14 going to write the word "value." 15 the word "digital" across the top because we're agreed, at least 16 for now, to talk about the market like that. 17 All right. Mr. Dunn, I have approached the board, and on I'm And on the right side, I'm And then we're going to write Now, on the value side, tell me, you're on there, right, 18 TaxACT? 19 A TaxACT would be a value company, yes. 20 Q Okay. 21 A Free Tax USA, TaxSlayer. 22 Q Free Tax, TaxSlayer. 23 A There are others. 24 Q Anybody serious? 25 A You know, we watch them all. TaxACT. And any others? Anybody else? Anybody you really care about a lot? Free Tax USA and TaxSlayer are 56 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 28 of 93 1 the two that have adopted the free -- have adopted the value 2 model the best. 3 Q How about TaxHawk? 4 A TaxHawk and Free Tax USA are the same company. 5 represents like 18 different Web sites. 6 difficult to say who is who. 7 Q 8 more that at least pretend to be in the business? 9 A That's why it's So these are the top guys, and then there's maybe 20 or so There are some other software companies, yes, that could be 10 in the value segment. 11 Q 12 to think about serious competitors? 13 A No. 14 Q All right. 15 side? 16 A 17 You'd have Liberty Tax with their eSmart Tax. 18 Jackson Hewitt licenses a copy of CCH. 19 premium Space. 20 Free Tax USA But nobody you think we need to put on the chart right now On the premium side, who is on the premium CCH, Wolters Kluwer, with a product called "Complete Tax." Intuit, Block. You'd have But they are also in the Fileyourtaxes.com. Are you asking me to repeat the list of the FFA Web site 21 from memory? 22 Q 23 premium market, sir. 24 get your list and then we'll -- obviously, you didn't give me 25 everybody who is on the Free File Alliance. No. I'm asking you to tell me who you think is in the If you think there are -- well, let's just 57 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 29 of 93 1 A Fileyourtaxes.com. 2 Q We'll call them "FYT," okay. 3 A Let's see who else is on the FFA Web site. 4 some -- 5 Q 6 and Block represent? 7 A 8 by themselves. 9 software last year. Those are Do you have an idea in the premium market what share Intuit Well, by revenue, Intuit is 80 percent of all software, all 10 Q 11 percent for Block; do you think? 12 A 13 than 10 percent. 14 Q 15 10 percent somewhere, do you think, in the premium side? 16 A 17 across the board. 18 Q 19 Premium digital market, you've identified Intuit and Block as 20 competitors. 21 Okay. I think they did $1.3 billion in consumer And what about Block? 80 percent for Intuit. Block probably did 200 million. What So they're probably less And the rest of these, it splits up for the other No. Intuit 80 percent. That's all software. That is Well, I'm trying to focus today on the digital market. You may not know, but if you do know, tell me what 22 percentage of the premium digital market Intuit has. 23 A I don't know. 24 Q Do you have any guess? 25 A No. Do you ever think about it? 58 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 30 of 93 1 Q Okay. 2 either, sir? 3 A No. 4 Q And what about on the value side? 5 the market shares on the value side of this chart? 6 A 7 get the information? 8 Q 9 documents where you've calculated some market shares, so I was No. And Block, you don't know what their percentage is Do you have any idea of No one releases those numbers publicly. Where would I I don't know, sir, but we're going to look at a lot of 10 hoping you'd know something about that. 11 A 12 information. 13 Q 14 numbers you've been using? 15 A 16 publicly reported units of like Intuit and block. 17 Q 18 right? 19 A Yes. 20 Q What are your market shares in the market that you've just 21 described to the Court? 22 A What market did I describe to the Court? 23 Q I asked you -- the value digital market. 24 compete in the value digital market, okay? 25 A I've calculated market shares on publicly available And sitting here today, you don't remember what kind of You know, I believe we have calculated them for using the Let me ask you this: You're the CEO of the company today, You said you That's true. 59 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 31 of 93 1 Q Do you compete in a different market? 2 A Well, we compete in the market for tax preparation, yes. 3 Q All right. 4 A We compete for 140 million taxpayers. 5 different reasons why somebody selects any of these. 6 Q 7 digital -- if you don't want to use the market, we'll use 8 something else -- but the digital value segment of whatever it 9 is you're talking about, do you have any idea of what your share All right, sir. There's 140 million But focusing ourselves on the value, 10 is within that segment? 11 A 12 Free Tax USA and TaxSlayer do not publicly announce their 13 numbers. 14 Q 15 what's the share of your market, what do you say? 16 A 17 is released publicly. 18 many E-files are done across the entire tax preparation industry 19 and how many E-files are done as DIY. Between TaxACT, Free Tax USA and TaxSlayer, no. TaxACT, So you're sitting at a board meeting and somebody says If there's an analysis done, we would compare E-files, which So for example, the IRS announces how 20 So in the board context, we would say, okay, here's the 21 number of federally accepted E-files divided by the total in DIY 22 software, and here's the number of E-files we have across all 23 tax preparation. 24 Q 25 that, what did you say? Okay. And the last time somebody at the board asked you What numbers did you give them? 60 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 32 of 93 1 A In terms of -- 2 Q Market share. 3 A Yes. 4 Q You're sitting at a board meeting. 5 A Let me answer, please. 6 Q I'm trying to get you to answer my question. 7 the purpose is here, okay. 8 just tell me and I'll help you out. 9 My question is: 10 11 That's what If you can't answer the question, The board is sitting -- MR. ROBERTSON: Objection. Can we have counsel slow down. 12 MR. WAYLAND: 13 THE COURT: Sure. I'll slow down. Mr. Dunn, please respond and answer the 14 questions. 15 in order to answer it as accurately as you feel comfortable 16 answering, please do so. 17 going back and forth. 18 And if you have to provide a caveat to your answer But we're wasting a lot of time here So could we answer the question. If you want to answer 19 the question about market share based on E-filings and DIY 20 software, please do so as promptly and quickly as possible 21 because we've now spent five minutes go round and round and not 22 gotten an answer to a fairly simple question. 23 BY THE WITNESS: 24 A 25 12 percent. The share of TaxACT's DIY software would be about 61 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 33 of 93 1 Q And what are you counting when you say 12 percent? 2 this market or premium value? 3 A 4 E-files, do-it-yourself. 5 Q You're including pen and paper? 6 A No. 7 include fillable forms on the Free File Alliance. 8 include all value, all premium. 9 Q Just That would be TaxACT's consumer E-files divided by all DIY It would include all -- Free File Alliance. It would It would All DIY solutions. And when you're looking at DIY solutions, you then are 10 including the firms on this (indicating) side of the line, 11 correct? 12 A 13 would also share -- compute our market share as a percentage of 14 the total; that is, all consumer E-filed returns. 15 assisted prep regardless of their source. 16 Q 17 value side, as you've identified it, correct? 18 A I don't have the information to compute that. 19 Q Okay. 20 line at all? 21 anybody on the left side of the line? 22 A I compete with everybody in tax preparation, yes. 23 Q So the answer is yes, you are competing across this line 24 (indicating), correct? 25 A That is the publicly available information we can use. We That includes And what you don't do is calculate your percentage of the Now, sir, do you compete across this (indicating) Do you consider yourself in competition with I compete with all of those people. I compete with every 62 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 34 of 93 1 CPA. I compete with every enrolled agent. 2 wherever 140 million taxpayers get their tax return done. 3 4 MR. WAYLAND: Okay. I compete with Your Honor, I'm just marking this as Trial Exhibit 5. 5 (WHEREUPON, a certain document was marked Trial Exhibit 5 6 for identification as of September 7, 2011.) 7 BY MR. WAYLAND: 8 Q 9 you're willing to sign your name on a letter out to the public, All right, sir. You are proud enough of your business that 10 right, describing the business? 11 A Yes. 12 Q All right. 13 14 Let's take a look at Government Exhibit 28. MR. WAYLAND: Your Honor, we have binders to hand to the witness and the Court, if you want one. 15 THE COURT: Yes, please. 16 BY THE WITNESS: 17 A What document am I looking at? 18 Q I haven't told you yet. 19 Government Exhibit 28. 20 Just wait a second. It's It is at Tab 3. Mr. Dunn, this is a document that begins with the page 21 "TaxACT, Your Affordable Solution for Tax Software." 22 it continues on and ends before the back page with a letter 23 signed by you or a note from the president. 24 25 Do you see that? A And then It's on page 19. Yes. 63 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 35 of 93 1 Q Do you recognize this document? 2 A Yes. 3 Q What was the purpose of a press kit? 4 A A press kit is to provide information to media so that they 5 will include us in reviews, articles, news stories. 6 Q And you don't want to mislead the press, right? 7 A No. 8 Q Everything in here is accurate, as far as you know? 9 A Yes. 10 Q All right. 11 This is a press kit. Let's look at a couple of pages in here. Let's go right to your letter because I think that's 12 actually pretty good. 13 on page 18. 14 That's at the end of the document. It's Do you have the letter in front of you? 15 A Yes. 16 Q And you signed the letter, right? 17 that you stand behind the company and what you say about it? 18 A Yes. 19 Q All right. 20 "Since that time," meaning 1998, "TaxACT has been a catalyst for 21 change in the tax preparation industry." 22 You wanted people to know And so you say at the top, second sentence, And that's true, correct? 23 A Yes. 24 Q And you're very proud of it because TaxACT was the first 25 service to offer free preparation of federal taxes, correct? 64 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 36 of 93 1 Is that right? 2 A We weren't exactly the first, but yes, we're claiming that 3 here. 4 Q 5 least, right? 6 A Yes. 7 Q You were aggressive. 8 about it, right? 9 A Yes. 10 Q And then you were the first to offer free printing of a 11 federal tax return, correct? 12 A Yes. 13 Q And the first to offer free E-filing of a federal tax 14 return? 15 A 16 FFA, but I think the point here is we were the first to offer 17 free for everyone in 2003. 18 Q 19 depending on income level? 20 A On the FFA? 21 Q Or in 2003. 22 A In 2003, we made a very broad-based offer on the Free File 23 Alliance that was different from the competitors. 24 point, the other products listed on that page would not have had 25 an offer as broad as ours. And you're claiming it because you were a leader in that at You are the first one to be aggressive We offered it at the same time as everybody else did in the And at that time, other providers were just offering it free What made you different in 2003? At that 65 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 37 of 93 1 Q And in summary, you made sure that TaxACT has consistently 2 forced the tax preparation industry to become more competitive. 3 That's your true, right, and continues to be your view 4 today? 5 A Yes. 6 Q And in doing so, you forced your competitors to change as 7 well, correct? 8 A 9 document is to, you know, set us apart and try and get us It's a pretty broad statement. The objective of this 10 included into, you know, articles and news stories when they 11 might not have otherwise included us. 12 So yes, we were trying to show that we were unique. 13 Q But, this isn't very different than the story you generally 14 tell about the company, is it? 15 A No. 16 Q If you would go back a page to page 17 -- 16 and 17. 17 MR. WAYLAND: Can we put them both up. 18 BY MR. WAYLAND: 19 Q 20 there two charts, and one is on the left side entitled "Entry 21 Level Standard Software Comparison Chart." 22 You'll see here, Mr. Dunn, that you have listed -- you have Do you see that? 23 A Yes. 24 Q On the right side, you have "Deluxe/Premium Software 25 Comparison Chart," right? 66 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 38 of 93 1 A Yes. 2 Q And then underneath the left-hand side, you've listed three 3 competitors, TaxACT TurboTax and TaxCut, correct? 4 A Yes. 5 Q And on the right side, you've listed the same three 6 competitors, correct? 7 A Yes. 8 Q This chart doesn't look very much like that chart we made on 9 the board over there (indicating), does it? 10 A The TurboTax -- 11 Q Yes or no? 12 A No. 13 Q Okay. 14 column that says "Deluxe/Premium," right? 15 A 16 that program, Deluxe. 17 product included in that column. 18 Q 19 There's a pie chart at the top and then some Web traffic 20 underneath. 21 Yes. Just yes or no? And you have your company, TaxACT, listed under a That is the name of our product that's included in Okay. And Premium is the name of the TaxCut And let's go back to page 15, one more page back. Now, Mr. Dunn, do you understand what information is being 22 conveyed in this with this pie chart? What's Web traffic? 23 A 24 "Hitwise" that reports by their measurement the amount of 25 traffic going to tax-related sites. This is using a third-party report from a company called 67 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 39 of 93 1 Q Why do you think that would be relevant to the press? 2 A Because we needed to show that we were relevant in the 3 market. 4 to be the two dominant players, TurboTax and Block. 5 for us to get coverage, in order for us to get some 6 representation in those articles because our product was 7 different, we needed to show why they should include us. 8 Q 9 distinguish yourself from Jackson Hewitt in the chart, right? The press generally only covered what they considered All right, sir. So in order And you didn't think you needed to 10 A 11 product. 12 Q But they had an in-store product, didn't they? 13 A This was directed at people that would be creating news 14 stories about software. 15 Q 16 and Jackson Hewitt with respect to their retail business, is 17 there? 18 A Not that anyone would write about. 19 Q All right. 20 In 2008, I don't believe Jackson Hewitt had a software All right. And there's not really much of a story about you If you would go to -- well, not yet. Now, on the left-hand side of the chart, we have Block and 21 Intuit. And you think that both of those companies offer a 22 premium product, right? 23 A Yes. 24 Q All right. 25 partly because they have brand power; is that your view? And a premium product, they are able to offer it 68 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 40 of 93 1 A Premium is a business model and brand plays into that. 2 Q How does brand played into that? 3 A You know, the distinctions between value and premium is how 4 you attract customers, how you utilize free, and how you 5 distinguish yourself, I guess, to the potential customer. 6 value product or a value company is going to make price a 7 primary determinant and have their price prominently displayed. 8 9 A We're also going to use free software to attract as many people as possible. And we don't care if they use free for 10 multiple years. 11 We want them just to keep coming back because that free customer 12 starts the chain reaction of word-of-mouth advertising. 13 We don't care if they use free for one year. So we utilize free to bring people in, to provide them a 14 high-quality service, and we hope that they come back. And we 15 hope they come back as free. 16 upgrade to a paid product, it needs to be the customer's choice. 17 They need to see the value proposition of the product that 18 they're selecting, whether that's Deluxe, whether that's state. 19 We need to establish a relationship with that customer, and When they make the decision to 20 it has to be based on delivering a high-value, high-quality 21 product where they have not only the perception of value, but 22 value in fact. 23 So we utilize free -- when we have free customers, we look 24 at them as an asset. Free customers are the most likely to come 25 in, utilize the product and then go around and tell their 69 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 41 of 93 1 friends, neighbors and coworkers what a tremendous value and 2 what a tremendous customer experience they had at TaxACT. 3 premium company, on the other hand, utilizes free to attract 4 customers, but then does everything they can to avoid providing 5 it. 6 A So if you look at some of the, like, Intuits, yes, they'll 7 advertise free. You'll go to their home page. Free will be 8 there, but it won't be the default selection. 9 product, you go to our home page, you go to TaxHawk, you go to On a value 10 TaxSlayer, free is prominent. 11 difference. 12 between value companies and premium companies, how we utilize 13 free. 14 Q 15 answering my question which is terrific, but just let me pick up 16 on something. 17 And that distinguishes the That's one of the distinguishing characteristics I don't mean to interrupt you, but you've gone long past What is the motivation for the Intuits and the Blocks of the 18 world not to want people to really use their free product? 19 A 20 are putting free out there in front of as many people as 21 possible to get customers to come to their Web site. 22 get there, then they're trying to do everything they can to show 23 that there's reasons why you should use a different product. 24 Q I understand that. 25 A Why the price shouldn't be your primary determinant in They're using free because it has universal appeal. They Once they 70 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 42 of 93 1 making your purchase decision. So yes, brand is part of it. 2 And they will show the features and they will show the support, 3 and they will show all the reasons why their paid product is the 4 appropriate solution for you and not their free product. 5 don't depend on word-of-mouth advertising like TaxACT does. 6 Q 7 right to the higher priced branded product they have, right? 8 A 9 Everyone likes to see a free product. They And they'd rather skip free all together then and just go Like I said, they do free because it has universal appeal. Everyone wants to respond 10 to free. 11 140 million taxpayers, free has a lot of pull. 12 getting customers to look at free and come to their Web site and 13 then evaluate the options that they have. 14 Q And so I understand it, you're doing the same thing? 15 A We also use free because it has universal appeal. 16 free is completely different than, say, the free of Intuit. 17 Q 18 different from the motivation that is driving Block and 19 Intuit? 20 A 21 depend -- our whole life depends on bringing free customers in, 22 keeping them and having them tell their friends, neighbors and 23 coworkers about the tremendous value. 24 with either Intuit or Block and out-advertise them. 25 So when they're casting that net out there to And they're But our Why do you think your motivation for your free strategy is Our free strategy is what drives 2nd Story Software. We I can't stand toe to toe Intuit's spent $1.1 billion last year on sales and 71 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 43 of 93 1 marketing; the lion's share of that, I'm sure, on consumer tax. 2 I spent 25 million. 3 my one ad runs once for their 25, you know, that I'm going to be 4 able to compete with them. 5 provide a great customer service, a great product, and a great 6 customer experience so that they will tell their friends, 7 neighbors and coworkers. 8 that keeps going and keeps perpetuating the growth of 2nd Story 9 Software. I can't stand there and say, yes, because I have to utilize free. I have to It's that word-of-mouth chain reaction 10 Q Let me see if I can cut to the chase. 11 telling me is that your strategy, as a company, depends on a 12 robust, free strategy, free product, right? 13 A Yes. 14 Q Okay. 15 have that same strategic imperative to have such a robust, free 16 product, right? 17 A But free is still important to them. I mean, they have 18 to do free because of the Free File Alliance. Free is not going 19 anywhere. 20 Q 21 your strategy depends on it? 22 A 23 and others are using free products, we do have to differentiate 24 our free from their free. 25 customers. No. I think what you're And what you're telling me is Block and Intuit don't They don't have to do it quite as robustly as you because It does today, yes. Now that Intuit and Block are also -- That's how we attract the true value And that's how our customers are different than the 72 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 44 of 93 1 Block and Intuit customers and other premium customers. 2 customers are value-oriented, price conscious. 3 Our We make our -- we try to encourage our customers to make 4 their primary purchase decision based on price. Other products 5 in the premium -- and you don't have to go any further than look 6 at these companies' home pages to understand that they are not 7 making price the primary determinant. 8 Q 9 fisherman too? Now, Mr. Dunn, with the fishing analogy, are you a 10 A No. 11 Q That seems to be an analogy in the business. 12 MR. WAYLAND: I'm going to have to borrow the 13 microphone again. 14 BY MR. WAYLAND: 15 Q 16 both Mr. Bennett and yourself -- I can't do two things at 17 once -- you and Mr. Bennett have told us about. 18 draw a big C down here (indicating). 19 So I've been thinking about this fishing analogy both you -- There's a big sea full of taxpayers. And you want to throw 20 your net into that sea, right? 21 A 22 possible. 23 Q 24 We've got a big net down there (indicating). 25 some taxpayers will climb into your net? Yes. Okay. So let's just We want to get our offer in front of as many people as So there's TaxACT up there and here comes its net. And you're hoping 73 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 45 of 93 1 A Yes. 2 Q And one of the ways -- your strategy is free and then low 3 cost and then quality. 4 those are ways you attract people into your net, as I understand 5 what we've been talking about, right? 6 A Yes. 7 Q All right. 8 Intuit in there too. 9 same pool, right, same -- but they have got a different 10 I don't mean to say in that order, but Then we've got, let's say, Block, and we can put And they have their net going into the strategy. 11 What's their strategy? It's brand, correct? 12 A Yes. 13 Q What else do you think? 14 A They will differentiate based on features and quality of 15 service. 16 Q All right. 17 A It's implied in their brand. 18 Q All right. 19 have different competitive strategies of how to get people in 20 that net, right? 21 A 22 23 24 25 Yes. Quality. So you're both going in the same sea. You just We depend greatly on word-of-mouth advertising. MR. WAYLAND: So I'm marking that as Trial Exhibit 6, your Honor. (WHEREUPON, a certain document was marked Trial Exhibit 6 for identification as of September 7, 2011.) 74 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 46 of 93 1 BY MR. WAYLAND: 2 Q 3 time, premium and value? 4 A It's a business model, not a product. 5 Q Not a product. 6 on either side of the category or am I misunderstanding? 7 A 8 have to look any further than their home page to determine who 9 is who. Mr. Dunn, can a product ever be in both places at the same All right. But there are products that go There are companies on each side of that list. Okay. You don't 10 Q With the Court's indulgence, I'll just remind you 11 that I have questions. If you answer them directly, it will 12 just be a lot quicker. And your counsel will have a chance to 13 ask you questions and get out whatever you need to get out, 14 okay. 15 MR. WAYLAND: 16 THE COURT: Is that all right, your Honor? It's fine. Proceed. 17 BY MR. WAYLAND: 18 Q 19 everything I need to understand about the value and premium 20 distinction. 21 All right. So let's go back and make sure I understand It's a business model in your mind. It's not a distinction 22 between individual products, right? 23 A Correct. 24 Q So a company on the right side could be selling premium -- 25 could be selling premium products on the left side -- or could 75 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 47 of 93 1 be selling premium products? 2 A 3 other. 4 Q I don't believe so, no. All right. You're either on one side or the Now, let's take a minute on assisted. 5 You believe sir, don't you, that the only likely reason that 6 someone will switch from a TaxACT product to assisted is because 7 somehow a loss of trust or life event? 8 A 9 of the taxpayer. I believe I said there was a loss of confidence on the part An example of that would be a life event. 10 Q You're sure you said only an event as we've discussed 11 before? 12 right? 13 A 14 when they regain their confidence or that life event goes away, 15 they might come back. 16 Q 17 companies and the IRS, right? 18 A Yes. 19 Q And today both H&R Block and TaxACT offer free tax prep 20 products through the IRS Web site, right? 21 A Yes. 22 Q And post-acquisition, you can't have both brands in the FFA, 23 right? 24 A One company cannot have two products on the FFA. 25 Q And you think you'd probably have to take the TaxACT brand That someone somehow -- loss of trust or life event, That's one reason why someone would leave tax software. And The Free File Alliance is a partnership between tax prep 76 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 48 of 93 1 down after the transaction? 2 A 3 to the particular customers on both sides, which I haven't had 4 full details to look at. 5 take the TaxACT one down. 6 Q 7 its product available free to anyone with an adjusted gross 8 income above a hundred thousand, right? 9 A We'd have to look at the exact results of what's happening But I would guess that, yes, we would Now, when the Free File Alliance first began, TaxACT made That is the first offer that we made on the Free File 10 Alliance in tax year 2000, yes. 11 Q 12 offering the free filing at that income level? 13 A Yes. 14 Q And in the second year, you changed your offer to provide 15 free for customers with adjusted gross income above 50,000, 16 right? 17 A 18 peak. 19 offer. 20 Q When you talk about peak, what do you mean? 21 A Tax season has two -- is like a camel. 22 There is a sustained processing peak around February 1st or 23 February 15th as people receive their information documents. 24 Then the volume will level off or lower and then level off 25 throughout March. And at that time, were you the only company that was Actually, we changed that in the first year for the second Then in 2003, we started the tax season with that same 50,000 and above, yes. It has two humps. 77 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 49 of 93 1 And then the last day of the year is the busiest time of the 2 day -- is the busiest time of the year. The absolute peak is on 3 April 15th or 16th or 17th, whatever the filing date happens to 4 be that year. 5 Q 6 product, did other digital tax providers follow? 7 A What was the question? 8 Q Going back to when you had the strategy of providing free 9 for its customers above $50,000. Now, after TaxACT was offering it to the $50,000 and above You said that in the second 10 year. 11 A On the Free File Alliance. 12 Q Other companies filed suit, right? 13 A Yes. 14 offers as well during the 2003 tax season. 15 wasn't a lot of restrictions on the FFA as to how frequently you 16 could change your offer so there was a lot of movement. 17 Q 18 the FFA, right? 19 A Yes, we were. 20 Q And then what happened after you did that? 21 sequence of events in the FFA? 22 A 23 of companies offered free for everyone on the FFA. 24 Q And then the FFA changed, right? 25 A Then the FFA -- the IRS changed the rules on the FFA, yes. As we changed our offer, other companies changed their At that time, there And you were the first company to offer free for all through What's the After we offered free for everyone in 2003, in 2004, a lot 78 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 50 of 93 1 Q Do you have an understanding of how that came to pass? 2 A Slightly. 3 Intuit asked the Free File Alliance members that we should 4 restrict offers, which I believe is probably not legal for that 5 group to restrain trade. 6 Q You're in the right room for that argument, sir. 7 A So discussion on that stopped, and then after the 2004 tax 8 season, the IRS decided to do that. 9 asked them not to, but they did it. I mean, during 2003 -- after the 2003 tax season, How and why. You know, I 10 Q 11 after that happened? 12 A In 2005? 13 Q Yes. 14 A Yes, for 2005, we felt we really didn't have any option. 15 Since so many companies had provided free products in 2004 on 16 the Free File Alliance and they wouldn't necessarily be able to 17 offer them there for 2005, we felt that we really had no choice 18 but to be the first to do it there or perhaps at the same time 19 as others. 20 Q 21 And what was your response strategically, competitively I'm sorry. I just lost the end of that. So what did you actually do? 22 your Web site? 23 A We offered free for everyone. 24 Q On your Web site? 25 A On our Web site. You offered free -- before 79 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 51 of 93 1 Q And that was a first in the business, right? 2 A Well, a lot of companies had done it on the FFA in 2004, and 3 as we contemplated what we were going to do for 2005, we 4 certainly considered that any one of them might do it in 2005 as 5 well. 6 needed to do that. So yes, we felt that we really had no choice; that we 7 We also felt that the IRS was Walmarting us and that we 8 needed to make a better offer on our Web site than we had on the 9 IRS Web site so that customers would come to us, not to the 10 IRS.gov. 11 Q 12 hey, what's going to next and you said, well, maybe some people 13 will go free. 14 you beat everybody else to the market with your free Web site, 15 right? 16 A Yes. 17 Q You got a jumpstart, and that was a pretty good business 18 decision, right? 19 A Yes, it worked out well for us. 20 Q And you've actually called that a watershed moment for the 21 company, right? 22 A 23 industry. It turned out you were pretty good businessmen. 25 It was a watershed moment for the company and for the THE COURT: worked. And you did it first and As it turns out, no one else did follow that year. Yes. 24 We better do it first. You said, Can I just understand practically how this So you were still on the FFA Web site? 80 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 52 of 93 1 THE WITNESS: Yes. The FFA changed their rules so that 2 the FFA in aggregate would have to limit their offers to 3 70 percent of the tax-paying population. 4 an AGI limit, and no one can make an offer that exceeds that 5 AGI. 6 And the IRS computes Individual companies can only make an offer on the Free 7 File Alliance that appeals to 50 percent of the tax-paying 8 public or less. 9 would foster competition by allowing differentiation on the FFA. 10 And the idea that the IRS put out was that THE COURT: I got that part. So in 2005, on your Web 11 site you're offering free federal filing for all. 12 FFA Web site, you were given a more cabined offer? 13 THE WITNESS: Yes. But on the Our offer on the Free File Alliance 14 would have been more capped. And honestly, I can't remember 15 what the offer was that year. 16 2005, the IRS had the Walmart supercenter of tax software 17 offers. 18 best you could find for any of those products on the Internet. But the point was that prior to You had one site that had 18 offers, and they were the 19 So here's an institution in the United States 20 government that says they want to compete with the industry and 21 if we don't provide free filing services, they will. 22 were we doing as an industry? 23 Web site. 24 customers -- sending customers there to find our offers. 25 in 2005, one of the things that we considered in going free for So what We were helping them build their We were making our best offers there, sending our And so 81 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 53 of 93 1 everyone on our site, besides the fact that others might do it, 2 was the fact that we needed to have a better offer. 3 offer we make needs to be on our Web site, not the IRS.gov. 4 MR. WAYLAND: The best Thank you, your Honor. 5 BY MR. WAYLAND: 6 Q 7 strategy, you saw an increase in the number of electronically 8 filed returns that you processed, right? 9 A Yes. 10 Q Okay. 11 of the other competitors to try to offer free at all? 12 A I would have preferred if they hadn't. 13 Q Right. 14 Intuit, for example, to have to offer a free product, compete 15 with you on that level? 16 A 17 product out there for as long as I could have. 18 Q 19 your book, sir. 20 Now, after you implemented your free-for-all Web site No. Now, is it your -- part of your strategy to force any Did you think it would be helpful if you forced I would have preferred to have the only free-for-all Let's look at Government Exhibit 2817. That's at Tab 13 in These appear to be the notes or the minutes of a strategy 21 meeting on January 22, 2008. 22 that are listed is Lance. 23 You'll see among the attendees Any other Lances at the company? 24 A No. 25 Q Do you have any recollection of this meeting, sir? 82 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 54 of 93 1 A Specifically, no. 2 Q Did you attend strategy meetings from time to time? 3 A Infrequently. 4 Q But you do, right? 5 A Yes. 6 Q No reason to believe that you weren't there if you see your 7 name on this? 8 A 9 part of it. No. There is no reason to believe that I wasn't there for 10 Q 11 will be a difficult year for marketing and a difficult year to 12 expand, et cetera." 13 If you go down, the third bullet has a heading, "Overall And then there's some subpoints. And one of them says, 14 "Look at the product. 15 differentiate our free offer from that of TurboTax and raise the 16 stakes so Turbo has to offer their free program to everyone 17 rather than selectively marketing it." 18 Redefine what is free. We need to better Do you remember a discussion about that particular potential 19 strategy? 20 A 21 aggressively free. 22 in search. 23 Intuit would have a free offer there next to ours. 24 25 Yes. At this point, TurboTax had not rolled out They were selectively using it, for example, So you could search for free tax software, and But they did not have free as prominent on their advertising and their home page as they do today. 83 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 55 of 93 1 Q Why would it be helpful for you to raise the stakes so that 2 Turbo has to offer their free to everyone? 3 benefit you? 4 A 5 customers. 6 Q So this is a response to them targeting your customers? 7 A The way that they were implementing free was that they were 8 only providing free products to people that were looking for 9 free products. How does that They stop just specifically targeting us, our free Which at that time we were the only ones out 10 there suggesting and having a free product for everyone on our 11 home page. 12 So at this point, they were selectively offering free, yes. 13 Q Which you saw as a threat to your customers, right? 14 A Not to our customers. 15 appeal to different customers. 16 marketplace, yes, they're promoting free, we're promoting free, 17 but at the end of the day, we're promoting free to try and get 18 customers that are value conscious and cost conscious. 19 promoting free to try and get people that are making their 20 purchase decision on something other than just price. 21 Q 22 a marketwide free, right? 23 A Eventually. 24 Q Okay. 25 A They have more recently, yes. At the end of the day, we really But confusion in the They're And Intuit eventually did -- or TurboTax -- launch a free -- I'm not sure they did it in 2008 or not. And then H&R Block followed? Free has universal appeal. 84 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 56 of 93 1 Q Got to get those fish in the pond. 2 A It's a big pond. 3 of as many people as possible. 4 Q 5 prepare, free to print, free to E-file," right? 6 A Yes. 7 Q And then that phrase has been grabbed by some of your 8 competitors? 9 A Yes. 10 Q Intuit grabbed that phrase? 11 A Pretty much everyone in the industry is using it today. 12 Q And were you concerned about other people using your same 13 phrase? 14 A 15 have preferred to have kept it, but other institutions ruled 16 otherwise. 17 Q 18 you're going to be the president -- or -- is the title president 19 of the digital business? 20 A I believe so, yes. 21 Q Right. 22 A I will be reporting to Bill Cobb. 23 Q He is the president of the overall business, H&R Block's 24 business? 25 A You have to get your message out in front You were the first company to use the phrase, "Free to Yes. You know, it was a good marketing message. We would After the acquisition, I understand from the testimony that And you'll be reporting to whom, sir? I believe, yes, he is the CEO of H&R Block. 85 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 57 of 93 1 Q So he'll have responsibility -- bottom-line drive, 2 profits-in-the-door responsibility -- for the premium side of 3 the business as well as the value side that you'll be running, 4 right? 5 A Yes. 6 Q All right. 7 H&R Block's free product; is that right? 8 A No. 9 Q You don't think that the emphasis for marketing a free I will have responsibility for both, yes. And your plan is de-emphasize the marketing of 10 product would be placed behind the TaxACT brand? 11 A 12 currently being done. 13 Q 14 deposed, did you have the view at that time, whatever the market 15 was, that the emphasis for marketing a free product should be 16 placed behind the TaxACT brand? 17 A Okay. 18 Q I think that's a yes. 19 A Yes. 20 Q All right. 21 for H&R Block's digital, correct? 22 A What will be a change? 23 Q Change of de-emphasizing the free brand. 24 A No. 25 They already have one. The market changes every year. All right. We have to react to what's Well, a couple of months ago when you were That was your view then? And that will be yet another change in strategy I just said that we would continue the free brand. It's already successful. I haven't seen 86 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 58 of 93 1 the numbers on how successful it is. 2 after I talked to Block. 3 All of that's happened I haven't gotten any reverse due diligence regarding their 4 free, but it looks like it's successful. I would want to 5 continue that. 6 Q 7 continue to differentiate your product, right? 8 in the pond if you can't differentiate yourself, right? 9 A Yes. 10 Q And one of the ways that you can differentiate yourself is 11 to improve your product, right? 12 A Yes. 13 Q And in the case of tax software, one of the ways that you 14 improve the product is to offer more forms than other people 15 that you cover, right? 16 A Yes. 17 Q Okay. 18 to increase the number of forms to make your products more 19 attractive, right? 20 A 21 currently -- that we did not support at that time so that we 22 could make the marketing claim free for everyone because we want 23 to get our product -- our message in front of everyone, our 24 potential customers. 25 Q After the market followed in offering free, you needed to Yes. Harder to fish Differentiation is important to us. And that was one of the strategies that you follow is We added the rest of the federal forms that we did not And when you did that, was H&R Block offering -- making the 87 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 59 of 93 1 same offer, free for everyone, all the filing? 2 A No one but TaxHawk, Free Tax USA has a similar offer. 3 Q Now, in the last tax season, you lost share in comparison to 4 TurboTax and H&R Block, right? 5 A 6 by E-file, we were relatively flat. 7 Q 8 they are spending a lot more money than you are on promotion? 9 A By some metrics, that's what some people say, yes. Again, One of the reasons in your view for that change was that They are heavily promoting free. And our free message is 10 not as differentiated as it could be, yes. Value customers are 11 having a harder time finding us. 12 Q 13 and Intuit are making, right? 14 A Yes. 15 Q Now, speaking of marketing, there is intense competition 16 between companies to get marketing space, right? 17 A Yes. 18 Q And tell us where -- when we say "marketing space," what are 19 you looking for? 20 advertising? 21 A 22 example, Yahoo.com home page is a popular place to advertise. 23 So yes, we try to get space on Yahoo. 24 Q 25 digital tax preparation? That's because of all the noise in the market that H&R Block Is it Web advertising? Where are you Web advertising is the most competitive. You know, for And who else is trying to get that space on Yahoo for 88 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 60 of 93 1 A For digital tax preparation? 2 Q Yes. 3 A I would say pretty much everybody in the space. 4 Q And you spend money to get space, right? 5 A Yes. 6 Q All right. 7 A I believe Intuit pretty much smothers everybody. 8 Q You're bumping up to them constantly when you're trying to 9 buy space? Yes. Who is spending the most money? 10 A I think we're going to get shut out on Yahoo. I think 11 Intuit is going to buy it lock, stock and barrel. 12 Q Do you think that's going to hurt your business? 13 A We're going to have to find other advertising venues to 14 promote product to our value customers, yes. 15 Q If you don't, it will hurt your business, right? 16 A Yes. 17 Q Okay. 18 A We bump into them less, but yes. 19 against a lot of people for media space, but inside the DIY 20 software, yes, we bump up against Block, but Block advertises 21 their assisted. 22 Flowers.com a lot too. 23 Q 24 your tax prep business, do you? 25 A You also compete against H&R Block for media space? Everybody. We compete During tax season, we bump up against But you don't worry about Flowers.com taking away any of In essence, they do. If we can't get our product promoted, 89 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 61 of 93 1 it is hurting us. 2 Q Where can I put flowers on that chart? 3 A We bump up them again advertising. 4 you were asking. 5 Q 6 charging for their products? 7 A Yes. 8 Q Let's look at Government Exhibit 28-20, which is at Tab 23 9 in your book. That was the question Do you monitor the prices that Intuit and H&R Block are We have to differentiate ourselves against them. This is a document, Mr. Dunn, that's titled 10 "Price Increase Pros and Cons." 11 series of pros. 12 seems to be a set of prices. 13 Never mind. On the left side, there's a On the right side, a series of cons. And there I think it refers to standard Deluxe 14.95, Deluxe 12.95 and 14 is that ultra or ultra Deluxe, sir? 15 A Ultimate bundle. 16 Q Have you seen this document before? 17 A Only in my deposition. 18 Q Do you recall any discussions about whether or not you 19 should be increasing your prices to the 14.95 level for 20 standard? 21 A No, I don't. 22 Q Who has pricing authority at the company? 23 A Pardon? 24 Q Who has prizing company at the company? 25 A The four founders, but any price increase we'd have to take Combination of Deluxe and state. Do you? 90 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 62 of 93 1 to the board of directors as well. 2 Q 3 additional resources while still maintaining an advantage in 4 cost relative to our main competitors, Intuit and H&R Block." 5 You see the second bullet says, "The price increase will net Do you see that? 6 A Yes. 7 Q "We can still claim value leader." 8 9 Do you agree that you could still claim value leader if you raise your price to 14.95? 10 A I believe we could claim value leader. 11 break our value proposition, but I'm sure we could claim it. 12 13 THE COURT: I think it would Mr. Wayland, I'm presuming from your questions that this is a TaxACT document. 14 MR. WAYLAND: 15 THE COURT: I'm sorry, your Honor? Is it a TaxACT document from any particular 16 time period or year? 17 BY MR. WAYLAND: 18 Q 19 your prices to 14.95, 12.95 and 17.95? 20 A No idea. 21 Q Do you know if you actually raised your price to 14.95 for 22 the standard? 23 A 24 been. 25 Q Do you know, sir, when there was a discussion about raising Standard has never been changed. It's 9.95. Always has Standard plus state, how much is that? 91 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 63 of 93 1 A Depends on the time of year, but generally, our state 2 product runs about 16 to 17.95 as a stand alone with standard. 3 Q All right. 4 5 THE COURT: created? 6 7 MR. WAYLAND: I don't think this witness knows enough about it. 8 9 So we don't know when this document was THE COURT: That was becoming apparent to me. BY MR. WAYLAND: 10 Q Do you know who Mike Larson is? 11 A Mike Larson is in charge of creative in our marketing 12 department. 13 Q 14 creative? 15 A 16 banners, e-mails, Internet. 17 with ideas for our advertising. 18 Q And how long has he been at the company? 19 A Mike has probably been there ten years. 20 Q All right. 21 A He's familiar with his job. 22 Q All right. 23 right? 24 A 25 advertising stand out from others. And what is creative? What's the responsibility of He is responsible for creating advertising that runs on He is responsible for coming up So he's pretty familiar with the business? Well, part of his job is to market the business, His job is to come up with creatives and make our 92 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 64 of 93 1 Q 2 The exhibit is Government Exhibit 28-32. 3 A I'm sorry. 4 Q Tab 24. 5 Larson, June 4th, 2010. 6 All right. Let's look at Exhibit 24. I'm sorry, Tab 24. What tab? This is a TaxACT brand analysis prepared by Mike You've seen it before? 7 A I saw this in my deposition. 8 Q All right. 9 fall under Mike Larson's responsibility to prepare? 10 A 11 and, you know, differentiating our products from others that are 12 being advertised. 13 Q 14 document. 15 heading that says, "How Are the Major Direct competitors 16 Positioning the Above Items?" 17 Yes. Do you recognize this as a document that would As I said, he is responsible for creating advertising All right. Would you look at the third page of the Do you see at the bottom of the page, there's a Do you see that? 18 A Yes. 19 Q And then underneath it, he lists two competitors, TurboTax 20 and H&R Block, correct? 21 A Yes. 22 Q And if you turn the page, you'll see at the top, it says, 23 "Our competitors have some branding advantages." 24 25 Do you see that? A Yes. 93 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 65 of 93 1 Q And then the two competitors that he discusses are Turbo and 2 H&R Block? 3 A Yes. 4 Q Okay. 5 come up with marketing campaigns for you has identified the 6 major competitors as TurboTax and H&R Block, correct? 7 A 8 yes. 9 Q So the person whose principal responsibility is to These are two that will advertise their tax products a lot, All right. And if you -- just so there's no doubt about it, 10 if you'd turn to the next page at the bottom under "Brand Audit 11 Overview for Creative," you'll see that your -- under the No. 1, 12 you'll see that your marketing fellow, says, "Major competitors 13 refers to H&R Block At Home and TurboTax," correct? 14 A Yes. 15 Q And he's designing marketing strategies to compete with 16 these major competitors, right? 17 A 18 strategy. 19 disapproved, reviewed by the vice president of marketing, as 20 well as Cammi Greif, the chief marketing officer. 21 22 23 He comes up with ideas for creatives, yes, but that's not Anything he creates is going to be approved, THE COURT: Do you have any role in approving marketing plans or do you review them as a regular -THE WITNESS: Only in the broadest sense. You know, 24 Cammi and I and the four founders will discuss, you know, 25 specifically how much the marketing budget is going to be. 94 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 66 of 93 1 Specifically, you know, big buys. 2 Whether we should by, you know, more premium space on Yahoo's 3 home page or MSN's home page versus, you know, run of site, 4 which is kind of a remnant buy. 5 Where we might be promoting. So we talk about big issues. But in terms of, you 6 know, specific execution of specific campaigns, no. That's 7 handled by Kris Peterson, vice president of marketing. 8 BY MR. WAYLAND: 9 Q Before we leave the document, Mr. Dunn, if you look back on 10 the prior page from where we were just looking at, the one that 11 has, "Our competitors have some branding advantages." 12 number at the bottom is 1262. 13 A 1262. 14 Q You'll see just above the last heading, there's a sentence 15 that says, "Each company" -- and referring to TurboTax and H&R 16 Block -- "puts an emphasis on a different point. 17 of use, H&R Block is on accuracy and we are on comprehensiveness 18 and price." 19 The Bates Okay. Turbo is ease Do you have any sense of in June of last year whether that's 20 your understanding of what the companies were emphasizing? 21 A 22 advertising copy for each much more closely than I would have. 23 Q Who is -- is it Cammi Greif? 24 A Cammi Greif. 25 Q What is her position? I'll take Mike's word for it. I'm sure he looked at the 95 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 67 of 93 1 A She is chief marketing officer and cofounder. She is one of 2 my partners. 3 Q And what are her responsibilities at the company? 4 A Her primary responsibility is marketing, but like all of the 5 four cofounders, we share in coming up with the vision and 6 strategy of the company. 7 Q 8 involvement with 2nd Story, you have used financial advisors to 9 seek investment or other access to capital, correct? Now, Mr. Dunn, from time to time over the course of your 10 A We are currently owned by a private equity -- two-thirds 11 owned by a private equity firm, which means that we are 12 constantly for sale, yes. 13 Q 14 prepared various offering memoranda describing the company and 15 its business for use in that purpose, right? 16 A Yes. 17 Q And the information in those materials, generally you would 18 expect to be accurate, right? 19 A Yes. 20 Q And you would generally be familiar with the information 21 that was in those memoranda? 22 A Yes. 23 Q All right. 24 start with Government Exhibit 28-8 which is at Tab 26 in your 25 binder. And you know that from time to time, your company has Let's walk through several of them, sir. Let's 96 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 68 of 93 1 This document, Mr. Dunn, is entitled "Confidential 2 Memorandum, 2nd Story Software." 3 Greene Holcomb & Fisher company; is that right? 4 A Yes. 5 Q And I think it was about 2004, do you remember that, that 6 this was prepared? 7 A Sounds about right. 8 Q If you look at the second page, there is an appendix, table 9 of contents listing, and it says, "Fiscal 2003 audit and 10 And it is prepared by the financial statements," indicating that they are attached. 11 So that would lead you to believe it's probably about 2004, 12 right? 13 A Yes. 14 Q All right, sir. 15 Let's look at page 2 of the document. And this is a page that gives the company overview, 16 correct? 17 A Yes. 18 Q And again, it's a familiar story if we look at the second 19 paragraph. 20 name recognition by offering a full-featured, tax-preparation 21 product for use online," et cetera. 22 "2nd Story has rapidly gained market share and brand That's correct, right? 23 A Yes. 24 Q All right. 25 A It was in 2004. That's your basic story? And -- 97 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 69 of 93 1 Q 2 it? 3 A Yes. 4 Q And as you see, the last sentence says, "Prices for each of 5 these products and services are considerably below its primary 6 competitors." 7 Still is, right? It's still your story basically, isn't So competitors who are offering at a higher price are Intuit 8 and Block, generally, right? 9 A Yes. 10 Q Let's turn to page 9 of the document. 11 Those are premium products. Now, this, sir, under the heading "Industry Overview," has a 12 chart, right? 13 A Yes. 14 Q And so as I understand it, this chart is trying to break 15 down the -- what happens on individual returns. 16 better. 17 Sort of a flow chart, I guess, or a chart? Let me say it Starting at the top with all the individual returns that are 18 filed, right, the whole universe of filing? 19 A 20 returns. 21 Q 22 million self-prepared tax returns, correct? 23 A Yes. 24 Q And on the right wing, 78 million professionally prepared, 25 right? Right. That's our potential customer base, 132 million tax And then it breaks down on two wings. On the left wing, 54 98 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 70 of 93 1 A Yes. 2 Q And then on the left, you go down under the self-prepared to 3 31 million manually prepared. 4 We've been referring to that as pen and paper sometimes 5 here, right? 6 A Yes. 7 Q And then 23 million using software, correct? 8 A Yes. 9 Q All right. And so if you're looking at the whole universe 10 of people who are filing, you described the world as set forth 11 in this chart, right? 12 who is filing their taxes? 13 A Yes. 14 Q Are these all the fish in the ocean, or that's it, right? 15 A Yes. 16 Q All right. 17 23 million using software, right? 18 A Yes. 19 Q All right. 20 It's a fair way to think about everybody 132 million is it in 2004. And the digital market is the group that is the Then let's go to page 14. And now we're talking about -- we're not talking about the 21 universe as much anymore, but we're talking about more specific 22 competition, correct? 23 A Yes. 24 Q Under this, it says, "The company's major competitors for 25 both desktop and Internet-based income software and E-filing 99 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 71 of 93 1 services include Intuit and H&R Block," correct? 2 A Yes. 3 Q And they are described as your major competitors, correct, 4 in this? 5 A 6 intended for, yes. 7 Q 8 to know that Intuit and H&R Block are your primary major 9 competitors? Those are two other software providers. Certainly in the context of, you know, who this document was Why do you say that? Why would the people who get this want 10 A 11 to is to potential buyers. 12 cover letter would have been slapped on it and sent to 30 or 40 13 private equity firms. 14 Where this document and others like it would have been sent So this would have been sent -- a And the first thing the private equity firm is going to do 15 is say, "TaxACT sells tax software. I think Intuit sells tax 16 software." 17 information available for Intuit. 18 know, they're going to come -- or they're going to look at this 19 in light of the information that they can get publicly 20 available. 21 Q 22 to its two major competitors, 2nd Story has positioned its 23 product offerings as being of equal or higher quality and 24 completely fulfilling the needs of a vast portion of the 25 potential market. And they'll go out and look at the public All right. And so it would be -- you Well, in the next paragraph you say, "Relative It also pursues a pricing strategy that 100 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 72 of 93 1 positions its products and services meaningfully below either 2 Intuit or H&R Block, in some instances free," correct? 3 A Yes. 4 Q And that accurately described your strategy at the time, 5 correct? 6 A 7 and Block or from both of those. 8 going to come in with a bias that we provide software, they 9 provide software, so how are we different than those? Yes. It's clearly showing how we are different from Intuit The reader of this document is 10 Especially with Intuit being an 800-pound gorilla, the reader of 11 this is going to say, you know, why isn't Intuit potentially 12 going to squash you like a bug? 13 So you know, one of the key points that this document is 14 trying to make is that we serve different customers. 15 Q 16 "Intuit is the recognized market leader and also the highest 17 priced provider of similar products and services. 18 also enjoys very significant brand name recognition in part 19 because of its nationwide strategy of storefront locations where 20 tax professionals provide service." 21 All right, sir. If you go to the next paragraph, it says, H&R Block So they have a branded product that -- they use your brand 22 to help them sell their digital, right? 23 A Block has a strong brand, yes. 24 Q And the next paragraph says, "2nd Story believes its 25 software and online products are equal or superior to either 101 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 73 of 93 1 those of Intuit and H&R Block and are offered to consumers at a 2 lower price," correct? 3 A Yes. 4 Q So your view was your product was just as good, and the way 5 you were going to get people to buy it was to sell at a lower 6 price? 7 A 8 this document is to show the potential buyers that we service 9 different customers than Intuit and Block. Yes. We differentiate based on price. And the purpose of They are going to 10 come up with the bias -- I mean, looking at even the companies 11 today. 12 software today. 13 potential buyer is going to say why doesn't Intuit squash you 14 like a bug? 15 Like I said, Intuit sells $1.3 billion of consumer We sell 70 million of consumer software. A Any time they want to they could do away with you. The only way that we can show that we're not going to be 16 squashed like a bug is to show how we're different than Intuit 17 and Block and show how we serve different customers than Intuit 18 and Block. 19 continue to succeed. 20 Q 21 in your company to know about those people on the right side of 22 the column and the Free Tax and the TaxSlayers and the rest of 23 the world? 24 A In 2004, that's barely getting started. 25 Q All right. And that's why we succeed and that's why we'll And it wasn't going to be relative to the people who invest A few years later, 2007, you had occasion to 102 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 74 of 93 1 engage Deutsche Bank for financial advice, correct? 2 A Yes. 3 Q All right. 4 correct? 5 A Yes. 6 Q And again, you would be familiar with the content of the 7 document? 8 A Yes. 9 Q And you can see that. 10 And again, their memorandum was prepared, It's Government Exhibit No. 134 and it's at Tab 27. 11 And if you look, sir, at page 1 of the document, the No. 12 1 -- it's the third page in, we're not going to -- if we read, 13 we'll be reading the same thing mostly so we'll just skip 14 through this pretty quickly. 15 Let's go to the next -- if you go to the bottom of that -- 16 the line that starts with, "Currently, the company generates a 17 significant majority of its revenue by up-selling customers of 18 its free tax preparation solutions to paid premium offerings, 19 including state tax preparation with E-filing and deluxe 20 versions with premium content." 21 Do you have a different view of what "premium" meant in this 22 document than what we talked about earlier today? 23 A 24 at a price premium over our free product, yes. 25 Q The content of our Deluxe program and our state program is Price premium. So now the word "premium" only means a 103 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 75 of 93 1 delta? It's a difference, premium; difference between our 2 low-priced product and our high-priced product? 3 A 4 our standard product. 5 Q Why don't you call it your paid value offerings? 6 A That's not referring to a business model like premium versus 7 over value here. 8 Q All right, sir. 9 A The price is still the same. It's a paid product so, yes, it is a different product than State was probably 12.95, 10 Deluxe was 9.95. 11 Q 12 you're calling it, sir. 13 A "Paid" is the key word there. 14 Q But you added the word "premium." 15 A Yeah. 16 Q Okay. 17 heading "Competition." 18 No. That doesn't change our business model. Just trying to understand why you're calling it what Let's go to page 16. Somebody did. This is under, again, the Three years after the one we just saw. You have market share of self-prepared, E-filed federal tax 19 returns, correct? 20 A Yes. 21 Q All right. 22 says, "Competitors in the consumer tax preparation software 23 market include CCH, H&R Block and Intuit." 24 25 And then the second bullet point from the bottom Do you see that? A Yes. 104 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 76 of 93 1 Q And CCH is not a big player, is it? 2 A Wolters Kluwer is a very big company. 3 Q In terms of their share of tax software, it's not very big, 4 is it, on the digital side, consumer? 5 A 6 how big they are. 7 Q All right. 8 A And the point here is to compare ourselves with companies 9 that have publicly available information. It varies. They don't release their numbers. I don't know Compare and 10 contrast. 11 Q Okay. 12 A To show how -- 13 Q I'm sorry? 14 A We have to show how we can compete with big companies. 15 Q Again, just quickly on page 17, three years after the first 16 memoranda we looked at, again, you're identifying your two main 17 competitors as Intuit and H&R Block, right? 18 A 19 readers would have information about them and would want to be 20 how we compare to those. 21 thing. 22 want to know how we're not going to be smashed by a large 23 company. 24 we attract different customers. 25 Yes. Again, just quickly -- Top of page 17. In the context of this document, I think that the And like I said, this is the same It's an offering memorandum. The potential investors So we have to show them how we are different and how So the point is the same. And I think if you read the 105 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 77 of 93 1 document as a whole, you'll see that that is one of the key 2 points that this makes, as well as the management presentation 3 that would logically follow after this. 4 Q 5 the series, July 2009. 6 it's at Tab 29 of your book. 7 All right, sir. All right, sir. Let's turn to another of the memorandum in This is Government Exhibit 28-24, and We're looking at Government Exhibit 28-24 8 which is at Tab 29 in your book. And we'll look at page 3. 9 A Yes. 10 Q And sir, do you see in the second paragraph, again, you're 11 describing yourself as an industry innovator in the delivery of 12 free online tax software. 13 powerful brand affiliation, correct? 14 A 15 referring to earlier, that's critical in value software. 16 Q 17 mouth, right? 18 A It starts with the first unit. 19 Q And it gets better as you sell more units, more and more and 20 more, right? 21 A 22 have, the more referrals you get. 23 Q 24 where you are now, right? 25 A And you've generated your own That refers to the chain reaction, word of mouth, that I was Took you a while to build up that brand affiliation, word of I believe that that's how exponents work, yes. The more you And you think it would take somebody 11 years to duplicate No. 106 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 78 of 93 1 Q You thought that at your deposition? 2 A I believe that my deposition, I was asked how long it would 3 take someone to get 11 years experience, and it would take 11 4 years. 5 Q You were just being funny at the deposition? 6 A That was the question I was asked. 7 gave. 8 Q Page 6. That's the answer I We're in the middle of the first paragraph, sir. 9 And we've pulled out, "Management believes the company's 10 extensive domain expertise, combined with highly specialized 11 tools and skills needed to develop a trusted tax preparation 12 solution, provides a formidable barrier to competitive entry." 13 True when you put it out to the market then? 14 A Yes. I believe for someone to create a product from scratch 15 would be difficult, but there are already 18 competitors out 16 there. 17 Q 18 you to have a program that makes you a successful company, 19 right, sir? 20 A 21 efficient and very effective software development and marketing 22 infrastructure. 23 this transaction. 24 scratch would be very difficult. 25 in tax software. But it's more than just loading up the software that allows Correct. Like I said, starting in 1998, we created a very And it's, I think, still the primary reason for So yes, for someone to create that from We've had 20 years experience I've had it with three different tax software 107 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 79 of 93 1 providers. 2 That is an asset that would be difficult to replicate. But 3 there's a lot of players in the software market, and CCH will 4 license a product to anybody. 5 Q Page 14, sir. 6 MR. WAYLAND: We're on page 14, your Honor, of 7 Government Exhibit 28-24. 8 BY MR. WAYLAND: 9 Q In case the reader of the document missed the point the 10 first time about barriers to entry, you've said it again. 11 "TaxACT has a large, loyal customer base and its 12 differentiated product portfolio has built established, 13 formidable barriers to entry, preventing other competitors from 14 easily entering the tax preparation market with alternative free 15 solutions." 16 You said it twice. Yes. Must have felt pretty strongly about it. 17 A I believe that it would be difficult for someone to 18 build a product from scratch like we did, but there's plenty of 19 other options out there. 20 MR. WAYLAND: 21 THE COURT: 22 25 Your Honor, it's 5:30, right, your Honor? I was planning on going until 5:00 depending on where we are with the witness. 23 24 A lot of companies are doing it. MR. WAYLAND: That's fine, your Honor. Just needed to know. THE COURT: It's just 4:30. 108 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 80 of 93 1 MR. WAYLAND: Yes. 2 BY MR. WAYLAND: 3 Q 4 maybe marketing in the business? 5 that means anything to you? 6 A I'm not familiar with the context. 7 Q All right. 8 Tab 30 of your binder. 9 10 Mr. Dunn, you use the concept backloaded when referring to "Backloaded," is that a term Let's look at Government Exhibit 952. That's at Mr. Dunn, this is what we've marked as Government 252. It's an e-mail from you to Todd Crockett. 11 Who is Todd Crockett? 12 A 13 partner at TA Associates. 14 Q 15 And you write in the first paragraph, "I would normally 16 anticipate that we would lose a little more share in the last 17 two weeks as Intuit tends to be more backloaded than we are." 18 Todd Crockett is on our board of directors. He is managing And this is an e-mail from just this year in April 2011. What does that mean? 19 A In this example or in this case, it means that they tend to 20 have more returns filed on April 15th relative to their overall 21 business. 22 Q All right. 23 A In this context, we're talking about share of E-file units 24 and using that as a metric for measuring our success this year, 25 especially with respect to, you know, a potential sale. And why would that affect your share? 109 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 81 of 93 1 Q 2 marketing or business proposal to Fidelity at some point? 3 A No. 4 Q All right. 5 recollection, and if not, we'll move on. 6 7 Let me just see if I could refresh your Let me show you what's been referred to as Government Exhibit 105. 8 9 Mr. Dunn, do you recall that TaxACT made some kind of It's at Tab 50. This is a document, sir, that's entitled "2007 Tax Season Proposal," submitted to Fidelity June 2007. 10 Do you recognize this at all? 11 A No. 12 Q Do you have any recollection of having anything to do 13 with it? 14 A No. 15 Q All right. 16 17 Okay. MR. WAYLAND: You can put it aside. Give me a minute, your Honor. I may be done. 18 THE COURT: 19 Certainly. (Brief pause.) 20 MR. WAYLAND: Your Honor, we have a couple of documents 21 that we have to close the courtroom. 22 end the day. 23 And that may be the way to Let me do a couple other ones before we do that. THE COURT: 24 BY MR. WAYLAND: 25 Q Fine. Now, you, Mr. Dunn, in the day-to-day operations of TaxACT, 110 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 82 of 93 1 you monitor the prices of TurboTax and HRB? 2 that earlier. 3 A We do monitor them, yes. 4 Q All right. 5 Government Exhibit 28-29. 6 "2009 Competitive Price Comparison." 7 some pages of product comparison as well. Let's look at Tab 34. 8 Do you see that, sir? 9 THE COURT: 10 I think you told me This is a chart. It's And it's a chart that's entitled And it's followed with Can I just correct you for a second. Are we on Tab 34? 11 MR. WAYLAND: 12 THE COURT: 13 MR. WAYLAND: 14 THE COURT: Yes. Is this Government Exhibit 19, not 29? It's 28-19, your Honor. Just for the record to be correct. 15 BY MR. WAYLAND: 16 Q 17 that you're comparing the prices of TaxACT, H&R Block and 18 TurboTax? 19 A I believe that's what this document does, yes. 20 Q And then the next page is a description of the competitive 21 positioning statements for each of those three competitors, 22 correct? 23 A Yes. 24 Q And then if you'd turn to two pages later, you'll see -- the 25 Bates number is 91 at the bottom, sir. Do you see, sir, on this 2009 Competitive Price Comparison Do you see that? You'll see a 2009 111 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 83 of 93 1 features comparison that has TaxACT, H&R Block and TurboTax, 2 correct? 3 A Yes. 4 Q Okay. 5 6 THE COURT: second, so this is a TaxACT document? 7 MR. WAYLAND: 8 THE COURT: 9 10 12 THE COURT: 13 THE WITNESS: THE COURT: 16 MR. WAYLAND: 19 20 No, not to my knowledge. Was this only done in 2009? I'm not familiar with this, but this is not something that we do in the ordinary course of business. 15 18 And Mr. Dunn, is this the kind of features basis every year in preparation for every tax season? THE WITNESS: 17 It is, your Honor. and competitive price comparison that TaxACT does on a regular 11 14 Mr. Wayland, just to slow you down for a Okay. All right, your Honor. We need to close the courtroom now. THE COURT: Could I just ask you how long do you estimate the closed session for Mr. Dunn will be? MR. WAYLAND: Should be relatively short, your Honor. 21 I just have a couple of documents to go through. 22 us to 5:00. 23 It will take I think I should be done at the end of the day. THE COURT: Frankly, if we can finish the closed 24 session for Mr. Dunn today so that we start at 9:30 with the 25 open cross, I'd like to do that. But I guess you can't tell me 112 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 84 of 93 1 how long you're going to be on cross of the -- 2 MR. WAYLAND: It may take me a little bit longer than 3 that anyway, your Honor. It really depends on how long it takes 4 us to get through the documents. 5 MR. ROBERTSON: Your Honor, the witness will be on for 6 quite a bit longer because we also have our direct that we will 7 put on with Mr. Dunn as well, which also may include 8 confidential documents. 9 through with the confidential section of that today. 10 THE COURT: So there's no chance we're going to get Okay. All right. Let's close the 11 courtroom, and we'll conclude with the direct examination with 12 the government's closed documents. 13 9:30 with cross-examination of these closed documents or would 14 you just prefer to wait and deal with cross-examination of these 15 documents -- 16 MR. ROBERTSON: 17 documents. 18 end. 19 tidy that up. I may have other confidential It might make sense to wait, and I'll do it at the And that way counsel can redirect, and we can recross and I think that will make it cleaner. 20 THE COURT: 21 MR. ROBERTSON: 22 We'll start tomorrow then at All right. Otherwise, we may have people trying to get in at 9:30 and that would be a little clumsy. 23 THE COURT: Right. I was thinking that we might be 24 able to avoid that. 25 more closed session with Mr. Dunn so we'll start 9:30 with an It's clear we're going to have at least one 113 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 85 of 93 1 open courtroom, but we will now close it to at least do these 2 documents. 3 MR. WAYLAND: 4 THE COURT: Thank you, your Honor. Okay. We have now closed the courtroom. 5 This portion of the transcript will be sealed. 6 confirm with counsel that the only people remaining in the 7 courtroom are appropriate to be here. 8 MR. WAYLAND: 9 THE COURT: Yes, your Honor, for the government. Mr. Robertson? 10 MR. ROBERTSON: 11 THE COURT: 12 I want to Yes, your Honor. Thank you, Mr. Robertson. Please proceed, Mr. Wayland. 13 MR. WAYLAND: 14 Thank you, your Honor. CROSS-EXAMINATION 15 BY MR. WAYLAND: 16 Q 17 Hollingsworth? 18 A They are in our marketing department. 19 Q And what responsibilities do they have? 20 A Leigh Aragon does preliminary negotiation with potential 21 partners as sort of an outside liaison as she also does PR. 22 Q And Greg Hollingsworth? 23 A He is no longer with the company, but when he was with the 24 company, he was in our social media. 25 Q Mr. Dunn, do you who know Leigh Aragon and Greg And what was his responsibility there? 114 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 86 of 93 1 A 2 I would consider almost technical support. 3 Q 4 entitled "Competitive Analysis Tax Year 2009," created by Leigh 5 Aragon and Greg Hollingsworth. 6 A Okay. 7 Q Turn to the introductory page, which has the Bates number 8 that ends 666 on it. 9 A Yes. 10 Q And you'll see that the middle paragraph says, "Our focus 11 this season was on differentiating our free product from that of 12 our competitors." 13 listed TaxACT, H&R Block and TurboTax, correct? 14 A Yes. 15 Q All right, sir. 16 "Upstream traffic sources: 17 He would respond to Facebook postings and Twitter. All right, sir. Let's look at Tab 49. Did what This is a document And then on the right-hand side, they have On a page we've shown, Mr. Dunn, it says, HRBlock.com." Do you see that? 18 A Yes. 19 Q And you'll see that this apparently is tracking where your 20 business -- or what hits on various Web sites and et cetera, 21 correct? 22 A Yes. 23 Q I shouldn't say "et cetera," but it's on sites -- media 24 sites like Facebook, MySpace and YouTube, correct? 25 A I believe it has a lot of Web sites here, yes; Google, 115 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 87 of 93 1 Yahoo, Microsoft, yes. 2 Q 3 are Google, Yahoo, Microsoft, Facebook are listed, and then the 4 three companies TaxACT, H&R Block and TurboTax with percentages. 5 Why is it important to know what kind of traffic you're All right. It has a lot of sites. And then in the chart on the right side, there 6 getting at these various sites? 7 A We utilize it to determine where we should advertise. 8 Q All right. 9 know in order to make your decisions to advertise? And how do you utilize it? What do you want to 10 A 11 going to Google, Yahoo, IRS, Facebook, Microsoft. 12 Q 13 "H&R Block received more of its traffic from IRS.gov than any of 14 the three big and drew a rather significant chunk of traffic 15 from social media sites like Facebook, MySpace and YouTube. 16 These three sites combined account for a certain percentage of 17 upstream traffic." 18 Whether, you know, some of those 140 million taxpayers are All right. And then you see at the bottom, it says that, What would you do with this kind of information? Make 19 decisions about media buys or advertising? 20 A 21 generally kind of confirms, I think, probably what we already 22 know about, you know, where taxpayers go to find information. 23 Q 24 show you that document, let's set the stage. 25 It would be helpful there but, you know, it just -- it All right. Let's just go to the next document. Before I Now, you sell online product, correct, Mr. Dunn, online 116 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 88 of 93 1 product? And you also sell software in a box, right? 2 A 3 long time. 4 Q And that's new, right? 5 A It's been a while since we've -- anyone's bothered to take 6 our product to retail, yes. 7 Q 8 product to retail? 9 A I don't remember specifically. 10 Q All right. 11 A Where is it going to retail now? 12 Q Yeah. 13 A I believe Avanquest had it at Staples this past tax 14 season. 15 Q What is Avanquest? 16 A It is a software distributor. 17 Q And do you have an arrangement with Avanquest to distribute 18 your software? 19 A 20 license agreement. 21 Q 22 proposition? 23 A 24 it. 25 Q This year we sell software in a box for the first time in a And how long has it been since anyone bothered to take your It was probably 2004. And where is your product going to retail now? We have a contract with Avanquest I would say much like a And how does that work? What's the basic business We give them a product, they give us a royalty and they sell And so it's their responsibility to go out to the retailer 117 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 89 of 93 1 and market it and put it on the shelf? 2 A Yes. 3 Q All right. 4 offered for the first time at Staples? 5 A In a long time. 6 Q And who else was being sold at Staples? 7 A I believe this past tax season Intuit and Block were. 8 Q And what was your value proposition to get in the door? 9 What was your selling proposition? If that's what they want to do with it. And in November of 2010, your product was Do you know? 10 A You know, that was really up to Avanquest, but I believe 11 they had a slightly lower price than Block and Intuit's. 12 Q 13 that Avanquest prepared in connection with this business 14 proposition? 15 A No. 16 Q All right. 17 Avanquest's materials? 18 A 19 review it, but that's primarily for accuracy because we have to 20 provide the technical support for this product on the back end. 21 We don't want them saying something about the product that we 22 don't do. 23 Q 24 which is at Tab 36 in your binder. 25 sorry. And were you familiar with any of the marketing materials No. So you haven't seen or reviewed any of I believe Kris Peterson, I think she has the right to Let me show you what we've marked as Government Exhibit 62, Government Exhibit 63. I'm It's at Tab 36. 118 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 90 of 93 1 THE COURT: Can I just clarify for the record since 2 it's my preference not to have closed sessions of a public 3 trial, so was there something -- so Tab 49 and what we just 4 looked at, it was necessary to do this in a closed session? 5 6 MR. WAYLAND: According to the defendants, your Honor. We didn't -- 7 THE COURT: 8 MR. ROBERTSON: 9 10 To seal the transcript for that? the current one are third-party documents. documents. MR. WAYLAND: 12 MR. ROBERTSON: 13 MR. WAYLAND: 14 THE COURT: MR. WAYLAND: 17 THE COURT: MR. WAYLAND: 20 THE COURT: 24 25 Which one? This one. I just want to be clear in my own mind. So Yes, your Honor. Looks like a slide show created by two That's exactly correct, your Honor. So hence, my question of why this part of the hearing had to be sealed and done in a closed courtroom. 22 23 It was a TaxACT document. employees of TaxACT, Leigh Aragon and Greg Hollingsworth. 19 21 No. Government Exhibit 104, which is at Tab 49. 16 18 They are not TaxACT And those third parties had -- 11 15 Your Honor, that document as well as MR. ROBERTSON: Your Honor, can I just check for a moment? THE COURT: Yes. (Brief pause.) 119 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 91 of 93 1 MR. ROBERTSON: We could -- your Honor, on the document 2 that you're referring to right now, there are some pages in here 3 that are competitively sensitive, but we believe that what was 4 put up on the screen you could put back in the public record. 5 We could try to clear that up later if your Honor wants us to go 6 back and change the transcript. 7 THE COURT: Yes. And I think so far the only thing 8 we've covered in the sealed part of this record has to do with 9 Tab 49. 10 MR. ROBERTSON: Correct. And I was mistaken. I was 11 looking at the one on the screen here, which is a different 12 document. 13 THE COURT: Exactly. So I think at this point we can 14 unseal the record up to this point. 15 hard to -- the minute we've sealed the courtroom, it's hard to 16 redo this in a public forum. 17 we seal the courtroom to make sure we're sealing it in talking 18 about things that have to be done in a sealed context. 19 So the record is unsealed up to now. 20 Government Exhibit 62. 21 MR. ROBERTSON: 22 THE COURT: 23 MR. WAYLAND: 24 Story. 25 to 2nd Story. And if -- you know, it's But let's be very careful before We are now on And this appears to be a -This is a document from Avanquest. This is a document with Avanquest. But was produced from the files of 2nd That's because it's an agreement between 2nd -- proposal So I don't know why it would be sealed. 120 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 92 of 93 1 2 THE COURT: Mr. Dunn, do you have a confidentiality agreement with Avanquest? 3 THE WITNESS: 4 THE COURT: Yes. That requires you to keep confidential 5 information that's related to your license agreement with 6 Avanquest? 7 THE WITNESS: 8 THE COURT: 9 10 11 Yes. Okay. So I think it is appropriate to seal the record from here on out as we discuss Government Exhibit 62. MR. WAYLAND: Thank you, your Honor. (The following portions, pages 122-123, were designated as 12 confidental/attorneys' eyes only and sealed under a 13 separate transcript per order of the Court.) 14 15 16 17 18 19 20 21 22 23 24 25 121 Case 1:11-cv-00948-BAH Document 127 Filed 12/27/11 Page 93 of 93 1 CERTIFICATE OF OFFICIAL COURT REPORTER 2 3 I, Lisa S. Schwam, certify that the foregoing is a 4 correct transcript from the record of proceedings in the 5 above-entitled matter. 6 7 8 9 10 _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ SIGNATURE OF COURT REPORTER DATE 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 124