Neon Systems is suing IBM, claiming Big Blue's anticompetitive behavior violated trademark laws and cost Neon business. Neon's zPrime software lets businesses move more mainframe workloads onto cheaper specialty processors, threatening to cost IBM millions. IBM says Neon's product subverts mainframe performance. The Neon suit is only the latest legal hurdle for IBM and its System z mainframe business.
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
In a lawsuit
filed Dec. 14 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 organizations 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
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 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
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 promised greater scrutiny.