Rival Adds To IBM’s Mainframe Legal Woes

Neon Systems, a small Texas company that makes software designed to shift mainframe workloads onto cheaper specialty processors, is suing IBM for what officials say are false and disparaging claims about its product.

In a lawsuit filed on 14 Dec. in U.S. District Court in Texas, Neon officials are claiming that IBM has bullied customers into staying away from the company’s zPrime software, costing Neon business and profit margins.

Neon is saying that IBM—fearful of the millions of dollars Big Blue stands to lose if its mainframe customers use zPrime—has violated the Lanham Act, trademark legislation that, among other things, makes it illegal to make false claims and advertising.

“Faced with the threat now posed by Neon, IBM has used a variety of unlawful means, including misrepresentations, disparagement, threats of retaliation and baseless litigation, and other types of unfair and unlawful competition, in an attempt to crush Neon and thereby protect the revenue generated from IBM’s monopoly in the processing of” legacy mainframe workloads, according to the lawsuit.

Neon is asking the court to order IBM to halt what the smaller company calls the illegal business practices and to order that IBM pay Neon whatever money it made through the use of those practices. It’s also seeking an unspecified amount of actual and punitive damages.

Neon’s lawsuit is only the latest legal hurdle for IBM and its mainframe business. The U.S. Department of Justice is looking into claims by such organisations as the CCIA (Computer and Communications Industry Association) and T3 Technologies, which sold non-IBM systems to run mainframe workloads. Regulators reportedly contacted T3 executives in early October, after a U.S. District Court judge dismissed T3’s antitrust lawsuit against IBM.

At the time, IBM officials said they were confident in their business model, and pointed to the court’s dismissal of T3’s lawsuit as support for their position. A spokesman for IBM said Neon’s lawsuit has no merit.

At the heart of the Neon lawsuit is the core processing unit that IBM puts into its System z mainframes. IBM has been making mainframes for more than four decades, and over that time many of the largest companies in the world have grown dependent on the massive systems to run their most sensitive, mission-critical workloads—IBM has said that $5 trillion (£3.1tr) in assets run on IBM mainframes, according to Neon.

The lawsuit claims that over that time, the mainframes’ unique operating environment makes it near impossible for these businesses to migrate to cheaper servers, locking them into the System z environment. As a result, IBM, with no real competition, is able to charge a high fee on the mainframes, Neon says.

IBM charges not only the upfront costs for the system, but also ongoing licensing fees for workloads running on the central processor. When the workloads go up, so do the fees, Neon says. In 2004, to slow the drain of more modern workloads—such as those based on Java or Linux—from the mainframes onto other systems, IBM created specialty processors that let businesses move those workloads off the more expensive central processors, but remain on the mainframes.

According to Neon officials, those specialty processors essentially are identical to the central processors. Neon’s zPrime, which was released in June, is designed to let businesses offload even more workloads from the central processors and onto the specialty engines, where there are no licensing fees.

In an interview last month, Neon Chairman and CEO Lacy Edwards said zPrime gives customers the chance “to shave significant dollars of mainframe costs.” Several thousand businesses signed up to test zPrime.

In the lawsuit, Neon claims the software can save businesses tens of millions of dollars a year. To protect their business, Neon officials are saying that IBM has engaged in an aggressive campaign of threats and coercion with its customers, claiming that by using zPrime, businesses are violating agreements connected to their mainframes and that they risk being charged licensing fees for use of the specialty processors. IBM also is making some mainframe sales conditional that the customer doesn’t use zPrime, and threatening legal action if they do.

Neon claims that there are no provisions in customer contacts with IBM limiting the workloads that can be moved onto the specialty processors. In the November interview, Neon’s Edwards said they’ve had lawyers look at the contracts and found no restrictions.

However, because of their reliance on IBM and past aggressive behavior against any threat to its mainframe business, more than 50 customers that had expressed in zPrime eventually walked away.

The results are that Neon not only has lost business, but has had to lower its prices to get the customers it has, according to the lawsuit.

In a statement, IBM dismissed Neon’s lawsuit.

“Neon’s claims have no merit, and its product offers no innovation,” according to the IBM statement. “Neon’s software deliberately subverts the way IBM mainframe computers process data. This is akin to a homeowner tampering with his electrical meter to save money. IBM has invested billions of dollars in the mainframe this decade, and we will vigorously protect our investment.”

For most of this decade, IBM has seen interest in its mainframe business grow, defying earlier analyst predictions that the massive systems would fade away. However, the recent global recession that has battered most of the tech industry also has taken its toll on IBM’s System z business, which saw revenues in the third quarter drop 26 percent over the same period last year.

Neon’s lawsuit comes amid a changing regulatory environment in both the United States and Europe, as illustrated by the aggressive investigations by regulators on both sides of the Atlantic of Intel, Oracle and Sun Microsystems.

Earlier this year, the Obama administration did away with Bush-era rules that regulators said hindered the government’s ability to press antitrust probes, and promise