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IBM V. PSI: WHEN COASTS COLLIDE

IBM is trying to prevent Platform Solutions, Inc., (PSI) from selling computers that can mimic its mainframe, and it principal method is a lawsuit filed on November 29, 2006, alleging that PSI's product illegally uses IBM technology.  On August 7, 2007, when IBM amended its complaint, it added assertions that PSI had misappropriated IBM trade secrets.  On April 23, PSI stuck back, asking a New York Federal Court to toss out these claims.  The issue raises the stakes, because PSI's request for a ruling impugns IBM's reputation as a fair player even when taking a very tough stand in litigation.

PSI filed a petition for summary judgment, which in ordinary English means that it asked Judge Lewis A.  Kaplan of the United States Court for the Southern District of New York, in Manhattan, to toss out part of IBM's suit before proceeding with the rest of the case.  The legal basis for this request is not a Federal law or even New York law but rather the California Uniform Trade Secrets Act ("CUTSA"), one of a family of UTSA laws that are part of the legal code in 44 or 45 states.  Among the handful of states that have not adopted an UTSA law and instead rely on their own rules that are rooted in common law (and, some might say, English common law), however, is New York, the venue for this legal dispute.

(We have provided the full petition and a related document that includes a summary of undisputed facts related to the petition in PDF format.)

UTSA laws are all similar and they attempt to regulate and simplify a set of rules that govern business secrets that are protected by the secret holder's conduct, not by patents, copyrights, trademarks or other means.  In this case, PSI argues that CUTSA gives an aggrieved party three years to make a claim.  The three years begins when the complainant discovers its secrets have been taken or misused.  Strictly speaking, the clock starts when there are circumstances that indicate the complainant should have known the secrets were misappropriated.  The wording in the law is designed to prevent certain kinds of mischief involving belated claims that experience has shown can distort the intended effect of the law.  One other aspect of the California law is that when it addresses a group of acts that are all really part of one situation, the time limitation clock starts with the first act, not the last one.

New York law, by contrast, doesn't have the kind of time limit on trade secret claims that is the law in California (and in all other states with a few exceptions), and it also has a different way of running the clock on many kinds of torts (legal talk for a types of misbehavior that involve what the law views as twisted conduct) and lets the clock run from zero if a miscreant (a tort-feasor if you like legal beagle words) repeats, reprises, or adds another related action to the original tort.

The story has an angle lawyers love: There is a body of case law in New York that addresses issues that took place in other states but end up on trial in New York.  PSI's lawyers have found solid examples of such cases in which the New York courts felt that they should apply the laws of other states because the conduct in dispute occurred in those states and the actors all assumed (or should have assumed) that the rules under which they operating were the rules of the state where the actions took place.  In other words, New York courts have said that in this case the California rules that PSI wants to apply are the right ones to bring about a just outcome.

To return to ordinary language for a moment, PSI is saying that IBM brought in claims of trade secret misappropriate as an afterthought when it should have known these claims were out of order.  PSI does not say and probably cannot say that it believes IBM may have put in these extra claims as sacrifice points to protect other aspects of its suit, to beef up what might not be a very strong case for patent infringement, and to generally bog down a court burdened by a dispute that perhaps should never have gone to court.  In the past, IBM has always been able to settle disputes with makers of compatible mainframes through private negotiation, although some of its key battles with the makers of plug-compatible mainframe peripherals were fought in the open.

But that was then and this is now.  In the old days IBM made mainframes that were distinct computers.  Today IBM's makes mainframes that are based on chips in the Power family, the circuits a the hear of IBM's System p Unix computers.  IBM says very loudly that the circuits in the P10 mainframes are not the same ones it uses in its System p boxes but customers can see that this is mainly marketing talk aimed at helping IBM justify the high price it charges for mainframes.  It's pretty clear that the System i processors went down the road the System z is not taking and it leads to IBM's server sausage factory where what comes out is unquestionably available in a number of flavors but where the ingredients except for seasonings are pretty consistent.

So what IBM is doing with Power family chips is more or less what PSI is doing with Intel Itanium chips, making a mainframe that takes advantage of more cost-effective technology than anyone could make if they had to build unique processor engines for the relative handful of mainframes the world will buy when the broader market for high performance Unix, Linux, Solaris, and Windows servers can absorb production volumes hundred of times as great.  There's no surprise here.  The surprise might be that IBM (and anyone who wants to compete with IBM in the mainframe game) didn't just port its firmware to whatever is inside a Wii box, a mobile phone, or the Sun Niagara and let a zillion vendors find a way to make mainframes ubiquitous again.  If IBM mainframes were more popular, IBM's software and services business, strong even now, would be absolutely booming.  Imagine how HP would prosper if it could get out of the printer business and still find a customer base for its toner products that was ten times the present size! Of course that could not happen, and neither could IBM stop making mainframes and keep its mainframe software and services business, but the case for IBM remaining the only hardware vendor in the game is something that apparently looks a lot more solid from inside Big Blue than from outside.

But as puzzling as IBM's attitude toward other hardware makers might be, nothing about this case is as hard to understand as its legal strategy in this matter.  While there is no doubt that IBM has made it impossible for PSI to sell mainframes, it has done so in a way that puts it against a few parties with an interest in stealing pieces of the IBM mainframe base (and the whole shebang if they could).  Behind PSI lies Intel, which makes the Itanium chips used by HP and NEC in processors that can run PSI's firmware.  (PSI started out in the HP camp but subsequently shifted the balance of its server supplier relationship to NEC.) Microsoft, which didn't want anything to do with PSI at first, is now also in the picture.

IBM now has a different battle on its hands than the one it started in 2006.  PSI might not be selling an compatible mainframes as long as IBM can frighten customers, but it does look like it has enough backing to keep up its courtroom battle.  If it can get a couple of IBM's claims tossed out, it stands to gain a psychological advantage inside and outside the courtroom.  For now, and perhaps even after IBM responds to PSI's latest salvo, IBM is at risk of inflating its claims to a visibly greater degree than one can write off as enthusiasm on the part of its litigators.  If things don't go very well for IBM the contrast between its legal strategy today and the way it handled such matters in the past, when it often left things in the hands of Cravath, Swaine and Moore, will attract attention IBM could well do without.

Meanwhile, PSI has little to lose even if the motion for summary judgment gets knocked down.  IBM's misappropriation of trade secret claims, should they ever actually be tried, are a bit odd even in the context of a part of the law that is particularly eccentric.  When it attempts to explain just what it is that PSI did that it should not have done, IBM says that PSI tested its systems using emulators developed by Amdahl.  Amdahl and IBM agreed to some mutual disclosures of various secrets during the years when, however reluctantly, they were pressed to cooperate by the persistent influence of the 1956 Consent Decree.  The 1956 Consent Decree was IBM's way of setting a Federal antitrust suit and among other things it compelled IBM to share certain information about its products and to refrain in some ways from abusing its market power in the computer business.  PSI never knew what Amdahl and IBM shared, which might have included trade secrets.  PSI only used software that was the fruit of this cooperative effort.  How IBM could show, to the satisfaction of a court, that this fruit was itself a trade secret is a puzzle IBM's lawyers will have to solve.

What makes the story even more baffling is that at no time did PSI act as if it had found a way around the trade secret laws protecting IBM's internal knowledge.  On the contrary: from its inception, PSI went to meeting where Amdahl (and its parent Fujitsu) along with IBM discussed what each was up to when it came to the technology used to test processor compatibility.  IBM, which had hired some former Amdahl scientists after Amdahl wound down its mainframe business, even discussed ways it might get to use the testing software that IBM says is tainted by its trade secrets.  In its court filing, PSI says that IBM was interested in the software at one point because the Amdahl folk it hired said it was better than the tools IBM had for hardware testing and that it would make their job a lot easier.

During these discussions IBM never said the use of the software by Amdahl and its transfer to PSI was in any way illegal.  But it was clear at the time that if IBM was concerned about this matter it should have raised some questions about the situation.  That, says PSI, is the moment when the clock started on any window IBM had if it wished to claim PSI had misappropriated its intellectual property.  And that was several years ago, far outside the three-year timeframe embodied in the laws of California (and most other states).

While IBM's lawyers almost certainly have a basis on which to argue their interpretation of the law and facts in this matter, it remains to be seen how the court treats this skirmish.  Even if IBM can hold on here, early indications are that its grip on this case may not be as tight as it would wish.

— Hesh Wiener May 2008


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