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IBM Hit with Mega-Buck Antitrust Tying Charges

Platform Solutions Inc. (PSI), the mainframe wannabe has sued IBM for antitrust

Platform Solutions Inc. (PSI), the mainframe wannabe whose Itanium-based servers can run IBM's z/OS mainframe operating system as well as Windows, Unix and Linux, has sued IBM for antitrust, charging Big Blue with, among other things, tying the sale of z/OS to the sale of its mainframe hardware, a serious antitrust no-no and something IBM is specifically forbidden to do under the lingering terms of its now-dissolved 1956 consent decree with the United States government.

The start-up, a Fujitsu spinout whose IBM-compatibility mojo is based on widgetry licensed from Amdahl and whose financing comes from Goldman Sachs and Intel, also accused IBM of spoiling its acquisition last fall by an unnamed "major technology company" that sources identified as Hewlett-Packard.

PSI claims damages in the "hundreds of millions of dollars" from the loss of its acquisition alone. It wants a jury trial, treble damages and IBM enjoined and forced - by court order - to license PSI what it needs to compete, not to mention a declaratory judgment that it hasn't trod on any IBM patents.

Besides tying and tortuous interference with the potential sale of PSI, the 54-page suit charges IBM with monopolization, attempted monopolization, leveraging a monopoly, maintaining, extending and prolonging a monopoly, denying access to an essential facility, restraining trade, suppressing competition, coercing customers and injuring consumers, as well as exclusionary conduct and unfair or fraudulent business practices that deceive customers and cause "supracompetitively" higher prices that also run into the "hundreds of millions of dollars."

In other words, it throws the book at IBM and charges it with violating Section 1 and Section 2 of the Sherman Antitrust Act, Section 3 of the Clayton Antitrust Act, the California Business and Professions Code and New York General Law.

Actually the PSI suit is a countersuit. IBM sued PSI last November and charged it with breach of contract and patent infringement (CSN No. 671).

PSI's countersuit, filed last Friday in the same district court in White Plains, New York as IBM's, denies IBM's allegations and says the IBM suit isn't about protecting IBM's IP, it's about preventing PSI from entering the market and maintaining IBM's monopoly over a literally trillion-dollar market.

PSI essentially calls IBM's patent charges twaddle and says its IBM compatibility derives from IBM's Principles of Operation, which are in the public domain, and it only licensed and used IBM's operating system for testing purposes, not reverse engineering.

The two companies are really arguing over IBM's refusal to license z/OS for use on PSI's HP-built Itanium machines and have been since 2000 when Amdahl and Hitachi, the last of the PCMs, exited the market and PSI started up.

PSI accuses IBM of a "paradigmatic tying arrangement: IBM has made the licensing of its operating system contingent on not purchasing, or not using, a rival mainframe."

PSI says its exclusionary conduct charges are gonna sound awfully familiar to IBM because they're reminiscent of the charges IBM made against Microsoft - which IBM accused of discriminatory treatment in its Windows contract after IBM had the audacity to develop OS/2 in competition with Windows. And after the government's antitrust suit against Microsoft, IBM ultimately collected a $775 million settlement from Microsoft without even filing suit.

See, IBM always used to license its mainframe operating system and patents to plug-compatible manufacturers - when there were plug-compatible manufacturers, like Amdahl and Hitachi, and when the government was on IBM's back - but now that IBM is the last mainframer standing - and the Justice Department isn't paying attention to it any more - PSI says IBM has changed its traditional non-discriminatory licensing policies to keep PSI out of the market and maintain its monopoly.

Among other things, PSI claims z/OS is an essential facility - since it's the only operating system used on mainframes - and by definition makes a mainframe a mainframe, able to run all the pricey application software written for mainframes - and so IBM's refusal to the license the thing is anticompetitive.

According to PSI, customers are locked into the IBM platform and in the absence of any competition have been paying "substantially higher" prices for mainframes than they used to when Amdahl and Hitachi were around. There's no other choice. Unix and Windows boxes don't do the job and converting to a non-IBM mainframe system would be "prohibitively expensive."

Besides, PSI says, IBM also holds more than 85% of the non-IBM-compatible mainframe market that companies like Bull and Unisys play in.

The suit does not reflect on the fact that the price per mainframe MIPS that IBM charges have plummeted but anyway…

According to the story PSI tells, IBM knew that PSI, the first significant new mainframe developer in 30 years, intended to enter the IBM-compatible mainframe business, and during a series of negotiations running from 2000 through 2006 IBM initially and then off and on represented to PSI - sometimes in writing - that PSI would be able to license the IP that Amdahl and other PCMs had licensed from IBM on similar reasonable and non-discriminatory (RAND) terms.

On that basis PSI raised upwards of $20 million (reportedly considerably more than $20 million; but it doesn't want IBM to know how much more; we hear it was $100 million of which it has $15 million-$20 million left). With the money it developed what it calls the first open architecture mainframe system.

Going into the exercise, PSI assumed that it would be running the standing IBM-compatible operating system, the OS/390, but then allegedly to put obstacles in PSI's path, IBM switched from OS/390 to z/OS at the beginning of 2001, discontinued technical support for the OS/390, and, in PSI's mind, forced customers to upgrade.

IBM also ceased to provide the critical interface information it used to provide PCMs and announced that this March it would stop supporting z/OS on anything but 64-bit hardware, leaving the old, in-place Amdahl and Hitachi machines out in the cold since they're 31-bit.

Anyway, according to PSI after IBM dropped OS/390 it reportedly told PSI that it would continue licensing the OS as it had it the past, then it told PSI that it wouldn't license z/OS, or OS/390, on Itanium machines, but didn't say why.

Then it reportedly said that it hadn't really rejected the licensing idea, it just hadn't decided yet, in part because it hadn't determined a price.

Then, when PSI was getting its first round and needed OS-availability assurances from IBM, IBM said it would license it but that PSI also needed a patent license and that IBM would give it a patent license.

By the time 2004 rolled around and patent discussions were underway PSI says IBM wanted a running royalty rate of 1% of net sales on licensed products up to a maximum cumulative royalty rate of 5% for a license to five or more patents. PSI wanted to know what patents it needed, but IBM didn't say, and then IBM reportedly wouldn't talk patents at all unless PSI disclosed "specific technical information" about its product and signed an agreement that would let IBM treat any disclosures PSI made as non-confidential and use the information to compete against PSI - and this after agreeing that IBM wasn't obligated to enter into a license agreement when all was said and done anyway.

In 2005 PSI finally agreed to these terms after IBM came up with a list of 150 patents that PSI "may" infringe but claimed it wasn't "exhaustive." It was also in 2005 that PSI started thinking about selling out to a company with an existing patent cross-license with IBM to avoid any patent kafuffle.

Then last year, the suit says, IBM pulled the rug completely out from under PSI by reneging on its promises to license its patents and operating system to anybody running the OS on PSI gear. It changed its patent policy and sometime last year took down the RAND patent policy web site that developers and users have relied on for years, the one that used to be at www.ibm.com/ibm/licensing/patents/practices.shtml. It also changed the terms of the latest version of the z/OS 1.8 license, dropping the words "or equivalent" and limiting its use to its proprietary System z servers.

PSI claims that when this happened it was on the verge of finalizing its acquisition and, as a result, PSI's acquirer, presumably HP, tore up its letter of intent and walked away. But it wasn't just over the OS. PSI claims that "IBM threatened the would-be acquiring company with other adverse economic consequences were it to purchase PSI or market its products."

So now, the suit says, PSI can't market and sell its systems. But, according to PSI marketing and product management chief Christian Reilly, it is anyway on the theory that end users, the actual z/OS licensees in any case, can run the IBM operating system on any gear they want, though IBM's original suit mumbled something about end users maybe infringing IBM patents if they did.

PSI claims that IBM can't collect a double royalty and write an OS license that requires users to buy an IBM mainframe to run the software. Therefore, it contends, IBM's patents can't be infringed by using the software on PSI's mainframe - and anyway, Intel and HP, the makers of the underlying hardware, where some of the translation magic happens, have patent cross-licenses with IBM.

By the way, it was no accident that IBM sued PSI in Q4, Reilly says. PSI won four mainframe deals away from IBM then and, ignoring IBM's patent assertions, Q1 is going nicely. PSI's problem, which is what the suit is referring to, he explained, is with new licenses.

The suit says large multinationals have implemented PSI's system. Sources say that means Lufthansa and LL Bean; Bean's a known beta site that hasn't gone into production; and PSI's reportedly got a pharma too.

The installed mainframe base that PSI figures it can still sell into, despite IBM, is about 15,000 strong. However, PSI also accuses IBM of spreading FUD and telling potential customers that PSI's boxes won't work as PSI says they will and that buying PSI gear will result in a loss of reliability, availability and serviceability.

The PSI suit quotes IBM as telling customers it is "committed to putting PSI out of business."

Speaking the kind of language judges sit up at, PSI accuses IBM of erecting "insurmountable barriers" to entering the IBM-compatible mainframe market, interfering with customer choice, having "monopoly pricing power," "reducing innovation" and "injuring consumers" by delaying PSI's entry into the market, jeopardizing its funding and customer relationships and preventing it from selling its boxes as well as related applications and services such as storage, technical support, maintenance and consulting.

Remembering the fortune Goldman earned its last quarter, Reilly says that PSI's backers, which include Blueprint Ventures, InterWest and Investcorp, have the stomach and the wherewithal to ride out the litigation. However, Intel for one says it didn't know about it.

Reilly also claims support from the ISVs but sources say CA and BMC haven't put their widgetry on the PSI machine.

PSI's suit seems to be an open invitation for the Justice Department to wade back into the case since PSI contends that it wouldn't be having these problems if the 1956 consent decree were still in force.

It quotes the DOJ's dissolution agreement as saying, "If, after the decree terminates, IBM engages in any anticompetitive activity that would violate the antitrust laws, it would immediately be liable to suit. For example, should IBM engage in anticompetitive tying - be it to parts or operating systems - the United States could bring an action for injunctive relief both to stop the illegal conduct and to get other, broader prophylactic relief. Also, IBM would be liable to a host of potential treble damage actions."

The PSI suit says the consent decree was only dissolved in 1997 because Amdahl and Hitachi were still in the business with 20% of the market and because the policy of non-discriminatory licensing had become "integral to [IBM's] public image, reputation and success." But once Amdahl and Hitachi were gone, IBM reversed its non-discriminatory licensing and "embarked on a strategy of monopolizing the market."

PSI is represented by Susman Godfrey, a first-class litigator with a track record in antitrust and intellectual property that won a case against IBM recently.

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Most Recent Comments
Klemen 01/29/07 03:28:20 AM EST

BTW, System z (mainframe) can also run Linux....

SOA News 01/28/07 05:03:15 PM EST

Platform Solutions Inc. (PSI), the mainframe wannabe whose Itanium-based servers can run IBM's z/OS mainframe operating system as well as Windows, Unix and Linux, has sued IBM for antitrust, charging Big Blue with, among other things, tying the sale of z/OS to the sale of its mainframe hardware, a serious antitrust no-no and something IBM is specifically forbidden to do under the lingering terms of its now-dissolved 1956 consent decree with the United States government.