Neon Sues IBM for Antitrust

By Maureen O’Gara

No sense pussyfooting around anymore trying to sidestep the legal equivalent of nuclear war.

Texas ISV Neon Enterprise Software, accepting that it’s in a fight to the death with IBM over mainframes, ripped the kid gloves off late Wednesday, amended its pre-Christmas suit against its giant nemesis for tortious interference, business disparagement and unfair competition and charged Blue with antitrust violations.

It cited both the Sherman Antitrust Act and the Clayton Antitrust Act, charging IBM with monopoly maintenance and conditioning sales to mainframe users on their promise not to buy from a competitor. 

If proved, IBM may have to disgorge a billion dollars or more of its profits on software licensing fees on a Lanham Act charge and pay hundreds of millions of dollars more in damages. And those damages could also be trebled.

Neon names would-be customers it claims it lost to IBM intimidation because that’s what the Supreme Court says an antitrust action needs to succeed – the recitation of chapter and verse.

Neon figures it has nothing left to lose since IBM has already cost it these potential accounts.

It says that IBM threatened retaliation against Honda, FedEx, Daimler-Benz US, Swisscom, Sainbury’s, HuK Coburg, Home Depot and Experian if they used its zPrime technology, the software that can offload legacy workloads onto so-called mainframe specialty processors that the users buy from IBM saving them perhaps billions of dollars in notoriously punitive monthly IBM mainframe licensing fees.

Neon says IBM threatened to sue these users, jack up their mainframes fees, or curtail its maintenance and support. In the process it allegedly disparaged and misrepresented Neon’s technology as “illegal” to protect its mainframe monopoly.

Neon claims it lost sales to HEB Grocery Stores and Highmark, the insurance company, to IBM defamation. In its countersuit a few days ago IBM called Neon a theft, comparing it to a “crafty technician who promises, for a fee, to rig your cable box so you can watch premium TV channels without paying the cable company.” It has reportedly said the same to customers.

The suit says IBM also threatened to cancel its partner contract with a German reseller if it handled zPrime.

Honda was interested in zPrime when it first came out last summer. The suit says the auto maker was told “IBM would look to make an example of the first companies that bought zPrime.”

The suit quotes Experian, the US credit reporting bureau, telling Neon, “Just so you know, Experian will not be pursuing a formal contract with Neon because of potential IBM billing issues which could arise from utilizing Neon’s zPrime software. At this time, Experian does not wish to risk this type of distraction from IBM. Due to your efforts, we have proven Neon’s technology is sound and functions as designed. Plus, we have demonstrated Neon is a great company and maybe someday in the future we will consider zPrime or other DB2 utilities.”

Neon’s amended suit describes a big American bank with sizeable mainframe operations clinging to the idea of using zPrime to save money in the midst of the financial downturn last year despite IBM’s threats that it “could affect the bank’s level of service.” The bank only backed away, as it told Neon, after IBM threatened “to change the pricing structure and charge for software across the board and charge them for IFLs [IBM’s Integrated Facility for Linux specialty engine processor, which is not affected by zPrime] as well.”

The bank, believed to be Wells Fargo, also told Neon it was concerned about being sued and that IBM “is aware of all the parties using zPrime and they will potentially be named in a lawsuit from IBM.” 

IBM claims that users are contractually restricted from running anything but authorized workloads on the $125,000 apiece zAAP and zIIP specialty processors that Neon makes use of.

Big Blue is purple with rage because it doesn’t charge for the use of these processors, which are exactly the same as the so-called central processors that usually run the legacy workloads and make IBM a fortune.

IBM invented these so-called SPs to run XML and Java programs and accelerate DB2 apps on its big iron so it wouldn’t lose mainframe business to commodity servers. Now – in addition to a loss of its hefty software licensing fees – it could also lose a substantial amount of money because zPrime customers wouldn’t have to buy as many very expensive million-dollar central processors when they start running out of workload capacity. They could shift the workloads to the SPs.

In response to IBM’s “deceptive” contract claims, Neon says neither IBM nor any of its customers can produce any workload-restricting paperwork and that IBM is bluffing. The best IBM can come up with is its “unilateral intent” and IBM in fact originally represented that the “interface to the zIIPs are open, and other vendors are open to leverage it.”

Neon claims customers own the parts in perpetuity and are perfectly within their rights to use them to run legacy workloads but that IBM is now trying to undo its own oversight – an error it didn’t make with its Integrated Facility for Linux specialty engine processor, which is restricted to Linux workloads – by trying to get customers to sign new retroactive agreements that foreclose their right to run zPrime on zAAPs and zIIPs. And if they want new SPs IBM has refused to supply the processors without an undertaking from the customer not to use them for zPrime.

The suit calls this exclusive dealing, an antitrust violation that “forecloses a substantial amount of competition – indeed all competition – in the market for the processing of legacy workloads.” It reasons too that IBM’s campaign to put new agreements in place proves its contract representations are hollow.

Neon also charges IBM with violating the Clayton Antitrust Act by conditioning product discounts on the customers not using or dealing in zPrime.

No doubt the Justice Department lawyers currently investigating IBM’s mainframe unit for antitrust will pay close attention to Neon’s amended complaint since it would broaden their case from a hardware complaint to IBM’s allegedly illegal defense of the fee-to-use revenue model it’s built around the z/OS operating system.

Neon, which has sold other mainframe utilities besides zPrime for the last 15 years, claims that it too is a victim of IBM retaliation and that IBM is out to crush it.

It says IBM has cut off its developer discounts, which jeopardizes its ability to compete; conditioned Neon getting early releases of the z/OS mainframe operating system under an established IBM program on it dropping zPrime; rescinded its credentials to attend critical mainframe conferences on which Neon depends to generate business; and excluded it from user group meetings.

The amended complaint is here.